author: ARnold:

text:
    Mary M. Hutchings, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95359.
    Promulgated June 6, 1939.

      I. M. Tullar, Esq., for the respondent.
   OPINION.

ARnold:

Section 501 (a) of the Revenue Act of 1932 imposes a tax upon the transfer by any individual, resident or nonresident, of property by gift. Section 501 (b) of that act provides that the tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible. Section 504 (b) of the same act provides that the first $5,000 of gifts made “to any person” shall not be included in the total amount of gifts made during the taxable year. Séction 1111 of the 1932 Act, in defining the term “person,” provides that it shall mean inter alia “a trust.”

In Seymour H. Knox, 36 B. T. A. 630, we considered the question here presented and held that for the purpose of the $5,000 exclusion the trust, as an entity, was the “person” within the meaning of section 504 (b). In so deciding we cited and relied upon Commissioner v. Wells (C. C. A., 7th Cir.), 88 Fed. (2d) 339, affirming 34 B. T. A. 315; Commissioner v. Krebs (C. C. A., 3d Cir.), 90 Fed. (2d) 880, affirming a memorandum opinion of this Board; and Noyes v. Eassett, 20 Fed. Supp. 31. Subsequent decisions of this Board have followed the principle announced in the Knox case, supra, and in a recent decision of the Circuit Court of Appeals for the Eighth Circuit, Robertson v. Nee (Mar. 6, 1939, not reported), it was held that a transfer in trust in 1935 to one trustee was entitled to only one $5,000 exclusion since only one trust was created. The court so decided despite the specific provisions of the trust indenture providing for the division of the trust estate into three parts and naming the wife and the two children of the grantor as beneficiaries, each being entitled to the income and principal of one of the parts of the trust estate.

In Welch v. Davidson, 102 Fed. (2d) 100, the Circuit Court of Appeals for the First Circuit reached the opposite conclusion, and was followed by the United States District Court for the Northern District of Illinois in Ryerson v. United States, 28 Fed. Supp. 265. Despite our respect for the opinion of the Circuit Court of Appeals for the First Circuit and the opinion of the Federal District Court which followed the First Circuit, we feel obliged to follow the rule laid down in Seymour H. Knox, supra, and in Robertson v. Nee, supra.

The facts in the instant proceeding are on all fours with the facts in the Robertson case. The trust here created was clearly intended to be a single trust with seven beneficiaries who were to share equally in the trust income and principal. Every reference in the trust indenture points to an intent and purpose to create a single trust estate for the distribution of income and corpus among the several beneficiaries. We hold, therefore, that the property was transferred to the trust as an entity, and that petitioner is entitled to but one exclusion of $5,000 as determined by the respondent.

Decision will be entered for the respondent.


source: Caselaw Access Project

author: Disney :

license: Public Domain

text:
    Lorraine Manville Gould Dresselhuys, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88887.
    Promulgated June 6, 1939.

      Mark Eisner, Esq., and Ferdinand Tannenbcmn, Esq., for the petitioner.

      E. O. Hanson, Esq., and Harold F. Noneman, Esq., for the respondent.
   OPINION.

Disney :

This proceeding involves liability for gift tax. Deficiency was determined in the amount of $15,000.24 (of which only $4,337.89 is now in issue) for the year 1934. The facts are stipulated, and will be set forth herein only so far as necessary to consideration of the issue presented. That issue is whether petitioner made two gifts, each of the present worth of the right to receive $25,000 at age 35, one to a person aged 18 years, the other to a person aged 19 years. There is no disagreément as to the valuation, so that the only question presented is as to whether gifts were made.

Property was on January 30, 1934, transferred to a trustee, with directions to'make a payment of $25,000 to each of two children, upon the attainment by each of the age of 35 years, with the provision, however, that the payments were to be made only if the husband of the donor should execute and file with the trustee a formally acknowledged written consent to the payment, and, in case donor’s husband should have died prior to the attainment of age 35 by the child involved, then only if the donor should execute and file with the trustee similar written consent to the payment. If neither donor nor her husband should execute and file the written consent, the $25,000 upon the termination of the trust should revert to donor, or, if deceased, to her estate, but if both donor and her husband should be deceased at the attainment of age 35 by the child involved the obligation of the trustee to make payment would be absolute.

Does this situation show gift, within the purview of section 501 of the Eevenue Act of 1932? Though the parties discuss section 501 (c) of the Eevenue Act of 1932, we find consideration thereof unnecessary to determination of the issue here, which is whether transfer by gift is involved at all. If so, the tax is applicable. Petitioner cites cases as to the general question of conditional gifts. Eespondent emphasizes the element of mere possibility of reverter as to any dominion by the grantor, under the thought expressed in Helvering v. St. Louis Union Trust Co., 296 U. S. 39; and Becker v. St. Louis Union Trust Co., 296 U. S. 48, construing estate tax law, and adds reference to Burnet v. Guggenheim, 288 U. S. 280, as to similar treatment of the law as to gift tax. The case last cited states: “The two statutes are plainly in pari materia”, and proceeds to consider the concept of transfer as essentially the same in both statutes, and as “identified more nearly with a change of economic benefits than with technicalities of title.” There is undoubtedly close connection between the gift tax and the tax upon transfers that take effect at death, as also dwelt upon in the case last cited, and each statute is a complement to the other; nevertheless we think that the respondent’s application of Helvering v. St. Louis Union Trust Co., supra; Beeher v. St. Louis Union Trust Co., supra; also Rothensies v. Cassell, Executor, 103 Fed. (2d) 834, is not valid here. In order for the statute to apply there must be a gift, in trust or otherwise, direct or indirect. Here, although the property was placed in trust, the trust would terminate at a certain time and the corpus here involved would return to the donor, unless a certain event took place, upon which event, and only in which event, the gift was effected, to wit, the execution of a written consent, primarily by the donor’s husband, and secondarily in case of his death, by the donor. In the absence of such affirmative action, the child took nothing from the trust. We think that, under primary principles as to the nature of gifts, such a positive condition precedent dictates that here there was no gift. A gift must be complete, subject to no condition precedent, or it is void, is no gift at all. Citation of authority is hardly necessary, so uniform and elementary is the rule. Klein v. United States, 283 U. S. 231; Halbert v. Halbert, 21 Mo. 277. Although it is true under many cases that the revenue law is not to be too closely inhibited by strict legal rights, nevertheless we think it can not fairly be thought that section 501 of the Eevenue Act of 1932, merely because it involves gifts, should be given the effect of taxing conditional gifts which under uniform interpretation can not be said to constitute gifts. Moreover, section 510 of the Eevenue Act of 1932 provides that the tax may fall upon the donee, to the extent of value of gift, which indicates well, we think, that there must be a donee possessing something to tax. There was no such donee in this case. Moreover, we think Burnet v. Guggenheim, supra, bears out petitioner’s theory when properly applied to this proceeding. If in that case a gift was effected when a settlor canceled a power of revocation, we think that herein the gift would be effected only if the husband filed the consent, or Avhen, after the death of donor’s husband, she so filed, or gave up the power to fail or refuse to give written consent to the payment to the child — but in the absence of such action, which would of course entail a wholly new provision in, or modification of, the trust instrument, the child could not secure the payment. This only serves to emphasize that the original trust agreement did not provide a gift.

We therefore conclude and hold that the Commissioner erred in applying section 501 of the Revenue Act of 1932 and in determining the deficiency herein involved. Nevertheless, because of another element in the proceeding which it has not been necessary herein to discuss,

Decision will he entered under Rule 50.


text:
    Alvina Ludorff and Emma C. Meissner, as Executrices under the Last Will and Testament of Albert Ludorff, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89212.
    Promulgated June 7, 1939.

      Laurence Arnold Tamer, Esq., Eugene L. MuTlaney, Esq., and /ohn W. Townsend, Esq., for the petitioners.

      E. O. Hanson, Esq., and Thos. H. Lewis, Jr., Esq., for the respondent.
   OPINION.

Disney :

The basic facts, including the bases for the various blocks of stock acquired by petitioners’ decedent before and after March 1, 1913, and the amount and time of receipt of the liquidating dividends, are not in dispute. The broad issue is the amount of gain includible in income for the taxable period. This in turn depends upon the proper method of computing the profit. Petitioners insist that the amount is the figure resulting by treating each payment as yielding its proportion of profit when received. The method they advance is the same as that provided by statute for reporting gain on installment sales, but no contention is being made that the installment provisions (sec. 44, Revenue Act of 1934) are applicable. Respondent contends, in general, that there can be no gain on liquidating dividends until the stockholder recovers his capital investment and when that occurs, subsequent distributions constitute gain in their entirety.

Section 115 (c) of the 1934 Act provides that “* * * amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock” and that the gain “* * * to the distributee resulting from such exchange shall be determined under section 111 * * It further provides:

* * * In the case of amounts distributed (whether before January 1, 1934, or on or after such date) in partial liquidation * * * the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of subsection (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation.

Subsections (a) and (b) of section 111 read:

(a) Computation of Gain or Loss. — The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 113 (b) for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized.
(b) Amount Realized. — The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received.

Section 111 (c) provides for the recognition of gain to the extent provided for in section 112. The distributions here do not come within any of the exceptions set out in section 112 and consequently the entire amount of gain must be recognized in accordance with section 112 (a).

Section 113 (a) provides that the basis of property shall be cost, except that in case the property was acquired prior to March 1, 1913, if the adjusted basis is less than the fair market value of the property as of March 1,1913, then the basis shall be such fair market value.

Section 113 (b) (1) (D) provides as follows:

(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) Genebal rule. — Proper adjustment in respect of the property shall in all cases be made—
(D) in the case of stock (to the extent not provided for in the foregoing sub-paragraphs) for the amount of distributions previously made which, under the law applicable to the year in which the distribution was made, either were tax-free or were applicable in reduction of basis * * *.

The Revenue Act of 19B2 provides for the computation of gain or loss in a like manner.

Petitioners concede that the amounts distributed in 1933 and 1934 were distributions in partial liquidation within the meaning of section 115 (h) of the Revenue Act of 1932 and section 115 (i) of the Revenue Act of 1934. The amounts so distributed are by the statute “treated as in part or full payment in exchange for the stock.” Sec. 115 (c), 1932 and 1934 Acts, supra. Other provisions definitely provide for the recognition of prior distributions applicable in reduction of basis in arriving at the adjusted basis for determining gain or loss. Sec 113 (b) (1) (D), 1932 and 1934 Acts, supra. If one of a series of distributions in complete liquidation was intended by the statute to give rise to taxable gain to the extent that the payment constituted profit, computed in the manner contended by petitioners, there would be no need for a provision of this sort requiring adjustments to the subbase for distributions in prior taxable years. Read together, as they must be, these statutory provisions disclose a purpose to delay the imposition of a tax on liquidating dividends until the amount of the distributions exceeds the stockholder’s basis. This Board and the courts have thus construed the provisions. In Florence M. Quinn, 35 B. T. A. 412, we rejected a theory that one or more of a series of distributions in complete liquidation, accompanied by a surrender of one share of stock for each $100 distributed, could be treated as a separate sale of the stock surrendered and thus reduce the aggregate basis of the stock. In Letts v. Commissioner, 84 Fed. (2d) 760, affirming 30 B. T. A. 800, it was held that so much of the final liquidating dividend received in 1927 as exceeded the stockholder’s aggregate basis, as reduced by prior distributions, constituted taxable gain. The effect of this ruling is that the distributions prior to 1927 merely served to reduce the stockholder’s capital investment. See also Hellman v. Helvering, 68 Fed. (2d) 763.

These decisions are consistent with the general rule that the income tax laws reach only realized gains and losses, Lucas v. American Code Co., 280 U. S. 445, and that a taxpayer is entitled to a restoration of his capital investment before being called upon to pay a tax on profit. Doyle v. Mitchell Brothers Co., 247 U. S. 179; Burnet v. Logan, 283 U. S. 404. Here the distributions in 1933 applicable to the shares of stock held less than two years were less than petitioners’ decedent’s cost basis therein, and if we were to follow the petitioners’ method of computing and reporting gain, taxable income would result from such payments prior to the return of capital. Obviously such a course should not be followed without clear legislative authority.

The method advanced by petitioners for the computation of gain is based upon the theory that at the close of 1933 it was known that the remaining liquidating dividends would aggregate $112.50 per share. The claim lacks proof. Prior to December 15, 1933, dividends of $200 per share had been distributed. The book value of the corporation’s net assets on December 15, 1933, was $346,869.42 or $115.01 per share. At that time the corporation had as assets numerous accounts receivable and an interest-bearing mortgage, payable at the rate of $50,000 semiannually, with the right to anticipate payments. Obviously the bare terms of the instrument furnish no means for accurately determining at the close of 1933 the amount ultimately to be recovered from the claim, and nothing was offered in evidence to prove that as of December 31, 1933, there xvas any assurance that $150,000 would be paid on the debt in January 1934 and the balance sold two months later.

At that time the corporation’s tax liability for 1932 and 1933 had not been determined. Additional tax for 1932 was paid after December 31, 1933, and the corporation’s 1933 tax liability was not determined until 1935 and was the subject of a refund claim filed in December 1937. It actually filed an amended return in March 1934 for 1933 disclosing additional tax liability, which the corporation paid in installments in 1934. It had income in 1934, and as of the close of the year accrued an amount on its books for tax thereon. Under the circumstances, we think the record lacks proof that as of the close of 1933 it could reasonably be determined that future distributions in complete liquidation would amount to $112.50 per share. No effort was made to establish that the rights of the stockholders to participate in further distributions in liquidation had a fair market value at that time of a like amount.

In Burnet v. Logan, supra, the respondent sold her stock for cash and an agreement of the buyer to pay the additional amount of 60 cents per ton for ore removed from a certain mine. It was held that, as the promise to pay was contingent upon facts incapable of foretelling with reasonable certainty and had no ascertainable fair market value, the transaction could not be regarded as a closed one or give rise to taxable gain until the seller recovered her capital investment. Here there was no unconditional promise to distribute a definite sum of money, and the corporation could have abandoned dissolution proceedings at least not later than April 1934, when it filed a certificate of dissolution by appropriate action of its stockholders. As just shown, it was unknown as of the close of 1933 what additional amounts the corporation would distribute as liquidating dividends and no attempt was made to prove that the rights of the stockholders to their proportionate share of the assets of the corporation in liquidation had a fair market value at the close of 1933 of $112.50 per share or any other amount. In both cases future payments were uncertain; in the Logan case they lacked fair market value and here there is no proof of fair market value. Thus if it could be said that the petitioners’ method of computing the profit taxable each year has statutory approval, without proof of one of the essential factors it could not be applied here.

The ruling made in O. D. 343, C. B. No. 1, p. 80, cited by petitioners, was not intended to be applicable to facts prevailing here. That is clearly shown by more recent rulings. O. D. 461, C. B. No. 2, p. 85; I. T. 2246, C. B. IX-2, p. 14.

The case of Commissioner v. Winthrop, 98 Fed. (2d) 74, affirming 36 B. T. A. 314, involved a loss, not the question of apportionment of gain on the redemption of stock by a series of distributions during more than one taxable year. There the future distributions could be determined with reasonable certainty and the certificate received to evidence the stockholder’s right to a final distribution had a value susceptible of determination.

Petitioners urge the applicability of sections 41 and 42 of the Kevenue Act of 1934. These sections require the computation of net income on an annual basis in accordance with the accounting method regularly employed by the taxpayer, but if he has no such method of accounting or the one used does not clearly reflect income, the computation shall be made in such manner as in the opinion of the Commissioner does clearly reflect income.

The revenue acts are designed to produce revenue at regular intervals based upon the operations of taxpayers within the taxable year. Burnet v. Sanford & Brooks Co., 282 U. S. 359. Here the petitioner’s decedent kept his books and filed his returns upon the cash basis, a recognized method of accounting for tax purposes, and the facts and the question involved herein do not require a computation of gain by an accounting method other than that regularly employed to return income.

The cases cited by petitioners in their argument on the applicability of sections 41 and 42 have been examined and found to be either distinguishable or not in point. For instance, in Ward Ames, Jr., 27 B. T. A. 624; affd., 71 Fed. (2d) 939, it was agreed that each payment included a return of capital and income and the only question was the amount thereof. Some of the cases involved facts similar to Bwmet v. Logan, supra, and were decided prior and contrary to the rule announced in that case. In other cases, the question turned upon whether gain should be computed upon a single basis or a basis for each unit of property acquired as a whole.

The method followed by respondent in computing the gain is sustained.

Decision will he entered for the respondent.»


author: Mellott:

text:
    Nebraska Bridge Supply & Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90846.
    Promulgated June 7, 1939.

      Clarence T. Spier, Esq., for the petitioner.

      Hugh Brewster, Esq., for the respondent.
   OPINION.

Mellott:

The Commissioner made several adjustments to the net income shown by petitioner upon its return for the calendar year 1934 and determined a deficiency of $5,298.90 in its income tax and a deficiency of $1,775.51 in its excess profits tax for that year. Several of the adjustments are conceded by the petitioner to be correct. One allegation of error contained in the petition was abandoned. The proceeding was submitted upon a stipulation of facts, the error charged being the disallowance by the Commissioner of “Loss on land due to tax sale $36,722.25.”

Petitioner, a Nebraska corporation engaged in the wholesale manufacture and sale of timber products, had acquired certain tracts of land in the counties of Lee and Monroe in the State of Arkansas. The aggregate cost bases to petitioner as of 1934 were:

Lee County lands_$27,205.68
Monroe County lands_ 10, 983. 73
Total 38,189.41

In its return of income petitioner treated the aggregate cost bases as $38,122.25 and claimed tbe entire amount as a deductible loss. The Commissioner allowed $2,000, disallowing the remainder. Under the stipulated facts the maximum amount which may be allowed is $38,189.41.

The lands in each county, in accordance with the statutory provisions of the State of Arkansas, were offered for sale for taxes and were sold to the State of Arkansas at the regular tax sale held on June 13, 1932. The county clerk of Monroe County in 1934 made, out a “Certificate of Sale” to the state for the lands in that county; but the county clerk of Lee County did not make out such certificate of sale for the lands in that county until April 18,1935.

The issues may be epitomized. Respondent, conceding that all of the steps had been taken in 1934 to divest petitioner of its title to the Monroe County lands and that it had therefore lost its investment in them, contends that its deduction for such loss must be limited to $2,000 under the provisions of subsections 117 (b) and (d) of the Revenue Act of 1934. While not abandoning this contention, he also argues that even though it be held that the loss is not thus limited, still no loss had been sustained in connection with the Lee Comity lands until 1935.

Upon brief both parties quote at length from the Arkansas statutes and cite several decisions by the highest court of that state on the general question of whether the.usual incidents of a “sale” were, or were not, present in connection with the acquisition of the lands by the state and whether the proceedings can, or can not, appropriately be designated a “forfeiture” of the lands. Petitioner also places some reliance upon the adoption of a resolution by its board of directors in July 1934 to the effect that “the market and potential value of the lands * * * [is] insufficient to justify payment of said delinquent taxes or the redemption of the lands sold or surrendered * * * [and that] the corporation take no steps to effect redemption within the period provided by law.” The conclusion which we reach from an analysis of the statutory provisions makes it unnecessary for us to determine whether or not the corporate resolution served, in itself, as an “identifiable event” fixing the loss in the year 1934. Cf. DeLoss v. Commissioner, 28 Fed. (2d) 803; certiorari denied, 279 U. S. 840; United States v. White Dental Manufacturing Co., 274 U. S. 398.

The parties agree that the lands were capital assets. Respondent contends, and determined the deficiency upon the theory, that there was a “sale” of such capital assets. He cites, among other cases, Betty Rogers, 37 B. T. A. 897; affd., 103 Fed. (2d) 790. But that case is distinguishable upon its facts. There the makers of a purchase money note made a voluntary conveyance of the fee to certain real estate for a consideration of $10 and a release from their liability upon the note. Here, however, there was no sale by the petitioner. It lost its property in a sale made by the collector of the county “for taxes, penalty and costs thereon.” Sec. 10085 et seq., Statutes of Arkansas (Crawford and Moses, 1921.) There was no “transfer of property from one person to another for a valuable consideration” (see 7 Words & Phrases, 1st series) but a proceeding whereby petitioner’s title was extinguished. Cf. Commissioner v. Freihofer, 102 Fed. (2d) 787, affirming Sol Greisler, 37 B. T. A. 542; C. Griffith Warfield, 38 B. T. A. 907; Commonwealth, Inc., 36 B. T. A. 850. We are therefore of the opinion and hold that the respondent erred in determining that petitioner’s loss must be limited to $2,000 under the provisions of section 117, supra.

But shall petitioner be limited in its loss to the aggregate cost of the Monroe County property because of the fact that the “Certificate of Sale” was not delivered by the collector of Lee County to the state during the taxable year ? Respondent cites T. J. Bosquett, 39 B. T. A. 763. The gist of the cited case and the authorities therein cited is that a taxpayer may not deduct as a loss the cost of property lost under foreclosure proceedings until the time within which the property might be redeemed has expired. The rule is sound and well established; but, as we read the Arkansas statutes and the decisions of its highest court, it is inapplicable.

Under section 10112 of the statutes of Arkansas the clerk is required to make out a certificate of sale to the state for all lands purchased by it, and, upon its being recorded in the recorder’s office, “the title to all lands embraced in such certificate shall vest in the state * * * and be subject to disposal, as other forfeited lands shall be.” This provision, or one quite similar to it, has been held to be merely directory and a failure to comply does not affect the sale. Leigh v. Triple, 91 Ark. 117; 120 S. W. 972; Liddell v. Stone, 101 Ark. 328: 142 S. W. 506. It has also been held that where property is bid in by the state for want of other bidders at the sale, no deed is necessary to pass title to the state. Kelley v. Laconia Levee District, 74 Ark. 202; 87 S. W. 638. Section 10104 permits the owner to redeem the lands sold to the state within two years after the sale by making application to the clerk of the county court in which the property is situated, and paying the taxes, penalties, and costs assessed against it. Section 10106 permits “the person, firm or corporation holding * * * lands under color of title”, which have been sold to the state for the nonpayment of taxes since the year 1908 or thereafter, “which sale has never been certified to the Commissioner of State Lands”, to file with such commissioner “a certificate from the clerk of the county in which said lands are situated showing the sale of said land, the amount of taxes, penalty and cost due thereon, if any, and the payment thereof and make a sworn statement in writing that he is the holder of said lands * * * and entitled to redeem same.” These sections, respondent contends, gave petitioner until April 18, 1935, the right to redeem the lands in Lee County and therefore, under the rule of such cases as T. J. Bosquett, supra, the loss was not sustained during the taxable year.

Petitioner contends that irrespective of whether or not the clerk had certified the land prior to October 1, 1934, its period of redemption expired on that date. It points to the provisions of Act No. 2 of the Forty-Ninth General Assembly of the State of Arkansas, Third Extraordinary Session 1934 (Acts of Ark. 1935, p. 1011), which, so far as applicable here, provides that if land has been certified by the county clerk to the state but has not been sold by the state, it may be redeemed “at any time before October 1,1934” and “If, for any reason whatsoever, the sale to the state has not been certified, * * * redemption may be made at any time before October 1, 1934 * * *.”

No decision of the highest court of the state construing this section or passing upon its effect or impingement upon sections 10104 and 10106, supra, has been called to our attention and we have found none. The Supreme Court of Arkansas has said, however, that “The owner must exercise his privilege of redeeming within the specified time limited for that purpose, or lose it finally * * *,” Nelson v. Pierce, 119 Ark. 291; 177 S. W. 899, and “Where the owner is accorded a certain time to redeem, this period begins to run from the day of the sale and will not be extended in the absence of statute.” Brasch v. Mumey, 99 Ark. 324; 138 S. W. 458. It is no doubt true, as respondent points out upon brief, that the courts of Arkansas favor a liberal construction of redemption provisions (Walker v. Ferguson, 3 S. W. (2d) 694). There probably was at least a possibility that petitioner might have been permitted to redeem the Lee County lands under the general provision of law (secs. 10104 and 10106, supra) rather than being limited to making redemption prior to October 1, 1934, under the Special Act of 1934. But whether it would have been permitted to do so was primarily dependent upon the construction which the courts of the state should put upon the later legislation. In any event, petitioner wrould have had the laboring oar of convincing the court that the Act of 1934 did not, as its wording clearly indicates, amend and modify the general rule by substituting in its stead a specific requirement that redemption must be made before October 1, 1934.

The stipulated facts clearly indicate that petitioner lost both the Monroe and Lee County lands, having aggregate cost bases of $38,-189.41, during the taxable year 1934. The portion of the deficiency attributable to the disallowance of the deduction of this amount from gross income, must be set aside.

Judgment will be entered irnder Rule 50.

       SEC. 117. CAPITAL GAINS AND LOSSES.

      (b) Definition of Capital Assets. — For the purposes of this title, “capital assets” means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.

      (d) Limitation on Capital Losses. — Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the united States or of any State or Territory, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale (except such portion of the loss as does not exceed the amount, if any, by which the adjusted basis of such instrument exceeds the par or face value thereof) shall not be subject to the foregoing limitation and shall not be included in determining the applicability of such limitation to other losses.


author: Disney:

text:
    The Chase National Bank of the City of New York and Otto W. Sartorius as Executors of and Trustees under the Last Will and Testament of Otto Sartorius, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89542.
    Promulgated June 7, 1939.

      Edward N. P&rhms, Esq., for the petitioners.

      E. O. Hanson, Esq., and Thomas H. Lewis, Esq., for the respondent.
   OPINION.

Disney:

This proceeding involves income taxes for the period January 22 to December 31, 1934. Deficiency of $4,290 was determined by the respondent, and the total amount thereof is in issue. The facts have been stipulated, except certain facts placed in evidence by testimony, from which we find the following additional facts: The $8,250 involved in this proceeding was paid to Annie Sartorius by check on December 17, 1984. At that date the estate had about $31,000 income accumulated, ample to make the payment. The payment was originally charged against principal. Later, on February 21, 1935, the entry was reversed and the payment was charged to income; and it was actually paid out of income. The $10,000 payment to Annie Sartorius was charged to principal. The agreement entered into between Annie Sartorius and the executors and trustees of her husband’s estate was approved by the Surrogate’s Court after the close of the year 1934. The trust for the security of the payments was not set up until after January 1,1935. The facts will be referred to herein only so far as necessary to a discussion of the issue. The issue is whether petitioners are entitled to deduction of $8,250 paid either as trust income currently distributable under section 162 (b) of the Revenue Act of 1934, or on the theory that it is taxable to an annuitant under section 22 (b) (2).

The facts controlling here may be epitomized as follows:

The $8,250 in question was paid during the taxable year to Annie Sartorius, the widow of Otto Sartorius, deceased, who died a resident of Pennsylvania. The deceased’s will gave to his widow an annuity of $9,000 for life. After Ms death, she threatened to enforce her rights as a widow, adversely to the will, unless $9,000 additional for life was provided for her. The deceased’s net estate was $1,041,830.91 and the widow under the law of Pennsylvania was entitled to receive $371,448.72. About October 25, 1934, she made an agreement with the petitioners as executors and trustees under the will of the deceased husband, providing that she should receive a lump payment of $10,000 and an additional $9,000 per year for life. The payment thereof was to be out of the residue of the decedent’s estate remaining after payment of all legacies, including the provision for $9,000 annuity to the wife as provided by the will, and as security for the payment of the additional $9,000 annuity the executors and trustees agreed to set aside out of the residue of the estate securities or a sum sufficient in their sole judgment to yield a net income of $9,000 per year, and to invest and reinvest same, receive the income, and, out of the net income therefrom and also out of the principal of said securities or fund if the net income should not be sufficient, to pay Annie Sartorius $9,000 per year for life. In consideration thereof she waived her right to elect to take against the will and during the year received under the agreement (in addition to a like amount under the will) $8,250 here involved as income, for and on account of the eleven months of that year commencing with the first day of February (the husband having died January 21, 1934).

We think the question has been answered by cases of high authority. Lyeth v. Hoey, 305 U. S. 188, dictates that Annie Sartorius received the payment in question by way of inheritance, albeit through a compromise settlement. She would then not be taxable thereon and, considering the complementary nature of taxation of heir and fiduciary, the fiduciary would prima facie not be entitled to deduction of the amount paid. Helvering v. Butterworth, 290 U. S. 365, and Bush v. Commissioner, 89 Fed. (2d) 596. Petitioners seek, however, to distinguish the situation herein from that involved in the cases above cited by urging, in effect, that Annie Sartorius was entitled to payment, not from the estate of her deceased husband, but from a trust set up and from income of funds or securities held by such trust, the consideration received by her in the compromise agreement being, not the moneys to be received, but the benefits of a position.as beneficiary under the trust. We think petitioners misconceive her situation. Payment to her was promised “out of the residue of the estate.” The quoted expression appears in words or effect four times throughout the agreement between the executors-trustees and Annie Sartorius, and the executors-trustees “agree to pay Annie Sartorius out of the residue of the decedent’s estate.” It is in addition to this promise “and as security, for the payment” that they “agree to set aside out of the residue of the estate securities or a sum” to. be held invested and reinvested and “out of the net income therefrom (and also out of the principal of said securities or fund thus set aside if at any time said net income shall not be sufficient) to pay unto said Annie Sartorius in. each year during her life the sum of Nine Thousand dollars.” The consideration was the surrender of an interest in the estate. Though suggestion is made as to consideration through an oral contract with the husband, no proof thereof is made. It is plain both that the setting aside of securities was by way of security, and that payment xvas to be at all events, if necessary, from the corpus or residue of the estate, and in our opinion Annie Sartorius did not accept a mere status as beneficiary of a trust in lieu of that of heir to the estate. Nor is it material that the payment of $8,250 to her in the taxable year was actually from income. The agreement did not so limit it. Elizabeth G. Heywood, 11 B. T. A. 29; W. S. Tyler Estate, 9 B. T. A. 255; Marion Shainwdld Sevier, 14 B. T. A. 709 (117).

If payments made by trustees under a will do not depend upon income, they are made in discharge of a gift or legacy and are not taxable. Helvering v. Butterworth, supra.; Burnet v. Whitehouse, 283 U. S. 148, 151. Lyeth v. Hoey, supra, applies the principle to payments received through compromise, as by inheritance, and Ave think it, applies fully here. In Benefield v. United States, 27 Fed. Supp. 57, the Court of Claims, following the above- cases, applied it in a situation very similar to that herein. An annuity was paid to a widow from trust income and corpus, by agreement among heirs, under an unexecuted will and in disregard of an executed will, which had provided for the widow a smaller annuity. As herein, the trustees set aside certain assets as a trust fund for the purpose of making the payments, which were made partly from the income of such trust fund and partly from the corpus thereof — exactly as might have transpired herein. There the United States made the same plea as herein, in effect, urged by petitioner, that the widow was a beneficiary of a trust, and not a legatee. The court held, upon a broad view of the cases from the Supreme Court hereinabove considered, that the payments were a charge upon the whole estate, that the annuity did not depend upon income from the trust estate, and that the widow was not taxable upon payments received. The same is true here, and the fiduciary was not entitled to the deduction claimed, upon a theory that the payments were distribution of income.

We come to the same conclusion as to the theory urged that Annie Sartorius was taxable as annuitant under section 22 (b) (2) of the Revenue Act of 1934. As respondent points out, if the matter is viewed as an annuity purchased by surrender of a one-third interest in the estate, the widow would take contrary to the will, would not receive under it the other annuity of $9,000 per year (not herein involved because not claimed and paid from income) and the resultant $18,000 yearly annuity surrendered is to be compared with the taxable 3 percent of consideration paid for the annuity — with the result that such consideration being the stipulated $371,448.72 value of the widow’s one-third interest, 3 percent thereon (after deducting therefrom $10,000 paid to the widow from corpus) would be $10,483.46, so that such annuitant, even upon petitioners’ own theory would, to a considerable extent, not be taxable upon the $18,000 per annum received by her, and to that extent there is no valid argument that taxation to the annuitant relieves the payor of the annuity from taxation. Moreover, taxability to annuitant does not necessarily indicate deduction for the payor of annuity. Hoe Estate Co. v. Gommissioner, 85 Fed. (2d) 4. However that may be, since we have above concluded that under Lyeih v. Hoey, supra, there is no difference in principle between the situation as to widow taking under the will and one taking as here by agreement contrary to it, we apply the language of the Court in Helvering v. Butterworth, supra:

When she mates her election the widow decides to accept the benefits of the will with the accompanying rights and liabilities. In no proper sense does she purchase an annuity. * * *

Here the widow elected to take, by compromise, a portion of the estate, payable if necessary from corpus thereof, and took by inherit-anee and not by purchase. We conclude that the respondent did not err in denying the deduction upon either theory advanced by petitioner.

Decision will b&. entered, for the respondent.


author:
Sternhagen: Black,
      VaN FossaN,

text:
    John N. Fulham, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91390.
    Promulgated June 7, 1939.

      George H. B. Green, Esq., for the petitioner.

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

Sternhagen:

The Commissioner determined a deficiency for 1935 of $1,184.89 in petitioner’s individual income tax. He included in petitioner’s gross income $5,338.82, being the net income of the Mary E. Pulliam trust, which was made up of $4,691.96 dividends and $646.84 other income. He said in his notice of deficiency:

2 and 3. It is the opinion of this office that section 166, relating to the Revenue Act of 1934, which provides for taxing to the grantor income of trusts revocable by the grantor or by a person not having a substantial adverse interest in the income or principal of the trust applies in the instant case. Income received from the Mary E. Fulham Trust is therefore held to be taxable to you, since it appears that Mrs. Fulham does not have a substantial adverse interest.

The proceeding was submitted on a written stipulation of facts. The argument ivas confined to section 166. No reference has been made throughout to section 167.

Petitioner is a resident of Winthrop, Massachusetts. He was married to Mary E. Fulham, and throughout the year 1935 she and five children were living. On April 11, 1930, he executed the so-called Mary E. Fulham trust, naming himself and Dudley H. Dorr, trustees, to whom he transferred scheduled property. The trust provided:

Clause First: Until the death of my wife, Mart E. Fulham, the trustees shall accumulate the income of the trust fund. During my wife’s life the trustees may pay to her at any time or from time to time any part or parts or the whole of the principal and/or accumulated income of the trust fund.
Clause Second: Upon the death of my said wife the trustees shall divide the remaining principal and all unpaid, accrued, and accumulated income of the fund into shares so that there shall be one share for each child of mine then living and one share for the issue then living of each child of mine then dead but represented by such issue.
A. The trustees shall pay and distribute by right of representation to and among the issue of any deceased child the principal of a share to the income of which such child would have been entitled if living.
B. The trustees shall pay quarterly or oftener to each of such living children until he reaches the age of twenty-five (25) years the net income of his share.
C. Upon each such child reaching the age of twenty-five (25) years the trustee shall pay and distribute to him the remaining principal and all unpaid, accrued and accumulated income of his share free of all trust.
D. If any child of mine survives my wife and myself but dies before becoming entitled to a distribution of principal leaving issue him surviving, the remaining principal and all unpaid, accrued, and accumulated income of such deceased child’s share shall be paid over and delivered to such issue per stirpes. If any such child so survives but dies before becoming entitled to a distribution of principal without issue him surviving, then the share of such deceased child shall be divided equally among my other children or their issue then living, that is to say, it shall follow the fortunes of and merge with the share then held in trust for or previously paid over to them, the surviving issue of any deceased child to participate in such distribution by receiving by right of representation property which would have been held in trust for or delivered to their ancestor if he had survived.
Clause Thikd : The foregoing beneficial interests are subject to the following conditions and provisions:
A. Whenever any share or fund is held for any person the trustees may in their discretion pay to any such person at any time or times or from time to time any part or parts or the whole of the principal of his or her fund or share.
B. Whenever in this instrument it is provided that upon the death of a beneficiary his or her interest in income or principal or both will shift to another beneficiary, I direct that the latter beneficiary shall be as fully entitled to unpaid and accrued income as if it were current income, and that no right to such income shall belong to the estate of the deceased beneficiary.
C. Whenever by reason of the death of a beneficiary hereunder the share of any other beneficiary is increased, I authorize the trustees to hold in trust the entire amount or any part of such increase subject to the general provisions of this instrument irrespective of the fact that they may have distributed in whole or in part the original capital of a share or fraction of a share thus augmented.
D. All provisions in this instrument for the payment of any sum whether principal or income, held on an active trust are subject to the further provision and condition that said principal or income shall be inalienable and not subject to be reached or applied by any creditor of the person entitled thereto.
E. So far as the trustees are directed to pay income to any beneficiary they may in their discretion expend the same for his or her use or benefit, and they shall have full power to determine what expenditures are for the use or benefit of any beneficiary. So far as the trustees are directed to pay income to any beneficiary they may in their discretion accumulate said income or any part or parts thereof and retain the accumulations as they may be invested from time to time in a separate account, and they may in their discretion pay out such accumulations or any part or parts thereof at any time or times to the person or persons entitled to the income at the time of each such payment.
F. Whenever any principal vests in any person and the trustees are directed to pay and distribute to such person his share, the trustees may in their discretion retain the legal title to the share of such person to hold for such person for any period until he or she reaches the age of twenty-one (21) years, with all the powers, provisions, rights, exemptions, privileges, and immunities herein set forth and with the further power to apply any part or parts of such share without distinction as to principal and income for the benefit of the beneficiary.
G. It is possible that under the specific provisions of this instrument some interests may not vest within the time limited by the rule against perpetuities. I therefore provide that in spite of any such specific provisions all interests shall vest at the latest twenty-one (21) years after the death of the survivor of my said wife and my children now living; and in each such case the remaining principal and all unpaid, accrued, and accumulated income of each fund or share which has not previously vested shall then be distributed to the person then entitled to the income thereof.
Clause Fourth : I give to the trustees hereunder and their successors the following powers, rights, and exemptions in addition to and not in limitation of any powers given otherwise in this instrument or by rules of law and make the following provisions concerning them:
A. While said Dorr is living he shall keep the books of account, and shall be the managing trustee.
B. All trustees shall have the same power of disposition of and management over the property as if they were the absolute owners free of all trust. Without limiting such powers, they shall specifically have power to buy, exchange, sell, pledge, mortgage, invest, reinvest, and borrow, when, as, how, and what they please irrespective of rules of law, including the power to lend money to any person including any trustee or beneficiary with or without security, to lease for terms longer or shorter than the active trusts, to compromise or arbitrate any matter, to decide irrespective of rules of law what is income and principal, and all questions between income and principal, and all questions between persons successively entitled to income, to hold and carry real and personal property in any name without indication of any trust, to hold, manage, and invest trust funds or shares in one fund or divided in such way as the trustees may choose; and in distributing the trust funds among the beneficiaries to distribute wholly or partially in kind and/or to sell to distribute, with power to transfer investments and to convey real estate or any interest therein (whether separate or undivided) as part or the whole of the share of any person with or without transferring or conveying similar property to any other person at such valuations as the trustees shall deem just, which valuations shall be conclusive.
O. No trustee shall be liable, except that each shall be liable for his own fraud or embezzlement.
D. The trustees shall have power and authority to execute, deliver, and acknowledge all necessary or proper deeds and other instruments in writing incident to any of their power and authority.
E. Any trustee may by a writing delegate his power at any time or times for any period or periods to another trustee.
F. Any account of the trustees or any action by them or any charge made or allowed by them approved in writing by a majority of the Committee shall be binding on all persons (whether in being or not) who are then or may become interested in the trust fund.
Q-. Any trustee may resign by a written instrument signed by bim.
H. No bond, surety, or security shall be required of any trustee.
Clause Fifth : I hereby create in Jeannie L. Ronald, of Boston, Suffolk County, Massachusetts, Abthue L. Pabkeb, of Somerville, Middlesex County, Massachusetts, and Nicholas L. Fulham of said Winthrop, hereinafter referred to as the Committee, a joint power exercisable at any time or times or from time to time by any two of said Committee by a signed instrument in writing. I direct that each such writing shall forthwith be delivered to the trustees hereunder, but such delivery shall not be a prerequisite to its taking effect. This Committee by two of its members so exercised shall have the power to do the following things and the following provisions shall apply.
A. To change, alter, and revoke any of the trusts herein set forth, and declare new trusts of the property in any way or manner, and to change, alter, and revoke any or all of the provisions of this instrument. No exercise of this power shall exhaust it It may, however, be released, extinguished, or restricted by a like instrument so signed by any two of the Committee. Without qualifying or limiting the foregoing power in any particular, it shall include the power to alter the number of, the powers of, and the succession among the trustees, the power to remove trustees, the power to appoint successor trustees, the power to appoint additional trustees, and the power to alter the number of, the power of and the succession among the Committee, and to appoint additional members of the Committee and successor members of the Committee.
B. Any of the persons in whom said joint power is vested may resign at any time by a signed instrument delivered to any of the Committee or any trustee hereunder.
C. In case the number of Committee shall at any time be less than the number required by the provisions then in force a vacancy or vacancies shall be filled by an instrument in writing signed by a majority of the remaining members of the Committee and delivered to any trustee. The person filling such vacancy shall have the same powers as if originally named, and any additional member of the Committee shall have the same powers as if originally named. No personal liability shall attach to any member of the Committee for any reason.
D. A certificate signed by a majority of the Committee as it may be composed from time to time certifying to a change in the trustees or the Committee or to any other fact affecting the trust fund or the trust instrument or to any alteration, change, or revocation of any of the trusts or any of the terms of this instrument shall be conclusive evidence thereof.

The committee on June 25,1932, modified the instrument as follows:

At the end of Paragraph A of Clause Fifth of said, trust instrument, we insert the following:
It is further provided, however, that the power created in Paragraph A of Clause Fifth of the trust instrument shall not be exercised while Mart E. Fulham is living and competent to act in any manner so as to revest in the creator John N. Fulham any part or all of the corpus or income of the trust fund, unless the exercise of such power is consented to in writing by said Maby E. Fulham. In so far as the Committee may have any power to alter, amend, or revoke the proviso contained in the last sentence, they hereby relinquish and extinguish such power.

No part of the net income of the trust has been paid to petitioner.

The argument is made to turn first on the question whether Mary E. Fulham had what the statute calls a substantial adverse interest in the disposition of the corpus. It is primarily necessary, therefore, to examine the trust instrument and the supplement to learn what the wife’s place in the trust scene is. She is expressly mentioned in but two places. In clause first she is named as the person until whose death the trustees shall accumulate the trust income and during whose life “the trustees may pay to her” at any time any part of the corpus or accumulated income. By the supplement to clause fifth it is her consent which is made the condition of the exercise of the committee’s power to change, alter, or revoke the trust. These, it seems to the Board, are not substantial adverse interests.

The wife was not a beneficiary, and it is apparent throughout the instrument that she was not so regarded. The word “beneficiaries” is used several times and quite obviously it means the children of the settlor, any one of whom might die before the settlor, with or without issue, and thus leave a problem. The wife was given no right to demand anything from the trustees, although they were given the authority to pay her in their discretion. Since the settlor was a trustee, nothing the wife had was adverse to him, for one who may legally refuse the request of another is not subject to an adverse interest. The supplemental constriction of the committee’s power to alter or revoke the instrument is also something different from a substantial adverse interest. It is, in fact, no interest at all, and certainly not a substantial interest. It is but the power of consent without which the trust remains fixed. If one creates a trust with the power to revoke, dependent upon the written consent of X, this is not to create in X a substantial adverse interest even though X be the settlor’s wife. X must have some right to trust benefit which is to some extent affected by his consent. We agree with the respondent that nothing in the instrument gives Mary E. Fulham a substantial adverse interest.

It is argued that even if the wife is not one having a substantial adverse interest, there is in petitioner no power to revest the corpus in himself. The trust holds the corpus and accumulates the income, and the purpose is clearly to provide for the children and their issue. Since there are five of them, they may reasonably be expected to survive their parents and take under the trust. They and they only are the persons having substantial interests in the trust. Neither of the trustees qua trustees has such an interest, Reinecke v. Smith, 289 U. S. 172; Bowler v. Helvering, 80 Fed. (2d) 103, and no one or all of the committee has an interest. If there be a power to revest, it is not substantially adverse to the settlor.

That there is such a power is clear from the provision that the committee may alter and revoke and that the trustees may deal with the property as their own. The settlor, being a trustee, is literally possessed throughout the taxable year 1935 of the power to revest in himself title to all of the corpus of the trust in conjunction with persons not having any substantial adverse interest in the disposition of any part of the corpus or income. This is not a remote power which only vests upon the death of the children. It is a present power exercisable whenever the committee chooses to exercise it and the wife consents. It leaves the corpus as clearly in the control of the settlor as Congress apparently contemplated when section 166 was enacted. No one who was given a voice in the exercise of the power had any adverse interest and hence no material reason for resistance. To be sure, their refusal to act was final, but Congress apparently discounted that possibility and acted upon the belief that unless they had a “substantial adverse interest” they would not resist. This was reasonable enough to support the legislation.

Reviewed by the Board.

Decision will be entered for the respondent.

Black,

concurring: I concur in the result reached in the majority opinion, but I do not agree with the reasoning by which such result is reached.

The majority opinion, in holding that Mary E. Fulham was not a person with a substantial adverse interest in the income or the principal of the Mary E. Fulham trust, in my judgment conflicts with our decision in Jane B. Shiverick, 37 B. T. A. 454. In that case, Jane B. Shiverick created a trust, reserving the power to revest in herself the corpus of the trust with the consent of her husband, Asa Shiverick, who was made cotrustee with the Cleveland Trust Co. Under the terms of the trust, after the decease of the settlor, in the event her husband was then living, so much of the income was to be paid him during his life as he might demand by a written instrument lodged with the trustee, and while he was the recipient of the income, the trustee was authorized to pay him from the principal of the trust such amounts as it should deem necessary or proper for his maintenance, support, and comfort.

Thus it will be seen that the right of the settlor’s husband in the Shiverick case to share in the income of the trust or any of the corpus thereof, was contingent upon his surviving the settlor. Even though the husband’s interest in the income and corpus of the trust was a contingent one, we held that such interest was “a substantia] adverse interest” within the meaning of section 166 of the Revenue Act of 1932. On that point we said:

While his interest was contingent upon the death of his wife occurring before his decease, he might reasonably be expected to object to any change in the assets of the estate which would be inimical to his rights under the trust instrument in the event he outlived her. To that extent, at least, his interest was adverse. * * * The property placed in trust by the settlor was very substantial in amount — more than a half million dollars in bonds alone, half of which were Government bonds. The interest on the bonds was more than $20,000 a year. His right to receive this amount, contingent though it was, is sufficient,’we think, to justify us in holding that he had a substantial adverse interest.

In the Mary E. Fulham trust involved in the instant case the interest of Mary E. Fulham was contingent, but, in the light of what we said in the SMvericTc case, it was a very substantial one. The settlor provided that “During my wife’s life, the trustee may pay to her at any time or from time to time any part or parts of the whole of the principal and/or accumulated income of the trust fund.”

Therefore, for the reasons above stated, I do not agree with the majority holding that the interest of Mary E. Fulham was not a substantial adverse interest.

However, under the doctrine announced by the Board in Mary Byerson Frost, 38 B. T. A. 1402, it is my opinion that petitioner would be taxable on the income in question under section 16/ of the Revenue Act of 1934, and it would seem that the same reasoning used in the Frost case would be equally applicable to section 166. In the Frost case, the grantor of the trust (Mrs. Frost) reserved a power, first in conjunction with her husband and after his death alone, to require the trustee to distribute to herself the trust principal, including a portion of the income which was to be accumulated. We held that under these circumstances the income was taxable to the settlor, Mary Ryerson Frost, under section 167 of the Revenue Act of 1934.

In the instant case, the power to revoke the trust and revest the accumulated income and corpus in the settlor was placed in the hands of a committee by clause fifth of the trust instrument. This clause fifth was amended June 25, 1932, so as to take out the committee the power to alone revoke during the life of Mary E. Fulham and to confer upon her the power “to consent in writing” to a revocation of the trust. This power to consent to revocation by Mary E. Fulham, during her lifetime, was of course to cease at her death and the power to revoke was again to rest in the hands of the committee, the committee clearly not being an adverse interest.

These facts, it seems to me, bring the instant case within the rule of the Frost case. For this reason, I concur in the result reached by the majority opinion but not in the reasoning by which such result is reached.

HarroN agrees with the above.

VaN FossaN,

The right to change, alter, and revoke the trust under consideration was originally vested in a committee. In 1932, however, the committee, by formal action, had abridged the provisions of the trust and the question at issue must be decided in the light of such amendment or abridgement.

By this amendment the right to revest the corpus in the grantor, as originally granted to the committee, was changed so as to require the written consent of Mary E. Fulham. To make assurance doubly sure the committee formally relinquished and extinguished any power possessed by it to alter, amend, or revoke the provision requiring the consent of Mary E. Fulham. Such was the status in the taxable year.

Obviously, the committee acting alone, as it might prior to 1932, did not possess a substantial adverse interest.. Accordingly, prior to 1932 the trust would have come within the provisions of section 166 (2). Subsequent thereto, as just indicated, this power, formerly vested in the committee, was conditioned on the written consent of Mary E. Fulham. Thus we arrive at the controlling question: Did Mary E. Fulham have a substantial adverse interest? In considering the question reference is made first to the trust provisions. Clause first provides:

Clause: First : Until the death of my wife, Mart E. Fulham, the trustees shall accumulate the income of the trust fund. During my wife’s life the trustees may pay to her at any time or from time to time any part or parts or the whole of the principal and/or accumulated income of the. trust fund.

Respondent contends that the quoted provision was permissive but not mandatory and that Mary E. Fulham, could not have compelled payment to her of any part of the corpus or income. I can not agree.. In construing a trust, the intent of the grantor is controlling. It is not to be assumed that the provisions of the trust were idle gestures, lacking in substance. A reading of the trust instrument convinces me that the grantor contemplated and intended that Mary E. Fulham, his wife, have the right and power to draw on the trust, both corpus and accumulated income, so far as her needs might require and that if need had arisen she could successfully have enforced her demands. It is noteworthy that the provision in question is placed in clause first of the trust instrument. It is also to be noted that clause second provides, “upon the death of my said wife the trustees shall divide the remaining principal and all unpaid, accrued and accumulated income”, etc., thus confirming the suggestion that the grantor contemplated the payments to Mary E. Fulham. I am of the opinion that under the trust instrument Mary E. Fulham was a beneficiary of the trust holding a substantial adverse interest in the corpus and income thereof. See Jane B. Shiverick, 37 B. T. A. 454; Smith v. Commissioner, 59 Fed. (2d) 56 (C. C. A., 1st Cir.); Bessie B. Jones, 27 B. T. A. 171. Entertaining this view, it follows that I can not concur hi the opinion of the majority. I do not believe that the trust here in question falls within the provisions of section 166 (2) of the Revenue Act of 1934.

Arundell agrees with this dissent.


text:
    Estate of John J. Stamler, Deceased, Rose K. Stamler, Executrix, and Rose K. Stamler, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89134.
    Promulgated June 7, 1939.

      Byron G. Carson, Esq., for the petitioners.

      Loren. P. Oakes, Esq., for the respondent.
   OPINION.

Disney:

This proceeding involves normal and surtax income taxes for the year 1934, deficiency having been determined in the amount of $496.75. The only issues are as to exemption of income received by John J. Stamler for services rendered as master .in chancery in the State of New Jersey, and as a member of the board of water commissioners of the city of Elizabeth, New Jersey.

Pursuant to statute the city of Elizabeth, at a cost of $4,614,277, purchased a water distribution system for the city on July 15, 1931, from the Elizabethtown Water Co. and another company serving a limited section, and financed it first by a temporary bond issue and then by a permanent 40-year bond .issue, and thereafter proceeded to operate it through a board of water commissioners, consisting of four members, appointed by the justice of the supreme court presiding in that district. Approximately 20 percent of the water consumed is used for municipal, city, and county purposes such as cleaning streets and furnishing water to state and governmental agencies such as armory, post office building, etc.

The board of water commissioners is by the state statute creating and authorizing it substituted in general for and invested with the theretofore existing powers of any board of public works, board of aldermen, common council, or other governing body or committee of the city relating to the matter of water distribution in such city and all things pertaining thereto. The board is required to make monthly reports to the board or body having charge of city finances, and before the 15th of each month to pay into the city treasury all moneys received during the preceding month, same to be carried in a special fund called the water fund; to submit annually to the body in charge of the finances of the city a budget consisting of a statement of anticipated revenue applicable to current expenditures, unexpended balances from previous revenues received from operation of the water system, amount to be raised by taxation, and the objects for which revenues are to be expended. Moneys may, if necessary, be raised by taxation for the maintenance of the department conducted by the water commissioners, with a limit of 1 cent for each $100 of the taxable ratables of such city, plus interest and amortization charges on water bonds.The city may issue bonds for water purposes, but the water commissioners do not have management of moneys raised by taxation. The mayor of the city has the same general veto power over the actions of the water commissioners as over the common council, board of aldermen or other governing body of the city. The state statute prescribes the salary of a water commissioner and that it shall be paid in the same manner as provided by law for other city officers; also prescribes a bond of $10,000 for faithful discharge of official duties, the bond to be filed in the office of the clerk of the city.

John J. Stamler was throughout the year 1934 a member of the board of water commissioners of the city of Elizabeth, New Jersey. He took an oath of office as such water commissioner, as required by law, and on his income tax return for 1934 reported $3,150 received from the city of Elizabeth, out of a total income of $15,098.12. During 1934 he spent an average of about one hour a day on his duties as water commissioner. The board met every Thursday afternoon at three o’clock. The board operated the water distribution system of the city, handling all matters in connection therewith, and used the revenue to maintain that department and to amortize the bond issue and pay interest on bonds. Collections for water used were deposited in the five banks of the city during each month, but at the end of the month transferred to a special earmarked trust account in the city depositary bank in the city treasurer’s name, where he held the money absolutely distinct from all city moneys. The salaries of the water commissioners were paid out of funds raised from the sale of water. Expenses of the water commissioners were always paid by check upon the special trust account, signed by the president of the water commission, countersigned by the mayor of the city, by the city comptroller and the city treasurer. The board of water commissioners had about 40 employees, all of whom were under the civil service provisions of the New Jersey state law. The water commissioners themselves were not under civil service. Each consumer is rendered a water bill, which does not bill for anything except for water consumed. The board is not in any way subject to public utilities supervision. Water rates have decreased by different stages since the board was instituted — from $3.50 per thousand cubic feet of water in 1931 to $2.40 per thousand cubic feet. The reduction was because there had been collected more revenue than was necessary to run the water works. No resort to taxation to supplement any deficit has ever been necessary and a reserve fund has accumulated. If expenditures should exceed receipts, the water commissioners have sole power and authority to raise rates to balance expenditures.

John J. Stamler was a master in chancery. He took an oath of office as such, and in his income tax report for 1934 reported from such office income of $1,980.65, and $9,952.07 income from business or profession (aside from $3,150 from the city of Elizabeth). He was an attorney. His compensation was solely from fees collected by taxation as costs in cases before him, according to a schedule prescribed by the Chancery Rules of New Jersey. In proceedings in formaa faiwpefis the master of chancery receives nothing. He devoted during 1934 less than one full day per week to his duties as master, in chancery. The Chancellor of the State of New Jersey appoints masters in chancery. '

Are (a) fees received by a master in chancery in New Jersey from litigants involved in matters before him, and (b) compensation as a member of a board of water commissioners for the city of Elizabeth, New Jersey, received from funds collected from users of water, exempt from taxation as income under the revenue acts of the United States ?

Since the trial of this proceeding the Public Salary Tax Act of 1939 (ch. 59,1st sess., 76th Cong.) has become law. By the provisions thereof, income tax shall not be assessed upon the compensation for personal service of officers and employees of a state, or political subdivision thereof, for any taxable year beginning prior to January 1, 1938, and no proceeding in court for the collection thereof shall be begun or prosecuted, unless pursuant to an assessment made prior to January 1, 1939. Assessment of the income tax herein involved has not been made, and section 210 of the act above named provides:

For the purposes of this Act, the term “officer or employee” includes a member of a legislative body and a judge or officer of a court.

From time immemorial a master ,in chancery has been considered an officer of the court appointing him. “A master in chancery is an officer appointed by the court to assist it in various proceedings, incidental to the progress of a cause before it.” Kimberly v. Arms, 129 U. S. 512. To the same effect are Metropolitan etc. Trust Co. v. Perry, 194 Ill. App. 271, and Citizens State Bank v. Joplin, 198 S. W. 370, 372. It is obvious therefore that under the above act assessment of income tax upon the compensation of John J. Stamler as master in chancery for the year 1934 can not be subjected to assessment of income tax. In Albert J. Gould, Jr., 40 B. T. A. 6, we recently held that, assessment of income tax being prohibited under the above statute, judgment of no deficiency should be rendered. We therefore hold that there is no deficiency, so far as relates to compensation as master in chancery.

As to compensation as water commissioner of the city of Elizabeth: John J. Stamler took an oath of office as water commissioner, his salary (not fees) was prescribed by state statute and payable in the same manner as provided by law for other city officers; a $10,000 bond is required by the state statute. Under the state statute the expenses of the board of water commissioners could be, in part, paid from tax levies, though in the city of Elizabeth this has never been done and the income herein involved was received from a fund accumulated from fees paid by users of water, which was, though kept separate from other city revenues, deposited with the city treasurer and the compensation check, though written by the board, was countersigned by the city treasurer. Upon these facts it can not be said that John J. Stamler was an independent contractor, but he was in our opinion an officer or employee of the state, or a political subdivision thereof. It is immaterial as to which category he filled, if he filled either, for since the passage of the act above referred to we have no question of essential governmental function or burden upon the state, but only one of definition of the term employee, or officer. Receipt of compensation from a fund consisting of receipts from water sold to the public does not prevent classification of the water commissioner as an employee or officer of the city, Bettman v. Warwick, 108 Fed. 46; Harman v. Helvering, 90 Fed. (2d) 622; George H. Harrian, 30 B. T. A. 804, 808, and the other attributes of his position, such as fixed salary, oath of office, and bond, clearly, we think, classify John J. Stamler as employee or officer of the city of Elizabeth, a political subdivision of the State of New Jersey. Under the recent statute above mentioned, therefore, his compensation received in 1934 for personal services is not subject to assessment of income tax and we hold, as above as to master in chancery, that there is no deficiency as to compensation as a member of the board of water commissioners.

Decision mill be rendered of no deficiency.


author: Murdock:

text:
    S. C. Thomson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91308.
    Promulgated June 7, 1939.

      E. 1. SprouTl, G. P. A., for the petitioner.

      James G. Maddox, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined a deficiency of $4,641.02 in the income tax of the petitioner for the calendar1 year 1934. The only issue for decision by the Board is whether a loss of $24,625 is a capital loss, as determined by the Commissioner, or whether it was deductible in 1934 as a bad debt. The Board adopts as its findings of fact the stipulation filed by the parties.

The petitioner purchased $25,000 face amount of 20-year, 6 percent sinking fund, gold debentures of the New York United Hotels, Inc., maturing February 1, 1947. He purchased the bonds in May 1927 at a cost of $24,750. The bonds were subject to redemption by the debtor at any time after notice of 30 days, but if they were redeemed before maturity, they had to be redeemed at a premium.

The debtor, encountered financial difficulties beginning in 1931 and the bond holders at that time waived a portion of the interest on the bonds. Ancillary receivers were appointed by a Federal court on December 15,1933, at which time a plan to reorganize the debtor corporation was submitted to the court. The plan proposed a sale of the assets of the corporation to a new corporation and permitted the debenture holders to purchase for cash debentures to be issued by the new corporation upon certain terms. A supplemental plan was submitted to the court in February 1934, making minor changes in the original plan. The court, on March 8, 1934, entered an order approving the plan, but under that plan there was no provision for debenture holders who did not participate in the plan of reorganization. The court entered its final order on May 22, 1934, under which the receivers were directed, inter odia, to pay to debenture holders who would surrender their debentures with all coupons attached before a fixed time, $5 for each $1,000 face amount. The petitioner received a written notice pursuant to the order of the court of May 22,1934, which stated that the debtor corporation’s assets had been sold and that he was entitled to receive $5 for each $1,000 face amount of his debentures upon surrender of the debentures, with all interest coupons attached, on or before August 20,1934. Payment of $5 was to be “in full payment and settlement of said debentures.” The petitioner surrendered his debentures on June 22,1934, and received $125 in cash for them.

The Commissioner, in determining the deficiency, allowed the deduction of losses from sales or exchanges of capital assets arising from transactions, other than the one involved in these bonds, in an amount which exceeded the gains from such sales or exchanges by at least $2,000.

Section 117 (d) of the Eevenue Act of 1934 provides that losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges. Thus, if the Commissioner was correct in determining that the petitioner’s loss from the disposition of the bonds was a capital loss, the loss will not benefit the petitioner for income tax purposes. The petitioner, therefore, seeks to have this loss allowed as a bad debt under section 23 (k). The petitioner kept no books, but made his return upon a cash basis and claimed the loss in question as a bad debt on his return for 1934. Bonds are evidences of debt and such debts may give rise to a deduction under section 23 (k). Samuel Bird, 4 B. T. A. 259; Merrill Trust Co., 21 B. T. A. 1395; Carl P. Dennett, 30 B. T. A. 49; Commonwealth Federal Savings Bank v. Lucas, 41 Fed. (2d) 111; Kitselman v. Commissioner, 89 Fed. (2d) 458; certiorari denied, 302 U. S. 709; Pacific National Bank of Seattle v. Commissioner, 91 Fed. (2d) 103. The Commissioner contends, however, that section 117 (f) is controlling. That provision, which appeared for the first time in the Kevenue Act of 1934, is as follows:

SEC. 117. CAPITAL GAINS AND LOSSES.
(f) Retirement or Bonds, Eto. — For the purposes of this title, amounts received by the holder upon the retirement of bonds, debentures, notes, or certificates or other evidences of indebtedness issued by any corporation (including those issued by a government or political subdivision thereof), with interest coupons or in registered form, shall be considered as amounts received in exchange therefor.

The petitioner argues that the provision is not applicable because the word “retirement” was intended to mean redemption at maturity, or at some earlier time, in accordance with the terms of the debentures, and was not intended to include such a forced surrender of the bonds as occurred in this case for a nominal amount in obvious violation of the redemption provisions of the bonds.

The word “retirement” is not defined in the statute. It is susceptible of various meanings. Among the meanings given in Webster’s New International Dictionary are these: “To withdraw from circulation or from the market, to take up or pay, as to retire bonds, or retire a note.” The same authority defines “redeem” as meaning “to pay back, to recover the obligation of, or to fulfill as a promise.” No case, has come to our attention where a court has considered the possible distinction, from the standpoint of retirement, between a forced surrender of bonds for an amount less than that provided in the debentures, as opposed to a redemption of bonds for full value in accordance with the provisions of the bonds governing redemption. Although the provisions of section 117 (f) clearly apply where bonds have been retired in accordance with their redemption provisions (cf. Fairbanks v. United States, 806 U. S. 486, there may be room for doubt as to whether the provisions apply when bondholders are forced to surrender their bonds for less than the redemption figure.

The legislative history of the provision has been examined in an effort to discover the intent of Congress. The capital gain and loss provisions first appeared in the Revenue Act of 1921. A capital gain or loss was defined in that statute, and also in later statutes, as the gain or loss resulting from the “sale or exchange” of capital assets. The question of whether the redemption of a capital asset bond was a sale or exchange had arisen. There are decisions holding that it is not a sale or exchange. Fairbanks v. United States, supra; Arthur E. Brawn, Trustee, 29 B. T. A. 1161; John H. Watson, Jr., 27 B. T. A. 463. The effect of such holdings in the case of a loss might be favorable to the Commissioner, but the effect in the case of a gain might be favorable to the taxpayer. The first suggestions to Congress for eliminating uncertainty on this subject were presented in the hearings before the Committee on Ways and Means while it was considering the Revenue Bill of 1928. Recommendations were made' to that committee that capital gain and loss in the Revenue Bill of 1928 should be defined as including any gain or loss resulting from “redemption or retirement of corporate securities.” A suggestion from another source was that the term “sale” should be defined to include all transactions resulting in taxable gain or loss. The purpose was to avoid confusion and prevent litigation. A brief submitted to the Finance Committee during the hearings on the Revenue Bill of 1928 also recommended that the capital gain and loss provisions be clarified to show that gain or loss from the “redemption or retirement of corporate securities constitutes ‘capital gain’.” The argument was tha,t if corporate securities had been held for more than two years, the tax result should be the same whether they were sold, retired, or redeemed. Congress did not adopt the suggestions for the purpose of the Revenue Act of 1928.

This same subject was brought to the attention of the Committee on Ways and Means considering the Revenue Bill of 1934, and again the contention was made that the question ought to be settled by a clarifying provision. The suggestion was that capital gain or loss be defined as resulting from the “sale, exchange, or redemption of capital assets.” The only reference to this subject in the Committee reports is the following from the report of the Ways and Means Committee: “Subsection (f) provides that amounts received upon the retirement of corporate bonds and similar evidences of indebtedness shall be considered as amounts received in exchange therefor.” Congress has not disclosed why it did not use the suggested word “redemption” but selected instead the word “retirement.”

The word “retirement” as applied to evidences of indebtedness has a somewhat broader meaning than the word “redemption.” Retirement is generally understood as meaning to withdraw from circulation not necessarily in accordance with the redemption provisions of the bonds, whereas redemption is generally understood to mean a retirement in fulfillment of or in accordance with the provisions for redemption contained in the indenture. Thus, the selection by Congress of the word “retirement” and the rejection of the word “redemption” would seem to indicate an intent on the part of Congress to give breadth to subsection (f). The suggestions to Congress for a change were prompted by a desire on the part of the Bar for an end to uncertainty and the resulting litigation, and Congress, in enacting the legislation, was apparently attempting to bring about the desired result. That desired result could be best accomplished by including in capital gains and losses, gains and losses from all transactions in bonds giving rise to taxable gain or loss. It seems reasonable to believe that Congress intended the word “retirement” to have its broadest meaning. An inference might be drawn from the evidence in the present case that the bondholders had lost all of their equity in the property of the debtor and the $5 was given to them as a sop. If that was not the situation, another inference would be that they were practically forced to surrender their bonds. Certainly, they did not have much choice in the matter. An argument, not without force, is that the statute should not be interpreted as applying in case of a forced surrender or in case of a mere nominal payment in discharge of the bonds. However, it would be extremely difficult to draw any satisfactory line for the purposes of section lit' (f) short of applying the section to all retirements. The bonds in' the present case were retired in the sense that they were withdrawn' from circulation, taken up on behalf of the debtor, and discharged as an obligation. We hold that there was a retirement of these bonds within the meaning of that word as used by Congress in section ITT (f). The question of ascertainment of worthlessness of the debt and whether that ascertainment should have been made in an earlier year are questions which need not be considered in view of this holding.

Decision will be entered for the respondent.


author: Van Fossan :

text:
    Mary D. Gerard, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92759.
    Promulgated June 8, 1939.

      Spotswood D. Bowers, Esq., for the petitioner.

      Walt. Momd/ry, Esq., for the respondent.
   OPINION.

Van Fossan :

A deficiency of $1,747.93 in income tax for the year 1934 is here contested. The sole issue before us is whether a certain gain of $5,000 was a capital gain, taxable accordingly, or an ordinary gain.

On March 26, 1930, the Apperson Realty Corporation negotiated a loan from petitioner in the net amount of $225,000, agreeing to pay a bonus of $22,500, the corporation, under that date, giving a bond and mortgage for the aggregate of those sums or $247,500, with interest at 6 percent. The money was paid by petitioner, the bonus repaid to her, and from time to time through 1930, 1931, 1932, 1933, and 1934 various sums were paid on account of principal and interest. By the end of 1934, petitioner had recovered her principal sum of $225,000 with interest, plus a sum of $5,000 which petitioner accounted for as a capital gain, reporting 60 percent or $3,000 as taxable income. Respondent treated the entire $5,000 as taxable. The bond and mortgage were still in effect in 1935 and certain payments were made in that year, final payment being made May 14,1935. Neither the bond nor the mortgage had coupons attached nor does it appear to have been registered.

Section 117 (f) of the Revenue Act of 1934, on which petitioner relies, is as follows:

(f) Retirement or Bonds, Etc. — For the purposes of this title, amounts received, by the holder upon the retirement of bonds, debentures, notes, or certificates or other evidences of indebtedness issued by any corporation (including those issued by a government or political subdivision thereof), with interest coupons or in registered form, shall be considered as amounts received in exchange therefor.

Petitioner contends that the bond and mortgage here involved constituted an “evidence of indebtedness” within the meaning of the term as above used and thus by relation to immediately preceding provisions of the revenue act entitle her to report her gain as capital gain.

We are unable to agree with petitioner, and for several reasons. We may admit that a mortgage is, under general definitions, an “evidence of indebtedness”, and yet be of the opinion that this bond and mortgage do not come within the quoted statute. The section deals with “Retirement of Bonds” and is premised on the statement, “amounts received by the holder upon the retirement of bonds” etc. The sum here in question was not received upon the retirement of a bond (and mortgage). The bond and mortgage were still in effect in 1935 and not paid in full until May 14 of that year. Moreover, the bond and mortgage fail of meeting the statutory test in that they did not have interest coupons nor were they registered. But a more basic reason than these is that a bond and mortgage given in the form and in the circumstances here present, under the old and well established doctrine of noscitur a sociis, are not included in the term “bonds, debentures, notes, or certificates or other evidences of indebtedness issued by any corporation.” Obviously, Congress, by the use of the word “other”, intended to limit the scope of the term “evidences of indebtedness.”

In Frank J. Cobbs, 39 B. T. A. 642, we had for determination the question whether the voluntary surrender of a combined life insurance and annuity contract for its face amount was a sale or exchange under section 117 of the Revenue Act of 1934. Holding that it was not a sale or exchange, we stated that the term “evidence of indebtedness” as used in section 117 (f) excludes such contracts and is limited by the doctrine of noscitur a sociis to such things as bonds, debentures, notes, etc., which are specified in the context.

We make the same ruling here. Respondent’s determination is sustained.

Decision will be entered for the respondent.