text:
    Patrick Cudahy Family Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83436.
    Promulgated December 15, 1937.

      Richard H. Tyrrell, Esq., for the petitioner.

      Albert E. Arent, Esq., for the respondent.
   OPINION.

Smith :

This proceeding involves deficiencies in petitioner’s income tax for the fiscal years ended June 30, 1933, and June 30, 1934, of $773.99 and $101.46, respectively. Only a portion of each deficiency is in controversy. The sole question in issue is as to when Wisconsin personal property and real property taxes accrue as liabilities so as to be deductible from gross income in income tax returns made on the accrual basis, under section 23 (c) of the Revenue Act of 1932.

The petitioner is a Wisconsin corporation, engaged in the business of renting business and residential apartment properties owned by it and located in the city of Milwaukee. It has at all times kept its books of account and made its income tax returns on the accrual basis, and continuously since 1924 upon the basis of a fiscal year ended June 30.

In its income tax returns for the fiscal years ended June 30, 1933, and June 30, 1934, it deducted from gross income, as taxes accrued during that year, personal property and real estate taxes which became due and were paid by it within each fiscal year as follows:

Upon audit of the taxpayer’s returns the respondent allowed the deduction from the gross income reported for the fiscal year ended June 30, 1933, of the taxes which were assessed as of May 1, 1933, namely, $56,387.59, which taxes were claimed by the petitioner as a deduction from gross income in the return for the fiscal year ended June 30,1934, and for the last named year substituted as a deduction for the $56,387.59 claimed in that return the amount of $56,192.65, which represented the real estate and personal property taxes assessed as of May 1, 1934. He thus disallowed the deduction of $3,888.18 claimed upon the return for the fiscal year ended June 30, 1933, and $194.94 of the amount claimed as a deduction upon the return for the fiscal year ended June 30, 1934.

The adjustment made by the respondent is in accordance with I. T. 2694, Cumulative Bulletin XII-1, p. 107. In that ruling it is held:

With respect to the accrual date of real property taxes under the Wisconsin Statutes of 1927, it has been held (I. T. 2633, C. B. XI-2, 77) that ownership of real property on the date (falling between May 1 and the first Monday in July of each year for cities, and between May 1 and the last Monday of June elsewhere in the State) as of which such property is actually valued for assessment purposes is the “event” which determines the liability for the tax. It was further held that where the tax had accrued prior to the purchase of the property it should be treated as a part of the cost of the property.

In this proceeding the petitioner contends that both personal property and real property taxes in Wisconsin do not accrue until December of each taxable year and that the taxes which accrue at that time are those which are assessed as of May 1 preceding. It is contended that no liability for the payment of these taxes attaches under the laws of the State of Wisconsin until the tax roll is completed and delivered by the tax commissioner to the city treasurer with his warrant for collection of the taxes annexed thereto; that such a contention is supported by the decisions of the State of Wisconsin and one Federal court, and that the rule is recognized and followed by the Wisconsin State Tax Commission in the administration of the Wisconsin income tax law; that the tax commission does not allow the deduction of Wisconsin property taxes prior to November 30 by income taxpayers reporting on a fiscal year basis and making its returns upon the accrual basis. See article 507.1 of the Wisconsin income tax regulations, to the effect that personal property taxes and real estate taxes are deductible in the year in which they are assessed, but that no accrual for such taxes may be deducted on any return for the fiscal year ending prior to November 30 (see Prentice-Hall Wisconsin Tax Service, 1937, paragraph 1128).

Section 70.10 of the Wisconsin statutes provides in part:

* * * All real and personal property shall be assessed as of the first day of May in such year except as provided in section 70.13.

Section 74.62 of the same statutes provides in part:

* * * As between grantor and grantee of any land, when there is no express agreement as to which shall pay the taxes assessed thereon for the year in which the conveyance is made, if such land is conveyed an or before the first day of December, then the grantee shall pay the same; but if conveyed after that date, then the grantor shall pay them.

Although tax rolls are based on the valuations of property as of May 1 each year, they are not completed until many weeks thereafter. The various steps taken by the state, county, and city authorities in making the assessments for the calendar years 1932 and 1933 were in their chronological order as follows:

On the last Monday in June (June 27, 1932, and June 26, 1933) the assessors of the city of Milwaukee delivered their assessment rolls to the city tax commissioner and met with the commissioner as an assessment board to make all necessary corrections and changes in the assessment rolls.

On the first Monday in July (July 5, 1932, and July 3, 1933) the board of review of the city of Milwaukee met to review the work of the assessment board, and after hearings thereon adjourned in August.

On September 29, 1932, and September 21, 1933, the reports and assessment valuation rolls of the tax commissioner for the city of Milwaukee were filed with the common council and were approved on October 3 and October 2 of the respective years. On November 10, 1932, the common council, by resolution, adopted the recommendations of the city comptroller relating to the tax levy and levied the Milwaukee city taxes for 1932, fixing the city tax rate at $22.40 for each $1,000 of assessed valuation. On November 13, 1933, the common council of the city of Milwaukee, by resolution, adopted the recommendations of the city comptroller relating to the tax levy and levied the Milwaukee city taxes for the year 1933, fixing the city tax rate at $23.33 for each $1,000 of assessed valuation. On December 12, 1932, and on December 11, 1933, both dates being the second Monday of December of those years, the tax commissioner delivered the tax rolls to the city treasurer of Milwaukee with his warrant for the collection of the taxes shown by the tax rolls annexed thereto.

The petitioner’s income tax returns for the tax years here in question were made under the Revenue Act of 1932, winch provides (sec. 23 (c)) for the deduction from gross income of “Taxes paid or accrued within the taxable year.”

Section 41 of the same act provides in part:

The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the ease may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. * * *

The question presented in this case was ruled upon directly by the District Court of the United States for the Eastern District of Wisconsin in the case of Securities Co. of Milwaukee v. United States (Dist. Ct., Wisc., Dec. 10, 1936), not reported. The court held that state and county taxes on real property in Milwaukee, Wisconsin, accrue on the day that the tax roll in which they are extended is completed and delivered by the local tax commissioner to the local treasurer with his warrant for collection of such taxes annexed thereto. Although the 1929 real estate taxes were assessed on a valuation as of May 1, 1929, the court held that they did not accrue and become a lien on the property until December 9, 1929, when the tax roll in which they were extended was completed and delivered by the tax commissioner of the city of Milwaukee to the city treasurer, with his warrant for collection of such taxes annexed thereto.

The case of Theodore Plestcheeff, 35 B. T. A. 508, involved the deduction of real estate taxes in the State of Washington. In that state the tax levy was made in October but upon a valuation determined as of the preceding March 1. The taxpayer became the owner of the property on April 5, 1931, and claimed as a deduction the taxes levied in October 1931. The respondent disallowed the deduction upon the ground that the taxes were based upon a valuation determined as of March 1, a date before the taxpayer acquired title to the property, and that therefore such taxes were not the taxpayer’s taxes. The Board held, however, that the incidence of the tax did not occur until the levy in October and that therefore the deduction was proper.

Since it appears that the petitioner had no liability for the payment of real property taxes assessed as of May 1, 1932, and May 1, 1933, until after the beginning of its fiscal years ended June 30,1933, and June 30, 1934, we are of the opinion that the real property taxes properly accruable for the fiscal years mentioned are the real property taxes which were assessed as of May 1, 1932, and May 1, 1933, as contended by the petitioner, and not those assessed as of May 1, 1933, and May 1, 1934.

We are of the opinion that no distinction should be made between real property taxes and personal property taxes under the laws of Wisconsin so far as the date of accrual is concerned. Both are assessed as of May 1 in each calendar year, but it is clear from the decisions of the Wisconsin courts that the date of May 1 is only the date of valuation. Cf. Gilkey v. City of Merrill, 67 Wis. 459; 30 N. W. 733. No levy is made of either personal property taxes or real property taxes until after November 1 of each year. Ordinarily, no liability for the payment of taxes, expenses, etc., accrues until after the happening of all events which definitely fix the liability. Cf. Lucas v. American Code Co., 280 U. S. 445. In United States v. Anderson, 269 U. S. 422, the question presented to the Court was whether a taxpayer keeping its books of account on the accrual basis and accruing therein munitions taxes for the calendar year could deduct in a subsequent year the munitions taxes which it had accrued in a prior year. The Supreme Court held that the purpose of the provision of the Revenue Act of 1916, permitting taxpayers keeping their books of account on the accrual basis to make income tax returns on that basis, was to enable them to “make their returns according to scientific accounting principles, by charging against income earned during the taxable period, the expenses incurred in and properly attributable to the process of earning income during that period.” It was further held:

* * * In a technical legal sense it may be argued that a tax does not accrue until it has been assessed and becomes due; but it is also true that in advance of the assessment of a tax all the events may occur which fix the amount of the tax and determine the liability of the taxpayer to pay it. * * *

The principle thus announced was further extended in Fawcus Machine Co. v. United States, 282 U. S. 375, in which it was held that Federal income and excess profits taxes for the year 1918 accrued in that year even though the Revenue Act of 1918 was not passed until February 24, 1919, and made changes in the rates. The Court observed that—

* * * The act [Revenue Act of 1918] was passed in ample time to allow the taxpayer to readjust its accounts for that year by including these taxes; and since its books were kept on an accrual basis, it was necessary that this should be done in order clearly to reflect the income for 1918.

The petitioner’s income tax returns for the fiscal years ended June 30, 1933, and June 30, 1934, were due to be filed on or before October 15 of each year. At that date the rate of tax to be levied upon real and personal property in Wisconsin had not been determined and the levy of the taxes had not been made. All of the incidents had not transpired which fixed the petitioners’ tax liabilities for 1933 and 1934 until after the returns were due to be filed. We do not think that it can be said in this case, as was said in United States v. Anderson, supra, and Fawcus Machine Co. v. United States, supra, that the taxes levied as of May 1, 1933, and May 1, 1934, were properly charges against the incomes earned for the fiscal years ended June 30, 1933, and June 30, 1934. As we understand the statutes of the State of Wisconsin the taxes assessed as of May 1 each year are for the purpose of raising funds to meet the expenses of the calendar year. If our supposition is correct, as we believe it to be, and since all of the incidents fixing the tax liabilities had not transpired up to October 15 of each year, we are of the opinion that the petitioner correctly accrued in its income tax returns for the fiscal years involved in this proceeding the tax liabilities which were assessed as of May 1, 1932, and May 1, 1933.

Judgment will be entered under Rule 50.


source: Caselaw Access Project

author: Mellott :

license: Public Domain

text:
    Ohio Farmers Indemnity Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80116.
    Promulgated December 15, 1937.

      Charles E. Curtis, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Mellott :

The Commissioner (respondent here) determined a deficiency in petitioner’s income tax for the year 1932 in the amount of $7,531.55. The deficiency resulted from the Commissioner’s determination that petitioner and the Ohio Farmers Insurance Co., which owned all of the capital stock of petitioner, improperly filed, and were not entitled to file, a consolidated return. It is stipulated that if they were entitled to file a consolidated return no tax is due and if they were not entitled to file such return, then a tax in the above amount is due.

The facts, all of which were stipulated, are as follows:

2. The petitioner is a corporation organized in 1929 under the general corporation laws of the State of Ohio. It is authorized to conduct a general liability insurance business and the major portion of its business since organization has consisted of insuring against the liability arising out of the ownership, maintenance, and use of motor vehicles.
3. It was authorized to issue 2,000 shares of common capital stock, and at the time of organization the entire 2,000 shares were subscribed for by Ohio Farmers Insurance Company. 1,991 shares were issued to said Ohio Farmers Insurance Company and at its direction the remaining nine shares were issued one to each of the nine directors of said Ohio Farmers Insurance Company. During the year 1932 and at present the shares of petitioner were and are so distributed.
4. The directors of Ohio Farmers Insurance Company were elected directors of the petitioner and they or their successors have been re-elected from time to time since organization of petitioner.
5. The Ohio Farmers Insurance Company is an Ohio corporation which was organized in 1848. It obtained its charter by special act of the Legislature of the State of Ohio, and it was and is authorized to conduct the business of fire insurance and allied lines. It is not authorized to conduct the business of liability insurance.
6. The Ohio Farmers Insurance Company has no capital stock and no shareholders. Its directors are elected at an Annual Meeting at which each policyholder is entitled to vote.
7. The petitioner and Ohio Farmers Insurance Company conduct their business from the same office with the same officers, directors, employees and agents. The business of the petitioner is conducted as though it were a department of the Ohio Farmers Insurance Company. The two Companies issue joint policies on motor vehicles, the petitioner underwriting the classes of insurance which it is authorized to write; namely, liability, and Ohio Farmers Insurance Company insuring against loss or damage to the vehicle.
8. The agents of both Companies account only to the Ohio Farmers Insurance Company for the business which they write for both Companies. They also pay the balance due both Companies to Ohio Farmers Insurance Company only. The portion of those funds which belongs to the petitioner is paid to it monthly by the Ohio Farmers Insurance Company.
9. The policies of insurance which the petitioner issues both in conjunction with the Ohio Farmers Insurance Company and separately are issued for a cash premium ascertained and payable in advance, and there is no authority or provision for or liability of policyholders for assessments. The petitioner does not pay and makes no provision in its policies to pay dividends to policyholders.
10. The Ohio Farmers Insurance Company issues only policies on which the premium is ascertained and payable in advance. Its policies contain no authority or provision for or liability of policyholders for assessments and it has not issued a policy containing any such authority or provision or liability for over seventy-five years. Its policies make no provision for the payment of dividends to policyholders and it does not make any such payments.
11. Ohio Farmers Insurance Company writes and issues policies on the stock plan only and its policies are the uniform standard form adopted and used by stock fire insurance companies. A specimen of the form of policy issued is attached hereto and marked Exhibit “A.” In states where a statutory policy is in effect for the stock companies, Ohio Farmers Insurance Company issues that statutory form.
12. Ohio Farmers Insurance Company keeps its books and records in accordance with the established practices and rules of stock fire insurance companies; it keeps its books on an accrual basis and establishes reserves for unearned premiums and reserves for unpaid losses. It is admitted to membership in the National Board of Fire Underwriters, an organization which limits its membership to stock insurance companies only.' It subscribes to regular published rates of premium for stock companies.
13. The Ohio Farmers Insurance Company made its income tax return for the year 1932 under section 204 of the revenue act of that year. For many years prior to that time it made its income tax return under the section of law provided for insurance companies other than life or mutual.

In addition to the stipulated facts, the annual statements of the two companies, which were filed with the State of Ohio for the year ended December 31, 1932, were received in evidence. The statement filed by petitioner was upon a form entitled “Miscellaneous Stock Companies—Convention Edition, 1932” while the form used by the Ohio Farmers (Mutual) Fire Insurance Co. was entitled “Mutual Fire Companies—Convention Edition, 1932.”

In the notice of deficiency it is stated:

Tour contention that your company and the Ohio Farmers Insurance Company are affiliated within the meaning of section 141 of the Revenue Act of 1932, has been denied. You contend that the Ohio Farmers Insurance Company is taxable as a stock fire insurance company under the provisions of section 204 of the Revenue Act of 1932 for the reason that it conducts its business in the same manner as a stock fire insurance company and that it should, therefore, be permitted to file a consolidated return with the Ohio Farmers Indemnity Company which is taxable under section 204 of the Act.
Section 208 of the Revenue Act of 1932 provides that mutual insurance companies other than life insurance companies, shall be taxable in the same manner as other corporations, with certain exceptions. Other corporations are taxable under section 13 of the Act. Section 141 (e) provides that an insurance company subject to tax under sections 201 or 204 shall not be included in the same consolidated return with a corporation subject to the tax imposed by section 13.
This office holds that the Ohio Farmers Insurance Company, which has no capital stock, is a mutual insurance company within the meaning of section 20S of the Revenue Act of 1932.

The sections referred to in the notice of deficiency are shown in the margin.

Whether the petitioner and its parent were entitled to file a consolidated return for the taxable year depends primarily upon whether the parent was, or was not, a mutual company. Petitioner was subject to the tax imposed by section 204, supra. If its parent was subject to the tax imposed by the same section then the use of a consolidated return was proper; but if the parent was a mutual company and subject to the tax imposed by section 13 of the revenue act, then the use of a consolidated return is not proper, for section 141, supra, specifically prohibits its use under such circumstances.

It has been stipulated that the Ohio Farmers Insurance Co. obtained its charter by special act of the Legislature of the State of Ohio in 1848. An examination of the act (vol. 46, Ohio Laws, p. 95 et sequa) discloses that the original name of the company was the “Farmers Mutual Fire Insurance Company of Medina County.” The act provided that all persons who should at any time become interested in said company by insuring therein should be deemed and taken to be members thereof for and during the term specified by their respective policies of insurance. It made provision for the election of a board of directors with the usual power; required that every person who should become a member of the company by effecting insurance therein should deposit a promissory note for such sum as should be determined by the board of directors; provided that a part, not exceeding 6 per centum, of the note should be immediately paid, the remainder to be payable when the directors should deem payment to be requisite for the payment of losses or other expenses; obligated every member to pay his portion of all losses and expenses; made provision for special assessment on all the members of not exceeding fifty cents on each hundred dollars by them insured: and authorized any member, upon payment of the whole of his deposit note and surrendering his policy before any subsequent loss or expense had occurred, to be discharged from the company.

The original act was amended under date of February 23, 1849 (vol. 47, Ohio Laws, p. 287), prohibiting insurance upon certain kinds of property and providing that the company should not make insurance on any one risk exceeding two thousand dollars. It was again amended under date of January 3, 1851 (vol. 49, Ohio Laws, p. 255). The amendment provided that the name of the company should be changed to “Ohio Farmers Mutual Fire Insurance Company” ; that “the amount to be paid at the time application is made for insurance in this company may be determined by the directors, and may include such amount as will pay the applicant’s proportion of losses and expenses during the time of such insurance”; and that the capital stock of the company should be annually listed, assessed at its true value, and taxed in the same manner as other personal property. Our attention has not been called to any other amendments to the charter of the company and we have found no others.

It is apparent from the foregoing that the Ohio Farmers Mutual Fire Insurance Co. was organized and incorporated as a mutual insurance company, and this is not denied by the petitioner. Moreover, petitioner admits that it resembles a mutual insurance company in that it has no capital stock and its directors are elected by its policyholders. But petitioner contends that in deciding whether or not it is a mutual insurance company within the meaning of the provisions of the Revenue Act of 1932 here involved, we should be governed by the nature of its business and not by its corporate structure or organization. Petitioner argues that it conducts its business as a stock fire insurance company in that it issues policies of insurance only in consideration of a cash premium ascertained and payable in advance; that-the policies so issued by it are nonassessable and carry no contingent liability for additional premiums from the policyholders; that it does not pay dividends to policyholders; and that it keeps its books and records and accumulates reserves in accordance with the established practices of, and the rules, regulations, and laws governing, stock fire insurance companies. Petitioner therefore urges us to find that said company is engaged in insurance business “other than life or mutual” and is entitled to make its income tax return under the provisions of section 204, supra.

The contention and - argument of the petitioner is strikingly similar to that considered by the Supreme Court of Ohio in Ohio Mutual Insurance Co. v. Marietta Woolen Factory, 3 Ohio St. 348, N. S. In that case an insurance company was incorporated in 1843 with powers usually conferred upon mutual insurance companies and in no material respects different from those conferred upon the Farmers Mutual Insurance Co. of Medina County in 1848. The charter of the Ohio Mutual Insurance Co. was amended by the Legislature of the State of Ohio in 1844, the amendment providing that it should be lawful for any person applying for insurance to pay the company a certain definite sum of money, in full for such insurance; which sum was to be in lieu and place of a premium note; and that such person or persons should not be liable to the company during the continuance of his, her, or their policy, for any sum beyond the amount thus originally paid. It was contended that this amendment entirely changed the essential character of the company from a purely mutual to a mutual stock company. The Supreme Court of Ohio held that no such radical change was intended to be effected, and said:

It was still a mutual insurance company, with no power in the directors to control its assets as an independent company, or to divert them from the purposes to which the law and the contract of the parties had appropriated them. Every person insuring, whether by the payment of a cash premium, or the deposit of a premium note, still became a member of the company, and this act simply gave the “election” to him, whether he would become a member in one way or the other; and if he chose the former, it expressly provides that the sum paid should “be in lieu and place of a premium note” and he should be liable to pay no more.

This decision of the Supreme Court of Ohio is, in our opinion, supported by a majority of the courts of the United States. An insurance company is mutual when there is no group but the policyholders who have interest in it or power over it. Equitable Life Assurance Society of the United States v. Bowers, 87 Fed. (2d) 687. “The theory of a mutual insurance company is, that the premiums paid by each member for the insurance of his property constitute a common fund, devoted to the payment of any losses that may occur. * * * The cash premium may as well represent the insured in the common fund as the premium note” and the mutual principle is not abrogated by the taking of cash premiums. Union Insurance Co. v. Hoge, 62 U. S. 35, 65; State v. Manufacturer's Mutual Fire Insurance Co., 91 Mo. 311, 318. A person paying a cash premium to a mutual insurance company at the time a policy is issued becomes a member of the company and interested in its fund in proportion to the amount of the policy, and to tire extent of that interest he is an insurer of all other members. The term “mutual” as applied to an insurance company “does not import any peculiar or exact method of producing mutuality in the sense of equality among its members, but * * * is simply significant of an association for the purposes of insurance, whose fund for the payment of losses consists, not of a capital mutually contributed by any uninsured parties, but of the premiums mutually contributed by the persons insured * * *.” Mygatt v. New York Protection Insurance Co., 21 N. Y. 52; Schimpf & Son v. Lehigh Valley Mutual Insurance Co., 86 Pa. 373. A mutual insurance company issuing policies providing for the payment of a cash premium does not lose its identity as a mutual company. Buck v. Ross, 240 N. W. 858, 859; Davis v. Oshkosh Upholstery Co., 82 Wis. 488; 52 N. W. 771. Given v. Rettew, 162 Pa. St. 638; 29 Atl. 702; Spruance v. Farmers’ & Merchants' Insurance Co., 9 Colo. 36; 10 Pac. 285.

The Ohio Farmers Mutual Fire Insurance Co. was expressly authorized by statute to issue policies either on a premium note or cash plan. It appears that during the past 75 years it has operated on the cash plan and has issued policies only in consideration of a cash premium ascertained and payable in advance, these policies being nonassessable and carrying no contingent liability for additional premiums. This fact is strongly relied upon by petitioner in support of its contention that such company was doing business wholly and solely upon the stock company plan, and should be permitted to make its return upon the same basis as a stock fire insurance company under section 204, supra. Petitioner also relies upon the last sentence of article 1014 of Treasury Regulations 77, which reads as follows:

A stock fire insurance company, operated on the mutual plan to the extent of paying dividends to certain classes of policyholders, may make a return on the same basis as a mutual fire insurance company with respect to its business conducted on the mutual plan.

' Petitioner argues on brief that we have here the converse of that situation and that its parent company, although organized without capital stock, does its business upon the stock company plan and hence that it should be permitted to make its return upon the same basis as a stock fire insurance company.

We need not decide whether the above excerpt from the regulations is or is not a practical and correct interpretation of the statute. We may assume for the purposes of this decision that it is, for we do not agree with the petitioner that the situation here presented is the converse of that set forth in the regulations. It is true that the Ohio Farmers Mutual Insurance Co. has for many years issued policies on the cash premium plan, and that these policies are similar to those issued by stock fire insurance companies. In our opinion, however, this fact does not justify petitioner’s statement that the corporation is doing business on the stock company plan. The foregoing authorities convince us that a mutual insurance company may issue policies on the cash premium plan without departing from the principle of mutual insurance. “The cash premium belongs precisely where the premium note whose place it takes would belong and is subject to the same appropriation, with this modification, that it must first be applied and no part of it can be withdrawn upon the expiration of the policy although it should not have been all expended.” Ohio Mutual Insurance Co. v. Marietta Woolen Factory, supra. The cash premium is the equivalent of an assessment to the full amount of the premium note at its inception, had a note been given. Davis v. Oshkosh Upholstery Co., supra. The cash premiums are paid into a common fund which is to be retained for the payment of any losses or expenses which may occur to the company. Every person insured by paying a cash premium became a member of the company and entitled to vote for the election of its directors. Tinder these circumstances we do not agree with petitioner that the Ohio Farmers Insurance Co. was doing business upon the stock company plan. It had no capital stock and no group but its policyholders had any interest in it or power over it. It exercised only the powers conferred upon it by statute. These powers were the powers of a mutual insurance company.

It is our conclusion that the Ohio Farmers Mutual Fire Insurance Co. is a mutual insurance company and subject to tax as such under section 13 of the Revenue Act rather than under section 204, supra. We hold, therefore, that the respondent did not err in his determination that it could not file a consolidated return with the petitioner.

Judgment will be entered for the respondent.

       SEC. 13. TAX ON CORPORATIONS.
      (a) Rate of Tax.—There shall be levied, collected, and paid for each taxable year upon the net income of every corporation, a tax of 13¾ per centum of the amount of the net income in excess of the credit against net income provided in section 26.
      ***** * *
      SEC. 141. CONSOLIDATED RETURNS OF CORPORATIONS.
      ***** * *
      (e) A consolidated return shall be made only for the domestic corporations within the affiliated group. An insurance company subject to the tax imposed by section 201 or 204 shall not be included in the same consolidated return with a corporation subject to the tax imposed by section 13, and an insurance company subject to the tax imposed by section 201 shall not be included in the same consolidated return with an insurance company subject to the tax imposed by section 204.
      SEC. 201. TAX ON LIFE INSURANCE COMPANIES.
      (a) Definition.—When used in this title the term “life insurance company” means an insurance company engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), the reserve funds of which held for the fulfillment of such contracts comprise more than 50 per centum of its total reserve funds.
      SEC. 204. INSURANCE COMPANIES OTHER THAN LIFE OR MUTUAL.
      (a) Imposition of Tax.—In lieu of the tax imposed by section 13 of this title, there shall be levied, collected, and paid for each taxable year upon the net income of every insurance company (other than a life or mutual insurance company) a tax as follows:
      * * * * * * *
      SEC. 208. MUTUAL INSURANCE COMPANIES OTHER THAN LIFE.
      (a) Application of Title.—Mutual insurance companies, other than life insurance companies, shall be taxable in the same manner as other corporations, except as hereinafter provided in this section.
      ***** * *
      (c) Deductions.—In addition to the deductions allowed to corporations by section 23 the following deductions to insurance companies shall also be allowed, unless otherwise allowed—
      * * * * * * *
      (3) Mutual insurance companies other than life and marine.—In the case of mutual insurance companies (including interinsurers and reciprocal underwriters, but not including mutual life or mutual marine insurance companies) requiring their members to make premium deposits to provide for losses and expenses, the amount of premium deposits returned to their policyholders and the amount of premium deposits retained for the payment of losses, expenses, and reinsurance reserves.


author: ARNOLD:

text:
    Estate of Jessie H. Rand, Deceased, Frank C. Rand, Joseph O. Rand, and Fred L. Rand, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81984.
    Promulgated December 15, 1937.

      Stanley S. Waite, Esq., for the petitioner.

      Ralph E. Smith, Esq., for the respondent.
   OPINION.

ARNOLD:

The controlling statute, section 302 (c) of the Revenue Act of 1926, is set out in the margin. The respondent’s theory is that the gifts, although made six and four years, respectively, prior to decedent’s death, were made in contemplation of death. In support of his theory respondent contends that decedent’s “dominant motive” in making the gifts was to reduce her estate and avoid the estate tax as to her property. It is urged that, since avoidance of the estate tax was the “dominant motive”, it follows that the gifts were made in contemplation of death.

It is frankly conceded by respondent that decedent had other motives for making her transfers in addition to what he terms the “dominant motive.” He has conceded that one of decedent’s motives was her desire to see her children enjoy the benefits of the property given during her lifetime. He concedes that another .motive was her desire to avoid the Alabama personal property tax, and that still another motive was her desire to avoid the Federal income tax. But he contends that the principal motive, the one that primarily moved her to make these transfers, was her desire to avoid the Federal estate tax.

On their part the petitioners contend that decedent was motivated solely by the following desires: (a) to give to her children so she could see them enjoy the property while she lived; (b) to save Federal income taxes; and (c) to save Alabama personal property taxes. Petitioners deny, however, that decedent considered the possibilities of her own death, or any savings in death duties which might result from these transfers.

Whether property alleged to have been transferred in contemplation of death! should be included in a decedent’s gross estate rests primarily upon the particular facts of each case. The very nature of the question requires an examination of the motives and reasons which activated the decedent. The state of her health and mind at the time of making the gifts and her purpose in making them are of the utmost importance in determining whether the transfers were made in contemplation of death. Edith Huggard Sharp et al., Executors, 33 B. T. A. 290; United States v. Wells, 283 U. S. 102.

The Supreme Court has pointed out in the Wells case, supra, that it is not the general expectation of death which all entertain, that is meant by the statutory expression “contemplation of death”, but that “the thought of death is the impelling cause of the transfer.” The Court states that, where the disposition of property springs from a different motive, the statute does not embrace it, and particularly points out the dispositions of property related to purposes associated with life, rather than in anticipation of death.

The record in this case establishes clearly the deep and motherly affection which existed between the decedent and her children. She visited them while living, gave equally to them of her bounty so they could all be established in their homes and businesses, and upon her death distributed the residue among them, share and share alike. Her letters to them indicated a desire to help, with no hint of an apprehension of death. Her physical condition had been unchanged for years, and no organic trouble was discovered in an examination occurring approximately two years after the last transfer. Her disposition was cheerful, and even her last illness was not considered serious until a few days before her death. We can not believe under these circumstances that death was the impelling cause of the transfers here questioned.

The respondent urges, however, that, if the desire to avoid estate taxes on her property was the “dominant motive”, that would be sufficient to bring the transfers within the meaning of the statute. He relies particularly upon the testimony of Todd, the cashier of the bank at which decedent did business, which he brought out on cross-examination as follows:

Q. In addition to the discussion of Federal income tax there was also a discussion with reference to tax in event of her death?
A. No, except to this extent—when she called on the telephone and told me that she wanted these securities sent off, she referred to the estate and other Federal tax, and made the remark that she had been wanting to give them to the children for a good while, and she believed she would do it.
* * * * * * *
Q. By that she realized that by making the transfer the estate tax would be reduced, did she not?
A. I should think she would have by making the transfers, I cannot say what she realized, but that is what I thought she had in mind.
Q. Did she not say so?
A. I think she did.

We are unable to attribute to this testimony the weight respondent gives to it. The witness expressed a conclusion of his own regarding a statement made to him by the decedent over the telephone. He denies there was any discussion of estate taxes, which squares exactly with the rest of the record. Certainly, if death, and estate taxes were the principal concern in making the transfers, the letters from decedent’s brother would have made some reference indicating that apprehension. On the contrary, every communication from brother to sister, and from mother to children, indicates an intention to divide the property equally among the children for their benefit, so the mother could have the pleasure of watching her children enjoy the gifts.

It is unquestionably true that the transfers enabled the decedent to relieve herself of the responsibility of paying certain taxes. It may well be that she appreciated that she would save in taxes by the transfers, but the evidence could be far less convincing than that here adduced, and still justify us in disapproving the respondent’s determination. Had she been primarily concerned in avoiding estate taxes, as respondent insists, we doubt that she would have failed to distribute a much larger proportion of her estate. Nor would she have delayed so long as four years in making another distribution, if the distributions of 1927 and 1929 were impelled by the thought of death. The conclusion is inescapable that the impelling motive was thoughts of life and love, and the savings in taxes were merely a gratifying incident of the transfers.

In view of the foregoing we deem it unnecessary to review the extensive list of authorities presented by counsel. We would direct attention to the similarity of facts in the Wells case, supra, to the facts herein, and to the similarity of facts in Cecil R. Gamble, Executor, 33 B. T. A. 94.

For the reasons stated the respondent’s inclusion of the value of the property transferred in 1927 and 1929 in decedent’s gross estate is disapproved. The deficiency should be recomputed, giving effect to the deduction of $300 to which petitioners are admittedly entitled, to the $44 valuation for the common stock of the company, which petitioners concede, and to our opinion herein.

Decision will be entered under Rule 50.

       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—
      *******
      (c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. Where within two years prior to his death but after the enactment of this Act and without such a consideration the decedent has made a transfer or transfers, by trust or otherwise, of any of his property, or an interest therein, not admitted or shown to have been made in contemplation of or intended to take effect in possession or enjoyment at or after his death, and the value or aggregate value, at the time of such death, of the property or interest so transferred to any one person is in excess of $5,000, then, to the extent of such excess, such transfer or transfers shall be deemed and held to have been made in contemplation of death within the meaning of this title. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death but prior to the enactment of this Act, without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.


author: Hill:

text:
    Albert A. Levin, Petitioner, v. Commissioner of Internal Revenue, Respondent. Church & Brighton Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. Eleven Associates, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 60969, 60970, 60971.
    Promulgated December 21, 1937.

      Albert A. Levin, Esq., pro se.

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

Hill:

The parties have stipulated the amounts of deficiencies in tax due for the taxable years involved, as set out hereinabove, and have submitted for decision the single issue whether or not any part of each of such deficiencies is due to fraud with intent to evade tax.

In his tax return for 1927, petitioner reported net income of $6,413.58, and paid a tax thereon of $65.56. Petitioner now admits that he should have paid a tax for that year in the amount of $22,849.76. He omitted from gross income dividends of $29,580.62, of which it is shown that he personally had knowledge.

In his 1928 return petitioner reported net income of $7,286.41, and paid a tax of $85.20. He concedes that he should have paid a tax for that year of $34,168.85. He knowingly omitted from gross income reported for 1928 proceeds from sales of securities in the amount of $332,340.35, and dividends in the sum of $33,534.20.

In his return for 1929 petitioner reported net income of $9,359.23, on which he paid a tax of $72.90. He has stipulated that the net income for that year was in fact $213,895.36, on which the correct amount of tax due was $24,235.56. He deliberately omitted from gross income reported in his return for 1929 profits realized from the sale of securities in the amount of $207,676.82 and dividends in the amount of $49,175.94.

Petitioner has not offered, nor attempted to offer, any reasonable explanation for his actions; indeed, it would, under the facts and circumstances shown, be difficult to conceive of any explanation which could lead an impartial mind to a conclusion other than that petitioner was guilty of deliberate fraud. He personally prepared his income tax returns for all years involved; they are admittedly in his own handwriting. He omitted from income reported, among other items, dividends and profits derived from sales of securities amounting in the aggregate to hundreds of thousands of dollars. Without further proof, it would be unreasonable to assume that petitioner could innocently have overlooked such large amounts of income; but we are not left to conjecture on this point. The evidence discloses not only that petitioner had sufficient records from which he could have determined his taxable income for each year, which fact he now admits, but the figures were prepared for him by his assistants and he had them before him when he made up his returns. It is unnecessary to refer in detail to numerous other facts in the record, all of which tend strongly to establish a fraudulent intent.

We hold that the stipulated deficiency for each of the taxable years is due to fraud with intent to evade tax, and pursuant to the provisions of section 275 (b) of the Revenue Act of 1926, and section 293 (b) of the Revenue Act of 1928, 50 per centum of the total amount of each deficiency (in addition to such deficiency) may be assessed and collected as a fraud penalty. Cf. John Kehoe, 34 B. T. A. 59; Robert Burd, 19 B. T. A. 734, 736; M. Rea Gano, 19 B. T. A. 518, 533.

Having reached the conclusion that the returns filed by petitioner were false or fraudulent with intent to evade tax, it follows that assessment and collection of the deficiencies and penalties are not barred by limitation. Sec. 278 (a), Revenue Act of 1926; sec. 276 (a), Revenue Act of 1928.

In Docket No. 60969, judgment will be entered wider Rule 60. In Docket Nos. 60970 and 60971 judgments of no deficiencies and no penalties will be entered.


author: Sternhagen:

text:
    Bishop Trust Company, Limited, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 81625, 87102.
    Promulgated December 21, 1937.

      Urban E. Wild, Esq., Milton Codes, Esq., and E. R. Cameron, C. P. A., for the petitioner.

      Arthur H. Fast, Esq., and Henry L. Young, Esq., for the respondent.
   OPINION.

Sternhagen:

1. The principal question in issue is whether the petitioner was entitled to include the Henry Waterhouse Trust Co., Ltd., in its consolidated return under the Revenue Acts of 1928 and 1932, sec. 141. This it was entitled to do if the Waterhouse Co. was within the affiliated group as defined in subdivision (d). The petitioner included the Waterhouse Co. as a party to its consolidated return, and the Commissioner ruled against the affiliation in' the following language:

The question of affiliation was considered again and the revenue agent was sustained in the disallowance of the loss of the Henry Waterhouse Trust Company, Limited, for the period February 15, 1931, to December 31, 1931, as a deduction in the computation of the consolidated net income for the reason that the companies are held to be not affiliated; also for the further reason that the loss was sustained prior to the period February 15, 1931, to December 31, 1931. The facts in your case show that the Henry Waterhouse Trust Company, Limited, was hopelessly insolvent at the time the stock of that corporation was turned over to you, and was held only for the purpose of liquidation; therefore, you and the Henry Waterhouse Trust Company, Limited, are held to be not affiliated during the period February 15, 1931, to December 31, 1931.

The “further reason” is now disavowed by the respondent and it is stipulated that the loss was sustained after February 14, 1931.

The petitioner claims that on February 14, 1931, it acquired all of the Waterhouse stock in fact and in law and continued to own it thereafter until the merger at the close of 1933; that this is squarely within the language of the statute defining an affiliated group; and that it is therefore entitled to file a consolidated return covering that corporation. The respondent does not dispute that petitioner was the record owner of the shares.after February 14,1931, but for various reasons disputes the application of the statute.

The evidence provides in detail the history and circumstances of the transactions, all of which were described by credible witnesses. It is free from doubt, and there has been none to resolve in making the findings. That all the Waterhouse shares were owned directly by petitioner is a fact indubitable in the record and is therefore categorically found. If the statute means what it says, the finding decides the case.

The respondent asserts that the shares were acquired by petitioner without cost and therefore not by purchase; that in reality petitioner did not own them, but only held the formal legal title as a means of achieving liquidation for the equitable owners, among whom were the contributors to the $400,000 loan, who, rather than petitioner, controlled the situation; that petitioner was a sort of trustee or agent; and there is a suggestion that the whole plan was factitious and shaped artificially to enable petitioner to reduce its taxes. The argument is hard to follow. Most of it is beside the point.

Affiliation is purely a statutory matter, and it must be administered with a close adherence to the statutory language. Ownership and control of the shares mean juristic and not practical or economic ownership and control, Handy & Harmon v. Burnet, 284 U. S. 136; United States v. Cleveland, P. & E. R. R. Co., 42 Fed. (2d) 413; Marbelite Corporation of America, Ltd. v. Commissioner, 77 Fed. (2d) 713; and are equally effective when the subsidiary corporation is being liquidated, Burnet v. Aluminum Goods Manufacturing Co., 287 U. S. 544; Pittsburgh & West Virginia Railway Co., 32 B. T. A. 66; or is commercially unsuccessful, Woolford Realty Co. v. Rose, 286 U. S. 319; or inactive, Utica Knitting Co. v. United States, 68 Ct. Cls. 77; Sprague-Sells Corporation, 30 B. T. A. 1165; and when the subsidiary’s shares are under pledge, Lavenstein Corporation v. Commissioner, 25 Fed. (2d) 375; or its properties leased for a long term, United States v. Cleveland, P. & E. R. R. Co., supra.

The evidence gives no ground for finding á trust, or an agency, or that petitioner’s acquisition was not by purchase, or that its ownership was qualified or partial, or that liquidation was the sole or primary purpose of the acquisition, or that tax reduction was a motive. Hence it is unnecessary to consider a construction of the statute to apply to such situations. There was no acquisition of a subsidiary for the sake of its prior net losses within the condemnation of the Woolford Realty decision. The clear implication of that decision is that the losses of one affiliate are available to offset taxable net income of another if sustained during the period of affiliation— which is the situation here. Gregory v. Helvering, 293 U. S. 465, is wholly inapplicable unless it is to be read as disapproving any construction of a statutory term like reorganization or affiliation which recognizes a lower tax. That case revealed a sham, and the Court disregarded the mask and dealt with realities; but, as in Helvering v. Minnesota Tea Co., 296 U. S. 378, it can here be said, “The present record discloses no such situation; nothing suggests other than a bona fide business move.”

The Commissioner’s determination denying affiliation was in error.

2. The petitioner deducted the contributions made in 1932 and 1933 to the Hawaii Bureau of Governmental Research. The deductions were held by the Commissioner not to be allowable, and the petitioner argues that they are ordinary and necessary expenses of carrying on its business. In order to succeed in this contention, the evidence must support a finding that the contributions were made to promote the petitioner’s business and that they could be reasonably expected to result directly in a business benefit. Old Mission Portland Cement Co. v. Helvering, 293 U. S. 289; Helvering v. Evening Star Newspaper Co., 78 Fed. (2d) 604; certiorari denied, 296 U. S. 628; Merchants National Bank of Mobile v. Commissioner, 90 Fed. (2d) 223. Such a finding can not, however, be made from the evidence. The question is not whether the Bureau of Governmental Research is such an organization as is exempt from tax or contributions to which by individuals are deductible as donations. Whether it is such an organization need not, therefore be decided. The question is whether the petitioner’s contributions are made for the sake of benefits to be derived, whether such benefits may reasonably be expected to result, and, if so, whether the result is direct. A general benefit to the community as a whole does not support the deduction. Merchants National Bank of Mobile v. Commissioner, supra. That kind of benefit is the most that can be inferred from the present record, and the respondent’s determination is therefore sustained.

Judgment will be entered under Rule 50.

       (d) Definition of “Affiliated Group.”—As used in this section ant “affiliated group” means one or more chains of corporations connected through stock ownership with a common parent corporation if—
      (1) At least 95 per centum of the stock of each of the corporations (except the common parent corporation) is owned directly by one or more of the other corporations ; and
      (2) The common parent corporation owns directly at least 95 per centum of the stock of at least one of the other corporations.
      As used in this subsection the term “stock” does not include nonvoting stock which is limited and preferred as to dividends.

       See Law of Federal Income Taxation, Paul and Mertens, vol. 4, ch. 38, VI § 38.73 et seq.


author: Van Fossan :

text:
    August Heckscher, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82000.
    Promulgated December 22, 1937.

      Horace N. Taylor, Esq., and Winthrop G. Brown, Esq., for the petitioner.

      Philip M. Clark, Esq., and Stanley B. Pierson, Esq., for the respondent.
   OPINION.

Van Fossan :

This proceeding was brought to redetermine a deficiency in the income tax of the petitioner for the year 1932 in the sum of $2,847.93.

The sole issue is the deductibility of an alleged loss arising from the sale or exchange of certain stock, costing the petitioner $176,382.05, for real estate in which the petitioner’s interest was limited to $150,000.

In 1921 the petitioner and his wife organized the Heckscher Foundation for Children, hereinafter called the Foundation. Its purpose is to help the underprivileged. It owns a building at 104th Street and Fifth Avenue, New York City, equipped with gymnasium, library, swimming pool, theater, etc., and it also owns a summer camp at Peekskill.

In 1928 the petitioner gave to the Foundation a tract of land on Long Island containing 16½ acres and three or four dwellings. Due to the market crash of 1929, the income of the Foundation was greatly reduced and the property became a heavy burden. Thereupon the petitioner paid for the Foundation certain carrying charges amounting to over $16,000. He leased the land from August 1, 1980, to May 31, 1931.

The petitioner owned 2,500 shares of the capital stock of the Alcoma Corporation which he had acquired in December 1928 and had cost him $176,382.05. On June 17, 1932, the petitioner transferred to the Foundation the 2,500 shares of Alcoma stock and canceled its $16,000 obligation to him in exchange for the Long Island property. His agreement with the Foundation provided as follows:

I further agree that if, as and when, the property is sold, I will pay over to you such net sum as may'be realized after deducting therefrom $150,000 representing original cost of the property and after deducting all costs of carrying, maintaining and selling the property, including taxes, repairs, improvements or expenditures of any kind in connection with the property, crediting, however, any income or rent received therefrom from and after the conveyance to me.

In his income tax return for 1932 the petitioner deducted as a loss the sum of $26,382.05 representing the difference between the cost of Alcoma stock to him and the maximum amount of his interest in the Long Island property. The respondent disallowed the deduction on the ground that the transaction between him and the Foundation was not entered into for profit.

The position of the respondent is precisely expressed in the following explanation of his disallowance of the deduction, contained in his notice of deficiency:

Tour attention is directed to the contract under which the exchange was made wherein it was stated that if you sold the property received for the stock for more than $150,000.00 the value placed on the property, such excess should be returned to the Foundation. In view of the above it clearly shows that you could not under any consideration expect to make a profit and therefore, the transaction was one not entered into for profit.

Counsel for respondent concedes that he can find no authorities in support of his position.

The reasoning underlying respondent’s action has been rejected in R. W. Hale, 32 B. T. A. 356; affd., 85 Fed. (2d) 882. There we said:

Respondent’s position is based on the theory that the transaction which resulted in the loss in each case was the sale to Lura Hale. That was only one of several steps, all of which can and must be retraced to find the origin of the transaction. We thus go back to June 6,1929, when the stock was acquired by petitioners. That acquisition marked the inception of a “transaction entered into for profit” within the meaning of the statute. The principle of relation back to inception is fundamental in the tax statutes. In order to determine gain or loss the amount realized is compared with the basis, and the basis is a figure determined as of the time of acquisition—with a few exceptions, as, for instance, acquisition prior to March 1, 1913. Following a transaction through, it is ordinarily ended and gain or loss computed when property is sold. * * *

See also Terry v. United States, 10 Fed. Supp. 183.

In the case at bar the transaction was a simple one. The Alcoma stock was originally acquired in a transaction entered into for profit at a cost of $176,382.05. The petitioner sold or exchanged the Alcoma shares for Long Island property in which he obtained an interest of a value of not more than $150,000. Thus the value or price of the property received in exchange, i. e., an interest in the Long Island property, was fixed at $150,000 or less. Upon its sale petitioner can derive no profit. In this proceeding he claims a deduction of the loss. He contends that the events of the taxable year fix the amount of such loss. In the Male case, supra, we expressly refrained from ruling on the situation that arises where the guaranty is satisfied in a later year. Neither are we called on to rule on such issue here. The reasoning of the Hale case is, however, applicable in the present proceeding and is controlling. The taxpayer here can never receive more than the specified amount of $150,000. The present measure of the value of the real estate is exactly $150,000. The cost of the Alcoma stock was $176,382.05. The difference between these sums, or $26,382.05, is the loss suffered by the petitioner by reason of the exchange. It is an allowable deduction from his gross income for the year 1932.

Decision will be entered under Rule 50.


author: Smith:

text:
    Balkan National Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76608.
    Promulgated December 22, 1937.

      Allen H. Gardner, Esq., for the petitioner.

      John F. Greaney, Esq., and Leslie H. Rushbrook, Esq., for the respondent.
   OPINION.

Smith:

As the record stands in this case there is a deficiency in income and profits tax due from the petitioner for 1918 in the amount of $83,709.57. The petitioner does not contest the correctness of the determination of the tax liability. It contends, however, that the assessment and collection of the deficiency are barred by the statute of limitations. This is its sole contention. As grounds for this contention it alleges, first, that the deficiency notice was mailed more than five years after the return for the taxable year was filed, and, second, that an assessment of tax was made more than six years prior to the mailing of the deficiency notice.

When the petitioner’s properties were taken over by the United States, the United States took them as its own. United States v. Chemical Foundation, Inc., 272 U. S. 1; Krausz v. United States, 14 Fed. Supp. 291. In the last named case the Court of Claims stated:

Plaintiffs’ suit is based upon the claim that all of the provisions of the revenue laws with reference to assessment and collection of federal taxes together with all of the provisions with reference to refunds of taxes illegally or erroneously collected are applicable to their cause of action. We think that this theory cannot be sustained when the peculiar facts of the situation are considered in connection with the special statutes applicable.

The petitioner contends that, inasmuch as its properties during 1918 were in the custody of the United States, it was the duty of the proper officer having charge of the properties to make any required return for the assessment and collection of income and profits tax due for the year 1918; that pursuant to such duty the United States caused a return to be made by its agent, the Alien Property Custodian. It was held, however, in 32 Ops. Atty. Gen. 249, that the Alien Property Custodian was not such a trustee as was required by law to make income tax returns or pay income taxes; that he was merely an official or agent of the Government. We are of the opinion that the return prepared by an agent of the Alien Property Custodian and filed with the collector of internal revenue, which was not sworn to by anyone, was not a return contemplated by the statute and that the filing of it gave no basis for the claim that time may be computed therefrom within which the respondent may assess and collect a deficiency in tax due from the petitioner.

As was pointed out by the Court of Claims in Krausz v. United States, supra, there is no statute of limitations with respect to the collection of tax due from alien enemies or allies of alien enemies whose property was seized by the Alien Property Custodian where no return was filed by such alien enemies, as required by the income tax law. The stipulation of facts in this case is that the petitioner has never filed an income and profits tax return for the year 1918.

In Krausz v. United States, supra, the Court of Claims stated, in answer to the plaintiffs’ contention, that the general tax statutes, including the specific provisions relating to the assessment and collection of taxes, were applicable to aliens whose property was seized by the Alien Property Custodian, as follows:

* * * This is clearly an erroneous conclusion. We Rave already shown that until the War Claims Act became a law the former owners of the property seized had no enforceable rights whatever therein, and when this act was passed they acquired no rights except those granted thereby. The War Claims Act made provision for the payment of taxes and the government having complete right to retain the property, none of the taxing statutes had any application except as specially stated in the act itself.
* * * * * * *
We think the wording of subdivision (b) [Trading with the Enemy Act, as amended] requires that where taxes were due from the aliens whose property had been seized they should be computed and withheld without regard to the statute of limitations. If it should be conceded for the sake of the argument that the statute was ambiguous, the surrounding circumstances clearly show that such must have been the intent of Congress. This money or property was turned over purely as an act of grace. In so doing, the United States was not standing upon its war-time rights, but placed the matter on a moral and equitable plane highly favorable to the claimants. Having done this, it seems hardly conceivable that it was intended to turn this property back to the former owners without collecting taxes justly due from them. Our government was intending to do exact justice to the alien claimants, and it would exact no more than justice in requiring these taxes to be paid. Where the intent is manifest and the language ambiguous the intent must control.

This was likewise the ruling of the Board in Helmuth Heyl, 34 B. T. A. 223, in which the Board held that where no returns of income had been filed by or on behalf of the taxpayer for the years 1918 and 1921, during which time his property was in the custody of the Alien Property Custodian, the assessment and collection of a deficiency determined by the respondent in 1935 were not barred by the statute of limitations.

The petitioner also makes the contention that, inasmuch as an assessment was made against it on the unverified return filed at the instance of the Alien Property Custodian in 1918, although the assessment was afterwards abated, no collection of a deficiency could be made more than sis years after such assessment. It relies upon the provisions of section 278 (d) of the Revenue Act of 1924, which provides:

(d) Where the assessment of the tax is made within the period prescribed in section 277 or in this section, such tax may be collected by distraint or by a proceeding in court, begun within six years after the assessment of the tax. Nothing in this Act shall be construed as preventing the! beginning, without assessment, of a proceeding in court for the collection of the tax at any time before the expiration of the period within which an assessment may be made.

In support of its contention it cites United States v. Updike, 281 U. S. 489. In that case the Supreme Court held that where an assessment had been made against a transferor no suit for the collection of the assessment could be brought against a transferee after the collection of the tax was barred under section 278 (d) of the statute of limitations.

We are of the opinion that the ruling announced by the Supreme Court in the above entitled case is not applicable to the situation which prevails here. The respondent is not attempting to collect from the petitioner an assessment which was made against it. He is attempting to collect a tax liability which, so far as the record shows in the case, is legally due. His predicate for the proposed assessment is an income and profits tax return for the year 1918 prepared for the petitioner by the respondent under the provisions of section 3176 of the Revised Statutes on March 9, 1934. Since the petitioner' filed no return for that year, we are of the opinion that the assessment was made within the time required by the applicable statutes. Cf. Kahle v. Commissioner, 43 Fed. (2d) 61; certiorari denied, 282 U. S. 892.

Reviewed by the Board.

Judgment will be entered for the respondent.

Leech concurs solely on the authority of Krausz v. United States, 14 Fed. Supp. 291.


author: Leech:

text:
    W. L. Honnold, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72090.
    Promulgated December 28, 1937.

      Ellsworth C. Alvord, Esq., and Karl Riemer, Esq., for the petitioner.

      Isador Graff, Esq., for the respondent.
   OPINION.

Leech:

The petitioner’s case rests solely on whether or not the income received by him in 1930 from the corporation was community income. To be such it must have been derived from community property acquired subsequent to July 29, 1927, or from salaries, wages, and fees earned by him on and after that date. Civil Code of California, sec. 161 (a) ; Clara B. Parker, Executrix, 31 B. T. A. 644.

The position of the petitioner is that the income which he received represented “compensation for some consideration equivalent or similar to services, currently rendered by or passing” from him “to the company” and not, as the respondent has held, and as he here contends, “from a capital asset owned by him since 1917.”

It would seem to beg the question to argue that the compensation received by the petitioner in 1930 was consideration for something “equivalent or similar” to services. In order to constitute community income such amounts must have been derived from community property acquired subsequent to July 29, 1927, or from salaries, wages and fees, not “equivalent or similar” to, but as such, which must have actually been earned after that date. The stipulated facts are that the petitioner not only rendered no services in 1930 but that he could not even have been required to do so. Therefore, we see nothing in the record upon which to predicate any reasonable conclusion that such amount was “earned” by him after July 29, 1927. Duboff v. Davies (1932), 256 N. Y. S. 17.

Petitioner argues that the contract under which he was made a permanent director of the corporation did not create a property right in him but merely provided for a continuing relationship between the corporation and him, similar to that existing between a lawyer and his client, because of which relationship petitioner currently earned the contested funds. He says such contract created no property right because of the limitations and uncertainties as to his receipts thereunder and the restrictions against assignability. Undoubtedly certain such conditions affecting petitioner’s rights under the contract were there imposed. But those conditions did not change the legal status of the right petitioner received as such under the contract. They did no more than measure its quantum. See Carson Estate Co., 31 B. T. A. 607; affd., 80 Fed. (2d) 1007.

The relationship between petitioner and those interested in the organization of the corporation, and later the corporation itself, may have been similar to that of lawyer and client, but the so-called contingent fee petitioner was to receive for services was paid in 1917 when those services, which were all that petitioner, ever rendered or agreed to render, were completed. That payment consisted of a then created property right. See Ralph W. Street, 36 B. T. A. 391. That they..called it a permanent directorship does not alter that fact. Thus we have no doubt that the petitioner acquired a valid, enforceable, property right in 1917 and that the income, in its entirety, which the respondent here seeks to tax to him, flowed directly from that right.

The record shows that the petitioner was a mining engineer and promoter; that he, and another, aided in the promotion of the corporation; that these services of petitioner were performed at his domicile, New York, New York, in 1917; that in consideration of such services he was to become, and in fact did become, a permanent director of that corporation, organized in September of that year, and that while there were no written agreements, as such, in the beginning, relating to that relationship, the memorandum of association provided that he should hold that office in recognition of such services “during his life or until he resigns office”, for which he was to receive “cash or other assets, equivalent to 2½ per cent, of the cash or other assets” distributed among its members. This amount was later changed by agreement to 1 ¾ percent. In this connection it is significant to observe that this reduction was brought about by the voluntary consent of Oppenheimer, who was another permanent director, and the petitioner. So we find, long prior to taking up his domicile in the State of California, and prior to the effective date of the community property statute of that state— which, for tax purposes, authorizes the division of income from community property—the petitioner performed valuable services, in consideration for which the corporation carved out and vested in him a definitely specified percentage of the corporation’s net assets, when distributed as dividends or otherwise under the contract. The right to these assets was defeasible only by (a) unprofitability of the venture or, perhaps, by reason of two other conditions, pertaining to the office of “director”, as shown in article 92 of the articles of association, i. e., bankruptcy or insanity. None of these conditions appears to have occurred. Whether property is that of the community or the separate spouse depends not upon the time of the vesting of the property in the husband, or the receipt of the income therefrom, “but the time of the inception of the rights whereby income is earned.” Sara B. Preston, 35 B. T. A. 312. See also John M. King, 26 B. T. A. 1158; affd., 69 Fed. (2d) 639; Helen N. Winchester, Administratrix, 27 B. T. A. 798; Gouverneur Morris, 31 B. T. A. 178; Albert J. Houston, 31 B. T. A. 188; Charles A. Shea, 30 B. T. A. 1265; affd., 81 Fed. (2d) 937, and Barton T. Bean, 29 B. T. A. 1261.

The petitioner has cited no law nor court decisions of California— nor do we find any—which would hold the income in question to be that of the community. We are convinced, therefore, upon the facts, that such income was derived from a separate property right of the petitioner acquired prior to July 29, 1927, and that the respondent correctly so held.

Reviewed by the Board.

Judgment will be entered under Rule 50.


author: Disney:

text:
    Eggerman Investment Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79013.
    Promulgated December 28, 1937.

      Ray L. Johnson, Esq., for the petitioner.

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

Disney:

This proceeding involves the redetermination of a deficiency of $4,981.03 in income tax for 1932. The question presented for decision is whether the respondent erred in taxing petitioner on the sum of $32,079.27 as profit realized on repossession of certain real property. The petitioner alleges in the alternative that the value of improvements made on the property by the purchaser does not constitute gain. Substantially all of the facts were stipulated.

In 1929 the petitioner, a Washington corporation, sold a lot 108 feet by 120 feet, improved by a two-story building of brick and wooden construction, used as a garage, for the sum of $150,000, payable as follows: $25,000 cash; $83,500 in installments over a period of five years with interest at the rate of 6 percent per annum; and the remainder by assuming an outstanding mortgage of $41,500 on the property. The property had cost $96,311.33, including the mortgage of $41,500. The parties reduced the selling price to $142,700 by adjustments made for commissions, etc., and made a corresponding reduction in the initial payment.

The contract of sale provided for the assumption by the buyer of all taxes and assessments that might thereafter as between grantor and grantee become a lien on the premises and all hazards of damage to or destruction of any improvements then or thereafter erected on the property, and for the retention of legal title by the seller until the purchase price had been paid in full. A deed to the property was executed by the petitioner and placed in escrow for delivery to the buyer upon payment of the balance of the purchase price. The buyer immediately entered into possession of the property and remained in possession until July 26,1932.

The petitioner, which filed its income tax returns on the cash basis, elected to, and did, return the profit of $46,388.67 realized on the sale on the installment basis. The gain, aggregating $17,285.73, returned in 1929 and 1930, was based upon payments of $17,700 and $20,010, respectively received in those years on the purchase price of the property, upon a percentage of profit of 45.8386 percent.

On November 2, 1931, the petitioner, in accordance with a provision of the contract of sale, joined in the execution of a mortgage on the property in the sum of $34,000, and the prior existing mortgage was paid and canceled.

The failure of the buyer to make certain installment payments when due resulted in the termination of the contract of sale by an agreement executed on July 26, 1932. By provisions of the contract the buyer agreed:

(1) To give the petitioner a note for $2,055 (of which $1,500, plus interest of $23.25, was paid in 1932, and $555 in 1933).
(2) To pay delinquent taxes and overdue installment assessments against the property in the respective amounts of $1,104.26 and $1,110.58.
(3) To pay the petitioner $40,000 in installments as damages agreed to have been sustained by the petitioner because of the buyer’s failure to carry out the sales contract, with the proviso, however, that if the buyer did not default under the agreement, the obligation would be deemed to have been fully discharged when the sum of $17,500 had been paid. The sum of $1,250 was paid in 1932 under this agreement and the remaining installments were met when due.
(4) To give the petitioner a quitclaim deed to the property (which was done).

And the petitioner agreed:

(1) To assume the mortgage indebtedness against the property then amounting to $31,900 and cancel the unpaid installments of $63,490.
(2) To pay the second half of 1931 tax assessment against the property in the amount of $1,104.27.
(3) To pay local improvement assessments made against the property prior thereto in the amount of $31,311.14, none of which was delinquent on July 26, 1932.

The provisions of this contract were substantially carried out.

Had the contract of sale been carried out in accordance with its terms, the taxable profit on the amount due thereunder on July 26, 1932, would have been $29,102.94.

The real property in question had a fair market value on July 26, 1932, of $60,000 (inclusive of a mortgage of $31,900).

In its return for 1932 the petitioner reported no taxable gain and did not claim a deductible loss arising from the agreement of July 26, 1932. The respondent determined that repossession of the property resulted in a profit to petitioner of $32,079.27, computed as follows, under the provisions of article 358 of Regulations 77, relating to cases in which the seller retained title in the sale:

Cash paid in 1929 on purchase price-$17,700.00
Cash paid in 1930 on purchase price- 20,010.00
Mortgage on property assumed by purchaser-$41,500.00
Balance due on cancellation of contract- 31,900.00
Reduction of mortgage indebtedness- 9,600.00
Payments made and acknowledged in agreement of July 26,1932- 2,055.00
Value of improvements to property made by purchaser- 1,842.44
Total_ 51,207.44
Less profit returned on installment basis, 1929_ $8,113.43
Profit reported on installment basis, 1930_ 9,172.30
Depreciation sustained on property while in the hands of the purchaser at 3% on cost of building, $17,139.00; for 1929, 1930, 1931 and 7 months of 1932_ 1,842.44
Total 19,128.17
Net profit_ 32,079.27

The improvements made on the property by the purchaser were not separable from the existing building.

The major difference between the parties is whether the gain realized or loss sustained, if any, when the petitioner repossessed the property, should be computed under article 353 of Regulations 77, which we applied in Boca Ratone Co., 31 B. T. A. 1060, a case involving parallel facts, or section 44 (d) of the Revenue Act of 1932, which the Circuit Court of Appeals for the Third Circuit held to be applicable in reversing our decision. Boca Ratone Co. v. Commissioner, 86 Fed. (2d) 9. The petitioner asks us to follow the court’s decision and the respondent relies upon our decision. We now agree with the reasoning of the court and conclude that gain or loss on repossession of property sold and returned for tax purposes on the installment basis, as here, should be computed under the provisions of section 44 (d). The parties agree that the sale was one on installments.

There remains the question of the extent of petitioner’s gain or loss under the applicable statute. The petitioner contends for a deductible loss of $39,147.42, computed in the following manner:

Amount realized
Fair market value of property-$40, 000
Note_ 2,055
Obligation of buyer- 17, 500
Total-59,555
Less:
Local assessments. $31, 311.14
Taxes assumed_ 1,104.22
Mortgage-31,900.00
-64,315.36
Loss- 4,760. 36
Basis of obligation-_ 34,387. 06
Excess of basis over amount realized_ 39,147.42

We agree that the petitioner has correctly determined the basis of the obligation to be $34,387.06, a figure representing the difference between the gain of $29,102.94, which would have been returnable if the installment obligation had been satisfied in full, and $63,490, the face amount of the obligation. We also agree with the general idea of the petitioner that in determining “the amount realized” upon repossession, obligations assumed by it as a part of the agreement should be used to reduce the gross amount. Such objections as wre have to the petitioner’s computation relate to the value of the property repossessed and items excluded from the computation.

We think the valuation of the real estate at $40,000 claimed by the petitioner is too low. Two of its witnesses at the hearing testified to such a value on the basic date, but their testimony is contrary to other and more satisfactory evidence of record. One of the witnesses testified that property in the vicinity of the parcel in question decreased from 60 to 75 percent in value between 1929 and the middle of 1932. This indicates a value in 1932 of $60,000, based upon the selling price of $150,000 and the minimum reduction of 60 percent in values. The buyer placed a new mortgage on the property in November 1931, nine months before the property was repossessed, in the amount of $34,000, and there is no proof that the property was not encumbered at that time by the lien of $31,311.14 existing in July 1932 for local improvements. The original contract between the parties, entered into on February 26,1929, referred to assessments under an ordinance numbered 50890, and obviously the $31,311.14 assessments were referred to. But even if some other assessment was referred to, it is plain that the mortgage was made subject to some amount of assessment obligation, and under such circumstances a mortgage of $34,000 would indicate a much, greater value upon the property than petitioners place upon it. Even without considering assessments, a mortgage of $34,000 indicates a value of much more than that amount, for the mortgage is made by an insurance company, and there is no indication in the record that it was not dealing at arm’s length with the mortgagors. Such a mortgage is much more consistent with a valuation of $60,000 than with one of $40,000, which petitioner seems to consider approximately the value of the property. The recitations as to $40,000 in the contract of July 26, 1932, are in their nature self-serving and can not be accepted in the face of a $34,000 mortgage.

Indeed, these recitations are to the effect that the value of the property was approximately $40,000 less than the remaining obligations, which would mean a valuation of less than $23,490, since the unpaid installments were $63,490. It is thus apparent that there is no consistency between petitioner’s valuations at the time of the contract and at time of trial. We conclude that the real property was on July 26,1932, of a fair market value of $60,000.

The contract of July 26, 1932, having been substantially carried out, no question arises as to the value to petitioner of the obligations (to pay note, taxes, and assessments) which were resumed from the purchaser.

The gross amount realized should include, in addition to the note and obligation of the buyer and the real property repossessed of the fair market value of $60,000, the amount of $1,104.26 received for payment of delinquent taxes, and the amount of $1,110.58 for payment of an overdue installment assessment levied against the property. The taxes and assessment constituted a lien against the property. Payment of the amounts by the buyer as a part of the agreement relieved the petitioner of the obligations, and under the circumstances was constructive receipt by the petitioner.

Section 23 (c) of the Revenue Act of 1932 permits a taxpayer reporting on the cash basis to deduct local taxes paid within the taxable year and ordinarily assessments made for local improvements are capital items an'd become a part of the basis of the property when they accrue or are paid, as the case may be. However, the statute and rule governing such situations are not applicable here, where the problem is to determine “the amount realized” by the petitioner at the time of acquiring repossession of the property. The real estate was burdened with liens consisting of $31,311.14 for local improvements, $1,104.21 for taxes and $31,900 under an outstanding mortgage, all of which, totaling $64,315.41, the petitioner assumed as part of the consideration passing under the repossession agreement. The items fall within one classification. Their aggregate amount is reflected in the consideration paid by the petitioner, for it is obvious that the purchaser would not have paid or agreed to pay the amounts it did if it had not been released from its liability to pay these charges. The amounts assumed by the petitioner constitute a part of the cost of reacquiring possession and should be deducted from the gross receipts to determine “the amount realized” within the meaning of section 44 (d). The petitioner sustained a deductible loss of $16,932.58, computed as follows:

Gross amount realized:
Real property_$60,000.00
Promises of buyer_ 21,769.84
81,769. 84
Obligations assumed by petitioner_ 64,815.41
Amount realized by petitioner_ 17,454.43
Basis of obligation:
Unpaid installments_$63,490.00
Unreported profit_ 29,102. 94
- 34,387.06
Deductible loss under 44 (d)_ 16,932.53

The conclusion reached by us renders it unnecessary to consider the alternative contention raised by the petitioner.

Reviewed by the Board.

Decision will be entered under Rule 50.

       Sec. 44. (4) Gain or Loss upon Disposition of Installment Obligations.—If an installment obligation is satisfied at other than its lace value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and (1) in the case of satisfaction at other than face value or a sale or exchange—the amount realized, or (2) in case of a distribution, transmission, or disposition otherwise than by sale or exchange—the fair market value of the obligation at the time of such distribution, transmission, or disposition. The basis of the obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full, * * *

       Correct amount $1,104.27.


author: TURNER:

text:
    Estate of Hugo Goldsmith, Deceased, Max Goldsmith, Erich Keibel and the Chase National Bank of the City of New York, as Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82612.
    Promulgated December 28, 1937.

      Harter F. Wright, Esq., for the petitioners.

      Lewis S. Pendleton, Esq., for the respondent.
   OPINION.

TURNER:

The only issue presented is whether the guardian fee and claim paid by the petitioners are deductible from the gross estate of the decedent under section 303 (a) (1) of the Revenue Act of 1926. The respondent rests the disallowance of the deduction on the ground that the claim was not “incurred or contracted * * * for an adequate and full consideration in money or money’s worth.”

While the reasoning in the cases construing the provisions of the statute referred to above may not be in complete harmony, certain conclusions may be drawn from the decided cases and now regarded as settled. First, a claim against an estate is not deductible merely because it is enforceable. Latty v. Commissioner, 62 Fed. (2d) 952; Porter v. Commissioner, 60 Fed. (2d) 673; Glaser v. Commissioner, 69 Fed. (2d) 254; Taft v. Commissioner, 92 Fed. (2d) 66. Second, it is not necessary that the consideration should pass to the decedent. Jeptha H. Wade, Jr., et al., Executors, 21 B. T. A. 339; United States v. Mitchell, 74 Fed. (2d) 571; Carney v. Benz, 90 Fed. (2d) 747; Commissioner v. Bryn Mawr Trust Co., 87 Fed. (2d) 607; Taft v. Commissioner, supra. Third, it is not essential that the transaction on which the claim is based should have been of a business or commercial nature. Jeptha H. Wade, Jr., et al., Executors, supra; Taft v. Commissioner, supra; Commissioner v. Bryn Mawr Trust Co., supra; Turner v. Commissioner, 85 Fed. (2d) 919. In each of the cases last cited the claim was based on subscriptions made by the decedent during his lifetime to certain recognized public, educational, charitable, or religious institutions. The subscriptions were made in consideration of similar subscriptions by other individuals and the Board and the courts have uniformly held that the promise of others to make similar contributions supplied the necessary consideration in money or money’s worth to bring those claims within the meaning of the statute and to make them deductible from the gross estate. In some of the earlier cases there was some intimation that the statute contemplated the allowance of deductions only in the case of claims based on commercial or business transactions. Arguments to that effect might be based on language appearing in Latty v. Commissioner, supra; Porter v. Commissioner, supra; Glaser v. Commissioner, supra; United States v. Mitchell, supra; and Carney v. Benz, supra. In the first three cases cited, however, the deductions were disallowed for other reasons, namely, that the promises upon which claims were based were in fact promises to make a gift or a bequest, while in the other two cases the transactions involved were definitely of a business or commercial nature, making it unnecessary to determine the effect of the statute on claims of a different character.

In none of the cases, however, have we been able to discover a holding that a claim based on a promise of gift or contemplated bounty was a claim incurred for money or money’s worth within the meaning of the statute, even though under local law the claim might be enforceable. The courts in United States v. Mitchell, supra, and Carney v. Benz, supra, were definitely of the opinion that Congress had in mind, when it enacted the provisions in question, the exclusion of family contracts and similar understandings made as a cloak to cover gifts.

It is argued in the instant case that the claim here involved has been considered as to its legal aspects and allowed by the Surrogate’s Court; that it was in fact a business transaction even though made between a brother and sister; that the promise made by the decedent to his sister was in the discharge of a legal obligation which rested upon the decedent to support his mother; that it is supported by the mutual promise of the sister to permit the mother to occupy property belonging to sister; and that a claim based upon such a promise is brought within the provisions of the statute relied on and the interpretation of the statute by the Board and the courts. Considering the facts disclosed by the record, however, we are of the opinion that the promise of the decedent was the promise of a bounty. The real nature and character of the transaction is best shown by the statement of the decedent himself, written in his own hand and left among his papers. This statement convinces us that the gift of the property by the decedent to Nettie G. Dreifuss was subject to the right of the mother to occupy the dwelling during her lifetime. Nettie G. Dreifuss herself was the object of decedent’s bounty and no consideration passed from her to anyone in respect of the understanding on which the claim herein was based. The decedent not only gave her the property, but also agreed to relieve her during the lifetime of the mother of the burden of maintaining the property and of paying the taxes thereon. From these facts the only conclusion we can draw is that the claim subsequently made against the estate of the decedent was not incurred for adequate and full consideration in money or money’s worth, as required by the statute, but that the consideration was in the nature of the love and affection which he held for his sister and his mother. Nothing of money or money’s worth passed from any one except from the decedent himself.

In reaching the above conclusion we do not overlook the fact that the stipulation of facts contains a statement to the effect that at some time subsequent to October 1,1929, a date after that of the formal conveyance of the property to Nettie G. Dreifuss, the decedent entered into an agreement with her for the benefit of his mother in respect of the occupancy and use of the property. While this statement standing alone might indicate that there were no conditions attached to the conveyance of the property to Nettie G. Dreifuss and that at the time of the agreement with the decedent for the care of their mother, Nettie G. Dreifuss did supply consideration in money or money’s worth in the form of the use of property then unconditionally belonging to her, the stipulation does not stand alone and such a conclusion is clearly not in harmony with statements contained in the decedent’s memorandum. It may be that the details of the agreement were not worked out until after October 1, 1929, but the decedent’s memorandum in our opinion definitely shows that the conveyance was made in the light of the private understanding mentioned.

On the facts in this case, we hold that the claim here involved was not incurred by the decedent for full and adequate consideration in money or money’s worth.

Decision will be entered for the respondent.

       Sec. 303. For the purpose of the tax the value of the net estate shall be determined—
      (a) In the case of a resident, by deducting from the value of the gross estate—
      (1) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebtedness in respect to, property (except in the case of a resident decedent, where such property is not situated in the United States), to the extent that such claims, mortgages, or indebtedness were incurred or contracted bona fide and for an adequate and full consideration in money or money’s worth * * *.