author: Black :

text:
    J. S. Pyeatt, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 92125, 93279.
    Promulgated April 18, 1939.

      A. Harding Paul, Esq., for tbe petitioner.

      W. W. Kerr, Esq., for the respondent.
   opinion-.

Black :

The Commissioner has not made very clear Ms position in these proceedings. He has included in petitioner’s income for 1934 all the taxable income of two trusts which in a prior year petitioner had established for his two daughters, Frances and Martha. In his deficiency notice for 1934 the Commissioner does not explain the ground upon which he included the income of these two trusts in petitioner’s income. For 1935 the Commissioner included in petitioner’s income the income of the trust for Martha, but not the income of the trust for Frances. In justification of his action for 1935 the Commissioner cites section 166 of the Revenue Act of 1934.

Inasmuch as Frances married in 1933 and throughout the year 1934 was living with her husband in her own home and all of the 1934 income of the trust created for her benefit was paid to her by the trustee, except $250 which was paid to petitioner just prior to January 14, 1934, and was immediately paid over to Frances by him, we hold that none of the 1934 income of the trust for Frances is taxable to petitioner. The reasons for this holding will be given more at length later on.

We shall now take up the question of the taxability to petitioner of the income in 1934 and 1935 of the trust for Martha. In both of these years Martha was a minor and the tax consequences for both years of the income of this trust are the same.

The Commissioner has not filed any brief, but his counsel at the hearing stated that the Commissioner is relying upon Douglas v. Willcuts, 296 U. S. 1, and the line of cases decided in pursuance thereof. We presume that the Commissioner’s contention that all the income of the trust for Martha for both taxable years is taxable to petitioner is based upon the following language in the trust: “* * * to pay or apply the net income from the other one of said equal shares and so much of the principal as shall be required, as herem-after 'provided to or for the use of the said Martha Elizabeth Pyeatt * * (Italics supplied.) Evidently the Commissioner has interpreted “as hereinafter provided” to refer only to the principal of the trust and the trust itself to provide that all the income of the trust should be used for the support and maintenance of Martha during her minority. If this were the correct construction of the trust instrument, then unquestionably the Commissioner’s contention that Douglas v. Willcuts, supra, applied to all the income of the trust for Martha for both years would be correct. Cf. Helvering v. Stokes, 296 U&. S. 665. However, we do not construe the language above mentioned to refer only to the principal of the trust, but construe it to also apply to the income and to provide that both shall be distributed “as hereinafter provided.” When we look to the trust instrument to find out what provision is “hereinafter provided” for distribution for the support and maintenance of the minor, we find the language contained in paragraph 5 of the trust instrument as set out in our findings of fact. The language in paragraph 5 in some parts is not free from ambiguity. That is true as to the provision for a maximum distribution of $3,000 for the support and maintenance of the minor in any one year. We construe the meaning of the language of the trust in this respect to mean substantially this: The trustee shall pay out of income a maximum amount of $3,000 for the support and maintenance of the minor in any one year. This shall be paid upon the written request of the grantor or his wife, Myra Loy Pyeatt, and if the income is not sufficient for that purpose then the trustee shall invade the principal to make up the full $3,000.

The testimony at the hearing was to the effect that both the grantor and the trustee interpreted the trust indenture as above indicated in their dealings with the trust. We think the trust indenture is fairly susceptible to the construction which has been given it by the parties thereto. Therefore we hold that Douglas v. Willcuts, supra, does not apply except as to the maximum of $3,000 of the income which within the discretion of the grantor could be used for the support and maintenance of Martha. See our discussion in Jay C. Hormel, 39 B. T. A. 244. Cf. Phebe Warren McKean Downs, 36 B. T. A. 1129; Hudson v. Jones, 22 Fed. Supp. 938.

Petitioner relies upon E, E. Black, 36 B. T. A. 346, and other similar Board and court cases to support his contention that he is taxable only on the small amounts of income which he actually received from the trust in the two taxable years. These amounts are shown in our findings of fact. The Black case held in substance that, where the trust instrument confers upon the trustee the discretion to use all or part of the income of the trust for the support and maintenance of the minor and the evidence shows that none of the income was so used, then none of the income of the trust is taxable to the grantor who Avas legally liable for the support and maintenance of the minor. To the same effect is Hudson v. Jones, supra; Higgins v. White, 93 Fed. (2d) 357. See G. C. M. 18972, Cumulative Bulletin, 1937-2, p. 231, which cites the Black case.

We do not think the foregoing authorities are applicable to the facts of the instant case. The discretion as to what part of the income of the trust should be used for the support and maintenance of the minor was not left to the trustee. That discretion was left to the settlor of the trust, petitioner herein, upon whom rested the legal obligation to support and maintain Martha during her minority. Fie was limited, however, to $3,000 which he could draw in any one year. The income in 1934 was ample to pay the full $3,000 Avithout invading any part of the principal. It is true petitioner drew only $236 from Martha’s trust in 1934, but he might have drawn the full $3,000 if he had so desired. The only reason that he did not draw it was because he did not care to, but preferred to pay most of Martha’s expenses out of his own pocket. We think that in such a situation section 167 (a) (2) of the Eevenue Act of 1934 Avould be applicable to $3,000 of the income of the trust, even though only $236 Avas withdrawn. That section reads: “(a) Where any part of the income of a trust * * * (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor * * * then such part of the income of the trust shall be included in computing the net income of the grantor.”

In such a case the doctrine of the Supreme Court in Corliss v. Bowers, 281 U. S. 376, as well as the express language of the foregoing statute applies^ “The income that is subject to a man’s unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or hot.”

The situation in the instant case, as we have already remarked, is distinguishable from that which existed in E. E. Black, supra, and that line of cases. In those cases the settlor could not go to the trustee and demand all or part of the income within his own discretion. He could get only such part of the income as the trustee, within the exercise of his discretion might pay to the settlor. In such latter circumstances, as we have already pointed out, the Board and the courts have held that, where the evidence shows that none of the income was used for the support and maintenance of the minor, the income of the trust is not taxable to the settlor.

As we have already stated, the Commissioner in his deficiency notice for the year 1935 justified his action by a reference to section 166 of the Revenue Act of 1934. Section 166 relates to revocable trusts as to corpus. The trusts in the instant case were not revocable as to corpus and we think Section 166 has no application.

It might be contended that all the income of the trusts herein was taxable to petitioner under section 167 (a) (1) because the trust indenture contains á provision which reads: “In event of the death of said Frances Edith Pyeatt and Martha Elizabeth Pyeatt before the termination of this trust, without issue surviving, then said Trustee is directed to pay over the principal of said trust funds, together with any accumulations of income thereon, to the Grantor * * Undoubtedly, under the doctrine of Kaplan v. Commissioner, 66 Fed. (2d) 401, such a contention would be plausible. There, the court, in construing a statute substantially the same in language as section 167 (a) (1) of the Revenue Act of 1934, said: “We think the statute means that if under any circumstances or contingencies any part of the accumulated income might inure to the benefit of the grantor such portion of the income is taxable to him.” (Italics ours.) The Kaplan case, supra, was decided July 24, 1933, which was prior to the Supreme Court’s decision in Helvering v. St. Louis Union Trust Co., 296 U. S. 39, and Becker v. St. Louis Union Trust Co., 296 U. S. 48, in which it was held that such a provision in a trust as we have quoted above from the Martha trust was a mere “possibility of re-verter” and was not sufficient to require an inclusion in the decedent^ estate of property conveyed in trust by decedent in his- lifetime. Plainly, the language which we have quoted from the Kaplan case, supra, has been narrowed by these later decisions of the Supreme Court.

We cited these Supreme Court cases as our authority for holding in William E. Boeing, 37 B. T. A. 178, that the income of a trust was not includible in the grantor’s income although the trust instrument contained a possibility of a reverter if the beneficiary should die before reaching the age of thirty and prior to the death of the grantor. See also John Edward Rovensky, 37 B. T. A. 702; Meredith Wood, 37 B. T. A. 1065: Henry A. B. Dunning, 36 B. T. A. 1222.

Therefore, under authority of the foregoing cases, we hold that the income of the trusts is not taxable to petitioner because of the fact that under the terms of the trust both the accumulated income and the corpus of the trust might revert to petitioner if Frances and Martha died prior to petitioner and provided also they died without issue. Another reason, aside from any of the reasons given in the foregoing opinion as affecting the trust for Martha, as to why none of the income from the trust for Frances should be taxed to petitioner, is that Frances married in 1933 and was living with her husband in her own home in 1934. The trust indenture provided: “* * * in the event that either of said beneficiaries shall marry before the termination of the trusts hereby created, * * * the Trustee is to have absolute and sole discretion in the matter of disbursing the income to the end that the whole thereof shall be applied exclusively to and for the support, maintenance and education of those whom this agreement is intended to protect and benefit, and to this end, the Trustee shall require, if necessary, a submission of vouchers before disbursing such income.” See paragraph 6 of the trust indenture set out in our findings of fact.

A representative of the trustee testified at the hearing and said that the trustee, acting under the foregoing provisions of the Frances trust, exercised its discretion and paid over all the income of the trust for Frances in 1934 to her except the $250 which was paid to petitioner shortly prior to January 14, 1934, the date when Frances became twenty-one years of age. The trustee did not explain why this $250 was paid over to petitioner, but petitioner testified that the check was promptly endorsed by him and paid to Frances. It was not used to discharge any legal obligation of petitioner, cf. Douglas v. Willcuts, supra, because Frances was married and living in Denver, Colorado. Under the laws of Colorado a parent is not legally liable for the support of his married daughter. Perkins v. Westcoat, 3 Colo. App. 338. See also 46 Corpus Juris, sec. 46, p. 1269. We hold, therefore, that the $250 which was paid to petitioner in 1934 from the income of the trust for Frances and was in turn paid over to Frances by him is not taxable to petitioner.

In conformity with the foregoing opinion, we hold that none of the income of the trust for Frances is taxable to petitioner in 1934, and that $3,000 of the income from the trust for Martha is taxable to petitioner in each of the years 1934 and 1935, which includes the comparatively small amounts that were actually distributed to him in those years.

Keviewed by the Board.

Decision will be entered under Rule 50.


source: Caselaw Access Project

author: Murdock :

license: Public Domain

text:
    Estate of George Tuttle Brokaw, Dec’d., United States Trust Company of New York and Frances Seymour Brokaw, as Executors, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90091.
    Promulgated April 18, 1939.

      Harry J. Ahlheim, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner determined a deficiency of $73,403.81 in estate tax. The only issue is whether the Commissioner erred in including in the gross estate $312,884.47 representing the fair market value at the date of the death of the decedent of property transferred by him in trust. The parties have filed a stipulation of facts, which is hereby adopted as the Board’s findings of fact.

George Tuttle Brokaw, the decedent, died on May 28, 1935. He was survived by his first wife, Ann Clare Brokaw, their daughter, Ann Clare Brokaw, and also by his second wife. The petitioner was first ¡married in 1923. He and his wife separated in the latter part of 1928 and they never thereafter lived together. Their daughter lived with her mother.

The decedent and his first wife entered into a separation agreement on January 31, 1929. The decedent agreed among other things to discharge certain debts of his wife and to pay her $2,500 per month for the term of her life. The money was to be used for her own support and maintenance and also for the support, maintenance, and education of their daughter. Divorce and remarriage were not to affect the provisions of the agreement. The monthly payments were to bei a charge upon the estate of the husband in case he predeceased Ms wife. The wife released all of her rights in the estate of her husband. The agreement contained the following provision:

In the event, however, that the hnsband shall at any time hereafter establish a trust in the principal sum of Four Hundred and twenty-five thousand ($425,000) Dollars, the income of which shall be payable to the wife during her life, then from and after the date that such trust is established, the obligation of the husband and of his estate to make the aforesaid payment of Twenty-five hundred ($2500) Dollars a month shall cease, and the income from the said trust shall be accepted by the wife in full satisfaction and discharge of the obligation of the husband to make the aforesaid monthly payments, and the provisions of this agreement with reference to the application of the aforesaid monthly payments shall apply with full force and effect to the income from the said trust. Such trust may be established by the husband during his lifetime, or by will, or by instrument executed during his lifetime, which becomes effective as to the trust Upon the death of the husband.
For the purpose of said trust the husband may deposit securities, and such securities shall be valued at the market value as of a date to be agreed upon between the parties in writing; * * *

The amount of $2,500 per month was fixed by the parties as the approximate amount reasonably required for the support of the wTife and daughter in accordance with their station in life and with the decedent’s ability to furnish such support. The parties contemplated that about one-third of the amount would be devoted to the support of the daughter during her minority. The decedent paid his wife $2,500 per month for February, March, April, and May, 1929. The property of the decedent in 1929 was worth more than $1,425,000.

The wife after January 31, 1929, instituted an action of divorce and obtained an absolute decree of divorce from the decedent on May 20, 1929. The decree ratified and approved the separation agreement and made it enforceable as a part thereof. The decedent then notified his wife that he intended to establish the trust and the two agreed that certain securities should constitute the principal of the trust fund. The decedent had prepared a trust agreement in January 1929 for use in case he exercised his option to establish a trust and the wife had approved the form of that agreement. He delivered the trust agreement on June 12, 1929, to the Guaranty Trust Co. and to his wife as the trustees named therein, together with the securities. The fair market value of the securities placed in the trust at the time of its creation was $414,324.50. The wife accepted the trust in lieu of all other payments to be made to her by the decedent.

The trust income is payable to the wife during her life. She is given a power of appointment by will over $200,000 of the corpus. The balance of the corpus, or the entire corpus in case there is no valid exercise of the power of appointment, goes to the daughter at the death of the wife or to her lawful issue, if any. If she leaves no issue, then the corpus goes to the decedent, or as he shall appoint by will. The trust agreement contains a provision that the decedent and his wife might terminate, modify, alter, or revoke the trust in whole or in part. It was modified in 1933 in some minor and unimportant particulars.

The decedent made no further monthly payments to his wife after May 1929, but thereafter the wife received the net income of the trust. The gross income of the trust varied from $22,097.32 in 1931 to $13,679.89 in 1936. The securities constituting the trust fund were of the fair market value of $312,884.47 at the date of the decedent’s death. The respondent included that amount in the gross estate.

The wife was twenty-six years of age when the trust was established. The daughter was then four and one-half years of age. The then value of an annuity of $30,000 payable to a person then twenty-six years of age was $529,794.12.

Section 302 (d) of the Revenue Act of 1926 provides that there shall be included in the gross estate the value of property :

To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke * * * except in case of a bona iide sale for an adequate and full consideration in money or money’s worth.

The following was added by an amendment on June 6, 1932:

For the purpose of this title, a relinquishment or promised relinquishment of dower, curtesy, or of a statutory estate created in lieu of dower or curtesy, or of other marital rights in the decedent’s property or estate, shall not be considered to any extent a consideration “in money or money’s worth.”

The Commissioner concedes that the transfer was not made in contemplation of death, all of the transactions were bona fide and for the purposes mentioned, the transfer took effect immediately, the corpus is not taxable because of any retention of income, and the Joint Resolution of March 3,1931, and section 803 (a) of the Revenue Act of 1932 have no application. See Hasset v. Welch, 303 U. S. 303; James C. Webster, 38 B. T. A. 273, 281. Since the transfer was one where the enjoyment was subject at the date of the death of the decedent to change through the exercise of a power by the decedent in conjunction with his wife to alter, amend, or revoke, section 302 (d) applies unless there was adequate and full consideration in money or money’s worth for the transfer. Helvering v. City Bank Farmers Trust Co., 296 U. S. 85; Helvering v. Stevens, 297 U. S. 693. Thus, there is squarely presented the question of whether there was an adequate and full consideration in money or money’s worth for the transfer.

The petitioner contends that the trust was founded upon an adequate and full consideration in money or money’s worth, since it was made in discharge of the decedent’s obligation to pay his wife $2,500 per month as fixed by the divorce decree, which had the effect of an enforceable judgment. The parties have stipulated that the wife had a dower interest in real estate which interest was worth $20,591.85 in 1929 and she “had and would have no other dower right or statutory estate created in lieu of dower or other marital rights in her deceased husband’s property or estate.” That stipulation was in accordance with the law of the State of New York as it was at that time. Despite the fact that the wife had no other interest in his estate, the decedent was legally obliged so long as he lived to support her and to support his daughter during her minority. Although it has been held that even prior to the enactment of section 804 of the Revenue Act of 1932 the release of dower was not consideration in money or money’s worth, Sheets v. Commissioner, 95 Fed. (2d) 727, affirming 35 B. T. A. 220; Empire Trust Co. v. Commissioner, 94 Fed. (2d) 307, affirming 35 B. T. A. 866; Eben B. Phillips, 36 B. T. A. 752, nevertheless, this case does not depend upon that rule of law.

The relinquishment of dower was only a part of the consideration for the transfer in trust and there was other valuable consideration, consisting of the release and discharge of the legal obligation of the decedent to support and maintain his wife and minor child. The right of the wife and child to that support was not a right in the deceased husband’s property or estate. Edythe C. Young, Executrix, 39 B. T. A. 230. It was a right which would cease at his death. The stipulation further shows that the release or discharge of that obligation was of a value at least equal to that of the securities transferred to the trust. The agreement was reached by parties dealing at arm’s length. The stipulation contains the following statement with reference to the payments of $2,500 per month:

* * * Said sum was estimated and fixed by agreement of the parties, as the approximate amount reasonably required for the support and maintenance of the wife, Ann Clare Brokaw, and of the daughter, Ann Clare Brolraw, in accordance with their station in life and with his ability to furnish such support and maintenance.

It was also stipulated that the value of an annuity of $30,000, payable to a person of the age of the wife, was $529,794.12. Consequently, it seems reasonable to conclude that the discharge of the obligation was at least worth $414,324.50. Therefore, we conclude that the corpus of the trust can not be included in the decedent’s gross estate under section 302 (d), as amended, for the reason that there was an adequate and full consideration in money or money’s worth for the transfer of the securities to the trust.

Decision will be entered under Rule 50.


author: Mellott ;

text:
    Blanche G. Penn, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90760.
    Promulgated April 19, 1939.

      A. F. Schaetzle, Esq., for the petitioner.

      Hugh Brewster, Esq., for the respondent.
   OPINION.

Mellott ;

Respondent determined a deficiency in petitioner’s income tax for the calendar year 1934 in the amount of $681.92. The sole issue is whether or not all or any part of the income of a trust created by petitioner is taxable to her either under the provisions of section 166 or 167 of the Revenue Act of 1934.

All of the facts have been stipulated. For the purposes of this decision they may be summarized as follows:

Petitioner is a resident of Des Moines, Iowa, and for the taxable year filed a Federal income tax return with the collector of internal revenue at Des Moines.

On August 27, 1932, the petitioner executed the following instrument:

Deed of Trust.
Know Axl Men by These Presents :
That, I, Mrs. Blanche Penn, of Chicago, Illinois, Settlor, do hereby assign, transfer and convey unto Mrs. Blanche Penn and Mrs. Bessie Reynolds of Chicago, Illinois, as Co-trustees, or to their successor, the property described in Schedule “A” hereto attached and made a part hereof, to be held by said Co-trustees in trust for the uses and purposes herein set forth.
1. In disposing of the income and principal of this trust the Co-trustees’ duties shall be:
(a)To deposit and keep the property of this trust at the Chicago office of Halsey, Stuart & Company for safekeeping only and receipts therefor shall be issued by said Halsey, Stuart & Company to the Co-trustees evidencing its receipt and possession thereof for safekeeping. This depository of said property may be changed by the Co-trustees only with the written approval of Albert Penn of Des Moines, Iowa.
(b) To apply the sum of $150.00 per month out of the income of the trust to the use of Mrs. Bessie Reynolds during her lifetime. For the purpose of meeting any contingency arising due to the fact that the income from investments should not provide sufficient funds to take care of the monthly payments of $150.00, a surplus cash fund of $500.00 shall be accumulated out of excess monthly interest income and maintained at all times with Halsey, Stuart & Company to obviate the necessity of drawing on the principal. Any income in excess of the $150.00 per month, and the surplus cash fund, both above mentioned, shall be allowed to accumulate and when the excess amounts to the sum of $1,000.00, the Co-trustees shall reinvest said sums in securities, which must be approved in writing by Albert Penn.
(c) The securities making up the corpus of this trust may be changed by the Co-trustees but only with the written approval of Albert Penn.
(d) When securities are purchased at a premium by the Trustees or Trustee, it shall not amortize such premiums, but the current income received from such securities shall be credited entirely to the income account, and any depreciation to the trust estate on account of the sale or maturity of such securities purchased at a premium shall be charged to and borne by the principal of the trust estate, and likewise where securities are purchased by the Trustees or Trustee at a discount, all current income arising from such securities shall be credited entirely to the income account, and any increase or appreciation to the trust estate on account of the sale or maturity of such securities so purchased at a discount shall be added to and. become a part of the principal of the trust estate.
(e) Upon the death of Mrs. Blanche Penn or Albert Penn, or if Albert Penn desires to be relieved of the responsibility of approving the additional and/or change in investments, or in the event of Mrs. Blanche Penn’s inability to act as trustee, before the terms of the trust are fully carried out, then the property in this trust and any replacements thereof or additions thereto, shall pass to a successor trustee, and the Northern Trust Company of Chicago, Illinois, is hereby nominated as such successor trustee. The duties of such successor trustee shall be:
(1) To retain property coming into its hands in the same form as received by it and to invest and reinvest the same and the proceeds therefrom or from any part thereof in corporation, railroad, public service corporation, municipal or government bonds, mortgages or other securities, and to sell, alter or change the investments thereof until the final and complete distribution of the trust estate as hereinafter provided, without being in anywise restricted by any present or future laws governing the investment or administration of trust funds.
(2) To pay to Mrs. Bessie Reynolds the sum of $150.00 per month during her lifetime out of the income of the trust. Any income in excess of said $150.00, and the surplus fund, both hereinbefore mentioned, shall be allowed to accumulate and when this sum accrues to the sum of $1,000.00, a successor trustee shall reinvest said amount in securities, which it, in its discretion, deems a wholesome investment.
(f) This trust shall terminate upon the death of Mrs. Bessie Reynolds, at which time the property of the trust shall revert to Mrs. Blanche Penn, if then living, and if deceased to her heirs at law or to those whom she may designate in her will.
(3) I hereby reserve the right by an instrument in writing delivered to the Co-trustees to modify, alter and amend this instrument, provided, however, that the duties and responsibilities of the Co-trustees shall not be substantially increased without their written consent and provided that no such modification, alteration or amendment shall in any way or to any extent revoke or change the beneficial interest established hereunder or the enjoyment thereof.
(4) This trust shall take effect September 1, 1932, if accepted by the Co-trustees and in all respects shall be governed by the laws of the State of Illinois, except as under such provisions as are otherwise clearly defined.

By amendment to the deed of trust dated September 18, 1934, the depository for the securities was changed from Halsey, Stuart & Co. to the Iowa Des Moines National Bank & Trust Co. of Des Moines, Iowa.

The deed of trust and the amendment were duly carried out in accordance with their terms.

During the calendar year 1934, and prior to October 1 of that year, Halsey, Stuart & Co. collected interest in the amount of $1,708.75 on the securities contained in the trusteeship. Of this amount $1,508.75 represented interest subject to Federal income tas and $200 represented interest on municipal securities which were exempt from Federal income tax. Halsey, Stuart & Co. disbursed the sum of $150 per month for the nine months from January to September 1934, Avhich was applied to the use and benefit of Bessie Eeynolds, in accordance with the terms of the trust instrument.

For the balance of the year 1934, i. e., the pei'iod from October 1 to December 31, the Iowa Des Moines National Bank & Trust Co. collected interest on the securities turned over to it by Halsey, Stuart & Co. in the aggregate amount of $463.84 and disbursed the sum of $450, during this period, for the use and benefit of Bessie Reynolds. Of the total interest received by the Iowa Des Moines National Bank & Trust Co. the sum of $351.16 represented interest subject to Federal income tax and the sum of $112.68 represented interest on municipal securities which was exempt from such tax.

The receipts and disbursements may be summarized as follows:

Receipts:
Interest wholely taxable- $244.91
Interest on which 2% was paid at source_1,615.00
Interest exempt from all Federal income tax- 312. 68
Gross income of trust. 2,172.59
Disbursements :
Amounts paid to Bessie Reynolds at the rate of $160 per month per terms of the trust_$1,800. 00
Copy of photostatie copy- 1.22
-$1,801.22
Balance of income_ 371.87

A capital loss in the sum of $1,209.48, not taken into account in tli8 foregoing statement of receipts and disbursements, was suffered by the trust upon sale of securities. The parties have stipulated that this loss is limited to the sum of $553.57 under the capital gains and loss percentages provided in the Revenue Act of 1934.

Respondent added the sum of $1,859.91 to the taxable income reported by petitioner on her return for the year 1934. No deduction has been allowed to the petitioner with respect to the capital loss suffered by the trust upon the sale of securities.

Petitioner contends that none of the income from the trust herein referred to is taxable to her. Respondent contends that all or some part of the income is taxable to her under the provisions of either section 166 or 167 of the Revenue Act of 1934.

Respondent’s first contention is that the income realized by the trust is taxable to the petitioner under section 166 of the Revenue Act of 1934 and article 166 — 1 of Regulations 86, as amended by T. D. 4629, XY-1 C. B. 140 (1936), (a) because of the reversionary interest retained by her and (b) because she remained in substance the owner of the corpus. Section 166 of the Revenue Act of 1934 provides:

SEC. 166. REVOCABLE TRUSTS.
Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested—
(1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
(2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, then the income of such part of the trust shall be included in computing the net income of the grantor.

Article 166 — 1 of Regulations 86, as amended, construes this section as follows:

Aiít. 166-1. Trusts, loith respect to the corpus of which, the grantor is regarded as remaining in substance the owner.—
********
(b) Section 166 defines with particularity instances in which the grantor is regarded as in substance the owner of the corpus by reason of the fact that he has retained power to revest the corpus in himself. For the purposes of this article the grantor is deemed to have retained such power, if he, or any person not having a substantial interest in the corpus or the income therefrom adverse to the grantor, or both, may cause the title to the corpus to revest in the grantor. If the title to the corpus will revest in the grantor upon the exercise of such power, the income of the trust is attributed and taxable to the grantor regardless of—
(1) whether such power or ability to retake the trust corpus to the grantor’s own use is effected by means of a power to revoke, to terminate, to alter or amend or to appoint;
(2) whether the exercise of such power is conditioned on the precedent giving of notice, or on the elapsing of a period of years, or on the happening of a specified event;
(3) the time at which the title to the corpus will revest in the grantor in possession and enjoyment, whether such time is within the taxable year or not, or whether such time be fixed, determinable, or certain to come;
(4) whether the power to revest in the grantor title to the corpus is in the grantor, or in any person not having a substantial interest in the corpus or income therefrom adverse to the grantor, or in both. A bare legal interest, such as that of a trustee, is never substantial and never adverse;
(5) when the trust was created.

In support of liis contention that the income of the trust here involved should be included in petitioner’s taxable income because of the reversionary interest retained by her, respondent relies on Warren H. Corning, 36 B. T. A. 301 (on appeal, C. C. A., 6th Cir.). In that case the settlor of two trusts reserved to himself the power, after his father’s death, to revoke or amend the trusts and revest himself of the corpus. Our holding that, because of the retention of such power, the income of the trusts was taxable to the settlor, does not justify the respondent’s position that a settlor retaining a reversionary interest is in the same category. Section 166 provides that before the income of a trust can be taxed to the grantor there must be a “power to revest” in him title to some part of the corpus of the trust. Article 166 — 1 also refers to a power to revest. This Board has held that a reversionary interest or a possibility of re-verter is not a power to revest within the meaning of this section. William, E. Boeing, 37 B. T. A. 178 (on appeal, C. C. A., 9th Cir.), and John Edward Rovensky, 37 B. T. A. 702.

In support of his contention that the income of the trust should be taxed to petitioner because she remained in substance the owner of the corpus, respondent cites and relies upon Estate of A. C. O'Laughlin, 38 B. T. A. 1120; Benjamin F. Wollman, 31 B. T. A. 37; William C. Rands, 34 B. T. A. 1107; and George B. Clifford, Docket No. 89054, an unreported memorandum opinion of this Board entered September 26, 1938. In the cited cases this Board held that the income of certain trusts should be taxed to the settlors because they retained such control and enjoyment of the corpus of the trusts that they remained in substance the owners of the corpus after the execution of the trust instruments. In these cases the settlor named himself as trustee, provided in substance that the securities remain in his name and in his possession; and that he should have the right to sell any property constituting the corpus and reinvest the proceeds without restriction; to accumulate the income and invest it as if these funds were owned by him; to determine what is income and what principal; and in the case of stock to exercise voting powers and appoint proxies. In the instant case petitioner did not name herself as sole trustee; did not keep the trust corpus in her possession; and could not change the securities constituting the trust corpus without the consent of her cotrustee, the beneficiary, and Albert Penn, her husband. She did, however, reserve the right to modify, alter, and amend the trust instrument, but provided that no such modification, alteration, or amendment should revoke or change the interest of the beneficiary or its enjoyment. In our opinion petitioner did not have the broad and extensive powers over the trust corpus which were retained by the petitioners in the cases relied upon by the respondent, and was not in substance the owner of the corpus after the provisions of the trust instrument were executed.

While the contentions of the respondent that the income of the trust is taxable to her because of the reversionary interest retained or because she was in substance the owner of the corpus are not sound and can not be approved, the income of the trust, if any, in excess of $1,800 per annum is taxable to the petitioner. Section 167 (a) (1) of the Revenue Act of 1934 provides that, where any part of the income of a trust is held or accumulated for future distribution to the grantor, then such part of the income of the trust shall be included in computing the net income of the grantor. Petitioner on brief concedes that any income of the trust in excess of $1,800 per annum is taxable to her under the provisions of section 167 (a) (1), supra. She contends, however, that, before there could be any accumulation of income for her, as grantor, capital gains would have to be added to, and capital losses deducted from, the income of the trust, and that when this was done there was no income during the taxable year which could be accumulated for her benefit. The stipulated facts disclose that the income of the trust for 1934, without regard to capital gains and losses, was $2,172.59, and that $1,800 of this amount was distributed to the beneficiary and $1.22 spent for a photostat, leaving $371.37 to be accumulated for the benefit of the grantor if capital losses are not considered. The stipulated facts disclose that during the taxable year the trust sold certain securities and sustained a capital loss of $553.57. We agree with petitioner that such a loss must be deducted from other trust income not distributed to the beneficiary in determining what income, if any, could be accumulated for the benefit of the grantor. Inasmuch as the capital loss of $553.57 exceeded the $371.37 ordinary income not distributed to the beneficiary, it is our conclusion that no part of the income of the trust for the year 1934 is taxable to petitioner.

Judgment will be entered for the petitioner.


author: ArüNdell :

text:
    Sada G. Wilson Blake, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89109.
    Promulgated April 19, 1939.

      Ralph E. Smith, Esq., for tbe petitioner.

      B. M. Goon, Esq., for tbe respondent.
   OPINION.

ArüNdell :

The petitioner contends that all depreciation allowable in respect of the trust corpus should be allowed as deductions from her portion of the trust income, rather than allocated among all the income beneficiaries of the trust. The applicable statutory provisions are section 23 (k) of the Revenue Act of 1932 and section 23 (1) of the Revenue Act of 1934. Both provide:

In the ease of property held in trust the allowable deduction [for depreciation] shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each.

The instrument creating the trust in this case contains no provision for apportionment of deductions between beneficiaries and trustees, and it appears that none of the income goes to the trustee, as the will provides for distribution of all of the income to beneficiaries. Petitioner does not claim that any depreciation is allowable to the trustees. It is conceded by the petitioner that the beneficiaries designated in the will are beneficiaries of income as distinguished from annuitants. Cf. Irwin v. Gavit, 268 U. S. 161, and Burnet v. Whitehouse, 283 U. S. 148. They are, therefore, “income beneficiaries” as the quoted statute uses that term.

The statute, as far as pertinent here, allows depreciation deductions to the income beneficiaries and the trustee “on the basis of the trust income allocable to each.” Eliminating the trustees from consideration, as they received no income, the statute then quite plainly provides that depreciation deductions are allowable to the income beneficiaries on the basis of the trust income allocable to each of such beneficiaries. Where there is only one income beneficiary, and no provision for apportionment of income to the trustee, we have held that such beneficiary is entitled to depreciation deductions even though there is no income from the trust property. Sue Carol, 30 B. T. A. 443. In the Carol case, after reviewing the legislative history of section 23 (k) of the Revenue Act of 1928, which is the same as the provisions here under consideration, we said:

From the legislative history above set forth, it is clear that Congress intended to grant to both life tenants and beneficiaries under trust instruments the same privilege of deducting the depreciation allowance as that enjoyed by any other individual. The allowance to the income beneficiary, however, was subject to any specific provision relating thereto which might be contained in the trust instrument, or, lacking any suck provision, to any division of trust income designated therein. The section has no other limitations whatever to the income beneficiary’s right to the depreciation allowance.

There is nothing in the statute, nor in the opinion in the Carol case, upon which to base the exclusion of any income beneficiary from a proportionate share of the allowable deduction for depreciation. Each beneficiary has a substantial interest in the property. Blair v. Commissioner, 300 U. S. 5. Where it is intended to allow a deduction to the owners of any particular interest, the statute has provided therefor. Thus, it is provided that in the case of a life tenancy with remainder over, depreciation is to be allowed to the life tenant. No similar provision is made in the provisions relating to income beneficiaries. Each of the beneficiaries named in the will, including this petitioner, is an income beneficiary and, as we read the statute, each is entitled to a portion of the depreciation deduction allowable based on, the income allocable to each. The Commissioner is sustained.

Decision will Toe entered for the respondent.


author: Hill:

text:
    Frank M. Dixon, Petitioner, v. Commissioner of Internal Revenue, Respondent. Lloyd G. Bowers, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 91246, 91247.
    Promulgated April 19, 1939.

      Lloyd G. Bowers, Esq., for the petitioners.

      L. W. Greason, Esq., for the respondent.
   OPINION.

Hill:

The sole question presented for determination is whether the income received by petitioners as compensation for services in suits against the Government for the recovery of War Eisk insurance under the World War Veterans’ Act of 1924 and amendments thereto is exempt from taxation. If it is so exempt our decision must be for the petitioners. If it is not exempt the deficiencies must be approved.

Petitioners contend that the income received from the fees in question is exempt from taxation under the provisions of the World War Veterans’ Act of 1924 as amended, as set forth in sections 454, 454a, 445, and 551, Title 38, Part V, U. S. C. A.

Section 454 provides in part as follows:

The compensation, insurance, and maintenance and support allowance payable under Parts II, III, or IV, respectively, shall not be assignable; * * * and shall be exempt from all taxation. * * *

This section was modified by act of Congress approved August 12, 11935, cli. 510, sec. 3, 49 Stat. 607, and as modified appears as section 454a, supra, which provides in part as follows:

Payments of benefits due or to become due shall not be assignable, and such payments made to, or on account of, a beneficiary under any of the laws relating to veterans shall be exempt from taxation, * * *

Section 445 provides in part as follows:

In the event of disagreement as to claim under a contract of insurance between the bureau and any person or persons claiming thereunder an action on ¡the claim may be brought against the United States either in the Supreme Court >of the District of Columbia or in the district court of the United States in and for the district in which such persons or any one of them resides, and jurisdiction is conferred upon such courts to hear and determine all such controversies. * * *

Section 551 provides in part as follows:

Except in the event of legal proceedings under section 445 of this chapter, mo claim agent or attorney except * * * shall be recognized in the presentation or adjudication of claims under Parts II, III, and IV, of this chapter, and ¡payment to any attorney or agent for such assistance as may be required in the ¡preparation and execution of the necessary papers in any application to the bureau shall not exceed $10 in any one ease: Provided, however, that wherever a judgment or decree shall be rendered in an action brought pursuant to said section 445 of this chapter the court, as a part of its judgment or decree, shall (determine and allow reasonable fees for the attorneys of the successful party or parties and apportion same if proper, said fees not to exceed 10 per centum of the amount recovered and to be paid by the bureau out of the payments to be made under the judgment or decree at a rate not exceeding one-tenth of each of such payments until paid. Any person who shall, directly or indirectly, solicit, contract for, charge, or receive, or who shall attempt to solicit, contract for, charge, or receive, any fee or compensation, except as herein provided, shall be guilty of a misdemeanor, and for each and every offense shall be punishable by a fine of not more than $500 or by imprisonment at hard labor for not more than two years, or by both such fine and imprisonment.

Petitioners argue that since attorneys are deprived of the right of fixing the amount of their compensation by contract in War Risk insurance litigation and receive direct from the Government payment of their fees for such services in such amount as the court shall fix, within the statutory limitation, out of tax-exempt moneys recovered under the judgment or decree rendered in such litigation, the income realized from fees is a part of such tax-exempt moneys and is, itself, tax-exempt in the hands of the attorneys.

The respondent contends, on the other hand, that petitioners realized income as compensation for personal service rendered litigants in War Risk insurance and that such income is taxable regardless of the means of payment of such compensation; that the fact that such compensation was paid out of a tax-exempt award to the litigant does not affect the taxable status of the income so received by petitioners.

We agree with the contention of respondent. Section 22 (a) of the Revenue Act of 1934 provides:

(a) GeneRíx Definition.' — “Gross ineome” includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses * * *.

Such income of petitioners does not come within the exclusions from gross income as provided in section 22 (b), nor does it come within the deductions from gross income allowable under section 23 of the act. It is apparent, therefore, the compensation in question must be included hi petitioners’ gross income in determining their tax liability.

Sections 454 and 454a, supra, make an award for War Risk insurance exempt from taxation. Such award is made to the veteran under his contract with the Government. An attorney who represents the veteran in a suit against the Government to secure such award is not a party to such contract and is not a beneficiary thereunder. No award for insurance is made to him. He performs services for which he is compensated in the manner provided under section 551, supra. He accepts the statutory provisions as to the amount and method of his compensation when he agrees to render such service. The Government can not be sued without its consent. In giving such consent it may impose conditions which must be complied with. United States ex rel. Norris v. Forbes, 278 Fed. 331.

Petitioners voluntarily accepted employment imder the provisions of this statute. They realized income from the performance of personal service therein even though they were powerless in determining the amount thereof. That service was paid for by the Government for, and out of moneys belonging to, petitioners’ client. The moneys with which the payment was made was exempt from taxation as against the insured veteran, but as representing income to petitioners for personal service performed it is taxable. Hitner v. Lederer, 63 Fed. (2d) 877.

Decision will be entered for the, respondent.


author: Leech : Sternhagen,

text:
    Lewis Hunt Mills as Administrator De Bonis Non of the Estate of Evelyn Scott Mills, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91734.
    Promulgated April 20, 1939.

      Charles E. McCulloch, Esq., Fletcher Bochwood, Esq., and Thomas B. Stoel, Jr., Esq., for the petitioner.

      John E. Pigg, Esq., for the respondent.
   OPINION.

Leech :

The Commissioner determined a deficiency of $713.86 in the 1935 income tax of the decedent, Evelyn Scott Mills, by treating as her income the capital gain resulting from the sale or other disposition of securities by a trustee. The determination was predicated on Eevenue Act of 1934, section 166, and the petitioner, in assailing it, contests the applicability of that section. This is the sole issue in the case, and the facts have all been stipulated.

In 1927 the decedent, by a written instrument, created a trust, the income of which was to be distributed to her. The only provision of the instrument which is material to the present issue is as follows:

II
Application op Income and Coepus. The gross income derived from said Trust property, which shall come into the hands of the Trustee, shall be applied by the Trustee to the purposes and in the order following:
*******
(3)In the event it shall develop that the net income derived from said Trust Property shall be insufficient to furnish to said Trustor the funds to which she has been accustomed for the upkeep of her home and her personal enjoyment, then to pay from the corpus of said Estate to said Trustor or to said Lewis Hunt Mills on her behalf (or to any other of said beneficiaries upon the express request of said Trustor) such amount as may in the discretion of said Trustee be reasonably necessary for such purpose.

It is conceded that, under the law of Oregon, by which the trust is controlled, the trustee must add these capital gains to the corpus of the trust.

Kespondent supports his position upon two premises, the existence of both of which is essential to his determination. These premises are: (1) That the trustee was a person “not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom”, and (2) that, “the power to revest in the grantor title to * * * the corpus of the trust is vested” in such trustee. The petitioner denies both premises.

Inasmuch as the trustee had no interest in the corpus, except as trustee, it did not have a “substantial adverse interest” within the meaning of section 166, supra. Reinecke v. Smith, 289 U. S. 172; Witherbee v. Commissioner, 70 Fed. (2d) 696; Sterling Morton, 38 B. T. A. 1283.

In the present trust instrument, the trustee was authorized “to pay from the corpus of said Estate to said Trustor or to said Lewis Hunt Mills on her behalf (or to any other of said beneficiaries upon the express request of said Trustor) such amount as may in the discretion of said Trustee be reasonably necessary for said purpose.” That purpose is defined in the earlier part of the paragraph.

Respondent argues that such provision vested in the trustee a power to revest corpus of the estate in the decedent, settlor. That such power was vested, if at all, in the trustee, as such, does not contradict its character as a “power” within section 166, supra, particularly because its limitation, if it was such, was as broad as the “enjoyment” of the settlor. See Rollins v. Helvering, 92 Fed. (2d) 390, affirming 34 B. T. A. 319; certiorari denied, 302 U. S. 763; Fanny M. Dravo et al., Executors, 34 B. T. A. 190; Daisy Christine Patterson, Executrix, 36 B. T. A. 407; appeal dismissed, 99 Fed. (2d) 1007; but compare Higgins v. White, 93 Fed. (2d) 357; First Rational Bank of Boston v. Welch, 24 Fed. Supp. 695. However, that power could be exercised, only, if and when “it shall develop that the net income derived from said Trust Property shall be insufficient to furnish to said Trustor the funds to which she has been accustomed for the upkeep of her home and her personal enjoyment.” True, the happening of that contingency was ascertainable. Ithaca Trust Co. v. United States, 279 U. S. 151. Nevertheless, it was “a contingency in the nature of a condition subsequent, the occurrence of which was entirely fortuitous so far as any control, design, or volition on his part was concerned.” Helvering v. St. Louis Union Trust Co., 296 U. S. 39. And, “Since the contingency alone makes possible the exercise of the power, it is no power at all until the contingency occurs, or at most an incipient or inchoate power, Sugden on Powers, vol. 1, §§ 320, 321.” John Edward Rovensky, 37 B. T. A. 702, at page 704. See Phebe Warren McKean Downs, 36 B. T. A. 1129; also I. T. 3238, 1938 Int. Rev. Bull. No. 50. The power here to revest corpus in the settlor, decedent, did not vest, therefore, until and unless the contingency occurred upon which it could be exercised. John Edward Bovensky, supra; Phebe Warren McKean Downs, supra. Trust income for 1935, alone, is involved. It is admitted that none of the corpus was distributed to the settlor during that year. But neither that fact nor anything else, yet, in the record contradicts the occurrence of such contingency during that period. See Daisy Christine Patterson, Executrix, supra.

It was petitioner’s burden to show error in respondent’s determination. Since he has failed, thus far, to contradict the occurrence of the contingency upon which the exercise of the power to revest corpus depended, we think he has failed to establish error in the contested determination.

Reviewed by the Board.

Decision will be entered under Bule 50.

Opeek concurs in the result.

Disney concurs only in the result.

Sternhagen,

dissenting: In my opinion there was in no one “the power to revest in the grantor title to any part of the corpus of the trust.”

While I am inclined to think that for present purposes the trustee may properly be regarded as having a substantial adverse interest by reason of his duty to retain the corpus for other beneficiaries against unfounded demands of the settlor, and that Reinecke v. Smith, 289 U. S. 172; Witherbee v. Commissipner, 70 Fed. (2d) 696; certiorari denied, 293 U. S. 582; and Sterling Morton, 38 B. T. A. 1283, are distinguishable because they involved reserved powers of the settlor, I pass that question and assume arguendo with the prevailing opinion that the trustee is not a person having a substantial adverse interest.

The necessity for the occurrence of the objective “event”, i. e., the insufficiency of income for the settlor’s customary needs and enjoyment, seems to me to make it impossible to say that there was a power in either the grantor or the trustee to revest in the grantor title to any part of the corpus. The settlor was given no power at all. Upon the trustee, the happening of the contingency imposed a duty to invade the corpus to the extent necessary to provide for the settlor’s customary needs and enjoyment. According to the Commissioner’s view, no matter how remote may be the possibility of such a distribution of corpus, the mere possibility must bo recognized as the equivalent of a “power.” Note too that this “power” is regarded as requiring that all the income of the entire trust is to be attributed and taxed to the settlor, irrespective of any relation it may have to the amount which she may possibly at some undeterminable time need. The statute only requires that she be taxed upon “the income from such part of the trust” as she or the trustee has power to revest in her. But here, despite the fact that she received nothing and no one has claimed that her income is inadequate for her needs, the latent power is said to require taxing her with all the trust income in every year. I am impelled to disagree with both the interpretation of the statute and with its application here.

I also think it is improper and unfair to place the decision adverse to the petitioner on the failure to prove that the contingency did not arise. The case was submitted on a written stipulation and the question submitted by both parties was whether by the terms of the twist instrument the settlor or trustee could be said to have such a power to revest as the statute described. No one suggested at any stage of the proceeding, from the deficiency notice through the reply brief, that there was a question of fact. I venture to think that if it had been intimated that the settlor might in the taxable year have needed more than the income of the trust for her maintenance and customary enjoyment and thus could have demanded some of the corpus, the petitioner would have introduced proof and perhaps could have clearly proven the negative. Indeed, from the fact that she made no such demand and that the trustee made no such payment to her, it is reasonable to infer that there was no occasion for it.

Upon the only issue litigated I am of opinion that decision should go for the petitioner.

AeuNdell, Van Fossan, Murdock, Black, and HaReon agree with this dissent.

      SEC. 166. REVOCABLE TRÜSTS.
      Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested—
      (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
      (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,
      then the income of such part of the trust shall be included in computing the net income of the grantor.


author: Leech:

text:
    Daniel P. Woolley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87285.
    Promulgated April 21, 1939.

      Ellwood W. Kemp, Jr., Esq., G. A. Donohue, Esq., and Elden McFarland, Esq., for the petitioner.

      Gonway N. Kitchen, Esq., for the respondent.
   OPINION.

Leech:

The single issue presented is whether the income of the trust for the period from June 19, the date of petitioner’s relinquishment of Ms power of revocation of the trust, to December 31, 1934, was taxable to the petitioner.

The Revenue Act of 1934 is controlling. Section 161 (a) (4) provides, inter alia, that the income tax imposed by the act shall apply to the income of trusts “including * * * income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated.” Section 162 (c) of this act provides that the amount of such trust income for the taxable year, which is, under the trust, properly paid or credited during such year to a beneficiary, shall be allowed as a deduction in computing the net income of a trust, but shall be included in the net income of the beneficiary for that year.

None of the trust income for the period June 19 to December 31, 1934, which is here in controversy, was “properly paid or credited during * * * [1934] to any beneficiary.” Thus, under sections 161 and 162 of the Revenue Act of 1934, that income was properly included in the net income of the trust and taxed as such, unless ex-cludable therefrom and taxable to the settlor, under sections 166 and 167 of the same revenue act and the regulations construing those sections. Arts. 166-1 and 167-1, Regulations 86.

In our judgment, the facts here disclose that the trust, while originally revocable, was, in effect, validly amended on June 19, 1934. Thereafter it was irrevocable, terminating, by its terms, on January 1, 1937.

The trust, as thus amended, is the only one with which we are here concerned. Olive H. Prouty, 30 B. T. A. 1068. It was simply a trust for a term of years. The only right in reference to the corpus of that trust, under its terms which petitioner, grantor, had, at any time, was to have that corpus returned to him at its termination. The Board has held that such a right in the grantor does not constitute a vested power to revoke the trust, and thus revest himself of its corpus, but is a mere reversion. Meredith Wood, 37 B. T. A. 1065 (on appeal, C. C. A., 2d Cir.); John Edward Rovensky, 37 B. T. A. 702; Phebe Warren McKean Downs, 36 B. T. A. 1129. See also I. T. 3238, 1938 Int. Rev. Bull. No. 50. Cf. Warren H. Corning, 36 B. T. A. 301 (on appeal, C. C. A., 6th Cir.). Upon the authority of those cases, we hold that none of the contested income was taxable to the petitioner under section 166, supra.

Section 167 of the Revenue Act of 1934 provides, so far as is here pertinent, that trust income shall be taxed to the grantor when any part of such income is, or in the discretion of the grantor or of any person not having a substantial interest in the disposition of such part of the income, may be accumulated for future distribution to the grantor, or when, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition thereof, such income may be distributed to the grantor. But, not only because of less direct implications contained in the trust instrument, but particularly because of the express directions therein taken in connection with the fact that Robert W. Gardner, Jr., or his estate, was the only infant beneficiary during the tax year, he, or his estate, was the only possible recipient of the accumulated income of the trust for that year. Thus, the applicability of section 167 is confined to the second alternative. It is true that the income of the trust may be distributed, when not accumulated, to petitioner.

But such distribution may be made by Ethel Y. Woolley, the trustee, “in her sole, absolute and uncontrolled discretion, * * * to and among one or more of [the beneficiaries] * * * in accordance with their respective needs * *

If that discretion, thus limited, is not within the meaning of “discretion” as used in section 167, rnpra (see Higgins v. White, 93 Fed. (2d) 357; First National Bank of Boston v. Welch, 24 Fed. Supp. 695), obviously the section would not apply. On the other hand, if that limitation does not deprive this power to distribute of the discretionary character to which the section refers (see Lewis Himt Mills, Administrator, 39 B. T. A. 798, and cases cited therein), then Ethel Y. Woolley, trustee, can exercise that discretion by distributing any part of the contested income to herself, as beneficiary. Since the settlor is a like beneficiary of this income, though even thus contingent, this right of the trustee constitutes a substantial adverse interest to that of the settlor. Sophia P. O. Morton, 38 B. T. A, 419; Jane B. Shiverick, 37 B. T. A. 454. Thus, under the express terms of the statute, section 167 is not applicable.

The grantor was not the trustee here. The grantor reserved the right to direct the trustee to buy or sell property when funds were available from corpus or income, and to lease property, but even then the trust instrument significantly provided that such sales or purchases must be made at the fair market price. Nothing restricted the trustee from making such investments or sales as she desired in her discretion. The petitioner, grantor, reserved no right under the trust instrument to borrow from the trust estate with or without security, nor to vote stock held by the trust.

So, respondent’s contention, if it be a separate one, that petitioner did not divest himself of control of the corpus of this trust other than by power of revocation, so as to preclude its taxibility to him as grantor (see Warren E. Corning, supra), we think is likewise without merit. Commissioner v. Waterbury, 97 Fed. (2d) 383; Henry A. B. Dunning, 36 B. T. A. 1222; Carson Estate Co., 31 B. T. A. 607; aff'd., 80 Fed. (2d) 1007.

The income of the trust from June 19 to December 31, 1934, was properly taxable to the trust for that year and not to the grantor, the petitioner here.

Reviewed by the Board.

Decision will be entered under Rule 50.

       SEC. 163. REVOCABLE TRUSTS.
      Where at any time the power- to revest in the grantor title to any part of the corpus of the trust is vested—
      (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
      (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,
      then the income of such part of the trust shall be included in computing the net income of the grantor.
      SEC. 167. INCOME FOR BENEEIT OF GRANTOR.
      (a) Where any part of the income of a trust—
      (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or
      (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or
      (3) is, or in tho discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes, and in the manner specified in section 23 (o), relating to the so-called “charitable contribution” deduction) ;
      then such part of the income of the trust shall be included in computing the net income of the grantor.
      (b) As used in this section, the term “in the discretion of the grantor” means “in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question.”


author: Opper:

text:
    Genevieve F. Moore, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 94648.
    Promulgated April 21, 1939.

      A. F. EiTlix, Esq., and Paul F. Moore, Esq., for the petitioner.

      Carroll Walker, Esq., Elizabeth B. Fegan, Esq., Arthur E. Fast, Esq., and Irving M. Tullar, Esq., for the respondent.
   OPINION.

Opper:

The question is whether the petitioner is taxable on income of trust property conveyed by her for the benefit of her six children.

It is first contended by respondent that the provisions of section 167 (a) (1) of the Revenue Acts of 1934 and 1936 are applicable in that the income may be accumulated for the ultimate benefit of the grantor. As we read the trust agreement income may be accumulated, but, in order that such accumulations can ultimately revert to the grantor, the following contingencies would be requisite: Death of all six of grantor’s children prior to arriving at the age of 35 (or, as to the “Protective Fund”, at any time), without having executed a testamentary power of appointment if at the time of death they are unmarried and have testamentary capacity, and without issue who survive to the age of 35 or for 21 years after the death of the last of the grantor’s children.

Only upon the happening of all of these events could any interest in the accumulations revert to the grantor. Since the grantor is 56 years of age and her children range from 16 to 30 years of age, the improbability of the contingency is extreme. Without suggesting that the provisions of section 167 depend for application upon the propinquity or remoteness of the contingency upon which the grantor may take the accumulations, it seems clear that we have here the same “mere ‘possibility of reverter’ ” (cf. Mary Ryerson Frost, 38 B. T. A. 1402), of which we said in William E. Boeing, 37 B. T. A. 178, 185, “we do not. think that where such bare possibility exists the income of the trust may be said to be ‘held or accumulated for future distribution to the grantor’, within the meaning of section 167.”

As a second ground, not mentioned in the deficiency notice and relied upon for the first time in his brief, respondent points to that part of the trust instrument which provides that "the trustees may invest in and/or pay the premiums upon any life insurance contracts or annuities for the benefit or welfare of any beneficiary or beneficiaries hereunder, * * * ” as justifying the application to this proceeding of subdivision (a) (B) of section 167.

While on its face section 167 might appear to apply, it has, so far as can be discovered, never been considered applicable even by the respondent as broadly as is now suggested. In Charles Stewart Mott, 30 B. T. A. 1040, where the Board held that the payments which could have been made upon life insurance policies were to be taxed to the grantor, it is evident that respondent made no effort to tax the entire income of the trust to him, but only the comparatively small proportion which represented premiums on insurance policies then in force. Even as to these the Board was reversed in 85 Fed. (2d) 315 (C. C. A., 6th Cir.). In Frank T. Heffelfinger, 32 B. T. A. 1232, the Commissioner for certain years charged petitioner with premiums paid on an insurance policy and in other years included the entire income of the trust. We said (p. 1234) :

Clearly the Commissioner erred as to 1928, 1929, and 1930 in including in the petitioner’s income more than the part of the income of the trust applicable to the payment of the premiums on the policy.

Apparently, no appeal from this part of the decision was taken by the respondent. The Board’s decision, in so far as appealed from, was affirmed by the Circuit Court of Appeals for the Eighth Circuit, 87 Fed. (2d) 991 (certiorari denied, 302 U. S. 690). See also Frank D. Yuengling, 27 B. T. A. 782, 784. And the respondent’s regulations can be said to justify this position.

It follows that application of the provision in question depends upon the existence in the tax year of policies upon which it would have been physically possible for the trustees to pay premiums and upon the amount of the premiums so payable. There is no evidence in the record as to either of these points, and the form of the deficiency letter avoided in this instance the imposition upon petitioner of the burden of disproving any facts with relation thereto. On both issues therefore the respondent’s determination must be overruled.

Decision will he entered under Rule 50.

       Revenue Acts of 1934 and 1936—
      SEC. 167. INCOME EOR BENEFIT OF GRANTOR.
      (a) Where any part of the income of a trust—
      *******
      (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (o), relating to the so-called “charitable contribution” deduction) ;
      then such part of the income of the trust shall be included in computing the net income of the grantor.

       E. g., Regulations 86, art. 167-1. * * *
      (b) * * * Such a distribution also occurs if the income is applied in payment of premiums upon policies of insurance on the grantor’s life.


author: Smith:

text:
    John McKeon, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 85516.
    Promulgated April 21, 1939.

      Laurence L. Cassidy, Esq., for the petitioner.

      George R. Sherriff, Esq., for the respondent.
   OPINION.

Smith:

The petitioner is an unmarried man residing at the Bilt-more Hotel, New York City. He filed an income tax return for 1931 in which he reported a gross income of $314,434.61, deductions of $213,854.77, and a net loss from the prior year of $63,328.40, leaving a net taxable income of $37,251.44. The tax reported as due on the return was $2,424.59.

The respondent has determined a deficiency against the petitioner for 1931 of $43,248.49 and a 50 percent fraud penalty under section 293 (b) of the Revenue Act of 1928 in the amount of $21,624.25.

In petitioner’s income tax return the principal income items listed were:

Salaries, wages, commissions, etc., from Paramount Famous
Players_$23, 618. .90
Profits in trading account with Sisto & Co., 67 Wall Street, New
York City_ 284, 853. 60
Profits on joint account known as Sisto-McKeon- 27, 646.51
Among the principal deductions claimed in the return were:
Interest paid to Sisto & Co-$16,540.77
Bad debts_ 25,439.00
Loss on operation of racing stable in Paris, France_ 23,000.00
Other deductions_ 170,000.00

In his deficiency notice the respondent made the following adjustments in computing petitioner’s net income:

Add:
1. Interest received- $15.01
2. Loss on race horses disallowed- 23, 000. 00
3. Bad debts disallowed- 21,700.00
4. Other deductions disallowed- 110,089.63
5. Commission received_ 20,000.00

Adjusted net income was shown as $275,385.28. Respondent allowed the deduction of a 1930 net loss of $56,657.40.

Following are shown the several items claimed by the petitioner in his return under “Other Deductions”:

Telephones, telegrams, cables, etc- $3,000
One-half rent at Hotel Biltmore, New York City- 2, 650
Clerical hire, commissions, etc., paid in United States- 25,000
Clerical hire, commissions, etc., paid abroad- 13, 050
Entertainment and miscellaneous expenses- 30,000
Salary for secretary- 12,000
Legal fees in United States- 7,500
Legal fees abroad_ 15,000
Automobile expense_ 1,200
Chauffeur_ 2,600
Gambling losses- 58,000
Total_ 170,000

In his deficiency notice the respondent allowed $59,910.47 and disallowed the balance, $110,089.53, under “Other Deductions.” The items allowed by the respondent were as follows:

Telephone, telegrams and hotel expense_$3,000. 00
Entertaining expense- 534. 84
Payments to P. A. Dinneen and Harry Norris- 10, 700. 00
Salary of secretary_ 1, 820. 00
Legal fees_ 2, 500. 00
Gambling losses- 41,,355.63
Total_59, 910.47

Petitioner alleges in his petition that the respondent erred generally in determining the deficiency and the fraud penalty and that he erred specifically in making each of the above adjustments shown in the deficiency notice, except as to the inclusion in gross income of the item of $15.91 additional interest received.

As a basis for the assessment of the fraud penalty the respondent alleges in his answer that the petitioner in his 1931 return described his occupation as “broker”, whereas he was a mere trader in securities and not a broker; that the petitioner in his return claimed the deduction of $23,000 as a loss on the business of raising and developing race horses in France, whereas the petitioner sustained no such loss; that the petitioner in his return claimed the deduction of certain bad debts amounting in the aggregate to $25,439, whereas “the petitioner not only is unable to show that these alleged debts became uncollectible in 1981, but is even unable to show that he ever made any such loans to the persons named” and that the claim for the deduction was fraudulent with intent to evade tax; that in his return the petitioner claimed under “Other Deductions” certain excessive deductions, that is, in excess of the deductions allowed by the Commissioner in his deficiency notice, for losses which he did not sustain and for ordinary and necessary expenses which he did not incur; that in computing the amount of his claimed 1930 net loss of $63,328.40 carried forward to 1931 the petitioner failed to include in his 1930 income an item of $20,000 which he received in that year as compensation for services in negotiating the sale of certain shares of Warner Brothers Pictures, Inc., stock for the estate of Jules E. Mastbaum; and that in his return for 1931 the petitioner claimed a personal exemption of $3,500 and a credit for dependents of $800, whereas petitioner in 1931 was not a married man, was not the head of a family, and had no dependents.

We shall first consider the computation of the correct tax liability, upon which the burden of proof is upon the petitioner.

The petitioner did not appear at the hearing. In attempting to prove that the petitioner was entitled to many of the deductions claimed his attorney relied principally upon the testimony of an internal revenue agent who had made an examination of the petitioner’s records for the purpose of verifying the return. The revenue agent was handicapped in his investigation by the fact that the petitioner kept no books of account. The only records available were check book stubs, canceled checks, and correspondence contained in the pe-tioner’s files, supplemented by testimony of the petitioner’s attorney. As will be noted from the return, the petitioner claimed under “Other Deductions” $170,000, of which the respondent allowed the deduction of only $59,910.47. Out of the $170,000 “Other Deductions” claimed the revenue agent found total payments made in the amount of $84,072.86. The respondent did not accept as deductible items all of the payments found by the revenue agent.

As to what the petitioner’s activities were in 1931 is shrouded in much mystery. On his return he stated his business as that of “broker.” The attorney for the petitioner testified that in prior years the petitioner had been a “theatrical broker” and the designation of “broker” was used in the 1931 return as characterizing the petitioner’s business, but it appears from the evidence that the petitioner was simply a trader in securities in 1931 and had other activities from which he received compensation from Paramount Famous Players Lasky Corporation of $23,618.90. The petitioner had an account with Sisto & Co. as brokers and made large profits from short sales of securities in that account in 1931. He also had an account with the brokers under the name of Sisto-McKeon. This was a joint account and the petitioner had profits from this account in 1931 of $27,646.51.

Although the petitioner had no office with Paramount Famous Players Lasky Corporation and was not on the pay rolls of that corporation as an employee, he nevertheless performed some service for the corporation in securing the cooperation of public officials whose assistance was necessary in connection with the construction of a marquee for the Paramount Theatre Building in New York City.

The gross income returned by the petitioner for 1931 has been increased by the respondent in the amount of $15.91, which increase is not questioned, and also by the amount of $20,000 representing ‘‘Commission received.” Upon the basis of the evidence the respondent does not now claim that the gross income returned should be increased in the amount of $20,000, but he does claim that the net loss brought forward from 1930 and allowed as a deduction from gross income for 1931 in the amount of $56,657.40 should be reduced to $36,657.40 by reason of the fact that the petitioner received, as contended by the respondent, compensation for services rendered in 1930 in the amount of $20,000.

At this point it may be stated that there is no evidence before the Board that the petitioner carried on a regular trade or business in 1931 which would warrant the bringing forward of any net loss for 1930. But the respondent has allowed the deduction of a net loss brought forward in the amount of $56,657.40 and the respondent does not contend that the petitioner is not entitled to deduct from his gross income of 1931 any net loss which the petitioner may have sustained for 1930. He seeks only to reduce the amount of the net loss of 1930 from $56,657.40 to $36,657.40.

Briefly stated, the facts bearing upon this issue are as follows: Sometime near the close of 1928 the executors of the estate of Jules E. Mastbaum, deceased, one of whom was the decedent’s widow, obtained the petitioner’s assistance in disposing of some shares of Warner Brothers Pictures, Inc., preferred stock, of which the estate held a large block. Because of the petitioner’s close friendship with the Mastbaum family he did not ask for and did not expect any compensation for the services which he rendered. In 1929, however, Mrs. Mastbaum and the other executor, Morris Wolf, feeling that the petitioner should receive compensation from the estate for the services which he had rendered, mailed the petitioner a check for $2,500 with the following letter dated April 19, 1929:

Dear Jack:
At Etta’s suggestion, and with my entire acquiescence, I am enclosing check of the Estate for $2500, as a slight evidence of our appreciation of your help in connection with the sale of the stock of Warner Brothers Pictures, Inc.
Very truly yours,
MW/B
Enc.
Mr. John Mc-Keon
1560 Broadway,
New York City, N. Y.

On April 22, 1929, petitioner returned tlie check to Morris Wolf with the following letter :

Dear Morris:
I am returning to you check which you and Etta so kindly sent me.
I have thought this matter over and I cannot see where I am in any way entitled to compensation from the Jules E. Mastbaum Estate.
Thanking both you and Etta for your expressions of appreciation, I am,
Very truly yours,
[Signed] J. J. McKeon
Mr. Morris Wolf,
Estate of Jules E. Mastbaum
#1204 Packard Building,
Philadelphia, Pa.

In the following- year, 1930, the executors again asked the petitioner to assist them in disposing of an additional lot of shares of the same stock, which the petitioner did. This transaction involved 16,000 shares and amounted to about $1,000,000. The sale of the shares was made in April 1930. There was no agreement about any compensation to be paid to the petitioner and no mention of the matter was made by any of the parties at the time. About two months later, however, Mrs. Mastbaum told her coexecutor that she had talked the matter over with her children and that even though the petitioner had said that he did not want anything for his services they would not feel comfortable unless a payment was at least offered to him. Accordingly, the executors tendered the petitioner payment of $20,000 and the petitioner accepted the amount. The executor, Morris Wolf, who is an attorney of long standing, testified that he considered the estate under no legal obligation to make the payment, but that it was done purely as a matter of satisfaction to Mrs. Mastbaum and others of the family and himself.

In the income tax return filed on behalf of the Mastbaum estate for 1930, which was prepared by a firm of accountants, the item of $20,000 paid to the petitioner as set forth above was deducted from the amount realized upon the sale of the shares of Warner Brothers Pictures, Inc., stock. The return in question showed a large net loss without benefit of the deduction of the $20,000.

The above facts show, we think, that the payment of the $20,000 to the petitioner by the executors of the Mastbaum estate in 1930 was purely gratuitous. There was no contract or understanding of any kind that the petitioner would be compensated for his services and apparently there was no binding obligation on the estate to pay. As said in Earl S. 14 B. T. A. 393, 407, “Payments gratuitously made, though on account of some past act or service, do not constitute taxable income.” Also, in Herman T. Dietrick, 6 B. T. A. 1371, we said:

There was never any charge made by petitioner for any information or counsel he gave or any service he rendered the Bruners or either of them, nor was there any promise made or any assurance, express or implied, given him that he would be paid or compensated for what he did for them. The 216 shares of stock issued to petitioner were an absolute gift, which was made or prompted by the feeling of moral obligation and high sense of appreciation on John W. Bruner’s part, for the kind and valuable services rendered him and his son by a genuine friend.
The fact that petitioner’s friendship, suggestions, and services were beneficial to the Bruners does not convert what was clearly a tona fide gift to petitioner into compensation, for such services so as to make the amount of the gift income, taxable under the statute.

See also Bogardus v. Commissioner, 302 U. S. 34; Jones v. Commissioner, 31 Fed. (2d) 755; Blair v. Rosseter, 32 Fed. (2d) 286. Cf. Alford J. Williams, Jr., 29 B. T. A. 892, where the taxpayer was held taxable, on the receipt of commissions on a sale of real estate which he demanded and threatened to sue for.

Upon the evidence the Board is of the opinion that the respondent erred in increasing the petitioner’s gross income for 1931 in the amount of $20,000 and that the net loss allowed by the respondent in the determination of the deficiency for 1931 in the amount of $56,657.40 should not be reduced.

In his income tax return the petitioner claimed the deduction from gross income of $23,000 with the following explanation:

Schedule “A”
The taxpayer during the year 1931 conducted a separate business in Paris, Prance, which consisted of the purchase, sale, rearing and development of race horses. None of these horses were sold during the year 1931 but certain of them earned income totaling- $8, 000. 00
In connection with the conduct of this business, the taxpayer sustained a substantial loss due to the following expenses:
Training, boarding, veterinarian hire and incidental expenses _$17, 500. 00
Hire of personnel incident to maintenance of stables— 7, 500. 00
Transportation and travel expenses_ 6, 000. 00
Total expenses- 31,000. 00
Net Boss_-_$23,000. OO

The facts relating to the deduction of the claimed loss of $23,000 are involved in much obscurity. The evidence shows that the petitioner actually made payments to persons in France connected with horse racing. Whether this was a business transaction which would entitle the petitioner upon proof of the amount of the loss, if any, to deduct any loss sustained on the transaction is doubtful. There is no proof whatever that the petitioner operated the racing stable as a business enterprise or for the purpose of profit. It is not in evidence as to whether the racing stable, if one was operated, was entirely closed out in 1931, although it appears that a bank account from which the payments were made was closed out in that year. There is no evidence that the respondent improperly disallowed the claimed loss of $23,000.

In his income tax return the petitioner claimed the deduction for bad debts of $25,439. The respondent has disallowed the deduction of $21,700 representing claimed loans to persons residing in France. There is no evidence to show that the petitioner is entitled to deduct from gross income the bad debts disallowed in the amount of $21,700.

In his return the petitioner claimed the deduction from gross income of “Other Deductions” in the amount of $170,000 and the respondent has disallowed the deduction of $110,089.53 of this amount. There is no evidence in the record that the petitioner is entitled to deduct any part of the amounts disallowed by the respondent in the amount of $110,089.53. Included in the $170,000 “Other Deductions” is the following:

Entertainment for business representing many detailed items which is impossible for the taxpayer to record in detail but which generally include expenditures in meeting and entertaining various persons whose contact it is necessary for the taxpayer to maintain in connection with the conduct of his activities, including luncheons, dinners, gifts and miscellaneous expenses, which it is estimated are not less than $2,500 per month-$30, 000. 00

Of this amount the respondent has allowed the deduction of $534.84. Although it would appear from the findings of the revenue agent that $14,093.79 of the claimed amount was paid, there is no evidence which would show that the petitioner was entitled to deduct any greater amount than allowed ($534.84) as ordinary and necessary expenses of carrying on any trade or business. For lack of proof the determination of the respondent that the entertainment expense deduction in excess of $534.84 is not a legal deduction from gross income is approved.

The petitioner also claimed the deduction from gross income, in “Other Deductions”: Automobile expense $100 per month, $1,200: and chauffeur $50 per week, $2,600.

There is no evidence that the petitioner was entitled to deduct these expenses as ordinary and necessary expenses of carrying on any trade or business.

The petitioner also deducted from gross income the following: “Irene L. Dayton, Secretarial hire, $12,000.00.” The revenue agent found that the actual salary paid to Irene L. Dayton was $1,820 and no more. There is no evidence that any greater amount was paid to Irene L. Dayton, or to any other person, for secretarial services.

Included in the “Other Deductions” also are gambling losses of $58,000. This is described in the return as follows:

Loss on gambling and like transactions entered into by tbe taxpayer for profit in tbe States of Florida, Maryland, Kentucky and New Jersey and abroad. Sucb transactions under the laws of those jurisdictions are held to be legal-$58, 000. 00

The revenue agent found that $41,355.68 had actually been paid and the respondent has allowed the deduction of that amount as gambling losses. There is no evidence that the gambling losses disallowed in the amount of $16,644.37 were actually paid, that the gambling transactions were entered into for profit, or that any part of the gambling losses claimed constitute legal deductions from gross income. The disallowance of the gambling losses in the amount of $16,644.37 is approved.

A careful weighing of all of the evidence in this case convinces the Board that the disallowance of the “Other Deductions” by the respondent in the amount of $110,089.53 was proper.

In his return the petitioner claimed personal exemption and credit for dependents in the amount of $4,300. In such return he stated that he was married and living with his wife and that he was the chief support of two dependents. The evidence clearly shows that the petitioner was not a married man and that he lived alone in his suite at the Biltmore Hotel. There is no evidence that the petitioner was the chief support of any dependents anywhere.

The respondent contends that the income tax return filed by the petitioner for 1931 was false and fraudulent with intent to evade tax within the meaning of section 293 (b) of the Revenue Act of 1928, which provides, so far as material, as follows:

(b) Fraud.- — If any part of any deficiency is duo to fraud with intent to evade tax, then 50 per centum of the total amount of tbe deficiency (in addition to sucb deficiency) shall be so assessed, collected, and paid, in lieu of tbe 50 per centum addition to tbe tax provided in section 3176 of the Revised Statutes, as amended.

Section 907 (a) of the Revenue Act of 1924, as amended by section 601 of the Revenue Act of 1928, provides:

* * * In any proceeding involving tlie issue whether tlie petitioner has been guilty of fraud with intent to evade tax, where no hearing has been held before the enactment of the Revenue Act of 1928, the burden of proof in respect of such issue shall be upon the Commissioner. * * *

The question here is whether the evidence in this case sufficiently shows that the return was false and fraudulent with intent to evade tax. There can he no question that the net income shown in the return was grossly understated and that the petitioner claimed deductions from gross income which he was not entitled to take. If the gross income had been understated and the respondent had borne the burden of proof of showing that the petitioner had a larger gross income than he had reported, and the evidence indicated that the failure to disclose the full amount of the gross income was with intent to evade tax, there could be no question as to the incurrence of the fraud penalty. We think it is equally clear, however, that, where a taxpayer claims the deduction from gross income of amounts which he has not paid or to which he clearly is not entitled and those deductions are made with the intention of understating his correct net income, the return is equally false and fraudulent. See L. Schepp Co., 25 B. T. A. 419.

From a consideration of all of the evidence in this case the only permissible inference is that the petitioner claimed deductions from gross income which he was in no wise entitled to claim. Thus, in his return he claimed the deduction of $12,000 after the title “Irene L. Dayton, Secretarial hire.” The evidence is clear that the petitioner paid Irene L. Dayton a salary of only $1,820.

The evidence is equally clear that the petitioner claimed the benefit of a personal exemption as a married man or head of a family when he was in no wise entitled to such personal exemption and also claimed the credit for two dependents when he was not entitled to that credit. Since section 293 (b) of the Revenue Act of 1928 provides that “If any part of any deficiency is due to fraud with intent to evade tax” and since in our opinion the evidence conclusively shows that the petitioner made deductions from gross income to which he was not entitled, and falsely claimed the benefit of a personal exemption as a married man or the head of a family, we are of the opinion that the return was false and fraudulent and that the penalty provided for by section 293 (b) of the Revenue Act of 1928 was incurred.

Judgment will be entered u/nd&r Rule 50.