author: Smith:

text:
    H. D. Walbridge & Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 35289, 35869.
    Promulgated April 12, 1932.

      James P. Quigley, Esq., for the petitioner.

      Eugene Meacham, Esq., and G. E. Lowery, Esq., for the respondent.
   obinion.

Smith:

The petitioner first contends that its liability for the taxes in controversy was extinguished by section 1106 of the Revenue Act of 1926 and cites Knight-Campbell Music Co., 23 B. T. A. 1233, and other cases, wherein this Board held that where the period of limitations had expired, a waiver executed after the enactment of the Revenue Act of 1926 and the expiration of the period of limitations for the assessment of the tax in question, was ineffective. The • periods of limitations for the assessment of the deficiencies here involved would have expired on March 15, 1926 (section 277 (a) (3) and (2), Revenue Act of 1926), had the petitioner executed no consents or waivers extending the time within which the deficiencies might be assessed and collected. In its petitions, the petitioner alleged as a fact, and the respondent admitted the fact, that:

Two waivers were executed lor 1920 under date of October 7, 1925 and January 13, 1926, respectively, but both expired December 31, 1926.
This taxpayer did execute and file a waiver for 1921 on January 13, 1926 and it expired on December 31, 1926.

In the light of these allegations and admissions it was not incumbent upon the respondent to introduce in evidence these particular waivers. These waivers were executed at a time when the assessment and collection of the deficiencies for 1920 and 1921 were not barred by the statute of limitations, and clearly extended the time for the assessment and collection of the deficiencies to December 31, 1926. Petitioner’s contention on this point is refuted by its admission of fact.

The remaining contentions of the petitioner are, in effect, that neither of the waivers executed on Hovember 4, 1926, and Decern-ber 6, 1926, was “ competent to revive the extinguished tax ” and that “ neither was competent to bind the taxpayer, since both lack valid agency.” As we have pointed out above, the liability for the deficiencies was not extinguished at the time the alleged waivers were executed. There is no question therefore of the reviving of an extinguished liability.

The petitioner argues that when the waivers of November 4, 1926, and December 6, 1926, were executed the corporation had been dissolved and its existence was maintained by the Delaware statutes solely “for the purpose of prosecuting and defending suits by or against them, and of enabling them gradually to settle and close their business.” It is argued that the corporation was not continued for the purpose of continuing the business for which the corporation was established. It is therefore submitted that “ neither the officers nor the directors of this petitioner had power to create new liability for this corporation by reviving liability.” But this argument is upon the erroneous assumption that the liability for the deficiencies was extinguished by section 1106 of the Revenue Act of 1926. The waivers executed prior to the enactment of the Revenue Act of 1926 extended the time within which assessment of these deficiencies could be made against petitioner to December 31, 1926.

Revised Code C. 65, General Corporation Law of Delaware, sections 39 and 40, as amended by L. 1925, C. 112, section 9, provides in section 39 the method in which a corporation under the laws of the State of Delaware shall be dissolved, and section 40 provides, in part:

Continuation of Corporation After Dissolution for Purposes of Suit, Etc.: All corporations, whether they expire by their own limitation, or are otherwise dissolved, shall nevertheless be continued for the term of three years from such expiration or dissolution bodies corporate for the purpose of prosecuting and defending suits by or against them, and of enabling them gradually to settle and close their business, to dispose of and convey their property, and to divide their capital stock but not for the purpose of continuing the business for which said corporation shall have been established. * * *

The Delaware statute as it stood at the time of the dissolution of the petitioner continued the corporate existence, permitted it to sue in its own name, and makes the corporation its own liquidator. Where a statute authorizes a corporation after dissolution to act for the purpose of winding up its affairs and makes no provision for winding them up by a court or trustees, normally the business is to be wound up by the corporate organization, and the corporation and its officers have power to function. McCarthy v. Dubuque, 208 N. W. 507, 508. The Delaware statute is similar to the West Virginia and Massachusetts statutes considered in South Penn Oil Co., 20 B. T. A. 1180, and American Feature Film Co., 11 B. T. A. 1271. In the South Penn Oil Co. case waivers executed on behalf of a dissolved corporation before the expiration of the statutory period of limitation by one who was an officer and director at dissolution were held valid, the Board saying that those dealing with the corporation were entitled to rely on the apparent authority of an officer acting within the limits imposed by the statute. In the American Feature Film Co. case the Board held that under the Massachusetts law the officers had the same authority after dissolution as before and that a waiver signed.by its president in the corporate name and after dissolution was valid. See also First Bond & Mortgage Co., 21 B. T. A. 1.

During the three-year period following the dissolution of the petitioner the officers of the corporation had authority to act for it and the waivers filed in November and December, 1926, extending the time within which assessment might be made to December 31, 1927, were executed by such officers, one of whom verified the petition in Docket No. 35869. At the time of the dissolution of the petitioner on January 12, 1926, the officers of the dissolved corporation possessed the same powers of management in liquidation as before, except that the scope of the business was limited to liquidation. The proceeding for a redetermination of tax liability is an act incident to the winding up of the corporate affairs; Olean Sand & Gravel Co., 24 B. T. A. 324; South Penn Oil Co., supra; Charles D. Jaffee, 17 B. T. A. 675; affd., Jaffee v. Commissioner, 45 Fed. (2d) 679; certiorari denied, 283 U. S. 853; Parish & Bingham v. United States, 44 Fed. (2d) 933; and where, as here, the statute permits the lawful acts to be done in the corporate name and the affairs to be administered by the board of directors in office at the time of dissolution, the corporation and its directors may act through officers in the same way as before dissolution. South Penn Oil Co., supra; Charles D. Jafee, supra, and cases cited. The power to sign waivers need not be expressly conferred upon the officers of a corporation. Benz Brothers & Co., 20 B. T. A. 1214.

The periods of limitation, extended by valid waivers to December 31, 1926 (see section 278 (c) of the Revenue Act of 1926), had not expired when the waivers of November 4 and December 6, 1926, extending the periods of limitation to December 31, 1927, were filed. Such waivers were valid for the purpose of further extending the time within which assessment might be made to December 31, 1927. See Lutcher & Moore Cypress Lumber Co., Ltd., 19 B. T. A. 887; Commissioner v. Hind, 52 Fed. (2d) 1075. The instant proceedings are distinguishable from those cases in which the Board has held similar waivers to be invalid because executed after the statutory period of limitation on assessment had expired. See Southwestern Investment Co., 19 B. T. A. 30; South Penn Oil Co., supra; Con tinental Oil Co., 23 B. T. A. 311. Likewise, the instant proceedings are distinguishable from those cases in which similar waivers were held ineffective to extend the statutory period where there is no evidence that the officers executing the waivers had authority to consent for the dissolved corporation. See Southwestern Investment Co., supra; White Eagle Oil & Refining Co., 19 B. T. A. 185; T. W. Warner Co., 19 B. T. A. 872; National Bank of Commerce, 19 B. T. A. 1080; Newport Co., 22 B. T. A. 833; Equitable Gas Co., 22 B. T. A. 1268; Farmers & Planters Tobacco Warehouse Co., 22 B. T. A. 1331.

Despite the signing of the waivers in November and December, 1926, by officers of the petitioner corporation, counsel for the petitioner assails their validity with an argument that they were countersigned

Por H. D. Walbridge & Co.
By [Signed] John J. Heberle
John J. Heberle
Attorney for Taxpayer as per Power on file in Burean,

and that the Board knows nothing of the competency of “ that pretense of agency to bind a corporation which the Board knows was then dissolved.” Such arguments merit no serious consideration since Heberle is shown by the record to have handled these tax matters for the petitioner from the beginning of the controversy; he, by countersigning, approved the execution of the waivers by an officer of the petitioner corporation; and assuming that he, Heberle, was exclusively authorized to handle petitioner’s tax matters, we would nevertheless hold the waivers valid, since there is no reason whatever to prevent the officers of the petitioner “ so acting in the appointment of agents to perform the detail work in winding up the affairs of the corporation. This, indeed, would be the only feasible way for them to act in many, probably most, instances.” Jaffee v. Commissioner, supra.

The deficiency notices having been mailed to the petitioner prior to the expiration of the periods of limitations for assessment and collection, as extended by valid waivers, and the periods having been further extended by the pendency of these proceedings (section 277 (b), Revenue Act of 1926), it follows that the deficiencies are not barred by the statute of limitations. Brown & Sons Lumber Co. v. Burnet, 282 U. S. 283.

Judgments will be entered for the respondent in the amounts of $13,765.88 for 1920 and $133.38 for 1921.


source: Caselaw Access Project

author: Black:

license: Public Domain

text:
    Searles Real Estate Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 24489.
    Promulgated April 12, 1932.

      George E. Elliott, Esq., and Paul R. Clay, Esq., for the petitioner.

      C. R. Marshall, Esq., for the respondent.
   OPINION.

Black:

In this proceeding the petitioner seeks a redetermination of its income-tax liability for the years 1922 and 1923, for which years the respondent has determined deficiencies of $3,259.80 and $3,558.81, respectively, and has also asserted a 25 per cent delinquency penalty for each of the years in the respective amounts of $814.95 and $889.70.

The petitioner, in its original petition and by amendment, assigned errors which it designated A, B, C, D, E, F, G and H. All have been abandoned except G, E, F and G, which are as follows:

C. In allocation of total purchase price paid for both tracts to the two separate tracts known as “Oakside” and “Highfield” in determination of initial cost of each tract.
E. In respect of penalties imposed, that'the Commissioner was not justified upon the evidence submitted in determining the failure of the petitioner to file returns was due to willful neglect or without reasonable cause.
P. Respondent erred in denying petitioner a deduction in the amount of $1,000 in the year 1923 in respect of a bad debt owing from one Thomas W. Dowling.
G. Petitioner is entitled to a deduction from its gross income in the years 1022 and 1923 of certain legal expenses in the amounts of $466.00 and $454.65, respectively, not heretofore allowed by respondent.

Error C„

The petitioner is a common law trust, created by declaration of trust dated March 81, 1922, with its office at Lawrence, Massachusetts. It is an association taxable as a corporation. Upon that point there is no dispute between the parties. Edward F. Searles, a wealthy resident of Methuen, Massachusetts, died in 1921. Among the assets of his estate were two parcels of undeveloped real estate situated in Methuen, adjoining the city of Lawrence, known as “Oakside” and “Highfield.” Frank M. and T. Edwin Andrew, who as a partnership conducted a real estate brokerage business in the city of Lawrence, Massachusetts, conceived the idea of developing for residential purposes the tract known as “ Oakside,” which had many attractive features and was readily adaptable to subdividing. The representatives of the Searles estate refused to dispose of Oakside unless Highfield was included in the purchase. It was decided by the prospective purchasers to form a common law trust to which the land could be transferred. On March 31, 1922, the Searles Real Estate Trust was created and the Searles estate conveyed directly to the trust the two tracts of land.

In consideration of the transfer of the property to it, the Searles Real Estate Trust gave to Frank M. and T. Edwin Andrews its gold mortgage bonds in the amount of $200,000 and a 10 per cent interest in the capital of the trust. The remainder of the capital interest in the trust was transferred to the three individuals who were named as trustees in the declaration of trust, as trustees. It has been stipulated that the cost of the two tracts, together with the buildings thereon, to the petitioner was $200,000. The trust also acquired from Thomas L. Barstow on or about April 1, 1922, an adjoining parcel of land in order to straighten the boundary of Oakside, at a cost of $4,000, It has been agreed that of the costs as shown above, the amounts of $11,876.48. and $475.06 should be allocated to the cost of the buildings on Oakside and Highfield, respectively. It has also been agreed between the parties that the further sum of $2,257.32 is properly allocable to a reservation for park or play ground purposes, established upon the southeast corner of Oakside, immediately adjacent to the city limits of Lawrence. The petitioners made no attempt to allocate any part of the $200,000 as cost to either tract of land at the time of purchase. The respondent in computing the deficiency made his allocation on the basis of 44.4 per cent to Oakside and 55.6 per cent to Highfield. The taxpayer is contending that the allocation should be made on the basis of 74.3 per cent to Oakside and the balance to Highfield.

The petitioner subdivided into 450 lots and developed the Oakside tract, of approximately 75 acres, during the years 1922 to 1923, at a total cost of $64,818.62, which was largely expended for grading and the building of sidewalks.

The Highfield tract contains approximately 200 acres and adjoins East Street, Methuen, Massachusetts, directly opposite from the Oakside tract. About one-third of Highfield is on a high knoll and the remainder consists of land not so desirable, some of it being marshy, and unsuited for development. The sewerage facilities available for the Oakside tract were not sufficiently adequate to allow the addition of connections to serve Highfield in case it should be developed. Highfield has never been subdivided or improved and the expansion from the city of Lawrence has not been such as to warrant any such development. In 1922 the prospects for the development of Highfield were very remote and under the existing conditions there was no indication that it could be marketed for residential purposes.

In the period since the petitioner acquired these two tracts, 250 lots have been sold from Oakside, but there has been no inquiry for any land in Highfield, except one small parcel at the northeasterly corner of the property.

We think it is clear from the evidence that Oakside had a considerably greater value than Highfield, but we do not believe the evidence sustains petitioner’s contention that the proportion is three to one in favor of Oakside. Considering all the evidence in the record, we find that the aggregate cost of the two tracts (which was $200,000), after deducting the agreed cost of buildings, $12,351.54, and agreed cost of park reservation, $2,257.32, should be apportioned as' follows: To the tract known as Oakside, two parts; to the tract known as Highfield, one jpart. To the cost of Oakside, as thus ascertained should be added $4,000, which it has been agreed was the cost of the Barstow. parcel which was purchased and added to Oakside after the acquirement of the latter tract from the Searles estate in 1922. This disposes of petitioner’s assignment of error “ 0.”

ERROR F.

Thomas W. Dowling was a building contractor, operating in Andover and to some extent in Lawrence and Methuen, Massachusetts. In 1922 and 1923, he had purchased forty or more lots in Oakside from petitioner and built houses thereon. He financed the purchase of these lots by giving petitioner a check to be cashed at some indefinite time in the future after a mortgage had been placed on the property. He paid for all of these lots except one. During the latter part of the year 1923 he purchased a lot for $1,000 and gave his check with the understanding that it was to be presented for payment at a later date. The check was dishonored when presented for payment some time late in 1923. The exact date when said check was presented for payment and payment was refused is not shown. The evidence shows however that petitioner continued to hold the check and to endeavor to collect it until it was ascertained to be worthless in 1924. Dowling became insolvent and made an assignment for the benefit of creditors in April, 1924.

The applicable section of the Revenue Act reads:

Sec. 214. (a) That in computing net income there shall be allowed as deductions:
*******
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;
*******
(7) Debts ascertained to be worthless and charged off within the taxable year * * *.

It is the contention of the petitioner that the transaction resulted in a loss which is deductible under the provisions of subsection (4), while the respondent takes the position that the transaction is governed by subsection (7). The petitioner argues that the loss occurred when it accepted the check in payment of the lot, which he alleges was at all times worthless.

It seems to us that petitioner’s method of selling Dowling these lots and taking his check, to be paid at some future date when he had succeeded in negotiating a first mortgage on the property, out of the proceeds of which payment was to be made, was simply the creation of the relation of debtor and creditor between the parties. Petitioner exchanged its lot for a check to be paid at a future date. Under such circumstances the check is very similar to a promissory note evidencing the debt which Dowling owed petitioner for the lot. Petitioner admits that it did not include this check in. its books as income in 1923 because it kept its books on the cash receipts and disbursements basis, and it' was not treated as a cash item. Of course, it is elementary that a taxpayer can not take, as a bad. debt loss, a note or account which has never been included in gross income. Cf. J. Noble Hayes, 7 B. T. A. 936; Henry V. Poor, 11 B. T. A. 781.

However, petitioner contends that respondent, in computing the deficiency, did include the check in income and that because of the circumstances which we have already related, petitioner should be allowed to deduct the item as a loss in 1923. Counsel for respondent at the hearing did not admit that this item had been carried into gross income in computing the deficiency.

The revenue agent’s report which was used as a basis in computing the deficiency, and which was approved by respondent, was introduced in evidence. It shows the vaifious items of petitioner’s income and deductions as compiled by the revenue agent from petitioner’s books, but the items of income are not sufficiently analyzed for us to determine whether this $1,000 check from Dowling was included in gross income. But even if we assume that it was so included and that petitioner’s method of handling the checks was equivalent to charging it off vithin the taxable year, still we do not think petitioner would be entitled to prevail on this item.

In addition to charging it off in 1923, the taxpayer must also have actually ascertained the debt to be worthless in that year, and the facts show there was no ascertainment of worthlessness in 1923. That took place in 1924. It was then that Dowling went into bankruptcy and petitioner ascertained that it would never collect its debt.

Petitioner is not entitled to take the deduction claimed because it did not ascertain the debt against Dowling to* be worthless in 1923. D. P. Harris Hardware & Mfg. Co., 24 B. T. A. 752, and long list of cases there cited.

ERROR G.

The petitioner contends that it incurred legal expenses in the amount of $446 and $454.65 during the years 1922 and 1923, respectively, for professional services rendered by Paul R. Clay, as attorney, and that it is entitled to take these amounts as deductions in the respective years.

The evidence shows that in the years 1922 and 1923 Paul R. Clay, of the law firm of Rowell & Clay, as attorney for petitioner, rendered certain legal services pertaining to the operations in those years, for which deduction has never been allowed petitioner. These services consisted of the preparation of deeds, professional services in connection with contracts of petitioner for grading, laying sewers and construction of streets, conferences with town officials in connection with installing water mains and a bond issue in connection with installation of a watering system, preparation of a form for sale of lots, and like services, and expenses in connection therewith, amounting to $466 in 1922 and $454.65 in 1923. These services and disbursements were recorded upon the books of the law firm, but the bills were not paid in those years because there was no available money.

The petitioner admits that its books of account were kept on the cash receipts and disbursements basis, but contends that respondent has computed its income on the accrual basis and that therefore the claimed deductions should be allowed. An examination of the revenue agent’s report which was introduced in evidence shows that the respondent computed petitioner’s net income for 1922 and 1923 upon an accrual basis, except in the case of a relatively few installment sales of lots, the income from which he computed upon the installment sales basis. Where income is computed on the accrual basis, items of expense should be accrued in the year when incurred. United States v. Anderson, 269 U. S. 422; Aluminum Castings Co. v. Routzahn, 282 U. S. 92.

Petitioner’s contention in assignment of error “ G ” is accordingly sustained.

ERROR E.

The petitioner did not file any Federal income-tax returns of any kind for the years 1922 and 1923 and the respondent has asserted the 25 per cent penalty provided by section 1311 of the Revenue Act of 1921.

Section 3176 of the Revised Statutes, as amended by section 1311 of the Revenue Act of 1921, provides in part as follows: “ * * * In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law, the Commissioner of Internal Revenue shall add to the tax 25 per centum of this amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. * * * ”

Section 225 (a) (4) of the Revenue Act of 1921 provides that every fiduciary shall make under oath a return for “ every estate or trust, the net income of which for the taxable year is $1,000 or over * * Section 239 (a) of the same act provides that every corporation not expressly exempt from tax must make a return, regardless of the amount of net income.

Section 2 (2) of the Revenue Act of 1921 provides that, “ The term ‘ corporation ’ includes associations * * The petitioner concedes that it is a common law trust and that under the decision of the Supreme Court in Hecht v. Malley, 265 U. S. 144, it is an association -within the meaning of the above section and is taxable as a corporation. It contends that its failure to file returns was^ not due to -willful neglect on its part and that the advice it sought and received shows reasonable cause for not filing returns. Not only did the petitioner fail to file a return within the time prescribed by law, but failed to file a return at any time and thus, unless legally excused from filing belated returns by the circumstances which we will hereafter discuss, does not come within the exception provided» in the statute. Southern Ice & Fuel Co., 10 B. T. A. 1213; A-C Investment Association, 24 B. T. A. 582.

In A-C Investment Association, supra, we said:

Under the above quoted provision [speaking of section 3176 which we have already cited] no such addition to the tax shall be made “ when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect.” The sentence is in the conjunctive. Both conditions must exist. There must have been a filing (though late) of a return and there must have been reasonable cause for the failure to file on time. Here the stipulation is that no returns were filed for the years 1920 to 1927, inclusive. The stipulated facts do not make clear whether the form filed in 1927 related to one year only or to all previous years, but even if such claim for exemption were filed for the entire period, in our opinion such filing would not be equivalent to filing a return required by the statute. The statute is clear and definite that a return must be filed to entitle taxpayer to relief from penalties.

In the instant case, petitioner having filed no belated returns, it would seem that under the rule as announced in the above quoted decision there would be no legal grounds for relief from the penalties provided by the statute, even though the taxpayer did present a reasonable cause for not having filed original returns within the time required by law. But petitioner says that after the decision of the Supreme Court of the United States in Hecht v. Malley, supra, and after the Commissioner had promulgated his new regulations thereunder, it offered to file belated returns, but that the internal revenue agent who had examined petitioner’s books told Paul B,. Clay (one of petitioner’s trustees and its legal adviser) that it was unnecessary to file any belated returns because the report which he was sending to the Department furnished all necessary information to enable the Commissioner to compute the income for the taxable years.

On this point, Paul R. Clay, a witness for petitioner, testified:

I took that matter up with Mr. Tedford [meaning the internal revenue agent], 1 have seen so many people connected with the Department service, I cannot be exact, but I am very sure that it was Mr. Tedford, who told us that in view of his report and the determination made, it would not be necessary for us to file any belated returns and I am very sure that I had that same information from the Treasury Agent in Charge of the office in Boston. We offered to file returns if necessary, but were told it was not necessary to file them.

This testimony was uncontradicted and we have no reason to disbelieve it.

f Although petitioner in its brief does not so designate it, the plea a which it advances as to why the Commissioner should not be per- | mitted to impose ad valorem penalties of 25 per cent for each of the I taxable years amounts to a plea of equitable estoppel against such | action on the part of the Commissioner. The effect of petitioner’s I contention is to say that because the revenue agent who examined ^petitioner’s books and also the revenue agent in charge at Boston, Massachusetts, told those in charge of petitioner’s affairs that it need not file belated returns, it was thereby relieved from the necessity of doing so and may have the privilege of showing that its failure to file its original returns was due to reasonable cause and not willful neglect, and be thereby relieved from' the ad valorem penalties, just the same as if it had actually filed belated returns as required by the statute cited above, and that the United States Government, through the Commissioner of Internal Revenue, is estopped from denying it such right. •

The doctrine of equitable estoppel as applied to the tax liability of taxpayers was discussed by us in James Couzens, 11 B. T. A., beginning at page-1148. After stating the grounds upon which the doctrine was sought to be invoked in that case, among other things, we said:

The nature of this .argument is such as to omit any consideration on the measure of petitioners’ tax liability had timely demand been made, and strikes ■ only at the respondent’s right at this time to assert such liability as might otherwise exist — an argument finding its basis, not in the express terms of the statute by which tax liability is commonly measured, but in the conduct of the parties. Such an argument must be treated with the utmost caution, since its sanction in any case would result in having individual tax liability depend, not upon the factors and measures prescribed by Congress as applicable to all, but upon the statements and conduct of a particular Government officer in respect of each individual.

As we have already pointed out, section 3176 of the Revised Statutes, as amended by section 1311 of the Revenue Act of 1921, plainly requires that before a taxpayer can get relief from the imposition of ad valorem penalties by showing that his failure to file the original return within the time required by law was due to reasonable cause and not willful neglect, he must file a belated return.

We find no provision in the law which would permit the Commissioner to waive this requirement of the statute by the conduct of his subordinate employees, or indeed by his own express action.

Petitioner’s assignment of error “ E ” is accordingly denied.

Reviewed by the Board.

Decision will be entered under Bule 50.


author: Van Fossan :

text:
    Central National Bank, Trustee for Jacob Perkins, et al., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 28701.
    Promulgated April 13, 1932.

      D. J. Needham, Esq., for the petitioner.

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

Van Fossan :

The question for determination is whether or not the income for the taxable years ended May 31, 1923, and May 31, 1924, is taxable to the petitioner. The respondent determined that the trust herein involved “ is a discretionary trust ” and that the income is, therefore, taxable to the trustee in accordance with article 342 of Regulations 62 and 65. The respondent concedes in his brief, however, that the theory that “ the trust as a taxable entity under section 219 of the Revenue Acts of 1921 and 1924 could be taxed for income distributed to the so-called beneficiaries is questionable under the most recent rulings and decisions applicable.”

The respondent thereupon departed from the theory originally advanced and now contends that the petitioner is a trustee of the Edgewater Land Company, a dissolved corporation, pursuant to section 8742 of the Ohio General Code; that, therefore, under the provisions of section 239 (a) of the Revenue Acts of 1921 and 1924 and article 622 of Regulations 62 and 65, it should have filed returns for that corporation covering the taxable years in question in the same manner and form as corporations are required to make return; and that, consequently, income determined on the basis of such return is taxable to the petitioner. While respondent was within his rights in advancing a new theory on which to predicate liability, we are unable to concur in his contentions.

Article 8742 of the General Code of Ohio is as follows:

Trustees to Settle Affairs of Corporations. — Upon the dissolution of a corporation by the expiration of the term of its charter, or otherwise, and unless other persons be appointed by the legislature, or by the stockholders, directors, or trustees of the corporation, or by a court of competent authority, the directors, trustees, or managers of the affairs of such corporation, acting last before the time of its dissolution, by whatever name known in law, and their survivors, shall be the trustees of the creditors and stockholders of the dissolved corporation, and have full power to settle its affairs, collect and pay outstanding debts, and divide among the stockholders the money and other property remaining, in proportion to the stock of- each stockholder paid up, after payment of debts and necessary expenses.

Section 239 (a) of the Revenue Act of 1921 and section 239 (a) of the Revenue Act of 1924 are identical, and provide:

That every corporation subject to taxation under this title and every personal service corporation shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title. The return shall be sworn to by the president, vice president, or other principal officer and by the treasurer or assistant treasurer. If any foreign corporation has no office or place of business in the United States but has an agent in the United States, the return shall he made by the agent. In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns. Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control.

Article 622 of Regulations 62 and 65 reads:

'Returns 6y receivers. — Receivers, trustees in dissolution, trustees in bankruptcy, and assignees, operating the property or business of corporations, must make returns of income for such corporations on Form 1120, covering each year or part of a year during which they are in control. Notwithstanding that the powers and functions of a corporation are suspended and that the property and business are for the time being in the custody of the receiver, trustee, or assignee, subject to the order of the court, such receiver, trustee, or assignee stands in the place of the corporate officers and is required to perform all the duties and assume all the liabilities which would devolve upon the officers of the corporation were they in control. A receiver in charge of only part of the property of a corporation, however, as a receiver in mortgage foreclosure proceedings involving merely a small portion of its property, need not make a return of income. See Articles 424 and 548.

It is to be observed that section 239 (a) makes no reference whatever to trustees in dissolution. Even though it should be assumed that the phraseology of section 239 (a) is broad enough to include trustees in dissolution within the requirements of the section, we are of the opinion, nevertheless, that the provisions of that section and of article 622 of Regulations 62 and 65 are not applicable to this proceeding. The stipulated facts do not show that the petitioner is a trustee operating the business of the Edgewater Land Company but, on the contra^, discloses that it is a trustee by virtue of a contract entered into by it with persons who were already, in eifect, the owners of certain property as a result of the declaration of a liquidating dividend in kind distributable among the stockholders of the Edgewater Land Company. By reason of the assignment to it of the whole of the liquidating dividend and the conveyance and transfer to it of the assets comprised in that dividend the petitioner, as a trustee, became charged, under the provisions of the contract, with the duty of liquidating the assets transferred and conveyed to it and of distributing the proceeds thereof in accordance with the terms of the agreement. That the petitioner in so acting as a trustee was not acting on behalf of the dissolved corporation, is in our opinion established by the facts.

It appears that on June 3, 1921, the date of the agreement, the charter of the Edgewater Land Company was about to expire by limitation of time. It is stipulated in substance, among other things, that all the facts set forth and contained in the agreement of June 3, 1921, may be fully considered for the purposes of this proceeding “ the same as though original proof thereof had been produced at the time of the hearing.” It may, therefore, be taken as a fact proved at the hearing that at the date of the execution of the agreement “ the Edgewater Land Company had declared a liquidating dividend of all its remaining assets ” which dividend was distributable among its stockholders. It was also stipulated that “ the great bulk of the assets ” comprising the liquidating dividend could be transferred only in kind and that it was deemed advisable to concentrate them in some agency for convenience in their collection, care, management and distribution. Thereupon the persons entitled to possession of the assets of the Edgewater Land Company assigned all their interest in the liquidating dividend to the petitioner as such an agency, and the Edgewater Land Company, at the request of such persons, transferred and conveyed to the petitioner in kind the assets constituting the liquidating dividend. By so doing the corporation paid and distributed among its stockholders the liquidating dividend in kind declared by it as completely and as effectively as though the distribution had been made directly to and among the stockholders themselves. Legal title to the liquidating dividend and to the assets comprising it thus became vested in the petitioner.

It does not áppear that at the time of the transaction referred to the Edgewater Land Company had any ordinary commercial * debts. It does appear, however, that certain local and Federal taxes had become payable or might become payable. Whatever disposition of the assets was made, such taxes would be either liens upon the real estate forming a part of the property conveyed in payment of the liquidating dividend, or could be collected from the transferee or transferees of that property. Provision for their payment was therefore made in the agreement of June 3, 1921.

It is our opinion that the terms of section 8742 of the Ohio General Code, hereinbefore quoted, do not alter or modify the trust relationship existing between the petitioner and the other parties to the agreement of June 3, 1921. Moreover it does not appear nor does it follow from the facts that the petitioner was a trustee of a dissolved corporation such as is referred to in article 622 of Kegulations 62 and 65. Section 8742 of the Ohio General Code provides a means for settling the affairs of a dissolved corporation. There is nothing in the facts or in the agreement of June 3, 1921, which shows that it was the intention of the parties to the agreement that the petitioner should settle the affairs of the Edgewater Land Company after the expiration of that company’s charter. There is no provision that the petitioner, as trustee, might sue or be sued in the name or on behalf of the Edgewater Land Company, nor is there any provision authorizing the petitioner to do or perform anything whatsoever for, in behalf of, or in the name of the Edge-water Land Company or to do or to perform any act or acts which should be done or performed by the officers of that company were they in control. It is in this connection that this proceeding is distinguishable from Taylor Oil & Gas Co. et al., 15 B. T. A. 609; 47 Fed. (2d) 108, which is cited by the respondent. In that proceeding we said:

* * * Here tlie question is whether a sale of the property of the corporation (the proposal and specific offer for such sale having been definitely made to the board of directors of the corporation before its dissolution, but the sale having been consummated after the filing of the necessary certificates of dissolution with the Secretary of State of the State of Texas within the three-year period after dissolution allowed by law “ for the purpose of enabling those charged with the duty to settle up its affairs”) was in fact and in law a sale by such corporation or by its creditors and stockholders through their trustees, and we hold that it was a sale by the corporation.

In Taylor Oil & Gas Co. we pointed oftt that the corporation was dissolved as a result of a resolution adopted by its stockholders and that by such resolution the directors were appointed as liquidating trustees for the corporation “ with full power to settle its affairs ” and that they were authorized as such trustees to sell, transfer and convey the corporation’s properties “ in the name of said Taylor Oil & Gas Co.” The facts in the present proceeding are essentially different from those of the Taylor Oil & Gas Co. case and the conclusions reached in that proceeding are not here applicable. *

The petitioner was a trustee by virtue of the agreement of J une 3, 1921, for the purpose of liquidating property for the benefit of the parties named in said agreement. The income of the trust is therefore taxable under the provisions of section 219 of the Revenue Acts of 1921 and 1924.

It is clear from the provisions of the agreement of June 3, 1921, that the income of the trust was distributable at the discretion of the trustee and might be accumulated. It has been held in a long line of decisions that in such case the income actually distributed is taxable to the beneficiaries of the trust and that income undistributed is taxable to the trustee. William E. Scripps et al., Trustees, 1 B. T. A. 491; Mary L. Barton, Trustee, 5 B. T. A. 1008; affd., Blair v. Barton, 26 Fed. (2d) 765; John D. Rogers, Trustee, 16 B. T. A. 368; Ordway v. Willcuts, 12 Fed. (2d) 105; 19 Fed. (2d) 917; Edward J. Lehmann et al., Trustees, 21 B. T. A. 664.

There is no dispute between the parties herein as to the taxable income for the respective years. It does not appear from the facts whether or.not the taxable income for the fiscal year ended May 31, 1923, was distributed. It does appear, however, that taxable income in the sum of $24,050.46 was distributed in the fiscal year ended May 31, 1924. It also appears that in the latter year there was additional taxable income amounting to $2,000.03. In accordance with the foregoing the income actually distributed is taxable to the beneficiaries of the trust and the amount of the income undistributed is taxable to the petitioner.

Decision will be entered under Rule 50.


author: Love:

text:
    Charlotte Coxe Teuber, by Her Attorney in Fact, John Cadwalader, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 37112, 41564.
    Promulgated April 13, 1932.

      John Cadwalader, Jr., Esq., for the petitioner.

      A. II. Garnduf, Esq., for the respondent.
   OPINION.

Love:

Petitioner’s principal contention in these proceedings is that she is entitled to a deduction for depletion of the coal mined by Coxe Brothers and Company under the indenture dated June 24, 1904. She bases this contention upon the ground that she is a life beneficiary under the wills of two of the original lessors of the said indenture. She had no interest in the corpus of either trust created under the wills of Rebecca Coxe and Eckley B. Coxe, Jr. The taxable years in .question are all prior to the taxable year 1928. Under such circumstances we have held in a long line of decisions that deductions in the nature here contended for are not allowable. See Sophia G. Coxe (where the will of Eckley B. Coxe, Jr., was also involved), 5 B. T. A. 261; Arthur H. Fleming, 6 B. T. A. 900; Richard Sharpe (a Pennsylvania case), 17 B. T. A. 135; Albert Taylor, 19 B. T. A. 688; Catherine A. Codman, 20 B. T. A. 880; affirmed by the First Circuit at 50 Fed. (2d) 763; and Otto H. Falk et al., 24 B. T. A. 299, and cases therein cited. Petitioner cites aúd relies upon the decision of the Second Circuit in Merle-Smith v. Commissioner, 42 Fed. (2d) 837, but this case is to be distinguished from the instant proceedings on the same basis as it was distinguished in Otto H. Falk, supra.

But petitioner further contends that while the indenture of June 24, 1904, is in the form of a lease, yet the courts of Pennsylvania, where the coal lands in question were located, hold that where the term is for the exhaustion of the mineral, the agreement between the parties in such cases is a sale of the coal in place and not a lease thereof. From this contention petitioner argues that the amounts she received from the two trusts in question “ are in fact installments of the purchase price of the coal and relate to capital assets ”; that “ the mere intervention of a trustee through whom the said royalties are paid does not change their nature ”; and that “ as the royalties represent shares of capital, the taxpayer receives them as an owner in fee and is entitled to the same deductions to which all owners in fee are entitled.”

At this point it should be specifically noted that the record made by petitioner is substantially deficient in proof of the amounts of the deductions she is claiming, and that, upon the present record, we would have to sustain the respondent’s determination even if we agreed with petitioner on the law. Neither is there any evidence that the indenture of June 24, 1904, was in effect during the taxable years here in question. Assuming, however, that the indenture was in effect during the years 1923, 1924 and 1925; that the two trusts here in question received royalties thereunder; and that petitioner was paid a part of such royalties (all of which petitioner contends is true), we are clearly of the opinion that petitioner is not entitled to reduce the actual amounts which she received from the two trusts by any deduction for depletion or, in the language of petitioner, “ deductions to which all owners in fee are entitled,” and we discuss the law issue simply to show that there is no miscarriage oí justice, due to petitioner’s failure to offer proof as to the amounts of the deductions she is claiming.

It is our opinion that as far as these proceedings are concerned it is wholly immaterial whether we regard the indenture of June 24, 1904, as a lease or as a sale of coal in place. The fact remains, based upon the above assumption, that petitioner was paid the amounts in question by the trustees appointed in the two wills and under such wills she had no interest in the corpus of the trusts, but was merely a life beneficiary. In her brief petitioner states that “ The contention here is not that no income tax should be charged on the coal royalties but as they partake of the nature of capital a reasonable allowance for depletion should be made as provided by the Act of Congress.”

We regard the decisions cited above as controlling, and, therefore, find no error in the respondent’s determination as to this issue. See also Rosenberger v. McCaughn, 25 Fed. (2d) 699; and Strother v. Commissioner, 55 Fed. (2d) 626.

Petitioner offered no evidence on the issue as to whether an amount of $120.38 was income to petitioner in 1928 or in 1924. The respondent determined that the amount was income in 1923. We sustain the respondent.

Judgment will be entered for the respondent.


author: Van Foss AN:

text:
    Moro Realty Holding Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 37406, 44759, 50490.
    Promulgated April 13, 1932.

      J ohn W. Townsend, Esq., Claude E. Koss, Esq., and J ames Craig Peaeoek, Esq., for the petitioner.

      John D. Riley, Esq., for the respondent.
   OPINION.

Van Foss AN:

The question before us is whether or not petitioner was the real owner of a certain property known as the Lorrington Apartments and entitled to the benefits of ownership, or whether petitioner was merely a dummy corporation holding bare record title, the real ownership and all rights to the benefits being in a certain syndicate.

• The syndicate agreement provided that the trustees of the syndicate were empowered to buy in the specified property for the benefit of the syndicate and take title “ in the name of the trustees or some corporation or Massachusetts trust to be formed by them for the benefit of the members of the syndicate.” The agreement further specified the contributions and share of the profits of each of the subscribers, but provided that the control of the corporation, if one were organized, should rest exclusively in Eose, Moses and Ka-lish. The property was bought in by Eose and Kimbark and by them transferred to the corporation. Eose and Kimbark, however, had no beneficial ownership in the property as individuals, but held the same in trust for the benefit of the members of the syndicate. Consequently, the corporation acquired no beneficial interest by the transfer to it of the record title.

Thus it is clear that the corporation was, as characterized by one of the witnesses, a legal shell holding bare record title only, all beneficial interest in the property and right to the usufruct being in the syndicate members. The corporation was formed solely for the purpose of holding title, issued no stock or other evidences of beneficial interest, held no corporate meetings, had no paid-in cash capital, paid no dividends and exercised none of the usual rights or privileges of corporate ownership.

The entire transaction was financed by contributions of the syndicate members or by borrowings on their indorsement. On sale of the property the corporation acted only as a conduit for the transferring of the proceeds to the syndicate members.

The income from the sale of the property was income to those entitled to the beneficial interest, the real owners of the property, and distributable to them in accordance with the syndicate agreement as modified. Theirs is the tax liability. The petitioning corporation derived no income from such sale and has no tax liability on account thereof.

The question presented is not new. It was fully considered in Stewart Forshay, 20 B. T. A. 537, in which case we held that where real property situated in New York is conveyed to one person for the benefit of another, the legal and equitable title vests in the latter under the laws of the state. Consequently, it was held that no part of the rents or profits from the sale of such property is income to the person in whose name the property is held.

By reason of the ample evidence introduced by petitioner, we are not left in a situation such as confronted us in 112 West 59th Street Corporation, 23 B. T. A. 767, where we said:

We may state at the outset that the petitioner has not presented us with any definite evidence as to how it obtained title to the property in question or as to the circumstances of the sale of the property in 1921. There is no evidence as to any trust or agency agreement between the petitioner and the Beaumont' Investment Trust, and we see no merit in petitioner’s contention that petitioner was agent of or trustee for the Beaumont Investment Trust. Petitioner’s contention is that under the law of New York there was a resulting trust in favor of the Beaumont Investment Trust, based upon the hypothesis that the property was purchased with funds of the Beaumont Investment Trust, although title was taken in the name of the petitioner. The evidence before us does not sustain this position. So far as we are able to determine from the record the property was purchased by Louis D. Beaumont on behalf of the Beaumont Investment Trust, was later sold to petitioner in a formal manner, and all the capital stock of petitioner was issued to the Beaumont Investment Trust in part payment therefor. Apparently the petitioner continued to owe the Beaumont Investment Trust a part of the purchase price. These facts distinguish the instant proceeding from the numerous cases of the courts of New York, cited by petitioner.

The evidence before us is complete and amply sustains petitioner’s contention.

Reviewed by the Board.

Decision will be entered for the petitioner.

Sternhagen dissents.


author: Maeqtjette:

text:
    George W. Balkwill, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 34238, 41858, 52053, 56077.
    Promulgated April 14, 1932.

      W. H. Annat, Esq., and H. A. Mihills, G. P. A., for the petitioner.

      J. E. Marshall, Esq., and G. R. Marshall, Esq, for the respondent.
   OPINION.

Maeqtjette:

The first question here presented concerns the status, for income-tax purposes, of petitioner’s distributive share of partnership income.

In 1919 petitioner and one George C. Lucas formed a partnership under the name of Cleveland Frog & Crossing Company. In 1921 the petitioner, his brother and his sisters entered into a trust agreement respecting the property owned by each. In that agreement petitioner declared that he held in trust, for the equal benefit of the beneficiaries, his interest in the partnership above named and in all the real and personal property owned by it. The agreement was irrevocable for a period of eight years, and was not terminated during any of the taxable years. George C. Lucas knew nothing of the trust agreement, and earnings of the partnership were distributed to the petitioner and his partner, individually. It is the petitioner’s contention that his share of such partnership income did not constitute income to him, but to the trust. Eespondent has determined otherwise.

The Eevenue Acts of 1921, 1924, 1926 and 1928 provide for the levy and collection of normal and surtaxes upon the net income of every individual on an annual basis. Each also provides, in substantially the same language, that:

* * * individuals carrying on business in partnership shall be liable for income tax only in their individual capacity. There shall be included in computing the net income of each partner, his distributive share, whether distributed or not, of the net income of the partnership for the taxable year.

The partnership, Cleveland Frog & Crossing Company, received a net income during each of the taxable years here involved. It is not contended that the Balkwill Trust was a member of the above partnership and the record negatives such membership. Petitioner does contend, however, that by virtue of his declaration of trust he thereafter held all of his interest in the corpus, or net worth of the partnership and the income therefrom only as trustee for the Balkwill Trust.

The principle applicable in these proceedings is the same as that in Charles P. Leininger, 19 B. T. A. 621; affirmed by the Supreme Court March 14, 1932. In that case the taxpayer was a partner in a business firm. He made a written agreement with his wife declaring her to be a full equal partner with him in his interest in the business firm. She was not a partner in the firm itself, and its distributions of income were paid to her husband, who divided them with his wife. It was held that the husband was taxable upon the full amount of his distributable share of the partnership income. In affirming the Board’s decision the Supreme Court said in part that the taxpayer:

* * * urges that the assignment to his wife was of one-half of the “ corpus ” of his interest and that this “ corpus ” produced the income in question. The characterization does not aid the contention. That which produced the income was not his individual interest in the firm, but the firm enterprise itself, that is, the capital of the firm and the labor and skill of its members employed in combination. * * *

The court further held that the wife had only a derivative interest in the firm’s income, and that the taxing statute dealt explicitly with the liability of partners as such. Cf. Lucas v. Earl, 281 U. S. 111.

In our opinion the present proceedings are not distinguishable in their facts from the Leininger case, supra. We conclude, therefore, that the distributive income from the Cleveland Frog & Crossing Company for the years in question constituted taxable income to the petitioner, individually.

The next question is whether the respondent properly disallowed deductions from petitioner’s gross income of amounts representing his share of deductible losses sustained by the Balkwill Trust. Although petitioner has alleged error with respect to such disallowance, he does not mention it in his brief and has apparently abandoned the contention. It has been decided frequently that beneficiaries of a trust which has sustained net losses may not deduct such losses pro rata in their individual returns. Cf. George M. Studebaker, 2 B. T. A. 1020; Cora S. Stern, 14 B. T. A. 444; Clarence M. Busch, 17 B. T. A. 592; affd., 50 Fed. (2d) 800; F. M. Law, 20 B. T. A. 354. Those decisions are controlling in these proceedings and we approve the respondent’s determination respecting the deductions in question.

The third and last error alleged has been conceded by the respondent, and petitioner is therefore allowed a deduction of $14,540 for loss sustained during the year 1923.

Decision will be entered wider Bule B0.


author: Murdock:

text:
    Chemical Bank & Trust Company, Laurette Schinasi and Victoria Schinasi Pini (sometimes referred to as Victoria Schinasi Ross), as Executors of the Estate of Morris Schinasi, deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51690.
    Promulgated April 14, 1932.

      Milton Winn, Esq., and Fred L. Van Dolsen, Esq., for the petitioners.

      Lewis 8. Pendleton, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined a deficiency in estate tax of $88,422.39. The only issue requiring our decision is whether the respondent erred in including in the gross estate of the decedent $390,000 representing the admitted value of a piece of real estate which the decedent had conveyed in trust during his lifetime. All other errors were waived, conceded, or stipulated. The respondent now concedes that the petitioners are entitled to an additional deduction of $4,400.41 paid by them to their attorneys.

The petitioners are the executors under the last will and testament of Morris Schinasi, who died on September 10, 1928, a resident of New York City. His will was duly probated in New York County. His net estate as returned and as determined by the Commissioner was in excess of $6,000,000.

■ On May 25, 1925, Morris Schinasi and his wife Laurette Schinasi, who at that time were living apart, entered into two agreements. By one of these the husband conveyed a property in New York City known as Blervie Hall to a bank upon the following trust:

Tbe said trustee shall bold the above described property and collect the rents, dividends, income, interest and profits thereof, and after the payment of all' taxes, repairs and expenses of any and all kinds, pay oyer the pet income in quarterly installments, to my wife Laurette Schinasi, until slie shall die, or until the trust shall terminate prior to her death as hereinafter provided, and upon her death or its prior determination, to pay, transfer, assign or convey the principal of said trust fund absolutely to me if then living, or if I shall not be then living, then to my, the Grantor’s, children then surviving (the issue of my said wife Laurette Schinasi and myself) share and share alike, to each of such children, the issue then surviving of any deceased child of mine to take, per stirpes and not per capita, the share to which its parent would have been entitled if then surviving.

The trustee was given power to manage the property, but not the right to sell the property during the life of the grantor without his written consent. The agreement further provided that the trust should be terminated by the death or remarriage of Laurette Schinasi; by her divorce for adultery; upon written notice by the grantor and his wife to the trustee; and if the wife should violate any provisions of the second agreement referred to herein, especially if she should refuse, as in such indenture provided, to join for the purpose of releasing her dower in any conveyance of real estate which the grantor, his executors, administrators, heirs, or devisees might desire to sell, provided that a certain written notice be given the wife specifying the violation of which she had been guilty.

This agreement was made by the decedent more than three years prior to his death, and was not made in contemplation of death. The trust was actually set up pursuant to the terms of the instrument and remained in full force and effect up to the time of the decedent’s death. The consideration mentioned in the above agreement was $1 and other valuable consideration, especially the consideration of the wife executing the second agreement, which was annexed to and made a part of the first. The second agreement was as follows:

Know All Men by These Presents
Whereas, Morris Sohinasi, hereinafter sometimes referred to as “the husband,” desires to make certain provisions for Laubette Schinasi, his wife, hereinafter sometimes referred to as “ the wife,” during his lifetime, which said provisions are to be in the nature of a jointure upon the conditions and terms as hereinafter more specifically set forth; and
Whereas, the said provisions are embodied in a trust deed, made simultaneously herewith and annexed hereto and made part hereof, by which the said husband does convey to the Chemical National Bank of New York certain property upon the trust as in said trust deed more specifically set forth, and
Whereas, the wife in return is willing to permit the husband to sell any real estate in which she has an inchoate right to dower, free of such dower
Now, This Indenture Witnesseth:
Pxrst : The trust deed hereto annexed is made part hereof as if herein specifically set forth.
Second: The wife agrees that during the lifetime of the husband, she shall not be entitled to demand or receive from him any money, support or alimony in addition to the income from the trust fund established by the trust deed hereto annexed, whether living with the said husband or apart from him, and agrees not to apply in any action suit, or proceeding, in any jurisdiction, whether instituted by. the husband or the wife for any alimony or support, it being agreed that the income from the said trust shall be in full for any alimony and support which might be awarded by any court. The wife further agrees, whether living with her husband or apart from him, to pay and discharge all her private debts and not to incur any debt or obligation upon the credit of her husband, either on her own account, or on account of any of the parties’ children, and to keep the husband free and harmless and indemnify him from and against any and all debts .and liabilities hereafter contracted or incurred by the wife.
Third : In case the husband desires- -to- sell from time to time any one or more parcels of real estate owned by/him -at any time, in good faith, to any third person or persons, the wife shall* join in the deed to such purchaser and release her dower right, it being understood that the husband shall be the sole judge of the adequacy and character.;of the consideration received therefor, of which consideration the husband shall notify the wife forthwith. For the purpose of computing any amount to which, the wife shall be entitled pursuant to the fourth clause of this agreement, the' net. proceeds of any such sale (minus any amount which the husband may have to pay for income taxes on such sale) shall be considered as if they were real estate of which the husband had died seized bearing an income at the rate of four percent (4%) per annum.
Fourth : If the wife survives the husband she shall receive during her life, as long as she remains unmarried, In addition to the income from the Trust Deed hereto annexed, such amount of annual income by which her annual dower right would exceed the income under such Trust Deed, and for such purposes the annual dower right shall be computed to. consist of one third of the income in which the real estate of which the husband may die seized, and in which she would be entitled to dower, plus one-third (%) of the Income from any property held subject to the Trust Deed hereto annexed. The wife expressly agrees that she will not claim any amount as (jower, annual or otherwise, in excess of the provisions made in this paragraph.
Fieth: The wife further agrees that after the death of her husband she will release her dower right in any real estate to enable the executors, admin istrators, heirs or devisees of the husband to sell the same. For the purpose of computing any amount to which the wife shall be entitled pursuant to the fourth clause of this agreement, the net proceeds of any such sale (minus any amount which may have to be paid for income taxes on such sale) shall be considered as if they continued to be real estate of which the husband had died seized, bearing an income at the rate of four percent (4%) per annum.
Sixth : The wife covenants and agrees that she will execute and deliver, at the husband’s expense, any and every instrument and document that in the judgment of the counsel for the husband, of his heirs, executors, administrators, devisees and assigns, shall or may be necessary to effect the purposes of this agreement.
Seventh : The wife hereby covenants and agrees that the trust deed hereto annexed is made in consideration of this indenture and upon condition that she perform all the agreements and clauses in this identure contained.
Eighth : This indenture may be cancelled or amended at any time during the joint lives of the husband and the wife, by an instrument in writing executed by both of them.
Ninth: The amounts payable to the wife pursuant to the “Fourth” paragraph shall be paid to her annually by the legal representatives of the husband and/or the heirs, next of kin, devisees, legatees or parties in interest, as may be.
In Witness Whereof the parties hereto have hereunto set their hands and seals the day and year first above written, to wit: the 25 day of May, 1925.
Morris Schinasi
Latjrette Schinasi

Laurette Schinasi was forty years old when the above agreements were entered into.

The Commissioner has included in the decedent’s gross estate $390,000 representing the value at the date of the decedent’s death of the Blervie Hall property. In justification of his action he points to the power which the decedent reserved to himself and his wife jointly to revoke the instrument of May 25, 1925. See section 302 (d) of the Revenue Act of 1926. He claims in the alternative that if the above is not a good ground, then at least the value of the remainder interest in this property should be included in the gross estate as representing transfers which took effect in possession or enjoyment at or after the decedent’s death. The decision of this case, however, may not be limited to the question of whether or not the reasons advanced by the respondent are sound. If, for these reasons or for any other, all or any part of the value of this property should be included in the gross estate, we may not exclude it. Only in case there is no reason to justify inclusion could our judgment on this point be for the petitioners. The latter contend that the transfer in the instruments of May 25, 1925, was a bona fide sale for a full and adequate consideration in money or money’s worth; that it was not a transfer intended to take effect in possession or enjoyment at or after death; that the grantor had no power to alter or revoke the trust, either alone or in conjunction with any person not a beneficiary of the trust; that, therefore, no part of the value of the Blervie Hall property may be included in the gross estate under section 302 (c) and (d) of the Revenue Act of 1926, citing McCaughn v. Carver, 19 Fed. (2d) 126; Ferguson v. Dickson, 300 Fed. 961; and White v. Erskine, 47 Fed. (2d) 1014.

The trust was for the purpose of paying income to the wife for life or until sooner terminated. It was not to continue after her death. Upon its termination the trustee was required to convey the remainder to the grantor, if living, or, if dead, to his children. The inclusion of this remainder in the decedent’s gross estate need not depend upon section 302 (d). The transfer of the remainder to the children was one intended to take effect in possession or enjoyment at or after the grantor’s death. It was contingent upon his dying before the trust terminated. It vested in the children at his death. His death was the indispensable and intended event which effected the transmission of the remainder from the dead (the husband) to the living (the children). The transfer of the remainder was not a sale for a full and adequate consideration in money or money’s worth. The grantor could not sell to himself, and there was no consideration in money or money’s worth for the transfer to the children. It was proper for the Commissioner to include the value of this remainder in the decedent’s gross estate under section 302 (c) of the Revenue Act of 1926. Cf. Klein v. United States, 283 U. S. 231. The value of the fee at the date of the decedent’s death is con-' ceded to be $390,000. The value of the remainder would be $390,000 minus the value, at the date of the decedent’s death, of the wife’s interest in the property.

There remains for our consideration the question of whether or not the value at the date of the decedent’s death of the interest which the wife had in the trust property should be included in the value of the decedent’s gross estate. The respondent concedes that the transfer in question was not made in contemplation of death. We agree with the petitioner that the transfer in trust for the benefit of the wife was not intended to take effect in possession or enjoyment at or after the decedent’s death, for it took effect in possession or enjoyment immediately, as intended by. the parties. Although the estranged husband and wife seem to have dealt at arm’s length with a business regard for property values, each trying to exact from the other a fair price for their respective agreements and conveyances, nevertheless, we do not find it necessary to decide whether or not section 302(d) applies, nor to consider in this connection, the decision in White v. Erskine, supra. In any event, we would not know how much to deduct from the value of the fee as the value of the wife’s interest at the date of her husband’s death. This value has not been proven and there are no figures in the record to support this contention of the petitioners. The only evidence of value is the testimony of an attorney. He was asked, “ Did you at my request compute the value of the life estate of Mrs. Laurette Schinasi at the age of forty-three years, her age at the death of her husband, in the sum of $390,000, being the agreed value for the purpose of this proceeding, of the corpus of the trust estate in question? ” He answered that he had not made such a computation, but “ I found the value of Mrs. Schinasi’s life estate at the age of forty to be $267,272.30.” The value of the interest of Mrs. Schinasi in the trust property when she was forty years of age may have been quite a different thing from a similar value at the date of her husband’s death, when she was forty-three years of age. Furthermore, at the date of her husband’s death she did not have an absolute life estate, as the witness seems to have assumed. Her interest, which might last for her life, was subject to be divested by the happening of certain events, namely, her remarriage or her refusal to join in deeds. Being without proof of the value, at the time of the husband’s death, of the wife’s interest in the trust property, we would be unable to make a proper deduction from the $390,000.included by the Commissioner and would have to leave the parties as we found them. There is, however, a possible justification for including the full value of the Blervie Hall property in the decedent’s estate. We suggest the question but do not decide it. Section 302(b) provides that there shall be included in the value of a decedent’s gross estate, the value at the time of his death of all property wherever situated “ to the extent of any interest therein of the surviving spouse, existing at the time of the decedent’s death as dower, curtesy, or by virtue of a statute creating an estate in lieu of dower or curtesy.” The instruments of May 25, 1925, provided a fund for the support of the wife so long as there was any obligation on the part of the husband to support her. The Commissioner is not including in the gross estate the amounts actually paid during the joint lives of the husband and wife for the support of the wife. The wife’s interest in the Blervie Hall property, as it existed at the time of his death, was something acquired by her by contract in lieu of dower. Though contractual, was it testamentary in character and properly included in the gross estate under section 302(b)? Cf. Lillian T. Latty, Executrix, 23 B. T. A. 1249 .

Judgment will be entered under Rule 50.


author: Lansdon:

text:
    Anna J. Cotton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 45005, 51393.
    Promulgated April 15, 1932.

      M. A. Matloeh, Esq., for the petitioner.

      Nathan Gammon, Esq., for the respondent.
   OPINION.

Lansdon:

The petitioner contends that changed conditions have accelerated obsolescence and shortened the useful life of her hotel property by one-third. She therefore claims the right to depreciated deductions on such account from net income in each of the taxable years at the rate of 3 per cent on the cost thereof. No evidence has been introduced to show that conditions have permanently changed for the worse in respect to the petitioner’s property since it was opened up as a hotel in 1913. That it has not greatly suffered from destructive competition is indicated by the fact that its greatest earnings were in 1920, five years after the building of the Nice Hotel. The evidence also shows that the operation of the Texas State Hotel across the street helped rather than injured its business. The falling off of revenues, of course, is no evidence, per se, of a shortening of the property’s economic life. The witness, E. C. Cotton, who was petitioner’s business manager, testified that in his opinion the hotel business was overdone in Houston. Even if this is true, it would not-establish obsolescence or accelerated depreciation of petitioner’s properties. In Mie absence of proof to show that the true economic life of this property is shorter than determined by the respondent, we affirm the respondent’s determination on this issue. Mandel Brothers, 4 B. T. A. 341; Potter Farms Co., 6 B. T. A. 110; California Iron Yards Co., 15 B. T. A. 25; Darling-McDuff Coal Co., 15 B. T. A. 110.

The petitioner contends that she sustained a business loss in 1927 in the amount of $139,675.38 as a result of expenditures made by her deceased husband and herself in developing a mine which was abandoned in September, 1926. Although the abandonment was in 1926, she contends that, because of a provision in the lease which allowed a six-month suspension of work before subjecting her interests in it to forfeiture, the loss did not occur until after the lapse of that period, which ended in 1927. In this contention she has overlooked the fact that her interests in that property were not terminated by forfeiture, but that she voluntarily abandoned it on September 8,1926. Her son, who was her manager and in full charge of the work at the mine, when asked the question: “Was it your intention to go back and resume operations later ? ” answered: “ No, I did not go back for it cost too much money to get the equipment.” This voluntary abandonment, with the intent indicated, terminated the petitioner’s interests in the lease, as and from that date without awaiting further lapse of time or invoking involuntary forfeitures. United Mining Co., v. Morton, 174 Ky. 366; 192 S. W. 79; Grubb v. McAfee, 109 Tex. 527; 212 S. W. 464; Buffalo Zinc Co. v. Crump, 70 Ark. 525; 69 S. W. 572; Worrall v. Wilson, 101 Iowa 475; 70 N. W. 619; Aye v. Philadelphia Co., 193 Pa. 451; 44 Atl. 555; Bay State Pet. Co. v. Penn Lubricating Co., 121 Ky. 639; 87 S. W. 1102; Wilmore Coal Co. v. Brown, 153 Fed. 143. Inasmuch as the petitioner has failed to establish the loss contended for in 1927, it follows that there was no resulting net loss which she was entitled to carry forward in reduction of her taxes in 1928.

Decision will be entered for the respondent.


text:
    Charles Havard, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ella J. Williams, Petitioner, v. Commissioner of Internal Revenue, Respondent. Olive R. Pope, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 29273, 29274, 32841.
    Promulgated April 15, 1932.

      Marie B. Ingle, Esg., and Walter E. Barton, Esg., for the petitioners.

      E. A. Tonjes, Esg., for the respondent.
   OPINION.

Lansdon:

The question of the statute of limitation raised in the original petition has already been decided in favor of the respondent. Charles Havard, 19 B. T. A. 1270. The petitioners concede the deficiency assessed against the taxpayer for 1921 is correct in amount, but deny that they have ever received any of the assets thereof in circumstances that bring them within the provisions of section 280 of the Revenue Act of 1926.

Upon the record it is perfectly clear that the petitioners surrendered their stock and received payment therefor in the checks of the taxpayer about June 1, 1924, in the amounts set forth in our findings of fact. The record does not support a finding of fact that the taxpayer was liquidating its business at June 1, 1924. The only corporate action relating in any way thereto was the resolution of the stockholders on December 31, 1924, authorizing the sale of the corporate assets, but that resolution is silent as to the disposition to be made of the proceeds of such sale. The certificates for which the petitioners were paid were not canceled, but were taken into the accounts of the taxpayer as treasury stock and later reissued to W. E. Corn. After the petitioners and several other stockholders had turned in their certificates and received payment therefor, the taxpayer continued in the business of manufacturing ice and selling coal for more than a year. The first corporate action looking to the closing out of the business was a resolution adopted on October 28, 1925, and the application for dissolution which was filed on June 28, 1926. Even then there is no statement to show whether the assets of the corporation had been distributed prior to the resolution authorizing dissolution or were to be distributed by the statutory trustees thereafter.

The payments to the petitioners were relatively small, were made when the taxpayer was solvent, and did not create insolvency. The books of the taxpayer disclose corporate surplus on December 31, 1923, in an amount in excess of $16,000 and that its business was prosperous from that date until June 1, 1924. The payment of $6,510 to the petitioners at about the latter date was not sufficient to absorb the corporate surplus and left the taxpayer in sound financial condition to proceed with the business of manufacturing and selling ice, and its balance sheet included in its income-tax return for 1924 indicates solvency at December 31 of that year. In Samuel Keller, 21 B. T. A. 84, relying on McDonald v. Williams, 274 U. S. 397, we said:

If a corporation transfers a part of its assets to stockholders while it is solvent and is not made insolvent by the transfer, there is no liability either at law or in equity on the part of the stockholders who receive such distribution, even though the corporation subsequently becomes insolvent and is no longer able to pay its debts.

The Keller decision, supra, is consistent with the well settled rule that a distribution to the stockholders of a corporation does not impress the funds so paid with a trust in favor of creditors or remaining stockholders unless the corporation was insolvent at the date of payment or insolvency was thereby created. United States v. Updike, 1 Fed. (2d) 550; 8 Fed. (2d) 913; United States v. Armstrong, 26 Fed. (2d) 227; Kinnett-Odom Co., 19 B. T. A. 1124.

Decision will he entered for each of the petitioners.


text:
    Ethel Fisher Dixon, Petitioner, v. Commissioner of Internal Revenue, Respondent. Katherine Fisher Dixon, Petitioner, v. Commissioner of Internal Revenue, Respondent. Alice Fisher Foster, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 44302, 47067, 47068, 47069.
    Promulgated April 15, 1932.

      Charles L. Brown, Esq., for the petitioners.

      B. N. McMillan, Esq., and W. H. Payne, Esq., for the respondent.
   OPINION.

Lansdon:

The respondent has asserted deficiencies as follows:

The principal issue is whether each petitioner’s share of the income of a testamentary trust under which all are beneficiaries shall be ratably decreased for Federal income-tax purposes by deducting therefrom a ratable part of the depreciation sustained by the physical property included in the corpus of the trust. The several proceedings have been consolidated for hearing.

Each of the petitioners is a resident of Chicago, Illinois. All are surviving daughters of Lucius Gr. Fisher, who died testate on March 20, 1916. Under the terms of the decedent’s will the petitioners and their brothers were designated as life beneficiaries of a trust, the corpus of which included certain office buildings in Chicago. The provisions of the will material here are as follows:

Fifth: I give, devise and bequeath all of my real estate to Charles B. Osborne as trustee for the purposes and with the powers following, to-wlt:
* * * Said trustee is also authorized * * * to insure, to improve, and to do all other acts in his judgment needful or desirable to the proper and advantageous management of said trust estate so as to protect the same and make the same productive * * *.
Out of the net income derived from said trust estate I direct that the following payments to be made by said trustee:
1st. To each of my children the sum of Five Thousand Dollars ($5,000.00) per annum in equal quarterly installments commencing from the date of my death. * * *
*******
4th. To pay over the residue of the net income of said trust estate in each year in quarterly payments to my children in equal shares. * * *

The will of the decedent is the only evidence before the Board. From its terms we must determine whether the beneficiaries of the trust are entitled ratably to decrease their respective incomes by deducting therefrom certain amounts representing depreciation sustained by the depreciable assets included in the corpus of the trust. This identical, question has heretofore been considered, exhaustively discussed, and decided by the Board. - We have uniformly held that the terms of the trust instrument must determine whether trustees are authorized to set up a reserve for depreciation and to deduct ratable parts thereof each year from the income distributable to the beneficiaries. At bar there is nothing in the instrument that authorizes such a reserve and there is a provision that the net income shall be distributed. In this situation we affirm the determination of the respondent. Baltzel v. Mitchell, 3 Fed. (2d) 428; Estate of Virginia I. Stern, 7 B. T. A. 853; Frederick M. Hubbell et al., 14 B. T. A. 1040; affd., Hubbell v. Commissioner, 46 Fed. (2d) 446.

The petitioners also allege that they are entitled to have their several incomes for each of the taxable years ratably decreased on account of the payment of certain municipal and other taxes in such years by the trustees. No evidence to sustain this allegation was adduced and, as it is denied by the respondent, his determination thereto must be affirmed.

Decision will be entered for the respondent in each of the proceedings for each of the years involved.


text:
    Chapman & Dewey Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Chapman & Dewey Land Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Kansas City & Memphis Farms Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 33466, 37402, 37403, 47130, 50196, 51058, 51059, 51060.
    Promulgated April 15, 1932.

      Fred B. Angevine, Esq., for the petitioners.

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

Lansdon:

At Docket Nos. 33466, 31402, 47130, 50196 and 51058 the respondent has determined deficiencies in income tax against the Chapman & Dewey Lumber Company for the years 1922, 1923, 1924, 1925, 1926 and 1927 in the respective amounts of $14,692.73, $3,981.17, $12,421.54, $12,654.20, $12,239.08 and $10,105.58; at Docket Nos. 37403 and 51059, against Chapman & Dewey Land Company for the years 1923 and 1927 in the respective amounts of $8,864.81 and $168.24; and, at Docket No. 51060, against the Kansas City & Memphis Farms Company for the year 1927 in the amount of $4,186.70. The several petitioners constitute an affiliated group for which the Chapman & Dewey Lumber Company as the parent corporation made consolidated income-tax returns in each of the taxable years. The consolidated group.will be referred to hereinafter as the petitioner. The several proceedings were duly consolidated for hearing. All the evidence material to the issues in controversy has been embodied in a series of stipulations which are hereby incorporated in this report by reference.

An allegation of error in respect of insufficient depletion of timber for the year 1924 has been settled by a stipulation that for the year 1924 the petitioner is entitled to additional depletion in the amount of $5,353.69 and adjustment in conformity therewith will be made under Rule 50. Two questions are submitted for our decision:

(1) Is the petitioner entitled to deduct irom gross income for each of the taxable years a pro rata amount of taxes levied against and paid by it and used by eertain improvement districts in the State of Arkansas for the payment of their current interest obligations?
(2) Is the petitioner entitled to deduct from its gross income in each of the taxable years that part of its taxes paid in such years and used by improvement districts in the State of Arkansas for maintenance and repairs?

The petitioner owns extensive tracts of land within the boundaries of improvement districts, all duly and legally constituted under and by virtue of the laws of Arkansas, for the purpose of constructing and maintaining public highways, drainage ditches and levees. Such districts make annual assessments of taxes against the owners of lands within their boundaries which are always a certain percentage of the total benefits allocated to the several tracts of land taxed under the law for the construction and maintenance of the improvements. This annual assessment is based upon an estimate of the funds necessary to pay installments due on the principal cost of the improvements, interest on any outstanding district bonds and costs of maintenance and repairs. Requirements for such several purposes are not segregated on the books of the districts or on the tax statements and receipts. The respondent, on brief, concedes, however, that if the petitioner prevails the stipulation contains all the data necessary to the redetermination of all the deficiencies under Rule 50.

It is stipulated that the improvement taxes paid by the petitioner in the taxable years were used as follows :

On the books of the petitioner that part of taxes paid for retirement of bonds was capitalized and that for interest and maintenance was charged to profit and loss and deducted as paid from gross income in the income-tax returns made for the several taxable years. Upon audit of such returns the respondent has disallowed the deductions so taken and determined the deficiencies here in controversy.

The identical questions here involved, relating to improvement districts in the State of Arkansas, have been fully considered, discussed and decided in favor of the petitioner in Lee Wilson & Co., 25 B. T. A. 840. We there held that “ the portion of taxes paid by the petitioner and allocated to interest for each of the years is deductible.” In the same opinion we also held that “ the portion of taxes paid by the petitioner and allocated to maintenance, repairs and expenses for each of the years is deductible.” On the authority of that report we disapprove the deficiencies herein as determined by the respondent. Cf. Andrew Little, 21 B. T. A. 911.

Decision will he entered v/nder Bule 50.