author: Black: Opper,

text:
    Frederick Ayer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93019.
    Promulgated, September 18, 1941.

      Phillips Ketehvm, Esq., for the petitioner.

      Charles P. Reilly, for the respondent.
   OPINION.

Black:

In taxing the income of the five children’s trusts to petitioner the Commissioner, in his deficiency notice, relied upon section 166 of the Revenue Act of 1934 and article 166-1 (b) (2) of Regulations 86. At the hearing of this proceeding the Commissioner, however, amended his answer and stated therein, among other things, as follows:

* * * In support of said determination the respondent relies not only on the provisions of Section 166 but also on Sections 167 and 22 (a) of the Revenue Act of 1934.

The petitioner denies that he is subject to tax under either of the named sections of the statute. We shall examine the respective sections of the statute relied upon by respondent and determine whether the trust indentures involved herein fall within their respective provisions, or of any of them.

Section 166.

Section 166 and article 166-1 (b) (2) of Regulations 86, which respondent named in his deficiency notice, are printed in the margin.

The provisions of the trust indentures herein involved retain no power of revocation lodged either in petitioner or in anyone else. The trusts were created under and have been administerd according to Massachusetts law. Decisions of the Supreme Judicial Court of Massachusetts hold that a reservation of powers in the grantor of an inter vivos trust must be made by words of specific reservation in the trust indenture. Thorpe v. Lund, 227 Mass. 474; 116 N. E. 946; Coolidge v. Loring, 235 Mass. 220; 126 N. E. 276.

Respondent cites no authority to the contrary. He merely argues in his brief that:

In view of the presence in each trust instrument of the very broad general provision permitting the trustees to “do all things in relation to the trust property which the Settlor could do if this instrument had not been made”, plus the fact >o£ absence from each trust instrument of any limitation on, or exception to, said general provision indicating that the trusts might have been intended to be irrevocable, respondent contends that the trusts are in fact revocable by the trustees and that the income is properly taxable to the grantor under Section 166 of the ¡Revenue Act of 1934.

The broad power of the trustees referred to by respondent in the :ábove quotation from his brief was not an unlimited power in the trustees, but concerned only the management of the trust property for the purposes of the trust as set forth in the indentures.

In Carleton H. Palmer, 40 B. T. A. 1002; affd., 115 Fed. (2d) 368, the trustees were given the power “to exercise freely and in their uncontrolled discretion all the rights, powers and privileges appertaining to full and complete ownership thereof.” In referring to the broad powers of the trustees, we stated in our opinion as follows:

* * * Those powers which petitioner as grantor reserved to himself as one of the trustees relate to the management of the trust corpus and do not vest in the grantor any control as an individual over the economic benefits or enjoyment of the trust property. * * *

We held that the trust in that case was not a revocable trust within the meaning of section 166. Likewise, we hold in the instant case that, petitioner is not taxable on the income of the five children’s trusts under section 166.

Section 167.

It is respondent’s contention that petitioner is taxable on the income of the trusts under section 167, printed in the margin.

In support of his contention that the incomes of the trusts were taxable to petitioner under section 167, respondent points out that each of the trust indentures provides that the trustees shall pay to the child of petitioner therein named as beneficiary so much of the income as they may deem necessary for his support, education, comfort, and happiness and so much of the principal as they may deem necessary from time to time for his maintenance and support and to add the balance of the net income, if any, in any year to the principal.

In E. E. Black, 36 B. T. A. 346, we held with respect to a trust established by a taxpayer for the benefit of his wife and children, under which the trustees had a discretionary power to apply the income for the support and maintenance of the taxpayer’s wife and children, that the grantor was not taxable on the income of such a trust where, as a matter of fact, none of the income was distributed or used by the trustees in discharge of the grantor’s legal obligation to support the members of his family.

In the instant case none of the net income of the trusts was applied or distributed by the trustees during the calendar year 1934 for the children’s benefit. The entire net income was accumulated in accordance with the provisions of the trusts. Therefore, on authority of the Black case, we hold against respondent on this point. See also Martin F. Tiernan, Trustee, 37 B. T. A. 1048 (appeal dismissed, C. C. A., 3d Cir., June 12, 1939); Hudson v. Jones, 22 Fed. Supp. 938.

(Respondent adviinces, as his next reason why the trust income is taxable to petitioner under section 167, that each trust instrument provides that upon the death of the child named as beneficiary, without issue and in default of appointment, the principal of the trust shall go to the settlor, if living. The Board has held that the mere possibility of a reverter is not sufficient to cause the income of an irrevocable trust to be taxable to the settlor under section 167. William, E. Boeing, 37 B. T. A. 178; Genevieve F. Moore, 39 B, T. A. 808; Marrs McLean, 41 B. T. A. 565. On the authority of these cases we hold against respondent on this point.

Section 22 (a).

It is the Commissioner’s further contention that petitioner is taxable on the income of the trusts under section 22 (a) of the Revenue Act of 1934, printed in the margin.

We think this latter contention of respondent presents considerable more difficulty than those which we have discussed above. Respondent relies principally upon Helvering v. Clifford, 309 U. S. 331. There is some uncertainty as to the extent of the applicability of section 22 (a) under the decision of the Clifford case. Cf. Snowden A. Fahnestock, 43 B. T. A. 569. It should be remembered that the trusts involved in the instant case were not short term trusts, as in the Clifford case, but were for the life of the beneficiary named in the respective trusts. The corpus and accumulated income were not to revert to the grantor except upon a remote contingency. Under these circumstances, we do hot think Helvering v. Clifford, supra, is controlling.

As the court pointed out in Commissioner v. Branch, 114 Fed. (2d) 985:

Helvering v. Clifford rests on its particular facts, as the court was careful to say. We do not understand that the case, as a general proposition, obliterates the separate legal personality of the wife for purposes of determining the gross income of the husband under Section 22(a). Where the grantor has stripped himself of all command over the income for an indefinite period, and in all probability, under the terms of the trust instrument, will never regain beneficial ownership of the corpus, there seems to he no statutory basis for treating the income as that of the grantor under Section 22(a) merely because he has made himself trustee with broad power in that capacity to manage the trust estate. See Helvering v. Achelis, 112 F. (2d) 929. We do not read the dictum in Helvering v. Fuller, 310 U. S. 69, 76, as implying the contrary.

White v. Higgins, 116 Fed. (2d) 312, was also a trust which was to last for the lifetime of the beneficiary, as in the Branch case, and was decided by the same court as decided that case. The court in its decision in White v. Higgins pointed out the distinction in the facts there present from those which were present in the Branch case. Among the powers reserved to the settlor in White v. Higgins was one, as pointed out by the court, whereby the settlor:

* * * Under paragraph (b) of Article Fourth she need not even wait these three years; she may at once pay any or all of the principal or income to herself, if she as trustee thinks that this will most promote her “best interests and welfare.”

There are no such provisions contained in the trusts in the instant case. Likewise, in Morton Stein, 41 B. T. A. 994, in which Helvering v. Clifford was followed, although not a short term trust, large powers were reserved to the settlor, such for example as the power “to alter, modify or vary the terms of the trust except not in such a manner as that any part of the trust income could be paid to him during the lifetime of his wife.” On account of the large powers reserved to the grantor of the trust in that case, we held that the income was taxable to him under section 22(a).

We think the facts in the instant case more nearly correspond with those present in Commissioner v. Branch than any of the other cases cited above. Therefore, following the Branch case, we hold that none of the income of the trusts was taxable to petitioner in the year 1984. Cf. Frank E. Wolcott, 42 B. T. A. 1161.

The parties have stipulated that if our decision is in favor of the petitioner on this main issue, then it is agreed that petitioner has made an overpayment of income taxes for the year 1934 in the amount of $170.50, which amount was paid by the petitioner within three years before the filing of the petition in this proceeding.

Keviewed by the Board.

Decision will be entered for 'petitioner in accordance with the stipulated amownt.

Leech dissents.

Opper,

dissenting: This income falls literally within the language of section 167 (a) (2) for it “may, in the discretion * * * of any person [the petitioner and his wife] not having a substantial adverse interest [Reinecke v. Smith, 289 U. S. 172; Commissioner v. Caspersen (C. C. A., 3d Cir.) 119 Fed. (2d) 94] * * * be distributed to the grantor,” he being the natural guardian of his minor children. Melanefy v. O’Driscoll, 164 Mass. 422; 41 N. E. 654; Freeman v. Coit, 27 Hun. 447; 96 N. Y. 63; Cleveland Clinic Foundation v. Humphrys (C. C. A., 6th Cir.), 97 Fed. (2d) 849; certiorari denied, 305 U. S. 624; Creeley v. Creeley, 258 Mass. 460; 155 N. E. 424. That he can obtain such income only for a specific purpose does not avail to transform a literal distribution to the grantor into something which we can fairly say Congress did not intend to include; for it is a purpose involving his own pecuniary benefit, a “restriction entailing only what would cause grantor’s taxability under Douglas v. Willcuts, 296 U. S. 1 * * *”, in any event. George H. Whiteley, Jr., 42 B. T. A. 402, 416; affd. (C. C. A., 3d Cir.), 120 Fed. (2d) 782; J. S. Pyeatt, 39 B. T. A. 774.

If such a distribution was not made in the taxable year, that is no ground for ignoring section 167, since it is the possibility, not the result, which that section prescribes as the criterion of taxability. George H. Whiteley, Jr., supra; J. S. Pyeatt, supra, distinguishing E. E. Black, 36 B. T. A. 346, and similar cases. Actual or constructive receipt of income is a consideration more appropriate to the determination of gross income under section 22 (a). See Schweitzer v. Commissioner, 75 Fed. (2d) 702; reversed, 296 U. S. 551. But subdivision (a) (2) of 16'7 refers to income which “may” be distributed. The word “is” does not even appear.

Only a total disregard of reality can justify us in viewing the same individual in his capacities of taxpayer, grantor, trustee, natural guardian, and father, as sepárate beings. Lacking acceptable proof that petitioner can not benefit from this trust except by violating its terms — an inconceivable result, since the instrument specifically sanctions his use of the income for the payment of his own obligations — I am unconvinced that there is warrant for reading section 167 as though it used the word “grantor” to describe a capacity instead of a man. See Reinecke v. Smith, supra; White v. Higgins (C. C. A., 1st Cir.), 116 Fed. (2d) 312; William Clark Arkell, 38 B. T. A. 177, 181; Ethel K. Childers, 39 B. T. A. 904; affd. (C. C. A., 10th Cir.), 110 Fed. (2d) 934; certiorari denied, 311 U. S. 667.

Smith, Hnx, and Disney agree with this dissent.

       SEC. 166. REVOCABLE TRUSTS.
      Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested—
      (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
      (2) in any person not having a substantial adverse Interest in the disposition of such part of the corpus or the income therefrom,
      then the income of such part of the trust shall be included in computing the net income of the grantor.
      Art. 166-1. Trusts in the corpus of which the grantor retains an interest.—
      *******
      (b) Test of taxability to the grantor.- — The sufficiency of the grantor’s retained interest in the corpus resulting in the taxation of its income to the grantor Is determined by a single test, namely, whether the grantor has failed to divest himself, permanently and definitively, of every right which might by any possibiltiy enable him once more to possess and enjoy in title the trust corpus. For the purposes of this article the sufficiency of the grantor’s retained interest in the corpus is not affected by the fact that the grantor has provided that the right to cause the title to the corpus to revest in himself is, or may at some future time be, vested in any person (either alone or in conjunction with the grantor) not having a substantial interest in the corpus or income therefrom adverse to the grantor.
      If the grantor has retained any such interest in the corpus he is taxable on the income therefrom regardless of—
      * ******
      (2) whatever the nature of interest retained may be; whether the interest retained is vested, contingent, in reversion, or otherwise; whether conditioned on the precedent giving of notice, or on the elapsing of a period of years, or on the happening of a specified event; whether taken by appointment, or by designation in the trust instrument, or merely by virtue of the grantor not conveying his whole estate in the corpus, or otherwise;

       SEC. 1ST. INCOME FOR BENEFIT OF GRANTOR.
      (a) Where any part of the Income of a trust—
      (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor ; or
      (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or
      (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (o), relating to the so-called “charitable contribution” deduction) ;

        then such part of the income of the trust shaU be included In computing the net income of the grantor.
      (b) As used in this section, the term “in the discretion of the grantor” means “in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question.”

       SEC. 22. GROSS INCOME.
      (a) Generas Definition. — “Gross income” includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever hind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *


source: Caselaw Access Project

author: Murdock:

license: Public Domain

text:
    Wyman Building Trust (#1), Arthur M. Wyman and Albert W. Rockwood, Trustees, Petitioners, v. Commissioner of Internal Revenue, Respondent. Wyman Building Trust (#2), Arthur M. Wyman and Albert W. Rockwood, Trustees, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 104238, 104239.
    Promulgated September 18, 1941.

      Benjamin C. Perkims, Esq,, for the petitioners.

      Davis HasMn, Esq., for the respondent.
   opinion.

Murdock:

The Commissioner determined deficiencies as follows:

The principal issue for decision is whether these trusts were associations taxable as corporations, and a secondary issue is whether trust (#1) was subject to excess profits tax. The parties have filed a stipulation of facts which the Board adopts as its findings of fact.

Louis A. Wyman acquired property in Boston, Massachusetts, in 1912 and erected a building thereon in 1913. He executed a declaration of trust in 1918 which, provided that he should hold the property in trust for himself and five other beneficiaries in stated proportions, rent the property, and pay over the net proceeds to the beneficiaries. The trust was to terminate on July 1, 1917, but could be extended by consent of the beneficiaries. The declaration of trust was never recorded. Louis A. Wyman died on July 6, 1917.

The Board makes the following findings from the oral testimony. Louis E. Wyman, a son of Louis A., was an attorney. The question of what' should be done with the trust property was submitted to him following the death of his father. He concluded that legal title to the property was in the heirs of his father and the beneficiaries of the 1918 trust were beneficial owners. He prepared the Wyman Building Trust (#1) so that the heirs of his father could transfer the property in trust for the beneficial owners and thus provide an effective agency to lease the property and distribute the rents to those entitled to receive them.

Trust (#1) continued until July 1, 1937, when the beneficiaries declared trust (#2). These trusts were substantially identical, except for dates. Only one property was involved in the three trusts. It was rented to the same tenant at the same rental at all times material hereto. The lessee was required to pay all expenses, taxes, and repairs. The trustees merely executed and extended the leases and collected and distributed the rents.

One important element in deciding whether a trust is taxable as a corporation is its form — does it resemble a corporation % Morrissey v. Commissioner, 296 U. S. 344; Sears v. Hassett, 111 Fed. (2d) 961. This trust does bear some resemblance to a corporation in form. But that circumstance is not necessarily determinative, “it must also have been created as a joint enterprise for the carrying on of a business and sharing its gains, as distinguished from the mere holding and conserving of particular property, with incidental powers, as in the traditional type of trusts.” Sears v. Hassett, supra. These trusts were not intended or permitted to deal with other than a single piece of property. They could not deal with the property generally. Their only purpose was to provide a convenient authority for executing and extending the leases on behalf of a more cumbersome group of beneficial owners and for receiving and distributing the rent. There was no larger purpose to engage in business or to deal with the property in other ways. Cf. Sears v. Hassett, supra. The lessee paid all expenses, including taxes and repairs. There was no change in the lessee or the provisions of the leases. The only change in beneficiaries was caused by death. The trusts were for definite, short terms. Some of these circumstances may be fortuitous and of little or no significance, but the case is as strong for the taxpayer as some other recent ones. Cf. Commissioner v. Gibbs-Preyer Trusts, 117 Fed. (2d) 619, affirming 39 B. T. A. 492; Cleveland Trust Co. v. Commissioner, 115 Fed. (2d) 481; certiorari denied, 312 U. S. 704; Lewis & Co. v. Commissioner, 301 U. S. 385.

The Sears case, supra, is distinguishable. The court looked at the entire purpose and history of the Sears trust and saw that it had a broad purpose and extensive powers to deal' with a number of properties to the best advantage of the beneficial owners for an indefinite time. Here the purpose and powers as set forth in the instruments were much more limited.

Decision will be entered for the petitioners.


text:
    Pieroni Building Trust, Italo Catignani, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103105.
    Promulgated September 19, 1941.

      Joseph N. Welch, Esq., and Edward J. Keelan, Jr., Esq., for the petitioner.

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

Murdock:

This trust was not intended “to provide a medium for the conduct of a business and sharing its gains.” Cf. Morrissey v. Commissioner, 296 U. S. 344; Mortgage Trust Certificate Pool, 42 B. T. A. 1238. It was not to carry on any business of its own or to make profits for the holders of beneficial interests. Its purpose was merely to serve the convenience of the partnership by holding the real estate and receiving only enough rent to pay its expenses and meet the obligation of the mortgage. Cf. Kingkade Hotel Co. v. Jones, 30 Fed. Supp. 508; appeal dismissed, 108 Fed. (2d) 1015; Cooperative Power Plant, 41 B. T. A. 1143. That is all it ever did and during these taxable years it was not an association taxable as a corporation. Cf. Commissioner v. Gibbs-Preyer Trusts Nos. 1 and 2, 111 Fed. (2d) 619, affirming 39 B. T. A. 492; Lewis & Co. v. Commissioner, 301 U. S. 385. This case is distinguishable from Sears v. Hassett, 111 Fed. (2d) 961, by the fact, already mentioned, that it was not “created as a joint enterprise for the carrying on of a business and sharing its gains” but was merely to hold and conserve a particular property, with incidental powers, as in the traditional type of trusts.

Decision will be entered under Pule 50.


author: Disney:

text:
    Vandam Charlton Corporation, Dissolved, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103925.
    Promulgated September 19, 1941.

      Harry Geist, C. P. A., for the petitioner.

      Harold D. Thomas, Esq., for the respondent.
   OPINION.

Disney:

The income tax return of the petitioner, a corporation dissolved under the laws of New York on October 27, 1936, for the year ended February 28, 1937, the taxable year, was filed with the collector of internal revenue for the third district of New York on May 15,1937. The first page of the return bore a notation reading as follows: “Final Eeturn, Corporation Dissolved.” The word “dissolved” appears on page 4 of the return in answer to a question concerning the nature of petitioner’s business. In a document entitled “Statement of Facts”, attached to the return, appears the following statement:

The attention of the Commissioner is further called to the fact that this corporation has been legally dissolved and it asks that an immediate examination of this return be made by the Treasury Department.

On July 24, 1940, a 80-day letter was mailed to Ira Streusand, former president of petitioner, attached to which was a statement showing that there had been added to the income reported by him for the calendar year 1986 the amount of $65,664.37 as a dividend received from petitioner. The deficiency notice forming the basis for this proceeding was mailed to petitioner on April 30,1940. It makes no reference to the alleged dividends paid to Ira Streusand.

The return filed by petitioner for the taxable year reported gross income of $26,961.24 from rents and claimed deductions of $14,885.33, leaving net income of $12,075.91 from operations. It also showed profit of $166,137.53 from sales of leases under one method of computation and gain of $49,683.90 under a different method of computation. The respondent determined deficiencies of $45,858.43 in income tax and $12,855.45 in excess profits tax against petitioner for the fiscal year ended February 28, 1937. In determining the deficiencies, respondent held that taxable gain of $94,968.95 was realized from the sale. At the hearing the parties stipulated that the correct taxable profit on the sale was $85,617.83.

The petitioner alleges that it made at the proper time a written request under section 275 (b) of the Eevenue Act of 1936, for assessment of its tax liability within a period of eighteen months and, as respondent failed to determine the deficiencies within the short period, assessment is barred by the statute of limitations. The period of eighteen months for assessment provided for in section 275 (b) is an exception to the general rule requiring assessment within three years. The provision not only requires a strict construction, but there must be “meticulous compliance” on the part of the taxpayer with its conditions. See cases cited in Puget Sound National Bank of Tacoma, Washington et al., Trustees, 36 B. T. A. 386. We have said that the request for assessment must meet all of the statutory requirements and “be sufficiently clear to put the Commissioner on notice of such intention.” Mary Lee Winger, Executrix, 30 B. T. A. 357.

The request was in writing and made at a time required by the statute. Maffitt v. Becker, 65 Fed. (2d) 880. There is authority for holding that a written request is good, even though made after the corporation has dissolved. White v. United States (Ct. Cls.), 22 Fed. Supp. 821. The request relied upon by petitioner first refers to legal dissolution and then requests an “immediate examination” of the return. A mere statement on the face of the return that the corporation had dissolved is not enough. California Brewing Association, 43 B. T. A. 721.

The items of income and deductions of the petitioner for the taxable year appear in schedules attached to the return, to which reference was made on page 2 of the return. There was also attached to the return a document consisting of eight pages headed “Statement of Facts.” The statement of facts relates to the proper basis for two leases acquired by petitioner at the time of its organization and sold during the taxable year, and was made in connection with two computations of the profit on the sale, each on a different basis. The request of petitioner for an examination of its return appears at the close of the statement.

Section 275 (b), supra, is not mentioned in the request of the petitioner ; neither is the word “assessment” employed. Examination of a return and assessment of income tax liability are separate and distinct operations in the administration of the revenue laws. Our attention has not been called to any statute, and we know of none, requiring examination of returns before assessment. The Commissioner may rely upon the return as rendered and assess without an audit or examination thereof.

The case of Beverly Wall Paper Co. v. Commissioner, 98 Fed. (2d) 211, reversing 36 B. T. A. 353, does not help petitioner. There the Commissioner admitted in a communication that the request was made to obtain the benefits of the statute. We do not think the request made herein complies with the statute. It follows that assessment of the deficiencies is not barred by the statute of limitations.

The deficiency in income tax includes surtax on undistributed net income of $123,792.31. In an amended petition filed at the hearing over objections of the respondent, the petitioner alleges in effect that the amount of undistributed income of petitioner should be reduced by $65,664.37, an amount representing a proposed addition to the income of Ira Streusand as dividends received from petitioner during tbe calendar year 1986.

Petitioner does not allege in its petition or contend upon brief that the amount was paid out as a dividend. Its argument is that if Streusand received the dividend, petitioner must have paid it, and as both determinations of the Commissioner can not be presumptively correct, respondent had the burden of proving that none of the earnings of petitioner were distributed. We see no merit in the contention being made by the petitioner. The letter of July 24, 1940, is merely a notice from the internal revenue agent in charge disclosing the result of a preliminary audit of Streusand’s return for 1936 and does not constitute a final determination of tax liability by the Commissioner. No conclusions reached therein are binding upon the Commissioner, and it does not have the standing of a determination of the Commissioner. In fact, at the hearing, counsel for petitioner admitted that the protest filed by Streusand as the result of the letter of July 24,1940, had not been finally acted upon, and that Streusand •‘will not swear that he received that dividend.” Petitioner made no attempt at the hearing to prove by testimony or other evidence that it paid the dividend or that Streusand received it, although Streusand testified as a witness for it. Respondent is sustained on this issue.

Decision will he entered under Rule 50.

       SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.
      ****** *
      (b) Request fok Pkompt Assessment. — In tbe case of income received during tbe lifetime of a decedent, or by bis estate during tbe period of administration, or by a corporation, tbe tax sball be assessed, and any proceeding in court without assessment for tbe collection of such tax shall be begun, within eighteen months after written request therefor (filed after the return is made) by the executor, administrator, or other fiduciary representing the estate of such decedent, or by the corporation, but not after the expiration of three years after the return was filed. This subsection sball not apply in the case of a corporation unless—
      (1) Such written request notifies the Commissioner that tbe corporation contemplates dissolution at or before the expiration of such 18 months’ period; and
      (2) The dissolution is in good faith begun before tbe expiration of such 18 months’ period; and
      (3) The dissolution is completed.


author: Disney :

text:
    J. E. Farrell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 84726, 103430.
    Promulgated September 19, 1941.

      Charles D. Kamel, Esq., and John Enrietto, Esq., for the petitioner.

      James K. Yeatman, Esq., for the respondent.
   OPINION.

Disney :

There is no controversy about the cash payments involved in the transaction. The issue relates to the proceeds of production payable to petitioner under the oil payment, the contention of petitioner being that they constitute taxable income to him as earned in 1933, 1934, and 1935, and not in 1936 as respondent held in his determination of the deficiency and argues here.

The contention of respondent in general is that under the prevailing circumstances the income was not available to petitioner until 1936. Petitioner did not actually receive the income until 1936 and did not include any part of it in his original returns for the earlier years. It was not until September 1936, five months after actual receipt, that he concluded that the amount received was taxable to him as earned, and filed amended returns. This treatment of the income discloses a conclusion of petitioner at the time it was earned that production under the oil payment resulted in no taxable income to him. It has been held under similar circumstances that the taxpayer was “hardly in a position to urge” to the contrary. Olson v. Commissioner, 67 Fed. (2d) 726; certiorari denied, 292 U. S. 637.

Petitioner’s argument upon brief includes contentions that he was a participant in a joint venture, taxable as a partnership; that Yount-Lee was in the position of a fiduciary or agent for all interested parties or for himself; and that the income was available to him as earned upon furnishing collateral. Under any of these theories it is alleged that the income was taxable in the earlier years as earned as distributable income or income constructively received.

There is nothing in the agreement of March 11,1931, disclosing any intention of the parties thereto to become associates in a business venture as the term is generally understood. The assignee was under no obligation to the assignors to drill upon or develop the lands covered by the leases except to drill such offset wells as might be necessary to protect the property from drainage and the assignors incurred no liability for expenses incurred by the assignee in developing and operating the property. No provision was made in the agreement for sharing profits and losses in the operation of the leases, the right of the assignors to participation in production being limited to the provisions of the oil payment. It is clear from the agreement entered into that the development and operation of the leases was intended to be a business of the assignee in which the economic interest of the asi-signors would not exceed the right to participate in gross production sufficient to pay off the oil payment. None of the assignors undertook to assume in the agreement or otherwise any of the obligations of joint venturers. The operation of the leases was the business of Yount-Lee.

Except for provision made in the agreement of March 11, 1931. for a payment to the assignors of $2,000,000 only out of oil and gas produced and saved, which provision was a retention by the assignors of oil and gas in place sufficient to make the payments, Thomas v. Perkins, 301 U. S. 655, the agreement would not be otherwise than an ordinary sale of property, with the usual tax consequences. Marrs McLean, 41 B. T. A. 565; affd., 120 Fed. (2d) 942. The peculiar law applicable to transactions of this nature makes amounts paid under the oil payment ordinary income to the recipient, with the right to deduction for depletion, instead of a return of capital.

Other than D. H. Byrd, 32 B. T. A. 568, no authority is cited on this point. In that case the petitioner received in 1930 an advance from the Owen-Sloan Oil Co. with which to deal in oil property, the money advanced to be repaid from proceeds of sales of property purchased with the funds. Thereafter, after certain expenses of petitioner had been recouped, all moneys received from the leases and royalties sold or retained were to be divided between petitioner and the Owen-Sloan Oil Co. on an equal basis. In 1931 the petitioner and Jack Frost engaged in the business of dealing in and developing oil and gas leases, from which in 1931 they earned profits, one-half of which the Commissioner included in petitioner’s taxable income. Petitioner contended that his share of the profits of the business relation with Frost should be reduced one-half on account of a claim asserted by the Owen-Sloan Oil Co. to such share of the earnings. In deciding the question we did not find it necessary to determine whether the business dealings of Byrd and Frost were a joint venture or a partnership. The Commissioner and the petitioner appear to have proceeded under the theory that it was one or the other, although a statement appears in the opinion that the evidence was insufficient to decide whether or not it was a partnership. The case does not control the answer here. We conclude that there was no relation of joint adventure.

Section 1001 (a) (6) of the Revenue Act of 1936 defines the term “fiduciary” as used in the act as meaning “* * * a guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person.” The same definition appears in section 1111 (a) (6) of the 1932 Act and section 801 (a) (6) of the 1934 Act.

Petitioner alleges that Yount-Lee was as much a fiduciary in connection with the operation of the leases as was the receiver appointed by the court in Commissioner v. Owens, 78 Fed. (2d) 768. In that case the court appointed a receiver to lease land for the benefit of persons ultimately determined in litigation then pending to be the rightful owners of the property, about 225 persons having entered appearances in the title suit. The case of R. S. Goforth, 32 B. T. A. 1206, also relied upon by the petitioner, involved similar litigation in which about 75 individuals claimed to be heirs, assignees, or vendees, but the interested parties agreed that the proceeds from the sale of royalty oil be impounded and held in trust for the persons finally held to be entitled to it". In each case it was held that the income earned prior to the termination of the litigation was taxable to the receiver or trustee as money being accumulated for unascertained persons. Here petitioner held as his own separate property the right to receive out of production an amount sufficient to pay his one-half interest in the oil payment. Petitioner was an ascertained person whose right to receive payments under the oil payment was being contested by his former wife. The controversy was between two ascertained persons, a fact that serves to distinguish this proceeding from the Owens and Goforth cases. Commissioner v. Owens, supra; Benton Wilson, 33 B. T. A. 649; Mary Clark de Brabant, 34 B. T. A. 951; affd., 90 Fed. (2d) 433.

Here the court did not impound the proceeds from production payable to petitioner; it enjoined petitioner from receiving the money. This injunction was vacated in 1934, when the District Court entered judgment in the case in favor of the defendants, and thereafter the refusal of the holders of the leases to make payments was due entirely to their desire to protect themselves against possible liability to petitioner’s former wife.

We do not find in the agreement of March 11, 1931, any terms usually found in instruments creating trusts. Petitioner had title to oil and gas in place, and except for such amount as exceeded, when produced and sold, $1,000,000, did not transfer it to Yount-Lee. Commissioner v. Wilson, 76 Fed. (2d) 766. Thus title to oil and gas sufficient to pay petitioner’s interest in the oil payment was at no time in Yount-Lee. George L. Craig, 7 B. T. A. 504.

No authority is cited by petitioner to support his assertion that Yount-Lee in receiving petitioner’s share of oil runs was acting as his agent. We find none. The agreement of March 11, 1931, discloses no intention on the part of the assignors to appoint the assignee of the leases their agent to develop and operate the property and sell their proportionate share of the oil produced. The assignee was not, as already pointed out, under any obligation to develop the property except to drill offsetting wells. Neither was it required to sell production to pipe line companies. The contract provided that if Yount-Lee sold the oil produced it “shall account to Grantors for their proportion of the oil * * * on the basis of the sale price” and if the sale price was less than the posted price or the minimum price of 30 cents per barrel, the grantee was to account to the grantors on the basis of the posted price or minimum price, as the case might be. It then provided that Yount-Lee “shall have the option of purchasing said oil (and if said Yount-Lee Oil Company runs the oil it shall be considered a purchase) at the average price posted” by four of six designated pipe line companies, Yount-Lee, in any event, to “account” to the grantors at the minimum price of 30 cents per barrel. Thus Yount-Lee could have purchased all of the oil at the posted price or at the minimum price of 30 cents per barrel in the event the posted or selling price was less than that amount. In April, May, and June 1933 oil sales were made at less than 30 cents per barrel and Yount-Lee made up the dilference. The term “account” used in the contract does not have any great weight under the circumstances in establishing the relationship of principal and agent under the contract. The assignee was to “account” to petitioner, whether the oil and gas was sold to third parties or taken over by the assignee at prices fixed by the agreement. Obviously, if the assignee accepted the production, thereby making it liable to petitioner, it, as a purchaser, would not be acting as an agent of petitioner. Such a transaction would create a debtor and creditor relationship.

The willingness of petitioner to look to Yount-Lee alone for his proportionate share of the proceeds of the oil runs, and not to pipe line companies, does not make Yount-Lee an agent of petitioner. The intent of the contract was to make Yount-Lee liable to the grantors for their proportionate share of the proceeds of oil runs as part of the consideration for the assignment. This liability was not made contingent upon receipt by Yount-Lee of the selling price from the pipe line companies. The receipt of the selling price was a responsibility assumed by Yount-Lee. A run of oil or gas made Yount-Lee liable to petitioner for his proportionate share of the selling price and we think the liability was that of a debtor, not agent.

Assuming that Yount-Lee was agent for petitioner in the sale of the oil and gas, the facts here do not warrant an application of the rule that receipt by an agent is receipt by his principal. The doctrine rests in the constructive receipt theory and has its limitations. In A. L. Voyer, 4 B. T. A. 1192, we declined to include in a return filed on the cash basis the amount paid to and retained by the taxpayer’s agent, an attorney, to secure the balance of his fee and expenses. In Tyler v. Commissioner, 72 Fed. (2d) 950, affirming 28 B. T. A. 367, the court pointed out that cases like Maryland Casualty Co. v. United States, 251 U. S. 342, hold that “receipt by an agent, on behalf of his principal, of income to which the principal is personally entitled without limitation or qualification, constitutes constructive receipt by the principal.” The theory of constructive receipt must be sparingly applied. John A. Brcunder, 3 B. T. A. 231.

Here there was no actual receipt by petitioner until 1936. Prior thereto the amount in question was always subject to the outcome of the suit instituted by petitioner’s former wife. Until May 1934, a court order expressly forbade petitioner from receiving the income. The alleged agent was made a party to the proceeding and until the termination thereof declined to turn the money over to petitioner on account of possible liability to plaintiff as a party defendant. This liability was real at all times important. She not only’asked the court to declare all property then in possession of petitioner to be community property, but that the property be equally divided and partitioned by the court and that she recover “of both defendants an equal one-half part of the $1,000,000 oil payment which the defendant Yount-Lee Oil Company has agreed to pay” and that any judgment against petitioner for the difference in value of the community estate on August 8,1981, and at the time of filing suit, be protected by an equitable lien upon the oil payment. She claimed that the community estate had a value on August 8,1981, of approximately $1,750,000. She claimed a one-half undivided interest in the oil payment payable to petitioner and asked the court for an equitable lien on the other one-half to secure payment of the portion of her alleged interest which had been withdrawn by petitioner. Recovery of his undivided one-half interest in the assignment of petitioner to Yount-Lee and the proceeds accrued under the oil payment was found by the court to be the chief purpose of the suit. Burguieres v. Farrell, 85 S. W. (2d) 952; 87 S. W. (2d) 463. Thus the proceeds of production received by Yount-Lee were at all times important subject to the demands made by Stella B. Burguieres in her suit, including the prayer for a lien upon the entire interest of the petitioner, and to that extent qualified his right to receive money from his alleged agent.

A further contention of petitioner is that he could have obtained possession of the funds upon furnishing collateral and accordingly the proceeds of oil runs constituted taxable income to him in the years earned, citing Commissioner v. Brooklyn Union Gas Co., 62 Fed. (2d) 505. In that case the court authorized withdrawals of funds impounded by its order upon the giving of a bond and permitted future collections to be withheld from impounding upon substituting a bond or securities. The court held that the funds were taxable when earned and not in the year in which the suit, on account of which the money was impounded, was terminated. No like situation prevails here. Prior to June 8, 1934, a court order prevented petitioner from receiving the money as earned. Thereafter he made demands upon Yount-Lee for payment of the amount being withheld from him and in 1935 there was some discussion about paying over the money upon giving satisfactory security. Stano-lind’s only suggestion on the subject required petitioner to deposit in bank moneys equal in amount to those drawn down — which obviously would have been of no benefit to petitioner. No agreement was ever entered into on the subject. Under the circumstances it can not be said that petitioner was at any time important in a position to receive the fund by giving satisfactory security therefor.

In North American Oil Consolidated v. Burnet, 286 U. S. 417, prior to 1916 the United States instituted suit to oust petitioner from possession of oil lands being operated by it, and in February 1916 secured the appointment of a receiver to operate or supervise the operation of the properties and hold the net income thereof. Income from the properties was paid to the receiver as earned and in 1917, after entry of the final decree by the District Court dismissing the bill and vacating the receivership, the accumulated money was paid by the receiver to the operator. The Govermnent appealed from the decision and in 1922 the litigation was terminated. The question was whether the income earned in 1916, but not paid to the operator until 1917, was income to the petitioner in 1916, 1917, or 1922. The Supreme Court held that the income was not taxable until received in 1917, whether the petitioner filed its return on the cash or accrual basis. In reaching its conclusion the Court said, among other things:

The net profits were not taxable to the company as income of 1916. For the company was not required in 1916 to report as income an amount which it might never receive. * * * There was no constructive receipt of the profits by the company in that year, because at no time during the year was there a right in the company to demand that the receiver pay over the money. Throughout 1916 it was uncertain who would be declared entitled to the profits. It was not until 1917, when the District Court entered a final decree vacating the receivership and dismissing the bill, that the company became entitled to receive the money. * * *

The Court pointed out that the income in question was not taxable in 1922 because the company became entitled to receive it and actually received it in 1917 and thereafter held it as under a claim of right.

A like case is National Petroleum & Refining Co., 28 B. T. A. 569, where proceeds from the sale of oil were impounded pending the outcome of litigation between two states on the location of property.

In Sara R. Preston, 35 B. T. A. 312, a check was received which was payable to the order of two payees who could not agree as to the amount to which each was entitled for services rendered by them to the payor. Thereafter the check was deposited in a joint bank account, subject to withdrawal only by checks bearing the signature of petitioner and the other payee. This Board held in effect that the money represented by the check did not constitute taxable income to the petitioner reporting on the cash basis until litigation to determine the extent of the interest of the parties in the check was terminated.

Another case alleged by the respondent to be on all fours is London-Butte Gold Mines Co., 41 B. T. A. 852; affd., 116 Fed. (2d) 478. In that case the petitioner in 1933 made sales of ore produced from properties being operated by it. Thereafter in the same year the petitioner filed suit for the collection of the purchase price and the defendant deposited witli the court the full amount due. At the same time the Mosquito Gold Mines filed a motion in the proceeding, claiming that the ore sold had been mined from its property. Sales were made by the petitioner to another corporation in 1933 and 1984, but it refused to pay until' the suit between petitioner and the Mosquito Gold Mines was finally decided. In 1984 the court decided that the ore and the money in the registry of the court belonged to petitioner. The court’s decision was affirmed by appellate court and litigation was terminated in 1935. It was held that the income in question was not accruable and therefore not taxable to petitioner until 1935, when the litigation was finally terminated.

We think the principle of these cases controls the answer here. Throughout 1933 and during part of 1934 petitioner was in no position to demand the money and thereafter, until payment in 1936, payment was refused because of the claims asserted by petitioner’s former wife. It was not until termination of the litigation in 1936 that it became known who would receive the fund. It was then paid to petitioner. Prior thereto he had no use or enjoyment of the income or a right to use and enjoy it. It was not error for the respondent to treat the amount paid in 1936 as taxable income of that year. Accordingly, pursuant to the stipulation, an order will be entered finding an overpayment of $22,502.46 for 1933 and that there is a deficiency of $198,044.98 for 1936.


author: Black

text:
    Lane-Wells Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Technigraft Engineering Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 99829, 99830.
    Promulgated September 25, 1941.

      Raphael Deehter, Esq., for the petitioners.

      E. A. Tonjes, Esq., and Alva G. Baird,, Esq., for the respondent.
   SUPPLEMENTAL OPINION.

Black

: This is a reconsideration of issues (g) and (h) of our report promulgated January 31,1941, in the above entitled proceedings. See 43 B. T. A. 463. In this report we said in part:

From petitioner’s exhibit 28, introduced in evidence by agreement between the parties, Technicraft’s earned surplus, at the time of its merger with the Lane-Wells Co. of Delaware, August 31, 1937, was $55,660.84 and not $65,814.75 as alleged in its assignment of error. The correct amount of Technieraft’s earned surplus transferred to the Lane-Wells Co. of Delaware in the reorganization should be used in a recomputation under Bule 50.

In our findings of fact we made a finding that Technicraft’s balance sheets showed total assets in excess of total liabilities on August 31, 1937, of $155,660.84. The evidence for this finding was petitioner’s Exhibit 28, which also showed such net assets of $155,660.84 to be represented by or made up of the following items:

Capital stock-$25,000.00
Appropriated surplus_ 75,000.00
Surplus account before charging dividends_ 10, 060.47
Income account — year to date_ 85, 600’. 37
Dividends - (40,000.00)
155, 660. 84

In our report promulgated January 31, 1941, we arrived at Technicraft’s earned surplus of $55,660.84 by taking the net result of the last three items shown in the immediately preceding paragraph. If “Technicraft’s earned surplus, at the time of its merger with the Lane-Wells Co. of Delaware, August 31,1937” were at least the amount of $65,814.75, it would not be liable under Credit Alliance Corporation, 42 B. T. A. 1020; affd., 122 Fed. (2d) 361, for the calendar year 1937 for any surtax on undistributed profits under section 14 of the Bevenue Act of 1936 or for any surtax on personal holding companies under section 351 of the Bevenue Act of 1936 as amended by section 1 of the Bevenue Act of 1937, and, instead of deficiencies for 1937 of $1,196.80 and $40,992.05 and a penalty of $10,248.01, as determined by respondent, there would be an overassessment for that year. That this is true is demonstrated by the fact that the parties agree that Technicraft’s net income for 1937 is $123,123.24; that its normal tax for 1937 is $17,308.49; that the tax previously assessed for 1937 was $27,003.71; and that it is entitled to a dividends paid credit (exclusive of any earned surplus on August 31, 1937) of $40,000. See sec. 14 (a) and (b), Bevenue Act of 1936, and sec. 1, Bevenue Act of 1937. In other words, if for 1937 Technicraft’s “dividends paid credit” is1 the amount of $105,814.75 instead of $40,000, it will owe no surtaxes for that year, as the following computation illustrates:

Surtax on Undistributed Profits
Net income-$123,123. 24
Minus normal tax, sec. 14 (a) (1) (A)- 17,308.49
Adjusted net income- 105,814.75
Minus dividends paid credit, sec. 14 (a) (2)- 105, 814. 75
Undistributed net income- None
Surtax on Personal Holding Companies
Net income_$123,123.24
Deduct: Federal income tax, see. 356 (a) (1)- 17,308.49
Adjusted net income- 105, 814.75'
Minus dividends paid credit, sec. 355 (a)- 105,814.75
Undistributed adjusted net income_ None

Was Technicraft’s earned surplus at the time of its merger with the Lane-Wells Co. of Delaware on August 31, 1937, at least the amount of $65,814.75?

On May 12,, 1941, we granted at the request of both parties a “Joint Motion to Open Eecord and for the Introduction of Further Evidence.” The purpose of the evidence to be introduced was to show the amount of petitioner’s earned surplus at the time it transferred its assets to the Lane-Wells Co., in liquidation, in 1937. On May 29, 1941, the parties filed the following stipulation of facts:

It is hereby stipulated and agreed, by and between the parties hereto, through their respective attorneys, that:
1. The item of $75,000.00, appearing on Petitioners’ Exhibit 28, being a “Statement of assets and liabilities as shown by the books of Technicraft Engineering Corporation as at May 31, 1937, June 30, 1937, July 31, 1937, and August 31, 1937,” and described as “appropriated surplus” was set up out of the earnings of Technicraft Engineering Corporation.
2. The said Petitioners’ Exhibit 28 does not reflect the liability of the Technicraft Engineering Corporation for the taxes in controversy herein; and the surplus as reflected by said Exhibit 28 has not been reduced by any amount on account of the said taxes in controversy herein, and the books of the said Technicraft Engineering Corporation do not show any reserve for the taxes in controversy.

Upon the basis of this stipulation both parties agree in their briefs that the appropriated surplus of $75,000 should be added to the earned surplus of $55,660.84 determined by the Board, thus making as a starting point an earned surplus of $130,660.84. From this amount, the respondent contends, there should be subtracted as a liability not reflected by Exhibit 28 all the taxes and penalties which he has determined in his deficiency notice in the total amount of $74,625.59, thus bringing the earned surplus down to $56,035.25. Petitioner concedes that tbe $130,660.84 should be reduced by the taxes and penalties for the years 1934, 1935, and 1936, which in no event will exceed $22,210.55, which would bring the earned surplus down to $108,450.29, or $42,635.54 in excess of the amount of $65,-814.75. The amount of $65,814.75 was the sum which the Commissioner determined as petitioner’s undistributed income for the year 1937.

Petitioner contends that there should not be any reduction in its earned surplus on account of 1937 taxes because there will be no deficiency under the Board’s decision for that year, but that on the contrary there will be an overassessment. It seems clear that this is true. Under the decision of the Board, following Credit Alliance Corporation} supra, petitioner will be entitled to a dividends paid credit, under section 27 (f) of the Revenue Act of 1936, of more than the Commissioner has determined to be its undistributed profits for 1937. Cf. Commissioner v. Kay Manufacturing Co., 122 Fed. (2d) 443. Therefore, since it is true that there will be no deficiency against petitioner for the year 1937, it follows that its earned surplus should not be reduced by the accrual of any additional tax liability for that year. On this point we sustain petitioner.

Therefore, we find as a fact that Technicraft’s earned surplus, at the time of its merger with the Lane-Wells Co. of Delaware, on August 31, 1937, was at least the amount of $108,450.29 and that this surplus represented earnings and profits accumulated after February 28, 1913.

Issues (g) and (h) of our report promulgated January 31, 1941, are modified accordingly.

Decision will be entered under Bule 50.


author: KeRN :

text:
    Arundel-Brooks Concrete Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101026.
    Promulgated September 25, 1941.

      William S. Hammers, Esq., for the petitioner.

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

KeRN :

Tbe issue here is clear-cut — whether the $20,000 contributed by another corporation, the Maryland Slag Co., to the erection of petitioner’s concrete mixing plant, or approximately one-half its cost, should be included, as petitioner contends, in the cost of the plant for purposes of the depreciation deduction which may be taken by the petitioner. Respondent contends that it may not be so included and argues, in the alternative, that, if the petitioner may deduct on the basis of the total cost, then this sum contributed by the Maryland Slag Co. constituted income to petitioner in the year 1987 when it was contributed.

A third corporation, the Arundel Corporation, was involved. It owned all of petitioner’s capital stock and 25 percent of the capital stock of the Maryland Slag Co. It also had a hand, though not a controlling one, in the directorates of petitioner and the Maryland Slag Co., for two of its directors were also on the boards of each of these corporations.

The Maryland Slag Co. had an exclusive right for 15 years to remove slag from the Bethlehem Steel Co.’s blast furnaces at Sparrows Point, and this slag could be used in coarse aggregate concrete. It had no sales organization, but this was taken care of by Arundel. Petitioner agreed with the Maryland Slag Co. to erect the concrete mixing plant in question, and that company agreed to share the cost of its erection with petitioner. It was obviously to its interest to do so, as petitioner points out on brief, for it thus got another outlet for its slag. Petitioner further argues that in this posture of aifairs it can not be said that petitioner gave any consideration for the $20,000 contribution made by the Maryland Slag Co. to the cost of the concrete plant.

Respondent contends (1) that “cost”, as used in the applicable section, section 113 (a), Revenue Act 1936 (the same basis to be employed for depreciation under section 114 (a)), means the cost to the taxpayer, and, in the alternative, (2) that the contribution by the Maryland Slag Co. to building the plant- constituted income to petitioner. The basis being established, depreciation is allowable under section 23 (1). Since we agree with respondent on the first issue, we put aside the other, with its discussion of capital contributions, under the doctrine of Edwards v. Cuba, Railroad Co., 268 U. S. 628, and related cases.

The principle involved is fundamental. • Deductions from income allowed under the statutes have, and have always had, a direct relation to the production of income. Taxes and interest are allowed generally, whether or not incurred in the taxpayer’s effort to make money, but all expenses and losses are strictly limited to those arising out of tbe production of income. There is, it is true, one exception among losses, where it arises from fire or other casualty, and is not compensated by insurance; but this exception, conceded by Congress because of the peculiar hardship which would otherwise result, serves merely to emphasize the rule. The loss allowed for wear and tear is no exception to the general rule, for depreciation is limited to property used in the trade or business. A man may own two houses and live in one and rent the other, but he may claim depreciation only on the house which produces income.

Starting, then, with the proposition that deductions generally, and those for depreciation specifically, bear a direct relation to the production of income and are limited to property so employed, the next step follows naturally, that the basis of depreciation of such property must bear some relation to the money embarked in the enterprise. We find that this is so, and that “cost” has been taken as the basis. Conceivably value might have been taken instead of cost. Such a standard would have borne a reasonable relation to the income or return on the investment, but value is a fluctuating standard and, even if fixed as of a basic date, would be a difficult one to determine. Congress was trying to adjust the tax burden equitably by allowing for the wasting of assets used in the production of income, and if value were an impracticable standard, cost would certainly serve as fairly for all purposes arising after March 1,1918, as to which the constitutional objection was not to be considered. If a taxpayer received a return through depreciation of the cost of his wasted asset, he could not fairly complain because he had not received a return of its value. Cost would at least represent what the taxpayer had invested in the business, and as of a basic date, cost would ordinarily approximate value. Divergencies between cost and value would no doubt occur, but a rule suitable for the great majority of cases must serve for all.

With these statutory premises accepted, that the depreciation deduction is allowable only for assets used to produce income and that the basis of that deduction is cost, the conclusion seems inevitable that cost as a basis must mean cost to the taxpayer claiming the deduction. It is his income which is being taxed, and the equitable relief represented by the depreciation deduction which is extended by the grace of Congress to reduce gross or apparent gains for tax purposes to actual, or net, gains is a relief in each instance extended to him as taxpayer, with a direct relation to the assets which he is using in the business and with a direct relation to the money which he has risked in acquiring the asset so used. Once Congress decided that cost was to be the proper basis for depreciation and not value, there would be no possible ground for doubt that it meant cost to the taxpayer. Value is a quality which inheres in the thing itself, and, of course, fluctuates with it; cost imports a relation between the thing and its purchaser and as between them it is forever fixed. Cost, therefore, has no meaning apart from the purchaser, and, since a deduction has no meaning apart from the taxpayer claiming it, the cost spoken of by the statute must mean the taxpayer’s cost and no other. Any other interpretation, we conceive, would stultify the whole theory of statutory deductions.

We have said so much on this elemental question for the reason that, being elemental, it has generally been tacitly assumed in our own decisions. Inarticulately assumed, it might always be inferred, but to meet the taxpayer’s argument here, the assumption should be explicitly stated so as to refute the fundamental fallacy of the argument. Citation of cases is unnecessary to support a conclusion so obvious. Where Congress intended that the cost of the asset to another than the taxpayer should be taken as the basis for gain or loss, it said so in unequivocal terms, as in the case of gifts inter vivos or by trust, where the donor’s basis is to be used to prevent evasion. Secs. 113 (a) (2), (3).

We must conclude, therefore, that for depreciation purposes the cost of the concrete plant was its cost to the petitioner alone, and the $20,000 contributed by the Maryland Slag Co. to build it is irrelevant.

The only question left is whether half of the plant had a depreciable basis as a gift made to petitioner by the Maryland Slag Co. We think not. The petitioner negatives such a conclusion when he says on brief:

* * * The Maryland Slag Company was interested in having petitioner erect the mixing plant at Sparrows Point because, if located there, processed slag would have to be used for coarse aggregate and it could sell its product to petitioner; and, as an inducement to petitioner to locate the plant there, it agreed to contribute towards the cost of erecting the plant. There was no consideration passing to it in exchange for such contributions as it had agreed to make to petitioner, other than the benefit it would derive from obtaining another customer for its product, or an increased outlet for its processed slag. * * *

Moreover, nothing in the record indicates a gift, but quite the contrary. Throughout the language used is that of an agreement between the petitioner and the Maryland Slag Co. for mutual profit and advantage, and for the accomplishment of a business purpose desirable to both parties.

There was no gift here, so that there is no need to adjust the depreciable cost basis of the concrete plant to petitioner by the addition of its cost basis to petitioner’s donor. We hold accordingly that petitioner is entitled to depreciate only the amount of $19,766.13, which it actually expended in erecting the plant.

Decision will be entered, under Rule 50,


author: Leech:

text:
    Dorothy McBride Orthwein, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104704.
    Promulgated September 25, 1941.

      R. D. FitzGibbon, Esq., and Henry J. Richardson, Esq., for tbe petitioner.

      G. H. Gmi, Esq., for the respondent.
   OPINION.

Leech:

The respondent determined deficiencies in income tax as follows:

1936_$18,399. 68
1937- 10,362.71
1938_ 10,367.07
Total_ 39,129.46

One of the issues, relative to a loss sustained by petitioner from the foreclosure of property, has been abandoned by petitioner. On this issue the respondent is, therefore, sustained. The only remaining issue is whether undistributed income of a testamentary trust is taxable to the petitioner as one of the beneficiaries thereof. We find the facts as stipulated and will set forth herein only those necessary for an understanding of the only issue to be decided.

Petitioner is a resident of the State of Missouri and filed her income tax returns for the years 1936, 1937, and 1938 with the collector of internal revenue at St. Louis, Missouri.

William C. McBride, of St. Louis, Missouri, died testate on May 21, 1917, leaving four daughters, of whom petitioner was one. His will was probated and administered in Missouri and provided for the creation of a trust, which was duly established and always administered in the State of Missouri. Also, each of the trustees of the trust created by the will has at all times resided in Missouri.

During the taxable year 1936 and until October 2 of the taxable year 1937 (hereinafter referred to as the first period), petitioner’s oldest living sister, Ellen McBride Craib, who died on the latter date, was a successor trustee of the trust. Beginning October 2, 1937, and during the taxable year 1938 (hereinafter referred to as the second period), Kathleen McBride Kelley, petitioner’s next oldest living sister, was the next successor trustee of the trust.

In accordance with the terms of this testamentary trust petitioner was beneficiary of one-fourth of the income of the trust distributed by the trustee during the first period and one-third of such income distributed by the trust during the second period.

The pertinent provisions of the trust are as follows:

I direct that this trust shall continue during the life time of the last survivor of my four daughters hereinabove mentioned and for a period of twenty-one (21) years thereafter.
It is my desire that the principal of the trust estate hereby created shall remain intact until the termination of the trust, but during the period of trusteeship of my said wife I desire that she have power to distribute to the beneficiaries of said trust any part of the principal of said estate, if in her judgment she deems it necessary so to do; but after her death or resignation as such trustee, I direct that her successor or successors as trustee shall have no power to distribute any part of the said principal, but shall only have the power to distribute the income therefrom; hut nothing stated herein shall be considered as directing my said wife or any subsequent trustee to distribute all of the said income; but on the contrary, she or any subsequent trustee shall have full authority to add such portions of the income as to such trustee may seem proper, to the principal of the said trust estate, also bearing in mind, however, the needs and requirements of the beneficiaries of said trust estate.
The beneficiaries for whom I hereby create this trust estate are my wife and my four daughters above named. Each is entitled to receive one-fifth of the income from said estate distributed by said trustee, and upon the termination of said trust the principal thereof is to be divided equally between the respective issue of my daughters in equal portions per stirpes and not per capita.
No husband of any of my daughters, grand-daughters or great-grand-daughters, and no wife of any of my grandsons or great-grandsons shall have any interest in, right to or claim upon any part of the principal or income from any portion of said trust estate, my intention being that the heirs of my body shall be the only ones who shall derive any benefit whatsoever directly from said trust estate, and I direct any and all trustees of said estate to pay no part of the income from said estate, or the principal thereof upon termination of this trust, to any one except the beneficiaries thereof in person, or to the duly authorized legal representative of such beneficiaries as may be from time to time under legal disability.

In each of the years 1936 to 1938, inclusive, the trustee withheld from distribution income of the trust for such years in the sums of $110,-190.18, $60,746.22, and $56,879.98, respectively. In none of these years did the trustee credit on her books any portion of these withheld amounts to petitioner or any other beneficiary of the trust. Respondent in determining the deficiencies here in question has added to petitioner’s income for 1936 the amount of $27,547.54; for 1937, the amount of $20,248.75; and for 1938, the amount of $18,959.99. These amounts in each case represent the distributive share of this petitioner in the income withheld in each year by the trustee as above set out, had such income been, in the discretion of the trustee, distributed to the beneficiaries. In each of these years the amounts of income withheld from distribution by the trustee, as above set out, were returned and taxes paid thereon by the trustee. Petitioner for each of these taxable years filed her return, as did also the trustee of the trust, on the cash receipts and disbursements basis, and for each year included in her return all of the income of the trust for those respective years which was distributed to her by the trustee, and paid the tax thereon. With the exception of $602.15 in the year 1928, the trustee has never added to her principal account on her books any income in any of these years.

The only issue is whether that portion of the income of the trust in each of the taxable years withheld by the trustee from distribution, to which petitioner would have been entitled if distributed, is taxable to her as income currently distributable.

The petitioner contends that under the terms of the trust the trustee had discretion in the distribution of income to the beneficiaries and, consequently, the income of the trust was not to be distributed currently. The respondent argues, in substance, that the only discretion as to trust income possessed by the trustee was to add such income to principal or distribute it to the beneficiaries, during the year of its receipt, and, since in the several years here in question certain income was not then added to principal, that it became vested in the beneficiaries in each such year and subject to their demand.

The respondent relies on subsections (2) and (4) of section 161 (a) of the Revenue Acts of 1936 and 1938. The tax imposed by subsection (2) applies to income of any kind of property held in trust “which is to be distributed currently by the fiduciary to the beneficiaries.” The tax imposed by subsection (4) applies to the income of such property “which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.” The primary tax liability under both of these subsections is upon the fiduciary. Sec. 161 (b). Section 162, however, provides for specific deductions in computing the net income taxable to the fiduciary. Under section 162 (b) income is deductible by the fiduciary “which is to be distributed currently by the fiduciary to the beneficiaries” and the amounts so allowed as deductions are includable in computing the net income of the beneficiaries “whether distributed to them or not.” Section 162 (c) allows deduction by the fiduciary of income which, in his discretion, may be either distributed or accumulated and which is by him “properly paid or credited during such year” to any legatee, heir, or beneficiary. The amounts allowable as deductions to the fiduciary under this section are likewise taxable to the beneficiaries. Helvering v. Butterworth, 290 U. S. 365.

It is settled that a current distribution of income “presupposes a periodic duty” to distribute such income in accordance with the provisions of the trust, Commissioner v. Stearns, 65 Fed. (2d) 371; and “the test of taxability to the beneficiary is not receipt of income, but the present right to receive it,” Freuler v. Helvering, 291 U. S. 35. We find nothing in the trust instrument which imposes a duty upon the trustee to make a periodic distribution of income to the petitioner as a beneficiary, Commissioner v. First Trust & Deposit Co., 118 Fed. (2d) 449, affirming 41 B. T. A. 107; nor do we think that the provisions thereof give rise to a “present right” on the part of petitioner to receive the income held by the trustee. Central Hanover Bank & Trust Co. et al., Executors, 34 B. T. A. 741. Therefore, we hold this income was not Required by the trust instrument to be currently distributed to the beneficiaries.

Respondent's argument, as we understand it, is that the only discretion which the trustee had was to add the income to the principal of the trust or distribute it to the beneficiaries, during the year of its receipt, and, since it was not then added to the principal it thereupon became, by reason of this failure, converted into income currently distributable to the beneficiaries. This argument is, we think, contrary to the provisions of the trust, in which it is stated:

* * * but nothing stated herein shall be considered as directing my said wife or any subsequent trustee to distribute all of the said income; but on the contrary, she or any subsequent trustee shall have full authority to add such portions of the income as to such trustee may seem proper, to the principal of said trust estate, also bearing in mind, however, the needs and requirements of the beneficiaries of said trust estate.

We find nothing in ths provision characterizing such income as currently distributable immediately upon failure of the trustee to add it to the principal; nor do we find any provision directing the i/rrnne-diate addition by the trustee of the income to the principal, the failure of which would necessarily be the event automatically converting it into income to be¡ “distributed currently” to the beneficiaries. Moreover, there appears nothing in the trust requiring a distribution at all of such income to the. beneficiaries. On the other hand, it specifically provides: “Each [beneficiary] is entitled to receive one-fifth of the income from said estate distributed by said trustee * * (Emphasis supplied.) Thus, for petitioner to be entitled to such income, it must first be distributed by the trustee. Consequently, until this event took place, petitioner had no right as beneficiary to such income. See Elizabeth Earhart Kennedy, 38 B. T. A. 1307.

No authority need be cited for the principle that the intention of the testator as expressed in a testamentary instrument governs in the proper construction of that instrument. The testamentary trust here gives the trustee great discretion in that she has “full authority to add such portions of the income” as to her “may seem proper, to the principal”, bearing in mind, however, “the needs and requirements of the beneficiaries” of the trust. In our opinion, this language evidences the intent and desire of the decedent that the trustee be enabled to assist the beneficiaries and that this broad power gives the trustee authority to withhold income from the principal of the trust in order to meet any unforeseen necessitous circumstances which might arise affecting the beneficiaries. Once the income was added to corpus during the taxable years here, its distribution to the beneficiaries was impossible, no matter what the necessities of the beneficiaries.

We conclude, therefore, that the pertinent provisions of this trust clearly describe “income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.” We hold further that the income here sought to be taxed to this petitioner, beneficiary, for each year was neither distributed nor credited to her by the trustee in such year and the liability for income tax thereon is that of the trustee, who has in each instance reported it and paid the tax.

Decision will Toe entered wider Bule 50.


author: Kern :

text:
    Eastern Building Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101222.
    Promulgated September 25, 1941.

      Joseph B. Miller, Esq., for the petitioner.

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

Kern :

The first question presented by this proceeding is whether, for the purpose of computing the surtax on undistributed profits, petitioner is entitled to a credit for certain sums paid to a sinking fund pursuant to a trust indenture for the retirement of bonds. The applicable statute is section 26 (c) (2) of the Revenue Act of 1936, set out in the margin.

The facts in the instant case disclose a debt which arose when the bonds were issued. The indenture of trust, which is a written contract executed by the corporation prior to May 1, 1936, required that a certain sum of money be irrevocably set aside within the taxable year in discharge of that debt. And, as we said in Michigan Silica Co., 41 B. T. A. 511, 513, the fact that the petitioner had the option of redeeming the bonds or purchasing them does not affect the result. Our ultimate question, therefore, narrows down to an issue similar to one involved in the Michigan Silica Co. case, i. e., whether the provision of the trust indenture requiring the depositing of sums certain in the sinking fund “expressly deals with the disposition of earnings and profits of the taxable year.” In the cited case, under somewhat different facts, we concluded that it did; here we reach the opposite conclusion.

Regardless of whether petitioner realized any earnings and profits in the taxable year, the regular annual payment was still required by the indenture of trust. Without earnings, petitioner would have had to resort to some other manner of obtaining the necessary funds. This could have been done by applying accumulated surplus, if any, by the sale of assets, by issuing additional stocks or bonds, or by any other method of borrowing. Since the indenture does not require the payments to be from current earnings and profits or to be measured by current earnings and profits, it becomes immaterial whether the payments actually were out of earnings and profits of the taxable year. Provisions granting special exemptions are to be strictly construed. Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46.

The three decisions which petitioner relies upon, G. B. R. Oil Corporation, 40 B. T. A. 738; Joell Co., 41 B. T. A. 825; and Michigan Silica Co., supra, are all readily distinguishable. As was pointed out by the Board in the latter case, the terms “earnings and profits of the taxable year” do not have to be written into the contract; but in. all three of those cases the Board said that there must be some provision in the contract which, when read in the light of reason, expressly deals with the distribution of earnings and profits of the taxable year. Annual gross receipts were referred to in the contracts in each of those cases, and we held that gross receipts necessarily included earnings and profits. We do not have a similar state of facts in the instant case, for neither annual gross receipts nor any specific receipts are mentioned in the indenture; and therein lies the distinction.

The second and sole remaining issue for oúr determination is whether the discount at which petitioner in 1936 purchased its own bonds, which were disposed of for face value in 1937, is taxable income of the petitioner in 1936 or, as the petitioner contends, in the later year of disposition.

It appears that the sole purpose of the purchase of the bonds in 1936 was to have them on hand for deposit in the sinking fund at a later date at their face value. By this procedure the petitioner actually realized a profit between what it paid for the bonds and their face value. Petitioner claims that the purchase of the bonds was a transaction entered into for profit and that, consequently, no income was realized until petitioner disposed of the bonds. The actions of petitioner point to the inescapable conclusion that they were purchased for retirement. However, its purpose in purchasing its own bonds is immaterial. As we said in Garland Coal & Mining Co., 28 B. T. A. 348 (affd., 76 Fed. (2d) 663) :

* * * The purchase of the bonds by the petitioner constituted such a closed transaction as gives rise to recognizable gain or loss under the revenue act. The fact that the petitioner had such bonds available for resale is not controlling. Such a resale would be an entirely new transaction.

See also American Brake Shoe & Foundry Co. v. Interborough Rapid Transit Co., 19 Fed. Supp. 234.

On this issue we hold for respondent.

Decision will be entered for the respondent.

       SEC. 26. CREDITS OF CORPORATIONS.
      In the ease of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax—
      *******
      (c) Contracts Restricting Payment of Dividends.— *******
      (2) Disposition of profits of taxable year. — An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside. For the purpose of this paragraph, a requirement to pay or set aside an amount equal to a percentage of earnings and profits shall be considered a requirement to pay or set aside such percentage of earnings and profits. As used in this paragraph, the word “debt” does not include a debt incurred after April 30,1936.


author: Keen :

text:
    Mary B. Adams, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103197.
    Promulgated September 25, 1941.

      George E. Hamilton, Jr., Esg., and John L. Hamilton, Esq., for the petitioner.

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

Keen :

The case presented is one of law and involves two questions — (1) whether the term “head of a family”, as construed in respondent’s regulations as applying to an individual “closely connected * * by blood”, applies to a first cousin; and (2) whether actual residence in the same household with petitioner of the dependents as to whom family headship is claimed is, in the circumstances presented here, necessary to bring the case within the statute.

Since our resolution of the first question will render any answer to the second unnecessary, we shall not discuss the latter here.

Pleadship of a family connotes ordinarily the status which a man acquires by marriage, or by acquiring both wife and children, or children by adoption. This is the normal condition. But it may also connote the position assumed by a child, one or both of whose parents may be still living, when the child, because of the age or infirmity of his parents, supplants the father as the economic maim stay of the household. This in an inversion of the normal condition. The same headship would remain, of course, if that child continued to keep his younger, or infirm, brothers and sisters from want by his exertions; certainly, at least, during their minority. The concept is familiar to us all. The only difficulty, like most difficulties in the law, is to know where to draw the line. But if the word “family” be kept steadily in view we can not go far wrong. That term, as used in the statute, can not refer to all persons descended from a common ancestor, or, in other words, related in blood. The. semibarbaric Gaels of North Britain and Ireland once treated it so and thus extended its meaning to the whole sept, or clan, as the Hebrew children did in an earlier age; but the fluidity of modern social relations has long since done away with such patriarchal concepts, even in the South of our own country where ahnost any degree of consanguinity once entitled one to the familiar address of “cousin.” We think of “family” as the immediate family, that is, the father and mother and the children of that common father and mother. An orphaned nephew or niece often becomes even at this day, when the social security established and maintained by Government is rapidly replacing family dependencies hitherto relied on, the member in every true sense of that small household called “the family.” A niece stands, under Canon law rules familiar to all common lawyers at least since Blackstone, 2 Com. 206 (see Co. Litt. 23), in the third degree of consanguinity to her supporting uncle who may claim the tax exemption. It is obviously such a “close” relation as the regulations speak of, and we have so held. William Lee Tracy, 39 B. T. A. 578; Estate of Grace Adams Howard, 42 B. T. A. 449.

But when we go beyond the third degree of consanguinity — and the nearest blood relation here was that of a first cousin and therefore of the fourth degree — we must answer the question whether such a relative shall also be brought within the household as a matter of family moral obligation, so as to entitle her protector to the tax benefit? Petitioner confesses that she can find no authority to support the claim. The Circuit Court of Appeals for the District of Columbia has held that a second cousin does not fall within the statutory category. Wade v. Helvering, 117 Fed. (2d) 21. And we are of the opinion that a first cousin is also not sufficiently close. A first cousin is not within the prohibited degree of relation for purposes of marriage, and if she is to be regarded as sufficiently remote for that purpose, we think that she may well be excluded from the familial hearth also for tax purposes. Nor is this test an unreal or arbitrary one. As we have sought to point out, the family in modern society exists as a unit for the procreation and rearing of children. The children themselves, the product of this union, may continue to hold together by this same bond which brought their lives into being together, and thus continue to constitute a real “family”; but the cousins of those children (and therefore the children of other parents), whom they themselves might marry, may not likewise be considered a part of that family. For this construction, it seems to us, would merge the “family” into the clan or tribe; and thus render the statutory definition meaningless.

There remains only the petitioner’s argument that her first cousins have stood virtually in the relation of brothers and sisters to her from infancy because, early bereft of their own parents, they were taken into her family by her parents and maintained there until the death of those parents and since that time have been maintained largely by petitioner’s own contributions, although in a separate household. Our only answer is that we are not trying to measure the mutual love and affection and lovingkindness which in such circumstances must have subsisted in this relation. The gratitude offered their kinswoman, the petitioner, by these dependents no doubt carries its own reward, but it must not affect our determination. The circumstances here are unusual, and we must be governed by norms of conduct. See Cardozo, J., in Welch v. Helvering, 290 U. S. 111. Cousinly affection is as likely as not in ordinary circumstances to be replaced by its opposite, dislike and distrust. Indeed, the history of our country might have been different had Marshall and Jefferson not regarded each other with the distrustful eye which so often characterizes such a relation. We can only say, therefore, that the continuance of the kindness and care by a mere cousin under a sense of moral obligation, although wholly commendable, can not persuade us that the dependent cousin’s status as a member of petitioner’s family would not normally have ceased with the death of her aunt, the petitioner’s mother. Kindness and care for a niece is one thing, that for a cousin another, and while a stranger may, through affinities of mind and character, become dearer to one than a brother, we must not set up a standard of family headship for tax purposes which goes beyond the confines of ordinary human conduct. The ordinary man expects things of those close to him in blood which he does not look for in a stranger, and, in turn, he assumes obligations for such persons as a matter of course. We can not define the “family” in terms of Christian charity but must stick to the less laudable standard of blood and self-interest. We are not persuaded, therefore, that petitioner could or did maintain a “family” by her continuing charities to her kinswomen.

Respondent allowed the deduction of all claims in respect of petitioner’s cousins as dependents and denied only the family headship exemption. We think he was right.

Decision will be entered for the respondent.


text:
    Minnie Felber (Formerly Minnie Goldman), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102988.
    Promulgated September 26, 1941.

      B. A. Littleton, Esq., for the petitioner.

      J. L. Bachstrom, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined a deficiency of $2,313.61 in income tax for the calendar year 1936. The Board adopts the stipulation of the parties as its findings of fact. The Commissioner added to income $10,574.10 representing community income for the period from January 1 to February 12, 1936, which the petitioner had not reported. The petitioner assigns this action as error.

The petitioner was the widow of Simon Goldman, who died on February 12, 1936. They resided in Shreveport, Louisiana. All of their property was community property. Part of the property was a one-half interest in a partnership. The partnership earned profits of $41,113.40 from January 1 to February 12, 1936, “of which a one-half part, or $20,556.70, was distributable to the community of Petitioner and her husband, Simon Goldman; and the community had other income accrued, as rents up to February 12,1936, in the amount of $1,289.00, or a total income accrued to February 12, 1936, of $21,-845.70, against which there was accrued expense of $697.50, which makes Net accrued income of $21,148.20 of the community.” The value of the other assets of the community was far in excess of the debts.

The petitioner filed a return for 1936 with the collector of internal revenue for the second district of Texas, but did not include in that return any of the community income for the period up to February 12. The Commissioner included $10,574.10 in determining the deficiency. The administrator of Simon filed an income tax return for the period January 1 to February 12, 1936, in which he reported community income of $20,431.18 and paid a tax of $1,825.07 thereon.

The petitioner contends that all of the community income for the period from the first of the year to the date of the death of the husband was properly reported by the administrator of the husband and none of it may properly be included in her income for 1936. She argues that the last day of the taxable year of the community was February 12, 1936, when the husband died and, since she and her husband were living together on that day, they had a right to file a joint return; but she was “under disability” to file a return (section 51 (c)) because under the law of Louisiana the administrator was placed in charge of all community funds and, therefore, the return he filed was proper. The sequence of the argument, as presented in the brief, is not so easily followed, but the foregoing seems to be the purport of it.

The situation of this petitioner in regard to a joint return is no different from that of any other surviving spouse, whether residing within or without a community property state. Each spouse is a separate taxpayer. Sec. 51, Eevenue Act of 1936. The community is not a taxpayer and had no taxable year. The taxable year of the petitioner was the calendar year 1936 and it was not cut short or divided in any way by the death of her husband. His death terminated their right to file a joint return. [Regulations 94, article 51-1; Katharine B. Bliss, 29 B. T. A. 1037; affd., 76 Fed. (2d) 101; Gertrude H. Thompson, 30 B. T. A. 30; Estate of Lee R. Farrell, 35 B. T. A. 265, 270, 271. Section 51 (c), relating to the filing of returns for “persons under disability” has and was intended to have no application to a case like this. The petitioner was not “unable” to make her own return. She, in fact, made and filed her return and she could and should have reported in it her share of the community income. Bender v. Pfaff, 282 U. S. 127. The administrator was required to file a' return for the decedent but not for the petitioner. Sec. 142. Katharine B. Bliss, supra.

The administrator in Louisiana is charged with the community property after the death of one of the spouses and any income arising thereafter must he reported by the administrator. J. H. Tippett, 25 B. T. A. 69; Ida Stephenson, 33 B. T. A. 252. But the income here in question arose before the death of the spouse. It is immaterial if the petitioner could not obtain free use of her share until the administrator paid the debts and made distribution. It became hers as it was earned. It does not appear that she did not obtain it within the taxable year, if that is material. Even during the lifetime of her husband she had to report her share of the community income, although the husband had full charge of the community property. Most of the income was from a partnership and was taxable whether distributed or not. Sec. 182. We find no error in the determination of the Commissioner.

[Reviewed by the Board.

Decision will le entered for the respondent.