author: Mellott:

text:
    Bessie C. Williamson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80545.
    Promulgated June 5, 1936.

      Harry Stiolmey, Esq., and Murray- Seasongood, Esq., for the petitioner.

      G. O. Holmes, Esq., and G. G. Guy, Esq., for the respondent.
   OPINION.

Mellott:

Petitioner seeks a redetermination of the deficiency in income taxes determined by the respondent for the calendar years 1932 and 1933, in the amount of $20,080.22, of which $12,323.69 is for the calendar year 1932, and the balance, or $7,756.53, for the calendar year 1933. All of the facts have been stipulated. The deficiency results from respondent’s determination that petitioner realized taxable gain when she sold certain shares of stock acquired from the estate of her husband. The principal question in dispute is the basis to be used in computing the gain or loss upon the sales.

Petitioner is a resident of Miami Beach, Florida. Her husband, Andrew Wilson Williamson, died intestate on March 28, 1931, being at the time of his death, a resident of Cincinnati, Ohio. He left no children or descendants, his parents had predeceased him, and petitioner was his sole heir at law. She waived her rights to administer the estate. The Fifty-Third Union Trust Co. and William L. McGrath were duly appointed administrators, and qualified by giving bond as such in the Probate Court of Hamilton County on April 17, 1931. They filed their final account and were discharged on June 28, 1932.

At the time of decedent’s death, he was the owner of 3,094 shares of the common stock of the American Bolling Mill Co., which had a fair market value on that date of $29.50 per share, or a total value of $91,273, and 5,932½ shares of the common stock of the Columbia Gas & Electric Corporation which had a fair market value on that date of $41 per share or a total value of $243,232.50. The stocks ■were included in the Federal estate tax return at these valuations, and such valuations were accepted by the respondent in computing the amount of Federal estate taxes payable by the estate.

The gross estate, consisting chiefly of stock,- bonds and real estate, was valued as of March 28, 1931, at $1,048,256.30. Deductions, exclusive of the specific exemption of $100,000, were determined by the Commissioner to amount to $108,435.02. They consisted of the debts of the decedent, expenses of administration, including the fees of the administrators and their attorneys, and the widow’s allowance of $30,000. The net estate subject to the Federal estate tax was determined by the Commissioner to be $839,821.28, and the administrators paid the tax on this basis.

The law of Ohio in effect at the time of the death of the decedent and applicable to estates of decedents dying prior to January 1, 1932, provided that an administrator should, within three months after the date of his bond, sell the whole of the personal property of the estate which was liable for the payment of debts, except stocks and bonds and collectible claims, the sale of which was not necessary for this purpose, and except property selected by the surviving spouse at its appraised value. (General Code of Ohio, sec. 10697.) Petitioner did not make such a selection.

The law of Ohio also provided that if the administrator did not, within six months after his appointment, have notice of demands against the estate which would authorize him to represent it as insolvent, he might proceed to pay the debts due from the estate, without becoming personally liable to any creditor in consequence of such payments made before notice of his demand, even though the remaining estate be insufficient to satisfy such payment. (General Code of Ohio, sec. 10741.)

Petitioner, subsequent to the appointment of the administrators on April 17, 1931, and prior to October 31, 1931, made demand upon them that they sell sufficient assets of the estate to pay the expenses of administration, and taxes; hut the administrators failed to comply with this demand. If they had sold the American Polling Mill Co. stock and the Columbia Gas & Electric Corporation stock between the time of their appointment on April 17, 1931, and July 17, 1931, the highest price they could have obtained for the former would have been $32.37½ per share, and for the latter, $39.37½ per share. The lowest selling price during this period for the American Polling Mill stock was $15.12½ per share and for the Columbia Gas & Electric stock $20.62½ per share.

On June 18, 1932, the administrators entered into an agreement with the petitioner, under the terms of which the Fifth-Third Union Trust Co. agreed to lend petitioner enough money to pay the state inheritance tax, the additional Federal inheritance tax, and all the other expenses and debts of the estate not theretofore paid. Petitioner agreed to execute and deliver notes in the principal sum of the loans to the order of the trust company, with interest at 5 percent, payable when the principal was paid. As security for the payment of these notes petitioner agreed to deliver in pledge to the trust company all of the securities in the estate. The agreement provided that if petitioner should desire to sell any or all of the collateral before maturity of the notes, she should have the right to do so, and the trust company agreed that in every such instance it would make sales thereof upon her written request at the market prices of “listed” stocks and would apply the proceeds on account of the notes. Under the terms of this agreement petitioner obtained loans in the amount of $92,225.53 and on June 20, 1932, advanced this amount to the administrators.

On June 28, 1932, the Probate Court of Hamilton County, Ohio, entered an order directing the distribution in kind of the property of the estate to the person entitled thereto according to law, such person, being the petitioner. This order directed the distribution of the aforesaid 3,094 shares of the common stock of the American Rolling Mill Co. and the 5,932½ shares of the common stock of the Columbia Gas & Electric Corporation. On that date the common stock of the American Rolling Mill Co. had a fair market value of $4.12½ per share, and the common stock of the Columbia Gas & Electric Corporation had a fair market value of $6.12½ per share.

Petitioner made the following sales of part of the stock she acquired from the decedent’s estate:

In her income tax returns for the years 1932 and 1933, petitioner reported losses on these sales, computed by taking the difference between the amounts realized and the fair market value of the shares at the time of the decedent’s death, March 28, 1931. Respondent determined that the petitioner realized gain, taxable at normal and surtax rates, based upon the difference between the amounts realized and the fair market value of the shares on the date of distribution, June 28, 1932.

The petitioner makes several contentions which will be discussed in the order in which they are presented upon brief. Her first contention is that she acquired the stocks in question on March 28, 1931, upon the death of her husband; that they were sold for less than their fair market value at the time of acquisition, and hence that she did not realize any gain.

Section 113 (a) of the Revenue Act of 1932 provides that the basis for computing gain or loss upon property shall be the cost of such property with certain exceptions. The exception with which we are here concerned is that contained in subsection (5) shown in the margin.

Prior to the enactment of the Kevenue Act of 1928, the “basis” section did not contain the clause: “In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer.” (See sec. 204 (a) (5), Kevenue Acts of 1924 and 1926; sec. 202 (a), Kevenue Acts of 1918 and 1921.) This is the clause which is especially applicable here. Preceding acts provided that such “basis” should be the fair market value of the property at the time of acquisition.

In Brewster v. Gage, 280 U. S. 327, the Supreme Court construed the words “time of acquisition” to mean the date of the death of the decedent and held that a residuary legatee acquired certain stocks under the will of his father on that date, and not at the time they were distributed to him. Petitioner insists that we should give the same construction to the words “time of distribution to the taxpayer” used in the 1928 and 1932 Acts which the Supreme Court in Brewster v. Gage, supra, gave to the words, “time of acquisition” used in the earlier acts. This we cannot do because, as the Supreme Court pointed out in the Brewster case, “The deliberate selection of language so differing from that used in the earlier acts indicates that a change of law was intended.”

The petitioner cites and relies upon Goodrich v. Edwards, 255 U. S. 527, in support of her contention that she realized no gain upon the sale of her stocks in the taxable years. In that case a taxpayer acquired stock by purchase prior to March 1, 1913. The stock was sold in 1916 for a price in excess of its March 1, 1913, value, but less than the amount of taxpayer’s investment therein. In holding that there was no taxable gain on this transaction the Supreme Court said:

It is thus very plain that the statute imposes the income tax on the proceeds oí the sale of personal property to the extent only that gains are derived therefrom by the vendor, and we therefore agree * * * that since no gain was realized on this investment by the plaintiff in error no tax should have been assessed against him.

Petitioner argues that she is in the same situation as the taxpayer in Goodrich v. Edwards, supra, but we do not think so. In that case the Supreme Court held that the taxpayer realized no gain because the ampunt realized upon the sale of his shares of stock was not in excess of his capital investment. In the instant case petitioner acquired the stocks which she sold during the taxable years without any cost to her; she had no capital investment in them. Having invested nothing, she is not in the same position as the taxpayer was in Goodrich v. Edwards, supra. Her basis for gain or loss depends upon the will of Congress. It has prescribed such basis to be the fair market value of the property at the time it was distributed to her. It could have provided that it be the cost of the stocks to the decedent; Taft v. Bowers, 278 U. S. 470; or their fair market value when acquired by her. Brewster v. Gage, supra. It did not select the latter basis because at the time of the passage of the 1928 Act there was some doubt as to the meaning of the term “date of acquisition.” (Report No. 2, Committee on Ways and Means, 70th Cong., 1st sess., p. 18; Report No. 960, Committee on Finance, 70th Cong., 1st sess., p. 26.) In providing that the basis for gain or loss on personal property acquired by intestacy should be its fair market value at the time of distribution, the intention of Congress was to fix a time which would be definite and would not give rise to controversy. (Report of Committee on Ways and Means, supra.) The use of this basis in computing the gain realized by petitioner in the instant case does not result in the taxation of any part of her capital investment in the property sold because, as heretofore pointed out, it was acquired without cost to her. In our opinion, the respondent did not err in using the basis for gain or loss provided by Congress in section 113 (a) (5) of the Revenue Act of 1932, in computing petitioner’s taxable gain from the sales of stock here involved.

Petitioner’s second contention is that section 113 (a) (5), supra, is unconstitutional. The question of the constitutionality of section 113 (a) (6) of the Revenue Act of 1928, which is similar in all particulars to section 113 (a) (5) of the 1932 Act, was considered by this Board in Harry G. Haskell, 30 B. T. A. 855; aff'd. (C. C. A., 3d Cir.), 78 Fed. (2d) 869; certiorari denied, 296 U. S. 652. In that case it was said:

Congress lias the power to provide that in determining gain or loss from the sale of property acquired by gift the basis shall be the cost of the property to the preceding donor. Taft v. Bowers, 278 U. S. 470; Richard T. Keeley, 15 B. T. A. 804; Magdaline McKinney, 16 B. T. A. 804. We therefore see no valid reason why Congress may not provide that in determining gain or loss from the sale of property acquired under a will the basis shall be its fair market value at the time of its distribution to the taxpayer, as was proposed by the respondent in this case and as has been sustained by us.
* ⅜ * * * * *
* * * We fail to see anything arbitrary or capricious in the classifications made by Congress in section 11S (a) (5) and find in them nothing that works unreasonable or unjust discriminations between taxpayers.

After the Circuit Court of Appeals affirmed our decision in this case on June 19, 1935, a motion for rehearing was filed by the taxpayer. The court, in a per curiam decision, dated September 17, 1935, said:

On further examination we find no sufficient reason for granting a rehearing. The question of the constitutionality of the Act was not overlooked and we find no reason to sustain that contention. So holding, the motion for rehearing is denied.

In view of the foregoing we are unable to agree with this contention of petitioner and must hold that section 113 (a) (5), supra, is constitutional. (Cf. Ralph W. Harbison, 26 B. T. A. 896.)

The next contention of the petitioner is that as to the sales of stock made by her during 1933, she is entitled to have the gain resulting therefrom taxed as capital net gain under the provisions of section 101 of the Eevenue Act of 1932, this stock having been held by her for more than two years. The respondent concedes that this contention accords with the views expressed by the Supreme Court in McFeeley v. Commissioner, 296 U. S. 102, and petitioner’s tax on these sales will be computed as provided in section 101 upon the recomputation under Bule 50.

The remaining contentions of petitioner are in the alternative. She contends that if the value at the date of distribution is to be taken as the basis, then we should find such “date of distribution” to be when distribution should have been made under Ohio law. She states that the ordinary practice in Ohio has long been to settle and distribute estates of an intestate at the end of six months after the appointment of the administrator, and that if the administrators had done their duty in this case, the basis for determining gain or loss would have been much higher than it was when the probate court, on June 28, 1932, entered the order of distribution. We do not deem it necessary or essential to the decision of the question involved in this proceeding, to discuss whether the administrators should have distributed the shares of stock to petitioner within six months after their appointment. We are concerned only with ascertaining the basis at the time of distribution in accordance with section 113 (a) (5), supra. We hold that the time of distribution was June 28, 1932. Harry G. Haskell, supra; Arthur E. Braun, Trustee, 29 B. T. A. 1161; William R. Huntley, 30 B. T. A. 931; Harwood Robbins, 33 B. T. A. 880; and Emma W. Davis, 32 B. T. A. 943. The fair market value of the stocks at that time (which value has been stipulated) is the basis which must be used in computing petitioner’s gain.

The remaining alternative contention of the petitioner is that the sales “were, in substance, made by the administrator”; that they “should not be treated as her sales because she did not have complete control over the securities” either before or at the time of their sale; and that she did not have control of the proceeds after the sales. She argues that the arrangement by which the property was distributed — under an agreement by which a bank advanced to her the amount necessary to pay taxes and other expenses — merely shifted the claims against the estate to personal claims against her; that the securities were still retained by one of the administrators, and, notwithstanding the order of distribution, no “right of enjoyment vested” in her. With this contention we can not agree. She has stipulated that she “sold” the stocks in question. 'They unquestionably belonged to her, and, subject only to the lien of the bank which had advanced funds to her, she could do with them as she pleased. She chose to sell a portion of such stocks and to liquidate her indebtedness; the balance of the proceeds derived from such sales belonged to her and could be used by her as she saw fit without accounting to anyone.

It is our conclusion that respondent did not err in determining a deficiency, but the amount thereof must be adjusted in accordance with the views herein expressed.

Judgment will be entered under Rule 50.

       Sec. 113. (a) (6) Pkoteety transmitted at death. — If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent’s estate from the decedent, the basis in the hands of the estate shall be the fair market value of the property at the time of the death of the decedent. In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. In the case of property transferred in trust to pay the income for life to or upon the order or direction of the grantor, with the right reserved to the grantor at all times prior to his death to revoke the trust, the basis of such property in the hands of the persons entitled under the terms of the trust instrument to the property after the grantor’s death shall, after such death, be the same as if the trust instrument had been a will executed on the day of the grantor’s death.


source: Caselaw Access Project

author: Leech:

license: Public Domain

text:
    Charles W. Nash, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81414.
    Promulgated June 5, 1936.

      Glauide M. Souohins, Esq,, and John E. Walicer, Esq., for the petitioner.

      Chester A,, Gwinn, Esq., for the respondent.
   OPINION.

Leech:

The petitioner seeks a redetermination of a deficiency in income tax of $12,715.32 for the year 1932, and, in addition, claims that he made an overpayment of income tax for that year in the amount of $27,472.06.

The facts have been stipulated in writing and are adopted by us as our findings of fact, as follows:

1. The petitioner is an individual whose residence was and is at 6221 Third Avenue, Kenosha, Wisconsin. For all years herein material, including the calendar year 1932, the petitioner kept his books and made his Federal income tax returns and his income tax returns to the State of Wisconsin on a cash receipts and payments basis.
2. Prior to the year 1926 and at all times since, the petitioner was and now is married and living with his wife.
3. For all the years herein material, the petitioner filed his Federal income tax returns as required by law and likewise filed his State income tax returns with the State of Wisconsin as required by the laws of that State.
4. Pursuant to á provision in the State income tax law imposing upon the petitioner a tax based upon and measured by the income of his wife, the State of Wisconsin assessed against and collected from him for the years 1926 to 1931, inclusive, taxes aggregating $81,346.50. The petitioner paid the aforesaid taxes to the State of Wisconsin for the above named years and deducted the amounts so paid in his Federal income tax returns for those years.
5. In November, 1931, the Supreme Court of the United States held to be unconstitutional the law under which the State of Wisconsin assessed and collected the said taxes of $81,346.50 from the petitioner for the aforesaid years.
6. In the year 1932, the State of Wisconsin refunded to the petitioner the aforesaid taxes aggregating $81,346.50 plus interest thereon of $20,420.76, which amounts the petitioner treked in his Federal income tax return as income received by him in that year.
7. In the year 1935, the Commissioner of Internal Revenue upon audit of petitioner’s Federal income tax return for the year 1932, made certain adjustments, not contested herein, resulting in the deficiency herein of $12,715.32.
8. At the time the petition for review in this proceeding was filed, the Statute of Limitations had barred further assessment or collection of additional taxes for the years 1926 to 1931, inclusive.

The record discloses the controversy arose in this manner. Petitioner paid the Wisconsin income tax for the years 1926 to 1931, both inclusive, and was allowed deductions therefor in making his Federal income tax returns.

After receiving the refund from the State of Wisconsin in 1932 of the taxes in the amount of $81,346.50 with interest of $20,420.76, the entire amount of $101,370.06 was returned by the petitioner in his 1932 return for Federal income tax as taxable income and he paid the tax thereon.

Subsequently the respondent audited petitioner’s return and determined a deficiency of $12,715.32 from adjustments not contested in this proceeding. After receipt of the deficiency notice petitioner filed the petition herein and, for the first time, claimed that the refund of $81,346.50 made to him by the State of Wisconsin did not constitute income to him, and that the inclusion of it in his taxable income resulted in an overpayment of taxes in the sum of $27,472.06. No question is raised relative to the inclusion of the $20,420.76 interest in income for 1932 and it is admitted that this was proper. ⅜

The respondent entered a general denial in his original answer. By an amended answer he pleaded that the petitioner, by reason of taking deductions in the years 1926 to 1931, both inclusive, and returning the refund for taxation in 1932, was now estopped to change his position after limitation has run as to the years when the deductions were taken.

Petitioner contends the amount of the principal of the refund was not taxable income for the year of its receipt.

If we assume that there was no legal right to the original deduction of the principal refunded when paid as taxes, there might be no present authority to tax the refund as income — particularly, if the refund had occurred before petitioner’s tax liability for the year of the deduction had been definitely closed. Inland Products Co. v. Blair, 31 Fed. (2d) 867, affirming 10 B. T. A. 235; Leach v. Commissioner, 50 Fed. (2d) 371, affirming 16 B. T. A. 781.

However, the present record will not follow that assumption. This Board has decided amounts paid the State of Wisconsin as taxes imposed under the very statute under which the refunded taxes here were levied, were deductible, largely upon the theory that they were taxes paid. Charles F. Fawsett, 30 B. T. A. 908. And, if not deductible as taxes, they were so as losses or ordinary and necessary expenses. E. L. Brace Co., 19 B. T. A. 777.

True, there was no refund in either of those cases as is disclosed here, but that circumstance does not here change the character of the disbursement when made.

We conclude the present refunded payments to the State of Wisconsin were deductible from gross income for the years when paid.

Since that is true, the refund of those amounts constitutes taxable income for the year when received. Chevy Chase Land Co., 34 B. T. A. 150; Central United National Bank, 33 B. T. A. 588; Houbigant, Inc., 31 B. T. A. 954. Cf. Burnet v. Sanford do Brooks Co., 282 U. S. 359.

Decision will be entered for the respondent.


author: Aetjndell : MoRRis,

text:
    H. Liebes & Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68231.
    Promulgated June 5, 1936.

      Homer H. Tooley, C. P. A., for the petitioner.

      George, D. Brabson, Esg., for the respondent.
   OPINION.

Aetjndell :

The petitioner offers three points of argument, the first two of which are that the amounts received from the United States of America in liquidation of judgments arising out of the foregoing claims do not constitute taxable income at all because compensation for injury can not result in a profit, and, furthermore, such amounts do not constitute taxable income in the fiscal year under consideration, January 31, 1930, because they would not have been subject to a Federal income tax had they been recovered during the years in which the damage was sustained. In answer to these arguments it is sufficient to cite J. R. Knowland, 29 B. T. A. 618, wherein we held a taxpayer, who sued under the same enabling act and under a strikingly similar set of facts and circumstances, to be taxable upon the sums which he received, in the year of receipt. No question was raised in that proceeding about the year in which such sums were taxable. Undoubtedly that petitioner, an individual, was upon the cash receipts and disbursements basis.

Petitioner urges in the alternative that the net recoveries finally received by it in the taxable year were accruable in the years in which judgment was rendered, which in all three suits was prior to the taxable year. While the parties have not stipulated that petitioner kept its books and made its returns on an accrual basis, the arguments of both parties proceed on that assumption, which we accept for the purposes of this discussion. A brief restatement of the facts at this point should prove helpful. The Pacific Trading Co. instituted two suits in the United States District Court and obtained a favorable judgment in May 1927. An appeal was taken by the United States to the Circuit Court of Appeals, which latter court dismissed the appeal by mandate issued in June 1928. On August 22, 1928, payment was made by the United States of the full amount of the judgment, payment being made to the surviving trustee for the Pacific Trading Co. Thereafter, on September 14, 1928, certain individuals brought suit in the local courts of California against the sole surviving trustee for the Pacific Trading Co., alleging their right to one-half of the net amount of the judgment rendered. The petitioner intervened in this case, claiming that it was the sole owner of all the capital stock of the Pacific Trading Co. and consequently entitled to the whole proceeds. Later another person intervened, claiming an interest in the sum received by reason of being a stockholder in the Pacific Trading Co. On February 19, 1929, judgment in this action was entered for the petitioner and on February 28, 1929, the money was paid over to it.

We think the Commissioner correctly holds that the income is taxable in the fiscal year ended January 31, 1930. It was not until within that year that the right of the petitioner to the money became fixed and was in fact paid to it. Petitioner was not, in its corporate capacity, a party to the original suit against the United States, but was a stockholder of the Pacific Trading Co. There was no judgment in its favor in the proceedings in the Federal courts. It was not until the litigation in the state courts was concluded that its right to any of the proceeds of the judgment was established. If the decision in the intervention suit had gone against the petitioner, it would be absurd to require accrual while that suit was pending and then allow a loss in the later year of termination of the suit. While the intervention suit was pending petitioner’s claim was contingent on its successful conclusion. “A mere contingent claim, especially a contested one, whether of gain or loss, may never be sustained or realized; it is too uncertain to be considered in making up an income tax return.” Commissioner v. Southeastern Express Co., 56 Fed. (2d) 600. To the same effect are Commissioner v. Brown, 54 Fed. (2d) 563, and Buffalo Union Furnace Co. v. Helvering, 72 Fed. (2d) 399. All of these cases involved sums concerning which there was litigation and the substance of the holdings is that during litigation the taxpayer’s rights were too uncertain to warrant accrual. We do not read the case of Lichtenberger-Ferguson Co. v. Welch, 54 Fed. (2d) 570, as opposed to the decisions above cited. In that case the taxpayer was awarded a sum by the War Department in 1919 for cancellation of a war contract. Due to some confusion in the War Department the check covering the award was not received by the taxpayer until 1920. There was no dispute or litigation concerning the award after it was made by the War Department, and the court, finding that “the adjustment made in August, 1919, was a final adjustment”, held it to be accrued income in 1919. Similarly, in Automobile Insurance Co. v. Commissioner, 72 Fed. (2d) 265, the taxpayer accrued in 1928 the amount of an award by the Mixed Claims Commission, United States and Germany. It received a substantial payment on the award in that year, and it does not appear that there was any contest, litigation, or other contingency respecting the taxpayer’s right to the amount awarded. The Circuit Court sustained the accrual in 1928, quoting Spring City Foundry Co. v. Commissioner, 292 U. S. 192, that, “it is the right to receive and not the actual receipt that determines the inclusion of the amount in gross income.” Here the taxpayer’s “right to receive” was not established until February 1929, which was within its fiscal year ended January 31, 1930.

In No. 17541 suit was brought directly by the petitioner and judgment was rendered for the petitioner on December 28, 1928. The parties stipulate that no appeal was taken by the United States. However, they do not stipulate that any final settlement or agreement not to appeal was reached within the petitioner’s fiscal year 1929. The appeal period of three months (§§ 226, 230 U. S. C. A.) did not expire until in petitioner’s fiscal year ended January 31, 1930, and in the absence of any act by the parties the judgment would not become final until the expiration of that period. At the time the judgment was rendered there was no appropriation available to satisfy it, and the funds were not appropriated until in petitioner’s fiscal year ended January 31, 1930. Under these circumstances we are of the opinion that this judgment, like the others, was surrounded by too many contingencies and uncertainties to warrant accrual as income prior to the year of payment. Apparently the petitioner thought so too, as it did not accrue any of the items on its books and did not report them as income in the years in which it now says they were accruable.

It is not without significance that these items were extraordinary and outside the scope of ordinary business transactions. Day to day business deals may well be accruable even though they involve some element of contingency. But in so unusual a situation as this, where the result depends on the unpredictable outcome of litigation and of legislation (cf. Untermyer v. Anderson, 276 U. S. 440), the contingencies are too many to warrant accrual, whether it be of gain or loss.

Reviewed by the Board.

Decision will be entered for the resfondent.

MoRRis,

dissenting: I disagree with the views of the majority and am of the opinion that the petitioner should be sustained. The majority opinion attaches considerable importance to the fact that in the two suits instituted by the Pacific Trading Co. the petitioner was not a party and there was no judgment in its favor. The respondent conceded, however, that if claims had not been filed for part of the money all of it would have been taxable in a prior year, thus basing his determination solely on the adverse claims. Prior to the taxable year it had been determined that the Pacific Trading Co. was entitled to recover- and the amount of the judgment had been actually paid to the surviving trustee. The liability was no longer contingent. The facts show that all of the capital stock of the Pacific Trading Co. upon incorporation was issued to the petitioner and it claimed ownership thereafter. Under such circumstances I think the amount of the judgment was accruable prior to the taxable year. See Lichtenberger-Ferguson Co. v. Welch, 54 Fed. (2d) 570.

In the other action judgment was rendered for the petitioner in the preceding taxable year and it was stipulated that no appeal was taken therefrom. In my opinion the purport of that stipulation was to eliminate the principal ground upon which the conclusion of the majority is based, namely that the judgment did not become final until the taxable year. That the parties so regarded it is evidenced by the respondent’s argument in support of his conclusion that the appropriation for the payment of the judgment was not passed until during the taxable year in question, therefore the amount thereof could not be accrued until that time. I disagree with that conclusion. It seems to me that when the United States Government specifically authorized the bringing of suits it recognized liability and tacitly promised to pay any successful litigant the sums found by the authorized court to be due. Payment is not essential under the accrual system of accounting. Where the liability is fixed it is only necessary that payment be contemplated in the ordinary course of events. The judgment rendered in the preceding taxable year definitely determined the amount of petitioner’s recovery. Under the circumstances it was entitled to regard payment thereof as certain. I therefore think judgment should be rendered for the petitioner.


author: Leeci-i:

text:
    Bank of America National Trust and Savings Association, Executor of the Last Will and Testament of Merton J. Price, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77885.
    Promulgated June 11, 1936.

      Kenneth M. Johnson for the petitioner.

      O. P. Reilly, Esq., for the respondent.
   OPINION.

Leeci-i:

This case involves a deficiency in estate tax of $172.82. The question is whether the entire proceeds of certain life insurance policies should be included in the decedent’s gross estate for estate tax purposes, or only one-half thereof. The facts have been stipulated and are adopted by reference as our findings of fact. The essential facts are: The decedent and his wife were residents of California, where the community property law prevails. Section 161 (a) of the California Civil Code, which became effective July 29, 1927, provides:

- The respective interests of the husband and wife in community property during continuance of the marriage relation are present, existing and equal interests under the management and control of the husband as is provided in sections 172 and 172 (a) of the Civil Code. This section shall be construed as defining the respective interests and rights of husband and wife in community property.

Section 172 provides:

Management of commwvity personal property. The husban'd has the management and control of the' community personal property, with like absolute power of disposition, other than testamentary, as he has of his separate estate; provided, however, that he cannot make a gift of such community personal property, or dispose of the same without a valuable consideration * * * without the written consent of the wife.

After the enactment of this section of the Civil Code the decedent, Merton J. Price, took out four policies of life insurance on his own life and paid the premiums thereon from community income or property earned or acquired after the effective date of section 161 (a). The stipulation of facts does not state to whom the policies were payable, whether or not the insured retained the right to change the beneficiary, nor what rights the insured had as to loans or surrender values, or to convert into some other form of insurance.

No controversy exists as to petitioner’s right to the exemption of $40,000 under section 302 (g) of the Revenue Act of 1926, applicable here.

The respondent included the entire value of the proceeds of the insurance policies in the decedent’s gross estate for estate tax purposes. Petitioner attacks the validity of that action.

In view of the failure of the stipulation to set out the reserved rights of the insured, and the presumption of correctness attaching to the respondent’s determination, we find that deceased, at his death, possessed rights which properly supported a tax under section 302 (g) of the Revenue Act of 1926, as defined in Chase National Bank v. United States, 278 U. S. 327, and Louise C. Moore, Executrix, 33 B. T. A. 108, unless those reserved rights were deprived of that status by the law of the State of California (supra).

Petitioner’s theory is that where the insurance was taken out after the enactment of section 161 (a), Civil Code, and the premiums were paid from community funds, the insurance was community property, that one-half thereof belonged to the wife, and that the husband’s one-half, only, should be included in his gross estate.

Petitioner contends that under the law of California it is immaterial who was the designated beneficiary, or whether the insured had the right to change the beneficiary or not, if the premiums were paid from community property then one-half of the insurance belonged to the wife and she could not be deprived of it by the husband without her consent.

The premise of petitioner’s position is that the present tax is laid upon the proceeds of the policies in controversy. Petitioner cites many California cases which may support its conclusion upon that premise. See Coffman-Dobson Bank & Trust Co., Executor, 20 B. T. A. 890. But the premise falls because the deficiency is proposed, not under section 302 (a), but under section 302 (g), which covers something not included in the former subsection. See Porter v. Commissioner, 288 U. S. 436. As was stated by the Circuit Court of Appeals for the Fifth Circuit, in affirming this Board in Newman v. Commissioner, which presented a similar question arising under Louisiana law, “The tax [here] is not upon the proceeds of the policies; it is not upon the interest to which the beneficiary succeeded at death, but upon the right of disposition and control the insured had at death.” Newman v. Commissioner, 76 Fed. (2d) 449, affirming 29 B. T. A. 53.

Whatever the character of petitioner’s rights in the policies, prior' to the death of the insured, may have been (see United States v. Malcolm, 282 U. S. 792), those rights were certainly no more substantial under California law than they would have been under the law of the State of Washington. See sec. 6892, Remington’s Compiled Statutes of Washington, 1922. Poe v. Seaborn, 282 U. S. 101; Warburton v. White, 176 U. S. 484. But, this Board has held against petitioner’s contentions on a similar question arising under the law of the State of Washington. Estate of Julius C. Lang, 34 B. T. A. 337.

The determination of the respondent is affirmed. Newman v. Commissioner, supra; Estate of Julius C. Lang, supra. See Chase National Bank v. United States, supra.

Judgment' will Toe entered for the respondent.

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all properly, real or personal, tangible or intangible, wherever situated'—
      (a) To the extent of the interest therein of the decedent at the time of his death.

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      * ⅜ # ⅜ ⅝ ⅜ *
      (g) To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.


text:
    Pryor & Lockhart Development Company, by Ralph J. Pryor, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 63523.
    Promulgated June 11, 1936.

      Allen H. Gardner, Esq., for the petitioner.

      Roy N. McMillan, Esq., for the respondent.
   OPINION.

Leech:

The petitioner asks redetermination of a deficiency of $531.39 in income tax for the year 1929. The petitioner claims to be a trust and taxable as such, while the respondent contends that the petitioner is an association, taxable as a corporation, and, upon this theory, he determined the deficiency.

It appears that heretofore deficiencies were determined against the petitioner upon the same ground for the years 1925, 1926, 1927, and 1928, and upon appeal to this Board in Docket Nos. 38872, 45668, and 51326, we held that the petitioner was a common law trust, and not an association taxable as a corporation, 26 B. T. A. 1054. This case was affirmed by the Circuit Court of Appeals, 10th Circuit, 70 Fed. (2d) 154, and certiorari was denied by the United States Supreme Court, 293 U. S. 574. The parties entered into the following stipulation:

1. All of tbe evidence, including oral testimony and tbe transcript thereof, exhibits, stipulations, and written or -oral admissions, in three earlier proceedings of this petitioner, designated as docket numbers 38872, 45G6S, and 51326 is to be treated as evidence in the instant proceeding so far ,as material to the issue whether the petitioner is taxable as a trust or as an association. The exhibits in the former proceedings material to this issue are those marked therein as Petitioner's Exhibits 1, 2, and 3.
2. All conditions, facts, and circumstances affecting the issue of taxability as a trust or association were the same in the year 1929 here in controversy, as in the year 1928 which was involved in the proceeding bearing docket number 51326. All evidence of sucia conditions, facts, or circumstances may, therefore, be deemed applicable as fully to the taxable year 1929 as to the year 1928, even though such former evidence does not purport to cover any period subsequent to December 31, 1928.
3. If the petitioner is subject to tax as an association its net income for the year 1929 amounts to $7,830.79 as determined by the respondent in sending the deficiency notice in this proceeding. If the petitioner is not taxable as an association, the net income of $7,830.79 should be reduced by $36,000, the amount of petitioner’s income which was paid and credited during 1929 to its beneficiaries.

No other evidence was taken in the instant case.

No formal plea of res adjudicate supported by the decision in the earlier proceedings, was made by the petitioner, but, at the hearing, it was agreed that it should be considered as if formally made and the case was heard with that understanding.

Though the parties here are the same as those in the prior proceedings, since the pending deficiency is for a year later than those there involved, and is, therefore, a different right of action, the plea of res adjudicaba is effective if, and only if, “the point or question to be determined” here “is the same as that litigated in the former action” and the facts are the same. Tait v. Western Maryland Railway Co., 289 U. S. 620.

The only question here is whether the petitioner is taxable, for the year 1929, as a trust or as a corporation. See the Revenue Act of 1928, sec. 701 (a) (2).

This very question was presented in the earlier proceedings, the adjudication of which is here pleaded in bar, under the same or identically worded statutory provisions. See the Revenue Acts of 1924 and 1926, sec. 202 (a) (2).

All the conditions, facts, circumstances, and evidence, pertaining to this issue, are the same here as those before this Board in that former proceeding.

It follows, we think, that the plea of res adjudicata is effective. Tait v. Western Maryland Railway Co., supra; Portage Silica Co., 29 B. T. A. 881; Sand Springs Railway Co., 31 B. T. A. 392; Terre Haute Electric Co., 33 B. T. A. 975. Compare D. F. Strickland, 32 B. T. A. 804, where the evidence and facts in the two proceedings were not the same.

Respondent argues that the recent decisions of the Supreme Court in Commissioner v. Coleman-Gilbert Associates, 296 U. S. 369; Morrissey v. Commissioner, idem 344; Swanson v. Commissioner, idem 362; and Commissioner v. Combs, idem 365, destroy the validity of this plea here. The answer is that those cases obviously could not and did not change the statutory law. New Orleans v. Citizens’ Bank, 167 U. S. 371. So the identity of the issue in the two proceedings is not disturbed. And, assuming without holding that the adjudication in the earlier proceedings was wrong, in the light of those recent Supreme Court decisions, that would not affect the validity of petitioner’s plea here. The question involved here may or may not have been adjudicated correctly in the former proceedings, but it was legally adjudicated, and such adjudication has become final. That is the essence of the plea. United States v. Guaranty Trust Co. of New York, 76 Fed. (2d) 747; Art Metal Construction Co. v. United States, 13 Fed. Supp. 756; Sand Springs Railway Co., supra.

Respondent contends that the doctrine of res adjudicata does not apply in this class of cases and that its recognition here would result in the perpetuation of an error. The first is unsound, as is the second, even if the factual premise be true. As the Supreme Court stated in Tait v. Western Maryland Railway Co., supra, resolving a similar question:

* * * It cannot be supposed that Congress was oblivions of the scope of the doctrine, and in the absence of a clear declaration of such purpose, we will not infer from the annual nature of the exaction an intent to abolish the rule in this class of cases.
[3] We are not persuaded that the operation of the principle of the thing adjudged in tax cases will, as petitioner insists, produce serious inequalities, or result in great confusion; but any adverse consequence in the administration of the law furnishes no sufficient reason for the abandonment of a rule founded in sound policy, to the enforcement of which suitors are in justice entitled.

On recomputation, effect will be given to clause 3 of the stipulation.

Decision will he entered under Rule 50.


author: Black:

text:
    Proctor Patterson and Earl P. Disbro, Executors Under the Will of Marion C. Tyler, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75719.
    Promulgated June 12, 1936.

      Sterling Newell, Esq., for the petitioners.

      George D. Brabson, Esq., for the respondent.

       This dissent was noted during Mr. Séawell’s term of office.

   OPINION.

Black:

Section 23 (n) (2) of the Revenue Act of 1928 reads as follows:

In computing net income there shall be allowed as deductions:
* ⅝ * # * * *
(n) Charitable and other contributions. — In the case of an individual, contributions or gifts made within the taxable year to or for the use of ⅜ * * (2) any corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual.

The essential requirements are that the purpose of the donation must be one of those named, viz., religious, charitable, scientific, literary, or educational. The corporation or other entity must be organized and operated exclusively for that purpose and no part of its net earnings shall inure to the benefit of any private stockholder or individual. Meeting these requirements, contributions to it by an individual taxpayer are deductible in the computation of his net income, subject to the percentage limitation. John R. Sibley et al., Executors, 16 B. T. A. 915.

The purpose of the trust fund involved in the instant case, as expressed in the instrument of writing, was “To be used to loan or assist employees, former employees, or their families or dependents, etc.” Are these uses exclusively charitable? Perry on Trusts, par. 681, vol. II, gives as one of the most approved definitions of “charity” that used by Mr. Justice Gray in Jackson v. Phillips, 14 Allen, 556. It is as follows:

A charity in a legal sense may be more fully defined as a gift to be applied consistently with existing laws, for the benefit of an indefinite number of persons,- — either by bringing their hearts under the influence of education or religion, by relieving their bodies from' disease, suffering, or constraint, by assisting them to establish themselves for life, or by erecting or maintaining public buildings or works, or otherwise lessening the burdens of government. It is immaterial whether the purpose is called charitable in the gift itself, if it is so described as to show that it is charitable in its nature.

Zollmann, in his “American Law of Charities”, sec. 201, characterizes this definition of Mr. Justice Gray “the best as it certainly is the most scientific of all the definitions.” This definition of charity has been many times approved by the courts in dealing with charitable trusts and in the determination of charitable uses.

It is well settled that charitable trusts are liberally construed by the courts so as to give effect if possible to the intent of the donor. This fact is succinctly stated by the Supreme Court of Ohio, the state from which this proceeding comes, in the case of Gearhart v. Richardson, 109 Ohio St. 418, 434; 142 N. E. 890, as follows:

Charitable trusts are entitled to a liberal and favorable consideration and will receive a more liberal construction than is allowable to private trusts or in cases of gifts to private individuals. “They are construed so as to give them effect if possible, and to carry out the general intention of the donor, when clearly manifested, even if the particular form and manner pointed out by him cannot be followed. If two modes of construction are fairly open, one of which would turn a gift into an illegal trust, while by following the other it would be valid and operative, the latter mode must be preferred.” 5 R. C. L. 353; Woodruff vs. Marsh, 63 Conn. 125, 126; 26 Atl. 846, 38 Am. St. Rep. 346, In re Robinson’s Will, 203 N. Y. 380, 96 N. E. 925, 37 L. R. A. (N. S.) 1023; and Atty. Gen. ex rel vs. City of Lowell, 141 N. E. 45. This principle was recognized in Ohio as early as the case of Francis LeClercq vs. Trustees of the Town of Gallipolis, 1 Ohio 218, 221, Part 1, 28 Am. Dec. 641.

In our opinion the contribution here involved meets all requirements for deductibility as one to charity. The instrument in writing dated November 20, 1931, specifies the fund to be contributed, it named the trustees and defined and limited the purpose of the contribution, which purpose was charitable and did not inure to the benefit of any private stockholder or individual.

In John R. Sibley et al., Executors, supra, we held that a donation to a corporation organized and operated solely for the purpose of extending aid to the employees of a large department store in cases of death or disability was a charitable contribution and was deductible.

To the same effect are Mutual Aid & Benefit Association v. Commissioner, 42 Fed. (2d) 619, and Gimbel v. Commissioner, 54 Fed. (2d) 180, in both of which the beneficiaries were limited to the employees, families, or- dependents of a business concern. The Cimbel case cited our Sibley case, supra, with approval.

Recently the Surrogate’s Court of New York County, New York, had before it a similar question. In Re Westinghouse’s Estate, 281 N. Y. S. 603, and sustained the gift as a charitable gift under the state law, which is similar to section 23 (n) (2) of the Revenue Act of 1928. The court said in part:

It is inescapable that the intent and purpose of this gift was charitable. The number of employees of the air brake company is very large. There is nothing in testator’s language which indicates any purpose to confer a merely private benefit on anyone. Everything in the provisions of the will, both initially and alternately, speak a general charitable purpose. The fact that in some aspects an individual benefits is true of all charity. That type of individual benefit erects no bar to this gift.
The gift here is not to the corporation. It is to a group who, in acting under the provisions of the will, are trustees in a real sense. The wide discretion committed to them does not import any consent by the testator to a private and individual use of the fund. They are vested with discretion to use the fund impersonally and for the general benefit of this large body of employees. That use of this fund is a “charitable use” within the meaning of the Tax Law and the gift is subject to deduction in determining the net estate. Eagan v. Commissioner of Internal Revenue, supra; Gimbel v. Commissioner of Internal Revenue (C. C. A.) 54 F. (2d) 780.

Cases relied upon by respondent against the validity of the trust as a charity have been examined, but are not considered in point, as in Slee v. Commissioner, 42 Fed. (2d) 184, it was held that the birth control league was not within the statute; Henriette T. Noyes, 31 B. T. A. 121, the national and state League of Women Voters was not educational; Henry C. Du Bois, 31 B. T. A. 239, the beneficiaries were named relatives and an old negro servant; and James Sprunt Benevolent Trust, 20 B. T. A. 19, was a private charity to relatives.

The distinction between these cases and the instant case seems clear and no further discussion of them is necessary.

Does the fact that one of the purposes of the trust as expressed in the written instrument was to loan money in assisting employees and former employees of the W. S. Tyler Co. or their families or dependents destroy the exclusively charitable purpose of the trust? It has been held that where an organization is otherwise classified as charitable or educational or religious, mere incidental things which are not charitable or educational or religious are not sufficient to deprive the organization of its charitable or educational or religious classification. Trinidad v. Sagrada, etc., 263 U. S. 578. But it must be assumed that the direction of the donor in the instant case to the trustees that the trust fund should be loaned to such employees, former employees, etc., as might be in need of assistance was not merely incidental. It must be construed as one of the dominant purposes of the trust. It should be noted however that none of the profits, if any, from such loans would inure to the benefit of any private individual.

Zollman, in his book, “American Law of Charities”, sec. 277, says:

Property to be loaned out may create a charitable trust. No less a person than Benjamin Franklin in his will made provision for such a loan. Having laid the foundation for his fortune through the kind loan of money on the part of two friends, he wishes to be useful in forming and advancing young men to be of service to their country. He therefore left a fund of one thousand pounds sterling each to the cities of Boston and Philadelphia to be loaned out at 5 per cent interest to young married artificers under the age of twenty-five years who had served an apprenticeship and had maintained a good moral character. This disposition has been maintained as a charitable gift by the Supreme Court of Massachusetts, Boston v. Doyle, 184 Mass. 373, 68 N. E. 851, and by the courts of Pennsylvania, Franklin v. Philadelphia, 2 Pa. Dist. Rep. 435. The New York Supreme Court has held that the fact that the charitable fund is to be loaned out to be repaid by the beneficiaries five years after they have entered upon their lives’ work does not make the gift non-charitable. In Re, Davidge Will, 193 N. Y. Supp. 245.

The court in the latter case, in the concluding part of the opinion, said:

We see nothing in the clause of the will above quoted which prevents the expenditure of income.
“A construction which is fairly within the rules of law and that sustains the trust and devotes the fund included therein to purposes permitted by law and to the good of humanity should be preferred.” Matter of RoMnson, supra.
The clause fairly construed with this principle in mind means that income loaned out to a beneficiary if repaid shall immediately be again applied to the use of another beneficiary for the educational use provided for in the will. There would then be no resulting accumulation with addition to the capital amount; nor would there be any withdrawal of income from use. There being no accumulation, there is no violation of the statutes with reference to prohibited accumulations.

In view of the foregoing authorities, we hold that the provision in the trust instrument authorizing the trustees to make loans to employees and former employees of the W. S. Tyler Co. and their families who are in need of assistance does not render the gift noncharitable.

Respondent contends that the W. S. Tyler Co. might at some future date cease to exist and there would be no employees of that company who could avail themselves of the benefits of the trust and hence the trust would terminate and the fund would revert to the heirs of the settlor of the trust.

Zollmann, in his “American Law of Charities”, from which we have already quoted, says in section 647:

While a charitable trust may be terminated by adverse possession, tbe exhaustion of its funds, the extinction of its beneficiaries, and the accomplishment of its purpose, it will not, once created, revert to the donor or his heirs in the absence of conditions to that effect.

It will be noted there are no provisions providing for a reversion in the trust instrument. Hence we hold that respondent’s contentions on that point are without merit.

Respondent also contends that, even though it be held that the gift here in controversy was exclusively for charity, nevertheless the gift was not irrevocable, and that only irrevocable gifts are deductible. It is true that decedent did not expressly state in the written instrument by which the gift was made that it was irrevocable. The rule as we understand it to be in a situation of this kind is this: Powers to alter, modify, or amend and powers to revoke and terminate an express trust are created by stating in the trust instrument that the settlor reserves the power to alter, modify, or amend the trust or reserves the power to revoke and terminate the trust. When such language is not used such powers are not reserved. The rule is stated in Title Guarantee, etc., Co. v. Honen, 219 N. Y. 468, as follows:

If a trust was created, then however voluntary and .without consideration its creation may have been, it could not be revolted in the absence of express reservation of the power to do so without the consent of the beneficiary, and the beneficiary could at once compel execution of the trust for its benefit.

See also Thurston, Petitioner, 154 Mass. 596; Gray v. Union Trust Co., 171 Cal. 637; Russell's Executors v. Passmore, 127 Va. 475; Dickerson's Appeal, 115 Pa. St. 198.

Respondent contends that the following language in the written instrument reserved such broad powers to the donor as to be tantamount to a power to revoke and terminate the gift:

* * * a record to be kept of what they do and submitted to me from time to time and whenever I request for my approval or the approval of Mr. Squire, my attorney.

In construing the meaning of the clause set forth above, we should examine the instrument as a whole and should not take this particular clause out of its context and attempt to ascertain its meaning without reference to the remaining provisions of the written instrument.

The declaration of trust begins with a statement of the donor’s reason for creating the trust (“realizing the hard times and the wants of many of the present and former employees”). It then proceeds to create the fund which is to constitute the corpus of the trust and to vest the same in Proctor Patterson and Earl Disbro, petitioners herein, to hold and operate as trustees. The instrument next sets forth how the fund is to be used and the class of persons who are to be entitled to its benefits (“as a trust fund to be used to loan to or assist employees, former employees, etc.”). The precise method of operating the fund within these general directions is left wholly within the discretion of such trustees (“as in their judgment may be of assistance”). Then after the fund has been designated, the trust imposed therein, the trustees thereof named, and the purpose, method, and beneficiaries of its operation have been designated, the donor goes on to state that the trustees are to keep a record of the actions which they have taken thereunder and submit the same to the donor or her attorney when requested, for approval. We do not construe this language as the reservation of a power to revoke the trust. It is simply the reservation of a visitorial power recognized by the common law.

Cases cited by respondent in support of his contention are Security First National Bank of Los Angeles, Executor, 28 B. T. A. 289; First National Bank of Boston, Administrator, 25 B. T. A. 252, and W. L. Honnold, 30 B. T. A. 774, but we think they are distinguishable, for in the last two the express power of revocation was reserved and in the Security-First National Bank case the donor, Huntingdon, reserved such broad powers as to the management, use, and benefit of the property during his life that we held that the- income of the trust must be included in computing the net income of the grantor. We hold against respondent on this point.

Respondent urged further that the gift is not deductible because the trust was not operated during the taxable year. We think it would be too narrow an interpretation of the statute to hold that, where a taxpayer has made a contribution to a trust to be organized and operated exclusively for religious, charitable, etc., purposes, as provided by the statute, the trust or corporation or foundation would have to begin operation at once in order for the taxpayer to receive the benefit of the deduction in the taxable year; necessarily some time must elapse to perfect organization if the trust, corporation, or foundation is not already in operation.

The written trust agreement was made November 20, 1931, and the money was paid over December 1, 1931. In January 1932 the objects of the benefaction began to receive its benefits, which was probably as quick as was possible.

In William T. Bruckner et al., Trustees, 20 B. T. A. 419, the respondent made substantially the same contention as he is making here, but we held against him. Following our decision in that proceeding, we hold against respondent’s contention that the contribution here in question is not deductible because the trust did not actively operate in 1931. Cf. Morgan v. Nauts (Dist. Ct., N. Dist. Ohio, Apr. 19, 1928), 6 A. F. T. R. 8011.

We hold that the contribution was deductible to the extent of the 15 percent limitation provided by law.

Reviewed by the Board.

Decision will Toe entered under Rule 50.

Seawell dissents.


author: Van Fossan :

text:
    Walter S. Goodale, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78456.
    Promulgated June 17, 1936.

      Walter 8. Goodale pro se.

      Paul A. Sebastian, Esq., for the respondent.
   OPINION.

Van Fossan :

This is a proceeding for the redetermination of a deficiency of $474.15 for the calendar year • 1932. The issue is whether the respondent erred in including in taxable income the compensation received by the petitioner as superintendent of the Buffalo City Hospital, it being alleged that said hospital is a branch of the city government of Buffalo, New York, and as such is an essential governmental function.

The petitioner is a physician employed as superintendent of the Buffalo City Hospital, hereinafter referred to as Hospital. The Hospital was organized in or about 1918, pursuant to the provisions of section 126, et sequentes, of the General Municipal Law, Book 23, McKinney’s Consolidated Laws of New York. It was erected by the municipality by floating a bond issue, and the construction and equipment represent an investment of approximately $4,000,000. The petitioner was appointed superintendent of the Hospital when it first opened. During the taxable year petitioner was an employee, through the city of Buffalo, of the State of New York.

The Hospital is a general public hospital having all facilities necessary for the treatment of all diseases and illnesses. It accepts patients regardless of their financial ability to pay. The petitioner, as superintendent of the Hospital, is charged by statute with investigating the financial responsibility of each patient. The maximum charge to any patient for any services rendered by the Hospital is $3.50 per day. This maximum charge is an arbitrary figure determined by the Hospital’s board of managers and represents the estimated average daily cost of operating, per patient, $2.65 to $2.74 per day, plus depreciation on plant and equipment, and plus interest on outstanding bonds. No amount of profit is included in the $3.50 maximum charge. Patients accepted by the Hospital, who come from Erie County and are a charge on the county, instead of the municipality of Buffalo, are charged at the rate of $2 per day. This sum is also fixed by the board of managers and accepted by the Hospital. Patients who are financially able to pay a portion of their hospital bill are charged in proportion to their ability to pay, but no patient is charged over $3.50 per day. A patient unable to pay is cared for free of charge.

All funds received by the Hospital from the care of patients •were deposited with the city treasurer, as the Plospital had no right to expend its receipts. The Hospital’s expenditures were kept strictly within the bridgetary allowance prepared annually by petitioner, as superintendent, and submitted to the mayor and city council for approval or modification.

During the fiscal years ending July 1931 and 1932, the Buffalo City Hospital had a total income of $281,662.25 and $252,553.29, respectively. Approximately 57 percent of this income was derived from the care of county patients. Payments by the county to the Hospital for the care of county patients were made irregularly, the county sometimes being current, and other times as much as three j^ears behind.

The percentages of paying, part-paying, and free cases admitted to the Hospital are as follows:

Paying patients (paying $3.50)_ 2.92%
Part-pay patients (less than $3.50)_ 6.60'%
Erie Oounty patients ($2 flat rate)._21. 68%
New York State patient ($2 flat rate)_ 2.47%
Free patients-6(5. 31%

In determining the deficiency respondent increased petitioner’s income by $7,625.59, and denied petitioner’s claim that salary and maintenance received from the Hospital were exempt from Federal income taxation.

The statutory authority for the establishment of public general hospitals in the State of New York by any city, town, or village is found in section 126, et sequen-tes, General Municipal Law, being chapter 558, Laws of 1910, McKinney’s Consolidated Laws of New York, which was amended by chapter 265, Laws of 1922, so as to authorize counties of the state to establish public general hospitals. The governing board of the county, city, town, or village had the power “to cause to be assessed, levied and collected” the necessary sums for lands, buildings, equipment improvements, maintenance, and all other necessary expenditures for the hospital. Section 127 provided for a board of managers, serving without compensation, and further provided that “The treasurer of the county, town, city or village by which the hospital is maintained shall be treasurer of the hospital.” Section 128 provided for the appointment of a superintendent of the hospital by the board of managers and set forth their general powers and duties. Section 129, which sets forth the general powers and duties of the superintendent, provides, in part, as follows:

The superintendent shall be the chief executive officer of the hospital and, subject to the by-laws, rules and regulations thereof, and to the general control of the board of managers, shall:
(5) Receive into the hospital, under the rules established by the board of managers, any person in the county, town, city or village who is sick or maimed or injured and who is in need of hospital care, irrespective of whether such person is able to pay for his care or not; and may also receive persons from without the county, town, city or village, provided there is a vacancy in the hospital, and provided the reception of such person does not interfere with the proper care and treatment of persons received from the county, town, city or village.

Section 129 further provides that receipts and collections of the hospital shall be transmitted to the treasurer of the county, town, city, or village by which the hospital is maintained.

Section 130, as amended, reads as follows:

Whenever a patient shall have been admitted to such hospital, the superintendent shall cause to be made such inquiry as he may deem necessary, relative to the ability of such patient, or of the relatives of such patient legally liable for his support, to pay for his care and treatment. If he find that such patient, or said relatives, are able to pay for his care and treatment in whole or in part, an order shall be made by the superintendent directing such patient, or said relatives, to pay to the treasurer of such hospital for the support of such patient a specified sum per week, in proportion to their financial ability but such, sum shall not exceed the actual cost of maintenance. The superintendent shall have the same power and authority to collect such sums from the patient, or his relatives legally liable for his support, as is possessed by an overseer of the poor in like circumstances. If the superintendent find that such patient, or his said relatives, are not able to pay either in whole or in part, for his care and treatment in such hospital, the unpaid cost of his maintenance shall become a charge upon the county, town, city or village by which the hospital is maintained; provided, however, that in case such patient is not a resident of said county, town, city or village, the cost of his maintenance shall be a charge upon the civil division of the state upon which he would be a charge as a poor person. No employee of such hospital shall accept from any patient thereof any fee, payment or gratuity whatsoever for his service. [Emphasis supplied.]

It is petitioner’s contention that these statutory provisions, together with the public health law, the sanitary code, the public welfare law, and the rules and regulations of the different state authorities, thereunder, constitute the Hospital an essential governmental function carried on by the municipality of Buffalo under its charter. The respondent denies that the operation and maintenance of the Hospital are an essential governmental function, but asserts that if this be true, nevertheless, petitioner is entitled to no relief because this Hospital was organized, operated, and conducted in such a manner that it was proprietary rather than governmental.

In support of his contention that the Hospital here is not an essential governmental function respondent relies on the decision of the Court of Claims in Liggett & Myers Tobacco Co. v. United States, 13 Fed. Supp. 143, from which he quotes at length. The facts are that the Commonwealth of Massachusetts owned and operated a public hospital known as the Boston State Hospital. In treating patients the State Hospital distributed manufactured tobacco free of charge. The question was whether the Federal tax on this tobacco is valid against the state. The court said: “We think it obvious that in establishing and maintaining a hospital the State of Massachusetts is not exercising any sovereign power.” The Federal Government’s right to the tax was sustained.

Opposed to this decision is Mallory v. White, 8 Fed. Supp. 989, where the Federal District Court for Massachusetts held the Boston City Hospital was an instrumentality of the municipal corporation, and that the services of its pathologist in chief were rendered in connection with an essential governmental function, thereby exempting his compensation from Federal taxation. The court’s discussion of the Massachusetts cases and the law pertinent to its decision are, in our opinion, applicable here. The court’s decision reads in part as follows:

It is agreed that the city of Boston is a municipal corporation and a political subdivision of the state. The first question, therefore, is whether the Boston City Hospital is an instrumentality of the City of Boston, within the meaning of the decisions.
The statutes require the maintenance by municipalities of hospitals such as the facts show the Boston City Hospital to be. See chapter 174, Acts of Massachusetts of 1880; chapter 111, General Laws of Massachusetts (Ter. Ed.). This hospital was established and is maintained “for the reception of persons who by misfortune or poverty may require relief during temporary sickness,” and the total amount collected from nonsettlement cases and paying patients during the year 1929 was only 4.1 per cent, of the expenses for that year. Providing hospital care for dependent poor and accidentally ill, the prevention and cure of contagious diseases, and the care of the public health are essential governmental functions as opposed to proprietary functions. The underlying test for determining if work being carried on by a municipality is governmental or proprietary is, as stated in Bolster v. City of Lawrence, 225 Mass. 387, at page 390, 114 N. E. 722, 724, L. R. A. 1917B, 1285, “whether the act is for the common good of all without, the element of special corporate benefit or pecuniary profit.” In the same case it is said, “Although such institutions may receive pay patients their public character is not lost thereby. * * ⅜ ” See, also Benton v. Boston City Hospital, 140 Mass. 13, at page 17, 1 N. E. 836, 54 Am. Rep. 436, and Curran v. Boston, 151 Mass. 505, 24 N. E. 781, 8 L. R. A. 243, 21 Am. St. Rep. 405. In County of Essex v. Newburyport, 254 Mass. 232, at page 236, 150 N. E. 234, 236, the court said: “No argument is required to demonstrate that the establishment of the hospital * ⅜ * was a public purpose. ⅜ ⅜ * The hospital stands on as firm footing in this respect as do schools, roads, bridges, and other confessedly governmental functions. ⅜ * * ” See also, Flint v. Stone Tracy Company, 220 U. S. 107, at page 172, 31 S. Ct. 342, 55 L. Ed. 389, Ann. Cas. 1912B, 1312; Sacramento County v. Chambers, 33 Cal. App. 142, 164 P. 613; Cooley on Taxation, p. 204; Cumulative Bulletin XI-2, Internal Revenue Bureau, Juiy-December 1932, p. 113, XI-38-5698, G. C. M. 10814.
The plaintiff’s services having been rendered in connection with an essential governmental function, his salary, paid by the city, is exempt from taxation by the federal government if he was an officer or employee of the city of Boston. Regulations 74, art. 643; Burges v. Commissioner (C. C. A.) 69 E. (2d) 609.

The similarity between the facts of the instant case and those obtaining in the Mallory case is quite obvious. The major difference is in the percentage of paying patients, which is the basis for respondent’s second contention that, in any event, the Hospital here exercised proprietary functions, and therefore, petitioner’s compensation is not immune. Much of the force of respondent’s argument is lost, however, when it is noted that county and state cases are a charge on the taxpayers too, so that, while free cases constituted 66 percent of the total, only 2.9 percent pay the maximum charge, no part of which is profit; 6.6 percent pay a portion of their cost of hospitalization; -while the taxpayers pay for the remainder. In other words, over 90 percent of the patients hospitalized were provided for in toto by taxes on the community from whence they came.

The superintendent had no discretion regarding the acceptance of patients, because the statute made him the chief executive officer and stated that he “shall receive into the hospital, * * * any person in the county, town, city or village who is sick or maimed or injured and who is in need of hospital care, irrespective of whether sueh person is able to pay for his care or not; * * (Emphasis supplied.) This provision is mandatory upon the superintendent, and while “indigent poor”, “paupers”, and/or other descriptive terms of the needy are not used, the provision “irrespective of whether such person is able to pay for his care or not” is sufficiently comprehensive, and was, in our opinion, obviously intended to include the poor, the indigent, the afflicted, and the paupers. We think the state statute was for the common good of all, was designed to protect the public health, which is of first importance to the body politic, and was as necessary to the welfare of society as public schools and other matters of general public concern.

In G. Ridgely Sappington, 25 B. T. A. 1385, after a thorough discussion of the basic principles and legal philosophy of the" question, we held that the University of Maryland was an instrumentality of the state, and its functions were not proprietary. Here, we believe the evidence properly before us is sufficient to establish that this hospital is an instrumentality of a political subdivision of the state, engaged in an essential governmental function. This being true, and it being conceded by respondent that petitioner was a state employee, it follows that his compensation is exempt from Federal taxation.

Reviewed by the Board.

Decision will be entered for the petitioner.


author: Arundell :

text:
    Milton Smith, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 77414—77417.
    Promulgated June 25, 1936.

      George J. Perkins, Esq., for the petitioner.

      R. P. Hertzog, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Sarah Avis Smith ; C. A. Smith; Milton Smith, Sarah Avis Smith, and C. A. Smith, in behalf of Smith Transportation Co.

   OPINION.

Arundell :

The chief issue for decision is whether the transaction referred to above constitutes a nontaxable reorganization within the meaning of section 112 (i) (1) of the Revenue Act of 1928.

The petitioners do not contend that there was a strict statutory merger, but rather that the requirements of the parenthetical part of clause “(A)” have been met in that the Shaver Co. acquired “substantially all the properties” of the Smith Co. for stock. Following the transfer of properties the Smith Co. dissolved and the Shaver Co. operated the two steamship lines as one enterprise. The parties characterized the amalgamation of their interests as a merger, and it is evident that the transaction meets the test of Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462, as at least partaking “of the nature of a merger”, and it also comes within the requirement laid down in Helvering v. Minnesota Tea Co., 296 U. S. 378, in that “the seller acquired a definite and substantial interest in the purchaser.”

So there is left only the question of whether the assets taken over by the Shaver Co. constituted “substantially all of the properties” of the Smith Co. If so, decision must be for the petitioners. Assets of the Smith Co. having a book value of $133,374.08, a cost of $117,-743.32, and a selling price based on stock value of $170,000 were acquired by the Shaver Co. The Smith Co. retained assets of the value of $52,082.59 with which to liquidate liabilities of $45,956.98. Of the assets retained, only $41,046.46 represented cash and receivables. The remainder was made up of land, buildings, and automobiles. There is some' doubt as to whether land and buildings valued at $5,232.94 and carried on the books as “buildings” were the property of the Smith Co. or of the Smiths personally, but we regard this as an unimportant detail.

The respondent contends that the phrase “substantially all the properties” refers to the gross assets, rather than net, and that the 71 percent of gross assets transferred in this case was not “substantially all.” We think it unnecessary to decide whether the quoted phrase refers to the gross value of the assets or such value less liabilities. ^Whether the properties transferred constitute “substantially all” is a matter to be determined from the facts and circumstances in each case rather than by the application of any particular percentage.*'' It might well be, as said by the respondent, that if a corporation having gross assets of $1,000,000 and liabilities of $900,000 transferred only the net assets of $100,000 the result would not come within the intent of Congress in its use of the words “substantially all.” Any number of further suppositions might be made concerning the case put by the respondent. The transferor corporation might continue in business; it might not discharge its liabilities; it might use the retained assets in various ways such as the inauguration of a different line of business; the assets might be distributed to the stockholders. A concrete case is that of David Gross, 34 B. T. A. 395, where a corporate transferor retained gross assets of $236,394.03 and had liabilities of only $57,505.70. The net assets retained amounted to about 20 percent of the total assets before the transfer. We held that under the facts there the 80 percent transferred did not constitute “substantially all.” In that case the transferor after discharging its liabilities had left nearly $180,000 in assets as against assets of $747,890 transferred. In Arctic Ice Machine Co., 23 B. T. A. 1223, the transferor transferred all of its assets, but immediately received back about 32 percent thereof, resulting in a transfer of about 68 percent. There was no finding in that case as to what disposition was made of the retransferred 32 percent of assets. In Alice V. St. Onge, 31 B. T. A. 295, all of the transferor’s liabilities were assumed by the transferee corporation. The transferor received from the transferee $467,947.74, which it used to buy stock of the transferee. The transferor retained assets of the value of $148,125, which it distributed to its stockholders. In Pillar Rock Packing Co., 34 B. T. A. 571, assets having a cost to the transferor of $60,536.06 were trails-ferrecl for cash, notes and stock in the amount of $94,691.50. The transferor retained assets worth $45,294.52 and there was no showing of what disposition was made of them. All of these cases are distinguishable from the one before us. In each of them there was retained a substantial amount of assets in proportion to the assets transferred and in none was the retention for the sole purpose of liquidating liabilities. In this case, as above pointed out, assets having a book value, in round figures, of $133,000 were transferred for stock worth $170,000; assets worth $52,000 (including the doubtful real estate) were retained for the purpose of meeting liabilities of $46,000. After discharging its liabilities — and this was done within the year — the outside figure of assets remaining with the petitioner would be $6,000, which is certainly not an excessive margin to allow for the collection of receivables with which to meet its liabilities. No assets were retained for the purpose of engaging in any business or for distribution to stockholders. In these circumstances,- we are of the opinion that the assets worth $133,374.08 transferred to the Shaver Co. constituted “substantially all” the assets of the Smith Co. within the meaning of that statutory phrase and the transaction is nontaxable under section 112 (i) (1) (A). Cf. Western Industries Co. v. Helvering, 82 Fed. (2d) 461, where assets of a book value of $479,835.79 were transferred for a consideration of cash, notes and stock worth $1,123,537.26, the retained assets were worth $302,225.52, Avhich was $194,575.09 in excess of the liabilities of $107,650.43, and it was held by the Court of Appeals for the District of Columbia that the assets transferred constituted “substantially all.”

The respondent further contends that even though there was a reorganization the Shaver Co. stock was not distributed to the Smiths “in pursuance of a plan of reorganization” (sec. 112 (g)), and that, therefore, the distribution is taxable under section 115. His argument is that a plan by the Smith Co. to distribute the stock is not sufficient to meet the provisions of section 112 (g), but that the plan must have been part of the agreement between the Smith Co. and Shaver Co. We doubt whether this view is sound, but we do not find it necessary to pass upon it. The contract of January 9, 1930, between the Smith Co. and Shaver Co. and the stockholders thereof provides that the Shaver Co. stock “shall be issued to the party of the second part [Smith Co.] and/or the parties of the fourth part [Smih stockholders] * * *.” Resolutions of the Smith Co. directors and stockholders provided for the proportionate distribution of the Shaver Co. stock to the Smiths. This in our opinion is sufficient to establish that the Shaver Co. stock went to the Smiths in pursuance of the plan of reorganization.

We are satisfied, upon consideration of all the evidence, that the value of the Shaver Co. stock received in the exchange was not in excess of $68 per share, which figure we have found as a fact represents its value.

Reviewed by the Board.

Decision will be entered under Rule 50.

Murdock. Leeci-i, Turnee, and Tyson dissent.

       The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation) * * *.


author: Seawell:

text:
    W. C. Tyrrell, Petitioner, v. Commissioner of Internal Revenue, Respondent. Helen R. McGill and Ruth R. Steves, Executrices of the Estate of Vinnie T. Rorick, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent. Esther L. Garth, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 62026-62028.
    Promulgated June 25, 1936.

      L. J. Benchenstein, Esq., Wm. J. Brown, Esq., and Walter A. Bolinger, Esq., for the petitioners.

      Dean P. Kimball, Esq., Hunter B. Linton, Esq., Gurtis Risley, Esq., and R. B. Gannon, Esq., for the respondent.

       This decision was prepared during Mr. Seawell’s term of office.

   OPINION.

Seawell:

The first issue we shall consider and determine is-whether the W. C. Tyrrell Trust was, within the meaning of the Revenue Act of 1926, a joint stock company or an association taxable as a. corporation. Section 2 (a) (2) of the Revenue Act of 1926 states:: “The term ‘corporation’ includes associations, joint-stock companies and insurance companies.”

It is frequently very difficult to determine whether a trust or other organization is taxable as a corporation. There are certain trusts which, in the sense of the revenue act, are clearly simply trusts, and others which are as clearly associations. Each case necessitates a construction of the particular trust and agreement involved therein. The line of demarcation between the different types of organizations is often so fine that it is almost indistinguishable.

In the instant proceedings, when all the facts and their proper relation to one another are carefully considered and given their true meaning and full weight, we think the W. 0. Tyrrell Trust falls within that category determined by the Supreme Court of the United States to be an association taxable as a corporation. What is so well and ably said in some recent decisions of the Supreme Court as to when a' trust is an association taxable as a corporation within the meaning of the Revenue Acts of 1926 and 1928 makes aa extended discussion of the subject here unnecessary. See Morrissey v. Commissioner, 296 U. S. 344, affirming 74 Fed. (2d) 803; Helvering v. Coleman-Gilbert Associates, 296 U. S. 369, reversing 76 Fed. (2d) 191, and affirming memorandum decision of this Board; Helvering v. Combs, 296 U. S. 365, reversing 76 Fed. (2d) 682, which affirmed memorandum decision of this Board; Swanson v. Commissioner, 296 U. S. 362, affirming 76 Fed. (2d) 651, which affirmed memorandum decision of this Board; Commissioner v. Vandergrift Realty & Investment Co., 82 Fed. (2d) 387; Central Republic Bank & Trust Co., Trustee, 34 B. T. A. 391. Notwithstanding the authorities cited as determinative of the issue now being considered, some discussion is deemed advisable and may make clearer and more convincing our determination.

In the instant proceedings the record shows that the trustee of the trust was empowered to buy and sell real and personal property and to operate farms, which he did for the interests of the trust. Income tax returns of the trust indicated, as our findings of fact, show, that its business was investments, farming, and real estate. The evidence, in our opinion, does not indicate that the trust was a mere passive trust simply preserving and conserving valuable property, with no more than the necessary minimum business activity to do so. The fact that the certificate holders or beneficiaries did not exercise control is not determinative. Hecht v. Malley, 265 U. S. 144. What was said by the Supreme Court in Helvering v. Combs, supra, seems applicable and appropriate to be here repeated with respect to the parties forming the trust: “Entering into a joint undertaking they avoided the characteristic responsibilities of partners and secured advantages analogous to those which pertain to corporate organization. The fact that meetings were not held or that particular forms of corporate procedure were absent is not controlling. Morrissey v. Commissioner, supra.”

Prior to any tax controversy the trust and the petitioners as members thereof considered it and represented it to the public and to the respondent (Commissioner) to be a joint stock company, its letterheads used throughout its existence so indicating. In view of our findings of fact, there is no occasion or necessity for repeating here the many acts and circumstances indicating the W. C. Tyrrell Trust was, as it and its members or organizers represented it to be, a joint stock company or association. In our opinion, and we so hold — as heretofore indicated- — the W. C. Tyrrell Trust was in the sense of the Eevenue Act of 1926 a joint stock company or association taxable as a corporation.

The next issue for our determination is whether the petitioners realized taxable gain upon liquidation of the W. C. Tyrrell Trust. Section 201 (c) of the Eevenue Act of 1926 provides in part as follows:

Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock. * ⅜ ⅜ The gain or loss to the distributee resulting from such exchange shall be determined under section 202, but shall be recognized only to the extent provided in section 203.

We have seen that under section 2 (a) (2), supra, the term “corporation” includes associations and joint stock companies, and, in view of our determination that the W. C. Tyrrell Trust is an association or joint stock company taxable as a corporation, we think it logically follows that the certificate owners or shareholders would be taxable upon any gain realized by virtue of the distribution in complete liquidation of said trust, association, or joint stock company. We have heretofore determined a similar issue, in the case of Pierce Oil Corporation, 32 B. T. A. 403. We there decided that gain was realized by the stockholders of a joint stock company organized under the laws of Texas upon liquidation thereof.

This issue is controlled by the principles enunciated and applied in Pierce Oil Corporation, supra, wherein we said, in part:

It is of no moment that Pierce Fordyce was not a corporation but an unincorporated association, for the statute has expressly included it within the definition of corporation, and the statute is valid. Burk-Waggoner Oil Association v. Hopkins, 269 U. S. 110. It is thus to be treated as a corporation for all purposes of the revenue act, including that prescribing consolidated returns. California Brewing Association, 5 B. T. A. 347. This the petitioner recognized when it filed the original consolidated return. Its certificates of proportionate interest are treated as corporate shares. Petitioner would limit the influence of the Burlc-Waggoner decision to considerations affecting the tax of the association, and urges that the association may not be treated as a corporation in determining the tax of the shareholder. But Congress intended no such exception. Section 201 (a) treats of distributions for the purpose of determining the tax not alone of the distributing corporation, but also of the receiving shareholder, and provides that the term dividend “means <1) any distribution made by a corporation ⅜ * ⅜ to its shareholders or members”, thus bringing within its intendment not only those who may lie strictly called shareholders of a corporation, but also those who by reason of the form of their organization are designated “members.” It is also said that Pierce Oil by acquiring the association certificates immediately became íiro tanto the owner of the direct interest in the assets, the liquidation of which can not be called a realization of income. But this depends on whether for purposes of the revenue act the association is to be treated pluralistically. The Burk-Waggoner decision holds that it is not. And it matters not how Texas law treats it. Burnet v. Harmel, 287 U. S. 103; Palmer v. Bender, 287 U. S. 551. But even though Texas should for some purposes and in some circumstances apply partnership law to such an association, no one could say that the association is an “ordinary partnership” and it is only to such that the partnership provisions of the statute are applicable. Burk-Waggoner Oil Association v. Hopkins, supra.

Cf. Holmby Corporation v. Commissioner, 83 Fed. (2d) 548, affirming 28 B. T. A. 1092.

After the distribution of assets or liquidation of the W. C. Tyrrell Trust its certificate holders or shareholders had something substantially different from what they had before. Before liquidation or distribution, they had no legal or equitable title to any particular assets. After liquidation or distribution of the trust assets they had legal and equitable title in particular assets. The distribution made of the assets of the trust among the certificate holders resulted in gain to them, so the respondent determined.

We have held that the W. C. Tyrrell Trust should be classed as an association or joint stock company taxable as a corporation and find no evidence sufficient to overthrow the presumption of the correctness of respondent’s determination that the distribution or liquidation resulted in gain to each of the petitioners, and we therefore so hold. In our opinion, the position of W. C. Tyrrell, Jr., after the distribution in liquidation was practically the same as that of the other certificate holders with respect to the income tax law and these proceedings. In any event, W. C. Tyrrell, Jr., was in receipt of a distribution in liquidation just as much as the other shareholders. There was a merger of the legal and equitable estates in him of the remaining one-fourth of the trust property. He became the sole owner, sole trustee, and beneficiary of one-fourth of the trust assets and realized gain therefrom as did the other beneficiaries.

We are of the opinion and hold that each of the petitioners realized gain, taxable income, as the result of the transactions resulting in Ahe distribution in liquidation of the assets of the W. 0. Tyrrell Trust as heretofore described.

It was stipulated that in the event we should determine, as we now do, that the transactions heretofore described resulted in taxable income to each of the petitioners, the amount thereof is in each instance as particularly set forth in the stipulation. Computations in recognition of the stipulation applicable to each case will accordingly be made.

Reviewed by the Board.

Decision in each case will be entered under Rule 50.