author: Smith:

text:
    T. J. Primm, Petitioner, v. Commissioner of Internal Revenue, Respondent. T. J. Primm, Temporary Administrator of the Estate of Mattie Primm, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 37792, 37793.
    Promulgated May 4, 1933.

      Benjamin H. Saunders, Esq., and A. C. Upleger, C.P.A., for the petitioners.

      Shelby S. Faulkner, Esq., for the respondent.
   OPINION.

Smith:

The only question for decision in these proceedings is whether the petitioner and Mattie Primm, constituting a marital community in the taxable year, are liable to income tax upon the net profits of the cotton-trading account, amounting to $127,838.34, of which amount $17,548.33 was returned as taxable income by the marital community. The respondent contends that the evidence of record does not warrant a finding that the income of the trading account was the income of a trust. It is to be noted that the respondent makes no claim against T. J. Primm as a fiduciary.

The issue, then, is whether T. J. Primm intended to and did actually create a valid trust with respect to the cotton-trading account. The existence or nonexistence of the alleged trust must be determined by the laws of the State of Texas. The rule as stated in Houser v. Jordan, 26 Tex.Cv.A. 398; 63 S.W. 1049, is:

* * * Our statute ol' frauds does not apply to trusts arising directly from an express contract, nor to implied or constructive trusts, and the contract by which an express trust is created, or the facts from which an implied trust will result, may alike be proven by parol. James v. Fulcrod, 5 Tex. 512, 55 Am. Dec. 743; Miller v. Thatcher, 9 Tex. 482, 60 Am. Dec. 172; Brotherton v. Weathersby, 73 Tex. 473,11 S.W. 505.

In section 99 of Perry on Trusts, it is said that:

Whether the trust is perfectly created or not, is a question of fact in each case; and the court, in determining the fact, will give effect to the situation of the property, and the purposes or objects which the settlor had in view in making the disposition.

When shown the instrument dated November 24, 1923, and asked when the alleged trust was created, T. J. Primm testified that:

It was created the latter part of 1922, we discussed that when my children were gathered at home at Christmas, and from then on, about January 1, 1923, we considered it a trust, and so acted.

He further testified as follows:

I was going to try the cotton market, and if I made any money I wanted them to be the beneficiaries, and they wanted me to handle it as I thought best, and I proceeded to do so.
I said I was going to play the cotton market and wanted them to have the benefit of the money made.
*******
It came np this way. Usually I would give the children what I made during the year. This conversation came up, and my son, J. F. Primm, who is here now, he was one of the children living in El Paso, and in the conversation he said he would not let me give him anything. He said: “ I don’t want it. You give it to the balance of the children. I have plenty. I don’t need it.” He would not take anything. It came up at the gathering Christmas.

Primm continued his operations in the cotton-trading account and toward the end of 1923 he said he “ finally sold out and found I had made some money.” The profit from dealing in cotton through the brokerage account with Hayward & Sons resulted from Primm’s efforts. With the exception of a check for $50,000 which was deposited in a savings account, all of the money made in the brokerage account was handled by Primm through his individual bank account. He gave to his children as their needs required — some receiving more than others. Approximately $10,000 of the earnings from the brokerage account was used by Primm in purchasing land. With respect to this purchase Primm testified as follows:

A. I' bought an undivided half interest in 400 acres of land from Mr. Higginbotham.
*******
Q. This land was taken in your own name?
A. This was in my own name.
* * * * * * *
Mr. Upleger. That check for $10,538.33 was on your own personal account and for your own personal benefit?
Mr. Primm. Yes.

The venture in the automobile finance business absorbed the earnings that were not distributed to the children or used by Primm.

Several of the children, beneficiaries of the alleged trust, testified with respect to the conversation at Christmas 1922. From their testimony it appears that they considered that they were to receive the benefit of any profits that their father made through the brokerage account, and that he would stand any losses that might be incurred.

The discussion at Christmas 1922, was consistent with Primm’s custom of making gifts to members of his family. The earnings of the trading account were distributed by Primm as he saw fit, and not equally among the designated beneficiaries. A large portion of these earnings went for the purchase of land (title to which was taken by Primm) and for the automobile finance company (of which Mrs. Primm and the children may or may not have been the stockholders). Then, too, the written instrument which was prompted by the accumulation of profits merely provides for the division of “ the income of this fund.” Although Primm’s trading account was transferred from himself as an individual to himself as a trustee upon the books of the broker, there was no transfer of an interest in the $2,327.50 (the property producing the income) to the beneficiaries. In Hazel T. Power, 23 B.T.A. 428, 431, we said:

The rule is well established that notwithstanding the document of grant or assignment itself may be perfectly valid and enforceable between the parties thereto, the liability for income tax upon future income or profits which will or may accrue to the assignor by reason of the ownership of or an interest in property can not be avoided by the assignor or grantor through the grant or assignment of such income or profits to another. * * *

It appears that the designated beneficiaries each received in November 1923, a distribution of $2,500, although at the time of that distribution there was a considerable profit in the account and Primm said he wanted to let each child have what was his.”

The earnings which the respondent has taxed to the marital community resulted from Primm’s trading activities. He realized the profits and distributed or used them as he saw fit. His disposition of the profits- indicates that they were subject to his “ unfettered command,” and the evidence refutes the contention that the income was the income of a trust. The fact that the designated beneficiaries reported and paid a tax upon such profits does not relieve these taxpayers of their liability for tax upon income that belonged to the marital community. The respondent’s determination is sustained. Cf. A. M. Ellis, 25 B.T.A. 1195; Corliss v. Bowers, 281 U.S. 376.

Reviewed by the Board.

Judgment will he entered for the respondent.


source: Caselaw Access Project

author: Lansdon:

license: Public Domain

text:
    G. Wildy Gibbs, Petitioner, v. Commissioner of Internal Revenue, Respondent. Sallie Gibbs Milliken, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 31329, 31330.
    Promulgated May 4, 1933.

      J. M. McMillin, Esq., for the petitioners.

      Shelby S. Faulkner, Esq., and R. B. Cannon, Esq., for the respondent.
   OPINION.

Lansdon:

The petitioners contend that the transfer of property to them evidenced by the trust instrument was a sale only to the extent of the encumbrance and the then present worth of the annuity to their mother and that the remaining value was a gift. If their view is correct the basis for computing the gain which they realized from the sale in the taxable year is the fair market value of the property at the date it was acquired, which they contend was at least equal to the amount which they received. The respondent’s position is that the property was worth no more than the mortgage and the annuity and that the transaction was an outright sale. If this view is correct the basis for computing gain from the sale in the taxable year is the amount of the mortgages plus the annuity actually paid before that time or a total of $216,852.50.

A transfer of property may involve both a gift and a sale. In Harry F. Robertson, 5 B.T.A. 148, where the petitioner bought 80 acres of land from his mother-in-law for $200 an acre, it was stipulated that the land had a fair market value of $300 per acre at date of sale. The Board held that the difference between the fair market value of the land at date of the transaction and the cost paid was a gift and that the basis for computing the gain realized in a later sale was the fair market value of the land at the date it was acquired by the son. In Robinson v. Commissioner, 59 Fed. (2d) 1008, where there was a somewhat similar controversy over the transfer of shares of stock at less than their fair market value, the court held that “ the surplus value of the stock over the actual price paid for the shares must be taken into consideration in determining the capital base and that such base is to be fixed at the true market value at the time the stock was acquired.” We think these cases are controlling here. The true basis for determining the gain resulting from the sale in 1920 is the fair market value of the property in question at date of transfer to the trustee in 1918.

Fair market value is a matter of fact to be determined by evidence. In support of their contention the petitioners introduced an appraisal certificate issued by the Dallas Heal Estate Board which fixes the value of the land involved at $382,131.60 as of February 18, 1918. This appraisal was made by the business property appraisal committee of such board, two of whom were present and testified at the hearing. Each of such appraisers said that all elements affecting the value of business real estate in that section of the city were carefully considered by the committee and that such elements included sales of similar property, location, the fact that the land was a corner with frontage on four streets, the growth of the business district, the normal increase in the value of property and other material considerations. Each witness had been many years in the real estate business in Dallas. One dealt almost exclusively in such property and either he or members of his family owned property in the same neighborhood. In rebuttal the respondent introduced one witness who is also a member of the Dallas Real Estate Board.

After a careful consideration of the evidence of value adduced by the parties, we conclude that the land in question had a fair market value at February 18, 1918, in the amount of $382,131.60.

No witness for either party placed any definite figure of value on the improvements that were on the land at the date of the transfer to the trust. Petitioners’ counsel claims a value of at least $75,000, which he bases on the rentals being received at the time of the transfer. Counsel for the respondent contends that the improvements had no value at date of the transfer since the income therefrom was less than the carrying charges of the property, which were made up of interest on the mortgage indebtedness, taxes, repairs and insurance. He argues that the entire value of the land could be made a profitable investment only by the removal of the improvements and the erection of buildings with rental capacity sufficient to make the ownership of the property profitable. It may well be that on valuable business real estate cheap or temporary improvements inadequate to produce income commensurate with the value of the land, in some circumstances, may be a liability. This- would be true, however, only if the owners proposed to raze or remove existing structures and erect others with sufficient rental capacity to yield an adequate return on the combined value of the land and cost of the new buildings. It would not be true if the owners, as was the fact here, held the entire property as an investment from which it was hoped to realize profits by sale. In such a situation the very substantial rentals received for the use of the improvements were a material contribution to the carrying charges and we think probative evidence of some market value. For these reasons, based on the income realized therefrom we have found that the improvements in question had a fair market value of $30,000.

Reviewed by the Board.

Decision will he entered under Bule 50.

SteRNíiageN, MuRdock, and McMahoN dissent.


text:
    Planters Gin Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46299.
    Promulgated May 4, 1933.

      H. A. Mihills, C.P.A., for the petitioner.

      F. A. Schlosser, Esq., for the respondent.
   OPINION.

Lansdon:

The single question here is whether the correct basis for computing allowances for depreciation of the physical assets used by the petitioner in its business in the taxable year is the cost of such property to the original partnership, or such basis reduced proportionately by the purchase of the Phillips interest by Wooten and J. W. Simmons at a cost to them which was less than the book value thereof in the amount of $62,985.06. While the records indicate that the advances made as set out in our findings of fact may have been loans, there is nó proof that repayment except by distribution was contemplated or that the whole amount thereof was not represented in the assets of the partnership. Accordingly, though probably not material to any issue pleaded, we shall regard such advances as capital contributions.

On the record it is clear that the petitioner may use the basis for computing depreciation to which the partnership was entitled upon the reorganization which followed the acquisition of the Phillips interest by Wooten and J. W. Simmons. After the incorporation all the shareholders of the petitioner owned stock exactly in proportion to their several interests in the second or reorganized partnership at June 29, 1925. In such circumstances it follows under the provisions of section 203 (b) (4) and 204 (a) (7) of the Eevenue Act of 1926 that the exchange of the partnership assets for the stock of the petitioner was a transaction which resulted in neither gain nor loss to the members of the partnership and that the petitioner, after incorporation, should use the basis for computing depreciation to which the partnership was entitled at the date of the transfer of its assets to the petitioner.

Under the laws of Texas, in the absence of any agreement to the contrary, the original four-party partnership was terminated some time in February 1924, when Phillips died. Morris v. Owen, 143 S.W. 227; Stern v. Fenelon, 24 S.W. (2d) 1111; Johnson v. Smith, 35 S.W. (2d) 798. The records disclose no agreement that such partnership was to continue regardless of the death or withdrawal of one or more members. It follows, therefore, that on February 24, 1924, the assets of the old partnership became distributable to the estate of Phillips and the three surviving partners in proportion to their respective interests and that either by agreement or operation of law a new partnership of which Wooten, J. W. Simmons and E. M. Simmons were members came into being. It was this new partnership which transferred the assets in question to the petitioner.

It has been held that partnership property belongs to the firm and not to the partners. Sam H. Harris, 11 B.T.A. 871; Edward B. Archbald, 27 B.T.A. 837. The cost of the assets with which a partnership begins business is the fair market value thereof at the date paid in. Edward B. Archbald, supra. The respondent has determined that the fair market value of the Phillips interest in the old partnership was fixed by the sale to Wooten and J. W. Simmons at an amount less by $62,985.06 than its book value at February 24, 1924, and has proportionally reduced the basis for computing depreciation on the whole body of physical assets acquired by petitioner upon incorporation. In our opinion this view must be accepted, since the petitioner has adduced no evidence of any other or different value.

On brief the petitioner relies on our decisions in Alpin J. Cameron, 8 B.T.A. 120; Sam H. Harris, supra; Abe J. DeRoy et al., Executors, 19 B.T.A. 452; Henry Wilson, 16 B.T.A. 1280; J. J. Carroll, 27 B.T.A. 65; and Cameron v. Commissioner, 56 Fed. (2d) 1021. In the Oameron case there was a gift by one partner of a part of his interest to his son, with resulting changes in distributable interests. This proceeding arose under the laws of Pennsylvania-, which expressly provide that the “ conveyance by a partner of his interest in the partnership does not of itself dissolve the partnership.” This rule governed our decision, which was affirmed in Oameron v. Commissioner, supra, except that we there held that the assets of a partnership are not the individual property of the members, who own only a distributable interest in the net worth thereof. The Harris case, supra, has no bearing on this issue here in controversy. The only question at issue in the DeBoy case related to the basis for reporting income of a partner after the termination of a partnership by the death of one of its members. In so far as it has any bearing on this proceeding it supports our conclusion set out above. In the Wilson case, supra, there was a controversy over the correct basis for computing profit and consequent distributable income from the sale of a part of the petitioner’s assets. Two of the partners had acquired their interests by gift and the question was whether the cost of all the partnership assets should be adjusted to conform to value of the gift when made, which was different from the cost to the original partnership. In the Carroll case, supra, there'is much the same situation, but the controversy relates to the basis for depleting natural resources, which is the same as that used for determining gain or loss from the sale of assets. In each case we held that entrance into the firm of new partners by gift to them of interests therein does not make it necessary to readjust the values of the whole body of assets for either of the purposes indicated. In neither case was there any specific transaction such as a sale of a part of the assets that had the effect of establishing a new market value. In our opinion all the cases cited are readily distinguishable from the instant proceeding and therefore can not be regarded as controlling the issue here.

Petitioner having abandoned its allegation that the respondent erroneously reduced the rate of depreciation on its gin building in the taxable year, it follows that the determination of the respondent thereto must be affirmed.

Reviewed by the Board.

Decision will Toe entered, for the respondent.

       [Sec. 203 (b) (4).] No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interests in the property prior to the exchange.
      [Sec. 204 (a).] The basis for determining the gain or loss from the sale or other distribution of property acquired after February 28, 1913, shall be the cost of such property ; except that—
      # ik * * * * *
      (7) If the property (other than stock or securities in a corporation a party to the reorganization) was acquired after December 81, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.


author: Sternhagen :

text:
    Post and Sheldon Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56695.
    Promulgated May 4, 1933.

      M. Z. Ottenstein, C.P.A., for the petitioner.

      J. H. Leinenkugel, Esq., for the respondent.
   OPINION.

Sternhagen :

The petitioner is one of two affiliated corporations, which, year return. Upon the basis of such consolidated return, the Commissioner determined a deficiency in petitioner’s income tax of $700.06. The petitioner assails this upon the ground that in computing consolidated net income the Commissioner has failed to eliminate two intercompany items, the result of which failure is to distort consolidated net income and effect an excessive tax. The facts appear entirely in an agreed statement.

The petitioner and the National Warping & Winding Co. were continuously affiliated during the fiscal years ended October 31, 1926, 1927, and 1928, and filed consolidated returns. The profits and losses for such years, before the elimination of intercompany transactions, were as follows:

On the return the petitioner applied its net loss against the National’s net income, but in view of Woolford Realty Co. v. Rose, 286 U.S. 319, and Planters Cotton Oil Co. v. Hopkins, 286 U.S. 332, the petitioner makes no point of this. The crucial facts upon which the present controversy turns are these: During the fiscal year 1928, the National Co. “ rendered services to the petitioner in the amount of $57,513.85,” which cost it $50,636.70, or $6,777.15 less than “ the amount at which they were billed to the petitioner.” The petitioner also paid the National Co. $540 interest on a loan of $9,000.

Ordinarily it is of no practical importance whether in the determination of consolidated net income the two sides of an intercompany transaction, that is the payment and consequent deduction by one and the receipt and consequent item of gross income of the other, are included or eliminated. This is because the consolidated net income upon which the total tax is computed is the same in either event. For the purpose of determining the total tax, it is important that both sides shall be used to balance the computation, cf. Bermont Oil Co., 22 B.T.A. 182. But if the total tax is to be assigned among the affiliated corporations, it is conceivable that the inclusion of inter-company transactions, even if balanced as between the two corporations affected, may bring about a different apportionment from the exclusion. When, however, there are prior net losses, which are applicable only to the subsequent net income of the particular corporation sustaining it, Woolford Realty Co. v. Rose, supra; Planters cotton Oil Co. v. Hopkins, supra; Delaware & Hudson Co., 26 B.T.A. 520, it is plain not only that the. treatment of intercompany items affects the apportionment of income and tax, but also that it enters into the determination of the consolidated net income upon which the total tax is computed.

In such a situation the question whether intercompany items shall be included or excluded is a question of right, and the Commissioner must deal with it as such. It is argued here that the auditing practice in the Bureau is to eliminate only such intercompany items as do not “ wash out,” as it is called. If so, we think it stops short of the necessary audit to determine the correct tax, and is a departure from the requirement of the regulations, and hence, since the regulations are in this instance a projection of the statute, is contrary to the contemplation of the statute. Article 784, Regulations 74, prescribes the elimination of intercompany transactions with no intimation of exceptions, and there is a fair inference from section 118 (a) (12), Revenue Act of 1928, that this was what Congress had in mind. It was so held as to 1917 in Buffalo Forge Co., 5 B.T.A. 947, upon the insistence of the Commissioner, and there is no reason for a different answer to the demand of the taxpayer.

The Commissioner urges that, since the services rendered by the National Co. to the petitioner resulted in goods which were sold to third persons at a profit, there is reason to assign to the National Co. its share of the profit. In this light, it is argued, the question is merely one of the proper assignment of consolidated income and not one of intercompany transactions. These considerations are, we think, outside the province of the Commissioner. If there were any suggestion of arbitrary accounting by the taxpayer tending to distort income, there might be reason to consider the Commissioner’s right or duty to disregard it. But this case presents no such question, and no reason why the normally correct process of audit should not be used.

Both the items of $57,518.85 and $540 should be eliminated in the computation of income for 1928. Thus the petitioner’s deduction will disappear and its income be increased, while the National Co.’s will be reduced. To these adjusted incomes the separate prior net losses will be applied, with the result that the combined net income will be substantially reduced.

Judgment will be entered under Rule 50.


author: Smith: Van Fossan,

text:
    Howard F. Burns, Executor of the Estate of Emma Paige Eells Newberry, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42515.
    Promulgated May 5, 1933.

      Ashley M. Van Duzer, Esq., George P. Bickford, Esq., and A. C. Dustin, Esq., for the petitioner.

      A. H. Fast, Esq., for the respondent.
   OPINION.

Smith:

Section 203(c) of the Revenue Act of 1926 provides:

If there is distributed, in pursuance of a plan of reorganization, to a shareholder in a corporation a party to the reorganization, stock or securities in such corporation or in another corporation a party to the reorganization, without the surrender by such shareholder of stock or securities in such a corporation, no gain to the distributee from the receipt of such stock or securities shall be recognized.

Article 1576, Regulations 69, cited by both the petitioner and the respondent, is as follows:

Receipt of stock or securities in reorganization. — If, without any surrender of his stock or securities, a shareholder in a corporation a party to a reorganization receives in pursuance of the plan of reorganization stock or securities in such corporation or in another corporation a party to the reorganization, no gain to the shareholder will be recognized.

Section 203 (h) of the Revenue Act of 1926 defines the terms material to the issue in the case at bar, as used in section 203 (c), in the following language:

(1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation .of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form or place of reorganization, however effected.
(2) The term “ a party to a reorganization ” includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation cf at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.

The petitioner contends that the bonds received by decedent in 1926 as a stockholder of the Sandusky Cement Co. are exempt from income tax upon the ground that they were distributed to her " in pursuance of a plan of reorganization ” under section 203 (c) of the Revenue Act of 1926. Whether this be so depends upon the interpretation given to section 203 (h) (1) (A) of the Revenue Act of 1926 quoted above. In Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462, the Supreme Court, referring tp this language, said:

* * * The words within the parenthesis may not be disregarded. They expand the meaning of “ merger ” or “ consolidation ” so as to include some things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words — so as to embrace circumstances difficult to delimit but which in strictness cannot be designated as either merger or consolidation. But the mere purchase for money of the assets of one Company by another is beyond the evident purpose of the provision, and has no real semblance to a merger or consolidation. Certainly, we think that to he within the exemption the seller must acquire an interest in the affairs of the purchasing company more definite than that incident to ownership of its short term purchase money notes. This general view is adopted and well sustained in Cortland Specialty Co. v. Commissioner of Internal Revenue, 60 E. (2d) 937, 939, 940. It harmonizes with the underlying purpose of the provisions in respect of exemptions and gives some effect ¡to a)l the words employed. [Italics supplied.]

From our findings it is to be noted that the Sandusky Cement Co. acquired all of the capital stock and bonds of the Railway Co. in 1922. This was an .outright purchase. The stockholders and bondholders of the Railway Co, received cash and short term notes in payment for the securities sold, They did not acquire any interest in the affairs of the purchasing company. The 3,000 shares of par value stock of the Railway Co. were changed into a like number of shares of no par value and a new issue of bonds supplanted the old issue. But this was not a part of the original plan and although it might be a reorganization of the Railway Co. under section 203 (h) (1) (C), nevertheless, it is not the reorganization relied upon by the petitioner and would not support petitioner’s case in any event. Most of the capital stock of the Railway Co. was distributed to the Cement Co.’s stockholders in 1925 and the bonds were distributed to the stockholders in 1926. There was clearly no “ reorganization ” of the companies within the interpretation of the pertinent language of section 203 (h) (1) of the Revenue Act of 1926 as interpreted by the Supreme Court.

It appears to us that there is no ground for holding the decedent exempt from income tax in respect of the fair market value of the bonds received, the value of which is not in question. The decision of the United States Supreme Court in United States v. Phellis, 257 U.S. 156, is determinative of this issue.

Reviewed by the Board.

Judgment will be entered for the respondent.

Trammell dissents.

Van Fossan,

dissenting: The prevailing opinion in this case turns solely on the ground that when the Cement Co. acquired 100 percent of the stock and bonds of the Railway Co. there was no reorganization under the statute. It may be pertinent first to point out that neither in the notice of deficiency, nor in the pleadings, nor at the hearing, has respondent ever questioned the fact that there was a statutory reorganization in 1922. The sole issue to which the attention of the parties has been addressed is whether or not the distribution of bonds in 1926 came under section 203 (c) of the Revenue Act of 1926, and the contention of respondent is that the distribution was made at such a time and in such a manner as to constitute the payment of a dividend and not a distribution “ in pursuance of a plan of reorganization.”

Section 203 (h) (1) provides:

(li) As used, in this section and sections 201 and 204—
(1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.

The Cement Co. acquired, all of the stock of the Railway Co. How then can it be held that this fact did not bring thé transaction within the express terms of the statute? The prevailing opinion cites the decision of the Supreme Court in Pinellas Ice Co. v. Commissioner, 287 U.S. 462. With all respect it is submitted that this case, so far as pertinent at all, supports the exact opposite of the majority view. When the Pinellas case was before the Board it was held that the transaction was merely a sale of assets for money and did not partake of the nature of a statutory reorganization. The circuit court of appeals affirmed this decision (57 Fed. (2d) 188), but went beyond the necessity of the case and expressed certain dicta as to the interpretation of the statutory definition of a reorganization. When the case came before the Supreme Court on certiorari, that Court, after affirming the holding as to the character of the transaction, took occasion to point out that the dictum of the circuit court was too narrow and might prove perplexing. The Court proceeded to point out the error in the opinion of the Circuit Court and stated, in effect, that the parenthetical clause in section 203 (h) (1) (A) worked an enlargement of the terms “ merger ” or “ consolidation ” beyond their ordinary meaning. Returning to the situation in the case before them, the court expressed the thought on which the author of the prevailing opinion in this proceeding, as indicated by italics, places chief emphasis. But when the expression of the Supreme Court is read in its context it is readily seen that it has no pertinence here. The Court was addressing itself to a situation in which there had been a sale of assets for cash or its equivalent. The same factual situation obtained in Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937, which the Supreme Court cited with approval. In the instant case we have the acquisition of all of the stock and bonds of one company by another company. It is not necessary to employ the liberty of interpretation authorized by the Supreme Court. The present case comes within the very language of the statute. Where a case falls squarely within the provisions of a statute it is not for this Board or the courts to write it out by assuming analogy to a different case.

It may be that some of the confusion in this case arises from the thought that the transaction here does not look like a “ reorganization ” as popularly understood. But we are concerned not with the popular definition or conception, but with the statutory definition, a very different thing. Whether this transaction was a “ merger ” or a “ consolidation ” at common law is not the question. The question is does it come within the statutory definition, especially the parenthetical clause which the Supreme Court has said enlarges the scope of the terms used. Believing that it does, I must dissent.

By reason of the thesis on which the case is made to turn, no consideration is given to the proposition on which this case was submitted, i.e., the character of the distribution of the bonds. On this question I have no doubt of the correctness of petitioner’s position. Accordingly I am of the opinion that judgment should have been for the petitioner.


text:
    The Connecticut Power Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59734.
    Promulgated May 5, 1933.

      Herman J. Galloway, Esq., for the petitioner.

      Prew Savoy, Esq., for the respondent.
   OPINION.

Sternhagen :

The Commissioner determined a deficiency of $1,924.48 in the petitioner’s income tax for 1928. The facts are embodied in an agreed statement, which it is unnecessary to set forth at length. In 1928, the petitioner, being the owner of the stock of the Millerton Electric Light Co. and of a note of that corporation for $92,598.63, given to petitioner for the cost of certain transmission lines for which petitioner had paid, and being otherwise the creditor of that corporation for $18,000 which petitioner had advanced, agreed to, and did, dispose of such shares, note, and credit to the Central Hudson Gas & Electric Corporation for a composite consideration consisting in part of 2,000 of the shares of Central Hudson’s common stock and in part of cash. The Commissioner applied the undisputed value of what was thus received by the petitioner against the undisputed cost of what it gave up, and included the resulting gain in the petitioner’s gross income. The petitioner assails this as contrary to law, contending (1) that the transaction is within section 112 (b) (3), Revenue Act of 1928, whereby the gain is not to be recognized, and (2) that, if cognizable at all, the gain to be recognized is limited to $15,000 by virtue of section 112 (c) (1).

In our opinion, the petitioner’s contentions can not be sustained. As a postulate for the first proposition, it is urged that the transaction was divisible so that the disposition of the Millerton shares was correlated to the receipt of the Central Hudson shares, thus constituting an exchange of stock for stock. This conception is not supported by the evidence. It conforms neither with what appears to have been intended nor with the actual contract, its performance, the description of it to the Public Service Commission of New York in the application for its approval, or the accounting record of the transaction on the petitioner’s own books. The plan was conceived and carried out as a single transaction, and thus it stands for the determination of income tax.

With that decided, there is nothing left of petitioner’s case. Whether, under section 112 (i), there was a statutory reorganization comprehended in the whole transaction is of no significance here, or whether petitioner was a statutory party to a reorganization, for in either case, the immunity from the recognition of gain is limited to the transactions which the statute expressly describes, and this is not such a transaction. There is no provision which relieves from present tax, under section 111, a disposition by one corporation to another of assets, including shares of a third corporation, for cash and a part, in unknown proportion, of the shares of the second corporation. The care with which section 112 was drafted admonishes us to be no less careful in applying it according to its terms. Loose or careless construction will defeat the purpose it was designed to serve. The rationale of the statute is, first by section 111 "to establish the general rule that gain is to be recognized and taxed when it is realized, and second by section 112 to establish exceptions. Those who invoke an exception must assume the risk of bringing themselves within it. This, in our opinion, the present petitioner has failed to do, in respect of either section 112 (b) (3) or section 112 (c) (1).

Judgment will he entered for the respondent.


author: Smith :

text:
    Blanche S. Ross, Petitioner, v. Commissioner of Internal Revenue, Respondent. Stella S. Jannotta, Petitioner, v. Commissioner of Internal Revenue, Respondent. Frank V. Skiff, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 51171-51173.
    Promulgated May 5, 1933.

      E. Barrett Prettyman, Esq., and Preston B. Kavanagh, Esq., for the petitioners.

      Bernard D. Hathcock, Esq., for the respondent.
   OPINION.

Smith :

The only question for determination in these proceedings is whether the gift of bonds to the petitioners, upon which the respondent has computed the gift tax of $29,243.31, took place in 1925 as the respondent has determined, and is therefore subject to the gift tax provisions of the Revenue Act of 1924, sections 319 to 324, inclusive, as amended by section 324 (a) of the 1926 Act, or whether the gift was made in 1920 as the petitioners contend, prior to the effective date of any Federal gift tax law.

The petitioners admit that they each received assets from the decedent’s estate as residuary legatees and transferees thereof in excess of the deficiency and penalty proposed, and that they are liable severally as transferees for the deficiency herein if the gift in question was made in 1925 as the respondent has determined.

In his brief, the respondent concedes that in accordance with Law Opinion 1091, Cumulative Bulletin 1-1, p. 422, and General Counsel Memorandum 9162, Internal Revenue Bulletin of April 20, 1931, the petitioners are not liable for the proposed penalty.

The respondent asserts in his brief that the evidence failed to establish that there was a delivery of the subject matter of the gift; that is, the $750,000 in bonds, in 1920; that the decedent continued to exercise dominion and control over the bonds until 1925, when they were divided among the petitioners and removed from the safe deposit box; and that the gift was not completed until that time.

The essential elements of a valid gift inter vivos are: (1) An intention on the part of the donor to make the gift; (2) delivery by the donor of the subject matter of the gift; and (3) acceptance of the gift by the donee. In Edson v. Lucas, 40 Fed. (2d) 398, 404, the rule is stated as follows:

* * * There must be a donor competent to make the gift, a clear and unmistakable intention on his part to make it, a donee capable of taking the gift, a conveyance, assignment, or transfer sufficient to vest the legal title in the donee, without power of revocation at the will of the donor, and a relinquishment of dominion and control of the subject matter of the gift by delivery to the donee. * * *

See also Parrott v. Noel, 8 Fed. (2d) 368; Blair v. Rosseter, 33 Fed. (2d) 286; Adams v. Hagerott, 34 Fed. (2d) 899; Mary Katherine Dulin, 25 B.T.A. 1259. On several occasions prior to or during 1920, the decedent expressed an intention to give all or the greater part of his property to his three children, the petitioners. This intention was also clearly manifest by his acts in going to the safe deposit box with his son, one of the donees, and helping him to select and segregate certain of his bonds for the purpose of the gift and then giving his son custody of his, the decedent’s, key to the box. There can be no doubt of the intention on the part of the donor to make the gift in 1920.

We are also of the opinion that the facts show a valid delivery of the subject matter of the gift to the donees in 1920. At the time of the alleged gift in 1920, the decedent and Frank V. Skiff went to the safe deposit box together and at the direction of the decedent, Frank V. Skiff selected the $750,000 tax exempt bonds, which the decedent instructed him to divide “ one-third to each of the children.” Frank Y. Skiff then wrapped the bonds in a separate bundle and put them back in the box with other securities belonging to him and the decedent. This, we think, constituted an actual delivery of the $750,000 of bonds by the donor to Frank Y. Skiff. At that time, or soon afterwards, the decedent gave the custody of his key to the safe deposit to Frank V. Skiff. In Hagemann v. Hagemann, 204 Ill. 378; 68 N.E. 381, it was said:

* * * Michael was given a key to the box containing the said notes. This alone has been held to be a good symbolical delivery. Stephenson’s, Adm’r. v. King, 81 Ky. 425, 50 Am. Rep. 173; Telford v. Patton, 144 Ill. 611, 33 N. E. 1119. * * *

See also Beaumont v. Beaumont, 152 Fed. 55.

The delivery to Frank Y. Skiff, one of the donees, of all of the bonds, including those for himself and his sisters, constituted a valid delivery to each of them of their respective shares, and this is also true of the acceptance by him, in respect of which Frank Y. Skiff became an agent or trustee for the other donees. Smith v. Commissioner, 59 Fed. (2d) 534; Trubey v. Pease, 240 Ill. 513; 88 N.E. 1005; Taylor v. Harmison, 179 Ill. 137; 53 N.E. 584; Gordon v. Adams, 127 Ill. 223; 19 N.E. 557. In Smith v. Commissioner, supra, the court said:

In cases of gifts, delivery to the actual donee is not necessary; it may he made to a third person for the benefit of donee, and in such event the third person becomes a trustee for the donee. In the instant case the stock was delivered to the custody of Earl E. Smith for the benefit of all children, including himself, and that constitutes a delivery to the donee. Martin v. McCullough, Adm., 136 Ind. 331; Grissom v. Sternberger, 10 F. (2d) 764; Owen v. Commissioner of Internal Revenue, 53 F. (2d) 329.

Also, in Trubey v. Pease, supra, the court said:

* * * The law is well settled that title to personal property by gift may be passed by delivery of it by the owner to another as trustee for the donee. In such case delivery to the trustee is deemed, in law, delivery to the donee, and divests the donor of all control over, or right or title in, the property, and the gift is irrevocable. * * *
If, as the respondent contends, the decedent still had access to the safe deposit box after the alleged gift in 1920 and might have removed the bonds if he had so desired, this does not render the gift invalid. In Beaumont v. Beaumont, supra, the court said:
* * * The possession and control of the bonds was exclusive, and not the less so in legal contemplation that the donor had also a key to their place of deposit, and could, in violation of their rights accruing from his gift, have carried them away. * * *
It is sufficient for the facts of this case to say, if the donor, with the clearly expressed intention of making a gift, make an actual delivery into the hands of the donee, the fact that the donor has lawful access to the depository of the thing given, does not invalidate the gi Et, if the donee has also the same access to said depository, and has such control over the thing given, that he may remove it at any time he chooses to do so. * * *

See also Smith v. Commissioner, supra, and cases therein cited; Hagemann v. Hagemann, supra; Martin v. Martin, 170 Ill. 18; 48 N.E. 694; Gilkinson v. Third Ave. R. Co., 63 N.Y.S. 792; Hynes v. White, 190 Pac. 836.

It has been held also that a gift is valid even where the subject matter of the gift remains in the depository of the donor after the gift is made if it is removed before revocation by the donor. Muir v. Gregory, 168 Fed. 641. All of the bonds in question here were removed by the donees in 1925 with the knowledge and approval of the donor and there is no indication that the donor ever undertook to revoke the gift.

The respondent in his brief stresses the facts that the interest or proceeds derived from the coupons which were clipped from the bonds from 1920 to 1925 were deposited to the credit of the donor, and that during that period numerous changes were made in the bonds by exchanges, purchases and sales, all of which were handled through the donor’s bank account. We do not believe, however, that these matters in any way affect the validity of the gift. The reason for depositing the coupons in the decedent’s account was satisfactorily explained by the witnesses, the donees. It was in accordance with their prior arrangement to keep a substantial amount in the donor’s bank account to meet any needs or wants that he might have during his lifetime. The evidence is not clear as to whether the donees agreed to the arrangement among themselves voluntarily, or whether it was a condition subsequent imposed by the donor. Assuming, however, that the latter was the case, the gift of the bonds themselves would not be affected. The retention by a donor of the interest from a fund or income from property or even a life estate in the subject matter of the gift does not render the gift invalid. Smith v. Commissioner, supra; Edson v. Lucas, supra; Beaumont v. Beaumont, supra; Miller v. Western College of Toledo, 177 Ill. 280; 52 N.E. 432. In Smith v. Commissioner, supra, the court said:

* * * There was, however, a clear and unmistakable intention on the part of decedent to make a present gift to his children, and he described to them in detail how he intended to make the delivery, that is to say, by placing the amount of stock intended for each child in a separate envelope with such child’s name placed thereon, and depositing the same in his son’s lock box at the bank, there were no reservations whatever as to title, dominion, or revocation, except that he retained the right to the dividends during his life, if he so chose. That reservation was merely a limitation on the quantity of the contemplated gift, and in no way .affected ijts validity. Edson v. Lucas, supra.

All of the sales and exchanges of the bonds were made by Frank V. Skiff and were cleared for convenience through, the decedent’s bank account. Assuming, most favorably to the respondent’s contention, that in these transactions Frank V. Skiff acted as agent for the donor rather than as agent or trustee for the donees, still the gift would not be rendered invalid, for it is apparent that these things were necessary for the protection of the donees and were in no sense inimical to their interests.. Smith v. Commissioner, supra; Edson v. Lucas, supra.

The only material fact shown by the evidence which in any way supports the respondent’s position that the gift of the bonds was made in 1925 is that the petitioners in that year all went to the safe deposit box and removed the bonds, each then taking actual possession of his or her share. This was not done at that time by direction of the donor or by reason of any new authority granted by him, although he was aware of what was being done and was agreeable to it. We are convinced that the petitioners at their own pleasure might have divided and removed the bonds at any time after the decedent and Frank Y. Skiff had segregated them in 1920.

We are of the opinion that bonds of the face value of $750,000 were given to the petitioners in 1920 and not in 1925.

Judgment of no liability as transferees will be entered for the petitioners.


author: Marquette :

text:
    Elliott R. Corbett, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 36737, 44087.
    Promulgated May 9, 1933.

      Roscoe C. Nelson, Esq., for the petitioner.

      O. W. Swecker, Esq., A. N. Williams, Esq., and Seth B. Stockton Esq., for the respondent,
   OPINION.

Marquette :

Petitioner contends that the amount he paid to Emma L. Corbett each year was merely the transmission of income from an estate, under a testamentary provision. He says that the amount so paid never was income to him in reality, that he was merely a conduit for the transmission of the money from the estate to the legatee. That view is not sustained by the facts. It clearly appears that in 1912 Emma L. Corbett wholly relinquished any rights she might have against the estate, and consented to the distribution of the remaining corpus and to the closing of the administration. That consent was the consideration given by her for a promise by the petitioner and his brothers to pay her a fixed monthly income. That the amount to be paid coincided with the amount bequeathed to her under the will does not alter the fact that a contract was made and carried out by which petitioner and his brother took the property free of the charge against the income. The contract superseded the will and the latter then passed out of consideration. Had petitioner and his brothers failed to make the agreed payments they would have been liable not for breach of trust as fiduciaries, but for damages for breach of contract as individuals. In our opinion the payments in question constituted capital expenditures, and are not deductible in computing taxable net income. Robert L. Scott, 9 B.T.A. 955; affd., 29 Fed. (2d) 472.

In 1923 petitioner sold for $10 corporate stock for which he had paid its par value, $18,000, and in 1925 he again sold for $10 stock in the same corporation for which he had paid par, $27,500. The respondent concedes that a deductible loss was sustained by the sale in 1923, but contends that in that year the petitioner determined the stock to be worthless and therefore no loss should be allowed in respect of the sale in 1925.

That conclusion is not justified by the evidence. Although conditions affecting the sheep and wool industries were not good, many of the Basin Wool Co.’s borrowers had shown improvement. The market price of wool had more than doubled and the outlook for the company in 1923 was by no means hopeless. The large loan to R. W. Stanfield gave promise as late as July 1924 of working out successfully. Not until the fall of 1925 was it known that the loan could not be collected. Petitioner testified that in 1923 he did not know the value of the Basin Wool Co.’s stock and that his sale of the stock in that year was purely for the purpose of taking an income tax loss. The fact that he sold stock for a nominal sum, under the circumstances set forth, does not prove that petitioner had determined the stock to be worthless at the time. And in our opinion it was not worthless in 1923. We think that the loss on petitioner’s sale of the Columbia Basin Wool Co.’s stock in 1925 was deductible for that year.

The last question is whether petitioner may carry over to 1924 a net loss resulting from the sale of his Basin Wool Co. stock in 1923. The Revenue Act of 1921, so far as here pertinent, provides:

Seo. 204. (a) That as used in this section the term “net loss” means only net losses resulting from the operation of any trade or business regularly carried on by the taxpayer * * *.
(b) If for any taxable year beginning after December 31, 1920, it appears * * * that any taxpayer has sustained a net loss, the amount thereof shall be deducted from the net income of the taxpayer for the succeeding taxable year * * *.

Under the statute, the petitioner is entitled to carry over his net loss in 1923 only if that loss was sustained in a trade or business regularly carried on by him. Oscar E. Rehm, 16 B.T.A. 1045; R. P. Clark, 19 B.T.A. 859.

It appears from the record that petitioner was the vice president of a bank in which he and his brothers owned a 40 percent interest. He devoted his business days to the interests of the bank, but also consulted with his brother nearly every day concerning all their investments. Petitioner’s individual investments included the stock here in question. It is apparent from the record that petitioner changed his investments from time to time and his investment transactions averaged $164,000 per year from 1910 to 1925. But it nowhere appears that petitioner regularly engaged in buying and selling securities, nor that in 1923 he engaged in any stock transaction except the one here in question. The record does not indicate that petitioner was engaged in directing or managing the business conducted by the corporation whose stock he sold.

The situation here strongly resembles that of Alfred M. Bedell, 9 B.T.A. 270; affd., 30 Fed. (2d) 622. That taxpayer was a dealer in ladies’ wear. Pie also bought securities on the market not as a broker, but on his own account. Some securities he bought outright, some on margin. For the year 1920 he claimed a net loss deduction resulting from the sale of securities in 1919. In sustaining the Commissioner’s disallowance of the deduction, we said:

The petitioner starts with a presumption against him. To prove that he was regularly engaged in 1919 in carrying on the business of buying and selling, exchanging and otherwise dealing in bonds and stocks, he testified in a general way as to what he had done in “ 1919 and the several preceding years.” But he never limited his testimony so that it would apply specifically to the year 1919. * * *
On cross-examination he was asked to identify his income-tax return for the calendar year 1919. The return was then offered in evidence by the respondent without any objection by the petitioner. This return shows but one profitable sale of a stock or a bond during the year. The bond sold was purchased in 1916. * * *
A loss of $254,367.95 was claimed as shown by an attached schedule a copy of which appears in our findings of fact. * * * The petitioner also
testified on cross-examination that the stocks and bonds shown on the schedule attached to the return were owned by him on March 1, 1913, and were turned over by him to the Bank of Manhattan, which sold them for his account.
It seems to us that the facts thus developed on cross-examination seriously challenge the direct testimony of the petitioner in regard to his 1919 stock and bond purchases and sales. If in 1919 he was doing an active business with brokers, if he was buying and selling stocks and bonds, where is this reflected in his return? The sales at a loss were all made through a bank. These securities had all been held for six years at least. * * *
He did not mention one specific purchase or sale of stocks or bonds made by him during the year. The only other witness did not give any more satisfactory testimony on this point. The petitioner has not sustained his burden, his proof on this point is not convincing and fails to give us sufficient justification for changing the Commissioner’s determination. * * *

And in its affirming opinion, the Circuit Court of Appeals stated:

A trader on an exchange, who makes a living in buying and selling securities or commodities, may be said to carry on a “ business ”; a person who frequents brokers’ offices and continually dabbles in real estate is conceivably quite different. Most men who have capital change their investments, and may speculate all the time; we should hardly call this a business, though the line is undoubtedly hard to draw.

Again, in R. P. Clark, 19 B.T.A. 859, where the taxpayer was the majority stockholder and president of a corporation whose stock he sold at a loss, we held that the loss arose from an occasional transaction and not in a trade or business regularly carried on. The decision was reversed, 59 Fed. (2d) 1031, on the ground that as the taxpayer devoted all his time to the management of the corporation the sale of his stock in the company could not be separated from the regular course of business of which it was a part, and that the sale could not be considered a wholly independent transaction. The appellate court was reversed and this Board’s decision sustained by the Supreme Court on December 12, 1932, Burnet v. Clark, 287 U.S. 410.

We cannot perceive any material distinction between the conditions now 'before us and those in the cases above cited. We conclude, therefore, that petitioner’s sale of the Basin Wool Co.’s stock in 1923 did not result in a loss sustained in a trade or business regularly carried on. Hence, he is not entitled, under the Revenue Act of 1921, to carry forward a net loss in computing his 1924 income tax.

As indicated earlier in this opinion, petitioner’s taxable income for 1925 should be increased by the $4,000 paid under contract to Emma L. Corbett in that year, and a deduction of $27,490 should be allowed for loss on the sale of corporate stock.

Decision will he entered under Bule 50 in Doclset No. 36737. Decision will he entered for the respondent in Docket No. It,lfi87.


author: Van Fossan :

text:
    J. G. Robertson, Petitioner, v. Commissioner of Internal Revenue, Respondent. C. F. Chapman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 49552, 52370, 52496.
    Promulgated May 11, 1933.

      Henry W. Wales, Esq., and Ashley M. Van Duzer, Esq., for the petitioners.

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

Van Fossan :

The sole question presented in this case is the determination of the fair market value on March 1, 1913, of the shares of common stock of the Firestone Tire & Rubber Co. sold by the petitioners in 1927 and 1928. The respondent asserts that his action in fixing that value at $310.24 per share should not be disturbed. The petitioners contend that such value was at least $609.61 per share.

Section 204 (b) of the Revenue Act of 1926, identical in form and context with section 113 (b) of the Revenue Act of 1928, is as follows:

The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be (A) the cost of such property * * * or (B) the fair market value of such property as of March 1, 1913, whichever is greater. In determining the fair market value of stock in a corporation as of March 1, 1913, due regard shall be given to the fair market value of the assets of the corporation as of that date.

Article 1591, Regulations 69, identical with article 591, Regulations 64, provides as follows:

What the fair market value of property was on March 1, 1913, is a question of fact to be established by competent evidence. In determining the fair market value of stock in a corporation, due regard shall be given to the fair market value of the corporate assets on the basic date. In the case of property-traded in on the public exchanges, actual sales on or about the basic date afford evidence of value, but in each case the nature and extent of the sales and the circumstances under which they were made must be considered. Those prices received at forced sales or prices received for small lots of property may be no real indication of the value of the property.

In James Couzens, 11 B.T.A. 1040, we had before us the problem of determining the fair market price or value of the stock of the Ford Motor Co. on March 1, 1913. In that case we said:

While we have not arrived at this value by the application of any mathematical formula, because we believe that there is no authoritative formula available, we have given careful consideration to the several methods suggested in the course of the trial, and have not been unmindful of the aid to be derived from the use of such tests. The comparative studies which have been submitted of the Ford Company and numerous other industrial corporations, from which the market value of the Ford stock has been deduced were in some instances found to be of little help because they involved assumptions or collateral matters which were not cognizable here, or were based on unsubstantiated hypotheses, or for other reasons were found of little weight. We think it would unjustifiably deflect this opinion from its proper course to set forth a critical analysis of all of the evidence and methods by which the numerous witnesses arrived at their various opinions as to value.

And in the concurring opinion in that case it was said:

Passing to the question of a proper valuation on March 1, 1913, of the Ford stock, we engage ourselves in an undertaking which is at once complex and simple. Complex in the factors and formulae that are presented for consideration and simple in the realization that, in its essence, the determination of value is merely a matter of judgment. Many factors must be weighed, and in this process various theories and formulae may be employed, but in the end the value determined on must comport with sound and well reasoned judgment. It follows that the accuracy of the valuation is directly proportionate to the soundness of the judgment.

Under the conditions set forth in the findings of fact we do not deem the few scattered sales of Firestone stock in small lots to be conclusive of fair market value. Firestone was distinctly a close corporation, the Firestone family owning a large part of its stock. No statement of the company’s assets, volume of business, earnings, actual or potential market or other facts vital to its financial condition had been given or was available to the public, banks, stockholders, or anyone not within the inner circle of its officers and directors. During the first four months of 1913 only 22 sales, aggregating 235 shares, were recorded in the Cleveland Stock Exchange. The strike in the rubber plants in Akron in February and March 1913, had a depressing effect on the prices of stock in tire companies and particularly on the few transactions in the Firestone stock. Neither the volume of the sales nor the attendant circumstances were sufficient to establish a fair market. In view of this situation we must examine other factors to arrive at the proper fair market value.

We find several unique facts in the record which convince us that the fair market value was much greater than the price at which a few shares of stock were sold at par or near March 1,1913. Harvey Firestone and Henry Ford were warm friends. Their business association likewise was unusually close. Firestone consistently furnished Ford with over half of his tire needs. He was in constant and intimate touch with Ford’s business policies and his projected plans for expansion. On March 1, 1913, the Firestone Co. knew what would, in all probability, be required from Ford and accordingly provided for its own anticipated increase in business and earnings. Its subsequent deliveries to Ford show clearly that its expectations were amply justified.

At the same time Firestone was engaged in perfecting and placing on the market in substantial quantities its nonskid tires and demountable rims, in the production of both of which it was the pioneer among tire and rim manufacturers. The marked increase in the sales of these two articles also reflects the reasonableness of Firestone’s belief that the public demand for them would be strong.

In arriving at our conclusion we must give due regard to certain other unusual practices of Firestone which served to enhance the fair market value of its stock. The company’s assets were carried on its books at an unwarranted low figure, so low in fact, that in 1916, after an appraisal a sharp upward revision was required and made. Contributing to this situation was the fact that Firestone had taken excessive depreciation on its physical assets. Such depreciation was later reduced by the respondent and was reflected in Firestone’s increased income during the period in which such depreciation had been taken. Furthermore, Firestone had never carried as assets such valuable intangibles as patents, good will, etc. No appraisal or valuation of such intangibles was presented to us, but their possession by Firestone may properly be taken as a factor in arriving at fair market value.

The character and ability of Firestone’s management also has an important bearing on our problem. It was described as “ outstanding.” The organization was young and virile, headed by Harvey Firestone, a young man of large experience in the tire industry. The officers of the company were constantly on the alert to invent, discover and develop improvements in their products and methods of manufacture as well as to reduce the cost of production and distribution. On March 1, 1913, they had forseen the probable great growth of their business and were making their plans accordingly.

Under the foregoing circumstances we are convinced that the fair market value of common stock of the Firestone Tire & Itubber Co. on March 1,1913, was at least $550 per share and we so determine.

Decision will be entered under Bule SO.


author: Marquette:

text:
    Big Four Oil & Gas Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54478.
    Promulgated May 11, 1933.

      William J. Byrne, Esq., and Thomas J. Reilly, Esq., for the petitioner.

      Frank B. Schlosser, Esq., for the respondent.
   OPINION.

Marquette:

Petitioner contends that the respondent had no authority to reestimate the amount of remaining recoverable reserves. It takes the view that the right to have such reestimate is a relief provision for the sole benefit of the taxpayer.

Section 23 (1) of the Revenue Act of 1928 authorizes as deductions from gross income:

In the ease of mines, oil and gas wells, other natural deposits, and timber, a reasonable allowance for depletion and for depreciation of improvements, according to the peculiar conditions in each case; such reasonable allowance in all cases to be made under rules and regulations to be prescribed by the Commissioner, with the approval of the Secretary. * * *

Article 230 of Regulations 74 provides:

Determination of quantity of oil in ground. — In the case of either an owner or lessee it will be required that an estimate, subject to the approval of the Commissioner, shall be made of the probable recoverable oil contained in the territory with respect to which the investment is made as of the basic date. The oil reserves must be estimated for all undeveloped proven land as well as producing land. When information subsequently obtained clearly shows the estimate to have been materially erroneous, it may be revised with the approval of the Commissioner.

From the foregoing the petitioner reaches the conclusion that a revised estimate may be made by the owner or lessee but not by the Commissioner, and that the latter’s function is restricted to approving or disapproving the estimate submitted.

We can not concur in that viewpoint. The regulation does not specify who shall make the revised estimate, should one be necessary. It simply provides that an erroneous estimate may be revised with the approval of the Commissioner. If the latter makes the revision himself, fairly and without arbitrary caprice, it may be assumed that he approves his own handiwork. In such case the requirements of the regulation will have been fully met. If the taxpayer submits a revised estimate which the Commissioner does not approve, and then another, and keeps on until approval is finally won, the ultimate result is that the Commissioner has, in effect, made the revision. We find nothing in the regulations to prevent the Commissioner from doing directly that which, as petitioner contends, he might do circuitously.

Petitioner’s next point is that oil reserves may be reestimated only when it appears that the first estimate was materially erroneous, and that in the present case the error was too small to be material. Petitioner compares the amounts added to reserves with the original estimate. Taking the three leases in the aggregate, the comparison shows an error of 6.08 percent. We do not agree with the petitioner that the error is so small as to be immaterial. In the present case it amounts to 110,000 barrels o.f oil, which is by no means inconsiderable. We think it amply sufficient to justify the revision in question.

Petitioner further contends that the changed unit rate of depletion can not be applied to the year 1928, on the ground that it was not until February 7, 1931, (date of the 60-day letter) that the Commissioner determined new estimates of the oil reserves of the leases and changed the unit rate of depletion as of January 1, 1928. Several decisions are cited to the effect that revised estimates and depletion rates may not be applied retroactively.

The evidence discloses that during the year 1928 an error in the original oil estimate was discovered. It does not appear just when the new estimate was made, but certainly there was no acceptance of the original estimate as a basis for allowing depletion deductions for 1928. But although the reestimate may have been computed subsequent to the taxable year, it was a part of the due consideration given to the determination of the proper tax for that year. The conditions now before us are thus distinctly different from those in Sterling Coal Co., Ltd., 8 B.T.A. 549, which is strongly relied upon by the petitioner. In that case the question was whether depletion deductions might be determined upon facts developed and ascertained and estimates made subsequent to the taxable years, where estimates had already been determined and accepted as fair and reasonable for those years. We held that under those circumstances the tax for the years then in question might not be redetermined upon the basis of the subsequent estimate. Staub Coal Co., 16 B.T.A. 584, rests upon similar facts.

In Stouts Mountain Coal Co., 4 B.T.A. 1292, depletion was allowed by the Commissioner for the years 1920 and 1921 upon the basis of the original estimate of recoverable reserves. During 1921 it was discovered that the amount of reserves was far less than at first estimated. We there held that the subsequently discovered facts might be utilized to revise the basis for computing depletion for the year (1921) in which the facts first became apparent. That case is directly in point with the present proceeding.

In Kehota Mining Co. v. Lewellyn, 28 Fed. (2d) 995; affd., 30 Fed. (2d) 817, it was held that a new estimate of coal recoverable could be used only in determining allowances to be distributed to capital remaining to be recovered, but it could not change allowances already deducted in prior years on the basis of the original estimate.

In the light of the above decisions it seems clear that the revised estimate in the present proceeding, made upon facts appearing during 1928, may properly be applied in determining the depletion allowance for that year, and we so hold. Petitioner admits that respondent’s computation is correct, if he had authority to make it, except as to the Buchanan lease, and respondent admits error in that respect. The full amount of depletion deduction for that lease, as claimed by petitioner, should be allowed. With that adjustment the respondent’s determination will be correct.

Decision will be entered wider Rule 50.


author: Murdock :

text:
    Donald McDonald, Jr., Administrator of the Estate of Donald McDonald, Sr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 27108.
    Promulgated May 11, 1933.

      Donald V. Hunter, Esq., for the petitioner

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

Murdock :

A jurisdictional question was suggested by the Board Member at the hearing and the parties were requested to. up by proof of all pertinent facts. The petitioner had been the sole administrator of his father’s estate but had been discharged before receiving the notice of deficiency. The question was whether he had ever notified the Commissioner of the termination of his fiduciary capacity. See section 281 (a) of the Be venue Act of 1926. The notice of deficiency would indicate that he had not and counsel for the respondent said there was nothing in his files to indicate that such notice had been given. The petitioner was questioned on the subject, but did not know whether or not a notice had been given. His counsel made no further answer to our question, but now urges us to dismiss the proceeding for lack of jurisdiction. We hold that we have jurisdiction. Jessie Smith, Executrix, 24 B.T.A. 807.

The petitioner contends for a loss deduction of $12,280 as a result of the sale of the 292 shares of stock which the decedent acquired from his daughter-in-law. The Commissioner allowed a deduction of only $2,620 on the loss resulting from the sale of those particular shares. A theory advanced in the notice of deficiency and still relied upon by the respondent is that the excess of the purported purchase price of the stock over the fair market value of the stock at the time of acquisition represented a gift and was not a part of true cost. Some support for this theory is found in two cases cited by the respondent, Harry F. Robertson, 5 B.T.A. 748, and Robinson v. Commissioner, 59 Fed. (2d) 1008. Furthermore, the present case is an appropriate one for the application of such a theory, if the theory is sound in principle. The decedent could have purchased the stock for less money. He paid more than market only that thereby he might aid his son and his daughter-in-law. Adverse interests can be relied upon to fix a proper cost for tax purposes, but where, as here, the interests of the parties are not adverse, the terms agreed upon may require closer scrutiny.

The respondent suggests other grounds to support his determination. One is that the loss was not sustained in a transaction entered into for profit. The loss in question was not incurred in trade or business. Neither was it a loss from casualty or theft. Therefore, the petitioner must rely upon section 214 (a) (5) of the Kevenue Act of 1921, which allows as a deduction “ Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business.” Obviously the decedent did not enter into this transaction for the sole purpose of making a profit. The making of a profit was not even his primary purpose. Indeed the facts do not indicate that he gave any consideration to the question of probable profit or loss. He advanced his money in order to relieve his son and his daughter-in-law from their difficulties. If the transaction can not be divided so that in part it was one entered into for profit and in part was not one entered into for profit, the petitioner would not be entitled to any deduction, since he could not show that the transaction as a whole was one entered into for profit. Furthermore the loss resulting from the excessive price paid for the stock must have been compensated for by the personal satisfaction which he derived from coming to the aid of his family. Probably the legislators, when they enacted the provision in question, had in mind only compensation of a material kind. However that may be, we think that they did not intend to allow a deduction for that part of the loss which resulted in this case from paying more than a fair price for the stock. The excess cost was paid for personal reasons, would not have been paid otherwise, and can not be the basis of a loss.

Decision will be entered for the respondent.


author: Lansdon :

text:
    National Cottonseed Products Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45488.
    Promulgated May 11, 1933.

      Frank J. Albus, Esq., and Homer K. Jones, C.P.A., for the petitioner.

      R. W. Wilson, Esq., and S. B. Anderson, Esq., for the respondent.
   OPINION.

Lansdon :

Our first issue relates to the petitioner’s right to deduct $33,250 from its gross income for 1926, on the ground that it represents interest paid in that year upon its obligations. The respondent has denied this claim and held that the payment should be attributed to dividends on stock.

The record shows that the petitioner purchased the assets from the Phoenix Co. and, simultaneously therewith, agreed to purchase back the 7,500 shares of its preferred stock at the rate of $150,000 liar value per annum “ with accrued and unpaid dividends.” The offer made and accepted proposed that the petitioner would cause to be purchased at par, plus any accrued and unpaid dividends, $150,000 par value per year of the stock. It will be seen that this offer contemplated future purchases with a formula by which the price paid should be fixed when made. This price was to include the par value of the stock with all accruals for dividends added. This fixing of future dates for execution of the resales precludes any theory of an existing obligation, or obligations, to pay before said dates, upon which interest could accrue in the interim.

The petitioner contends, however, that the parties intended to make provisions in their contract of sale of the Phoenix Co.’s assets to allow for interest on deferred payments on their purchase price, and that the increase in payments -over par was intended to represent such allowance. It therefore argues that, because of that intent, we should attempt to change the character of this capital outlay in order to give effect to the substance of the transaction.

Assuming that the intent of the selling parties was as contended for by the petitioner, that fact, in our opinion, does not change the character of this expenditure or affect the real substance of what the parties did. They saw fit to divorce completely the purchase and sale of the Phoenix Co.’s assets from the resale of the preferred stock. The first was immediate and conclusive as to all parties, while the latter was wholly executory and binding only on the petitioner. It agreed to buy back the preferred stock at the price fixed, but there was no corresponding commitment on the part of the Phoenix Co. or its stockholders to sell should they change their minds on any of the terms. Whatever the parties may have intended in the transaction, their contract wholly failed to create any debt against which the petitioner could accrue an interest charge during the intervening period from date of its execution to the date of the purchase, and we therefore hold that the respondent correctly rejected the deduction claimed on account of it in the period under review.

Petitioner next contends that it is entitled to deduct $238,460 from its gross income for 1926 as the value of its stock payment made to its president, Cornish, for services rendered and to end litigation and terminate its so-called five-year contract with him.

The record shows that the salary contract with Cornish authorized by petitioner’s directors on August 18, 1924, was never executed. Chairman Eice of that board says in his deposition that it was not signed because when they got ready to draw it up they “ split upon the proposition of when he (Cornish) was entitled to the five percent.”

Cornish actually served as petitioner’s president about one year and was paid in excess of $25,000 cash for that service. The stock payment later made was in compromise of Cornish’s suit and to get a release from him and his crowd that would get rid of the receiver and give control to the group that was to refinance and rehabilitate its affairs.

In our opinion the stock expenditures here contended for were in the nature of capital outlays made in the reorganization or rehabilitation of petitioner’s business and not expenses incurred in the operation thereof. The record convinces us that Cornish was adequately paid in cash for any and all services ever performed for the petitioner before the receiver took over its management and the petitioner has failed to show any additional services he rendered to it after that time and for which the amount in controversy would be reasonable compensation. Deductions of the character here contended for, to be allowable, must be shown to be reasonable in amount and necessary to the prosecution of the business to which they are attributed, and this the petitioner has failed to show. Its claim for this deduction is therefore denied. Morris Moore’s Sons, Inc., 1 B.T.A. 906; Sharpsville Boiler 'Works Co., 3 B.T.A. 568; Unióla Real Estate Co., 3 B.T.A. 1113; Bailey Dental Co. of Iowa, 11 B.T.A. 860; and Golding & Hahn, 15 B.T.A. 499.

Decision will he entered imder Rule 50.


text:
    Solomon Silberblatt, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46335.
    Promulgated May 11, 1933.

      Benjamin Mahler, Esq., for the petitioner.

      D. R. Sheriff, Esq., for the respondent.
   OPINION.

Marquette:

There is no dispute concerning the fact of the total amount of loss sustained by the petitioner in connection with the Supreme Cloth Sponging Co. The point here in controversy is whether that loss occurred in 1925 or in 1926, either in whole or in part.

The loss consisted of two items. One item, for money loaned, amounted to $8,000. It seems clear to us from the record that petitioner sustained that loss in 1925. He knew in that year that the money loaned could never be recovered. By written contract in August 1925 petitioner agreed to cancel the debt if certain persons would buy his corporate stock at a specified price, and they did so. At the time the agreement was executed petitioner knew the exact amount he would lose by reason of his loans to the company, and by that agreement he definitely accepted that loss. Whether the purchasers of petitioner’s stock fulfilled their part of the contract, or whether they did not, would neither enhance his loss in respect of the money loaned nor reduce it. The amount of that loss was fixed, and its existence determined not later than August 1925. If treated as a loss, it was not sustained in 1926, the taxable year. If treated as a bad debt, it was clearly ascertained to be worthless in 1925, although not charged off until 1926. The statute requires that both take place during the same taxable year. In our opinion, therefore, petitioner is not entitled to any deduction for 1926 in respect of the $8,000 loaned to the Sponging Co.

Regarding petitioner’s loss upon the sale of his corporate stock the conditions are different. The contract for sale was made, and part of the purchase price was paid in 1925, but by agreement the balance of the purchase money was not due until 1926. Pending payment of the deferred installments petitioner deposited his stock in escrow, to be delivered to the purchasers only if they met their deferred payments promptly. If they did not, petitioner was empowered to withdraw the stock from the escrow agent.

Upon this statement of facts the respondent contends that the sale of the stock in question was consummated in 1925. He argues that petitioner knew in 1925 that he could not recover upon his investment in the company more than the $5,000 agreed price, and therefore that petitioner also then knew the minimum amount of his loss. In support of this contention he cites George P. Sacks, 23 B.T.A. 307, and Darwin D. Martin, 24 B.T.A. 528. In each of those cases corporate stock was sold at a loss, the purchase price to be paid over a period of years. In neither case does it appear that the stock was held in escrow pending payment of the installments of the purchase price, with power in the seller to recall the stock upon failure to pay any installment. Nor does it appear in either case that the purchase money notes were of doubtful value at the time the contract of sale was made. Those cases, therefore, present facts materially different from those before us. What they decided was that section 212 (d) of the Revenue Act of 1926 only authorized the spreading of profit from installment sales over the years when received, and did not authorize a like spread of loss upon an installment sale. No such issue is presented in the present proceeding.

The question here raised has been before us on several occasions. In Theodore J. Swift, 20 B.T.A. 1099, the taxpayer contracted in 1921 to sell and convey certain lands. The purchase price was payable over a period of years and the executed deed for the property was deposited in escrow with instructions to deliver it to the purchaser when all the payments had been made in full. We there held that the sale was not consummated in 1921, but in 1924, when the payments were completed and the deed delivered to the purchaser by the escrow agent. That decision was affirmed, 54 Fed. (2d) 746. G. Allan Hancock, 25 B.T.A. 607, is to the same effect.

In Charles W. Dahlinger, 20 B. T. A. 176; affd., 51 Fed. (2d) 662, corporate stock was sold and title to it passed to the purchaser prior to December 31, 1921, although the purchase price was not fully paid until a later date. It appeared that payment of the deferred installments was not a condition precedent to the passing of title to the stock, and that failure to make the deferred payments would not divest title from the purchaser. The sale, therefore, was held to have been consummated upon passing of title to the purchaser.

We think those cases are controlling, imder the facts here presented. Petitioner placed the stock in escrow to be delivered to the purchaser if and when the latter made prompt payment of the deferred installments as they fell due. The right to recall the stock from escrow if any deferred payment was not promptly made was expressly reserved to the petitioner. Clearly, full payment of the purchase price was a condition precedent, and title to the stock passed only when the purchase payments were completed, which was in 1926. Hence the sale was not consummated in 1925. It must be borne in mind that, although petitioner received promissory notes covering the deferred payments, the contract of sale makes it plain that those notes were neither given nor received as discharge of the unpaid balance. Furthermore, when the notes were given in 1925 their value was by no means certain and their ultimate payment was somewhat doubtful. If payment had been defaulted upon all or any considerable number of those notes, petitioner’s loss upon his stock would have been substantially greater than it turned out to be. While that fact, if standing alone, and unsupported by other facts, would probably be insufficient to support petitioner’s contention, in connection with all the circumstances of this case, we think it carries some weight. We conclude, therefore, that petitioner sustained a deductible loss in respect of his corporate stock in 1926, which should be allowed.

Decision will he entered wider Rule 50.


author: GOODRICH:

text:
    Anna A. Frank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 53785, 59841.
    Promulgated May 11, 1933.

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

      M. M. Mahaney, Esq., for the respondent.
   OPINION.

GOODRICH:

In these proceedings, which were consolidated for hearing, petitioner asks for the redetermination of deficiencies in income taxes of $3,402.62 for 1928 and $4,182.42 for 1929, the greater part of which results from respondent’s action in including in her income for these years amounts of $29,678.42 and $42,926.56, respectively, paid to her by a trustee. As our findings of fact we adopt the statement agreed to at trial by counsel for the parties, together with the exhibits in evidence. For the purposes of this report the facts need not be recited in full.

Petitioner is the widow of Abraham Frank, who died a resident of Pittsburgh, Pennsylvania, on March 6, 1928, leaving a will whereby he left all of his property to petitioner or to his children should his wife predecease him. The will was executed on January 27, 1926. Thereafter, on March 3,1927, Frank established a trust by written instrument transferring to the Bank of Pittsburgh National Association, as trustee thereunder, the greater part of his property, exclusive of real estate. On the same day he executed a codicil to his will by which he named this bank as coexecutor thereof.

Under the trust instrument, Frank retained the power to direct the trustee with respect to the disposition of the transferred property and the reinvestment of the proceeds thereof. He retained also the power to terminate the trust and recover the property upon short notice at his election. He was to be paid the income of the trust during his life and, after his death, the trust was to continue and the income therefrom to be paid to petitioner during her life. Upon the death of the widow, the trust property was to be distributed to the donor’s children, unless they elected to continue the trust.

Following Frank’s death, his will was probated and petitioner, exercising the privilege granted her by the Pennsylvania statute, filed her election to take under the will, thus relinquishing her claim of dower in the decedent’s estate. Shortly thereafter there was distributed to petitioner by the executors, in accordance with the order of the probate court, the sum of $21,470.10, being the net proceeds of the property (exclusive of that held by the trustee) of which Frank died possessed. The value of the trust property was taxed as a part of the decedent’s estate, both by the Commonwealth and by the Federal Government. The distribution made to petitioner by the executors was not included in her income, either by her upon her return, or by respondent in the determination of the deficiencies here involved, and no issue is raised respecting this distribution.

(Respondent has included in petitioner’s income for the years before us the amounts of distributable income of the trust paid to her by the bank as trustee, and this action she challenges. As petitioner views the case, the sole issue for our determination is as to the legal import of the trust instrument. She contends it was testamentary in character — in legal effect, a will — and therefore did not divest Frank of ownership of the property transferred to the bank as trustee. Consequently, she argues, that property was a part of the decedent’s estate in which she had a. right of dower and, when she relinquished that right, she became a purchaser for value of the property coming to her under the testamentary provisions accepted in lieu of dower and may recover, free from tax, the value of her dower interest; citing Briscoe v. Craig, 32 Fed. (2d) 40;. Warner v. Walsh, 15 Fed. (2d) 367; United States v. Bolster, 26 Fed. (2d) 760; Allen v. Brandeis, 29 Fed. (2d) 363, and other cases. Therefore, she contends, she should not now be taxed upon these amounts received by her from the trust, since they aggregate far less than the value of her relinquished dower interest in the estate. In support of her view she points to the fact that by the instrument the decedent retained some control over the trust property by means of his power to direct its investment; retained the power to revoke the trust; and, further, that the value of the trust property was taxed as a part of the decedent’s estate both by the Commonwealth and by the Federa] Government. In short, while petitioner does not deny Frank’s power during his lifetime to divest himself of his personal property as he saw fit, she contends that, by the creation of this trust and the transfer of the property to it, he did not do so.

No importance need attach to the fact that the value of the trust property was included for purposes of taxation in the decedent’s estate; that does not indicate an interpretation of the trust instrument as a will, nor does it mean that the trust property was a part of the decedent’s estate subject to dower. It is readily apparent that the trust property might be subjected to the Federal tax under paragraph (d) of section 302, Revenue Act of 1926, which provides that the value of such property shall be so included where the grantor retains the power of revocation. See Porter v. Commissioner, 288 U.S. 436 (affirming 23 B.T.A. 1016), wherein the court said:

The net estate upon the transfer of which the tax is imposed, is not limited io property that passes from decedent at death.

Pennsylvania has a statute of similar effect which affords sufficient authority for taxing the trust property, although, for purposes of dower, it was not a part of the estate. P.L. 521; Pa. St. 1920, par. 20465; Dolan's Estate, 279 Pa. 582; Spangler’s Estate, 281 Pa. 118.

We see no reason sufficient to impel us to regard the trust instrument as a will. It evidenced an intention and accomplished the purpose of immediately divesting Prank of his legal title to the property transferred, reserving to himself a life interest in the income, and vesting a beneficial remainder interest in the several beneficiaries. Having disposed of the property during his lifetime, it was not a part of his estate at his death subject to dower and consequently his widow had no dower interest therein to relinquish. It is true that Frank retained the power to revoke the trust and repossess the property ; but he did not exercise it. True also, he retained the power to direct the trustee respecting sales and reinvestment of the trust property, but, under the facts before us, that did not affect the trustee’s title or ownership. Nor would the remaindermen come into possession of the corpus until the termination of the life interests in the trust, but it is well settled by the decisions of the Pennsylvania courts that the postponement of possession by the cestui que trustent, the reservation bv/the grantor of the trust income for his life, and "his reservation of the power to revoke do not invalidate the trust nor prove it a disposition of property to take effect after death. See Windolph v. Girard Trust Co., 245 Pa. 349; Benkart v. Commonwealth Trust Co., 269 Pa. 257, and cases there cited.

Petitioner recognizes this long established rule, but seeks to distinguish the case at bar on the fact that the donor retained a right of control over the property. But in the Windolph case the donor reserved a right of control to the extent that her permission was necessary before the trustee could reinvest in any but a certain class of securities, and it appears, moreover, that the donor there was consulted by the trustee respecting all reinvestments. The court found, however, that the evidence tending to show that the settlor continued to exercise the control of an owner over the property was insufficient to invalidate the trust. Here we have no evidence whatever as to any control exercised by the donor over the property. In such circumstances we are not prepared to say that the reservation by Frank of the power to direct investments interfered with the trustee’s ownership to such an extent as to nullify the transfer. See also Houston's Estate, 276 Pa. 330, where the dped was sustained although the settlor retained power, jointly with the trustee, to change investments.

Petitioner relies strongly upon a decision in Beaumont's Estate, 214 Pa. 445, wherein the court held a trust deed to be testamentary in character. Analysis of that decision readily distinguishes it. There the deed made no final disposition of certain bonds transferred to a trustee for the specific purpose of using the income therefrom to meet premiums on an insurance policy so that the maturity of the policy would discharge the trust, so far as it concerned the bonds, and they, necessarily, would revert to the donor or to his estate. In the case at bar, the trust property is definitely disposed of under the terms of the instrument and therefore the cited case is not applicable.

It may be, as petitioner contends, that Frank’s intention at the time he created the trust is of little importance. However, in our opinion, it is clear that it was not his intention to make a trust deed testamentary in character. He already had a will, and he made a codicil to it on the very day he executed the trust instrument and transferred the bulk of his personal property to the trustees. A part of his property, including some real estate, he kept to himself and, as we see it, his intention was to let that part pass under his will and to dispose, during his lifetime, of the greater part in such a way as to insure its management and conservation for the benefit of his beneficiaries.

We conclude that the trust instrument was not testamentary in character; that the trust property was not a part of decedent’s estate in which petitioner had a right of dower; and that the amounts received by her from the trustees in the years here involved are to be included in her income.

Reviewed by the Board.

Judgment will be entered for the respondent.