author: Arundell:

text:
    Sol H. Goldberg, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77098.
    Promulgated June 8, 1937.

      Robert Jackson, Esq., and Aaron Holmrn,, Esq., for the petitioner.

      Charles P. Reilly, Esq., and G. H. Curl, Esq., for the respondent.
   OPINION.

Arundell:

The respondent bases his claim of fraud on three grounds. First, the petitioner’s attempted concealment of the improper deduction on Savold stocks by combining it with the Gasoline Products transaction. Second, that petitioner knew the Savold stocks had become worthless long -prior to 1928. Third, that the shares claimed to be worthless in the 1919 return were to a large extent the same shares on which a loss was claimed in the 1928 return. The petitioner denies fraud and alleges error in the dis-allowance of the claimed loss deduction on the Savold stocks.

We shall first consider the question of whether a loss deduction on the Savold stock is allowable for the year 1928. The petitioner alleges that “in 1928 said stock became worthless and was sold or otherwise disposed of.” In his reply to the Commissioner’s answer he says that in 1928 he knew or suspected the stock had become worthless and void and that in the hope of securing some salvage he turned the stock over to Wiener and agreed to give Wiener all that he could get over $1,290.80. At the hearing the petitioner insisted that the transaction with Wiener was a sale of the stocks.

We are of the opinion that no loss was sustained in 1928 on the Savold stocks and hold that the claimed deduction is not allowable. The Commissioner’s disallowance of the deduction “presumably rests upon a correct determination of the facts.” Old Mission Portland Cement Co. v. Helvering, 293 17. S. 289. Not only does the evidence in this case fail to overcome this presumption, but it affirmatively convinces us that the Commissioner was right. Stock losses are allowable in the year they are sustained. The loss may be sustained on a bona fide sale or on the worthlessness of the stock. If it arises out of worthlessness, the deduction therefor is to be taken in the year that worthlessness occurs, and it may not be taken in a later year on a sale for a nominal amount. DeLoss v. Commissioner, 28 Fed. (2d) 803; Gilbert H. Pearsall, 10 B. T. A. 467; Leigh Carroll, 20 B. T. A. 1029; Claude D. Cass, 32 B. T. A. 713; affd., 83 Fed. (2d) 841. The petitioner in this case was at one time very definitely of the opinion that the Savold shares were worthless prior to the year 1928 in which he now seeks to take a deduction. For the year 1919 he claimed a deduction of $38,500 for Savold stock held personally and $375,718.04 for his interest in stock of the so-called pool. He represented in his return that “this company is practically bankrupt and no return is expected. * * * No bidders on stock exchange. Shares are considered worthless.” :When the matter was questioned by the Government, he procured sworn statements from brokers and from his then attorney to the effect that the stock was worthless. These he filed with the Government officers. His representations convinced the Commissioner and his claim for a loss on the ground of worthlessness was allowed. In addition to the petitioner’s representations there is other convincing evidence that the stock was worthless prior to 1928. Whether worthlessness occurred in 1919 need not be decided. The principal company, Delaware Savold, had its charter revoked by the State of Delaware by proclamation issued in January 1923, which declared that the corporation became “inoperative and void” on March 22, 1922, for nonpayment of taxes. An affidavit of petitioner’s former attorney, dated in May 1921, reports the result of his investigation and an interview with the president of the Delaware Savold Co., and concludes “that the stock in * * said Savold Tire Corporation and its subsidiary corporations has absolutely no value; and had absolutely no value in November, 1919 * * A revenue agent who examined petitioner’s records for 1919 and prior years and who made an investigation as to the value of the stock reported in 1921 that both the Savold companies had proved absolute failures, that they were defunct, and that there were no assets remaining. These several declarations of worthlessness prior to 1928 are contradicted only by petitioner’s claim that he thought the shares had value after 1919 because of the valuable patents that the companies owned. But there is no proof that the patents had value other than petitioner’s testimony of their potential value if licensed under a method that he had in mind. Moreover, while it may be assumed that the Savold companies owned the patents, there is no proof of it. The evidence is that petitioner sold the patents to an individual, who, with associates, organized the corporations. In view of the evidence establishing worthlessness prior to 1928, we hold that the respondent rightly disallowed the deduction claimed for that year based on the transaction with Wiener. DeLoss v. Commissioner, supra, and Claude D. Cass, supra.

Aside from the worthlessness of the shares prior to 1928, and for other reasons, we are of the opinion that the transaction with Wiener was not a bona fide sale. The parties to that transaction are not in agreement as to what it was, nor are they consistent in their views. Petitioner’s testimony is to the effect that it was a sale. In his reply to the Commissioner’s answer the petitioner describes the transaction as one wherein “he turned the stock over to David Wiener and agreed to give said Wiener all that he could get over $1,290.80 for said stock.” From this it would appear that Wiener was acting as a broker rather than being a purchaser.. Wiener likewise appears to have some doubt as to what the transaction really was. While' he speaks of “buying” the shares, he couples with that the understanding that he was to sell them and get the benefit of anything realized over 10 cents per share. Of course, if the transaction had been an outright sale there would have been no occasion for an agreement that Wiener was to retain any part of the proceeds of sales. Both parties to the transaction seem to have treated the recited consideration rather lightly. Wiener apparently had funds at or after the time of the transaction for he testified that earlier in 1928 he borrowed $25,000 from the petitioner which he has repaid. The petitioner testified that he awaits Wiener’s convenience in paying the $1,290.80. In 1930, 1931, and 1932 Wiener gave petitioner his notes covering loans aggregating some $30,000. Wiener’s testimony is that to the best of his recollection the $1,290.80 was included in one of the notes given to the petitioner. This is the nearest approach to any recognition of the alleged consideration for the shares. Upon consideration of all the evidence we do not believe that the transaction was a bona fide sale.

Considerable time at the trial and numerous pages in the briefs were directed to the question of whether the shares on which a loss was claimed in 1919 were the same shares as those on which a loss was again claimed in 1928. We find it impossible to say whether they were or were not the same. The petitioner did not keep records complete enough to permit of an identification of shares by certificates or otherwise. His brokerage records are incomplete as to both sales and purchases. Neither side seemed to know the total holdings of petitioner at any time. However, it does not seem to us to be of any particular importance, either on the loss or the fraud question, whether or not the shares were identical. 'Of course, it would strengthen the respondent’s position somewhat if it could be shown that two deductions are claimed for the identical shares. But if they were different blocks of stock a deduction would not be allowable on one in 1919 and on the other in 1928 under the circumstances present in this case. The 1919 deduction was claimed with respect to 13,364 shares, of which 1,450 shares were owned by petitioner individually and 11,914 shares were in the “pool” accounts. If those 13,364 shares were worthless in 1919, as petitioner then vigorously insisted they were, then clearly his other shares were equally worthless at that time, and under the cases above cited the petitioner could not carry over a block of the shares' to a subsequent year and take a loss deduction.

Perhaps a word ought to be said at this point as to the so-called “pool.” Petitioner claimed a loss in 1919 on Savold shares in a “pool.” He now insists that he was not in a pool. He says that he simply paid up some of the margin accounts of employees of a bank. It appears, though, this is not clear, that upon payment petitioner acquired the stock in the account. His return would indicate that he acquired interests to the extent of his payments and the bank employees retained interests corresponding to their payments. However this may be, it is not of importance here to determine whether or not the petitioner was “in a pool.” What is of importance is that he claimed ownership of the so-called pool stock to the extent of an interest of 112,500/197,075 and that interest was recognized by the Commissioner and a loss allowed to the petitioner.

We also sustain the respondent on the fraud issue. We have above referred to the statements made in petitioner’s 1919 return which indicated worthlessness at that time. If he had any doubt about it then that doubt must have been dispelled in 1921 when he procured and filed sworn statements from brokers and his attorney which unanimously declared the stock worthless. Still later, in 1922 and 1923, he had occasion to inquire into the status of the Savold companies. In his 1922 return he took a deduction of $33,216.56 listed as part payment of a judgment and attorneys’ fees and costs growing out of “Savold Tire Corp. affairs.” In his 1923 return he claimed a similar deduction of $32,811.25. In view of petitioner’s knowledge of the worthlessness of the shares prior to 1928 he can not successfully maintain that he sustained a loss in that year through the pretended sale to Wiener. That transaction was entered into, we are convinced, solely for the purpose of supporting a loss claim which the petitioner knew he was not entitled to take.

When the petitioner came to make a report of the transaction with Wiener he did not make the adequate disclosure that an honest intent would require. The combining of the Gasoline Products and Savold transactions was not a disclosure; it was a concealment. In dollars these two items are the largest on the return and they are the only two that are combined. The excuse offered is that there were five items to be reported in schedule 0 and only four lines on which to report them so that two items had to be combined. The petitioner was not ignorant of the common practice of attaching separate schedules to returns when the space on the return is inadequate. Several of his returns covering earlier years in evidence have separate schedules attached. We are satisfied that he adopted the method of reporting that he did for the purpose of concealing the true facts covering the transaction with Wiener in Savold shares and thereby falsely and fraudulently understating his income. Cf. Victor A. Dorsey, 33 B. T. A. 295. We do not accept the testimony of petitioner’s bookkeeper Lang that this manner of reporting was solely his own idea.

Reviewed by the Board.

Decision will be entered under Rule 50.


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    Warner Collieries Company of Delaware, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 34679.
    Promulgated June 8, 1937.

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

      J. B. Johnston, Esq., for the respondent.
   OPINION.

Van Fossan:

This case is now before us on a mandate of the United States Circuit Court of Appeals for the Sixth Circuit. The Board’s original report was promulgated on September 29, 1932, and the decision was entered the following day (26 B. T. A. 1047). An appeal was taken by the respondent on the transferee issue.

The Circuit Court of Appeals, without opinion, remanded the cause for further proceedings to be had in conformity with the judgment of the court. That judgment was as follows:

The court being of opinion that the Board of Tax Appeals abused its discretion in refusing, after the recess at the hearing, to permit counsel for the Commissioner to submit further proofs on the question of the net value of the assets of the Crawford Hill Coal Company transferred to the respondent as of June 30, 1919, and also erred in refusing to consider evidence thereafter offered by the Commissioner touching the value and amount of such assets.
It is ordered that the order of the Board be reversed and the cause remanded for a redetermination of the question after permitting the Commissioner to introduce such proofs and considering the evidence pertaining thereto offered by the Commissioner and rejected by the Board.

Pursuant to the mandate a further hearing was held on March 31, 1936, at which additional evidence was adduced relating to the net value of the assets of the Crawford Hill Coal Co., transferred to the petitioner as of June 30,1919.

In addition to the facts as found by us in our original report of September 29,1932, we find the following facts:

The agreement of October 30,1919,' was executed and fully carried out in accordance with its terms. As provided in paragraph 5 of that contract, the Crawford Hill Coal Co., on January 29, 1920, directed in writing that the 4,500 shares of the petitioner’s stock be issued to the former company’s stockholders in proportion to their stock-holdings.

The balance sheet of the Crawford Hill Coal Co., as of June 30, 1919, shows assets aggregating $240,558.18, consisting chiefly of accounts receivable, $58,442.11; plant, less reserves, $157,695.33; and Liberty Bonds, $82,500; with current liabilities and taxes of $10,-518.27; capital stock, $90,000; surplus, $168,319.01; and profit and loss, $32,404.77. The net value of the assets of the Crawford Hill Coal Co. as of June 30, 1919, was at least $100,000 in excess of its liabilities.

The assets of the Crawford Hill Coal Co. as of June 30, 1919, were transferred to the petitioner pursuant to the agreement of October 30.1919. The business of Crawford Hill Coal Co. was conducted by it from June 30, 1919, to October 30, 1919, the date of the transfer of its assets to the petitioner. The original entries reflecting the transactions of the Crawford Hill Coal Co. during that period were made on the Crawford Hill Coal Co.’s books and were transferred to the petitioner’s books. They were there set up with similar entries relating to other properties acquired by the petitioner. All profit or loss resulting from the operation of the Crawford Hill Coal Co. after June 30, 1919, accrued to the petitioner. The petitioner derived a profit from such operations from June 30, 1919, to April 1,1920. No loss appeared during that period and all liabilities incurred and paid by the Crawford Hill Coal Co. during such period related to operations and were reflected in the profit and loss account from which the petitioner received the benefit. All ledger accounts were closed as of June 30,1919, and so transferred to the petitioner’s books. Ultimately there was a complete transfer.

Liberty bonds of the face value of $82,500 and worth from 80 to 90 percent thereof were transferred by the Crawford Hill Coal Co. to the petitioner on October 30, 1919. The accounts receivable of $58,442.11, due from W. H. Warner & Co. to the Crawford Hill Coal Co., was ultimately paid in full. The liabilities shown on the balance sheet of June 30,1919, were assumed and paid by the petitioner. The differences between the receipts and expenditures and the credit and debit balances arising from the operation of the Crawford Hill Coal Co. during the period from June 30 to October 30,1919, were reflected in the profit and loss account of the petitioner.

Upon the transfer of its properties to the petitioner the Crawford Hill Coal Co. owned the right to receive personally or through its nominees 4,500 shares of the petitioner’s capital stock. Pursuant to the written instruction of the Crawford Hill Coal Co. dated January 29.1920, the petitioner issued such 4,500 shares to the stockholders of the former corporation in proportion to their holdings. The shares of the partnership of W. H. Warner & Co. were issued to its individual members. The stock was issued on January 30, 1920. After that date the Crawford Hill Coal Co. had no assets and was dissolved in 1921. The value of the 4,500 shares of the petitioner’s stock was the net value of the assets of the Crawford Hill Coal Co. at the time they were taken over by the petitioner and it was so set up on the books of the petitioner.

The petitioner originally presented four questions in this case, briefly described as, the statute of limitations, the transferee liability, the affiliation, and the special assessment issues. In our former opinion we held that the statute of limitations did not bar the assessment of the tax against the Crawford Hill Coal Co.; that the respondent had not sustained the burden of proving the liability of the petitioner as transferee; that, although the affiliation issue did not need to be considered, yet under the decision of the Supreme Court in Handy & Harmon v. Burnet, 284 U. S. 136, the petitioner and the Crawford Hill Coal Co. were not entitled to affiliation; and that the special assessment issue had become moot.

In his petition for review to the United States Circuit Court of Appeals the respondent’s assignment of errors related only to the transferee liability issue. The petitioner filed no cross appeal nor did it call the attention of the appellate court to any suggested errors in our opinion. The petitioner now asserts that our decision on the statute of limitations issue was erroneous and that it should be permitted to reopen that issue because it relates to and affects the transferee liability issue. Complaint is also made that we ignored the petitioner’s contention that as a part of the statute of limitations issue the waivers filed were invalid. The validity of the waivers had no bearing under our decision that the statute did not bar assessment and, hence, it was unnecessary to discuss that point.

The respondent’s position is that this case was remanded to us for action only to the extent required to carry into effect the mandate of the court and that such mandate limited the scope of our authority and decision to the receipt of evidence relating to the net value of assets of the Crawford Hill Coal Co. transferred to the petitioner as of June 30, 1919, and the effect such evidence might have on the transferee liability issue.

The rule of law applicable to the situation before us is stated in In re Sanford Fork & Tool Co., 160 U. S. 241 as follows:

When a ease has been once decided by this court on appeal, and remanded to the Circuit Court, whatever was before this court, and disposed of by its decree, is considered as finally settled. The Circuit Court is bound by the decree as the law of the case; and must carry it into execution, according to the mandate. The court can not vary it, or examine it for any other purpose than execution; or give any other or further relief; or review it, even for apparent error, upon any matter decided on appeal; or intermeddle with it, further than to settle so much as has been remanded.

In Peary-Byrnes Lumber Co., 31 B. T. A. 985; affd., 86 Fed. (2d) 234; certiorari denied, 300 U. S. 674, we discussed this question at length. In that case the mandate directed that the -petitioner’s tax liability should be redetermined in accordance with a specific finding of “$665,000 as the fair value of the stock, the cost of the timber, as of July 28, 1913, when the exchange was made” and we held that we were without authority thereafter to permit the petitioner to amend its pleadings so as to raise new issues or to give any other or further relief. Cf. H. H. Champlain, 31 B. T. A. 587; Swenson v. Commissioner, 69 Fed. (2d) 280.

In the case at bar we find that only one question was presented to the court, that is, the refusal of the Board to receive certain evidence relating to the net value and amount of the assets of the Crawford Hill Coal Co. transferred to the petitioner as of June 30, 1919, and the bearing that such evidence would have on the transferee issue. The mandate orders the cause “remanded for a redetermination of the question after permitting the Commissioner to introduce such proofs.”

The petitioner predicated its appeal to the Board on four distinct allegations of error. The adjudication of the statute of limitations issue was necessarily a determination precedent to the consideration of the other issues. Our action thereon was final in the absence of an order from the court specifically relating to that issue or a general-order to rehear and redetermine the case not inconsistently with the court’s opinion and mandate. We construe the word “question” in the mandate to refer to the transferee liability issue alone. The present condition of the record does not warrant the reopening of the statute of limitations issue.

The primary and controlling issue is the liability of the petitioner as transferee of the assets of the Crawford Hill Coal Co. We have no doubt that the transaction by which the transfer was accomplished was a sale. The facts show clearly that the petitioner purchased the properties and assets of the Crawford Hill Coal Co., together with those of several other companies engaged in a like business, and paid for such assets with its own stock, which had a substantial value. However, the method employed to make payment rendered the seller insolvent and unable to pay the tax, the correctness of which is not challenged. See Fostoria Milling & Grain Co., 11 B. T. A. 1401. It is well established that the insolvency of the transferor is a condition precedent to proceeding against the transferee to collect the tax. The petitioner and the Crawford Hill Coal Co. as corporations and the individual officers and directors thereof were parties to and had full knowledge of the agreement and conditions of sale. The petitioner asserts that the real transferees from whom the respondent should collect the tax are the transferor’s stockholders to whom the petitioner’s stock was distributed. It cites sevefal cases in support of its theory, including B. F. Fairless, 19 B. T. A. 304; affd., 67 Fed. (2d) 475. However, in the opinion of the Circuit Court of Appeals in that case we find the following:

* * * The petitioners contend that, since all of the physical assets and property of the Union Company were turned over to the Metropolitan, the latter is the transferee against which the deficiency should have been declared. We see no merit to this contention. We find nothing in the statute which limits collection of defaulted taxes owing by a dissolved or abandoned corporation to the transferees of its physical assets. Certainly the transferees of a mere holding company which has no property other than shares of stock are not immune from the operation of the section. When the Union Company sold its physical property to the Metropolitan, it became owner of Metropolitan stock, against which the tax liability could have been asserted. Distraint against the Union Company was rendered futile by its distribution of the stock to its stockholders. This is clearly a situation which section 280 was intended to meet, and we have no doubt that the tax can be assessed against and collected from the Union’s stockholders to the extent of the assets they received.

The facts in the Fairless case present the converse of the situation before us, but we see no difference in the principle involved. The respondent is not precluded from proceeding against the transferee of assets whose disposition by the taxpayer rendered it insolvent even if other assets, constructively owned but never received by it, are subject to a like process, Woodley Petroleum Co., 16 B. T. A. 253; McGowin-Foshee Lumber Co., 20 B. T. A. 223; Wayne Body Corporation, 22 B. T. A. 401; Estate of John W. Rapp, 24 B. T. A. 1061.

In our former decision we said:

The assets of The Crawford Hill Coal Company were transferred to petitioner under the terms of the agreement of October 30,1919, as of June SO, 1919. The record contains no enumeration or proof of the value of either the assets conveyed to petitioner nor of the liabilities assumed by it at June 30, 1919, the time of transfer. There is evidence that on March 31, 1919, the transferor possessed Liberty bonds in amount of $80,000 and had liabilities in the amount of $11,503.02, but there is no evidence that at June 30, 1919, it still owned such bonds and transferred them to petitioner; nor is there any evidence whether the amount of its liabilities increased or diminished between March 31 and June 30. We know only that petitioner received assets of an unproved value and assumed liabilities of an unproved amount. On this state of the record we must hold that respondent has not sustained the burden of proof placed on him by the statute.

The record now shows that assets of the transferor as of June 30, 1919, were worth over $100,000 in excess of its liabilities. This amount was ample to pay the tax liability of the transferor. Fostoria Milling & Grain Co., supra; Woodley Petroleum Co., 16 B. T. A. 253; Concrete Industries Co., 19 B. T. A. 655; Gideon-Anderson Co., 20 B. T. A. 106; Magnolia Window Glass Co., 23 B. T. A. 1242.

Moreover, the contract itself also expressly provides that the Crawford Hill Coal Co. was deemed to have acted for and on account of the petitioner in conducting the business of the former from June 30, 1919, to the date of the transfer of its property and assets. The petitioner thus agreed that the properties acquired and that the value thereof were to be determined and fixed on the basic date of June 30,1919. The contract refers to an “informal agreement.” We can justifiably conclude that such an agreement contemplated the acquisition of the Crawford Hill Coal Co. assets by the petitioner on that date at their value appearing on the contemporaneous balance sheets. All subsequent transactions were charged and credited to the petitioner and were reflected ultimately in the petitioner’s profit and loss account. The date of the written agreement, therefore, is not exclusively decisive of the time of the transfer.

There is a further reason for holding the petitioner liable for the proposed tax. The petitioner agreed expressly:

* ⅜ * to pay and satisfy any and all obligations and liabilities of whatsoever kind, nature or description, owed or incurred by said Seller on or before June 30, 1919, and to indemnify and save harmless said Seller from any and all claims, demands and actions in any manner arising out of any obligations and liabilities asserted against said Seller, and from all loss, cost, damage and expense in connection therewith.

By reason of this agreement the petitioner became specifically liable for the tax in question. Helvering v. Wheeling Mold & Foundry Co., 71 Fed. (2d) 749; American Equitable Assurance Co. of New York, 27 B. T. A. 247; affd., 68 Fed. (2d) 46; Gontinental Baking Co., 27 B. T. A. 884; affd., 75 Fed. (2d) 246; United States Trucking Corporation, 29 B. T. A. 940; see California Iron Yards Gorporation v. Commissioner, 82 Fed. (2d) 776, and cases there cited; West Texas Refining & Development Co. v. Commissioner, 68 Fed. (2d) 77.

In our former opinion we said: “Under our decision above, the question of special assessment becomes moot.” In view of the mandate it now becomes pertinent to consider the issue of special assessment. H. H. Champlin, supra. Upon a careful examination of the record we find nothing therein which warrants our granting the petitioner’s request for special assessment.

We said in our former opinion that the decision of the United States Supreme Court in Handy & Harmon v. Burnet, supra, was determinative of the affiliation issue. We see no reason to alter our view that the petitioner and the Crawford Hill Coal Co. are not entitled to affiliation.

Decision will be entered for the respondent in the sum of $21,721.33 for the fiscal year ending March 31, 1919.


author: Hill:

text:
    W. Frank Carter, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 78878, 78879, 78880, 78881.
    Promulgated June 8, 1937.

      David Baer, Esq., for the petitioners.

      William E. Davis, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Emmet T. Carter; Ada Davis Burkham, Executrix of the Estate of Robert Burkham, Deceased; and Harold R. Small.

   OPINION.

Hill:

Petitioners allege that respondent, in determining the deficiencies, erred in treating as distributable income of the partnership and including in taxable income of each of the petitioners, other than the estate of Robert Burkham, deceased, their respective proportionate interests in the amount paid to the estate of decedent during the taxable year, pursuant to the partnership agreement of January 1,1927. Substantially, the position of the petitioners is that the sum paid to the deceased partner’s estate was that portion of the income from fees received by the partnership which was due the decedent’s estate, and was received by the partnership as trustee for such estate.

The facts were stipulated by the parties, and on this issue, among other things, it is stated, that neither of the petitioners nor any members then constituting the copartnership “received any part of the sum * * * paid to the estate of Robert Burkham, deceased, but pursuant to the terms of the agreement of January 1, 1927 herein referred to, said sum was received by the co-partnership with the duty imposed to pay the same to the said estate of Robert Burkham, deceased, which duty was duly performed, as aforesaid.”

The meaning intended to be expressed in the quoted stipulation (which we have not included ⅛ our findings of fact above) is not entirely clear, but we need not construe it. If it was meant to say that the money out of which the sum in controversy was paid to the decedent’s estate was not first “received” by the partnership it is contrary to the facts otherwise clearly established by the record and must be rejected. William Ernest Seatree, 25 B. T. A. 396; Volunteer State Life Insurance Co., 35 B. T. A. 491. If the parties intended to stipulate that the sum was received by the partnership not as its own property but in trust for the estate of the deceased member, then the stipulation amounts to a legal conclusion and must be disregarded. Unless the fund when received belonged to the partnership, obviously it could not constitute distributable income taxable to the members. This involves the very question which has been submitted to the board for decision. “A stipulation concerning the legal effect of admitted facts is ineffective, and will be treated as a nullity.” Swift & Co. v. Hocking Valley Railway Co., 243 U. S. 281, 289. If the parties meant to stipulate that the fund was not actually distributed to the members, it is of no materiality. In any event, therefore, it will be disregarded.

It is conceded by all parties that the death of Robert Burkham dissolved the old partnership, and that the new partnership organized by the surviving members paid the amount in controversy to the decedent member’s estate under and pursuant to the terms of the partnership agreement of January 1, 1927; also that the principal purpose of the agreement was to eliminate a partnership administration upon the death of a partner and an accounting over a long period of time by the surviving partners.

Solution of the problem presented here depends upon whether the sum paid to Burkham’s estate represented his share of fees earned by the partnership prior to but uncollected at the time of his death, or whether such payments constituted the consideration paid by the surviving members for Burkham’s interest in the old partnership and its assets. Bull v. United States, 295 U. S. 247.

The nature of the transaction, we think, is fully disclosed by the terms of the partnership agreement pursuant to which it was carried out, which provided that in the event of death of any member of the firm his heirs, executors, or administrators should receive a sum equal to one-half of the amount actually received by such deceased partner during the two calendar years next preceding such death, “in lieu of all interest which the heirs, executors or administrators of such deceased partner may have in any fees received by the firm subsequent to the date of such death ⅜ * * and in full payment of the interest of such deceased partner in the library and office equipment of the firm.” The partnership agreement further recited that “each member of the firm hereby agrees in the event of his death that no administration of the firm or its assets shall be required, and waives all right thereto and agrees that the payment made to his heirs, executors or administrators as above provided, shall be taken and received by them in full payment for his interest in the firm and its assets.”

The conclusion seems inescapable to us that by the payment of a definitely ascertainable consideration, which is the amount here in controversy, the surviving partners of the old partnership purchased all of the interest of the deceased Burkham in the firm and its assets. The parties have stipulated that one of the purposes of the partnership agreement was to fix at death a definite sum for payment to the estate of a deceased member, regardless of whether, in the absence of such agreement, the amount payable to the deceased partner’s estate for his interest in the partnership would have been greater or less than the amount fixed by the agreement.

Whether the interest of the deceased Burkham had in fact a fair value of more or less than the amount paid under the contract, and whether or not the survivors derived a profit from their purchase of his interest for such sum, does not appear from the record. No question is raised on this point. Likewise, it does not appear what assets, if any, the partnership owned other than a library and office equipment of undisclosed value. The petitioners offered no evidence as to these matters. But in the state of the record before us, they are in any event immaterial.

The fact remains that the surviving partners purchased the interest of Burkham in the firm and its assets, for a stated consideration. Thereupon, they became the exclusive owners of all uncollected fees, whether the services for the rendition of which such fees were received were performed either prior or subsequent to his death. It was out of such fees that the amount in question was paid to Burkham’s estate* The amount, therefore, constituted distributive income of the new partnership when received, and is taxable to the petitioners to the extent of their respective interests, whether in fact distributed to them or not. (Sec. 182 (a), Revenue Act of 1932.)

The partnership did not act in a fiduciary capacity in respect of any of the fees collected after the death of Burkham. His estate had no interest therein. Under the partnership contract- it had only the right to demand payment of the stipulated amount. It was not entitled to payment out of fees; and in case no fees had been collected within the time fixed for payment, the estate would still have been entitled to receive the amount agreed upon, and the partnership could have fully discharged its obligation by payment out of any fund, whether or not it embraced fees collected subsequent to Burkham’s death.

In Willard C. Hill, 14 B. T. A. 572, a partnership was formed under an agreement which provided, among other things, that upon the death of any partner there should be paid to his estate for a period of years the share of partnership earnings to which the deceased partner would have been otherwise entitled, and that upon the completion of such payments the business should become the sole property of the surviving partners. We held, that the partnership agreement provided for the sale of the interest of a deceased partner to the surviving partners, and that there should be included in the net income of each surviving partner his distributive share of all amounts paid in accordance with the terms of the partnership agreement, to the estate of the deceased partner. In that connection we said: .

A partner may not avoid the income tax under an agreement by which his share or a portion of his share of the profits of the partnership are to be paid to the estate of a deceased partner in the acquiring of such deceased partner’s interest in the assets of a prior partnership.

Our decision in the cited case was affirmed in Hill v. Commissioner, 38 Fed. (2d) 185. See also Benedict v. Price, 38 Fed. (2d) 309; Pope v. Commissioner, 39 Fed. (2d) 420; Arthur C. Hilmer, 27 B. T. A. 1165; cf. Lester G. Hathaway, 16 B. T. A. 1318.

In Bull v. United States, supra, the Supreme Court stated the applicable rule as follows:

Where the effect of the contract is that the deceased partner’s estate shall leave his interest in the business and the surviving partners shall acquire it by payments to the estate, the transaction is a sale, and payments made to the estate are for the account of the survivors. It results that the surviving partners are taxable upon the firm profits and the estate is not [citing with approval Hill v. Commissioner, supra].

For the reasons indicated respondent’s determination in respect of the first issue is approved.

The conclusions reached above are not in conflict with our decision in Gussie K. Barth, 35 B. T. A. 546. The latter case is distinguishable on the facts. There the partnership contract provided that “the partnership shall not be immediately dissolved by reason of the death of a partner but his interest therein shall be determined” by payments to his widow for a period of three years of specified percentages of what would have been the deceased partner’s distributive share in the proceeds from the business if he had remained alive. The amount received by Barth’s widow did not represent payment for capital assets. In the instant case, the old partnership owned tangible assets and the amount paid to the decedent’s estate was for his interest in the old partnership, including such assets.

Furthermore, in the Barth case, the question presented was whether the amount paid by the surviving partner constituted income taxable to the widow of the deceased partner. Here the question is whether the amount paid to the decedent’s estate by the surviving partners, having been paid out of income (that is, out of fees collected by them), constituted distributive income taxable to the members of the new or succeeding partnership. Since the transaction before us was clearly a purchase and sale of the deceased partner’s “interest in the old partnership and its assets”, the consideration paid by the new partnership out of income is taxable to the members of that partnership, whether or not the consideration so paid also represents in whole or in part taxable profit to the decedent’s estate. In no event, therefore, does the Barth case rule the decision in the instant case.

The second issue involves the question whether the salaries received during the taxable year by Robert Burkham and Emmet T. Carter from the board of education of the city of St. Louis, for their services as “attorney” for said board, are subject to the Federal income tax. That the hoard of education was a political subdivision of the State of Missouri, engaged in the exercise of essential governmental functions, is conceded. The controversy is whether said individuals were officers or employees of the board, or whether they were independent contractors.

The term “officer” is defined in Metcalf & Eddy v. Mitchell, 269 U. S. 514, as follows:

An office is a public station conferred by the appointment of government. The term embraces the idea of tenure, duration, emolument and duties fixed by law. Where an office is created, the law usually fixes its incidents, including its term, its duties and its compensation. * * * The term “officer” is one inseparably connected with an office; * * *

The Missouri courts have also defined the term. In State ex rel. Walker v. Bus, 135 Mo. 325; 36 S. W. 636, it is stated that an individual who is invested with the authority and is required to perform the duties incident to an “office” is a “public officer.” And again “an officer * * * is one who by the local law enjoys either an annual salary or a definite term of office.” State ex rel. Bartraw v. Longfellow, 95 Mo. App. 660; 69 S. W. 596.

The Supreme Court of Missouri, in State ex inf. McKittrick v. Whittle, 333 Mo. 705; 63 S. W. (2d) 100, 102, said:

A public office is defined to be “the right, authority, and duty, created and conferred by law, by which, for a given period, either fixed by law or enduring at the pleasure of the creating power, an individual is invested with some portion of the sovereign functions of government, to be exercised by him for the benefit of the public.” Mechem, Pub. Off. 1. The individual who is invested with the authority, and is required to perform the duties, is a public officer.
The courts have undertaken to give definitions in many cases; and while these have been controlled more or less by laws of the particular jurisdictions, and the powers conferred and duties enjoined thereunder, still all agree substantially that if an officer receives his authority from the law, and discharges some of the functions of government, he will be a public officer [citing among others State ex rel. Walker v. Bus, supra].

Petitioner Emmet T. Carter and the decedent Burkham, we think, come well within the definitions above given. The school board was empowered by the state legislature to appoint such “officers” as it might deem necessary and proper, and to fix their compensation; also to make rules and regulations for the government and management of the public schools and school property in the city of St. Loins. Pursuant to such authority, the board promulgated rules and regulations -which provided that the “officers” of the board should include an “attorney” elected for a term of four years, prescribed the duties of the attorney, and required bond in the sum of $10,000 for the faithful discharge of such duties. The salaries of both Garter and Burkham were fixed by the board on a yearly basis, payable monthly.

However, respondent contends that neither individual mentioned was an “officer” for the reason that he was not required to take an official oath of office and further that the “office” of attorney could be created only by the legislature and not by the board of education.

These contentions are not supported by the weight of authority. In Miller v. Warner, 59 N. Y. S. 956, 957, it was pointed out that a public office may be created by the legislature or any municipal board, or body authorized by the legislature to create one, and, as indicated by the Missouri decisions hereinabove referred to, although not specifically discussed, the same rule appears to prevail in that state. Our attention has not been called to any contrary decision nor to any decision holding that an official oath of office is necessary in the absence of such requirement by the creating authority. No oath of office was required in the instant case.

In State ex inf. McKittrick v. Whittle, supra, it was held (1) that a school district or board of education in Missouri was a political subdivision of the state, performing the duties of the state in the conduct and maintenance of the public schools, and (2) that Whittle, who was a school director, was a “public officer” within the definition of that term hereinabove quoted from the court’s opinion, although neither the definition nor the court’s opinion makes any reference to an oath of office.

In State ex rel. Bartraw v. Longfellow, supra, the Court of Appeals at St. Louis held that the relator was an “officer” under his appointment as an inspector of buildings, and remained such until his status was changed to that of an employee by the later enactment of an amendatory ordinance. The appointment was made under authority delegated by the state legislature to the municipality of St. Louis, and under the municipal code which defined the term “officers” as including “all persons holding any situation under the city government or its departments, with an annual salary or for a definite term of office.”

The relator in the cited case was required to give a bond for the faithful performance of his duties, but it does not appear that he was required to take any oath of office. Nevertheless, as above stated, he was held by the Missouri court to be an “officer” under his original appointment. The essential facts in that case are strikingly similar to the instant proceedings.

In any event, if the petitioner Emmet T. Carter and the decedent Robert Burkham were not “officers”, certainly they were, in our opinion, “employees” of the board of education. In Burnet v. Livezey, 48 Fed. (2d) 159; affirming 15 B. T. A. 806, the qualifications of an “employee” are fully discussed and distinguished from an independent contractor, in relation to facts in all material respects the same as in the case at bar. We need not repeat the discussion here. We hold that Carter and Burkham were “officers or employees” of a political subdivision of the State of Missouri, and the salaries received by them as such are exempt from Federal income tax. Respondent’s action on this issue is reversed.

Reviewed by the Board.

Judgment will be entered under Rule 50.


author: Steenhagen:

text:
    Security-First National Bank of Los Angeles, Trustee, Trust SS-6170, Robert W. George, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86064.
    Promulgated June 8, 1937.

      Joseph D. Brady, Esq., for the petitioner.

      Edward A. Tonjes, Esq., for the respondent.
   OPINION.

Steenhagen:

The petitioner is trustee of the testamentary trust to which the real property was devised: Although it acquired possession in April 1932, its ownership related back to the date of the testator’s death, notwithstanding the intervening administration of the decedent’s estate. Deering’s Probate Code of California, sec. 300; In re O'Connor's Estate, 2 Cal. App. 470; 84 Pac. 317; In re Rawitzer's Estate, 175 Cal. 585; 166 Pac. 581; Blair v. Hazzard, 158 Cal. 721; 112 Pac. 298. See Brewster v. Gage, 280 U. S. 327.

The taxes in question covered the period beginning July 1, 1931, and ending June 30, 1933, and were therefore in the clearest sense the petitioner’s taxes—taxes on its own property. Petitioner alone was chargeable with them, and since its accounts and returns were on the basis of receipts and disbursements, it was entitled to deduct them when it paid them.

Judgment will be entered for the petitioner.


author: Murdock :

text:
    George Washington, Sr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83712.
    Promulgated June 11, 1937.

      Allen G. Gartner, Esq., for the petitioner.

      O. W. Swecker, Esq., for the respondent.
   OPINION-.

Murdock :

The statute of limitations has run against the assessment and collection of any deficiency for 1930 unless the petitioner’s return for that year was false or fraudulent with intent to evade tax. Sec. 276 (a), Revenue Act of 1928. The Commissioner contends that the petitioner’s return for that year was false or fraudulent with intent to evade tax as is shown by the fact that the petitioner failed to report as a part of his income on that return the dividends paid on 1,125 shares of the common stock of the company standing in the name of his wife. The Commissioner also claims that a part of the deficiency for each year is due to fraud with intent to evade tax. Fraud is shown, he says, by the petitioner’s failure to report as a part of his income the dividends paid in each year on the 1,125 shares of the common stock of the company which stood in the name of the petitioner’s wife, and by the petitioner’s failure to report the dividends on the 6,000 shares which were in the names of his wife and daughter and later in the name of the trust. The burden of proof on these issues is by statute placed upon the Commissioner. Sec. 907 (a), Revenue Act of 1924, as amended by sec. 601, Revenue Act of 1928.

The point which the Commissioner attempts to make is that each of the alleged gifts lacks two of the essential elements of a bona fide gift, to wit, first, a clear and unmistakable intention on the part of the donor to absolutely and irrevocably divest himself of the title, dominion, and control of the shares, and, second, an irrevocable transfer of the present legal title, the dominion, and the control of the entire gift to the donee, so that the donor can exercise no further act of dominion or control over it. These elements are essential to a valid gift inter vivos. Adolph Weil, 31 B. T. A. 899. There is no contention that other essential elements of a valid gift are lacking.

The Commissioner argues that the petitioner did not intend to make gifts, but intended only to reduce his income taxes by divesting himself of the naked legal title to the stock, retaining all beneficial interest in the stock. Obviously this argument would not apply to the 1,125 shares which the petitioner gave to his wife in 1910 before there was any income tax law. The Commissioner also contends that there is some connection between the later transfers to the petitioner’s wife and daughter, and the sale by the petitioner in January 1929 of his secret process to the company for $1,500,000 and 8,134 shares of the common stock of the company. He states that in November 1929 the petitioner canceled all future payments under the sale because he realized that the cash payments to be received during each of the six years following would result in large income taxes; after he canceled the payments, the company, for the first time, began to pay large dividends; and the petitioner then realized the desirability of splitting up his stockholdings among the members of his family to reduce his income taxes. The Commissioner also contends that the petitioner benefited from the dividends on the stock through the payment by his wife of premiums on life insurance policies taken out upon the life of the petitioner (citing Burnet v. Wells, 289 U. S. 670) and through payment by the trust of the expenses of Franklin Farms (citing Hill v. Commissioner, 88 Fed. (2d) 941, affirming 33 B. T. A. 891).

The story of the petitioner, of his early failures, of his persistence, of his faith in and his reliance upon others, and of his ultimate financial success is unusual and extremely interesting. He is a chemist and an inventor. He came to this country in 1896, bringing with him his wife and his daughter Louise. Two additional children were born while the family resided in New York. Following a business disappointment, he decided to move his family to Guatemala. He operated a plantation there with the aid of his wife. In Guatemala he conceived the idea of reducing coffee to a concentrated soluble form. The laboratory which he set up for his experiments was destroyed in 1906 by an earthquake. The petitioner then returned to New York to make use of better laboratory facilities there. His wife and the three children remained in Guatemala and she continued to operate the plantation. The petitioner was supported during this period by money which his wife provided. Part of this was her own, the remainder she earned from the operation of the plantation. The petitioner finally perfected his process, which he determined to keep a secret between himself and his wife. His family joined him in New York, where he and his wife started to manufacture the product under the secret process. Lina assisted her husband in many ways. When the company was organized the petitioner gave her one-half of the shares which he received, except for one share which was placed in the name of a director in order to qualify him. Thereafter the petitioner never received any dividends on these shares and never had physical possession of the certificate. The first dividends were paid in 1929. Sometimes Lina voted her shares individually at stockholders’ meetings; sometimes she voluntarily gave proxies to her husband and others when such proxies were requested, and once, to satisfy the objection of the preferred stockholders that the inventor controlled the company, she endorsed her certificate for voting purposes to trustees. Later, she again held a certificate or certificates for her shares. New certificates were issued to her at various times as a result of corporate changes. Clarence Mark became vice president of the company and a trusted and valued friend and advisor of the petitioner and his wife. At Mark’s request, and in order to retain his services and keep him satisfied, the petitioner and Lina in 1929 sold to Mark one-fourth of their common stock in the company at a very low price. Thereafter, Lina owned and continuously held certificates for 1,125 shares. During the latter part of 1931 the petitioner gave an additional 3,000 shares of the common stock of the company to his wife and also gave 3,000 shares of the same stock during that period to Louise. These gifts were made without any reservations whatsoever. There was no understanding between the donor and donees in regard to the use of the shares or the dividends from the shares. The petitioner intended to part with the shares. They were complete bona fide gifts.

The respondent contends that the petitioner was extremely tax conscious, as shown by various transfers and retransfers of property between the petitioner and his children in prior years. It does not appear, however, that those transfers were made merely to reduce income tax. The Commissioner also argues that the use to which the dividends from the stock were put shows that the petitioner did not intend to and did not divest himself of title, dominion, and control over the shares. In this connection he points to the fact that Lina paid premiums on five policies of life insurance upon the petitioner’s life. These policies had been taken out originally by the company for its protection and it had paid the premiums. About 1927 the company sold the policies to members of the petitioner’s family. Later, but prior to the taxable years, the policies were placed in a trust established by the petitioner. The trustee was named beneficiary of the policies. Lina and Louise were given life estates in the income from the investment of the proceeds of the policies. The other children and some relatives of the petitioner were likewise beneficiaries under the trust. The petitioner had power to alter, modify, or revoke the trust during his lifetime, but he could not cash the policies, borrow on them, or draw the dividends on them except in payment of premiums. The record is not entirely clear as to who really owned these policies and who had the right to change beneficiaries, but that circumstance may be relatively unimportant here, and it may be assumed that the petitioner was the owner and had the right to change the beneficiaries. Lina paid premiums on the policies amounting to $11,054.25 in 1930 and $18,599.25 in each of the other years. Although the record does not show just why she made the payments, it is clear that she was not required to make them. She paid them voluntarily. The dividends on her stock in the company were for some years less than the premiums which she paid, while in other years they were in excess of the premiums. The fact that the petitioner failed to report in his income the amount of the premiums which his wife paid, does not show any fraud upon his part. Since the wife paid those premiums voluntarily from her own income, and since the premiums were not paid from the income of any trust (cf. sec. 167, Revenue Act of 1928; Burnet v. Wells, 296 U. S. 670) established by the petitioner, there is no good reason whatsoever to include the amount of the premiums in the petitioner’s income for any of the years.

The petitioner relied upon Mark and others to handle many of his business and personal financial transactions. Although he made a great deal of money out of his secret process, yet his tastes remained simple and he made but modest use of his fortune for living and personal expenses. He was fond of his family and desired that his wife and children should be supplied with whatever they might want. His wife and Louise, his daughter, wanted to continue to live upon the large estate known as Franklin Farms. The house contained about forty-two rooms. Lina managed the house. Louise managed a dairy farm on the estate. The petitioner’s two younger children were married and did not live at Franklin Farms in the latter part of 1931. The petitioner thought that the expense of maintaining the place was entirely too large under the circumstances. He suggested that they dispose of it and move to a smaller place. But Lina and Louise said they liked it so much that they wanted to live there always and have it as their permanent home. They, as a result of the petitioner’s generosity, had some independent means, and they offered to share the expense of the estate with the petitioner. Louise was a mature woman at that time. The three shared the expenses of the estate equally during the first six months of 1932. The fact that Lina and Louise voluntarily paid from their own incomes a part of the expenses of Franklin Farms for the first six months of 1932, coupled with the further fact that the petitioner did not report in his income any part of the expenses thus paid by his wife and daughter, falls far short of proving that a part of the deficiency for that year was due to fraud with intent to evade tax. A similar statement may be made about the situation which existed after the trust was created in June 1932. If the petitioner had created a trust solely with his own property for the purpose of paying the expenses of Franklin Farms, the case of Hill v. Commissioner, cited by the respondent, would be authority for holding that the petitioner could not thereby escape tax on the income from the property actually used to pay expenses of the estate. It would not, however, be authority to support the Commissioner on the fraud issue. Furthermore, the present case is distinguishable on its facts from that case. Here the petitioner did not create the trust out of his own property. He was one of three who created the trust. The income-producing property held by the trust was contributed equally by the three grantors. The wife and daughter made their contributions voluntarily. The petitioner did not escape tax through this device. He was taxable upon one-third of the income of the trust just as previously he had been taxable upon the income of one-third of the income-producing property. Excess income was divided and the petitioner was certainly not taxable with all of it. Hill v. Commissioner, supra, would seem to be authority for requiring Lina and Louise, likewise grantors, to report their respective shares of the income of the trust, since that income was either distributed to them directly or was used as they directed and desired for their own benefit. There was no provision of this trust, nor was there any agreement, that any of the income of the trust should be used to pay premiums on life insurance covering the life of the petitioner. Cf. Burnet v. Wells, supra. It is immaterial that Lina may have used some of the income from the trust to pay a part of the premiums. Cf. Commissioner v. Mott, 85 Fed. (2d) 315, where the court said: “The premiums were not, however, paid from income of the trust estates but were paid by the beneficiaries of the policies, who had income in addition to their income derived from the trust estates.” The facts in the present case show that Lina must have paid the larger part of these premiums for 1932 and 1933 from funds other than those which she derived from the trust.

The evidence as a whole not only fails to show that the return for 1930 was false or fraudulent with intent to evade tax and that a part of the deficiency for each year was due to fraud with intent to evade tax by reason of the petitioner’s failure to report dividends on the stock in question, but, on the contrary, it shows that the petitioner made bona fide gifts of the shares to his wife and to his daughter, and the dividends belonged, not to him, but to his wife, his daughter, and the trust.

Reviewed by the Board.

Decision will be entered for the petitioner.


author: Arnold:

text:
    Frederick Pitzman and Charles E. Richardson, Trustees, Cahokia Trust, Petitioners, v. Commissioner of Internal Revenue, Respondent. Frederick Pitzman, Trustee, Pitzman-Methudy Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 81746, 81750.
    Promulgated June 11, 1937.

      John Potts Barnes, Esq., for the petitioner.

      B. H. Neblett, Esq., and Harold F. Noneman, Esq., for the respondent.
   OPINION.

Arnold:

The first issue is whether the trusts now before us are, as a matter of law, associations taxable as corporations, since the several revenue acts define the term “corporation” as including associations, joint-stock companies, and insurance companies. Sec. 2 (2), Revenue Act of 1921; secs. 2 (a) (2), Revenue Acts of 1924 and 1926; sec. 701 (a) (2), Revenue Act of 1928.

Recently, the Supreme Court has had occasion to restate the fundamentals to be considered in determining whether certain trust indentures created trusts or associations taxable as corporations. Swanson v. Commissioner, 296 U. S. 362; Helvering v. Coleman-Gilbert Associates, 296 U. S. 369; Helvering v. Combs, 296 U. S. 365; Morrissey v. Commissioner, 296 U. S. 344. In each of these cases the trust indenture used language purporting to create an ordinary trust, but the Court held that actually there was created, in each instance, an organization for profit having many of the attributes of a corporation.

The salient features of a trust created and maintained as a medium for the carrying on of a business and sharing in its gains were fully discussed in the Morrissey opinion. These features may be briefly stated as: (1) trustees, as a continuing body with provision for succession, holding title to property; (2) centralized management; (3) security from termination or interruption by death of owners of beneficial interests; (4) transfer of beneficial interests without affecting continuity of enterprise; and (5) limitation of personal liability to property embarked in the undertaking.

Speaking specifically regarding these features the Court states, p. 296:

It is no answer to say that these advantages flow from the very nature of trusts. For the question has arisen because of the use and adaption of the trust mechanism. The suggestion ignores the postulate that we are considering those trusts which have the distinctive feature of being created, to enable the participants to carry on a business and divide the gains which accrue from their common undertaking, trusts that thus satisfy the primary conception of association and have the attributes to which we have referred, distinguishing them from partnerships. In such a case, we think that these attributes make the trust sufficiently analogous to corporate organization to justify the conclusion that Congress intended that the income of the enterprise should be taxed in the same manner as that of corporations.

Since the Supreme Court’s decision in the foregoing cases the Board has decided at least two cases where similar questions were raised, Girard Trust Co., Trustee, 34 B. T. A. 1066, and Broadway-Brompton Buildings Liquidation Trust, 34 B. T. A. 1089. In each proceeding we held that the trust was taxable as a trust, because each trust was created for liquidation purposes and not to enter into a business enterprise.

Turning to the facts of these proceedings it must be conceded that elements of a trust and an association are present as to each, but in our opinion, the paramount purpose of each trust was liquidation. These beneficiaries pooled their interests for the orderly and equitable distribution of the proceeds from a large tract of land, then owned by them as tenants in common, the nature of which made partition impractical. Their efforts were directed toward the conservation of their resources pending disposition, which is quite different from conducting a business for profit. While it is quite true that these trusts had certain salient features of trust organized to carry on a business for profit, such as, (1) property held by trustees, (2) centralized management, (3) security from interruption or termination of the trust by death of holders of beneficial interest, and (4) transferability of beneficial interests within strict limitations, yet these salient features have been found in ordinary trusts without making them associations taxable as corporations. Broadway-Brompton Buildings Liquidation Trust, supra,. And it should be noted that one of the salient features stressed by the Supreme Court, in the Morrissey and Swanson cases, supra, namely limitation of personal liability to the property embarked in the undertaking, is missing in these proceedings, since there is no provision with respect thereto in either of the trust deeds before us.

The very essence of the issue, therefore, is whether there was an associating together by the beneficiaries and owners in a joint enterprise for profit. Several factors point to the answer. In the first place the original owners, Kehr and Pitzman, were very advanced in age at the time an organization to handle their real estate holdings was being considered. Kehr died before an organization could be perfected, leaving Pitzman and Kehr’s four heirs as the joint owners of the property. The Kehr heirs and Pitzman recognized the need of some organization that could conveniently handle and dispose of the property without the necessity of consulting and securing the signature of each individual owner and spouse, where married; that, should any of the interested parties die leaving minors or otherwise become incapacitated, sales and conveyances would be delayed and complicated through necessary court proceedings. It was recognized that partition was not possible without loss to all, and the testimony is unrefuted that the object of creating the trust was to enable the liquidation of the property as rapidly as possible and to the best interest of all concerned.

In the second place the character of the trust deed of May 22, 1918, and the declared purpose thereof are in accordance with the testimony that the trust was created for liquidation. The declared purpose was “to dispose of the realty in such times and such manner as the trustees deem to be to the best interest of the beneficiaries.” By the terms of the trust deed of December 1928, “the trustees are given absolute control of the trust estate for the purpose of alienating the same.” The provision for division of the cash as received among the beneficiaries is clearly in accord with the declared purpose of liquidation. The powers and duties of the trustees as prescribed by the trust deeds were means for carrying out the declared purpose of the trusts, and we are unable to find therein any requirement or provision which is foreign to good business practice or conduct on the part of any fiduciary with a like purpose in view.

Thirdly, the activities of the trustees were in keeping with the declared, purpose of the trust. The record shows that the trustees were disposing of the property by sale and lease upon terms which they considered to the best interests of the beneficiaries. It may well be that the sale of this property could have been accelerated by a radical reduction in the sale price, but the law does not require the trustees to sacrifice property in order to hurriedly complete liquidation. Broadway-Brompton Buddings Liquidation Trust, supra. In the Girard Trust Go., Trustee, case, supra, the Board stated that under the circumstances in that proceeding a tract of 54 acres was too large for the market, and that subdivision was the only effective way to dispose of it. Here, we have a tract of over 1,600 acres, part of which was, on May 22, 1918, being used for industrial purposes. The price at which the trustees were- willing to sell was a matter within their discretion, and while their prices were exorbitant for farming purposes, subsequent sales of about 400 acres for industrial purposes would indicate that purchasers desiring industrial sites could and would pay the prices asked by the trustees. Respondent contends that this was nothing but a long range speculative venture, which may have been true as to the original purchasers. It does not follow, however, that the intention of the original cotenants was retained by their heirs. The situation facing them was that each year taxes, repairs to roads, levees, and tenant houses, and other expenses had to be met to preserve the property. In the meantime the trustees sought to reduce their carrying charges as much as possible by any available use of the property which would yield a return until it could be sold. In our opinion this was nothing more than the exercise of good business judgment by the trustees.

The principal value of the property is essentially for industrial uses. It is not desirable for development and sale as residential subdivisions on account of its location and low elevation. It has some value for farming purposes but that is very small compared with its value for industrial purposes. It is true the demand for industrial sites in this vicinity has been slow but the property by reason of its location and surroundings is perhaps the most desirable in the Saint Louis-East Saint Louis area. Doubtless the reason for providing term extensions in the trust agreements was the knowledge that on account of its particular adaptability purchasers would be limited, sales would be slow, and it would require a long period of time to liquidate without undue sacrifice in price. The primary purpose in the beginning was to sell and dispose of the property and divide the proceeds. That purpose was manifest throughout both trusts and the handling of the property by the trustees was consistent to that end. They were not only awaiting an opportunity to sell, but were active in soliciting purchasers. Under these circumstances we do not think the time element in the trust agreements and the delay in making sales have the effect of stamping these trusts as business rather than liquidating trusts.

While respondent lays no particular stress on the development and improvement of the trust acreage by the trustees, he does stress language found in the Supreme Court decisions, supra, relating to the business of holding, improving, and selling real estate, and stating that trusts were convenient methods by which persons become associated for dealings in, real estate, the development of tracts of land, and the sales of properties. We must and do recognize the weight and authority of the language appearing in these decisions. But each of these is grounded upon the facts in the case decided. The Court makes no attempt to draw a line of demarcation between trusts and associations, so that organizations of one type are clearly trusts while organizations of another are clearly associations. These proceedings must, therefore, be determined by applying the principles announced by the Supreme Court to our own facts.

The facts respecting the development, improvement, and purchases by the trustees are simple and clear. The development included repairs to roads, levees, and tenant houses. No single new improvement, new building, or new structure of any kind on the entire acreage is disclosed by tbe testimony nor by the large number of documentary exhibits. Purchases of approximately four acres of land were testified to and reasons amply justifying each purchase were given, one for dedication of land to the Illinois State highway system, and the other to' close a local roadhouse and gambling resort which was considered harmful to the trust property. We are unable to find in any activity of the trustees an indication that they were conducting a business for profit. Every activity testified to or otherwise shown by the record squares with the purpose of conserving and protecting the trust corpus until such time as it could be sold or disposed of. See Dauphin Deposit Trust Co., Trustee, 21 B. T. A. 1214.

Respondent points to 96 shares of stock of the Saint Clair Ferry & Transfer Co. referred to in the trust deed of May 22, 1918, as showing that the activities of the trustees included the holding of securities as well as the holding of real estate. It does not appear what disposition was made of these shares, but it is plain that they constituted a part of the original trust corpus. No dividends were reported therefrom during any of the taxable years or periods of either trust. No reference thereto appears in the assets taken over by the Cahokia trust, and we can find no authority in the first trust deed permitting the trustees to deal in stocks, bonds, and other securities. The Cahokia trust agreement permitted the trustees to invest the reserve fund in Government securities, municipal bonds, or a conservative security recommended by one of the five largest banks in Saint Louis. As the reserve fund was created for the purpose of taking care of expenditures that might become necessary for the preservation of the trust corpus and making the property more attractive to those seeking industrial sites, we do not think this limited authority to invest in income-producing securities, pending the use of the money for the purpose intended, has the effect of making an otherwise liquidating trust one for business purposes. No power was granted the trustees to deal in securities other than as mentioned.

The respondent, as we understand his contentions, treats the Cahokia trust as a mere continuation of the Pitzman-Methudy trust. Petitioners make no objection thereto because under their theory either or both trusts existed only for liquidation purposes, and neither is an association taxable as a corporation. But in our opinion the two trusts were separate and distinct from each other. The first trust definitely terminated its existence on May 22, 1928, and by the terms thereof the title to the property immediately vested in the beneficiaries in proportion to their interest in the trust. These co-owners, who had been the beneficiaries of the Pitzman-Methudy trust, were the grantors and beneficiaries of the Cahokia trust. However, such enlargements of the trustees’ powers, as appeal’s from an examination of the trust instruments, did not change a liquidating endeavor into a joint business venture.

In Myers’ Brothers Building Trust v. Commissioner, 89 Fed. (2d) 86, three brothers, owners of improved business property, as tenants in common, erected a new building, obligating themselves on the mortgage indebtedness, and created a trust to facilitate management operation and preservation of the property in which they each retained an equal beneficial interest. The court there held the operation of the trust as a business enterprise was merely incidental to the broader purpose of preservation and convenience in handling and therefore was.a pure trust not taxable as an association. The court said:

Every trust of the present type necessarily has attributes of a business organization. Its very existence depends on such. That characteristic alone cannot brand it as an “association.” If the father of the three Myers brothers had by his will set up a trust estate for their benefit in the precise manner here indicated it would have been almost typical of a traditional type of family trust. We think it none the less so that its creation has been by the three brothers.

In many respects the situation in these proceedings is comparable to that presented in Theron E. Catlin, 25 B. T. A. 834; Selah Chamberlain, 19 B. T. A. 126, and Trudie T. Mwiger, 16 B. T. A. 168. In each of these proceedings we held that the trusts attempted to be created by the owners of property were not actually taxable entities, but were in the nature of agencies created for the more convenient management of property. Stoddard v. Eaton, 22 Fed. (2d) 182. See also, Cleveland Trust Co., Executor, 24 B. T. A. 132; N. H. Boynton, 11 B. T. A. 1352; George L. Craig, 7 B. T. A. 504; Lewis & Co. v. Commissioner, 301 U. S. 385. It might well be argued in these proceedings that the trusts here were more in the nature of agencies for convenient handling and disposition of the property than true trusts in a restricted legal sense. However, petitioners have preferred to rest their case upon the principle that these trusts were liquidating trusts, distributing their proceeds to beneficiaries, who were taxable upon any income resulting from sales and lease rentals. In either view the respondent has erred in determining the trusts were associations taxable as corporations.

Our decision on the legal question makes it unnecessary to go into the question of fact as to values or the question of penalties.

Reviewed by the Board.

Decision will be entered for the petitioners.


author: Mellott:

text:
    Charles A. Dana, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76699.
    Promulgated June 11, 1937.

      Benjamin Mahler, Esq., for the petitioner.

      J. B. Johnston, Esq., for the respondent.

       SEC. 111. DETERMINATION OF AMOUNT OF GAIN OR LOSS.
      (a) Computation of gain or loss.—Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in section 113, and the loss shall be the excess of such basis over the amount realized.
      SEC. 112. RECOGNITION OF GAIN OR LOSS.
      (a) General rule.—upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter ¡provided in this section.
      (b) Exchanges solely in kind.—
      * * * * * * *
      (3) Stock for stock on reorganization.—No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in .another corporation a party to the reorganization.
      * * * * * *
      (i) Definition of reorganization.-—As used in this section and sections 113 and 115—
      (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.
      (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 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.
      * * * * * * *
      SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.
      (a) Property acquired after February 28, 1913—The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; * * *

   OPINION.

Mellott:

Petitioner contends (1) that any gain upon the exchange is not to be recognized since it was an exchange of stock of one corporation for stock of another corporation made pursuant to a plan of reorganization, both corporations being parties thereto; and (2) that if it be held that he realized a taxable gain on the exchange, then the gain should be measured by the fair market value of Spicer stock received by him, which value he contends is not in excess of $30 per share.

The pertinent provisions of the Revenue Act of 1928 are shown in the margin.

Under section 112 (b) (3) no gain or loss is to be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. It is not disputed that petitioner exchanged his stock in Salisbury solely for stock in Spicer. The question for determination therefore is simply whether such exchange was made in pursuance of a plan of reorganization and whether or not Salisbury and Spicer were parties thereto.

The respondent contends that the exchange was not made pursuant to a plan of reorganization. He argues (1) that prior to the exchange Spicer was the owner of more than a majority of the stock of Salisbury and that it did not acquire 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 Salisbury through the exchange in question; (2) that it acquired by purchase a minority interest in the Salisbury stock owned by petitioner; (3) that the petitioner’s Salisbury stock was not acquired pursuant to the plan for the transfer by Salisbury of all or part of its assets to Spicer; and (4) that if there ever was a statutory reorganization to which Spicer and Salisbury were parties, such reorganization had been consummated prior to 1929.

Petitioner argues that there was a statutory reorganization by reason of (a) the acquisition by Spicer of at least a majority of the stock of Salisbury; (b) the acquisition by Spicer of substantially all the properties of Salisbury;' (c) a recapitalization of Spicer; or (d) a recapitalization of Salisbury. He further argues that all of the requisites of the statute have been met; that there was a plan of reorganization, an exchange pursuant thereto of stock in one corporation for stock in another, and that both corporations were parties to the reorganization.

The record discloses that there were two plans, (1) the plan of petitioner to move Spicer and Salisbury to Toledo and consolidate and merge their physical assets and businesses; and (2) the plan set forth in the agreement with the bankers, which included the acquisition by Spicer of all of the outstanding stock of Salisbury and the recapitalization of Spicer. We are satisfied that the exchange was made pursuant to the plan contained in the agreement between Spicer and the bankers. While we deem it unnecessary to give any consideration to the first mentioned plan, petitioner’s argument to the effect that it was a plan of reorganization is not without substantial merit. William H. Redfield, 34 B. T. A. 967; Western Industries Co. v. Helvering, 82 Fed. (2d) 461; C. T. Investment Co. v. Commissioner, 88 Fed. (2d) 582; Gross v. Commissioner, 88 Fed. (2d) 567.

The agreement between Spicer and the bankers provided that Spicer should acquire all of the stock of Salisbury not then owned by it; that it should reduce its authorized capital stock by the elimination of the 100,000 shares of preferred stock; that, subject to obtaining the approval of its stockholders, it should increase and reclassify its capital stock so that it should consist of 150,000 shares of preferred and 600,000 of common; that it should acquire all of the capital stock of the Brown-Lipe Gear Co., procure and deliver to the bankers a consolidated statement of the assets and liabilities of the corporation (Spicer) and its wholly owned subsidiary companies (Salisbury and Brown-Lipe) and that it should sell to the bankers 85,000 shares of the new preferred stock.

The agreement constituted a plan of reorganization if any of the acts to be performed by Spicer fall within the meaning of the term reorganization as defined by section 112 (i) (1), supra. This section defines a reorganization to mean, inter alia, 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 a recapitalization. As heretofore pointed out, the agreement provided that Spicer should acquire all of the Salisbury stock and that Spicer should be recapitalized.

The respondent urges us to hold that there was no statutory reorganization because Spicer owned a majority o.f the stock of Salisbury prior to the exchange. Such a construction of subdivision (A) of section 112 (i) (1), supra, would not, in our opinion, give effect to the purpose which Congress had in mind in enacting the reorganization provisions of the statute. That purpose was to facilitate readjustments of corporate businesses by permitting the postponement of gain or loss on exchanges made in pursuance thereof where the transferor retained a continuing interest in the reorganized corporation or corporations. G. & K. Manufacturing Co. v. Helvering, 296 U. S. 389; Mead Coal Co. v. Commissioner, 72 Fed. (2d) 22. And “the terms ‘merger’ and ‘consolidation’ are to be given a liberal interpretation to effectuate the purposes” which Congress had in mind in enacting the statute. Mead Coal Co. v. Commissioner, supra.

In providing that a reorganization means 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) Congress intended to cover not only a strict merger or consolidation but also transactions which have a real resemblance thereto. In Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462, the Supreme Court, in discussing the same provision of the 1926 Act, said:

The words within the parenthesis may not be disregarded. They expand the meaning of “merger” and “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 these words—so as to embrace circumstances difficult to delimit but which in strictness cannot be designated as either a merger or consolidation.

As the Supreme Court pointed out, the acquisition by one corporation of at least a majority of the stock of another is a reorganization because it “partakes of the nature of a merger or consolidation.” If the acquisition by one corporation of a bare majority of the stock of another constitutes a reorganization, we are of the opinion that the acquisition by one corporation of all the outstanding stock of another, thus enabling the acquiring corporation, at its pleasure, to consolidate or merge the two corporations, falls -within the same category. At the time Spicer acquired petitioner’s Salisbury stock, there was in existence a plan, which was subsequently executed, for Spicer to take over the assets of Salisbury and to merge and consolidate the businesses theretofore conducted by the two corporations. Moreover, the agreement between Spicer and the bankers tends to-indicate that at the time it was entered into, a merger or consolidation was contemplated by the parties; for by it Spicer was obligated to procure and deliver to the bankers a statement of the assets and liabilities of itself and “its wholly owned subsidiary companies”, Salisbury and Brown-Lipe. In view of the foregoing we hold that the acquisition of petitioner’s stock by Spicer was pursuant to a plan of reorganization within the meaning of subdivision (A) of section 112 (i) (1), supra, and that Salisbury and Spicer were parties thereto.

It follows therefore that the respondent erred in determining the above deficiency. The conclusion reached renders it unnecessary to determine the' fair market value of the Spicer stock received by-petitioner.

Reviewed by the Board.

Judgment will be entered for the petitioner.


author: Harron :

text:
    William H. Slack, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77004.
    Promulgated June 15, 1937.

      Joseph B. Brennan, Esq., and W. A. Sutherland, Esq., for the petitioner.

      Owen W. Swecker, Esq., for the respondent.
   OPINION.

Harron :

This proceeding is for the redetermination of a deficiency in income tax for the year 1930 which respondent has determined to be $1,565.62. Part of this deficiency is contested by the petitioner, who contends that the respondent is in error as to the basis he has «determined for computing gain from the sale of an interest in real «estate under the provisions of section 113 (a) (5) and section 113 (b) of the Revenue Act of 1928. The respondent has determined that the petitioner’s gain from the sale of his interest in a parcel of real estate was greater than petitioner reported and the deficiency arises in part from an increase in profit from the transaction added to the petitioner’s taxable income.

The parties to this proceeding have stipulated the facts which are summarized hereafter.

William H. Slack, Sr., acquired title to a parcel of improved real estate located in Washington, D. C., in the following way. William H. Goddard by his will devised the property to his wife, Martha Goddard, for life, with remainder in fee to William H. Slack, Sr., a resident of Georgia.

William Goddard died in the year 1891. Martha Goddard died March 9, 1928. William H. Slack, Sr., gave a one-eighth undivided interest in the property to the petitioner in April 1928. In June 1930 the entire property was sold. The fair market value of the property was greater on March 1, 1913, than the fair market value on the date of the death of William Goddard.

The fair market value on March 1, 1913, of the petitioner’s one-eighth undivided interest was $24,895.90 (land, $21,512.55; buildings, $3,383.35). This valuation is the fair market value on March 1, 1913, of the petitioner’s interest, without deducting therefrom a proportionate part of the fair market value of the life estate of Martha Goddard.

Depreciation was suffered with respect to the buildings on the realty from March 9, 1928 (the date of the death of the life tenant), to June 2,1930 (the date of sale), a period of 2 years, 2 months and 24 days, at the rate of 2½ percent per annum, which rate is not less than the amount of depreciation allowable for income tax purposes. On the March 1, 1913, value of the buildings of $3,383.35, the petitioner is entitled to a deduction for depreciation of $188,90.

The net sale price of petitioner’s interest was $39,994.54. The gain to the petitioner from the sale of his interest is $15,287.54 on the adjusted value as of March 1, 1913, less depreciation, without -deducting therefrom the value of the life estate of Martha Goddard.

The respondent has determined that the basis to the petitioner for «computing his gain from the sale of his interest in the property is the March 1, 1913, value of his interest less the fair market value on March 1, 1913, of the intervening life estate in petitioner’s one-eighth interest which was $8,760.37 ($7,569.84, land and $1,190.53, buildings), according to computation under the American Experience Table of Mortality, less depreciation at the rate of 2½ percent per annum. According to this basis, the respondent has determined that the petitioner’s gain on the sale is $23,981.45.

The question accordingly is whether the petitioner’s gain was $15,287.54 or $23,981.45, as determined by the respondent. Proper determination of this question turns upon whether the basis to the petitioner is the fair market value of the property on March 1, 1913, or the fair market value of the remainderman’s interest therein on that date.

The petitioner received his interest in the property by gift. It is conceded that the basis to him is the same as to the donor under the provisions of section 113 (a) (2) of the Revenue Act of 1928. See Taft v. Bowers, 278 U. S. 470. The interest of the donor was a vested remainder interest.

Section 113 (a) (5), in so far as pertinent, states:

* * * if real property wag acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. [Italics supplied.]

Section 113 (b) states:

The basis for determining the gain or loss from the sale or other disposition of property acquired before March 1, 1913, shall be:
[(1) the cost, or]
(2) the fair market value of such property as of March 1, 1913, whichever is greater. [Italics supplied.]

Congress has expressly stated in the above statutory provisions of the Revenue Act of 1928 that the basis, in the situations referred to, will be the fair market value of the property at the time of the death of the decedent. The respondent argues that the term “property” is to be interpreted in a broad sense and that in this proceeding the subject to be valued is the remainderman's interest in the real property at March 1, 1913. Under the facts in this proceeding, the terms in the applicable statutory provision are not ambiguous and the respondent’s theory places too great a strain on the literal meaning of words. The subject matter of the sale here involved was the fee simple title to real estate which had vested in possession in the vendor (the remainderman). The vendor was not selling a remainder interest in the realty. Applying the words of the statute, real property was sold which was acquired by specific devise. In 1930, the date of sale, the .fact that there had been an intervening life estate, had become an academic consideration so far as we are concerned with the language of section 113 (a) (5) applied to the facts before us. There is nothing in the language of the statute to support the respondent’s argument that the real property sold by a remainderman in possession should be discounted by the value of a terminated intervening life estate. To accede to such construction of the statute would be to interpret it to intend to establish two bases, (a) the value of the real property at the time of the death of the decedent, and (b) the value of the remainder interest in real property at the time of the death of the decedent, depending on whether sale of the property was by a life tenant in possession or by a remainderman in possession. The basis to be used should not be made to depend on whether the devise was made in fee or divided into life estate and remainder interest. The same property, is involved in either case and the same basis should apply. The applicable statute does not provide for such differentiation in the basis.

It is held that the value of the real property on March 1, 1913, undiminished by the value of the life estate, is the basis to be used in computing the petitioner’s gain on the sale of his one-eighth interest in the real property in 1930.

The weight of authority of Board and court decisions supports this holding. A similar issue, arising out of interpretation of the same section of the Revenue Act of 1928 was before this Board in Robert E. McGrath, 30 B. T. A. 562, wherein it was held that the basis for determining profit from the sale of real estate acquired under vested remainder interests was the entire value of the real property at the time of the testator’s death and not the value of the vested remainder interests. This decision has been sustained by the Circuit Court of Appeals for the Sixth Circuit. See Fidelity & Columbia Trust Co. v. Commissioner, 90 Fed. (2d) 219. There the Circuit Court states:

The statute specifically states that the basis shall be the fair market value “of the property” at the time of the death of the decedent. While right to possession and enjoyment could mature only upon the extinction of the mother’s life interest, the property sold was the entire real estate, and the Commissioner erred in deducting only the value of the remainder interests in making his determination.

The above language of the Circuit Court might well be paraphrased and applied to the issue in this proceeding.

The question here in issue in substantially similar form has been decided by this Board previously, in accordance with the holding here. See Rodman E. Griscom, 22 B. T. A. 979; Isabel Richardson Molter, 27 B. T. A. 442; Farley Hopkins, 27 B. T. A. 845; Robert E. McGrath, supra. Our decisions in all of the above cases which were taken on appeal have been affirmed by'the courts. See Molter v. Commissioner, 69 Fed. (2d) 7 (C. C. A., 7th Cir.), affirming 27 B. T. A. 442; Hopkins v. Commissioner, 69 Fed. (2d) 11 (C. C. A., 7th Cir.), affirming 27 B. T. A. 845; Fidelity & Columbia Trust Co. v. Commissioner, supra (C. C. A., 6th Cir.). See also Huggett v. Burnet, 64 Fed. (2d) 705 (Court of Appeals for the District of Columbia), reversing 24 B. T. A. 669. The Board followed Huggett v. Burnet, supra, in Henry A. Cleland Estate Co. Ltd., 29 B. T. A. 436. The issues in some of the eases referred to above related to the statutory provisions of prior revenue acts which Congress clarified in the Revenue Act of 1928 in section 113 (a) (5). The conclusions reached in all of the above decisions of the Board and the courts arrive at the same result in holding that where vested interests have been created, the basis for gain upon the sale of the property is the fair market value thereof at the time of the decedent’s death and not the value of the vested remainder at the time of the decedent’s death. The holding in this opinion follows these prior decisions of the Board and the courts which we believe constitute the weight of authority.

In the case of Elizabeth S. Vale, 30 B. T. A. 1351, the Board adhered to the opinion it had adopted in the case of "William Huggett, supra, rejecting the conclusion reached by the Court of Appeals in Huggett v. Burnet, supra. The Board is now convinced that its position in the Vale case was erroneous and that case will not be followed in the future.

Reviewed by the Board.

Judgment will be entered under Rule 50.