author: Teammell:

text:
    Rainbow Gasoline Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 65152, 72365.
    Promulgated January 15, 1935.

      Harold E. Rorsohach, Esq., and Jack L. Rorschach, Esq., for the petitioner.

      Willis R. Lcmsford, Esq., for the respondent.
   OPINION.

Teammell:

These are consolidated proceedings for the rede-termination of income taxes for the years 1929 and 1930 in the amounts of $1,119.22 and $6,162.93, respectively. The issues are: (1) Whether limitations barred assessment and collection of the deficiencies at the dates of mailing of the deficiency notices; (2) whether petitioner is entitled to deductions for depletion of casing-head gas; (3) whether petitioner is entitled to compute deductions for depreciation on the unit of production basis; (4) whether certain expenditures in the taxable year constituted capital investments or deductible expenses; and (5) whether petitioner is entitled to certain deductions for accrued interest. Respondent asserts claim to an increase in the deficiency for 1930 on account of a deduction for interest alleged to have been improperly allowed for said year.

Issue (1) — Limitations.—In the original petitions it is alleged as the first assignment of error that assessment and collection of the deficiencies were barred by limitations at the time of the mailing of the deficiency notices. In its brief petitioner does not discuss this issue, and if not to be considered as abandoned, we find no merit in the allegations.

Issue (2) — Depletion.—Petitioner contends that it is entitled to deductions for depletion on casinghead gas. In its original returns for 1928 and 1929 petitioner did not claim any deduction on account of depletion, but in its original return for 1930 and in an amended return for 1929 it deducted such amounts, which were disallowed by the respondent on the ground that petitioner was engaged in the business of manufacturing natural gasoline and did not own the property from which the gas was produced.

The evidence in the record is very meager, but it appears that during the taxable years petitioner operated a gasoline plant in the Rainbow Field of Union County, Arkansas. It was engaged in extracting natural gasoline from casinghead gas obtained under contracts with the producers or operators of the wells in that field, with all of which petitioner’s plant was connected. These contracts are variously referred to in the record as “ casinghead gas contracts ” and “ gas purchase contracts.” Sixteen such contracts, each of which was entered into with the “ oil lease operator ” as “ seller ”, were introduced in evidence by petitioner and marked as exhibits. A fair sample is stated by petitioner in its brief to be the contract with the Pure Oil Co. (petitioner’s Exhibit 16) covering 43 leases in Union County.

This contract was originally executed by the Pure Oil Co. and Boot Refineries, Inc., and subsequently the interest of the latter corporation, with the consent of the former, was assigned to the petitioner. The agreement provided, among other things, as follows:

CASINGHEAD GAS CONTRACT
This contract, made and entered into this 27th day of June, 1928, by and between The Pure Oil Company, an Ohio corporation * * * as producer, hereinafter termed the Seller, and Root Refineries, Inc., * * * hereinafter termed the Buyer : Witnesseth :
That, whereas, the Seller owns certain oil and gas mining leases and is now operating for oil and gas under said oil and gas mining leases covering lands situated in Union County, Arkansas and described as follows:
Whereas, certain wells on said lands are productive in addition to oil of what is termed casinghead gas * * * and Seller desires to sell and the Buyer to buy all of the casinghead gas produced from said wells now on said lands or that may hereinafter be produced from wells drilled thereon during the term of this contract:
Now, therefore, in consideration of the sum of One Dollar ($1.00), paid by the Buyer to the Seller, the receipt of which is hereby acknowledged, and other payments, covenants, stipulations and conditions hereinafter specified, the Seller hereby grants, bargains, sells and agrees to deliver to the Buyer, and the Buyer agrees to purchase and take from the Seller all of the casinghead gas from the wells on lands of the Seller above described, now existing and producing or that may hereafter be drilled, and that produce such casinghead gas during and for the term of three (3) years * * *.
The casinghead gas sold hereby is conveyed to the Buyer for the sole purpose of extracting natural gasoline. * * *
Buyer agrees to begin taking gas of Seller into said plant and pay for same immediately upon completion thereof * * *.
The Buyer agrees to pay Seller for each thousand cubic feet of gas taken from the premises, thirty-three and one-third per cent of the gross value of the gasoline content * * * and the sale price of gasoline, governing in said value, shall be the average quoted market price of raw gasoline of like specifications for the month for which statement is being made * * *.
Payments for gas shall be made hereunder by the Buyer not later than the twentieth of each month for all casinghead gas purchased during the preceding month * * *
Failure to pay for casinghead gas as above provided shall give the Seller the right to withhold said casinghead gas from said gasoline plant * * *
The Seller agrees to assume and be responsible for the payment to lessors or royalty ownez-s of all royalty claims for gas tafeen from the premises. It is understood and agreed that the Seller may release from the contract any lease or leases in the event Seller is unable to obtain from its royalty owners an agreement to accept as their royalty share of such casinghead gas an amount not to exceed one-eighth of the proceeds from the sale of gas received by the Seller under this contract.
* * * ' * * * *
The Buyer shall, upon request of the Seller, maintain a steady vacuum on the Seller’s wells, and such vacuum shall be equivalent in number of points pull, if the Seller so directs, to the existing or prevailing vacuum upon wells on offset or adjoining leases to Seller’s lease. The Seller shall have, at all times, control over the degree of vacuum up to a maximum equal to points pulled on'adjoining properties and the manner of applying same. * * * No bacfe pressure shall be maintained on any of Seller’s wells without express permission from Seller.

Respondent contends (1) that the contracts in question are merely agreements of purchase and sale of casinghead gas after production, and that petitioner has no interest in the gas-producing properties for which a depletion allowance can be made, and (2) that even if petitioner acquired an economic interest in the gas in place, it had no gross or net income from such property right, and hence has no basis for computing a depletion allowance under the statute.

The first question presented here was considered by the United States Circuit Court of Appeals for the Ninth Circuit in Signal Gasoline Corporation v. Commissioner, 66 Fed. (2d) 886, and it was held that the owner of the casinghead gas contracts there involved had such an economic interest in the gas in the ground as entitled it to deductions for depletion, although the court did not discuss whether the statutory basis for the computation of such allowances existed. This conclusion of the court was predicated upon two distinct grounds, first, that the petitioner under the circumstances disclosed was in effect a joint or coproducer of the gas with the lessees, and, second, that the contracts gave the petitioner an interest which amounted to a profit a prendre. The opinion states:

Considered by themselves, the contracts may not specifically convey any title to gas in the ground, but the contracts confer upon petitioner the right to enter upon the land and connect its pipes directly with the oil wells, install meters, and petitioner is required to maintain vacuums on the oil wells. These provisions, together with the method of operation sanctioned by the parties whereby petitioner, by means of gas lifts, rodless pumps, and the use of compressors to create vacuums, extracted the gas that would otherwise not be produced from the premises, conferred upon it an incorporeal right to be exercised in the land in relation to the gas which was in the nature of a grant of a profit a prendre.

There is no direct evidence in the record before us to show that petitioner actually in fact assisted by any of the devices referred to above in producing the gas, although the contract required petitioner to maintain a vacuum on the wells, if the operator so requested. However, in our opinion it is unnecessary to decide here whether petitioner was a joint producer of the gas, or hy the contracts was granted a profit a frendre, so that it may be said to have acquired an economic interest in the gas in place. We prefer to base our decision on the second point raised by respondent. Assuming, without deciding, that petitioner had an economic interest in the gas in the ground, it is entitled to depletion deductions only if the facts bring it within the provisions of the statute authorizing such deductions.

The Revenue Act of 1928, section 114 (b) (3), provides that in the case of oil and gas wells the allowance for depletion shall be 27% per centum of the gross income- from, the property during the taxable year, but not to exceed 50 per centum of the net income of the taxpayer from the property, except that in no case shall the depletion allowance he less than it would be if computed without reference to this provision, that is, on the basis of cost.

In the recent decision of the Supreme Court in Helvering v. Twin Bell Oil Syndicate, 293 U. S. 312, it was held that the lessee’s gross income from the property, within the statute allowing percentage depletion, was the gross proceeds from the sale of the oil less the amount of the royalties paid.

In Brea Canon Oil Co., 29 B. T. A. 1134, the petitioner was the owner of oil and gas properties, and converted casinghead gas produced therefrom into commercial gasoline in its own plant. We held that casinghead gas is a raw material used in manufacturing operations, and that only the fair market value thereof at the mouth of the well is an element in computing gross income for the purpose of determining depletion deductions. On authority of this decision we must hold adversely to petitioner’s contention that its gross income from the property is the full amount of the gross proceeds of sale of the natural gasoline manufactured or extracted from the raw gas. Its gross income from the property must be determined on the basis of the fair market value of the gas at the mouth of the well; that is, fair market value less royalties paid.

In Signal Gasoline Corporation, 30 B. T. A. 568, we held that where petitioner purchased casinghead gas under contracts similar to those here involved the gross income from the production under the contracts, or the gross income from the property, within the meaning of the statute, is the difference between the fair market value of the gas at the well and the royalties paid therefor. We reached the same conclusion in Greensboro Gas Co., 30 B. T. A. 1362, where we held that the gross income from the property for the purpose of computing depletion did not comprise the total proceeds from the sale of gas after transportation through the petitioner’s distribution system, but that such gross income was that portion of the total receipts which represented the fair market or field price of the gas at the wells prior to transportation, reduced by the amount of rents and royalties paid.

The royalty basis on all of the contracts involved in the instant case was 33% percent of the gross value of the gasoline content, and the evidence establishes that the fair market value of the raw gas at the wells was one third of the gross gasoline receipts. Moreover, the parties are not in disagreement on this point, and since there is no difference between the fair market value of the gas at the wells and the royalty paid therefor, it follows under the rule as stated in Signal Gasoline Corporation, supra, that petitioner has neither gross nor net income from the property, and no basis for the allowance of percentage depletion. The same result is reached by applying the rule as stated in Greensboro Gas Co., supra. When the fair market value or field price of the gas at the wells is reduced by the amount of royalties paid, no basis remains for the computation of percentage depletion deductions.

Petitioner’s argument clearly would lead to the allowance of a double deduction of the same amount. First, it would deduct for depletion 27% percent of its gross gasoline receipts, and then the amount would be deductible a second time as the cost of the raw material entering into the manufacture of the gasoline from which it derives the proceeds of sale, and which is the basis for the depletion deduction claimed.

Petitioner contends on brief that the royalties paid were in fact less than the fair market value of the gas at the wells, and that therefore it has a basis for computing percentage depletion, although conceding that the contracts required the payment of royalties equal to one third of the gasoline receipts and that this represented the fair market value of the gas.

On the state of the record before us, we cannot agree with petitioner’s argument. All the contracts provided for the payment of royalties in an amount equal to one third of the gasoline recovered, which is admitted to have been the fair market value of the gas at the wells, and there is no evidence that the contracts were modified or that they were not carried out in accordance with their provisions.

While the evidence establishes that the amount of royalties paid apparently in cash was less than one third of the gross proceeds from the sale of gasoline, and hence less than the royalties stipulated in the contracts, there is no proof that the difference between the royalties paid in cash and the amount provided by the contracts was not paid in services, materials, or other things of equivalent money value. That the royalty consideration may in fact have been paid partly by the furnishing of vacuum service is indicated by the report of witness Morris, a petroleum engineer, introduced in evidence by the petitioner, in which it is stated that the owners in the Rainbow Field traded gas for vacuum services, “ the producer waiving the royalty payments of the contracts.” In the absence of proof to the contrary, we must assume that the contract royalties were paid in money and/or money’s worth.

Petitioner has not only failed to bring itself within the terms of the statute providing for the allowance of percentage depletion, but it has likewise failed to show that it is entitled to depletion on the basis of cost. There is no evidence that it paid anything for the contracts in excess of the royalties. The purpose of the allowance of depletion deductions is to permit recovery of the capital invested in the depletable asset. Obviously if the taxpayer has no capital investment, he is not entitled to depletion allowances on the basis of cost. Respondent’s action on this issue is approved.

Issue {3)' — Whether petitioner is entitled} to compute deductions for depreciation on the unit of production basis. — Section 28 (k) of the Revenue Act of 1928 provides that, in computing net income there shall be allowed as a deduction, among other things, “ a reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.” The purpose of the allowance is to permit recovery of the capital investment over the period of useful life of the wasting asset, as the exhaustion occurs. Where the asset is used up or exhausted ratably by the passage of time, such result is equitably achieved by the allowance of an aliquot part of the cost or other basis in each year. This is commonly called the straight line basis of computing depreciation. But where exhaustion does not occur at a uniform rate, depreciation computed on the basis of the unit of production affords a more reasonable allowance than the straight line method, if the useful life of the asset does not exceed the period of production. Both methods are recognized by the respondent’s regulations, subject to the requirement that whichever plan or method of apportionment is adopted must be reasonable and have due regard to operating conditions during the taxable period. See Regulations 74, art. 205, as amended.

The reasonableness of the method adopted depends upon the facts and circumstances of each case. In Golconda Oil Co., 7 B. T. A. 955, we allowed depreciation on oil well equipment on the unit of production basis rather than the straight line basis, where it appeared that the useful life and value of the equipment depended upon the rate of extraction of the oil content. In Evangeline Gravel Co., 13 B. T. A. 101, we refused to disturb respondent’s action in allowing depreciation on the straight line basis, where it did not appear that the equipment would not have a useful life after the gravel pit had been exhausted.

In the instant case respondent has computed depreciation by the straight line method, while petitioner contends that its deduction should be determined on the unit of production basis.

Petitioner’s contention, we think, must be sustained. The record discloses that petitioner’s production of gasoline increased from 893,650 gallons in 1928 to 3,414,298 gallons in 1930, and thereafter declined to 1,557,042 gallons in 1933; that when the casinghead gas in the Rainbow Field is exhausted no other source of supply will be practically available; and that upon exhaustion of the present field petitioner’s plant and equipment will have a salvage value, of only 10 percent. In the light of these facts, it is our opinion that the provision of the statute for a reasonable allowance requires that the deductions for depreciation be computed on the unit of production basis. Respondent’s action on this issue is reversed.

Issue (4) — Whether certain expenditures in the taxable years constituted capital iiwestments or deductible expenses. — During 1929 petitioner expended $834.95 for a booster plant and $6,970.76 for a stabilizer, and in 1930 invested the additional amount of $102,553.48 in the booster plant. The stabilizer was not in use in February of 1931, and then had the appearance of not having been in use very long. A stabilizer does not increase but lowers the production of a gasoline plant. A booster plant is used to pick up the gas at a distance from the gasoline plant and deliver it to the compressor or absorption units. It has nothing to do with the extraction of the gasoline, but simply effects the movement of the raw material. Petitioner’s booster plant was located about three miles from the gasoline plant, and was installed to bring in gas from the Crain Field.

Petitioner contends that the above mentioned expenditures were made solely to maintain output, that they did not increase production nor enhance the value of the plant, and that it is, therefore, entitled to deduct the amounts so expended in the respective taxable years as operating expenses, notwithstanding the assets acquired had a useful life in excess of one year.

Respondent resists petitioner’s claim on the ground that the cost of constructing the booster plant is a capital item, returnable through depreciation, and not deductible as expense, pointing to the fact that he has consistently so held in connection with the oil and gasoline industry, respecting which his regulations differ from those for mining.

■ In support of its contention petitioner cites United States v. Roden Coal Co., 39 Fed. (2d) 425; Marsh Fork Coal Co. v. Lucas, 42 Fed. (2d) 83; and Commissioner v. Brier Hill Collieries, 50 Fed. (2d) 777. The cited cases, all of which involved coal mines, held that expenditures made to maintain hut not increase the normal output of the mines, which did not reduce operating expenses nor enhance the value of the property as a whole, constituted deductible expense.

The principle applied in these decisions must be strictly limited, we think, to expenditures which clearly do not increase either the normal output or the aggregate value of the property, for it is obvious that expenditures which do either would result in the acquisition of additions or betterments to the plant, the deduction of which is specifically prohibited by section 24 (a) (2) of the Revenue Act of 1928.

The record before us contains no direct or affirmative proof that the expenditures in question did not constitute additions or better-ments, and such inferences as may properly be drawn from other facts established by proof do not lead to that conclusion. So far as the record discloses, the normal capacity of petitioner’s gasoline plant, as originally intended, may have been increased by the building of the booster plant, which brought in an additional supply of casinghead gas from the Crain Field. Certainly the salvage value of the petitioner’s plant as a whole was increased by the additional expenditures in controversy, and this may also be true of the market value of the plant as an operating unit. In the absence of competent evidence, we can not indulge in the assumption of facts which the petitioner has the burden of proving.

In this connection it may be noted that the decisions above cited rest upon judicial approval of the respondent’s regulations issued under the Revenue Acts prior to 1926. Article 222 of Regulations 45, under the Revenue Act of 1918, relating to allowable capital items in the case of mines, provided that the “ cost of minor items of equipment and plant, necessary to maintain the nominal output * * * may be charged to current expense of operation.” Identically the. same provision was contained in article 222 of Regulations 62, under the Revenue Act of 1921, and in article 224 of Regulations 65, under the Revenue Act of 1924. However, this provision was omitted from article 222 of Regulations 69, under the Revenue Act of 1926, which provides that:

Expenditures for plant and equipment, not including expenditures for maintenance and for ordinary and necessary repairs, shall be charged to capital account recoverable through depreciation.

The latter provision is continued in article 242 of Regulations 14, under the Revenue Act of 1928.

For the reasons indicated, respondent’s action on this issue is approved.

Issue (5) — Whether petitioner is entitled to certain deductions for accrued interest. — In its return for 1930 petitioner deducted for interest an amount which included $4,499.14 accrued and charged to profit and loss on an open account due to the Henderson Co. This amount of $4,499.14 consisted of interest accrued on the books in December 1930 for the years 1928, 1929, and 1930. In computing the deficiency for the latter year respondent allowed as a deduction the amount of $1,639.23 representing interest accrued for the year 1930, and disallowed the balance of such accrual representing interest for the years 1928 and 1929.

By first amended petitions, petitioner alleged that it borrowed money from the Henderson Co. on which it agreed to pay interest at 7 percent on the average yearly balance, and that the average balance for 1929 was $31,408.05 and for 1930 was $26,855.93. In his answers to the amended petitions, respondent specifically denied all material allegations of fact contained therein, and thus put the petitioner upon proof.

At the hearing the parties stipulated that the average balance in the account of the Henderson Co. on the books of the petitioner and the amount of interest, if interest were computable at 7 percent, were as follows:

The above stipulation was made with the specific reservation that respondent does not agree that interest upon this account is properly deductible in any amount.

At the hearing respondent also claimed such increase in the deficiency for 1930 as would result from the inclusion in petitioner’s income for that year of the amount of $1,639.23 allowed as a deduction for accrued interest, on the ground that there was no legal liability on the part of the petitioner to pay interest on the account of the Henderson Co., and hence the deduction for accrued interest in 1930 had been erroneously allowed.

In support of its contentions, petitioner offered the testimony of its general auditor to the effect that in December 1930 interest was accrued on the books on the average balance of the Henderson Co. account for each of the years 1928, 1929, and 1930 pursuant to the instructions of the general manager of the petitioner corporation.

The issue joined by the pleadings of the parties filed prior to the hearing having raised specifically the question whether there was any legal obligation on the part of the petitioner to pay interest on the account of the Henderson Co., the mere proof of accrual on the books of the petitioner is insufficient, we think, to establish the liability, respondent’s contention being that the accrual was erroneous because of the lack of a legal obligation to pay. There is no proof that any interest was in fact ever paid, nor that the petitioner was legally liable to pay interest, or, if so, at what rate, nor that the general manager of petitioner was authorized to direct the accrual, and it appears that no interest was accrued for 1928 or 1929 until in December 1930. In these circumstances the interest deduction claimed by the petitioner for 1928 and 1929 must be disallowed for lack of proof.

Petitioner further contends that in any event the increased deficiency for 1930 claimed by respondent must be denied for the reason that the burden was upon respondent to prove that the allowance of the deduction for that year was erroneous, and no proof on this point was offered by respondent.

In the situation presented here, we think that petitioner’s argument is sound. Ho duty rests upon the petitioner to offer testimony with respect to an issue on which the burden of proof rests on the respondent. The presumption was that what had been done by the Commissioner was correct. No testimony was offered to show that it was not. We therefore hold that the revisions in deficiencies asked for by respondent should not be allowed.

Judgment will be entered wnder Bule 50.


source: Caselaw Access Project

author:
Matthews :
      TuRNER,

license: Public Domain

text:
    Boca Ratone Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 62215.
    Promulgated January 15, 1935.

      Harry J. Budiak, Esq., and Bernhard Knollenberg, Esq., for the petitioner.

      8. B. Anderson, Esq., for the respondent.
   OPINION.

Matthews :

The respondent determined a deficiency in income tax against the petitioner for the year 1929 in the amount of $3,153.38. The sole issue presented for our consideration is whether the respondent erred in determining that the petitioner realized taxable income of $26,672 in the taxable year on the repossession of certain lots of land which it had sold on the installment basis and to which it had retained legal title.

A stipulation of facts was filed by the parties, which reads as follows:

1. In years prior to 1929 the petitioners sold nine lots of land located in Inlet Subdivision, Palm Beach, Florida, for an aggregate selling price of $78,760.00. The contracts of sale provided that the petitioner should retain legal title to the lots until the purchase price was paid in full, but that the purchasers should have immediate possession. The purchasers, accordingly, entered into possession of the lots.
2. Prior to 1929 the purchasers paid to the petitioner $39,376.00 under their contracts. The cash received from the sale of each lot, in the year in which the sale was made, did not exceed one-fourth of the selling price of the lot and the petitioner elected to report, and did report, profits from the sales of all the lots in question on the installment basis.
3. On the installment basis, profits of $12,253 were reported for years prior to 1929, computed as follows :
Sales price-^_$78,750. 00
Cost_ 54,243. 99
Prospective profit_$24,506. 01
Proportion of Cash received to be reported as
profit_ 24, 506.01/78,750. 00
Cash received_$39,375. 00
Profit -reported_ 12, 253. 00
4. In 1929 the purchasers defaulted in their obligations and negotiations were entered into which resulted in agreements executed in 1929 whereby the petitioner released the purchasers from further obligation for the unpaid installments of the purchase price and, in addition, paid them $50.00 in cash for each lot, being $450.00 in all; and the purchasers surrendered their equity in the property to the petitioner and returned possession thereof to the petitioner.
5. The aggregate value of the said nine lots so repossessed by the petitioner in 1929 was, at the time of said repossession, less than $27,122.00.
6. Petitioner’s return for 1929 reported no taxable profit or deductible loss resulting from the repossession of said nine lots.
7. The respondent ruled that the petitioner realized taxable income in 1929 of $26,672.00 from the repossession of the said nine lots, representing the excess of the total cash received from the purchasers ($39,375.00) over the sum of the profits previously reported ($12,253.00) plus the amount ($450.00) paid to the purchasers as set forth in paragraph 5 above. If the respondent’s ruling is correct, judgment should be entered for the deficiency determined by him. The petitioner’s position is that it realized no taxable income from said repossession. If petitioner’s position is correct, there is no deficiency.

The petitioner contends that section 44 (d) of the Revenue Act of 1928, which relates to the gain or loss upon the disposition of installment obligations, is here controlling. This section provides:

If an installment obligation is satisfied at other than its face value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and (1) in the case of satisfaction at other than face value or a sale or exchange— the amount realized, or (2) in case of a distribution, transmission, or disposition otherwise than by sale or exchange — the fair market value of the obligation at the time of such distribution, transmission, or disposition. The basis of the obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full.

The obligations of the purchasers to pay the balances due on the purchase prices of the lots were installment obligations. The face value of the obligations at the time of the repossession was $89,875, since the selling price of all the lots was $78,750 and the sum of $39,375 had previously been paid. The value of the lots at the time they were repossessed was less than $27,122.

It is argued by the petitioner that the installment obligations of the purchasers of the lots in question were “ satisfied at other than their face value ” when the lots were repossessd by the petitioner, as vendor, under the agreements described in paragraph 4 of the stipulation. This theory is based on the premise that there was a “ satisfaction ” of the obligations of the purchasers when the petitioner, as vendor, repossessed the lots and released the purchasers from further obligation for the unpaid installments. It is pointed out by the petitioner that under this theory any gain to the petitioner would be the difference between the basis of the obligations and the amount realized, in accordance with the provisions of section 44(d), quoted above. The basis of the obligations, as defined in section 44(d), is the excess of the face value of the obligations over an amount equal to the income which would be returnable were the obligations satisfied in full. The income which would have been returnable if the obligations had been satisfied in full is $12,253, and when this amount is subtracted from $39,375, the face value of the obligations at the time of the repossession of the lots, we have $27,122 as the basis of the obligations. The amount realized, under the circumstances of this case, was the value of the purchasers’ equity, less $450. The value of the purchasers’ equity could not have exceeded the value of the lots, which was less than $27,122, and when this amount is reduced by $450 we have $26,672 as the amount realized by the petitioner when the lots were repossessed, which latter amount is less than the basis of the obligations. Thus the petitioner contends that no gain resulted from the repossession of the lots and that the effect of such repossession was to reduce the basis of the property.

We are of the opinion that section 44 (d) does not apply. It is to be borne in mind that the petitioner still had legal title to the property and merely repossessed it after the purchasers had defaulted in their obligations. The petitioner released the purchasers from any further obligation for the unpaid installments and paid the purchasers $50 in cash for each lot, and the purchasers surrendered their equity in the property. Under these circumstances it can not be said that when the purchasers were released from further liability for the unpaid installments their obligations were satisfied at other than their face value, within the meaning of section 44 (d) of the Revenue Act of 1928.

Prior revenue acts did not contain a section equivalent to subdivision (d) of section 44, which is quoted above. The report of the Ways and Means Committee of tlie House and the report of the Finance Committee of the Senate with respect to the inclusion of this provision in the Revenue Act of 1928 read as follows:

Gain or Loss upon Disposition of Installment Obligations
Subsection (d) contains new provisions of law to prevent evasion of taxes in connection with the transmission of installment obligations upon death, their distribution by way of liquidating or other dividends, or their disposition by way of gift, or in connection with similar transactions. The situations above specified ordinarily do not give rise to gain and yet at the same time it is urged that they permit the recipient to obtain a greatly increased basis in his hands for the property received, except in the case of gifts. It therefore seems desirable to clarify the matter. The installment basis accords the taxpayer the privilege of deferring the reporting at the time of the sale of the gain realized, until such time as the deferred cash payments are made. To prevent the evasion the subsection terminates the privilege of longer deferring the profit if the seller at any time transmits, distributes, or disposes of the installment obligations and compels the seller at that time to report the deferred profits. The subsection also modifies the general rule provided in subsection (a) for the ascertainment of the percentage of profit in the deferred payments, in those cases in which the obligations are satisfied at other than their face value or are sold or exchanged. The modification permits a compensating reduction in the percentage of profit in case the obligations are satisfied at less than their face value, or are sold or exchanged at less than their face value.
Whether, or not the gain or loss realized under the section is recognized for tax purposes, depends upon general principles of law embodied in the income tax provisions, the exchange of installment obligations in connection with tax-free exchanges, for instance, being cared for by section 112.

Neither the language of the statute nor the comments made in the reports of the House and Senate Committees indicate that it was the purpose of the provision to treat an installment obligation as “ satisfied at other than its face value ” when, as in the instant case, the sale was not consummated because the purchasers had defaulted in their payments and by agreement they were released from further payments.

In the notice of.deficiency the petitioner was advised that the profit had been computed in accordance with the provisions of article 353 of Regulations 74, the second paragraph of which at that time read as follows:

If for any reason the purchaser defaults in any oí his payments and the vendor returning income on the installment basis repossesses the property, the entire amount received in installment payments and retained by the vendor, less the sum of the profits previously returned as income and an amount representing proper adjustment for exhaustion, wear and tear, obsolescence, amortization, and depletion of the property while in the hands of the purchaser, will be income of the vendor for the year in which the property is repossessed, and the basis of the property in the hands of the vendor will be the original basis at the time of the installment sale.

On December 23, 1932, which date is subsequent to the filing of the petition herein, article 353 of Regulations 74 and article 45 of Regulations 69 were amended by T. D. 4360, by the elimination of the second paragraph of each article, which are identical, and the substitution for the paragraph eliminated of a paragraph reading as follows:

If the vendor had retained title to the property and the purchaser defaults in any of his payments, and the vendor repossesses the property by agreement or process of law, the difference between (1) the entire amount of the payments actually received on the contract and retained by the vendor and (2) the sum of the profits previously returned as income in connection therewith and an amount representing what would have been a proper adjustment for exhaustion, wear and tear, obsolescence, amortization, and depletion of the property during the period the property was in the hands of the purchaser had the sale not been made, will constitute gain or loss, as the case may be, to the vendor for the year in which the property is repossessed, and the basis of the property in the hands of the vendor will be the original basis at the time of sale. If the vendor had previously transferred title to the purchaser, and the purchaser defaults in any of his payments and the vendor reacquires the property, such reacquisition shall be regarded as a transfer by the vendor, in exchange for the property, of such of the purchaser’s obligations as are applied by the vendor to the purchase or bid price of the property. Such an exchange will be regarded as having resulted in the realization by the vendor of gain or loss, as the ease may be, for the year of reacquisition, measured by the difference between the fair market value of the property reacquired and the basis in the hands of the vendor of the obligations of the purchaser which were applied by the vendor to the purchase or bid price of the property. The basis in the hands of the vendor of the obligations of the purchaser so applied will be the excess of the face value of the obligations over an amount equal to the income wbicb would lie returnable were the obligations satisfied in full. The fair market value of the property reacquired shall be presumed to be the amount for which it is bid in by the vendor in the absence of clear and convincing proof to the contrary. If the property reacquired is subsequently sold, the basis for determining gain or loss is the fair market value of the property at the date of reacquisition.

The amendment of Regulations 69 and 74, quoted above, followed the acquiescence by the Commissioner in the decision of this Board in Jacob M. Dickinson, Jr., et al., Executors, 18 B. T. A. 790, where the question involved the income to be returned by the vendor in the year of reacquisition of property sold on the installment plan where title had been transferred to the purchaser. This Board held that in such a case the sale and reacquisition were separate transactions and should not be considered together in computing gain or loss. We further held that the utilization of the purchase money notes in reacquiring the property sold at a trustee’s sale constituted a realization of profit under the installment method of reporting income of that proportion of the notes utilized which the total profit bore to the total contract price.

In its original form the second paragraph of article 353 of Regulations 74- applied the same rule to vendors who retained title and to vendors who transferred title in installment sales transactions. As amended the article applies the same rule with respect to the vendor who retains title to the property sold on the installment plan as was contained in the article before amendment. Hence, the petitioner’s contention that the article should be considered in its original form in determining its applicability to the instant case does not help petitioner’s case.

The first sentence of the second paragraph of article 353, as amended, is identical with the first sentence of the second paragraph of article 354, which relates to deferred payment sale of real property not on the installment plan.

In the instant case the petitioner never transferred title to the property, only possession. It now has title and possession of the property and $26,672 on which tax has not been paid. At the time of receipt it was treated, for tax purposes, as a return of capital and had the transaction gone through to completion, there would have been a full return of the capital invested in the property sold. In the taxable year the purchasers defaulted and were released from payments on' the property and gave up possession. Thereupon the amounts previously received became clear gain to petitioner and not a return of capital. The determination of the respondent is approved.

Reviewed by the Board.

Judgment will be entered for the respondent.

TuRNER,

dissenting: I am unable to agree that this case on its facts does not come within the meaning of section 44 (d) of the Revenue Act of 1928. By the provisions of that section there are only two conditions prerequisite to its application in cases such as that before us. The obligations dealt with must be installment obligations and they must have been satisfied at other than their face value. In my opinion the parties have stipulated that these conditions have been met.

Neither party questions the fact that the obligations of the purchasers in the instant case were installment obligations, and the majority opinion finds as a fact that they were. The question, then, is whether these obligations were “ satisfied at other than ” their “ face value.” On this point the stipulation reads as follows:

4. In 1929 the purchasers defaulted In their obligations and negotiations were entered into which resulted in agreements executed in 1929 whereby the petitioner released the purchasers from further obligation for the unpaid installments of the purchase price, and', in addition, paid them $50.00 in cash for each lot, being $450 in all; and the purchasers surrendered their equity in the property to the petitioner and returned possession thereof to the petitioner.
5. The aggregate value of the said nine lots so repossessed by the petitioner in 1929 was, at the time of said repossession, less than $27,122.00.

In my judgment these stipulated facts clearly show satisfaction of the purchasers’ obligations by an executed agreement of accord. Boffinger v. Tuyes, 120 U. S. 198; Missouri-American Electric Co. v. Hamilton Brown Shoe Co., 165 Fed. 283; Buford v. Inge Construction Co., 279 S. W. (Tex.) 513; Davis v. Davis, 229 Pac. (Okla.) 479; Chapman v. Adams, 219 S. W. (Mo.) 132; Glucksman v. Board of Education of City of New York, 164 N. Y. S. 351. The purchasers defaulted on obligations to pay the further sum of $39,-375 and a settlement was negotiated, the net result of which was that the purchasers satisfied their obligations and received $450 in cash, in return for possession of the property and surrender of their equity therein. By the stipulation it was agreed that the entire value of the property at that time was less than $27,122, thereby showing that the obligations were satisfied at other than their face value and definitely bringing this case within the provisions of section 44 (d).

The majority opinion, it seems to me, loses itself in an effort to distinguish between a sale of property where title passes and a mortgage is given as security for the purchasers’ obligations and a sale where bare legal title is retained as such security. Section 44 (d) of the statute makes no such distinction, but applies to installment obligations arising from sales of either type and, according to my view, contains nothing which would justify the distinction which the majority opinion attempts to draw.

For the reasons stated I respectfully dissent.

Smith, Trammell, ArtjNdell, McMahoN, and Leech agree with this dissent.


author: Goodeich:

text:
    C. E. Gullett, Petitioner v. Commissioner of Internal Revenue, Respondent. W. J. Gullett, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 52517, 52518.
    Promulgated January 16, 1935.

      Hugh N. Smith, G. P. A., for the petitioners,

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

Goodeich:

Respondent determined deficiencies in income tax for 1928 against C. E. Gullett in the amount of $8,901.30, and against W. J. Gullett in the amount of $3,550.01. In these proceedings which, upon motion, were consolidated, petitioners seek redetermina-tions of those deficiencies. There is but one issue, common to both cases, for our decision, namely, whether respondent erred in including in each petitioner’s income a certain amount as salary, constructively, though not in fact, received.

The primary facts are not in dispute. They are presented by an agreed statement of counsel, accompanied by certain exhibits, and supplemented by short testimony. They need not be set out in full for an understanding of the issue.

At the times material, petitioners were resident of Lincoln, Illinois. Their records were kept, and their tax returns made, on a cash receipts and disbursements basis. Between them they equally owned all but two shares of the outstanding stock (75,000 shares, no par value) of Gullett & Sons, Inc. (hereinafter called the company) They were officers and directors of the company, which was engaged in the wholesale and retail floral business.

The company kept its accounts and made its returns on an accrual basis, using a fiscal year ending August 31. It was organized on September 1,1927, and (we infer as to the nature of the transaction) in exchange for its stock, took over from petitioners a plant and equipment of substantial value, and bonds of a par value of $162,038.04. It assumed various liabilities, including notes payable of $118,363.54, and accounts payable of $32,148.01.

On August 31 and December 31, 1928, the investment account (bonds) remained practically the same as at the inception of the company. Notes payable were $114,075.40 on the first date, and $96,532.96 on the latter; accounts payable at these dates were $85,371.23 (which included $43,051.90 officers’ salaries unpaid) and $10,631.05, respectively.

At the first meeting of the directors of the company salaries of $25,000 a year, payable monthly, were voted to each of these petitioners. However, at a subsequent meeting of the board on February 20,1928, for the recited reason that the company was heavily involved, it was provided “ that for the year 1928, and until such further time as the company’s finances are in better shape ” petitioners “ shall not be allowed to draw in excess of $6,000.00 in cash.”

These minutes were drawn by the company’s auditors. Through inadvertence they were not signed by the directors.

Of the company’s notes payable those amounting to about $66,000 were held by two banks. Bonds owned by the company to a face value in excess of the notes (the record does not disclose the exact amount) were deposited as collateral security. The bonds could not have been sold for full par value on the market; in 1928 perhaps $10,000 less than par value would have been realized upon sale. During the fiscal year ended August 31, 1929, the company distributed the bonds to its stockholders, reducing its outstanding stock accordingly.

In 1928 the company was constructing a new heating plant at a cost of about $70,000. To help finance this expenditure petitioners advanced to it during the year a total of $45,768.19, none of which was repaid.

During 1928, each petitioner drew $6,000 in cash as salary from the company, and each reported, that amount in his return. The company, however, credited to each of their accounts the full salary originally voted and on its returns claimed as a deduction the whole amount so accrued. The amounts so accrued but undrawn by petitioners have never been paid to them. The company, at the time of this trial, was in the hands of receivers.

Eespondent has now added to the 1928 income of each petitioner the difference between the amount drawn and reported by him, and the amount accrued and reported by the company. From those increases in the incomes of the individuals, arise the deficiencies here in controversy. Whether respondent’s action is proper is the sole issue in these cases.

Eespondent bottoms his action upon authority of article 332, Eegu-lations 74, which provides, upon a theory of constructive receipt, for the inclusion in income of a taxpayer whose return is made on a cash receipts and disbursements basis, amounts credited to his account or set aside for him, even though not actually received by him, if the funds are available to him without substantial restriction as to payment, and time of receipt thereof depends upon his own desire or judgment.

From the decisions in cases previously arising upon this issue, a number of which are cited by each party, the principles to be applied in deciding the case at bar upon its own facts have been established. It is clear that the doctrine of constructive receipt is to be sparingly used; that amounts due from a corporation but unpaid, are not to be included in the income of an individual reporting his income on a cash receipts basis unless it appears that the money was available to him, that the corporation was able and ready to pay him, that his right to receive was not restricted, and that his failure to receive resulted from exercise of his own choice. A. L. Englander, 1 B. T. A. 760; John A. Brander, 3 B. T. A. 231; Adolph Schlett, 7 B. T. A. 150; W. B. Brooks, 12 B. T. A. 31; Ella C. Loose, Executrix, 15 B. T. A. 169; Albert J. Sullivan, 16 B. T. A. 1347; R. V. Board, 18 B. T. A. 650; Old Colony Trust Co. et al., Administrators, 22 B. T. A. 1062; Eakins v. United States, 36 Fed. (2d) 961; Moran v. Commissioner, 67 Fed. (2d) 601, affirming 26 B. T. A. 1154.

Here, petitioners’ right to receive their salaries in full was restricted by action of the directors of the company. They could be paid only $6,000 each until that restriction was removed when “ the company’s finances are in better shape.” True enough, as respondent points out, these petitioners were in control of the company, both as stockholders and directors and, had they so desired, could have voted the removal of the restriction and authorized full payment of the salaries. But that they did not do. The facts are that the restriction stood, and that petitioners each received only $6,000 during the year.

Moreover, it appears that the company’s financial condition was such that the full salaries, even had payment been unrestricted, could not have been paid without embarrassment to the corporation and impairment of its credit standing. Substantial liabilities were outstanding against it; part of its bonds were pledged as collateral on its debts; it did not have available the funds with which to pay the salaries in full. Indeed, petitioners were called upon to advance a substantial amount of cash to the company that it might complete an addition to its plant — advances which were never repaid.

Under such circumstances, we cannot say that petitioners, through their own choice, failed to receive the unpaid balances of their salaries, or that those amounts were constructively received by them. Cf. Brooklyn Radio Service Corporation, 31 B. T. A. 269.

Beviewed by the Board.

Judgment will be entered for the petitioners.


author: Smith: GoodRioh,

text:
    Brooklyn Trust Company, as Trustee under its Declaration of Trust Bearing Date April 22, 1929, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71673.
    Promulgated January 17, 1935.

      Francis L. Durh, Esq., for the petitioner.

      J. M. Leinenhugel, Esq., for the respondent.
   OPINION.

Smith:

The only question for our determination in this proceeding is whether the petitioner in respect of its trusteeship of the composite fund is an association taxable as a corporation.

Section 701 of the Revenue Act of 1928 provides in part as follows:

(a) When used in this Act—

* * sj* # *
(2) The term “ corporation ” includes associations, joint-stock companies, and insurance companies.

Articles 1312 and 1314 of Regulations 74 are as follows:

Art. 1312. Association. — Associations and joint-stock companies include associations, common law trusts, and organizations by whatever name known, which act or do business in an organized capacity, whether created under and pursuant to State laws, agreements, declarations of trust, or otherwise, the net income of which, if any, is distributed or distributable among the shareholders on the basis of the capital stock which each holds, or, where there is no capital stock, on the basis of the proportionate share or capital which each lias or has invested in the business or property of the organization. A corporation which has ceased to exist in contemplation of law but continues its business in quasi-corporate form is an association or corporation within the meaning of section 701.
Art. 1314. Association distinguished, from trust. — Where trustees merely hold property for the collection of the income and its distribution among the beneficiaries of the trust, and are not engaged, either by themselves or in connection with the beneficiaries, in the carrying on of any business, and the beneficiaries have no control over the trust, although their consent may be required for the filling of a vacancy among the trustees or for a modification of the terms of the trust, no association exists, and the trust and the beneficiaries thereof will be subject to tax as provided by sections 161-170 and by articles 861-891. If, however, the beneficiaries have positive control over the trust, whether through the right periodically to elect trustees or otherwise, an association exists within the meaning of section 701. Even in the absence of any control by the beneficiaries, where the trustees are not restricted to the mere collection of funds and their payment to the beneficiaries, but are associated together with similar or greater powers than the directors in a corporation for the purpose of carrying on some business enterprise, the trust is an association within the meaning of the Act.

The petitioner contends first that in respect of the composite fund it was not an association taxable as a corporation in 1930, the taxable year before us, but was a trust. It further contends that this issue is res judicata, having been determined by the United States District Court for the Eastern District of New York in Brooklyn Trust Co. v. Corwin, 5 Fed. Supp. 287, and, if not, that it should be decided in the petitioner’s favor under the doctrine of stare decisis.

In deciding that the composite fund did not constitute an “ association ” and that the certificates of beneficial interest were not subject to the stamp tax imposed on corporate shares, the court, in Brooklyn Trust Co. v. Corwin, supra, expressed the opinion that the composite fund was merely an extension of the trust services performed by the petitioner in accordance with the law of the State of New York.

In Investment Trust of Mutual Investment Co., 27 B. T. A. 1322, we held that an organization created for the purpose of carrying on a securities investment business for profit and actively engaged in such business on a large scale was an association taxable as a corporation. The facts in that case bear a strikingly close resemblance to those in the instant case. In each instance the beneficial shareholders turned over funds to a single trustee for investment purposes and received the profits in the form of dividends or similar distributions. In each instance the trust funds were commingled and the investments made as a single business enterprise. In Investment Trust of Mutual Investment Co., supra, the taxpayer was organized by an agreement executed by and between the Mutual Investment Co. and the Empire Trust Co. Under the agreement the latter company held the legal title to the funds while the active management was entrusted to the Mutual Investment Co. Certificates were issued to, and the profits from the fund distributed to, the beneficial shareholders. In the instant case the composite fund was created by a so-called declaration of trust executed by the petitioner under the terms of which the petitioner was to act in a dual capacity as trustee for the separate trust funds comprising the composite fund and also as manager of the composite fund. The certificates of beneficial interest here were not issued directly to the beneficial owners, but to the petitioner as trustee for such owners. In our opinion in Investment Trust of Mutual Investment Co., supra, we said:

It was apparently the intention of Congress to tax as corporations, associations of men, other than copartnerships, organized for the purpose of carrying on a business. We think that where men associate themselves together and contribute money to a common fund to be held by one or more trustees for a business purpose, the profits thereof to inure to them, the entity thus created is properly classifiable as an association, regardless of the power of control held over the trustee by the associates; of their authority freely to transfer their shares of beneficial interests; or of any provision for meetings of the certificate holders. Upon the entire record we are of the opinion that the petitioner was an association taxable as a corporation for 1928.

On appeal, that case was affirmed by the Circuit Court of Appeals for the Second Circuit without opinion, 71 Fed. (2d) 1009. Since the promulgation of our decision in that case the same court, the Circuit Court of Appeals for the Second Circuit, decided Ittleson v. Anderson, 67 Fed. (2d) 323, affirming Ittleson v. Anderson, 2 Fed. Supp. 716, which we relied upon strongly in Investment Trust of Mutual Investment Co., supra. The facts in Ittleson v. Anderson were that a single grantor conveyed to himself and to others as cotrustees certain property, consisting entirely of stocks, to be held in trust for the benefit of the holders of certificates of beneficial interest. Two certificates representing the entire beneficial interest were issued to the grantor. The trustees received the income from the funds, consisting of dividends and interest, which they either distributed to the sole beneficiary or reinvested. In holding that the trust was an association taxable as a corporation and that the certificates of interest issued were subject to the capital stock tax, the court said:

An examination of these cases [the cases referred to being Hecht v. Malley, 265 U. S. 144; Sloan v. Commissioner, 63 Fed. (2d) 666; Merchants’ Trust Co. v. Welch, 59 Fed. (2d) 630; Trust No. 5833, Security-First Nat. Bank, v. Welch, 54 Fed. (2d) 323; Little Four Oil & Gas Co. v. Lewellyn, 35 Fed. (2d) 149; United States v. Neal, 28 Fed. (2d) 1022; Lansdowne Realty Trust v. Commissioner, 50 Fed. (2d) 56; Gardiner v. United States, 49 Fed. (2d) 992; Allen v. Commissioner, 49 Fed. (2d) 717] indicates the rule to be that whether or not a particular trust is taxable as an association depends not so much upon the extent of the powers given to the trustees in the deed of trust, but rather upon the nature of the activities of the trustees and the use they make of the powers given to them. Gardiner v. United States, supra. A distinction is to be drawn between the activities of trustees under a strict trust as distinguished from the activities under a business trust. Even in the strict trust the activities of the trustees, in preserving the trust estate, may partake of the nature of business transactions. It is a matter of degree. When, on the one hand, the trustees promote and conduct a particular business enterprise with the trust estate, it is considered an association. The usual type is a trust for the development of real estate (Trust No. 5833, Security-First Nat. Bank v. Welch, supra) or for the active management of developed real estate (U. S. v. Neal, supra). When, on the other hand, a trustee is merely engaged in the amount of business activity necessary to preserve the corpus and otherwise discharge the functions traditionally attributable to a strict trust, it is not treated as an association. Lansdowne v. Com’r, supra; Gardiner v. Com’r, supra; Allen v. Com’r, supra. Between these extremes is the field where trustees in the management of trust property engage in considerable business activity, and the question then presented is whether they function as a business organization or merely as trustees under the modem conception of what a strict trustee has a duty and right to do.
* * * In the modern use of the trust device a trustee of the strict trust, traditionally concerned with preservation, may engage in some activities with a view of an accretion to the corpus. A distinction between a strict and business trust cannot be made solely upon the presence or absence of the profit motive. When that motive exists in a strict trust, it is to a restricted extent. When the trustee of an estate consisting of securities engaged in considerable business activity and is trading those securities and loans and invests the proceeds so that he is in reality conducting an investment business for profit, then the estate is in business and is taxable as an association. -
* * * Activities such as the purchase and sale of stock and bonds of corporations not connected with the corporations represented in the original corpus and the purchase of an interest in an oil syndicate for profit (May Stores stock, U. S. Public Service Bonds; Amster Syndicate) were sufficient upon which to base a finding that this was a business trust, although the other activities of the trustees considered alone might well have been within the limits of a strict trust.

In our opinion the question here in issue is substantially the same as that involved in Ittleslon v. Anderson, supra, and in Investment Trust of Mutual Investment Co., supra, and under authority of those opinions we must hold that, in respect of the composite fund, the petitioner was an association taxable as a corporation in the year before us.

There can be no doubt that the management and operation of the composite fund, involving the investment and reinvestment of such a large amount of capital and the collection and distribution of interest and dividends, constituted an active business as distinguished from a passive or liquidating trust. We said in Investment Trust of Mutual Investment Co., supra:

We also think that it was engaged in a business operation. The petitioner argues that it was not doing business within the meaning of the decisions of the courts which have held the transaction of business a factor of importance in the classification of an organization of the character of the petitioner. In its brief the petitioner states:
While the buying and selling of securities may become a business, as the Bureau held, such changes in investment as an active trustee reasonably makes in the trust funds in his care to meet the continually changing important economic and financial conditions is investment and not business, and we most emphatically maintain we are doing no more than a wide-awake Trustee should do.
We cannot agree that the investment of funds by an entity organized' for that purpose does not constitute the doing of business. The evidence of record shows that the petitioner intended to take advantage of wide swings in the market and, in point of fact, a large percentage of the petitioner’s net income for 1928 was from profit on the sale of securities. The petitioner was doing the business for which it was organized. The fact that most of the work was performed by the managing company and paid for by that company does not make it that the petitioner was not doing business.

See also the above quoted language of the court in the Ittleson case upon this point; Twin Bell Oil Syndicate, 26 B. T. A. 172; affd., 70 Fed. (2d) 402; Russell Tyson et al., Trustees, 25 B. T. A. 520; affd., 68 Fed. (2d) 584; certiorari denied, 292 U. S. 657. Cf. Morriss Realty Co. Trust No. 1, 23 B. T. A. 1076; affd., 68 Fed. (2d) 648.

We are not unmindful that the conclusion thus reached by us in this proceeding is, in effect, contrary to that reached by the United States District Court in Brooklyn Trust Co. v. Corwin, supra. With all due respect for the decision of the court in that case, however, we are of the opinion that, in so far as it may stand for the proposition that the petitioner in respect of the composite fund is not to be classified as an association taxable as a corporation for income tax purposes, it is not in harmony with the majority of the authorities, particularly the Ittleson and the Investment Trust of Mutual Investment Co. cases discussed above.

We are also of the opinion that the issue as to whether the petitioner is an association taxable as a corporation for income tax purposes is not res judicata by reason of the decision of the United States District Court for the Eastern District of New York in Brooklyn Trust Co. v. Corwin, supra. The Supreme Court has held that a judgment in a suit to which the collector of internal revenue is a party does not conclude the Commissioner or the United States Government. Tait v. Western Maryland Ry. Co., 289 U. S. 620; Bankers’ Pocahontas Coal Co. v. Burnet, 287 U. S. 308. Moreover, the question involved in Brooklyn Trust Co. v. Corwin, supra, was whether the petitioner was liable for the stamp' tax upon the certificates issued by the composite fund, whereas the instant proceeding involves the petitioner’s liability for income tax under a different provision of the statute. '

We are of the further opinion that there is no merit in the petitioner’s contention that it is entitled to a judgment in the instant proceeding under the doctrine of stare decisis-. We do not understand that the principle of law which the petitioner seeks to apply in this proceeding has been established by the courts of last resort so as, to render applicable the doctrine of stare decisis.

Eeviewed by the Board.

Judgment will he entered under Rule 50.

GoodRioh,

dissenting: Both Investment Trust of Mutual Investment Co., supra, and Ittleson v. Anderson, supra, upon which the majority opinion relies, bottom upon facts so divergent from those m the instant proceeding that those decisions, save for reiteration of principles, offer little basis for the determination of this controversy.

These questions must be answered here: Do funds held by petitioner as trustee under instruments creating strict trusts - change character when commingled for investment? ■ Does the investment (and reinvestment) of separate trust funds, which is an activity clearly within the duties of the trustee of a strict trust, become a different thing when done on a large scale and simultaneously for a number of such trusts? And do the commingling of funds, and the carrying on of investment and reinvestment in bulk, so to speak, transform into a quasi-corporate operation such as these statutory provisions aim at, the performance of the duty to which petitioner, as trustee, is committed respecting each separate, strict trust ?

I am not ready, as apparently are the majority of my brethren, to answer these questions affirmatively and so reach their conclusion in this case. Moreover, I cannot comprehend the composition of the association which, according to the prevailing opinion, here exists. Who is in it? The settlors of the various strict trusts? Not they, for they don’t know each other in this arrangement; they have no control of the fund nor voice in its management; they don’t have even an evidence of an interest in it. Or is the association composed of petitioner, standing on one foot as trustee of the several strict trusts, and on the other as manager of the composite fund ? If that be the theory, it is one too novel for me to accept without considerably more elucidation, especially since it necessarily was considered and already has been rejected by the district court in its decision on this issue — Brooklyn Trust Co. v. Corwin, supra.

It is immaterial whether, as respondent asserts and petitioner denies, this arrangement under the declaration of trust creating the composite fund was planned to obtain for petitioner the advantages resulting from the operation of an investment trust and yet avoid classification and taxation as an association. That is its effect. And we would do better to recognize the result rather than nullify it by a conclusion so plainly erroneous.

Arundell, YaN Fossan, McMahoN, Matthews, and Leech agree with this dissent.


author: Murdock : Adams, TurNer, Van Fossan,

text:
    Percy H. Clark, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 65177.
    Promulgated January 17, 1935.

      Henry A. McCarthy, Esq., for tbe petitioner.

      Dean P. Kimball, Esq., and E. N. McMillam,, Esq., for tbe respondent.
   OPINION.

Murdock :

Tbe Commissioner determined a deficiency of $2,355.91 in the petitioner’s income tax for 1929. Tbe errors assigned are:

1. The inclusion in tbe petitioner’s gross income of tbe income of four irrevocable trusts established by tbe petitioner for four of his children who were minors.

2. The inclusion in the petitioner’s gross income of $15,029.14 as a dividend from a corporation of which he was the sole stockholder.

The facts have been stipulated.

The petitioner is an individual, residing in Pennsylvania. On December SO, 1924, be executed a deed of trust creating irrevocable trusts for each of his eight children. The Willoughby Co., a corporation of Delaware, was named trustee and acted as such at all times material hereto. The petitioner was the sole stockholder of that corporation. The petitioner, in the trust instrument, transferred certain shares of stock to the trustee to be held in eight separate and equal trusts for his eight children by his wife, Elizabeth B.., which children were named in the trust instrument. The stock was transferred to the Willoughby Co. without any designation as trustee, and that company was given the power to sell the securities and to reinvest the principal without restriction, provided that the estate of each child should at all times be invested in the same securities as the estate of all of the others with certain exceptions not here material. Paragraph 3 of the agreement is as follows:

The income of each of said trusts shall be expended as it accrues for the maintenance, education and support of the beneficiary of such trust. Expenditures for tuition, clothing, taxes, board, lodging, traveling, entertainment and recreation shall be proper, and the written approval of any expenditure by Percy H. Clark or Elizabeth R. Clark, or either of them, shall be conclusive evidence that such expenditure is included among the purposes above specified. It is intended that the income of the trusts shall not be allowed to accumulate, and any income of any child not expended in any year shall be available for expenditure for the maintenance, education and support of such child in future years.

Each child was to have an allowance out of his or her share of the income of $40 a month beginning at the age of 16; $75 a month beginning at the age of 18; and $100 a month beginning at the age of 20 years. The principal of each son’s trust was to be paid to him when he attained the age of 25 years. The principal of each daughter’s trust was to be held during her life, but the full income of the trust was to be paid to her after she attained the age of 25 years. The trust instrument also provided for the disposition of the corpus of each trust in case a son died before reaching the age of 25 years or a daughter died at any time. In general, the principal was to go to the persons designated by the son or daughter or to their heirs. In case any child died unmarried and without issue while the trust was still in effect, the corpus of that trust was to be divided equally among the trusts for the surviving children. There was also provision for successor trustees to cover all eventualities.

Four of the children were minors at the close of the year 1929. The income from each trust for the minors during 1929 amounted to $799.61, or $3,198.44 for all four. The Commissioner included this income in the petitioner’s income for 1929.

The Commissioner contends that, because the petitioner was personally liable for the expenses of maintaining, educating, and supporting his minor children, the income of the trusts was in truth used for his benefit, he was the real beneficiary of the trusts, and, therefore, under section 162 (b) of the Revenue Act of 1928, the income of these four trusts should be included in computing his net income. The facts do not bring the case within the provisions of section 167. The word “ beneficiary ” as used in Supplement E must be accorded its usual meaning. That meaning is the meaning usually intended when the word is used in connection with trusts. The word refers to the four children, not to their father. The income is not taxable to the father. This is in accordance with the Commissioner’s rulings and regulations (C. B. 3, p. 116), and the decisions of the Board and the courts. Irene O'D. Ferrer, 20 B. T. A. 811; Lilian K. Blake, 23 B. T. A. 554; S. A. Lynch, 23 B. T. A. 435; Franklin Miller Handly, 30 B. T. A. 1271; Theodore P. Grosvenor, 31 B. T. A. 574; John H. Stevens, 24 B. T. A. 52. Cf. Emil Frank, 27 B. T. A. 1158; Edson v. Lucas, 40 Fed. (2d) 398.

The petitioner, on October 8, 1929, wrote to the Willoughby Co. as follows:

The' Willoughby Company holds in its No. 1 Account, as' part of the assets which it owns individually, fourteen hundred (1,400) shares of the common stock of the Portland Electric Power Company. I, as the owner of all of the stock of the Willoughby Company, request that Company to donate the said stock of the Portland Electric Power Company to my Children’s Trust, to be held in Willoughby No. 2 Account and to be administered as part of the assets held under the aforesaid Deed of Trust.

The directors of the Willoughby Co. met on October 8, 1929, and directed the transfer as requested. They took no other action with respect to this transfer. The stock so transferred was then of the value of $108,869.18. The earnings and profits of the Willoughby Co. accumulated after February 28, 1913, amounted to $15,029.74 on October 8, 1929. The Commissioner included $15,029.74 in the petitioner’s income for 1929 as a dividend from the Willoughby Co.

The petitioner controlled the Willoughby Co. It acted solely to accommodate him in making the transfer. He enjoyed the use of the property by having it transferred for his own purposes. This was the use he wanted to make of the property. He would have enjoyed it no more had it been distributed to him directly. The surplus of the corporation was wiped out. For income tax purposes the transaction amounted to the distribution of a taxable dividend, to tbe extent of the earnings mentioned. Sec. 115 (a), (b); Security First National Bank of Los Angeles et al., Executors, 28 B. T. A. 289, 310, 311. Cf. Old Colony Trust Co. v. Commissioner, 279 U. S. 716.

Reviewed by the Board.

Decision will be entered wider Bule 50.

Adams,

dissenting: Petitioner is a citizen of the State of Pennsylvania. Under the laws of that state the father is legally liable for the maintenance, education, and support of his minor children.

The facts show that in the year 1929, four of the petitioner’s children were minors for whose education he was legally liable. Petitioner on December 30,1924, executed irrevocable trusts by the terms of which the trustee was directed to expend for the maintenance, education, and support of these minors the income of the trusts. These expenditures were to include tuition, clothing, taxes, board, lodging, traveling, entertainment, and recreation. The written statement of the petitioner or his wife was to be conclusive evidence that such expenditure was made for the purposes specified. The trust instruments further provided that, at certain times after the minority of the children, the income from as well as the principal of the trusts was to belong unrestrictedly to the children. The grantor, through the trust instruments, controls absolutely the disposition of the income of these trusts during the minority of the children who were the nominal beneficiaries. Petitioner Clark was the grantor of the trusts. The trustee, the Willoughby Co., was a corporation of which petitioner was the sole owner and which necessarily was under his absolute control.

The question which we have to decide is, Who were the real beneficiaries in these trusts? The majority of the Board concludes the children themselves were the real beneficiaries. I think otherwise. I think that petitioner, grantor of the trusts, is the real beneficiary. If we look to substance rather than form, certainly this is true. The law deals with realities and not with fictions. I think we are too often influenced by the name given to a transaction rather than by its nature. Because a given instrument is called a trust, such designation does not necessarily make it so. Because a given person is called a beneficiary, that does not necessarily make him so.

What petitioner actually did was to set aside a certain portion of his property, the income from which was to be applied to the payment of an obligation which petitioner was legally compelled to perform. Looking to the economic result of the transaction from the standpoint of income, petitioner was no poorer by transferring the income of these properties from himself as an individual to himself as trustee, with the direction to the trustee to expend such income in the payment of his legal obligation, than he would have been had he not made such transfer. From an income standpoint, the children were no richer during their minority by receiving from their father or his solely owned corporation this income than they would have been had they received it directly from their father as their father and not as trustee. Their income estate during their minority was not increased by the expenditure of this income for their mainte-. nance, education, and support. Petitioner retained the benefit during the minority of these children of the income received by the trusts and expended by the trusts for the purposes which he directed in the trust instruments.

The trust at most was a mere instrumentality through which Clark paid his legal obligation already existing. I think he was the real beneficiary and that to hold otherwise opens the door wide for the “ facile evasion ” of the law.

Had the trust instruments merely placed this property in trust for the benefit of petitioner’s children without any directions as to its use or expenditure, then we would have a different situation. When petitioner specifically directs the income shall be used for a certain purpose, that purpose being one which was his legal as well as his moral obligation, then I think he becomes the true and real beneficiary.

The Revenue Act of 1928 provides for the taxation of the net income of every individual. Net income is defined to mean gross income computed under the act less the deductions allowed therein. The act permits certain deductions which are set out and, on the other hand, specifically forbids the deductions of certain items, among those being “ personal, living or family expenses.” The act allows certain exemptions from tax, among the number being a personal exemption in the case of the head of a family or married person living with husband or wife, of $3,500. It allows a credit of $400 for each person' (other than husband or wife) dependent upon and receiving chief support from the taxpayer if such dependent person is under 18 years of age or incapable of self-support because mentally or physically defective. This provision of the law petitioner evidently had the advantage of.

The Revenue Act of 1928 provides:

Supplement E — Estates and Trusts
SEC. 161. IMPOSITION OE TAX.
(a) Application of tax. — The taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in trust, including—
(2) Income which is to be distributed currently by the fiduciary to the beneficiaries * * *. [Emphasis supplied.]
SEC. 162. NET INCOME.
The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
* * * «= * * *
(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries * * *.
SEC. 167. INCOME EOR BENEFIT OP GRANTOR.
Where any part of the income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor * * * such part of the income of the trust shall be included in computing the net income of the grantor.

The provisions of the revenue act should be construed together. It was -evidently the purpose of Congress to allow to the heads of families responsible for the education, maintenance, and support of their minor children a deduction from their income in the sum of $400 per annum for each minor child and that such deduction should constitute the entire allowance to the taxpayer for such purpose. The act went further and specifically forbade a taxpayer to deduct personal, living, and family expenses. Such expenses necessarily include the support, education, and maintenance of minor children.

The prevailing opinion is based on the proposition that under section 162(b), supra, the income of the trust for the taxable year was distributed by the fiduciary to the nominal beneficiaries. I think that this is erroneous. I think it was distributed to the grantor, Clark, for his immediate benefit and that the income so distributed was applied by him to the payment of his legal obligations. If this be true, then under section 167, supra, the income from such trusts would be properly taxable to Clark, the grantor of the trust, the petitioner here.

I shall not undertake to reconcile the conflicting opinions of the Board of Tax Appeals on this question, for that would be an attempt to reconcile the irreconcilable. I shall content myself with a reference to the holdings of the Supreme Court of the United States in Burnet v. Wells, 289 U. S. 670, and Reinecke v. Smith, 289 U. S. 172, and with the opinion of the United States Circuit Court of Appeals for the Eighth Circuit in the case of Willcuts v. Douglas, 73 Fed. (2d) 130.

In the opinion in Willcuts v. Douglas, supra, it was said:

The main and serious ^contention of the Commissioner is that the creator of this trust is taxable for the income therefrom because that income is “ used to pay a legal and adjudicated obligation which he owed, and in so doing-conferred the benefit upon him.” The argument is that the trust was created to provide an income in lieu of alimony or other interest in his estate and was, by the court granting the divorce specifically decreed in lieu thereof. Therefore, it is said to follow that since this trust was created to meet a personal and legal obligation he was bound to fulfill and since the income therefrom was devoted to that purpose, it was'so used for his benefit as to constitute it his income.
In efforts to avoid income or estate taxes various devices have come to the courts. From decisions thereon, has evolved the general rule that where the creator receives the substance of enjoyment (Burnet v. Wells, 289 U. S. 670, 677) of the income it is regarded as his for taxation purposes. [Emphasis supplied.] Instances where such enjoyment has been held to exist are contracts for assignments of income (Lucas v. Earl, 281 U. S. 111), assignments of future income (Burnet v. Leininger, 285 U. S. 136), contracts for payment of obligations of the taxpayer by another (Old Colony Trust Co. v. Commissioner, 279 U. S. 716; United States v. Boston & Maine R. Co., 279 U. S. 732) and payment, of premiums of insurance ■ on the life of the taxpayer from income of a trust created by him which was revocable (DuPont v. Commissioner, 289 U. S. 685) or irrevocable (Burnet v. Wells, 289 U. S. 670).
Among the devices employed to avoid income and estate taxes none has been more used than trusts dealing with members of a family and the courts have been alert to prevent such avoidance by this means. The question here is whether this trust is of that character — irrespective of whether tax avoidance was an impelling- motive or was not. In determining this it is the effect upon rather than the motive of the creator in forming the trust. In the majority opinion in Burnet v. Wells, 289 U. S. 670, the validity of a statutory requirement (Section 219 (h) Revenue Acts of 1924 and 1926) that insurance premiums on the life of the creator paid from the trust were taxable to him as income was upiheld because there was recognized a benefit to the creator there from the performance of a pressing social duty and a usual manner of providing for dependents (p. 681). The dissent was grounded on the view that the benefit to the creator must be “ something more tangible than a purpose to perform a social duty, or the recognition of a moral claim as distinguished from a legal obligation” (p. 683); and that “the distinction to be observed is between the devotion of income to payments which the settlor is bound to make, and those which he is free to make or not make, as he may see fit ” (p. 684).
The contention here by the Commissioner is that the income of this trust was employed to meet a legal obligation which appellee was bound to make. Whether this was the character of this trust is the determining problem. * * *

Tbecourtconclud.es:, , ■

The payment of alimony in this form was-a legal obligation which appellee was bound to meet. This took the.form of “income”. It was. taxable as income. It was taxable (under either opinion in Burnet v. Wells, supra) to appellee because it directly benefited him by discharging a legal obligation he was bound to perform.

I am unable to distinguish the reasoning and conclusion in that case from the situation which we have before us.

Looking to the case of Burnet v. Wells, supra, in the majority opinion it is said:

Taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed — the actual benefit for which the tax is paid. * * * Liability does not have to rest upon the enjoyment by the taxpayer of all the privileges and benefits enjoyed by the most favored owner at a given time or place. Corliss v. Bowers, 281 U. S. 378; Reinecke v. Smith, supra. Government in casting about for proper subjects of taxation is not confined by the traditional classification of interests or estates. It may tax, not only ownership, but any right or privilege that is a constituent of ownership. Nashville, Chattanooga & St. Louis Ry. Co. v. Wallace, 288 U. S. 249 ; 268, 53 S. Ct. 345, 77 L. Ed. — ; Bromley v. McCaughn, 280 U. S. 124, 136, 50 S. Ct. 46, 74 L. Ed. 226. Liability may rest upon the enjoyment by the taxpayer of privileges and benefits so substantial and important as to make it reasonable and just to deal with him as if he were the owner, and to tax him on that basis. A margin must be allowed for the play of legislative judgment. To overcome this statute the taxpayer must show that in attributing to him tlie ownership of the income of the trusts, or something fairly to be dealt with as equivalent to ownership, the law-makers have done a wholly arbitrary thing, have found equivalence where there was none nor anything approaching it, and laid a burden unrelated to privilege or benefit. Purity Extract & Tonic Co. v. Lynch, 226 U. S. 192, 204, 33 S. Ct. 44, 57 L. Ed. 184; Hebe Co. v. Shaw, 248 U. S. 297, 303, 39 S. Ct. 125, 63 L. Ed. 255; Milliken v. United States, supra. The statute, as we view it, is not subject to that reproach,
«K * * * * * *
Trusts for the preservation of policies of insurance involve a continuing exercise by the settlor of a power to direct the application of the income along predetermined. channels. In this they are to he distinguished from trusts where the income of a'fund, though payable to wife, or kin, may be expended by the beneficiaries without restraint, 'may be given away or squandered, the founder of the trust doing nothing to impose Ms will upon the use. * * * Here the use to be made of the income of the trust was subject, from first to last, to the will of the grantor announced at the beginning. A particular expense, which for millions of men and women has become a fixed charge, as it doubtless was for Wells, an expense which would have to be continued if he was to preserve a contract right, was to be met in a particular way. He might have created a blanket trust for the payment of.all the Hems of his own arid the family budget, classifying the proposed expenses by adequate description. If the transaction had taken such a form, one can hardly doubt the validity of a legislative declaration that income so applied should be deemed to be devoted to his use. Instead of shaping the transaction thus, he picked out of the total budget an item or class of items, the cost of continuing his contracts of insurance, and created a-source of income'to preserve them against lapse.

Comparing the case before us with the situation in the Wells case, the language of the Supreme Court applies with equal force here as there. Clark might have created a blanket trust for the payment of items of his family budget, classifying the proposed expenses by adequate description, and, if the transaction had taken such a form, I cannot doubt that the income from the trust so applied would have been taxable to him. If such a result would have followed under those conditions, it necessarily follows here.

An examination of the dissenting opinion in the case of Burnet v. Wells, supra, leads me to the belief it is equally as strong in the support of my position as is the majority opinion. There, we find this language: “Obviously as it seems to us, the distinction to be observed is between the devotion of income to payments which the settlor is bownd to make, and to those which he is free to make or not malee, as he may see fit. In the former case the payments home the substantial elements of income to the settlor.” [Emphasis • supplied.]

It seems that there was no difference of opinion in the Supreme Court as to what would have been the legal result if the settlor had directed that the income of the trust should be devoted to a payment which he was bound legally to make.

If the petitioner here can so readily evade the payment of income taxes by setting up a trust to pay the obligation which he personally is legally bound to pay in any event, then we have indeed opened wide the door for that “ facile evasion ” of which the Supreme Court spoke. If this trust, of which Clark was the grantor, the trustee, and the beneficiary, separates from his personal income the items here involved, then there is nothing to hinder him or any other taxpayer from setting up a trust the income from which shall be devoted to the payment of his personal debts, purchase of clothing for himself and family, to all the things which go to make up household, living, and family expense; and thereby do by indirection that which the law forbids. If this can be done, then the provision of the statute which denies a deduction of these items to the taxpayer has been rendered nugatory and entirely without effect. That such a result can follow the creation of a trust of this character, I do not believe.

In the case before us the trust instruments created two situations. We are dealing here with a provision of the trust instruments which were in effect during the year 1929. At that time, as shown, the nominal beneficiaries of the trusts here involved were admittedly minors for whose support, education, and maintenance petitioner was legally liable. What the situation would be when they attained their majority can have no effect on the situation here. The respondent seems to have recognized that as to those trusts where the nominal beneficiaries had reached their majorities the income from them was not taxable to the grantor for the very obvious reason that when the children reached their majorities the legal obligation of the petitioner to support, educate, and maintain them had ceased. The income from such trusts had at that time become absolutely theirs and went out of the control of the grantor. At such time the income from the trusts was no longer devoted to payments which the grantor was bound to make.

Believing that the income of these trusts directly benefited the petitioner by discharging a legal obligation which he was bound to perform, I think that he was properly taxable individually with such income. I believe the determination of the respondent should be approved.

Entertaining these views and believing that the prevailing opinion is erroneous, I respectfully dissent.

Smith and Sea well agree with this dissent.

TurNer,

dissenting: In my opinion the facts in this case clearly bring it within the provisions of section 161 of the Eevenue Act of 1928. That section provides in substance that where “ any part of the income of a trust may, in the discretion of the grantor * * * be distributed to the grantor * * * such part of the income of the trust shall be included in computing the net income of the grantor.” [Italics supplied.] Here we are concerned only with the income for the benefit of minor children. The trust does not specifically name the person or persons who are to receive and spend the income for the minor children except as to the fixed monthly allowances made to them after they became 16 years of age, but the clear and, to my mind, the only reasonable inference is that it is within the discretion of the grantor to receive and use this income as he pleases. Specific provision is made that the judgment of the grantor or his wife that the income was spent for the purposes of the trust is conclusive and may not be questioned. It seems to me that the income here in question is taxable to the petitioner whether we hold that his moral duty to feed, clothe, educate, and maintain his minor children furnishes basis therefor or not. Beading the terms of the trusts I cannot avoid the conclusion that the income “may, in the discretion” of this grantor be distributed to him and, if so, the statute provides that it shall be included in his income.

For the reasons stated I respectfully dissent.

Van Fossan,

dissenting: I can not assent to the theory that is basic in this and similar cases where a taxpayer attempts, by whatever device, to do by indirection that which the law forbids if done directly. The prevailing opinion puts the stamp of approval on a scheme that is clearly violative of the intent of Congress. Moreover, it is contrary to the well considered reasoning of the courts. See Burnet v. Wells, 289 U. S. 670; Willcuts v. Douglas, 73 Fed. (2d) 130.

      (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall bo included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year.