author: Trammell :

text:
    J. M. Kessler, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52640.
    Promulgated December 6, 1934.

      Richard S. Doyle, Esq., and Howard B. Hopps, Esq., for the petitioner.

      R. P. Uertsog, Esq., for the respondent.
   OPINION.

Trammell :

This is a proceeding for the redetermination of a deficiency in income tax for the year 1920 in the amount of $24,767.65. The issue is whether or not petitioner, during the taxable year, made a valid gift to his wife and an employee of his one-seventh interest in a certain oil lease.

During the year 1920 the petitioner, with one H. H. Rath, was engaged in the sale of stock of the Noco Petroleum Co., a corporation organized under the laws of Delaware, with offices in Kansas City, Missouri, and engaged in the development and operation of oil properties.

Petitioner, Rath, one C. J. Webster, and four other individuals acquired at a cost of $2,000 an undivided one-half interest in an oil lease known as the McAdoo lease, located in Okmulgee County, Oklahoma, and by an instrument dated February 10, 1920, the owners instructed Webster to take the title in his name as trustee for them. Subsequently, a well was brought in on property adjoining the McAdoo lease, and petitioner and his associates then acquired the other one-half interest in the lease by assignment dated June 15, 1920, at a cost of $9,500. Title to the one-half interest last acquired in the lease was also taken in the name of Webster, who was directed by an instrument dated July 10, 1920, to hold the entire lease in his name as trustee for the respective owners.

Webster, as trustee, executed a certificate to each of the owners as evidence of ownership of the one-seventh interest in the whole McAdoo lease, the certificate so executed and delivered to petitioner reading as follows:

July 10,1920. This to certify that I have received an assignment to a certain oil and gas lease, known as the McAdoo Lease, situated in Okmulgee County, Oklahoma, of which J. M. Kessler is an equitable owner of a one-seventh interest.
[Signed] C. J. Webste®,
Trustee.

Drilling was begun immediately on the McAdoo lease, and on August 4,1920, a well was brought in, flowing about 1,500 barrels per day. Petitioner decided to give his interest in the lease one half to his wife and one half to his assistant in charge of sales, Eoxanna Holloman, and advised Webster, the trustee, to that effect. On August 6, 1920, petitioner signed or endorsed his certificate of interest and delivered it to Webster’s secretary with instructions that it be held for the benefit of Mrs. Kessler and Eoxanna Holloman. He informed Miss Holloman of the gift to her at a dinner party in New York on August 5,1920, at which Webster and Miss Essie Holloman, his secretary, were also present. Petitioner advised his wife of the gift to her by letter of August 6, 1920. She acknowledged the gift, and when petitioner was in Oklahoma City on August 13, 1920, it was agreed between them that he should look after her interest for her.

A Delaware corporation, known as the Blue Eock Oil Co., was organized on or about August 5,1920, for the purpose of taking over and operating the McAdoo lease. By written instrument dated August 11,1920, and signed by six of the original owners other than Webster, the trustee was directed to deliver all interest in the McAdoo lease to the Blue Eock Oil Co. in exchange for that company’s 6 percent notes to be dated August 11,1920, in the amount of $50,000 for each one-seventh interest. The instrument was signed by the petitioner, with directions that the note for $50,000 representing his original interest should be made payable to “ T. W. Kessler and J. M. Kessler, Trustee.”

The note payable to petitioner, as trustee, and to his wife was paid partly in Liberty bonds and partly in cash, the last payment being made on December 15,1920. The bonds were sold and the proceeds, together with cash paid on the note, were deposited by the petitioner in a special account in the bank in the total amount of $50,274.22. On December 16, 1920, petitioner deposited in the bank to the credit of Eoxanna Holloman one half of this sum, or $25,137.11, and on December 20, 1920, transferred the same amount to the credit of his wife.

The petitioner did not report any profit as having been realized by him in connection with the sale of his original interest in the McAdoo lease, contending that he had made a gift of his entire interest to his wife and Eoxanna Holloman prior to the sale and transfer to the Blue Bock Oil Co. Eespondent determined that petitioner derived a profit of $48,285.71 from the transaction, holding that he made a gift of the proceeds from the sale and not a gift of his interest in the lease prior to the sale.

Petitioner’s contentions, we think, must be sustained. Whether he made a valid gift of the res, that is, of his property rights in the lease, prior to the sale of the whole lease, or whether he merely made a gift of his share of the proceeds of such sale, in which latter event the profit derived admittedly would be taxable to him, depends upon whether he made a complete and irrevocable transfer of, and surrendered all dominion over, his one-seventh interest in the lease prior to the sale thereof.

There is no serious controversy in this case respecting the sufficiency of the proof to establish all the essential elements of a valid gift by the petitioner of his interest in the McAdoo lease, except as to the delivery of possession or relinquishment of dominion over the subject matter of the gift. On this point, Webster, the trustee, testified as follows:

Q. What did Mr. Kessler say he was going to do?
A. Said lie was going to give his interest to Mrs. Kessler.
Q. That he was going to give it all to Mrs. Kessler?
A. Yes.
Q. When did he make that announcement?
A. That was on the night of the 4th, that we talked it over up there, and on the evening of the 5th, is when he told me he had decided to give one-half to Mrs. Kessler and one-half to Miss Holloman.
Q. But you do not know what action he took in respect to the two ladies involved?
A. Yes, he directed that the certificate of interest be changed over to them.
Q. Was that oral or in writing?
A. It was oral then but I went to the office next day and it was done in writing.
*******
Q. The only thing that Mr. Kessler did was to sign his name on the back of the certificate?
A. Endorse his name on the back and deliver it to my secretary and we had the records made accordingly so that the change of interest and ownership would be shown on our records.
Q. When did you do that?
A. On the morning of the 6th.
Q. What did you do with the certificate?
A. Put it in the file and delivered it to my secretary who was holding all of the papers.
Q. You held it after that?
A. Yes.
Q. What change did you mate in your records?
A. Just a change of ownership.

The evidence clearly establishes (1) that the petitioner announced his intention of making a gift of his interest in the lease to his wife and Miss Holloman, (2) that he endorsed in blank his certificate of beneficial interest and delivered it to the trustee with specific instructions to transfer the ownership of a one-half interest therein to each of the donees, and (3) that such change of ownership was actually made on the records of the trustee on August 6, 1920. The sale of the lease to the newly organized corporation was not completed until August 27, 1920. The record further discloses that the beneficiaries were informed of the gift, and that they impliedly if not expressly accepted the same and requested petitioner to act as trustee for them in the matter of the sale of their interests. There is no suggestion in the record that the donor or either of the donees was incompetent. These facts, in our opinion, constitute a valid gift inter vivos.

In Marshall v. Commissioner, 57 Fed. (2d) 633 (affirming in part and reversing in jaart 19 B. T. A. 1260); certiorari denied, 287 U. S. 621, the petitioner, in order to reduce his income tax, decided to give to his wife certain shares of capital stock of various corporations. Some of the shares petitioner merely endorsed in blank and caused to be placed in a safe-deposit box carried in the name of his wife, but to which his private secretary had access. Other shares were not only endorsed by the petitioner but were thereafter transferred to the name of his wife upon the books of the respective corporations. In its opinion, the court said:

As to the shares of stock not transferred upon the books of the issuing companies, we are of the opinion that the decision of the Board of Tax Appeals was correct. AVhile Mrs. Marshall was advised by her husband that he intended to give all his holdings of capital stock to her, it is quite evident, as to those shares not transferred upon the books of the issuing companies, that there was not a complete relinquishment of dominion and control of the subject-matter of the gift, and, we think, that there was no such conveyance or assignment as operated to divest the donor of legal title or to vest such legal title in the donee, whatever may have been the equitable rights' of the parties after the endorsement of the certificates in blank. See Edson v. Lucas, 40 F. (2d) 398, 404 (C. C. A. 8), and cases there cited; Sizer et al. v. U. S., 65 Ct. Cl. 450; Lee v Lee, 55 App. D. C. 344, 5 F. (2d) 767. Cf. Basket v. Hassell, 107 U. S. 602, 614, 615, 2 S. Ct. 415. 27 L. Ed. 500.
*******
As to those shares actually transferred upon the books of the respective companies, however, we are of the opinion that the action of the Commissioner and the decision of the Board of Tax Appeals were erroneous. Transfer upon the books of the corporation in itself constitutes a delivery. Roberts’ Appeal, 85 Pa. 84. The transferee then becomes the legal owner. Mrs. Marshall had executed no broad power of attorney * * * The stock was not endorsed and redelivered to her husband, and could not thereafter be transferred, or the dominion and ownership of the petitioner thereafter be regained, except through the independent and voluntary act of his wife. There was nothing unlawful, or even mildly unethical, in the motive of petitioner, to avoid some portion of the burden of taxation. There is nothing illegal in a gift of shares of stock by a husband to his wife.

We see no material distinction, so far as the present issue is concerned, between petitioner’s certificate of beneficial interest in tlie oil lease and shares of capital stock in a corporation. The principle applied by the court in the above cited case, we think, therefore, is equally applicable here. The certificate of beneficial interest having-been transferred to the donees upon the records of the trustee prior to the sale, it could not thereafter be again transferred, or the dominion and control of the petitioner regained for his personal benefit, except through the independent and voluntary action of the donees. Such transfer constituted delivery of possession and surrender of dominion. The gift was then complete, and the subject matter of that gift was the petitioner’s one-seventh interest in the McAdoo lease, and not the proceeds of the subsequent sale.

It is immaterial that the petitioner acted as trustee for the donees and collected for them the proceeds of the sale. In proper circumstances one may make a lawful gift of his property and yet retain possession and control as trustee for the donee. Such was the case in Marshall v. Commissioner, supra.

The respondent’s action is reversed.

Reviewed by the Board.

Judgment will he entered u/nder Rule 50.

Adams, dissenting: I am not satisfied that the facts show bona fide gifts, and, therefore, dissent.


source: Caselaw Access Project

author: Tkammell :•

license: Public Domain

text:
    Rosalie Hampton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 28708.
    Promulgated December 6, 1934.

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

      O. W. >Sweaker, Esq., for the respondent.
   OPINION.

Tkammell :•

This is a proceeding,for the r.edetermination of a deficiency in income tax for the year 1923. in the amount-of $883.33. The sole issue is whether certain oil and gas royalties and bonus received by petitioner during the taxable year as a member of the Osage Tribe of Indians from lands located in the State of Oklahoma, petitioner being married and residing with her husband in the State of Texas, constituted community income taxable one half to petitioner and one half to her husband.

The facts were stipulated by the parties as follows:

Bosalie Hampton, petitioner, is a member of the Osage Tribe of Indians, duly enrolled as such under the Act of June 28, 1906, and holds a certificate of competency issued pursuant to that Act. During the year 1923 she was a resident of San Antonio, Texas, and owned her own original share in the tribal revenues, together with one share acquired by inheritance.
During the calendar year 1923 the total payments for each share disbursed by the Osage Indian Agency was $11,800.00 and petitioner, as the owner of two shares, received as follows:
Payment of oil and gas royalties_$11, 600.00
Payment of bonus_ 12, 000. 00
Total payment_$23, 600. 00
' That depletion in the sum of $7,749.16 is a proper deduction from income for this year. ,
That petitioner is entitled to other 'deductions from gross income in the total sum of $4,373.59.
That petitioner during 1923 was married and living with, her husband and is entitled to personal exemptions of $2,400.00.

The status of land, and of Income-therefrom, involves a rule of property in respect of which we are bound by the law of the estate where the land is situated. Tyler v. United States, 281 U. S. 497; Moffitt v. Kelly, 218 U. S. 400; Warbwton v. White, 176 U. S. 484; DeVaughn v. Hutchinson, 165 U. S. 566, 570. And it is the settled rule “ that marital rights in land are regulated by the law of the situs.” McKay on Community Property, § 639; Wharton on Conflict of Laws, vol. 1, 3d ed., § 237 et seq.

Thus, in conformity with the general rule, it is held that in determining the respective interests of spouses in property for the purpose of the Federal estate tax, the law of the state where the property is situated controls. United States v. Robbins, 269 U. S. 315, 326; Hernandez v. Becker (C. C. A., 10th Cir.), 54 Fed. (2d) 542; Allen v. Henggler (C. C. A., 8th Cir.), 32 Fed. (2d) 69; Talcott v. United States (C. C. A., 9th Cir.), 23 Fed. (2d) 897.

We applied the same rule in John O’Neil, 16 B. T. A. 614, where we pointed out that:

Under the general rule that the law of the situs determines whether land is separate or community property, revenues from land in a common-law state do not fall into the community, although the owner lives in a community-law state.

The O’Neil case involved the question whether oil royalties received from land situated in the State of Oklahoma, the separate property of the husband living in Texas, constituted separate income of the husband, and we held that it did, since Oklahoma is not a community property state. Likewise, we must hold here, irrespective of the rule in Texas, that if the income in controversy was oil and gas royalties and bonus received by the petitioner from her separate land in Oklahoma, then it was her separate income.

But on brief, petitioner refers to the fact that by the Act of June 28, 1906 (34 Stat. 539) the mineral rights in the land were reserved to the tribe of which petitioner is an enrolled member, and that the tribal income is held in trust by the United States and distributed to the individual members according to the roll. On this premise, petitioner argues that the income in controversy was merely income received from a trust fund, and that the question. involved is controlled by our decision in Eva Lavino Griffiths, 30 B. T. A. 852. This argument, we think, is unsound. The cited case is clearly distinguishable on the facts.

The Griffith case involved income from a trust, the corpus of which consisted of corporate securities. Under the terms of the trust instrument, the petitioner, a married woman residing in Texas, received the income alone from the trust fund for life. We held that the gift to petitioner was not of income, but a definite and determined portion of the corpus for life, which was personal property, and that under the laws of Texas the. income was community income of herself .and her husband, taxable one half to each.

Under Texas law income from separate personalty is community income, Willcutt v. Willcutt, 278 S. W. 236, and other decisions cited in Anna Davis Terry, 26 B. T. A. 1418, but oil and gas royalties are held by the courts, of Texas to be neither rents nor profits but proceeds of sale, taking the place of so much of the separate realty as thus was sold. Hence such a fund belongs separately to the spouse owning the land from which it was derived. Stephens v. Stephens, 292 S. W. 290. And see also Chesson v. Commissioner; 57 Fed. (2d) 141.

In Anna Davis Terry, supra, we held that in Texas income received by a wife as beneficiary of a trust created by will was community income, taxable one half each to the wife and husband. However, the effect of that decision is clearly limited to. a trust under which the beneficiary is given no interest in the ■ corpus, but only in the income; and furthermore the income in that case consisted of interest and dividends of domestic corporations, not oil and gas royalties.

The relation between the United States and the Osage Tribe of Indians is that of guardian and ward. The members of the tribe are wards of the Government. Heiner v. Colonial Trust Co., 215 U. S. 232. While the relation of guardian and ward is, generally speaking, that of trustee and cestui que trust (Smith v. Smith, 210 Fed. 947; affd., 224 Fed. 1), the trust is not of such character as to give the guardian the legal title of the ward’s estate (Winona Oil Co. v. Barnes (Okla.), 200 Pac. 981), but the title remains in the ward and the possession of the guardian is the possession of the ward. 28 C. J. 1128; Francis v. Sperry (Okla.), 176 Pac. 732.

Thus, receipt by the guardian is receipt by the ward, and if the income in this case, first received by the guardian, was royalties, the income received by the ward, petitioner herein, was royalties. However, if we assume, without deciding, that the Government is an ordinary trustee, the view most favorable to petitioner’s contention, we are led to the same ultimate conclusion that the controverted income is petitioner’s separate income.

We can not accept petitioner’s theory that what she received was merely a distributive share of income from a trust fund, for the reason that, in the first place, the parties have stipulated that the income received by the petitioner was “ payment of oil amd gas royalties and, bonus”, and that she is entitled to a deduction for depletion, the amount of such deduction being stipulated. The allowance for depletion is based upon the ownership of an interest in the property, that is, the mineral rights, which interest is diminished or depleted by the production of the oil and gas. If petitioner received only income from a trust fund, in the corpus of which she owned no interest, she would not be entitled to the deduction for depletion. It would, indeed, be anomalous to say that petitioner received only a distributive share of income from a trust fund and at the same time allow a deduction for depletion in respect of property in which we hold that she had no interest.

In the second place, it is apparent that petitioner in fact owns a substantial interest in the corpus of the trust. The mineral rights in the land were reserved to the Osage Tribe, and the individual members of the tribe, one of whom is this petitioner, are the beneficial and proportional owners. She has not only an interest in the income of the trust, but an interest in the corpus in exactly the same proportion.

In Kate Fowler Merle-Smith, 11 B. T. A. 254, we held that the beneficiaries were not entitled to deductions for depletion on account of the removal of ore from property forming a part of the corpus of the trust, on the theory that what the beneficiaries received was merely income from a trust fund. Our decision was reversed by the Circuit Court of Appeals at 42 Fed. (2d) 837 (certiorari denied, 282 U. S. 897), the court in its opinion saying:

The decision of the Board of Tax Appeals is grounded on the claim that the petitioner’s right to income is that of a beneficiary of a trust only. Irwin v. Gavit, 268 U. S. 161 * * *. It is argued that these beneficiaries be taxed upon their distributive share and that they have no interest in the capital or corpus held by the trust.

The court further stated:

Both petitioners’ rights to the royalties, first paid to the trustee and then to the petitioners, came under these trusts. They are, in this sense, beneficiaries. But the trust from which Kate Fowler Merle-Smith obtained her royalties terminates, and the corpus of the trust vests in her when she arrives at the age of forty-five, and if she dies prior to that time, it will go as directed by her in. her will. * * * She could defeat her right to possession only by dying intestate.

In that case, as in the instant case, the beneficiary had an interest in the corpus as well as in the income, and the court squarely held that what the beneficiary received was royalties and not merely income from a trust fund. The decision of the court is predicated upon the proposition that where a beneficiary has an interest in the corpus of the trust fund, royalties received constitute something more than merely a distributive share of income from the trust; that to the beneficiary they are in fact royalties, subject to the depletion allowance, notwithstanding they are paid first to the trustee and then to the beneficiary. We have adopted and followed this same view in our subsequent decisions. See Mary Alphin, 21 B. T. A. 1101; Ida L. Kuhn, 24 B. T. A. 216; E. B. Galbreath, 24 B. T. A. 1107.

If the income here in controversy was what the parties have stipulated, namely, oil and gas royalties, as undoubtedly it was, petitioner is entitled to the stipulated deduction for depletion, and it was not community income under either the laws of Oklahoma, where the land was situated, or under the laws of Texas, where petitioner and her husband resided. John O’Neil, supra, and authorities therein cited.

Kespondent’s action is approved.

Judgment mil be entered under Rule 50.


author: McMahon : Smith,

text:
    Irving D. Rossheim, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 57503.
    Promulgated December 13, 1934.

      Lawrence A. Baker, Esq., for the petitioner.

      Paul E. Waring, Esq., for the respondent.
   OPINION.

McMahon :

In this proceeding the respondent based his original deficiency upon a determination that petitioner received additional compensation in 1928 in the amount of $186,212.50, being the difference between the fair market value of certain stock and the cost thereof to petitioner. By an amended answer respondent has increased the amount of additional compensation so received to $243,800, and asks the Board to increase the deficiency accordingly. Respondent relies upon articles 51 and 53 of Regulations 74, Treasury Decision 3435, C. B. II-7, p. 50, and our decision in Albert B. Erskine, 26 B. T. A. 147.

The respondent contends that the provisions of article 51 of Regulations 74 require that the difference between cost and fair market value of the stock purchased by petitioner, under the facts and circumstances disclosed in the instant proceeding, should be included in gross income. Article 51 is the successor to, and is identical with, article 31 of Regulations 65 and 69, interpreting corresponding provisions of the 1924 and 1926 Acts, respectively. It should also be noted that article 31 of Regulations 65 and 69 and article 51 of Regulations 74 were first promulgated by the Treasury Department as Treasury Decision 3435, and thereafter appeared as a part of Regulations 65, 69, and 74.

Treasury Decision 3435 has been carefully considered by the courts in Taplin v. Commissioner, 41 Fed. (2d) 454; and Commissioner v. Van Vorst, 59 Fed. (2d) 677, affirming George W. Van Vorst, Executor, 22 B. T. A. 632, and by the Board in the latter case and in James William Everhart, 26 B. T. A. 318. These cases and authorities therein cited adequately support the view that article 51 of Regulations 74 cannot create income where none, in fact, exists when measured by the statutory definition of gross income. We cannot agree with the contention of the respondent based on article 51.

The respondent further contends that the resolutions of September 12 and 26, 1928, which are set forth in the agreement of October 15, 1928, constitute a contract of employment between petitioner and the Stanley Co. of America, and that the difference between cost and fair market value was additional compensation. Petitioner contends that these resolutions permitted him to buy stock at a bargain price, and that no contract of employment was intended or resulted.

The petitioner testified that he thought he was being offered an opportunity to become a substantial stockholder, since he owned very little stock in the corporation.

Except for the inference which may be drawn from all the facts disclosed in this proceeding, the record throws no light upon the influences which moved the directors to grant this option to the petitioner.

Between 1915 and 1918 the petitioner was employed as a law clerk by the firm of Stern & Wolf. His duties with that firm, however, had to do particularly with a group of corporate clients then engaged in the extension of motion pictures, which group in 1919 was combined and consolidated into the Stanley Co. of America. In the latter part of 1919 he was taken over by that company because his time was devoted almost entirely to its business. In December 1925 the petitioner became assistant treasurer of the company, with a salary of $25,000 per annum, commencing January 1, 1926. In April 1927 his salary was increased to $800 per week, and in July 1927 he was made treasurer of the company at the same salary. In January 1928, because of dissatisfaction of members of the board of directors of the company with McGuirk, the then president of the company, on account of his method of attempting to do business without consulting them, the petitioner was elected president of the company. He was chosen as a compromise candidate by the opposing factions. His salary was $65,000 per annum plus $10,000 for expenses, which was the same salary theretofore paid to McGuirk. In May 1928 the option as expressed in the resolution of September 28, 1928, was first discussed by the petitioner with some of the directors and largest stockholders of the company. As a result of this discussion the petitioner understood that he would be granted such option. In July 1928, at the first meeting of the newly elected board of directors, the petitioner was reelected president. Thus it appears that petitioner was, after 1915, actively interested in the business of the Stanley Co. and its predecessor companies.

The business of the Stanley Co. was conducted in a very informal manner and from December 1926 until January 1928 the business of the company was conducted with even less formality than before. It never made any salary contracts with any of its employees or officers. In fact the option which the petitioner understood he was to be given was not -reduced to writing until the petitioner, in view of the contemplated absorption of Stanley Co. by Warner Brothers Pictures, Inc., urged that this be done in order to protect his own interests.

It also appears that the Stanley Co. did not make it a practice to pay its employees or any of its officers a bonus, but treated authorized salaries as compensation in full.

Whatever the practice of the company may have been in the conduct of its business, it does appear that the petitioner was not only able to induce the directors to grant him an option giving him the right to purchase stock of the company at $40 when the bid price for such stock for not less than 1,000 shares would be not less than $55 a share, but also was able to have the agreement put in writing. In fact the agreement was reduced to writing at a time when the price of $55 had already been bid and paid for more than 1,000 shares while the petitioner could purchase at $40.

The right that Rossheim acquired under the written agreement was a right to purchase up to 10,000 shares of stock at $40 per share. The right expired in any event after December 31, 1929, and no provision was made for purchases of a portion of the stock in subsequent years. Cf. Phillip W. Haberman, 31 B. T. A. 75. Actually petitioner acquired tbe right, exercised it, and purchased the stock, all during the taxable year 1928, so that the question of the value of the right need not be considered.

In reference to petitioner’s relationship with the corporation, there is found a proviso that if petitioner “ resigns as president of Stanley Company of America before the exercise of this option the option thereupon shall become null and void.” In fact, unless his continued services with the Stanley Co. be deemed the consideration for such option, such option upon its face appears to have been given without consideration whatever. It is a well-established rule that an option contract, to buy or sell, as in the case of other contracts, must be supported by a valuable consideration, 55 C. J. 109, and cases cited. As stated in Albert Russel Erskine, 26 B. T. A. 147, 157:

* * * The officers and directors of the corporation had no lawful right to make a gift to the petitioner of any part of the value of the shares of stock, or to “ sell ” them to the petitioner at a price known to be considerably less than their cost or market value. We must assume that the officers and directors did not act unlawfully. Noel v. Parrotí, 15 Fed. (2d) 669.

So we must assume here that the directors and officers did not act unlawfully. Here the consideration moving from petitioner to the corporation was services. It seems to us that the members of the board of directors and stockholders considered the petitioner a valuable employee and were anxious to retain his services, especially at a time when friction arose among them. This is obvious from the fact that he was chosen as president in January 1928 by the opposing factions. Furthermore, the petitioner had been actively engaged in the business of the company for many years.

Taxation is a practical matter and we. must look to the /substance rather than the form. Business men acting as directors and officers of corporations ordinarily do not give away the funds in corporate treasuries without adequate consideration. We are well satisfied that the petitioner would not have been given the option in question if he were not president of the corporation, under all the facts and circumstances as shown by the proof. The mere fact that the provisions of the option were not woven into a formal contract of employment is not sufficient to establish that the contention of the respondent in this respect is unsound. In our view this proceeding is controlled by the underlying principles of Albert Russel Erskine, supra, and Omaha, National Bank et al., Executors, 29 B. T. A. 817, notwithstanding that there are some differences in the facts and circumstances and more particularly that there were more -formal contracts in those cases. We are impressed by the failure of the petitioner to show that the difference between the cost to him and market value of the stock was not taken as a deduction by the Stanley Co. in 1928. Cf. Haskell & Barker Car Co., 9 B. T. A. 1087, and Commercial Investment Trust Corporation, 28 B. T. A. 143.

No question of a gift of the difference between the cost and fair market value is involved here, such as was considered in Harry F. Robertson, 5 B. T. A. 748, and Joseph W. Robinson, 5 B. T. A. 907, reversed in Robinson v. Commissioner, 59 Fed. (2d) 1008.

Reviewed by the Board.

Decision will be entered for the respondent.

MtjRdock, Seawell, Goodeioh, and Leech concur in the result.

Black dissents.

Smith,

dissenting: I can not agree that the petitioner received taxable income for 1928 in the amount of $243,800 by exercising an option to purchase 10,000 shares of the unissued capital stock of Stanley Co. of America. According to the findings, the petitioner discussed with some of the directors and largest stockholders of the Stanlejr Co. the granting of this option in May 1928. During that month the stock sold as high as $45 per share and as low as $30.50 The petitioner was not to exercise the option until the stock sold on the open market in an amount of not less than 1,000 shares at $55 The petitioner understood that the option would be granted him This informal understanding was carried into effect at a meeting of the board of directors on September 26, 1928. It appears that by that time 1,000 shared of the stock had sold at a price of $55 Even if the contract made by the board of directors with the petitioner on September 26, 1928, was a contract for compensation for services performed or to be performed, it seems to me that the only amount which could be included in the gross income of petitioner for 1928 was the value of the option contract at the date it was acquired by the petitioner.' The findings do not show any cash value for the contract at that date. By the option contract the petitioner was not given shares of stock in payment for his services.

Prior to the end of 1928 the stock advanced in price by leaps and bounds. In December 1928 the petitioner exercised his option and acquired the shares of stock. These shares of stock cost him something. It seems to me that when he sold them the basis for the computation of gain or loss was the price that he paid for them and not the fair market value on the" date when he exercised the option.

‘ I can not see that tlie principle applied by the Board in Albert Russel Erskine, 26 B. T. A. 147, is applicable here. To my mind that case is clearly distinguishablé from the present one. The facts in this case are substantially those which obtained in D. C. Bothwell, 27 B. T. A. 1351, in which we held that where the optionee sold his stock the basis for computing his gain was the purchase price for the shares. I am also of the opinion that the Board’s decision in this case is contrary to Rose v. Twist Co. of Georgia, 28 Fed. (2d) 767; Taplin v. Commissioner, 41 Fed. (2d) 454; Durkee v. Welch, 49 Fed. (2d) 339; and Commissioner v. Van Vorst, 59 Fed. (2d) 677.

       Art 51. * * * Where property is sold by a corporation to a shareholder, or by an employer to an employee, tor an amount substantially less than its fair market value, such shareholder of the corporation or such employee shall include in gross income the difference between the amount paid for the property and the amount of its fair market value. In computing the gain or loss from the subsequent sale of such property its cost shall be deemed to be its fair market value at the date of acquisition by the shareholder or the employee. This paragraph does not apply, however, to the issuance by a corporation to its shareholders of the right to subscribe to its stock, as to which see article 58.
      Art. 53. * * * Where services are paid for with something other than money, the fair market value of the thing taken in payment is the amount to be included as income. * » * Compensation paid an employee of a corporation in its stock is to be treated as if the corporation sold the stock for its market value and paid the employee in cash. * * *


author: TuRNee:

text:
    Alamo Coal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59309.
    Promulgated December 13, 1934.

      Addison S. Pratt, Esq., and George C. Manly, Esq., for the petitioner.

      James K. Polk, Esq., for the respondent.
   OPINION.

TuRNee:

The first issue for determination is the right of the petitioner to amortize the commissions paid in connection with the sale of its preferred stock by deducting one twentieth of such costs for each year of its corporate existence. It now contends that the commissions so paid amounted to $195,000, $45,000 representing a cash payment and the remainder the 500 shares of common stock at á value of $300 per share.

It is well settled that commissions paid in connection with the issue and sale by a corporation of its stock are not deductible as ordinary and necessary business expenses for the year paid or incurred. Corning Glass Works, 9 B. T. A. 771; affd., 37 Fed. (2d) 798; certiorari denied, 281 U. S. 742; Simmons Co., 8 B. T. A. 631; affd., 33 Fed. (2d) 75; certiorari denied, 280 U. S. 577; Emerson Electric Manufacturing Co., 3 B. T. A. 932; Odorono Co., 26 B. T. A. 1355. In Simmons Co., supra, the Circuit Court of Appeals said:

Commissions paid for marketing stock simply diminish the net return from the stock issue. Financially they are equivalent to an issue of stock at a discount from par; the par value must be carried as a liability without an offsetting, equal, amount of cash or property.

In Corning Glass Works, supra, it is said that the payment of such commissions “ represents a capital expenditure, and should be charged against the proceeds of the stock, and not be recouped out of operating earnings.” These pronouncements, in our opinion, rather than the reasoning of the court in Hershey Manufacturing Co. v. Commissioner, 43 Fed. (2d) 298, relied on by the petitioner. give tlie correct answer to the question here involved. We have previously considered the question and held that a corporation may not amortize or deduct commissions so paid ratably over the life of the stock. Commercial Investment Trust Corporation, 28 B. T. A. 148; Surety Finance Co. of Tacoma, 27 B. T. A. 616. On the basis of these latter decisions, which are directly in point, the first issue is decided for the respondent. See also James I. Van Keuren, 28 B. T. A. 480.

On the second issue the petitioner contends that it discovered the Alamo Mine, within the meaning of the statute, section 204 (c) (1) of the Revenue Act of 1926, and under its provisions is entitled to compute the depletion thereof on the basis of a discovery value. The date of discovery of the Alamo Mine fixed by the petitioner is December 31, 1924, when the vein of coal had been opened up and developed to such extent that all of its characteristics and the mining conditions became known. In other words, the petitioner contends that while Lewis discovered the seams of coal which lay under section 36, the petitioner, by virtue of its development work and operations along the seams, discovered the mine and that the discovery was not complete until December 31, 1924, at which time the seam had been sufficiently explored and opened up to determine its size and extent.

. In support of this contention, the petitioner points out that Webster’s New International Dictionary defines a mine as “ a subterranean cavity or passage ” from which coal, ores, etc., “ are taken by digging.” From this it is concluded that the discovery of a vein or deposit of coal is not, the discovery of a mine, since at that time there is no underground cavity or passage. In further support of its position in this respect, the petitioner cites numerous cases to show that the term “ mine ” means a mineral deposit which has been opened up and which is being worked. In a quotation from one of these cases, Astry v. Ballard, 2 Mod. 193 (8 Morrison Mining Report 316), decided in England some 250 years ago, it is interesting, to note that the court, after stating that a mine is not properly so-called until it is opened, refers specifically to-opened and unopened mines; The same is true of the quotation from Westmoreland Co.'s Appeal, 85 Pa. State, 344, 346. We do not believe that any of the cases cited on petitioner’s behalf are authority'for construing the term “mine ”, as used in the statute, in the restricted sense contended for. • .Neither do we believe that Congress had in mind any such interpretation when the statute was enacted. We are convinced that the discovery of the mine, as contemplated by the statute, refers not to the finding of a mine in the sense of a complete operating unit, but the ascertainment of a natural deposit of coal or mineral previously unknown. We seriously doubt whether there could be a date of discovery of a mine in the sense contended for by the petitioner. The gradual development of a coal seam or mineral deposit results in constant enlargement of the field of activity of the mine until the deposit is exhausted, and it is not .until the deposit is exhausted that any one can positively and definitely determine the exact amount and quality of the coal or mineral that can profitably be removed and all of the working conditions to be encountered in connection with its extraction. An arbitrary date would have to be fixed at some time in its operations, just as the petitioner has done here. The petitioner recognizes this weakness in its position and in its brief states that it “ would be impossible to point to a particular day as the date of discovery, or to fix a day when it could be said mth oertamty that the development had proceeded to such an extent that the vein was no longer merely a vein but was a mine.” The foregoing quotation graphically depicts the uncertainty which attaches to efforts to determine a discovery date under the petitioner’s- interpretation of the term “ mine.”

In our opinion the facts clearly indicate that the discovery of the Alamo Mine was made prior to the acquisition of the property by the petitioner on October 16,1922. Lewis acquired the lease in 1921, and immediately started the work of exploration. He employed Muiry, a churn driller with years of experience in that territory, to sink eight drill holes. The results are shown in the findings of fact.' Testimony was offered, both on behalf of the petitioner and on behalf of the respondent, by experienced coal men who were familiar with the territory in which the petitioner’s mine is located and familiar with the results of the drilling tests. The testimony of these men convinces us that these drill tests disclosed deposits of good and mineable coal. The chippings from the drill holes - were carefully examined and analyzed and the results were considered sufficient, by all parties testifying, to justify the development of the mine. Some of the witnesses were more positive than others in their conclusions as to the extent and quality of the coal indicated by the tests, but those who were most reluctant to state that a workable vein of coal had been discovered were of the opinion that the results justified the opening of the mine. Lewis indicated that he was satisfied on the point in his communication to the lessor company, stating that he intended to exercise his option and to carry out the terms of the lease. The same views were disclosed in his communication to the board of directors of the petitioner company. The directors of the petitioner company, according to the minutes of their organization meeting, were convinced that a vein of commercially mineable coal had been discovered and immediately took the necessary steps for installing and erecting the machinery and equipment required for an extensive coal-mining operation. They based their conclusions not only on the results of the drill holes sunk on section 36, but on tests made by the Victor American Fuel Co. on section 25, immediately to the north of section 36.

We accordingly conclude that the Alamo Mine was discovered within the meaning1 of the statute prior to the petitioner’s acquisition of the lease and that the petitioner is not entitled to compute depletion on the basis of a discovery value. Darby-Lynde Co., 20 B. T. A. 522; affd., 51 Fed. (2d) 32; Hoffer Oil Corporation, 27 B. T. A. 98; Rialto Mining Corporation, 25 B. T. A. 980; Melville G. Thompson, 10 B. T. A. 25; Boucher-Cortright Coal Co., 7 B. T. A. 1.

In the petition there is a claim in the alternative to the effect that depletion should be computed on the basis of the value of the lease on section 36 at the time of its acquisition by the petitioner from Lewis. This alternative contention was not discussed at the hearing, nor is there any supporting argument to be found in the brief, but in any event the contention is disposed of by the provisions of sections 204 (a) (8) and 203 (b) (4) of the Revenue Act of 1926, which, when applied to the facts in this case, provide that the basis for depletion of the lease so acquired by the petitioner is the same in its hands as in the hands of Lewis, from whom it was acquired. The record does not indicate that Lewis paid anything for the lease, and the method used by the respondent of computing depletion on the basis of development expense will not be disturbed. The facts do show, however, that development expense on December 31 of each of the years herein involved is greater than that used by the respondent in his determination of the deficiencies. There is also a variation in the number of tons of coal mined in the taxable years. The depletion deductions should be revised on the basis of the figures shown in our findings of fact.

Decision mil be entered under Rule 50.

       Sec. 204 (c) The basis upon which depletion, exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the same as is provided in subdivision (a) or (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property, except that—
      (1) In the case of mines discovered by the taxpayer after February 28, 1913, the basis for depletion shall be the fair market value of the property at the date of discovery or within thirty days thereafter, if such mines were not acquired as the result of purchase of a proven tract or lease, and if the fair market value of the property is materially disproportionate to the cost. The depletion allowance based on discovery value provided in this paragraph shall not exceed 50 per centum of the net inoome of the taxpayer (computed without allowance for depletion) from the property upon which the discovery was made, except that in no case shall the depletion allowance be less than it would be if computed without reference to discovery value. Discoveries shall include minerals in commercial quantities contained within a vein or deposit discovered in an existing mine or mining tract by the taxpayer after February 28, 1913, if the vein or deposit thus discovered was not merely the uninterrupted extension of a continuing commercial vein or deposit already known to exist, and if the discovered minerals are of sufficient value and quantity that they could be separately mined and marketed at a profit.


author: SMITH:

text:
    Caroline W. Edwards, Patrick J. Sullivan, James H. Slocum, and Fred B. Persse, Executors of the Estate of Daniel M. Edwards, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68533.
    Promulgated December 13, 1934.

      Laurence SoviJc, Esq., for the petitioners.

      P. M. OlarJc, Esq., and S. D. Pierson, Esq., for the respondent.
   OPINION.

SMITH:

The first question presented by this proceeding is the fair value of 14,700 shares of common stock (the total issue outstanding) of E. W. Edwards & Son at the date of the death of the decedent on May 26, 1929. These shares were returned by the petitioners as having a fair market value at the date of death of $310 per share. This isi the amount at which they were appraised by the two appraisers appointed by the Surrogate’s Court. The petitioners now contend that the fair market value of the shares on May 26, 1929, the date of the death of the decedent was not in excess of $200 per share.

One of the witnesses for the petitioners in this proceeding was Elmer T. Eshehnan, one of the appraisers appointed by the Surrogate’s Court. He testified that in appraising the stock of E. W. Edwards & Son for probate purposes the $310 per share value was not based on the “ fair market value ”, but upon the value ”; that “ fair value ” is what a thing is worth; that “ market value ” is what you can sell a thing for; that a thing is worth a little more than market value, that is “ unless it is some particular thing somebody wants.”

We are of opinion that the distinction sought to be made by the witness between “ fair value ” and “ fair market value ” is not valid. Section 302 of the Revenue Act of 1926 provides: “ The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated.” In article 13 of Regulations 70 (1929 edition) the respondent has provided: “The fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell.” But we do not understand from the witness’ testimony that his appraisal was on an essentially different basis from that provided for by the law and regulations. There is nothing in the witness’ testimony that would warrant a finding that the appraised value was different from the price at which 14,700 shares of common stock “ would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell.”

From a consideration of all of the evidence introduced in this proceeding it is apparent that the present claim of petitioners that the fair market value of the shares of stock of E. W. Edwards & Son on May 26, 1929, the date of the death of the decedent, was less than $310 per share is predicated in large part upon hindsight. There were no facts before the appraisers or before the petitioners at the time they filed the estate tax return showing that the fair market value of the shares was less than $310 per share. The operating losses of subsequent years could not be foreseen as at the date of the death of the decedent. The taxing statute requires the inclusion in gross income of the value of property possessed by the decedent “ at the time of his death.” The petitioners introduced no evidence which proves that the fair market value of the shares was less than $310 per share. The determination of the respondent that that value was $310 per share will not therefore be disturbed.

The second question is whether there should be included in the gross estate the proceeds of a life insurance policy taken out by the decedent in 1918 on his own life. The beneficiary named in the policy is E. W. Edwards & Son. The insured had the right, however, to change the beneficiary and he exercised such right on September 20, 1920, and designated and appointed his wife, Caroline W. Edwards, as his beneficiary “ if living; if not, to Insured’s Estate.” In making such designation the insured did not reserve any right further to change the beneficiary. It follows therefrom that the insured did not at the time of his death have any right further to change the beneficiary. David A. Reed et al., Executors, 24 B. T. A. 166. Cf. Sampson v. United States, 1 Fed. Supp. 95.

The respondent contends, however, that whether or not the insured had the right to change the beneficiary the proceeds of the policy are includable in the gross estate, since the decedent up to the date of death had the right to surrender the policy and receive cash therefor, or to pledge it for loans equal to the surrender value, and since the $40,000 exempt insurance permitted the estate under section 302 (g) of the Eevenue Act of 1926 was exhausted on other policies on the life of the insured payable to other beneficiaries than the executors.

The question presented here is substantially the same as that which was considered by the court in Sampson v. United States, supra, and in Edith Hug gard Sharp et al., Executors, 30 B. T. A. 532. In both of these cases proceeds of insurance policies were held to be includable in the gross estate. In the last named case we exhaustively considered the decisions of the Board and of the courts bearing upon this point and set forth the reasons for our conclusions. In accordance therewith the action of the respondent in including the proceeds of the insurance policy in question in the gross estate of the decedent is sustained.

Keviewed by the Board.

Judgment will be entered wnder Buie 50-

Murdock and McMahoN concur in the result.

YaN FossaN concurs only in the result.


author: SteRnhagen :

text:
    George Vawter, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74876.
    Promulgated December 14, 1934.

      Walter A. Bolinger, Esq., for the petitioner.

      GarroTl WdEker, Esq., and Framds S. Gettle, Esq., for the respondent.
   OPINION.

SteRnhagen :

The petitioner, on his return, took a deduction for a loss amounting to the difference ($4,897.50) between the cost ($30,-540) of the 100 shares bought in 1929 and the sale price ($25,642.50) of the 500 shares sold in 1930, treating the shares purchased and those sold as identical. The respondent disallowed the deduction, and instead determined a profit under the first in, first out rule. He held, as shown by his notice of deficiency, that identification of the dividend shares which petitioner received was not feasible, that the allocation of dividend certificates to certain existing shares was arbitrary, and hence that the stock sold must be presumed to be part of that received as a dividend upon his earliest purchased stock. The stipulation of the parties provides that, if the first in, first out rule applies, the deficiency is correct, and that if the sale is to be treated as of the shares bought in 1929, the petitioner’s return is correct.

The first in, first out rule, its validity and applicability, have been repeatedly considered. Towne v. McElligott, 274 Fed. 960; Howbert v. Penrose, 38 Fed. (2d) 577; Skinner v. Eaton, 45 Fed. (2d) 568; Snyder v. Commissioner, 54 Fed. (2d) 57; Horner v. Commissioner, 72 Fed. (2d) 407; Commissioner v. Merchants’ & Manufacturers’ Fire Insurance Co., 72 Fed. (2d) 408; Snyder v. Commissioner, 73 Fed. (2d) 5; William W. Miller, 31 B. T. A. 192; Courtenay D. Allington, 31 B. T. A. 421. By its terms, it seems to assume that shares of stock of one class in a corporation owned by a single person through different purchases at different times are susceptible of identification by lots. What may be the means of such identification is not set forth in the regulation and we are not informed as to the means which the Commissioner uses. It is generally when the Commissioner refuses to recognize the identification urged by the taxpayer and determines that the shares can not be identified as those bought at a certain time or price and requires the use of the first in, first out rule that the question comes to the Board or the courts. Then it is that the taxpayer must overcome the determination by affirmatively establishing the identity of the shares sold. Skinner v. Eaton, supra; Courtenay D. Allington, supra.

The rule is one of administrative convenience and necessity, the purposes of which are uniformity of taxation, certainty of determination, and simplicity of computation. Broadly speaking, shares of the same class are fungible, each representing a proportionate interest in the whole and each new acquisition being absorbed into the expanding interest of the shareholder. Richardson v. Shaw, 209 U. S. 365; Duel v. Hollins, 241 U. S. 523; Howbert v. Penrose, supra; Snyder v. Commissioner, supra; Burdett Stryker, 21 B. T. A. 561. In this sense shares defy identification. To what extent the administrative practice departs from this concept or upon what theory the concept is modified so as to recognize an identification is difficult to learn from the cases which have been litigated.

But this case presents no reason for overthrowing the Commissioner’s determination. Intention alone, it has frequently been held, is not a criterion, Skinner v. Eaton, supra; Courtenay D. Allington, supra; nor is the taxpayer’s mere mental or verbal labeling of the shares sold. The claimed identification must at least be consistent with his actual performance, Horner v. Commissioner, supra; Commissioner v. Merchants' & Manufacturers' Fire Insurance Co., supra; Rankin v. Commissioner, 73 Fed. (2d) 6. Here the petitioner unquestionably intended to sell his newest shares and close out his speculative venture, but his performance was different from his intent. Not only did he receive a stock dividend applicable indiscriminately to all his shares, thus by the terms of the rule precluding identification, Towne v. McElligott, supra; Skinner v. Eaton, supra, but moreover he himself mixed up his certificates and kept the very one (A-5720) which represented the shares he last bought. Thus he makes it impossible for anyone to identify any of the shares sold as those last acquired. Cf. Rankin v. Commissioner, supra. The first in, first out rule is clearly applicable, and the respondent’s determination must therefore be upheld.

Judgment will be entered for the respondent.


author: Murdock:

text:
    Commonwealth Life Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 49710, 60786, 70304, 74407.
    Promulgated December 14, 1934.

      D. V. Hv/ruter, Esq., for the petitioner.

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

Murdock:

The deficiencies determined by the Commissioner and the docket numbers of the various proceedings are shown below:

The evidence consists of a stipulation of facts.

The petitioner occupied all of the space in an office building which it owned. It did not include in its gross income any amount representing the rental value of the space which it occupied in this building, but it nevertheless claimed certain deductions for depreciation, expenses, and taxes in connection with this building. It contended originally that section 203 (b) of the act, which requires the rental value of the space occupied to be included in gross income, was unconstitutional. But the Supreme Court has held, since the present case was submitted, that this provision is constitutional. Commissioner v. Independent Life Insurance Co., 292 U. S. 371. Consequently the deductions cannot be allowed unless the rental value is included in gross income. The statute is so worded that an insurance company which occupies all of the space in a building and consequently receives no rents for space occupied by others, will not derive any benefit under the provisions of section 203 (a) (6) and (7) when read in connection with subdivision (b). Commissioner v. Independent Life Insurance Co., supra. The Supreme Court held, in Rockford Life Insurance Co. v. Commissioner, 292 U. S. 382, also decided since this proceeding was submitted to the Board, that depreciation on furniture and fixtures used in the underwriting department of a life insurance company is not • deductible. That decision disposes of one of the issues raised in this case.

Another issue raised is whether, in computing a deduction of 4 percent of the mean of the reserve funds required by law and held at the beginning- and end of the year, the petitioner is entitled to include in its reserve funds the amount of its obligations incurred on account of matured and unsurrendered coupons attached to certain of its policies.

The petitioner was incorporated in Kentucky and conducted its business in Kentucky. It was a life insurance company within the meaning of sections 201, 202, and 203 of the Revenue Act of 1928. It wrote a type of insurance policy which had coupons attached. These coupons matured regularly at certain dates during the life of the policy. Each coupon was a promise on the part of the petitioner to pay a certain sum of money to the insured on the due date of the coupon. The insured could surrender a matured coupon in part payment of the premium due on his insurance or he could leave the amount due with, the company as a deposit. The amounts left on deposit bore interest and could be withdrawn, together with the interest, at any time. The amount due on matured coupons and accumulated interest was payable to the beneficiary in the event of the death of the insured. The holder of a coupon policy could also elect in writing within one year after the date of the policy to take the benefits of a special provision set forth in the policy, under which the coupons would be canceled and the date accelerated upon which the policy would become fully paid up. The facts in regard to the reserves were stipulated as follows:

7. The Company was required by the Commissioner of Insurance of the Commonwealth of Kentucky to keep on deposit with him securities sufficient in value to cover the liability of the Company on its outstanding policies, including the liability for said matured and unsurrendered coupons, less the amount of outstanding loans to policyholders on security of the policies. In the years 1928, 1929, 1930 and 1931 the values of the securities so deposited were less than the net values of the policies as reported to the Insurance Commissioner which net values, as reported, included the liabilities for said matured and unsurrendered coupons. However, the Company had other assets consisting of premium notes and cash, of a value in excess of the amounts by which the deposits with the Insurance Commissioner were less than the aforesaid net values of the policies. The difference between the values of securities deposited with the Insurance Commissioner and the net values of the policies in each of the years were greater than tlie liabilities on account of the matured and unsurrendered coupons.
8. During the years 1928, 1929, 1930 and 1931, the Company’s liability on account of matured ánd unsurrendered coupons attached to the above-described policies were in the amounts set forth below:
Year January 1 December SI
1928_$82,575.00 $84,271.00
1929_ 84,271.00 95, 235.00
1930_ 95, 235.00 105,404.49
1931_ 105,404.49 112,972.00
The total reserves reported by the Company in its Federal Income Tax Return for the years 1928, 1929, 1930 and 1931 were as follows :
Reserves Reported Reserves Reported Year as of January 1 as of December SI
1928_$7, 568, 075. 06 $8, 622,779.49
1929 _ 8, 622, 779.49 9,745, 659. 62
1930_ 9,745,659.62 10,755,991.21
1931_ 10, 755, 991.21 11, 636, 755.11
The Company reported the foregoing amounts to the Insurance Commissioner of Kentucky upon forms prescribed by the National Convention of Insurance Commissioners and listed the amounts relating to coupons under “ Liabilities, surplus, and other funds ” on a line which is designated “ Dividends left with the Company to accumulate at interest, and accrued interest thereon ”.
9.The Company in its income tax returns for the¡ taxable years in question included the above ajnounts relating to coupons as a part of its reserves in arriving at the claimed deduction of 4% of the mean of its reserves. The respondent in determining the deficiencies in controversy eliminated the aforesaid amounts and by reason thereof made the following additions to income reported:
Year Additions to Income
1928_$3,337.12
1929_ 3, 590.12
1930_ 4,012.79
1931_ 4,367.53

The words u reserve funds ” as used in section 203 (a) (2) of the Revenue Act of 1928 do not refer to general assets of a corporation nor to assets which merely render a corporation solvent. They refer to something- which is set aside or reserved as a fund for some particular purpose. McCoach v. Insurance Co. of North America, 244 U. S. 585; Maryland Casualty Co. v. United States, 251 U. S. 342; United States v. Boston Insurance Co., 269 U. S. 197; New York Life Insurance Co. v. Edwards, 271 U. S. 109. State officials sometimes designate certain funds as “ reserve funds ” and sometimes require that certain funds be maintained for certain purposes. But all such funds are not necessarily included within the meaning of the phrase “ reserve funds required by law ” contained in section 203 (a) (2) of the Revenue Act of 1928. McCoach v. Insurance Co. of North America, supra; United States v. Boston Insurance Co., supra; New York Life Insurance Co. v. Edwards, supra.

The petitioner, in order to show what reserve funds were required by law, has called our attention to section 648-a (1,) and section 653 of Carroll’s Kentucky Statutes. The provisions of section 648-a (1) may be summarized for the purpose of this case, as requiring that every domestic life insurance company shall deposit with the state treasurer, for the security and benefit of its policyholders, an amount which shall be not less than the amount of the net cash value of each policy in force, ascertained “ as now required by law.” We are unable to hold that this statute requires any deposit on account of the matured and unsurrendered coupons involved in the present case. These coupons could not be used to purchase additional insurance nor to accelerate the maturity of any policy. The net cash value of the policies in force would not depend upon or include the value of matured and unsurrendered coupons outstanding. The former depends upon the probable life of the insured and is ascertained under the laws of Kentucky by the use of certain “ mortality ” or “ experience ” tables. The latter is quite different, being for a definite, fixed amount. The material provisions of section 658 are as follows:

When the actual funds of any life insurance company doing business in this commonwealth are not of a net cash value equal to its liabilities * * * it shall be the duty of the Insurance Commissioner to give notice to such company and its agents to discontinue issuing new policies within this- commonwealth until such time as its funds have become equal to its liabilities * * *. Any office or agent, who, after such notice has been given, issues a new policy from and on behalf of such company, before its funds have become equal to its liabilities as aforesaid, shall forfeit for each offence not exceeding $1,000.

This is a solvency requirement rather than the kind of a reserve requirement referred to in the revenue act. No other provision of the statutes of Kentucky has been called to our attention as having any application in this case and, therefore, we are unable to say what reserve, if any, the petitioner was required by law to maintain in connection with its liability or obligation in regard to matured and unsurrendered coupons.

Furthermore, the stipulation does not show that the petitioner actually held at the beginning and end of the years in question any amount as a reserve to cover its obligations in connection with matured and unsurrendered coupons. The statements of paragraph 1 of the stipulation are contradictory. In the first sentence of that paragraph it is stated that the commissioner of insurance required the petitioner to keep on deposit with him securities sufficient in value to cover the liability of the petitioner on its outstanding policies, including the liability for matured and unsurrendered coupons, less loans secured by policies. But in the next sentence it is stipulated that the values of the securities actually deposited were less than the net values of the policies, including the liabilities for matured and unsurrendered coupons. The next sentence states that the company had, however, other assets consisting of premium notes and cash more than sufficient to make up the difference. The petitioner argues that these “ other assets consisting of premium notes and cash ” are part of a reserve required by law and held by the petitioner. We are unable to so hold. The Commissioner draws attention to the substance of the last sentence of paragraph T of the stipulation to show that there were no securities deposited with the insurance commissioner to cover any part of the liability of the petitioner on account of matured and unsurrendered coupons. There is no statement in the stipulation to show that any reserve was set apart on the petitioner’s books to cover its liability on account of matured and unsurrendered coupons.

Thus the petitioner has failed to show that reserves to cover its liability on account of matured and unsurrendered coupons were required by law or that it held, at the beginning and end of the years in question, any reserve to cover its liability on account of matured and unsurrendered coupons. The Board has held in some cases that reserves required by law and held at the beginning and end of the taxable year to cover liability on account of matured and unsur-rendered coupons are to be included in the computation of the deduction of 4 percent of the mean and these decisions have been affirmed by three Circuit Courts of Appeal. See Commissioner v. Standard Life Insurance Co., 47 Fed. (2d) 218; Commissioner v. Western Union Life Insurance Co., 61 Fed. (2d) 207; Commissioner v. Great American Life Insurance Co., 70 Fed. (2d) 138. Contra, decisions of the Court of Claims in Massachusetts Mutual Life Insurance Co. v. United States, 56 Fed. (2d) 897, and Continental Assurance Co. v. United States, 8 Fed. Supp. 474. However, the question decided in those cases is not reached in this case. Furthermore the coupons in this case are materially different from the coupons involved in the above line of cases, which could be used to purchase additional insurance or to accelerate the maturity of a policy.

The petitioner, in its brief, incorrectly states that the Board in a memorandum opinion in Inter-Southern Life Insurance Co., Docket No. 24966, “ construed the above sections of the Kentucky Statutes •as requiring reserves to be maintained to cover obligations on account of matured coupons identical in all material respects with those in the case at bar.” A reference to the stipulation in that case will show that the Board was merely repeating the stipulation in respect to the requirements of the statute.'

The final question for decision is whether or not the petitioner is entitled to deduct as “ investment expenses ” under section 203 (a) (5) the amount paid in each year to attorneys in connection with the foreclosure of mortgages. The petitioner, in each of the taxable years, acquired title to certain real estate through foreclosure upon mortgages which were in default. The company invested a very large part of its funds through mortgage loans on real estate. Its income from rentals on real estate was a very small part of its gross income. If the attorney fees paid in connection with the foreclosures were included in the petitioner’s investment expenses, the total in each year would be less than one fourth of 1 percent of the book value of the mean of the invested assets held at the beginning and end of the year. The petitioner deducted on its income tax returns amounts representing the expenditures for attorney fees, but the Commissioner disallowed these deductions.

Section 203 (a) (5) provides that “ net income ” means the gross income less—

(5) Investment Expenses. — Investment expenses paid during title taxable year: Provides, That if any general expenses are in part assigned to or included in the investment expenses, the total deduction under this paragraph shall not exceed one-fourth of 1 per centum of the book value of the mean of the invested assets held at the beginning and end of the taxable year.

Congress did not define the phrase “ investment expenses.” The questions of what is a capital expenditure and of what is an expense have frequently arisen and have been discussed both from the standpoint of proper accounting and from the standpoint of the revenue acts. Many items have been extremely difficult to classify and perhaps some fall neither in the class of expenses nor in the class of capital expenditures. Holeproof Hosiery Co., 11 B. T. A. 547, 555, 556; Julia Stow Lovejoy, 18 B. T. A. 1179; Sigmund Spitzer, 23 B. T. A. 776; Commissioner v. Field, 42 Fed. (2d) 820, reversing 15 B. T. A. 718. The language of this provision differs materially from the language of section 23(a), relating to the deduction of ordinary and necessary expenses of taxpayers computing their income under the general provisions of the statute, and decisions under 23(a) and its predecessors are not controlling here. However, they may be helpful in so far as they deal with the common word “ expenses.” Attorney fees were allowed as ordinary and necessary expenses, even though they were paid in connection with the acquisition of a capital asset, in E. S. Briant, Administrator, 6 B. T. A. 651. Cf. Samuel D. Leidesdorf, 26 B. T. A. 881; L. B. Reakirt, 29 B. T. A. 1296. However, the Briant case seems to be somewhat out of line with the weight of authorities, for more frequently attorney fees have not been allowed as expenses but have been treated for tax purposes as if they were a part of the cost of the capital asset acquired. Stephens Fuel Co., 13 B. T. A. 666; Columbia Theatre Co., 3 B. T. A. 622; First National Bank of St. Louis, 3 B. T. A. 807; Emerson Electric Manufacturing Co., 3 B. T. A. 932; Charles P. Hewes, 2 B. T. A. 1279; Laemmle v. Eisner, 275 Fed. 504. Cf. S. & L. Building Corporation, 19 B. T. A. 788 (reversed on other grounds); Spinks Realty Co., 21 B. T. A. 674; affd., 62 Fed. (2d) 860; certiorari denied, 290 U. S. 636; Central Bank Block Association, 19 B. T. A. 1183; affd., 57 Fed. (2d) 5; Horn & Hardart Baking Co., 20 B. T. A. 486. Occasionally an allocation between capital and expenses has been required. Frederick McLean Bugher et al., Executors, 9 B. T. A. 1155. Cf. Peaslee-Gaulbert Co., 14 B. T. A. 769.

The legislative history of section 203 (a) (5) and other special provisions of the act relating to insurance companies may afford some justification for an argument that the phrase “ investment expenses ” was enacted by Congress with the belief that it had some special significance in a uniform method of accounting employed by insurance companies and it therefore should be interpreted as including all of those items which, under that method of accounting, would be recorded as investment expenses. However, the decision of that question must await another case, since the present record contains no evidence whatever of accounting methods, not even evidence of how the expenditures in question were treated on the petitioner’s books. It may be that the phrase “ investment expenses ” has no special significance in the accounting methods of insurance companies. If the phrase was intended to have the meaning which the two words, as ordinarily used, would imply, then the word “ expenses ” would not include the expenditures in question. Such expenditures, if made by a taxpayer other than an insurance company, would not be considered expenses under section 23 (a), but would be treated as a part of the cost of the capital asset acquired. Firemens Insurance Co., 30 B. T. A. 1004; Odorono Co., 26 B. T. A. 1355; Charles J. Livingood, Executor, 25 B. T. A. 585; I. N. Burman, 23 B. T. A. 639; Murphy Oil Co., 15 B. T. A. 1195; affirmed on this point, 55 Fed. (2d) 17; Marjorie Post Hutton, 12 B. T. A. 265; affd., 39 Fed. (2d) 459; C. M. Nusbaum, 10 B. T. A. 664; Seletha O. Thompson, 9 B. T. A. 1342; Brawner v. Commissioner, 63 Fed. (2d) 129, affirming 19 B. T. A. 192. Did Congress intend to treat them as expenses when made by another taxpayer? Cf. Volunteer State Life Insurance Co., 27 B. T. A. 1149, where commissions on sales of properties acquired through foreclosure were not considered investment expenses. It does not appear in this case that the attorney fees were expenses within the meaning of the act. Consequently, we can not say that the Commissioner erred in holding that they were not deductible for the years in question as investment expenses.

Reviewed by the Board.

Decision will he entered under RiCle 60.

Smith and McMahon dissent on the fifth point.

       Sec. 203. (a) General rule. — In the case of a life insurance company the term “ net income ” means the gross income less—
      ****** *
      (2) Reserve ponds. — An amount equal to the excess, if any, over the deduction specified in paragraph (1) of this subsection, of 4 per centum of the mean of the reserve funds required by law and held at the beginning and end of the taxable year. * * *


author: GoodRich :

text:
    George A. Peak, Petitioner, v. Commissioner of Internal Revenue, Respondent. Vesta Peak Denny (Now Vesta Peak Maxwell), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 55178, 55179, 65219, 68021, 68065, 68066.
    Promulgated December 14, 1934.

      B. S. Doyle, Esq., for the petitioners.

      R. W. Wilson, Esq., for the respondent.
   OPINION.

GoodRich :

In these proceedings, which upon motion were consolidated, petitioners, who, at the times here material, were residents of Des Moines, Iowa, contest respondent’s determinations of deficiencies in income tax as follows:

Both petitioners raise an issue respecting distributions received from an insurance company — whether such distributions were of capital or income, and whether subject to tax. Petitioner Maxwell raises a second issue, respecting the amount of deduction to which she is entitled as an allowance for depreciation on an office building.

The facts were submitted upon stipulation, supplemented by excerpts from testimony previously given before this Board in Central Life Assurance Society of the United States, Mutual, 18 B. T. A. 667. For the purposes of this report the facts need not be set out in full; we summarize those necessary to an understanding of the issues.

Prior to 1919, George B. Peak, the father of these petitioners, owned 1,040 of the 2,000 outstanding shares of stock of the Central Life Assurance Society. That was a so-called stock company and wrote both participating and nonparticipating policies of insurance. In that year a new corporation of the same name was organized to take over the assets, assume the liabilities and continue the business of the stock company. The new organization, however, was a so-called mutual company, and wrote exclusively participating insurance.

The transaction was consummated under a contract of May 19, 1919, between the two companies which, in part, was for the benefit of the stockholders of the old company. It provided, inter alia, that the new company should segregate and manage the nonparticipating business of the old company (then amounting to about $49,000,000), annually determine the earnings on it, and, for a period of 22 years, distribute those earnings to the former stockholders of the old company pro rata. A fund of $100,000 was to be held until the end of the period when, it was estimated, all the nonparticipating policies would be liquidated, either by surrenders, or deaths of the holders. Beginning in 1921, distributions have been made in accordance with the contract.

George B. Peak died, testate, on August 24, 1923. His widow, Alice H. Peak, mother of these petitioners, renounced the will and elected to take her statutory interest in the estate. Consequently, she and petitioners each became the owner of one third of decedent’s interest in the contract. In 1926, Mrs. Peak made a gift to petitioners equally of the interest she inherited in the contract. Since that time, all distributions under the contract relating to the interest owned during his life by their father, have been equally divided between petitioners.

For the purposes of the Federal estate tax the interest of George B. Peak under the contract was valued at $700,000 as of the date of his death. The distribution received by petitioners in 1928 brought the total receipts under the contract by the Peak heirs to $738,664.69, or $38,664.69 in excess of the basis above mentioned. One half of that excess, respondent has included in the income of each of these petitioners for 1928. Likewise, respondent has included in income of each petitioner for the years following 1928, one half of each annual distribution under the contract. That action gives rise to the deficiencies here in controversy.

And that action is erroneous, petitioners contend. In their view, their receipts under the contract constitute the corpus of the inheritance from their father; the distributions are of capital, not income. In other words, they regard any surplus earnings on the nonparticipating policies of the old company as an accrued, ascertained fund, subject to liquidation. They regard it as the property of the old stockholders which cannot be changed from capital to income until it, or their inherited interest in it, is sold or disposed of otherwise. Since the earnings are capital, to tax them as income upon distribution is unconstitutional. They make the same argument respecting the interest given them by their mother, adding that their receipts from that interest are in liquidation of a gift.

We cannot subscribe to that theory. The contract gives the former stockholders, including petitioners’ decedent, the right to receive annually, pro rata, any earnings there might be upon the nonparticipating policies during a period of 22 years. It does not assign them the policies nor the assets held in reserve back of the policies; those things belonged to the new company. Nor does it assign to them a definite fund, despite the fact that perhaps the ultimate amount of future earnings, and the period required for its realization could be forecast with some accuracy by actuarial estimate. The contract gave them only the profits upon those policies, as realized in the future. As we see it, those earnings were not capital, but income, and taxable.

The matter of ownership of that income has been a subject of prior adjudication. In Central Life Assuranee Society, Mutual v. Commissioner, 51 Fed. (2d) 939, the court held (reversing 18 B. T. A. 667) that the income from the nonparticipating policies belonged, not to the new company, but to the former stockholders of the old company, and that the new company was merely a conduit, perhaps a trustee, for the purpose of collecting and passing it on to them. Consequently, the earnings on the nonparticipating policies could not be included in the income of the new company and there taxed.

The most George B. Peak had under the contract — and the most he could pass on to his heirs — was a right to receive income. He was to get his pro rata share of such earnings as there might be upon designated policies. The granting of that right to him, and his fellow stockholders, was one of the considerations of the contract. That right was property, but it produced income, and the transfer of it, whether for value, by death or by gift, could not change the character of the'benefits flowing from it. See Parker v. Routzahn, 56 Fed. (2d) 730; certiorari denied, 287 U. S. 606. Cf. Hall v. Burnet, 54 Fed. (2d) 443 (reversing 17 B. T. A. 752); certiorari denied, 285 U. S. 552; Van Meter v. Commissioner, 61 Fed. (2d) 817 (affirming 22 B. T. A. 1202.)

We see no error in respondent’s determination of the taxability of the distributions received by petitioners. The right to receive income acquired by petitioners’ father under the contract was valued as of the date of his death, and at that value included in his estate for purposes of the tax thereon. (Sec. 302 (a), Bevenue Act of 1926, as amended by the Bevenue Act of 1928.) The value of that right inherited by petitioners, has been excluded from their incomes, according to their interests, as prescribed by section 22 (b) (3), Beve-nue Act of 1928. The income arising from that inherited right has been included, as provided by the cited section, after recovery of the basic value, as provided in section 113 (a) (5) of the same act. Income from the inherited interest given to petitioners by' their mother is subject to the same statutory provisions, and has been so treated by respondent.

If the basic value used by respondent was inadequate, as indicated by petitioners upon brief, there is no evidence here to so prove, nor to show us what the correct basis may be. We note that the stipulation indicates that respondent has included in the incomes of these petitioners the distributions payable to Alice H. Peak subsequent to 1926 upon her interest as an original beneficiary under the contract. There is no statement respecting a gift of that interest by her; consequently, we must assume that respondent correctly determined that she transferred to petitioners her original interest, as well as her inherited interest. We fail to see any applicability to this case of the principles of Helvering v. Pardee, 290 U. S. 365, as argued by petitioners.

The further issue raised by petitioner Maxwell concerns respondent’s disallowance of part of the deduction claimed by her as an allowance for depreciation sustained upon the Insurance Exchange Building in Des Moines.

This building was erected by petitioners’ father, George B. Peak, upon leased premises. It was still under construction at the time of his death, August 24,1923, and was thereafter completed by these petitioners and their mother, who inherited the building. The building was operated by the three heirs as partners until Ja-nuary 1, 1926, when the mother, Alice H. Peak, withdrew and made a gift of her interest to petitioners.

For the purposes of determining the Federal estate tax liability, the building and leasehold were included in the estate of George B. Peak at a valuation of $500,000. On the books of the partnership, the cost of the building and equipment as of 1923 is shown as $711,665.63. Additions between that time and 1930 entered on the partnership books bring the cost in the latter year to $765,659.43. Using that cost basis, the partnership claimed an allowance for depreciation on the building in its 1930 return of $21,799.52.

Respondent allowed less — $14,815.41-—because he used as a basis for depreciation, the value assigned to the building and leasehold at the time of decedent’s death, adjusted for additions made thereafter up to 1930. His disallowance of a part of the depreciation allowance claimed results in tax which is a part of the deficiency petitioner contests.

We are of opinion respondent’s determination is correct. By statute (section 114 (a), referring to section 113 (a) (5), Revenue Act of 1928) the basis for depreciation of real estate transmitted by death is the fair market value thereof at decedent’s death. This is the basis respondent has used. Apparently proper adjustments have been made on account of additions to the building, for petitioner points out no errors. How extensive were the additions; how near completion was the building when decedent died, the record does not tell us. Apparently there is no dispute as to a proper rate of depreciation.

We find nothing in the record to prove the basic valuation erroneous. Petitioners argue that the basic valuation used is less than construction cost, because the latter has been discounted on account of the burden of the lease. But that argument may cut both ways. It is quite conceivable that the leasehold itself was a valuable one, and that the aggregate value of it and the building on it might be in excess of the cost of both. As to the value placed on either of these assets alone, and as to the excess (if any) of the building construction cost over the value placed on it, we are not told.

Perhaps petitioners, willing to accept a low basic value for purposes of the estate tax, now desire a higher basis for depreciation, and regret the bargain. However that may be, they have not convinced us that respondent’s determination of the depreciation allowance is in error; therefore we approve it.

Judgment will be entered for the respondent.


author: Adams : Trammell,

text:
    Adolph Weil, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69907.
    Promulgated December 18, 1934.

      John B. Tales, Esq., and Paul F. Myers, Esq., for the petitioner.

      H. F. Morton, Esq., for the respondent.
   OPINION.

Adams :

The petitioner contends that the transactions in question show completed gifts from petitioner to his children of the Coca-Cola Co. stock before its sale.

The respondent contends that there were no gifts of the Coca-Cola stock, but at most only gifts of the proceeds arising out of the sale of such stock.

From an examination of the authorities we find the essential elements of a bona fide gift inter vivos to be (1) a donor competent to make the gift; (2) a donee capable of taking the gift; (3) a clear and unmistakable intention on the part of the donor to absolutely and irrevocably divest himself of the title, dominion, and control of the subject matter of the gift, in praesenti; (4) the irrevocable transfer of the present legal title and of the dominion and control of the entire gift to the donee, so that the donor can exercise no further act of dominion or control over it; (5) a delivery by the donor to the donee of the subject of the gift or of the most effectual means of commanding the dominion of it; (6) acceptance of the gift by the donee; Edson v. Lucas, 40 Fed. (2d) 398, and authorities there cited. Cf. Allen-West Commission Co. v. Grumbles (C. C. A., 8th Cir.), 129 Fed. 287; Edwin J. Marshall, 19 B. T. A. 1260; affd. (C. C. A., 6th Cir.), 57 Fed. (2d) 663, certiorari denied, 282 U. S. 61.

The respondent argues that the donees, being minors, were incapable of receiving the gift, since no guardian or trustee was appointed to act for them. We do not think these facts are determinative of the question. It is not essential to the validity of the gift inter vivos that the property be delivered to the donee personally. Delivery may be made to a third person, such as a trustee or a guardian for the benefit of the donee, 28 C. J. 639. This seems to be the rule in the State of Alabama. Pope v. Randolph, 13 Ala. 214; Encyclopedic Digest of Alabama Reports, vol. 7, p. 863, and cases there cited. The petitioner here was the natural guardian of the donees, and we think he was capable in such capacity of receiving a gift for them. A gift did not, therefore, fail for lack of acceptance, and a donee capable of taking it.

The important question here is not whether there was a gift by petitioner to his children, but whether there was a gift of the Coca-Cola stock to them. Was there a clear and unmistakable intention on the part of the donor to give the Coca-Cola stock to his children; to absolutely and irrevocably part with the title, dominion, and control of it at the very time the gift was made, or did he intend all the while to sell the stock and give the proceeds thereof to his children ?

In examining this question we think the testimony of petitioner is important. At the hearing he testified as follows:

Q: The certiticate of stock was never sent to the Coca-Cola Company for transfer on the books of the corporation?
A: No.
Q: They never were transferred from you to the children?
A: No. The reason for that is I expected to sell them for the children and I avoided the expense of the transfer by endorsing it in blank making them negotiable.
* * # * # *
Q: This gift was made with the intention of selling?
A: Yes.
Q: You told them?
A: Yes.

This testimony clearly demonstrates that it was the purpose and intention of petitioner at the time when and before he put the shares of stock in the envelopes for his children to sell them and give to his children the benefit of the proceeds from the sale. The testimony of petitioner is characterized by commendable frankness. It is noteworthy that he testified as to his reason for handling this transaction in the way he did, as follows:

Q: Those stocks and bonds have been issued in whose names?
A: The bonds are in anybody’s name.
Q: The stocks which you bought?
A: In the children’s name. I sold those stocks. You might say, “Why didn’t you sell the stocks and take the proceeds and give them to the children? ” By selling those stocks, by giving them to the children and letting them sell the stocks, it divided the income tax, which I thought was permissible, and I still think it is.

Petitioner decided to dispose of tbe stock by first giving it to bis children and then selling it. The weakness of his plan was that he at no time intended them to have the stock, but at all times intended to sell it and put the proceeds to their credit. Moreover, he kept within himself the power to control the disposition of the stock.

The transactions examined in the light of petitioner’s testimony persuade us that he did not intend making a gift of the stock, nor to divest himself of such title, dominion, and control of it as was necessary to constitute a good and valid gift of the stock, in praesenti, but that such transfer was but a step in the disposition of the stock for the benefit of his children. J. L. McInerney, 29 B. T. A. 1, and cases there cited. The motive which actuated the petitioner was twofold — to increase the estate of his children and to avoid payment of income tax.

It is significant that the transfer to his children of the certificates of stock in question was almost contemporaneous with the sale of the stock. The transaction was not handled in the ordinary and usual business manner. Tbe testimony does not show that the certificates were endorsed when transferred to the envelopes. The required stamps were not affixed to the certificates at that time and petitioner was acting in the dual capacity of donor and trustee, or natural guardian to his children.

Under all the circumstances we conclude that what petitioner intended to give his children and what he gave them was not the stock itself, but the proceeds from the sale of the stock. It follows from this conclusion that the determination of the respondent must be approved.

Reviewed by the Board.

Decision will l>e entered under Rule 50.

Black, Van Fossan, and Leech dissent.

Trammell,

dissenting: I am unable to agree that the petitioner did not make a completed gift to his children of the stock in question before it was sold. The essential elements of a valid gift inter vivos are set forth in the prevailing opinion. It seems to me that each of these essential elements has been met in this case. The prevailing opinion, itself, answers the only question, in my opinion, as to where there might be doubt, that is, as to delivery by the donor and acceptance of the gift. It is shown that delivery and acceptance meet the legal requirements. Then, as I see it, the prevailing opinion is founded in substance on what it considers an improper motive or purpose on the part of petitioner in making the gift, that is, to reduce his taxes. In other words, the majority opinion in effect holds that an actual gift which meets legal tests will not be recognized if the motive in making it is to reduce taxes. I agree that the petitioner, as the natural guardian of his children, had the right to receive the gift for them, notwithstanding he was the grantor, or it might well be held that the transaction whereby petitioner transferred the stock to his children amounted to his constituting himself trustee for them. If it was a gift and title passed, it is immaterial that the petitioner acted in behalf of his children in selling the property. It was sold for them and they received all the benefits thereof, as is shown by all the records. Petitioner never at any time received or had the right to receive any of the proceeds of the sales to give to the children. They did not receive them from petitioner. Their accounts were credited directly by the brokers. It is rather difficult to see how it can be said that petitioner gave the proceeds of sales to his children under these circumstances.

In my opinion, too much emphasis has been placed in the prevailing opinion upon the purpose of the petitioner in making a gift to his children. In Marshall v. Commissioner, 57 Fed. (2d) 633, the court said:

There was nothing unlawful or even mildly unethical in the motive of petitioner to avoid some portion of the burden of taxation. There is nothing illegal in a gift of shares of stock by husband to his wife.

There was certainly nothing unethical in the petitioner giving shares of stock to his children for the purpose of reducing the burden of taxation, even though he had in mind at the time that the stock would be sold by or for the children. The question is, Did he make a gift of the stock before it was sold? There was, in my opinion, not only no sale, but no binding obligation or contract to sell entered into before petitioner had effectively and legally given the stock to his children. If there was a completed gift by the petitioner to his children, I see no occasion for the Board to inquire as to the purpose or motive thereof. The only question is whether there was a gift which meets the requirements of the law before the sale so that what the petitioner gave was stock and not the proceeds from the sale thereof, and the question as to why petitioner made a valid gift is beyond the scope of any proper inquiry.

The Circuit Court of Appeals and the Supreme Court, in the case of Commissioner v. Duke, 62 Fed. (2d) 1057; 290 U. S. 591, upheld as a valid transfer a gift in trust from the donor as an individual to himself as trustee, when as trustee he had complete dominion over the property in that capacity to the same extent as he had as owner before the transfer. I therefore do not think it of any particular significance that the petitioner here did order the sal of the stock after he had given it to his children. It is not necessary that a person designate himself as trustee by the specific use of that word if he declares that he holds property for another. The control and dominion in the capacity as trustee for another is not the retention of control and dominion as owner. The Supreme Court so held in the Duke case and in McCormick v. Burnet, 283 U. S. 784, where that question was presented. In both those cases the same individual exercised dominion after the transfer as before. This did not affect the validity of the gift.

Upon either the trust theory or the theory of a completed gift, I think the prevailing opinion is in error.

Ajrundell agrees with this dissent.