author: Smith:

text:
    A. M. Landman, Superintendent of The Five Civilized Tribes, for Estate of Jeanetta Burgess Nee Tiger, Deceased Creek, Roll No. 5069, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 98496.
    Promulgated October 15, 1940.

      Huston Thompson, Esq., and Oscar P. Mast, Esq., for the petitioner.

      R. O. Whitley, Esq., and Ralph E. Smith, Esq., for the respondent.
   OPINION.

Smith:

The petition filed in this proceeding alleges that the “Respondent erred in determining that under the law the estate of decedent is subject to any Federal estate tax.”

The Revenue Act of 1926 provides in part:

Seo. 301. (a) In lieu of the tax imposed by Title III of the Revenue Act of 1924, a tax equal to the sum of the following percentages of the value of the net estate (determined as provided in section 303) is hereby imposed upon the transfer of the net estate of every decedent dying after the enactment of this Act, whether a resident or nonresident of the United States.
* * * # # * *
Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(a) To the extent of the interest therein of the decedent at the time of his death. [Emphasis supplied.]

The estate tax imposed by the Revenue Act of 1926 and the amendments thereto is upon the net estate of “every decedent dying after the enactment of this Act, whether a resident or nonresident of the United States.” The decedent died subsequent to the Revenue Act of 1926. She was a resident of the United States. All of her property was located in the United States.

The petitioner contends, however, that the decedent had no “net estate” within the meaning of the taxing statute; that “the interest of the decedent [in her property] was deleted by statutory restriction and governmental practice and regulations thereunder so that decedent [at the time of her death] had nothing to transfer but a hollow interest in the estate.”

The decedent was recognized as the owner of the land, although she could not sell, lease, or otherwise encumber it without the approval of the Secretary of the Interior. She was also recognized as the beneficial owner of all of the income from the land and of property purchased out of such income, as well as of such property. The legal title to all such property was held by the United States in a fiduciary capacity for the benefit of the decedent. She was the sole beneficiary. The United States had paid over to her during her lifetime more than $400,000 of the income. The balance was held by the United States at the date of death for the benefit of the decedent. She had the right under section 23 of the Act of April 26, 1906 (34 Stat. 131) to will that property to whomever she chose. She made an ineffective will in 1931, devising and bequeathing nearly all of the property to her husband. Where a person has the entire beneficial interest in property held in trust the value of such property is includable in the gross estate. The petitioner does not question the correctness of the value of the property determined by the respondent as includable in the decedent’s gross estate. We reach the conclusion that the decedent had a net estate in the amount claimed by the respondent within the meaning of the Revenue Act of 1926.

The petitioner further contends that, under the treaties between the United States and the Five Civilized Tribes, lands in Oklahoma (then the Indian territory) were set apart for the Indians in exchange for other lands given up by them and that Congress has provided that the lands allotted to full-blood Indians shall be “nontaxable and inalienable and free from any incumbrance whatever for twenty-one years” (sec. 7 of the Act of March 1, 1901, 31 Stat. 861, 863, and sec. 16 of the Act of June 30, 1902, 32 Stat. 500, 503); that the understanding of the Indian was that the provision that the land should be nontaxable embraced every form of tax, including an estate tax; and that the understanding of the Indian must be given effect.

Apparently all of these arguments were pressed upon the United States Supreme Court in the case of Superintendent of the Five Civilized Tribes v. Commissioner, 295 U. S. 418. The Supreme Court rejected the contentions in holding that the income of a trust fund held for a restricted Indian was subject to income tax. The Supreme Court said:

Nor can we conclude that taxation of income from trust funds of an Indian ward is so inconsistent with that relationship that exemption is a necessary implication. Nontaxability and restriction upon alienation are distinct things. Choate v. Trapp, 224 U. S. 665. The taxpayer here is a citizen of the United States, and wardship with limited power over his property does not, without more, render him immune from the common burden.

The petitioner contends that the above cited case is not in point in this proceeding for the reason that the Court was there dealing only with income derived from the investment of surplus funds of a restricted Indian and not with income derived from royalties on oil produced from the Indian’s land. It is apparent, however, from the rationale of the opinion and from the cases cited, that the court intended to make no distinction between a restricted Indian’s income derived from the investment of surplus funds and his other taxable income. The point was made that “The language of sections 210 and 211 (a) [Eevenue Act of 1918] subjects the income of ‘every individual’ to tax.” Therefore the income of the restricted Indian is subject to tax the same as the income of an unrestricted Indian or any other citizen or resident. By a parity of reasoning the estate of a restricted Indian must be held subject to estate tax; for the estate tax is imposed upon the net estate of “every” decedent dying after the enactment of the imposing statute.

It is furthermore to be noted that the Federal estate tax is not a tax upon property; it is an excise tax imposed upon the transfer or shifting “of the economic benefits and burdens” of property at death. Chase Nat. Bank v. United States, 278 U. S. 327. The distinction between a direct tax on property and an excise on the transfer of property is neither illusory nor inconsequential. It is so fundamental that it has been made the basis for sustaining a tax of the latter character, even though the subject of the transfer itself was tax-exempt. Thus a state may impose a legacy tax on a bequest which consists wholly of tax-exempt United States bonds. Plummer v. Coler, 178 U. S. 115; Orr v. Gilman, 183 U. S. 278. Likewise the Federal Government may impose the estate tax upon the transfer of net estates consisting in part of municipal bonds. Greiner v. Lewellyn, 258 U. S. 384.

Likewise it was held in United States Trust Co. v. Helvering, 307 U. S. 57, that the proceeds of a War Eisk Insurance policy payable to a deceased veteran’s widow was subject to Federal estate tax. In that case the executor of the estate contended that .the proceeds of such policy should not be included in the estate because of the provisions of the World War Veterans Act, 43 Stat. 607, which provided that “insurance * * * shall be exempt from all taxation.”

The Federal estate tax does not specifically exempt from the tax the estate of a restricted Indian. If such an estate is exempt from estate tax the exemption must rest upon implication. But, as was said in United States Trust Co. v. Helvering, supra, “Exemptions from taxation do not rest upon implication. * * * Similarly, the statutory immunity of War Eisk Insurance from taxation does not include an immunity from excises upon the occasion of shifts of economic interests brought about by the death of an insured.” See also Edgar A. Igleheart, et al., Executors, 28 B. T. A. 888; Estate of Irving S. Fellner, 33 B. T. A. 746; Lawrence C. Phipps, 34 B. T. A. 641; Trotter v. Tennessee, 290 U. S. 354.

We conclude that the respondent did not err in his holding that the estate of the decedent was subject to Federal estate tax.

In the petition filed in this proceeding it is alleged that “Respondent erred in disallowing a credit for State estate or inheritance taxes.” It does not appear from the record in this proceeding that any state, estate, or inheritance tax has been paid or will be paid upon the estate of the decedent. It is alleged, however:

That tlie State of Oklahoma is now proceeding against the estate of the decedent to collect an estate or inheritance tax and if successful the estate will be entitled to a credit on account thereof to the extent of 80% of the Federal estate tax imposed by the Revenue Act of 1926, and no allowance has been made for said credit and, therefore, the estate of decedent has been deprived of its rights.

Upon proof of the payment of a state, estate, or inheritance tax, credit therefor will be allowed upon the settlement under Rule 50 of the Board’s Rules of Practice.

Reviewed by the Board.

Decision will be entered under Rule 50.


source: Caselaw Access Project

author: Kern :

license: Public Domain

text:
    Estate of David Davies, Deceased, by Mabel L. Davies, Executrix, and H. W. Jameson and John L. Davies, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91941.
    Promulgated October 15, 1940.

      John L. Davies, Esq., for the petitioners.

      Stanley B. Pierson, Esq., for the respondent.
   OPINION.

Kern :

We have held that where taxes imposed by a statute later declared unconstitutional are paid by a taxpayer using the cash method of accounting or are accrued and then paid by a taxpayer using the accrual method of accounting, and such taxes have not been refunded prior to the final determination of the tax liability for the year in which such payments were made, then under such circumstances the taxpayer is entitled to a deduction from gross income in the amount of such payment as “taxes paid”, either in the year of payment or the year of accrual, depending on the method of accounting used. See Cartex Mills, Inc., 42 B. T. A. 894, and cases therein cited.

However, in J. A. Dougherty's Sons, Inc., 42 B. T. A. 892, we refused to allow a deduction “for accrued taxes which were resisted, were never paid, and were declared unconstitutional prior to the filing of the petition” in that case.

There is a very real and practical distinction between the two cited cases, which has impelled us to a difference in their resolution. In the first there was an actual payment of money demanded as taxes by the sovereign, which might or might not be refunded, and, if refund were made, might be refunded either in whole or in part. Under the rule applied in that case the taxpayer can deduct amounts thus paid as taxes, either in the year of payment or of accrual, depending on the taxpayer’s method of accounting, and if the law imposing these taxes is declared unconstitutional and any part thereof is refunded to the taxpayer in a year subsequent to the filing of the petition or the final determination of the tax liability for the year in which such taxes were paid, then the amount so refunded is includable in the taxpayer’s gross income for the year in which such refund is made. In the second case no sums were paid as taxes, the taxpayer consistently contended that it was not liable for the payment of such taxes, and prior to the filing of the petition the law imposing these taxes was declared unconstitutional and it was apparent that no amounts would ever be paid pursuant thereto. Under such circumstances it is obviously more just and infinitely more practical to make the proper adjustment in the taxpayer’s income for the year in which the deduction was claimed, since all the facts necessary to such adjustment are known and it is not rendered impossible by reason of any period of limitation.

The facts of the instant case bring it squarely within the rule of J. A. Dougherty's Sons, Inc., supra, and, under the authority of that case’

Decision will he entered for the respondent.


author: Sternhagen :

text:
    Warner G. Baird and Julia Dole Baird, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97439.
    Promulgated October 15, 1940.

      James A. Sprowl, Esq., and George F. James, Esq., for the petitioners.

      E. G. Sievers, Esq., for the respondent.

       SBC. 24. ITEMS NOT DEDUCTIBLE.
      (a) GunbbaIi Rural — In computing net. Income no deduction shall in any case he allowed in respect oí—

      (5) Any amount otherwise allowable as a deduction which is allocable to one or more classes of income other than interest (whether or not any amount of income of that class or classes is received or accrued) wholly exempt from the taxes imposed by this title; or

   OPINION,

Sternhagen :

1. The petitioner deducted the cost, $6,908.58, of the lots in Bavinia Woodlands as an ordinary loss. This deduction the Commissioner disallowed, saying:

The examination indicated that Mr. Warner G. Baird purchased in December of 1929 six lots at a total cost of $34,908.58. These properties were subject to mortgages totaling $28,000, leaving a net equity of $6,908.58. In December of 1935 this real estate was quit-claimed by Mr. Baird to the mortgage holders. This is considered to be a capital transaction, coming within the provisions of section 117 of the Revenue Act of 1934, and the loss of $6,90S.58 is being considered under item (f) herein.

As shown by the findings, the petitioner did not assume the mortgages on the property and was not liable on them. His interest was only in the “equity.” The threat of foreclosure of the mortgage was only ominous to him if the property was worth more than the mortgage. Apparently it was not. The quitclaim was not to relieve petitioner of a liability, but only to simplify the transfer of title. As to him it had no aspect of a sale or exchange. Polin v. Commissioner, 114 Fed. (2d) 174; Commonwealth, Inc., 36 B. T. A. 850; Sherwin A. Hill, Administrator, 40 B. T. A. 376 (on review C. C. A., 6th Cir.); Realty Operators, Inc., 40 B. T. A. 1051 (on review C. C. A., 5th Cir.). The situation is unlike Rogers v. Commissioner, 103 Fed. (2d) 790; certiorari denied, 308 U. S. 580; rehearing denied, 308 U. S. 635, in which the quitclaim deed was given in exchange for a release of the taxpayer’s mortgage obligation.

In respondent’s brief, after expressing disagreement with the decision in Commonwealth, Inc., supra, the suggestion is made for the first time that by giving the quitclaim the petitioner may have, been relieved of liability for taxes or for mortgage interest or for other items. The petitioner had no reason to suppose that there was any issue except as to his liability for the mortgage and whether, on that account, his quitclaim was to be regarded as a sale or exchange. By the question which respondent now attempts to raise in his brief, the Board would be required to search the record for other items of liability and to determine whether by the quitclaim petitioner was relieved of such liability. This is a burden which the Board is not required to assume unless the matter has been the subject of the litigation. While the Government is not limited or bound by an inept or inadequate deficiency notice, there is ample opportunity, by timely pleadings, for the expansion of the issues of fact and law so that they can be fully explored and presented before the end of the trial. There is no reason for speculation, outside the stated issues, as to whether the petitioner was relieved of an existing liability for taxes or interest, and it is unfair to surmise now that he was. From the record it appears more likely that he had no such liability or that, if he had, he was not i'slieved of it.

The deficiency was incorrect in treating the loss of $6,908,ñ8 as a capital loss.

2. The Commissioner increased the income attributable to Julia Dole Baird as the beneficiary of a trust established by her father’s will. The deficiency notice does not clearly explain the determination and the Commissioner has several times shifted his position, so the issues are in some confusion.

(a) The respondent has conceded that the determination of the trust’s taxable income erroneously includes interest on improvement bonds of the city of Chicago and of the village of Villa Park. Such interest is exempt. Commissioner v. Pontarelli, 97 Fed. (2d) 793.

(b) At the hearing, the respondent stated that a reason why the expenses of the trust were not deductible was because the trust was not engaged in carrying on a trade or business but was only a passive recipient of income and a conservator of investments, citing George Vanderbilt Trust, 36 B. T. A. 967; City Bank Farmers Trust Co. v. Commissioner, 112 Fed. (2d) 457, affirming 39 B. T. A. 29. There is nothing in the deficiency notice or the pleadings to suggest this question, and petitioner complains that he was unprepared at the trial to meet the new contention; although he urges that the evidence indicates frequent and regular transactions sufficient to constitute a business. The issue, we think, was not properly pleaded and it would be unfair to consider it. The deficiency proceeded upon the postulate generally that expenses were deductible by the trust, and held that it was necessary to apportion the expenses between taxable and nontaxable income. The petitioner assailed the requirement of apportionment.

Under Revenue Act of 1934, section 24 (a) (5), the deduction of expenses is limited so as to exclude from the deduction an amount allocable to tax-exempt income “other than interest.” As shown by the findings, all of the trust’s tax-exempt income was interest and, therefore, there is no part of the trust’s expense deduction which is properly allocable to tax-exempt income other than interest and no occasion for an apportionment. The entire amount of expenses of the trust is properly deductible, Cornelia W. Roebling, 37 B. T. A. 82; John H. Watson, Jr., et al., Trustees, 35 B. T. A. 706, 709.

Decision will be entered wider Rule 50.


author: Van Fossan:

text:
    Estate of Carrie M. Botts, Deceased, Transferee, Homer H. Tooley, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent. John Parker, Entitled as “Mr. John Parker, Transferee,” Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 96766, 96854.
    Promulgated October 15, 1940.

      Byron Coleman, Esq., for the petitioner in Docket No. 96766.

      Adolphus E. Graupner, Esq., for the petitioner in Docket No. 96854.

      E. A. Tonyes, Esq., for the respondent.
   OPINION.

Van Fossan:

The only issue for our consideration concerns the liability of petitioners as transferees for income taxes of James M. Botts, deceased, for the year 1933. Petitioners contend that respondent is barred by the statute of limitations. They maintain that, in any event, they received nothing from the estate of James M. Botts and, hence, are not transferees of assets of the deceased. They further claim that our decision fixing the deficiency of the alleged trans-feror was void. Petitioner Parker urges that he was a specific legatee and action against him may not be taken until respondent has proceeded against the residuary beneficiaries. Respondent argues that the limitation period has not run and asserts that Carrie M. Botts and Parker received assets in the distribution of James M. Botts’ estate. He denies that petitioners may here attack the validity of our decision regarding the liability of James M. Botts, deceased, for income taxes in the year 1933.

Our first inquiry relates to the question of whether or not respondent is barred by the statute of limitations. Respondent asserts that the filing of form 1040 by Carrie M. Botts on March 15, 1934, did not constitute the filing of a return which would start the statute running. We can not agree.

Carrie M. Botts, one of the two persons for whom the return purported to speak, included income and deductions of her husband and herself and stated that it was a joint return. The “return” was received by respondent and was audited in due course, and a deficiency was asserted against the husband’s estate. It appears to have complied with the law. Germantown Trust Co. v. Helvering, 309 U. S. 304. See Mrs. D. Sydney Smith, 4 B. T. A. 385.

In our opinion the statute began to run upon the filing of the return by Carrie M. Botts. The limitation period was extended until June 30,1937, by a consent signed by Carrie M. Botts as taxpayer and Dollar as executor of James M. Botts’ estate. On May 14, 1937, respondent sent Dollar, as executor of the estate of James M. Botts, a notice of deficiency relating to income taxes of the decedent for the year 1933 in the sum of $21,038.71. On July 7, 1937, Dollar filed a petition with this Board in response to the notice of deficiency dated May 14, 1937. Section 272 (a) of the Revenue Act of 1932, as amended by section 501 of the Revenue Act of 1934, prohibits respondent from making an assessment of a deficiency until after the expiration of the 90-day period within which the taxpayer may appeal to the Board or, if a petition has been filed with the Board, until the decision of the Board has become final. Section 277 of the Revenue Act of 1932 provides for the suspension of the statute of limitations for the period during which respondent may not assess, and for 60 days thereafter. Petitioners contend that the notice of deficiency dated May 14, 1937, was void because it was addressed to Dollar, who had previously been discharged as executor of the estate of James M. Botts. They maintain that a void notice of deficiency will not prohibit respondent from making an assessment and, hence, will not suspend the statute of limitations.

We are of the opinion that the notice of deficiency was valid. Respondent sent the notice to Dollar, who had been executor of the estate. The record shows Dollar had not, prior to his receipt of the notice, informed respondent of his discharge. Section 312 (a) of the Revenue Act of 1932 provides that upon notice to respondent of fiduciary capacity the fiduciary shall “assume the powers, rights, duties and privileges of the taxpayer * * * until notice is given that the fiduciary capacity has terminated.” At the time Dollar received the notice he was still the “taxpayer” to whom the notice of deficiency might be addressed. Respondent has complied with requirements of the law in this regard. Jessie Smith, Executrix, 24 B. T. A. 807.

Petitioners assert that we had no jurisdiction in the proceeding begun by the petition filed by Dollar as former executor of the estate of James M. Botts, citing Estate of Joseph B. Dabney, 40 B. T. A. 276. The cited case is not in point here, because in that case a jurisdictional question was raised upon the initiation of the proceeding by the administrator. Such is not the fact here. The facts here are more comparable to those in Marie Minor Sanborn, 39 B. T. A. 721; affd., 108 Fed. (2d) 311. There, a notice of deficiency was sent to the discharged executrix and coexecutor of the estate of the deceased taxpayer. The executrix and coexecutor in due course filed a petition with this Board for the redetermination of the proposed deficiency. Both petitioners in their verifications of the petition stated that they had been discharged as representatives of the estate. We rendered an opinion and entered a decision finding a deficiency. Respondent was unable to collect the amount of the deficiency because no assets remained in the estate and proceeded against the former executrix of the deceased taxpayer as “transferee and/or fiduciary.” In considering the question of suspension of the statute of limitations by the proceeding commenced in the Board by the discharged representatives of the estate, we stated:

First, while it may be conceded for present purposes that the discharge of petitioners as executors terminated their powers under the law of the State of Missouri, it does not follow that for purposes of Federal taxation they were without standing, particularly that their authority with respect to the institution on behalf of the estate of a proceeding before the Board was terminated.

We further stated:

* * * And entirely beyond this the provisions of the Revenue Act of 1928, section 312, make it clear that the power under the revenue act of a fiduciary to represent and take the place of the taxpayer, upon notice of a fiduciary relationship, does not terminate until contrary notice. Petitioner’s signature, verification, and filing of an income tax return entitled “Mrs. Marie N. Sanborn, Executrix, Estate of Dr. W. E. Minor, Deceased” and executed “Marie M. Sanborn, John A. Minor, Executors” clearly gives the first type of notice. It was given on April 9, 1930, after the discharge on which petitioner relies as terminating her authority and as far as the record shows nothing happened thereafter to change the situation until after the filing of the petition in 1932. Even though it be conceded, as petitioner contends, that the petition was notice to the Commissioner of the termination of such fiduciary responsibility, that notice could not have been brought to the Commissioner’s attention until after the petition had actually been filed with the Board. This filing can thus by no remote inference be regarded as ineffectual, invalid, or void in so far as the provisions of the Federal revenue laws are concerned.
Second, the proceeding thus placed upon the docket of the Board, even though it had not been commenced under circumstances giving it every aspect of legality, would nevertheless have been sufficient to toll the running of the statute. And it would have had that effect until the decision of the Board therein became final, even though the circumstances had been such that they would eventually have required the dismissal of the petition. Revenue Act of 1928, sec. 277. Both the express language of the section and the purpose to be served call for that interpretation. “Because the effect of the passage of time would be the same whether the Board made its decision on the merits or on some other ground, if the period stated in the statute of limitation meantime expired, it is reasonable to believe that Congress did not intend to have the time a proceeding was pending before the Board counted any more when the decision was a dismissal for want of jurisdiction than when it was not.” American Equitable Assurance Co. of New York v. Helvering, 68 Fed. (2d) 46 (C. C. A., 2d Cir.), affirming 27 B. T. A. 247.

In the present proceeding sufficient notice of fiduciary capacity was given respondent by Dollar’s signature as executor on the consent extending the period of limitation for assessment filed February 15,1936. Here, as in the Sanborn case, the executor gave respondent no notice of his discharge before filing the petition before the Board. The filing of the petition suspended the running of the statute of limitations. The proceeding was pending upon our docket and tolled the statute during its pendency.

Our decision in regard to the deficiency of James M. Botts, deceased, for the year 1933, did not become final until October 20, 1938. The limitation period applicable to these petitioners could not expire until at least one year and 60 days from October 20,1938. Revenue Act of 1932, sec. 311 (b) (1). The notices of deficiency addressed to petitioners in the present proceeding were dated November 10,1938, well within the statutory period. We hold, therefore, that respondent is not barred by the statute of limitations.

We now turn to petitioners’ contention that the shares of stock of the American Marine Paint Co. were owned by Carrie M. Botts as survivor of the joint tenancy and should not have been included in the estate of the deceased husband. California law must determine whether or not the shares were received from the estate or by virtue of the joint tenancy. Freuler v. Helvering, 291 U. S. 35; Blair v. Commissioner, 300 U. S. 5; Sharp v. Commissioner, 303 U. S. 624; reversing per curiam, 91 Fed. (2d) 802; Susan B. Armstrong, 38 B. T. A. 658; Estate of Frederick R. Shepherd, 39 B. T. A. 38. The Supreme Court in Freuler v. Helvering, supra, said:

* » * ijijjg decisi0n 0f that court, until reversed or overruled, establishes the law of California respecting distribution of the trust estate. It is none the less a declaration of the law of the state because not based on a statute, or earlier decisions. The rights of the beneficiaries are property rights and the court has adjudicated them. What the law as announced by that court, adjudges distributable is, we think, to be so considered in applying section 219 of the Revenue Act of 1921. *

In the case of Frederick R. Shepherd, supra, we said:

* * * The Board, like the Federal courts, is bound by decisions of the state courts in regard to property rights and the effect of conveyances executed within the state relating to property situated therein. The decision of a state court, until reversed or overruled, establishes the law of that state respecting the distribution of trust property within its jurisdiction and the rights of beneficiaries to that property. * * *

Petitioners here assert that the law of California is contrary to the conclusions to be drawn from the decree of settlement of the estate of James M. Botts and cite the cases of Young v. Young, 126 Cal. App. 306; 14 Pac. (2d) 580; Williams v. Williams, 160 Cal. 625, and others for the proposition that a surviving joint tenant takes property to the exclusion of the estate of the deceased tenant. They point out that the decree of the Probate Court distributed only such title as the deceased had at the time of his death and urge that the deceased had no power to pass title to the stock to his estate or heirs, citing Pometti v. Laraia, 134 Cal. App. 545; 25 Pac. (2d) 857. We are not constrained to inquire behind the decree of the Superior Court of California. So far as we are concerned, the court’s decree of settlement of the estate of James M. Botts is the law of the case. Petitioners received the shares in the distribution of the estate.

Petitioner Parker, however, contends that his status as specific legatee defers any transferee proceedings against him until it has been shown that the residuum of the estate was insufficient to pay the deficiency. He relies on section 750 of the California Probate Code, which provides that specific legacies are exempt from claims of creditors if the Probate Court finds such exemption necessary in order to carry out the testator’s intent, and there is sufficient other estate to satisfy the claim. The effect of this statute in the instant proceeding is not for us to consider. Moreover, the record does not reveal that the Probate Court has taken any action affecting the collection of the taxes due.

Both petitioners received assets from the estate of James M. Botts in excess of the deficiencies asserted by respondent against the estate. We hold that petitioners are transferees of the estate of James M. Botts, and that each is liable for the deficiency in income taxes of deceased for the year 1933 in the sum of $16,507.80.

Decisions will he entered for the respondent.


author: Black:

text:
    Estate of Shearn Moody, Deceased, W. L. Moody, Jr., and A. A. Horne, Independent Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97484.
    Promulgated October 15, 1940.

      James W. Wayman, Esg., for the petitioners.

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

Black:

Petitioners contend that only one-half of the proceeds of the policies of insurance taken out on his life after his marriage to his wife, Frances R. Moody, the premiums of which were paid entirely from community funds, should be included in computing decedent’s gross estate.

As to those policies which were taken out by decedent prior to his marriage, petitioners contend that there should be included as a part of decedent’s gross estate the total proceeds of these policies, reduced b;y one-half of that proportion of such total which premiums satisfied with community funds bears to all premiums paid, all, of course, subject to the $40,000 exemption allowed by law.

In support of their contentions, petitioners rely on Lang v. Commissioner, 304 U. S. 264. In the Lang case, there were seventeen policies of insurance involved, all aggregating $200,000. Fourteen of these were payable to the wife and three were payable to the children of decedent. Three of the policies were taken out prior to marriage and the early premiums were paid out of the separate funds of decedent, Lang. After the marriage all premiums on these three policies were paid out of community funds. Likewise all premiums on the 14 policies taken out after marriage were paid for out of community funds.

On these facts the Supreme Court held that only one-half of the proceeds of the fourteen policies taken out after marriage should be included in decedent’s gross estate and that all the proceeds of the three policies taken out prior to marriage, reduced by one-half of that proportion, of such total which premiums satisfied with community funds bear to all premiums paid, should be included as a part of decedent’s gross estate. Thus the decision of the Supreme Court in the Lang case would seem to sustain petitioners’ contention.

However, respondent contends that the Supreme Court decided the Lang case under article 25 of Eegulations 10, and that this article was superseded by aiticle 25 of Regulations 80; that at the time of the death of decedent in the instant case, article 25 of Eegulations 80, was in full force and effect, and that under that article, the entire proceeds of the policies involved in this proceeding were includable as a part of decedent’s estate, less the statutory exemption of $40,000 provided by law. The two respective articles are printed in the margin.

Respondent, in support of Ms contention that article 2S of Regulations 80 has supplanted the earlier regulation and that under the latter regulation the entire proceeds of insurance policies taken out by decedent and payable to others than his estate are includable in his gross estate, less the statutory exemption of $40,000, even though all the premiums were paid out of community funds, cites Estate of Cyprian A. Sport, Sr., 40 B. T. A. 925. That case unquestionably supports respondent’s position.

However, since briefs were filed in the instant case, the Fifth Circuit has reversed our decision in the Sporl case, sub nom. DeLappe v. Commissioner, 113 Fed. (2d) 48. The court in its opinion expressed the view that its own decision in Newman v. Commissioner, 76 Fed. (2d) 449, which we cited and relied upon in our decision in the Sport case, had been impliedly overruled by the Supreme Court in the Lang case. The court in its opinion in the DeLappe [Sporl] case, among other things said:

It is unimportant whether the beneficiary receives the proceeds as separate property or as community property. In either case, if the premiums have been paid out of community funds, the wife has paid one-half of the cost of the insurance and the decedent has paid the other half. In this case the interest of decedent in the policies at the time of his death was only one-half. Regulations 80 could not and did not change this.

It is, of course, true that the Sport case involved insurance policies taken out on the life of a decedent who lived in the State of Louisiana and the community property rights in the policies were governed by the laws of that state. However, no distinction has been pointed out in this respect between the laws of Louisiana and of Texas. In both states the community interest of the- wife in property acquired during marriage is present and vested and not a mere expectancy.

The respondent in his brief, in urging that the Board’s decision in the Sport case was controlling of our decision in the instant case, did not argue that there was any difference between the laws of Louisiana and those of Texas in respect to rights in insurance policies taken out on the life of one of the spouses and paid for with community funds. In discussing the Sport case in his brief, the respondent said:

The more recent case of Estate of Cyprian A. Sporl, Sr., 40 B. T. A. 924, is directly in point, except that the decedent in that ease was a resident of Louisiana, another community property state. The question there, as here, was whether the total value of the insurance policies, the premiums on which had been paid out of community funds, was includable in gross estate. The Board concluded that it was, relying upon Newman v. Commissioner (C. C. A. 5th, 1935) 76 F. (2d) 449, cert. denied, 296 U. S. 600, and refusing to follow Lang v. Commissioner, (1938) 304 U. S. 264, a Washington case, because of the change in the Commissioner’s regulations in force when the decedent, died. (Article 2d, Regulations 80, supra.) The decedent herein also died after the promulgation of Regulations 80.
The decision in the Sporl case seems to turn largely on the fact that the decedent had the right up to the time of his death to change the beneficiary and to give the proceeds to any person whom he might select without the wife’s consent. The decedent in this case had the same right under the community property laws of Texas.

On authority of Lang v. Commissioner, supra, and DeLappe v. Commissioner, supra, we sustain petitioners in their assignment of error.

The parties have stipulated the facts which will enable the apportionment of the proceeds of the policies taken out by decedent prior to his marriage in accordance with the rule laid down by the Supreme Court in the Lang case. As to the policies taken out by decedent after his marriage, only one-half of the proceeds of these will be included in decedent’s estate because the entire premiums on these policies were paid with community funds.

Reviewed by the Board.

Decision will be entered under Rule 50.

Leech and Turnee dissent.

       Art. 25. [Regulations 70.] Tamable Insurance. — * * *
      The term “insurance” refers to life Insurance of every description, including death benefits paid by fraternal beneficial societies, operating under the lodge system. Insurance is deemed to be taken out by the decedent in all cases where he pays all the premiums, either directly or indirectly, whether or not he makes the application. On the other hand, the insurance is not deemed to be taken out by the decedent, even though the application is made by him, where all the premiums are actually paid by the beneficiary. Where a portion of the premiums were paid by the beneficiary and the remaining portion by the decedent the insurance will be deemed to have been taken out by the latter in the proportion that the premiums paid by him bear to the total of premiums paid.
      Art. 25. [Regulations 80.] Tamable Insurance. — * * *
      The term “insurance” refers to life insurance of every description, including death benefits paid by fraternal beneficial societies, operating under the lodge system. Insurance is considered to have been taken out by the decedent, whether or not he made the application, if he acquired the ownership of, or any legal incident thereof in, the policy; but in the case of a decedent dying before November 7, 1934 (the date of approval of the 1934 edition of Regulations 80), the provisions of the second paragraph of article 25 of Regulations 70 (1929 edition) will continue to apply. Legal incidents of ownership In the policy include, for example: The right of the insured or his estate to its economic benefits, the power to change the beneficiary, to surrender or cancel the policy, to assign it, to revoke an assignment, to pledge it for a loan, or to obtain from the insurer a loan against the surrender value of the policy, etc.


author: ÁRündeud:

text:
    Rietta K. Levy, Executrix of the Estate of Oscar Levy, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100180.
    Promulgated October 15, 1940.

      B. F. Yoimg, Esq., for the petitioner.

      Donald P. Moyers, Esq., for the respondent.
   OPINION.

ÁRündeud:

The principal question here is whether the eighteen insurance policies on decedent’s life must be included in his estate at their full value or only at a figure representative of the premiums which were paid by him. The first position is the view of the respondent, who relies on our decision in Estate of Cyprian A. Sporl, Sr., 40 B. T. A. 925. The facts there were with the exception of minor differences similar to those in the instant proceeding. The decision of the Board in that case has been reversed sub nom. DeLappe v. Commissioner, 113 Fed. (2d) 48, and we think the views of the court given there must control our decision.

The basis for the holding of the Circuit Court is made plain by the following quotation from its opinion:

* * * In Louisiana the wife has a present, vested interest in one-half of the community property and not a mere expectancy. Upon the death of the husband she does not take by inheritar'ee but in her own right as owner. * * * In computing estate taxes on the proceeds of life insurance the question to be decided is whether the decedent paid all or only part of the premiums. * * * if the premiums have been paid out of community funds the wife has paid one-half of the cost of the insurance and the decedent has paid the other half.

Ownership of the policies under local law determined in Louisiana by the source of the premiums, therefore, is the significant factor in the settling whether any part of their value should be included in the decedent’s estate. In the instant case the amount of the premiums paid by decedent’s wife is plain and that proportion of the proceeds of the policies is not includable in decedent’s estate. The presence of the provision in four of the policies making the decedent’s estate the beneficiary in certain contingencies, and the provisions reserving certain rights to the decedent found here and in the Sporl case, supra, do not vary the conclusion reached. While these rights are normally some evidence of ownership, in the present case the decedent is invested with them not because of ownership of the policies involved, but as an agent of the community. Nor does the possibility that the decedent’s estate might receive the proceeds of the policies, standing alone, place in the petitioner such an important incident of ownership as to alter this result when the contingency did not mature.

We conclude, therefore, that the decedent’s estate should include the policies purchased subsequent to decedent’s marriage at only one-half their value and those purchased prior thereto must be included at three-fifths of theirs. This result is in keeping with Lang v. Commissioner, 304 U. S. 264. The case of Newman v. Commissioner, 76 Fed. (2d) 449, in so far as it conflicts, is overruled by the decision of the Circuit Court in the Sporl case, supra.

There remains for disposal the question of the deduction of attorney’s fees paid in the administration of the community which included decedent’s and petitioner’s' properties. It is stipulated that the entire community was administered, the community interest of Rietta K. Levy along with that of the decedent. In these circumstances our decision is controlled by Lang v. Commissioner, 97 Fed. (2d) 867; reversed on another point, 304 U. S. 264. See also Austen Leigh Claiborne et al., Executors, 40 B. T. A. 722.

Those cases involve estates administered under Washington law. No contention is made by the parties that the Louisiana law on this point is different. We, therefore, think they should be followed and since only one-half the fees are attributable to the administration of decedent’s portion of the estate, only one-half may be deducted in computing the estate tax.

Reviewed by the Board.

Decision will be entered under Rule 60.

Leech and Turner dissent.


author: SteRNHagen :

text:
    Suffolk Company, Limited, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81817.
    Promulgated October 15, 1940.

      Thomas F. Boyle, Esq., for the petitioner.

      J. W. Smith, Esq., for the respondent.
   SUPPLEMENTAL FINDINGS 01’ PACT AND OPINION.

SteRNHagen :

In an earlier opinion, Suffolk Co., Ltd., 37 B. T. A. 1156, the Board held that the amount received by petitioner, a foreign corporation, as a refund of taxes on moneyed capital erroneously paid by its domestic predecessor to the city of New York, was not gross income from sources within the United States under section 119 (a), Revenue Act of 1932, and that for this reason the Commissioner’s determination was erroneous. The decision upon that ground was reversed by the Circuit Court of Appeals for the Fourth Circuit, Commissioner v. Suffolk Co., Ltd., 104 Fed. (2d) 505, and the cause was remanded for further proceedings and consideration of the question “whether the refund of the tax was income in the year 1932 [fiscal year ended January 31, 1933] under section 22 (a)

It has been found that the moneyed capital taxes were paid by Blair & Co. in 1923, 1924, and 1925; that in 1929 Blair & Co. transferred its claim for refund thereof to the Suffolk Corporation, and in 1932 the Suffolk Corporation transferred it to petitioner; that the refund was received by petitioner on June 15,1932; that each of the transfers was made pursuant to a plan of reorganization whereby the transferor exchanged substantially all its assets for all of the transferee’s stock. It is now found further that all shares of the respective transferees were “thereupon distributed, pursuant to said plan of reorganization, pro rata to the shareholders” of the respective transferors; that the value of the refund claim at the time of its transfer to petitioner was its face amount, $426,713.12, and that on its income tax return for the period February 12, 1932, to January 31, 1933, petitioner stated “Company in liquidation.”

The Commissioner argues, under the view that the transfers occurred in the course of “nontaxable reorganizations”, that “petitioner is in the same position regarding its accountability for the refund for income tax purposes as though it had been received by its domestic predecessor”, and that the predecessor, Blair & Co., had a basis of zero “in view of deductions having been previously claimed and allowed.” Petitioner urges that “the absolute right to the refund so assigned had fully matured and accrued” in 1926 because in that year the New York Court of Appeals held that firms and corporations similar to Blair & Co. were not subject to the New York “moneyed capital tax”, People ex rel. Broderick v. Goldfogle, 242 N. Y. 540; 152 N. E. 418; People ex rel. Benkard v. Goldfogle, 242 N. Y. 546; 152 N. E. 420; People ex rel. Bankers Commercial Security Co. v. Goldfogle, 242 N. Y. 545; 152 N. E. 420; People ex rel. Talcott v. Goldfogle, 242 N. Y. 544; 152 N. E. 420; that the amount should have been reported as income of 1926 by Blair & Co., which used an accrual method of accounting; that by assignment the claim was acquired by petitioner without any of the equitable burdens which might have been on Blair & Co. because of its prior deduction of the tax when paid; and that the refund when received by petitioner was only the cash realization of a capital asset consisting of the claim which it had received for its capital shares.

If the refund had been received by Blair & Co. in 1926, or later, the amount would then have been taxable to that corporation as income, for the benefit of deductions had been taken in the earlier years of payment and those years were no longer open for adjustment. Houbigant, Inc., 31 B. T. A. 954; affd., 80 Fed. (2d) 1012 (C. C. A., 2d Cir.); certiorari denied, 298 U. S. 669; Nash v. Commissioner, 88 Fed. (2d) 477 (C. C. A., 7th Cir.); certiorari denied, 301 U. S. 700. Cf. Inland Products Co. v. Blair, 31 Fed. (2d) 867 (C. C. A., 4th Cir.); Central Loan & Investment Co., 39 B. T. A. 981. But the refund was not received by Blair & Co. Whether it was clearly enough accrued before Blair & Co. transferred the claim, so that it should have been treated as Blair & Co.’s accrued income, can not on this record be assuredly said. Blair & Co. did not itself recognize it as accrued income, and it is now fair to adopt the postulate that to Blair & Co. the claim was not income, either received or accrued. This is a distinction from McLaughlin v. Harr, 99 Fed. (2d) 638 (C. C. A., 3d Cir.), and Helvering v. Missouri State Life Insurance Co., 78 Fed. (2d) 778 (C. C. A., 8th Cir.), in which the interest in question had been accrued by the predecessor and had been treated as its taxable income. The claim was transferred to the Suffolk Corporation, and in turn to the petitioner, solely in exchange for stock. Each of these exchanges was made, it is stipulated, in pursuance of a plan of reorganization, and hence no gain or loss was recognized, sec. 112 (b) (4). So far as can be ascertained or inferred from the present record, the shareholders of Blair & Co. and of the Suffolk Corporation immediately before and after the exchange in 1929 were identical, and this in turn was true as to the shareholders of Suffolk and of petitioner immediately before and after the exchange in 1932. The basis for computing gain or loss upon the cash realization of the claim “shall bo the same as it would be in the hands of the transferor,” sec. 113 (a) (7). This basis in the hands of Blair & Co. would have been zero because the deduction had been taken when the taxes were paid and Blair & Co. had retained the tax benefit unchanged by reason of any possible accrual of the refund, Nash v. Commissioner, supra.

The tax deduction to Blair & Co. in 1923, 1924, and 1925 was felt by the same shareholders as felt the recovery in 1932. They continued to own or control the shares of the corporation owning the claim, and there is no recognition of gain or loss resulting from the exchanges; the basis persists through the exchange transactions.

When, therefore, in 1932 the petitioner received the refund of $426,773.12, its basis was zero and it realized gain in the full amount, reducible only by the $45,009.40 expenses which it paid to obtain it.

Reviewed by the Board.

Decision will he entered under Rule 50.

Keen dissents.


author: OppeR :

text:
    Robert H. Scanlon, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 98020.
    October 18, 1940.

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

      Harry B. Horrow, Esq., for the respondent.
   OPINION.

OppeR :

The present controversy involves the transfer by petitioner to his wholly owned corporation of shares of common and preferred stock of the Powell River Co., Ltd. The parties differ as to whether this was a gift subject to tax under the provisions of Revenue Act of 1932, sections 501, et seq., and, if so, as to the value of the stock transferred. Since we are of the opinion that the gift tax sections do not apply, consideration of the second question will be unnecessary.

Characterization of the transfer as a gift seems to us to be contrary to the generally accepted and ordinary meaning of the term. Fitch v. Helvering, 70 Fed. (2d) 583; see Helvering v. San Joaquin Fruit & Investment Co., 297 U. S. 496. Webster defines a gift as “anything voluntarily transferred by one person to another without compensation; a present.” We tliink it clear that there was full and satisfactory compensation to petitioner, through the corresponding enhancement in the value of his shares, even though it be conceded that this was a transfer by one person to another. Motive may not be conclusive and it may not help merely to say there was no donative intent. But see Noel v. Parrott, 15 Fed. (2d) 669, 671. Yet the existence of compensation to petitioner is indicated by the answer to the question: Did he make the transfer to benefit the corporation as a disconnected and isolated entity, or to benefit some third person, or was it for his own benefit exclusively? Formulation of the question is its own best answer.

It is indeed difficult to say that this was a “gift” for purposes of perpetuating the transferor’s basis under, e, g., the Revenue Act of 1926, section 204 (a) (2), Commissioner v. Rosenbloom Finance Corporation, 66 Fed. (2d) 556; certiorari denied, 290 U. S. 692, and not for purposes of the gift tax. Yet if the property had been transferred for stock in the transferee corporation the basis would still have been that of the transferor. Sec. 204 (a) (8). Hence, it made little difference in the Bosenbloom case which way the transfer was regarded. See King v. United States, 10 Fed. Supp. 206; affd., 79 Fed. (2d) 453. But the main strength of the gift argument would in such condition disappear. For the stock would represent consideration, even though perhaps it gave the transferor nothing he did not have before. Eisner v. Macomber, 252 U. S. 189. For this very reason no attempt should be made to lay undue emphasis on the fact that petitioner’s compensation here was by way of increase in the value of his existing shares rather than the “proliferation” of his interest by issuance of new ones. See King v. United States, supra.

It is true that Higgins v. Smith, 308 U. S. 473, 477, indicates that if the corporate form is used the taxpayer must take the consequences. But here, not the existence of the corporation but the form of the transfer creates the question. We do not say, disregarding the corporate entity, that petitioner made a transfer to himself, so much as we do that, having due regard to the realities, petitioner’s interest as sole stockholder in the corporation’s property gave him a corresponding compensation for the transfer, which prevents it from being a true gift within the meaning of the gift tax law.

If petitioner were not the sole shareholder a different question would arise. For other shareholders would benefit proportionately from the receipt of the property by the corporation. As to them, particularly members of the transferor’s family, there is no reason to disre-' gard the gift theory. And if to that extent the transfer is a gift there may be no practical method of administering the act save to treat the tax as applying to the whole. Frank B. Thompson, 42 B. T. A. 121. But no such difficulty need disturb us here, since no one but petitioner was interested in either the property transferred or its recipient. We are not unmindful that in Bothin Real Estate Co. v. Commissioner, 90 Fed. (2d) 91, the Circuit Court of Appeals, Ninth Circuit, affirming the Board, applied the rule of the Rosenbloom decision to the case of a sole stockholder in holding that the basis of his transferee corporation was the same as his own. But the conclusion there expressed that the transfer was a “gift” seems to have rested principally on the taxpayer’s concession of fact that consideration was lacking.

Since a different question is presented here, and since we think it strains the sense and purpose of the gift tax act to call this transaction a gift within its intendment, we conclude that the deficiency was erroneously determined.

Reviewed by the Board.

Decision will be entered for the 'petitioner.

       Webster’s New International Dictionary, 2d Ed.


author: Haseon:

text:
    Eckert Packing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92340.
    Promulgated October 18, 1940.

      P. McKinley Harris, Esq., and J. Bernard Brown, O. P. A., for the petitioner.

      Stanley B. Pierson, Esq., for the respondent.
   OPINION.

Haseon:

The basic question is whether, on its corporation income and excess profits tax return for its fiscal year ended October 31, 1935, petitioner is entitled to deduct $46,622.72 in Federal processing tax which it accrued in the taxable year but never paid to the collector of internal revenue, and which was abated by the collector of internal revenue shortly after the tax was held invalid on January 6, 1936 (United States v. Butler, supra).

On its corporation income and excess profits tax return for the fiscal year ended October 31, 1935, petitioner included in its cost of manufacturing, and thus deducted, $74,355.49 in processing tax. In the deficiency notice respondent disallowed the deduction of $46,622.72 in processing tax, the amount which petitioner accrued in the taxable year but never paid, and allowed the deduction of $27,732.77, the amount of processing tax which petitioner actually paid to the collector of internal revenue.

Petitioner contends that respondent erred in disallowing the deduction of $46,622.72 in processing tax because, in spite of the fact that the amount in question was never paid and was abated, petitioner had a fixed and determined liability to pay the amount in question at the end of the taxable year.

In support of his determination respondent contends that petitioner is not entitled to deduct the sum of $46,622.72 in question because it never paid that amount to the collector of internal revenue, and because, prior to the date of the filing of the petition in this proceeding, the processing tax was held invalid and the amount in question was abated. Respondent relies on Philip C. Brown, 10 B. T. A. 1122.

A taxpayer is not entitled to deduct the amount of tax paid in a given year if, prior to the. final determination of his tax liability for such year, the amount paid is refunded or recovered. Bergan v. Commissioner, 80 Fed. (2d) 89; Leach v. Commissioner, 50 Fed. (2d) 371; Inland Products Co. v. Blair, 31 Fed. (2d) 867; Bohemian Breweries, Inc. v. United States, 27 Fed. Supp. 588; Joseph V. Horn, 23 B. T. A. 1131; Philip C. Brown, supra; and see Lehigh Valley Coal Sales Co., 15 B. T. A. 1401. Similarly, a taxpayer is not entitled to deduct the amount of tax accrued in a given year if, prior to the final determination of his tax liability for such year, the amount accrued is ascertained to be excessive, and then he is entitled to deduct only the correct amount of tax. See Elsie S. Eckstein, 41 B. T. A. 746, in which the Board stated in part as follows (p. 751) :

* * * In any event, however, we have consistently hold that where in a given year a taxpayer takes a deduction which, prior to the final determination of his income tax liability for such year, is ascertained to be excessive only the correct amount will be allowed in the final determination of his income tax liability. Inland Products Co., 10 B. T. A. 235; affd., 31 Fed. (2d) 867; Mary W. Leach, 16 B. T. A. 781; affd., 50 Fed. (2d) 371; Joseph V. Horn, 23 B. T. A. 1131; J. B. Jemison, 18 B. T. A. 399; Beacon Coal Co., 9 B. T. A. 280; Producers Fuel Co., 1 B. T. A. 202.

See also Bohemian Breweries, Inc. v. United States, supra, in which the Court of Claims stated, in part, as follows:

* * So long as a case involving the audit and determination of the correct tax liability of a taxpayer is open and under consideration by the Commissioner of Internal Revenue, it is his duty correctly to determine the income of the taxpayer and deductions to which the taxpayer is entitled. Lewis v. Reynolds, 284 U. S. 281; Illinois Terminal Co. v. United States, 73 C. Cls. 263, 53 F (2d) 904. * * * This conclusion that plaintiff cannot recover because of the exclusion, of these deductions is not inconsistent with tile rule that an amount deducted and allowed from income in a certain year must be included in income when collected or recovered in a subsequent year when the correction of the return and the tax liability in a prior year is barred by the statute of limitations. * * * Wherever it is possible to do so, the taxing statutes require that the items of income subject to tax and the deductions to which the taxpayer is legally entitled for the years under consideration be correctly and legally determined by the Commissioner in his final decision, notwithstanding such decision may be made several years after the returns for the particular years involved were filed. Lewis v. Reynolds, supra. [Italics supplied.]

The application of the principles set forth above to the facts here compels the conclusion that petitioner is not entitled to deduct $46,-622.72 in Federal processing tax which it accrued in the taxable year but never paid, and which was abated shortly after the tax was held invalid on January 6, 1936. The respondent correctly disallowed the deduction of the amount in question. Bergan v. Commissioner, supra; Leach v. Commissioner, supra; Inland Products Co. v. Blair, supra; Bohemian Breweries, Inc. v. United States, supra; Philip C. Brown, supra; Elsie S. Eckstein, supra. See also Cartex Mills, Inc., 42 B. T. A. 894; and J. A. Dougherty’s Sons, Inc., 42 B. T. A. 892.

In view of the conclusion that respondent correctly disallowed the deduction of the amount in question, it is not necessary to consider the further contention made by respondent that petitioner is not entitled to deduct the amount in question because the statute under which the processing tax was levied “was declared unconstitutional and was as inoperative as though it had never been passed.” Philip C. Brown, supra.

The cases cited by petitioner have been considered and in our opinion are neither controlling nor applicable.

Decision will he entered for the respondent.


author: Mellott :

text:
    St. Francis Hospital, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 98575.
    Promulgated October 18, 1940.

      Edward J. 1. Gcrnnon, Esq., for the petitioner.

      Orris Bennett, Esq., for the respondent.
   OPINION.

Mellott :

The Commissioner determined that petitioner was obligated to deduct and withhold certain amounts of tax under section 144 of the Revenue Act of 1928 and section 143 of the Revenue Act of 1932. Based upon the information contained in certain “Ownership Certificates” (Form 1000 Treasury Department), on file in the Department, he prepared annual returns for the petitioner under the provisions of section 3176 of the Revised Statutes as amended, and, having determined that petitioner had failed to file annual returns, as required by sections 144 and 143, sufra, added 25 percentum of the tax as provided in section 291 of the Revenue Acts of 1928 and 1932. He accordingly determined deficiencies and additions to tax in the following amounts:

The proceeding was submitted upon the following stipulation of facts:

1. St. Francis Hospital of Pittsburgh is a non-profit corporation without capital stock for the purpose of establishing and maintaining a hospital in the City of Pittsburgh, incorporated under a decree of the Court of Common Pleas of Allegheny County, Pennsylvania, at No. 188 January Term, 1887 under the name of St. Franeiscus Hospital of Pittsburgh. The said name was subsequently changed by order of court to St. Francis Hospital of Pittsburgh. The sisters of the Third Order of St. Francis of the Diocese of Pittsburgh is likewise a corporation not for profit incorporated under a decree of the Court of Common Pleas of Allegheny County, Pennsylvania.
2. At and prior to July 21, 1930 the said Sisters of the Third Order of St. Francis of the Diocese of Pittsburgh held in trust for the said St. Francis Hospital the real estate on which the hospital and other buildings were erected, and for the purpose of erecting additional buildings at the request of the said hospital corporation executed a mortgage to the Union Trust Company of Pittsburgh in the sum of $1,100,000, with interest at the rate of 5½% per annum, of record in the Recorder’s Office of said County in Mortgage Book, Vol. 2252, page 47, which mortgage contains a provision as follows:
“said payments of principal and interest to be made in gold coin of the United ■States of America of or equal to the present standard of weight and fineness at the office of said The Union Trust Company of Pittsburgh, Pittsburgh, Pennsylvania, and without deduction from either principal or interest for or on account of any tax or taxes (excepting inheritance or succession taxes and except the excess of any Federal income tax over two per cent. (2%) per annum), and without deduction for any tax or taxes up to but not in excess of four (4) mills per annum on the principal amount thereof, assessed against or payable by the holder or holders thereof, or any part thereof, under the laws of the State of Pennsylvania, which said Sisters or said The Union Trust Company of Pittsburgh, or any assignee or assignees of said The Union Trust Company of Pittsburgh, may be required or permitted to pay thereof or to retain or deduct therefrom under any present or future laws of the United States of America, or of the Commonwealth of Pennsylvania, or of any county or municipality thereof, said Sisters agreeing to pay any such tax or taxes insofar as they may lawfully do so
said mortgage being executed in accordance with an order of the Court of Common Pleas of Allegheny County, Pennsylvania, at No. 582 October Term, 1930.
3. On March 1, 1933 the hospital corporation having requested a conveyance of the property so held in trust, the said Sisters of the Third Order of St. Francis of the Diocese of Pittsburgh executed a conveyance therefor, reciting that the property had been held in trust for the hospital corporation, the said deed being of record in Deed Book, Vol. 2480, page 380. The said conveyance is made specifically subject to the said mortgage to the Union Trust Company, which the hospital corporation expressly assumed and agreed to pay in accordance with the terms and conditions thereof. The said mortgage was at all times considered by all of the parties as a debt of the hospital corporation and alJ payments of interest thereon were made by said hospital corporation.
4. Each semi-annual installment of interest during the tax years involved herein was paid by the said St. Francis Hospital in a single check to the Union Trust Company. Subsequent to the delivery of the mortgage and on or about August 21, 1930 the said Union Trust Company executed and retained in its own records a “Declaration of Trust” [a copy of the document is attached to the stipulation and marked “Exhibit A”. It refers to the mortgage described above and states that the “mortgagee above named does hereby certify that the above recited mortgage and its accompanying bond, and all moneys secured i hereby, are held in trust for the several estates interested therein to the extent of the contribution of each of said trust estates towards the principal thereof, as shown by the books of original entry, ledgers, vouchers, card and other records of the trust department pertaining thereto.”] but no assignment or declaration of trust as to said mortgage was ever entered of record in the Recorder’s Office of Allegheny County, Pennsylvania, and no notice of any such declaration was ever given to said St. Francis Hospital, unless as a matter of law receipt of the ownership certificates, Treasury Form 1000, referred to in paragraph 6 constitutes such notice. Said declaration remained in effect during the tax years involved herein.
5. After the delivery of said mortgage the said Union Trust Company allocated various portions thereof to various estates of individuals for which it was guardian, trustee, agent or other fiduciary by notation upon its records that certain funds of these estates were invested in. said mortgage, some of which estates were so small the income thereof was less than the income tax exemption.
6. As the semi-annual installments of interest were paid to said Union Trust Company the said trust company distributed among the various estates referred to in paragraph 5 such portions of the interest payments as were applicable to such estates by reason of the allocation of their funds to said mortgage; and sent to the Sisters of the Third Order of St. Francis of the Diocese of Pittsburgh at their headquarters, or Mother House, in Shaler Township, Pennsylvania, a number of forms (ownership certificate, Treasury Form 1000), showing the payments to such various estates, * * *.
7. The Union Trust Company of Pittsburgh is a domestic corporation organized under the laws of the commonwealth of Pennsylvania and has its principal office in the City of Pittsburgh, Allegheny County, Pennsylvania.

Sections 144 and 291 of the Revenue Act of 1928 are shown in the margin. The corresponding sections of the Revenue Act of 1932 are substantially the same.

Petitioner contends that all of the interest here involved was “payable to” the Union Trust Co., a domestic corporation, either in its own right or as fiduciary; that no other person or corporation had any right to collect the same or any part thereof; that a payment of the interest or any part thereof to any person or corporation other than the Union Trust Co. would not have discharged the mortgagor’s legal liability; that the withholding provisions of the Revenue Acts of 1928 and 1932 do not apply to payments to a domestic corporation; and that it is not liable, therefore, for the deficiencies and penalties.

Respondent contends that the Union Trust Co. did not receive the interest payments in its own right; that the company had executed a written declaration of trust which specifically stated that the mortgage was held in trust by it; that the interest payments were necessarily received by it as trustee, with the obligation to distribute to those entitled to receive; and that the collection and distribution of these payments by the trust company did not relieve petitioner of its liability for tax as a withholding agent.

The dispute here involved arises out of the provisions in the mortgage executed by petitioner to the Union Trust Co. wherein it agreed to pay the Federal income tax of the holder or holders of the bonds up to an amount not in excess of 2 percent per annum of the interest paid. Under the withholding provisions of the statute petitioner was liable to pay the income tax on this interest “if payable to an individual, a partnership, or a foreign corporation not engaged in trade or business within the United States and not having any office or place of business therein.” No withholding is required in the case of bonds owned by domestic corporations, as such corporations are not entitled to claim the 2 percent credit for tax paid at the source. Art. 763, Regulations 74 and Regulations 77.

The laws of Pennsylvania in effect at the time the mortgage here involved was executed require that trust companies “shall keep all trust funds and investments separate and apart from the assets of the companies, and all investments made by the said companies as fiduciaries shall be so designated as that the trust to which such investment shall belong shall be clearly known.” Act of April 6, 1925, P. L. 152, § 1, amending the Act of May 9, 1889, P. L. 159, § 1, which in turn amended the Act of April 29, 1874, P. L. 73. They also provide, however, that trust companies may assign to various trust estates “participation in a general trust fund of mortgages upon real estate securing bonds, in which case it' shall be a sufficient compliance with the provisions of this section for the company to designate clearly on its records” the mortgages, the names of the participating trust estates, and the amounts of their respective par-ticipations; that the company may repurchase mortgages from the fund and substitute other mortgages therefor; and that no participating estate shall be deemed to have individual ownership in any mortgage in the fund. Act of April 11, 1929, P. L. 512.

In discussing these statutory provisions in In re Guthrie’s Estate, 182 Atl. 248, the Supreme Court of Pennsylvania stated:

* * * If designation on tbe company’s records is sufficient in the case of a participation pool consisting of a number of mortgages, it must likewise be sufficient where the participation is by a number of estates in but a single mortgage. It is plain that the Legislature saw fit to permit an exception to the rule in the case of participation in a pool of a number of mortgages because such pools could not be successfully operated otherwise. It is equally plain that the exception is no less necessary to the successful operation of participations in single mortgages, and that the legislative intention must therefore have been to include the latter within the exception. The distinction is between mortgages in which Participation is allotted and those in which there is no participation. The single mortgage participation scheme is generieally not distinguishable from that in which the participation is in a larger pool. Permission with regard to the greater must include permission as to the lesser.

Here the Union Trust Co. allotted participation in a single mortgage to a number of estates of individuals for which it was acting as fiduciary, and executed a declaration of trust wherein it stated that it was holding the mortgage and accompanying bond in trust for the several estates interested therein to the extent of the contribution of each of the trust estates towards the principal thereof. In compliance with the statutory provisions above mentioned, the Union Trust Co. made notations on its records of the funds invested by the various estates in the mortgage, and as installments of interest were received from petitioner they were distributed among these estates in accordance with their participations.

Under the stipulated facts we are unable to agree with petitioner’s contention that the Union Trust Co. received the interest here involved in its own right. “The provisions of a mortgage are not personal to the party named in it as mortgagee, but are for the benefit and security of the real owner of the debt thereby secured.” 41 C. J. 376. After the execution of the declaration of trust, the Union Trust Co. held the mortgage in trust for those estates which had contributed toward the principal of the loan, and was required by the laws of Pennsylvania to keep their respective interests in principal and interest separate and distinct from its own corporate assets. That is why, to use the language of the stipulation, “After the delivery of said mortgage the said Union Trust Company allocated various portions thereof to various estates of individuals for which it was guardian, trustee, agent or other fiduciary” and as “the semi-annual installments of interest were paid * * * distributed among the various estates * * * such portions of the interest payments as were applicable to such estates by reason of the allocation of their funds to said mortgage.” In our opinion no further discussion is necessary to show that the Union Trust Co. did not receive the interest in its own right.

Petitioner’s contention that the withholding provisions of the statute are not applicable because the interest payments were made to a domestic corporation, as guardian, trustee, agent, or other fiduciary remains to be considered. In support of this contention petitioner argues that the Union Trust Co., as fiduciary, had the legal ownership and control of the mortgage and was entitled to the interest thereon, and that under the Pennsylvania law the estates participating in an investment “Pool” have no “individual ownership in any bond or mortgage in such fund.” The mortgage here involved ivas executed for the purpose of securing payment of the bond or bonds issued by petitioner. The bond was the primary contract to pay, and the mortgage was simply a separate contract to secure payment. 11 C. J. S. 399. The transfer of a part of a debt secured by a mortgage carries with it a proportionate interest in the mortgage and the security which it affords. 41 C. J. 674, 675. While it may be true that petitioner was justified in paying the interest to the Union Trust Co., the latter, after the execution of the declaration of trust, was merely an agency for collecting and distributing it to the estates entitled to receive it because of investments in the mortgage indebtedness. The fact that these estates had no “individual ownership” in the bond or mortgage is immaterial. The important factor is that as participants in the loan secured by the mortgage they were entitled to receive their aliquot part of the interest paid, and did receive it. It was income of the estates, and not of the trustee or other fiduciary, even though the trustee or other fiduciary might be required to pay the tax resulting from its receipt on behalf of the estates for which it acted. The payments of interest by petitioner to a domestic corporation which was under obligation to distribute it to estates to which it rightfully belonged, and for which the corporation was acting as trustee or other fiduciary, did not relieve petitioner of its liability to pay the Federal income tax under the tax free covenant contained in the mortgage. The trust company was under no obligation to report this income for Federal income tax in its corporate income tax return. Having received the interest, the estates were required by the provisions of section 144. (d) of the Revenue Act of 1928 and 143 (d) of the Revenue Act of 1932 to include it in their returns (whether filed by them or by fiduciaries acting for them) and were entitled to claim the credits provided for in these sections. They can not be deprived of such credits because their income is included in returns filed for them by a corporate trustee or other fiduciary. Individual income tax returns, Forms 1040 and 1040-A, and fiduciary income tax return, Form 1041, specifically provide for a credit for taxes paid at source.

It is our conclusion that the interest here involved was not payable to a domestic corporation and that respondent correctly determined that, under the withholding provisions of the Revenue Acts of 1928 and 1932, petitioner was liable for tax on the interest paid to the various estates. Inasmuch as petitioner did not file the returns required by section 144 (c) of the Revenue Act of 1928 and 143 (c) of the Revenue Act of 1932, the imposition of the 25 percent addition to tax provided for in section 291, supra, is mandatory. John Ernest Goldring, 36 B. T. A. 779; Taylor Securities, Inc., 40 B. T. A. 696, 703.

Judgment will be entered for the respondent.

       SEC. 144. withholding OF TAX AT SOURCE.
      (a) Tam-free covenant bonds.—
      (1) Requirement of withholding. — In any ease where bonds, mortgages, or deoils of trust, or other similar obligations of a corporation contain a contract or provision by which the obligor agrees to pay any portion of the tax imposed by this title upon the obligee, or to reimburse the obligee for any portion of the tax, or to pay the interest without deduction for any tax which the obligor may be required or permitted to pay thereon, or to retain therefrom under any law of the united States, the obligor shall deduct and withhold a tax equal to 2 per centum of the interest upon such bonds, mortgages, deeds of trust, or other obligations, whether such interest is payable annually or at shorter or longer periods, if payable to an individual, a partnership, or a foreign corporation not engaged in trade or business within the united States and not having any office or place of business therein: Provided, That if the liability assumed by the obligor does not exceed 2 per centum of the interest, then the deduction and withholding shall, after the date of the enactment of this Act, be at the following rates: (A) 5 per centum in the case of a nonresident alien individual, or of any partnership not engaged in trade or business within the united States and not having any office or place of business therein and composed in whole or in part of nonresident aliens, (B) 12 per centum in the ease of such a foreign corporation, and (C) 2 per centum in the case of other individuals and partnerships: Provided further, That if the owners of such obligations are not known to the withholding agent the Commissioner may authorize such deduction and withholding to be at the rate of 2 per centum, or, if the liability assumed by the obligor does not exceed 2 per centum of the interest, then at the rate of 5 per centum.
      * * * * * * 41
      (c) Return and payment. — Every person required to deduct and withhold any tax under this section shall make return thereof on or before March 15 of each year and shall on or before June 15, in lieu of the time prescribed in section 56, pay the tax to the official of the United States Government authorized to receive it. Every such person is hereby made liable for such tax and is hereby indemnified against the claims and demands of any person for the amount of any payments made in accordance with the provisions of this section.
      (d) Income of regiment. — Income upon which any tax is required to be withheld at the source under this section shall be included in the return of the recipient of such income, but any amount of tax so withheld shall be credited against the amount of income tax as computed in such return.
      *******
      SEC. 291. FAILURE TO FILE RETURN.
      In case of any failure to. make and file a return required by this title, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, 25 per centum of the tax shall be added to the tax, except that when a return is filed after such time and it is shown that the failure to file it was due to reasonable cause and not due to wilful neglect no such addition shall be made to the tax. The amount so added to any tax shall be collected at the same time and in the same manner and as a part of the tax unless the tax has been paid before the discovery of the neglect, in which case the amount so added shall be collected in the same manner as the tax. The amount added to the tax under this section Bhall be in lieu of the 25 per centum addition to the tax provided in section 3176 of the Revised Statutes, as amended.


author: Arundell:

text:
    Standard Industrial Life Insurance Co. of Louisiana, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99842.
    Promulgated October 18, 1940.

      Ed. J. DeVerges, O. P. A., for the petitioner.

      Donald P. Moyers, Esq., for the respondent.
   OPINION.

Arundell:

The issue before us is whether the insurance reserves maintained by the petitioner during the taxable years were adequate to bring petitioner within the definition of a life insurance company specified in sections 201 (a) and 203 (a) (2) of the Revenue Act of 1936 and articles 201 (a)-l and 203 (a) (2)-l of Regulations 94, and thus to entitle it to report its net income under section 203 of that act. Section 201, as far as material here, provides that life insurance companies are those issuing life insurance contracts and whose reserve funds for the fulfillment of such contracts are more than 50 percent of the total reserve funds. In addition, the requirement is added by section 203 (a) (2) and article 201 (a)-l that the reserves which are so held must be those which are prescribed by state law. -These provisions of the regulations have been approved and followed in numerous instances and no question is now made of their validity. See Helvering v. Inter-Mountain Life Insurance Co., 294 U. S. 686; Helvering v. Illinois Life Insurance Co., 299 U. S. 88.

The petitioner was engaged in the business of issuing life insurance contracts. Such reserves as it had were held in whole for the fulfillment of those contracts. So far the petitioner meets the requirements of the statute. The narrow point of contest is whether such reserves, which admittedly were below the amounts required on the basis of an actuarial computation, were reserves “required either by express statutory provision or by rules and regulations of the insurance department of a state.”

The statutes of Louisiana provide that every life insurance company shall make an. annual report to the Secretary of State, who shall thereupon make a valuation of the policies and shall ascertain the reinsurance reserves and surplus of each company. The statute (Acts 1898, No. 114 § 2; Dart, sec. 4054) further provides:

All such valuations shall be in accordance with the terms of the respective contracts on the net premium basis.
The legal minimum standard for such valuation of policies, including industrial life policies, shall be the American Experience Table of Mortality with interest at four (4) per cent per annum * * ⅜.

The statute in effect prior to 1936 prohibited the payment of dividends or payments to policy holders unless assets exceeded liabilities, including reserves computed by use of “recombined experience table of mortality.” Acts 1898, § 3; Wolff’s Code, 1920, p. 967. The same section further provided:

* * * but for all purposes the reinsurance reserve of every such company shall be computed upon the basis of the so-called American Experience Table of Mortality with interest at four (4) per cent per annum.

The provision just quoted did not by its terms specifically apply to industrial insurance companies, but was contained in the title dealing with reports of life insurance companies. The provisions relating to life insurance companies have, however, been held to apply to industrial life insurance companies. See McBride v. Acme Industrial Life Insurance Society, 154 So. 741; Smith v. Unity Industrial Life Insurance Co., 184 So. 368. In the Unity case the Court of Appeal of Louisiana considered tbe above quoted section 3 of the Acts of 1898 and said:

The above language is explicit and we think that it clearly evinces the intention of the Legislature that, for every purpose (except for the payment of dividends), the reinsurance reserve must be computed upon the American Experience Table of Mortality.
We also experience no difficulty in concluding that the Legislature, in speaking of “reinsurance reserve” in Act No. 114 of 1898 and in prohibiting the forfeiture of the “surrender value” of the policy in Act No. 193 of 1906, were referring to the same thing and that the terms are synonymous in that they apply solely to the actual net value of the policy.

As the statutes of Louisiana were amended in 1936 so as to remove the provision permitting reserves for dividend purposes to be computed in a manner different from reserves for other purposes, the exception noted in the Unity case no longer applies and reserves for every purpose must be at least equal to an amount computed on the American Experience Table of Mortality. Speaking specifically of policy reserves, the Court of Appeal of Louisiana, in Williams v. Peoples Industrial Life Insurance Co., 191 So. 331, held:

In computing policy reserves, an insurer may adopt any standard provided it does not unfairly discriminate between policyholders and further provided that the resultant reserve is not less than would have been produced by the use of the American Experience Table of Mortality at four percent interest.

We read the cases quoted as meaning that under the Louisiana statutes the reserves required of an industrial life insurance company, for all purposes, must be at least equal to those computed on the American Experience Table of Mortality. Such reserves then are the reserves required by law within the meaning of the taxing statutes and the respondent’s regulations.

The petitiorier’s view is that when the Secretary of State, as ex officio insurance commissioner, authorized it to do business upon the setting up of certain amounts of reserves, then such reserves were those required by rules and regulations of the insurance department, and so they come within the respondent’s regulations. We can not subscribe to this view, even passing the fact that the actual reserves set up by the petitioner fell somewhat below the amounts prescribed by the insurance commissioner. There are in evidence communications from the insurance department of the office of the Secretary of State of Louisiana from which it clearly appears that the reserves directed to be carried in 1936 and 1937 were solvency reserves rather than reserves attributable to life insurance elements. From this evidence it appears that prior to 1936 industrial life insurance companies in Louisiana had contended that they were not subject to the reserves requirements exacted of other life insurance companies in Louisiana and in consequence maintained no reserves under the state statute. In that year, by decision of the State Supreme Court and by action of the Legislature, this contention was overruled and the companies were then for the first time faced with the necessity of accumulating reserves to meet these liabilities for which no provision had been made theretofore. In the words of the statement heretofore referred to, the Secretary of State was faced with this problem:

* * * The statutes of the State did not require that those reserves be accumulated as a condition precedent to the granting of a certificate of authority of the company. The statutes did require that the companies remain solvent and the Secretary of State was charged with the duty of seeing that they were solvent To consider the reserves as computed under Act 114 of 1898, an absolute liability in determining the company’s solvency would have rendered practically every industrial insurance company of Louisiana insolvent and would have resulted in their destruction with great loss to thousands of policyholders.
The Secretary of State, therefore, ruled that only a certain portion of the reserves as computed under Act 114 of 1898 would be taken as an absolute liability of the company in determining their solvency. * * *

Reserves which are thus established are wholly arbitrary in amount and have no significant relation that we have been shown either to the life insurance elements of the policies or to the mortality tables. The duty of the Secretary of State in this instance and the purpose of the reserves thus fixed by him are to insure the solvency of the subject company. They are therefore not life insurance reserves but are more in the nature of solvency reserves; nor is this conclusion affected by the fact that they were computed in terms of percentages of the, reserves required under the mortality tables. It follows that the reserves set up by petitioner to meet the requirements established by the Secretary of State were not the life insurance reserves required by law, and, as mere reserves for solvency, do not come within the statute. See Helvering v. Inter-Mountain Life Insurance Co., 294 U. S. 686; Helvering v. Illinois Life Insurance Co., 299 U. S. 88.

We must accordingly hold, in view of its failure to maintain adequate reserves, that petitioner is not a life insurance company within the meaning of the revenue act.

Decision will be entered, for respondent.

       SEC. 201. TAX ON LIPS INSURANCE COMPANIES.
      (a) Definition. — when used in this title the term “life insurance company” means an insurance company engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), the reserve funds of which held for the fulfillment of such contracts comprise more than 50 per centum of its total reserve funds.
      SEC. 203. NET INCOME OP LIPE INSURANCE COMPANIES.
      (a) General Rule. — In the case of a life insurance company the term “net income” means the gross income less—
      **##*#*
      (2) Reserve funds. — An amount equal to 4 per centum of the mean of the reserve funds required by law and held at the beginning and end of the taxable year, except that in the case of any such reserve fund which is computed at a lower interest assumption rate, the rate of 3¾ per centum shall be substituted for 4 per centum. Life insurance companies issuing policies covering life, health, and accident insurance combined in one policy issued on the weekly premium payment plan, continuing for life and not subject to cancellation, shall be allowed, in addition to the above, a deduction of 3 % per centum of the mean of such reserve funds (not required by law) held at the beginning and end of the taxable year, as the Commissioner finds to be necessary for the protection of the holders of such policies only * * *.
      Art. 201 (a)-l. Life inaurmice companies: Definition. — The term “life insurance company” as used in Title I is defined in section 201 (a). In determining whether an insurance company is a “life insurance company” as defined in section 201 (a), no reserve shall be regarded as held for the fulfillment of an insurance contract unless it conforms to the definition of “reserve” contained in article 203 (a) (2) — 1.
      Art. 203 (a) (2)-l. Reserve funds. — In general, the reserve contemplated is a sum of money, variously computed or estimated, which, with accretions from interest, is set aside (reserved) as a fund with which to mature or liquidate, either by payment or reinsurance with other companies, future unaccrued and contingent claims. It must be required either by express statutory provisions or by rules and regulations of the insurance department of a State, Territory, or the District of Columbia when promulgated in the exercise of a power conferred by statute * » *.

       There is a provision in section 11, Act 148 of 1936, to the effect that in computing paid up or extended insurance the Standard Industrial Table of Mortality may be used. The relevancy of that provision is not shown.