author: MaRquette :

text:
    J. R. Knowland, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 45198, 60979.
    Promulgated December 21, 1933.

      Hart H. North, Esq., and B. H. HicJdin, C.P.A., for tbe petitioner.

      Alva C. Baird, Esq., for the respondent.
   OPINION.

MaRquette :

At the time of the seizure and detention of the Jane Gray and of the Lydia, the United States was asserting jurisdiction over a certain part of the Bering Sea more than three miles from the shore. This claim was denied by Great Britain and resulted in arbitration between the two governments. An account of these matters may be found in the opinion in Whitelaw v. United States, 75 Fed. 513, decided June 29, 1896. In that case the Circuit Court of Appeals held that seizures such as those here involved were illegal. Since that decision it has been recognized that the seizures were made without right. Nevertheless the United States not only did not compensate American citizens who were owners of the ships detained, but it was not until the approval of the Act of June 7, 1924, 43 Stat. 595, the material part of which is copied in the margin, that suit was permitted against the United States on account of the seizures.

Bemedial bills were passed by the Senate on three occasions between March 1906 and June 1910, and passed by the House on two occasions between January 1907 and February 1908, but such bills never became law.

On the state of facts set out in our findings, coupled with the historical facts we have detailed, the petitioner asserts that the amounts recovered are not taxable, since they constituted compensation for losses suffered; that he, the petitioner, acquired these claims by bequest and therefore his recovery of them is not taxable to him; that it has been a recognized fact, at least since the decision in the Whitelaw case, that the seizures were illegal, and since the United States was at all times solvent, the claims when acquired by him had a value equal to the amounts recovered; and, lastly, that so much of these recoveries as represented the lays or shares of the crews should be deducted. The suggestion is made that the recoveries were of a capital nature to the extent that money had been expended to equip the vessels.

With respect to the last contention, it may be pointed out that in the case of the Lydia the court made a deduction of $500 for cost of equipment and depreciation. We have no evidence whatever before us on this issue with reference to the Jane Gray and therefore can afford no relief. The fact that it is probable that such evidence cannot now be obtained does not serve to entitle the petitioner to relief in the absence of evidence. Burnet v. Houston, 283 U.S. 223.

While the damages recovered were for compensation for losses, the losses were not of a capital nature. The damages were meás-ured by the average value of the vessels’ probable catches, or, in other words, their probable losses of gross profits. Such recoveries are subject to income tax. Burnet v. Sanford & Brooks Co., 282 U.S. 359. Cf. Kansas City Southern Ry. Co. v. Commissioner, 52 Fed. (2d) 372, and John J. Bliss, 27 B.T.A. 803.

The petitioner acquired the claims against the United States in 1921 by bequest from his mother. The “ value ” of these claims was not taxable to him as income, but any income derived from the bequests is taxable. Sec. 213 (b)(3), Revenue Acts of 1921 and 1926, and sec. 22 (b) (3), Revenue Act of 1928. Such income may be made by a “ sale or other disposition ” of the bequest and the basis for the computation of such income is, as to that part received in 1926, the fair market value of the bequest as of the time of his mother’s death (sec. 204 (a) (5), Revenue Act of 1926; Brewster v. Gage, 280 U.S. 327), and as to that part received in 1928, it being a general bequest, the fair market value of his claim at the time of distribution in February 1921. Sec. 113 (a)(5), Revenue Act of 1928.

When the petitioner recovered on his claims, he made a “ disposition ” of them within the meaning of that word as used in section 204 (a) of the Revenue Act of 1926 and section 113 (a) of the Revenue Act of 1928. Ayer v. Blair, 26 Fed. (2d) 547. We know the amounts of the recoveries but we are not informed as tp what was the fair market value of the claims as of the basic dates. If the estate of the mother was subject to Federal estate tax, then the appraised value for such purpose of the claim on which recovery was received in 1926 would establish its fair market value as of the time of her death (Brewster v. Gage, supra), and would afford a reasonable measure of such value of the other claim as of date of distribution, it not appearing that there was any material change in conditions. These claims were for unliquidated damages. In 1921 the Government not only had not paid any part of them, but for 29 years had not permitted itself to be sued on them. These factors must have had a very depressing effect on their fair market value. The respondent has determined that the claims had no value on the basic dates. In the absence of any evidence as to such value, the respondent is affirmed on this point. In reaching this conclusion we have given no consideration to the fact that these claims may not have been assignable.

In the alternative, the petitioner asserts that if we hold the recoveries are taxable to him, then the amounts recovered should be diminished by the amounts of the shares or lays of the crews. The nature of such claims is set forth in United States v. Laflin, 24 Fed. (2d) 683, which was an appeal from the judgment in the action relative to the detention of the Lydia. After stating that it was well settled that in whaling ventures the sailors who are entitled to a lay or share of the proceeds of the voyage as wages are never regarded as partners with the owners; that the owners of the vessel are the owners of the products of the voyage; that such a crew is rather to be deemed hired seamen than partners or joint contractors; and that neither the officers nor members of the crews may join with the owners in an action for recovery of the proceeds of the voyage, the court said:

In Taber v. Jenny, Fed. Cas. No. 13720, 1 Spr. 315, 322, it was said: “ It is the right and duty of the owners to protect the products of the voyage, and if unlawfuliy taken by any one, to pursue and obtain them, and the seamen have then a right to share in the net avails. The owners must obtain and hold them for this purpose. Otherwise, the seamen could not get redress; they have no title to the property, and could maintain no action for it. If the owners neglect to take proper means to obtain indemnity, they would be responsible to seamen for that neglect. It is not for the respondents to say that the owners will not pay the crew. The respondents certainly have no right to their share; and an individual might as well say, when sued by a guardian, that perhaps he might never settle with his ward.”
It is clear from the foregoing and other like decisions that the funds received by the owners in a ease such as this are charged with a trust for the payment of the claims of the officers and crew of the vessel.

It thus appears that an agreement by the master or owner of a vessel to pay seamen a share of the profits of the voyage does not give the seamen any ownership in or title to the cargo, with the result that when recovery is sought for its loss the owner or master has the sole right to sue, and, having recovered the value of the cargo, to hold for each sailor his proportionate share of the recovery, to be paid to him on demand.

The petitioner lias participated in two recoveries and has recovered in his own name. It is not disclosed what disposition he has made of the parts of the recoveries which he now claims belong to the crew. It is not shown that he has segregated such parts and set them aside as trust funds for the benefit of the crews, they to receive the benefits of any income that may accrue from their shares. Income taxation is a very practical matter and the facts disclosed by this record should be viewed from a practical standpoint. The voyages were made in 1892. About 40 years elapsed between the voyages and the hearing of these proceedings. How many of the 66 men who composed the crews of the two vessels may now turn up and claim against the petitioner personally or through their representatives, we do not know. At the time of the hearing the petitioner had been in receipt of one recovery for five or six years, and of the other for three or four years, but he did not offer to jirove that he had paid a single seaman. For all we know, final settlement may hai^e been made with some of them. Under the circumstances of these proceedings, we are of opinion that the money recovered by the petitioner in his own name, while impressed with the quasi-trust in favor of the seamen to whom he is or may be indebted, is taxable to him without diminution by reason of the shares of the sailors. Furthermore, it would be a very difficult, if not an impossible task, to compute the value of the lays. We know the gross fractional part to which the crews are entitled, but we do not know what, if any, may have been forfeited under the articles; what settlements may have been made with the sailors; nor what was the total catch of whales of the Pacific Coast Fleet. Nor do we know what part the advancements would play in such a computation.

Reviewed by the Board.

Decision will he entered for the respondent.

       1. That jurisdiction be, and it is hereby, conferred upon the United States District Court, Northern District of California, to hear and determine the claims of American citizens, their,heirs and legal representatives, for damages or loss occasioned by or resulting from the seizure, detention, sale or interference with their voyages by the United States of vessels charged with tmla-wful sealing in the Bering Sea and water contiguous thereto and outside of the three mile limit during the years 1886 to 1896, inclusive, and to enter judgment therefor.


source: Caselaw Access Project

author: Van Fossan :

license: Public Domain

text:
    Agnes A. McAuliffe, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49071.
    Promulgated December 26, 1933.

      Alfred Nelson, Esq., for the petitioner.

      E. A. Tonjes, 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 1926 in the sum of $1,005.15.

The petitioner alleges that the respondent erred in asserting the tax upon certain profits from the alleged sale of stock of the Bank of Italy and the First National Bank of Oakland, California, when, in fact, no such sale was made.

The petitioner is a widow on whom rests the duty of supporting her children and the responsibility of educating them. In October 1925 she received 100 shares of stock of the First National Bank of Oakland, California, and 75 shares of stock of the Bank of Italy from the estate of her father, who died in September 1924. The First National Bank stock was appraised at $10,000 and the Bank of Italy stock at $18,450. The stock was left to the petitioner for the purpose and as a means of taking care of her mother and herself and rearing her family.

In the fall of 1926 one William Nelson, knowing that the petitioner owned the 175 shares of stock, approached her with the request to borrow the stock to use as collateral in his furniture business. He offered a 10 percent return, whereas the stock was then paying less. The petitioner was induced to consult one A. T. Matthews, assistant vice president and branch manager of the Mercantile Trust Co., later the American Trust Co. Previous to seeing Matthews the petitioner inquired of the Bank of Italy officers as to his standing and was assured that he was a reliable man. Matthews stated to the petitioner that his bank did not want her to make such an arrangement with Nelson unless it could protect her and prevent a possible sale of the stock. He suggested an escrow agreement whereby Nelson was to execute a note to the petitioner and deposit furniture contracts due from purchasers in amounts double the value of the petitioner’s stock, which was also to be deposited. The bank was to verify such contracts, to see that they were paid every month, and to make monthly replacements so that the security would remain at the same ratio.

The petitioner agreed to the proposed plan. Nelson was to be given 15 days in which to submit the furniture contracts and the bank was to have all necessary escrow papers prepared. The petitioner did not read the papers but signed them at the direction of Matthews, whom she trusted and on whose representations and integrity she relied absolutely. The original alleged escrow agreement was in the form of a letter of instructions dated September 1, 1926, and was supplemented by similar letters dated October 4, October 7, October 15, November 4, and December 16, 1926. In each letter appears a recital that the petitioner sold to Nelson certain shares of bank stock, with an option to repurchase a like number of shares before a definite expiration date.

Prior to her entering into the agreement with Nelson the petitioner had a $9,000 loan from the First National Bank of Oakland secured by 45 of the 75 shares of Bank of Italy stock owned by her. An official of the First National Bank suggested to her that she sell 20 shares of such stock and pay the loan, but she refused to do so because of her conviction that the stock was going much higher. She also refused to proceed with the Nelson agreement, whereupon Matthews lent Nelson $10,000 on his short-term note, the petitioner’s loan was paid, and the 45 shares were released and were then to be used as collateral for Nelson’s note as well as for later transactions under the escrow agreement.

Shortly after December 16, 1926, the petitioner heard rumors that Nelson’s financial condition was unsound. Among those so intimating were two officers of the First National Bank. The petitioner then went to Matthews and one Lloyd Graybiel, an assistant trust and escrow officer of the American Trust Co., and was assured that “ everything was perfectly all right.” The petitioner’s last conversation with Matthews was about March 18, 1927, and he reiterated his assurance that everything was all right and insisted that she sell some of her Bank of Italy stock. She again refused to do so.

On March 21, 1927, Nelson disappeared and became a fugitive from justice. The petitioner then learned through the Bank of Italy that all of her stock in both banks had been sold long before her last conversation with Matthews. Greatly alarmed, she immediately sought Matthews and Graybiel, but they refused to discuss the matter with her. She later learned that many of the furniture contracts were forgeries and that the bank had never verified them nor demanded and received replacements, as agreed.

The petitioner received interest from Nelson for two or three months. She realized approximately $2,500 from the furniture contracts and upon the settlement of the bankruptcy proceedings against Nelson she received a dividend of about $5,300 on her claim. Such sums were received after the year 1926.

Subsequent to 1926 the petitioner filed a civil action in the Superior Court of Alameda County, California, against the American Trust Co., Matthews, and Graybiel, charging a conspiracy and a fraudulent conversion of 175 shares of bank stock held in the bank’s possession under the alleged escrow contract and asked judgment for $153,205, and other relief. The case was settled in 1931 by the payment to her of $43,644.70, one third of which she paid out as attorneys’ fees.

The “ letters of instruction ”, purporting to set forth the agreement by which Nelson and the Mercantile Trust Co. obtained possession of the petitioner’s bank stock and according to terms of which the stock was sold, did not embody the true and correct contract of escrow entered into by the petitoner with Nelson and officials of the Mercantile Trust Co.

The petitioner filed no return for the year 1926, but the Commissioner, through a deputy collector, filed one for her. That return showed receipts of $1,420 from rents, $1,137.50 from dividends, and $20,567.85 from profits from the sale of the bank stock in question. Deductions of $401.20 covering interest paid and an exemption and credit for dependents of $4,300 were allowed. The petitioner proved additional losses of $2,874.17 arising from her operation and exchange of real estate.

From the foregoing facts and the supporting testimony it is clear that the petitioner’s transfer of her 100 shares of stock of the First National Bank and her 75 shares of stock of the Bank of Italy to William Nelson was merely a loan to him. Her purpose in making such an arrangement was to receive the additional income which she needed in the rearing of her family. Throughout the negotiations prior to the so-called “ escrow ” agreement, in her dealings with Nelson and the bank officials and in her conversations with others she exhibited no intention or thought of selling her stock. On the contrary, with great certainty and emphasis she expressed her determination to retain her stock indefinitely or at least until its price became much higher than it was in the fall of 1926.

Counsel for respondent conceded at the hearing that petitioner intended to make a loan, but argued that the actual transaction was, in law, a sale.

We can not agree. The fraud perpetrated by Nelson and Matthews was such as to make the written agreement a nullity. Taxpayer agreed to lend and thought she was lending the securities. She never intended to sell. Furthermore, she never condoned or ratified the sale. She received none of the proceeds of the sale. She took the only avenue open to her and sued the offending parties for conspiracy to defraud. It would be a plain distortion of facts to hold that she made a sale of the stock in 1926 or at any other time.

Our conclusion is that the petitioner’s transfer of her bank stock in 1926 was in legal effect a loan and not a sale. Petitioner derived no profit therefrom.

Decision will be entered for the petitioner.


author: Lansdon :

text:
    Southern Power & Manufacturing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 57512.
    Promulgated December 26, 1933.

      John J. Finnorn, Esq., for the petitioner.

      De Witt M. Evans, Esq., for the respondent.
   OPINION.

Lansdon :

The basis for the deficiency determined by the respondent is that the profit realized by the petitioner in the sale of its capital assets must be computed under the provisions of section 112 (b) (5) and section 113 (a) (8) of the Revenue Act of 1928 which he asserts are applicable to the facts established in the record. The petitioner contends that such provisions do not apply and the computation of profit must be governed by the exception in section 112 (b) (5), and that if such exception applies it is entitled to a basis for computing profit from the sale equal to the fair market value of the assets acquired.

The exception relied on by petitioner is as follows:

* * * but in tlie ease of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.

The property in question is the lease of March 22,1923. Petitioner contends that at the date of its exchange for stock such contract was the sole property of Pottharst. To support this contention Jones, Pottharst, and Morgan all testified orally at the hearing that prior to April 7,1923, the contract was the sole property of Pottharst and that prior to that date neither Jones nor Morgan had any interest therein. If the record contained no other evidence such oral testimony would seem to establish the claim of the petitioner.

In rebuttal of the oral testimony of Jones, Pottharst, and Morgan, the respondent adduced in evidence the letter of April 7, 1923, which Pottharst wrote to petitioner and the minutes of the corporation of that date. In that letter Pottharst expressly states that “ * * * the contract of lease * * * was entered into in my name alone for the purpose of convenience and that the said contract is in fact owned by the following named persons in the proportions set opposite their names: J. George Jones, 3/7ths; J. E. Pottharst, 3/7ths; and R. N. Morgan, l/7th.” At the meeting of the directors of the petitioner on the same day, the statement of the letter was accepted and on that basis stock was issued to the three incorporators. In this direct conflict of evidence we must accept that which is the more reasonable and convincing. In our opinion the contemporary documents must be taken in preference to oral testimony of interested witnesses ten years after the event in question. The general rule is that the properly proved records of a corporation establish the facts set out therein. Central Electric Co. v. Sprague Electric Co., 104 Fed. 16. The real facts seem to us to be that in order to secure working capital Pottharst, Jones, and Morgan entered into the deal prior to the organization of the petitioner, with interests therein as set out in Pottharst’s letter to the petitioner. We conclude, therefore, that upon incorporation the petitioner issued its stock to the three incor-porators in exact proportion to their interests in the contract and that the exception relied on by the petitioner is not applicable.

In the light of our conclusion above the value of the assets in question at the date they were acquired by the petitioner is not material, since the basis for determining gain or loss on the subsequent disposition thereof is cost to the prior owners, plus any capital addition thereafter. There was no cost to such prior owners and the capital additions subsequent to acquisition have been allowed by the respondent, whose determination must be affirmed. Grain King Mfg. Co., 14 B.T.A. 793; Federal Grain Corp., 18 B.T.A. 242; Paradox Land & Transport Co., 23 B.T.A. 1229; Sconset Oil Co., 26 B.T.A. 419.

ISTo evidence was offered in explanation of the negligence for which penalty is asserted and so the determination of the respondent in regard thereto must be affirmed.

Decision will be entered for the respondent.

       Sec. 112. (b) Exchanges solely in Mnd. — * * *

        ****** *

      (5) Transfer to corporation controlled by transferor. — No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply poly if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
      Sec. 113. (a) Property acquired after February 28, 1913. — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1013, shall be the cost of such property; except that—
      *******
      (8) Same — Corporation controlled- by transferor. — If the property was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described in section 112 (b) (5) (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money, in addition to such stock or securities), then the basis shall be the same as it would be In the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made; * * *


author: Smith:

text:
    Robert G. Dodge, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 63404, 70509.
    Promulgated December 26, 1933.

      R. Ammi Gutter, Esq., for the petitioner.

      George D. Brabson, Esq., for the respondent.
   OPINION.

Smith:

If the assignments made by the petitioner on September 13,1929, were valid assignments, the decision in this case is ruled by our opinion in Edith H. Blaney, 13 B.T.A. 1315. We there held that an assignor of portions of her right to receive income from a trust fund was not liable to income tax in respect of income paid to the assignees after the execution of the assignments. We held, however, that the assignor was liable to income tax in respect of income which had been accumulated by the trustees prior to the date of the execution of the assignments. Consonant with that opinion, we hold that the petitioner is liable to income tax upon $130.92 of the amounts distributed to the petitioner’s assignees in 1929.

The respondent contends that the instruments by which the petitioner purported to assign fractional parts of his interest in the trust fund were not sufficient in law. The basis for this contention is that they were not under seal.

We are of the opinion that there is no merit in this contention. The exhibits show that the assignments are under seal, and recite that they are under seal. But, even if no seal had been upon the instruments, they would have been under seal for, by statute in Massachusetts, an instrument, if it recites that it is under seal, has the effect of a sealed instrument, whether a seal has been placed upon it or not. See G.L. Mass. (Tercentenary ed. 1931), ch. 4, § 9 A (St. 1929, ch. 377, § 2).

Reviewed by the Board.

Judgments will 5e entered under Bule 50.

Stebnhagen and Sea well dissent.


author: Black :

text:
    Superintendent, Five Civilized Tribes, for Sandy Fox, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66375.
    Promulgated December 26, 1933.

      Thomas J. Reilly, Esq., for the petitioner.

      B. M. Goon, Esq., for the respondent.
   OPINION.

Black :

This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1929 in the amount of $167. The amended petition alleges that the amount of taxes in controversy is $269.59, which amount includes the original assessment of $102.59, and assigns two errors, as follows:

(a) The Commissioner erred in including as income for the year 1929 an amount of $3,117.50 received as interest on a refund of income tax during the year 1929.
(b) The Commissioner erred in exacting any taxes from this petitioner for the year 1929.

The facts were stipulated as follows:

Petitioner is a full-blood restricted Creek Indian, being enrolled opposite Creek Roll No. NB 1263.
His property, both real and personal, is restricted and under tbe direct supervision of the Superintendent of the Five Civilized Tribes, and under the direction and supervision of the Secretary of the Interior.
The income from petitioner’s allotment is received and held in trust by the said Superintendent and invested by him under the direction of the Secretary of the Interior. The income interest from such investments is likewise received and held in trust as part of petitioner’s restricted funds and property.
For the calendar year 1929 the Superintendent filed for petitioner an income taz return and the said Superintendent paid the tax shown thereon to be due for restricted funds of petitioner in his possession.
Included in petitioner’s tax return for 1929 was an amount of $7,797.42 received by said Superintendent upon petitioner’s restricted funds. There was also included in said return an item of $8,351.75 received by the said Superintendent as interest on Liberty Bonds held by him as part of petitioner’s restricted funds. Neither of these sums were subject to petitioner’s demand.
During the year 1929, the Commissioner of Internal Revenue under authority of Treasury Decision 3570 refunded to said Superintendent for petitioner the following taxes which had been paid by the Superintendent as follows:
There was also refunded during 1929 interest computed according to law on said refunds in the amount of $3,117.50, said interest being paid to the said Superintendent for petitioner. This interest is part of petitioner’s restricted funds and is not subject to his demand.
That the interest set forth iri the paragraph just above has never been returned for income tax purposes by said Superintendent or petitioner.

The net income of petitioner as determined by respondent is shown in the statement attached to the deficiency notice as follows:

The records of this office disclose that you received $3,117.50 in the form of interest on a refund of income tax during the year 1929. Interest paid on such refund is taxable income for the year in which received. Inasmuch as this office is unable to identify this item in your return, the amount has been included resulting in a deficiency of $167.00.
Net income reported on return_$16,149.17
Add:
Interest- 3,117.50
Adjusted net income_ $19, 266. 67
Less:
Interest on Liberty Bonds. $8, 351. 75
Personal exemption_ 3, 500. 00
Credit for dependents_ 400. 00
- 12,251.75
Balance subject to normal tax. $7, 014.92

The relationship between the Government and the restricted ” Indian is that of guardian and ward. Tiger v. Western Investment Co., 221 U.S. 286, 310-317; United States v. Waller, 243 U.S. 452, 459. In the instant proceeding Sandy Fox is the ward, and the pleadings were properly filed for him by the Superintendent of the Five Civilized Tribes, who is the officer of the Interior Department directly in charge of the restricted Indians of such tribes. See sec. 143, Revenue Act of 1928; Rule 6 of the Board’s Rules of Practice; and sec. 17, ch. 222, Act of August 1, 1914, 38 Stat. 582, 598.

It is contended on behalf of petitioner that he is totally exempt from the Federal income tax on all the income involved in this proceeding because of his status as a full-blood restricted Creek Indian. The case of Mary Blackbird v. Commissioner, 38 Fed. (2d) 976, is especially cited in support of that contention. Mary Blackbird was a full-blood restricted Osage without a certificate of competency. Her principal source of income was from bonuses and royalties on tribal mineral leases. She also received a small amount as surface rental, a few dollars from miscellaneous sources, and $100 each year as interest on funds held in trust for her by the United States. In holding her not subject to the income tax statute the Tenth Circuit said, in part:

She is a restricted full-blood Osage. Her property is under the supervising control of the United States. She is its ward, and we cannot agree that because the income statute, Act of 1918 (40 Stat. 1057), and Act of 1921 (42 Stat. 227), subjects “ the net income of every individual ” to the tax, this is alone sufficient to make the Acts applicable to her. Such holding would be contrary to the almost unbroken policy of Congress in dealing with its Indian wards and their affairs. Whenever they and their interests have been the subject affected by legislation they have been named and their interests specially dealt with. Elk v. Wilkins, 112 U. S. 94, 100, 5 S. Ct. 41, 44, 28 L. Ed. 643: “ General acts of Congress did not apply to Indians, unless so expressed as to clearly manifest an intention to include them.” In Choate v. Trapp, 224 U. S. 665, 32 S. Ct. 565, 56 L. Ed. 941, the court, after noting the general rule that exemptions from taxation are to be strictly construed, said at page 675 of 224 U. S., 32 S. Ct. 565, 569:
“ But in the government’s dealings with the Indians the rule is exactly the contrary. The construction, instead of being strict, is liberal; doubtful expressions, instead of being resolved in favor of the United States, are to be resolved in favor of a weak and defenseless people, who are wards of the nation, and dependent wholly upon its protection and good faith. This rule of construction has been recognized, without exception, for more than a hundred years, and has been applied in tax cases.”

The Solicitor General of the United States did not ask for a writ of certiorari in the Blackbird case.

On the same day that the Tenth Circuit decided the Blackbird case, it also decided Chouteau v. Commissioner, 38 Fed. (2d) 976, and Reid that where an Osage Indian had received his “ certificate of competency ” he was subject to the income tax.

The Supreme Court granted a writ of certiorari in the Choteau case and later affirmed the Board and the decision of the Circuit Court of Appeals. Choteau v. Burnet, 283 U. S. 691. While it is true that in the Choteau case the taxpayer was an Indian who had received his “ certificate of competency ” and in that respect was different from the instant case, where the petitioner is a restricted Indian with all the income in question having a restricted status, nevertheless, we think that the Supreme Court made it plain in the Choteau case that the exemption applying to the income of certain classes of Indians was not as broad as stated by the learned court of the Tenth Circuit in Mary Blackbird v. Commissioner, supra. In the Choteau case, the Supreme Court, among other things, said:

It is further insisted tliat, since the royalties are not taxable so long as they remain in the hands of the government in trust for the tribe and undistributed to members, income derived by the individual member from this fund comes from an exempt source and must therefore also be held to be exempt. ⅜ * * Royalties received by the government from mineral leases of Indian lands have been held to be beyond a state’s taxing power ⅜ ⅞ ⅜ on the ground that while in the possession of the United States they are a federal instrumentality, to be used to carry out a governmental purpose. It does not follow, however, that they cannot be subjected to a federal tax. The intent to exclude must be definitely expressed, where, as here, the general language of the act laying the tax is broad enough to include the subject matter. * * ⅛ But whatever may have been the liability of the fund to federal taxation while it remained in the hands of the government, it cannot properly be said that the share of it paid as royalties to the petitioner constituted in his hands an instrumentality of the government and was therefore beyond the scope of the tax. * * ⅜ There is therefore nothing in the nature of the income which excepts it from the effect of section 213 (a) of the Revenue Act of 1918.

The real test, therefore, it seems to us, of the applicability of the Federal income tax laws to the income of Indians is whether such income or the property which produces such income is specifically exempted from taxation, either in the tax statutes or other legislation dealing particularly with Indian affairs. This was the test applied by the Tenth Circuit in the two recent cases of Bagby v. United States, 60 Fed. (2d) 80, and Lucinda Pitman v. Commissioner, 64 Fed. (2d) 740.

The court in the Pitman case, after considering the applicable provisions of the Act of May 27, 1908 (35 Stat. 312), concluded as follows:

We conclude, therefore, that the homestead remained restricted and exempt from taxation, and that the surplus allotment became freed of restrictions and subject to taxation from and after sixty days from May 27, 1908.

In the instant proceeding the respondent is not proposing to tax any income from petitioner’s allotment. Respondent in his brief admits that the income of a restricted Indian from restricted lands is exempt from taxation, but contends that there is no provision of law or treaty which exempts income from income from Federal taxation, for example, interest from a refund of Federal income tax such as exists in the instant case. In making this contention respondent is following GKC.M. 9621 (X-2 C.B. Ill) in which it was held that income of a restricted Indian of the Five Civilized Tribes, including the Choctaw Tribe, from the reinvestment by the Interior Department of tax exempt income from his restricted allotted lands is taxable to the same extent as the investment income of other citizens and residents of the United States. The income which the respondent has determined in his deficiency notice to be taxable is the income received from the reinvestment of the exempt income. This identical question was before us in R. E. Snell, Jr., 10 B.T.A. 1081, wherein we said in part:

The source of the income which we are considering here is not the petitioner’s homestead allotment, but is United States notes purchased and deposits made with the income from the allotment. When that income was received for the petitioners by the Superintendent of the Five Civilized Tribes, it was separated from its nontaxable source and when invested became itself a new source of income, which is not protected from taxation either by the Revenue Act of 1S>18 or by prior acts of Congress under which the homestead allotment was made. We are therefore of the opinion that the interest on the Government notes and bank deposits involved herein is subjected to tax under the Revenue Act of 1918. ■ ⅜

Our decision in the Snell case was made prior to the decisions in the Blackbird, Chotean, Bagby, and Pitman cases, supra. With the exception of the Blackbird case, we see nothing in these cases which would require a reversal of our holding in the Snell case; and we regard the holding in the Blackbird case as having been somewhat modified by the later decisions in the Choteau, Bagby, and Pitman cases. Furthermore, we believe the holdings in McCurdy v. United States, 246 U. S. 263; United States v. Ransom, 263 U. S. 691; and Shaw v. Gibson-Zahniser Oil Corp., 276 U. S. 575, all tend to support the decision made in the Snell case. These cases all stand for the proposition that where lands which are subject to taxation and owned by non-Indian citizens are purchased for a restricted Indian, under the supervision of the Secretary of the Interior, with moneys derived as royalties from departmental leases of the Indian’s restricted allotment, the act of the Secretary in restricting such purchased lands as to alienation can not have the effect of exempting such lands from state taxation, in the absence of an express provision by Congress to that effect. In Shaw v. Gibson-Zahniser Oil Corp., supra, the Supreme Court, after observing that the plan of the Government has been gradually to emancipate the Indian from his former status as a ward, said:

* * ⅜ In this as in other Indian legislation, opportunity is afforded for their emancipation by imposing upon them duties as well as giving them the privileges of citizens and property owners, including the duty to pay taxes.
In a broad sense all lands which the Indians are permitted to purchase out of taxable lands of the state in this process of their emancipation and assumption of the responsibility of citizenship, whether restricted or not, may be said to be instrumentalities in that process. But they are far less intimately connected with the performance of an essential governmental function than were the restricted allotted lands, and the accomplishment of their purpose obviously does not require entire independence of state control in matters of taxation. To hold them immune would be inconsistent with one of the very purposes of their creation, to educate the Indians in responsibility, and would present the curious paradox that the Secretary by a mere conveyancer’s restriction, permitted by Congress, had rendered the land free from taxation and thus actually relieved the Indians of all responsibility. There are some instrumentalities which, though Congress may protect them from state taxation, will nevertheless be subject to that taxation unless Congress speaks. [Citations.] These lands we take to be of that character.

The principle thus announced as to lands and their taxability would aq)pear to be just as applicable to new acquisitions of personal property and the income therefrom. See also United States v. Gray, 284 Fed. 103.

Returning now to the Blackbird decision, counsel for petitioner, in his brief, observes: “ One of the items under consideration in the Blackbird case was interest on funds held in trust by the United States, the identical issue presented in this Appeal.” This is, of course, literally true as to the $100 item, but the point of law involved in the Snell case was not discussed by the court in the Blackbird case, and, as we have previously indicated, it is our opinion that the Blackbird decision was somewhat modified by the later decisions in the Choteau, Bagby, and Pitman cases.

Counsel for petitioner emphasizes the fact that the income in question is held in trust by the superintendent and was not subject to petitioner’s demand. This is of course true in all cases where there is a guardianship relationship. But the income itself is not exempt from taxation unless it is somewhere so provided. The respondent does not propose to subject the Liberty bond interest of $8,351.Y5 to the normal tax. Aside from this item of income being exempt from the normal tax, the items of income here involved are not exempt by virtue of any provision in any treaty with the Indians, the Sixteenth Amendment to the Constitution, the Revenue #Act of 1928, or any other statute of the United States. The determination of the respondent is approved.

Reviewed by the Board.

Decision will be entered for the resvondewt,.


author: Teammell :

text:
    Edna T. Stevens, John P. Stevens, Jr., and Robert T. Stevens, Executors under the Last Will and Testament of John P. Stevens, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68422.
    Promulgated December 27, 1933.

      Edward, J. Patterson, Esq., for the petitioners.

      Frank T. Homer, Esq., for the respondent.
   opinion.

Teammell :

This proceeding involves a deficiency in estate tax in the amount of $27,554.52, of which only $15,056.24 is in controversy, the balance being admitted by the petitioners.

The sole issue involved is whether or not the value of certain property included in a trust instrument should be included in the gross estate of the decedent.

The decedent, John P. Stevens, died October 27, 1929, a resident of New Jersey, and the petitioners are his duly appointed executors.

On January 12, 1927, the decedent executed four trust indentures, designated in the stipulation as Nos. 1, 2, 3, and 4, respectively.

At the time of the decedent’s death all the property, the inclusion of which in his gross estate constitutes the subject of this controversy, was held by the trustees under indenture No. 1.

By the terms of indenture No. 1 the property held in trust thereunder is to be held during the life of the decedent’s wife, and upon her death (or within such further time not exceeding ten years as the trustees may determine, but in no event beyond the lives of the decedent’s three sons) the principal is to be paid to the decedent’s three sons and/or their issue, their appointees by will, or their successors in case of intestacy. The income during the continuance of the trust is likewise completely disposed of to persons other than the decedent. No beneficial interest in either income or principal was retained by the decedent, but in article eight it was provided:

Article Eighth: At any time after two (2) years from the date hereof and during- the life of said Edna T. Stevens, the Grantor, or after his death his executor or administrator, by instrument in writing executed by him or them, and consented to in writing by his wife, Edna T. Stevens, and by his children, John P. Stevens, Jr., Robert T. Stevens and Nathaniel Stevens, or by his said wife and the survivors or survivor of said children, and delivered with such consents to the Trustees, from time to time may revoke the trusts hereby created with respect to all or any part or parts of the Trust Estate or may modify this Indenture or change the beneficiaries as in such instrument provided, and upon any revocation made in the manner aforesaid, the Trust Estate or such part or parts thereof as shall be affected by such revocation shall be assigned, transferred and paid over to the Grantor, his executor or administrator, provided, however, that no such revocation, modification or change of beneficiaries sliall be made to affect or invalidate any act or thing theretofore done by the Trustees hereunder or any provision of this Indenture relating' to the indemnification, security or protection of the Trustees.

None of tlie foregoing assignments or transfers was made in contemplation of death.

Indenture No. 1 referred to contains the following provision:

To have and to HonD unto the Trustees, tlieir successors and assigns, in TRUST, NEVERTHELESS, as follows :
First: To hold the Trust Estate and to collect the income therefrom arising during the life of Edna T. Stevens, wife of the Grantor, and during her life, after deducting all proper taxes, charges and expenses, to pay the net income therefrom arising as follows:
(a) To the Plainfield trust company, a corporation organized under the laws of the State of New Jersey, and John P. Stevens as Trustee under a certain indenture bearing even date herewith and executed by the Grantor, the sum of Five Hundred Dollars ($500) for each birthday during the life of the said Edna T. Stevens of each grandchild of the Grantor now living or hereafter born during the life of said Edna T. Stevens, to and including the twenty-first birthday of each such grandchild or during such shorter time as he or she shall live, the payment for each birthday of each of said grandchildren to be made within ninety (90) days after the occurrence thereof, except the payments for the twenty-first birthday of each grandchild, which payments shall be made immediately.
The grandchildren of the Grantor now living, with the respective dates of their births, are as follows:
(b) To divide the net income then remaining into four equal parts and to pay over the same as follows:
One fourth part thereof to said Edna' T. Stevens.
One fourth part thereof to John P. Stevens, Jr., son of the Grantor, or in case of his death, thereafter to such person or persons as he by his last will and testament shall give or bequeath his residuary estate, or, in default of such gift or bequest, to such person or persons as shall be entitled to his estate under the intestate laws applicable thereto;
One fourth part thereof to Robert T. Stevens, son of the Grantor, or in case of his death, thereafter to such person or persons as he by his last will and testament shall give or bequeath his residuary estate or, in default of such gift or bequest, to such person or persons as shall be entitled to his estate under the intestate laws applicable thereto;
One fourth part thereof to Nathaniel Stevens, 2d, son of the Grantor, or in case of his death, thereafter to such person or persons as he by his last will and testament shall give or bequeath his residuary estate or, in default of such gift or bequest, to such person or persons as shall be entitled to his estate under the interstate laws applicable thereto.
Second: Upon the death of said Edna T. Stevens, to divide the Trust Estate into six equal parts and thereupon, or within such further time as is hereinafter provided, to assign, convey and pay over the same as follows:
(1) One of said equal parts to said John P. Stevens, Jr., or in case of his prior decease, then to such person or persons as he by his last will and testament shall give or bequeath his residuary estate or, in default of such gift or bequest, to such person or persons as shall be entitled to his estate under the intestate laws applicable thereto;
(2) One of said equal parts in equal shares to the children of said John P. Stevens, Jr., living at the death of said Edna T. Stevens and the children of any child of said John P. Stevens, Jr., who may theretofore have died leaving issue, per stirpes et non per capita;
In case there shall be no issue of said John P. Stevens, Jr. living at the death of said Edna T. Stevens, said equal part shall be added to the equal part provided for in subdivision (1) of this Article Second and be assigned, conveyed and paid over in like manner.
(3) One of said equal parts to said Robert T. Stevens, or in case of his prior decease, then to such person or persons as he by his last will and testament shall give or bequeath his residuary estate or, in default of such gift or bequest, to such person or persons as shall be entitled to his estate under the intestate laws applicable thereto;
(4) One of said equal parts in equal shares to the children of said Robert T. Stevens living at the death of said Edna T. Stevens and the children of any child of said Robert T. Stevens who may theretofore have died leaving issue, per stirpes et non per capita:
In case there shall be no issue of said Robert T. Stevens living at the death of said Edna T. Stevens, said equal part shall be added to the equal part provided for in subdivision (3) of this Article Second and be assigned, conveyed and paid over in like manner.
(5) One of said equal parts to said Nathaniel Stevens, or in case of his prior decease, then to such person or persons as he by his last will and testament shall give or bequeath his residuary estate or, in default of such gift or bequest, to such person or persons as shall be entitled to his estate under the intestate laws applicable therto;
(6) One of said equal parts in equal shares to the children of said Nathaniel Stevens 2d living at the death of said Edna T. Stevens and the children or any child of said Nathaniel Stevens who may theretofore have died leaving issue, per stirpes et non per capita;
In case there shall be no issue of said Nathaniel Stevens living at the death of said Edna T. Stevens, said equal part shall be added to the equal part provided for in subdivision (5) of this Article Second and be assigned, conveyed and paid over in like manner. The provisions in subdivisions (2), (4) and (6) of this Article Second for the benefit of children or grandchildren of any of the sons of tlie Grantor living at the death of his said wife shall apply equally to posthumous children and grandchildren.

The statute involved in this case is section 302 (d) of the Revenue Act of 1926, which provides as follows:

Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated — »
* » ⅜ ⅞ ⅜ * *
(d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. The relinquishment of any such power, not admitted or shown to have been in contemplation of the decedent’s death, made within two years prior to his death but after the enactment of this Act without such a consideration and affecting the interest or interests (whether arising from one or more transfers or the creation of one or more trusts) of any one beneficiary of a value or aggregate value, at the time of such death, in excess of $5,000, then, to the extent of such excess, such relinquishment or relinquishments shall be deemed and held to have been made in contemplation of death within the meaning of this title.

The respondent contends that since the decedent reserved the right in the trust indenture to revoke the trust or to modify the same, or to change the beneficiaries, the trust instrument is brought within the terms of the above quoted section of the statute and therefore the property included therein should be included in the gross estate. The fact is, however, that the power of revocation or modification of the trust could only be exercised by the decedent in conjunction with all of the beneficiaries, except the Plainfield Trust Co., a corporation, which was one of the trustees for certain minor children. The trust instrument here involved provided that certain income should be paid to the Plainfield Trust Co. and John P. Stevens as trustees, to be paid over to the grandchildren of the grantor at the rate of $500 a year on each birthday of each grandchild, and $500 when each grandchild arrived at the age of 21 years. The Plainfield Trust Co. and John P. Stevens were trustees for the grandchildren under another trust which was to receive the income for this purpose from the trust here involved, known as indenture No. 1. The trust of which the Plain-field Trust Co. and John P. Stevens were trustees was a beneficiary of the trust set out in indenture No. 1. All of the beneficiaries of this trust (indenture No. 1) would have to join in a written consent before the decedent could revoke it, except the Plainfield Trust Co.

The facts, we think, bring this proceeding within our decision in David J. Lit et al., Executors, 28 B.T.A. 853, which case arose under section 302 of the Revenue Act of 1926, the statute here involved. In the cited case the decedent created a trust on December 30, 1927, the income of which was to be paid to his wife Rosa L. Lit for life, or to himself for life if his wife predeceased him, and upon the death of both the corpus was to be transferred to another or others. The trust instrument further provided that it might be revoked or amended by an instrument in writing duly executed by the settlor and Rosa L. Lit. The settlor died February 28, 1929. Decedent having reserved the right to revoke the trust only with the written consent of his wife, who was one of the beneficiaries thereunder, we held that the life estate vested in the wife should not be included as a part of the decedent’s gross estate, because as to her the trust conveyance was irrevocable.

The question here presented has been considered and the same conclusion reached in cases under the Revenue Act of 1924, which in so far as material here contains a provision similar to that now under consideration. Estate of Irving Lee Stone, 26 B.T.A. 1; Colonial Trust Co. et al., Executors, 22 B.T.A. 1377.

If the minor children be considered as beneficiaries of the trust known as indenture No. 1, which is here involved, then all of the beneficiaries of that trust who were of age were required to join in a consent to revoke and the case comes squarely within our decision in Colonial Trust Co., supra. However, if the Plainfield Trust Co. and John P. Stevens, who were trustees in a separate trust for the grandchildren of the decedent, be considered as beneficiaries of the trust known as indenture No. 1, one of those trustees being required to sign the consent to revocation, the case falls within our decision in the Stone case, supra, where six of seven beneficiaries were required to sign a consent to revocation.

It is also to be observed that in the case of Reinecke v. Northern Trust Co., 278 U.S. 339, there were five trusts involved. The Supreme Court in that case said:

He [the decedent] could not effect any change in the beneficial interest in the trusts without the consent, in the case of four of the trusts, of the person entitled to that interest, and in the case of one trust without the consent of a majority of those so entitled. Since the power to revoke or alter was dependent on the consent of the one entitled to the beneficial, and consequently adverse, interest, the trust, for all practical purposes, had passed as completely from any control by decedent which might inure to his own benefit as if the gift had been absolute.

The Court treated that trust, in which a majority of the beneficiaries were required to join in the consent, in the same way that it treated the four trusts in which the sole beneficiary was required to join in the consent to revocation.

We think, therefore, that the reserve powers to the trustor in this case are not of such character as to bring this case within the purview of the above quoted section of the statute, and hold that the property included in the trust instrument involved is not to be included in the gross estate of the decedent.

Reviewed by the Board.

Judgment will be entered under Bule 50.


author: Sea well:

text:
    Joseph Carroro (Johnny Dundee) and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent. Joseph Carroro (Johnny Dundee), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 41732, 61598.
    Promulgated December 27, 1933.

      Lawrence P. Mattingly, Esq., for the petitioners.

      Bruce A. Low., Esq., for the respondent.
   OPINION.

Sea well:

The petitioners, Joseph Carroro, sometimes called Johnny Dundee, and Lucile Carroro, were at all times material herein, man and wife, living together in or near New York City. He was a professional boxer and prize fighter, and was the owner, or part owner, of several racing horses which he raced for prizes or purses during some of the years involved, as hereinafter noted. She was an habitual gambler at horse races, betting money on races of her husband’s horses and other horses, and she was also a speculator and investor in securities.

The Commissioner having determined deficiencies in income taxes of the petitioners for the years 1920 to 1925, inclusive, mailed to them a deficiency notice on October 4,1928, from which they appealed to the Board of Tax Appeals and seasonably filed their joint petition, signed by Joseph Carroro and verified by him alone, but signed by the counsel who represented both petitioners throughout the hearing and is still their counsel of record. On December 10 and 31, 1928, and April 19, 1929, petitioners filed amended petitions verified and signed in the same way. Subsequently, on motion of said counsel for petitioners, the proceeding was dismissed as to the years 1920, 1921, and 1922 upon the ground that the income tax returns for those years, upon which the proceeding was based in part, were not joint returns of the petitioners as husband and wife, but the separate returns of Joseph Carroro. The proceeding as to the years 1923, 1924, and 1925 was continued and is Docket No. 41732. Later, on December 24, 1931, the Commissioner mailed a new deficiency notice to Joseph Carroro and reasserted the deficiencies previously asserted against him for the years 1920, 1921, and 1922, and petitioner seasonably filed his petition with the Board in reference thereto and the proceeding is Docket No. 61598. For all the years involved in both proceedings the Commissioner asserted against the petitioners the 50 percent fraud penalty as provided in section 250 (b) of the Revenue Acts of 1918 and 1921, and in section 275 (b) of the Revenue Act of 1924. The proceedings were consolidated for hearing and report.

Docket No. 61598 — 1980, 1921, and 1922. — These years involve Joseph Carroro alone and concern asserted deficiencies in his income tax as follows:

1920_$10, 367. 62
1921___ 13,445.78
1922_ 19,003.59

The petitioner pleaded and relies solely upon the statute of limitations for his defense. Respondent offered no waiver in evidence, but on the issue of the statute of limitations relies solely upon his allegation and the supporting evidence that the petitioner’s returns for the years were false and fraudulent and made with intent to evade tax.

The burden of proof is on the respondent, and from the testimony offered it appears, and we so find, that in his income tax returns for the three years mentioned petitioner’s gross income is reported in lump sums and as derived solely from professional boxing, in th« amounts of $25,000, $55,000, and $65,000 for the respective years. Likewise, the claimed deductible expense of his professional boxing business for each year is therein reported as a lump sum in the amounts of $15,000, $20,000 (together with $15,000 loss in a musical comedy), and $30,000, respectively. In neither the year 1920, nor the year 1921, when he claims a deductible loss of $15,000 on account of the musical comedy, is any gross income reported from that business. The evidence discloses and from it we find that the petitioner had gross income from race track winnings in 1920 of at least $8,800, and in 1921 of at least $10,250, none of which was reported in any of his income tax returns. The evidence also discloses and from it we find that in each of the three years here under review petitioner had other income from dividends and interest on bank deposits of at least $114 in 1920, $735 in 1921, and $237 in 1922, none of which was reported in his income tax returns for those years. We find also that petitioner deposited in bank in 1922 not less than $30,134. hTo evidence was offered by petitioner attempting any explanation of or excuse for the omissions from reported income of the items stated, or explanation of his bank deposit and the lump sums reported as income and as deductible expense. We do not mean to imply that income and deductions may not be stated in round lump sums, if they are such in fact; but a continuous recurrence of such items year after year seems so unusual that an explanation or some corroboration would ordinarily be produced if available. We hold merely that it is a circumstance to be considered with the other evidence.

Petitioner, through his counsel, contends, however, that the evidence of the respondent at the hearing did not show petitioner’s income from boxing as great as that reported by him in his returns, and that respondent’s evidence of income from boxing added to the proved items of income omitted from the returns did not amount to as much as the sums included in the returns by petitioner as income from boxing. Petitioner, from this circumstance, argues that the respondent has failed to show an understatement of income and, therefore, has failed to carry the burden of proof required to show that the returns were fraudulent. We think this argument fallacious in that in the trial of the issue of fraud it does not permit respondent to rely, as he may, upon the statement of petitioner, made under oath in his returns, which were in evidence, that his income from boxing was as much as reported by him.

Upon consideration of all the evidence we are convinced and hold that each of the returns for the years 1920, 1921, and 1922 were false and fraudulently made, with intent to evade tax, and accordingly we sustain the respondent in respect to both the penalty and the statute of limitations. D. C. Clarke, 22 B.T.A. 314.

Doclcet No. 41732 — 1923,1924, and 1925. — These years involve both petitioners and concern deficiencies asserted in their income tax as follows:

1923_,_$13,089.21
1924_ 5,610.12
1925_ 3,820.91

with 50 percent penalties added because of alleged fraudulent returns made with intent to evade tax.

Petitioners at the outset contend the Board is without jurisdiction to hear and determine their tax liabilities for these years. The petitioner, Lucile Carroro, in her testimony at the hearing denied that she knew of or consented to her husband including her income with his in a joint return. Jurisdiction is wanting, therefore, they say, because no deficiency has been determined against them within the meaning of section 272 of the Revenue Act of 1928, for the respondent has “ determined one tax liability predicated on the combined incomes of two taxpayers.” This contention was also made by them prior to the hearing in a motion to dismiss the proceeding, but it was then denied. It is apparently based upon a misapprehension of the situation involved and the law applicable thereto. Within the time provided by statute the petitioner Joseph Carroro filed income tax returns for each of the years and in each return stated that it was a joint return of himself and wife. Notice of deficiency was thereafter mailed by the respondent to each of the petitioners and was received by them, and their joint petition on appeal to the Board of Tax Appeals was filed by them within the 60 days provided by statute. To the joint petition so filed was attached a copy of the respondent’s notice of deficiency in which his determination of the taxable income of each petitioner for the several years here under review was stated separately and also stated in the aggregate.

Section 223 (b) of the Revenue Acts of 1921 and 1924, the statutes applicable here, is as follows:

(b) If a husband and wife living together have an aggregate net income for the taxable year of $2,500 or over, or an aggregate gross income for such year of $5,000 or over—
(1) Each shall make such a return, or
(2) The income of each shall be included in a single joint return, in which case the tax shall be computed on the aggregate income.

These petitioners were husband and wife living together during the years involved, and they had an aggregate net income for each of those taxable years of $2,500 or over and an aggregate gross income of more than $5,000. It would, therefore, appear that a single joint return for each of the years named, as made by the husband, was proper. McIntosh v. Wilkinson, 36 Fed. (2d) 807. As to the years here involved, unless Lucile Carroro’s income was returned with that of her husband as indicated, her income was not reported, in which case the respondent has the right and duty to mail the deficiency notice to her and assess and collect the tax and the penalty provided by the statute in cases where a taxpayer fails to file a return. She is therefore not in any position to complain. For, whether she participated in the returns or they were made solely by her husband without her knowledge or consent, she would nevertheless be liable for the taxes under the law. Both she and her husband had the deficiency notice and filed their joint petition. Under these circumstances we hold that we have jurisdiction of the proceeding and of both petitioners. If there are here two proceedings instead of one, as petitioners seem to contend, it might have been proper, if timely motion had been made, to have separated the two proceedings, but not to dismiss either. And where the husband, under the circumstances here present, filed a joint return for himself and wife, without objection of the wife, who failed to file a separate return, it will be presumed the joint return was-filed with the tacit consent of the wife, and she will not be heard to the contrary after joint petition has been filed with the Board of Tax Appeals. Grant v. Rose, 24 Fed. (2d) 115.

The only evidence offered by the petitioners was that of petitioner Lucile Carroro, herself. Her evidence, for the most part, was vague, inconclusive, lacking in details and without corroboration. She testified she had securities and money of her own in bank, commingled with other money and securities of her mother, her daughter, her aunt, and her uncle, all in her name; but no attempt was made to determine definitely the amount of the whole or of the separate interest of herself or that of any of the others. She testified that the interest on bank deposits in her name, and the money won by her on bets on horse races amounted to ten or twelve hundred dollars in each of the years 1923, 1924, and 1925, and that after payments to others named, she “ imagined seven or eight hundred dollars ” a year was her part; and that she was of opinion her income in said years was not more than $1,000 a year, because at the end of the year she was out of money. Her deposits in bank, as shown by other evidence in the case, were: for 1923, $17,785.33; for 1924, $28,823.27; and for 1925, $23,108.68. None of her relatives mentioned as having interests in her bank deposits nor any officer or employee of any bank where she had deposits was called or offered as a witness for petitioners, and there was no explanation of the failure so to do. The evidence offered at the hearing is not sufficient to overcome the presumption of the correctness of respondent’s determination of the deficiencies in income tax of the petitioners, and we so hold.

It remains for us to determine whether, under the facts appearing from the evidence offered by the Commissioner, the petitioners are subject to the 50 percent penalty asserted against them for all or any of the years here under review. This depends, as in the former years hereinbefore considered, upon whether the returns understated income or overstated expense or other deductions in such manner as to render them false or fraudulent and to justify the conclusion that they were made with intent to evade tax.

Considering the years separately, we find from the evidence that for the year 1923 there was reported in the returns of the petitioners gross income in the sum of $46,750, derived from 13 boxing exhibitions of Joseph Carroro. The evidence discloses, and from it we find, that the income of Joseph Carroro from boxing during 1923 at six exhibitions aggregated more than $50,000; also, that he had income from interest and' dividends of $458.48, but reported only $300 from this source in the returns. During the year Joseph Carroro deposited with the Manufacturers Trust Co. of New York the sum of $83,209.57, and during the same year petitioner Lucile Carroro, as above stated, deposited in the same bank $17,785.33, and she had income from interest during the year of $40. There was nothing reported in the return as income for the year of petitioner Lucile Carroro. There was no explanation, or mitigating or exculpatory evidence offered with reference to the joint return of petitioners for the year 1923, except the evidence of Lucile Carroro hereinbefore stated. We sustain the respondent as to the 50 percent penalty asserted for the year 1923. Tanner Oil Co., 20 B.T.A. 794.

For the years 1924 and 1925 respondent’s evidence as to Joseph Carroro’s individual income agrees substantially with the amount reflected in the income tax returns and fails to show understatement of his income. But the returns were joint and they failed to include any of Lucile Carroro’s income for those years. The evidence disclosed that during the respective years she deposited in the Manufacturers Trust Co., a bank in New York, the sums of $28,823.27 and $23,108.68. She also testified she had gross income, not reported in the returns, from bets on horse races, from interest on bank deposits, and dividends during each of these years. It was the duty of petitioners to report these items of income in the joint returns filed, and failure to do so constitutes evidence of fraud. No attempt to explain or show mitigating circumstance was made at the hearing by the petitioners, except as shown in the above evidence of Lucile Carroro. Her evidence rather confirmed respondent’s contention. From these circumstances and all the other evidence produced at the bearing we are convinced of the presence of the fraud asserted, and, therefore, also sustain the respondent in the addition of the fraud penalties for the years 1924 and 1925. M. Rea Gano., 19 B.T.A. 518.

Reviewed by the Board.

Judgment wül ~be entered for the respondent.


text:
    Mascot Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53997.
    Promulgated December 27, 1933.

      J. Arthur Greenfield, Esq., for the petitioner.

      Elden McFarland, Esq., and E. G. Sievers, Esq., for the respondent.
   OPINION.

Van Fossan :

In this case, in which a deficiency of $2,228.88 for the year 1928 was determined, the question is whether in computing depletion petitioner is entitled to include as income from its oil property a bonus received for granting an exclusive right to drill and explore at depths below 1,600 feet to a sublessee, it appearing that there was production of oil from wells of less than 1,600 feet (drilled by petitioner) and no production from wells deeper than 1,600 feet (drilled by the sublessee), or, to state it differently: Did petitioner by the execution of a sublease granting an exclusive right to drill and explore to depths beyond 1,600 feet thereby create a new “ property ” in the land below 1,600 feet, which “ property ” must stand on its own production in computing depletion, thereby depriving petitioner of the right to include income from such new “ property ” in computing depletion under its original lease?

The parties stipulated the facts substantially as follows:

The petitioner is a corporation organized under the laws of the State of California, with principal place of business in the city of Los Angeles, State of California; its income tax return for the year 1928 was filed with the collector of internal revenue at Los Angeles, California.

This proceeding involves a deficiency of $2,228.88 proposed by respondent in the income tax liability of the petitioner for the calendar year 1928.

The petitioner concedes that $155.88 of the deficiency as proposed by respondent is correct. The only issue is whether the bonus of $60,000 received by petitioner should be included in gross income from the oil and gas properties in computing depletion allowable under section 114 (b) (3) of the Eevenue Act of 1928.

Petitioner on November 23, 1901, acquired all of the lessee’s right, title, and interest in and to an oil and gas lease dated August 10, 1901, and another one dated April 2, 1901. The leases were in the usual form, granting the lessee the exclusive right to drill and explore for oil, gas and other substances to a desired depth at fixed terms.

Thereafter petitioner developed this property, drilled a total of 54 oil wells, and extracted and sold the oil and gas therefrom, and during the calendar year 1928 received a gross income from the sale of gas and oil extracted therefrom (exclusive of the bonus hereafter referred to) in the amount of $125,593.75.

Petitioner on November 13, 1928, entered into an agreement of lease with the Standard Oil Co. of California. The sublease granted the exclusive right to drill and explore for oil, gas, and other hydrocarbons at a depth below 1,600 feet on certain fixed terms.

Petitioner received during 1928 the sum of $60,000 from the Standard Oil Co. of California as a bonus for entering into the agreement set forth above, and paid a commission of $15,000 to an agent for services rendered in the matter.

At the time of entering into this agreement and receipt of $60,000 bonus, petitioner was receiving income from the sale of oil and gas extracted from the property, and continued to do so for the balance of the year 1928, and is at the present time receiving income from said property, such oil and gas being produced from oil and gas sands by virtue of the leases of August 10 and April 2,1901.

The Standard Oil Co. of California to date has been unsuccessful in completing a well under the terms of the agreement of November 13, 1928, nor has there been to the present time any production of oil under that agreement.

The expenses and deductions incurred by petitioner during 1928 as chargeable against the income from this oil and gas property (exclusive of the commission of $15,000) amounted to $58,067.25.

The depletion allowable for the year 1928, based on cost and March 1, 1913, value of the property, amounted to $21,280.40.

The depletion allowed by the respondent from this property in determining the deficiency involved herein amounted to' $33,763.25.

If the Board holds that the bonus of $60,000 is properly included in gross income from the property, then the correct amount of depletion allowable from this property is the sum of $51,038.28.

We are not aware of any case involving the precise question here raised. The case of Vinton Petroleum Co. of Texas, 28 B.T.A. 549, cited by respondent, holding that depletion must be computed on the basis of separate properties (some owned and some leased) is clearly no authority for respondent’s position here. The problem does not, however, seem to be especially difficult.

By the original leases petitioner was entitled to drill and explore to any depth. The exact method of such development was left to petitioner. It could drill at its expense, could hire the drilling on a cash or a percentage basis, or it could sublease and receive either cash or a percentage of production. We do not know exactly what method was pursued previous to 1928, but it is a fact that successful wells were brought in and depletion was allowed in connection therewith.

The successful wells were drilled to a depth of less than 1,600 feet. For whatever reason, petitioner chose to sublease the exclusive right to drill to a depth greater than 1,600 feet. For granting this privilege petitioner received a bonus of $60,000 and incurred certain expenses. Thus far the deeper drilling has been unsuccessful and unproductive.

There can be no question but that were the sublessee successful in obtaining oil below 1,600 feet petitioner would be obliged to account to its lessor and predecessors in title for the same as production from the property originally leased. The question thus arises whether there is a difference in defining the term “ property ” as used in section 114 of the Revenue Act of 1928, between the point of view of the lessor and that of the lessee of land below 1,600 feet. Though as to that property lying above 1,600 feet petitioner is lessee only, and as to that below 1,600 feet it is both lessee and lessor, its rights with respect to its original lessor arc not abridged by the sublease. It seems to us we should gauge petitioner’s rights by looking at the question of property from its position, not from that of the sub-lessee. So viewing the question, we are of the opinion that the term “ property ”, as used in the sections of the revenue act relating to depletion in so far as respects petitioner in this case, relates to the property acquired by it under the original leases, and that wkatever may be the rights of the sublessee as respects its interest in the land below 1,600 feet, petitioner is entitled to return as income any proceeds related to the drilling of the land whether above or below 1,600 feet. Specifically, we are of the opinion that the bonus paid by the sublessee for the exclusive privilege of drilling the land to the lower depths is income from the property granted to petitioner by the leases to it, and since there is production from the depths of less than 1,600 feet it is immaterial that the deeper wells put down by the sublessee have been unproductive.

The effect of this holding is that all of the land both above and below the 1,600-foot level constitutes, as to the petitioner, one property. . So to hold is not to hold that petitioner could not, for certain purposes, sever part of the land lying below 1,600 feet, nor is it to hold that the party acquiring the land below 1,600 feet would not have a “ property.” Consideration of these questions is not necessary to our decision.

The above conclusions find support in the opinion of the Supreme Court in Palmer v. Bender, 287 U.S. 551. In that case the learned justice observed:

⅜ * ⅝ The language of tlie statute is broad enough to provide, at least, for every ease in which the taxpayer has acquired, by investment, any interest in the oil in place, and secures, by any form of legal relationship, income derived from the extraction of the oil, to which he must look for a return of his capital.
That the allowance for depletion is not made dependent upon the particular legal form of the taxpayer’s interest in the property to be depleted was recognized by this Court in Lynch v. Alworth-Stephens Co., 267 U.S. 364. There a depletion allowance under § 12 (a) of the 1916 Act, 39 Stat. 767, was claimed by a lessee of a mining lease, in the computation of tax on income from the proceeds of ore mined. The statute made no specific reference to lessees and the Government argued that as the lessee acquired no ownership of the ore until the severance from the soil (see United States v. Biwabik Mining Co., 247 U.S. 116, 123) the lease gave him no depletable interest in the ore in place. But this Court held that regardless of the technical ownership of the ore before severance, the taxpayer, by his lease, had acquired legal control of a valuable economic interest in the ore capable of realization as gross income by the exercise of his mining rights under the lease. Depletion was, therefore, allowed.
Similarly, the lessor’s right to a depletion allowance does not depend upon his retention of ownership or any other particular form of legal interest in the mineral content of the land. It is enough if, by virtue of the leasing transaction, he has retained a right to share in the oil produced. If so he has an economic interest in the oil, in place, which is depleted by production. Thus, we have íeeently held that the lessor is entitled to a depletion allowance on bonus and royalties, although by the local law ownership of the minerals, in place, passed from the lessor upon the execution of the lease. See Burnet v. Harmel, supra; No. 104, Bankers Pocahontas Coal Co. v. Burnet, ante p. 308.

We are of the opinion that respondent was in error in refusing to allow petitioner to add the bonus to income from the property in computing depletion therefrom. The fact that there has been for many years production from the shallow wells is sufficient to bring petitioner within the requirements laid down by the Board in Lizzie H. Glide, 27 B.T.A. 1264.

Reviewed by the Board.

Decision will be entered wider Rule 50.


author: Van Fossan:

text:
    David Herbert Botchford, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53118.
    Promulgated December 27, 1933.

      Walter E. Hettman, Esq., and Kenneth N. Logan, O.P.A., for the petitioner.

      Dean P. Kimball, Esq., for the respondent.
   opinion.

Van Fossan:

The respondent determined that a payment of $30,000 made to petitioner in the year 1928 was additional compensation for services rendered and found a deficiency for that year in the amount of $5,563.05. Petitioner contends the payment was a gift.

For a period of 14 years prior to 1928 petitioner had been vice president and general manager of Columbia Steel Corporation. Prior to August 1, 1927, his salary had been $20,000 per year. On that date it was changed to $30,000. In September of the same year petitioner suffered an attack of acute neuritis and high blood pressure. He was confined to his bed for a time and then on advice of his physician took a trip to Honolulu. Not being benefited, petitioner returned and later took a trip east for similar purposes. In the early part of December 1927 petitioner resigned his position, the company accepting the same December 19, 1927.

On December 23, 1927, a special meeting of the executive committee of the board of directors of the Columbia Steel Corporation was held and the following resolution adopted:

D. H. Botchford, Remuneration:
On motion of Director Fleishhacker, seconded by Director Drum, it was
Resolved that the Executive Committee recommend to the Board of Directors for their approval the following settlement to be made with Mr. Botchford upon his leaving the Company.
That Mr. Botchford’s connection with the Company cease as of December 31, 1927; that an additional year’s salary be credited to Mr. Botchford, there being charged against this amount the personal account of Mr. Botchford with the Company, and the remaining balance to be paid to Mr. Botchford in twelve equal monthly installments during the year 1928; and that President Grant and Director Dali be constituted a committee of two to draft appropriate resolutions covering this action, for consideration by the Board.

On January 16, 1928, the board of directors adopted the following resolution:

Resolved: That wheeeas D. H. Botchford resigned as General Manager of this Corporation on December 19, 1927, after having been in the service of this Corporation and its predecessor for many years; and
Whereas tlie condition of the health of said D. H. Botchford might make it difficult for him to procure immediate remunerative employment;
Resolved : That this Corporation pay to J. D. Grant and C. G. Dali the sum of $30,000 less the amount of the personal indebtedness of said D. H. Botchford to this Corporation and that said J. D. Grant and C. G. Dali shall hold the sum so paid to them for the benefit of D. H. Botchford and shall be authorized to pay over said sum to him in twelve equal installments during the calendar year 1928, or at such other times or manner as said J. D. Grant and C. G. Dali shall determine.

The personal indebtedness ” of petitioner to the corporation referred to in the resolution amounted to $14,417.84. This sum was to be credited to petitioner’s account and the balance of the $30,000 paid in installments. These payments were made monthly in amounts of $1,500, the final balance being $644.90, paid in December 1928.

Petitioner did not return the sums so received and credited as income. The company deducted the payment of $30,000 as an expense under the caption, “ Compensation allowed D. H. Botchford fox services to December 31, 1927, $30,000.”

In this case there is a direct conflict between the phrasing of and the inferences and conclusions to be drawn from the official corporate records and the testimony of certain of the witnesses for petitioner. Certain key words used in the resolution, such as “ remuneration ”, “ settlement with D. H. Botchford ”, “ additional year’s salary ”, “ pay to J. D. Grant and C. G. Dali the sum of $30,000 ”, together with the treatment by the company of the payment as an expense deduction in its tax return, it being described as “ compensation’ allowed D. H. Botchford for services to December 31, 1927 ”, suggest compensation rather than a gift. These resolutions and other records were coincident in time with the payment and presumptively accurately reflect the attitude of the company. The burden was on petitioner to rebut the natural inferences thus arising. There is nothing to demonstrate that these characterizations were merely inartistic. Under the holding of the Circuit Court of Appeals for the Second Circuit, the burden was on petitioner to prove that the action of the company officials in claiming a deduction for “ compensation allowed D. H. Botchford for services to December 31, 1927 ” was unauthorized if such be the fact, Fisher v. Commissioner, 59 Fed. (2d) 193, and no such proof was submitted.

Certain of the directors testified that they intended the payment as a “ donation.” Under the circumstances of the case, however, we feel constrained to hold that petitioner has not proved the respondent’s determination to be in error. See Fisher v. Commissioner, supra.

The case differs fundamentally from John H. Rosseter, 12 B.T.A. 254; affd., 33 Fed. (2d) 286. In that case the payment was officially designated as a gift, both by the directors and stockholders. The payment was charged to surplus and no deduction was claimed in the corporate tax return. Likewise, the case differs from the case of Wilfred H. Cunningham v. Commissioner, 67 Fed. (2d) 205. The court in that case held that the official characterization of the payment, in the authorizing resolution, as “ an honorarium ” clearly indicated the intention of the corporation to make a gift. Comparable considerations were the basis of the decision in Lunsford v. Commissioner, 62 Fed. (2d) 741. Cf. Bass v. Hawley, 62 Fed. (2d) 721; Noel v. Parrott, 15 Fed. (2d) 669; Arnold J. Mount, 10 B.T.A. 1156; Willis L. Garey, 16 B.T.A. 274.

Though we do not deem it necessary to enter into a discussion of the matter, we may call attention to the implications arising from the fact that corporation directors have been held to have no authority,' without authorization of the stockholders, to make a gift. Noel v. Parrott, supra; Fisher v. Commissioner, supra.

We hold that the petitioner has failed to prove that the respondent was incorrect in his determination that the payment of $30,000 was additional compensation.

Reviewed by the Board.

Decision will be entered for the respondent.


text:
    Helene V. B. Wurlitzer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61690.
    Promulgated January 3, 1934.

      Laurence Graves, Esq., for the petitioner.

      Allin Pierce, 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 1929 in the sum of $7,517.11.

The petitioner alleges that the respondent erred in determining that the basis for ascertaining the gain realized by the petitioner in 1929 from the sale of 512 shares of the capital stock of the Rudolph Wurlitzer Co., received by the petitioner on January 28, 1924, as a gift from her daughter, Louise Wurlitzer, who received the stock as a gift from her father, Howard E. Wurlitzer, prior to December 31, 1920, is the fair market value of such stock on March 1, 1913, in the hands of Howard E. Wurlitzer. The petitioner alleges that the proper basis is either the value of the stock on January 28, 1924, or its value when received by Louise Wurlitzer.

The facts were stipulated as follows:

The petitioner is an individual residing in Cineinnati, Ohio.
On January 28, 1924, the petitioner received as a gift from her daughter, Louise Wurlitzer, 515 shares of the common capital stock of The Rudolph Wurlitzer Company, a corporation. Of these 515 shares, 512 shares represented shares received by the said Louise Wurlitzer as gifts from her father, Howard E. Wurlitzer, on April 26, 1915, May 23, 1917, and August 31, 1918, together with stock dividends declared and received thereon.
The values of the said 512 shares of stock at the time of receipt by Louise Wurlitzer, after adjustment for a stock dividend of 100 per cent in 1920 and a stock dividend of 28 per cent in 1922, were as follows:
Louise Wurlitzer died on February 14, 1924. The respondent determined that the gift made by said Louise Wurlitzer, deceased, to the petitioner, of the 515 shares of stock of The Rudolph Wurlitzer Company was a transfer in contemplation of death and should he included as a part of the gross estate of the said Louise Wurlitzer for Federal estate tax purposes at a value of $235 per share, or a total value of $167,375. Upon the basis of such a determination the respondent assessed against and collected from the estate of the said Louise Wurlitzer a Federal estate tax in the amount of $2,046.11, no part of which has been refunded or credited.
In 1929 the petitioner sold the 515 shares of stock received from her daughter on January 28, 1924, together with other stock of The Rudolph Wurlitzer Company. In ascertaining the gain realized by the petitioner from the sale of 512 of the said 515 shares the respondent used as the petitioner’s basis the basis of such stock in the hands of Howard E. Wurlitzer, from whom the said Louise Wurlitzer had received such stock as gifts, such basis being the March 1,1913, fair market value of $107,283.40 or $209,557 per share.

Section 113 (a) (2) of the Revenue Act of 1928 is as follows:

(a) Property acquired after February 28, ISIS. — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
***$«*$
(2) Gm after December 31, 1920. — If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift. If the facts necessary to determine such basis are unknown to the donee, the Commissioner shall, if possible, obtain such facts from such donor or last preceding owner, or any oilier person cognizant thereof. If the Commissioner finds it impossible to obtain such facts, the basis shall be the fair market value of such property as found by the Commissioner as of the date or approximate date at which, according to the best information that the Commissioner is able to obtain, such property was acquired by such donor or last preceding owner.

The petitioner contends that the intendment of the above statute is to place the donee in the same position as his donor, that prior to December 1, 1920, the basis of measuring gain upon its sale is the fair market value of the property at the time of its acquisition by the donor and that, therefore, since the donor of Louise Wurlitzer acquired the stock prior to December 31, 1920, the petitioner’s gain should be determined by the fair market value of the stock at that time. In Aaron Mendelson, 18 B.T.A. 215, we considered the same argument and held that the facts in that case, which in all essential respects is similar to the case at bar, brought it within the second clause of section 202(a)(2) of the Revenue Act of 1921, identical in meaning with section 113(a)(2). There, as here, the donor of the petitioner was also a donee. The original donor there happened to be the petitioner, but we see no vital difference in principle. At the time of the acquisition by the petitioner donee the situation was on all fours with the present case. Our holding in the Mendelson case was that:

Under the provisions of section 202(a) (2) of the Revenue Act of 1921, the basis for determining any loss or gain in the sale of property acquired by gift after December 31, 1920, from a person who also obtained ownership by gift, is the cost of the property to the last preceding owner by whom it was not so acquired.

The decision of the United States Supreme Court in Taft v. Bowers, 278 U.S. 470, is cited by counsel for both the petitioner and the respondent. We think it sujiports the view of the respondent rather than that of the petitioner. In that case, in which the appropriate provisions of the Revenue Act of 1921 were involved, the Supreme Court said:

If, instead of giving the stock to petitioner, the donor had sold it at market value, the excess over the capital he invested (cost) would have been income therefrom and subject to taxation under the 16th Amendment. He would have been obliged to share the realized gain with the United States. He held the stock — the investment — subject to the right of the sovereign to take part of any increase in its value when separated through sale or conversion and reduced to his possession. Could he, contrary to the express will of Congress, by mere gift enable another to hold this stock free from such right, deprive the sovereign of the possibility of taxing the appreciation when actually severed, and convert the entire property into a capital asset of the donee, who invested nothing, as though the latter had purchased at the market price? And, after a still further enhancement of the property, could the donee make a second gift with like effect, etc.? We think not.
In truth the stock represented only a single investment of capital — that made by the donor. And when through sale or conversion the increase was separated therefrom, it became income from that investment in the hands of the recipient subject to taxation according to the very words of the 16th Amendment. By requiring the recipient of the entire increase to pay a part into the public treasury, Congress deprived her of no right and subjected her to no hardship. She accepted the gift with knowledge of the statute and, as to the property received, voluntarily assumed the position of her donor. When she sold the stock she actually got the original sum invested, plus the entire appreciation, and out of the latter only was she called on to pay the tax demanded.
The provision of the statute under consideration seems entirely appropriate for enforcing a general scheme of lawful taxation. To accept the view urged in behalf of petitioner undoubtedly would defeat, to some extent, the purpose of Congress to take part of all gain derived from capital investments. To prevent that result and insure enforcement of its proper policy, Congress had power to require that for purposes of taxation the donee should accept the position of the donor in respect of the thing received. And in so doing, it acted neither unreasonably nor arbitrarily.

See also Richard T. Keeley, 15 B.T.A. 804; Cooper v. United States, 280 U.S. 409.

The petitioner also argues that since the respondent determined for Federal estate tax purposes that the stock in question was property transferred in contemplation of death and that the fair market value thereof at the time of transfer was $167,375, such sum should be taken as the basis of gain, for the reason that property so designated does not come within the exceptions contained in section 113. We see no merit in this contention. The fact that the respondent has denominated the stock as “ property transferred in contemplation of death ” makes it none the less a gift. And we are dealing with the statute that applies directly to gifts regardless of the circumstances under which they were made. Petitioner’s contention is directly contrary to article 593 of Regulations 74. We approve the action of the respondent.

Decision will be entered for the respondent.