author: Steiínhagen : Aetjndell,

text:
    Minnesota Tea Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54227.
    Promulgated March 18, 1936.

      James G. Nye, Esq., and Homer Hendmchs, Esq., for the petitioner.

      George D. Brabson, Esq., for the respondent.
   OPINION.

Steiínhagen :

In this proceeding, the Board, in Minnesota Tea Co., 28 B. T. A. 591, held, upon the stipulated facts, that there was no statutory reorganization, and this decision precluded consideration of the taxpayer’s contest of the Commissioner’s original determination of deficiency. The Board’s decision was reversed, Minnesota Tea Co. v. Commissioner, 76 Fed. (2d) 797; Helvering v. Minnesota Tea Co., 296 U. S. 378. The proceeding is now here under mandate for consideration of the original issue.

The question is whether gain is to be recognized to the extent of $106,471.73 of the cash received, that being the amount of the corporate debts which were assumed and discharged by the shareholders. In 1928 the petitioner, in the statutory reorganization, transferred its assets to the Grand Union Co. for 18,000 shares of Grand Union stock and $426,842.52 money. The corporation was committed, by a resolution adopted the preceding day, to turn over the money immediately to its shareholders. The resolution is as follows:

Resolved further that all moneys received by Minnesota Tea Company on such sales of its assets and in consideration thereof, whenever received, shall be immediately distributed to the stockholders of Minnesota Tea Company ratably and in the proportion of their respective stockholdings in Minnesota Tea Company upon the assumption by the stockholders of all the corporate debts of Minnesota Tea Company in order to enable the company to hold all the corporate stock or. securities received by it for its assets on such sale thereof without being compelled to sell any part of the same, and the Board of Directors are hereby authorized and directed to so distribute the said moneys as aforesaid and in behalf of the company enter into a written agreement with the stockholders, signed and executed by the company and all the stockholders whereby said stockholders, in consideration of such distribution and for the purpose of enabling the company to continue to hold the said corporate stock and securities without being compelled to sell any part thereof for the payment of existing debts, agree to pay all the corporate debts of the Minnesota Tea Company whether due and payable or not and whether certain or contingent.

The money was turned over to the shareholders. The corporate debts amounted to $106,471.73. The evidence does not contain the written agreement required by the resolution, but it is stipulated that the amount of the liabilities was assumed and discharged by the shareholders.

The petitioner contends that immediately upon the receipt of the Grand Union shares and the $426,842.52, it distributed the money in pursuance of the plan of reorganization, and that the situation is squarely within section 112 (d) (1), Revenue Act of 1928, providing that “no gain shall be recognized.” The respondent urges that the shareholders’ assumption of the corporate debts prevents the amount of $106,471.73 from being regarded as a distribution by the corporation, and hence that it may not escape recognition as part of the corporation’s gain.

Taking the resolution at its face, it provides for two things: (1) the “distribution” to the shareholders of all the money received in the reorganization, and (2) an “agreement” by the shareholders to pay the corporate debts. Both were carried out. Apparently neither the terms of the resolution nor the actual conduct of the parties justifies treating these promises as conditioned one upon the other. Jacob & Youngs, Inc. v. Kent, 230 N. Y. 239; 129 N. Y. 889; Restatement of the Law, Contracts, § 261; Williston on Contracts, § 665. The legal effect of a dividend resolution which embodies such a shareholders’ promise is not clear, cf. Lindgrove v. Schluter & Co., 256 N. Y. 439; 176 N. E. 832; Thomas v. Matthews, 94 Ohio St. 32; 113 N. E. 669, but even if we treat the relation between the petitioner and its shareholders as if it were contractual, there is no reason to say that the failure of the shareholders to perform the promise would avoid or rescind the distribution. The corporation was not liquidating, and it had assets consisting of the 18,000 shares of Grand Union stock plus $426,842.52 in cash (approximately $966,000), entirely ample to justify a dividend of $426,842.52 and payment of its debts of $106,471.73, Clarence LeBus, 1 B. T. A. 733; cf. O. B. Barker, 3 B. T. A. 1180. Under these circumstances, breach of the shareholders’ promise would give the corporation no more than (if as much as) a remedy in damages. This would leave the dividend unaffected as to character or amount.

The Government argues that, of the distribution, $106,471.73 must be regarded as charged with the payment of the debts, or as a trust fund appropriated to that purpose, and that in neither event is it, properly speaking, a distribution. The corporation, until the actual discharge of its debts, remained the primary debtor. No attempt was made to secure the consent of the creditors to a substitution of obligor. The corporation continued to own the 18,000 Grand Union shares, worth over $500,000. What then is the foundation for a trust? Ordinary legal remedies were available for the ample protection of all parties. The corporation was neither liquidating nor impoverishing itself. Its liability persisted until payment. There was no occasion, either as to the corporation or as to the shareholders, for a trust. Against the shareholders, the corporation had, if there was a juristic promise, a remedy at law if they failed to pay the debts. The shareholders, upon the receipt of the $426,842.52 cash, had the right to use it as they chose and to fulfill their promise to the corporation in any way they might elect, without being required to use the distribution to pay the debts. If, indeed, the shareholders were able by negotiation to discharge the debts for less than their book or face value, they were still entitled to retain the amount of the distribution.

The regulations adopted pursuant to the Revenue Act of 1928 deal no more specifically with the present state of facts than does the statute itself, nor is any light to be derived from the Congressional reports as to the Revenue Bill of 1924, which first carried the statutory provision, i. e., Revenue Act of 1924, section 203 (e) (H. Rept. No. 179, Committee on Ways and Means, 68th Cong., 1st sess., p. 15; and S. Rept. No. 398, Committee on Finance, 68th Cong., 1st sess., p. 16). When considering the changes proposed from the existing Revenue Act of 1921, the House Committee on Ways and Means had before it a statement by A. W. Gregg, special assistant to the Secretary of the Treasury, which illuminates the intendment of the act finally passed, and indicates that since the petitioner was in fact “a mere conduit” through which the money passed from the Grand Union Co. to the shareholders, any gain to the petitioner which it embraced should escape recognition. Argument is presented to establish that this legislative history justifies a construetion broad enough to include a distribution among creditors as well as among shareholders. This view has its advocates, but it is not ''necessary that it be directly decided in this proceeding, for, as we have seen, the petitioner did not provide for or make a distribution among its creditors and did not secure from its creditors a release from its obligations. When a corporation used money thus received in a reorganization for the purpose of directly discharging its bonded indebtedness, it was held that such use was not a statutory distribution. Liquidating Co., 33 B. T. A. 1173. But the proposition that the corporation’s direct payment to its bondholders is not a statutory distribution does not carry the corollary that the shareholders’ promise to discharge the corporation’s current debts had the same effect, and changes the distribution made to them into a discharge by the corporation of its debts, converting, so to speak, the actual distribution pro tanto into a constructive nondistribution.

The Government urges that since the Tea Co. in fact had a gain of $712,195.90 (see 28 B. T. A. 591), all of which would be taxable but for the special statutory provisions for nonrecognition, the nonrecognition may only extend to cases clearly within the statute, and that the taxpayer is charged with the burden of bringing himself within the nonrecognition provision. This is a correct general statement, Sarther Grocery Co., 22 B. T. A. 1273; aff'd., 63 Fed. (2d) 68; Arctic Ice Machine Co., 23 B. T. A. 1223; 67 Fed. (2d) 983; Edison Securities Corporation, 29 B. T. A. 483; 78 Fed. (2d) 85. Literally, however there was an express distribution of all the money among the shareholders, and it is the respondent who seeks to depart from the recognition of the facts and to call the actual distribution which was made a constructive payment of corporate debts. It can not readily be said that to avoid recognition of the gain is contrary to any purpose manifest in the statute. The dominating purpose of the reorganization provisions of the statute is elusive. It is far from clear enough to prevent the recognition of an express distribution because it has the effect of lowering the corporation’s tax.

Reviewed by the Board.

Judgment will he entered under Bule 50.

Aetjndell,

dissenting: The question in this case is whether the petitioner meets the provisions of section 112(d) (1) of the Revenue Act of 1928 to the extent of $106,471.73 of the cash received by it from the Grand Union Co., which was the amount of the corporate debts assumed and discharged by the petitioner’s stockholders. The majority opinion holds that it does. I can not agree with that holding.

First: The recent case of the Liquidating Co., 33 B. T. A. 1173, decides directly against the suggestion that a distribution among creditors may come within the statute, holding that cash received in a reorganization and used to redeem the taxpayer’s debentures was not distributed within the meaning of the cited section. To the same effect is West Texas Refining & Developing Co. v. Commissioner, 68 Fed. (2d) 77.

Second: If the above proposition is sound, there would not be a different rule where the corporation turns the money over to others to use to pay its debts. Whatever the legal relation of the recipients to the taxpayer, they would be liable for payment of the debts at the instance of the creditors. Lawrence v. Fox, 20 N. Y. 268; Hendrick v. Lindsay, 93 U. S. 143. Their liability in this respect would not depend on the solvency or insolvency of the taxpayer nor upon whether or not the liability of the taxpayer persisted. I think it a misconstruction of the provisions of the resolution to say that the distribution by the corporation and the agreement by the stockholders to assume the debts were not conditioned upon each other. The part of the resolution quoted consists of one sentence. In the first part it is resolved “that all moneys * * ⅜ be immediately distributed * * * upon the assumption by the stockholders of all the corporate debts.” In the second part the directors are authorized and directed to distribute the money accordingly and to enter into an agreement with the stockholders whereby the stockholders “in consideration of such distribution * * * agree to pay all the corporate debts.” To me it seems clear from this language that the distribution is expressly conditioned upon the assumption of the corporate debts by the stockholders and they took the distribution subject to this condition. A dividend resolution “is to be taken as it emanates from the board. A part of it can not be taken and the rest discarded.” State v. B. & O. R. R., 6 Gill (Md.) 363, 386, quoted in General Utilities & Operating Co., 29 B. T. A. 934; aff'd., 296 U. S. 200. Thus, in the final analysis the petitioner merely used its stockholders as a conduit for payment of its debts, and gain realized and used for this purpose can not escape tax under the reorganization provisions of the statute. Liquidating Co., supra.

Black, McMahon, Turnee, Mellott, and Arnold agree with this dissent.

       SEC. 112. RECOGNITION OF GAIN OR LOSS.
      **♦•**#
      (d) name — gain of corporation. — If an exchange would he within the provisions of subsection (b) (4) of this section if it were not for the fact that the property received in exchange consists not only of stock or securities permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then—
      (1) If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, but

       See. 203 (e) : There Is no provision of the existing law which corresponds to subdivision (e) of the bill, nor has the Treasury Department ever ruled officially on the type of ease covered by that subdivision. The subdivision provides that if a corporation in connection with a reorganization transfers its assets to another corporation, a party to the reorganization, for stock and securities of the same corporation and cash, then no gain or loss to the transferor is recognized, if it distributes the cash to its stockholders. But if the selling corporation fails to distribute the cash to its stockholders then the gain or loss is to he recognized. In other words, if the corporation which sells its assets in connection with the reorganization acts merely as a conduit fin passing the proceeds of the sale on to its stockholders, no gain to the corporation lis to be recognized, but if it retains the entire amount of proceeds with the result that {. tKe transaction is in substance a real sale, then the gain shall be recognized.
      A corporation in connection with a reorganization may dispose of its assets in one of three ways: It may transfer them to a new corporation in exchange for stock or cash; it may transfer them to the new corporation, the consideration being the payment by the new corporation of stock or cash to the stockholders of the old corporation; or the new corporation may buy, with its stock and cash, from the stockholders of the old corporation their stock and then liquidate the' old corporation. If a corporation adopts the first method, its gain from the sale could be taxed. If it adopts the second method, the gain probably could be taxed on the theory of constructive receipt by the selling corporation. If it adopts the third method, there is no theory on which any' gain to the old corporation could be taxed. As a result of these considerations, subdivision (e) has been so drafted that the tax liability on the selling corporation is the same no matter which of the three methods set out above is adopted. In other words, if the selling corporation is a mere conduit through which the consideration for the sale of the assets passes, or if the consideration for the sale of the assets is paid direct to the stockholders of the old corporation, without passing through the conduit, no gain or loss to the old corporation is recognized, and the same result is reached that would have to be reached necessarily if the transaction were accomplished through the medium of a purchase by the new corporation of the stock of the old corporation followed by a liquidation of the old.

       Paul and Mertens, Law of Federal Income Taxation, Vol. 2, § 17.102;
      Miller, Reorganizations and Other Exchanges in Income Taxation, § 134;
      Montgomery, Federal Income Tax Handbook, 1935-1936, p. 202;
      Cf. Baar and Morris, Hidden Taxes in Corporate Reorganizations, ch. 12, § 15.


source: Caselaw Access Project

author: Leech:

license: Public Domain

text:
    Chevy Chase Land Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78584.
    Promulgated March 18, 1936.

      A. E. James, Esq., for the petitioner.

      L. W. Greason, Esq., for the respondent.
   OPINION.

Leech:

The petitioner seeks redetermination of a proposed deficiency of $2,655.10 in income tax for the calendar year 1932. The deficiency arises through respondent’s inclusion in gross income for 1932 of $15,5.11.33 received by petitioner in that year as a refund of special assessment taxes collected from it in prior years pursuant to a statute later declared unconstitutional.

We find the facts as formally stipulated. Briefly stated these facts are:

The petitioner in 1925 and 1926 sold property on which, in prior years, it had paid special improvement taxes, in the total amount of $15,511.33, assessed by the District of Columbia on the basis of front footage, under the so-called Borland Amendment.

Under its system of accounting the petitioner did not charge any of these special assessment taxes direct to the capital account of individual lots. Part of its property was not then plotted for subdivision. It maintained a capital reserve on its books to which it charged special improvement assessments paid. Each year as property was sold, in determining the gain or loss upon such sales, an amount of cost contained in the reserve was charged to the cost of such property. The amounts deducted from the reserve and allocated to the cost of the property sold in 1925 and 1926 were $251,080.40 and $86,067.88, respectively. In its income tax returns for these two years petitioner charged and deducted, as a part of the cost of the property sold during each of those years, one half of the amounts set out above, or $125,540.20 for 1925 and $43,033.94 for 1926. That only one half of the amounts allocated from the reserve was deducted in that computation was because of the fact that the original cost figure used, before the adjustment by reason of special assessment taxes paid, was a March 1, 1913, value determined for the property on the basis of its increased value caused by the improvements for which special assessments were made. Consequently, such value included a part of the cost of the special assessment. It was estimated that this amount was 50 percent of that paid assessment.

Subsequently, on audit of petitioner’s return for the year 1925, the respondent reduced petitioner’s estimate of March 1, 1913, value of property sold, but made no change in the amount added by petitioner to such cost, as special assessments and improvements, except to add thereto the sum of $76. Petitioner asked redeter-mination of the resulting deficiency by this Board. That proceeding was settled by compromise.

Upon audit of petitioner’s return for 1926 the respondent reduced the March 1,1913, appraised value of property sold in that year from the amount used by petitioner in computing the gain on sale of that property, but respondent made no change in the amount added to such value as special assessments and improvements charged to cost from the reserve as heretofore set out.

As in the case of the tax liability for 1925, settlement was effected by compromise during the pendency of a proceeding before this Board contesting that resulting deficiency. In arriving at this settlement the respondent increased his determination of the March 1, 1913, value of property sold by $95,472.38, and increased, by $71,-060.64, the amount added by petitioner to the March 1, 1913, value as assessment and improvement taxes paid. This computation resulted in a showing of overpayment of tax for that year in the amount of $1,444.72, but no refund of this amount was allowable by reason of the bar of the statute of limitations.

In 1932 petitioner received a refund of $15,511.33, paid by it prior to 1925, under assessments made against lots sold in 1925 and 1926. This refund was made because of the decision of the courts holding the Borland Amendment to be unconstitutional.

In determining net income for 1932 respondent included this refund in gross income as an amount received in that year for which petitioner had taken credit in prior years by including that amount in the capital cost of properties in computing the income upon which it paid its tax for such years.

It is admitted by petitioner that of the total of $15,511.33 in special assessments refunded to' it in 1932, items aggregating $1,750.80 were specifically claimed by petitioner and allowed by respondent as a part of the cost of property sold from 1927 to 1930 inclusive; that items totaling $11,212.57 were included in the $251,080.40 credited to the special assessment reserve and charged to cost of property sold in 1925 in the manner heretofore described; and that the balance, in the sum of $2,547.96, was included in the aggregate of $86,067.88 credited to the reserve and charged to cost of property sold in 1926, and was included in the amounts finally allowed by respondent in the settlement arrived at for that year.

Petitioner contends that the refund in question does not represent income. We do not agree. If this refund represents, as determined by respondent, a disbursement made in prior years by petitioner for which it then took credit in determining its net income, it is now, in fact, enriched to this extent by the payment received, or has actually realized a gain in this amount.

As we said in South Dakota Concrete Products Co., 26 B. T. A. 1429:

* * * income-tax liability under the Federal revenue acts is to be determined on annual periods on the basis of facts as they existed in each period, and when an adjustment occurs which is inconsistent with what has been done in the past in the determination of tax liability, the adjustment should be reflected in reporting income for the year in which it occurs.

The fact that the original payments here in dispute, the subject of the later refund, were made under an unconstitutional statute, which must be considered void ab initio, does not affect the question. Even if made under those circumstances, those payments were allowable deductions in computing net income for the years in which made. E. L. Bruce Co., 19 B. T. A. 777. See also Charles F. Fawsett, 30 B. T. A. 908. Respondent has determined here that the amounts represented in the refund were actually allowed to this petitioner in prior years. The cases cited by petitioner, in support of his contention that the contested taxes do not constitute deductions applicable to prior years, are upon facts different from those established here. In Inland Products Co., 10 B. T. A. 235; aff'd., 31 Fed. (2d) 867; and Mary W. Leach, 16 B. T. A. 781; aff'd., 50 Fed. (2d) 371, refund was received prior to the final determination of the tax liability for the year in which the refunded payment had been made. If the facts are as determined by respondent and the refund to petitioner in 1932, in fact, represents its payments in prior years, for which it received credit in computing net income, then the refund constitutes taxable income to petitioner. As this Board said in Houbigant, Inc., 31 B. T. A. 954:

The facts in this case show that in the inc >me tax returns filed by the petitioner for the years 1924 to 1930, inclusive, the petitioner claimed and was allowed the deduction of the full amounts of the customs duties paid. They were not allowed under the name of customs duties, but in increased cost of goods purchased by the petitioner. Having been deducted in prior year returns, if they are not taken up in the gross income when recovered, the petitioner clearly, over a series of years, escapes tax upon gains and profits equaling tlie amount of the customs duties recovered. It cannot be presumed that such a result was contemplated by Congress. Furthermore, from any standpoint the petitioner was enriched by the recoveries of the import duties in the fiscal year ended June 30, 1931. The argument that the income received from this source is exempt from tax has no support in the law.

That this is the correct rule is evidenced by many decisions of the courts and this Board. Burnet v. Sanford & Brooks, 282 U. S. 359; Excelsior Printing Co., 16 B. T. A. 886; Iberville Wholesale Grocery Co., Ltd., 17 B. T. A. 235; Carr v. Commissioner, 28 Fed. (2d) 551; Davidson Grocery Co. v. Lucas, 37 Fed. (2d) 806; Putnam National Bank v. Commissioner, 50 Fed. (2d) 158; Commissioner v. Liberty Bank & Trust Co., 59 Fed. (2d) 320; Cooper v. United States, 9 Fed. (2d) 216.

In our judgment, the cases holding that payments of amounts exacted as taxes, under unconstitutional statutes, can not be deducted by a taxpayer under the provisions of the taxing acts permitting the deduction of taxes paid, have no application to the present -situation. Here the benefit of the payments was not sought as taxes paid but as cost of property sold. The payments were, in fact, the cost of improvements to petitioner’s property, made by the District of Columbia, and for which it had reimbursed the city.

Upon the present question of whether the record establishes that credit actually has been taken in prior years by this petitioner for the payments constituting the refund it received in 1932, we have the respondent’s determination of that fact. The burden is thus placed upon petitioner to either prove the contrary, or, at least, to prove that determination erroneous and, consequently, arbitrary and excessive. Helvering v. Taylor, 293 U. S. 507. Petitioner contends that the evidence before us requires the application of the rule recognized in the cited case which would place upon respondent the burden of establishing definitely the fact that the special assessment taxes involved here were actually included in computing the gain upon the property sold in prior years. We do not agree. Petitioner admits its inability to show that it did not include these amounts in determining net income for prior years. The record discloses nothing contradicting the respondent’s determination that these payments were so included. Error in that determination will certainly not be presumed. United States v. Dandridge, 25 U. S. 64. This would reverse the ordinary presumption of correctness attaching to respondent’s determination. That presumption, therefore, stands undisturbed here.

Moreover, the stipulated facts show that credit for large amounts was taken by petitioner in the prior years as representing assessments paid. It was entitled to credit for all those assessments. The contest of petitioner’s tax liabilities for 1925 and 1926 involved the very question of the proper amounts of those credits. The settlements of petitioner’s tax liabilities for those years included allowances to it for large amounts as such assessments. The evidence does not indicate that these allowed amounts were insufficient to cover both the true March 1, 1913, value of the real estate and the disputed assessments. Upon that record, we think the presumption is strengthened that petitioner received the benefit of the deductions to which it was entitled. Uor does the fact that petitioner actually overpaid, slightly, its income tax for 1926 change that conclusion.

Judgment will he entered for the respondent.


author: TueneR:

text:
    Kate Hudson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Kate Hudson, Trustee for Marie Hudson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Galvin Hudson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 69723-69725.
    Promulgated March 20, 1936.

      W. E. Holmes, Esq., Hillsman Taylor, Esq., and Taylor E. Cress, C. P. A., for the petitioners.

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

TueneR:

The question here is whether the action taken by the corporation under the resolution of March 1,1929, whereby the debit balances of the stockholders were satisfied by charges against surplus, constituted dividends.

By section 115 (a) of the Revenue Act of 1928, the term “dividend” is defined as “any distribution made by a corporation to its shareholders, whether in money or in 'other property, out of its earnings or profits accumulated after February 28, 1913.” In section 115 (b) of the same act, it is provided that “every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits.”

No question is raised as to the sufficiency of corporate surplus for the payment of a dividend in the amounts herein, and since the facts show that the amounts in question were charged against surplus, we must assume that surplus was sufficient for the payment of such a dividend.

It is also assumed that all of these amounts were originally paid or credited to the stockholders as loans or advances, since there is no contention by either party that the amounts in question were-dividends or other than loans prior to the resolution of March 1, 1929, and the action taken thereunder.

The respondent contends that the resolution constituted a release to the debtor stockholders of their obligations, and, in substance, the declaration of a dividend. The petitioners deny that the corporation released, or intended to release, the stockholders of any indebt-ednesses and call attention to the eventual formal surrender of stock in 1931 and 1932, in settlement of the debit balances involved as evidencing the fulfillment of an intention on the part of both the corporation and its stockholders that the withdrawals should be repaid in full. It is also argued that, even though the forgiveness by a corporation of the indebtedness of its stockholders does under certain circumstances amount to the payment of a dividend, it can not be said that a dividend was declared and paid in the cases of these petitioners with reference to the amount of $102,679.04, representing advances made to Charles Hudson and to Galvin Hudson, administrator of the estate of Charles Hudson, since the advances were not made to these petitioners. The further contention is made that there was no formal declaration of a dividend at any time and it is unreasonable to assume the declaration and payment of a dividend in the manner described, since petitioner Galvin Hudson had received no advances personally, and a distribution such as this, not being in proportion to ownership of the stock, would result in a loss to him personally of at least $10,000.

The last contention of the petitioners has been decided adversely to them in several cases. It is not necessary that a dividend be paid to the stockholders in proportion to their stock holdings. Lincoln, National Bank, Executor, 23 B. T. A. 1304; aff'd., 63 Fed. (2d) 131; Ida L. Dowling, 13 B. T. A. 787; Joseph Goodnow & Co., 5 B. T. A. 1154. Neither is it necessary that a dividend be formally declared. Chattanooga Savings Bank v. Brewer, 17 Fed. (2d) 79; certiorari denied, 274 U. S. 751; Security First National Bank of Los Angeles et al., Executor, 28 B. T. A. 289; Leo G. Hadley, 6 B. T. A. 1031; aff'd., 36 Fed. (2d) 543.

It is also well settled that the cancellation of indebtedness of stockholders of a corporation is sufficient to constitute payment of a dividend. Moses Cohen, 28 B. T. A. 190; aff'd., 77 Fed. (2d) 184; certiorari denied, 296 U. S. 610; Ennalls Waggaman, 29 B. T. A. 473; aff'd., 78 Fed. (2d) 721; certiorari denied, 296 U. S. 618; Hugh H. Miller, 25 B. T. A. 418; Ida L. Dowling, supra; F. W. Fitch, 27 B. T. A. 615; aff'd., 70 Fed. (2d) 583. In the cases cited there was normal cancellation of the indebtedness of stockholders, while here the petitioners contend that there was no cancellation or release by the Hudson & Hugger Co. of the balances owing by them.

Giving careful consideration to the resolution and to the action taken in connection therewith, we are unable to reach a conclusion other than that reached by the respondent. There is no question that on the accounts of the corporation, the stockholders were relieved of liability. Surplus was reduced by the amount of the debit balances and the stockholders were relieved of the charges therefor by credits to their accounts from surplus. This was regular and in order. The corporation had a distributable surplus and the directors had authority to order distribution. If the stockholders desired that surplus be used to relieve themselves of the charge for balances owing by them to the corporation, they were within their rights and there was no one to complain. These petitioners say, however, that while the action taken was in the form described, there was an understanding that they would repay the amounts with which they were credited. That understanding was expressed in the resolution to the effect that the company still owned its “equity” in the debit balances and at such time as might be “convenient and appropriate” proper settlement would be made. This understanding certainly was not couched in terms ordinarily applicable to an agreement between debtor and creditor for payment of the debtor’s account. Just what was meant by the equity of Hudson & Dugger Co. is conjectural, but the meaning of the remainder of the resolution relied on by the petitioners seems to us apparent and is that the stockholders, if and when “convenient and appropriate” to them, would restore the surplus so exhausted. There is nothing in this language which indicates that the debtor-creditor relationship was intended to continue.

The petitioners also rely on their subsequent action in 1931 and 1932 in surrendering stock of a par value equal to the amount of the debit balances. Consideration of the practical effect of the surrender of the stock and the occasion therefor gives little support to that argument. In the first place the resolution providing for the surrender of the stock shows on its face that one of the principal reasons for taking any action was the controversy with the Federal Government over the issues involved in these cases. Furthermore there is nothing to show that the actual value of the stock surrendered had any relation whatever to the amount of the debit balances in satisfaction of which the said stock was surrendered. Keeping in mind the fact that the resolution of March 1, 1929, had, by its expressed terms, eliminated the stockholders’ accounts from corporate assets, the surrender of the stock in 1931 and 1932 did not serve in any way to either increase or decrease the assets of the corporation, and except for a slight change of the proportions in which the stock was held, the position of the stockholders with reference to the corporation and its assets was not changed. It served only as an adjustment of the stock holdings between the members of the Hudson family.

With reference to the contention that the advances to Charles Hudson and to Galvin Hudson, as administrator, can not be considered as advances to these petitioners and a release thereof treated as a dividend to them, it is interesting to note that by their own argument as to the effect of the resolution of March 1, 1929, and of the surrender of stock in 1931 and 1932, the petitioners treat themselves as having been liable in equal proportions for the total amount of these advances. Furthermore, there is no doubt that they were actually liable therefor. The amounts so advanced to Charles Hudson and to the administrator of his estate were liabilities of the estate, and the facts show that the only assets out of which these liabilities could have been satisfied were the shares of stock in Hudson & Dugger Co. The petitioners point out that this stock was distributed in 1926 by order of the probate court. Under the law of Tennessee, however, as in other states, a probate court is not permitted to make a distribution of the assets of an estate without making provision for the payment of outstanding liabilities; and while it is true that under section 8335 of the Tennessee Code provision is made that surplus assets of an estate be distributed within 18 months after administration is granted, it is further provided in section 8336 that “every legatee and distributee, before receiving his portion of the decedent’s estate, or some other for him, shall give bond with two or more sufficient sureties, or one corporate surety, in a penalty double the amount of his share, payable to the state, conditioned that if any debt or debts truly owing by the deceased shall be afterwards sued for and recovered or otherwise duly made to appear, said legatee or distributee shall refund and pay his ratable part of such debt or debts out of the part or share so allotted to him.” We may not assume that in making the distribution in this case the provisions of the law of Tennessee were not complied with. By accepting the distribution of the stock in 1926, the petitioners assume the liability for the debts of the estate to the extent of the stock so distributed, and a release of liability so incurred, in so far as the question in this case is concerned, is no different from a release of liability incurred as a result of advances made directly to the petitioners themselves.

Accordingly we conclude that the liabilities of the petitioners for the debit balances in question were released and canceled in the taxable year and hold that such release and cancellation was a dividend within the meaning of section 115 (a), supra.

Reviewed by the Board.

Decision will be entered for the respondent.


author: Leech :

text:
    C. M. Menzies, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent. Charles M. Menzies, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 76147, 76148.
    Promulgated March 20, 1936.

      H. J. Kleefisch, Esq., for the petitioners.

      G, P. Reilly, Esq., for the respondent.
   OPINION.

Leech :

The respondent determined that the disposition of alT the assets of the corporate petitioner in 1931 to the individual petitioner was not a sale but constituted a distribution in liquidation by the corporation. He determined a taxable profit to the individual petitioner, Charles M. Menzies, of $55,857.47, by subtracting- the basis for his corporate stock from the book value of the assets, transferred. The pending deficiency against Menzies resulted.

Petitioner Menzies maintains that such disposition was a valid,, bona fide sale of the corporate assets to him.

The Revenue Act of 1928, section 115 (c), is applicable. A corporate liquidation may involve one or more sales of corporate assets-in reducing them to a form in which its debts may be satisfied and the balance distributed to its shareholders. True, when an alleged-sale to a controlling shareholder of all the assets of a corporation occurs, as here, followed by actual liquidation of the corporation and distribution of any remaining balance of the consideration received in such transaction, the courts and this Board ignore such so-called sales and treat such a disposition of corporate assets as a distribution in liquidation. Cook v. United States, 3 Fed. Supp. 47; Benjamin H. Read, 6 B. T. A. 407. But here there was no such distribution unless the alleged sale, itself, is so characterized.

A distribution of corporate assets in liquidation differs widely from a sale of such assets. The liquidation of a corporation is the process of winding up its affairs, realizing its assets, paying its debts, and distributing to its stockholders, as such, the balance remaining. W. E. Guild, 19 B. T. A. 1186; Lafayette Trust Co. v. Beggs, 213 N. Y. 280; In re Union Bank of Brooklyn, 161 N. Y. S. 29. Cf. Canal-Commercial Trust & Savings Bank v. Commissioner, 63 Fed. (2d) 619. Such distribution is a conveyance to a stockholder in satisfaction of his right, possessed through ownership of stock, to participate in the assets of the corporation upon its liquidation, after the corporate debts are satisfied. The transferor receives nothing. It simply conveys to the stockholder something to which he has a right. A sale, on the other hand, is a transfer of property for a price which is received by the seller. The receipt of a price for the transfer is essential. Hatch v. Oil Co., 100 U. S. 124.

It necessarily follows that a mere transfer of property by a corporation, even to its majority stockholder, who pays an adequate consideration therefor, which is received by and actually becomes the property of the corporation, does not constitute a liquidating distribution within the intendment of the applicable statute. Fostoria Milling & Grain Co., 11 B. T. A. 1401. Petitioner Menzies owned more than 90 percent of the stock of the corporate petitioner. But that circumstance does not preclude recognition here of both as separate entities. Burnet v. Commonwealth Improvement Co., 287 U. S. 415. No legal barrier compels the construction of the contested transaction as a distribution in liquidation despite its proper purpose of reducing expenses of operation and taxes. Gregory v. Helvering, 293 U. S. 465. Whether the questioned disposition of assets was a sale or a distribution in statutory liquidation is thus entirely factual. Frelmort Realty Corporation, 29 B. T. A. 181.

The corporate resolution authorizing the alleged sale expressed no intention to liquidate the corporation. The corporate income tax return filed some nine months later stated: “The corporation was abandoned after said disposal of net assets.” And, that return disclosed neither assets nor liabilities. But the inferences from those statements are not conclusive. Mitchell v. Doyle, 247 U. S. 179. The fact controls the inference. Weiss v. Wiener, 279 U. S. 333. Corporate income and franchise taxes have been paid in each year since 1931, except income taxes for 1932 when a small loss was sustained. The corporate failure for two years to transact any business other than that incident to its only asset, the Menzies note, is not decisive of liquidation on this record. Nor is a change of business and assets without more than here disclosed. Cf. Canaday, Inc. v. Commissioner, 76 Fed. (2d) 278, affirming 29 B. T. A. 355; certiorari denied, 296 U. S. 612. The corporation, in fact, was not dissolved. No steps to dissolve have ever been taken. It was not abandoned. It still exists.

The corporate resolution, under the authority of which Menzies acquired its assets, designated that disposition as a sale. Menzies’ note given to the corporation as part of the consideration for the assets was without interest. Only small payments on account of interest were made during the two years following the giving of the note. But those facts certainly do not characterize the original note as worthless at any time. And, any possible inference that it was worthless — a mere form — is conclusively answered by the relevant and significant later sequence of events. Cf. Commonwealth v. Dyer, 74 Fed. (2d) 685. Payments on account of interest were made consistently, beginning before July 1, 1932. Substantial payments on the principal were made June 30, 1933, and March 29, 1934. Within four years from the date of the original note, it was paid in full, with interest due, by its maker. Those facts are not seriously controverted. The corporation leased to Menzies some of the real estate received in satisfaction of the note, returned the amounts paid in lieu of rents, as income, when received and paid the tax thereon.

We conclude the corporation was not liquidated, the contested! disposition of its assets was not a distribution in its liquidation within the statute, but was a bona fide sale for an adequate consideration.

The corporate deficiency involved in the proceeding, consolidated herewith, arose upon respondent’s disallowance of a deduction of an addition to bad debt reserve. The corporation in its return deducted no loss on the contested disposition of assets. But the book value of the corporate assets, the amount of which was part of the consideration for the disputed sale, apparently included this reserve as a corporate liability. In any event, respondent stipulated at the hearing that, if the disposition of the corporate assets was held to be a sale, then the corporate petitioner sustained a deductible loss on that sale in the amount of that reserve. Effect will be given to that stipulation on recomputation of the corporate deficiency.

Reviewed by the Board.

Decision will Toe entered under Bule BO.

       SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
      (c) Distributions in liquidation. — Amounts distributed in complete liquidation of a cor poration shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. In the case of amounts distributed in partial liquidation (other than a distribution within the provisions of section 112 (h) of stock or securities in connection with a reorganization) the part of such distribution which is properly chargeable to capital account shall not be considered a distribution of earnings or profits within the meaning of subsection (b) of this section for the purpose of determining the taxability of subsequent distributions by the corporation.


author: Sternhagen:

text:
    The Grand Rapids Trust Company, Nana A. Smith, Gilbert L. Daane and Arthur H. Vandenberg, Co-Administrators d. b. n., c. t. a. of the Estate of William Alden Smith, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56465.
    Promulgated March 20, 1936.

      Jacob 8. Seidman, G. P. A., and Frank E. Seidman, G. P. A., for the petitioners.

      Hartford Allen, Esq., for the respondent.
   OPINION.

Sternhagen:

The Commissioner determined a deficiency of $48,162.32 in the 1928 income tax of the decedent Smith, who instituted this proceeding before his death. We shall, for convenience, •treat him individually as the petitioner. On his return, he reported -capital net gain of $2,775, and to this the Commissioner added $385,163.20 as “increase in profit from sale of stock.” This addition is explained in the notice of deficiency, as follows:

The sale of stock of the Herald Publishing Company is held to be a completed sale by you to the Federated Publishers, Incorporated, notwithstanding the fact that between July 26, 1928, the date the option of sale was- given, and November 24, 1928, when final payment was made, you sold the stock subject to the option to the William Alden Smith Company under an agreement that you were to receive $570,000.00 over a term of approximately forty years. Since the William Alden Smith Company was only an intermediary of which you had full control, the alleged sale to this corporation has been ignored.

The proceeding is submitted entirely upon a stipulation of the facts, and detailed findings are not called for. Smith had for a long time owned shares in the Herald Publishing Co., which published the Grand Rapids Herald. On July 26, 1928, he made a contract in writing with R. J. Royle to sell his shares to Boyle on December 1, 1928, for a price of $604,062.15, if on that date Boyle, after an inves-ligation and audit, elected to purchase. Under the contract, Smith deposited his shares and Boyle deposited $42,522 with an escrow agent, this latter amount to be held for Smith as liquidated damages hi case Boyle failed to buy the shares or as part of the price if the sale was made. Smith agreed to stay out of the newspaper publishing business for five years.

Smith and his immediate family had long been the sole shareholders in a corporation called the William Alden Smith Co., which invested in securities, mortgages, and real estate. Smith was the president and the majority shareholder.

On October 29, 1928, while the Boyle contract was yet in operation but the sale not yet due, Smith made a written contract with the corporation assigning to it all his rights under the Boyle contract and all his rights in the Herald shares in consideration for the corporation’s promise to pay him $5,000 down and $565,000 payable in quarterly installments of $5,000 each with 5 percent interest. He notified Boyle and the escrow agent of the assignment.

On November 8, 1928, Boyle assigned his rights in the contract to Federated Publications, Inc., for $42,522 cash (the amount of Boyle’s deposit) and the assumption of his obligations. The sale of the Herald shares was consummated, and cashier checks payable to William Alden Smith Co. aggregating $604,062.15 were “transmitted to [that] company through William Alden Smith.”

The respondent’s determination, as has been seen, was predicated upon a complete disregard of the assignment by Smith to the corporation, the reason for such disregard being the alleged full control by Smith of the corporation. The separateness of Smith and the corporation as juristic entities and also as taxpayers can not be disputed, and there is no evidence which would justify lack of recognition of either. Burnet v. Clark, 287 U. S. 410. The corporation, so far as appears, was not merely a technical legal entity but was a substantial being which had been carrying on business for many years before the transaction with Boyle. It can not be regarded as a mere ephemeral tax-saving device, as in Gregory v. Helvering, 293 U. S. 465, even if such a characterization justified its disregard. Although transactions between an individual and a corporation controlled by him, like intra family transactions, always invite close scrutiny to ascertain their genuineness, Commissioner v. Eldridge, 79 Fed. (2d) 629, the relation between participants is not alone sufficient to require that transactions between them be ignored. In this proceeding, we know only that the corporation’s shares were held by Smith and his family, with no other evidence to ground even a suspicion that their affairs were not respectably conducted or the burdens of taxation not borne as fully as the benefits may have been enjoyed. We are compelled, upon this record, therefore, to treat the corporation as a separate contracting entity and to inquire whether the petitioner is for any other reason taxable as if he had received in cash the $604,062.15 which was paid for the Herald shares in 1928.

Clearly the transaction of July 26th was not an immediate sale. It was an agreement between Smith and Boyle looking to the consummation of a sale on the following December 1. The deposit in escrow was not a delivery to Boyle and served only to shift possession without changing title. Smith could thereafter exercise no control over the shares in derogation of Boyle’s right to acquire them on December 1, and no attempt was made by Smith to do so. His sale to the corporation of his right and interest in the shares was achieved by the same instrument whereby he assigned the contract,, and thus the corporation was given full notice of the existence of Boyle’s contractual rights and the escrow. The corporation acquired in the shares no greater interest than Smith had; but so much it did acquire to its full extent. The contract between Smith and Boyle was essentially an assignable contract for the simple sale of the shares. The only personal provision about which there could be any question was Smith’s agreement to refrain for five years from engaging in the newspaper publishing business in Michigan. This provision Boyle could waive, and we may assume that he and his assignee did so since they apparently assented to the assignment and paid the money to the assignee. We see no reason in this record to doubt the validity of the assignment or to say that the parties acted otherwise than in strict accordance with it. Smith did not. in fact, receive Boyle’s purchase price in December for his own, but only as the conduit through which the cashier’s checks, which had already been made payable to the corporation, were physically transmitted to the corporation, which alone was entitled to them.

This is not a case of the transfer by a taxpayer of the proceeds or income from a sale or disposition of property. The taxpayer here disposed of the property before he had either the proceeds or the right to the proceeds; and this is true whether we regard such proceeds as the fruit of the shares or the fruit of the contract, for both had been assigned before the proceeds had become even a chose in action.

If we adhere steadfastly, as we think we must, to the separate recognition of Smith and the corporation, there is no demand in justice for taxing Smith as if he had actually received the $604,-062.15. He did not receive this amount, and before he had acquired a legal right to it he had converted his expectancy into an installment contract with the corporation. Thus, in 1928, his definite and fixed right was never more than the right against the corporation to receive $5,000. If, in October 1928, Smith had been, let us say, hard pressed for cash and had made such a contract of assignment for say $250,000, payable at once, could it be said that his taxable gain should be measured nevertheless by the $600,000 fixed by the Boyle contract? Charles W. Walworth, 6 B. T. A. 788, holds substantially to the contrary, where the assignment was by gift. Cf. Oscar Deinert, 11 B. T. A. 651.

In our opinion, the petitioner may not be taxed as if he had received the $604,062.15 in 1928, but is taxable only upon the proportionate part of the total profit ultimately to be received, which is involved in the installment of $5,000 received in that year.

Judgment will he entered under Rule 50.


author: ^Aiítjndell :

text:
    Estate of William Steele, Joseph M. Steele, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73347.
    Promulgated March 20, 1936.

      A. E. James, Esq., and D. Hays Solis-Cohen, Esq., for the petitioner.

      Isador Grasjf, Esq., for the respondent.
   OPINION.

^Aiítjndell :

The question here is whether the petitioner’s share of the payment of $75,000 in 1931 in partial extinguishment of ground rent reserved in the sale in 1923 is taxable as income in 1931. The Commissioner apparently concedes that the payment is not income in 1931 under the governing revenue act (Revenue Act of 1928) and the decision in Pennsylvania Co. for Insurances on Lives & Granting Annuities, supra, but sets up as an affirmative defense that the taxpayer is estopped to deny a present liability by reason of its failure to pay the tax on the profit when realized in 1923 and by its implied agreement to pay the tax at some later date. The Commissioner does not make it clear what later date was contemplated but evidently he expected the tax to be paid in the years of receipt of payments in excess of the basis.

Under Treasury Regulations 62, articles 44, 46, and 1564, in force in 1923, and the Pennsylvania Co. case, supra, the entire profits of the sale were properly taxable in 1923 since the deferred payments for ground rent extinguishment had a readily realizable market value. However, at the time the Commissioner and taxpayer were negotiating about the matter in 1927, the Pennsylvania Co. case had not yet been decided and both the Commissioner and the taxpayer relied on O. D. 1089, 5 C. B. 98, as a correct interpretation of the law. It held that a sale reserving ground rents was not a closed transaction and no profit was realized thereon until the ground rents were extinguished. On this basis, the parties agreed that the sale was not taxable in 1923 and no1 deficiency was assessed. By the time the Pennsylvania Co. case finally determined the question to the contrary in 1930, the statute of limitations had run against any assessment for 1923. The Commissioner appeals to “broad principles of equity and fair dealing” to set up an estoppel against the taxpayer, alleging that the taxpayer induced him to refrain from an assessment in 1923 and impliedly agreed to pay the tax later when it should become due under the law as they then understood it.

We have found no misrepresentation whatever as to the facts of the transaction. The Commissioner was in possession of all the facts regarding it. The taxpayer invoked the Commissioner’s own interpretation of the law and the Commissioner, believing it to be. a correct interpretation, made no assessment for the year 1923. We have heretofore held that no estoppel can be predicated on a mistake of law in the absence of some misrepresentation of fact. Sugar Creek Coal Mining Co., 31 B. T. A. 344; Tide Water Oil Co., 29 B. T. A. 1208; U. S. Trust Co. of New York, 13 B. T. A. 1074. This rule has found support in United States v. Scott & Sons, 69 Fed. (2d) 728, and the dicta of the Second Circuit and the Supreme Court in the recent case of Salvage v. Commissioner, 76 Fed. (2d) 112; 297 U. S. 106. The rationale of the rule is that everyone being presumed to know the law, the Commissioner is not justified in relying upon the taxpayer’s interpretation thereof, and reliance is an essential element of estoppel. The Commissioner is duty bound to think and act for himself and make his own interpretations of the law. Tide Water Oil Co., supra.

The record discloses no agreement or understanding either expressed or implied in fact that petitioner would pay the tax in a later year if petitioner’s interpretation of the law should ultimately prove erroneous — that eventuality was apparently not in the minds of the parties; both considered the Commissioner’s interpretation correct. The taxpayer expected to obey the law if it remained unchanged but made no agreement to be bound by the current ruling if overruled by later authority. We see no justification for implying any such agreement as a matter of law. If the law were changed by act of Congress, the taxpayer would certainly be relieved of any obligation of following the former law. The result should be the. same upon change of interpretation by judicial decision.

We have frequently pointed out that each year stands on a separate basis in the tax law and that an error made in computation of the tax for one year can not be corrected by making an erroneous computation under the law of a later year. Union Metal Manufacturing Co., 1 B. T. A. 395; MacMillan Co., 4 B. T. A. 251; Cooper-Brannan Naval Stores Co., 9 B. T. A. 105; Bank of Commerce, 10 B. T. A. 73; Houston Baseball Association, 24 B. T. A. 69; Virginia-Lincoln Furniture Corporation v. Commissioner, 56 Fed. (2d) 1028.

We have been referred to no case where estoppel was founded on mutual mistake of law alone. In the cases which we have examined there were either representations of fact made to the Commissioner, on which he relied, Stearns v. United States, 291 U. S. 54; Ralston Purina Co. v. United States, 58 Fed. (2d) 1065; Naumkeag Steam Cotton Co. v. United States, 2 Fed. Supp. 126; Mahoning Investment Co. v. United States, 3 Fed. Supp. 322; a failure to disclose facts which amounts to a misrepresentation of facts, Crane, v. Commissioner, 68 Fed. (2d) 640; or an election of methods of reporting income where the taxpayer, having chosen, is bound, Wheelock v. Commissioner, 77 Fed. (2d) 474; Moran v. Commissioner, 67 Fed. (2d) 601; Raleigh v. United States, 5 Fed. Supp. 622. Hone of these situations existed here.

Reviewed by the Board.

Decision will be entered for the petitioner.


author: MnRDOCK:

text:
    Minneapolis, St. Paul & Sault Ste. Marie Railway Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74118.
    Promulgated March 20, 1936.

      John L. Erdall, Esq., for the petitioner.

      E. G. Algire, Esq., and Lloyd B. Harrison, Esq., for the respondent.
   OPINION.

MnRDOCK:

The petitioner’s first contention is for “a deduction in the year 1929, on account of the exhaustion of a contract entered into with the Canadian Pacific Railway Company.” It argues that the evidence “establishes the value to the petitioner of the Canadian Pacific guaranty as of March 1, 1913.” This value is supposed to be shown by the alleged saving to the petitioner resulting from the fact that the bondholders agreed to accept 4 percent interest on the bonds. The argument is, that, but for the guaranty, the petitioner would have had to pay interest at 5 percent instead of at 4 percent, thus the guaranty saved the petitioner 1 percent annually on all bonds outstanding, and, by the petitioner’s method of computation, the present worth on March 1, 1913, of the savings to be realized during the next 25 years was $7,370,146.43. On March 1, 1913, $52,293,000 par value of the petitioner’s bonds due in 1938 were outstanding. The remaining life of the bonds after 1913 was 25 years. Those bonds were still outstanding during 1929 and that year represented one twenty-fifth of the life of the bonds after March 1, 1913. Therefore, the petitioner would deduct for 1929, one twenty-fifth of the value which it claims for the guaranty on March 1, 1913.

The petitioner’s method of finding the present worth as of March 1, 1913, of the anticipated savings is mentioned in its brief. Detailed figures of the computation do not appear but only the following explanation: “The March 1, 1913, value of this total savings at 5% compounded annually (See Table IV — present value, page 124r-Kent) was $7,370,146.43.” There is no evidence to show that the use of the above table and interest rate would be proper under the circumstances of this case to determine the claimed value. A different method might furnish a different result. The Board has. no personal knowledge on the subject (Boggs & Buhl, Inc. v. Commissioner, 34 Fed. (2d) 859) and could not use it if it had. Uncas-ville Manufacturing Co. v. Commissioner, 55 Fed. (2d) 893; American Chemical Paint Co., 25 B. T. A. 1208, 1213, and cases there-cited. There is at least some question in the present case whether-the guaranty provisions were separable from other provisions of" the contract and whether the obligations of the petitioner, such as-its agreement to exchange traffic and not compete, did not possibly minimize the value to the petitioner of the guaranty provisions. Cf. Christensen Machine Co., 18 B. T. A. 256; Eitingon-Schild Co., 21 B. T. A. 1163, 1181. These are continuing obligations which maybe interdependent. The petitioner does not recognize this possibility and has not offered any proof on the point, except the words-ox the contract. However, there are other and, perhaps, more serious-defects in the petitioner’s contention.

Four million four hundred and thirty-nine thousand dollars par-value of the bonds of the issue here involved were outstanding as-straight 5 percent bonds prior to the execution of the contract in 1890. Thereafter at least 85 percent of these were surrendered by the bondholders so that the change in rate and the guaranty could', be stamped on them. The petitioner says in its reply brief:

The evidence is conclusive as to the savings on bonds issued prior to the-making of the contract. This evidence appears to be the only competent evidence in respect to the value of the guaranty provision. We submit that-inasmuch as there was apparently no change in financial condition of the-taxpayer when the later bonds were issued, that the savings in connection,, with the earlier bonds may properly, under the circumstances, be taken as-the basis for determining the savings on the later bonds.

This argument is a poor substitute for some proof of savings and. value, if any, which should properly be attributed at some particular time to the guaranty provisions of the contract. The holders - of the bonds sold prior to the contract of May 27, 1890, agreed to a. reduction of the interest rate on at least 85 percent of those bonds,., but the evidence does not show whether or not they did so solely because of the guaranty provisions of the contract. The guaranty probably helped to influence them, but the question is, How much? The petitioner depends upon inference for the answer.

Most of the bonds involved herein were issued at some undisclosed time, or times, after May 27, 1890, and before March 1, 1913. They-were sold with the guaranty and the 4 percent interest provisions - on them. If the guaranty enabled the petitioner to sell its bonds-as essentially 4 percent bonds, when otherwise a higher rate would-’ have been demanded, then certain value attributable to the guaranty and based upon a saving of 1 percent in interest must have come-into existence through and at the time of the sale of the bonds. Such asset value, reduced by exhaustion to March 1, 1913, might form the basis for deductions thereafter. Cf. Helvering v. Union Pacific Railroad Co., 293 U. S. 282. However, there is no evidence in the record to show or tending to show the effect of the guaranty upon the sales of the bonds. The financial condition of neither company has been shown. If the condition of the petitioner was relatively strong and that of Canadian Pacific relatively weak when any, or all, of the sales were made, it is possible that the guaranty was of little value to the petitioner, and the fact that it could sell 4 percent bonds instead of 5 percent bonds and thus “save” 1 percent would have to be attributed primarily to its own strength and prospects rather than to the guaranty. If the facts were otherwise, the inferences would, of course, be different. But without some proof of the value or effect of the guaranty at the time when the bonds were sold, how can its value be determined? The petitioner would draw the inference that but for the guaranty the petitioner could have realized the same amount from its bond issue only by increasing the interest rate to 5 percent. But the record does not justify this inference. Perhaps the bonds might have sold at a smaller discount with no guaranty, had they called for interest at 4¾ percent, 4½ percent, or 4¾ percent. Even at 4 percent they might have sold just as well without the guaranty. The exact savings attributable to this guaranty and the value of it are probably difficult to prove. Failure to prove them to a mathematical certainty need not be fatal. Kentucky Tobacco Products Co. v. Lucas, 5 Fed. (2d) 723. Yet some reasonable proof of the probable savings attributable to it and of the probable value of the contract at some particular time should have been introduced.

The statute allows a deduction on account of depreciation or exhaustion based upon the “fair market value” on March 1, 1913, of the property being exhausted through use in a taxpayer’s business. Secs. 23 (k), 114 (a), 113 (b), Revenue Act of 1928. Huyler's, Inc.. 24 B. T. A. 425. “Fair market value” has been defined judicially as the price at which property would pass at a given time from a willing seller to a willing buyer, where neither was forced into the transaction. The guaranty in question may not have been valuable or salable on March 1,1913. The bonds had been sold previously. The petitioner was then obligated to pay interest at 4 percent, and the bondholders could demand no more, except in case of default. In the latter case, the Canadian Pacific Avas to pay 4 percent to the bondholders and to become entitled to collect its advances with 5 percent interest thereon from the petitioner, or, if the Canadian Pacific defaulted on its guaranty, the bondholders could demand 5 percent from the petitioner. Thus the contract might prevent foreclosure, provided Canadian Pacific remained able to make good on its guaranty, but it would not save 1 percent on interest in case of default in the payment of 4 percent. The “savings” at that time depended primarily upon the probability of the petitioner meeting its obligation to pay 4 percent in each year. There is no direct evidence of the value of the guaranty at any time. It does not appear whether or not the guaranty was valuable on March 1, 1913. Unjustified inference can not serve as a ground for reversing a determination by the Commissioner and allowing deductions based on alleged values running up into the millions.

The petitioner contends that it abandoned its ore dock, yard and tracks, and its branch line and tracks on the range in 1929, and thereby sustained losses. Each party makes various other claims in regard to the proper treatment of these items which need not be set forth. The figures are not in dispute. The principal questions are whether the facilities were actually abandoned in 1929 and, if so, whether deductible losses resulted. The findings of fact furnish complete answers to all questions raised. A brief discussion of some of the evidence may be appropriate.

The Northern Pacific Railway Co. (hereinafter referred to as Northern Pacific) owned a large modern concrete ore dock in Superior, which was near and accessible to the petitioner’s main line. The capacity of this dock was sufficient to handle the ore shipments of both roads. The petitioner’s ore dock was in need of improvements and required increasingly expensive repairs. The two companies agreed to a plan in 1928 whereby they would try for one year to handle the ore shipments of both roads over the Northern Pacific dock. The petitioner was to pay rent for the use of the dock. The plan was not successful. Plowever, both companies were of the opinion in 1929 that operating expenses could be reduced by pooling their traffic in ore and coal under a single management so that the one dock and a single set of tracks on the range would suffice for all purposes. They appointed a committee in January 1929, which worked out a plan and prepared a contract.

The contract was executed by the two companies on April 15, 1929. It was for a period of 99 years. It provided for the pooling and the division between the two railroads in stated proportions of the ore and coal transported between Superior and the Cuyuna Range, the pooling of ore cars and other facilities, the movement of the petitioner’s ore trains over part of the main line of the Northern Pacific, the joint ownership of the trackage necessary for the movement of pooled tonnage on the Cuyuna Range and the abandonment of such of them as might be found unnecessary after a survey during the operating season of 1929 and for the abandonment of the branch line of the petitioner connecting its main line with the range. It also provided for the joint use of the Northern Pacific ore dock and ore yards at Superior and certain tracks on the range, for the maintenance during 1929 of such portions of the petitioner’s ore dock at Superior as the parties might determine advisable for a reserve until the close of the 1929 season, and for the assumption by the Northern Pacific of 40 percent of the sum of $19,000 expended by the petitioner on the maintenance of its facilities at Superior for the purpose of making them available for use during 1929, and 40 percent of the cost of current running repairs to the petitioner’s dock and its approaches while in this temporary use. If they found it necessary to use the petitioner’s ore dock during 1929, the parties intended to build an extension to the Northern Pacific dock in the fall of 1929 and abandon the petitioner’s dock. The petitioner’s ore dock, yard, and line were never used after 1928.

The movement of ore began about April 1, 1929, and at that time the two companies began operating under the pooling provisions of the agreement. Shortly after the agreement was signed they filed a joint application with the Interstate Commerce Commission for approval of the provisions relating to the pooling of ore tonnage, the operation by the petitioner over the line of the Northern Pacific Railway Co., and the joint operation by the two companies of tracks and facilities on the Cuyuna Range. The Commission approved this arrangement on June 3, 1929. The operations up to August 1929 demonstrated to the satisfaction of the petitioner’s general superintendent that all ore could be handled over the Northern Pacific dock. He notified the vice president in August 1929 that he was satisfied that the petitioner’s ore dock and ore line would no longer be required and recommended that arrangements be made to dismantle them. The petitioner’s chief engineer in the fall of 1929 informed his assistant, in charge of the ore dock, that the dock and ore line would be used no longer, and he instructed him to take the necessary steps to dismantle them and recover as much salvage as possible. They were not useful for any other purpose. The assistant found that the material could not be disposed of readily or profitably, but finally, in July 1930, a contract was entered into for dismantling the ore dock, the approach, and part of the ore line, and the actual work of dismantling was begun in August 1930. Shortly after the approval of the pooling agreement by the Interstate Commerce Commission, the general superintendent of each company determined and agreed what part of the tracks and facilities on the Cuyuna Range should be retained in use as jointly owned facilities under the agreement of April 15,1929, and what part should be abandoned. The tracks which they decided to abandon were not taken up immediately but their use was discontinued. The general superintendent of the petitioner prepared a detailed statement of all the tracks and facilities which were no longer needed, and recommended to the petitioner that they be abandoned. The petitioner, on July 13, 1929, filed an application with the Interstate Commerce Commission for its permission to abandon the tracks on the range and a part of its branch line leading to the range. The Commission authorized the abandonment by an order dated March 12, 1930. The work of taking up the tracks was begun thereafter.

The Commissioner, in determining the deficiency, has held that the properties in question were abandoned in 1929 but, because the abandonment took place as a result of the agreement of April 15, 1929, the loss should be amortized over the 99-year period of the pooling agreement. This agreement was not a lease. It did not result in the substitution of any assets for those abandoned. The abandonment of the property was not a necessary incident to the acquisition of other property. Thus the unexhausted cost of the assets abandoned should not be treated as cost of the agreement, nor should that cost be amortized over the life of the agreement on any other theory. The case of Chas. N. Manning, 7 B. T. A. 286, and other similar cases cited by the respondent apply only where there has been a substitution of assets and are not in point here.

The respondent now contends that there was no abandonment in 1929. This is contrary to his determination as shown in the notice of deficiency and is also contrary to the preponderance of the evidence. Loss for income tax purposes in cases such as this depends upon whether in fact the property became worthless in the taxable year as demonstrated in part by its abandonment. The abandonment is to be determined from all facts and surrounding circumstances. Belridge Oil Co., 11 B. T. A. 127; Reuben H. Donnelley Corporation, 26 B. T. A. 107; Fox River Paper Co., 28 B. T. A. 1184, 1200. See also Regulations 74, art. 173. Here there was not only an intention to abandon and a non-user but also an actual abandonment in fact of the facilities in 1929. The properties were not valuable for other purposes except as salvage. The loss actually occurred in 1929. The fact that demolition did not take place until later does not preclude the allowance of the deduction for the year of actual abandonment and loss. Fraser Brick Co., 10 B. T. A. 1252; Kilby Car & Foundry Co., 4 B. T. A. 1294.

The respondent argues that permission of the Interstate Commerce Commission had to be obtained before the branch line and the tracks on the range could be legally abandoned. See pars. 18, 19, 20, sec. 1, Interstate Commerce Act. Apparently permission of the Interstate Commerce Commission was not required in connection with the abandonment of the dock facilities in Superior. See par. 22, sec. 1. Interstate Commerce Act. The act upon which the Commissioner relies is for the purpose of regulating commerce. It provides its own penalties. The “abandonment” referred to therein has no necessary bearing upon the question of loss for income tax purposes. The deduction of a loss for income tax purposes is not withheld by that act until the permission of the Commission has been obtained. Cf. Old Colony Railroad v. Commissioner, 284 U. S. 552; Second National Bank of Philadelphia, 33 B. T. A. 750. The test for tax purposes is a practical one. Furthermore, in this case it appears that the Interstate Commerce Commission had approved the plan in 1929 which included as one of its principal purposes the abandonment of the lines made unnecessary by the pooling agreement, the petitioner made application in 1929 .for a permit to abandon the line, and the application, though contested, was granted early in 1930. It is now apparent that the petitioner actually sustained a loss in 1929.

Reviewed by the Board.

Decision will be entered under Rule 50.

      A value of $8,542,667.16 is claimed in tile petition “on a 5% present value basis.”

      These sections provide that no carrier by railroad subject to the act shall abandon any portion of a line of railroad until it shall first have obtained a permit for such abandonment from the Commission. The penalty provided is fine and imprisonment upon conviction.


author: Seawell :

text:
    San Jacinto Life Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75348.
    Promulgated March 24, 1936.

      Walter E. Barton, Esq., for the petitioner.

      Willis R. Lcmsford, Esq., and Edwa/rd M. Woolf, Esq., for the respondent.
   OPINION.

Seawell :

The contention of the respondent is that the note was executed by the San Jacinto Building, Inc., and accepted by the petitioner in payment of the semiannual interest due November 1,1931, a view tlie petitioner seems to have had when it filed its return for the taxable year. Irrespective of its conclusions at that time and the manner in which it reported the transaction in its income tax return, the petitioner now argues that the note merely operated to extend the time of payment of the interest.

The note and collateral agreement contain inconsistent provisions. Each refers to an agreement to extend the time of payment of the overdue interest and provides that the note “represents” the unpaid interest. The semiannual interest had been due since November 1, 1931, and the petitioner’s right to receive it could have been asserted at any time thereafter. The note given did not operate to extend the time of payment of the interest, for the holder could have demanded payment immediately. An extension of the maturity date of an obligation contemplates a future due date or one capable of being ascertained. The execution and delivery of a note, as here, to represent an obligation to pay under an agreement previously entered into, implies the substitution of a new promise for an old one. Nothing of record establishes any intent to discharge the debt by the note. The real purpose of the instruments was to have the obligation of the debtor expressed in such form as to enable the petitioner to use it in its annual report to the state insurance commissioner. At all times after November 1,1931, the petitioner could have assigned or asserted its claim for interest. The note gave the petitioner no additional rights to payment. It was nothing more than additional evidence of its claim to the overdue interest.

In Great Southern Life Insurance Co., 33 B. T. A. 512, the petitioner surrendered a note, the security therefor, consisting of stock of the maker of the note, and a claim for overdue interest and attorney fees incurred, in exchange for certificates of indebtedness of the receiver for the debtor. It was held that the transaction constituted merely a renewal of the note and interest thereon and that the taxpayer, being, as here, .on the cash basis of accounting, would derive no income in the way of interest until the certificates of indebtedness were paid or otherwise disposed of.

In Blair v. First Trust Savings Bank, 39 Fed. (2d) 462, the taxpayer, in connection with mortgage loans on real estate, deducted its commissions from the loans and paid the net amounts to the borrower. In holding that the commissions were not subject to ta? at the time the loans were made, the court said: A like ruling was made in Helvering v. Martin-Stubblefield, Inc., 71 Fed. (2d) 944.

It is plain that until the loan is paid or rediscounted the respondent has earned no profit, but has simply parted with its funds on the faith of - the security. The commission is not actually received until respondent gets back what it has previously paid out plus the commission. The deduction of the commission from the face of the loan brings nothing into the coffers of the bank.

The cases cited control the answer here. Accordingly, the respondent is reversed.

Decision will be entered under Bule 50.


author: Leech: Murdock

text:
    Fanny M. Dravo and Fidelity Trust Company, Surviving Executors of the Will of Francis R. Dravo, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78375.
    Promulgated March 24, 1936.

      William F. Knox, Esq., and William S. Moorhead, Esq., for the petitioners.

      George D. Brdbson, Esq., for the respondent.
   OPINION.

Leech:

The respondent determined a deficiency of $4,694.16 in income tax of Francis R. Dravo, for the calendar year 1931. The taxpayer died February 26, 1934. The petitioners are the executors of his estate. The only issue is the propriety of the action of respondent in including in the income of petitioners’ decedent the sum of $23,007.66. This amount was income received in 1931 by a trust, created by. the decedent, which was not distributed to the primary beneficiary but was retained by the trustees as an addition to corpus under the provisions of the trust.

We find the facts as formally stipulated. Briefly stated, these facts are that petitioners’ decedent, a resident of Sewickley, Pennsylvania, by deed dated January 17, 1931, transferred irrevocably to himself, his brother, Ralph M. Dravo, and the Bank of Pittsburgh National Association, as trustees, certain property, consisting of common and preferred stock and bonds of the Dravo Corporation. By the terms of the trust deed the trustees were given broad powers to sell, reinvest, and otherwise deal with the trust property. It was provided that all or so much of the trust income as the trustees, in the exercise of their discretion, might determine, should be paid to Danny M. Dravo, wife of the settlor, during her lifetime, with further power in the trustees to advance portions of the principal to this beneficiary as they might determine. All income of the trust, which the trustees in each year during the lifetime of Fanny M. Dravo had, in the exercise of their discretion, not distributed to the latter but had accumulated, was to be added to the corpus of the trust.

The trust deed further provided that upon the death of Fanny M. Dravo the corpus of the trust, as it then existed, including such additions of income accumulated by the trustees, as had been made, was to be divided into three equal shares designated as “A”, “B”, and “C.” The income from a portion of share “A” was to be paid to the settlor during his life and, upon his death, the principal of such portion was to be paid to certain designated charities. Other portions of share “A” were to be distributed to certain individuals under conditions not material here, since the settlor had no vested or contingent interest in such portions.

The trustees were directed to pay the income from share “B” to the settlor during his lifetime, upon his death, the principal to go to such charities as he might designate in writing. The designation was formally filed by him under the trust, prior to the close of the calendar year 1931, directing payment of the remainder interest in this share to Lehigh University, Valley Hospital, and St. Barnabas Free Home.

The trust deed further directed the trustees, at the death of the wife, to distribute 75 percent of the principal of “C” among such employees of the Dravo Corporation and, in such individual percentages, as the settlor or his brother and cotrustee, Ralph M. Dravo, should direct, by filing a written list with the trustees. It was specifically provided that the settlor and/or Ralph M. Dravo might, at any time prior to the death of the primary beneficiary, Fanny M. Dravo, change the list of employee beneficiaries and “revise said certified list so as to divest any certified officer or employee or his estate from the right to participate herein.” It was further directed that no list of officers or employees of the Dravo Corporation, certified to the trustees as beneficiaries of this part of share “C”, should include the name of the settlor.

The remaining 25 percent of share “C” was to be paid to the Dravo Management Co. to be distributed by it among employees of the Dravo Corporation in such proportions and upon such terms as the directors of the Dravo Management Co. or, under certain conditions, the Dravo Corporation, should determine.

Before the close of the calendar year 1931, the Bank of Pittsburgh National Association resigned as trustee and no new trustee was thereafter appointed in its place. The net income received by the trustees during the calendar year 1931 was $31,507.66, consisting of $13,500 dividends and $18,017.66 interest. Of this amount, $8,500 was distributed by the trustees to Fanny M. Dravo, the primary beneficiary, and included by her in her individual income tax return for that year. The balance of the income, or $23,007.66, was accumulated by the trustees and added to the corpus of the trust, as directed by the trust instrument. This amount was reported by the trustees in their return for the calendar year 1931 and the tax thereon was paid. Respondent has taxed it to the decedent.

The respondent did not question the legality of the trust. He contends that the powers granted the trustees to accumulate income, in their discretion, coupled with the control given the settlor as trustee, were such as to make trust income accumulated during the year here in question taxable to the settlor, under section 167 of the Revenue Act of 1928. This section provides:

SEO. 167. INCOME POR BENEFIT OF GRANTOR.

Where any part of the income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to him, or where any part of the income of a trust is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (n), relating to the so-called “charitable contribution” deduction), such part of the income of the trust shall be included in computing the net income of the grantor.

It is not disputed that before the close of the first year of the existence of the trust, which is the year here in controversy, one of the three trustees resigned, the vacancy was not filled and that the discretion granted to the trustees, thereafter was subject to exercise by the settlor, one of the trustees, and his brother, who was not a beneficiary of the trust. Respondent apparently argues that the power granted to accumulate income, where such power could be exercised by the settlor, as trustee, coupled with broad powers of control and administration of the trust estate, is sufficient to include the accumulations by the trustees within the scope of the above quoted section. He further contends that the interest of the settlor in the trust, represented by his right to enjoy certain portions of the trust income after the death of the primary beneficiary, since the trust corpus could be augmented by accumulations of income during the life of the primary beneficiary, which would result in the settlor receiving a larger income because of the accumulations, necessarily characterizes such accumulations as made “for the benefit of the grantor” and thus within the purview of the quoted section.

The petitioners, on the other hand, insist that, although the set-tlor, as trustee, had the right, in his discretion and that of his fellow trustee, admittedly not a beneficiary of the trust, to accumulate income, the trust instrument expressly directed that such accumulations should be added to corpus. Petitioners urge that the settlor had no power, as trustee, to distribute to himself any portion of such corpus nor had he any interest in this corpus other than his right to receive the income produced from a portion of it, after the death of his wife, the primary beneficiary. It is the petitioners’ position that only income, accumulated within the discretion of the settlor as would or might be distributable ultimately to him, is within the intendment of the above quoted section. They contend that none of the accumulated income here involved could, in any event, be distributed ultimately to the settlor and, consequently, no portion of it is taxable to him under that section.

It is true that the caption of section 167 of the Revenue Act of 1928 reads “income foe benefit of gkantoe.” But the section provides that the only income taxable to the grantor of the trust under this section is income which “may ⅜ * * be distributed to the grantor or be held or accumulated for future distribution to him * * The explicit and definite wording of this provision affords no justification for extending its boundaries to include income which, under the terms of the trust instrument or as a result of the exercise of a reserved power, never can be “distributed” to the grantor. Helvering v. City Bank Farmers Trust Co., 296 U. S. 85. The fact that he may receive income produced from the investment of the accumulations, does not make such accumulations distributable to him. Respondent’s citation of our opinion in Arthur J. Morris, 33 B. T. A. 241, is not in point. In that case the trust was for a limited period. The trustees, including the grantor, had a discretionary right to accumulate income and to add it to corpus. The grantor had a reversionary interest in such corpus.

If, under the trust deed here involved, no distribution of the accumulated income could be made, in any event, to the settlor, Francis R. Dravo, either as accumulated income, or in a distribution of corpus to which it had been added, we think such income is not taxable to him under section 167. Preston R. Bassett, 33 B. T. A. 182; Arthur J. Morris, supra.

The trust instrument discloses that the corpus of the trust, as it would exist on the death of Fanny M. Dravo, including the additions thereto by reason of the accumulation of income by the trustees in the exercise of their discretion, was to be divided into three equal parts. The disposition to be made of parts “A” and “B” shows clearly that none of the corpus of those parts, and consequently, no portion of the accumulated income included thereon, was distributable to Francis it. Dravo, nor could any action of his change the conditions of the trust so as to make such corpus distributable to him.

With respect to the remaining one-third share of the corpus of the trust, designated as share “C”, a different condition exists. It is noted that 75 percent of this share, which included one third of the accumulations made by the trustees from income, was to be distributed to certain employees of the Dravo Corporation. In reference to this portion of “C”, the settlor, Francis R. Dravo, reserved to himself the right to revise the list of beneficiaries “so as to divest any certified officer or employee or his estate from the right to participate herein.” The trust barred decedent from that list of beneficiaries. But no provision is made for a distribution of “C” by the trustees upon failure of the settlor to designate the beneficiaries or upon his removing from the certified list of beneficiaries the names of all theretofore designated to receive the fund.

It necessarily follows, we think, that, as to this 75 percent of one third of the trust corpus, the settlor reserved powers to himself sufficient to revoke the trust as to the remainder interest, in which case the rule is well recognized that the trustees would hold such interest under a resulting trust for the benefit of the settlor. As the court said in the Union Trust Co. of Pittsburgh v. McCaughn, 24 Fed. (2d) 459: “Where an express trust fails because of the want of a named beneficiary a resulting trust arises in favor of the donor.” See also In Re Lillys Estate, 272 Pa. 143; 116 Atl. 392; Sanford v. Van Pelt, 314 Mo. 175; 282 S. W. 1022; Wittfield v. Forster, 124 Cal. 418; 57 Pac. 219; Harris Trust & Savings Bank v. Morse, 238 Ill. App. 232; Blunt v. Taylor, 230 Mass. 303; 119 N. E. 964; Davison v. Wyman, 214 Mass. 192; 100 N. E. 1105; Clark v. Campbell, 82 N. H. 281; 133 Atl. 166.

Petitioners’ decedent, creator of the pending trust, possessed the power to accumulate income of the trust in the exercise of his discretion with that of one not a beneficiary of the trust. That decedent, under the trust instrument, reserved a power sufficient to cause a portion of the income so accumulated to be distributed to him upon the death of his wife, the primary beneficiary. It is not material that decedent did not exercise this power nor that the fund accumulated could be received by him only if he survived his wife. During the taxable year he was in possession of the power. As this Board said in Charles Kaplan, 26 B. T. A. 379; aff'd., Kaplan v. Commissioner, 66 Fed. (2d) 401:

In our opinion the power reserved by petitioner to himself as trustee to accumulate the trust income for future distribution to himself as the grantor in case he survived his wife, brings the trust income within the scope of section 219 (h), swpra. The word “may” as used in that section clearly is used in a permissive sense only and is not equivalent to “shall.” It contemplates a trust wherein the grantor retains dominion over the trust income to the extent of diverting it to himself. The 'declaration of trust before us reserved to the petitioner, as grantor and trustee, full power to bring about exactly the possibility contemplated by the statute. We find no error, therefore, in the respondent’s determination that the trust income was taxable to the petitioner individually.

As to the remaining 25 percent of “C”, the trust deed did not preclude the Dravo Management Corporation or the Dravo Corporation, either of which, in the alternative, had absolute authority under the trust to select the participants and their participation, from including the decedent in those participants. The trust instrument contained that inhibition as to 75 percent of “C.”

If decedent controlled either such corporation, certainly he could have exercised that control by causing his employment by the Dravo Corporation and its distribution of part or all of this fund to him.

The corporation bore the same name as decedent. The corpus of the trust was composed entirely of securities of that corporation. Apparently the considerable block of common stock included in the. trust corpus was not all of that stock decedent owned. However, it is not clear that the decedent did control either corporation. But respondent has determined the pending deficiency upon the theory that decedent possessed the power to cause distribution to him, at his wife’s death, of the disputed income, including the specific portion now under discussion. In any view of the record, control by decedent of either or both of these corporations is not contradicted. We must, therefore, premise our conclusion on its existence. The result reached as to 75 percent of “C” would thus follow, as to this remaining 25 percent, upon authority of Charles Kaplan, supra.

Accordingly, we conclude, one third of the contested income is taxable to petitioners’ decedent.

Eeviewed by the Board.

Judgment toill he entered under Rule 50.

Murdock

dissenting: The intent of the donor, as evidenced by the trust instrument, was that none of share “C” should come to him. The prevailing opinion goes too far in taxing one third of the income to him on the theory that he might outlive his wife, break faith with the employees whom he intended to benefit, and thus recover the income for himself. The petitioner has made a prima facie case as to the 25 percent of this share.

VAN FossaN, Matthews, and Mellott agree with this dissent.