author: Mellott:

text:
    Marie Anna Eisenmenger, Petitioner, v. Commissioner of Internal Revenue, Respondent.

      Docket No. 99914.

    Promulgated May 14, 1941.

      Edgar G. Vaughn, Esg., for the petitioner.

      Luden W. Shaw, Esg., for the respondent.
   OPINION.

Mellott:

This proceeding involves a deficiency in income tax in the amount of $8,458.47, of which $1,847.48 is for the calendar year 1986 and $1,610.99 for the calendar year 1937.

There is no substantial dispute between the parties as to the facts. They were all admitted in the pleadings, orally stipulated at the hearing, or contained in documents introduced in evidence without objection or subject only to an objection as to materiality.

The major issue is whether dividends, received during the taxable years by a trust in the form of deferred debenture notes, constituted income currently distributable by the trust to petitioner. There is no dispute as to the treatment to be accorded the cash dividends received. The only other issue is whether any deductions for taxes and accounting fees may be allowed in computing petitioner’s distributable share of the trust income.

The facts are found to be as stipulated or admitted. For present purposes they 'may be summarized as follows:

Petitioner, a resident of St. Paul, Minnesota, duly filed her income tax returns for the years in question with the collector of internal revenue for the district of Minnesota and paid the taxes shown to be due. Her returns were made on the cash basis.

On December 31, 1931, Charles W. Eisenmenger, husband of petitioner, created a trust known as the Charles W. Eisenmenger Trust No. 1 (hereinafter referred to as the trust) the corpus of which consisted of 200 shares, or 40 percent, of the common stock of the Chamar Investment Co., a personal holding company. The settlor, petitioner, and Ottilie Eisenmenger were named as trustees. During the years 1936 and 1937 and thereafter petitioner was a beneficiary of the said trust. The trust instrument provided in part as follows:

I.
The trustees shall pay to Marie Anna Eisenmenger, the wife of the grantor, for and during the term of her natural life, annually or as received, the net cash income received by them from the said shares of stock.
II.
Upon the death of the said Marie Anna Eisenmenger, the trustees shall pay and distribute to the four sisters of the grantor, * * * annually or as received in equal proportions, share and share alike, the net annual income received by them from the said Two Hundred (200) shares of stock. Each of said sisters shall be entitled to her share of said income for and during the term of her natural life.
III.
Upon the death of any of said sisters, without leaving issue, the trustees shall pay and deliver to the remaining sisters annually or as received in equal proportions, share and share alike, the net annual income received by said trustees from said shares of stock. Each of the said remaining sisters shall be entitled thereto for and during the term of her natural life.
IV.
Upon the death of any of said sisters leaving issue, then the net cash income apportionable to such sister, if living, shall be held by the trustees in trust, for the absolute sole use and benefit of her children, in equal proportions, each child share and share alike in the income apportionable to their mother, if living. * * *
Upon the death of the remaining sisters, their interest in said net cash income received by the trustees from said shares of stock shall be held by the trustees in trust for the absolute, sole use and benefit of the said children in equal proportions, share and share alike. * * *
V.
As soon as one of said children shall attain the age of thirty-five (35) years, then and in such event, he or she shall become entitled to and vested with an interest in One Hundred and Eifty (150), shares of the shares of stock forming corpus of the trust, in the same proportion as his or her share shall be in the income or [of] the trust, as hereinbefore set forth; and the trustees shall assign, transfer, and pay over to such child or children, his or her, or their proportion, of the previously accrued income and in and to the One Hundred and Eifty (150) shares of stock forming a part of the corpus of the trust. * * *
VI.
When One Hundred and Eifty (150) shares of the shares of stock forming the corpus of the trust shall have been distributed to the children of my deceased sister or sisters, then the trustees shall proceed to terminate the trust by assigning and transferring the remaining Fifty (50) shares in the following manner * * *.
*******
XII.
The term “net income” as herein used, shall include only the ordinary revenues less expenses incident to the trust, but shall not include any accretions or increment to the principal of the trust, whether such increment or accretion is realized by way of stock dividend or the sale or other disposition of the said shares of stock.

On December 28, 1936, a resolution was adopted by the board of directors of the Chamar Investment Co. in which it was recited that the tentative financial statement of the corporation disclosed earnings for 1936 in excess of $36,000; that it was the apparent requirement of Congress that such earnings be distributed forthwith or be made the subject of a penalizing tax; and that if consideration is given to the value of the investments of the corporation it would appear inexpedient and unwise to pay a cash dividend at that time. It was resolved that a dividend of $40,000 “be and is hereby declared, to be payable to the stockholders of this corporation forthwith and as of record December 28, 1936.” It was further resolved that 10 percent of such dividend, or $4,000, be paid in cash and the balance, or $36,000, be paid in 5 percent subordinated debenture notes, to be issued by the Chamar Investment Co. payable on or before December 31, 1946.

The trustees received, as dividends on the shares of stock held in trust, $1,600 in cash and a “6 per cent Subordinated Debenture Note” in the amount of $14,400, dated December 28,1936, the principal being payable on or before December 31,1946. The note provides that: (1) It is one of a total issue of $36,000 of notes bearing the same date; (2) no transfer of the notes shall be valid unless made by the registered owner thereof and registered on the books of the company; (3) the note may be retired at par and accrued interest on any interest date; (4) the note is subject and subordinated as to principal to the claims of all other creditors, present and future, of the corporation; (5) in the event of liquidation the note and interest thereon shall be paid in full before any payment is made to the stockholders; (6) no action in court for interest can be brought unless the interest shall have been in default for three years and no suit on the note (except for interest) can be brought unless joined in by the holders of 75 percent of the notes of the issue; (7) no dividends are to be paid by the corporation unless and until the interest due on the notes shall have been paid in full; and (8) the holder of the note expressly agrees to be bound by each and every term and condition thereof. The note at the time of its receipt by the trustees and at all times until the end of the calendar year 1986 had a presently stipulated fair market value of $14,400.

The trustees retained the note and on December 31, 1936, deposited the cash to the account of the trustee in a local bank, bio distribution of any portion of the cash or note was made to the beneficiary of the trust in 1936. The trustees filed their fiduciary income tax return for the year 1936 in March of 1937 and reported the receipt of dividends in the amount of $16,000. No credit was taken in the return for distribution's to the beneficiary of the trust and the trustees, in 1937, paid an income tax of $1,290 upon the reported basis.

On December 29, 1937, a resolution was adopted by the board of directors of the Chamar Investment Co. similar to the resolution of December 28, 1936, referred to above. Under this resolution a dividend of ■ $35,000 payable to the stockholders of record as of December 29, 1937, was declared, of which 15 percent, or $5,250, was to be paid .in cash and the remaining 85 percent, or $29,750, was to be paid in 4 percent subordinated debenture notes of the Chamar Investment Co. The trustees received, as dividends on the shares of stock held in trust, $2,100 in cash and a “4 percent Subordinated Debenture Note” in the amount of $11,900, the principal being payable on or before December 31, 1946. The provisions of said note, except as'to the amount, date, and interest rate, are identical to the provisions of the note dated December 28, 1936, referred to above. Said note had a presently stipulated fair market value at the time of its receipt by the trustees, and at all times.until the end of the calendar year 1937, of $11,900.

The trustees retained the note and on December 29, 1937, deposited the cash to the credit of the trustees in a local bank, together with an item of $720, making a total deposit of $2,820. The item of $720 represented interest on the 5 percent subordinated debenture note issued to the trustees as a dividend in 1936. No distribution of any portion of the $2,100 cash dividend, the 4 percent subordinated debenture note received as the 1937 dividend, or the interest on the 1936 dividend note was made to the beneficiary of the trust in 1937. The trustees prepared and filed their fiduciary income tax return for the year 1937 reporting the receipt of dividends from a domestic corporation in the amount of $14,000 and $720 interest. An income tax of $1,247.75 on this amount (less a fee of $45 for professional services) was paid by the trustees in 1938.

During the year 1936 the trust made no disbursements of any kind with respect to expenses or otherwise. Its books were kept on the cash basis.

During the year 1937 the only disbursements made by the trust consisted of a payment to the collector of internal revenue for income tax upon the 1936 income in the amount of $1,290 and a payment of $45 to an accounting firm for accounting service and making out returns.

The tax shown to be due by the return of the trust for 1937 ($1,247.75) was paid to the proper collector during the early part of 1938. Other disbursements made by the trust during 1938 were $759.65 for Minnesota state income taxes for 1937 and $45.50 for accounting fees.

Petitioner, in her income tax returns for the years 1936 and 1937, did not include in her gross income any amount on account of, or in connection with the trust.

Eespondent in the deficiency notice dated June 7, 1939, included as additional income to petitioner for the year 1936 the sum of $16,000 and for the year 1937 the sum of $14,675. These amounts included the dividends declared in cash and notes by the investment company for the years 1936 and 1937, and the interest of $720 received during the latter year. The 1937 income of $14,720 was reduced by the amount of $45 expended for accounting fees during that year. In the deficiency notice he justifies his action in the following language:

It is held that the notes and cash received by the Charles W. Eisenmenger Trust #1 during the years 1936 and 1937 as dividends from the Chamar Investment Company were income distributable to you as the beneficiary. Accordingly, there is added to your income for the calendar year' 1936 the amount of $16,000.00, and for the calendar year 1937 the amount of $14,675.00

Petitioner contends that the debenture notes received by the trustees as dividends in each of the taxable years should not be taken into consideration in computing the net income of the trust distributable to her under section 162 (b) of the Revenue Act of 1936. The parties also disagree as to the amount of the disbursements which may be deducted in computing the distributable net income of the trust. These issues will be discussed in the order stated.

In support of her first contention petitioner relies exclusively upon the language of paragraph i of the trust, stating that the trustees shall pay her, for and during her lifetime, the “net cash income” received by them from the shares of stock. She takes the position that the debenture notes were not cash income. Respondent on the other hand urges that a study of the entire trust agreement indicates that the expression “net cash income” and “net annual income” are used interchangeably; that “net cash income” should be given the same meaning as “net annual 'income”, and that petitioner, as the beneficiary of the net annual income of the trust during her lifetime, should have included the value of the debenture notes in computing her distributable share of the trust income.

The general rule with reference to the construction of trust instruments has frequently been stated substantially as follows:

The instrument should be construed as a whole so as to ascertain the general intention of the creator of the trust. Where there is manifest a general intent, construction should be such as to effectuate such intent, though in so doing some particular or subordinate intent may be defeated, or the literal import of the words be departed from. [Mills v. Embrey, 166 Va. 383; 186 S. E. 47.]

See also Buck v. Huntley, 151 Minn. 446; 187 N. W. 411; Boucicault v. Leubuscher, 207 N.Y.S. 1, 2; Dunn v. Dunn, 219 Ia. 349; 258 N. W. 695; Crise v. Smith, 150 Md. 322; 133 Atl. 110, 112; Dittemore v. Dickey, 249 Mass. 95; 144 N. E. 57, 60; Clark v. Hearne, 263 Mass. 114; 160 N. E. 309; Knowlton v. Atkins, 134 N. Y. 313; 31 N. E. 914, 916; Judge v. Pyle, 224 Pa. 479; 73 Atl. 919, 920; Crown Co. v. Cohn, 88 Ore. 642; 172 Pac. 804, 808; Miller v. Douglass, 192 Wis. 486; 213 N. W. 320, 322.

With this general rule in mind, we have examined the trust agreement to determine whether the expression “net cash income” used in paragraph i was intended by the grantor to limit petitioner to strictly cash income, as she urges, or whether his intention was that it should include the debenture notes received by the trustees during the taxable years, as respondent urges.

. It will be noted that the only asset of the trust was stock of a holding company. It is entirely possible and we think quite probable that the grantor anticipated that the income of the trust would consist only of cash dividends, stock dividends, or profit from the sale of the shares. These seem to be the only classes of income in the grantor’s mind. If, therefore, he anticipated that the chief income would be cash—a sound view to take considering the trust corpus—it would be immaterial to him which expression was used, inasmuch as the “net cash income” would be the “net annual income”, Avith the exception of such' profits as might be received from the sale of the stock or stock dividends received as an “increment or accretion” under paragraph xii. Then too, it must be kept in mind that the principal beneficiary under the trust—at least the one first mentioned, petitioner herein—was the wife of the settlor. In paragraph i she is given the “net cash income.” Under ■ paragraph n the settlor’s four sisters are given, after the death of petitioner, the “net annual income” during the term of the natural life of each, while under paragraph iv, upon the death of any of the sisters leaving issue “the net cash income apportionable to such sister, if living” is to be held in trust for the children of such sister. If the strict construction advocated by petitioner be applied to the expression “net cash income”, petitioner’s distributable share of the annual income during her lifetime will be less than that given to the grantor’s sisters after her death, and the children of any deceased sister will receive a smaller share than their parent had received prior to her decease. Such a construction would not in our opinion give effect to the intention of the grantor. His use of the expression “net cash income apportionable to such sister” in paragraph iv, when, under the provisions of paragraphs n and hi the “net annual income” was to be divided among the sisters, indicates that he believed that the “net cash income” would be the same as the “net annual income”, and that he intended that the “net annual income” should be distributed to petitioner even though he designated her distributable share as the “net cash income” of the trust in paragraph i.

The soundness of his conclusion is apparent when the result of limiting petitioner’s distributable share of the trust income to strictly “cash” income is considered. The debenture notes received as dividends in each of the taxable years are “noncash” income. If they are not distributed to petitioner during her lifetime under the provisions of paragraph i they can not be distributed under the provisions of paragraphs u, hi, and iv, as these paragraphs cover only income received by the trustees after her death. What, then, would the trustees do with this income? The petitioner argues that: (1) They would distribute it to the children of a deceased sister of the grantor under the provisions of paragraph v; or (2) if it is not distributable as accrued income to them, the trustees could treat it as an “accretion or increment” to the corpus of the trust estate under paragraph xn.

Paragraph v provides that upon the children of the sisters reaching the age of 35, they shall become vested with an interest in 150 (out of 200) shares of stock constituting the corpus, in the same proportion as their previous shares in the income, and that “the trustees shall assign, transfer, and pay over to such child or children, his or her, or their proportion, of the previously accrued income. * * *” We are unable to agree with petitioner that “previously accrued income” in paragraph v was intended to cover noncash income, such as the debenture notes, accumulated during the lifetime of petitioner. The only provision in the trust instrument for accruing income for these children is contained in paragraph iv. This paragraph provides that, upon the death of any of the grantor’s sisters leaving issue, the net cash income apportionable to such deceased sister shall be held by the trustee in trust for her children; that as much of this income as may be necessary shall be used by the trustees for the maintenance and education of such children; and that the surplus of the income be invested for their benefit. In our opinion the “previously accrued income” mentioned in paragraph v was intended to refer only to the income which a child or children of a deceased parent was entitled to receive under paragraph iv and which had not been expended by the trustees for the maintenance and education of such child or children.

Paragraph xn provides that “The term ‘net income’ as herein used, shall include only the ordinary revenues less expenses incident to the trust, but shall not include any accretions or- increment to the principal of the trust, whether such increment or accretion is realized by way of stock dividend or the sale or other disposition of the said shares of stock.” The debenture notes were clearly part of the ordinary revenues of the trust, and were not an increment or accretion realized by way of stock dividend.or sale of shares of stock.

It is apparent from the- foregoing that, if it be held that petitioner is entitled to receive only the cash income of the trust during her life, the trust will fail as to the noncash income, such as the debenture notes. “If property is transferred upon a trust which fails in part, a resulting trust arises as to the interest with respect to which the trust fails * * 2 Restatement of the Law of Trusts, p. 1258, sec. 411. The courts do not favor a construction of the language of a trust instrument which will invalidate the trust in whole or in part if any other interpretation is legitimately possible. The “general scheme of disposition is more significant than words and phrases.” Cohen v. Wacht, 244 N. Y. S. 274; Bear v. Millikin Trust Co., 836 Ill. 366; 168 N. E. 349. Here we think the general scheme of disposition was to give the net income of the trust to the petitioner during her lifetime, and to the grantor’s sisters and their children after her death. This being our view of the grantor’s intention, it follows that we are of the opinion that respondent did not err in including the debenture notes in computing the share of the trust income distributable to petitioner during the taxable years.

The remaining question is, What disbursements made by the trust may be allowed as deductions in computing the income of the trust distributable to petitioner during the years 1936 and 1937?

The trust kept its books on the cash basis. During 1936 it made no disbursements for expenses or otherwise. During 1937 it paid income taxes for the year 1936 in the amount of $1,290 and $45 to the accountants who kept its records and prepared the 1936 return. During 1938 it paid Federal income taxes for the year 1937 in the amount of $1,247.75, state income taxes for the same year in the amount of $759.65, and an accounting fee of $45.50.

In his original brief respondent urged that all of the income of the trust less actual disbursements represented income currently distributable to petitioner during each of the taxable years. In his reply brief, however, he takes the position that if it should be held that all of the income of the trust, including the debenture notes, was includable in computing the amount of net income currently distributable to petitioner, then the Federal income tax of $1,290 paid by the trustees in 1937 and the Federal income tax of $1,247.75 paid in 1938 were not properly paid and can not be allowed as a reduction of the distributable income, since the trust can obtain a refund of it under section 820 of the Revenue' Act of 1938 (I. R. C., sec. 3801), if not otherwise.

Petitioner contends that, in computing the net income of the trust distributable to her during 1936, the income taxes paid by the trustees in 1937 should be deducted, and in making the same computation for 1937, the Federal and state income taxes paid by the trustees in 1938 should be deducted.

This issue must, in our opinion, be decided in favor of the respondent. It is true that the trustees had the power to withhold a reasonable amount of trust income to meet present and anticipated expenses which were properly chargeable to income, and there might be some merit in petitioner’s contention if the trust estate were liable for either the Federal or state income taxes on the dividends received by it during the taxable years. Cf. Frick v. Driscoll, U. S. Dist. Ct., W. Dist. of Pa., Jan. 11, 1941; Central Hanover Bank & Trust Co. et al., Executors, 34 B. T. A. 741. In our opinion, however, it was not liable for such taxes. Under the provisions of section 162 (b) of the Revenue Act of 1936, supra, as well as under section 2394-28 of the Minnesota income tax law, the income of a trust which is to be distributed currently by the fiduciary to the beneficiary is deductible hi computing the taxable net income of the trust. Inasmuch as all of the income of the trust for 1936, and all of its income for 1937 except the amount of $45 expended for accountants’ fees, represented income which was currently distributable to the petitioner during those years, the deductions which the trustees were entitled to take under Federal and state laws left no net income subject to tax by either the Federal or state governments in the hands of the trustees. The fact that the trustees erroneously paid income taxes on the income received by them in 1936 and 1937 does not help the petitioner, and the same is true of the trustees’ failure to make any distributions of income to her during those years. The test of deductibility of income to the beneficiary of a trust is not “the receipt of income, but the present right to receive it.” Where, as here, the trustees are under a duty to distribute the income currently, “then the scheme of the act is to treat the amount so distributable, not as the trust’s income, but as the beneficiary’s.” Freuler v. Helvering, 291 U. S. 35.

It is our conclusion that all of the income received by the trustees during 1936, and all of the income received by them during 1937, except the $45 expended for accounting fees, was properly included by the respondent in computing petitioner’s taxable net income for those years.

Judgment will be entered- for the respondent.

       SEC. 162. NET INCOME.
      The net income of the estate or trust shall he computed in the same manner and on the same basis as in the case of an individual, except that—
      * « * * * * , *
      (b) There shall he 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 he 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.

       Section 2394-28, Mason’s Minnesota Statutes, vol. 3, 1936 Supp. Taxes on Estates—
      (a) The taxes imposed by subsection (a) of section 3 of this Act shall apply to the income of estates of decedents; and to the income from any hind of property held in trust * * * whether such income is under the trust terms to be accumulated, currently distributed, or in any other manner disposed of.
      (b) The taxable net income of such estate or trust shall be computed in the same manner and on the' same basis as in the case of an Individual.
      * * * * * « *-r (d) There shall be allowed in computing the taxable net income of an estate or trust for its taxable year as an additional deduction the amount of its income which is during such taxable year to be currently distributed * * * or which is during such year lawfully distributed * * * to the beneficiaries, but if such beneficiaries are domiciled within this state, the amount so allowed as a deduction shall be included in computing the taxable net income of such beneficiaries. * * *


source: Caselaw Access Project

author: OppeR:

license: Public Domain

text:
    R. Simpson & Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 98208.
    Promulgated May 14, 1941.

      .Gerald Donovan, Esq., for the petitioner.

      Conway Kitchen, Esq., for the respondent.
   OPINION'.

OppeR:

Every argument advanced by petitioner in its principal brief save one was made and considered .unfavorably in Noteman v. Welch (C. C. A., 1st.Cir.), 108 Fed. (2d) 206. See also Seaboard Small Loan, Corporation, 42 B. T. A. 715; O'Sullivan Rubber Co., 42 B. T. A. 721. Efforts to distinguish the Notemam case in the reply brief on the basis of details of operation of a pawn shop as compared to a “personal finance company”, even if borne out by the record or authority which they are not, must be unavailing as falling short of impeaching the underlying principle. We may consider that “the taxpayer makes out an appealing case, but mindful of the limits of our judicial function, we cannot save the taxpayer from an exaction which Congress required of it * * Noteman v. Welch, supra, 215.

Petitioner attacks the constitutionality of the section if applied to its situation, a question not expressly raised in the Noteman case on appeal. But see 26 Fed. Supp. 437, 442. We think, however, that it was inferentially disposed of. The contention is that the section 351 surtax would operate in an arbitrary and discriminatory fashion upon petitioner. In Noteman v. Welch, supra, 209, the court quotes Congressional Committees to show “that the bill would work no real hardship upon any corporation except one that was being used to reduce the surtaxes of its stockholders, because the corporation ‘can always escape this tax by distributing to its stockholders at least 90 percent of its adjusted net income.’ ” In the case of corporations having a handful of shareholders, a class to which the operation of the section is confined, such a distribution would scarcely cause the sort of significant burden requiring resort to the dignity and consequence of the Federal Constitution. And if corporations whose stock is more widely held are expressly omitted from the regulated group, the classification is for that very reason deprived of any discriminatory or arbitrary quality. The line may have been drawn unfortunately for petitioner, but wherever drawn someone'could frustrate it if petitioner can here. Nor can it be a legitimate cause of complaint that Congress has chosen to make the section applicable to petitioner by the device of definition and characterization as a “holding company.” While petitioner may not be a holding company for purposes of other statutes, it suffers no detriment by being called one here except such as would be equally severe if it were defined merely as a “taxpayer.” Cf. Helvering v. City Bank Farmers Trust Co., 296 U. S. 85.

The penalty for failing to file a personal holding company return is mandatory for the years 1934 and 1935, since no return was ever filed. Noteman v. Welch, supra. By the time the 1936 return was due, the statute had been in effect for practically three years. Each corporation income tax form had asserted the necessity that petitioner file such a return if it were a personal holding company, and petitioner’s failure to file was due entirely to its erroneous impression that it was not one. This can not be the reasonable cause required by the penalty section, Lone Pine Lawn Corporation, 41 B. T. A. 638, and requires approval of respondent’s imposition of the penalty, Lane-Wells Co., 43 B. T. A. 463, without the necessity of passing upon petitioner’s contention that under the wording of the 1936 Act a showing of reasonable cause entitles the taxpayer to a remission of the imposition in spite of the complete absence of even a delinquent filing.

Decision will be entered for the respondent.


author: Leech :

text:
    George A. Lembcke, Petitioner, v. Commissioner of Internal Revenue, Respondent. Molly S. Lembcke, Petitioner, v. Commissioner of Internal Revenue, Respondent. Oscar M. Bernuth, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 100968, 100976, 101241.
    Promulgated May 16, 1941.

      Albert E. James, Esq., for tRe petitioner.

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

Leech :

These proceedings, duly consolidated, involve deficiencies in income tax for the calendar year 1936 as follows:

A separate stipulation of facts was filed in each proceeding. All facts are found to be as stipulated and effect will be given to the concessions of the petitioners in the two first mentioned proceedings in a settlement under the Board’s rules.

The issue in each proceeding is the same. Stated generally it is: Did the Commissioner err in including in the gross income of each petitioner for the taxable year the full amount of the dividends declared and paid upon 6 percent cumulative preferred stock of the Wood Preserving Corporation owned by him?

The petitioners filed their respective returns for the year involved herein with the collector of internal revenue for the third New York district. They included in gross income, or now stipulate that there should be included, the amounts shown in column A of the following schedule. They deny that the amounts shown in column B, which were paid to the Koppers Co. under the circumstances hereinafter set out, should also be included.

At various dates in 1930 and 1931 the American Tar Products, Inc., hereinafter referred to as the Tar Co., entered into identical agreements with the petitioners. The agreements provided that the Tar Co. on the 30th day of June 1933, and annually on the 30th day of June in each year thereafter, up to and including June 30, 1952, would “purchase or cause to be purchased and/or redeemed at par, plus accrued dividends thereon, if requested so to do by [the named petitioner ] up to 5 percent (5%) in each year and no more”, of the 6 percent cumulative preferred stock of the Wood Preserving Corporation which he owned.

Continuously throughout 1931, to and including 1936, petitioners held and owned the following number of shares of such stock:

On June 14, 1933, the petitioners entered, into another agreement with the Tar Co. It provided that the obligation of the Tar Co. to purchase up to 5 percent of the stockholdings of the petitioners on June 30,1933,1934,1935,1936, and 1937, should be postponed and not accrue until June 30,1953 to 1957, inclusive. The said agreement also provided:

2. Should The Wood Preserving Corporation fail to pay a dividend or dividends aggregating the sum of 75 ⅜ per share for each semi-annual period commencing January 1, 1933, and ending December 31, 1937, then and in that event Tar Company shall pay to each Stockholder a sum of money equal to the difference between 754 and the aggregate of the dividends paid per share for each share of stock owned by such Stockholders for each such semi-annual period, such payment or payments to be made on June 30th and December 31st of each year commencing June 30, 1933; provided, however, that the Tar Company shall be entitled to reimbursement of the amounts so paid if, as and when dividends in excess of $1.50 per share in any one year shall be declared by the Wood Preserving Corporation, and the Stockholders direct The Wood Preserving Corporation to make such payments.
3. Tar Company agrees, if requested at any time between July 1st and December 31st of each year commencing with the year 1933 and ending with the year 1937, to purchase within thirty (30) days thereafter, at a price of $50.00 per share (which price shall include all accrued dividends), up to the following number of shares in each such year:
1933_:_ 360 shares
1934_ 420 shares
1935_ 1,092 shares
1936_1,824 shares
1937_ 1, 943 shares
The number of shares which each Stockholder is privileged to request Tar Company to purchase in any such year, shall be limited to his pro rata proportion (figured to the closest whole share) of the maximum number of shares to be purchased.
4. On June 30, 1938, and annually thereafter, Tar Company is obligated to purchase ½oth part of the holdings of each Stockholder as of the date hereof, at par plus accrued dividends, with proper credits for any sum of money advanced by Tar Company under the provisions of Paragraph 2 for which it shall not have been reimbursed as hereinabove provided; provided that such respective Stockholders shall make the request in any on» year as provided in the original agreement and subject to the limitation of ownership therein provided. If by reason of the sale to Tar Company under Paragraph 3 hereof, any one of the Stockholders shall not be in a position to demand his pro rata share of such stock, Tar Company shall nevertheless be obligated to purchase up to 1242 shares if requested, which shall be divided pro rata among the remaining Stockholders.
* ⅜ * * ⅜ ⅝ *
7. Should Tar Company default during the period of moratorium, then this agreement shall become ineffective and the obligations under the original agreement shall forthwith become effective.

Pursuant to the terms of the agreement the Tar Co. and the Koppers Co., its successor in interest, on June 30,1933, and semiannually thereafter up to and including June 30,1936, paid 75 cents per share to each of the petitioners upon the shares of the Wood Preserving Corporation held by him. The payments were set up on the books of the Tar Co. and the Koppers Co. in an asset account designated “Assets not considered current—advances of dividends to the Wood Preserving Corporation preferred stockholders.” The entries were supported by vouchers to the individual stockholders, of which a typical one was phrased as follows: “Advance against preferred dividends of the Wood Preserving Corporation in accordance with' agreement dated June 13, 1933.”

From 1930 to December 1936 the Wood Preserving Corporation paid no dividends. In December 1936 it paid a cash dividend of $6 per share upon its preferred stock. The corporate resolution provided that said amount of $6 per share “be applied against the accrued dividends due thereon” and that it “be paid to stockholders of record as of the close of business on December 16, 1986 and be paid on December 21, 1936.”

All of the petitioners included in their income for the years 1933, 1934, 1935, and 1936 (with the exception of Molly S. Lembcke, who did not originally include the amount received during the year 1935 but subsequently paid a deficiency in income tax which had been determined against her based upon her failure to include said sum in her return for that year) the payments made to them by the Tar Co. semiannually during the years 1933, 1934, and 1935 and also the payments made on June 30, 1936. The amounts so included in income aggregate the amount shown in column B which, during the taxable year, was paid to the Koppers Co. Petitioners also included in their gross income for 1936, or now stipulate that there should be included in the gross income for said year, the amounts shown in column A of the schedule.

The payments made to the Koppers Co. as shown in column B were made by the Wood Preserving Corporation pursuant to the direction of each petitioner.

In its information return for the calendar year 1936 the Wood Preserving Corporation reported that it had paid to the various petitioners in 1936 a dividend in the sum aggregating an amount equivalent to the sum of the figures shown in coliman A and column B of the above schedule. The respondent added to the income of each petitioner the sum shown in column B, this being the portion of the dividend of December 3936 paid direct to the Koppers Co.

It will be noted that under the first agreement the Tar Co. had obligated itself' to purchase annually, if requested by .petitioner, at par ($100) plus accrued dividends, 5 percent of the stock owned by each petitioner.

The second agreement, and the one controlling here, postponed the obligation of the Tar Co. to make the purchases and payments set out above until June 30,1953, to 1957, inclusive. It gave the petitioners a more restricted right to call upon the Tar Co. to purchase an aliquot portion of their stock at $50 per share; but in the event such purchase should be made the purchase price was to include all accrued dividends. On June 30,1938, it again became obligated to purchase annually 5 percent of the holdings of each petitioner at par plus accrued dividends, with proper credit for any sum of money advanced under paragraph 2 of the contract. With this background we examine the stipulated facts and the provision of the contract relied upon by petitioner.

Petitioners argue that they were in receipt of income in the years 1933,1934, and 1935 when they received the payments from the Tar Co. at $1.50 per share upon their stock and conclude that “if they were, they then were not in receipt of income in 1936 by reason of that part of the dividend * * * paid to Koppers Company (successor to American Tar Products Company, Inc.) pursuant to the contract of June 14, 1933.” They contend that the present controversy is limited to the “very narrow question of when income was received” and place their chief reliance upon North American Oil Consolidated v. Burnet, 286 U. S. 417.

In the cited case it was conceded that the net profits with which the Court was there dealing constituted income. That being so, the Court held that the amounts became income of the company “when it first became entitled to them and when it actually received them.” But here we are not dealing with earnings and there is no concession that the amounts paid in the earlier years constituted income. On the contrary the Commissioner has determined over assessments for the years 1934 and 1935 upon the theory that the amounts received from the Tar Co. in those years did not constitute income, thus eliminating the possibility of double taxation here.

If the question were as phrased by petitioner—though we do not so view it—we would be unable to conclude that the amounts received in the earlier years were income.

Petitioners argue that they were either advanced dividends, guaranteed dividends, or a part of the ultimate purchase price of the stock.

If they mean dividends, as we understand the term, the answer is obvious. These payments were never declared nor paid by the Tar Co. or its successor, the Koppers Co., as dividends. They were not treated as such by either of those companies. We do not think they were dividends. The stock upon which they are said to apply as such in effect, was not stock in either the Tar Co. or the Koppers Co., but in the Wood Preserving Corporation—a wholly separate and distinct corporate entity. The Tar Co. and Koppers Co., which made these payments, did so not because of any obligation to the Wood Preserving Corporation to pay its dividends. Kather, they were paid because of the obligation of those companies to the petitioners under the contract with them.

If, as we believe, petitioners mean that these payments to them in the prior years were consideration for the sale of their dividends to the Tar Co. or Koppers Co., its successor, the answer is simple. Petitioners did not sell their dividends, since, under the contract, they were not obligated to direct payment of them to those companies. That was discretionary with them.

And, even if these earlier payments had been part of the purchase price of the stock, only the portion in excess of petitioners’ basis for the stock constituted income. But, under the contract—ambiguous as it may be—petitioners clearly had the right to reimburse the Kop-pers Co. by directing the payment of the contested dividends to it. Upon receipt of these dividends by the Koppers Co. the credit theretofore due that company in a similar amount upon the contract price for the stock was eliminated and the price to be paid correspondingly increased.

Therefore, it is readily apparent that in the earlier years when these payments were made to petitioners it was wholly impossible to determine, because of the several future options in the contract, what part, if any, of them was income to petitioners. Until the Wood Preserving Corporation paid its accumulated dividends in that year and the “reimbursement” of the Koppers' Co. was directed by the petitioners and occurred, the taxable status of the payments received and returned by the petitioners in the earlier years could not be determined. When those events happened, the earlier payments may well have been characterized as the proceeds of loans to petitioners. See Virginia Iron Coal & Coke Co., 37 B. T. A. 195; affd., 99 Fed. (2d) 919; certiorari denied, 307 U. S. 630; Goldfields of America, Ltd., 44 B. T. A. 200; Journal Co., 44 B. T. A. 460; and Rotorite Corporation v. Commissioner, 117 Fed. (2d) 245. And, if so, the loans were paid by petitioners by voluntarily appropriating their dividends from the Wood Preserving Corporation to that purpose. See United States v. Boston & Maine R. R. Co., 279 U. S. 732, The record treatment of the transaction by the Tar Co. and the Koppers Co. confirms rather than contradicts this conclusion.

But this conclusion is not necessary for a decision of the issue, as we see it. The sole issue here, We think, is the taxability of dividends declared and paid upon stock owned by petitioners. The general rule is that dividends constitute income to a shareholder when unqualifiedly made subject to his demand. Avery v. Commissioner, 292 U. S. 210. It is clear that the contracts—if indeed the agreements were more than merely unilateral—did not effect a transfer of the legal or equitable title to the stock on which dividends were paid. Helvering v. San Joaquin Fruit & Investment Co., 297 U. S. 496. Title remained in petitioners.

The result under both the original • as well as the second and effective contract here was that petitioners were to receive the benefit of the accumulated dividends in any event.

By voluntarily directing the payment of a portion of these dividends on this stock to the Koppers Co. and its receipt of them, petitioners received a benefit in the elimination of the credit in that amount upon the purchase price of the stock for which the Koppers Co. was obligated.

It is stipulated that the payments were made by the Wood Preserving Corporation pursuant to the direction of the various petitioners. This voluntary use of the contested portion of these dividends for the benefit of petitioners does not render them any the less taxable as such to petitioners. We conclude that they were so taxable. United States v. Boston & Maine R. R. Co., supra; Helvering v. Horst, 311 U. S. 112; Helvering v. Eubank, 311 U. S. 122. See also Herman M. Rhodes, 43 B. T. A. 780; Alfred Le Blanc, 7 B. T. A. 256; Harrison v. Schaffner, 312 U. S. 579.

Reviewed by the Board.

Decisions will be entered under Rule 50.


author: Opper :

text:
    John R. MacManus, et al., Trust, John R. MacManus, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99781.
    Promulgated May 16, 1941.

      J. J. Sloan, Esq., and Godfrey Hammel, O. P. A., for the petitioner.

      Homer J. Fisher, Esq., for the respondent.
   OPINION.

Opper :

The single petitioner contends that the income of the trust may properly be divided into four parts and taxed accordingly on one of two alternative theories. It does not contend that this result should be reached under sections 161 and 162, Revenue Act of 1934, or that the four respective beneficiaries should pay the tax as upon income either distributed or currently distributable to them within the provisions of those sections. Apparently conceding that such a theory is not applicable because the income was accumulated pursuant to a discretion of the trustee, petitioner contends either that the beneficiaries were the grantors and that under sections 166, 167, or 22 (a) the trust income was taxable to them in the proportion that each of them created the trust; or, in the alternative, that petitioner, instead of being a single trust, is four trusts each of which should have filed a separate return, although they did not, and have paid a portion of the tax.

The first alternative urged refreshingly illustrates the impossibility of exhausting the novelty and variety of the law. That a taxpayer should invoke for his purposes the provisions of sections 166 and 167, safeguards created by Congress exclusively for the respondent’s comfort, see e. g. report of (1924) Senate Finance Committee, 68th Cong., 1st sess., S. Rept. No. 398, p. 25; C. B. 1939-1 (Part 2), p. 283; or of section 22 (a) on a theory similarly applied judicially to protect the revenue, see Helvering v. Clifford, 309 U. S. 331, affords merely another illustration of the wisdom of such proverbs as refer to the “ill wind” or “one man’s meat.”

However, ingenious and arresting as may be the concept, we can not agree that petitioner has here discovered the instrument for its application. What the theory requires at least is identity between beneficiaries and grantors. But the beneficiaries at no time obtained, with respect to corpus or income, any vestige of that legal title which would have enabled them to act as grantors in the sense that they had freedom of choice to create the trust or withhold it. What appears unmistakably is that the beneficiaries were as helpless to deal with their father’s property, after the original trust was created, as they had been before; and that the transaction which took place in 1934, by which the father was enabled to accomplish alterations in the terms of the trust which were not permitted by any of its provisions, was merely an illustration of the extent to which a grantor can remain the true owner of property by the selection of sufficiently pliable recipients of the trust benefits. Cf. Rollins v. Helvering, 92 Fed. (2d) 390 (C. C. A., 8th Cir.) ; certiorari denied, 302 U. S. 763. The father, who created the original trust in 1923, was as clearly the grantor of the trust which arose in 1934 as if he had remained the legal and beneficial owner in the interval. Since no attempt is being made to tax to him the trust income on any comparable theory, the point involved in the Rollins case requires no further consideration. It merely renders sufficiently apparent the fallacy of any contention that the children ever became owners of such rights in the original trust that they can be regarded as grantors of the new one. Without deciding, then, whether petitioner could otherwise succeed in the effort to apply in its favor such authorities as Helvering v. Clifford, supra, and sections 166 and 167, cf. Higgins v. Smith, 308 U. S. 473, 477, we take the view that here the effort must fail because the premise that the beneficiaries were the grantors is untenable.

Petitioner contends, secondly, that it is not one trust but four. It claims—apparently conceding in this connection that the father was actually the grantor of the second trust—that his intention, the decisive test, was that the trust set up in 1934 should be quadru-plex. We find no adequate support for petitioner’s contention that the record discloses convincing evidence of an intent to establish more than one trust. “Whether at various places in the instruments the singular ‘trust’ is used or the plural ‘trusts’ ’’ is a factor which may have little significance, as petitioner asserts in its reply brief. But it succeeds, as do other aspects of the relevant documents, in leaving the question of intent unanswered. If either father or son intended to create more than one trust they failed to give this intention adequate expression. What the father said was: “The details and mechanics of the matter I leave to you”; meaning the son who became the new trustee. What the evidence shows is that the son, assisted by the father’s consultant, set up one trust and not four. The books of account were so constituted by the consultant. A single fiduciary tax return for “the estate or trust” was filed, signed by the son, and stated to be prepared from the books with the assistance of the consultant. And the allegations of the petition in this proceeding are in accord. There is no assertion that four trusts were created. It alleges, for example, that the declaration of trust “clearly states that the four beneficiaries are the owners of the corpus income or emoluments of this trust" and “that the four beneficiaries individually included their share (½) of the profits in their personal income tax returns.” Were we to accept petitioner’s present contention it would necessitate the preliminary assumption that the father’s confidential adviser and his son and fiduciary proceeded with the administration of the trust in a manner inconsistent with the purpose and intention of the original grantor; and this in spite of abundant opportunity to acquaint themselves with his true intent, since it appears that both had discussed the transaction in advance with the elder MacManus. We are not prepared, as we should be forced to on petitioner’s premise, to infer that the son and the adviser were aware of the father’s intention to erect four trusts and deliberately accomplished the reverse. On the contrary, we are satisfied that the evidence of practical construction, which is all we have to follow in the absence of an adequate showing of intent, would justify no conclusion other than that this was a single trust.

We find no error in respondent’s treatment.

Reviewed by the Board.

Decision will be entered for the respondent.

       One of the father’s confidential advisers testified: * * I do know this : That Mr. MacManus would not have changed the beneficiary to John unless John had agreed to do as he stated in his declaration. * * *”

       Emphasis added.


author: Black :

text:
    E. W. Stockton, d. b. a. Riverside Baking Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101627.
    Promulgated May 16, 1941.

      Everett H. Smith, Esq., for the petitioner.

      Sidney B. Gambill, Esq., for the respondent.
   OPINION.

Black :

The question in this proceeding is whether the respondent erred in determining that, under section 501 (a) (2) of the Bevenue Act of 1986, petitioner was subject to an unjust enrichment tax equal to 80 percent of $3,841.55, representing reimbursements of Federal excise tax burdens received by petitioner during the calendar year 1936 from two of his vendors, which reimbursements had been included in prices paid by petitioner to such vendors during the taxable year 1935. The provisions of section 501 (a) (2) are set forth in our opening statement. Section 501 (d) provides:

(d) The net income from reimbursement * * * specified in subsection (a) (2) * * * shall be computed as follows: From the total payment or accrual (1) of reimbursement to the taxpayer from vendors for amounts representing Federal excise tax burdens included in prices paid by the taxpayer to such vendors * * * there shall be deducted the expenses and fees reasonably incurred in obtaining such reimbursement * * *.

There were no expenses or fees incurred in obtaining the reimbursements in question and petitioner concedes that the “net income” referred to in section 501 (a) (2) is the total amount of the reimbursements, namely, $3,841.55. This net income is taxable at 80 percent “to the extent that such net income does not exceed the amount of such Federal excise-tax burden which such person [petitioner] in turn shifted to his vendees.”

The respondent determined that petitioner shifted all of the Federal excise taxes in question to his vendees. Petitioner contends that the burden of such taxes was borne by him and that he did not shift any of them to others. This presents an issue of fact, the burden of proof of which is upon petitioner. Arden-Rayshine, Co., 43 B. T. A. 314; Sophie Jaski, 43 B. T. A. 321; Binghamton Candy Co., 43 B. T. A. 327.

Petitioner offered no evidence relative to the Federal excise tax involved in the reimbursement of $9.70 from the Corn Products Sales Co. We, therefore, approve the respondent’s determination as to this reimbursement and hold that petitioner is liable for an unjust enrichment tax equal to 80 percent of the net income from such reimbursement.

The Federal excise tax involved in the reimbursement of $3,831.85 from the Sperry Flour Co. is a processing tax on flour equal to $1.38 per barrel of flour. Petitioner’s vendors passed this tax of $1.38 per barrel on to petitioner as a separate additional cost of the flour which petitioner manufactured into bakery products and sold during the taxable year 1935. The question is whether petitioner in turn passed the tax on to his vendees.

Additional provisions of section 501 of the Revenue Act of 1936 are as follows:

(e) Por the purposes of subsection (a) (1), (2), and (3), the extent to which the taxpayer shifted to others the burden of a Federal excise tax shall be presumed to be an amount computed as follows:
*******
(2) If the taxpayer so elects by filing his return on such basis, from the aggregate selling price of all articles with respect to which such Federal excise tax was imposed and which were sold by him during the taxable year (computed without deduction of reimbursement to purchasers with respect to such Federal excise tax) there shall be deducted the aggregate cost of such articles, and the difference shall be reduced to a margin per unit in terms of the basis on which the Federal excise tax was imposed. The excess of such margin per unit over the average margin (computed for the same unit) shall be multiplied by the number of such units represented by the articles with respect to which the computation is being made; * * *
*******
(f) As used in this section—
(1) The term “margin” means the difference between the selling price of articles and the cost thereof, and the term “average margin” means the average difference between the selling price and the cost of similar articles sold by the taxpayer during his six taxable years preceding the initial imposition of the Federal excise tax in question, * * *
(2) The term “cost” means, in the case of articles manufactured or produced by the taxpayer, the cost to the taxpayer of materials entering into the articles; or, in the case of articles purchased by the taxpayer for resale, the price paid by him for such articles (reduced in both cases by the amount for which he is reimbursed by his vendor).
(3) The term “selling price” means selling price minus * * *.
***** * *
(i) Either the taxpayer or the Commissioner may rebut the presumption established by subsection (e) by proof of the actual extent to which the taxpayer shifted to others the burden of the Federal excise tax. Such proof may include, but shall not be limited to:
(1) Proof that the change or lack of change in the margin was due to changes in factors other than the tax. Such factors shall include any clearly shown change (A) in the type or grade of article or materials, or (B) in costs of production. If the taxpayer asserts that the burden of the tax was borne by him while the burden of any other increased cost was shifted to others, the Commissioner shall determine, from the respective effective dates of the tax and of the other increase in cost as compared with the date of the change in margin, and from the general experience of the industry, whether the tax or the increase in other cost was shifted to others. If the Commissioner determines that the change in margin was due in part to the tax and in part to the increase in other cost, he shall apportion the change in margin between them.

Petitioner and the respondent have agreed, in an exhibit which is a part of the record, that under the computation provided for in section 501 (e) (2) the “margin per unit” for the taxable year 1935 was $1.44 in excess of the “average margin (computed for the same unit)” for the base period preceding the initial imposition of the Federal excise tax in question. The details of computation are shown in the findings of fact.

Since $1.44 is in excess of the Federal excise tax in question of $1.38 per barrel of flour, it is presumed under section 501 (e) (2) that petitioner shifted the entire tax burden to his vendees. This presumption, however, is not conclusive. Section 501 (i), supra, provides that either the taxpayer or the Commissioner may rebut it. Petitioner contends that he has rebutted it by proving the “costs of production” for the respective periods, set out in our findings. He contends that when such costs of production are considered, as is permitted by section 501 (i) (1) (B), the actual margin per unit for the taxable year 1935 is 52 cents less than the actual average margin per unit for the base period, and that this indicates that he did not pass any of the processing tax on flour of $1.38 per barrel on to others. Details of petitioner’s computation of the actual margins made from his books for the respective periods are shown in the findings of fact and need not be repeated here.

We think the items which petitioner has included as representing costs of production are all proper items to be considered. We do not think, however, that the consideration of those items proves that petitioner did not shift any of the processing tax of $1.38 per barrel of flour on to his vendees. The computation shows that petitioner’s costs of production for the taxable year 1935 increased $1.96 per unit over what they were during the base period. Petitioner’s position seems to be that by making proof of what he terms the actual margin in 1935 as compared to the actual margin for the base period, he has proved that he shifted the increased cost of those items which went into production such as gas, labor, etc., to his vendees, whereas he, himself, absorbed the $1.38 per barrel processing tax. We think petitioner’s contention that the entire tax of $1.38 per barrel was borne by him is based upon the assumption without proof that petitioner shifted $1.44 of the $1.96 increased costs of production per unit rather than any of the processing tax. Petitioner’s sales per unit for the taxable year 1935 increased $4.34 ($23.05 minus $18.71) over what they were for the base period. Of this increase, $2.90 represented a shift by petitioner to his vendees of the additional cost of .flour exclusive of the processing tax. This left a net increase in the margin per unit of $1.44. We think that on the evidence in the record we must find that this change in margin of $1.44 was due in part to a shift of the processing tax of $1.38 per unit and in part to a shift of the increase in costs of production of $1.96 per unit, and that in accordance with section 501 (i) the change in margin should be apportioned between the tax and the increase in costs of production. We think 188/334 of $1.44 or 59 cents should be apportioned to the shift in processing tax and 196/334 of $1.44 or 85 cents should be apportioned to the shift in increased costs of production. Upon this basis we find that 59/138 of the reimbursement of $3,831.85 received by petitioner from the Sperry Flour Co. or $1,638.25, was shifted by petitioner to others.

• Eespondent does not contend that it would not be in order for us to apportion the change in margin between the tax and the increase in cost of production, in a proper case, notwithstanding no attempt was made to make such an apportionment in the deficiency notice. What he contends in his brief on this point is that petitioner has not made out a case rebutting the presumption which arises upon proof of the average margin computed under section 501 (e) and therefore no apportionment is in order. For reasons which we have already stated, we think petitioner has successfully rebutted the presumption named, at least, in part. Respondent in his brief argues that if we reach the latter conclusion then we should apportion as contemplated by section 501 (i) (1). On that point respondent says in his brief: “Even if it should be determined that the change in margin was due in part to the Federal excise tax burden and in part to the increase in the cost of some other item, the change in margin should be apportioned between them.”

With this contention we agree and we have made the apportionment along the lines which we think the statute contemplates.

We, therefore, hold that petitioner is subject to an unjust enrichment tax equal to 80 percent of $1,647.95 ($1,638.25 plus $9.70) rather than 80 percent of $3,841.55, as determined by the respondent.

Reviewed by the Board.

Decision will be entered, wider Rule 50.

       The year 1935 is used for the reason that it was during 1935 that the articles were sold with respect to which the reimbursement was received. See instruction No. 3, under schedule C-3, method II, Form 945, entitled “Return of Tax on unjust Enrichment.”


author: Leech:

text:
    Willoughby Camera Stores, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100707.
    Promulgated May 16, 1941.

      James E. Douglas, Esq., and Menahem Stim, G. P. A., for the petitioner.

      Oowway N. Kitchen, Esq., and Allen T. AMn, Esq., for the respondent.
   OPINION.

Leech:

The deduction of amounts which petitioner actually paid to its employees as bonuses or extra compensation during each of the years 1935 and 1936, is not in issue.

However, petitioner contends that since it is on an accrual basis the right to deduct the two contested additions to the reserve for bonuses matured when those additions were made, and not when actually paid to employees.

Respondent concedes the existence of the premise, but disagrees with the conclusion. He argues that the additions to bonus reserves were not legally accruable as deductions in the years in which the additions were set up and deductions therefor are claimed and did not become so in either instance until the following year which was the year in which payment to the employees was actually made.

The issue is resolved by a determination as to whether at the close of each year, the amounts set aside and credited to the bonus reserve then constitued, in each instance, a legal liability in the amount so credited. If, by the setting aside of these amounts petitioner incurred no legal liability to make payment of those sums it is clear, we think, that these amounts were the estimated sums which the corporation deemed necessary to meet such payment of bonuses in the following year as its board of directors would then, by voluntary action, authorize. It would then follow that these additions to the reserve would not constitute proper deductions for the year in which set up, since, in neither instance, had the liability at that time matured. As was said in Schoellkopf Aniline & Chemical Works, Inc. v. United States, 3 Fed. Supp. 417:

* * * An item accrues when all events have occurred necessary to fix the liabilities of the parties concerned therewith and to determine the amount of such liabilities. * * *

The record reveals that petitioner for many years had maintained a custom of paying bonuses from earnings to its employees and that these employees were told that they might expect such payments. There is, however, no indication that the contract of employment of these employees obligated the petitioner to make bonus payments nor is it indicated that there was any fixed method of computing the actual payment made to any employee. It is testified that the bonuses paid were in accordance with length of service, but whether they were based upon the salary received is not disclosed nor is it indicated that any liability was assumed or admitted by petitioner to make a bonus payment to an employee unless the latter was in the service at the time the payment was actually authorized by petitioner’s board of directors and made. In fact, the action taken by petitioner’s directors in paying the bonuses in the year following that in which the reserve was set aside and deducted as an accrued liability, indicates that it was not a liability enforceable against petitioner by its employees at the close of the year in which set up. If it represented a liability it would be due and payable to the employees upon the expiration of the year. It seems inconsistent with this condition that petitioner should pay the amounts of these accruals in specific bonus allowances throughout the course of the following year upon successive resolutions adopted by its board of directors specifically authorizing the payments.

It is our conclusion that the amount determined at the close of each of the taxable years here involved and set aside in the reserve for bonus did not in either instance then constitute a legal liability of the petitioner to its employees. It follows that these amounts were not subject to deduction in either of those years and that respondent’s action in allowing the deduction in the following year in which payment was made and in disallowing the deduction in the year in which the reserve was credited was proper. Bauer Brothers Co. v. Commissioner, 46 Fed. (2d) 874; certiorari denied, 283 U. S. 850; Commercial Electrical Supply Co., 8 B. T. A. 986.

Decision will be entered for the respondent.


author: Smith:

text:
    Estate of Gertrude Bucknell Day, Fidelity-Philadelphia Trust Company and Samuel Price Wetherill, Trustees and Transferees, Petitioners, v. Commissioner of Internal Revenue, Respondent. Estate of Gertrude Bucknell Day, Samuel Price Wetherill, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 100644, 100645.
    Promulgated May 16, 1941.

      Martin V. Bergen, Esq., for the petitioners.

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

Smith:

These proceedings, which were consolidated for hearing, involve estate tax liability of the estate of Gertrude Bucknell Day, who died a resident of Summerville, South Carolina, September 5, 1936. A deficiency notice was sent to the petitioner in Docket No. 100645 as executor of the estate under date of August 22, 1939, determining a deficiency in estate tax of $8,448.14. On the same date a further notice was sent to the petitioners in Docket No. 100644 asserting against them as “Trustees and Transferees” a tax liability of $69,246.04, including the amount reported in the estate tax return filed on behalf of the estate, $60,797.90, and the deficiency of $8,448.14.

The principal question in issue in both proceedings is whether there should be included in decedent’s gross estate the value of certain property with respect to which she exercised in her will a general power of appointment conferred upon her by her father’s will. A further question is raised in Docket No. 100644 as to the liability of those petitioners for any tax due from the decedent’s estate as trustees or transferees. The facts are stipulated.

Under the will of her father, William Bucknell, who died a resident of Philadelphia, Pennsylvania, on March 5, 1890, the decedent was left a life estate in a certain portion of his residuary trust estate, with a general power of appointment over the remainder of such portion. The material provisions of William Bucknell’s will read as follows:

4th. * * * From and after the death of my said wife, I order and direct my said trustees to pay the said net income arising out of the said one-third of my residuary estate, in quarterly payments, in equal shares, to my said children by my said wife Emma W. Bucknell, born and to [be] born, the children of a deceased child to take their parent’s share, for and during all the term of their respective natural lives, so, however, that the same shall not be liable, in the hands of my said trustees, to the debts, contracts or engagements of my said children or' any of them respectively, nor to pledge, assignments or anticipation thereof by them or either of them. And from and after the death of the said children respectively to pay, assign and convey the principal share of the one so dying, to such persons, and for such estates, as 'he or she may, by his or her last will, direct, limit and appoint, and in default of such last will, then to pay, assign and convey the said principal share of the one so dying to his or her children in equal shares, the children of a deceased child to take their parent’s share, and if he or she shall leave no children, nor the children of a deceased child him or her surviving, then to pay, assign and convey the principal share of the one so dying, to such persons, for such estates, as would take the same from him or her under the intestate laws of Pennsylvania, had he or she died seised and possessed of an absolute estate in said principal share.

The will of William Bucknell was duly admitted to probate in Philadelphia County, Pennsylvania.

The decedent died a resident of Summerville, South Carolina, September 5, 1986, survived by her husband, J. Gould Day, and a son, Charles Hollister Judd, Jr. She left a will in which she specifically exercised the power of appointment conf erred upon her by her father’s will, directing that such property, together with all the residue of her own estate, be conveyed to named trustees to pay from the income thereof $8,000 per year to her husband for life and to pay the balance of such income to her son for life. After her husband’s death all of the income was to be paid to her son for life and upon his death one-third of such income was to be paid conditionally to the son’s surviving widow, if any, for life. Upon the death of decedent’s son the remainder of the trust property was to be distributed to her son’s issue, per stirpes, or, upon failure of such issue, to decedent’s nephews and nieces. The material provisions of decedent’s will read as follows:

Fourth. Under the will of my father, William Bucknell, recorded in the Register of Wills’ Office at Philadelphia, Pennsylvania, in Will Book No. 151, page 171, and codicils thereto, I am given certain powers of appointment, by will, as to a share in his estate. I hereby exercise such power and in performance thereof, I do order, direct, give, grant, bequeath and devise all the assets, property and share over which I have such power under said will and codicils, together with all the rest, residue and remainder of the property, real, personal or mixed, of which I may die seized or possessed, to my Trustees hereinafter named In Trust Nevertheless, as follows:
(1) Of the income arising from same to pay to my husband, J. Gould Day, the sum of Three Thousand Dollars ($3,000.00) per year, during the term of his natural life.
(2) To pay all the balance of the income arising from same, and after the death of my said husband, to pay all of the income arising from same, to my son, Charles Hollister Judd, Jr., during the term of his natural life.
(3) After the death of my said son, Charles Hollister Judd, Jr., if he shall leave a widow surviving him, then I direct that one-third of the income which would have been payable to my said son if he had been living, shall be paid to his widow during the term of her natural life and as long as she shall remain his widow. If said widow of my said son shall have been in being at the time of my death then she shall receive said income during the balance of her life provided she does not re-marry. If she shall not he in being at the time of my death then she shall receive said income during the life of the survivor of my said husband, J. Gould Day, or of my said son, Charles Hollister Judd, Jr., and of any child of my said son who was living at the time of my death and twenty-one years thereafter or twenty-one years after my death, and during the remainder of her life and until she shall re-marry. Under any conditions she shall cease to receive any income from my estate if and when she shall re-marry.
(4) On the death of my said son, Charles Hollister Judd, Jr., the principal of the Trust shall be distributed, my Trustees retaining, however, sufficient to pay the respective amounts of income ordered to be paid to my husband, if he shall survive my son, and to the widow of my said son, if he shall leave a widow, which amounts of principal retained shall be distributed respectively when my said husband shall die or when the widow of my said son shall die or re-marry. Said principal shall be distributed as follows:
(5) If my said son shall leave issue surviving him, then to the issue, per stirpes, and not per capita, children taking the share of their deceased parents. If he shall not leave any issue surviving him, then the principal shall be distributed to my nephews and nieces, children of my brother, Howard, and of my sisters, Margaret and Edith, and their issue who survive my said son, per stirpes and not per capita, children taking the share of their deceased parents.
(6) If my said husband and my son’s widow shall survive my said son, then on the death of my said husband the amount retained as his share shall increase proportionately the amount retained to pay the income of one-third of the trust to the widow of my said son, as hereinbefore specified.

Samuel Price Wetherill, decedent’s brother-in-law, and the Fidelity-Philadelphia Trust Co., of Philadelphia, petitioners herein, were named executors and testamentary trustees in decedent’s will.

The will was duly admitted to probate in Dorchester County, South Carolina, and letters testamentary were issued to Samuel Price Wetherill. Ancillary letters testamentary were issued by the Register of Wills of Philadelphia County, Pennsylvania, to Samuel Price Wetherill, who is a resident of Pennsylvania, and the Fidelity-Philadelphia Trust Co. The Fidelity-Philadelphia Trust Co. is now also the trustee under the will of decedent’s father, William Bucknell.

Pursuant to decree of the Orphans’ Court of Philadelphia County, Pennsylvania, dated February 23, 1937, the trustee of the William Bucknell trust estate transferred the assets of the trust to the petitioners as trustees under decedent’s will. As such trustees the petitioners have never received any other properties or interests.

The estate of Gertrude Bucknell Day was insolvent at the date of her death and is still insolvent.

The value at the date of decedent’s death of the property in respect of which she exercised a general power of appointment in her will was $452,412.80. This property is now held by the petitioners as trustees under decedent’s will within the Commonwealth of Pennsylvania and has a value in excess of the tax liabilities involved herein, plus accrued interest.

At the date of decedent’s death her husband, J. Gould Day, was 54 years of age (date of birth June 2, 1882). Her son, Charles Hollister Judd, Jr., was 28 years of age (date of birth December 5, 1908). He was unmarried at the date of decedent’s death, but has since married. His wife was born July 3, 1917. He has no children.

The decedent was survived by a brother, Howard Bucknell, and two sisters, Margaret B. Pecorini and Edith Bucknell Wetherill, all of whom are still living. Howard Bucknell has three living children (two have died), all of whom have two or more living children. Margaret B. Pecorini has one living child. Edith Bucknell Wetherill has three living children (one has died) and seven grandchildren.

As executor of decedent’s estate, Samuel Price Wetherill filed an estate tax return with the collector at Columbia, South Carolina, which showed a gross estate of $468,926.27, a net taxable estate of $351,504.52, and a tax liability of $60,797.90. The tax shown to be due on the return was assessed in December 1937.

Under date of August 22, 1939, the Commissioner sent a deficiency notice to the executor, Samuel Price Wetherill, Philadelphia, Pennsylvania, determining a deficiency in estate tax of $8,448.14, which resulted from the disallowance of a credit claimed in the return for that amount of state inheritance taxes, which, it was stated, were not shown to have been paid. Also, under date of August 22, 19B9, the Commissioner sent a deficiency notice to “Fidelity-Philadelphia Trust Company and Samuel Price Wetherill, Trustees and Transferees of the Estate of Gertrude Bucknell Day”, determining against them, as such trustees and transferees, a tax liability of $69,246.04, plus interest.

It is alleged in the petitions in both proceedings that the Commissioner erred in including in decedent’s gross , estate any part of the corpus of the testamentary trust created by the will of William Bucknell over which the decedent exercised or attempted to exercise the power of appointment, except the value of the life estate appointed to J. Gould Day, which the petitioners concede should be included in the gross estate. The petitioners in Docket No. 100644 allege further that the Commissioner erred in holding them liable for any taxes due from the decedent’s estate, either as trustees under decedent’s will or as transferees of the assets of the decedent’s estate.

Section 302 (f) of the Revenue Act of 1926 provides for the inclusion in the gross estate:

* * * of any property passing under a general power of appointment, exercised by the decedent (1) by will, or (2) by deed executed in contemplation of, or intended to take effect in possession or enjoyment at or after, bis death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth; * * *

Petitioners contend, first, that the life estate which the decedent appointed to her son, Charles Hollister Judd, Jr., in the property held in trust under her father’s will did not pass to him under such power of appointment; that, under the will of the decedent’s father, her son, Charles Hollister Judd, Jr., had a vested remainder interest in fee in the entire property, after termination of decedent’s life estate, which the decedent by the exercise of her power of appointment reduced to a life estate. They contend that under the law of Pennsylvania, which follows the general rule, and which admittedly applies in this case, the life estate passed to the appointee under the will of the donor of the power and not under the power of appointment.

Among the cases relied upon by the petitioners are Rothensies v. Fidelity-Philadelphia Trust Co. (C. C. A., 3d Cir.), 112 Fed. (2d) 758, and Legg v. Commissioner (C. C. A., 4th Cir.), 114 Fed. (2d) 760. The first named case involved the estate tax liability of a half sister of Gertrude Bucknell Day. One of the questions in issue was whether there should, be included in the gross estate the value of a portion of the same testamentary trust estate of William Bucknell. There, as in the instant case, the decedent, in her will, appointed to her children a life estate in the property which the donor had bequeathed to them in default of the exercise of the power by the donee. The court held, following Helvering v. Grinnell, 294 U. S. 153, that under the laws of Pennsylvania the life estate passed to the children under the will of the donor, William Bucknell, and not under the power of appointment; that, since the children had a vested remainder interest in the whole of the property under the donor’s will, the appointment to them, of a life interest by the donee served merely to reduce the extent of their already existing estates. To the same effect is Legg v. Commissioner, supra. In Rothensies v. Fidelity-Philadelphia Trust Co., supra, the court was of the opinion that the conclusion reached was required under the decision of the Supreme Court in Helvering v. Grinnell, supra, even though the appointees had not rejected the donee’s bequest and elected to take under the donor’s will. Cf. Lee v. Commissioner, 57 Fed. (2d) 399, and Wear v. Commissioner, 65 Fed. (2d) 665.

There can be no doubt but that under the decisions in Helvering v. Grinnell, supra, Rothensies v. Fidelity-Philadelphia Trust Co., supra, and Legg v. Commissioner, supra, the value of the life estate in the William Bucknell trust property which the decedent appointed to her son passed to him under the will of the donor of the powey and not by reason of the exercise of the power by the donee, and is therefore not includable in the decedent’s gross estate.

The petitioners further contend that the decedent’s appointment of the remainder of such trust property to her son’s issue, or, in default of such issue, to her nephews and nieces, was void as being in violation of the rule against perpetuities and that such remainder therefore is not to be included in decedent’s gross estate as passing under the power of appointment.

The law of the Commonwealth of Pennsylvania governing the vesting of estates follows the general rule and limits the period for the commencement of executory devises to “a life or lives in being and twenty-one years, allowing for the period of gestation.” In re Warren’s Estate, 320 Pa. 112; 182 Atl. 396 (1936). In the case cited the court pointed out that, while ordinarily if under the will of the testator creating the trust an interest could possibly arise after the expiration of the period fixed by the rule the devise is void, a distinction is made where the interest is created by the donee of a power of appointment. Explaining the effect of this distinction the court said:

Contradistinguished from the case of the creation of a future interest in the original will or deed is when such interest is created by the donee of a power. While the remoteness of the appointed estate is still measured from the time of the creation of the power (Lawrences Estate, 136 Pa. 354, 20 A. 521, 11 L. R. A. 85, 20 Am. St. Rep. 925), it is the fact and not the possibility which rules. If the appointment as actually made does not violate the rule, such appointment is not rendered void merely because tbe appointee might have appointed in a manner too remote. It is well settled that the exercise of a power of appointment is not rendered void because of the fact that within its terms an estate might be created which possibly would be too remote. The determination of the validity of the appointment in such cases depends upon the facts as they actually exist at the time the appointment is made and not possibilities. * * *

With the exception noted, “the instrument exercising the power of appointment must be read as though it were a part of the instrument creating the power”, to determine the effect of the rule against per-petuities. Legg v. Commissioner, supra, affirming on this point 40 B. T. A. 1074. Applying these tests, were the remainder interests in the William Bucknell trust estate which the decedent in her will appointed to her son’s surviving issue, or, upon failure of such issue, to her nephews and nieces surviving her son, void as in violation of the rule? We think that they were. Decedent’s son was not in being at the time of the death of the donor of the power. At the time of decedent’s death the son was 28 years of age, was unmarried, and had no issue. Therefore, under the appointment which the decedent made, the vesting of the remainder interest might be postponed beyond any life in being and 21 years. The period during which issue might be born to the son extended well beyond the 21-year period from the date of decedent’s death.

In Legg v. Commissioner, supra, it will be noted, the life tenant under the donee’s will was in being at the date of death of the donor. This distinction is important and in itself requires a different result in the instant case. See In re Boyd's Estate, 199 Pa. 487; 49 Atl. 297; In re Warrens Estate, supra. See also Minot v. Paine, 230 Mass. 514; 120 N. E. 167.

The respondent makes the argument that, since at the date of decedent’s death the son had no issue in whom the remainder interest in the appointed property could vest, such interest vested in decedent’s nephews and nieces then living, subject to divestment upon issue being born to the son. Thus, it is argued the remainder interest was validly appointed and was properly included in the decedent’s gross estate.

This argument would be sound if the remainder interest vested in decedent’s living nephews and nieces upon her death. For the rule against perpetuities applies only to future contingent estates and not to vested estates. In re Lockhart's Estate, 306 Pa. 394; 159 Atl. 874; In re Friday's Estate, 313 Pa. 328; 170 Atl. 123; In re Wanamaker's Estate, 335 Pa. 241; 6 Atl. (2d) 852.

The appointment of the remainder interest in question, upon termination of the son’s life estate, was to his issue and upon failure of such issue to “my nephews and nieces, * * * and their issue who survive my said son.” In In re Hogg's Estate, 329 Pa. 163; 196 Atl. 503, it was said that:

* * * The rule is well established, however, that where there is a bequest to a class its members are determined as of the time appointed for distribution, and it is of no consequence that the testator, at the time of the execution of his will, may not have had in mind the individuals who might eventually come to compose such class. * * *

In re Feeney's Estate, 293 Pa. 273; 142 Atl. 284, involved the construction of a will in which the testator left a portion of his estate in trust, the income to be paid to his son, William, for life and then to his son’s children for life “living at the time of his [the son’s] death” with remainders over. It was held in an exhaustive opinion that the remainder estates as well as the intermediate life estates to the son’s children “living at the time of his death” were violative of the rule against perpetuities and invalid. The court there said:

* * * Por instance, it may be contended that, since two children of William were living when the will took effect, the second life tenancies then vested in them, subject to be divested pro tanto by the birth of other children of William, and subject further to be divested by the death of either one or both of the present children before that of their father, the first life tenant (Wheaton Coal Co. v. Harris, 288 Pa. 294, 135 A. 637); * * * Here, however, neither the intermediate life estates nor the ultimate remainders are vested, and although the former will vest within the required period, the latter may not.
* * * Besides, this controversy does not present a situation like that in Wheaton Coal Co. v. Harris, and other such cases, which hold that, where a legacy is made payable at a future time certain to come and is not subject to a condition precedent, it is vested if there be an ascertained person in esse at testator’s death, capable of taking when the time of enjoyment arrives, although his interest may be defeated altogether by his own death before that time. This principle does not apply where, as here, none of the remaindermen are ascertainable until the termination of the preceding particular estates.
We have repeatedly held that, where persons who are to take under a will must be living at a certain future day and those who answer to the description cannot be determined until that time arrives, the gift is contingent. Price’s Estate, 279 Pa. 511, 124 A. 179; Raleigh’s Estate, 206 Pa. 451, 55 A. 1119; Coggin’s Appeal, 124 Pa. 10, 16 A. 579, 10 Am. St. Rep. 565; and see Gray on Rule against Perpetuities (3d Ed.) 86. Thus, under the terms of this will, the second life tenancies, or intermediate remainders, are contingent, for, until the death of the first life tenant, the identity of the members of that particular class of remaindermen, the son’s children living at the son’s death, cannot be ascertained; the two children now living may die before their father, and the latter may have other children born to him. Again, “where a gift is only implied from a direction to pay, it is necessarily inseparable from the direction, and must partake of its quality; insomuch that if the one is future and contingent, so must the other be.” Moore v. Smith, 9 Watts, 403, 407, and cases hereinafter cited. The wording of the present will is that “the income from said fund shall be paid in equal shares to * * * said children” living at the death of the first life tenant; the provision as to time is annexed to the gift, not merely to the payment of it. Hence, for this reason also, the intermediate life estates are not vested but contingent. Kountz’s Estate, No. 1, 213 Pa. 390, 395, 62 A. 1103, 3 L. R. A. (N. S.) 639, 5 Ann. Cas. 427; Geissler v. Reading Trust Co., 257 Pa. 329, 334, 335, 337, 101 A. 797. * * *

In. summary the court said:

* * * In other words, a remainder cannot be limited to take effect upon a contingency, such as the death of a second life tenant more than 21 years after that of the first life tenant, if the second life tenant may be born subsequent to the death of the testator, even though he would be in esse during the life of the first devisee; * * *

See also In re Prim’s Estate, 279 Pa. 511; 124 Atl. 179.

Decedent’s nephews and nieces were to take their remainder interests only in the event that the son died without issue and then only those were to take who survived the son. Likewise, only such of the son’s issue, if any, as survived him were to take remainder interests. There is no doubt that on authority of the cases discussed above, and numerous other cases decided in the court of Pennsylvania, and other states, which are in accord, the remainder interests in the appointive property did not vest at the time of decedent’s death and may not vest within the period of 21 years from that date. As to such remainder interests the appointment was invalid and nothing passed under the decedent’s attempted exercise of the power. See Union & Peoples National Bank of Jackson et al., Administrators, 30 B. T. A. 1277.

Likewise, the life interest which the decedent appointed to her son’s wife, if any survived him, the son not being married at the time of her death, was outside of the rule and invalid.

The petitioners are sustained in their contentions that only that portion of the William Bucknell trust estate representing the value of the life estate which the decedent appointed to her husband is includable in her gross estate.

After elimination of all of the value of the appointive property, except the life estate which the decedent appointed to her husband, her estate will have no estate tax liability. The value of her husband’s life estate as computed by the petitioners is $33,849.75. It is stipulated that the decedent’s estate, except for the appointive property, was insolvent at the time of her death. It is unnecessary, therefore, for us to rule upon the question of the liability of the petitioners in Docket No. 100644 as trustees or transferees for any estate tax due from the decedent’s estate.

Decisions will T>e entered, wncler Rule 50.