author: Leech : Abtjndell,

text:
    Julian M. Livingston, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105539.
    Promulgated March 10, 1942.

      Lewis Schimberg, Esq., for the petitioner.

      JohnD. Kiley, Esq., and Lester M. Ponder, Esq., for the respondent.
   OPINION.

Leech :

The primary issue is whether or not petitioner may deduct in the taxable year a loss due to worthlessness of Orpheum preferred stock. The law is clear that the loss may be deducted only in the year in which it was sustained. There must be something identifiable to mark the period. United States v. White Dental Manufacturing Co., 274 U. S. 398. The rule is clear, only its application is difficult.

Respondent determined that the preferred shares of Orpheum became worthless prior to 1937, the year in which petitioner asserts his right to deduct the loss. It is, of course, the petitioner’s burden to overcome the prima facie correctness of that determination and to show that these shares became worthless during 1937. This burden may be met by proof that the stock had value either at the end of 1936, Mark D. Eagleton, 35 B. T. A. 551; afld., 97 Fed. (2d) 62, or that it had value at the beginning of 1937, Roosevelt Investment Corporation,, 45 B. T. A. 440, and that it lost such value during that year. But this value means, not necessarily intrinsic value of the assets applicable to the stock, but may include the market value of the stock. Rice v. Eisner, 16 Fed. (2d) 358.

Respondent points to Lambert v. Commissioner, 108 Fed. (2d) 624, which affirmed the memorandum opinion of this Board holding that the same stock became worthless prior to 1934. However, the proceeding now before us, involving an issue of fact, must be decided wholly on the present record, which is much more complete than that in the Lambert case. Here it is disclosed that Orpheum had paid dividends regularly on its preferred shares from the date of its organization in 1920 until October, 1931, when it defaulted. K. A. O. then owned all the common shares of Orpheum, and R. K. O., in turn, owned all the common shares of K. A. O. The three companies had the same officers and were operated as a single enterprise. Large loans had been made to Orpheum by K. A. O. By October 1, 1932, these loans amounted to $2,880,000 and most of Orpheum’s assets had been assigned to K. A. O. as security therefor. Petitioner and many other preferred shareholders, as well as bondholders, bank and other creditors, were dissatisfied with the management being given to the company by R. K. O. Committees were organized in 1932, to protect their interests. The position of these committees was that the officers and directors of Orpheum had been guilty of waste and mismanagement and were liable to damages therefor, that the notes given by Orpheum to K. A. O. were not valid obligations of Orpheum and that the transfer of Orpheum assets collateralizing those notes was likewise, therefore, invalid.

Early in 1933, the Orpheum notes and securing assets were transferred to Stadium. On January 27,1933, Orpheum filed a voluntary petition in bankruptcy and, as a matter of course, a formal adjudication was made on the same day. Its schedules, filed at that time, showed it to be solvent by about five and one-half million dollars. Certainly that adjudication afforded no basis for a determination of worthlessness of Orpheum preferred stock. Burnet v. Imperial Elevator Co., 66 Fed. (2d) 643; Peoples National Bank v. Foltz, 25 Fed. (2d) 295; Edward C. Lawson, 42 B. T. A. 1103; Sterling Morton, 38 B. T. A. 1283; affd., 109 Fed. (2d) 47; W. C. Coleman, 31 B. T. A. 319; J. Harvey Ladew, 22 B. T. A. 443; Jamies L. Byrd, 21 B. T. A. 1183. That conclusion is corroborated emphatically by several facts. On January 28, 1933, one day after the bankruptcy adjudication, the stock sold at $3 per share on the New York Stock Exchange while on June 14, five months later, the market had risen to $6 per share. Throughout 1933, after this adjudication, the preferred shareholders of Orpheum had an existing right under an offer by R. K. O. to exchange each share of their preferred stock for two shares of common stock of the latter company. This offer was later increased to three shares of R. K. O. common stock for one preferred share of Orpheum. Neither of these offers was accepted by petitioner and the other holders of more than 43,000 of the 53,378 shares of Orpheum preferred stock in the hands of the public, because they believed Orpheum preferred stock had a value in excess of the R. K. O. stock for which it could be exchanged.

In 1934 and 1935, conditions continued substantially the same. The assets of the bankrupt were being managed by the trustee. The preferred shareholders, as well as the bondholders, were organized to protect their investments. Committees representing them, as well as a bank creditor acting for itself, had made several efforts to have suit brought against the officers and directors of Orpheum, who were likewise officers and directors of K. A. O., R. K. O., and Stadium, to have the notes of Orpheum to K. A. O., together with the transfer of Orpheum’s assets securing the notes, then in the hands of Stadium, declared invalid, and to recover damages from such officers for mismanagement and waste. But these efforts were not fruitful. The officers of E. K. O. continued their assurances, begun in 1933, that the interests of the preferred shareholders would not be served by such suits and that their equity would be recognized by providing for their participation in the reorganization of R. K. O. in the 77B proceedings. Both the referee in bankruptcy and the District Court lent weight to this advice by denying for that reason and without prejudice petitions asking the referee to direct the trustee in bankruptcy to bring such suits. Finally, in 1936, on the repeated filing of such petitions, the referee in bankruptcy entered an order directing that such suits be instituted by or in the name of the trustee in bankruptcy. However, a petition for review of this order was filed and no order was ever entered thereon by the District Court. The assurances from the officers of E. K. O. continued, however, until late in 1936, when the plan of reorganization of E. K. O. was filed in the District Court in the then pending 77B proceedings. This was the first plan of reorganization filed in those proceedings and made no provision for participation by the preferred stockholders, of Orpheum. See Edward C. Lawson, supra. Following that closely, in December of 1936, the offer to purchase the assets of Orpheum was made by Stadium, the holder of Orpheum’s notes and assets. In order to pass upon this offer, the assets of Orpheum were appraised for the first time early in 1937. The value of these assets was there shown to be considerably less than the claims which had been filed against Orpheum in the bankruptcy proceeding.

Following this appraisal came the orders of the referee in bankruptcy on February 18, 1937, directing the trustee to accept the offer by Stadium and dismissing the petition of the committee filed January 25, 1937, under which orders the assets of Orpheum were transferred to Stadium, leaving nothing for the preferred shareholders of Orpheum and no hope for participation in the reorganization of E. K. O., which had been assured to them. See Sterling Morton, supra. Then came the order of the District Court on June 11,1937, affirming these orders of the referee. Petition for leave to appeal from this decision to the Circuit Court of Appeals was denied on July 30, 1937.

The preferred stock of Orpheum was removed from the New Tork Stock Exchange June 20,1933. But this was only because it no longer had a transfer agent in New York City. However, the stock was traded in the over-the-counter market thereafter until sometime in 1937. The records of actual sales during 1936 and 1937, as well as the bid and asked prices for this stock during those years, closely parallel the history of this company during that period, and they are therefore entitled to real evidentiary weight. Rice v. Eisner, supra. Cf. John B. Marsh, 38 B. T. A. 878. Though the actual purchases and sales disclosed during that period in this record were made by one firm of stockbrokers, those purchases and sales were made from and to at least six different brokerage firms.

Between November 7, 1936, and June 1, 1937, 116 shareholders, owning 13,846 shares of the 18,000 shares of Orpheum preferred stock represented by the committee, contributed $13,845, or $1 per share, for the purposes of the committee. Petitioner contributed $1,720.

We think petitioner has met his burden. This record establishes to our satisfaction (1) that Orpheum preferred stock had a market value at the close of 1936 and the beginning of 1937 and (2) that such stock became worthless during 1937, as we have found. Respondent is reversed on this issue.

The second issue is whether or not petitioner is entitled to deduct certain amounts from gross income of the taxable year as ordinary and necessary expenses of a trade or business. This issue arises from an affirmative pleading by respondent in his amended answer. Consequently, respondent has the burden of proving that he erroneously allowed the deductions in question.

The evidence shows that petitioner was engaged in activities involving real estate and investments in two corporations. It may be that both of these activities constituted a trade or business of petitioner. In any event, respondent has failed to prove that they did not. Where expenses are incurred in activities which are business and nonbusiness in nature an allocation ,of expenditures may be made. Higgins v. Commissioner, 312 U. S. 212. Here respondent has not shown the basis for a proper allocation. We may assume, therefore, that petitioner was engaged in a trade or business and that expenses incurred therein may be deductible.

We are of the opinion, however, that the sum of $250 expended for change of title registration is not a proper deduction but should be reflected in the basis of the property to which it related. Petitioner concedes on brief that only 80 percent of the salary deduction should be allowed. Adjustments covering these items should be made. Ke-spondent has not proved that the other amounts deducted under “Other deductions authorized by law” were improperly allowed by him.

Reviewed by the Board.

Decision will be entered u/nder Bule 50.

Abtjndell,

dissenting: As the Member who heard the testimony in this case it seems proper that I should set forth the reasons for my disagreement with the majority opinion. The Commissioner determined that the preferred shares of Orpheum became worthless prior to 1937, the period in which the petitioner seeks to take his loss. To prevail petitioner must prove that the shares in fact had value at the beginning of 1937, and that that value ceased within the year 1987. Marie D. Eagleton, 35 B. T. A. 551; affd., 97 Fed. (2d) 62. The undisputed evidence shows that the Orpheum Corporation was declared a bankrupt in 1933, that the creditors were finally paid 30 cents on the dollar, and that the preferred shareholders received nothing. The only possible basis for the attachment of any value to these shares in 1937 is that 250 of the shares were disposed of in over-the-counter sales and that there were some “bid and asked” prices. This testimony came from a bookkeeper of a defunct brokerage firm who knew absolutely nothing about the circumstances of the sales.

The statute allows losses in the year within which the property becomes worthless and at no other time. The rule is not like that provided for bad debts where the ascertainment of the creditor, is all important. It is the period of the loss and not the time the taxpayer learned of his loss which is determinative. Given an identifiable event demonstrating worthlessness, one need not be an optimist.

If we approach the situation here present in the way it usually appears, the error of the majority would seem more self-evident. Thus, should a taxpayer prove that the corporation in which he holds shares has been declared a bankrupt, that the shares have not one penny of liquidating value, and that the creditors will not receive more than 30 cents on the dollar, he must still be denied his loss on such shares if perchance the. Commissioner shows purchases by some badly informed optimists who are ready to gamble on the chances of salvaging something out of the situation. There were 63,840 preferred shares of Orpheum, 10,000 of which had been converted and 9,462 of which were owned by K. A. O., the parent company, leaving some 43,000 preferred shares in the hands of the public. Are these stockholders to be denied their loss at the actual time the shares become worthless because it is shown within the year 1937 less than one-half of 1 percent of the shares were sold over the counter under circumstances not disclosed ? There is not even proof in this case .that this individual taxpayer could have sold his holdings of 1,720 shares within the year 1937, let alone that there was any market in that year for the entire outstanding shares of preferred stock.

As pointed out by Judge Patterson in the Orpheum bankruptcy proceedings, 20 Fed. Supp. 101, not once did these stockholders, of which petitioner was one, prove their right to share in any of the bankrupts estate. The Congressional plan has always been to require that losses be taken when sustained and the statute contemplates that shares of stock in a coporation become worthless at the same time for all stockholders.

Van Fossan and Disney agree with this dissent.


source: Caselaw Access Project

author: Black:

license: Public Domain

text:
    Georgia Marble Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100555.
    Promulgated March 10, 1942.

      M. E. Kilpatrick, Esq., and E. D. Smith, Jr., Esq., for the petitioner.

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

Black:

The sole remaining issue for our determination is whether, in computing the surtax on undistributed profits under section 14 of the Revenue Act of 1936, petitioner is entitled to a “credit” such as is provided in section 26 (c) (1) of the same act, relating to contracts restricting dividends. This latter section is set forth in the margin.

The respondent in his deficiency notice took the position that the first mortgage trust indenture executed November'1, 1926, did not constitute a contract restricting the payment of dividends within the meaning of section 26 (c) (1), supra, for the reason that it did not restrict the payment of “stock” dividends, and he further contends that petitioner is not entitled to a credit under the section named for the additional reason that it does not appear that a dividend during the taxable year to the extent of the adjusted net income would have reduced the net quick assets as defined in the trust indenture below $500,000. The respondent requests the Board to find as a fact that “Petitioner’s net quick assets on December 31, 1936, were in excess of $900,000.”

Petitioner contends that its net quick assets throughout the entire taxable year 1936 were at all times below $500,000; and, that, therefore, with the one exception stated below, it could distribute no amount within the taxable year as dividends, in any form whatever, without violating a provision of a written contract executed by it prior to May 1, 1936, namely, the trust indenture executed November 1, 1926, providing in part that “no dividends shall be paid in any event that would reduce the net quick assets of the Company below five hundred thousand dollars ($500,000.00).” The one exception is an admission in petitioner’s brief that “Admittedly a taxable dividend payable in common stock could have been declared and paid to the preferred stockholders to the extent of $294.00.”

If petitioner’s net quick assets at any time during the taxable year equaled or exceeded $500,000, plus its adjusted net income of $123,-985.56, or a total of $623,985.56, it is at once apparent that petitioner would not be entitled to any credit under section 26 (c) (1) for the reason that in the language of the statute its adjusted net income would not be in excess of “the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends.” Cf. Thew Shovel Co., 45 B. T. A. 920. We have found as a fact that petitioner’s net quick assets on December 31, 1936, were in the amount of $589,273.65, ]ess whatever surtax on petitioner’s undistributed profits is determined in this proceeding. Therefore, it seems clear that petitioner could have paid a cash dividend without violating the provisions of the contract in question. We shall give our reasons for finding that petitioner’s net quick assets on December 31, 1936, were in the amount of $589,273.65, less the tax we have mentioned.

Referring to our schedule of quick assets and liabilities set out in our findings of fact, petitioner concedes that items (a), (b), (d) and (f) are quick assets, and the respondent concedes that items (h) to (k), inclusive, are such liabilities as should be deducted from the quick assets in arriving at the net quick assets. Respondent contends that there should be added to item (b), $146,576.39 as item (c). For reasons which we shall state later, we sustain respondent as to $2,216.05 of this amount and we have included it in our computation of petitioner’s net quick assets at the basic date.

Relative to item 2 of the condensed balance sheet set out in our findings, petitioner admits that of the total amount of notes and accounts receivable, the amount of $349,479.38 thereof, less a reserve of $28,138.36, or $321,341.02, represents quick assets (item (b) of our table of quick assets shown in our findings of fact), but contends that the balance of $582,088.18 thereof, less a reserve of $435,511.79, or $146,576.39, were not good and collectible as those terms are used in the trust indenture, and, therefore, should not be considered as quick assets. This balance is made up of the following items:

It must be remembered that in determining what are “quick assets” within the meaning of the trust indenture, we must resort to the definition contained in the trust indenture itself. It provides that in making up this total, “good and collectible” bills and accounts should be included. It also provides that “notes or debts due by insolvent debtors shall in all events be excluded from such computation.” It seems clear that the $146,516.39 in question did not represent bills and accounts of insolvent debtors. Petitioner does not contend otherwise. Petitioner does contend, however, that the bills and accounts which we have set out above, aggregating $582,088.18, against which a reserve of $435,511.19 had been set up on petitioner’s books, leaving a net of $146,516.39, were either so doubtful or so slow as to eliminate them from a proper classification as “good and collectible bills and accounts.” As to $2,216.05 of the $146,576.39, petitioner is not sustained. The evidence establishes that this $2,216.05 consisted of a series of notes aggregating $2,216.05 given by Goodloe H. Yancey. These notes were promptly paid at maturity. Petitioner’s own witness testified as to these notes as follows: “The Goodloe Yancey notes were perfectly all right but were not due until 1938, 1939 and 1940.” We think these notes should be included in the total of petitioner’s bills and accounts which were “good and collectible.” The mere fact that they were not immediately due and payable at the end of 1936 would not be sufficient to exclude them. There is no reason to interpret the words “good and collectible” that narrowly.

Petitioner introduced the testimony of two witnesses who were familiar with the notes and accounts which have been excluded, and the substance of their testimony was that they were familiar with the financial condition of the debtors and that in their opinion none of these bills and accounts were properly includible in “good and collectible” bills and accounts receivable. They gave their reasons, which, with the exception of the $2,216.05 we have mentioned above, seem to us plausible. These witnesses both testified that the reserves set up against these bills and accounts, while adequate for general accounting purposes, did not convert the amounts over and above the reserves into quick assets. They testified that the balance over and above the reserves was the amount which petitioner hoped ultimately could be realized out of them but that on December 31, 1936, no collections on them could have reasonably been forecasted. Eespondent cross-examined these two particular witnesses with reference to the bills and accounts in question and brought out that altogether petitioner, during the years 1937, 1938, 1939, and 1940, collected $71,430.22, charged off $189,530.75, and had a remaining balance on December 31, 1940, of $321,127.21, against which there existed a remaining reserve of $245,-981.04.

The above facts, of course, show that these bills and accounts had considerable value at December 31, 1936, perhaps the net value which petitioner had given them in its balance sheet at the end of 1936. In fact, we do not understand that petitioner disputes that they had that much ultimate value, but petitioner does dispute that they were “quick assets” at that time. We agree with petitioner that the facts above given demonstrate that the bills and accounts in question, with the exception of the $2,216.05 we have named, should not be classified as a part of petitioner’s “quick assets” at December 31,1936. On this point we sustain petitioner.

Item (e) (1), $8 — This amount represented cash deposited with the trustee as a sinking fund for the redemption of first mortgage bonds outstanding. Petitioner contends that it should not be included as a quick asset because the amount was in the hands of the trustee. While it is true that this $24,159.46 was in the hands of the trustee on December 31,1936, it was nevertheless the property of petitioner and remained so until it was applied to the payment of petitioner’s outstanding first mortgage bonds. The fact that it represented funds which had been earmarked does not seem to us sufficient to exclude this amount from the definition of quick assets as contained in the trust indenture. It would, of course, have been within the power of petitioner to have excluded this sinking fund cash in the definition of quick assets contained in the trust indenture, but it did not do so. For example, petitioner did exclude from the definition of “quick assets” all personal property which formed a part of the company’s plants or office equipment. It made no such exclusion of sinking fund cash in the hands of the trustee. Under the trust indenture all of petitioner’s property of every kind and nature was assigned to the trustee as security for the payment of the bonds by the following paragraph taken from the trust indenture:

Now, Therefore, * * * for the purpose of securing the payment of the principal and interest of all of the aforesaid bonds * * * the Georgia Marble Company does hereby grant, assign and convey unto the Mercantile Trust and Deposit Company of Baltimore, and its successors in the trust hereby created, all of the property, real and personal, now owned by said Marble Company, or hereafter during the existence of the trusts created by this indenture to be acquired by it.

The sinking fund was still petitioner’s property, although in the hands of the trustee, and, being in the form of cash, we hold that it should be included as a part of petitioner’s quick assets.

Item (e)(8), $11^75.53. — This amount represents cash deposited with the trustee in connection with the disposition of some plant property. For the same reasons stated with reference to item (e) (1) above, we hold that the $14,175.53 in question should be included as a part of petitioner’s “quick assets.”

Item (y), $lJf.6^1J¡J¡,. — This amount represents the cash surrender value on December 31, 1936, of certain life insurance policies on the life of Sam Tate who owned approximately 65 percent of petitioner’s stock. The reason given by petitioner for not including this item as a quick asset is very much the same as the two previous items, namely, that the policies were assigned to the trustee, and were not available to petitioner. In our discussion under the previous item, we pointed out that under the trust indenture all of petitioner’s property, both real and personal, had been assigned to the trustee. But we fail to see why that is a valid reason for excluding the cash surrender value of these policies from the classification of quick assets as that term is defined in the trust indenture and especially in view of the fact that the definition of quick assets contained in the trust indenture does not exclude this asset. Certainly the cash surrender value of a life insurance policy is the equivalent of cash and must be held to have “a readily realizable cash market value” as that phrase is used in the trust indenture. As to the cash surrender value of these policies, we sustain respondent.

We come now to item 4 of the balance sheet relating to investments in the net amount of $214,248.27. Petitioner admits that of this amount $279.62 should be included in the quick assets. See item (f) of the schedule of quick assets set out in our findings. The respondent contends that the balance of investments in the amount of $213,-968.65 should be included as quick assets. We do not agree with this contention. While these assets embraced in the term “investments” undoubtedly had considerable value, it is our opinion that petitioner has sufficiently proven, for reasons not necessary to discuss in detail, that these assets do not qualify as “quick assets” within the meaning of that term as used in the trust indenture, and, therefore, should be excluded, as we have done in our findings of fact. The corporation had many valuable assets which could not be classified as “quick assets” under the definition of the trust indenture.

The net result of our findings above is that out of its adjusted net income of $123,985.56 for the year 1936, petitioner could have distributed to its stockholders in cash dividends $89,273.65, less the surtax on undistributed profits determined in this proceeding, without violating the provisions of a written contract executed by petitioner prior to May 1, 1936. To the extent of this $89,273.65, less the tax, petitioner is not entitled to a credit under section 26 (c) (1). To the extent of the balance of its adjusted net income for 1936 it is entitled to such a credit.

The amount of petitioner’s “net quick assets” is determined by subtracting from the aggregate of its quick assets the amount of its liabilities except the amount due on its outstanding bonds. One of the liabilities which had to be subtracted was liability for taxes. In this proceeding, the petitioner has conceded that it is liable for the $10,-693.38 normal tax which the Commissioner has determined in his deficiency notice. Both parties have agreed that this $10,693.38 should be classed as one of petitioner’s liabilities in arriving at the amount of its net quick assets at December 31, 1936, and it has been so classed in the computation we have made.

Petitioner has contested its liability for any surtax on its undistributed profits. However, as a result of our decision herein, there will be a surtax on undistributed profits and petitioner will be entitled to have that amount deducted as a liability in determining its net quick assets at the end of 1936, the same as the $10,693.38 normal tax named above. This should be done in a computation under Bule 50. Cf. Floyd, Inc., 43 B. T. A. 101.

In the deficiency notice the Commissioner, among other things, stated as follows:

The credit claimed on your return for contracts restricting dividend payments is disallowed for the reason that the bond indenture executed November 1, 1926 does not constitute a contract restricting the payment of dividends within the meaning of Section 26 (c) of the Revenue Act of 1936 as it does not restrict the payment of stock dividends. * * *

Bespondent nowhere in his brief contends anything about the ability of petitioner to have paid taxable stock dividends in 1936. Be-spondent devotes his entire brief to a discussion of the issue that petitioner’s net quick assets were such that it could have declared cash dividends in 1936 without violating the provisions of any written contract entered into prior to May 1,1936. It was stated to us at the hearing that this represented the only issue which was submitted to us for decision. Therefore, we have eonstrued this to mean that respondent no longer presses the holding in his deficiency notice that petitioner could have paid taxable stock dividends in 1936 to the extent of its adjusted net income for that year. Having held herein that petitioner could have paid $89,273.65 cash dividends in 1936, less surtax on undivided profits, without violating the terms of any written contract, we make no attempt to decide what, if any, taxable stock dividends petitioner could have paid in 1936.

Decision will he entered wnder Fule 50.

       SEC. 26. CREDITS OE CORPORATIONS.
      In the case of a Corporation the following credits shall be allowed to the extent provided in the various sections imposing tax—
      * <í # * * * *
      (c) Contracts Restricting Payment on Dividends.—
      (1) Prohibition on Payment op Dividends. — An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. If a corporation would be entitled to a credit under this paragraph because of a contract provision and also to one or more credits because of other contract provisions, only the largest of such credits shall be allowed, and for such purpose if two or more credits are equal in amount only one shall be taken into account.


author: Smith:

text:
    National Securities Corporation, Successor by Merger to American Gas & Electric Securities Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103143.
    Promulgated March 10, 1942.

      'William H. Harding, Esq., and H. G. Küfatrioh, Esq., for the petitioner.

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

Smith:

Petitioner’s contentions are that the respondent has not applied section 45, as he professes to have done, but has disallowed the claimed deduction in whole and without statutory authority; that in any event section 45 does not give the respondent authority to make an allocation of the loss in question; and that the deduction claimed is clearly allowable under section 23 (f) and (j) and section 113 (a) (8) of the Revenue Act of 1936.

The sections of the statute referred to above, and others which petitioner deems pertinent to the question in issue, read in part as follows:

SEO. 46. ALLOCATION OP INCOME AND DEDUCTIONS.
In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income or deductions between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.
SEC. 2 3. DEDUCTIONS PROM GROSS INCOME.
In computing net income there shall be allowed as deductions : *******
(f) Losses by Corporations. — In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.
* * * * * * *
(j) Capital Losses.- — Losses from sales or exchanges of capital assets shall be allowed only to the extent provided in section 117 (d).
SEC. 117. CAPITAL GAINS AND LOSSES.
$$$#***
(d) Limitation on Capital Losses. — Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,006 plus the gains from such sales or exchanges. * * *
SEC. 112. RECOGNITION OP GAIN OR LOSS.
* * * * * * *
(b) Exchanges Solely in Kind.—
$ ****** *
(5) Transfeb to corporation controlled by transferor. — No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock * * * in such corporation, and immediately after the exchange such person or persons are in control of the corporation ; * * *
SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
(a) Basis (Unadjusted) op Property. — The basis of property shall be the cost of such property; except that—
* * * * * * *
(8) Property acquired by issuance op stock or as paid-in surplus. — If the property was acquired after December 81, 1920, by a corporation—
(A) by the issuance of its stock * * * in connection with a transaction described in section 112 (b) (5) * * *
then the basis shall be the same as it would be in the hands of the trans-feror, * * *

Section 45 above confers upon the respondent the power, whenever he deems it necessary in order to prevent evasion of taxes or clearly to reflect income, to distribute, apportion, or allocate gross income or deductions. This is a discretionary power and once the respondent has exercised it his action can be set aside only when clearly shown to be “arbitrary and capricious.” See Asiatic Petroleum Co. (Delaware) Ltd., 31 B. T. A. 1152; affd., 79 Fed. (2d) 234; certiorari denied, 296 U. S. 645; Welworth Realty Co., 40 B. T. A. 97; G. U. R. Co., 41 B. T. A. 223; affd. (C. C. A., 7th Cir.), G. U. R. Co. v. Commissioner, 117 Fed. (2d) 187.

The section does not authorize the respondent arbitrarily to disallow a deduction, however, General Industries Corporation, 35 B. T. A. 615; Tennessee-Arkansas Gravel Co. v. Commissioner, 112 Fed. (2d) 508, which the petitioner contends is what the respondent has done in determining the deficiency herein.

This contention, we think, is not well founded. As was pointed out in G. U. R. Co. v. Commissioner, supra, the allocation of a deduction to one taxpayer necessarily requires its disallowance to another. The language used in G. U. R. Co. was not intended to deny this postulate. Whether the allocation is of a portion or all of the deduction claimed is of no consequence. Certainly section 45 should not be construed as conferring upon the respondent the power to allocate to one taxpayer a portion of a deduction and not the whole of it. We think that the statement contained in the deficiency notice to the petitioner herein may reasonably be construed as showing a determination in accordance with section 45, that is, an allocation of the entire deduction claimed by the petitioner to its parent company and, necessarily, the resulting disallowance of the entire deduction to the petitioner.

Whether or not this deduction was actually taken into the parent company’s accounts in the determination of its tax liability for 1936 is not material to this proceeding. The parent company is not before us. It is stipulated, however, that the parent company’s 1936 return discloses an excess of capital losses on the sale of securities over capital gains of approximately $15,600, of which only $2,000 is an allowable deduction under section 117 of the 1936 Act. As a practical matter, then, it would be futile for the respondent to throw any additional capital losses into the computation of the parent company’s tax liability for 1936.

Does this fact in itself, that is, the incapacity of the parent company to absorb the deduction, prevent the application of section 45 SO as to disallow the deduction to the petitioner? In other words, must the actual loss sustained on the ultimate sale of the shares be allowed as a tax saying deduction (subject only to its limitation under the capital loss provisions of the statute) to some or all of the related group of taxpayers? We think not. The power to "allocate” the deduction, conferred by section 45, is not a mandate to allow- the deduction. The eventuality that some or all of the allocated deduction might not be available to the one to whom it should be allocated is a matter that was not provided for in section 45 and, we may assume, was not intended to affect its application.

The respondent having made his allocation under section 45, the question for the Board to determine is whether or not the allocation is just and equitable, or whether it is “arbitrary and capricious.”

Petitioner urges that the denial of the claimed deduction by the application of section 45 deprives it of the right conferred by sections 113 (a) (8) and 112 (b) (5) set out above. These sections provide in short that where property is transferred to a corporation in exchange for its stock and the transferor remains in control of the corporation no gain or loss shall be recognized on the transaction (section 112 (b) (5)), but the basis for computing gain or loss to the transferee shall be the same as it was in the hands of the transferor.

We do not see that the respondent has gone counter to either of these provisions of the statute. He has not determined any tax liability on the transfer of the Standard stock from the parent to American Gas, which transaction was clearly nontaxable under section 112 (b) (5), and he has used the cost basis of such stock to the transferor in computing the loss of the transferee (petitioner) on the sale of the shares in accordance with section 113 (a) (8). What the petitioner has to complain of is the respondent’s treatment of this loss as a right of deduction, rather than the computation of the loss under the provisions of sections 113 (a) (8) and 112 (b) (5). We find nothing in those sections which in any manner limits the application of section 45.

The facts in the instant case are not distinguishable in any material respect from those in G. U. R. Co. v. Commissioner, supra, except that the Commissioner there allocated a portion only of the loss deduction to the taxpayer, computed upon the basis of the fair market value of the shares sold at the time they were acquired from another corporation with whom it had a common ownership. The distinction, we think, is not one affecting our present question; for, as stated above, we do not think that section 45 should be construed as giving the respondent the power, in the exercise of his sound discretion, to allocate any portion of a loss but not the whole of it. Moreover, the respondent now concedes that the petitioner is entitled to the same measure of loss which was allowed to the taxpayer in the G. U. R. Co. case; that is, such portion of the loss as results from using as a basis to petitioner the fair market value of the shares at the time petitioner acquired them. In Pennsylvania Indemnity Co., 30 B. T. A. 413; affd., 77 Fed. (2d) 92, we limited the loss deduction to such an amount, on facts not dissimilar from those in the instant case, where the Commissioner had not made an allocation under section 45 but had merely disallowed a portion of the loss claimed.

We are not impressed with the argument made by the petitioner that the transaction here by which petitioner acquired the shares in question from its parent company was motivated purely by sound business reasons disassociated from any .consideration of tax consequences and that section 45 therefore has no application. Whatever the motive, there was a shift in the economic benefits to be derived from the deduction of the loss on the ultimate sale of the shares, which we think justified the application of section 45. The express purpose of the section is not only to prevent “evasion” of taxes but “clearly to reflect the income” of the members of the related group. We think that the allowance of the deduction of the entire amount of the loss claimed by petitioner computed on the basis of cost of the shares to the parent, without regard to their fair market value at the time acquired by petitioner or their cost to petitioner, would not clearly reflect petitioner’s income for the taxable year.

Obviously, petitioner did not acquire those shares as a business investment. They were all but worthless at the time of acquisition, having depreciated from approximately $140 a share when purchased by the parent company to about $8.50 when transferred to petitioner. The indicated value of petitioner’s shares given in exchange was over $90 per share, it being stipulated that petitioner’s net worth was not less than $349,000 and its outstanding capital stock 3,800 shares, including the 800 shares issued to the parent company in exchange for the Standard shares. As a business measure petitioner would hardly have transferred over $73,000 of its own stock for $8,562.50 worth of the Standard stock. See G. U. R. Co. v. Commissioner, supra, and Pennsylvania Indemnity Co., supra.

Since the respondent now concedes that the petitioner is entitled to the deduction of a loss equal to the difference between the fair market value of the shares at the time petitioner acquired them and the amount for which they were sold, effect should be given to such concession in the recomputation of the deficiency.

Reviewed by the Board.

Decision will be entered under Rule 50.


author: Mellott:

text:
    Arthur C. Stifel, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100001.
    Promulgated March 10, 1942.

      H. A. Mihüls, G. P. A., for the petitioner.

      E. L. Corbin, Esq., for the respondent.
   opinion.

Mellott:

This proceeding was submitted upon a stipulation of facts, which are found accordingly. Subsequently the parties have made concessions, making it unnecessary to determine all of the issues raised in their amended pleadings. The deficiency originally in issue — a deficiency in gift tax for the year 1938 in the amount of $6,525 — was paid March 4,1940, to the collector of internal revenue for the district of West Yirginia, subsequent to the filing of the petition (Sept. 12, 1939) and is no longer in issue. The present controversy involves respondent’s claim for an increased deficiency. Petitioner concedes some increase should be allowed. The sole issue is whether the $5,000 exclusions to be allowed are five, as respondent originally determined, or three as he now contends. The increased deficiency, therefore, will be computed either as conceded by petitioner or as requested by respondent. The following schedule reflects the two alternatives:

The two $5,000 exclusions in issue are claimed by petitioner to be proper under section 504 (b) of the Revenue Act of 1932. If the gifts in trust made by the donor in the taxable year for the benefit of his two grandsons were gifts of present interests in property then an increased deficiency, based upon the amounts shown in column II of the above schedule, results; if they were gifts of future interests in property then the increased deficiency is to be computed on the basis of the amounts shown in column III. Inasmuch as the two trust instruments are identical (except for the names of the beneficiaries and the property conveyed in trust) it will be sufficient for present purposes to discuss but one of them.

Article first of the trust created by petitioner on March 31, 1938, (Exhibit 3) and to which petitioner made a gift of securities having a value of $9,468.75, is as follows:

First: One-third of the principal of the Trust Fund shall be paid by the Trustee to Arthur O. Stifel, III, grandson of the Trustor, when he arrives at twenty-one (21) years of age, one-third when he arrives at twenty-five (25) years of age, and one-third when he arrives at thirty (30) years of age. Until he arrives at twenty-one (21) years of age, the Trustee shall apply the net income from the Trust Fund, quarterly in as nearly equal installments as practicable, to the use of Arthur O. Stifel, III, for his proper education, care, comfort and support. The Trustee shall make payments of income applicable to the use of the said Arthur O. Stifel, III, during such period to his father, Arthur C. Stifel, II, whose receipts for the payments so made shall operate as a complete discharge therefor as to said Trustee. If the said Arthur C. Stifel, II, should die, then the Trustee shall apply the income from the Trust Fund for the proper education, care, comfort and support of the said Arthur O. Stifel, III, in such a manner as to it in its unlimited discretion seems advisable. Upon the arrival of the said Arthur O. Stifel, III, at twenty-one (21) years of age and until he arrives at thirty (30) years of age, the Trustee shall apply the income from the Trust Fund for the proper education, care, comfort and support of the said Arthur C. Stifel, III, in such a manner as to it in its unlimited discretion seems advisable. If the said Arthur O. Stifel, III, should die before arriving at the age of thirty (30) years, that part of the Trust Fund remaining undistributed shall be held for the use and benefit of the said Arthur C. Stifel, II, for a period of five (5) years next ensuing, during which period the Trustee shall pay to the said Arthur O. Stifel, II, quarterly in as nearly equal installments as practicable, the income from the Trust Fund. At the end of said five-year period, the Trustee shall pay to the said Arthur O. Stifel, II, all of the Trust Fund. If the said Arthur O. Stifel, II, should die during the said five-year period, then that part of the Trust Fund which he would have received had he not so died, shall pass as intestate property of the Trustor, according to the laws of West Virginia then in force. Likewise, if the said Arthur O. Stifel, III, should die before arriving at thirty (30) years of age, having been predeceased by the said Arthur O. Stifel, II, then that part of the Trust Fund which the said Arthur 0. Stifel, II, would have received had he not thus predeceased the said Arthur 0. Stifel, III, shall pass as intestate property of the Trustor, according to the laws of West Virginia then in force.

The beneficiary was born November 3, 1937, and was less than five months old when the gift in trust was made. (The other grandson was two years of age when the gift in trust for his benefit was made.) The parties have stipulated “that the provisions of Paragraph 7 of Article 19 of the Commissioner’s Regulations 79 and Table A referred to therein are to be considered by the Board of Tax Appeals as determinative of the method of computing the value of annuities and life interests.” In petitioner’s rebuttal brief it is stated: “* * * on a 4% basis the present value of an annuity for life, payable quarterly, for Arthur C. Stifel III, aged less than one year at March 31,1938 and of an annuity for life for [the other grandson) aged two years at March 31, 1938 would be $5,661.34 and $7,081.03 respectively, (Table A of Article 19). The present value of an annuity for twenty-one (21) years for [this grandson] and nineteen (19) years for [the other], if it is assumed that the gift of the income ends, or at least becomes less, since one-third of the, principal is distributable to the beneficiary at his arriving at twenty-one (21) years of age, is $5,392.61 and $5,048.50 respectively * * The correctness of these computations is not questioned by respondent. We think it may therefore be assumed for present purposes that the gifts in trust for the benefit of the donor’s grandsons, if of present interests in property, had a value in excess of $5,000 each.

Was the gift in trust for the benefit of Arthur C. Stifel, III, a gift of a future interest in property ? Cases decided by the courts and this Board prior to the decisions of the Supreme Court in United States v. Pelzer, 312 U. S. 399, Helvering v. Hutchings, 312 U. S. 393, and Ryerson v. United States, 312 U. S. 405, are not particularly helpful. We will therefore confine our discussion to these cases and those decided subsequently.

In the Pelzer case the Court approved the regulation of the Treasury Department defining a future interest as one “whether vested or contingent, limited to commence in use, possession or enjoyment at some future date or time.” Since the beneficiaries “had no right to the present enjoyment of the corpus or of the income” and since they would never receive any part of either unless they survived the ten-year period and were then members of the class, the Court held that the gifts were of “future interests.” In the Ryerson case it was held that the beneficiaries had but “future interests in property” where the enjoyment of tbe trust fund by them was postponed until such time as they, in their capacity as trustees, should join in the exercise of a power.

Since the submission of the instant proceeding several Circuit' Courts of Appeal have had occasion to apply the rationale of the three Supreme Court cases. In Welch v. Paine (C. C. A., 1st Cir.), 120 Fed. (2d) 141, the property originally placed in trust was to be held by the trustee for the sole benefit of named minor children in stated proportions, the income to be accumulated and paid, with the principal, to the beneficiaries at age 21, and, in the case of the death of á beneficiary, to his heirs at the date when he would have become 21 years of age. The trustee was empowered to advance to the beneficiaries or for their benefit such sums as he, in his absolute discretion, should deem necessary or advisable for their support, maintenance, or education. The gifts were held to be of future interests. Property subsequently placed in trust, under a provision authorizing the trustee to pay it over to the children in such proportions and at such times as he might determine or to hold and accumulate it for their benefit, were held to be “more clearly gifts of future interests”, the court pointing out that: “The payment of such income is not merely postponed, for accumulation and eventual payment, along with principal, to the beneficiaries in equal shares; rather, the taxpayer reserves the power in his sole discretion to allocate and pay over the income to the beneficiaries in such proportions as he may determine, or to accumulate it.”

In Helvering v. Blair (C. C. A., 2d Cir.), 121 Fed. (2d) 945, a grantor conveyed funds to two trusts for the life of the longer liver of his wife and youngest child. Under one of the trusts his two sons, as trustees, during the wife’s life, had the power to distribute the trust income among the wife and the children in such proportions as they might deem proper and under the other trust they had a similar discretionary power so long as they continued to act as trustees. The court held that the interests of the beneficiaries were future.

Commissioner v. Taylor (C. C. A., 3d Cir.), 122 Fed. (2d) 714, involved a trust created by the grantor for the benefit of four nephews and nieces, the instrument directing the trustees to divide the principal of the trust into four equal shares and hold it for the benefit of the named children. The income from each share was to be paid to the designated child for his or her life; but the income until the child attained age 21 was to be accumulated until that time unless, “In the opinion of the Trustees, in their sole discretion” it should be needed for the proper education or support of the beneficiary during minority. The court (one judge dissenting) held that the gifts were of “future interests in property.”

In Hopkins v. Magruder (C. C. A., 4th Cir.), 122 Fed. (2d) 693, the- trustee, ±o_ whom insurance, policies and stock had been transferred for the benefit of children of the settlor, was to divide the corpus of the trust into as many shares as there might be surviving children and groups or stocks of children at the time of the death of the settlor and continue to hold each share in trust, paying over the net income to each son until he attained the age of 21, at which time the corpus, in the discretion of the trustee, was to be paid to them. The court held that the trust instrument “conveyed a future interest” and that the lower court had erred in allowing as many $5,000 exclusions as there were children.

Under the trust before the court in Commissioner v. Brandegee (C. C. A., 1st Cir.), 123 Fed. (2d) 58, the trustees were given discretionary power to pay the net income, in equal shares, to the beneficiaries, and after payment of mortgages or obligations against property acquired, were required to pay the net income to the beneficiaries. The court recognized “that the gift of an immediate life interest in income is to be regarded as a present interest”, but remanded the case to the Board to give the taxpayer opportunity to show, if such showing could be made, that the mortgages had been paid, thereby removing the option of the trustees to make payment of the income to the beneficiaries and requiring them to do so.

In Commissioner v. Glos (C. C. A., 7th Cir.), 123 Fed. (2d) 548, the trustee was directed to accumulate the income until the grantor’s death, then to liquidate the estate as rapidly as his discretion should dictate, but within five years, and finally to distribute the proceeds to thirteen individual beneficiaries and four churches. The court pointed out that “the sole statutory distinction between present and future interest lies in the question of whether there is postponement of enjoyment of specific rights, powers or privileges which would be forthwith existent if the interest were present”, and, finding that the enjoyment of such rights was postponed, held that the gifts were of future interests.

One of the most recent expressions by this Board upon the subject is Annie B. Smith, 45 B. T. A. 948, in which many of the cases are analyzed and discussed. See also Elizabeth H. Fisher, 45 B. T. A. 958; Rooke v. United States (U. S. Dist. Ct. N. J.),-Fed. Supp.(Nov. 13, 1941); and Vogel v. United States (U. S. Dist. Ct. Mass.), 42 Fed. Supp. 103.

The interested parties (the trustee and the fathers of the beneficiaries) construed the trust instruments as requiring that the trust income be paid over to the fathers for the benefit of their sons so long as the fathers should be alive. They are both alive and have received the income of the trusts. The construction seems clearly to be correct. Until the minor child “arrives at twenty-one (21) years of age, the Trustee shall apply the net income * * * to the use of [the minor] * * * for his proper education, care, comfort and support. Thetrus-tee shall make payments of income applicable to the use of [the minor] during such period to his father * * Payment of the income being mandatory and the trustee having no discretion whether it should be paid or accumulated, the rule applied in Annie B. Smith, supra, and some of the other cases cited above is not applicable. Elizabeth H. Fisher, supra, however, is almost on all fours. There, as here, “upon the creation of the trust each grandchild received an immediate right to a proportional share of the income from the * * * trust fund * * We held that “this right to receive such income was a gift of a present rather than a future interest.” We think the same conclusion should be reached in the instant proceeding.

Petitioner is entitled to five exclusions of $5,000 each in computing his gift tax for the year 1938.

Decision will be entered v/nder Rule 50.

       SBC. 504. NET GIFTS.
      *******
      (b) Gifts Less Than $5,000. — In the case of gifts (other than of future interests in property) made to any person by the donor during the calendar year, the first $5,000 of such gifts to such person shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year.


author: HakROn:

text:
    Halbert P. Gillette and Winifred Gillette, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent. Halbert P. Gillette, Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 104368, 104369.
    Promulgated March 11, 1942.

      A. Oodder Machay, Esq., for tbe petitioners.

      E. A. Tonjes, Esq., for tbe respondent.
   OPINION.

HakROn:

Respondent included in petitioner’s taxable income the entire trust income in the taxable years. The main questions are whether any of the trust income is taxable to petitioner, and, if so, how much thereof is taxable to him.

Before turning to the m,ain question the following is pointed out: After the property settlement agreement was executed petitioner obtained a divorce from his then wife in Nevada. The decree did not make any provision for support or alimony for the divorced wife and it did not reserve to the court any power to modify the decree. Under Nevada law the decree was final and, as it did not award alimony to the wife, she was foreclosed from ever obtaining any award for alimony. Sweeney v. Sweeney, 42 Nev. 431; 179 Pac. 638, and petitioner was not obligated under the divorce decree to continue to provide support for his former wife. If petitioner had not guaranteed, in the property settlement agreement, an annual income of $3,000 a year to his former wife, by virtue of his guarantee to make up any deficiency in the trust income up to $3,000, none of the trust income in question would be taxable to petitioner in the taxable years under the rule of Helvering v. Fuller, 310 U. S. 69. But the situation here is different from that of the Fuller case. This case, rather, comes within the rule of Helvering v. Leonard, 310 U. S. 80, as is shown hereinafter.

Petitioner is taxable upon the trust income which was used to discharge his obligation, assumed by him under the property settlement agreement. He executed a property settlement agreement, in lieu of alimony, the express purpose of which, inter alia, was to provide the former wife with an annual income of $3,000 for life. A trust was created by petitioner and his former wife for her support. Petitioner’s obligation to provide her with an annuity was assumed by him under a contract, under which his former wife released petitioner from all claims which she had for “alimony, support, or for any other cause.” Petitioner acquired, in effect, the interest of his former wife in his property in consideration of his agreement to pay her $3,000 a year during her lifetime. The trust was in the nature of collateral security to insure such payment. If the trust income was not sufficient to yield to the beneficiary such annual income, petitioner was obligated to pay to the trustee any deficiency so that she would receive the stipulated amount. The trust income was to be used to satisfy his legal obligation arising from the property settlement agreement. The fact that petitioner later obtained an absolute divorce from the former wife, without any provision for alim.ony or support, does not in any way wipe out petitioner’s continuing legal obligation which he assumed under the agreement. Petitioner’s obligation was in the form of a guarantee that the stipulated amount would be paid to his former wife, and that guarantee was a continuing obligation. It reached into the taxable years. So far as petitioner’s guarantee was concerned, the divorce decree and the establishment of the trust “permitted his preexisting unconditional duty to be transformed into a limited contingent one.” Helvering v. Leonard, supra. Petitioner’s obligation was discharged as income was received by the trustee, and he received benefit by the payments of the trust income to his former wife. The trust income which served to discharge petitioner’s guarantee constituted income to the petitioner and he is taxable on such income. Alsop v. Commissioner, 92 Fed. (2d) 148; certiorari denied, 302 U. S. 767; Glendinning v. Commissioner, 97 Fed. (2d) 51; Weir v. Commissioner, 109 Fed. (2d) 996; certiorari denied, 310 U. S. 637; Helvering v. Leonard, supra; Paul, Five Years with Douglas v. Willcuts, 53 Harvard Law Review 1.

The cases above cited are controlling in the matter of petitioner’s liability for income tax on the income of the trust which discharged his continuing obligation to his former wife. However, in all of the cases in which the question has been considered, the income of the particular trust was not in excess of the amount of the annual income guaranteed by a husband who created an alimony trust for a wife, later divorced. In this case, because the trust income in 1936 exceeded the guaranteed amount of $3,000, a question of first impression arises. See Paul, Studies in Federal Taxation, Third Series, pp. 272, 273. Is petitioner taxable on all of the trust income in the amount of $7,035.94, or only upon' such income as discharged his obligation, $3,000? The Supreme Court in the Leonard case has indicated clearly that the reason for taxing income from such a trust to the husband at all is the very reason why the amount of the income taxable to him is limited to the amount which he has guaranteed. It was said in the Leonard case that:

* * * the case in substance is the same as those where pursuant to contract or arrangement an obligation is discharged by another for the taxpayer’s benefit; * * * or where the taxpayer creates a trust, the income of which is applied to the discharge of his debt.

The petitioner had a contingent obligation to pay $3,000 a year to a trustee for his wife’s benefit, which was much the same as being liable for a “debt.” He has received “income” to the extent that his liability has been discharged, but anything paid to the wife from the trust income above $3,000 was not paid in discharge of petitioner’s obligation. Accordingly, petitioner is taxable upon not more than $3,000 of the trust income in the year 1936.

In 1936 the dividends on the Gillette Publishing Co. stock consisted of $2,160.94 in cash and a note for $4,875. Petitioner urges that the guarantee to the wife of annual income of $3,000 was discharged to the extent of the cash dividends only. The trustee distributed only the cash dividends and retained the note. There is no evidence whatever as to the value of the note and it must be assumed that its value was equal to the face amount less discount, at least. Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462. The trustee was required to distribute currently all dividends, after the trustee’s expenses, to the former wife. Dividends may be paid in cash or in notes or in other property. It was the general intent that the trustee should distribute all dividends, without any restrictions as to the form of the dividends. Consequently, all of the trust income in 1936 was distributable income. It is held that the amount of the trust income in 1936 which served to discharge petitioner’s guarantee was $3,000, and he is taxable on that amount in 1936. In 1937 the trust income was $1,618. Respondent properly included that amount in petitioner’s taxable income.

There is a remaining question. In his brief, petitioner claims that Winifred Gillette, petitioner, is not liable for any deficiency, under the joint return, for 1936 in Docket No. 104368, the deficiency resulting from Halbert P. Gillette’s income. That question must be answered contrary to petitioner’s contention on authority of George W. Schoenhut, 45 B. T. A. 812, which states that Ella T. Flaherty, Executrix, 85 B. T. A. 1131, will not be followed hereafter by the Board.

Reviewed by the Board.

Decision will be entered under Pule SO in Docket No. 101¡$68 {1936). Decision will be entered for the respondent in Docket No. 101,369 {1937).

       None of the trust income was derived from any property of the former wife which she conveyed to the trustee. All of the trust income was derived from stocks conveyed to the trustee by petitioner.
      46 B. T. A.


author: Turner:

text:
    Estate of Frederick C. Kirchner, Deceased, Emma R. Kirchner, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102381.
    Promulgated March 11, 1942.

      John W. Ford, Esq., for the petitioner.

      Stanley B. Pierson, Esq., for the respondent.
   OPINION.

Turner:

On the first issue the respondent determined that the decedent’s interests in the so-called Electrical Funds, Nos. 5 to 12, inclusive, should be included in his income as “amounts accrued up to the date of his death” within the meaning of section 42 of the Revenue Act of 1936. The amounts set up in the deficiency notice as accrued income are the same as the values reported in the estate tax return. On brief, the respondent calls attention to the fact that upon the decedent’s death his representatives had the right, under the provisions of the trust agreements, to elect to receive payments of his interests in the trust funds, and that the trust agreements prescribed a method of determining the values of his interests in the event that such election was made. Then he contends that the values so determined should be treated as “amounts accrued” within the meaning of the act. He states that the issue is controlled by Helvering v. Enright, 312 U. S. 636; and Helvering v. McGlue, 119 Fed. (2d) 167.

Petitioner contends that with respect to Electrical Funds Nos. 7 to 11, inclusive, the decedent’s interests therein were not capable of approximate valuation at the time of his death within the test laid down in the Enright case; that, since the trust funds consisted largely of common stocks, the distributions that eventually would be made to the decedent’s estate upon the termination of each trust were contingent and uncertain; and, further, that the value of the decedent’s interests at the time of his death was too indefinite for accrual. In respect of Electrical Fund No. 12, petitioner points to the fact that at the time of the decedent’s death the president of the company had not designated the employees who were to become beneficiaries under the trust, nor had he designated the amount or proportion to which each would be entitled. Therefore, she argues, the decedent had no rights of any kind at the time of his death in respect of this trust which might be treated as accrued.

We think petitioner’s contention with respect to Electrical Funds Nos. 7 to 11, inclusive, must be rejected. At the time of the decedent’s death the company had made its final payment to the trustee and the decedent had been designated as a beneficiary and there was no contingency or uncertainty as to the proportionate share to which he was entitled. Upon his death his representatives were entitled to demand payment of his interests therein and the trust agreements stipulated a method of computing the value thereof. There were no unknown factors which would render uncertain the value of his interests in the event that his representatives elected to receive payment therefor. If they had so elected, the decedent’s interests could have been ascertained by the application of the method set forth in the trust agreements, a pure mathematical computation. We decide this issue for the respondent on the authority of the Enright case. Cf. Bach v. Rothensies, 124 Fed. (2d) 306.

With respect to Electrical Fund No. 12, we think the petitioner’s contention must be sustained. At the time of the decedent’s death, neither he nor anyone else had been designated as a beneficiary under that trust agreement and of course no allotments had been made. It was not certain that the decedent would be designated, and it was not until two months after his death that he was designated. Obviously he had no interest in that trust at the time of his death, and there was nothing to accrue. We decide this issue for the petitioner. Cf. Seattle First National Bank v. Henricksen, 24 Fed. Supp. 256.

The respondent added a 25 percent penalty for failure to file a return. On brief, he contends that under section 291 of the Revenue Act of 1936 the imposition of the penalty is mandatory. He makes no contention that petitioner did not show reasonable cause for her failure to file the return. He cites a number of cases involving section 291 of the Revenue Act of 1934 and corresponding provisions of earlier revenue acts. Petitioner concedes that the imposition of the penalty under the 1934 Act has been held to be mandatory, but contends that changes made in section 291 of the Revenue Act of 1936 resulted in the removal of the mandatory provision and made the test whether the failure to file the return was due to reasonable cause and not to willful neglect. She contends that reasonable cause has been shown here and that the penalty should not be imposed.

Section 291 of the Revenue Act of 1934, which is substantially identical to corresponding provisions of prior acts, provides in part as follows:

In ease of any failure to make and file a return required by this title, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, S3 per centum cf the taw shall he added to the Mm, except that when a return is filed after such time and it is shown that the failure to file it was due to reasonable cause and not due to willful neglect no such addition shall be made to the tax. * * * [Emphasis supplied.]

The Board and the courts have held that this provision of the 1934 and prior acts requires that a return be filed by the taxpayer at some time as a prerequisite to a plea of reasonable cause. Scranton, Lackawanna Trust Co., Trustee, 29 B. T. A. 698; affd., 80 Fed. (2d) 519; certiorari denied, 297 U. S. 723; Harry D. Kremer, 31 B. T. A. 566; Kathryn Lammerding, 40 B. T. A. 589; affd., 121 Fed. (2d) 80; Douglas L. Edmonds, Administrator, 31 B. T. A. 962; affd., 90 Fed. (2d) 14; Marlborough House, Inc., 40 B. T. A. 882; reversed on other grounds, 118 Fed. (2d) 511; and Collateral Mortgage & Investment Co., 37 B. T. A. 630. These are the cases cited and relied on by the respondent. Cf. O'Sullivan Rubber Co. v. Commissioner, 120 Fed. (2d) 845.

Section 291 of the Bevenue Act of 1936 provides in part as follows:

In ease of any failure to make and file return required by this title, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the tax: * * * [Emphasis supplied.]

The Congressional Committee Keports pertaining to the 1936 Act throw no light on the reason for the changes made in this provision, but the new provision is unambiguous and in our opinion effectively removed that part of the prior provision which made mandatory the imposition of the penalty in cases where no returns had been filed. We can not presume that Congress made this change inadvertently. The term “any failure” obviously includes a complete failure and the test laid down is whether “such failure is due to reasonable cause and not due to willful neglect.” In R. Simpson & Co., 44 B. T. A. 498, we held that there was no reasonable cause for failure to file a return, and therefore found it unnecessary to pass upon petitioner’s contention that under the wording of the 1936 Act proof of reasonable cause would relieve it from the imposition of the penalty. In Huron River Syndicate, 44 B. T. A. 859, no return was filed, and we said, “The question under the Bevenue Act of 1936, section 291, is whether there was reasonable cause for the failure.” In that case we held there was no reasonable cause. In the instant case we think the petitioner has shown reasonable cause for failure to file the return. The facts are set forth in our findings and will not be repeated here. The respondent erred in imposing the penalty.

In the following cases we and the courts have sustained the imposition of the penalty under the 1936 Act: Olean Times Publishing Co., 42 B. T. A. 1277; nolle prosse (C. C. A., 2d Cir., Apr. 3, 1941); Logan, Cood & Timber Association, 42 B. T. A. 529; affd., 122 Fed. (2d) 848; John Armistead, 42 B. T. A. 1430; Puritan Mills, 43 B. T. A. 191; and Lane-Wells Co., 43 B. T. A. 463. In none of those cases, however, do the facts show that there was reasonable cause for the failure to file the return and any statements made therein to the effect that the imposition of the penalty is mandatory is obiter dictum. and is not controlling here.

Reviewed by the Board.

Decision will be entered under Bule 50.

         SEC. 42. PERIOD IN WHICH ITEMS OP GROSS INCOME INCLUDED.
      The amount ol all Items of gross income shall be included in the gross income for the taxable year in -which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period. In case of the death of a taxpayer there shall be included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period.


author: Tyson:

text:
    The Equitable Life Assurance Society of the United States, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 106089.
    Promulgated March 11, 1942.

      Hugh MeD. Ritchey, Esq., for the petitioner.

      Donald P. Moyers, Esq., for the respondent.
   OPINION.

Tyson:

Respondent contends: (1) That petitioner is liable at law as trustee and/or transferee of the estate of Byron Webster Beatty for the deficiency of $3,953.01 in Federal estate tax on that estate, together with interest thereon; or (2) that petitioner is so liable as a transferee of the transferee (Helen Beatty, beneficiary in the insurance policies). These contentions are based upon the application of section 315 of the Revenue Act of 1926, as amended by section 803 (c) of the Revenue Act of 1932, and of section 316 of the Revenue Act of 1926, the material parts of those sections being printed in the margin.

Petitioner contends: (1) That no assets of the estate of Byron Webster Beatty have been transferred in trust or otherwise to it; and (2) that petitioner is not trustee or transferee of the estate of Byron Webster Beatty or transferee of a transferee, but owes money under the terms of its written contract; its relationship to Helen Beatty and the contingent beneficiaries under its income bond and under its contracts of insurance being that of debtor and creditor.

The parties are in agreement, on brief, that the only amount with regard to which there is presented the question of whether petitioner received such amount as trustee,.transferee, or transferee of a transferee is $40,000, part of the proceeds of policy No. 7,535,701 which was received, or retained, by petitioner through election by Helen Beatty, beneficiary therein, under option 3 in that policy; so our inquiry as to whether or not petitioner received any amounts whatsoever as trustee, transferee or transferee of a transferee, so as to render it liable for the amount here involved, is narrowed to the inquiry of whether or not it so received the $40,000 of the proceeds of policy No. 7,535,701.

Did petitioner receive and hold the $40,000 proceeds from policy No. 7,535,701 as trustee? We think it is so obvious that it did not so receive and hold such amount as to require but little consideration of the question. The $40,000 was received by petitioner through the surrender of the fixed, determined and accrued right thereto of Helen Beatty, beneficiary in the policy, in exchange for petitioner’s obligations incurred to Helen Beatty and the contingent beneficiaries as evidenced by its bond. This bond, executed in compliance with Helen Beatty’s election under “Modes of Settlement At Maturity Of Policy” in policy No. 7,535,701, to convert the proceeds of the insurance policy under option 3 into a life income for 20 years certain and continuing thereafter during her life, with contingent beneficiaries should she die within the 20 years, did not, in our opinion, create the status of a trustee for petitioner- herein, but created merely the relation of debtor and creditor as between petitioner and those parties. Cf. John Hancock Mutual Life Insurance Co., 42 B. T. A. 809, 821, and authorities therein cited.

Did petitioner receive and hold the $40,000 proceeds from policy No. 7,535,701 as such a transferee of Byron Webster Beatty, or his estate, as would render petitioner liable, under the applicable statutes, for the tax here sought to be imposed? We are of the opinion that it did not.

At the time of his death the insured had not elected option 3 provided for in the policy as a mode of settlement by the insurer of its liability at maturity of the policy on the death of the insured. Thus, at the time of the insured’s death the beneficiary, Helen Beatty, had the fixed and determined right to be paid a lump sum in the face amount of the policy at the death of the insured and the insurance company was absolutely liable to her at that time in such lump sum. At that time the insurance company had no semblance of a right to retain in its possession the $40,000 for any purpose whatsoever. Such right of the insurance company arose for the first time when Helen Beatty, the beneficiary in the policy, then having the fixed and determined right to payment of the proceeds thereof in a lump sum, exercised another right vested in her, under the provisions of the policy, by giving written directions that the $40,000 lump sum be applied as a payment by her to the insurance company for a supplemental contract between that company and her, as evidenced by that "company’s bond.

It is thus clear that the $40,000 of the proceeds of policy No. 7,535,701 was not received by petitioner insurance company by reason of a transfer to it by either Byron Webster Beatty or his estate, which primarily owed the tax here sought to be recovered from petitioner as transferee. It is equally clear that the $40,000 was received by the insurance company from Helen Beatty in exchange, for its obligation, evidenced by its bond, to pay her monthly payments for 20 years certain and continuing throughout her lifetime, or, to pay certain amounts to contingent beneficiaries named by her.

The remaining question is whether the petitioner insurance company is such a transferee of a transferee (Helen Beatty, beneficiary in policy No. 7,535,701) of the $40,000 as would render it liable under the statutes relating to such liability.

Helen Beatty was the specific beneficiary under the policy executed by decedent and as such she was the transferee of the $40,000 as provided in section 315 (b), supra, cf. John Hancock Mutual Life Insurance Co., supra, p. 818; and while the $40,000 was received by petitioner by transfer from such transferee and in a literal sense petitioner was thus a transferee of a transferee, we are of the opinion that petitioner was not such a transferee of a transferee as would render it liable under the statutes applicable to a transferee’s liability; and for the reason that, as a consideration for the receipt or retention by it of the $40,000 petitioner undertook a supplemental obligation as evidenced by its bond for monthly payments to the beneficiaries named therein. We are of the opinion that the obligation thus incurred by petitioner under its bond constituted a full and adequate consideration for the $40,000 received or retained by petitioner insurance company, and hold that petitioner is not such a transferee of a transferee as would render it liable under the statutes' applicable to transferee’s liability.

The sole authority relied upon by respondent to sustain his contentions is John Hancock Mutual Life Insurance Co., supra. That case is not controlling here, for it is clearly distinguishable on its facts. There the entire lump sum of the proceeds of the policies involved, immediately upon the death of the insured and at his direction, came into the ownership and possession of the insurance companies, which were to make certain periodic payments of such proceeds to the beneficiaries as directed by the insured, and thus, in effect, the insurance companies received the proceeds by transfer directly from the insured. Here the petitioner insurance company received the $40,000 solely by transfer from a person other than the insured, which person had the absolute right at the time of the transfer, as beneficiary under the policy, to do as she chose with the $40,000. She chose to transfer the $40,000 to the petitioner insurance company in exchange for the latter’s bond.

We hold that the respondent erred in his determination.

Decision will be entered for the ‘petitioner.

       Sec. 315 (b). If (1) except in the case of a bona fide sale for an adequate and full consideration in money or money’s worth, the decedent makes a transfer, by trust or otherwise, of any property in contemplation of or intended to take effect in possession or enjoyment at or after his death, or makes a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (A) the possession or enjoyment of, or the right to the income from, the property, or (B) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom, or (2) if insurance passes under a contract executed by the decedent in favor of a specific beneficiary, and if in either case the tax in respect thereto is not paid when due, then the transferee, trustee, or beneficiary shall be personally liable for such tax, and such property, to the extent of the decedent’s interest therein at the time of such transfer, or to the extent of such beneficiary’s interest under such contract of insurance, shall be.subject to a like lien equal to the amount of such tar. Any part of such property sold by such transferee or trustee to a bona fide purchaser for an adequate and full consideration in money or money’s worth shall be divested of the lien and a like lien shall then attach to all the property of such transferee or trustee, except any part sold to a bona fide purchaser for an adequate and full consideration in money or money’s worth.
      Sec. 316. (a) The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this title (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds) :
      (1) The liability, at law or in equity, of a transferee of property of a decedent or donor, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed by this title or by any prior estate tax Act or by any gift tax Act.
      ***** * *
      Any such liability may be either as to the amount of tax shown on the return or as to any deficiency in tax.
      *******
      (e) As used in this section, the term “transferee” includes heir, legatee, devisee, and distributee.


text:
    Melville H. Haskell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105620.
    Promulgated March 11, 1942.

      E. W. LeFever, Esq., and M. J. Beigert, Esq., for the petitioner.

      Thos. F. Gallahan, Esq., for the respondent.
   opinion.

Smith:

This proceeding involves income tax deficiencies of $732.82 for 1936 and $1,039.42 for 1937.

Petitioner alleges, first, that the respondent erred in including in his gross income for 1936 and 1937 the net income of certain trusts which he created in 1935 for the benefit of his wife and three children pursuant to a predivorce settlement, and, in the alternative, that if the income of the trusts is taxable to him then he is entitled to a personal exemption of $2,500 as head of a family and to the statutory credit for dependents for each of the three children. Petitioner further alleges that respondent erred in disallowing in 1937 the deduction of a loss sustained in a joint venture in conducting a winter racing meet at Tucson, Arizona. Based on these contentions' petitioner has asserted a claim for refund of taxes already paid of $9,001.67 for 1936 and $7,269.20 for 1937.

The facts are stipulated.

Petitioner is a resident of Tucson, Arizona, and his principal place of business is at Cleveland, Ohio. He filed his income tax returns for 1936 and 1937 with the collector of internal revenue for the eighteenth district of Ohio.

On August 19, 1935, petitioner and his wife, Katherine Adams Haskell, who at that time were living apart and contemplating a divorce, entered into an agreement, the stated purpose of which was:

* * * settling and adjusting all rights and claims in and to the property of each other and in and to any community property owned by them, and to make provision for the care and support of their children, Coburn Haskell, Schuyler Adams Haskell and Melville H. Haskell, Jr.

Under the terms of this agreement petitioner agreed to transfer outright to his wife certain stocks and bonds and in addition to create four separate trusts, one for the benefit of the wife for life and one each for the benefit of their three minor children, 11, 7, and 5 years of age, respectively. The agreement provides in paragraphs 7 and 8 that:

7. Except as herein otherwise provided each of the parties hereto releases and discharges the other from all obligations of support and maintenance and from all other claims, rights and duties arising out of the marital relationship.
8. It is the understanding and intent of the parties hereto that the settlement herein set forth and provided for is and shall be a full and final settlement and adjustment of all the rights and claims of each party in and to the property of the other and in and to any and all community property.

The four trusts referred to in the agreement of August 19, 1935, were created by separate trust indentures executed by the petitioner on that date. In the trust created for the benefit of Katherine Adams Haskell for life she and the Boston Safe Deposit & Trust Co. were named cotrustees. Katherine Adams Haskell was to receive the income of the trust for life, with remainders over to petitioner’s issue or their trustees. In addition, she was to be permitted to withdraw certain amounts of the principal of the trust, upon conditions not here material.

The Superior Court for the State of Arizona for the County of Pima on August 23,1935, entered a decree granting Katherine Adams Haskell a complete and final divorce from petitioner. The decree of the court reads in part as follows:

And it further appearing that said parties have settled all questions pertaining to property and property rights and to the issue of said marriage, and that said matters are not submitted to or subject to order of this court,
It is, therefore,
Obdhred, Adjudged and Decreed, that the marriage heretofore existing between the plaintiff and the defendant be and it is hereby in all things dissolved and each of the parties freed from all the obligations thereof, and that the plaintiff be and is hereby granted an absolute divorce from the defendant, and both parties be and are hereby restored to the rights and privileges incident to a single status; that plaintiff have and recover her costs herein expended in the sum of $15.00.

This decree has since remained in full force and effect without any amendment or alteration.

Katherine Adams Haskell was remarried to Edward Stewart Hall at some time during the period November 19, 1936, to December 19, 1936.

All of the net income of the Katherine Adams Haskell trust for 1936 and 1937 in the respective amounts of $9,424.25 and. $9,020.69 was distributed or credited to her in those years. Petitioner reported those amounts in his gross income in his 1936 and 1937 returns.

In the written stipulation filed by the parties at the hearing of this proceeding the respondent concedes that petitioner is entitled to a credit in 1936 and 1937 of $400 for; each of his three dependent minor children, and petitioner concedes the correctness of all of the other adjustments made by the respondent except the inclusion in his gross income of the income from the Katherine Adams Haskell trust. Whether this income is taxable to the petitioner in 1936 and 1937 is therefore the only question remaining for our determination.

The United States Supreme Court has laid down the rule that the liability for income tax on the income of trusts of the character of the one here involved depends upon whether there is any continuing liability of the grantor, either contractual or imposed by state law, to contribute to the support of the divorced wife to whom the income of the trust is paid. Douglas v. Willcuts, 296 U. S. 1; Helvering v. Fitch, 309 U. S. 149; Helvering v. Fuller, 310 U. S. 69; Helvering v. Leonard, 105 Fed. (2d) 900. It is plain that no such liability on the petitioner’s part is to be read into the settlement agreement or the provisions of the trust indenture. The settlement agreement was, as stated by its terms, a complete “full and final settlement” of all property rights and a release of the parties from all obligations and claims arising out of the marital relationship. The petitioner agreed to convey a portion of his estate to his wife outright and to create separate trusts for her and their three minor children. The trust which petitioner created for the benefit of his wife imposes no future obligations upon him in respect of the wife’s support. The wife is to- receive all of the income of the trust for life to use in any manner she sees fit and there is no guaranty of income by the petitioner. Cf. Helvering v. Leonard, supra. The creation of these trusts and the fulfillment of the other terms of the settlement agreement were understood to be in complete discharge of all of petitioner’s marital obligations to his wife.

Neither do the laws of the State of Arizona place any further or continuing obligation upon the petitioner to contribute to his divorced wife’s support by way of alimbny payments or otherwise. The divorce decree malíes no award of alimony and expressly states that no question of property or property rights was “submitted to or subject to order of this court.” The court did not incorporate the settlement agreement in its decree or exercise any jurisdiction over it.

Section 27-805 of the Arizona statutes (2 Arizona Code Ann. (1989 Off. Ed.) 481) provides that on entering a decree of divorce the court “shall order such division of the property of the parties as the court shall deem just and right according to the rights of each party and their children.” Sections 27-810 and 27-811 provide in part as follows:

§ 27-810. In the final decree of divorce the court may, in addition to the division of the common property of the parties, or in lieu thereof, direct the husband to pay to the wife such amounts as may be necessary for the support and maintenance of the wife, and the minor children of the parties whose custody may be awarded the wife, as may be necessary or proper * * *.
§ 27-811. The court may from time to time after the entry of final decree, on petition of either party, amend, revise and alter such portions of the decree as relate to the payment of money for the support and maintenance of the wife or the expenses of the proceedings, as may be just, and amend, change or alter any provision therein respecting the care, custody or maintenance of the children of the parties as the circumstances of the parents and the welfare of the children may require.

Under tlie above provisions of the Arizona statute the only power which the court retains, after entering a final decree of divorce is to “amend, revise and alter such portions of the decree as relate to the payment of money for the support and maintenance of the wife” or to the “care, custody or maintenance of the children.” The decree which the court awarded to petitioner’s wife did not contain any award of alimony or make any provision for the support and maintenance of the wife. To the contrary, it expressly stated that such matters were not submitted to or subject to the order of the court.

The Supreme Court of the State of Arizona has construed section 27-811 (sec. 2188, Revised Code Arizona, 1928) as conferring no jurisdiction upon the court to make an alimony allowance where none was made in the original decree. Stanley v. McKenzie, 29 Ariz. 288; 240 Pac. 1033; Long v. Long, 39 Ariz. 271; 5 Pac. (2d) 1047. In the last named case the court said:

The jurisdiction given by this section, however, does not apply when the original decree of divorce contains no provision regarding alimony or the custody of the children. Stanley v. McKenzie, 29 Ariz. 288; 240 P. 1033. Since' the original decree contained no provision regarding alimony for plaintiff, the court was without jurisdiction to grant her petition for alimony in the present proceeding. The decree, however, expressly provided for the maintenance and custody of the minor children then living, and of course could be amended so far as that child was concerned. * * *

The provisions of the Arizona statutes relating to the matter in question are similar to those of the State of Connecticut which were under consideration by the United States Circuit Court of Appeals for the Ninth Circuit in Ingraham v. Commissioner, 119 Fed. (2d) 228. The court there said:

* * * We do not find in the statute which creates in the court the right to grant alimony any provision that the court retains jurisdiction over the parties to exercise that discretion after the divorce proceeding is terminated by a final decree.

The court further said that this conclusion was in harmony with the construction placed upon substantially similar statutory provisions by the courts of a number of other states, including Michigan, Oregon, Wisconsin, Maine, South Dakota, and Iowa.

We conclude that under the laws of the State of Arizona petitioner was under no continuing obligation to support his divorced wife and that petitioner has no tax liability in respect to the trust income that was payable to her for her own use. See Helvering v. Fuller, supra; F. W. Fitch, 48 B. T. A. 773; Arthur Letts, Jr., 41 B. T. A. 1172.

The petitioner would be taxable, however, on any of the income of the trust which was intended to be used and was used for the support of the minor children. Helvering v. Schweitzer, 296 U. S. 551; Ernestine Mitchell, 38 B. T. A. 1336; Arthur Letts, Jr., supra; William H. Stanley, 41 B. T. A. 1233; Reginald B. Parsons, 44 B. T. A. 1142. Petitioner does not deny his liability to support the children and, accordingly, he concedes in the written stipulation referred to above that he is taxable on all of the income of the three trusts which he created for the benefit of his children.

It is plain, we think, that none of the income of the wife’s trust was intended for the support of the children, but was all to be paid to her for her own and separate use. In the absence of any contention or evidence to the contrary, we shall presume that the income of the trusts created for the children was sufficient for their needs. It is of record that additional trusts had already been created for the children by petitioner’s mother.

The respondent has not filed a brief in this case and we have nothing to indicate his position on the matters under consideration except the statement contained in his deficiency notice that the income of the several trusts is taxable to petitioner under the provisions of sections 166 and 167 of the Revenue Act of 1936. These sections provide for taxing trust income to the grantor where he has the power to revest in himself title to any of the corpus of the trust (sec. 166), or when the income of the trust, in the discretion of the grantor or any one not having an adverse interest in the trust, is distributable to the grantor, or may be held for future distribution to the grantor, or applied to the payment of premiums upon insurance policies on the life of the grantor (sec. 167).

It goes without argument that neither of these sections applies to the trust here under consideration. Petitioner had no power to revest in himself title to any portion of the corpus of the trust, nor was he to receive any of the income either directly or indirectly. See Reginald B. Parsons, supra. Neither can it be said that the trust was without substance so that petitioner may be taxed on the income under the doctrine of Helvering v. Clifford, 309 U. S. 331. See Walter S. Halliwell, 44 B. T. A. 740.

Decision will be entered under Bule 50.