author: Disney: Mellott,

text:
    Annie B. Smith, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99900.
    Promulgated December 9, 1941.

      E. B. Hodges, Esq., for the petitioner.

      G. W. Reardon, Esq., for the respondent.
   OPINION.

Disney:

In this proceeding the respondent filed amended answer and seeks to increase the deficiency originally determined, on the ground that, the gifts involved were of future interests in property. He relies, primarily upon United States v. Pelzer, 312 U. S. 399, referring also to Helvering v. Hutchings, 312 U. S. 393, and Ryerson v. United States, 312 U. S. 405. By separate memorandum he calls our attention to Welch v. Paine, 120 Fed. (2d) 141. The. petitioner, of course, contends that the gifts were of present interests and seeks to-distinguish the above, cases. In substance, the present case involves, trusts under each of which the- trustee holds the trust estate for - the use of two children, is empowered- and directed in his sole discretion to use the principal and income for their education and preparation for their positions in life, and is to convey to each beneficiary upon his, reaching the age of 24 years his undivided portion of the estate then in, the hands of the trustee, the gift, in case of the death, of any beneficiary prior to distribution, to go to the survivor or, in case of the-death- of both beneficiaries, to another. The trustee may in his discretion determine whether receipts and disbursements shall be coni-sidered principal or income. The beneficiaries have no vested interest" in the trust estate,, except to enforce performance of the-trust agreements. Such provisions, the respondent argues, require us to hohl that the gifts are of future interests in property. The petitioner points to distinguishing features in the cases above named.

The trusts in the Pelaer case provided' a definite waiting period of ten years, for during that time the trustee was required to accumulate the income and at the end of- the trust divide the corpus and accumulated income among eight beneficiaries and any others after, borm No discretion was vested,in the trustee. The Hutchings case expressly recites that it docs not. consider whether the gifts are of future interests. In the Ryerson case the trust instrument particularly required income to be accumulated and added to corpus and the Court holds that the participants in the use and enjoyment of the trust principal and income were ascertainable only upon the happening of one or more uncertain events. No such contingencies are entailed in the instant proceeding. In the instant matter, the petitioner points out that the trustee was empowered and directed in his sole discretion to use both principal and income for the education of the beneficiaries and their preparation “to obtain and occupy an advantageous and desirable position in life”; and argues that such discretion in the trustee in effect eliminates the waiting period and leaves no similarity to the Pelzer case, since under general principles of law of trusts the beneficiaries could have compelled the application of at least a minimum amount of the principal and income to their use for the purposes stated in the trust instrument, and that there is no contingency here involved to affect the enjoyment of the gift, as in the Ryerson case.

Without the element of discretion in the trustee as to use of principal and income, the answer here would plainly be the same as in the Pelzer case, since otherwise here, as there, trust corpus is distributable only in the future. What then is the effect of the absolute discretion vested in the trustee herein as to use of both principal and income for the beneficiaries ? It is patent that this query is not directly answered by any of the cases above analyzed. The only cases bearing directly upon this point which have been called to our attention or discovered by us are Welch v. Paine, supra, Commissioner v. Taylor, 122 Fed. (2d) 714, and Helvering v. Blair, 121 Fed. (2d) 945. In Welch v. Paine, supra, the trust instrument provided that income should become a part of principal and be accumulated and paid, with the principal, to the beneficiaries at the age of 21, and in the case of death of a beneficiary to his heirs at the date when he would have become 21 years of age. The trustee was empowered, however, to advance to the beneficiaries or for their benefit such sums out of their respective shares as he might in his absolute discretion deem necessary or advisable for their support, maintenance, or education. The court concludes that the interests donated were limited to commence in enjoyment at some future date, in keeping with the explanation of the statute contained in the committee reports. The court uses the following language: “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.” It is to be noted that the trust instrument there involved does not, as in the instant case, specifically provide that the discretion of the trustee extends to the use of principal for the benefit of the beneficiary; yet the same power seems in fact to have been given the trustee, for the decision recites: “The trustee was empowered to advance to the beneficiaries, or for their benefit, such sums out of their respective shares as he might in his absolute discretion deem necessary * * Since this expression follows the recitation that income received was to become a part of principal and accumulated, it appears to be fair to conclude that the “shares” were shares of both principal and income and therefore we discern that discretion extended to both, as in 'the instant case. Moreover, the provision in the instant proceeding that principal could be distributed can not be given any particular weight, for the trustee in his discretion could decide whether receipts accretions (except stock dividends and stock rights) should be added to principal or income, and whether disbursements made should be charged to principal or to income. Iu other words, principal was such, to a large extent, only dependent upon the trustee’s discretion, so the situation is not essentially different from that in Welch v. Paine. In one respect the trust instrument in the present case goes farther to indicate future interests than does the trust instrument in Welch v. Paine — in the latter the death of a beneficiary effected no gift over to any other person, the beneficiary’s heirs becoming beneficiaries, whereas herein there was in case of such death of a beneficiary a gift over to the other beneficiary, or in case of his death, to another not otherwise a beneficiary. This fact, together with the provision that the trustee might in his discretion continue to hold indefinitely any trust corpus, the provision for absolute discretion in the trustee to use either principal or income for the benefit of the trust estate, the provision that during the entire term of the trust the whole title, both legal and equitable, in fee to the trust estate or any part thereof, is and shall be vested solely and absolutely in the trustee and no interest shall be vested in any beneficiary, the particular expression that it is the intent of the settlor that the only interest which a beneficiary shall or may have is personal property only, consisting of the right and power to enforce the due performance of the terms of the trust, the provision restraining any beneficiary from alienating his claimed beneficial or legal right to net income or principal, and the provision that such claimed interest shall not be subject to the liabilities, judgments, or legal processes against the beneficiary nor pass or descend by operation of law — all tend to indicate, we think, that the case here at hand is not to be distinguished from Welch v. Paine and that as therein stated in substance there was no mere postponement, but a reservation of right in the trustees either to pay or not to pay the beneficiaries— a limitation to future enjoyment within the congressional intent.

In Commissioner v. Taylor, supra, discretion on the part of the trustee is also involved, and the conclusion of the court is that there was a gift of a future interest. Therein the trust instrument pro-Tided life estates in dioses in action in named children with powers, of appointment and remainders over. Principal should be held for the use and benefit of the beneficiaries and income should he accumulated and paid to the minor beneficiaries at the age of 21 years: unless in the sole discretion of the trustees it should be needed for proper education or support. Although the life estates given to the minors vested immediately, the court considered that fact to be immaterial and in effect emphasized that it was sufficient if the enjoyment was for the future.

That in the consideration of this question effect must be* given to discretion vested in the trustees as to permitting enjoyment of the trust by the beneficiary, as held in the two cases last cited, is further emphasized in Helvering v. Blair, supra. There the court disallowed the $5,GOO exclusions claimed, holding that the value of the interests conveyed was uncertain during the period that the trustees, held discretionary power and that the enjoyment of the trust was suspended. Therein property was conveyed in trust for the period of the longer of two lives, those of grantor’s wife and his son. The instrument provided that during the wife’s life the trust income should be applied to the use of any one or more of eight people (the wife and seven children) and the lawful issue of any children, in the absolute discretion of the trustees. Upon the death of the wife the income was to be applied, to the use of the lawful issue of the grantor and his wife, but without any discretionary power. The instrument concluded with a gift of legal remainders upon the termination of the trust to. the living lawful issue of the grantor and his wife, per stirpes. The court holds that the interests conveyed, are future because of the continued discretionary powers of the trustees to change the original division, rendering it impossible to compute the value of the beneficiary’s share at the time of the original division. It is apparent, of course, that the situation, is not wholly analogous to that .in the instant matter. Nevertheless, the case does give weight to. the element of discretion in trustees as to payment to- beneficiaries. The most recent expression upon this subject is found in Commissioner v. Brandegee, 123 Fed. (2d) 58. Therein trustees were given discretionary power to pay the net income from the trust property, 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 considers that tire-trustees were, in effect, authorized to accumulate the income to pay the encumbrances, with discretionary power to pay the beneficiaries, and says:

* * * It is true that the trustees have a discretion to pay the net income to the beneficiaries in equal shares; and the right of the beneficiaries to receive such income at any time the trustees should choose to give it. to them is no doubt; a hind of interest of which a court of equity may take cognizance. See Fulham v. Commissioner, 110 F. (2d), 916, 918 (C. C. A. 1st, 1940). But if it may be called a present interest there is still the difficulty that such, an interest is inherently inpa^ahle, of valuation. Helvering v. Blair, 121 F. (2d) 945, 947 (C. C. A. 2d, 1941) [supra]. Where the absolute right of the beneficiaries to enjoyment of the income is postponed until the happening of a future event, a $5,000 exclusion in respect of-each donee is-not allowable to the donor under § 504 (b)- merely because he has invested the trustee with an- immediate- discretionary power to matea advancements. Welch v. Paine, supra; Commissioner v. Taylor, supra; Helvering v. Blair, supra. And this is so whether or not the trustee happens to pay over income to the beneficiaries during the yeaj; in which the gift is made. The nature of the interest of the donees is determined as of the date of the gift, not by what the trustee may subsequently choose to do in the exercise of his discretionary power. See Helvering v. Blair, supra, at p. 947.
If and wh.en the mortgages and encumbrances are discharged in full the interest of the beneficiaries, theretofore contingent upon the trustees’ discretion, is succeeded by a more substantial interest, for the trustees in such event come under a mandatory duty to pay the net income in equal shares to the survivor or survivors of the children and to the.ipsue of any deceased child per stirpes. But viewed from the date of the 1937 gift, such succeeding interest is clearly a “future interest” under the decided cases. The unqualified right to income is limited to commence in use and enjoyment at a future date or time. See definition- of “future interests” in Article 11 of Treasury Regulations 79 (1936 ed.)i. * * *

From tbe above cases we conclude that there is involved in the discretion of the trustees as to the enjoyment of income by beneficiaries, a contingency or postponement requiring enjoyment of the gift to be considered' limited to the future. Only when and if the discretion is exercised, and exercised to permit enjoyment of the gift, is the gift to be regarded as enjoyed. Under the facts herein involved, either or both beneficiaries might die before the exercise of discretion by the trustees, the gift would go to another, and neither income nor corpus benefit either beneficiary or his estate. The answer to petitioner’s view that the- trustee’s failure to devote at least a minimum to the requirements of the beneficiaries would be cognizable in equity, is found in the expression from Eestatement of the Law of Trusts cited by her, for after stating the rule contended for, the Eestatement qualifies it by adding “unless otherwise provided by the terms of the trust.” The trust instrument here, referring to the trustee’s power, reiterates as to “sole discretion”; “according to his own j udgment and discretion”'; “his absolute discretion”; as to exercise of' all of the powers “exercised b}? persons owning similar property in their own right”; “all decisions made-by the trustee in this regard (devoting principal' or income to trust purposes) in good faith shall be final and conclusive upon all parties in interest”'; that the trustee’s judgment (in regard to division and valuation of estate) shall-be “final' and conclusive upon all persons1 interested in the estate.” “The trustee shall be entitled" to full credit and protection for all amounts distributed in the exercise of the discretion hereby given Mm.” Clearly, we think, Ibis trust instrument contemplated no control by a court of equity over tlie discretion of the trustee.

In the light of the above decisions, we are of the opinion and hold that the interests conveyed by the trust instrument set up by the petitioner were gifts of future interests in property within the purview of section 504 (b) of the Kevenue Act of 1932 and that the respondent erred in allowing exclusions with respect thereto under the statute.

Eeviewed by the Board.

Decision will be entered under Rule 50.

Mellott,

dissenting: The essence of the test applied in all of the cases cited in the majority opinion is: Did the beneficiaries receive, at the time of the creation of the trust, “a right to the present enjoyment of the corpus or of the income”? They did not where the income was to be accumulated for ten years at the end of which it was to be distributed to a class, the members of which could not be ascertained until then (United States v. Pelzer); where the enjoyment of the trust fund by the beneficiaries was postponed until such time as they, in their capacity as trustees, should join in the exercise of a power (Ryerson v. United States) ; where the settlor-trustee, in his sole discretion, could hold the trust property for his lifetime and pay over to his children such amounts as he should determine (Welch, v. Paine); or where the beneficiaries had no more than contingent interests, dependent upon the trustee’s discretion (Helvering v. Blair and Commissioner v. Taylor).

Under the trust instrument in the instant proceeding the settlor established trusts for the education of her two 16-year old granddaughters and her two 19-year old grandsons and to prepare them “to attain and occupy an advantageous and desirable position in life.” The amount set aside for each was approximately $5,000. That she expected all of it to be expended, commencing immediately, is indicated by several circumstances. The trustees were to use the “principal and income.” The annual income reasonably to be anticipated from a corpus of $5,000 would not exceed $250 or $300. It is not unreasonable to assume that she realized such a small annual income could not be expected to provide the expenses of a year in college. The unusual sequence of the words “principal and income” indicates that she expected the principal to be used immediately for the designated purposes. This view is strengthened when consideration is given to the clause authorizing payment of either principal or income “direct to said minor, or to his natural guardian, without requiring qualification according to law.” Moreover, the references in other sections of the trust instrument to the discretion of the trustee do not, in my judgment, justify a holding that the gift can “be regarded as realized” only when the trustee has exercised his discretion “to permit enjoyment of the gift.” His discretion was “to use the principal and income” for the designated purpose — to determine which should be used rather than to determine whether either should be used. In other words, the property was to be used for the designated purpose and could not arbitrarily be withheld by the trustee. Nor should article sixth of the trust instrument be ignored in this connection. Under- it the trustee is authorized to expend any or all of the principal for the personal care and maintenance of the beneficiaries, if in his judgment and discretion necessary, and is also authorized to pay for any or all professional or medical care. As to the latter no specific discretion or judgment is vested in the trustee.

It seems to me that the beneficiaries had an absolute right, under article first (b) of the trust instrument, to have the principal and income used for the designated purpose. Under article sixth they had the absolute right to require the payment of medical attention out of principal and a right, enforceable in equity, to require the expenditure of a reasonable amount for their personal care and maintenance. The aggregate of all these rights is surely “ a right to the present enjoyment of the corpus or income.”

In spite of the language quoted by the majority from Commissioner v. Brandegee that case is not a very satisfactory authority upon which to rest a conclusion that the gift in the instant proceeding is one of future interest. The court remanded the proceeding to the Board “on the issue whether the beneficiaries took future interests in property.” It held that if petitioner can establish “that when the gift was made in 1937 there were no mortgages or other encumbrances outstanding, the existence of which would postpone the unqualified right of the beneficiaries to enjoyment of the net income”., she must prevail in her contention that the gift was of a present interest; for then the trustee would be required to pay the net income to the beneficiaries. As to this phase the court held that “the gift of an immediate life interest in income is to be regarded as a present interest”, pointing out that “in ordinary usage a life tenant under a trust, having the right to the immediate beneficial enjoyment of the income, is considered as having a present interest, even though possession of the corpus is withheld from him or postponed.” Cf. Kinney v. Anglim, 43 Fed. Supp. 431. The cited case, therefore, is but an application of the rule enunciated by the Supreme Court in the Pelzer and Ryerson cases.

Being of the opinion that the beneficiaries in the instant proceeding have- a present interest in the property placed in trust for them by their grandmother, I respectfully note my dissent.

Murdock, Yak Fossan, ToeneR, and Habron agree with this dissent.


source: Caselaw Access Project

author: Smith :

license: Public Domain

text:
    Elizabeth H. Fisher, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 98637.
    Promulgated December 9, 1941.

      F. T. Biiter, G. P. A., for the petitioner.

      Samuel Taylor, Esq., for the respondent.
   OPINION.

Smith :

The first question presented by this proceeding is whether the two paid-up single premium life insurance policies on the life of the donor should be valued for gift tax purposes at the cost of the policies to the donor, as determined by the respondent, or at their cash surrender values at the date of the gift, as contended by the petitioner. This issue is decided in favor of the respondent upon authority of Guggenheim v. Rasquin, 312 U. S. 254.

The second question is what exclusions, if any, the petitioner is entitled to in respect of the trust which she created for the benefit of her six grandchildren in 1937. In the determination of the deficiency for that year the respondent allowed an exclusion of $5,000, upon the theory that a single gift had been made to the trustee.

The respondent now contends that he erred in allowing an exclusion of $5,000 (upon authority of Helvering v. Hutchings, 312 U. S. 393) ; that the gifts to the grandchildren were gifts of “future interests” within the meaning of section 504 (b) of the Revenue Act of 1932 as construed by the United States Supreme Court in United States v. Pelzer, 312 U. S. 399, and Ryerson v. United States, 312 U. S. 405; and that petitioner is not entitled' to any exclusions in respect of such gifts. Section 504 (b) reads in part as follows:

* * * 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 * * * shall not * * * be included in the total amount of gifts made during such year.

In article 11 of Regulations 79 (1936 Edition) “future interests” are said to include:

* * * reversions, remainders, and other interests or estates, whether vested or contingent, and whether or not supported by a particular interest or estate, which are limited to commence in use, possession, or enjoyment at some future date or time. * * *

The above provisions of the regulations were given approval by the Supreme Court in United States v. Pelzer, supra. In that case there were gifts in trust to the donor’s 8 living grandchildren and for any other grandchildren later to be born. The trustee was to accumulate the income for 10 years and thereafter pay it to the living grandchildren as they attained the age of 21 years in equal shares for life. There were provisions for gifts over of any deceased grandchild’s share of distributable income. The trust was to continue for 21 years after the death of the last survivor of the named grandchildren, when the corpus and accumulated income were to be distributed to the surviving grandchildren (both named and unnamed), or the heirs of any deceased grandchild per stirpes. The Court held that the gifts made under the trust agreement were gifts of future interests within the meaning of section 504 (b) above. Quoting from the committee reports recommending the enactment of section 504 (b) and from the Commissioner’s regulations referred to above, the Court in its opinion said:

We think that the regulations, so far as they are applicable to the present gifts, are within the competence of the Commissioner in interpreting § 504 (b) and effect its purpose as declared by the reports of the Congressional committees, and that the gifts to the eight beneficiaries of the 1932 trust were gifts of future interests which are excluded from the benefits of that section. Here the beneficiaries had no right to the present enjoyment of the corpus or of the income and unless they survive the ten-year period they will never receive any part of either. The “use, possession or enjoyment” of each donee is thus postponed to the happening of a future uncertain event. The gift thus involved the difficulties of determining the “number of eventual donees and the value of their respective gifts” which it was the purpose of the statute to avoid.

The principal distinction between the instant case and the Pelzer case is that here the distribution of the trust income to the donees was to commence immediately within the year of the creation of the trust, rather than 10 years later, as in the Pelzer case. In other words, upon the creation of the trust each grandchild received an immediate right to a proportional share of the income from the $29,662.49 trust fund for a definite number of years, depending on his or her age at the date of the gift. We think that this right to receive such income was a gift of a present rather than a future interest.

In the Pelzer case the Court pointed out that the beneficiaries there had no right to the present enjoyment of the corpus or the income and would never receive any of the income or the corpus unless they survived the 10-year period. The beneficiaries here had the right to the present enjoyment of the income. This right was to continue until each beneficiary should attain the age of 25 years.

In J. Willis Gardner, 41 B. T. A. 679, there was a gift in trust, the income to be paid to the beneficiary for 25 years or for life, whichever was the shorter period, when the corpus also was to be paid to the beneficiary if still living. We held, sustaining the Commissioner’s determination, that the exclusions, to which the donor was entitled on account of the gift were limited to the present value of the right of the beneficiary to receive the income of the trust for a period of 25 years. As to the corpus, we held that the gift was of a future interest.

Likewise, in Leopold E. Block, 41 B. T. A. 830, the gift of the income of a trust fund for life was held to be a gift of a present interest, in respect of which the donor was entitled to a $5,000 exclusion. See also Edith Pulitzer Moore, 40 B. T. A. 1019.

Here, we think that there were gifts to the six grandchildren of a present interest in the income of the trust. The amount of each of such gifts was the present worth of the right to receive one-sixth of the income of the trust fund of $29,662.49 for the period during which it was to be paid to the donee.

We think that under the decision of the Supreme Court in the Pelzer case the gifts of the remainder interests, that is, the corpus of the trust, were gifts of future interests. The receipt of these gifts by the beneficiaries of the trust was contingent upon their attaining the age of 25 years. If any grandchild should die before that time, without issue, his or her share was to go to the survivors or their issue. There was no certainty whether, or to what extent, any of the beneficiaries would take upon final distribution of the corpus of the trust.

The respondent makes the argument that the gifts to the beneficiaries were gifts of “future interests” because the beneficiaries would receive no distribution until December 20 of each year. The argument of the respondent appears to be that since the income of the trust to be collected by the trustee was not to be paid over to the beneficiaries until December 20, the beneficiaries did not have the “use, possession, or enjoyment” of the income from the date of the creation of the trust. Under this interpretation of the law a gift to the beneficiary of a trust would necessarily be of a future interest unless the beneficiary had the right to demand from the trustee his share of the income of the trust as it was received, month by month, or day by day.

We do not think that this is a correct interpretation of the statute. We think that where the trust instrument provides that the income of the trust shall be distributed to the beneficiary annually or oftener the gift of the income is not a gift of a future interest.

Reviewed by the Board.

Decision will Toe entered under Rule 50.


text:
    Budd Wheel Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99625.
    Promulgated December 10, 1941.

      Frederick E. 8. Morrison, Esq., for the petitioner.

      Philip M. Clark, Esq., for the respondent.
   OPINION.

Smith :

In his audit of the petitioner’s income and excess profits tax returns for 1936 and 1937 the respondent made numerous adjustments which to some extent increased the taxable net income. The petitioner does not question the correctness of those adjustments in this proceeding. The net income as adjusted by the respondent for 1936 was $1,030,342.08 and for 1937 was $1,176,015.82. From the net incomes as adjusted the respondent deducted $151,492.58 for 1936 and $173,976.55 for 1937 for taxes payable, leaving adjusted net incomes for the computation of the surtax on undistributed profits of $878,849.50 and $1,002,039.27, respectively. The petitioner in this proceeding does not question the correctness of such determinations.

In its tax returns for 1936 and 1937 the petitioner claimed dividends paid credits under section 27 (a) of the Revenue Act of 1936 of $289,561.10 and $244,967.63, respectively. Included in these claimed credits were $44,119.50 and $10,538.03, respectively, representing the amount of premiums on outstanding shares of preferred stock which were purchased for retirement in each taxable year through the sinking fund. In the computation of the deficiencies the respondent has allowed the dividends paid credit claimed on the returns.

In the returns the petitioner claimed additional credits for contracts restricting dividend payments of $524,043.04 for 1936 and $181,172.53 for 1937. These credits have been disallowed by the respondent in the determination of the deficiencies. In this proceeding the petitioner claims that the respondent erred in making such disallowances and that the amounts which he should have allowed as credits for contracts restricting the payment of dividends are $878,849.50 for 1936 and $586,297.71 for 1937.

We consider first the contention of the petitioner that the provisions of its bylaws contained in its certificates of common stock and preferred stock outstanding constitute a written contract executed by the corporation prior to May 1, 1936, within the contemplation of section 26 (c) (1) of the Revenue Act of 1936, which prohibited it from declaring dividends on its common stock in the taxable years. Section 26 (c) (1) provides in material part as follows:

SRC. 26. CREDITS OP CORPORATION.
In the case of a corporation the following- credits shall be allowed to the extent provided in the various sections imposing tax—
*******
(C) CONTRACTS RESTRICTING PAYMENT OP 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.

The petitioner first argues that the stock certificates issued by it, incorporating therein the provisions of the bylaws restricting the payment of dividends, constitute the written contract required by section 26 (c) (1), supra. The provisions of the bylaws standing alone do not constitute the written contract required by the section referred to above. See Davison-Joseph Campau Realty Co., 41 B. T. A. 675; Atlas Supply Co., 43 B. T. A. 324; Metal Specialty Co., 43 B. T. A. 891. The petitioner argues, however, that the provisions of the bylaws above referred to, incorporated in its stock certificates, do constitute a written contract within the meaning of section 26 (c) (1) of the statute. In Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46, the question before the Court was whether a provision of a corporation’s charter restricting the payment of dividends was within the meaning of section 26 (c) (1) and (2). The Court held that it was not. The Court stated:

* * * The natural impression conveyed by the words “written contract executed by the corporation” is that an explicit understanding has been reached, reduced to writing, signed and delivered. * * *

In that case the argument was made that, even if the charter provision was not a written contract within the purview of section 26 (c) of the statute, nevertheless the issuance of stock certificates containing such charter provisions constituted a written contract within the purview of the section. In a footnote to its opinion the Supreme Court said:

Respondent contended that the stock certificates satisfied the statutory requisites even if the charter did not; but what we have here said with respect to the charter applies equally to the certificates.

This issue is determined in favor of the respondent upon the authority of Helvering v. Northwest Steal Rolling Mills, Inc., supra; Crane-Johnson Co. v. Helvering, 311 U. S. 54; Lehigh Structural Steel Co., 44 B. T. A. 422; Warren Telephone Co., 43 B. T. A. 451; and Bishop & Babcock Manufacturing Co., 45 B. T. A. 776.

It may further be noted that the restriction upon the payment of dividends contained in the petitioner’s stock certificates is at most a prohibition against the payment of cash dividends to the holders of stock other than first preferred stock. The respondent argues that this provision would in no event prevent the petitioner from paying other than cash dividends, such as dividends in property or dividends in second preferred stock, and his contention is that, since’ the petitioner was not restricted in the payment of such dividends, it has not met the requirements of section 26 (c) (1) of the statute. The respondent relies upon the following provision of Regulations 94, viz., article 26-2 (b), which provides in part as follows:

(b) Prohibition on payment of dividends. — The credit provided in section 26 (c) (1) is allowable only with respect to a written contract executed by the corporation prior to May 1, 1936, which expressly deals with the payment of dividends and operates as a legal restriction upon the corporation as to the amounts which it can distribute within the taxable year as dividends. If an amount can be distributed within the taxable year as a dividend—
(1) in one form (as, for example, in stock or bonds of the corporation) without violating the provisions of a contract, but can not be distributed within the taxable year as a dividend in another form (as, for example, in cash) without violating such provisions, * * *
*******
then the amount is one which, under section 26 (e) (1), can be distributed within the taxable year as a dividend without violating such provisions.

We think that this contention of the respondent is likewise sound.

Decision will he entered under Rule SO.


author: Leech :

text:
    Otto C. Botz, Transferee of Botz Printing and Stationery Company, a Corporation, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 101439, 101440, 101441, 101442, 101443, 101454, 101455.
    Promulgated December 10, 1941.

      'William M. Fitch, Esq., and Malcolm I. Frank, Esq., for the petitioners.

      G. H. Curl, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Heneé O. Botz, Transferee of Botz Printing and Stationery Company, a corporation; Joseph C. Botz, Transferee of Botz Printing and Stationery Company, a corporation; Katherine Botz, Transferee of Botz Printing and Stationery Company, a corporation; Frank C. Botz, Transferee of Botz Printing and Stationery Company, a corporation; William B. Malone, Transferee of Botz Printing and Stationery Company, a corporation; and Ada G. Malone, Transferee of Botz Printing and Stationery Company, a corporation.

   OPINION.

Leech :

The issue is whether petitioners are liable as transferees of the assets of the Botz Printing & Stationery Co., hereinafter called the Botz Co., under section 311 of the Internal Revenue Code. Respondent has the burden of proof.

The amount of the tax assessed against the Botz Co., the transferor, is not in issue. The collector of internal revenue having failed to collect this tax from that transferor, because no assets belonging to it could be found, proposed the liabilities here contested against each of the petitioners as transferees of the assets of the Botz Co. It is admitted that assets of that company were transferred to and received by petitioners in exchange for shares of their stock in that corporation.

Petitioners contend that the distributions made to them in 1933, 1934, 1935, and 1936, or, in any event, those for 1933 and 1934, did not render the corporation insolvent; that, under the contract of December 23, 1921, they were creditors, and, as such, the corporation had a right to prefer them over other creditors, even if insolvent; and that the judgments of the Circuit Court of Cole County established their status as creditors and are controlling here. We agree with none of these contentions in so far as they affect the issue here.

Assuming that the Botz Co. accepted or was bound by the contract evidenced by the offer of the “Hugh Stephens Printing & Stationery Company” dated December 23, 1921, and the inferred acceptance by buying the stock, certainly, petitioners buying stock of the Botz Co. became shareholders in and not creditors of that company. Helvering v. Richmond, Fredericksburg & Potomac R. R. Co., 90 Fed. (2d) 971; Dayton & Michigan Railroad Co., 40 B. T. A. 857; affd., 112 Fed. (2d) 627. And that conclusion is in no way disturbed by the judgments of the Circuit Court of Cole County mentioned in our findings of fact. It is true that the Board is generally bound by local law with respect to title to property within a state. Blair v. Commissioner, 300 U. S. 5. But that rule is ineffective here. The judgments mentioned, at most, merely purported to decide that these petitioners became creditors of the Botz Co. after and because of the failure of that company to repurchase their stock upon demand made after August 1, 1933. Moreover, when the proceedings in the Missouri courts were brought upon which these judgments were entered, the Botz Co. was without assets of any value. It had carried on no business for eight years and therefore had no adverse interest, in fact, to the petitioners. The judgments were clearly entered by the consent of the Botz Co. The answers filed by the attorney for that company in each of these suits specifically admit not only the allegations of the petition but the liability of the Botz Co. in the amounts severally claimed there by the plaintiffs, and on this admission pray for a judgment in each case for the defendant. The collusive charactei of the proceedings (see Freuler v. Helvering, 291 U. S. 35), we think, is clearly established. These judgments, even if material to the issue here, are in no way binding upon us. Cf. Freuler v. Helvering, supra; Blair v. Commissioner, supra; Poe v. Seaborn, 282 U. S. 101; Hugh D. Rhodes et al., Administrators, 41 B. T. A. 62; affd., 117 Fed. (2d) 509; Estate of Frederick R. Shepherd, 39 B. T. A. 38.

Since the rights of a shareholder in the assets of a corporation are undoubtedly subordinate to those of a creditor, it would scarcely seem possible that the corporation, by contract with its shareholders alone, could alter that priority. See Cook on Corporations, sec. 9. However, in any event, the status of the petitioners as stockholders was not changed until and unless the “repurchase” of their stock or the failure to do so upon petitioners’ demand, both of which occurred after August 1, 1933, effected such change. The debt for the tax, basing the present proceedings, arose on August 1, 1933, when the sale or exchange by the Botz Co. occurred, giving rise to the tax. Benjamin E. May, 35 B. T. A. 84. Thereafter the Botz Co. carried on no business except that of realizing on its assets and “purchasing” its stock. The subsequent agreements to “repurchase” all of its outstanding stock, carried out during 1933, 1934, 1935, and 1936 — in so far as its assets permitted — and the cancellation of the stock thus reacquired, despite the fact that these several reacquisitions may have taken the form of “purchases” of the stock, constituted a series of distributions in partial liquidation of the Botz Co. L. B. Coley, 45 B. T. A. 405, and cases therein cited.

In 1933, the corporation distributed $217,090 in liquidation of 2,241 shares of its stock; in 1934 it distributed $97,125 in liquidation of 1,175 shares; in 1935 it distributed $14,800 in liquidation of 148 shares; and in 1936 it distributed $6,500 in liquidation of 100 shares. By the end of 1936 the corporation had distributed a total of $335,515 to its stockholders (petitioners included), in liquidation of 3,664 shares of its stock, thereby leaving no assets except some accounts and notes receivable which had no market value. It may be true that these distributions in the earlier years did not bring about insolvency of the Botz Co., but the important and controlling fact is that the distributions were each made as one of a series of distributions in partial liquidation, which unquestionably rendered the corporation insolvent. The petitioners, distributees, are therefore liable as transferees in the respective amounts of those distributions they received. Robinson v. Wangemann, 75 Fed. (2d) 756; Edward E. Garcin, 22 B. T. A. 1027; Benjamin E. May, supra.

Since each of the petitioners thus received amounts in excess of the liability determined against each as transferee of the Botz Co., we sustain the respondent.

Decisions will be entered for the respondent.


author: Arundell : Tyson,

text:
    Harry Friedman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104611.
    Promulgated December 10, 1941.

      Harry Friedman, Esq., pro se.

      P. A. Bayer, Esq., for the respondent.
   OPINION.

Arundell :

The petitioner contends that the $25,333.36, part of the Tex-Penn fee retained by him, in addition to the $6,333.30 representing his admitted earned share, was not taxable income to him. His principal argument is that the fee was a gift from Horace A. Mann. He contends further that, whether it was a gift or not, it was taxable to the assignor.

The several elements of a gift have been too often stated to need repetition here. For the purposes of this case we can adopt the petitioner’s proposed definition that a gift is a voluntary transfer of property from one to another without any consideration or compensation therefor. The transfer from Mann to the petitioner, which resulted in the petitioner’s receipt of the $25,333.36 in dispute, is evidenced by the letter of May 19, 1933, quoted in the findings. That letter authorized the petitioner “to complete all work on the above-named cases and arrange for and collect the fees due.” At that time work on the Tex-Penn case had not been completed. It had been submitted to the Board for decision, but as it turned out, much more work was to be done. Prior to the assignment petitioner had been connected with these cases for more than four years. He had attempted their settlement and when this seemed no longer possible, turned his efforts toward preparation for trial. In spite of the fact that petitioner had no written contract with the Tex-Penn clients, he was fully recognized as one of their attorneys at the time of the trial before the Board and, in fact, he was the only one of the three associates who was an attorney of record in those proceedings. At the time of the assignment Mann was in ill health and wanted to retire from active practice. Upon this evidence the true situation appears to be that Mann made the transfer in consideration of the petitioner’s agreement to complete the unfinished cases that were in the office. The petitioner’s assumption of the duty “to complete all work on the above-named cases”, thereby relieving Mann of his burdens, was consideration for the transfer. Where there is consideration there can be no gift. Noel v. Parrott, 15 Fed. (2d) 669; Levey v. Helvering, 68 Fed. (2d) 401.

If there was any gift from Mann to the petitioner, it was a gift of Mann’s interest in the cases in his office and not a gift of the fee paid by the clients. As to some of them, his only remaining interest was the collection of fees. But the Tex-Penn case was not completed and there was no fee to assign by gift or otherwise. Mann’s interest in it was the dual one of completing it to his clients’ satisfaction and collection of the fee to be thereafter fixed. His agreement with J ones shows that he was to render a bill “if you and/or I (or my associates) succeed in bringing these cases to a conclusion satisfactory to our clients.”

There is some suggestion in the petitioner’s brief that the amount ultimately collected had been earned by Mann at the time of the assignment, and, it is argued, it was income to Mann under the case of Helvering v. Enright, 312 U. S. 636. The Enright case decides only a question of the reporting of income for a period ending, with the death of a taxpayer and has no application at all to the issue in this case. The extent to which the Tex-Penn fee had been earned at May 19,1933, is a matter of proof on the part of the petitioner. His evidence falls short of establishing the fact. He points to a letter dated June 1, 1933, from F. B. Parriott in which Parriott says “we think your request is entirely reasonable and will be glad to consider and discuss with you any suggestion you have along the lines of partial or full payment of your fees.” We do not read this as an admission that a fee was then due. It was written in response to one from the petitioner to Benedum and Parriott asking “whether there is any objection on your part to entertaining at this time a bill for, or a discussion of some partial payment on account of services rended by your [our?] firm in connection with those cases.” All that the clients agreed to do was to consider and discuss with the petitioner the matter of payment of a fee, which is far from an admission that any fee had then been earned. Moreover, later in the same year Parriott again wrote, calling the petitioner’s attention to a previous payment made by check bearing the notation that no other was to be chargeable prior to final disposition of the case, and stating that Benedum “felt that in view of the substantial payments already made, it was only fair that your firm wait until the case was disposed of before requesting further payments.” This evidence' is not only not convincing that the fee had been earned at the time of the assignment, but rather definitely indicates that the clients regarded it as not then earned.

To sustain his argument that the Tex-Penn fee should be taxed to Mann as an assignor, the petitioner cites Lucas v. Earl, 281 U. S. 111; Helvering v. Horst, 311 U. S. 112; Helvering v. Eubank, 311 U. S. 122; and Harrison v. Schaffner, 312 U. S. 579. They are not helpful to his case. They are cases of the assignment of income only. Here the assignment is of all of Mann’s “right, title, or interest in and to all of the cases now handled by this firm.” This is an assignment of the property out of which the income grew and not an assignment of the income alone. The governing case is Blair v. Commissioner, 300 U. S. 5.

Finally, the petitioner contends that in any event the most that can be taxed to him is the excess of the fee collected over the value of Mann’s interest in the fee at the date of the assignment. The petitioner testified that that value was approximately $24,000. We have made no finding on this because under our view that there was no gift of the fee the value is not material.

What we have said so far is based upon the theories of the parties to the case and their arguments thereon. Another view compels the same result. That view is that the petitioner’s retention of the larger share of the Tex-Penn fee was simply a readjustment of fees among associates in recognition of the amount of labor performed in bringing the case to a conclusion. The petitioner’s testimony establishes that after he came into the case the services of Mann and Jones diminished and the petitioner’s became greater. Mann participated in one conference in the Bureau of Internal Revenue after petitioner came into the case. Thereafter his participation was limited to consultation with his associates. Neither Maim nor Jones was counsel of record in the trial before the Board. Mann attended the trial a part of one day. The petitioner was one of record counsel and attended the trial regularly. After May 19, 1933, Mann had nothing to do with the case. Jones assisted in preparing the brief in the appeal to the Circuit Court of Appeals, but was not counsel of record, and thereafter had no more to do with the case. The petitioner assisted in preparing the case for appeal and was counsel of record in both the Circuit Court and the Supreme Court. Both Mann and Jones were ill and were away from their offices at times. At such times the petitioner carried on the firm’s work on the Tex-Penn case. The petitioner’s testimony is clear that the bulk of the work fell on him. On these facts it was only natural that there should be a readjustment of fees in some degree proportionate to the amount of services performed, particularly in view of. the fact that Mann was withdrawing completely, leaving the case unfinished. While the petitioner and his associates were not partners, they held themselves out to the world as a law firm, and their relations were close enough to those of partners to warrant a readjustment of earnings as is not uncommon among partners. On the whole record we are of the opinion that Mann’s assignment to the petitioner was in recognition of the services performed by the petitioner over and above those contemplated when the association began, and that it was an adjustment of the original arrangement among the associates. Accordingly, the sum received and retained by the petitioner was income from professional fees.

Reviewed by the Board.

Decision will be entered for the respondent.

Tyson,

dissenting: The majority opinion reaches the conclusion that there was no gift from Mann to petitioner because Mann in making the transfer to petitioner by the letter of May 19, 1933, received as consideration therefor petitioner’s agreement to complete the unfinished cases that were in Mann’s office, including the Tex-Penn case. The grounds in the opinion for reaching that conclusion are (a) that the expression in the letter to the effect that petitioner was “authorized to complete all the work on the above named cases and arrange for and collect the fees due”, when taken in connection with (b) the facts that, at the time of the writing of the letter, Mann desired to retire from active practice and that much more work was yet to be done, show that petitioner assumed the duty “to complete all work on the above named cases”, including the Tex-Penn case and that the assumption of such duty constituted a consideration for the transfer resulting in there being no gift made thereby.

The fact that Mann desired to retire from active practice and that there was much more work to be done on the Tex-Penn case after the date of the letter would seem to have little, if any, evi-dentiary bearing on the question of whether or not there was a consideration for the transfer, since the sole agreement of the parties is embraced in the letter and the acceptance of its terms by petitioner. The letter is, in my opinion, so plain and unambiguous in its terms as to preclude any attempt at interpretation through consideration of the mere circumstances that Mann desired to retire from active practice and that there was, at the time of the writing of the letter, much work yet to be done in the Tex-Penn case; and in this connection it is to be noted that at the time of the writing of the letter the Tex-Penn case had been submitted to the Board and it was not known, of course, what the decision of the Board therein would be and, consequently, it was not known what, if any, further work' would be done by counsel engaged in the case. So, in the final analysis, the specific question presented as a test of the soundness of the conclusion reached in the majority opinion, that there was no gift of Mann’s interest in the Tex-Penn fee, is, Did petitioner in accepting the terms of Mann’s letter agree to complete the work on the Tex-Penn case because of the language in the letter which “authorized [petitioner] to complete all the work on the above named cases and arrange for and collect the fees due” ?

I do not think the language above quoted from the letter indicates that petitioner accepted the transfer of Mann’s interest in that part of the fee in the Tex-Penn case already earned with the burden imposed upon petitioner, as a consideration for the transfer, that he should complete the work on that case. Such language merely gave petitioner “authority” to do such work, if any, but so far only as Mann was concerned. By the use of these words it was obviously intended by Mann that if the Tex-Penn parties were willing, and only in such event, petitioner could step into Mann’s shoes and would be fully authorized, so far as Mann was concerned, to complete the work in the Tex-Penn case. Without further authority fiom the Tex-Penn parties to complete the work petitioner could not have'completed it, since he at the time of the transfer had, as shown by the record (but not by the majority opinion), no contractual relations, express or implied, with the Tex-Penn parties with regard to such work and the question of whether or not those parties would authorize or permit petitioner to complete the work, if any further work was to be done, was an open one. Mann, at the time the letter was written, was the only one of petitioner, Jones, or Mann, who sustained any contractual relations, express or implied,' with the Tex-Penn parties with regard to their pending case. Then how can it be said that Mann, in authorizing petitioner to complete the work, intended to, or did, or could, impose upon petitioner, as a consideration for the transfer, an obligation to complete the work, since such obligation could not be performed by petitioner unless and until it was so agreed to by the Tex-Penn parties.

There remains the question of whether the petitioner sustained his burden, under the determination of the respondent, of affirmatively showing that the transfer made by the letter of May 19, 1938, was a gift from Mann to petitioner of Mann’s portion of the fee in the Tex-Penn case earned by Mann up to the time of the transfer.

Immediately prior to the writing of the letter in question Mann called petitioner into his office and said: “Harry, I am going to do something for you your father never did. I am going to give you all my interest in the cases we have — draw up a paper”, and after this statement by Mann the letter was written by petitioner and signed by Mann. The letter evidencing the transfer fails to show, as above stated, that there was any agreement for petitioner to complete the work on the Tex-Penn case. On the contrary, the language of the letter itself shows that a gift to petitioner was intended to be, and was, made by Mann of his interest in the fee in the Tex-Penn case earned up to the date of the letter to petitioner. The letter, signed by Mann, recites no consideration, but states, inter alia, that “my interest in the fees amounting to one-half or more of all fees to be collected in the above-named cases is hereby assigned and granted to you * * * I desire you to have, and this letter gimes you whatever interest I have or may hereafter have in said cases by reason of our association.” (Italics supplied.) Petitioner testified that the transfer was made to him without consideration, and a vice president of the Munsey Trust Co. who was well acquainted with Mann, seeing him probably three or four times a week in the bank and probably two or three times a week in an apartment building in which they both lived in Washington, testified that just about the time Mann left Washington and shortly after writing the letter Mann stated to him that his (Mann’s) health was poor, “that he was going to give up his business and that h'e had given to Mr. Friedman his interest in all the unfinished business in the office.” This testimony of the vice president of the Munsey Trust Co. was uncontradicted and its admission in evidence was not objected to by respondent. In my opinion, the evidence just recited establishes that Mann, by his letter of May 19, 1933, made a gift to petitioner of his, Mann’s, interest in his portion of the fee in the Tex-Penn case earned up to the time of the writing of that letter.

Petitioner testified that the value of Mann’s interest in the Tex-Penn case fee for services theretofore performed at the date of Mann’s assignment of that interest to petitioner was “two-thirds of $35,000 or approximately $24,000”, and I think that this testimony establishes that value as being $23,333.33. Petitioner, as shown in the majority opinion, had been practicing law in Washington since 1924 and had specialized in Federal tax practice, consisting of extensive appearances before the Bureau of Internal Bevenue, this Board, the Circuit Courts of Appeal, and the United States Supreme Court. This experience as a practicing attorney would seem to qualify petitioner to testify as to the value of Mann’s interest in the Tex-Penn case fee at the time of the transfer to petitioner of that interest and, although of course petitioner is the interested party with respect to this matter, his testimony to this effect is undisputed and I see no reason for failing to give conclusive weight to such testimony in the absence of any other evidence to the contrary.

Since the amount of $23,333.33 represents Mann’s share of the fee collected in 1938 in the Tex-Penn case for legal services rendered by him in that case prior to the assignment, it constituted income earned by Mann, petitioner’s assignor, and we should hold that such assigned income is not taxable to the petitioner, assignee. Helvering v. Eubank, 311 U. S. 122. Cf. Lucas v. Earl, 281 U. S. 111; Helvering v. Horst, 311 U. S. 112; and Harrison v. Schaffner, 312 U. S. 579.

The majority opinion reaches an alternative conclusion to the effect that, even if there was a gift from Mann to petitioner, it was “a gift of Mann’s interest in the cases in his office and not a gift of the fee”, and that as to such gift the ruling here is controlled by Blair v. Commissioner, 300 U. S. 5, rather than by Lucas v. Earl, supra; Helvering v. Horst, supra; Helvering v. Eubank, supra and Harrison v. Schaffner, supra, which latter four cases, the majority opinion further states, “are not helpful to this case”, because such cases “are cases of the assignment of income only.” I think this attempted distinction is not substantial, since Mann’s only interest in the cases was his interest in the fees to be derived therefrom and the gift was of that interest, and the value thereof does not constitute income to the petitioner.

The majority opinion reaches another alternative conclusion, to the effect that “petitioner’s retention of the larger share of the Tex-Penn fee was simply a readjustment of fees among associates in recognition of the amount of labor performed in bringing the case to a conclusion.” I am of the opinion that the evidence does not justify such a conclusion, since, as shown by the record (but not by the majority opinion), there were no contractual relations existing between petitioner and Mann at the time of the transfer or at any other time; and there being no such relations there could have been no readjustment of fees between Mann and petitioner; and'even if the transfer was made in recognition of services performed by petitioner over and above those contemplated, as stated in the opinion, it may be well said (adopting an apt expression in the hereunder cited Bogardus case) that it “by no means follows that [the transfer in question] was not a gratuity.” Petitioner had never been in the employ of or under any agreement with Mann with regard to performing services in the Tex-Penn case, and what was further said as follows in the Bogardus case, where gratuities were paid by a corporation to persons who were never in its employ, is apposite to the facts in this cáse: “There is entirely lacking the constraining force of any moral or legal duty as well as the incentive of anticipated benefit of any kind beyond the satisfaction which flows from the performance of a generous act.” Bogardus v. Commissioner, 302 U. S. 34.

For the foregoing reasons I dissent from the majority opinion.

Leech agrees with this dissent.


author: Arnold :

text:
    Champion Milling and Grain Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102106.
    Promulgated December 10, 1941.

      Perry W. Shrader, Esq., for the petitioner.

      Angus B. Shannon, Jr., Esq., for the respondent.
   OPINION.

Arnold :

Section 26 (c) (1) of the Revenue Act of 1936, set forth in the margin, grants a credit as to the surtax imposed on undistributed profits where a corporation is prohibited by contract from paying dividends. The statute requires that the contract be in writing, that it be executed prior to May 1, 1936, and that the provision thereof which would be violated by a dividend distribution expressly deals with the payment of dividends. Petitioner’s entire argument is premised upon the proposition that the trust deed provisions meet the statutory requirements.

We can not agree. In our opinion the trust deed of November 24, 1930, which was the only written contract executed prior to May 1, 1936, was not such a contract as is contemplated by the statute. It does not expressly restrict the payment of dividends. On the contrary, it expressly contemplates the declaration of dividends. By implication it restricts dividend payments upon the happening of certain contingencies, but this restriction exists only by implication. Petitioner would have us convert the provisions of article 5 into an express restriction upon a showing made that the contingencies mentioned have happened. But the statute specifically conditions the credit upon a provision which expressly deals with the payment of dividends, and the Supreme Court has held that section 26 is to be strictly construed. Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46. We can not by construction of the contract convert an implied restriction into the express restriction called for by the statute. Belle-Vue Manufacturing Co., 43 B. T. A. 12; Oregon City Manufacturing Co., 43 B. T. A. 212, 214; Artesian Water Co., 43 B. T. A. 408, 414 (now on appeal, C. C. A., 9th Cir.).

Our conclusion as to the legal effect of article 5 of the 1930 trust indenture is fortified by the actions of petitioner and the City National Bank. Under the proposed plan a new trust deed was to be executed, which carried the same article 5 as appeared in the trust deed dated November 24, 1930. Nevertheless, before the City National Bank would accept the class A bonds and consummate the plan of reorganization, it required petitioner to execute a separate contract on December 12, 1936, which expressly restricted the payment of dividends until the interest and principal of petitioner’s class A bonds were completely paid. The execution of the contract of December 12,1936, shows that the parties themselves construed the language of article 5 as insufficient to restrict the payment of dividends. We think effect should be given to their construction. The December 12, 1936, contract is too late, however, in point of time to entitle petitioner to the credit.

Decision will be entered, for the respondent.

       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—
      *******
      (c) Contracts Restricting Payment op 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. * * *


author: Arundell :

text:
    Joseph N. Kallick, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 106357.
    Promulgated December 10, 1941.

      Sidney O. Niermcm, Esq., for the petitioner.

      Lester M. Ponder, Esq., for the respondent.
   OPINION.

Arundell :

The sole issue for our determination is whether or not petitioner is entitled to a personal exemption as the head of a family under section 25 (b) (1) of the Internal Revenue Code. Respondent has disallowed the exemption and claims that petitioner has shown himself entitled only to the personal exemption of $1,000 accorded single persons. He argues that the standards set forth in his regulations have the force and effect of law and that petitioner has not proved that he meets such standards. Respondent maintains specifically that petitioner did not actually support and maintain a dependent individual in the taxable year, that he did not possess the right to exercise control over his mother, that petitioner’s mother was in good health and competent to earn her own living, and that the larger portion of petitioner’s expenditures would have been made even if his mother had not resided with him.

Respondent’s regulation here applicable is section 19.25-A of Regulations 108, which defines a head of a family as “an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation.”

We have previously approved' similar regulations interpreting earlier revenue acts. Alfred E. Fuhlage, 82 B. T. A. 222 (art. 292, Regulations 74, Revenue Act of 1928); Florence W. Hunt, 35 B. T. A. 1042 (art. 302, Regulations 69, Revenue Act of 1926); Olive Ross, 37 B. T. A. 928 (art. 292, Regulations 77, Revenue Act of 1932, and art. 25-4, Regulations 86, Revenue Act of 1934); Percy Wade, 40 B. T. A. 328; affd., 117 Fed. (2d) 21 (art. 25-4, Regulations 94, Revenue Act of 1936). See also George A. Ohl, Jr., 45 B. T. A. 21, and Mary B. Adams, 45 B. T. A. 193 (Revenue Act of 1938). Assuming the validity of respondent’s regulation here under consideration, there remains for us to determine whether petitioner has qualified as head of a family under its standards. We are of the opinion that he has clearly shown himself to be entitled to the head of a family exemption.

It seems clear that if petitioner’s mother had been totally dependent, financially, upon petitioner and had been supported and maintained in his home, there would be little question of petitioner’s status as head of the family. Annette Loughram, 40 B. T. A. 252; William Lee Tracy, 39 B. T. A. 578. Here, however, the mother of petitioner earned the sum of $710 in the taxable year from life insurance commissions. Petitioner expended the sum of $1,234 in the taxable year for mutual living expenses of himself and his mother, of which at least half may be attributable to her. The amount which petitioner contributed to his mother’s support may be determined by adding to one-half of the mutual living expenses the sum of $250 which petitioner gave his mother for personal expenses. The sum of these two amounts, $867, represents the contribution'which petitioner made for the support of his mother in the taxable year.

Although respondent’s regulation does not define the phrase “actually supports”, several of his rulings have indicated that the standard of support is satisfied where more than half of the support and maintenance of the dependent is furnished by the person claiming the exemption. O. D. 754,3 C. B. 195; O. D. 775,4 C. B. 214; G. C. M. 10431, XT-1 C. B. 37. We have held that the actual support requirement is met where the person claiming the exemption has contributed substantially, although not quite one-half, to the support of the dependent. Eleanor L. Mack, 37 B. T. A. 1101. See Olive Boss, 37 B. T. A. 928, 932. Thus, petitioner’s contribution of $867 meets the criterion of support previously determined by us and by respondent.

Respondent stresses the fact that petitioner’s mother might have earned more in the taxable year if she had devoted more time to her occupation. He cites Richard H. Baumbach, 42 B. T. A. 88, as authority for his argument that petitioner may not obtain the head of family exemption unless he proves that his mother could not have earned more in the taxable year. We do not understand the Batum-bach case to go so far. There the exemption was claimed by a father who actually maintained and supported a son “26 years old, in good health, a college graduate with a professional degree, and engaged in practicing his profession.” We held that the taxpayer was not entitled to the exemption, stating:

It is our opinion that the word “dependent” in the regulations can not properly be extended to a case like this where the individual is an adult, well educated, in good health, engaged in a profession, but simply fails to earn enough in his practice to fully support himself.

In the cited case the son was clearly without the normal concept of a dependent. Here, however, the mother of petitioner was 50 years of age and, although in a fair state of health, had never applied for a full time position. We do-not believe that a son should be required to have his mother attempt to perform full time work in order to determine whether he is entitled to the head of family exemption.

Respondent also cites Louise Kingsley, 11 B. T. A. 296. That case is clearly distinguishable from the instant proceeding, since there the taxpayer did not prove the amount devoted to the support of the alleged dependent. In Charlotte Hoskins, 42 B. T. A. 117, we considered the question of a dependent under respondent’s regulations regarding the head of family exemption and stated that “Dependency under the definition goes further than economic convenience; it speaks in terms of people incapable of supporting themselves because of infancy, senility, mental incompetence, physical incompetence, and like or similar circumstances.” The quoted statement does not require a holding that petitioner’s mother is not a dependent within the meaning of section 25 (b) (1) of the statute.

Petitioner certainly had a right to exercise control over his mother based on both a legal and a moral obligation. The statutes of Illinois confer on petitioner the duty to support his mother if she be unable to support herself. Secs. 98.01 and 98.02, Jones Illinois Stat. Ann. Respondent has recognized the moral obligation of a son to support his parent. I. T. 3410, 1940-2 C. B. 85. Furthermore, the evidence presented at the hearing demonstrated that petitioner actually exercised a measure of control over his mother.

We do not care to speculate as to what petitioner’s living expenses would have been if he had not had his mother living with him. The materiality of such a fact is not clear. We hold that petitioner has brought himself within the intendment of the statute granting the head of family personal exemption. ,

Decision, will be entered u/nd&r Bule 50.


author: Smith:

text:
    Commercial Casualty Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103639.
    Promulgated December 16, 1941.

      Ernest O. Lvm, Esq., and Noah Bass, O. P. A., for the petitioner.

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

Smith:

This proceeding presents two questions: First, whether the New Jersey company was indebted to the petitioner in 1931 in the amount of $1,002,582.01, and, second, whether the portion of that amount which proved to be uncollectible in 1937 is legally deductible from the petitioner’s gross income of 1937.

It is the contention of the respondent in this proceeding that the New Jersey company was not indebted to the petitioner in 1937 in any amount whatever. His contention is that the consideration for the reinsurance agreements entered into on March 19, 1932, was the transfer to the petitioner by the New Jersey company of assets of a value of $1,002,582.01, and that when the New Jersey company made the transfer of those assets within a few days after the dates of the agreements the debt was settled.

We do not think that this contention can stand in the light of the decree of the Court of Chancery of New Jersey entered against the petitioner on February 11, 1936. In that proceeding the petitioner and the other defendants contended that the unearned premiums on the policies reinsured by the petitioner were held in trust for reinsurance and that the fond was appropriately devoted to effecting the reinsurance in discharge of the trust. This contention of the defendants was not sustained by the court. It held that the transfer was not made for a valuable consideration within the meaning of the New Jersey statute; that it was made at a time when the New Jersey company was insolvent; and that therefore the transfer was null and void as to the creditors of New Jersey. The court did not hold, however, that New Jersey was not indebted to the petitioner in any amount whatever. The petitioner had serviced the policies which had been reinsured by it and presumably had paid out large amounts in settlement of claims arising out of the policies. The court held that petitioner was entitled to file a claim against the liquidator for the net amount of the unearned premiums on the policies of $1,002,-582.01. It further held that the petitioner was subrogated to the rights of the policyholders reinsured. We think this is tantamount to recognizing that the New Jersey company was indebted to the petitioner in the amount of the unearned premiums on the policies. There is no basis for the claim of fraud on the part of the petitioner as a result of entering into the agreements of May 19,1932. All that the court determined was that, since the New Jersey company was insolvent at the time the transfer of the assets was made to the petitioner in the month of May 1932, that transfer was null and void as to the other creditors. This left the petitioner a creditor of the New Jersey company in the amount of $1,002,582.01.

In this connection it should be noted that the petitioner was permitted to make proof of claim against the New Jersey company as a policyholder creditor in the exact amount of the unearned premiums on the policies reinsured, which is the amount that the New Jersey company agreed to pay under the reinsurance agreements of May 19, 1932. It was not required to limit its claim to the amount that it had actually paid out in servicing the policies. It was not a general creditor of the insolvent corporation.

The next question is whether this indebtedness was “in the nature of agency balances and bills receivable”, within the meaning of section 204 (c) (6) of the Eevenue Act of 1936.

Insurance companies are taxed under the Revenue Act of 1936 differently from other companies. They are required to include in gross income the amount earned during the taxable year from investments and from underwriting, gain from the sale or other disposition of property, and certain other items. Insurance companies, other than life or mutual, in which class the petitioner falls, are permitted to deduct from gross income under section 204 (c) (6) “Bad debts in the nature of agency balances and bills receivable ascertained to be worthless and charged off within the taxable year.” In the course of the business of an insurance company transacting business in different states premiums on policies written are ordinarily collected by the insurance company’s agents. Receipt by the agent is receipt by the principal. The company is chargeable with the gain derived through receipts by the agent. Where the premiums which have been collected by the agent can not be collected by the company from the agent, the insurance company is permitted to deduct from its gross income as a bad debt the amount owed to it by the agent.

The petitioner contends that as a result of the reinsurance agreements entered into by it on May 19, 1932, it was entitled to receive from the New Jersey company the net unearned premiums contracted for in the amount of $1,002,582.01; that by reason of the decree of the Court of Chancery on February 11, 1936, the amount owed to it by the New Jersey company was never paid in full and that it is entitled to deduct as a debt ascertained to be worthless and charged off in 1937 the amount which it was unable to collect. It claims that the uncollectible amount was of the nature of “agency balances.” We think that the petitioner’s contention upon this point must be sustained. There is no question but that the portion of the $1,002,582.01 owed to it by New Jersey, which was not collected in 1937, was ascertained to be worthless during 1937 and the charge-off of that amount to surplus constituted a proper charge-off thereof.

In its income tax return for 1937 the petitioner claimed the deduction from gross income of $773,523.56. That amount was arrived at by deducting from the $838,523.56, which it paid over to the liquidator, $65,000 which was received from Metropolitan Casualty Insurance Co. The petitioner now admits that it is not entitled to deduct as a bad debt any amount in excess of $527,582.01, which is arrived at in the following manner:

Net due from New Jersey May 1932 for re-insurance premium— $1,002, 582.01
Paid, April 2, 1937, on final settlement in New Jersey liquidation proceedings- 475, 000.00
Balance charged off April 1937- $527, 582. 01

It is to be observed, however, that the debt which was owed to the petitioner by New Jersey in 1937 was $1,002,582.01. The fund constituting the transferred assets, plus income thereon at the date of settlement, was in the amount of $1,339,703.98. Of this fund the petitioner was permitted to retain $501,180.42. This amount was made up of $7,680.42 which the petitioner had advanced for taxes and insurance premiums in connection with the segregated assets and $18,500 for the petitioner’s services and expenses incident to the handling and servicing of the segregated assets, plus $475,000. The petitioner contends that the first two items are not to be taken into account in determining the amount of the bad debt. We think that they should be. Presumably, the petitioner obtained the benefit of the deduction from gross income in years prior to the taxable year of $7,680.42 paid as taxes, and of $18,500 in cash paid for services and expenses. Since the petitioner has already obtained the benefit of the deduction of those amounts there is no occasion for allowing them as a bad debt deduction.

In our opinion the only amount of the bad debt which the petitioner is permitted to deduct is the difference between $1,002,582.01, constituting the debt owed to it by New Jersey, and $501,180.42, which it was permitted to retain under the settlement agreement. We accordingly hold that the bad debt deduction in respect of the item in question is in the amount of $501,401.59 and no more.

The findings of fact, paragraphs 18 to 23, inclusive, were stipulated by the petitioner upon the insistence of the respondent. The petitioner argues that they are not germane to the question as to the correct amount of the debt ascertained to be worthless and charged off in 1937. Its contention is that the Metropolitan Casualty Insurance Co. of New York made a profit upon underwriting and that as a result of the settlement agreement between the petitioner and that company the petitioner received $65,000 as its share of the profits. This profit was included in petitioner’s Federal income tax return for 1937. The petitioner contends that the receipt of this income had nothing whatever to do with the debt ascertained to be worthless and charged off by the petitioner in 1937.

The only argument which the respondent makes in his brief with respect to the $65,000 is that it shows that the petitioner considered the entire amount of its loss upon the New Jersey transaction as a loss rather than as a bad debt. We are of the opinion that the $65,000 item is not germane to the question of the amount of the debt ascertained to be worthless and charged off in 1937.

After deduction of the bad debt of $501,401.59, petitioner had a remaining loss of over $200,000, the assets which it was required to surrender to the court amounting to $838,523.56. The respondent concedes that petitioner is entitled to a loss deduction of $43,560, stating in his brief:

* * * The respondent now concedes that petitioner is entitled to a deduction in the amount of $43,560.00 of the loss claimed. A deduction of this amount is allowable under section 204 (c) (10) of the Revenue Act of 1936 for the reason that it now appears that petitioner had taxable miscellaneous income taxable under section 204 (b) (1) (C) in the form of the recovery of agency balances previously charged off in the amount of $43,560.00. In short, this amount is deductible even though it did not represent a bad debt in the nature of an agency balance or bill receivable because of section 204 (c) (10).

Reviewed by the Board.

Decision will be entered under Bule 50.

Murdock and Mellott dissent,


author: Arnold:

text:
    McLean County Service Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Champaign County Service Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 101830, 101831.
    Promulgated December 16, 1941.

      O. G. Ghapelle, Esq., for petitioners.

      Gerald W. Brooks, Esq., for respondent.
   OPINION.

Arnold:

Petitioners contend that, under section 26 (c) (1) of the Revenue Act of 1936, in computing the surtax on undistributed profits they are entitled to a credit to the extent of their respective net incomes upon the ground that the payment of dividends is prohibited by their charters, bylaws, and class A preferred stock, and common stock certificates, except dividends not in excess of 7 percent on class A preferred stock.

To be entitled to the claimed credit the petitioner must show the existence of “a written contract executed by the corporation prior to May 1, 1936” containing a provision which “expressly deals with the payment of dividends.”

It has been held that corporate charters and bylaws are not “written contracts executed by the corporation” within the meaning of the statute. Lehigh Structural Steel Co., 44 B. T. A. 422 (on appeal, C. C. A., 3d Cir.) ; Metal Specialty Co., 43 B. T. A. 891 (on appeal, C. C. A., 6th Cir.); Warren Telephone Co., 43 B. T. A. 451 (on appeal, C. C. A., 6th Cir.); Midland Cooperative Wholesale, 44 B. T. A. 824; Atlas Supply Co., 43 B. T. A. 324 (on appeal, C. C. A., 10th Cir.), and Davison-Joseph Campau Realty Co., 41 B. T. A. 675. Section 26 (c) (1) refers to “routine contracts dealing with ordinary debts.” Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46.

Whether the stock certificates are contracts within the meaning of section 26 (c) (1) was decided .in the negative in Bishop & Babcock Manufacturing Co., 45 B. T. A. 776. Stock certificates are not “routine contracts dealing with ordinary debts.” Helvering v. Northwest Steel Rolling Mills, supra. The petitioners are therefore not entitled to a credit under section 26 (c) (1), Bevenue Act of 1936.

Petitioners contend that if it is held the charter, bylaws, and stock certificates do not constitute a contract restricting the payment of dividends as contemplated in section 26 (c) (1), Bevenue Act of 1936, then the excess of the amount of patronage dividends accrued over the amount allowable as a deduction from gross receipts should be allowed as a dividends paid credit under section 27 of the Bevenue Act of 1936.

Section 27 (g) provides that:

No dividends paid credit shall be allowed with respect to any distribution unless the distribution is pro rata, equal in amount, and with no preference to any share of stock as compared with other shares of the same class.

Each of the petitioners distributed nonpreferential pro rata dividends on shares of class A preferred stock in the amount of $3,604.75 and $2,801.32, respectively, which were allowed as dividends paid credits by respondent. Under the charter and bylaw7 provisions the holders of common stock of petitioners are entitled to a distribution of income on the basis of patronage only, which distributions are designated patronage dividends as.distinguished from ordinary dividends on stock. The McLean Co. accrued patronage dividends of $88,263.93 for the fiscal year on its books, but actually distributed only $85,724.18. The Champaign Co. accrued patronage dividends of $58,340.35 on its books for the taxable year. The amount of patronage dividends paid by it during the taxable year was not stipulated. The respondent allowed as deductions from gross income patronage dividends in the amounts of $80,835.69 and $56,335.68, respectively. It was stipulated that the patronage refunds represented the common stockholders’ share of the net savings prorated solely on the basis of their patronage and not in proportion to stockholdings. Holders of one share of common stock who transacted no business with petitioners would be entitled to no dividends, whereas holders of one or more shares of common stock who transacted business with petitioners would be entitled to dividends in varying amounts, depending upon the amount of business transacted. A holder of two or three shares who did not transact business would not be entitled to any dividends, whereas the holders of only one share each who did transact business would be entitled to dividends, depending upon the amount of business transacted. Hence such distribution would not be pro rata equal in amount and with no preference to any share of stock as compared with other shares of the same class.

The language and meaning of section 27 (g) is clear. It is not ambiguous. There is no need for construction of a statute where no ambiguity exists. Osaka Shosen Kaisha Line v. United States, 300 U. S. 98, 101; Wilbur v. United States ex rel. Vindicator Consolidated Gold Mining Co., 284 U. S. 231; United States v. Missouri Pacific R. Co., 278 U. S. 269, 278. The petitioners are not cooperatives exempt from Federal income taxes under section 101 of the Revenue Act of 1936. Council Bluffs Grape Growers Association, 44 B. T. A. 152; Farmers Union Cooperative Co., Guide Rock, Nebraska, 33 B. T. A. 225; affd., 90 Fed. (2d) 488. However, the respondent has allowed each petitioner the deduction of a substantial amount of so-called patronage dividends “to the end that substantial justice may be done to an association which is engaged in the cooperative marketing or purchasing work which may not be exempt from taxation.” Fruit Growers Supply Co., 21 B. T. A. 315, 326; affd., 56 Fed. (2d) 90. The allowance of the deduction rests upon the theory that the so-called patronage dividends are “in reality rebates upon the business transacted by the association with its members rather than true income of the association.” Midland Cooperative Wholesale, 44 B. T. A. 824. See Cooperative Oil Association, Inc. v. Commissioner, 115 Fed. (2d) 666. Where a cooperative deals with nonmembers who are not entitled to any rebates upon the business transacted, the earnings from such business is taxable gain. Central Co-Operative Oil Association, 32 B. T. A. 359. To that extent the business of each petitioner was not upon a cooperative basis, but upon the same basis as that of any other organization engaged in business for profit.

It can not he denied that Congress favors true cooperatives by exempting them from Federal income tax. We are not permitted on that account to extend such exemption by allowing a dividends paid credit to cooperatives not exempt from Federal income tax merely because they transact business partly on a cooperative basis. See Taft v. Commissioner, 304 U. S. 351. To allow a dividends paid credit to cooperatives which are not exempt from tax under section 101 and which distribute taxable income on a patronage basis would in effect grant them exemption from taxation and violate the clear provisions of section 27 (g). We can see no injustice or unfairness in treating a cooperative not exempt from tax the same as other business organizations. What was stated in United States v. Ewing, 184 U. S. 140, 149, wherein it was claimed that great injustice would result in many cases if the clear directions of the law involved were required to be followed, is apposite here. The Court stated:

* * * although the result may be to withhold the benefits from some who might be regarded as otherwise entitled to it, yet we can not for that reason alter its terms so as to include them, and thus ourselves ehact instead of construing [sic] the law.

Furthermore, section 27 (g) provides that “the dividends paid credit shall be the amount of dividends paid during the taxable year.” (Emphasis supplied.) The amount of patronage dividends paid in the taxable year by the Champaign Co. was not stipulated. It was stipulated that the McLean Co. actually paid patronage dividends in the amount of $85,724.18 in the taxable year. It was also stipulated that at the beginning of the year the balance sheet of the McLean Co. showed patronage refunds payable at the beginning of the taxable year in the amount of $88,519.65 and that during the taxable year patronage dividends were accrued in the amount of $88,268.93. The stipulation, however, fails to disclose whether the payment in the taxable year was applied against the patronage dividends accrued in the taxable year or against patronage dividends accrued in prior years and unpaid at the beginning of the taxable year as reflected in the amount of $83,519.65 standing in the patronage refunds payable account at the beginning of the taxable year. In other words, the amount of $85,724.18 paid during the taxable year may have been, and probably was, first applied against the balance of patronage dividends remaining unpaid at the beginning of the taxable year of $83,519.65, leaving the amount of only $2,204.53 to apply on the patronage dividends accrued during the taxable year. If that be so, the McLean Co. did not pay any patronage dividends declared in the taxable year in excess of the amount of $80,835.81 allowed as a deduction by the respondent. This is also true with respect to the Cham-paign Co. Patronage dividends, if any, paid by it during the taxable year may have been applied against the balance of patronage dividends accrued on the books prior to the taxable years and unpaid at the beginning of the taxable year in the amount of $50,930.26. The claim is made that petitioners are entitled to a dividends páid credit of the excess of the amount of patronage dividends accrued in the taxable year over the amount allowed by the respondent. There is not sufficient evidence which would support a finding that such excess was actually paid or allocated and credited to the members’ accounts without restriction as to withdrawal. See John Gerber Co., 44 B. T. A. 26. We therefore hold that the petitioners are not entitled to a dividends paid credit as claimed.

The petitioners contend that Federal income taxes paid during the taxable year are not deductible from apparent net income before applying the percentage of member sales to total sales thereto to determine the amount of patronage dividends. This question was before the Board in Farmers Union Cooperative Exchange, 42 B. T. A. 1200 (appeal dismissed by Tenth Circuit, 122 Fed. (2d) 718), wherein it was held that in computing the amount of patronage dividends under A. R. R. 6967, C. B. III-l, p. 287, the “apparent net income” referred to therein is the net income accruing upon the business for the year, without reduction on account of Federal taxes and penalties paid. This decision is controlling herein. Valparaiso Grain & Lumber Co., 44 B. T. A. 125, cited by respondent, is not applicable or in conflict with Farmers Union Oooperative Exchange, supra. Therein the question involved here was not raised. The taxpayer therein contended that in computing the amount of patronage dividends allowable as a deduction the fixed dividends paid on capital stock were to be considered as having been paid out of profits realized on business done with nonmembers, leaving profits realized on business done with members available for distribution as patronage dividends. •

Decision will be entered wader Rule 50.

       SEC. 1001. DEFINITIONS.
      (a) When used in this Act—
      *******
      (8) The term “stock” includes the shares in an association, joint stock company, or insurance company.