author: Smith :

text:
    William George McKitterick, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105430.
    Promulgated March 11, 1942.

      Robert Blyihin, Esq., for tbe petitioner.

      L. R. Bloommthal, Esq., for the respondent.
   OPINION.

Smith :

This is a proceeding for the redetermination of a deficiency of $758.98 in income tax for 1938. The petition alleges that the respondent erred in the determination of the cost basis of 944.29 units of “Executives’ Investment Trusts of the Employees of the General Electric Company” by reducing the cost basis of the units, namely $94,948.94, by $10,076.10 net losses on the units claimed as deductions by petitioner in his income tax returns for 1930 to 1934, inclusive.

The material facts have all been stipulated, and we adopt such stipulation as our findings of fact.

Petitioner is an individual, residing in Cleveland, Ohio, and filed his income tax return for 1938 with the collector of internal revenue for the eighteenth district of Ohio, at Cleveland.

During 1929 and 1930 the petitioner purchased 944.29 units of the above referred to Executives’ Investment Trusts at a cost of $94,948.94.

On December 20,1930, the Commissioner ruled that the Executives’ Investment Trusts constituted “a strict trust” taxable under section 166 of the Eevenue Act of 1928 for the year 1930 and subsequent years. The trust operated at net losses for the years 1930 to 1934, inclusive. The petitioner’s share of such net losses amounted to $10,076.10. In his income tax returns for such years the petitioner claimed and the Commissioner allowed the deduction of such losses.

On October 26, 1935, the Commissioner ruled that the Executives’ Investment Trusts were taxable as an association under article 801-2 of Begulations 86, which provides that the term “association” as used in the Eevenue Act of 1934 includes an investment trust of the management type. In view of the position taken by the Commissioner, however, relative to the taxable status of this trust prior to the promulgation of Eegulations 86 on February 11, 1935, it was held, with the approval of the Secretary of the Treasury, that the new ruling should apply only for the calendar years subsequent to 1934 and that the Executives’ Investment Trusts would be taxed as a trust for the year 1934 and prior years.

In 1938 the petitioner sold his units in the Executives’ Investment Trusts for a cash consideration of $57,882.56, resulting in a loss, as contended by him, of $37,066.38, of which 50 percent, or $18,533.19, was reflected in his income tax return.

On audit of the petitioner’s tax return for 1938 the respondent reduced the base for the computation of the net loss from $94,948.94 to $84,872.84, thereby reducing the claimed long term loss of petitioner by one-half of $10,076.10, or $5,038.05.

The question in issue is whether the long term loss should be computed upon the basis of cost ($94,948.94) or upon such basis reduced by the net losses of the trust, amounting to $10,076.10, which had been availed of by the petitioner in his tax returns for 1930 to 1934.

In his brief petitioner states his position as follows:

It is contended that a correct computation of cost was made by Petitioner because there is no provision in the Internal Revenue Code requiring or permitting adjustments on account of profits or losses realized by an investment trust, which at the time of sale was regarded as an association. * * *

The applicable statute is section 113 of the Revenue Act of 1938. That section, so far as material, provides:

(a) Basis (Unadjusted) of Pboperty. — The basis of property shall be the cost of such property; * * *
* * * * * * *
(b) Adjusted Basis. — The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided.
(1) General Rule. — Proper adjustment in respect of the property shall in all cases be made—
(A) For expenditures, receipts, losses, or other items, properly chargeable to capital account. * * *
* * * * * * *

Article 113 (b)-l of Regulations 101, promulgated under the provisions of the Revenue Act of 1938, provides in part as follows:

Art. 113 (b)-l. — Adjusted basis; General rule. — The adjusted basis for determining the gain or loss from the sale or other disposition of property, is the cost of such property or, in the case of such property as is described in paragraphs (1) to (18), inclusive, of section 113 (a), the basis therein provided, adjusted to the extent provided in section 113 (b).
The cost or other basis shall be properly adjusted for any expenditure, receipt, loss, or other item, properly chargeable to capital account, including the cost of improvements and betterments made to the property. * * *
* * * * * * *
Adjustments must always be made to eliminate double deductions or their equivalent. Thus, in the case of the stock of a subsidiary company, the basis thereof must be properly adjusted for the amount of the subsidiary company’s losses for the years in which consolidated returns were made.

The crux of the question presented is whether the net losses on the 944.29 units availed of by the petitioner in computing deductions from gross income in his income tax returns for the years 1930 to 1934, inclusive, were “properly chargeable to capital account.”

The Executives’ Investment Trusts, treated as a “strict trust” by the respondent for the years 1930 to 1934, was a separate entity from the petitioner. The assets of the trust were not assets of the petitioner. Losses sustained by the trust were not losses of the petitioner, regardless of whether they were capital losses or operating losses. See Anderson v. Wilson, 289 U. S. 20; T. Rosslyn Beatty, 28 B. T. A. 1286. The petitioner clearly had no right, in making his income tax returns for 1930 to 1934, to deduct the net losses of the trust. The petitioner made an innocent mistake of law iii taking the deductions. The respondent did not correct the errors in the audit of the tax returns.

The respondent has not pleaded an estoppel against the petitioner and the evidence affords no basis for an estoppel. See Helvering v. Salvage, 297 U. S. 106. A mistake of law does not preclude the taxpayer from using the basis of cost of the units. Nicollet Associates, Inc., 37 B. T. A. 350; John B. Hollister, 44 B. T. A. 851.

Since the net losses deducted by the petitioner in his income tax returns for the years 1930 to 1934 were improperly claimed, we do not think that they were “properly chargeable to capital accounts” within the meaning of section 113 (b) (1) (A) of the Revenue Act of 1938. The respondent is reversed upon his action in reducing the cost basis of the 944.29 units by $10,076.10.

Decision will be entered under Bule 50.


source: Caselaw Access Project

author: Turner:

license: Public Domain

text:
    Estate of Edward A. Langenbach, Deceased, the First National Bank of Canton, Executor and Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.

      Docket No. 100492.
    Promulgated March 11, 1942.

      John Gr. Betterer, Esq., for the petitioner.

      W. W. Keer, Esq., for the respondent.
   OPINION.

Turner:

The petitioner, relying particularly on Commissioner v. Bonfils Trust, 115 Fed. (2d) 788, contends that in determining net income 25 percent of the capital gains realized during the taxable years is deductible under section 162 (a) of the Revenue Acts of 1934 and 1936 as gross income “permanently set aside” for charitable purposes. The respondent concedes that under Ohio law the capital gains became a part of the trust corpus, but contends that on the facts here Boston Safe Deposit & Trust Co. et al., Executors, 26 B. T. A. 486; affd., 66 Fed. (2d) 77, is controlling, and no part of capital gains may be said to have been “permanently set aside” for charitable purposes within the meaning of the statute.

Petitioner interprets the will to say that upon the death of Rosa Langenbach the estate is to be divided into halves, one of which is to pass under her will, otherwise to her relatives, while the other half is to be further divided into two equal parts, one such part, or 25 percent of the whole estate, to be used in paying specific legacies, and the remaining part, or 25 percent of the whole, to go to charity. On brief, it is stated: “Of great significance is the provision following the bequests of the specific legacies for the testator there provided that if one fourth of the corpus of his estate was not sufficient to pay the legacies in full, then the specific bequests were to be ratably abated or diminished in certain proportions. There was to be no diminution of the amount going to charity. We submit that the testator could not have been more specific and more clear in giving expression to an intention that 25 percent of the corpus of his estate was to go for charitable purposes.” The petitioner argues that the probability of invading the trust corpus to supply support, comfort, and maintenance for Rosa Langenbach is too remote to be of any moment, Commissioner v. Bonfils Trust, supra, and, since under Ohio law the capita] gains in question became part of the trust corpus, the conclusion is inescapable that in each of the years before us 25 percent of the capital gains realized must be regarded as having “been permanently set aside” for charitable purposes within the meaning of the statute.

A major difficulty with the petitioner’s claim and the argument thereon is that it is predicated upon an erroneous interpretation or impression of the terms of the will. Under the will the trustee is authorized and empowered to pay to Rosa Langenbach such sum or sums as it deems necessary or proper “to provide for her suitable support, comfort and maintenance, should her income from this or from other sources prove, in the judgment of the trustee, inadequate for such purposes.” The trustee is also authorized and empowered to pay to Rosa Langenbach from the principal of the trust estate $25,000 per annum to be used by her for any charitable purpose or for the support and maintenance of relatives as she in her discretion determines. Upon her death the trust estate remaining is to be divided into two equal parts, one of which is to pass according to the terms of her will, otherwise to relatives, while the remaining one-half is to be applied in the payment of specific bequests to the decedent’s brothers and sisters. If such remaining one-half of the trust estate is insufficient to pay the said legacies, then the legacies are to be ratably abated or diminished, in which case no amount goes to charity. If, however, the said remaining one-half of the trust estate is more than sufficient to pay such legacies, then the “over-plus” is to be divided in two equal shares, one of which is to go to the decedent’s brothers and sisters and the other’for charitable purposes as specified.

It is apparent therefore that we may not without qualifications say that any part or percentage of the trust corpus has been permanently set aside or will ever be used for charitable purposes. Before that may be said a number of contingencies and conditions must be met. The petitioner, due possibly to its erroneous reading of the will, deals with only one of those contingencies, namely, the likelihood or probability of invasion of the trust corpus for the purpose of providing for the support, comfort, and maintenance of Rosa Langenbach, and assumes that except for that contingency 25 percent of the estate is, under the terms of the will, definitely marked for charity. If that were so, we might be able to conclude, as the petitioner contends, that the probability of invading corpus for that purpose is so remote that Commissioner v. Bonfils Trust, supra, is controlling, and that the capital gains realized for 1935 and 1936 are to the extent of the 25 percent thereof permanently set aside for charitable púrposes. Here, however, the trust corpus is not only subject to the charge, probable or improbable, for the support, comfort, and maintenance of Rosa Langenbach, but so long as she lives is also subject to a charge of $25,000 per annum to be used in her discretion for charity or the support of relatives and at the time of her death specific bequests aggregating $100,000 must first be paid from that one-half of the corpus remaining and out of which the payments for charitable purposes, if any, are to be made. It can not be said before her death therefore what, if any, part or percentage of the estate will ever be paid or used for charitable purposes. We are not unmindful of the fact that the estate did not depreciate in value from September 8, 1934, the date of decedent’s death, to December 31,1936, and had Rosa Langenbach died on the latter date, for instance, a substantial part of the estate, an amount, in fact, approaching 25 percent of the whole estate, would have gone to charity. Rosa Langenbach did not die on that date, however, but was still living at the time of the hearing, and so long as she lives the contingencies affecting and controlling the payment for charitable purposes can not be resolved or determined and until her death it can not be said that any part of the gains here in question has been permanently set aside for such purposes. In our opinion, the rule pronounced in Commissioner v. Bonfils Trust, supra, is not applicable to a case such as we have here, but, to the contrary, the reasoning of Boston Safe Deposit & Trust Co. v. Commissioner, supra, is in point. We accordingly sustain respondent’s contention that petitioner is not entitled for either of the taxable years 1935 or 1936 to deduct any portion of the capital gains realized in those years as having been permanently set aside for charitable purposes within the meaning of section 162 (a), supra.

With respect to the issues involving the bad debt deductions, we think the petitioner’s contentions must be sustained. The facts show that petitioner was required to make good the decedent’s guaranty on the four notes and without any extended discussion of the facts we think it will suffice to say that the record convinces us that the petitioner properly ascertained the debts to be worthless when the notes were paid off. We accordingly hold that, except for the collateral received on the Danford note, petitioner is entitled to the deductions claimed.

The parties have stipulated that for 1935 and 1936 there should be excluded from the income of the petitioner the respective amounts of $435 and $180, said amounts representing the reduction of decedent’s liability as guarantor or endorser of notes of Mercy Hospital, Canton, Ohio; further that for 1935 there should be excluded from petitioner’s income the sum of $225 representing the excess of decedent’s liability as guarantor or endorser on the notes of Kenneth Miller over the appraised value of the estimated recovery on said note.

Decision will Toe entered, under Rule 50.

       SEC. 162. NET INCOME.
      The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
      (a) There shall be allowed as a deduction (in lieu of the deduction for charitable, etc., contributions authorized by section 23 (o)) any part of the gross income, without limitation, which pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in section 23 (o), or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, or for the establishment, acquisition, maintenance or operation of a public cemetery not operated for profit.


author: Kern:

text:
    Charlotte L. Andrews, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 97628, 97629, 97630, 97631, 99353.
    Promulgated March 12, 1942.

      Alexander S. Andrews, Esq., for the petitioners.

      Z. N. Diamond, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith : Bertha A. Rainey ; Mary A. Stoddard; Belle Andrews ¡ Antoinette D. Andrews.

   OPINION.

Kern:

1. Petitioners were the owners of certain “6% Convertible Obligations” of the Associated Gas & Electric Co. It is stipulated by the parties that the terms of these obligations contained “provision for payment of interest by action of the Board of Directors regardless of the existence * * * [of any conditions attached to the payment of interest], in which case payment may be made in cash and/or ‘securities’ as defined in Board resolution and such payment shall be deemed to the amount of the value of said securities as fixed in such resolution.” The phrase “conditions attached to the payment of interest” evidently refers to a provision that interest on such obligations shall be payable without action of the board of directors if dividends shall have been paid on the corresponding preferred stock into which these obligations were convertible. On September 22,1936, the board of directors of the company adopted a resolution to the effect that “this Board * * * does hereby declare and direct the payment of * * * interest for the period beginning June 1,1983 and ending November 30,1933 on the 6% convertible obligations * * * and does hereby determine that such interest shall be paid in obligations of this Company maturing October 1,1941 to be designated ‘Scrip Certificates for Interest on Convertible Obligations’ ”; that these Scrip Certificates should bear interest at the rate of 4% payable out of “Available Net income” but payable as to principal and accumulated interest at maturity without regárd to “available net income” but subordinated to the senior indebtedness of the company; and that “the interest hereby declared on the Convertible Obligations * * * shall be charged against Capital Surplus of the Company.” Similar resolutions were adopted with regard to the payment of interest on the convertible obligations for the period December 1, 1933, to May 31, 1935, and for the period June 1, 1935, to November 30, 1936, these resolutions being adopted under date of October 16, and November 6, 1936, respectively. Pursuant to these resolutions scrip of the company was issued and distributed to the petitioners herein, who received and retained it. The scrip was readily transferable; there was an active market for it immediately upon its issue, the sales being “over the counter” transactions; and it had a market value during the taxable year of 35 cents on each dollar of its face value.

Under these facts the first question posed herein is whether petitioners, on a cash basis, received taxable income during the year 1936 by reason of their receipt of this scrip, to the extent of its fair market value.

Our answer is in the affirmative. This scrip was not issued to petitioners merely to evidence or renew an existing interest obligation, but was issued in payment and satisfaction of this obligation pursuant to the provisions of the “6% Convertible Obligations” which they held and the resolutions of the board of directors of the company authorizing its issue. It was received and retained as such by petitioners regardless of their dissatisfaction with this medium of payment. The scrip had an established market value of its own and there was active trading in it. Under these facts the receipt by petitioners of this scrip constituted the payment to them of interest by property having a market value and to the extent of this value they received income. See arts. 22 (a)-l, 22 (a)-8, and 115-10, Regulations 94; Patterson v. Anderson, 20 Fed. Supp. 799; G. C. M. 14182, 14r-1 C. B. 152.

In so far as these factual elements are lacking in the cases cited by petitioners, they are inapplicable to the question here presented. Cf. San Jacinto Life Insurance Co., 34 B. T. A. 186.

2. We come, then, to the question of the scrip’s value. We have found as a fact that the scrip when received by the petitioners in 1936 had a fair market value of 35 cents for every dollar of its face value. It was never quoted on the exchanges, but was sold actively and in considerable amounts over the counter by New York brokers. We need not enter here upon a detailed consideration of the contingencies of payment of the scrip, since it had an established market value. As the Circuit Court of Appeals for the Second Circuit said in Rogers v. Helvering, 107 Fed. (2d) 394, 396:

All this is well understood, and for this reason the price at which shares are sold is ordinarily the best test of their value. It is quite true that, even in wide markets where there are many buyers and sellers, these often do not know the more important facts about the company, and their consensus of opinion is not necessarily a proper measure of value, if by that be meant a truly informed judgment; nevertheless, sales are usually the most reliable evidence, and in any case they should weigh heavily. We cannot therefore say that, in the case at bar, the Board were bound to prefer the calculations of experts, drawn from the books, to sales even of such small blocks as forty shares or less; or to quotations of brokers who dealt in the shares. Robertson v. Routzahn, 6 Cir., 75 F. 2d 537, 539.

Petitioners object to a finding of value on these sales because of the contention that the sale of large blocks of the scrip at one time would depress the market to the point of extinction.

The one expert witness who testified on this subject was a broker. He stated that if the holdings of petitioners in this scrip had been placed upon the market it would have resulted in a substantial reduction in the price at which they could have been sold. On cross-examination he was asked as to the effect on the market if petitioners’ scrip had been sold over a long period of time. His answer was as follows:

A. Well, no doubt tbat if they bad given me a period of two years I might have been able to liquidate tbeir entire holdings, but the very fact that that block of scrip never come into the market and, as we would say, it was tied off the market, it did not interfere with what constituted the ordinary flow of scrip coming in or going out of the market, but with that additional scrip coming in the market, it is impossible for me to answer what the price would have been.

In view of tbe fact that one brokerage firm sold $966,055.35 face amount of tbis scrip in the period of October 13, 1936, to September 30, 1937, that this amount was approximately 60 percent of all the scrip sold, and that the total of such scrip outstanding was only $10,439,761, we must conclude that the market for the scrip was active and capable of absorbing petitioners’ holdings if sold intelligently over a reasonable period of time. While the sales were made for the most part in small lots, the volume of total sales and the activity of the market were such as to demand that great consideration be paid to the market prices as evidence of fair market value.

However, in the light of the testimony of this witness we must also conclude that the absorption by the market of petitioners’ scrip would result in some reduction of the price thereof if the sales were to take place within a reasonable period. Therefore, instead of taking the average price at which the scrip was sold by this brokerage firm during 1936 (approximately 42) as the sole factor determining the amount of market value, we have considered all the factors presented by the evidence and have determined that the market value of petitioners’ scrip was 35. See John J. Newberry, 39 B. T. A. 1123; Augustus E. Staley, 41 B. T. A. 752; Estate of Leonard B. McKitterick, 42 B. T. A. 130; Bull v. Smith, 119 Fed. (2d) 490.

3. The only remaining question is whether petitioners, on the well established principle of agency, qui faeit per alivm faoit per se, are liable for the negligence penalty by reason of the failure of their bookkeeper, Sweeney, who prepared their income tax returns, to return their scrip in 1936 as income.

The respondent grounds his case on the fact that Sweeney, in 1933, against the advice of petitioners’ counsel, treated the scrip received by them in 1933 (and not here in question) as income at its face amount on his books and carried it to the profit and loss account, and at the same time returned it as income at 10 percent of its face value. This seems to have been an arbitrary amount fixed by Sweeney, so as to disclose the scrip’s receipt without conceding that it had any real value. No protest was made by the petitioners about the scrip being treated as income in 1933 and no claim of refund was filed for that year. At the hearing Sweeney professed to be familiar with the Treasury rulings in regard to scrip which was issued in payment of dividends but denied knowledge of any ruling in regard to scrip issued in payment of interest. In 1936 Sweeney treated it as income on his books but not on the returns made out for petitioners. He did so in the latter year on the advice of counsel. Respondent points to these facts as establishing negligence on the part of petitioners.

We do not agree with respondent’s contention. There is no question as to Sweeney’s honesty of doubt with regard to the taxability of this scrip. It was and is a matter of a controversial nature and Sweeney was not negligent in consulting with petitioners’ attorney with regard to it and following his advice. The failure to report this scrip as income in the taxable year was due to an honest misunderstanding of law and not to negligence.

Therefore, no penalty attaches.

Decision will be entered, wider Bule 50.


author: Kern :

text:
    Benjamin Franklin Life Assurance Co., a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101813.
    Promulgated March 12, 1942.

      Valentine Brooks, Esq., for the petitioner.

      Arthur L. Murray, Esq., for the respondent.
   OPINION.

Kern :

The only question involved is whether the sums paid by petitioner and claimed as interest can be called “interest paid”, and deductions therefor allowed under section 203 (a) (8) of the Revenue Act of 1934. We think that they should be allowed.

The California law provided for the advancement of moneys to a corporation doing the business of insurance on the assessment plan and required that the return of the principal and any interest agreed to on the loan “shall be payable only out of the surplus remaining after providing for all required reserves and other liabilities whether required by the laws of this State or any other State in which the corporation does business and shall not otherwise be a liability or claim against the corporation or any of its assets.” The full section is set out in the margin. It will be seen at a glance that the condition of payment in the agreement of June 27,1934 (certificate of indebtedness No. 4) uses the same language as the statute and was intended to meet the conditions) of postponement there required. The three earlier certificates, in postponing repayment of the principal “unless and until the surplus of assets over liabilities of [petitioner including the statutory deposits] exceeds the sum of $25,000”, obviously sought the same end. The principal difference is that the first certificate made no provision for payment of interest and the next two agreed to pay over the coupons on bonds deposited with the state commission as interest. This difference is not essential except in so far as it shows the general purpose, since we are here concerned only with the last agreement, that of 1934. The advances are indifferently referred to at different times as “Contributions” and “Donations” in the¡ “Certificates of Indebtedness”, but the terminology used is not determinative upon us.

Eespondent argues, in the first place, that the obligation to pay principal and interest does not name a day certain, as a negotiable promissory note should, see Northern Fire Apparatus Co., 11 B. T. A. 355, 360; but the answer is that this is not a note. It does not on this account, however, cease to be an acknowledgment of indebtedness both of principal and interest.

Respondent relies on Policyholder’s National Life Insurance Co., 37 B. T. A. 60, in which arose the deductibility of certain payments by a mutual life insurance company to the holders of its “founders’ certificates”, which had been issued to policyholders as an inducement to take and keep policies of the company under the corporation’s promise to redeem in capital stock, but the payment of interest “in an amount not to exceed 6%” was authorized on these certificates provided “the financial condition of the company shall warrant such payment.” The '‘Founders’ fund” was risked in the business, we found, the same way as the free surplus; and we held that the “interest” so paid was no different from any other distribution by the company of its profits or assets. The distinctions here are palpable: the holders of the certificates in that case were prospective shareholders, and their claim to the “interest” was itself contingent and no rate was fixed.

More in point here is our decision in Manhattan Mutual Life Insurance Co., 37 B. T. A. 1041. There a newly organized mutual life insurance company issued certificates “to maintain a surplus guaranty fund” as provided by state law, which bore 6 percent interest and were redeemable at par after 10 years at the corporation’s option. The holders were also to receive 2y2 percent of renewal premiums received by the company after a certain date. The certificates had this limiting condition:

But such certificates shall constitute no primary liability against such Company, and the payment thereof as herein provided shall in no way hinder or have preference over the sums due policy holders of the Company.

We held the interest to be deductible by the company, but not the renewal premiums payments, stating the general problem and the line of distinction between the situation present there and that in Policyholder’s National Life Insurance Co., supra, in the following language, at p. 1047:

This question has been considered by the Board and by the courts in a number of cases, some of which involved facts similar to but not identical with those in the instant case. See Proctor Shop, Inc., 30 B. T. A. 721; affd., 82 Fed. (2d) 792, and cases therein cited. In Richmond, Fredericksburg & Potomac Railroad Co., 33 B. T. A. 895; affd., 90 Fed. (2d) 971, it was held that the payments made by the taxpayer to the holders of its “guaranteed stock”, although denominated “dividends”, were in reality interest and were deductible as such from gross income. Also, in the still more recent case of Brush-Moore Newspapers, Inc., 37 B. T. A. 787, we held to be deductible, as interest, the payments made to the holder of guaranteed preferred stock which,' the taxpayer corporation had issued in exchange for its outstanding promissory notes. There, also, the payments of 7 percent were guaranteed. In our opinion in that ease we said that the holder of the preferred stock “was entitled to receive, if he demanded it, $28,000 per annum, irrespective of the successful operation of the corporation, or its earnings.”
We held in Policyholder's National Life Insurance Co., 37 B. T. A. 60, that the amount which a mutual life insurance company paid during the taxable year to the holders of its “founder’s certificates”, representing 6 percent interest on the certificates, was not interest paid on an indebtedness, but was a distribution of profits or assets. We pointed out in our opinion in that case that the taxpayer was not obligated to pay interest to the holders of the “founder’s certificates”, but that the payments were to be made only if the financial condition of the company warranted and in the discretion of the directors. In the instant case it was stated on the face of the certificate that the holder thereof “is hereby guaranteed a return of six percent (6%) interest on the par value of this certificate, payable annually.” The resolution authorizing the issue of the certificates likewise provides for the payment of 6 percent interest on the par value of the certificates.

In the instant case we have a stronger case to support the taxpayer’s claim for the reason that here, unlike Manhattan Mutual Life Insurance Co., there was an obligation to repay before liquidation; and, secondly, the true interest payment there, while distinguishable, was closely allied with the renewal premium distribution. In Commissioner v. National Grange Mutual Liability Co., 80 Fed. (2d) 316, affirming 31 B. T. A. 666, the Circuit Court of Appeals for the First Circuit dealt with an analogous situation and resolved it in favor of the taxpayer. There the deduction was claimed by a farmers’ mutual accident insurance company of interest payments to its guaranty fund certificate holders as “expenses.” The fundamental problem of the company was so like that of the petitioner that we quote the court’s statement of it, at p. 318, 319:

* * * The members of the corporation are the policyholders. They are assessed premiums from which expenses and losses are paid. It is desirable, and for certain purposes necessary, that such companies should have a fund called a “guaranty” or “reserve” fund which can be drawn on to pay extraordinary losses. When such companies are organized, it is expected that such a fund will be gradually created out of unused premiums. This, however, takes time; and the fund must be in hand when the company begins business. This necessity was evidently recognized by the organizers of the respondent, and at its organization a guaranty fund was provided by the issue of preferred stock on which dividends if earned were to be paid.
It was later held that this arrangement made the company a stock company and taxable accordingly. In order to avoid such taxation the company was reorganized in 1930, the preferred stock being abolished and retired and in its place a guaranty fund being created by the sale of guaranty fund certificates. It is said that most or all of the preferred stockholders exchanged their stock for guaranty fund certificates. As the guaranty fund was provided for the payment of losses, it was essential that the company’s liability for it should be postponed to its liabilities under its policies. It was also desirable, and for certain purposes essential, that the company be under no direct obligation with respect to repayment of the guaranty fund and therefore not obliged to carry it as a liability on its books and statements.

The Court’s conclusion was expressed as follows, at p. 320:

* * * The intention of the persons interested in the respondent company clearly was to substitute for the guaranty fund provided by the preferred stock one made up of borrowed money; of this there seems to be no room for doubt. The requirements of the situation compelled them to put the company’s obligation to the lenders into a tenuous and unusual form. But the essential character of the obligation, i. e., to repay borrowed money, was not changed. Payments for the use of this money were therefore interest and properly deductible as expenses of doing the business. On this point also we agree with the decision of the Board of Tax Appeals.

We think enough has been said to explain a fact upon which respondent insists; that petitioner did not, in its return to the state insurance commission, recite its obligation to the general manager as a “liability.” The clause in the statute providing that the advance “shall not otherwise be á liability or claim against the corporation or any of its assets” would seem to make unnecessary the recital of the advance as a liability of the ordinary kind. Moreover, we can not agree that under this provision in the statute “neither the payment of interest nor principal was obligatory.” The plain language of the statute is simply that the advance shall not otherwise be a liability than as previously provided, namely, that it “shall be payable only out of the surplus remaining after providing for all required reserve and other liabilities, whether required by the laws of this state or any other state.” The only possible question might be whether payment to the general manager was intended to be postponed until after payment of statutory reserves only or until after payment of all general creditors; and the general import of the language is that repayment of the advance is subordinated only to statutory reserves. It would seem also that the obligation here was payable as soon as petitioner should accumulate a surplus and was not postponed until liquidation, but even if it had been so postponed, the interest would have been deductible. Commissioner v. National Grange Mutual Liability Co., supra.

The line, as we set out at the outset, is one to be drawn between a creditor and a shareholder. This is made clear in Commissioner v. Schmoll Fils Association Inc., 110 Fed. (2d) 611, decided by the Circuit Court of Appeals for the Second Circuit, where former holders of cumulative preferred stock were issued debentures, upon which payments were made which the corporation claimed as interest deductions. The court denied it, citing its earlier decision — Commissioner v. O. P. P. Holding Corporation, 76 Fed. (2d) 11; and Jewel Tea Co. v. United States, 90 Fed. (2d) 451; and distinguishing Commissioner v. National Grange Mutual Liability Co., supra. It mentioned as characteristics of the debentures which resembled cumulative preferred stock, the absence of any fixed maturity date and the subordination to bank creditors in the payment of principal, even on liquidation. The debenture holders, it was said, “do not possess the ordinary right of creditors to obtain unconditional payment of their claims at some time”; and almost the only difference between them and cumulative preferred shareholders, it was pointed out, was that the former could compel payment of interest out of any net earning of the company.

In the instant case there was some uncertainty as to time of payment and, likewise, subordination, but both the uncertainty and subordination were created by the peculiar nature of the mutual insurance business, a condition which was recognized by the Circuit Court of Appeals for the First Circuit in the National Grange case and by the Circuit Court of Appeals for the Second Circuit in the Schmoll case in distinguishing that case. This fundamental fact, it seems to us, removes th§ doubt which otherwise might be present as to whether the general manager was really a creditor or an investor. As a creditor it had no other choice under the law than to accept an obligation payable only on fixed conditions. That it became a creditor subject to such conditions in these circumstances does not convert it into a shareholder. In the Schmoll case, on the other hand, every presumption would be that the cumulative preferred shareholders were not very differently circumstanced after the recapitalization from what they had been before, and no extraneous reason appears to justify the taxpayer’s contention there that they were. Here the presumption of a loan is supported by the statutory requirement.

We hold that the petitioner’s obligation in question was an indebtedness under section 203 (a) (8), and the interest on it was, therefore, deductible.

Decision will be entered under Bule 50.

       This section of the Civil Code of California was enacted in 1933 (Calif. Stat. 1933, p. 1310) and superseded in 1935, by a similar provision, section 10745 of the Insurance Code :
      “453h. (New) Advancement of Moneys, etc.; Refund Only Out of Surplus. Any officer or director of a domestic corporation doing the business of insurance on the. assessment plan under the provisions of this chapter, or any other person, may advance to such corporation any sum of money for the purpose of promoting or conserving its business or to enable it to comply with the requirements of the laws of this or any other State; and the return of such money, together with such interest thereon as may have been agreed upon, not exceeding eight per cent per annum, shall be payable only out of the surplus remaining after providing for all required reserves and other liabilities whether required by the laws of this State or any other State in which the corporation does business and shall not otherwise be a liability or claim against the corporation or any of its assets. No commission or promotion expenses shall be paid in connection with the advance of any such money to the corporation, and the amount of such advance shall be reported in each annual statement. When any such corporation discontinues business, after the payment of or provision for all liabilities, the balance in this fund must be returned to such person, or, if the advance is repaid, to the corporation or disposed of as may be determined by the superior court of the county in which is its principal place of business. (In effect 90 days from and after May 22, 1933, Sec. la, Art. IV, Const.; Stats. 1933, Chap. 508.)


author: Opper:

text:
    Estate of Benjamin Franklin McGrew, Third National Bank in Nashville, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102024.
    Promulgated March 13, 1942.

      Seymour Samuels, Jr., Esq., and James W. Allen, G. P. A., for the petitioner.

      John B. Stivers, Esq., for the respondent.
   OPINION.

Opper:

First issue. — The burden being upon petitioner to overcome the prima facie correctness of respondent’s determination that decedent transferred property in contemplation of his death, as well as under the presumption created by section 302 (c), the Board should have been placed in a position to determine by means of a sufficiently complete description of all relevant facts what was decedent’s impelling motive in making the two transfers. Petitioner fell.far short of doing tins. We do not know the cause of decedent’s death, see Luscomb v. Commissioner (C. C. A., 2d Cir.), 30 Fed. (2d) 818; his age, see Updike v. Commissioner (C. C. A., 8th Cir.), 88 Fed. (2d) 807, 811; certiorari denied, 301 U. S. 708; or his state of mind when the transfers were made, see Travelers Bank & Trust Co., Executor, 29 B. T. A. 88, 95. Even his physical condition at that time is described only as “fairly good” but “he was worried to death over this lawsuit” and “he never was a strong man.” The testimony shows that he was ill within six months of the time of the conveyance but not the nature of this illness.

The single circumstance relied upon to induce us to determine that these transfers were not made in contemplation of death is that decedent had previously intended to transfer the property to his wife and that at the time he feared his creditors might take it. But even this, in the form in which the evidence appears, is about as consistent with the one motive as with the other. The wife testified that “he felt that I needed more land and that the bigger part of his property should have been wiped out, if that happened, that I would have a living, and he wanted me to have it.” See Igleheart v. Commissioner (C. C. A., 5th Cir.), 77 Fed. (2d) 704.

On the other hand, decedent made his will within about two weeks of the transfer. See Rengstorff v. McLaughlin (Dist. Ct., N. Dist. Calif.), 21 Fed. (2d) 177. His wife was his beneficiary under both. See Myers v. United States (Ct. Cls.), 2 Fed. Supp. 1000, 1012; certiorari denied, 292 U. S. 629. The deed by which the gift was made was kept in his wife’s safe deposit box and not recorded until after decedent’s death.

The record, taken as a whole, leaves us far from satisfied that the gift was not brought about by testamentary motives. We have accordingly made the finding that the property was transferred in contemplation of death.

Second issue. — Although there may have been a reason for decedent to give his wife the money with which she opened their joint bank account, that is not enough to eliminate the item from decedent’s estate. There must have been “consideration”, adequate in money or money’s worth. The fact that the wife had supplied the husband with funds with which to satisfy his creditors does not constitute consideration unless the advances were a loan, accompanied by the promise that they would be repaid. Absent the evidence of any such promise in express terms, we must be able to find that one was implied. Fox v. Rothensies (C. C. A., 3d Cir.), 115 Fed. (2d) 42. “Expenditures out of the wife’s separate estate made by the husband with her knowledge and consent will not render him liable to account for the same”, 21 Cyc. 1431, quoted with approval in Williams v. Williams (Tenn.), 236 S. W. 926, 930, if the local law on the subject is controlling. But sea Commissioner v. Greene (C. C. A., 9th Cir.), 119 Fed. (2d) 383; certiorari denied, 314 U. S. 641. The relationship of the parties and their attitude- and intent respecting the transactions as infer-able from their conduct are the controlling factors in ascertaining the existence of any implied promise. See Williams v. Williams, supra. No implication that the transaction was a loan necessarily arises merely from the use of the wife’s principal or capital, Fox v. Rothensies, supra, nor from the husband’s use of the funds for his own personal purposes instead of their joint benefit. Williams v. Williams, supra. Difficult and obscure questions lurk in the subject but these need not detain us here, for the wife’s consent and approval and her attitude toward the financial transactions she had with her husband appear too unmistakably from her own testimony to leave room for any contrary implication. She testified, when explaining the purpose of the joint bank account, “We always lived that way, what I had was his, and what he had was mine, if we needed it * * There is no evidence that the wife was promised or expected repayment at the time the creditors were paid, and we are unable to find anything in the record justifying the conclusion that decedent’s funds, with which this joint account was opened, were given to the wife to liquidate any such promise or for anything else approaching an adequate and full consideration in money or money’s worth. On this issue respondent is sustained.

Third issue. — The only evidence relating to the value on the date of decedent’s death of certain bonds forming a part of his estate was the inability of the executor to find a purchaser for them or for the stock later received in exchange. The debtor, after a 77-B receivership and reorganization, was still in active business. There is no predicate for any finding that the value of the securities was lower than that fixed by respondent. Petitioner’s unsupported determination to that effect does not suffice. Higginbotham-Bailey-Logan Co., 8 B. T. A. 566, 578. Respondent’s action on this issue must accordingly he approved.

Fourth issue. — It is claimed that insurance on decedent’s life, payable to the estate, was in reality transformed by the unusual provision of Tennessee law, into policies for the benefit of decedent’s wife, and therefore, as payable to “other beneficiaries”, exempt within $40,000 from treatment as part of the estate. Sec. 302 (g). This case is not like Estate of Frederick G. Proutt, 41 B. T. A. 1299, for there was no testamentary disposition of the insurance here, and its proceeds went directly to the wife through the executor without the intervention of any trust or other process of administration. It would be entirely comparable with Commissioner v. Jones (C. C. A., 6th Cir.), 62 Fed. (2d) 496, were it not for respondent’s contention that the 1926 amendment to section 302 (a) presents a new problem, a question which the Board expressly reserved in the Proutt case.

While there was no authority on the point when this proceeding was presented and briefed, the recent decision of the Sixth Circuit Court of Appeals in Proutt v. Commissioner, 125 Fed. (2d) 157, reversing Estate of Frederick G. Proutt, supra, necessarily and directly passes upon the question and determines it in favor of petitioner. On the authority of that case, therefore, respondent’s determination on this issue is disapproved.

Other questions were eliminated by stipulations of counsel at the hearing. These matters should be taken into account in the recomputation.

Decision will he entered wider Rule SO.

       Tennessee Code (1932), see. 8456,


author: Arttnbell:

text:
    American Hotels Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105555.
    Promulgated March 13, 1942.

      Anthony J. Vaughn (an officer), for the petitioner.

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

Arttnbell:

The petitioner insists that it was at no time either legally or morally liable to make good the shortage caused by the misappropriation of the funds of the Carter Hotel. It is clear that if it was so liable, that liability arose in 1933 and 1934, when the funds were embezzled. But petitioner asks that it be permitted to accrue in 1937 an amount it was under no liability to pay because near the close of the year it had determined that it was good policy to make some settlement with the Metropolitan Life in order to retain the good will of that company. Accrual of liabilities in order to be used as a basis for income tax deductions must have a more substantial basis. On petitioner’s own statement of its case, no definite liability might arise until 1938, when the parties agreed upon the terms of settlement and, in the circumstances here present, no liability could arise, if at all, before that year. Arabol Manufacturing Co., 26 B. T. A. 1068; Trippensee Manufacturing Co., 15 B. T. A. 15; Price Iron & Steel Co. v. Burnet, 45 Fed. (2d) 921; Clark Dredging Co. v. Commissioner, 63 Fed. (2d) 527.

The conclusion here reached makes unnecessary any discussion of the fact that the lease was one between Metropolitan Life and the Management Corporation and not one made directly with petitioner. It also appears in evidence that the Management Corporation held during the taxable year certain obligations of Taylor to cover the funds embezzled by him, which obligations he was currently, if slowly, liquidating. It is also worthy of comment that if petitioner’s liability was that of a guarantor and thus a secondary liability there is no evidence that it could not have recovered from the Management Corporation a substantial part of the money it was paying to Metropolitan and there is at least some latent evidence in the record to support this observation.

Decision will he entered for the respondent.


author: Black:

text:
    Greenwood Packing Plant, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101593.
    Promulgated March 13, 1942.

      Theodore B. Benson, Esq., for the petitioner.

      Charles Oliphant, Esq., for the respondent.
   OPINION.

Black:

This is not a case where petitioner has received from the Government a refund of processing taxes which it had accrued and paid in a prior year and which the Commissioner has determined had been passed on to the taxpayer’s customers in such prior year and had not since been refunded to such customers. This is a case where the taxpayer accrued on its books in 1935 a liability for certain processing taxes which it did not pay in that year but which it took as a deduction on its income tax return filed for 1935. This return showed a loss of $497.37 and no income tax due.

Later on, after the processing tax had been declared unconstitutional, petitioner’s books and accounts were audited by a revenue agent and he disallowed as a deduction $2,051.19 processing taxes which petitioner had accrued as a liability on its books in 1935 and had taken as a deduction on its 1935 tax return, although such amount was never paid by petitioner. The revenue agent, however, allowed to petitioner certain additional deductions which petitioner had not taken on its income tax return. These additional deductions when taken into account still showed that petitioner had a loss in 1935 of $47.63.

So far as the record shows, the Commissioner approved this report of the revenue agent and did not determine any deficiency in petitioner’s normal income tax for the year 1935. The report of the internal revenue agent made no recommendation or findings as to petitioner’s unjust enrichment tax, if any, under Title III of the Bevenue Act of 1936. The Commissioner on December 6, 1939, determined a- deficiency of $1,598.02 in petitioner’s unjust enrichment tax for the calendar year ended December 31, 1935. The detailed reasons which were given by the Commissioner for his determination of the deficiency have already been stated, in our preliminary statement, and need not be repeated here.

It is plain that if petitioner is taxable on the $1,997.52 accrued processing taxes, not paid, it is under section 501 (a) (1) of the Revenue Act of 1936. That provision of the 1936 act is printed in the margin.

Petitioner defends against the imposition of the tax on two grounds: (1) That it operated at a loss and received no net income from any source in 1935, and, failing in this, (2) That no net income Aras received from the processing of hogs in 1935.

With respect to ground No. 1, it has been proved in this proceeding that the income tax return of petitioner which was filed for the year 1935 showed a loss of $497.37 and that respondent’s revenue agent made certain adjustments in petitioner’s income as shown on its return which were not contested, and that after these adjustments were made petitioner still had a loss of $47.63 instead of net income for the year 1935. For the purpose of this discussion we assume that this revenue agent’s report made a correct determination of petitioner’s income and deductions for the year 1935 and correctly arrived at a loss of $47.63 for the year. However, as we construe section 501 (a) (1), in order for a taxpayer to escape its provisions it is not sufficient to show that the taxpayer had a loss in the taxable year from general business operations. A taxpayer may be liable for unjust enrichment taxes even though he had no net income from general operations. It seems clear that the statute so provides.

As we construe the statute in question, there are two ways whereby a taxpayer can show he was not liable for the tax which has been imposed. First, if he can prove that he did not pass the tax on to his customers but absorbed it himself, then he is not liable for the tax, even though he did have a net income in the taxable year. Second, if he can prove that he had a loss from the sale of articles upon which the excise tax was not paid, then he would not be liable for the tax, even though he is not able to prove affirmatively that he absorbed the tax. No authorities need be cited to show that the burden is on petitioner to show these things. It seems plain that petitioner does not succeed in providing either of these things by showing that it had a small operating loss in 1935 from its business operations.

Petitioner, at the hearing, made no effort to show that it did not pass the processing tax on hogs to its customers except to show that during the year it operated its business at a small loss. This sort of evidence is not sufficient to prove that it did not pass the processing

tax on to its customers. Cf. Vennell v. United States, 122 Fed. (2d) 936, affirming 38 Fed. Supp. 381. Likewise, such evidence as to a small loss in 1935 from general business operations is not sufficient to show that petitioner incurred a loss in the sale of its hog products upon Avhich the processing tax was imposed. If petitioner did in fact suffer a loss in the sale of its hog products during the calendar year 1935, the burden was on it to prove such loss in one of the two ways which the statute requires. The method of proof is prescribed by section 501 (c), printed in the margin. Petitioner concedes that it has made no effort to determine its net income, if any, from its sales specified in section 501 (a) (1), in the manner prescribed by section 501 (c) (1) or (2). The reason that it has made no effort to do so is because it has no accounting records which will enable it to determine the amount of its gross income from the sale of hogs which were processed. Without first determining the amount of gross income from these sales, it is, of course, impossible to determine the net income or loss from them, as the case may be. Petitioner can and has determined that its gross sales of all products in 1935 were $105,821.95 but it has been unable to show any breaking down of these sales so as to show separately how much hog products, how much beef products, and how much miscellaneous merchandise were sold. Petitioner has records from which it can break down its purchases during 1935 and these have been shown in our findings of fact. The amount of hogs purchased plus materials which went into their processing was $16,811.78. However, this particular evidence as to hog purchases offers no help by which we can determine the gross income which petitioner received from the sale of hog products after the hogs were processed. Without such latter data, we are unable to determine, as we have already stated, whether petitioner had a net income in 1935 from its sales of hog products or had a net loss from these sales, as it claims.

Petitioner introduced the testimony of W. A. Barnett, vice president and secretary of petitioner, who testified in a general way that petitioner lost money on its purchases and sales of hogs and their products in 1935. The substance of his testimony was that petitioner was not advantageously located for the purchase of hogs, that it had to purchase them in competition with the big packers, and that he figured that petitioner, most of the time, lost money on its handling of hogs and hog products and that on this account petitioner endeavored to handle just as few hogs as possible and at the same time satisfy its trade. The witness was unable to give any figures from the books which disclosed the gross sales of hog products that had been processed or submit any figures from which we might arrive at what would be at least a reasonable approximation of what net income or loss, as the case might be, petitioner had in 1935 from its purchases, processing, and sales of hogs. We do not think such evidence as the witness Barnett gave, coupled with the other evidence which is in the record, is sufficient to overcome the presumptive correctness of the Commissioner’s determination.

As we have already pointed out, even though petitioner has been unable to show whether it had net income or loss from the sale of hog products in 1935, it still could have escaped the unjust enrichment tax which is now demanded if it could have shown that it absorbed the processing tax in question and did not pass it on to its customers. In making such a showing petitioner is not confined to the formulas, margins, etc., prescribed by the statute. Even when all books and records are lost, there are cases where such a showing can be made. Sophie Jaski, 43 B. T. A. 321. But in the instant case petitioner has offered no testimony at all bearing upon the question as to whether it absorbed the processing taxes or passed them on to its customers except the general testimony unsupported by figures that it lost money on handling hogs. Such testimony is insufficient to show that petitioner did not pass the tax on to its customers. Vennell v. United States, supra.

The petition raises the question of the statute of limitations, but nothing is said of it in the brief. The facts show that petitioner’s unjust enrichment tax return was filed December 15, 1936, and the deficiency notice was mailed December 6, 1939. The statute of limitations had not run at the time the deficiency notice was mailed. See secs. 275 (a) and 503 (a), Revenue Act of 1936.

The petition raises the question of the constitutionality of Title III of the Revenue Act of 1936, under which the Commissioner seeks to impose the tax. No argument is made in the brief in support of this particular assignment of error. We think it is without merit. The constitutionality of the unjust enrichment tax has been upheld by numerous decisions of the courts. See White Packing Co. v. Robertson, 89 Fed. (2d) 775; Louisville Provision Co. v. Glenn, 18 Fed. Supp. 423; appeal dismissed, 90 Fed. (2d) 1012; Union Packing Co. v. Rogan, 17 Fed. Supp. 934.

Decision will be entered for the respondent.

       SEC. 601. TAX ON NET INCOME FROM CERTAIN SOÜRCES.
      (a) The following taxes shall be levied, collected, and paid for each taxable year (in addition to any other tax on net income), upon the net income of every person which arises from the sources specified below:
      (1) A tax equal to 80 per centum of that portion of the net income from the sale of articles with respect to which a Federal excise tax was imposed on such person but not paid which is attributable to shifting to others to any extent the burden of such Federal excise tax and which does not exceed such person’s net income for the entire taxable year from the sale of articles with respect to which such Federal excise tax was imposed.

       (c) The net income from the sales specified in subsection (a) (1) shall be computed as follows:
      (1) From the gross income from such sales there shall be deducted the allocable portion of the deductions from gross income for the taxable year which are allowable under the applicable Revenue Act; or
      (2) If the taxpayer so elects by filing his return on such basis, the total net income for the taxable year from the sale of all articles with respect to which each Federal excise tax was imposed (computed by deducting from the gross income from such sales the allocable portion of the deductions from gross income which are allowable under the applicable Revenue Act, but without deduction of the amount of such Federal excise tax which was paid or of the amount of reimbursement to purchasers with respect to such Federal excise tax) shall be divided by the total quantity of such articles sold during the taxable year and the quotient shall be multiplied by the quantity of such articles involved in the sales specified in subsection (a) (1). Such quantities shall be expressed in terras of the unit on the basis of which the Federal excise tax was imposed.
      For the purposes of this section the proper apportionment and allocation of deductions with respect to gross income shall be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary.


author: TuRnee :

text:
    Philip H. Schaff, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101775.
    Promulgated March 13, 1942.

      John W. Ford, Esq., for the petitioner.

      Thos. F. Gcdlahan, Esq., for the respondent.
   OPINION.

TuRnee :

Petitioner contends that under section 23 (k) of the Revenue Acts of 1934 and 1936 he is entitled to bad debt deductions ' in the amount of $30,195.55 for 1935 and $50,000 for 1936, representing the debts of Marie Campbell Ravelli and Philip Wick, respectively, which debts were ascertained to be worthless in those years. The respondent contends that no debts were due the petitioner from Mrs. Ravelli or Wick and that there was accordingly nothing for petitioner to charge off or deduct as bad debts in the respective years. Respondent contends and petitioner concedes that before a deduction can be allowed on account of a worthless debt it is essential that the existence of a valid debt be established, J. S. Cullinan, 19 B. T. A. 930; Missouri Valley Bridge & Iron Co., 14 B. T. A. 1162; and Federal Fuel Co., 3 B. T. A. 814; and most of the argument presented centers' around the question whether the facts here establish the existence of valid debts.

We think that in both instances petitioner has established the existence of unadiudicated claims rather, than valid debts. With respect to the Ravelli matter, petitioner’s own attorney advised him that he had only a slight chance of winning a lawsuit against her. If, as petitioner contends, a valid debt existed, he would be concerned not so much with the question of obtaining a judgment, but rather with the matter of collection. Petitioner may or may not have had a meritorious claim against Mrs. Ravelli. The facts do show, however, that petitioner was not required or requested to assume any personal liability in handling the account and that he felt a moral obligation on account of the losses sustained while he was absent and unable to give the account his personal attention and for that reason voluntarily guaranteed her account. A mere voluntary assumption of an obligation is not sufficient to create a basis for a bad debt deduction. See Jamie A. Bennett, 40 B. T. A. 745; cf. Robinson v. Commissioner, 53 Fed. (2d) 810. Assuming as correct petitioner’s contention that when he made the last payment to the firm in 1934, he acquired whatever rights the firm had in the account, the fact remains that the record does not establish that Mrs. Ravelli had a definite legal liability to pay a specified sum of money to the firm. The record does not show to what extent the firm or the petitioner was authorized to make commitments for Mrs. Ravelli or any other terms and conditions of the arrangement except that in the beginning it was a “discretionary” account. After petitioner guaranteed her account the firm seemed to look to him for payment of the losses, and apparently made no effort to collect from her. In her letter to petitioner Mrs. Ravelli declined to assume any liability for the losses sustained. On this record we can not conclude that a valid debt existed. Moreover, even if we assume the existence of a valid debt, we do not think petitioner has established its worthlessness. He had reasons of his own not to press the matter and on the basis of the record here we could not conclude that a judgment in the amount claimed could not be collected. The respondent is sustained on this issue.

With respect to the second issue, we also think the facts disclose the existence of an unadjudicated claim against Philip Wick rather than a valid and subsisting debt. Petitioner does not contend that any claim which he might have had against Wick for breach of the partnership agreement constituted a “debt” within the meaning of the act'. Cf. Wadsworth Manufacturing Co. v. Commissioner, 44 Fed. (2d) 762; and Lewellyn v. Electric Reduction Co., 275 U. S. 243. His contention is that such claim was converted into a valid and subsisting debt by reason of certain oral statements made by Wick to the effect that he would reimburse petitioner for his losses. Petitioner expressly disavows any implication that Wicks misappropriated or embezzled any funds, yet his authority for his above contention consists of several cases involving embezzlement. Douglas County Light & Water Co. v. Commissioner, 43 Fed. (2d) 904; Ledger Co. v. United States, 37 Fed. (2d) 775; and Farish & Co. v. Commissioner, 31 Fed. (2d) 79.

Those cases are clearly distinguishable. Once embezzlement is admitted, as in those cases, there is no question as to legal liability and a promise to repay merely amounts to an admission of the legal obligation. In the instant case we have not seen a copy of the partnership agreement and on the basis of the record before us we could not, as a question of law, determine that Wick’s management of the firm’s business was such as to make him legally liable to petitioner for his losses, and moreover, we can not determine that Wick’s statement to petitioner amounted to an admission of legal liability under the contract. The record indicates that Wick may have had a number of reasons for making that statement and another fact which indicates that Wick did not regard his statement as having any binding effect is that he subsequently offered to settle the matter by giving petitioner his note for $50,000. Petitioner does not contend that this latter offer, which was rejected, created a valid debt for $50,000, apparently preferring to rely on his contention that there was a debt for the full amount of his losses, the exact amount of which is not shown by the record. On this point he states on brief that a deduction for only $50,000 was claimed because it represented the “minimum” amount he was entitled to deduct.

Petitioner’s negotiations with his attorney with respect to his handling the matter might indicate that petitioner himself did not regard his claim as having been converted into a valid debt. The record does not disclose whether petitioner’s counsel contemplated an action on the alleged debt or an action on the contract, but the negotiations and arrangements, together with other facts of record, suggest the latter. Finally, assuming that a valid debt was created by Wick’s oral statement, petitioner has not shown what value, if any, the debt had at the time of acquisition. Eckert v. Burnet, 283 U. S. 140; Park v. Commissioner, 58 Fed. (2d) 965; and C. H. White, 15 B. T. A. 1375.

We conclude that at the time of Wick’s death petitioner had nothing more than an unadjudicated claim for breach of the partnership agreement, and that does not constitute a valid debt within the meaning of the act. Wadsworth Manufacturing Co. v. Commissioner, supra, and Lewellyn v. Electric Reduction Co., supra. The respondent is sustained on this issue.

Another issue raised in the petition for 1935, involving the taxability of certain dividends received by petitioner from the Consolidated Freight Handling Co. has been abandoned by petitioner.

Decision will he entered under Rule 50.


text:
    Woodward Investment Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97964.
    Promulgated March 13, 1942.

      W. A. Sutherland, Esq., for the petitioner.

      F. L. Van Haaften, Esq., for the respondent.
   OPINION.

Black:

The Commissioner determined a deficiency of $5,397.43 in income tax against petitioner for the year 1936. The ground for the determination of the deficiency is stated in the deficiency notice as follows:

Your contention that, in the computation of the surtax on undistributed pmfits as provided in section 14 of the Revenue Act of 1936, you are' entitled to a credit for dividends paid of a portion of a distribution in liquidation in the amount of $112,800.00 is denied for the reason that under the provisions of section 27 (f) of the Revenue Act of 1936 this office considers that no portion of the distribution is properly chargeable against earnings or profits accumulated since February 28, 1913.

To this determination of the Commissioner, the petitioner has assigned error, as follows:

(a) The failure of the Commissioner to allow as a dividend paid credit a portion of a liquidating dividend paid on Dec. 31,1936, which credit exceeds the adjusted taxable income for the year and would eliminate the additional tax proposed.

In an amended answer the Commissioner affirmatively pleaded that petitioner’s net income as determined in the deficiency notice should be increased by $21,791.66 and that the deficiency should be increased accordingly. The parties have settled the issue raised by the Commissioner’s amended answer by stipulating that the income of petitioner shown in the notice of deficiency should be increased by $10,833.33.

The facts have all been stipulated and as stipulated are adopted as our findings of fact. The following statement of certain of the facts stipulated will suffice for the purpose of this opinion.

The petitioner was incorporated under the laws of Georgia in 1906, and was dissolved in 1938, following the complete liquidation of its property to its sole stockholder.

Petitioner filed its income tax return for the year 1936 with the collector of internal revenue for the district of Georgia on March 12, 1937.

The petitioner showed no undistributed profits tax to be due on such return. It claimed a, dividends paid credit in excess of the adjusted net income shown on its return. The Commissioner disallowed the'entire dividends paid credit claimed and proposed to assess undistributed profits tax of $5,397.43.

A final liquidation of petitioner was begun in December 1936, and, in accordance with the plan originally adopted before the liquidation began, the liquidation of the corporation was completed within two years, the final distribution being made on August 31,1938. When the first distribution was made, on December 31, 1936, petitioner had capital and surplus as follows:

Capital stock_$160,000.00
Paid in surplus prior to 3-1-13- 21, 000. 00
Earned surplus before March 1, 1913- 6, 663. 25
Appreciation 3-1-13 realized in later years- 49,874. 07
Earned surplus after 3-1-13- 218,223.95
Total_ 445,661.2T

The distribution made on December 31,1936, pursuant to a resolution of liquidation, consisted of cash and property having a total cost basis of $112,800-and a fair market value of $149,280.

Marion Woodward was the sole stockholder of petitioner. The two qualifying shares which stood in the name of others belonged to her, and the correct cost basis of petitioner’s stock which she owned was $424,300. The liquidating dividend of $149,280 paid in cash and property which she received in 1936 was less than the cost basis of her stock and she had no gain from the liquidation distribution in 1936. In 1937 she received another liquidating dividend from petitioner in cash and property, amounting to $367,557.96. Of this amount $275,020 was necessary to exhaust her cost basis of $424,300 and the balance of $92,537.96 has been agreed to by her and the Commissioner as the capital gain on which the tax is payable in 1937. The amount which she received in 1938 upon the completion of the final liquidation of petitioner was $130,364.60, all of which, with the exception of proposed taxes and expenses amounting to $5,887.56, was reported by her as capital gain in 1938. The year 1938 is still open and subject to adjustments for any change in the amount of taxes due by petitioner to the Federal Government for 1936. There was no distribution by petitioner in 1936 other than the liquidating dividend to which reference has already been made.

We do not understand the respondent to contend that the distribution of cash and property made by petitioner to its sole stockholder in December 1936 was not one of a series of distributions made pursuant to a plan for the complete liquidation of petitioner. Clearly, from the facts stated above and the resolutions of distribution which are a part of the record in this case, the distribution made December 31,1936, was a part of such plan. Nor do we understand respondent to contend that petitioner’s sole stockholder did not ultimately account in her income tax returns for all profits which .'she realized -from the 1 iqnirlatinn_ of bpT_.sf.ook in petitioner. What the respondent does contend is "that, inasmuch as the liquidating dividend which was paid to petitioner’s sole stockholder in 1936 was less than the cost basis of her stock, she was not “taxable” thereon within the meaning of the statute and petitioner is not entitled to any credit for a dividends distribution by reason of such liquidating dividend. We do not think that respondent’s contention finds any support in either the law or the applicable Treasury regulations. The applicable statute is section 27 (f) of the Revenue Act of 1936, printed in the margin. The applicable Treasury regulations are printed in the margin.

In the regulations which are printed in the margin, it is clear that a dividends paid credit resulting from a distribution made in liquidation of a corporation is conditioned upon two things: (1) The amounts distributed in liquidation must be those which are treated as received in payment in exchange for the stock; and (2) the gain or loss from such exchange must be one that is recognized under the provisions of section 112. It seems perfectly clear that both conditions are met in the instant case.

Kespondent does not dispute but that the distribution made in the taxable year was one of a series of distributions which resulted in the complete liquidation of petitioner and that therefore the amount received in the taxable year by petitioner’s sole stockholder was received in partial payment for her stock. The facts which have been stipulated show clearly that this was true. He seems 'to contend, however, that the gain or loss resulting from such distribution was not one which, under the provisions of section 112, was recognized merely because the amount distributed in 1936 was not equal to the cost basis of the sole stockholder’s stock. It seems to us that such contention is clearly untenable. It is frequently the case, where there are a series of distributions made in liquidation of a corporation which extend over a period of more than one year, that in the year of the first distribution the stockholders may not receive the cost basis of their stock. In fact, where there are a number of stockholders who have purchased their stock at different times and at different prices, some stockholders may receive the full cost of their stock and more in the’first year of distribution and have a taxable gain to report in that year from the liquidation distribution, whereas other stockholders who bought their stock at higher prices may have no gain to report in such first year of distribution and may not have received, in that year, the full cost basis of their stock. Such varying circumstances have nothing to do with the legal fact that gain or loss, if any, resulting from such liquidation distributions is recognized under the provisions of section 112. Eespondent’s contention on this point is, therefore, not sustained.

It remains only for us to determine how much of the distribution made in 1936 is to be allocated to earnings and profits accumulated by petitioner after February 28, Í9Í3. The”facts~Which have been stipulated show that petitioner had earned surplus after March 1, 1913, of $218,223.95. Its total capital and surplus was $415,661.27. The distribution made by petitioner December 31, 1936, consisted of cash and properties having a total cost basis to petitioner of $112,800 and a fair market value of $149,280. Of the property and cash thus distributed by petitioner in 1936 petitioner contends that it is entitled to a dividends paid credit under section 27 (f) of at least $55,226.88. Petitioner computes such credit in the following manner

$44566111 °r 48'-96% °f $112’800 equals $55,226.88.

We think this computation is made in accordance with article 27 (f)-l (b) of Regulations 94, supra. Therefore, of the $112,800 property (cost basis) and cash distributed by petitioner in liquidation December 31, 1936, $57,573.12 should be charged to capital account, for which petitioner is not entitled to receive any dividends paid credit, and $55,226.88 should be charged to petitioner’s earned surplus accumulated since February. 28, 1913. '"PstitionertTImHiled to receive a dividends paicTcredit for 'this latter amount under the statute and regulations which we have cited and discussed.

In addition to the foregoing contentions of respondent which we have stated, he also contends that subdivision (h) of section 27 forbids any dividends paid credit to petitioner for the liquidating distribution which it made December 31, 1936. Section 27 (h) is printed in the margin. It seems clear to us that this section has no application to a distribution in liquidation where the gain or loss is recognized to the stockholders upon exchange of their stock in liquidation. Section 27 (f) and article 27 (f)-l of Eegulations 94, as we have already endeavored to point out, cover such a situation. Even in cases where the liquidation distribution falls under the provisions of section 112 (b) (6) of the Eevenue Act of 1936 and no gain or loss is recognized to the stockholder, the Board has held that section 27 (h) does not limit section 27 (f) and that the dividends paid credit must be allowed to the corporation making the distribution in liquidation. Credit Alliance Corporation, 42 B. T. A. 1020; affd., 122 Fed. (2d) 361; certiorari granted, 314 U. S. 604; Lane-Wells Co., 43 B. T. A. 463; Crown Zellerbach Corporation, 43 B. T. A. 541; California Brewing Association, 43 B. T. A. 721. See also Commissioner v. Kay Manufacturing Co., 122 Fed. (2d) 443; certiorari applied for October 21, 1941.

Eegardless of what action the Supreme Court may take in the Credit Alliance Corporation case and the Kay Manufacturing Co., case, we do not think that it can affect in any way the issue we have to decide in the instant case. In the Credit Alliance case and the Kay Manufacturing Co. case, the distributions which were made in liquidation were made by the subsidiary corporations to their parent corporations and section 112 expressly"provided that no gain or loss should be recognized to the parent corporation in that kind of liquidation distribution. Section 112 (b) (6) of the Revenue Act of 1936 is printed in Credit Alliance Corporation, supra, and need not be printed here. Suffice it to say that in the instant case it is clear that the nonxecpgnition'pro'VTsions of section 112 (b) (6) of the Revenue Act of 1936 have no amplication. ' —" "

Decision will be entered under Rule 60.

       (f) Distributions in Liquidation. — In the case of amounts distributed in liquidation the part of such distribution -which is properly chargeable to the earnings or profits accumulated after February 28, 1913, shall, for the purposes of computing the dividends paid credit under this section, be treated as a taxable dividend paid.

         Art. 27 (f) — 1. [Regulations 94.] Dividends paid credit for distributions in liquidation. — (a) Distributions which diminish earnings or profits. — To the general rule that the dividends paid credit is allowable only with respect to taxable dividends paid, section 27 (f) makes one exception, namely, for that part of an amount distributed in liquidation which, under the Act, constitutes a distribution of, and is properly chargeable to, earnings or profits accumulated after February 28, 1913. Thus, a distribution either in complete or partial liquidation of a corporation is treated by the Act as one constituting in part a distribution of, and being properly chargeable to, earnings or profits, if—
      (1) Under the provisions of section 115 (c), the amounts distributed in liquidation are treated as received in payment in exchange for the stock; and
      (2) Under the provisions of section 112, the gain or loss, if any, from such exchange is recognized.
      In such a case, a dividends paid credit is allowable for the amount actually involved in such distribution which is properly chargeable to the earnings or profits accumulated after February 28, 1913, even though the method of taxation of the distribution is that ordinarily employed with respect to the gain or loss realized and recognized upon an exchange, rather than that employed with respect to a taxable dividend.
      * * * * * * *
      (b) Amount properly chargeable to earnings or profits. — In the case of a distribution in liquidation with respect to which a dividends paid credit is allowable (see paragraph (a) of this article) the amount of the credit is equal to the part of such distribution which is properly chargeable to the earnings or profits accumulated after February 28, 1913. To determine the amount properly chargeable to the earnings or profits accumulated since February 28, 1913, there must be deducted from the amount of the distribution that part allocable to capital account. The capital "account, for purposes of these regulations, includes not only amounts representing the par or stated value of the stock with respect to which the liquidating distribution is being made but also that stock’s proper share of the paid-in surplus, and such other corporate items, if any, which, for purposes of income taxation,’“STe treated like capital in (hat they are not taxable dividends when distributed but are applied against and reduce the basis of the stock. The remainder of the distribution in liquidation is, .ordinarily, properly chargeable to the earnings or profits accumulated since February 28, 1913. '* * *

       (h) Nontaxable Distributions.- — If any part of a distribution (including stock dividends and stock rights) is not a taxable dividend in the hands of such of the shareholders as are subject to taxation under this title for the period in which the distribution is made, no dividends paid credit shall be allowed with respect to such part.


text:
    Mary R. Nelson, Petitioner, v. Commissioner of Internal Revenue, Respondent. C. P. Nelson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 108052, 108053.
    Promulgated March 13, 1942.

      Taylor Vinson, Esq., for the petitioners. '

      E. L. Corbin, Esq., for the respondent.
   OPINION.

Black:

Were the interests conveyed by petitioners in trust for their four children future interests in property as the Commissioner has determined, or were they gifts of present interests as the petitioners contend? The answer to that question presents the only issue that we have to decide. There is no dispute by the parties as to the value of the property which was the subject of the gifts.

The meaning of the term “future interests” as used in section 504 (b) of the Revenue Act of 1932 is discussed at some length in Welch v. Paine, 120 Fed. (2d) 141, and in Commissioner v. Taylor, 122 Fed. (2d) 714, and we shall make no attempt to repeat that discussion here. We refer to it for a better understanding of our opinion which follows.

The trust indenture which was involved in the case of Commissioner v. Brandegee, 123 Fed. (2d) 58, contained certain features similar to the trust instrument involved in the instant case. Paragraph 4 of the trust instrument involved in the Brandegee case provided in part:

* * * And after all mortgages and other charges or obligations against property acquired by the trustees by gift or purchase, including mortgages and other charges or obligations given in substitution therefor, are paid in full (as to which facts the decisions of the trustees shall be conclusive) the trustees shall, during the continuance of the trust, pay the net income from the trust property as aforesaid. Payments of income shall be made quarterly and there shall be no apportionment of income on the death of any person entitled thereto.

In the instant ease paragraph (4) (1) of the trust indenture, copied in our findings of fact, confers upon the trustees similar powers and duties.

Also paragraph (9) of the trust indenture provides as follows:

(9) After all indebtedness is paid and satisfied, or, though not all paid if in the opinion of the trustees it would not entail a burden on the trust, they may pay to the beneficiaries share and share alike, any sum or sums from the surplus income account.

It is clear that the provisions of the trust indenture in the instant case in the respects noted above are as broad and comprehensive as they were in the Brandegee case, supra. The court in the Brandegee case, in discussing these powers conferred upon the trustees, among other things, said:

* * * Under the power conferred upon the trustees in the case at bar, they could apply all the income, or indeed all or any part of the principal, of the 1937 gift toward the extinguishment of existing charges against the property; thus they are in effect authorized to accumulate the income until the net value of the trust property is augmented by an amount equal to that of such outstanding encumbrances. It is true that the trustees have a discretion to pay the net income to the beneficiaries in equal shares; and the right of the beneficiaries to receive such income at any time the trustees should choose to give it to them is no -doubt a kind of interest of which a court of equity may take cognizance. See Fulham v. Commissioner, 110 F. (2d) 916, 918 (C. C. A. 1st, 1940). But if it may be called a present interest there is still the difficulty that such an interest is inherently incapable of valuation. Helvering v. Blair, 121 F. (2d) 945, 947 (C. C. A. 2d, 1941). Where the absolute right of the beneficiaries to enjoyment of the income is postponed until the happening of a future event, a $5,000 exclusion in respect of each donee is not allowable to the donor under § 504 (b) merely because he has invested the trustee with an immediate discretionary power to make advancements. Welch v. Paine, supra; Commissioner v. Taylor, supra; Helvering v. Blair, supra. And this is so whether or not the trustee happens to pay over income to the beneficiaries during the year in which the gift is made. The nature of the interest of the donees is determined as of the date of the gift, not by what the trustee may subsequently choose to do in the exercise of his discretionary power. See Helvering v. Blair, supra, at page 947.

The court there held that the interests granted to the beneficiaries were future interests, if there were existing mortgages at the time of the gift which had to be paid, off by the trustees and which would postpone the unqualified right of the beneficiaries to enjoyment of the net income. In the instant case it is clear that there were mortgages against the properties of petitioners which the trustees were charged with paying off as one of their primary duties. See paragraph (4) (1) of the trust indenture. Under these circumstances we think Commissioner v. Brandegee is applicable and supports the Commissioner’s determination.

Petitioners in their brief lay considerable stress as one of the facts showing that the gifts were of present interests rather than of future interests, that the trustees in an emergency could make an advancement to any one of the beneficiaries out of his or her portion of the trust estate, and that tills was actually done in June 1941 in the case of James Houghton Nelson.

In Welch v. Paine, supra, where the court held that the gifts were of future interests, the court in its opinion called attention to the following facts, among others, as existing in that case: “The trustee was empowered to advance to the beneficiaries, or for their benefit, such sums out of their respective shares as he might in his absolute discretion deem necessary or advisable for their support, maintenance or education.” We can see no essential difference between the power of the trustees to make advancements to the beneficiaries in the instant case and that which was present in Welch v. Paine.

We hold that the gifts in question were gifts of future interests and that petitioners are not entitled to any $5,000 exclusions by reason thereof. United States v. Pelzer, 312 U. S. 399.

Decision will be entered for the respondent.


author: Disney:

text:
    Estate of Joe Crail, Deceased, Gladys S. Crail, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105509.
    Promulgated March 17, 1942.

      John J. Georgeson, C. P. A., and J. Marion Wright, Esq., for the petitioner.

      Frank T. Homer, Esq., for the respondent.
   OPINION.

Disney:

Since the income here involved is from property shown to have been acquired by the decedent prior to July 29, 1927, in part prior to marriage in 1920, the question is whether there was transmutation of the husband’s separate property into community estate. We are governed by California law on the question as to what constitutes community estate. Black v. Commissioner, 114 Fed. 355; Talcott v. United States, 23 Fed. (2d) 897. That an oral agreement is in that state sufficient can not be doubted, under many decisions, including Kenney v. Kenney, 30 Pac. (2d) 398; In re Wahlefeld's Estate, 288 Pac. 870; Estate of J. Harold Dollar, 41 B. T. A. 869; United States v. Goodyear, 99 Fed. (2d) 523. The respondent contends in substance that the evidence here indicates only statements by the decedent, and not a mutual oral understanding sufficient to the decisions of California. It is true that the evidence consists largely of statements made by the husband, but after consideration of all of the evidence, we are of the opinion that there was a transmutation of the husband’s separate estate into community property. 31 C. J. 75 on this subject says:

Assuming the capacity of the parties to deal with each other, * * * property may be transmuted in character, as community or separate, by gift between the husband and the wife, either of the separate property of the husband or the wife to the community, or of the husband’s or the wife’s interest in community property to the other spouse.

The interest of a spouse in community property may be the' subject of a gift between the spouses. Kaltschmidt v. Weber, 79 Pac. 272; Ballinger v. Ballinger, 70 Pac. (2d) 629; Gillis v. Welch, 80 Fed. (2d) 165. In McDuff v. McDuff, 187 Pac. 37, a husband purchased a piece of property, caused the deed to be made to his wife, and orally stated that he was giving her the property. The court held “The property became the separate estate of the wife by the gift.” A husband may relinquish to his wife her separate earnings during the marital community and such relinquishment may be proved by the acts and conduct of the husband, indicating that he does not regard the earnings as community property. Smith v. Smith, 191 Pac. 60; Gray v. Perlis, 245 Pac. 221; Pacific Mutual Life Insurance Co. v. Cleverdon, 108 Pac. (2d) 405. The entire conduct of the husband here indicates community estate. In Title Insurance & Trust Co. v. Ingersoll, 94 Pac. 94, the husband obtained possession of the wife’s separate property and claimed same as community. The court said:

* * * But it is not essential in such a ease for the husband to show any express agreement on the part of the wife. The gift or change in the status of the property may be shown by the very nature of the transaction or appear from the surrounding circumstances.

Applying the above cases to the instant situation, we conclude that the husband made a gift of his separate property to the marital community, and that there was a meeting of minds on its treatment as community estate. Though it is true that the record contains nothing showing a definite acceptance on the part of the wife of the husband’s offer, nevertheless many of the husband’s statements were made directly to his wife. No dissent on her part appears and it is plain from the history of the marital community that she considered the property to be what the husband called it, community estate, and acted upon that assumption. She was consulted with about purchases of property, viewed the properties with her husband, and with him considered them and their purchase. It is clear, we think, that the husband and wife mutually, because of conversations, statements, and acts, understood the property to be community. The wife, in our opinion, after making no dissent to her husband’s repeated statements, and having treated the property accordingly, could not sue-cessfully have contended that the property was not community in a contest, for example, with his heirs. “The acceptance of a gift, beneficial to the donee and otherwise complete, will be presumed, unless the contrary is made to appear, even though the donee did not know of the gift at the time it was made.” 28 C. J. 672. Where a gift is between members of a family living in the same house, requirements as to delivery are not strictly applied. 28 C. J. 638. Acceptance of an offer may be inferred from silence, if the relation of the parties or other circumstances impose a duty to speak. 13 C. J. 276. Emery v. Cobbey, 43 N. W. 410; Orme v. Cooper, 27 N. E. 655. In Hobbs v. Massasoit Whip Co., 33 N. E. 495 (158 Mass. 194), Holmes, J., held that a contract was completed by failure to dissent from the offer, for the parties were not strangers to each other and

* * * The proposition stands on the general principle that conduct which imports acceptance or assent is acceptance or assent, in the view of the law, whatever may have been the actual state of mind of the party, — a principle sometimes lost sight of in the cases. * * *

In Kaltschmidt v. Weber, supra, the Supreme Court of California considered the present question where there was a dearth of definite understanding between husband and wife and the court said:

* * * Now, it may well have been the case that the husband could recall no conversation between them in which such an agreement was distinctly expressed. His testimony strongly indicates this condition of memory. And yet it might also be true that the fact that there was such an agreement was perfectly well understood between them. In such case resort may be had to circumstantial evidence. The conduct and actions of the husband with respect to such earnings, indicating that he did not regard them as community property, or that he had relinquished to her the right to control and dispose of her receipts from that source, would be competent evidence and admissible to prove the agreement. * * *

In re Sill's Estate, 9 Pac. (2d) 243, is similar to the instant situation in that it turned upon a statement by the husband to the wife (a single statement as contrasted with the various statements from the husband herein involved). The court says that “there was ample evidence” to justify the finding of community property. There property was placed in the name of the husband, who said to the wife: “Don’t feel bad about it, you know it is just as much yours as it will be mine; this is our home.” It is true that the wife made a minor contribution to the purchase price of the property involved, but the evidence did not show whether she had ever been repaid, and the mere fact of such contribution, without more, was no basis for communization of the property. The court said that particular words are not necessary to evidence an agreement for community property “as long at it may be fairly inferred from all of the circumstances in evidence that a community interest was intended by the parties.”

In the light of all of the above, we can not but believe that there was sufficient of gift and. mutual understanding between the husband and wife to satisfy the decisions of the California court upon this subject.

We therefore hold that the respondent erred in determining the deficiency upon the theory that the income here involved was the separate income of the husband.

Decision will be entered wnder Rule 50.