author: Mellott:

text:
    Edna F. Hays, Carrie H. Korach, Louis C. Selden and the Guardian Trust Co., as Executors of the Estate of Eugene K. Hays, Deceased, Petitioners, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 78718, 79428, 80859.
    Promulgated July 22, 1936.

      David A. GasTcill, Esq., and Earl P. Schneider, Esq., for the petitioners.

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

       Proceedings of the following petitioners are consolidated herewith : Edna Feiss Hays ; The Cleveland Trust Company, Edna Feiss Hays, Cary Hays Korach and Louis C. Selden, Trustees and Fiduciaries under Life Insurance Trust Agreement of Eugene K. Hays dated February 16, 1932.

   OPINION.

Mellott:

The respondent determined a deficiency in estate tax against the estate of Eugene K. Hays (Docket No. 78718) in the amount of $10,589.96. The estate being insolvent, deficiencies in the same amount were assessed against the petitioners in Docket Nos. 79428 and 80859. These proceedings were consolidated for hearing and determination. The facts have been stipulated or admitted in the pleadings.

Eugene K. Hays, a citizen and resident of Cleveland, Ohio, died testate on August 24,1932. The Guardian Trust Co., Edna F. Hays, Cary H. Korach, and Louis C. Selden were duly appointed executors of his estate on September 13, 1932. Prior to the receipt of the Commissioner’s notice of deficiency, the Guardian Trust Co. was placed in liquidation by the Superintendent of Banks of the State of Ohio, and was removed as coexecutor of the estate by order of the Probate Court of Cuyahoga County, Ohio. The three individual executors have continued to act in that capacity.

Edna E. Hays, petitioner in Docket No. 79428, was named beneficiary under an insurance policy issued by the New England Mutual Life Insurance Co. on the life of the decedent, in the sum of $15,000, and this amount was paid to her subsequent to his death. The decedent, until the time of his death, retained certain legal incidents of ownership in this policy, such as the right to change the beneficiary. The respondent determined that this petitioner was liable for the deficiency as “transferee and beneficiary.”

By a trust agreement dated February 16, 1932, the decedent appointed the Guardian Trust Co. of Cleveland, Ohio, Edna Feiss Hays, Cary H. Korach, and Louis C. Selden trustees of an insurance trust. This trust was the beneficiary of certain policies of life insurance taken out by the decedent upon his own life. The Cleveland Trust Co. was duly appointed successor corporate trustee in place of the Guardian Trust Co. on June 8, 1934, by order of the Common Pleas Court of Cuyahoga County, Ohio. The policies made payable to these trustees aggregated $285,000, and they received this amount from the insurance companies subsequent to decedent’s death. The decedent rfetained, until the time of his death, certain legal incidents of ownership in these policies such as the right to change the beneficiary. The petitioners in Docket No. 80859 were the duly qualified and acting trustees of this life insurance trust.

The total gross estate was $347,753.11. Of this amount, $260,000 ($300,000 less the $40,000 exemption provided for in section 302 (g) of the Revenue Act of 1926) represented the insurance taken out by the decedent upon his own life and payable to Edna Feiss Hays, and the life insurance trust above mentioned. This amount of $260,000 was not subject to the payment of debts and charges against the estate.

There were also included in the gross estate, assets of a revocable trust created by the decedent under date of February 16, 1932. The value of these assets at the date of decedent’s death was $29,362.91. The respondent determined that these asests were not subject to the payment of debts and charges against the estate. They were held by the Guardian Trust Co. under the trust agreement and as of the date of death, some of these assets having an aggregate value at that time of $23,907.50, were pledged with the collateral loan department of that company to secure personal obligations then owing by the decedent to that company. These obligations were at all times substantially in excess of the value of the pledged securities. Subsequent to decedent’s death, these pledged assets were sold by the Guardian Trust Co., and the proceeds realized therefrom were applied in partial liquidation of the debt. In the estate tax return the full amount of indebtedness owing by the decedent at the time of his death to the Guardian Trust Co. was deducted in determining the net estate.

At the time of his death the decedent owned 5 shares of the capital stock of the Guardian Trust Co. having a par value of $100 per share and 107 shares of the capítol stock of the Union Trust Co. having a par value of $25 per share. Subsequent to the decedent’s death, these two banking institutions became insolvent and assessments were made against his estate for the double liability on the stock. The assessments amounted to $3,175. No part of this sum has been paid by reason of the insolvency of the estate. In determining the net estate, respondent disallowed these liabilities as deductions.

The decedent at the time of his- death was indebted upon pledges made by him to certain charitable institutions, to wit: John Carroll University Building Fund, $50; Jewish Welfare Fund of Ohio, $125>; and the Cleveland Community Fund, $2,250. These pledges were made in consideration of similar pledges by others being made to these charitable institutions and were due and payable prior to decedent’s death. In determining the net estate respondent determined that the amount due on these pledges was not allowable as a deduction.

The debts of the decedent, not including double liability upon stocks owned in the banking institutions and not including indebtedness upon pledges to charitable institutions, amounted to $146,579.93, all of which debts were founded upon promises and were contracted by the decedent bona fide and for an adequate and full consideration in money or money’s worth. Including the double liability of the estate upon bank stock and the indebtedness upon pledges to charitable institutions, the debts of the estate amounted to $152,179.93, which amount was included as deductible debts of the decedent in the estate tax return.

The respondent determined that the total deductions should be limited to that portion of the gross estate subject to the payment of debts and charges of the estate, and accordingly reduced the amount allowable as debts of the decedent to the value of that portion of the gross estate which remained after deducting the amount of $260,000 representing insurance payable to other beneficiaries, and the amount of $29,362.91 representing the value of the assets held in the revocable trust. As a result of this determination the deductible debts of the estate were reduced by the respondent from $152,179.93, as returned by the executors, to $58,390.20.

The decedent’s estate as of the date of death, and at all times subsequent thereto, has been insolvent and will be unable to pay any part of any deficiency determined in these proceedings. On August 2, 1935, the petitioners in Docket Nos. 79428 and 80859 paid on account of the Federal estate tax liability of the estate the sum of $6,852.86, representing the amount of tax shown as due on the return less estimated credit for inheritance tax payable to the State of Ohio. No further payments of tax or interest have been made.

Petitioner’s first contention is that the respondent erred in limiting the deductible amount of debts and charges against the estate to the amount of the gross estate other than insurance payable to specific beneficiaries and assets held in the revocable trust. We agree with this contention of the petitioners.

It is now well settled that the deduction allowable for debts of a decedent includes all debts which are recognized in the settlement of the estate as actual and valid claims under the laws of the jurisdiction in which the estate is being administered, even though such debts exceed the amount of the assets available to pay them. The respondent erred in limiting the deduction to that portion of the estate which in his opinion was subject to the payment of the debts and charges of the estate. Union Guardian Trust Co., Administrator, 32 B. T. A. 996; Commissioner v. Strauss, 77 Fed. (2d) 401; Mary Q. Hallock et al., Trustees, 34 B. T. A. 575.

The petitioners’ second contention is that the respondent erred in disallowing as a deduction the amount of $3,175, representing double liability of the estate upon bank stocks owned by the decedent. With this contention we agree. In Matteson v. Dent, 176 U. S. 521, an individual owning stock in a national bank died while the stock was owned by him and registered in his name. Subsequent thereto, the bank became insolvent and an assessment was made against the widow and heirs of the decedent who received the stock when the property of the estate was administered. The Supreme Court of the United States said:

⅜ * * Because tlie insolvency of tlie bank took place after the death of Matteson, did it result that the assessment, which was predicated upon the insolvency, was not a debt of his estate? To so decide the statute must be construed as imposing the liability on the shareholder for the amount of his subscription when necessary to pay debts, only in case insolvency arises during the lifetime of the shareholder. In other words, that all liability of shareholders, to contribute to pay debts, ceases by death. This construction, however, would be manifestly unsound. The obligation of a subscriber to stock, to contribute to the amount of his subscription for the purpose of the payment of debts, is contractual, and arises from the subscription to the stock ⅜ * *. The obligation to respond is engendered by and relates to the contract from which it arises. This contract obligation, existing during life, is not extinguished by death, but like other contract obligations survives and is enforceable against the estate of the stockholder.

Section 303 (a) (1) of the Revenue Act of 1926 provides that there shall be deducted from the value of the gross estate such amounts for claims against the estate, to the extent that such claims were incurred or contracted bona fide and for an adequate and full consideration in money or money’s worth, as are allowed by the laws of the jurisdiction under which the estate is administered. Under the decisions of the courts of Ohio, the estate of the decedent became liable for the payment of the double liability on the bank stock as soon as the assessment was levied. Kulp v. Fleming, 65 O. S. 321; 62 N. E. 334; and State ex rel Fulton v. Bremer, 130 O. S. 227; 198 N. E. 874. In our opinion the amount assessed for double liability on bank stock represented a valid claim against the estate of the decedent and should have been allowed as a deduction.

The next contention of the petitioners is that the respondent erred in disallowing as a deduction the indebtedness of the decedent upon pledges made by him to the charitable institutions. It was stipulated that these pledges were “made in consideration of similar pledges of others” and were “of such character as to require payment in full had assets of the estate been available.” While the stipulation of the parties as to the legal effect of a transaction or series of events is not binding upon this Board, we are of the opinion that these pledges were valid claims against the estate and that they were incurred or contracted bona fide, and for an adequate and full consideration in money or money’s worth. The amount of such pledges should have been allowed as a deduction. (Jeptha H. Wade, Jr., et al., Executors, 21 B. T. A. 339; Frances Plumer McIlhenny et al., Executors, 22 B. T. A. 1093, 1105; David A. Reed et al., Executors, 24 B. T. A. 166, 172; Robert A. Taft, Executor, 33 B. T. A. 671, 677, 678.)

The issues heretofore discussed are common to the three proceedings. Although they have been decided in favor of the petitioners, there will be a small deficiency due to the fact that two issues relating to the value of bank stocks were abandoned by the petitioners and no evidence was offered with respect to them. It becomes necessary therefore to determine another issue raised by the petitioners in Docket Nos. 79428 and 80859. They contend that the respondent erred in determining or asserting a deficiency in estate tax against them.

The notice of deficiency in Docket No. 79428 was addressed to Edna Feiss Hays “Trustee and Beneficiary”; and in Docket No. 80859 to the four petitioners now before us, followed by the words, “Trustees and Fiduciaries.” The deficiency notices stated: “Pursuant to section 315 (b) and section 316 of the Revenue Act of 1926, there is proposed for assessment against you the sum of $10,589.96, plus interest thereon.” The notice addressed to Edna Feiss Hays stated that the amount proposed for assessment constituted her “liability as a beneficiary of life insurance upon the life of the decedent, Eugene K. Hays” while those addressed to the petitioners in Docket No. 80859, stated that the amount proposed for assessment constituted their “liability as trustees of life insurance upon the life of the decedent, Eugene K. Hays.”

We show in the margin the pertinent provisions of section 315 (b) and section 316 of the Revenue Act of 1926.

The petitioners concede that, as beneficiaries of insurance taken out upon the life of the decedent, they are liable for Federal estate tax to the extent provided in section 315 (b), supra. They argue, however, that the Commissioner may proceed against them only in a court of general jurisdiction and that they are not liable as transferees of the property of the decedent under the provisions of section 316, supra, for the deficiency in tax.

Under the applicable provisions of the Federal estate tax law, the “gross estate” of a decedent is not limited to the assets which pass to the executors, or over which the local probate court has jurisdiction, and to which the creditors of the decedent may look for the payment of their claims. It includes other items such as transfers of property made in contemplation of death, or to take effect at or after death, and insurance proceeds, in excess of $40,000 payable to beneficiaries other than the executors on policies taken out by the decedent during his lifetime, where he, prior to his death, did not part with all legal incidents of ownership. Sec. 302, Revenue Act of 1926; Chase National Bank v. United States, 278 U. S. 327.

The decedent in this proceeding had, at the time of his death, policies of insurance upon his life aggregating $300,000. Prior to his death, he did not part with all of the legal incidents of ownership in such policies. To the extent that this insurance exceeded the $40,000 exemption provided for in section 302 (g), sufra, it was includible in his gross estate. Edna Feiss Hays received $15,000 of this insurance, and the trustees, under the insurance trust agreement, received $285,000. They were therefore distributees of property of the decedent.

Section 316 (e), supra, provides that the term “transferee” includes heir, legatee, devisee, and distributee. Petitioners argue that if Congress had intended that beneficiaries of life insurance should be included within the term “transferee”, it would have included the word “beneficiary” in section 316 (e). With this argument, we do not agree. That it was the intention of Congress that beneficiaries of life insurance could be proceeded against as transferees where an estate is insolvent and unable to pay a deficiency in estate tax, is clearly shown in the following excerpt from the “Statement of the Managers on the part of the House” to be found on page 50 of the Conference Report on the Revenue Bill of 1926 (Rept. No. 356, 69th Cong., 1st sess.) :

Among the liabilities which the procedure outlined in section 316 will cover are the liability in respect of an estate tax, of an heir, devisee, distributee, or legatee of the decedent, and the liability under section 315 (b) of a transferee of a gift made by a decedent in contemplation of death, or of a specific beneficiary of an insurance contract of a decedent; * * *. [Italics ours.]

The parties to these proceedings have stipulated that the decedent’s estate as of the date of death and at all times subsequent thereto, was and is insolvent and that the estate will be unable to pay any part of the deficiency in tax which is due. The purpose of section 316, supra, was to provide for such a contingency and to permit the respondent to enforce such liability against transferees of property of a decedent. Petitioners in Docket Nos.' 79428 and 80859 having received proceeds of insurance policies taken out by the decedent upon his own life, in excess of $40,000, and in excess of the amount of the deficiency which we have here found to be due, are transferees and are liable as such for the amount of the deficiency.

The final contention of the petitioners in Docket Nos. 79428 and 80859 is that even if they are liable as transferees, their liability is limited to the deficiency in tax, and that they are not liable for the deficiency plus interest.

A similar contention was made in Louisiana & Arkansas Railway Co., 28 B. T. A. 153. In that case the corporation acquired all the assets of another corporation and agreed to assume its obligations. A deficiency plus interest, was asserted against it as transferee. It paid the deficiency but denied its liability for interest. The Board held that the Commissioner could determine a liability against a transferee, not only for a deficiency, but also for “interest, additional amounts, and additions to the tax provided by law” and that such a determination was subject to the same process as the determination of a deficiency. The transferee was held to be liable for the interest on the deficiency determined by the respondent. Upon appeal the decision was affirmed by the Circuit Court of Appeals for the District of Columbia (70 Fed. (2d) 286).

The section of the statute involved in Louisiana & Arkansas Railway Co., supra, was section 280 (a) of the Eevenue Act of 1926. This section is substantially the same as section 316 (a) supra, the only difference between the two sections being that the former covers transferee liability with respect to income, excess profits and war profits taxes, while the latter relates to transferee liability with respect to estate taxes. In determining transferee liability the same tests are applied under both provisions. We are of the opinion, therefore, that the decision of this Board and of the court in the Louisiana & Arkansas Railway Co. case is decisive of the question here presented and the petitioners are liable for the deficiency, including interest. See also R. T. Buzard et al., 29 B. T. A. 981; affd., 77 Fed. (2d) 391.

Judgment will be entered under Rule 50.

       Sbc. 315. (b) If (1) the decedent makes a transfer, by trust or otherwise, of any property in • contemplation of or intended to take effect in possession or enjoyment at or after his death (execpt in the case of a bona fide sale for an adequate and full consideration in money or money’s worth) or (2) if insurance passes under a contract executed by the decedent in favor of a specific beneficiary, and if in either case the tax in respect thereto is not paid when due, then the transferee, trustee, or beneficiary shall be personally liable for such tax, and such property, to the extent of the decedent’s interest therein at the time of such transfer, or to the extent of such beneficiary’s interest under such contract of insurance, shall be subject to a like lion equal to the amount of such tax. Any part of such property sold by such transferee or trustee to a bona fide purchaser for an adequate and full consideration in money or money's worth shall be divested of the lien and a like lien shall then attach to all the property of such transferee or trustee, except any part sold to a bona fide purchaser for an adequate and full consideration in money or money’s worth.
      Sec. 316. (a) The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this title (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds) :
      (1) The liability, at law or in equity, of a transferee of property of a decedent or donor, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed by this title or by any prior estate tax Act or by any gift tax Act.
      (2) The liability of a fiduciary under section 3467 of the Revised Statutes in respect of the payment of any such tax from the estate of the decedent or donor.
      Any such liability may be either as to the amount of tax shown on the return or as to any deficiency in tax.
      *******
      (e) As used in this section, the term “transferee” includes heir, legatee, devisee, and distributee.


source: Caselaw Access Project

author: Leech :

license: Public Domain

text:
    Anna Ball Kneeland, Yale Kneeland, Jr., Williamson Pell and United States Trust Company of New York, Executors of the Will of Yale Kneeland, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79748.
    Promulgated July 23, 1936.

      George L. Shearer, Esq., for the petitioners.

      J. R. Johnston, Esq., for the respondent.
   OPINION.

Leech :

Respondent contends, first, that the disputed transfer was made in contemplation of death, within the meaning of section 302 (c) of the Revenue Act of 1926, as amended by section 803 of the Revenue Act of 1932. The premise of that contention is entirely factual. Whether the transfer occurred more or less than two years before decedent’s ■ death is not decisive of the question. The presumption, in either event, is against petitioners, but this presumption is rebuttable. Heiner v. Dorman, 285 U. S. 312. It is rebutted here, as we have found. The evidence establishes the purposes motivating the transfer were the reduction of income taxes, the avoidance of gift taxes, and, as a corollary thereof, the equalization of the incomes of decedent and his wife. These are purposes associated with life rather than death. United States v. Wells, 283 U. S. 102.

Decedent suffered an attack of infantile paralysis in early childhood, which left him lame, but with no organic trouble. Despite his lameness through college, he was active in the outdoor sports of tennis and horseback riding. His health was good until 1923 when he became afflicted with rheumatoid arthritis, from which he was never cured. During this affliction, decedent was attended by highly eminent general physicians and specialists in arthritis. One of the most eminent was also his intimate personal friend. Decedent’s son who was, at the time of decedent’s illness and had been for several years prior thereto, a physician, also treated decedent a part of the time. This disease is a systemic infection, the source of which is unknown. It does not affect the organs of the body, but stiffens the joints and runs a course covering a maximum period of 10 years. It ordinarily “burns itself out” when the body has set up sufficient resistance to stop its progress. The effect of the disease depends largely upon the period of its activity, and thus may leave the patient with little or no apparent injury, with enlarged or partially stiffened joints, or, in severe cases, a permanent cripple. The ailment does not cause death, nor necessarily shorten life. Decedent was advised by his physicians of this diagnosis and prognosis first in 1924 and many times thereafter during his life. He always believed it to be true. Frequently, 'before and after the transfer in question, as late as a month before his death, decedent indicated his belief _that the disease would not .be fatal. As the ailment progressed, decedent underwent several operations on his knees, to improve their mechanical use. The last of these operations occurred during 1929. He recuperated normally and was benefited by each of these operations, but used a wheel chair a part of the time. In late 1927 decedent contracted pleurisy, resulting from treatment for his arthritis. During the summer of 1928 he recouped his weight and ordinary health lost by the attack of pleurisy. There was no marked change in his arthritis during 1930, 1931, and 1932. His heart, lungs, abdomen, and blood pressure were normal, and, except for the arthritis, he was in very good physical condition, for a man of his years, during that time.

While.at his farm in Vermont, about July 20, 1933, decedent took an apparently slight cold, followed shortly by a hemorrhage of the lung. It was first thought he had tuberculosis. Decedent did not believe this. He was brought back to New York on September 20, 1933. After extensive tests, it was found the hemorrhage resulted from a bronchiectasis. This development was neither known nor suspected by the physicians or decedent. After these tests, it was decided that decedent was suffering, not from tuberculosis, but from pneumonia, possibly a chronic pneumococcus or pneumonia germ infection of the chest. This latter diagnosis was confirmed about December 20, 1933. On December 22, 1933, it was pronounced terminal pneumonia, from which decedent died December 26, 1933. He Avas bedridden from the date of the hemorrhage, in July 1933.

During the summer of 1933, at the farm in Vermont, decedent, with his wife, planned the celebration of their fortieth wedding anniversary for 1935, and a trip to China as soon as the arthritis had finished its course. On being taken from the farm to New York, decedent indicated his expectation of returning the next summer. He was consistently optimistic, and expected to live and enjoy life, free from the pain, discomfort and inconvenience of arthritis, when that had run its course. He sold his seat on the New York Produce Exchange in August 1933, after the hemorrhage, for $2,100, although the amount of the gratuity fund maintained in connection with the exchange, payable to decedent’s family at his death, was $5,360. Decedent had engaged in the export grain business until 1925 when, because of its uncertainty, he retired from that business and invested his large estate in stocks and bonds. He placed these in the hands of the United States Trust Co. of New York, as his agent, to collect his income and keep his account. He continued thereafter to direct all purchases and sales for his account.

The respective incomes of decedent and Mrs. Kneeland for the following years was:

Decedent’s brother-in-law, Williamson Pell, was vice president of the United States Trust Co. of New York, and a very intimate personal friend of decedent. On Pell’s advice, for the purpose of reducing income taxes, decedent had created several trusts for his two children. (See Emily J. Pratt et al., Executrices, 18 B. T. A. 377.) The last two of these trusts were created for his son in November and December 1929. When decedent died, the annual income payable to each of his children from these trusts was about $15,000.

Decedent was a collector of first editions, and his wife, who, before the present transfer, had a substantial income of her own, collected porcelains. They exchanged many such gifts. During 1929 and 1930 decedent gave his wife porcelains costing him approximately $36,000. His brother-in-law, and vice president of the United States Trust Co. of New York, Williamson Pell, knew of decedent’s habit of spending these large amounts on presents for his wife, and that it would probably continue. Pell and decedent knew of the provisions in the then pending Revenue Act of 1932, reenacting gift taxes. Pell advised decedent to create a trust for his wife, for the purpose of effecting a saving in his income tax, and possibly a gift tax, and equalize the respective incomes of decedent and his wifé. At decedent’s direction, Pell drew and submitted the trust in question. After its execution, decedent and his wife paid for their respective gifts to each other of first editions and porcelains. Neither decedent nor Pell, before or after the execution of the disputed trust, indicated any purpose of avoiding death taxes. The only objects of the trust discussed by decedent or Pell at either time were those that we have found motivated the transfer.

Although an examination of the facts in other cases is not always helpful in determining motive (B. Paul Mossman, Executor, 32 B. T. A. 596), it may be so in learning the attitude and approach of the courts to the question.

Thus, the facts here are certainly no less strong for petitioners than those in United States v. Wells, supra. True, decedent executed a new will simultaneously with the trust, making changes in an earlier will, occasioned by the trust. But, though that fact might, under some circumstances, have considerable significance (Edgar A. Igleheart et al., Executors, 28 B. T. A. 888; aff'd., 77 Fed. (2d) 704), it is not controlling. Particularly is this so, where, as here, the record demonstrates so clearly the motivating purpose for the creation of the trust to have been other than contemplation of death Avithin the meaning of the controlling statute. That, and that alone, is decisive here. Having reached that conclusion as to the object of the trust, the new will was simply its logical practical complement.

Respondent urges that the pneumonia infection from which decedent died was a direct or indirect derivative of the same germ causing decedent’s arthritis. Although the pleadings, as constituted, tend to establish this as a fact, the testimony, admitted without objection, seems to seriously question, if not wholly contradict its accuracy. In any event, such fact, even if proved, is not controlling and does not disturb the premise upon which our factual conclusion is based. That premise is that decedent, throughout his lifetime, at least until after his execution of the pending trust, was informed and believed that the rheumatoid arthritis, from which he was then suffering, would not cause his death nor shorten his life.

The contention of the respondent that the transfer was one to “take effect in possession or enjoyment at or after death” is without merit. The transfer, in so far as the decedent was concerned, was absolute. He had no further interest in the trust corpus even if his wife should predecease him. Upon that evént it would go in equal shares to his two children. Under this conveyance, decedent’s wife was entitled to the entire income of the trust property from the date of the execution of the instrument for the full term of her life and her right to enjoy the income was subject to change by no power reserved by the grantor to himself or granted by him to a third party. At most, the interest retained by the grantor under the instrument was no more than “a mere possibility of reverter” predicated upon the contingency that his wife might, during his lifetime, exercise hei power to revoke the trust. This contingency was beyond his legal control. At his death, without its occurrence, no interest passed from his possession, enjoyment or control. There is no basis for the contention that the transfer was one to take effect in possession or enjoyment at or after the grantor’s death. The recent decision of the United States Supreme Court in Helvering v. St. Louis Union Trust Co., 296 U. S. 39, is controlling on this point. In that case the Court, in a situation substantially similar to that here presented, said:

If, therefore, no interest in the property involved in a given case pass “from the possession, enjoyment or control of the donor at his death,” there is no interest with respect to which the decedent has created a trust intended to take effect in possession or enjoyment at or after his death. 'The grantor here, by the trust instrument, left in himself no power to resume ownership, possession or enjoyment except upon a contingency in the nature of a condition subsequent, the occurrence of which was entirely fortuitous so far as any control, design or volition on his part was concerned. After the execution of the trust he held no right in the trust estate which in any sense was the subject of testamentary disposition. His death passed no interest to any of the beneficiaries of the trust, and enlarged none beyond what was conveyed by the indenture. His death simply put an end to what, at best, was a mere possibility of a reverter by extinguishing it — that is to say, by converting what was merely possible into an utter impossibility. * * *

The third position of respondent is that under the transfer in trust the enjoyment by the beneficiary of the interest conveyed was subject, at the time of decedent’s death, to a change through the exercise of a power, either by the decedent alone or in conjunction with another person, to revoke the trust.

This contention is premised upon that provision of the trust instrument, set out in the findings of fact, which specifically grants to the beneficiary, and the beneficiary alone, the right to revoke the trust. Thus the sole question is whether or not the power to revoke, granted to the beneficiary of the trust but neither reserved by the grantor to himself nor subject to exercise by him, constitutes here a reservation under the trust instrument, of power by the grantor to cause its revocation.

It is argued that the granting of a power to the beneficiary in circumstances such as these, where the beneficiary is the wife of the grantor, and through her love and affection may be induced to carry out the grantor’s wishes to the extent of execution of any instrument which he may wish executed, is equivalent to a reservation of a power to revoke. We are told that, under such conditions, the grantor has the power, and may exercise it at any time, to repossess himself of the property conveyed.

It may possibly be true that such condition exists and that the decedent could, at any time after the execution of this trust indenture, have induced his wife to execute a revocation of the trust. However, if he possesses this power it is in no sense a legal power and certainly is not a power reserved to him under the trust instrument. Such a power is one that comes of the association of the individuals and the love and affection borne by each to the other.

There is no indication that any such power as this was contemplated by Congress in its enactment of the section of the statute relied upon by respondent. We know of no authority for the proposition, that a husband’s influence over his wife through her love and affection for him, sufficient to secure a release to him of her legal rights, constitutes a legal power to alter or impair her right of enjoyment of her property. None of the cases cited by the respondent support this theory. Its soundness is shattered by the recognition that a husband can legally complete a gift to his wife. See Bingham v. White, 31 Fed. (2d) 574.

If there were any doubt upon this question, it is decided by the recent decision of the Supreme Court in White v. Poor, 296 U. S. 98. There the transfer in trust contained no reservation of power to the grantor to amend or revoke. That power was granted to the trustees, alone. After the execution of the instrument, one of the trustees resigned and those remaining exercised the power granted in the trust to appoint a new trustee. They designated the grantor as trustee to fill the vacancy; Thereafter the grantor, as trustee, possessed the power, in conjunction with the other trustees, to terminate the trust. The Supreme Court held that the power possessed by the grantor, at her death, to thus participate in the termination of the trust was not reserved to her under the trust instrument within section 302 (d), supra, but was received subsequently through action of the trustees and beneficiaries. See also Helvering v. Helmholz, 296 U. S. 93; Valentine Bliss, 26 B. T. A. 731.

Decision will be entered for the petitioners.


text:
    Kenneth K. Bechtel, Petitioner, v. Commissioner of Internal Revenue, Respondent. Stephen D. Bechtel, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 75485, 75486.
    Promulgated July 24, 1936.

      Max Thelen, Esq., Robert L. Bridges, Esq., and Paid S. Marrin, Esq., for the petitioners.

      G. P. Reilly, Esq., for the respondent.
   OPINION.

Leech :

In determining the deficiency here in question respondent has determined that the stock of the W. A. Bechtel Co. had a fair market value on December 26, 1931, of $175 per share and that the transfer of stock to the two petitioners by their father at a purported consideration of $100 per share was, in effect, a sale of four-sevenths of the transferred stock for an aggregate consideration of $39,000, and was a gift of the remaining three-sevenths of such stock. Accordingly, he treated the three-sevenths determined by him to have been a gift, as separate property of the petitioner in each case, and three-sevenths of the total dividend paid in each instance to be taxable to the respective petitioner. The remaining four-sevenths he treated as community property. Respondent now asks an increase of the deficiency in each case on the theory that the entire 390 shares of stock acquired by each petitioner were the separate property of the latter and all of the dividends received on such stock were taxable to them individually.

The California Civil Code provides:

Sec. 163. All property owned by the husband before marriage, and that acquired afterwards by gift, bequest, devise, or descent, * * * is his separate property.
Seo. 164. All other property acquired after marriage by either husband or wife, or both, including real property situated in this state, and personal property wherever situated, heretofore or hereafter acquired while domiciled elsewhere, which would not have been the separate property of either if acquired while domiciled in this state, is community property; * * *
Sec. 687. Community property is property acquired by husband and wife, or either, during marriage, when not acquired as the separate property of either.

. The rule is clear under the California decisions, that property acquired by residents of California during coverture is presumed to' be community property and that before such property can be treated as separate property this presumption must be overcome by evidence that it was acquired with funds constituting the separate property of the husband or wife, was acquired upon the credit of the separate property of one or the other, alone, as distinguished from the credit of the community, or was acquired by gift. Dunn v. Mullan, 211 Cal. 583; 296 Pac. 604; Fountain v. Maxim, 210 Cal. 48; 290 Pac. 576; Moulton v. Moulton, 182 Cal. 185; 187 Pac. 421. The Board has recognized this rule. As we said in Alanson Weeks, 31 B. T. A. 627:

So, that, whether or not the property in question was separate or community, i. e., whether or not the EUis case, cited by the respondent, or the Schuyler case, relied upon by the petitioner, should be'followed, depends upon whether or not that presumption that the borrowed funds with which the stock was purchased were community funds, has been successfully overcome. We are of the opinion that it has not.

Here the disputed stock was acquired by each of these petitioners during their marriage and residence in California. Thus the presumption arises in each case that such stock is community property. It has been so considered by the petitioners and their wives. The issue here submitted in each case is determined by the answer to the inquiry as to whether the evidence is sufficient to rebut the legal presumption.

Respondent argues that, because the sale price of the stock was less than its fair market value, the excess above that value constituted a gift; and that, since the sole security for the payment of both notes for $39,000 was the stock acquired, it must follow that the credit given in the transaction for the portion of stock actually sold, was on the security of the three-sevenths of the stock acquired by gift as the separate property of the individual petitioners. He contends that those facts and circumstances rebut the presumption under California law that the stock on which the disputed dividends were paid was acquired as part of the community estate, and that the case is controlled by In Re Ellis' Estate, 203 Cal. 414; 264 Pac. 743.

This position is premised upon a gift to petitioners of three-sevenths of the stock they here respectively acquired. In our opinion, the fact of a gift is contradicted by the record here.

A standard definition of gift is: “A voluntary transfer of property by one to another, without any consideration or compensation therefor.” Blair v. Rosseter, 33 Fed. (2d) 286; C. B. Wilcox, 27 B. T. A. 580.

Intent to make a gift is a sine qua non of a gift. Blanche S. Ross, 28 B. T. A. 39; affd., 67 Fed. (2d) 989; Arthur H. Lougee, 26 B. T. A. 23; affd., 63 Fed. (2d) 112. The presence of consideration here contradicts an intention to make a gift (Noel v. Parrott, 15 Fed. (2d) 669; certiorari denied, 273 U. S. 754), particularly since the law imposed no gift tax and no benefit, to the transferor, was apparently obtainable by artificially clothing a gift as a sale.

Here the facts disclose that both the transferor of the disputed stock and its recipients, the petitioners, intended the transaction to be a sale and not a gift. Consideration passed. It is true that the fair market value of the transferred stock was in excess of the price specified in the contract. But, nevertheless, it was a transfer for a very valuable monetary consideration. And, there was additional consideration in the form of past and future services to the company in which the father was deeply interested financially, as well as for personal reasons. Arthur L. Lougee, supra; Bass v. Hawley, 62 Fed. (2d) 721.

Although we are of the opinion that the transfers by W. A. Bechtel of all of this stock to the petitioners, his sons, were sales and not gifts, assuming that three-sevenths of the stock transferred was a gift, as respondent contends, then it would seem that the intent of the donor was to make a gift of that stock to the respective communities, from which it-would properly follow that such stock was so given and received.

Nor is the designation in each contract of December 26, 1932, of the pledgor as the “sole owner” of the stock, and the dividends thereon as his “absolute property”, controlling here. In construing a written agreement, we are not restrained by the parol evidence rule which operates only between the parties thereto. Peugh v. Davis, 96 U. S. 832. This Board is entitled, in the circumstances, to know the conditions and circumstances surrounding the parties at the time the contract was made, so as to put us, as nearly as possible, in the position of those parties. Commissioner v. Darnell, Inc., 60 Fed. (2d) 82. When this is done here, the importance of those references is nullified. In each case the agreement was drawn by the attorney, to effect a certain result. That was the guarantee of payment of each note and the protection of each petitioner in the matter of stock rights as against the holder of the note. The attorney considered that, under the conditions of these transfers, each petitioner received the stock as community property, and communicated this opinion to petitioners and their father.

The respondent argues that the failure of the respective wives of the petitioners to execute the agreement of March 19,1932, containing the mutual options, and the execution of a certificate evidencing their understanding of the agreement and releasing their claims to the proceeds of the insurance policies therein provided to be taken out by their husbands, except to the extent entitled thereto as beneficiaries of their husbands’ estates, contradict the theory that petitioners acquired this stock as community property. We do not agree. The explanation of these circumstances by the attorney who drew the original contracts of December 26, 1931, as well as the option agreements, three months later, is reasonable and convincing. The consent of the wives of the petitioners to the option agreement was evidenced because of the understanding that the stock was community property, and to preclude the raising of any question as to the right of the wives to any part of the proceeds of the insurance policies to be taken out by their husbands. Without such releases, the wives of the petitioners might have claimed a part of those proceeds on the ground that the premiums thereon had been paid from dividends received on the stock or from other community income. See New York Life Insurance Co. v. Bank of Italy, 60 Cal. App. 602; 241 Pac. 61; Union Mutual Life Insurance Co. v. Broderick, 196 Cal. 497; 238 Pac. 1034; Dixon Lumber Co. v. Peacock, 217 Cal. 415; 19 Pac. (2d) 233. We conclude that the record evidence does not rebut the legal presumption here effective that the 390 shares of stock acquired by each of these petitioners was community property, and taxable as such.

Decision will be entered mider Rule 50.


author: Van Fossan :

text:
    N. V. Koninklijke Hollandische Lloyd, (Royal Holland Lloyd), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78662.
    Promulgated July 24, 1936.

      Raymond N. Beebe, Esq., and Raymond 0. Omhwa, Esq., for the petitioner.

      'William E. Davis, Esq., for the respondent.
   OPINION.

Van Fossan :

This proceeding was brought to redetermine a deficiency in the income tax of the petitioner for the year 1932 in the sum of $49,749.83, together with a penalty of $12,437.46 for delinquency.

The sole issue is whether or not moneys received by the petitioner, a foreign corporation, in payment of a judgment in its favor against the United States as the result of a suit in the Court of Claims for damages for the illegal detention of the petitioner’s steamship during the War, constituted income from sources within the United States and, as such, was subject to tax.

The imposition of the penalty raises a dependent issue.

The facts were stipulated substantially as follows:

The petitioner is, and was at all times material hereto, a corporation organized and existing under the laws of The Netherlands, with its principal office at Amsterdam, The Netherlands.

During the year 1917 the petitioner was the owner and operator of a fleet of ocean-going steamships, and was engaged in the business of transporting passengers and freight between the ports of various nations and on the high seas. One of said ships was the steamship Zeelandia, which prior to October 17, 1917, was engaged in transporting passengers and freight between The Netherlands and South American ports, touching at North American ports enroute.

In September 1917 the Zeelandia sailed from South American ports for The Netherlands, via New York, carrying a cargo, all of which was consigned to Netherlands Oversea Trust Co., at various ports of The Netherlands; and also carrying about fifty-five passengers, some of whom were United States naval officers who took passage to New York, and mails destined for the United States. When the Zeelandia arrived off New York Harbor she carried a full supply of provisions, stores, and fuel sufficient to enable her to continue her voyage to The Netherlands without taking on additional stores or provisions, provided no additional passengers were taken on at New York. The passengers and mail could have been discharged by tugs beyond United States waters, but relying on the assurances of customs officials that the vessel might come into New York Harbor and be cleared out without hindrance, the Zeelandia came into the harbor of New York on October 16, 1917.

On October 17, 1917, an official of the petitioner applied to the United States Shipping Board for a license to take additional stores on the Zeelandia to enable her to carry a number of stranded Dutch citizens who desired to book passage to Holland. On October 22, 1917, not having received a reply to its application, the petitioner abandoned its plan to transport the additional Dutch passengers and applied for clearance of the Zeelandia from the port of New York. The United States customs officials refused clearance on the ground that petitioner did not submit an export license for the vessel’s transit cargo, bunkers, and stores. On the same day, petitioner applied, under protest, for an export license for such transit cargo, bunkers, and stores. From October 22, 1917, until March 21, 1918, officials of the United States Government refused to permit the Zeelandia to leave New York Harbor.

On March 21, 1918, the United States formally seized, requisitioned, and took over the steamship Zeelandia and placed her in the active service of the United States, and subsequently the petitioner was paid by the United States for the use of the vessel after that date.

For several years thereafter the Government of The Netherlands unsuccessfully attempted to procure a diplomatic settlement through the State Department of the United States, of the claim of the petitioner against the United States for the damages sustained by it by reason of the refusal of the Government authorities to grant clearance to the Zeelandia during the period from October 17, 1917, to March 21, 1918. On March 3, 1927, the Congress of the United States enacted the following act:

An Act for the Relief of the Royal Holland Lloyd, a Netherlands corporation of Amsterdam, The Netherlands.
Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled: That the claim of the Royal Holland Lloyd, owners of the Netherlands steamship Zeelandia, against the United States for damages alleged to have been sustained as a result of the refusal of the Federal authorities to grant clearance to the vessel during the period from October 17, 1917, to March 21, 1918, may be sued for by the said Royal Holland Lloyd in the United States Court of Claims, and said court shall have jurisdiction to he?„r and determine such suit to judgment and either party shall have the right of appeal: Provided, That such notice of the suit shall be given to the Attorney General of the United States as may be provided by order of the said court, and it shall be the duty of the Attorney General to appear and defend for the United States: Provided further, That said suit shall be brought and commenced within four months of the date of the passage of this Act.

Thereafter, pursuant to the said act, the petitioner instituted a suit against the United States in the Court of Claims. On December 7, 1931, the Court of Claims decided that petitioner was entitled to recover $446,826.22, together with interest, as follows:

Loss of use of vessel_$332, 292. 20
Cost and loss on coal- 30, 602. 02
Wages and premiums to crew- 49, 086. 00
Cost of provisioning crew_ 19,126. 00
Cost of repairs and survey and deck and engine room supplies_ 7, 500.00
Cost of port expenses_ 4,192. 50
Cost of water consumed_ 850. 50
Cost of insurance_ 3,177. 00
446, 826. 22

See Royal Holland Lloyd v. United States, 73 Ct. Cls. 722.

On July 18, 1932, the petitioner received from the United States Government a warrant in the amount of $531,356.95 in partial payment of the judgment of the Court of Claims. The payment included damages for the market value of the use of the Zéelandia, and also for the cost and loss of fuel, wages, various repairs, port expenses, water, insurance, and like items, exclusive of any allowance for overhead or advertising expenses, by reason of the refusal of the United States to grant clearance of the steamship ZeelamMa, and the refusal to permit her to leave the harbor of New York from October 22, 1917, to March 20, 1918, together with interest in the amount of $84,531.73.

During the calendar year 1932 and at all times prior thereto the steamship Zeelandia was documented under the laws of The Netherlands; and at all times material hereto the laws of The Netherlands granted to citizens of the United States and to corporations organized in the United States an equivalent exemption to the one granted to the operators of ships under a foreign flag by section 231 (b) of the Revenue Act of 1932.

During the year 1932 the petitioner was not engaged in business in the United States and did not maintain an office for employees kept within the United States.

On May 24, 1933, the collector of internal revenue addressed a letter to the petitioner at Amsterdam, stating that the Bureau of Internal Revenue had determined that the petitioner had realized taxable income in the amount of $416,822.93 during the year 1932 as the result of the judgment of the Court of Claims in the case herein-before mentioned; that letter informed the petitioner that a return should be filed on or before June 15, 1933. Upon receiving said letter, on June 20, 1933, the petitioner sent a radiogram to its United States attorneys, Davies, Jones, Beebe & Busick, of Washington, D. C., stating the receipt of the said letter, and requesting its attorneys to apply for an extension of time for filing the return. On June 21, 1933, the petitioner’s attorneys addressed a letter to the collector requesting an extension of time sufficient to enable the petitioner and its attorneys to investigate the question of whether or not there was a liability for income taxes on the part of the petitioner. Such request for an extension was denied for the reason that it was not made on or before June 15, 1933. After certain correspondence between the petitioner and its attorneys in the United States, a return for the year 1932 was filed on or about November 27,1933. That return set out the facts with reference to the payment of the judgment of the Court of Claims, and the petitioner’s contention that no part of the said judgment constituted taxable income.

The Commissioner based his deficiency notice on the following ground:

Tlie compensation determined by tbe Court was based upon tbe boat charter value, that is, tbe amount which it is estimated the corporation would have received if it had not been refused clearance by the United States authorities and could have chartered its boat. It is held that the amount of the award and interest thereon represents taxable income from sources within the United States * * * and therefore taxable under the provisions of section 119 (a) (4) of the Revenue Act of 1932.

The petitioner is a foreign corporation and its gross income is limited by section 231 (a) of the Revenue Act of 1932, which provides :

(a) General Rule. — In the case of a foreign corporation gross income includes only the gross income from sources within the United States.-

The phrase “income from sources within the United States” is defined by section 119 (a) of the same act to include the following general heads:

(1) Interest (on bonds, notes or other interest-bearing obligations of residents, corporate or otherwise, etc.)
(2) Dividends
(3) Personal services
(4) Rentals and royalties
(5) Sale of real property.

Section 119 contains no definition of income of a general or all-inclusive nature such as is found in section 22 (a) and, therefore, the income shown to be taxed must come strictly within the limits of the statutory requirements.

It is at once obvious that the amount received by the petitioner does not come within the classification of subdivisions 2, 3, or 5. Subdivision 4 of section 119 on which the respondent relies is as follows:

(4) Rentals and Royalties. — Rentals or royalties from property located in the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using in the United States, patents, copyrights, secret processes and formulas, good will, trade marks, trade brands, franchises, and other like property.

We are unable to agree with respondent in this position. The payment made to the petitioner by the United States did not consist of rentals or royalties — it was in settlement of a judgment obtained as just compensation for damages for the unlawful detention of the petitioner’s property. It matters not that the damages may have been measured in part by the “loss of use of the vessel.” The sum received by the petitioner remains the payment of a judgment for damages and does not constitute rent “from property located in the United States.”

Nor do we believe the payment, or any part of it, falls within the first subdivision entitled “interest.” Under well established rule, the “interest” was included in the judgment as part of just compensation for damages sustained. Seaboard Air Line Railway v. United States, 261 U. S. 299; Brooks-Scanlon Corporation v. United States, 265 U. S. 106; Phelps v. United States, 274 U. S. 341. The Board held in Consorzio Venesiano di Armamento e Navigazione, 21 B. T. A. 984, that a payment by the United States to a foreign corporation as just compensation for the taking of property for public use, which payment included an amount equivalent to interest for the period of use, did not result in income under the section here involved. We see no difference of principle in the case at bar. Here, the stipulation denominated the sum of $84,531.73 as the “amount received for damages measured by interest” and in its opinion the Court of Claims stated: “The plaintiff is entitled to interest, as has been said, because such allowance is ‘rightful’ and is necessary adequately to compensate it for the damage.” The facts here are more strongly in favor of the petitioner than those in the Consorzio Venesiano di Armamento e Navigazione case. Nor does the holding of the Supreme Court in Helvering v. Stockholms Enskilda Bank, 293 U. S. 84, require a contrary result. There the Court held (1) that under specific statutory provision a refund was an interest-bearing obligation of the United States, and (2) that the United States was a “resident” within the meaning of the pertinent statute. Here the obligation of the United States is to make just compensation for the unlawful detention of the vessel. Just compensation for the damage so suffered requires that the party damaged be made whole. An integral part of a payment for such purpose is interest covering the period of detention. In such a case it is merely a convenient method of measuring the amount of one of the factors of damage. It is not a separable item of interest on an obligation.

We are of the opinion that the payment received by petitioner was not taxable.

Reviewed by the Board.

Decision will he entered for the f&bitioner.

TueneR dissents.

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


author: Sternhagen :

text:
    H. Stanley Hinrichs, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80700.
    Promulgated July 24, 1936.

      Oscar P. Mast, Esq., for the petitioner.

      Wilford H. Payne, Esq., for the respondent.
   OPINION.

Sternhagen :

The Commissioner determined a deficiency of $215.60 in the petitioner’s individual income tax for 1933 by disallowing a deduction of $520 taken upon the petitioner’s return for that year as a loss, but which the Commissioner held was sustained in 1930 when the shares in question became worthless. The proceeding was submitted entirely upon a short stipulation of the facts. From this stipulation, the Board finds as a fact that the petitioner’s five shares of Capitol Title & Guarantee Co. became worthless in 1930, that petitioner sustained a loss of the cost thereof, namely $500, in that year, which loss was not compensated by insurance or otherwise, that the said loss was not sustained in the taxable year 1933, nor was the amount of $20 contributed by the petitioner in 1930 toward the expense of proposed litigation; and concludes as a matter of law that the petitioner is not entitled to the deduction of either of the said amounts for the taxable year 1933.

The crucial evidentiary facts are, that in 1928 the petitioner purchased five shares of Capitol Title & Guarantee Co. for $500, and when the company ceased operations in 1930 its liabilities exceeded its assets, leaving nothing for the shareholders. That this investment thus became a consummated loss in 1930 is the normal inference of fact. Upon the postulate of such a sustained loss, the petitioner in 1930 contributed $20 to the expense of proposed test suits to fix liability upon the New York Title & Mortgage Co. for alleged deceit and fraudulent representation. There was no suit against the seller of the shares for recovery of the price. Petitioner himself never instituted a suit, and there is nothing in the record to indicate if or how he was to recover his unfortunate investment. While it might be supposed that he would not contribute $20 to an expense fund unless he believed there was a reasonable likelihood of return, we must take the stipulation as we find it and leave its omissions to operate against him under the normal burden of proof rule.

The opinions of the United States Court of Appeals for the District of Columbia, in Hutton v. New York Title & Mortgage Co., 71 Fed. (2d) 989, including the dissenting opinion, and of the Supreme Court of the District of Columbia, in Schaeffer v. New York Title & Mortgage Co., do not support the view that this petitioner did not finally sustain his loss in 1930, as the Commissioner has held, or that he had any reasonable prospect in that year of recovering compensation through a fraud action. Had he deducted his loss upon his 1930 return, there would have been no answer among the facts stipulated in this record to his contention that the statute did not require him to be an incorrigible optimist. United States v. White Dental Manfacturing Co., 274 U. S. 398. A deduction for a loss of investment in worthless shares of stock is available when the shares become worthless; and when such worthlessness is reasonably demonstrable in one year, the deduction may not be postponed to a later year. Gowen v. Commissioner, 65 Fed. (2d) 923. While there is enough flexibility in this rule to prevent its harsh application, the circumstances shown by the present record fix the loss in 1930 and not in 1933.

Judgment will be entered for the respondent.

       See Paul and Mei'tens, Law of Federal Income Taxation, vol. 3, § 26.67.


author: Moeeis:

text:
    Darol Trading Account, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81519.
    Promulgated July 28, 1936.

      John E. McClure, Esq., and Millard, L. ThompJeins, Jr., Esq., for the petitioner.

      B. N. McMillan, Esq., for the respondent.
   OPINION.

Moeeis:

Guided by the principles laid-down in Morrissey v. Commissioner, 296 U. S. 344, we find not the slightest “resemblance” of an incorporated body in this case. It lacks resemblance in both substance and form — in substance, in that it was never intended by the parties in interest that they should enjoy the rights, privileges, or immunities of stockholders in an incorporated enterprise — -nor did they enjoy such rights, privileges, or immunities, under the incorporation laws of the state of their activities — in form, in that they operated under no guise indicating incorporation; there were no bylaws, nor anything resembling them; there was no.corporate seal; there were no officers or directors, nor any body. even slightly resembling them; there were no certificates of ownership issued or intended to be issued for the ready transfer of interests; no meetings, similar to those customarily held by directors of a corporate .body, were held; there were no employees, the venture occupied no office space and had no mailing address other than the office of Hutton & Co., which, as agent for the optionor, Girard, brought the parties in the venture together. These factors, in and of themselves, while not decisive, are, nevertheless, persuasive. Morrissey v. Commissioner, supra.

In that case, after reviewing the applicable statute, the earlier cases, and the regulations of the Department, and after rereviewing the legislative background, the Court proceeded to define what it termed the “salient features” of a trust, “when created and maintained as a medium for the carrying on of a business enterprise and sharing its gains — which may be regarded as making it analogous to a corporate organization.”

By no stretch of the imagination could it be said that this petitioner was “carrying on” a business enterprise, within the reasonable interpretation of those words as used by the Supreme Court. Obviously, any transaction, be it ever so trivial, entered into for personal gain, may be said to be a “business” enterprise, and so restricting the matter, this petitioner would fall squarely within the definition. But, the addition of the words, “carrying on”, connotes-not only general activity, but continuity, far beyond the confines of the facts of this case. This venture was limited to the consummation of a sale of a specific block of stock. Its duration was limited by the expressed language of the option to one month from the date-thereof. Actually, however,-the venture was completed and closed within 13 days. True, 35,700 shares were dealt in, but these addi-iional shares were merely incidental to the expeditious and profitable fulfillment of the purpose of the venture.

The Court there refers to the fact that a corporate organization “as an entity, holds the title to the property embarked in the corporate undertaking.” Here, the “entity”, if there could be said to be such, within the meaning of the word, as used, owned no property. The property, the subject matter of the venture, i. e., 25,000 shares of McKesson <¾ Bobbins stock, was owned by the optionor, who was. a participant only in the sense that she had those shares to sell at a stated figure, plus 25 percent of any profit to be derived from their-sale. She, in effect said, to Hutton & Co., “I have 25,000 shares of stock, which I would like to sell, and in order that I may be insured against loss in their sale, I am willing to forego 75 percent of the profit, in order that that may be accomplished.” To this end the-two participants'joined the venture with the understanding that they would share in 75 percent of the profit merely for the assurance by them that no loss would be suffered by the optionor.

The Court refers to the fact that a trust may be perpetuated, notwithstanding the death of the owners of beneficial interest, thus-rendering themselves akin to owners of corporate shares, and also to-the fact that the “trust type of organization facilitates, as does a corporate organization, the transfer of beneficial interests without affecting the continuity of the enterprise, and also the introduction of large numbers of participants.” It is safe to say that, in the absence of provision for the transfer of the interests of the real participants in this venture, they, even if they had marketable interests, could not transfer them prior to the completion of the venture and the determination of what those interests were. Furthermore, the transferees of such interests would necessarily have to be approved by the optionor since their financial ability to indemnify against loss was of the essence of their interests in the venture. Undoubtedly the type of transfer, to which the Court refers, should be reasonably free of restriction.

Finally, the Court refers to the fact that the trust method permits of limited liability, as in the case of a corporation. It seems only necessary to point out here that the only person enjoying limited liability was the optionor — the real participants agreed to indemnify the optionor against loss in consideration of their hoped for profit in the venture.

Subdivision (a) (3) of section 1111 of the Revenue Act of 1932 provides as follows:

The term “partnership” includes a syndicate, group, pool, joint venture, or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this Act, a trust or estate or a corporation; and the term “partner” includes a member in such a syndicate, group, pool, joint venture, or organization.

In our opinion the petitioner falls squarely within the term “partnership” as defined in the foregoing provision, which was inserted for the first time in the Revenue Act of 1932.

In so deciding, we are relieved of the necessity for considering the second issue pertaining to the statute of limitations.

Reviewed by the Board.

Judgment will l>e entered for the petitioner.


author: Leech: McMahon,

text:
    George W. Lindsay, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81768.
    Promulgated July 30, 1936.

      Irving L. Brims, Esq., for the petitioner.

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

Leech:

The petitioner asks a redetermination of a deficiency in income tax of $130.35 for the year 1932. Petitioner was a member of Congress during the taxable year and claimed deductions for his hotel expenses while in Washington and railroad expenses for trips between Washington, D. C., and Brooklyn, New York, during sessions of Congress. The respondent disallowed these deductions. Petitioner assigns this disallowance as error.

The facts were stipulated as follows:

1. That the petitioner was a member of the United States House of Representatives during the taxable year 1932 and during part of that year stopped at the Raleigh Hotel, Washington, D. C., while away from his residence in Brooklyn, New York City, on official business;
2. That the aggregate amount of expenditures for meals and lodging of the petitioner while actually away from home in pursuit of his vocation and while in Washington, D. C., in connection with his duties as a member of the United States House of Representatives, was $1,087.04;
3. That the petitioner expended an aggregate amount of $550, consisting of railroad fares between his home in Brooklyn, New York City, and Washington, D. C., while in pursuit of his vocation;
4. The sole vocation or business of the petitioner during the taxable year 1932 was membership in the United States House of Representatives [and] as a Democratic State Committeeman in the State of New York. The sole income of the petitioner consisted of his salary as representative and he received no remuneration for his services as State Committeeman.
5. None of the expenditures for meals, lodging, and railroad fares in amount of $1,637.04, referred to heretofore, were made in connection with his duties as State Committeeman, but were all in connection with his duties as a member of the United States House of Representatives, and the expenditures were all made in Washington, D. C., and in traveling from Brooklyn, New York City, to Washington, D. C.
6. No part of the- expenditures made by the petitioner for lodging, meals and railroad fares has been, reimbursed to the petitioner, except $94.00 railroad fare allowed by the United States Government, and which has been deducted from the total expenditures in the petitioner’s income tax return for the taxable year 1932.
7. That the necessity of the petitioner traveling to and from his home in New York City was for the purpose of receiving visits from his constituency in connection with official affairs and for the purpose of visiting his constituents in their places of assemblage. Most of his constituents were unable to expend the money or the time from their earning activities necessarily entailed in visits to their Congressman in Washington, D. C. It was also necessary for the petitioner to return to his residence periodically for the purpose of conferring with public officials in connection with his official duties and in securing necessary information and data pertinent to official matters pending before the Congress of the United States. These contacts with his constituents were necessary and mandatory for the election and re-election of the petitioner to the office of Congressman, which represented the source of his income during the year 1932 and in fulfillment of the petitioner’s obligations to his electors.

The Revenue Act of 1982 in section 23 (a) provides:

In computing net income there shall be allowed as deductions:
(a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; traveling expenses (including the entire amount expended for meals and lodging) while away from home in the pursuit of a trade or business; and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.

It will be observed that in order to be deductible the expense must be ordinary and necessary in carrying on the trade or business of the taxpayer, and in the case of traveling expenses, including meals and lodging, they must be incurred or paid while away from home in pursuit of trade or business.

It would be useless to review the many decisions on the subject of traveling expenses and subsistence while on business trips, but clearly, the object of section 23 (a) is to allow such deductions only ■when the taxpayer is away from home on a business trip. It was ■never intended to allow deductions for ordinary living expenses, or traveling expenses for trips of a personal nature.

In Mort L. Bixler, 5 B. T. A. 1181, the taxpayer and his family lived in Mobile, Alabama, but his business during part of the year was in Hammond, Louisiana, and during the remainder of the year in Houston, Texas. He claimed deductions for traveling expenses for several trips to Mobile and for living expenses while away from Mobile. The Revenue Act of 1921, section 214 (a) (1), was controlling, which, for present purposes, is substantially similar to the quoted provision disposing of the pending question. In denying the deductions this Board said in part:

We think the Commissioner in this case correctly held that railroad fare and living expenses paid out by this petitioner during the year 1922 were not deductible from gross income under the provisions of the above-quoted sections. Section 214 (a) (1) authorizes a deduction only of ordinary and necesswy expenses in carrying on any trade or business, and in this classification are included salaries paid or incurred and traveling expenses, including meals and lodging while away from home in the pursuit, or carrying on, of such trade or business. In the opinion of the Board, traveling and living expenses are deductible under the provisions of this section only while the taxpayer is away from his place of business, employment, or the post or station at which he is employed, in the prosecution, conduct, and carrying on of a trade or business. A taxpayer may not keep- his place of residence at a point where he is not engaged in carrying on a trade or business, as this petitioner testified was true in this instance, and take a deduction from gross income for his living expenses while away from home. We think section 214 (a) (1) intended to allow a taxpayer a deduction of traveling expenses while away from his post of duty or place of employment on duties connected with his employment. * * *

To the same effect, see Charles E. Duncan, 17 B. T. A. 1088; affirmed without opinion, 47 Fed. (2d) 1082.

Since “home” as used in the quoted applicable act thus means business location, post, or station, what is the business location, post, or station of a Congressman?

4 U. S. C. A., sections 6 and 7, are as follows :

6. * * * jyi that part 0f the territory of the United States included within the present limits of the District of Columbia shall be the permanent seat of government of the United States.
7. * * * All offices attached to the seat of government shall be exercised in the District of Columbia, and not elsewhere, except as otherwise expressly provided by law.

From those provisions, we conclude that, at least, unless otherwise properly authorized, which authorization is not established here, the business of a Congressman is to be performed at the seat of government. Thus, that was petitioner’s “home”, within the meaning of the controlling statutory provision. It follows that the living expenses of petitioner while attending a session of Congress are personal and are, therefore, not deductible. Revenue Act of 1932, sec. 24 (a) (1).

Relative to the deduction of the traveling expenses, we think the stipulation discloses that the trips between Washington and Brooklyn were not a part of petitioner’s official duties as a Congressman. He was merely keeping in touch with his constituents. The picture presented is colored by paragraph 7 of the stipulation of facts. That paragraph states: “These contacts with his constituents were necessary and mandatory for the election and re-election of the petitioner to the office of Congressman, which represented the source of his income during the year 1932.” It would seem these trips were made for personal purposes not in pursuit of trade or business and the expenses therefor are not deductible. Revenue Act of 1932, sec. 24 (a) (1). They were in the nature of campaign expenses, which are not deductible. David A. Reed, 13 B. T. A. 513.

The Government allows each member of Congress a mileage allowance of 20 cents per mile going to.and returning from each session of Congress, which was allowed and paid the petitioner.

But, even assuming that paragraph 7 of the stipulation does include traveling expenses paid by petitioner in connection with his official duties as Congressman, the same stipulation reveals that a part, at least, of the traveling expenses in question was expended “for the purpose of visiting his constituents in their places of assembly.” Obviously, the latter expense is personal, not official, and not deductible. David A. Reed, supra. Since the traveling expenses in connection with petitioner’s official and personal trips to Brooklyn are not segregated, the petitioner has failed to sustain his burden of proof in establishing the amount of any deduction to which he might be entitled under the statute. This is his burden. New Colonial Ice Co. v. Commissioner, 292 U. S. 435. Nor is there any basis in the record for approximating such item. See Cohan v. Commissioner, 39 Fed. (2d) 540.

The cases of Walter F. Brown, 13 B. T. A. 832, and Joseph W. Powell, 34 B. T. A. 655, are distinguishable here upon the facts.

In both of those cases the expenses allowed the taxpayer were incurred “in pursuit of trade or business.”

Here it is expressly stipulated that the only business of petitioner, in connection with which the questioned expenses were paid, was that of Congressman. It may well be that Congress could have authorized the performance of official duties of the petitioner, outside of Washington, but, so far as disclosed by this record, that business here was exclusively in Washington, the seat of government. 4 U. S. C. A., secs 6 and 7 {supra). And, if that barrier to the deduction were passed, petitioner fails here upon an absence of proof.

We conclude that the respondent was right in determining the deficiency.

Reviewed by the Board.

Decision will T)e entered for the respondent.

Smith dissents.

McMahon,

concurring: I agree with the result reached by the majority. Whether and to what extent deductions shall be allowed depends upon legislative grace; and only as there is clear provision therefor can a particular deduction be allowed. New Colonial Ice Co. v. Helvering, 292 U. S. 435; Helvering v. Inter-Mountain Life Insurance Co., 294 U. S. 686; and Lindley v. Commissioner, 2 Fed. Supp. 807. If there is any 'ambiguity or doubt as to whether Congress intended to permit a particular deduction, the rule that ambiguities are to- be resolved in favor of taxpayers does not apply. Helvering v. Inter-Mountain Life Insurance Co., supra. The most favorable view, from the standpoint of the petitioner, that can be correctly taken is that it is, at best, doubtful, in view of all the facts and circumstances here presented, whether Congress intended by the provisions of section 23 (a) of the Revenue Act of 1932 to permit deductions of the character here sought by the petitioner; and, as stated, such doubt may not be resolved in favor of the petitioner. There are no other statutory provisions which permit such deductions. There are none that require them. The better view is that, taking into consideration all statutory provisions that throw any light upon the subject, Congress did not intend to permit the deduction of any of the expenses involved in the instant proceeding. Questions of policy touching subjects of this character are reserved to Congress; and the wisdom, from the standpoint of sound public policy, of a policy which would open the door to deductions of the types in question here is, at best, so questionable that I am constrained to conclude that Congress never intended to give its sanction to such a policy. Statutory construction should lead to a sound result rather than a questionable one. It is to be presumed that the former was intended rather than the latter. Hence, none of the claimed deductions are allowable.-