author: Van Fossan:

text:
    Western Power Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72943.
    Promulgated May 27, 1936.

      Edward H. Green, Esq., and John A. Woodbridge, Esq., for the petitioner.

      DeWitt Evans, Esq., and James K. Polk, Esq., for the respondent.
   OPINION.

Van Fossan:

In this proceeding an original deficiency of $19,312.44 was asserted against the petitioner for the calendar year 1930. The petition alleges that respondent’s determination is based upon the erroneous inclusion in taxable income of $286,152.83 as interest accrued on loans and advances, the disallowance of $9,657.47 as a depreciation deduction, and the disallowance of $3,159.35 as an amortization deduction of bond discount and expense.

By an amended answer, respondent, after denying the foregoing allegations of error, affirmatively alleged that the deficiency is $8,295,605.39, instead of $19,312.44, and asserted a claim for the additional deficiency of $8,276,292.95. Respondent’s claim for the additional deficiency is based upon his failure to include in gross income “an amount of $88,969,107.89 ($68,969,107.89), or such greater amount as may be determined, representing the profit from the sale by the petitioner in the year 1930 of certain shares of capital stock of four certain public utility companies, and the cancellation by petitioner of certain floating indebtedness of two of the companies to it.”

' If the respondent’s determination that a sale occurred is sustained, an alternative issue of fact is presented, viz., the fair market value of a block of 1,825,000 shares of common stock of the Pacific Gas & Electric Co. on June 12,1930.

Stipulations of fact, with documentary evidence attached, together with the testimony of numerous witnesses and exhibits, make up the record of this proceeding. The stipulations dispose of the issues relating to depreciation and amortization, and effect will be given thereto under Rule 50. As to the issues raised by the amended answer and reply and the $286,152.83 item, only those portions of the stipulated facts and the other facts of record that are deemed pertinent to the determination thereof appear in our findings.

The petitioner is a New York corporation, organized on June 5, 1915, whose business is investments in capital stock of public utility Corporations. The petitioner’s capitalization on June 12, 1930, was as follows:

Both classes of stock had full voting powers.

In the year 1930, the North American Co., a New Jersey corporation, owned approximately 321,486 shares of petitioner’s outstanding common stock, or approximately 99.8 percent, but was not affiliated with it under the provisions of the Revenue Act of 1928 prior to December 17, 1930, because of outstanding voting preferred stock. The North American Co. was a large holding company of stocks and securities of public utility companies in various parts of the United States, principally in the District of Columbia, Virginia, Maryland, Ohio, Michigan, Wisconsin, Missouri, Illinois, Iowa, and California.

Immediately prior to the tiansactions hereinafter referred to the petitioner was the owner of certain shares of stock in the Great Western Power Co. of California, sometimes hereinafter referred to as Great Western, the San Joaquin Light & Power Corporation, sometimes hereinafter referred to as San Joaquin, and the Midland Counties Public Service Corporation, sometimes hereinafter referred to as Midland, all located in the State of California. The classes of stock, all with a par value of $100 per share, the number of authorized shares, the outstanding shares, and the number of shares owned by petitioner were as follows:

All of the stock of each of the above companies had full voting powers and the percentage of voting stock of each company owned by the petitioner was as follows:

Great Western Power Corporation- 62. 73%
San Joaquin Light & Power Co_ 51. 92%
Midland Counties Public Service Corporation_ 100.00%

The petitioner acquired its stock in Great Western in 1918, and its stock in San Joaquin and Midland in 1925. No companies operating west of the Rocky Mountains, other than the above corporations and their subsidiaries, were controlled directly or indirectly by petitioner or the North American Co.

Great Western, San Joaquin, and Midland were operating companies engaged in the public utility business of electric light, electric power, gas, and associated businesses m the State of California, more particularly described as follows:

The Great Western Power Co. of California system immediately prior to June 12, 1930, furnished electric light and power throughout a territory in central California of approximately 2,000 square miles with a population of 1,277,400. Included in the above are 44 communities, the principal cities of which are San Francisco, Oakland, Berkeley, Sacramento, Martinez, Richmond, Napa, Petaluma, and Santa Rosa. Central heating plants supply heat in San Francisco and Oakland.

In addition to owning and operating two hydro and four steam generating plants, Great Western contracted for the entire output of the Bucks Creek hydro plant, which is owned by the Feather River Power Co. It also had under lease a steam generating plant at Oakland from another subsidiary, California Electric Generating Co.

The total generating capacity of the hydro and steam plants of the Great Western system on December 31, 1929, was 249,400 kilowatts. The total amount of electricity produced in 1929 was 1,049,765,324 kilowatt-hours, of which 98.2 percent was produced by the hydro plants. In addition to the above production, 5,447,932 kilowatt-hours were purchased. There were received in interchange from San Joaquin .7,920,000 kilowatt-hours, and 197,538,000 kilowatt-hours were delivered to San Joaquin through interchange.

The San Joaquin Light & Power Corporation was incorporated in California on July 19, 1900, as a consolidation of the San Joaquin Light & Power Co., the Power, Transit & Light Co. of Bakersfield, and Merced Falls Gas & Electric Co. At June 12,1930, it controlled, through stock ownership, the Bakersfield & Kern Electric Railway, the San Joaquin Light & Power Co., and the Valley Electrical Supply Co.

In addition to furnishing Midland with all its power, San Joaquin served a population of over 331,500, which embraced a territory of 9,062 square miles, including 175 communities in California, the principal cities and towns being Fresno, Bakersfield, Merced, Madera, Selma, Hanford, Sanger, Reedley, and Dinuba. It also operated a street railway system in Bakersfield, furnished water in Selma, and distributed gas in Bakersfield, Merced, and Selma.

The properties of San Joaquin included 13 hydro-electric and steam-electric generating stations with a total capacity of 231,602 horsepower, and a transmission and distribution system including 8,839 miles of electric lines and 213 miles of gas mains.

* The Midland Counties Public Service Corporation was a consolidation in 1914 of the Coalinga Water & Electric Co., Midland Counties Gas & Electric Co., Paso Robles Light & Water Co., and Russell Robison Water & Electric Co. The Coalinga Water & Electric Co. had been incorporated on November 29, 1909, under the laws of California, as successor to the Coalinga Light & Power Co.

At June 12, 1930, Midland operated in the western portion of Fresno County, the southern part of Monterey County, the entire County of San Luis Obispo, and the northern part of Santa Barbara County. Principal cities and towns served with electric light and power are San Luis Obispo, Santa Maria, Arroyo Grande, Coalinga, San Miguel, and Paso Robles. It also served Arroyo Grande with domestic water.

All Midland’s power was purchased from San Joaquin. The territory served contained a population of 59,600, including 48 communities and embracing an area of approximately 1,842 square miles. The corporation owned and operated an electric distribution system of 1,167 miles of electric transmission and distribution lines.

The Pacific Gas & Electric Co., sometimes hereinafter referred to as Pacific, is a California corporation similarly engaged in the public utility business in California. Prior to June 12, 1930, Pacific and its affiliated companies served a territory embracing 38 counties of northern and central California, with an aggregate area of 61,000 square miles and a population of approximately 2,500,000. The company’s system was connected with approximately 1,038,500 customers who were supplied with service through 18,488 miles of electric transmission and distribution lines, and 5,488 miles of gas mains. The principal population served was in the cities of San Francisco, Oakland, and the cities surrounding San Francisco Bay. It also furnished steam heat in the cities of San Francisco and Oakland. ■

The electric system of Great Western was, in a large part, a duplication of Pacific’s electric system, extending through 14 counties in northern and central California, in all of which Pacific was operating and serving many of the same localities. In San Francisco, Oakland, and other cities on San Francisco Bay, over 90 percent of the business served by Great Western was in direct competition with Pacific, with resulting duplication of production, transmission, and distribution systems, district and division offices and warehouses, construction and service crews, salesmen and meter readers, collectors, and general office organization.

The electric system of Great Western was connected to that of San Joaquin by a 103-mile tie line, and the latter system and that of Midland were in large part supplemental to that of Pacific, though mainly not in direct competition. San Joaquin’s system extended through eight counties in central California, into three of which Pacific’s system also extended. Pacific was serving gas in Fresno, the largest city served with electricity by San Joaquin.

Negotiations looking forward to the acquisition of all the properties of Great Western, San Joaquin, and Midland by Pacific were carried on from the latter part of 1929 up to the agreement dated March 29, 1930. The acquisition of petitioner’s stockholdings in Great Western, San Joaquin, and Midland was Pacific’s first step in the acquisition of all the properties of these three corporations. The agreement dated March 29, 1930, was between Pacific and the North American Co., owner of 99.8 percent of petitioner’s outstanding common stock.

The parties agreed that, subject to the approval of the Railroad Commission of California, the North American Co. would cause petitioner:

* * * to sell, assign and deliver to Pacific the following 1’ull-paid shares of stock in the three subsidiary companies, viz.: [schedule of preferred and common stocks owned by petitioner in Great Western, San Joaquin, and Midland hereinabove set forth] together with one share of Preferred Stock of California Electric Generating Company, and will cause Western Power to cancel the floating indebtedness of the three subsidiary companies to it as of January 31, 1930 amounting to $19,180,776.76, in consideration of which Paeifie will issue, sell and deliver to Western Power 1,825,000 full-paid shares of the common stock of Pacific, of the par value of $25.00 per share.
Pacific will cause to be paid to Western Power in cash at the time of delivery as hereinafter defined, the excess of the aggregate floating indebtedness of the three subsidiaries to Western Power as of the time of delivery over the sum of $19,180,776.76, being such aggregate floating indebtedness as of January 31, 1930, together with interest at the rate of six per cent (6%) per annum from the respective dates on which the respective amounts of such excess floating indebtedness shall have been incurred to the time of delivery.

The agreement provided specifically for cash adjustment between petitioner and Pacific with respect to the dividends on the stocks exchanged; each party thereto agreed to use its best efforts to obtain a satisfactory decision from the Railroad Commission of California authorizing the carrying out of the agreement in accordance with its terms.

Under date of April 25, 1930, the North American Co. addressed a letter to petitioner’s board of directors in reference to the above agreement, as follows:

We hand you herewith a copy of the Agreement dated March 29, 1930, between The North American Company and Pacific Gas and Electric Company.
Pursuant to said Agreement, it is proposed that Western Power Corporation be reorganized in accordance with the following plan:
Plan of Reorganisation
of Western Power Corporation
Western Power Corporation will cancel the floating indebtedness to it of Great Western Power Company of California, San Joaquin Eight and Power Corporation and Midland Counties Public Service Corporation as of January SI, 1930, amounting to $19,180,776.76; and Western Power Corporation will then sell, assign, and deliver to Pacific Gas and Electric all its property (except 4,904%oths shares of the Common Stock of The North American Company, corporate papers and office records and supplies and the like), consisting of the following shares of stock, viz.: [schedule of stocks owned by petitioner in Great Western, San Joaquin, Midland, and California Electric Generating Company as hereinabove set forth] in exchange for which Pacific Gas and Electric Company will issue and deliver to Western Power Corporation 1,825,000 full-paid shares of common stock of Pacific Gas and Electric Company. £Emphasis supplied.]

The above agreement was approved by petitioner’s board of directors on April 25, 1930, and by its stockholders .on June 6, 1930. The resolutions of petitioner’s directors and stockholders provide that petitioner sell, assign, and deliver to Pacific all of the pi'op-erties and assets of this corporation, with the exception above noted, in exchange for 1,825,000 shares of common stock of Pacific in accordance with the plan of reorganization.

Under date of May 14, 1930, the Railroad Commission of California authorized Pacific to acquire and hold the above listed stocks; authorized Pacific to issue and deliver to petitioner, as full-paid and for the purpose mentioned in the agreement dated March 29, 1930, 1,825,000 shares of its common stock; refused without prejudice Pacific’s request to acquire additional stock and to acquire the properties of Great Western, San Joaquin, Midland, and their .respective subsidiaries.

The book value of the assets of Great Western, San Joaquin, and Midland at January 31, 1930, was as follows:

Great Western_$134,109, G65.19
San Joaquin_ 90, 650, 564. 31
Midland_ 6,893,221.47
231,653,450.97

The book value of the assets of Pacific and its subsidiaries at December 31, 1929, was $454,021,922. The book value of the assets of Pacific and its subsidiaries at June 30, 1930, was $659,269,544.25.

The agreement of March 29, 1930, was scheduled to be closed on May 1, 1930, but the closing was delayed to June 12, 1930, at the request of Pacific, owing to delay in obtaining the necessary approval of the California Railroad Commission to this acquisition by Pacific. On June 12, 1930, however, pursuant to the agreement, jietitioner canceled the indebtedness of the three companies to it in the amount of $19,180,776.76, transferred all the stock owned by it, except the North American Co. common, to Pacific, and on the same date Pacific issued and delivered to petitioner 1,825,000 shares of Pacific’s common stock. The cash received by petitioner on June 12,1930, immediately prior to such closing, from its three subsidiaries by way of additional advances after January 31, 1930, was paid over by petitioner to the North American Co. in reduction of petitioner’s indebtedness to that company.

At the time of the receipt of the 1,825,000 shares of Pacific’s common stock neither the petitioner nor the North American Co. owed any other shares of Pacific’s capital stock. Immediately after the closing of said agreement petitioner owned 32.18 percent of Pacific’s common stock then outstanding, and 19.77 percent of the total voting stock of Pacific then outstanding.

The capitalization of Pacific immediately prior to and after closing said agreement on June 12, 1930, was as follows:

The next largest stockholder of Pacific’s common stock on June 12, 1930, held 343,200 shares, or 6.04 percent of the total common stock outstanding. The largest stockholder of preferred stock held 20,000 shares, or 56/100 of 1 percent of the total perferred stock outstanding. On that date Pacific had 30,650 holders of 6 percent preferred, 9,952 holders of 5½ percent preferred, and 25,925 holders of common stock.

The amounts of the accounts receivable canceled by the petitioner in pursuance of the agreement were as follows:

Advances to Great Western_$15, 924, 701. 60
Advances to San Joaquin- 3, 256, 075.16
Total indebtedness canceled_ 19,180, 776. 76

The interest on said canceled indebtedness from January 31, 1930⅛. until May 1, 1930, at 6 percent per annum, amounted to $286,152.83.

The 4,904-12/40 shares of common stock of the North American C» owned by the petitioner on April 25, 1980, were disposed of by ite during May 1930, in exchange for common stock of Cleveland Electric Illuminating Co., which latter stock was sold by petitioner out June 10, 1930, and the proceeds paid over to the North American Co., in reduction of petitioner’s debt to that company.

After the closing of the agreement of March 29, 1930, whereby Pacific obtained the aforesaid stock of Great Western, San Joaquin,, and Midland, those subsidiaries and Pacific continued their corporate-existence as before, kept separate books of account, and made separate-reports to the California Railroad Commission. However, many economies were effected by eliminating duplication of labor, personnel, offices, warehouses, equipment, materials and supplies, and other expenses. Connections were established between the electric and steam systems of Pacific and Great Western, and between the electric systems of Pacific and San Joaquin, permitting large interchanges of electric energy and steam, abandonment of certain plants, readjustment of others, and the shutting down of still other plants and substations for long periods of time, all resulting in better and more efficient use of the production, transmission, and distribution facilities of the systems and their operations as one combined business and system. It was estimated by Pacific that by October 1, 1930, savings in annual operating and construction expenses amounted to $1,334,000.

After June 12, 1930, Pacific proceeded to acquire the outstanding minorities of Great Western and San Joaquin. By April 30, 1934, Pacific’s holdings in the capital stock of Great Western and San Joaquin were as follows:

During 1930, but subsequent to June 12, 1930, Pacific retired or refunded with its own bonds, over $15,000,000 of bonds and notes of Great Western. During 1930 and 1931 Pacific retired $31,441,900 par value of bonds of the subsidiaries of Great Western; and during 1931 and 1932 Pacific exchanged its preferred and common stocks for preferred and common stocks of these subsidiaries, aggregating $30,982,300, making a total of $62,424,200 of stocks and bonds replaced by Pacific’s stocks and bonds during 1930, 1931, and 1932.

Prior to June 12,1930, Great Western, San Joaquin, and Midland were the only companies in California controlled by petitioner or the North American. After that date petitioner, or its stockholders, or both, did not control directly or indirectly Pacific or any companies operating west of the Rocky Mountains other than through the stock ownership in Pacific acquired by the exchange occurring on June 12.

Respondent’s increased deficiency is based upon an alleged profit of $68,969,107.89 resulting from the transfer on June 12, 1930. Respondent computed the value of the 1,825,000 shares of Pacific common at $113,834,375, or $62.375 per share, which is the average of the high and low quotations on the New York Stock Exchange on that date. Respondent computed petitioner’s total cost of the stock exchanged at $44,865,267.11, which included the book value of the stocks exchanged for Pacific common of $25,398,337.52, the canceled floating indebtedness of $19,180,776.76, plus the interest thereon of $286,152.83 from February 1 to May 1, 1930.

After the agreement of March 29, 1930, was executed between Pacific and the North American Co., petitioner understood that this agreement provided that it should receive interest at the rate of 6 percent on the January 31, 1930, floating indebtedness of Great Western and San Joaquin due to the petitioner up to the date of transfer of the stock of these companies to Pacific, to wit, June 12, 1930, and set up on its books accrued interest due it on that basis. The petitioner prepared the statement for closing with Pacific on that assumption. Pacific objected to petitioner’s proposed closing on the ground that the agreement provided that such floating indebtedness should be canceled as of January 31, 1930, and claimed that no interest could accrue thereon after that date, and Pacific refused to recognize that petitioner had any right to accrue interest on such floating indebtedness after January 31, 1930. This controversy was adjusted and settled on the basis of Pacific consenting to petitioner’s charging interest on such floating indebtedness from May 1, 1930, to June 12, 1930, because the closing under said agreement had been extended from the former date to the latter date at Pacific’s request. The agreement was closed on that basis and the petitioner received no interest on such floating indebtedness from January 31, 1930, to May 1, 1930, but released all claims thereto. However, San Joaquin and Great Western accrued said interest on their books as interest payable, and upon the cancelation of the indebtedness included the same as paid-in surplus on their books of account. A copy of the release and acceptance thereof by Great Western is as follows:

To Great Western Power Company of California,
San Francisco,
California.
The undersigned, Western Power Corporation (a New York corporation), owns all of your outstanding common stock. At the close of business on January 31, 1930, your floating indebtedness to the undersigned amounted to $15,924,701.60. The interest accrued on that floating indebtedness to June 12, 1930, amounted to $347,689.32, on account of which you have this day paid to the undersigned the sum of $111,472.91, which is the equivalent of interest at the rate of six per cent per annum on said floating indebtedness from May 1, to June 12, 1930.
The undersigned desires to convert the above mentioned floating indebtedness together with the interest accrued thereon at the rate of six per cent per annum to ¡Uay 1, 1930, into an increase of its investment in your company. For the purpose of effecting this conversion, the undersigned hereby releases all its claims, demands and causes of action against you for or arising out of said floating indebtedness of $15,924,701.60 and the interest accrued thereon to May 1, 1930, amounting to $236,216.41, in consideration of your transferring to paid in surplus on your books of account the amount of floating debt and accrued interest hereby released. This release will become effective immediately upon its acceptance by you upon the terms herein expressed.
In Witness Whereof said Western Power Corporation has executed these presents this 12th day of June, 1930.
Western Power Corporation
By [Sgd] J. B. Black
Vice President
The above release is hereby accepted upon the terms therein expressed.
In Witness Whereof Great Western Power Company of California has executed these presents this 12th day of June, 1930.
Great Western Power Company op California By [Sgd] A. Emory Wishon, Vice President.

A similar release and acceptance by San Joaquin was entered into ' except as to amounts. The total amount of interest on the canceled indebtedness for the period January 31, 1930, to May 1, 1930, of the two companies amounted to $286,152.83. The respondent included in the taxable income of the petitioner for the year 1930 the said sum of $286,152.83.

The first issue is whether as a matter of law the transfer on June 12, 1930, was a sale or a statutory reorganization, the facts being undisputed. The transaction is governed by the provisions of section 112 of the Revenue Act of 1928, the pertinent portions of which appear in the margin.

Since the respondent originally recognized that a reorganization existed and raises the issue by amended answer, therein claiming that petitioner made a taxable sale, it is his burden to establish that, in the premises, there was no reorganization and that such sale occurred.

As indicated in the quoted sections, the general rule is that gain or loss shall be recognized upon the sale or exchange of property. Certain exceptions to the general rule appear in the subdivisions of section 112, and this taxpayer seeks to bring itself within the exceptions where gain or loss is not recognized.

To bring itself within the statutory exceptions the taxpayer must satisfy the requisites of a reorganization found in section 112 (i) (1). These requisites, as to this proceeding, are found in part (A) of the definition, which states that 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, or substantially all the properties of another corporation.

The petitioner contends that the transaction here involved was a statutory reorganization because of the existence of either or both of two situations: (1) A merger or consolidation including the acquisition by one corporation of substantially all the- properties of another corporation; and (2) 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 in exchange for the common stock of the transferee. Petitioner relies upon the decisions of the Supreme Court in Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462; Helvering v. Minnesota Tea Co., 296 U. S. 378; John A. Nelson Co. v. Helvering, 296 U. S. 374; Helvering v. Watts, 296 U. S. 387; and G. & K. Manufacturing Co. v. Helvering, 296 U. S. 389.

In the Pinellas Ice & Gold Storage Co. case the Court said:

* * * The words within the parenthesis may not be disregarded. They expand the meaning of “merger” or “consolidation” so as to include some things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words — so as to embrace circumstances difficult to delimit but which in strictness cannot be designated as either merger or consolidation.

One can not read the narrative of facts without coming to the conclusion that when Pacific acquired substantially all of the properties of petitioner it was part of a procedure which, if not strictly a merger or consolidation in law, certainly partook of the nature of a merger or consolidation, thus satisfying the definition announced bjr the Supreme Court. That the properties acquired constituted “substantially all of the properties” of petitioner is not contested,

In the Minnesota Tea Co. case, explaining the rule of the Pinellas case, the Supreme Court further observed that the interest acquired by the seller in the affairs of the purchasing company “must be definite and certain; it must represent a substantial part of the thing transferred.” We are of the opinion that the stock of Pacific acquired by petitioner in the exchange satisfies this requirement.

Testing the facts of record by the rules laid down by the Supreme Court in the cited cases, we are of the opinion that the transaction by which petitioner exchanged substantially all of its property for stock of Pacific was a reorganization and that respondent’s present contention must be denied.

Furthermore, it may well be that the statutory rule, as interpreted by the Supreme Court, has been satisfied with respect to petitioner’s second contention. The facts show that petitioner (a stockholder) exchanged “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” in three corporations (Great Western, San Joaquin, and Midland) parties to a reorganization, for stock in another corporation (Pacific) a party to the reorganization; that the exchange was made in pursuance of a plan of reorganization; and that the entire transaction falls within the spirit of the statute prohibiting recognition of gain or loss. The petitioner’s situation as to this contention is comparable to the position of Watts and the other stockholders in the Watts case, supra, and the facts seem to bring the case squarely within that decision.

There is one other question to consider before passing this issue, e., the cancellation of indebtedness by petitioner before Pacific would accept the capital stock of Great Western and San Joaquin. Assuming, but not deciding, that such cancellation was the equivalent of cash, it would not alter the situation under the Supreme Court’s opinions. In the Minnesota Tea Co., John A. Nelson Co., and G. & K. Manufacturing Co. cases, supra, cash formed a part of the consideration for the exchange but, nevertheless, the Supreme Court held in the first two cases that the transferor acquired a substantial and continuing interest in the affairs of the transferee, and remanded the G. & K. Manufacturing Co. case for a determination of whether substantially dll the properties were acquired by the exchange. These decisions are decisive of this question even if our assumption was an actuality.

The remaining issue is whether the accrual of $286,152.83 interest on the indebtedness of Great Western and San Joaquin to petitioner, amounting to the sum of $19,180,776.16, is income. Kespondent’s contention that this sum should be included in petitioner’s income rests primarily on the accrual entries on petitioner’s books of account. Book entries, however, must give way before the real facts. Doyle v. Mitchell, 247 U. S. 179, 187. The stipulated facts are that this $286,152.83 was accrued upon the assumption that petitioner was entitled thereto under the agreement of March 29,1930. That agreement, however, specifically provided for cancellation of the $19,180,-776.76 floating indebtedness as of January 31, 1930, and a closing of the agreement on May 1, 1930. Although there was no provision authorizing petitioner to accrue interest on the indebtedness after the effective date of cancellation, nevertheless, petitioner prepared a statement for closing with Pacific upon the assumption that it was entitled to interest until June 12, 1930, the actual date of closing. Pacific objected to such closing, and claimed that no interest could accrue on a canceled obligation. This controversy was “adjusted and settled” by Pacific consenting to petitioner’s charging interest from May 1 to June 12, 1930, since the closing had been extended at Pacific’s request, but denying petitioner’s claim to interest from January 31 to May 1, 1930. Petitioner, therefore, received no interest for the period January 31 to May 1, 1930, which was exactly in accord with the terms of the agreement of March 29, 1930. . Petitioner’s letter to its subsidiaries regarding the inclusion of this accrued interest in their paid-in surplus can not alter the fact that the accruals were erroneous. Obviously, no income was realized by petitioner from these accruals and, therefore, upon this issue, we hold against the respondent. Stern-Slegman-Prins Co. v. Commissioner, 79 Fed. (2d) 289, affirming an unpublished memorandum opinion of the Board.

Our decision on the first issue makes it unnecessary to go into the alternative issue relating to the value of a block of 1,825,000 shares of Pacific’s common stock on June 12, 1930, and all facts of record with respect thereto have been omitted.

Eeviewed by the Board.

Decision will he entered under Rule 50.

       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 he recognized, except as hereinafter provided in this section.
      (b) Exchanges solely in hind.— * * *
      ⅞ * * * * ⅛ *
      (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.
      (4) Same — gain of corporation. — No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities 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 * * *
      (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.


source: Caselaw Access Project

author: TURNER:

license: Public Domain

text:
    First National Bank and Robert R. Ellis, Jr., Executors, Estate of R. R. Ellis, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67967.
    Promulgated May 27, 1936.

      F. E.t Hagler, Esq., for the petitioners.

      Nathan Gammon, Esq., for the respondent.
   OPINION.

TURNER:

It is the position of the petitioners that the payment of $50,000 by Van Vleet to Ellis, the surrender by Ellis of 7,880.91 shares of Van Vleet-Ellis Corporation stock, the receipt by him of $253,166.75, the transfer by Van Vleet-Ellis Corporation of its real estate to the Chemical Realty Co. and the distribution of stock of the latter corporation, and finally the transfer of the remaining assets to McKesson & Bobbins, Inc., for stock and cash and the distribution in liquidation to the stockholders of the Van Vleet-Ellis Corporation were steps in a reorganization or merger of the Van Vleet-Ellis Corporation with McKesson & Robbins, Inc., consummated on January 31, 1930, and that there was no closed nor completed transaction during the year 1929 from which Ellis realized taxable gain. On the other hand, it is the contention of the respondent that the payment of the $50,000 to Ellis by Van Vleet, the disposition of 7,880.91 shares of Van Vleet-Ellis Corporation stock by Ellis, and the organization of the Chemical Realty Co. and its acquisition of real estate from the Van Vleet-Ellis Corporation were completed transactions in 1929, distinct and separate from the transaction whereby McKesson & Robbins, Inc., acquired all other assets of the Van Vleet-Ellis Corporation and that Ellis realized taxable gain therefrom in 1929. In the alternative, it is the contention of the respondent that if the transfers referred to were but steps in a single transaction, the transaction was completed on September 16, 1929, and any gain derived therefrom by Ellis was realized and is taxable to him in 1929.

In First Seattle Dexter Horton National Bank v. Commissioner, 77 Fed. (2d) 45, the general rule was stated from 13 C. J. 561, § 525, to the effect that “a contract is entire when by its terms, nature and purpose it contemplates and intends that each and all of its parts and the consideration shall be common to the other and interdependent.” Considering the agreement and the supporting facts in the instant case in the light of the language just quoted, there is no doubt in our minds that the disposition by Ellis of his 15,905 shares of stock in Van Vleet-Ellis Corporation was one transaction rather than two. From the time the option was given on May 6,1929, there was never any thought in the minds of the parties but that if the plan went through it should go through in toto and each and every stockholder of the Van Vleet-Ellis Corporation would surrender his entire holdings therein for cash, stock in the realty company, and stock in McKesson <& Robbins, Inc. There was no thought or intention on the part of Ellis, Van Vleet, the Van Vleet-Ellis Corporation, or McKesson & Robbins, Inc., that Ellis or any other stockholder would dispose of or surrender any portion of their holdings except as a step in the disposition of their entire holdings and the complete liquidation of Van Vleet-Ellis Corporation.

The conditions of management and ownership of the Van Vleet-Ellis Corporation were such that it would not be reasonable to assume that a transaction would have been entered into by either Ellis or Van Vleet that did not provide for the disposition of the entire holdings of one or both. There was never any thought or agreement for partial liquidation. Cf. Commissioner v. Blum, 75 Fed. (2d) 699, affirming 29 B. T. A. 580. It is true one step in-the transaction took the form of a surrender by Ellis of 7,880.91 shares of his stock prior to the final transfer of assets to McKesson. The evidence indicates, however, that the negotiations were originally based on an understanding that McKesson- was to acquire %he drug business and assets, except real estate, of Van Vleet-Ellis Corporation and that the stockholders of the Van Vleet-Ellis Corporation were to receive cash and McKesson stock at a rate equal to the book value of their stock in the Van Vleet-Ellis Corporation. The evidence also shows that, by reason of the failure on the part of McKesson to assume the employment contract of Ellis with the Van Vleet-Ellis Corporation and as an inducement to him, it had been agreed that he was to receive a substantial part of the consideration for his stock in cash. It is obvious that the 7,880.91 shares set off against the $250,000 in cash was arrived at, not because of an independent and original agreement between Ellis and the Van Vleet-Ellis Corporation for the surrender and redemption of that particular number of shares or only a part of his shares, but because that number of shares at the rate agreed upon for the surrender of all the Van Vleet-Ellis Corporation stock in the transaction as a whole equaled $250,000, which amount it had been agreed Ellis was to receive in cash.

Considering all the facts and circumstances, we think there is no doubt that Ellis disposed of his 15,905 shares of Van Vleet-Ellis Corporation stock as a unit and the gain or loss to him must be computed on the basis of one transaction. First Seattle Dexter Horton National Bank v. Commissioner, supra; West Texas Refining & Development Co. v. Commissioner, 68 Fed. (2d) 77; Omaha Coca-Cola Bottling Co., 26 B. T. A. 1128; Fred L. Dickey et al., Executors, 32 B. T. A. 1283; cf. Bruce v. Helvering, 76 Fed. (2d) 442.

We are further of the opinion that the alternative contention of the respondent is not sustained by the facts. The plan outlined in the agreement fixed the time for its final consummation as not earlier than January 15 nor later than January 31, 1930. It also appears from the agreement that liability on the part of McKesson was subject to certain conditions precedent and that these conditions were met in January 1930 and at the time of closing, when McKesson paid to the depositary the stock and cash required of it under the contract.

The facts do show, however, that Ellis did receive a substantial portion of the consideration for his stock during the year 1929. It is also apparent that the consideration paid over in 1929 was received by Ellis as his own, with full confidence that all conditions would be met and the transaction would be completed as provided in the agreement. He is accordingly taxable in 1929 if and to the extent that the consideration received in 1929 exceeded $576,116.33, the basis for his stock. The facts show that he received in that year $253,166.75 in cash and 15,905 shares of stock in the Chemical Kealty Co. It is the Commissioner’s contention that the Chemical Kealty Co. stock had a fair market value of $19.33 per share. Even though this value be conceded, it is apparent that the cash, plus the stock at that value, did not equal the cost to Ellis of his stock in the Yan Vleet-Ellis Corporation, and Ellis realized no taxable gain in 1929 from the disposition of the stock.

Having determined that Ellis realized no gain in 1929 in connection with the surrender of his stock in the Van Vleet-Ellis Corporation and the liquidation of that company, it is not necessary to consider and determine whether or not the acquisition by McKesson of the business and a portion of the assets of the Van Vleet-Ellis Corporation, consummated in 1930, constituted a reorganization within the meaning of the statute, since the reorganization provisions have to do only with the recognition and not the realization of gain. We do not have the year 1930 before us.

With reference to the item of $49,241.67 realized by Ellis on the note paid to him by Van Vleet under date of September 21, 1929, the respondent is sustained. This payment was made by Van Vleet individually for himself and other members of his family who were stockholders of the Van Vleet-Ellis Corporation. It was no part of the agreement between the Van Vleet-Ellis Corporation and McKesson & Robbins, Inc. It represented the price that Van Vleet and other stockholders were willing to pay to Ellis in order to obtain a favorable vote from him with reference to the McKesson transaction, and, while it is true that the agreement was occasioned by the option granted to McKesson by the Van Vleet-Ellis Corporation, neither of these corporations was a party to the agreement, nor obligated by it. It was a- side transaction between two of the stockholders of the Van Vleet-Ellis Corporation. While it is true that the language of the agreement of May 16, 1929, supports the contention that the money was not to be paid until the closing by the two corporations, the intent of the language was the subject matter of a dispute between the parties at the time Ellis received-the sum of $253,166.75 and submitted his resignation as chairman of the board of directors. It was his contention that the money was then due and owing, and after some discussion between the parties and their counsel the note for $50,000, payable on January 31, 1930, was executed by Van Vleet and delivered to Ellis and a new agreement setting forth the purposes for the payment was attached to the note. The note was an ordinary note payable on a given date in the future and the language of the new agreement indicates that the note was then and there given in satisfaction of the obligation of Van Vleet and for the performance of acts done and to be done by Ellis. It was income to Ellis when received. Alworth-Washburn Co. v. Helvering, 67 Fed. (2d) 694.

Reviewed by the Board.

Decision will be entered under Rule 50.


author:
Van Fossan:
      McMahon,

text:
    Lawrence G. Phipps, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78915.
    Promulgated June 2, 1936.

      David A. Reed, Esq., and W. A. Seifert, Esq., for the petitioner.

      E. G. Smith, Esq., for the respondent.
   OPINION.

Van Fossan:

Respondent determined a deficiency of $4,108.17 in gift taxes due from petitioner for the calendar year 1933. The petitioner alleges that:

The Commissioner has erred in including in the total taxable gifts for the calendar year 1933 $160,000 par value Liberty Loan First 3½ per cent Bonds, due June 15, 1947, representing gifts from petitioner to members of his family during 1933. Said bonds contained the express provision that they are free of all taxation except state and federal estate and inheritance taxes, and under the terms of that provision, the assessment of a gift tax upon the transfer of said bonds is erroneous and void.

It is established by the pleadings that on October 3, 1933, petitioner made a gift to his son, Allen R. Phipps, of $100,000 par value of First Liberty Loan 3½ percent bonds due June 15, 1947, and on December 25, 1933, made six gifts of $10,000 each par value of the same issue of bonds to other members of his family.

The following provision appears on the face of the bonds:

* * * The principal and interest of this bond shall be payable in United States gold coin of the present standard of value and shall be exempt, both as to principal and interest, from all taxation, except estate or inheritance taxes, imposed by authority of the United States, or its possessions, or by any State or local taxing authority. * * *

The above provision is quoted from the authorizing statute (40 Stat. 35, ch. 4).

Section 501 of the Revenue Act of 1932 provides:

(a) For the calendar year 1932 and each calendar year thereafter a tax, computed as provided in section 502, shall be imposed upon the transfer during such calendar year by any individual, resident or nonresident, of property by gift.
(b) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; * * *

Petitioner relies chiefly on the maxim “Expressio unius est exclmio alterius” and argues that had Congress intended to permit the imposition of gift taxes where Liberty bonds were the subject of the gift, it would have done so expressly as it did as to other obligations in the “Federal Home Loan Bank Act” (47 Stat. 725, 735, ch. 522) which exempts obligations of the bank “from all taxation (except surtaxes, estate, inheritance, and gift taxes) * * *” and as it did in the act creating the “Reconstruction Finance Corporation” (47 Stat. 5, ch. 8) where language identical to that just quoted was used.

The most obvious answer to petitioner’s petition is that a gift tax is not a tax on “the principal and interest of this bond” but is an excise on the transfer of the property to another. Knowlton v. Moore, 178 U. S. 41; New York Trust Co. v. Eisner, 256 U. S. 345; Bromley v. McCaughn, 280 U. S. 124. Consequent on the reasoning of Knowlton v. Moore, supra, is the holding in Plummer v. Coler, 178 U. S. 115, that a legacy of United States bonds is not exempted from the inheritance tax laws of a state by the provisions of the Act of Congress of July 14, 1870, and the declaration on the face of the bonds issued thereunder exempting them from taxation in any form by or under state authority, for the reason that the inheritance tax is not imposed on the bonds but on the privilege of acquiring property by will or inheritance, which is a right and privilege created and regulated by the state.

Following the same principles, we held in Edgar A. Igleheart, Executor, 28 B. T. A. 888; affd., 77 Fed. (2d) 704, that:

The estate tax being a transfer or transmission tax and not a tax on property, the value of Federal Farm Loan bonds issued under the provisions of section 26 of the Federal Farm Loan Act approved July 17, 1916, should be included in a decedent’s gross estate for Federal estate tax purposes, notwithstanding that by the provisions of the act such bonds and the income derived therefrom are exempted from “Federal, State, municipal and local taxation.”

The logic of these cases -leads irresistibly to a conclusion adverse to petitioner’s contention. A tax under the provisions of section 501 is an excise on the privilege of making a gift and not a tax on the property given. The taxes referred to in the bond and the taxes provided by section 501 are basically dissimilar.

In view of the fact that the basic nature of the gift tax controls our decision, we do not deem it necessary to discuss seriatim the’ several arguments advanced in support of petitioner’s position. The legal principles on which we base our holding are so well established that, in our judgment, merely to state them is to indicate their applicability. See Regulations 79, arts. 1, 2.

Reviewed by the Board.

Decision will be entered for the respondent.

McMahon,

dissenting: I dissent from the holding of the majority that the gifts of First Liberty Loan bonds and accrued interest thereon are taxable under section 501 of the Revenue Act of 1932.

On the face of each bond is language taken from the authorizing statute as follows: “* * * The principal and interest of this bond * * * shall be exempt, both as to principal and interest, from all taxation, except estate and inheritance taxes, imposed by authority of the United States, or its possessions, or by any state or local taxing authority. * * *” (Emphasis supplied.)

This is a mandatory exemption statute, expressly incorporated into the bonds in question. Its language is ordinary, simple and plain, as it should be, for the benefit of prospective purchasers of these bonds and others. It provides that “The principal and interest of this bond * * * shall be exempt * * * from all taxation.” This is broad, inclusive, comprehensive language. It would be difficult, if not impossible, to find English that is more so. These bonds are, in express language, made “exempt * * * from all taxation”, “both as to principal and interest.” The words “as to”, as here used, have broad, inclusive, comprehensive significance. They make the bonds “exempt from all taxation” touching either principal or interest or both, except as their “taxation” is expressly permitted in other language of the statute and bonds. There are only two of such express exceptions from this provision making them “exempt * * * from all taxation.” They are the express exceptions imposing “estate or inheritance taxes” “both as to principal and interest”, as specified in the statute and in the bonds. These express exceptions were necessary to permit “estate or inheritance taxes.” Without such exceptions neither “estate” nor “inheritance taxes” touching the principal or interest could be imposed. If only “estate” taxes were expressly excepted from the exemption then they alone, and not “inheritance taxes”, could be imposed. And by a parity of reasoning, since gift taxes were not expressly excepted, they likewise can not be imposed in view of the broad exemption “from all taxation.” Obviously, if Congress had intended to add other exceptions to the exemption, in addition to' “estate or inheritance taxes”, it would, at the same time, have expressed its intention to do so. In ány event, it did not except gift taxes from the exemption. It is apparent from the omission of Congress to expressly except gift taxes from the exemption that Congress intended that they should be included in the exemption. To hold otherwise is, in effect, to exercise the power of legislation which is reserved, under the Federal Constitution, to Congress alone, by amending the words of the exemption provision ' “except estate or inheritance taxes” by inserting therein immediately before the word “taxes” the words “or gift.” We have not authority, under the Constitution or otherwise, to do this. Even courts are not at liberty to ingraft upon a statute exceptions other than those expressed. Kendall v. United States, 107 U. S. 123.

The majority opinion correctly points out that the gift tax imposed by section 501 of the Revenue Act of 1932 is an excise tax on the transfer of property; and also correctly recognizes, and it can not be successfully challenged, that estate and inheritance taxes are likewise excise taxes upon the transfer of property. Thus the gift tax imposed by section 501 of the Revenue Act of 1932 is in the same category as inheritance or estate taxes in that all of them are excise taxes on the transfer of property. Since Congress in the statute authorizing the issuance of the Liberty bonds deemed it necessary to except Federal and state estate and inheritance taxes, which, like gift taxes, are excise taxes, from the exemption provided, it is clear that Congress considered that such excise taxes, as well as gift or other excise taxes, would have been prohibited under the general exemption provision had exceptions not been made. It is well settled that the exception of a particular thing from general words of a statute proves that, in the opinion of the lawmakers, the thing excepted would be within the general clause had the exception not been made. Brown v. Maryland, 12 Wheat. 419; and Arnold Constable & Co. v. United States, 147 U. S. 494. It is also well settled that an exception in a statute amounts to an affirmation of the application of its general provisions to all other cases not excepted. Bend v. Hoyle, 13 Pet. 263, and Kendall v. United States, supra. These cases well illustrate the maxim of expression unius est exelusio alte-rius, which is a maxim of universal application in the construction of statutes. United States v. De La Maza Arrendondo, 6 Pet. 691. Under the above authorities it is clear that the exemption “from all taxation” contained in the authorizing statute and in the bonds includes gift taxes, since gift taxes are not made the subject of an exception as are estate and inheritance taxes — other excise taxes.

There is another well accepted rule of general application to the effect that taxing laws are to be interpreted liberally in favor of the taxpayer. Bowers v. New York & A. Lighterage Co., 273 U. S. 346; and Burnet v. Niagara Falls Brewing Co., 282 U. S. 648; and it is also well settled that exemptions in the Federal income tax laws, when begotten from motives of public policy, are not to be narrowly construed. Helvering v. Bliss, 293 U. S. 144. There can be no question that the tax exemption provided for as to the Liberty bonds in question was provided from motives of public policy. The raising of funds for the prosecution of the World War was a matter of the most vital public concern; and necessary inducements to the lending public were held out. Exemption “from all taxation” excepting only “estate or inheritance taxes” was a major inducement.

Doubtless,'it never occurred to any of the purchasers of the type of bond in question that the exceptions to the ’ exemption extended beyond “estate or inheritance taxes.” It has been held that the words of a statute are to be taken in the sense in which they will be understood by that public in which they are to take effect. United States v. Isham, 17 Wall. 496. Ordinary laymen, such as those who undoubtedly formed a large part of the public who bought Liberty bonds of the type in question, did not have knowledge of the technical differences between an excise tax, such as a gift tax, and other types of tax, direct or indirect, and were fully justified in concluding that the words “exempt * ⅝ * from all taxation” meant exactly what they said literally; and they undoubtedly so concluded. Too, in a sense a gift tax is imposed upon the principal and accrued interest of all bonds, since it is elementary that such tax is measured by the value of the bonds, including the principal and accrued interest thereof. Too, as heretofore pointed out, the exemption is “as to” the “taxation” of “both principal and interest?

As stated, the provision for exemption from taxation of gifts of the Liberty bonds in question and the accrued interest thereon was not only definitely prescribed by the Congress, but was inserted in the bonds themselves. It thus created a binding contract obligation upon the Federal Government. Perry v. United States, 294 U. S. 330. In this case, in which the Supreme Court of the United States had under consideration the provision in the Fourth Liberty Loan bonds that the principal and interest should be payable in United States gold coin “of the present standard of value”, the Court stated in part:

⅜ ⅛ * There is a clear distinction between tbe power of tlie Congress to control or interdict the contracts of private parties when they interfere with the exercise of its constitutional authority, and the power of the Congress to alter or repudiate the substance of its own engagements when it has borrowed money under the authority which the Constitution confers. In authorizing the Congress to borrow money, the Constitution empowers the Congress to fix the amount to be borrowed and the terms of payment. By virtue of the power to borrow money “on the credit of the United States,” the Congress is authorized to pledge that credit as an assurance of payment as stipulated,— as the highest assurance the Government can give, its plighted faith. To say that the Congress may withdraw or ignore that pledge, is to assume that the Constitution contemplates a vain promise, a pledge having no other sanction than the pleasure and convenience of the pledgor. This court has given no sanction to such a conception of the obligations of our Government.
⅜ * ⅜ * ⅜ * *
* * * The binding quality of the promise of the United States is of the essence of the credit which is so pledged. Having this power to authorize the issue of definite obligations for the payment of money borrowed, the Congress has not been vested with authority to alter or destroy those obligations. The fact that the United States may not he sued without its consent is a matter of procedure which does not affect the legal and binding character of its contracts. * * *
We conclude that the Joint Resolution of June 5, 1933, in so far as it attempted to override the obligation created by the bond in suit, went beyond the congressional power.

Even if section 501 of the Revenue Act of 1932 were ambiguous when construed in the light of the authorizing statute, and, hence, it were not clear that Congress intended to exempt the gifts of the Liberty bonds and the accrued interest in question from gift taxes, which is definitely not conceded, the section should be construed as providing for the exemption in order to sustain the constitutionality of such section. Statutes must be construed, if fairly possible, so as to avoid the conclusion of unconstitutionality. Porter v. Investors Syndicate, 286 U. S. 461. To hold, as is held in the majority opinion, that section 501 imposes a tax upon the gifts of the Liberty bonds and accrued interest thereon in question herein, constitutes an alteration, repudiation or destruction of the obligations of the United States under the bonds. This, as pointed out in Perry v. United States, supra, is beyond the Congressional power conferred by the Constitution. It is to be noted that in Perry v. United States, supra, the Supreme Court had under consideration a provision as to the payment of the bond in United States gold coin “of the present standard of value”, language identical with that contained in the bonds involved in the instant proceeding and found in the same paragraph with the provision for tax exemption, both provisions being included in the contract obligation of the Federal Government and being of major importance. It may be added that we are here confronted with no question of “procedure” such as was presented there. Here the petitioner is following a “procedure” and resorting to a remedy expressly afforded by statute, in search of relief.

In Treasury Department Circular No. 78, issued May 14, 1917, for the purpose of inducing purchases of these very bonds in question, it is correctly stated as to them that “the bonds will be exempt, both as to principal and interest, from all taxation, except estate or inheritance taxes imposed by authority of the U. S. or its possessions, or by any State or local taxing authorities.” (Emphasis supplied.) It is well settled that the current, practical interpretation of a statute placed thereon by officials charged with its administration will not be disturbed except for weighty reasons. Brewster v. Gage, 280 U. S. 327. No such weighty reasons exist in the instant proceeding. As pointed out herein there are weighty reasons to the contrary. Subsequent developments, imaginary or real, unexpected or anticipated, can not be permitted to be determinative in a situation such as we have here presented, upon grounds of expediency or otherwise. See Perry v. United States, supra.

In the annual report of the Secretary of the Treasury on the state of the finances for the fiscal year ended June 30,1917, is tne following statement with regard to this issue of bonds: “The bonds are exempt, both as to principal and interest, from all taxation, except estate or inheritance taxes imposed by authority of the United States or its possessions or by any state or local taxable [taxing] authorities.” (Emphasis supplied.) This is another practical interpretation of the Treasury Department which, likewise, should not be disturbed.

Respondent contends that, since the gift tax was not in force at the time of the authorization and the issuance of the Liberty bonds, Congress could not have intended to exempt gifts of Liberty bonds from any gift tax enacted subsequent to the issuance of the bonds in question. However, Congress, in stating that the exemption should be “from all taxation”, undoubtedly intended and meant to exempt these bonds from gift and other taxes subsequently imposed and to convey to the buying public that the exemption should apply to taxes then in force or those which might thereafter be enacted. Such interpretation was correctly placed upon the exemption statute in question by the Treasury Department in Department Circular No. 300, dated July 31, 1923, captioned “United States Treasury Department Regulations with Respect to United States Bonds and Notes.” That circular contains the following language: “Fully tax-exempt obligations. — [including the bonds in question here] * * ⅜ the 3½ per cent bonds of the First Liberty Loan, are exempt * * * from all taxation, except estate or inheritance taxes, now or hereafter imposed * * ⅜.” (Emphasis supplied.) This is another practical interpretation which, likewise, should not be disturbed.

Article 2 of Regulations 79, relating to the gift tax under the Revenue Act of 1932, as amended by Treasury Decision 4550, approved May 21, 1935, C. B. XIY-1, p. 381, provides in part as follows:

* * * various statutory provisions, which exempt bonds, notes, bills and certificates of indebtedness of the Federal Government or its agencies and the interest thereon from taxation, are not applicable to the gift tax since this tax is an excise tax on the transfer, and is not a tax on the subject of the gift. * * *

To the extent that there is anything in such provision of the regulations calculated to impose a tax upon the gift of the bonds in question in the instant proceeding, it is contrary to the earlier correct current departmental constructions of the statute as heretofore pointed out and contrary to the express provisions of the special statute authorizing the issuance of the bonds and hence void, and it should not be applied in the instant proceeding. The Treasury Department can not, by its regulations, either limit the provisions of a statute or define the boundaries of their constitutional application. Helvering v. Powers, 293 U. S. 214.

The cases of Plummer v. Coler, 178 U. S. 115, and Edgar A. Igleheart et al., Executors, 28 B. T. A. 888; aff'd., 77 Fed. (2d) 704, relied upon in the majority opinion, Bankers Trust Co. et al., Executors, 83 B. T. A. 746, and Hubert de Stuers, 26 B. T. A. 201, and similar cases are distinguishable, since they involved different exemption statutes, which do not provide any exceptions to the exemption which would give rise to the application of the maxim of expressio v/nius est exclusio alterms. Furthermore, Plummer v. Coler, supra, involved the question of the right of a subdivision of a state to tax an estate containing Federal bonds which Congress had declared exempt from taxation by both the Federal and the local governments. That question is not involved here. Even if the Federal Government may not render the transfer of its obligations exempt from local taxation, it may render the transfer thereof, as well as the transfer of the accrued interest thereon, exempt from the Federal gift tax, as it did in the case of the issue of bonds with which we are concerned in the instant proceeding.

The case of Central Hanover Bank & Trust Co. v. United States, 14 Fed. Supp. 541, in which it was held that the gain or profit derived upon the sale of Liberty bonds of the same issue as those here involved is subject to the Federal income tax, is distinguishable. There the tax sustained by the court is an income tax imposed upon, based on, and measured by the amount of the profit. It is in reality a profits tax. It is not imposed upon, based on, or measured by the “principal and interest” of the bonds. It is not a tax “as to” such “principal and interest.” The gift tax involved in the instant proceeding is, in all of these respects, different from the tax there involved.

There is no sound escape from the conclusions that Congress did intend to exempt the bonds in question here “both ais to principal and interest” from gift taxes or similar excise taxes, other than estate and inheritance taxes which were expressly excepted from the exemption; and these bonds and accrued interest thereon are not taxable under section 501 of the Revenue Act of 1932.


author: Sternhagen:

text:
    Du Bois Young, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78345.
    Promulgated June 2, 1936.

      Raymond, H. Berry, Esq., and. Arthur L. Evely, Esq., for the petitioner.

      Charles H. Curl, Esq., for the respondent.
   OPINION.

Sternhagen:

The respondent held that when the petitioner turned in the 9,000 Trust Shares of America, which he had held more than two years, and received the aliquot portion of the assets consisting of various corporate shares which had been part of the composite fund of the trust, he did not sustain a loss, but only reduced his existing right to such shares to possession. The defense of this determination relies largely upon the fact that among the incidents of ownership of the trust shares was the unqualified right to exchange them for the proportionate trust assets. The petitioner contends that the trust shares were essentially different property from the corporate assets which gave them value, and that by turning them in for assets in the fund he exchanged property at a loss which must be recognized as deductible under the Eevenue Act of 1932, section 112 (a). This seems to us to be inescapable, Allen v. Commissioner, 49 Fed. (2d) 716; certiorari denied, 284 U. S. 655; Bancker v. Commissioner, 76 Fed. (2d) 1; certiorari denied, 296 U. S. 603; Prescott v. Commissioner, 76 Fed. (2d) 3. We are not persuaded by G. C. M. 10235, XT-1 C. B. 68 (1932). Although the organization called Trust Shares of America appears to be a trust, it is in our opinion not essential to the present decision to call it by a definitive name. It is sufficient if it be separate from the petitioner so that his ownership of an interest in the fund is different from the ownership by the organization of the fund itself. The evidence, as shown by the findings, clearly indicates such a difference in ownership as would insulate the petitioner from direct taxation upon the gains and income of the organization, cf. Wild v. Commissioner, 62 Fed. (2d) 777, and would require that be be taxed if the value of the assets received from the organization had exceeded the cost of his shares, Allen v. Commissioner, supra. He can not, therefore, be denied the deduction when by the same reasoning the exchange results in a loss.

The respondent has disallowed any deduction in respect of the sale by petitioner through his broker of shares subsequently acquired by his wife under the circumstances set forth in the findings. The respondent argues that the sale was a sham which left the petitioner as much the owner of the shares as he had been before it was attempted. In our opinion, however, the evidence establishes a sale, with the resulting loss. While it has frequently been said that transactions between a husband and wife are subject to more careful scrutiny, P. B. Fouke, 2 B. T. A. 219; James L. Robertson, 20 B. T. A. 112; Joseph E. Uihlein, 30 B. T. A. 399 (on review C. C. A., 7th Cir.) ; than transactions in the ordinary course of business, and in some instances alleged sales were refused recognition because in all the circumstances it could not be found that title had passed or the alleged loss had been sustained, Shoenberg v. Commissioner, 77 Fed. (2d) 446; certiorari denied, 296 U. S. 586; Lulu Tirrill Coombs, 30 B. T. A. 35; Joseph Blumenthal, 30 B. T. A. 125; W. E. Brochon, 30 B. T. A. 404; D. A. Belden, 30 B. T. A. 601, there have been, on the other hand, numerous cases where intrafamily transactions were held, upon the evidence, to require full recognition, Merritt J. Corbett, 16 B. T. A. 1231; Benjamin T. Burton, 28 B. T. A. 1242; Joseph E. Uihlein, supra; Charles F. Fawsett, 31 B. T. A. 139; Frank M. Arguimbau, 31 B. T. A. 604; Edmund S. Twining, 32 B. T. A 600 (on review C. C. A., 2d Cir.) ; Thomas W. Behan, 32 B. T. A. 1088 (on review, C. C. A., 2d Cir.). The evidence in this proceeding, in our opinion, establishes the sale by the petitioner of the shares, and the deduction of the resulting loss can not properly be denied. It matters not that the sale was arranged by petitioner in order that he might realize as a loss the diminution in value for tax purposes, nor does it matter that he was able to persuade his wife to purchase similar shares because of his belief that they would “come back.” The fact that he thought it necessary to procure Lyons to act as an intermediate owner, with the assurance to Lyons that Mrs. Young would purchase the shares from him so that Lyons would not be expected to hold them, does not destroy the genuineness of the petitioner’s complete disposition. The respondent’s argument proceeds upon the erroneous conception that a wife’s ownership may be regarded as dominion or control by the husband. There is nothing in the present record to support this view. Mrs. Young is shown to have substantial wealth of her own, far more than was necessary to enable her to buy these shares. Her property was kept and accounted for separately from that of her husband. Some of the shares here involved were recorded in her name and some continued in the name of Lyons with his blank endorsement. All of them were kept among her separate properties, and some of them have since been sold by her. None of the proceeds or of the shares have been acquired subsequently by the petitioner, and there is no evidence to support the respondent’s suggestion that they were used by petitioner as collateral security for his personal loans. Under these circumstances, we have found that petitioner sold the shares in 1932 and thereby sustained the loss which he claims, and we conclude as a matter of law that he is entitled to the deduction of the amount of his loss.

3. The fraud penalty was predicated entirely upon the respondent’s view that the foregoing sales of shares were sham, that the petitioner sustained no loss thereby, that his return was fraudulent, and that, since the deficiency was due in part to fraud with intent to evade tax, the statutory penalty of 50 percent should be assessed. In view of our finding that the deduction was proper, the determination of fraud necessarily falls, and the penalty may not be assessed.

4. The remaining items have been amicably adjusted by stipulation and do not require decision.

Reviewed by the Board.

Judgment will be entered under Bule 50.

       SEC. 112. RECOGNITION OP GAIN OR LOSS.
      (a) Gbotbal 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.


text:
    Ned R. Harman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79509.
    Promulgated June 2, 1936.

      Ned R. Harman pro se.

      James H. Teatman, Esq., for the respondent.
   OPINION.

Sternhagen:

The Commissioner regarded the $4,200 salary as exempt, but included the $5,848.30 transcript charges in the petitioner’s gross income and allowed him the deduction of the expenses paid in connection 'with it. The petitioner contends the entire amount is constitutionally immune from Federal tax. He regards himself as wholly an employee of the state, and his income of both classes as equally derived for the performance of his official statutory function, irrespective of the fact that the fees were not received from the state, but from others.

The question has never been presented for decision, although in Victor G. Marquissee, 11 B. T. A. 334; affd., sub nom Lewis v. Commissioner, 47 Fed. (2d) 32, such fees of official state court reporters were tacitly recognized as properly taxable. This, in our opinion, is the correct view. By statute in New York, the petitioner, if called upon by a party for a copy of the transcript, is required to furnish it at a charge of not more than 10 cents per folio, unless by voluntary agreement a higher charge is fixed; but such charges can not be regarded strictly as compensation derived from the state or for services performed for the state. The fact that they are regulated by the state makes them no less the subject of private arrangement, even though the petitioner is required, upon proper demand, to supply the transcripts. In this respect, he is in no different situation from carriers or innkeepers, who are under control of the state, are required to perform services and supply materials upon demand, and are limited in the charges which they may make therefor. Whether in fact to subject this income to Federal tax operates to the detriment of the state, can not be found from the evidence in this record, cf. Bew v. United States, 35 Fed. (2d) 977, nor can it be said that such inference is a priori so clear that it may be taken as a matter of law, cf. Miller v. McCaughn, 27 Fed. (2d) 128. The Commissioner’s determination is sustained.

Judgment will be entered for the respondent.


author: Murdook: Smith,

text:
    Joseph W. Powell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73763.
    Promulgated June 3, 1936.

      G. J. McGuire, Esq., and W. G. Magatham, Esq., for the petitioner.

      T. F. Callahan, Esq., for the respondent.
   OPINION.

Murdook:

The petitioner lived near and conducted his principal business activities in Boston during 1930. He also spent about three days of each week in New York, where he managed two corporations and was also active in trying to arrange a consolidation involving one of the companies. He received a salary of $20,833.30 from one of the corporations during 1930 and he also received a small amount for his services to the other. He attended directors’ meetings in New York and elsewhere during 1930. Most of the expenditures in controversy were made for railroad fare to and from New York and for board, lodging, and other living expenses while the petitioner was in New York.

The Commissioner concedes that the petitioner expended $9,442.38 in traveling, for food and lodging, and for other necessary purposes while away from home. His whole defense, as stated at the trial, is that the expenditures “were not in connection with the petitioner’s trade or business” and, therefore,' were not deductible as ordinary and necessary expenses of carrying on any business. His point seems to be that the petitioner has not shown that he had any recognized business to which these expenses could be related. However, the evidence shows that the petitioner was earning salaries and other income for services performed in New York while his home, and principal place of business, was in Boston. The Board has allowed similar deductions under similar circumstances and on authority of its earlier decisions the present deduction is proper. D. C. Jackling, 9 B. T. A. 312; Chester D. Greisemer, 10 B. T. A. 386; Walter F. Brown, 13 B. T. A. 832. Cf. Mort L. Bixler, 5 B. T. A. 1181; Fred Dewnett, 7 B. T. A. 1173; Charles E. Duncan, 17 B. T. A. 1088; aff'd., 47 Fed. (2d) 1082 (without opinion); Elmore L. Potter, 18 B. T. A. 549.

The Commissioner refuses to allow deductions for the alleged losses on the stocks and notes. He says, among other things, that the sales were not genuine, the dispositions were not final and complete, the petitioner never intended to permanently part with title to and dominion and control over the property, he never did effectively part with the property, and, not having completely and finally disposed of the property, he sustained' no real loss. A taxpayer who makes a final and complete disposition of his property for less than cost has sustained a loss and is entitled to deduct it. This is true'even though the buyer is closely related to or associated with the seller and the sale is made to realize a loss for income tax purposes. But, where one taxpayer sells and another, whose interests are closely allied to those of the seller, purchases identical property, even though both act through brokers, the transactions need careful scrutiny to determine whether the property was really disposed of without strings by which it might later be controlled, or, perhaps, reacquired.

It is fitting and proper to subject the petitioner’s transactions to careful scrutiny to determine the real effect of what he did. The beneficiaries of the trust were his wife, his son and himself. The interests of the trust were closely allied with his own. He had the power within himself to reacquire property from the trust identical with that which he sold. He did not have to have any agreement or option with any third party to repurchase. If he made the first transfer with an intention to reacquire after the 30-day period provided in section 118 of the Bevenue Act of 1928 and carried out that intent, it would appear that the property was never disposed of unqualifiedly. The only evidence in the record of his intention is his testimony, that he did not intend to reacquire any of the property, and his acts. Sometimes the acts of an interested witness speak louder than his words. Such is the case here.

The petitioner and the trust were separate taxable entities. The petitioner did not sell any of his stock directly to the trust. Transactions between them would have their usual legal significance for income tax purposes. Cf. Lee B. Foster, 22 B. T. A. 717. The sales were made at market prices. If he had never reacquired any of the property directly or indirectly from the trust he would be in no difficulty. Cf. William H. Albers, 33 B. T. A. 373; A. R. Glancy, Inc., 31 B. T. A. 236; Merritt J. Corbett, 16 B. T. A. 1231; Jones v. Helvering, 71 Fed. (2d) 214; certiorari denied, 293 U. S. 583. If he had reacquired it from some other source after thirty days or if he had reacquired a part of it from the trust and had given s'ome good reason for so doing, he might still get his deduction. But the facts are that shortly after the 30-day period he reacquired in three different transactions the same amount of the same kind of. stock that he had sold, he reacquired it either directly or indirectly from the trust, and the explanations which he gave for his three sudden changes of mind are not convincing. A change of mind in regard to reacquiring one .stock would not be so difficult to understand, but three changes out of a possible three tax one’s credulity, particularly in the absence of a good explanation. Cf. Harold F. Seymour, 27 B. T. A. 403; Commissioner v. Dyer, 74 Fed. (2d) 685; certiorari denied, 296 U. S. 586.

Furthermore, the evidence in regard to the notes destroys our confidence in the testimony of the petitioner as to his intention. His claim of a loss on the notes is not respectable. The petitioner knew that the notes were worth far more than $25,000. They were, in his opinion, worth about their face value, $41,000. He did not have even a potential loss on them. He had no intention of allowing them to go to an outsider for less than about $40,000. He knew everything about them, whereas no other bidder at the auction was likely to know much about them. Any bid he made would probably have been successful. However, he took no risk. He instructed his agent to buy them for the trust, even though the agent had to bid up to the face amount of the notes. There were no other bidders and the bid of $25,000 does not establish their fair market value. He might just as easily have fixed some other price. His reason for fixing the opening bid at $25,000, and thus limiting his “loss” to about $16,000, does not clearly appear. But he needed a loss of about that much in order to completely offset his substantial ordinary income for the year and show on his return no net income subject to tax. Here again he says he changed his mind and decided to acquire the new note from the trust, but he gave no good reason for the change in intent. If he paid the trust $20,000 for the note which he subsequently acquired, then at best he merely made the trust a present of $20,000. A gift does not create a loss. He must have known that he sustained no loss on the notes. Yet he claimed a loss of $16,052.25, and now attempts to substantiate it.

The petitioner cites Jones v. Helvering, supra, and Marston v. Commissioner, 15 Fed. (2d) 986, reversing 29 B. T. A. 976. The Jones case is distinguishable for in that case Jones did not reacquire any of the property which was transferred to the corporation. The Marston case is in some respects parallel with the transaction which the petitioner had in the notes, but it is, nevertheless, distinguishable from that feature of the present case. The court there pointed out that the shares involved had depreciated in value and the petitioner had tried to sell the stock but could find no market. There was other evidence to show that the property disposed of had depreciated in value until it was worth but a small part of its original cost. A part of it was never reacquired, and a reason satisfactory to the court was given for the reacquisition of the other block of stock. The notes in the present case had not depreciated in value, and the petitioner had made no effort to sell them. The auction price was no guide to their fair market value. The petitioner had not even a potential loss in the notes. The present case is more like Shoenberg v. Commissioner, 77 Fed. (2d) 446, 449, affirming 80 B. T. A. 659; certiorari denied, 296 U. S. 586. The petitioner in that case sold securities at market through a broker and at the same time had a corporation which he controlled purchase identical securities at the same price. After the lapse of 30 days he reacquired the shares from the corporation at the then market price. The court said:

A loss as to particular property is usually realized by a sale thereof for less than it cost. However, where such sale is made as part of a plan whereby substantially identical property is to be reacquired and that plan is carried out, the realization of loss is not genuine and substantial; it is not real. This is true because the taxpayer has not actually changed his position and is no poorer than before the sale. The particular sale may be real, but the entire transaction prevents the loss from being actually suffered. Taxation is concerned with realities, and no loss is deductible which is not real.

The court discussed the purpose of section 118 and held that the taxpayer had not sustained a loss because in the end he held the same securities which he had held in the beginning. There was no testimony in that case as there is in this one that the taxpayer did not intend to reacquire the property, but otherwise the two cases are very much alike. The facts in this case convince us that all of the transactions were but a part of a plan which the petitioner devised.

Taking all of the evidence into consideration, we hold that the petitioner never intended to finally and completely dispose of any of the stock or notes, the sales were not final dispositions but mere steps in an ineffective plan to establish losses for income tax purposes, and the petitioner sustained none of the alleged losses in the year 1930. The Commissioner did not err in disallowing the deductions. Cf. Shoenberg v. Commissioner, supra; Luella Hoyt Slayton, 29 B. T. A. 931; aff'd., 76 Fed. (2d) 497; certiorari denied, 296 U. S. 586; Rand Co., 29 B. T. A. 467; aff'd., 77 Fed. (2d) 450; Commissioner v. Dyer, supra.

Reviewed by the Board.

Decision will be entered under Bule 50.

Smith,

dissenting: I am of the opinion that the petitioner sustained deductible losses upon the sales made by him of his shares of stock in the American-Hawaiian Steamship Co., the Atlas Tack Corporation, and the Manhattan Co. Marston v. Commissioner, 75 Fed. (2d) 936.

Since the seller and the purchaser were the same individual,' though acting as separate taxable entities, it may be that an intention to repurchase, if it existed at the time of the sale, would contradict the fact of a then juristic sale, or legally premise the existence of an option to repurchase, if the securities sold were actually repurchased. See Shoenberg v. Commissioner, 77 Fed. (2d) 446, 449, affirming 30 B. T. A. 659; certiorari denied, 296 U. S. 586, and Commissioner v. Dyer, 74 Fed. (2d) 685; certiorari denied, 296 U. S. 586. However, even if that be true, the existence of that intention at the time of the sale is the essential factual premise of that conclusion. I think this record disproves the presence here of that fact.

Both the sales to and repurchases from the trust were made at market. That fact, in my judgment, on this record, conclusively corroborates petitioner’s testimony that when he sold the stocks to the trust he had no intention to repurchase them. Marston v. Commissioner, supra. No case is cited in the prevailing opinion, nor do I know of any which dispute that position. The sale of the notes with a then purpose to repurchase them certainly is not evidence of the existence of a similar intent with reference to the wholly separate and unrelated stock.

The Shoenberg case, supra, upon which the prevailing opinion largely relies, is distinguishable in that, though the sale and the repurchase there were made at market, the seller advanced to the buyer a large part of the consideration with which the securities were bought. And, in the Dyer case, supra, likewise relied upon, the repurchase did not occur at market.

Leech agrees with this dissent.


author: Turner:

text:
    Michael Fay and Nellie C. Blacker, Executors of the Estate of Robert Roe Blacker, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74202.
    Promulgated June 3, 1936.

      Claude /. Parker, Esq., for the petitioners.

      T. G. Riston, Esq., for the respondent.
   OPINION.

Turner:

The petitioners contend that the agreement between the decedent and the Institute was an endowment or annuity contract, and, under the provisions of sectiop 22 (b) (2) of the Eevenue Act of 1928, the amounts paid to the decedent during the taxable year were excluded from gross income. The respondent takes the position, on the other hand, that a trust was created by the decedent through the transfer of the securities to the Institute as trustee and that the income, being reserved in the grantor, is taxable to him.

The petitioners rely on Continental Illinois Bank & Trust Co. v. Blair, 45 Fed. (2d) 345, in which case the facts are very similar to the facts in the instant case. There the court reversed the Board and held that the various transfers of securities amounted to the purchase of an annuity or the creation of an endowment and that the grantor derived no income therefrom until the amount received equaled the value of the securities at the time of the transfer. While, as is pointed out by the respondent, the terms of the instrument in the instant case refer to the transfer of securities as the transfer to a trust, and the instruments involved in Continental Illinois Bank & Trust Co. v. Blair, supra, use language which does not of itself imply the creation of a trust, we see no substantial distinction between the two cases on the facts. In each instance the securities were transferred to the particular organization subject to a provision that the grantee should receive the income therefrom and pay it over to the grantor during his life and then to certain other individuals during their lives; and it was further provided in each case that after the death of the individuals so designated the income therefrom should be used in furthering the purposes of the institutions to which the securities had been transferred. It seems thus apparent that Continental Illinois Bank & Trust Co. v. Blair, supra, supports the petitioners’ contentions. We have carefully examined the decision and the reasoning of the court therein, but for reasons set forth below are unable to follow that decision in this proceeding.

A substantially similar transaction was before the United States Circuit Court of Appeals for the Eighth Circuit in Bettendorf v. Commissioner, 49 Fed. (2d) 173, and in our opinion the reasoning of the court in that case clearly and accurately construes the transaction which took place here. There a transfer of securities was made by a mother to her son. By the terms of the transfer instrument the son was to pay the income derived from these securities to the grantor and her husband during their lives. An effort was made to include the income from these securities in the income of the grantee under the same reasoning that was used by the court in Continental Illinois Bank & Trust Co. v. Blair, supra. The court held that the grantor had not purchased an annuity, saying, “In the instant case, at the time of the execution of this contract, Catherine Bettendorf was the absolute owner of these securities and, as an incident to such ownership, she was entitled to all the earnings or dividends derived therefrom. By her contract, however, she transferred the legal title to the stock, but by the terms of this same contract she retained and reserved to herself the right to the income during her life. The income was therefore at no time that of the petitioner, because by the very contract under which he held the legal title he was bound to account to the donor for the income. The contract required that the petitioner account only for such income as accrued, and not for a specified sum. He was not chargeable personally with the income for the stock, except as and when it should be received by him, and hence the contract did not create an annuity in favor of Mrs. Bettendorf.”

The reasoning of the court in Bettendorf v. Commissioner, supra, is equally applicable in this case. The grantor owned the securities transferred, and, as an incident of the ownership of those securities, was entitled to all the earnings or dividends derived therefrom. A transfer of the securities was made to the Institute for certain designated purposes, but the grantor never at any time parted with the right to receive the income. It is true that the securities were transferred to the name of the Institute and the income from them was to be collected by it, but by the terms of the contract all of this income, after the payment of certain charges incident to its collection, was to be paid over to the grantor during the period of his life. After his death the income was to be used for certain purposes specified by the grantor in the agreement, but the grantor never at any time parted with the right to receive such income as might be derived from the securities during his lifetime. The income as such was reserved by the grantor and by the terms of the instrument the Institute was merely the conduit through which it passed.

In Continental Illinois Bank & Trust Co. v. Blair, supra, the court, in support of its holding that the grantor had purchased an annuity, cited Warner v. Walsh, 15 Fed. (2d) 367; United States v. Bolster, 26 Fed. (2d) 760; and Allen v. Brandeis, 29 Fed. (2d) 363. The reasoning in those cases, however, was specifically rejected by the Supreme Court in Helvering v. Butterworth, 290 U. S. 365. In that case the Supreme Court held that an election by a widow to accept income from the residue of her husband’s estate as provided by will rather than to claim the rights granted her by the state laws was in no proper sense the purchase of an annuity. Cf. Burnet v. Whitehouse, 283 U. S. 148; Helvering v. Pardee, 290 U. S. 365; and Irwin v. Gavit, 268 U. S. 161.

The action of the respondent in including in the income of the decedent the amounts received from the securities transferred to the Institute is sustained. From this holding, it follows that a recom-putation of the deduction in respect of charitable contributions is necessary.

Deoision will be entered under Rule 50.