author: Disney :

text:
    Ethel S. Garrett (Formerly Ethel S. Darlington), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99445.
    Promulgated December 2, 1941.

      J. Garfield Houston, Esq., for the petitioner.

      William A. Schmitt, Esq., for the respondent.
   OPINION.

Disney :

The petitioner was the principal beneficiary under the provisions of her husband’s will. In years previous to the taxable year, the executors had accumulated from income and had on hand at the beginning of the taxable year, 1934, the sum of $262,436.08. During the taxable year the estate had income of $132,701.73 (in addition to an amount paid to another beneficiary not here involved). During the taxable year the executors paid petitioner $294,526.45. Thereof $60,000 was paid by voucher marked “Payment on Account of Personalty Income for Year 1934.” Of the $60,000 the petitioner reported as income $57,284.47, the remainder not being reported because nontaxable. As to the $60,000, there is no controversy here. The respondent in the deficiency notice took the position that petitioner should have reported the entire $132,701.73, and increased income by $75,417.26, the difference between $57,284.47 and $132,701.73. In other words, the position was taken that the payments to petitioner in the taxable year were from the income of the estate for that year; whereas the petitioner contends that, except for the $60,000, the payments to her were from the income of the estate for previous years, as to which the executors had reported on Federal income tax returns, and that therefore she is not taxable thereon for 1934.

Although there is some confusion in the briefs as to exactly what constitutes the issue presented to us, upon review of all that is said thereon, we conclude that, as petitioner points out and agrees, the respondent correctly framed the issue in the following language:

The question recurs, were the payments made to the beneficiary in 1984 from, income of the taxable year or prior years — not whether income was or was not paid or credited during the taxable year. It is stipulated that certain payments were in fact actually made during 1934, as hereinabove narrated— but from what source, is the question at issue.

What then is the source of the payments by the executors in 1934? Section 162 (b) and (c) of the Revenue Act of 1934 is involved. We are not sure, from the briefs, whether the respondent contends for the application of section 162 (b). At any rate, in our opinion, that subsection is not applicable here, for no provision of the will authorizes or requires that income “be distributed currently by the fiduciary”, in the language of that subsection, at least so far as the executors are concerned; and the trustees are not here involved, since they Avere not to receive the residue of the estate until the end of administration, and the trust was not set up until March 28, 1935, upon which date bjr final decree of the Probate Court the residuary estate was awarded to the testamentary trustees. We therefore need not consider the trust, but only the estate in the hands of the executors. Subsection 162 (c) provides that in case of income received by estates of deceased persons during the period of administration, the estate in computing net income, may deduct the amount of the income for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary, but such amount shall be included in computation of the net income of the recipient. Was the petitioner such recipient of the income of the estate for the taxable year? In paying her, the executors attempted to identify the payments as from income of previous years, paying $110,000 by vouchers marked “Payment on account of 1932 Income Collected” and $124,526.45 by a voucher marked “Payment in full of Balance of Personalty Income for Year 1933.” In Clara Louise Flinn, 37 B. T. A. 1085 (1096), referring to a distribution to a beneficiary under section 162 of the Revenue Act of 1932, we said:

* * * The distribution of $22,500 appears to have been made out of trust income of earlier years and is not properly taxable at the time of actual distribution in 1933. * * *

As to another distribution, we held that nothing appeared requiring the exclusion thereof from the individual’s income. It thus appears that the question is one of fact as to whether the disbursement is, or is not, from the income of earlier years, or of the taxable year. The respondent argues that the petitioner can not prove that the distribution was from pre-1934 estate income merely by so stating upon the vouchers paying same. The petitioner points out, however, that the evidence is not so limited, but that it is stipulated:

The Union Trust Company of Pittsburgh, one of tbe said executors, kept the books and records for the estate. It maintained separate book accounts for income and principal. The income account shows in detail the items of income received in each year and the disbursements therefrom to the beneficiaries.

Petitioner also contends that the evidence now before the Board shows that the executor was able to, and did identify the source of the payments of income made to the beneficiaries in 1934. We think that petitioner’s position should be sustained. Though the bank account from which the payments were made and the other accounts reflecting the condition of the estate were running accounts, running throughout 1932, 1933, and 1934, nevertheless they were balanced daily, and the financial condition of the estate, including amount of income on hand, was ascertainable at the end of each year. Therefore at the time of the payments in 1934, here in question, the executor was able to ascertain the condition of the preceding years as to income. With that knowledge the executor attempted to identify the payments made, as from income of 1932 and 1933, by notation on the vouchers and, in accord therewith, upon the books of account. In our opinion it can not soundly be said, that under such evidence, there was not sufficient identification. The respondent argues that the payments are from income of 1934, to the extent thereof. In this matter, we have no statutory mandate that payments made are from most recently accumulated income, as in case of dividends under section lio (b) of the various revenue acts covering all years here involved; so we see no reason for so presuming except such as arises from presumption of correctness of the respondent’s determination. Evidence was offered to overcome such presumption. Though of course not conclusive, the facts as to book entries are evidential. Doyle v. Mitchell Brothers Co., 247 U. S. 179. They have been given evidential value in determining questions of tax. Commissioner v. Brier Hill Collieries, 50 Fed. (2d) 777; Wessel v. United States, 49 Fed. (2d) 137; and we have said that evidence of book values constitutes a prima facie showing by the petitioner. B. F. Edwards, 39 B. T. A, 735. See also Frank C. Rand, 40 B. T. A. 233. The executor had accumulated income in all of the years, and was obligated to the petitioner therefor, in that, though not required to pay income to her currently, there was testamentary requirement that such income be distributed to trustees, in trust to pay the entire income to the petitioner during her life, save only a comparatively small amount to her mother. The executor, in such position, attempted to identify payments made by it, as from a certain source or upon a certain obligation, that is, as paying income accumulated in 1932 and 1933. In general, a debtor may designate his debts and apply payments thereto.

Moreover, in case of more than one debt owed, payment is presumed made upon or applied upon the oldest item, 48 Corpus Juris 707; and the creditor must show that payment was not upon the oldest item. Rickerson Roller-Mill Co. v. Farrel Foundry & Machine Co., 75 Fed. 554. “Application of payments to liabilities of earliest date, being in accordance with ordinary and usual course of business dealing, is presumed to be intention of parties.” Snell v. Rousseau, 257 Mass. 559; 154 N. E. 70. We think that the executor here is in a position not essentially different from that of the ordinary debtor, that some presumption arises that payment was from funds first obligated, and that, as in case of the ordinary debtor, entries on vouchers and books are evidence of application of payment to certain obligation or source of payment. Book entries are admissible to show payment on principal and not interest. McAllister v. Chambers, 129 Pac. 85. The petitioner, accepting and cashing such vouchers, could not successfully contend that she had received income from years other than those indicated by the vouchers. In other words, the identification is binding upon her. We think it is likewise sufficient in her favor.

In Holbrook v. Moore, 298 Fed. 264, the question was whether the petitioner received income from a corporation prior to March 1, 1918, or thereafter, and credits to him upon the corporation’s books were received in evidence on the point apparently without dispute. In various cases involving accrued compensation from corporations entries on corporate books have been received in evidence, e. g., Mossman, Yarnelle & Co., 9 B. T. A. 45. We can not think that where as here the question is in one sense one of application of payment, such entries axe not sufficient. Respondent’s view that the entries were self-serving evidence can not be sustained. They were not the acts of the petitioner, the person offering them, but of the executor, a different taxable entity; moreover, nothing in the record indicates that they were self-serving to the executor, but rather to the contrary, since they would tend to cause taxation of the estate upon the income of 1934, to the extent not paid or credited to the beneficiary. We conclude and hold that the petitioner adduced evidence competent and adequate to identify the sums paid in 1934, here in question, as paid from income of 1932 and 1933.

The respondent argues, however, in effect, that such earlier income is not tax-free, as contended by the petitioner, for the reason that to so hold would result in double deduction, the executor having had deductions in 1932 and 1933. Such view can not be sustained, first, because the deduction in 1932 and 1933 was not that of the taxpayer, but of the executor, and, second, because even the executor in those years was allowed no deduction for sums paid or credited to the petitioner as beneficiary. The deduction then allowed was for other items, largely payment of estate and inheritance taxes, and none was claimed by the executor for payments or credits to-the beneficiary, because there were no such payments or credits, so far as here concerned. Respondent’s argument, if followed, would tax the petitioner, in 1934, merely because in 1932 and 1933 the then statute, unlike that of 1934, allowed deduction by the executor of certain other items, particularly inheritance and estate taxes. We find no double deduction, or reason based thereon, for considering the payments in 1934 as taxable to the petitioner. Where the income is properly in gross income of the estate and not charged to the beneficiary, it may not thereafter be included in the gross income of the beneficiary. Elnora C. Haag, 19 B. T. A. 982.

The respondent suggests that the petitioner was entitled, under the will, to all of the income, and that the executors had no right to accumulate it. We understand this to mean, in effect, that, since she received in 1934 an amount within the income of the estate for that year, and the executors had no right to accumulate income, she therefore necessarily received the estate income of 1934 and not of earlier years. We think such contention is not well founded. The executors were not required to pay the petitioner currently, or by years — either by the will or the law of Pennsylvania. Respondent on brief agrees that under such law presumably an executor can not be compelled to distribute assets during the settlement of the estate, within reasonable limits; but suggests that he can set up proper book entries, segregate specific funds, and take credit without actually paying out the money, from which we assume it is contended that the petitioner has a right to such credit, and if she actually receives payment, receives it from current income. In Commissioner v. Stearns, 65 Fed. (2d) 371, it is held that, under section 162 of the Revenue Act of 1928, “credit” means allotment to the beneficiary beyond recall, and for practical purposes means payment. In our opinion the petitioner had no right to such credit prior to settlement of the estate by the court, and therefore the fact of payment does not, on such ground, indicate payment from current income.

We conclude and hold that the respondent erred in including the payments in 1984 above' $60,000 in petitioner’s income in arriving at the deficiency.

Decision will he entered wader Bule 50.

       SEC. 162. NET INCOME.
      The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
      *******
      (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year ;
      (c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.


source: Caselaw Access Project

author: Leech::

license: Public Domain

text:
    James T. Pettus, Petitioner, v. Commissioner of Internal Revenue, Respondent. James T. Pettus Trust for Irene Pettus, May W. Pettus, Trustee, Appearing Only and Solely as Such Trustee for the Purpose of Denying the Existence of the James T. Pettus Trust for Irene Pettus, Petitioner, v. Commissioner of Internal Revenue, Respondent. James T. Pettus Trust for James T. Pettus, Jr., May W. Pettus, Trustee, Appearing Only and Solely as Such Trustee for the Purpose of Denying the Existence of the James T. Pettus Trust for James T. Pettus, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 102775, 102776, 102777.
    Promulgated December 2, 1941.

      George S. Boudehush, Esq., for the petitioners.

      O. H, (\t-rf, Esq., for the respondent.
   OPINION.

Leech::

As to the petitioner, James ÍT. Pettus, respondent contends that he is taxable under section 167 of the Eevenue Act of 1936 upon the 1936 income of two trusts evidenced by trust agreements executed by him on November 10, 1933. In the alternative he contends that the petitioner, May W. Pettus, as trustee in each instance, is liable for tax on such income, together with penalties thereon, due to her failure to file returns as such trustee.

The question is resolved by our finding that the petitioner, James T. Pettus, in 1925 and 1926, made complete and effective gifts then to his two minor children of the stock he transferred to them at that time.

The requisites of a valid gift inker vivos are concisely stated in Estate of Lorenzo W. Swope, 41 B. T. A. 213, as:

* * * (1) A donor competent to make tke gift; (2) a donee capable of accepting tke gift; (3) a clear and unmistakable intention on the part of the donor to divest himself of title, dominion, and control over the subject matter of the gift; (4) an irrevocable transfer by the donor to the donee, or to someone acting as trustee or agent for the donee; and (5) an acceptance of the gift by or on behalf of the donee. [Citations.]

All these requisites are present here. The minor children were capable of taking and accepting the gift. Edward H. Heller, 41 B. T. A. 1020. At least this is so here through their natural guardian, May W. Pettus, the mother. Sec. 375, Revised Statutes of Missouri, 1939. The intention of the petitioner, James T. Pettus, when the contested transfers were effected is a fact to be determined, as any other. This petitioner has testified that his intention in the transfer of this stock in 1925 and 1926 was to make present gifts to each of his two minor children, the income thereof to be received by his wife as their natural guardian and the property to be turned over to them in each case upon reaching majority. Petitioner May W. Pettus testified she was advised of this intention by petitioner James T. Pettus, and so understood it at the time these transfers were made. The testimony of both of these witnesses is convincing and we believe it.

That such was the intention in the making of these transfers is supported by many facts and circumstances. The original transfer of the stock designated petitioners’ children as minor donees of the transfer and they were so designated on the stock certificates as reissued. Following this, for a period of some eight years, returns were duly filed each year for the individual child, in some instances by James T. Pettus, as agent, and in others by May W. Pettus, as natural guardian, reporting for tax all of the income received from the stock.

Under the circumstances, the execution of the purported trust agreements of November 10, 1933, is easily understood. These instruments were drawn by petitioners’ attorney. The petitioner, James T. Pettus, is not a lawyer. These alleged trusts were drawn and executed because of a suggestion from an officer of the corporation in which the stock was held that the method of its holding should be by trust in order to more readily effect its transfer if such need arose. The fact that the significance of the agreements executed on November 10,1933, was not apparent to these petitioners is, we think, clearly demonstrated. Following the execution of these documents, returns as trastee were never filed. Upon reaching their majority each child received delivery of the stock held for it, in total disregard of the provisions of the so-called trusts, which purported to give to the daughter only a life interest in the stock and to the son a right to possession at 25 years of age.

The petitioner, James T. Pettus, admitted that a reduction of his income taxes was one of the considerations moving him in making the transfers in 1925 and 1926. But that fact, although requiring careful scrutiny of the transaction, is not decisive. Gregory v. Helvering, 293 U. S. 465. After that careful scrutiny of the evidence, we think our finding that these transfers were present and complete gifts of the stock transferred to his two minor children is amply supported by the evidence. This finding makes necessary, without more, a decision for the petitioners.

However, we think it proper to say that if we were of the opinion that the evidence here was insufficient upon which to base a finding that James T. Pettus made a present and complete gift in the transfer of this stock in 1925 and 1926, we would be concluded, at least as to the stock then transferred to Irene Pettus, by the finding and decree of the Circuit Court of St. Louis County establishing that fact. The question presented in that proceeding is a matter of property rights controlled by local law and the decision of the state court thereon is binding upon us. Freuler v. Helvering, 291 U. S. 35; Blair v. Commissioner, 300 U. S. 5; Poe v. Seaborn, 282 U. S. 101; Hugh D. Rhodes et al., Administrators, 41 B. T. A. 62; affd., 117 Fed. (2d) 509; F. W. Fitch, 43 B. T. A. 773; Burton v. Burke, U. S. Dist. Ct., (Kans.), July 1,1941. Upon its face the decree in this case was rendered by a court of competent jurisdiction in an adverse proceeding with all parties represented, and evidence was presented and considered by the court.

The petitioner, James T. Pettus, having made a final and completed gift of the stock in question to his two minor children, in 1925 and 1926, and not a transfer in trust, is not taxable under section 167, supra, on the dividends received therefrom in 1936. It follows that the petitioner, May W. Pettus, did not hold title as trustee of the stock and therefore is not taxable as such on those dividends received from such stock. As their natural guardian, she was undoubtedly trustee of such dividends for each child after receipt, but the liability for tax on such income Avas that of the child to whom the stock belonged.

Decisions will be entered wader Rule 60.

       SEC. 167. INCOME POR BENEFIT OP 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 haviug a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor;
      **#+.:(<**
      then such part of the income of the trust shall he included in computing the net income of the grantor.


author: Van Fossan:

text:
    Stroud & Company, Incorporated, Petitioner, v. Commissioner oF Internal Revenue, Respondent.
    Docket No. 104012.
    Promulgated December 2, 1941.

      Thomas B. White, Esq., and Bernard V. Lentz, Esq., for Hie petitioner.

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

Van Fossan:

The issue as here drawn is whether or not a valuable consideration passed from the New Jersey company to the Delaware company for the transfer of the insurance policies on the life of Edward B. Robinette. If it did, the amounts received by the petitioner, as successor to the New Jersey company, by reason of the death of Robinette, less the actual value of the consideration and the amount of the premiums and other sums subsequently paid by the transferee, are includible in income. Section 22 (b) (1) and (2) of the Revenue Act of 1936 governs the situation.

The petitioner concedes that if the bill of sale of June 1, 1932, were to be considered alone, the Delaware company voluntarily transferred its interest in the insurance policies to the New Jersey company for the stock of the latter company, a valuable consideration. However, it assumes the position that the New Jersey company actually had no interest in the policies, but that it merely held them under the dictation of the creditor banks in order to effect the payment of the Delaware company’s debts. It then argues that in reality the policies continued to be held by and for the Delaware company under the control of its creditors and that hence there was no real transfer, but that only a sort of trust relationship was created under which the entire benefit of the policies would inure to the Delaware company.

The petitioner’s view of the situation is not complete. It ignores the dual purpose of the reorganization. True, one object was to pay the Delaware company’s debts, if possible. But that could have been accomplished by a receivership or other form of liquidation. The other and more important purpose was to enable Stroud & Co. to continue its business under its own name and with the advantages of its business reputation and good will.

The New Jersey company undertook to justify that business purpose. In fact, it is apparent that- the creditor banks relied on it and its successful operation to assist materially in the ultimate payment of the Delaware company debts. A careful inspection of the reorganization agreement shows that the New Jersey company and its officers were meticulously circumscribed in their functions, salaries, and activities, to accomplish that end. But that was the price which the New Jersey company and its officers and stockholders had to pay in order to carry on the Stroud & Co. business. Their vital concern was to weather the financiar storm and to emerge therefrom unencumbered by the weight of the frozen assets which the Delaware company retained.

We note that only four of the seven Delaware company stockholders became the sole stockholders in the New Jersey company. They were willing to gamble on the eventual rehabilitation of the enterprise through the reorganization plan, and the creditor banks were also willing to chance the payment of the Delaware company obligations to them by such means. In keeping with those motives and purposes the insurance policies were included in the transfer of assets from the Delaware company to the New Jersey company. At the time of their transfer they were potentially of considerable value.

If Robinette had died before all the Delaware company debts had been paid, the proceeds of the insurance policies would have been applied as set forth in our findings of fact. If only a portion of them had been required to purchase the remaining assets of the Delaware company or to satisfy its debts, the rest of the proceeds would have gone to the sole stockholders of the New Jersey company in proportion to their stock ownership. Thus, a very real benefit would have been gained by the New Jersey company and its stockholders. That outcome was contemplated at the time of transfer and certainly was of value to the New Jersey company.

The fact that the New Jersey company paid the premiums on the policies for five years also is indicative that it considered them both potential and actual valuable assets. We find nothing in the record showing that the New Jersey company was compelled to pay the premiums. It is stipulated that the New Jersey company retained an economic interest in Robinette’s life. That fact likewise imputed value to the transfer.

A reti’ospective survey of the events set forth in the findings of fact affords the petitioner no support. The fortuitous circumstance that the Delaware company’s debts were paid prior to Robinette’s death, enabling the petitioner’s predecessor (New Jersey company) to collect insurance of over $150,000 thereby, confirmed the hope, expectation, and belief of the New Jersey company and its stockholders that the Delaware company would be successfully liquidated.

The provision of the reorganization agreement that the proceeds from the insurance policies were to be used to purchase from the Delaware company assets which would be transferred to the New Jersey company as contributed surplus furnishes further proof that the consideration for the transfer was valuable.

We conclude, therefore, that while the transfer of the insurance policies may have been for the primary purpose of facilitating the payment of the Delaware company’s debts, the direct benefits to the New Jersey company were several and real and a valuable consideration therefor. Certainly petitioner has not proven respondent to be in error in his holding that the transfer of the insurance policies was for a valuable consideration.

The respondent has filed no brief, but has .submitted a memorandum of authorities stating that he relies on King Plow co. v. Cornmissioner, 110 Fed. (2d) 649 (affirming memorandum opinion of the Board, June 30, 1939); Charles E. Lambeth, 38 B. T. A. 351; and Alcy Sivyer Hacker, 36 B. T. A. 659. The King Plow Co. case is authority for the general principle that where an insurance policy is acquired with other assets for stock, in a nontaxable reorganization merger, the transfer is for “a valuable consideration.” We are of the opinion that here the policies were transferred as a part of the assets for which the stock was given and to that extent the cited case applies.

The petitioner raises the further issue that it may deduct from the proceeds of the insurance policies all premiums paid by its predecessoi’, regardless of the fact that they may have been allowed as deductions in previous years.

The respondent has added to the net proceeds of the policies, after deducting their cost, the sum of $6,120.64 representing premiums paid by the New Jersey company during 1932 to 1935, inclusive, and also $149.18, so paid by it in 1936. Apparently he seeks to justify his action on the ground that such amounts were claimed and allowed as deductions in previous years.

We find no statutory authority for respondent’s action in adding the premiums to petitioner’s gross income. Section 22 (b) (2) specifically states that the actual value of the consideration and the amount of premiums and other sums subsequently paid by the transferee shall be exempt raider section 22 (b) (1). The premiums here were paid by the transferee (the petitioner’s predecessor) and hence serve to increase the exemption.

As we said in Charles E. Lambeth, supra, “we are not dealing with the ordinary case but with the proceeds of life insurance contracts in respect of which Congress has seen fit to legislate specifically.” We also observed:

The fact that the petitioner might be permitted a deduction in some year by reason of the worthlessness of the corporate stock does not change the situation, for Congress has seen fit to deal specifically with the proceeds of life insurance and we must apply the statute as it is enacted.

In the case at bar no reference is made in the statute to deductions claimed or allowed relating to such “premiums and other sums subsequently paid by the transferee” either during the taxable year or theretofore. The language of the statute is clear and unambiguous. We must apply it as we find it. Therefore, the amount of the premiums aggregating $6,269.82 should be deducted from the $105,220.30, computed by the respondent to be the taxable gain on the life insurance proceeds.

The respondent’s motion, made at the hearing, to strike from the record the testimony of Norman Baumm, the petitioner’s witness, relating to the discussions and understandings of the parties to the June 9,1932, agreement prior to its execution is denied. An exception is allowed.

Decision will be entered v/nder Rule 50.

       SeC. 22. GROSS INCOME.
      * * * * * * *

      (b) Exclusions from Gross Income. — The following items shall not be included in gross income and shall be exempt from taxation under this title:
      (1) Life Insurance. — Amounts received under a life insurance contract paid by reason of the death of the insured, whether in a single sum or otherwise (but if such amounts are held by the insurer under an agreement to pay interest thereon, the interest payments shall be included in gross income) ;
      (2) Annuities, etc. — * * * In the case of a transfer for a valuable consideration, by assignment or otherwise, of a life insurance, endowment, or annuity contract, or any interest therein, only the actual value of such consideration and the amount of the premiums and other sums subsequently paid by the transferee shall be exempt from taxation under paragraph (1) of this paragraph.


author: Tyson :

text:
    Pacific Flush-Tank Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103787.
    Promulgated December 3, 1941.

      Graydon H. Ellis, Esq., for the petitioner.

      Devoid Altman, Esq., for the respondent.
   OPINION.

Tyson :

There is no controversy herein as to the amount of $20,100 used by petitioner to retire its indebtedness in 1938 being reasonable with respect to the size and terms of such indebtedness.

The respondent contends that the instant case is specifically covered by the applicable regulations, upon which he relies as the correct construction of section 27 (a) (4), supra; that that section contains ambiguities which require interpretation to effectuate the legislative intent; and that, in the absence of statutory language clearly granting a double deduction or tax benefit for the same transaction, it is to be presumed that Congress did not intend to grant a double deduction. Respondent cites Spokane Dry Goods Co., 43 B. T. A. 793 (on appeal to the Ninth Circuit), as controlling here.

The petitioner contends that, in using $20,100 during 1938 to pay an indebtedness evidenced by its notes which were in existence at the close of business on December 31,1937, it thereby met all of the requirements specified for the allowance of a dividends paid credit in such amount pursuant to the broad language of section 27 (a) (4), supra, which is unambiguous and contains no provision that it shall be inoperative in the event the taxpayer is entitled to a deduction of the same amount from gross income. Petitioner also contends that article 27 (a)-3 of Regulations 101, supra, creates a rule contrary to the express provision of the statute and is therefore a nullity, and, further, that neither the rule laid down nor the reasoning in Spokane Dry Goods Co., supra, is controlling here because that case involved a different factual situation to which section 27 (e) was held to be applicable rather than the section 27 (a) (4), here involved.

We agree with the contention of petitioner that in using the $20,100 during 1938 to pay its indebtedness evidenced by its notes all the requirements for the allowance of a dividends paid credit under section 27 (a) (4), supra, were met.

The terms of the statute, as applicable to the facts of this case, are so plain, clear, and unambiguous as to require, in our opinion, no resort to construction in order to ascertain its meaning.

However, if it could be said that the application of the literal meaning of the statute leads to results which should be avoided, i. e., the granting.of a double tax benefit, and that therefore the statute should be construed in the light of the purpose and intent of Congress in enacting same, we nevertheless remain of the opinion that the use in 1938 of the $20,100 to discharge petitioner’s indebtedness came within the purview of section 27 (a) (4), supra.

We reach this latter conclusion through a consideration of the legislative history of the statutes relating to the dividends paid credit granted to corporations, as disclosed by the congressional committee reports.

Section 27 (a) (4) first appeared in the 1938 Act and the prior revenue acts contain no provisions similar thereto. It was inserted in the 1938 Act while that act was being considered by the Joint Conference of the Senate and House Committees.

The committee reports show that the 1938 Act, as finally agreed upon, retained the principle of the undistributed profits tax provided for in the 1936 Act. Eeport No. 1860 of the committee of Ways and Means of the House of Eepresentatives, 75th Cong., 3d sess., with reference to the dividends paid credit provided for in section 27 of the 1938 Act, stated that the dividends paid credit “is usable by a corporation to diminish its tax wherever the determination of the tax is affected by the amount of dividends distributed” [p. 21]. The report further stated that “the committee believes that the tax should not be framed as a penalty surtax on undistributed profits but should be designed on the basis of a flat tax rate with a tax credit which will give reasonable encouragement to the distribution of dividends” [p. 4]; that, “In order to encourage the distribution of dividends, it is planned to allow a credit” of a certain percent of dividends, paid out against the maximum flat tax rate imposed; and that “This credit is so designed as to produce a minimum tax * * * when there is complete distribution.” [P. 5.]

From these committee reports it clearly appears that the broad general purpose underlying the enactment of section 27 of the 1938 Act as to dividends paid credits was to induce and encourage the distributions of dividends by a corporation to its shareholders, which would result in a diminution of the corporation’s tax and the imposition of a tax on such dividends in the hands of the stockholders. We are of the opinion that in connection with effectuating such purpose Congress, in enacting section 27 (a) (4), supra, intended to give relief to corporations by way of a dividends paid credit for the amount paid out for the retirement of indebtedness as therein specified, which amounts thus became unavailable for dividends; and this is true even if the tax benefit of the credit so given may be duplicated, as here, in whole or in part, by another tax benefit through the allowance of a deduction from gross income in a former year on account of the accrual of such amount as a deductible business expense.

Furthermore, as another indication that the purpose and intention of Congress in enacting section 27 (a) (4) was to allow a credit for the amount used to pay off notes, as was done here, even though the amount represented by such notes arose out of a transaction entitling petitioner to take a deduction therefor, it is to be observed that Congress excepted from the benefit of the credit only the deduction allowable by statute for interest, and it refrained from excepting any of the other deductions from gross income (such as the numerous types of business expenses, one of which is here involved) allowed by the revenue statutes which, under many conceivable circumstances, might become represented by notes. This would make applicable the doctrine of Expressio u/rdus est exclusio alterius.

We conclude that, even if the allowance of the credit claimed here would result in duplicating, in whole or in part, a tax benefit to the petitioner, it nevertheless appears clear that Congress intended to and did expressly grant such credit.

We further conclude that the above quoted portion of article 27 (a)-3 of Regulations 101 is contrary to the statute and is therefore a nullity as applied to the facts of this case.

Spokane Dry Goods Co., supra, is not controlling here, as contended by respondent, for it involved entirely different factual circumstances which brought into operation the specific provisions of section 27 (e) of the 1938 Act dealing with dividends paid in obligations of the corporation. .There, the taxpayer, on the accrual basis, declared a dividend in 1936 payable in cash or, at the option of its shareholders, in the notes of the corporation. A portion of such dividend was paid with the taxpayer’s notes, the total amount of which (having an actual value equal to their face value) was taken as a dividends paid credit for 1986. In 1938, the taxable year involved, the taxpayer paid the principcd amownt of some of those dividend notes and claimed a dividends paid credit, under'section 27 (a) (4) of the 1938 Act, for the amount so paid out in redemption of the notes. The Board, in applying section 27 (e), supra, denied the claim of the taxpayer because the facts showed that there was no excess in the amount paid by the taxpayer in the taxable year 1938 in redemption of its dividend notes over the fair market value of those notes at the time of their delivery in 1936 in payment of the dividend. That case, being controlled by section 27 (e) which deals specifically with the redemption of obligations used in payment of dividends, is distinguished from the case here which is controlled by section 27 (a) (4) without any relation to section 27 (e). The observations of the Board with regard to a double deduction contained in the last paragraph of its opinion, if made with reference to section 27 (a) (4), were so made through consideration of that subdivision in connection with, and as cumulative to, the effect of section 27 (e).

The respondent erred in his determination.

Reviewed by the Board.

Decision will Toe entered under Rule SO.

Hill concurs only in the result.

Disney and Hakron dissent.


author: Opper :

text:
    Estate of George H. Flinn, Deceased, George H. Flinn, Jr., and the Colonial Trust Company, Executors, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103050.
    Promulgated December 4, 1941.

      John 0. Wiclcs, Esq., and Chester L. Wallace, Esq., for the petitioner.

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

Opper :

The present controversy arises as the ultimate result of a sale by petitioner on the installment basis. Upon default of the purchaser in 1932 the securities sold were reacquired, subject, however, to certain liens and charges incurred by the vendee and by the corporation which he controlled by holding the securities. At the same time agreements between petitioner and the several lienors modified their respective interests. Although containing more complications than need be detailed, the essence of these contracts was to apportion the earnings of the securities in accordance with the respective interests of the parties; and to arrange for future payments to the creditors to provide eventually for the discharge of their advances.

In addition to the stock of Detroit Reduction Co. which was the subject matter of the sale on the installment basis, petitioner had sold to the same vendee stock of American Reduction Co. which, however, was not an installment sale. But this stock was reacquired at the same time, liens and charges existed against it in favor of the same creditors, and the same agreements between the latter and petitioner referred to both. In determining petitioner’s income for that year, including its gain from the retransfer of all the property, respondent permitted it to deduct the total of the adjusted claims as “damage and use.”

In 1936, the year before us, petitioner made a final settlement with the lienors under which, by a cash payment of very much less than their adjusted total, all claims against both blocks of stock were withdrawn. The deficiency arises from respondent’s assertion that petitioner is chargeable with income in the year of settlement to the extent of the difference between the amount actually paid to remove the liens and the deduction allowed in the prior year. This deduction had resulted from a purported application of respondent’s regulation relating to installment sales of personalty which at the time provided as follows:

* * * * * * *
If for any reason the purchaser defaults in any of his payments, and the vendor returning income on the installment basis repossesses the property, the entire amount received in installment payments and retained by the vendor, less the sum of the profits previously returned as income and an amount representing proper allowance for damage and use, if any, will be income of the vendor for the year in which the property is repossessed, and the property repossessed must be carried on the boots of the vendor at its original cost, less proper allowance for damage and use, if any.
****$$&
[Regulations 77, art. 351.]

If this regulation comprehended a case like this where there had been a casual sale, and the “damage and use” took the form of liens rather than physical deterioration, still we think the action of respondent’s agent in dealing with petitioner’s 1932 income was so erroneous an interpretation of the regulation as not to be supportable on any ground.

The regulation treats the damage and use allowance not as a general deduction from gross income, but specifically and narrowly as an offset against the income resulting from the retransfer of the subject of an installment sale. Presumably the theory is that a vendor resuming ownership is as well off as he was before the sale and in addition has been enriched by the vendee’s purchase money, which constitutes taxable income; except that the vendor is to be accorded a set-off for damage and use to the extent that the property has been diminished in value by the use to which the vendee may have put it meanwhile. The justification for the allowance of damage and. use must be that since, under the regulation, the taxpayer’s income from reacquisition is computed on the cash he lias receded and without regard to the market value of the transferred property, the gain is illusory unless it is diminished by the counteracting damage caused by the vendee’s use. But no recognition is given to a possibly minus result of that operation, and authorization to apply a net loss on reacquisition as a general deduction from gross income is lacking.

Here the regulation could properly be employed only in computing gain on the transfer of the Detroit stock since only that had been sold on the installment basis; and no more than a minor portion of petitioner’s 1932 income was profit on its reacquisition which was subject to tax under the regulation. It follows that the permissible allowance for damage and use under the regulatory scheme was limited by this related item of income. No greater allowance could have been made, since no greater income appeared against which the allowance could act as an offset. If this had been the extent of respondent’s treatment, the tax benefit to petitioner in 1932 from the damage and use allowance would have been no more than the part of the income which it canceled. And when, in 1936, almost twice this amount was paid out in removal of the liens, it is evident that the net result would have left the petitioner with no tax advantage from the two transactions. Hence, the necessity of treating the 1936 transaction as giving rise to taxable income would not have existed. Central Loan & Investment Co., 39 B. T. A. 981. See National Bank of Commerce of Seattle, 40 B. T. A. 72; affd. (C. C. A., 9th Cir.), 115 Fed. (2d) 875.

It is evident that the deduction permitted in 1932 was due in large part to inclusion in the computation of a much greater gain on the receipt of the American stock. But for this there was no warrant, since those securities were not the subject of an installment sale and altogether different principles for computing gain and allowing for loss of value were applicable. The two transactions were not susceptible of joint treatment and respondent’s action can acquire no authority from association of the two.

It follows that any addition made to petitioner’s tax liability for the year in dispute would have as its only justification an error in respondent’s calculation, of the proper tax for an earlier year. This Board is committed to the position that the principle requiring adjustment in a later year on account of subsequent developments which result in an unwarranted tax benefit, does not apply under these circumstances. American Light & Traction Co., 42 B. T. A. 1121. Respondent’s determination must accordingly be disapproved.

Reviewed by the Board.

Decision will he entered wider Rule 50.

       “ * * * And when property is sold to be paid for in installments, and only part oí what is paid is returned as gain, but the property is gotten back without any refund, so that all that was received turns out to be gain, the addition is made to income in the year the additional gain appears to be such.” [Sneed v. Commissioner (C. C. A., 5th Cir.), 119 Fed. (2d) 767, affirming 40 B. T. A. 1136.]

        Estate of William H. Block, 39 B. T. A. 338; affd. (C. C. A., 7th Cir.), 111 Fed. (2d) 60; certiorari denied, 311 U. S. 658; Commissioner v. Liberty Bank & Trust Co. (C. C. A., 6th Cir.), 59 Fed. (2d) 320; Beacon Auto Stores, Inc., 42 B. T. A. 703; Helvering v. Jane Holding Corporation (C. C. A., 8th Cir.), 109 Fed. (2d) 933; certiorari denied, 310 U. S. 653; Houbigant, Inc., 31 B. T. A. 954; affd. (C. C. A., 2d Cir.), 80 Fed. (2d) 1012; certiorari denied, 298 U. S. 669; Jamaica Water Supply Co., 42 B. T. A. 359; Hartford Hat & Cap Co., 7 B. T. A. 714; South Dakota Concrete Products Co., 26 B. T. A. 1429. See E. B. Elliott Co., 45 B. T. A. 82.

       Regulations 77, art. 354; G. C. M. 1387, C. B. VI-1, p. 48; G. C. M. 952, C. B. VI-1, p. 191.,


author: Smith:

text:
    Estate of M. M. Stark, Deceased, H. J. Lutcher Stark, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of W. H. Stark, Deceased, H. J. Lutcher Stark, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 103807, 103808.
    Promulgated December 5, 1941.

      Irl F. Kennedy, Esg., for the petitioners.

      Frank B. Schtosser, Esq., and H. G. Potthoff, Esq., for tln> respondent.
   OPINION.

Smith:

These proceedings, consolidated for hearing, are for the redetermination of deficiencies in income tax of the estate of Miriam M. Stark, H. J. Lutcher Stark, Executor, Docket No. 103807, and estate of W. H. Stark, H. J. Butcher Stark, Executor, Docket No. 103808, for the calendar years 1986,1937, and 1988 as follows:

The decedents were husband and wife and the transactions out of which the present tax dispute arose relate, for the most part, to their community properties. The petitions contain fourteen allegations of error, all but one of which are common to both proceedings. Several of the issues have been waived and others have been settled by stipulations entered into by counsel at the hearing, leaving for our determination the following four questions:

(1) Were the profits which the petitioners derived in 1937 and 1938 from the sale of timber under the contract entered into in 1917 capital gains, as petitioners contend, or ordinary income, as the respondent has determined ?

(2) Are the petitioners entitled in 1937 and 1938 to the deduction of the losses resulting from the operation of a leasehold previously acquired by the decedents where in decedents’ estate tax returns a deduction was taken and allowed for the estimated amount of such operating losses over the remaining period of the leasehold?

(3) In the alternative, if petitioners are not entitled to the deduction of the entire amount of such operating losses, are they entitled in any event to a deduction of the difference between the amount of the actual losses and an aliquot part of the amount of the anticipated losses alloAved in the estate tax returns spread ratably over the remaining life of the leasehold ?

(4) Are the petitioners entitled to the deduction in 1937 of a fee paid to an attorney for services performed in an attempt to relieve the decedents’ estates from certain obligations under the leasehold contract referred to in issues (2) and (3) above?

The findings of fact and opinion under each issue will be set out separately.

Issue I.

Timber Transaction.

FINDINGS or Fact. — The petitioners are the estates in process of administration of W. II. Stark, who died October 8,1936, and his wife, Miriam M. Stark, who died November 27, 1936. Both decedents were residents of Orange County, Texas. Decedents’ son, H. «T. Lutcher Stark, is the ex'ecutor of both estates. The income tax returns of both estates for the years 1936,1937, and 1938 were filed with the collector at Austin, Texas.

Prior to October 12,1912, the decedent, W. H. Stark, in association with his father-in-law, H. J. Lutcher, and his brother-in-law, E. W. Brown, acquired an interest in a large tract of timber land, comprising more than 80,000 acres, situated in Newton, Jasper, and Sabine Comities, Texas. The decedent, W. IT. Stark, and E. W. Brown each acquired a one-sixth interest and H. J. Lutcher a two-thirds interest. Each of such interests was held as community property under the laws of the State of Texas. H. J. Lutcher died on October 12, 1912, and upon his death his one-half community interest in the two-thirds interest held by himself and wife passed to his daughters, Miriam M. Stark and Carrie L. Brown. Thereafter, and until February 12,1917, the decedent, Miriam M. Stark, owned a one-sixth interest in the timber tract in her separate right and a one-sixth interest in community with her husband, W. H. Stark. Frances A. Lutcher, H. J. Lutcher’s widow, owned a one-third interest, and the remaining one-third interest was owned one-sixth by Carrie L. Brown in her own right and one-sixth by her and her husband, E. W. Brown, in community.

On February 12, 1917, these persons entered into a contract with B,. W. Wier covering all of the merchantable timber of certain specifications' on the entire tract. Under the terms of this contract Wier, hereinafter sometimes referred to as the purchaser, acquired the exclusive right to enter upon the tract with all necessary equipment and to “turpentine” and cut and remove all the merchantable pine timber 10 inches or more in diameter at the stump. The contract provided in paragraph “3” that:

Party of the second part [R. W. Wier] hereby obligates and binds himself to pay to the parties of the first part for said timber the sum of $6.00 per thous- and feet, log scale; and the further sum of Twenty-five per cent (25%) of the average selling price f. o. b. the mill, during each full semi-annual period, over and above the sum of $13.50 per thousand feet. Said payment of $6.00 per thousand feet to be made monthly, on or before the 15th day of each month, for the timber cut the preceding month, and the twenty-five per cent herein provided for shall be determined and estimated at the end of each six months period of operations, and shall be paid on or before the 15th day of succeeding months thereafter. * * *

It was further provided in the contract that the owners of the timber lands, sometimes referred to hereinafter as the seders, were to have free access at all times to the books of the purchaser; that the timber, with certain exceptions, would be “scaled at the mill” at the joint expense of the purchaser and the sellers; that the purchaser would build and equip on lands belonging to the sellers or adjacent thereto a modern sawmill with a capacity sufficient to cut 4,000,000 feet of timber yearly and all dry kilns, sheds, tramroads, railroads, and other facilities necessary for handling the timber; and that the purchaser would cut not less than 4,000,000 or more than 75,000,000 feet of timber annually, except that if market conditions should become such that the lumber would have to be sold at a loss to the purchaser, operations might be suspended temporarily. It was further provided that:

During the continuance of this contract, party of the second part shall maintain its [his] own sales department and sell its [his] product only through such sales department, or in such other way as may be hereafter, agreed upon by the unanimous consent of all directors, and in the event second party should desire at any time to sell his product in quantities or manner unusual to the customary conduct of industries of this type and at a price not satisfactory to the parties of the first part, then the parties of the first part shall have the right to purchase said offering, in preference to all other persons at such bona fide price.

It was further provided that the purchaser would immediately organize a corporation to construct the sawmill and operate the business and would assign his interest in the- contract to such corporation. The corporation was to have a capital stock of $400,000, which was to be subscribed for at par and the subscription price paid in as needed by the purchaser, or by'other stockholders whom he might procure. All of the net profits of the corporation were to be paid out as dividends to the stockholders until such net earnings equaled the total cost of the fixed investment and thereupon the stock was to be recalled and reissued, fully paid and nonassessable, one-half to the old stockholders in proportion to their former holdings and one-half to the sellers in the following proportion:

1/8 to Mrs. Frances A. Luteher
1/6 to W. H. , Starlc •
1/6 to Miriam M. Stark
1/6 to E. W. Brown
1/6 to Carrie L. Brown

Voting control and management of the corporation were to remain in the purchaser and his associates and for that purpose one share of stock was to be transferred in trust by the sellers to the purchaser or his nominee. The purchaser was to be president of the corporation and H. J. Luteher Stark and E. W. Brown were to be among its seven directors.

Pursuant to the terms of the above described contract, the Wier Long Leaf Lumber Co. was incorporated under the laws of the State of Texas on January 10, 1917, and on that date Wier transferred to it all of his rights to and interest in the contract. Thereafter the corporation began operations and has since continued to cut and remove a certain quantity of timber each year, for which it has paid the sellers regularly at the contract prices.

It is stipulated that the fair market value of the contract timber on October 8,1936, and on November 21,1936, the respective dates of death of W. H. Stark and Miriam M. Stark, was $1.18 per 1,000 feet.

It is stipulated further that during 1931 and 1938 the petitioners received from the Wier L.ong Leaf Lumber Co. certain payments for timber cut and removed from which their profits after the deduction of depletion and expenses, were as follows:

The petitioners kept their books and records and made their income tax returns for the years involved on the cash receipts and disbursements basis. In such returns they each reported the sales of timber from which the above stated amounts of profits were realized as gains from the sale of capital assets, within the meaning of section 111 of the Revenue Acts of 1936 and 1938. The respondent has determined in his deficiency notices herein that the amounts in question constituted ordinary income.

Likewise, in their returns for the tax year ended December 31,1936, the estate of Miriam M. Stark and the estate of W. H. Stark claimed capital loss deductions on the sale of timber under the above contract in the respective amounts of $211.61 and $163.14. In lieu of such capital deductions, however, the respondent allowed the petitioners ordinary loss deductions in the respective amounts of $1,693.08 and $1,516.15.

OPINION. — The respondent’s position is that the profits which petitioners received in 1931 and 1938 from the sale of timber under the contract of February 12, 1911, were ordinary income and not capital gains as reported in petitioners’ returns.

Capital gains are defined in section 111 of the Revenue Act of 1936 as gains from the sale of capital assets, and “capital assets” are defined as follows:

(b) Definition of Capital Assets. — For the purposes of this title “capital assets” means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.

More specifically, the respondent contends that the petitioners were engaged in the trade' or business of selling timber during the taxable years involved and that the profits in dispute were realized from the sale of “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business”, within the meaning of the above quoted provision of the statute. Obviously, the timber was a capital asset within the definition of the statute unless the petitioners were engaged in the trade or business of selling their timber during the taxable years involved.

One of the cases strongly relied upon by the respondent is Commissioner v. Boeing (C. C. A., 9th Cir.), 106 Fed. (2d) 305, which, respondent submits, is indistinguishable on the facts from the instant proceedings. In that case the taxpayer, along with other coowners of certain timber lands, entered into contracts employing logging companies to cut the timber, deliver it to tidewater, and there sell it for and on behalf of the owners to purchasers at the current market price. The taxpayer and his coowners were to receive one-third of the proceeds from the sales and the logging companies the other two-thirds. The court held, reversing the Board, that the taxpayer was engaged in a trade or business, citing Richards v. Commissioner (C. C. A., 9th Cir.), 81 Fed. (2d) 369, and Welch v. Solomon (C. C. A., 9th Cir.), 99 Fed. (2d) 41, and that the contracts were not “contracts of sale” and did not result in sales of timber to the logging companies, citing John W. Blodgett, 13 B. T. A. 1388, which, the court commented, “serves a useful purpose in distinguishing the instant case.” (See other cases at 23 A. F. T. R. 355.)

In the Blodgett case, supra, the taxpayer contracted for the sale of the standing timber which the vendees were to cut and pay for on the basis of a certain percentage of the selling price. We held that the contract was a contract of sale of the standing timber and did not constitute the vendees agents of the taxpayer “so that, through them, he was engaged in lumbering operations.” Thus it appears that the facts in the instant proceedings are indistinguishable from those in the Blodgett case rather than from those in the Boeing case. Here the contract was for the sale of all of the timber, of certain specifications, at so much per thousand feet, log scale, plus a further amount contingent on the sale price of the timber, plus further consideration with which we are not here concerned. The vendees themselves were to cut and market the timber and were to pay the vendors .monthly for the amount cut. The vendees were in no sense agents of the vendors. The contract was a contract of sale of all the timber, as in the Blodgett case.

This identical contract of February 12, 1917, was under consideration by the Board in Carrie Lutcher Brown, 26 B. T. A. 781. The question there in issue is not present in the instant proceedings, but with reference to this contract we said at page 787:

* * * In the present proceeding there was no outright, completed sale oí the entire stand of timber. Rather, the parties entered into a contract to sell such amounts of timber as the second party should cut and remove from the land. Florence A. Foster, 18 B. T. A. 819; Edward G. Swartz, Inc., 25 B. T. A. 1065; Carter v. Clark & Boice Lumber Co., 149 S. W. 278; Houston Oil Co. v. Boykin, 206 S. W. 815. * * *

On appeal the Board was affirmed by the United States Circuit Court of Appeals for the Fifth Circuit, Brown v. Commissioner, 69 Fed. (2d) 863, the court there saying:

* * * We are of the opinion that the timber was not sold as a whole, that a sale of none of it occurred upon the execution of the contract, but that sales were accomplished only as the timber was cut and removed. Foster v. Commissioner (C. C. A.) 57 F. (2d) 516; Houston Oil Co. v. Boykin, supra. * * *

See also J. J. Carroll, 27 B. T. A. 65; affirmed on pertinent issue (C. C. A., 5th Cir.), 70 Fed. (2d) 806.

We think it plain in this case that the standing timber on the lands of the two petitioners was not “held” by them “primarily for sale to customers in the ordinary course of” their “trade or business” within the intendment of section 117 (b). The petitioners had no “customers.” All of the sales of timber were to the Wier Long Leaf Lumber Co. pursuant to the contract of February 12, 1917. The petitioners had no “trade or business” as that term is commonly understood. Where the petitioners owned the standing timber for a period of more than one year at date of sale the sales were of capital assets within the meaning of section 117 (a) and the petitioners are taxable accordingly.

Consonant with our ruling upon this point the parties have stipulated that the losses deductible from the gross incomes for 1936 are $277.61 and $163.74, respectively, instead of the amounts allowed by the respondent in the determination of the deficiencies for 1936, namely, $1,693.08 and $1,516.75, respectively. This stipulation will be given effect in the Rule 50 recomputation of deficiencies for 1936.

Issues II and III.

The Carroll Lease.

Findings oe Fact. — On December 12, 1930, the decedent, W. II. Stark, acquired by assignment a lessee’s interest in certain improved real estate located in the business district of Beaumont, Texas. The assignment of the lease was in consideration of decedent’s payment of certain promissory notes of the assignor in the total amount of $102,500 which decedent had endorsed as a surety. The lease which the decedent so acquired, sometimes hereinafter referred to as the “Carroll lease”, was executed in 1923 and ran for a term of 99 years at an accelerated rental ranging from $150 per month in the early years to $600 per month from January 1, 1929, to the end of the lease term, June 1, 2022.

There was a two-story brick building on the premises when decedent took possession which had been erected by the prior lessee in compliance with a condition of the lease agreement. This building was subleased for store space and other purposes.

After decedent’s acquisition of the lease the property lost some of its desirability for rental purposes, due to a shift in the direction of the development of the city’s business area, so that the operation of the lease resulted in a loss to the decedent each year up to the time of his death.

In determining the estate tax liability of the decedents, the respondent treated the lease as a liability of the estates rather than as an asset, estimating that in the operation of the lease over its remaining life of 85 years the total amount of the excess of expenses over income reduced to present worth, would be $85,000. Accordingly, the respondent permitted a deduction in the estate tax return of each of the decedents of one-half of that amount, or $42,500.

During 1931 and 1938 the expenses of operating the lease, including the rental payments to the lessor exceeded the income therefrom by the amounts of $1,683.41 in 1931 and $10,696.67 in 1938. In their income tax returns for those years the petitioners each claimed as a loss deduction from gross income one-half of those amounts. The deductions so claimed were disallowed by the respondent, along with several other items, with the comment in the deficiency notice that such items “do not constitute proper deductions from gross income.”

A detail of the 1937 loss of $7,683.41 is as follows:

Total paid to the executor of the original lessor’s estate_$31, 816. 71)
Court costs paid_ 118.10
City of Beaumont taxes paid_ 6,937. 55
Jefferson County taxes paid_ 1,654. 55
Cost of water and'repairs_ 78.67
Cost of insurance_ 332. 00
Rent paid_ 2, 400. 00
Total paid in 1937- 42, 837. 66
Less: Rents received_ 3,138. 38
Difference--- 39, 699. 28
Less: Amount accrued on estate tax returns- 32, 015. 87
Difference- 7, 683. 41

Respondent recognized said $7,683.41 item as “Carro] 1 lease loss in 1937” and recognized that if allowable it would be deductible one-half by each estate, but nevertheless he disallowed it. Respondent’s explanation therefor was that the item does not constitute a “proper” deduction from gross income.

A detail of the 1938 claimed loss is as follows:

Rent paid to the executor of the original lessor’s estate_$7,200. 00
City of Beaumont taxes paid_ 3, 593. 81
Jefferson County taxes paid_ 1, 364. 70
Cost of water and repairs___ 86. 88
Other cash payments_:_ 510.10
Total paid in 1938_ 12,755.61
Bess: Rents received_ 2,058.94
Excess of payments over rentals_ 10, 696. 67

In his deficiency notice respondent referred to the $10,696.67 as “Carroll lease expense in 1938” and recognized that if allowable it would be deductible one-half by each estate, but he disallowed it with the explanation that the item did not constitute a “proper” deduction from gross income.

OpinioN. — The petitioners contend, first, that their net losses from the operation of the Carroll lease in 1937 and 1938 are deductible in full in their income tax returns for those years, notwithstanding that an allowance was made in the estate tax returns on account of such estimated losses. They further contend, in the alternative, that in any event they are entitled to the deduction of the portion of such losses remaining after allowance for amortization of the $85,000 taken as deductions in the estate tax returns, at the rate of $1,000 a year for the remaining 85 years of the life of the lease.

Section 162 of the Revenue Acts of 1936 and 1938, relating to income tax imposed on estates and trusts, provides that “The not income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual”, with exceptions not here material. Section 23 of the same acts provides for the deduction from gross income of:

* * * All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any 'trade or business, * and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer1 has not taken or is not taking title or in which he has no equity. [Subdivision (a).]
* * * * * * #
* * * Taxes paid or accrued within the taxable year [with exceptions not here material.] [Subdivision (c).]
* * * In the ease of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
(1) if incurred in trade or business; or
(2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * * * [Subdivision (e).]

We do not think it material that the excess of the amounts paid in respect of the Carroll property over the income therefrom was claimed by petitioners in their returns as deductions under subdivision (e). If the amounts are proper deductions from gross income under any subdivision of section 23 they must be allowed, regardless of any claim made by the petitioners. See Seufert Brothers co. v. Lucas, 44 Fed. (2d) 528.

We have no doubt that the petitioners are entitled to deduct the total amount of the city of Beaumont taxes and Jefferson County taxes paid within each taxable year, regardless of whether the petitioners are in a trade or business. The taxes paid in each year were in excess of the rentals received from the Carroll property. We further have no doubt that the rentals paid upon the Carroll property are a legal deduction from the gross income of the estates in the process of administration or settlement, regardless of the amount of the rents received from the property. The same is true with regard to the other expenses paid in connection with the Carroll property during the taxable year. Although the • petitioners disclaim that they were carrying on any trade or business, they were clearly required to include in their gross income the rentals received from the Carroll property. We think that they were entitled to deduct from gross income the expenses connected with the operation of that property as business expenses.

The only objection which the respondent offers to the allowance of the deductions claimed in the income tax returns of the estates for the years in question is that an allowance of $85,000 was made in the estate tax returns of the decedents in respect of such contemplated losses. We do not think that this objection is well founded. The estate tax return is concerned only with the value of the net estate which is transferred by the death of the decedent. It is not material in these proceedings that the respondent determined that the value of the net estate of each decedent was $42,500 less than otherwise would be the case by reason of the inclusion in the gross estate of an unprofitable lease.

The only question with -which we are concerned here is whether the amounts of the payments made by the estates during the years 1937 and 1938 .in respect of the Carroll property are legal deductions from gross income. That question must be determined from the provisions of law relating to the computation of the incomes of such estates. See Adams v. Commissioner (C. A. A., 8th Cir.), 110 Fed. (2d) 578; Robert J. Kleberg et al., Executors, 31 B. T. A. 95; Cecil B. Highland, Executor, 43 B. T. A. 598. In Adams v. Commissioner, supra, tbe court said:

4. Double Deduction. — Some emphasis is placed, both by tbe Board and tbe Commissioner, on tbe fact that some or all of tbe deductions claimed here were claimed also in connection with returns for mcome taxation of the estate. There is no necessary inconsistency in claiming tbe deductions as to both estate taxes and also as to income taxes of tbe estate. Tbe two taxes are different in theory and incidence. It is for tbe Congress to prescribe what, if any, deductions are to be allowed as to each. Also, it is for tbe Congress to declare that there shall be but one deduction and where that shall be permitted. Congress has prescribed separately tbe deductions allowable for estate tax purposes and for income tax purposes, dongress has not declared that these deductions shall, in any way, be affected by the circumstances — often of occurrence — that the same items might come within each of the separate deduction provisions. .It is not for the Courts to supply this omission — if it be such — in the statute. See Brown v. Commissioner, 74 F. 2d 281, 286, C.C.A. 10.

On tbe record in these proceedings we bold that tbe petitioners are entitled to deduct tbe amount of the payments made by tbe estates in respect of the Carroll property during tbe years 1937 and 1938 over the rents received therefrom, as contended by the petitioners.

It is unnecessary, in view of our ruling on the principal question, to discuss the petitioners’ alternative contention that they are entitled in any event to the deduction, of the amounts of the net losses reduced ■by a proper amortization allowance on account of the deductions taken in the estate tax returns.

Issue IV.

Attorney's Fee.

FINDINGS OF Fact. — Prior to the death of the decedent, W. H. Stark, litigation arose in the District Court of Jefferson County, Texas, between him and the estate of his deceased lessor under the Carroll lease to determine whether W. H. Stark was liable as as-signee of the lease for certain obligations of the original lessee, W. H. Stark contending that he was not so liable, since .he had not expressly assumed the obligations of the original lessee. In an opinion handed down on May 9, 1935, the court held that W. H. Stark was personally liable for the performance of each and all of the original lessee’s obligations fixed by the terms of the Carroll lease. He appealed to the Court of Civil Appeals sitting at Beaumont, Texas, where the judgment of the District Court was affirmed on December 5, 1936, approximately two months after Stark’s death. The decision of the appellate court was that, when he purchased, received, and accepted the assigned lease from H. M. Hargrove & Co. and took possession of the leased premises, W. IT. Stark then became liable for and obligated to pay to Carroll, his successors, and assigns, all rents thereafter falling due under the lease, and to perform all of the obligations imposed upon the lessee therein. Thereafter, and after the death of the decedents the executor of their estates filed in the Supreme Court of Texas an application for a writ of error, which was denied. The executor then engaged another attorney to present to the Supreme Court of Texas a motion for a rehearing on the application for a writ of certiorari. This motion was likewise denied. For such services the executor paid the attorney in 1937 a fee of $2,500 and also paid the cost of printing briefs in the amount of $145.20. These expenditures were .claimed as expense deductions in petitioners’ income tax returns for 1937, one-half of the total amount being claimed in the return of each petitioner. The claimed deductions were disallowed by the respondent in the determination of the deficiencies.

OpiotoN. — The question on this issue is whether the petitioners are entitled to deduct the attorney’s fee and cost of printed briefs which the executor paid in connection with the litigation to determine the petitioners’ obligations under the Carroll lease.

In their briefs the petitioners claim that the amount in question is deductible not as a business expense but as a loss under section 23 (e) (2) of the Bevenue Act of 1936. They state:

We do contend' (a) that the Carroll lease acquisition was a transaction entered into by the decedents for profit, (b) that the payment of these items by petitioners represented a losa sustained, since the expenditures were made in vain, and (c) such loss was not sustained in connection with a “trade or business.”

In Kornhauser v. United States, 276 U. S. 145, the question before the Court was whether a practicing attorney could deduct from his gross income of 1918, $10,000 which he paid during that, year in defense of a suit brought against him by a former partner in respect of legal fees. The deduction was claimed either as an ordinary and necessary expense of carrying on a trade or business, or as a loss. The Supreme Court dismissed the taxpayer’s claim that it was a loss with a single statement: “We think it is obvious that the expenditure is not a loss.” We think that the petitioners stand upon no better ground in claiming the deduction of $2,645.24 as losses than did the taxpayer in Kornhauser v. United States, supra.

It remains to be considered whether the amount may be deducted under any other provision of section 23 of the Eevenue Act of 1936.

It is plain that the expenditures here in question had nothing whatever to do with the receipt of income by the estates during the years 1937 and 1938. The litigation in respect of which the amounts were paid had started long before the deaths of either of the decedents. The executor saw fit to continue the litigation.

The petitioners in support of their contention cite Cecil B. Highland., Executor, supra, now on appeal before the United States Circuit Court of Appeals for the Fourth Circuit. In that case we held that expenses arising out of actions brought by an executor to maintain control or management of an estate as a going concern were legal deductions from gross income, but that those incurred in mere passive conservation of assets were not. In our opinion the expenditures here in question fall in the latter category.

We are of the opinion that the respondent did not err in disallowing the claimed deductions.

Reviewed by the Board.

Decisions will he entered under Bule 50.

Sternhagen dissents.


author: Disney:

text:
    Estate of Harry L. Mearkle, Deceased, Fidelity-Philadelphia Trust Company and Charlotte H. Mearkle, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96436.
    Promulgated December 5, 1941.

      John B. Peery, C. P. A., for the petitioners.

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

Disney:

This proceeding involves Federal estate tax. The respondent determined a deficiency of $31,449.71. The questions for consideration are whether certain contracts are within the exemption allowed, by section 302 (g) of the Revenue Act of 1926, as amended, for insurance receivable by beneficiaries other than an executor, under policies taken out by a decedent upon his own life; and whether certain joint and survivor annuity contracts are bases for inclusion of amounts in gross estate, and, if so, the basis of value thereof.

The parties filed a stipulation of all fa'cts, including exhibits referred to therein. In addition, certain facts were alleged and admitted by the pleadings. By reference we find the facts to be as admitted and stipulated, including the exhibits referred to in the stipulation. So bar as necessary to consideration of Jho questions for solution, they may be summarized as follows:

The petitioners are the duly appointed, qualified, and acting executors of the estate of Harry L. Mearkle, deceased, who died a citizen of the State of Pennsylvania on February 20, 1936. Decedent’s wife, Charlotte H. Mearkle, was 67 years of age at the date of decedent’s death. The Federal estate tax return for the estate of Harry L. Mearkle, deceased, was filed by the petitioners in the office of the collector at Philadelphia, Pennsylvania.

At the date of decedent’s death, there were in effect three contracts as to which there is disagreement as to whether they constitute contracts of insurance within the purview of section 302 (g) of the lie venue Act of 1926, as amended, and six annuity contracts. All of these contracts had been entered into by the decedent. The terms of the respective contracts, so far as pertinent herein, will be set forth in connection with their consideration. The three contracts Avhich are questioned as to whether they constituted insurance, under section 302 (g) of the Revenue Act of 1926, as amended, will be considered first.

I. — Two contracts were made by the decedent in 1933 with the Penn Mutual Life Insurance Co. They are identical and each is entitled “Participating Life Income Policy with Principal Sum Payable at Death.” Charlotte H. Mearkle, wife of the decedent, was named as beneficiary, and decedent was named as annuitant, with the right to change the beneficiary. Annuities ceased at death, and the beneficiary then had the right to the insurance. On each policy was stamped the consideration for the life insurance, $4,269.70, and consideration for the life annuity, $1,030.30, total cost $5,300. The annuitant had the right to receive $150 per year in quarterly payments of $37.50 each, and the beneficiary had the right, upon proof of death of the annuitant, to payment of $5,000. At date of issuance the annuitant was 72 years of age, and the beneficiary was 65 years of age.

The petitioner upon brief states, and we agree, that the Board had this question before it in Estate of Cecile Le Gierse, 39 B. T. A. 1134, and Estate of Anna M. Keller, 39 B. T. A. 1047. Upon appeal of Ihose cases the Supreme Court on March 3, 1941, in Helvering v. Le Gierse, 312 U. S. 531, and Keller v. Commissioner, 312 U. S. 543, bold that the Contracts considered together did not constitute a. contract of insurance and that the sums payable thereunder to the beneficiary were not within the scope of section 302 (g), but were taxable under section 302 (c), Kevenue Act of 1926, as amended, as a transfer to take effect in possession or enjoyment at or after death. To the same effect see Commissioner v. Clise, 122 Fed. (2d) 998. We therefore hold that the respondent did not err in denying the $40,000 exemption.

Another contract, No. 4,781,809, was entered into by the decedent on November 4, 1933, with the Mutual Life Insurance Co. of New York. It was labeled “Annual Dividend Single Premium Life Policy” on the life of Henry L. Mearltle, in the amount of $5,000 with single premium of $4,334.85. Charlotte H. Mearkle was named beneficiary upon proof of decedent’s death. The right to change the beneficiary was reserved to the decedent, in the absence of assignment other than to the company, or unless otherwise endorsed on the policy. The policy shows no such endorsement, and the record shows no such assignment of policy. The policy provided that the decedent had the right to borrow upon' it, to surrender it for cash value after one year, and to assign it upon notice given. It is stipulated that there was also issued to the decedent by the Mutual Life Insurance Co., coincidentally with the issuing of policy No. 4,781,-809, an annuity contract, that neither contract would have been issued without the other, that the decedent collected the annuities under the contract during his life, that the annuities ceased at his death, and that a physical examination of the decedent was not required in connection with policy No. 4,781,809.

The petitioner urges that this contract, as well as those already considered above, is an insurance contract, properly coming within the exemption of $40,000 allowed by the revenue act. The respondent upon brief recognizes the case of Estate of Anna M. Keller, supra, at that time pending appeal to the Circuit Court, as controlling. We find no essential difference in facts in the two situations presented. Therefore, in the light of the decisions in the Le Gierse and Keller cases by the Supreme Court, above referred to, we hold that the Commissioner did not err in including in gross estate the proceeds of policy No. 4,781,809.

II. — The decedent also, during 1933, 1934, and 1935, entered into six annuity contracts, all of which were in effect at his death. None of the contracts provides the right to change beneficiary. The terms of the various contracts are not the same. Two, Nos. 5622 and 5642, issued by the Connecticut Mutual Life Insurance Co., are entitled “Joint and Survivor Single Premium Life Annuity.” Three, Nos. 27689, 38020, and 38211, issued by the Mutual Life Insurance Co. of New York, are entitled “Non-Participating Joint and Survivor Annuity”, and one, No. 1740077, issued by the Penn Mutual Life Insurance Co., is entitled “Joint & Survivorship Annuity Policy — NonParticipating.” Each recites the consideration as the payment of a single premium. No. 5622 provides for payment of a monthly income of $50 “to Harry L. Mearkle and Charlotte H. Mearkle jointly, and to the survivor of them.” No. 5642 provides an income of $50 per month “to Henry L. Mearkle, if he be living, if not, to Charlotte H. Mearkle”, until February 10, 1944, with .provision for payment to a daughter of the annuitants in case of the death of both of them, and in case of the death of the daughter, for the payment of present worth of installments due, with interest, to the executors or administrators of the last survivor. No. 27689 provides for annuity payments of $169.67 per month, “to said Henry L. Mearkle if said Henry L. Mearkle be living on its due date or if said Henry L. Mearkle be not then living to said Charlotte H. Mearkle”, the payments to continue “until the death of the last survivor of Henry L. Mearlde * * * and Charlotte H. Mearkle.” Contracts Nos. 38020 and 38211 both provide for payment of an annuity of $50 per month “until the death of the last survivor of Henry L. Mearkle and Charlotte H. Mearkle the Annuitants” and provide that “Each such annuity payment shall be payable, when due, to said annuitants share and share alike, if both be living on its due date or if one only of said annuitants be then living to that one.” Contract No. 1740077 provides for payment “to Henry L. Mearkle if living as each annuity payment falls due, otherwise to Charlotte H. Mearkle” an income of $507.75 per month “during their joint lifetime, and until the death of the survivor.”

In the determination of the deficiency the Commissioner in the case of each annuity included in decedent’s gross estate the value of the annuity passing to the surviving wife, as a transfer intended to take effect in possession or enjoyment at the decedent’s death, with respect to which he had retained the income, under section 302 (c) of the Eevenue Act of 1926 as amended. Also, as to contracts Nos. 5622, 38020, and 38211, the Commissioner based the determination of deficiency upon section 302 (e) as amended on the theory that the annuity was jointly held property. The petitioners contend that the interest of Charlotte H. Mearkle in the annuity contracts irrevocably vested at the date of their issuance, and that the decedent did not enjoy income for life from property or investment in connection with the contracts. They argue that the decedent made a gift to his wife at the time of purchase of the contracts “of the amount in excess of what it would have cost to have purchased a single annuity payable to him alone during his life.” As to application of section 302 (e), petitioners argue that the act contemplates such property “as is left upon the death of one of the cotenants”, and that the annuities -here involved 'are not such property. Upon the first proposition they cite and rely upon Chemical Bank & Trust Co. et al., Executors, 37 B. T. A. 535; Hariot Reynolds Schultz et al., Executrices, 38 B. T. A. 59; and D. W. Blacksher et al., Executors, 38 B. T. A. 998. The respondent points out that the Chemical Bank case and the Schultz case involved transfers prior to the Joint Resolution of March 3, 1931, amending section 302 (c) of the Revenue Act of 1926, while the contracts here examined were issued thereafter. The Blacksher case we do not consider in point, for it involved construction of section 302 (g) with reference to an insurance contract. The annuity involved was merely the manner of payment of the insurance, after decedent’s death. Inasmuch as both the Schultz and Chemical Bank cases involved transfers prior to the amendment of section 302 (c) of the Revenue Act of 1926 by Joint Resolution of March 3, 1931, and section 803 (a) of the Revenue Act of 1932, whereas the transfers here were all made after that date, we think those cases can not be said to control the question here. In the Schultz case we emphasized the fact that the transfer was prior to March 3, 1931.

However, this point has recently been decided in Commissioner v. Clise, supra, wherein the court upheld the view of the respondent that the value at decedent’s death of joint and survivor annuity contracts should be included in the gross estate of the decedent. The same view was taken by the Circuit Court of Appeals for the Fifth Circuit in Commissioner v. Wilder, 118 Fed. (2d) 281. Both cases involved contracts entered into after the Resolution of March 3,1931, and section 803 (a) of the Revenue Act of 1932 became applicable. We find in the present matter no distinction in principle, and in view of the holdings in the Clise and Wilder cases, we conclude and hold that the Commissioner did not err in including in decedent’s gross estate the value, at the decedent’s death, of the joint and survivor annuity contracts. Nor do we think he erred in computing values for the annuities upon the basis of the amount which comparable annuities would cost, at the date of decedent’s death, under Regulations 80 (1937 Edition), article 10 (i) (2). No evidence was adduced to show such values to be erroneous, and no authority is cited on the subject. In gift tax cases the cost of duplicating life insurance policies is held to be the value of the gift. Guggenheim, v. Rasguin, 312 U. S. 254; Powers v. Commissioner, 312 U. S. 259; United States v. Ryerson, 312 U. S. 260.

Reviewed by the Board.

Decision will he entered under Rule 50.

       Sec. 302 [as amended by section 404 of the Revenue Act of 1934], The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside the united States—
      * * * * * * *
      (g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.

       (e) [As amended by Joint Resolution of March 3, 1931, Public No. 131, Seventy-first Congress, and by section 803 (a) of the Revenue Act of 1932.] To the extent of any interest therein of which the decedent has at any time made & transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which ’ he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from the property, * * *

       (e) To the extent of the interest therein held as joint tenants by the decedent and any other person, or as tenants by the entirety, by the decedent and spouse, or deposited, with any person carrying on the banking business, in their joint names and payable to either or the survivor, except such part thereof as may be shown to have originaUy belonged to such other person and never to have been received or acquired by the latter from the decedent for less than an adequate and full consideration in money or money’s worth: Provided, That where such property, or any part thereof, or part of the consideration with which such property was acquired, is shown to have been at any time acquired by such other person from the decedent for less than an adequate and full consideration in money or money’s worth, there shall be excepted only such part of the value of such property as is proportionate to the consideration furnished by such other person: * * *