author: Muedock : Black,

text:
    Alice V. St. Onge, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 70364, 70470-70473, 70815, 70816, 71263, 71342, 72530, 72664, 72701, 72930.
    Promulgated October 12, 1934.

      J. Robert Sherrod, Esq., and O. H. Ghmillon, Esq., for the. petitioners.

      Frederick R. Shearer, Esq., Wilford Pcm/ne, Esq., and Dean P. Kimball, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated and decided herewith: George E. Harris ; Ivory C. Eaton; Ered D. Cross, Executor, Estate of Harry W. Kams-dell; Fred D. Cross; Lucy E. Shea; John R. Burnett; George N. Andrews; George A. Sylvester; George F. Thurber; Lester F. Thurber; Elizabeth J. Flanders; Walter Burnett.

   OPINION.

Muedock :

The petitioners in these cases contend in the first place that the transaction between the National Bank and the State Bank was a “ reorganization ” within the definition of that term given in section 112 (i) of the Eevenue Act of 1928. The words of the definition upon which they rely are as follows:

The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of * * * substantially all the properties of another corporation) * * *.

The Supreme Court said, in Pinellas Ice & Gold Storage Co. v. Commissioner, 287 U. S. 462:

The words within the parenthesis may not be disregarded. They expand the meaning of “ merger ” or “ consolidation ” so as to include some things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words — so as to embrace circumstances difficult to delimit but which in strictness can not be designated as either merger or consolidation.

In Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937, the court said:

A merger ordinarily is an absorption by one corporation of the properties and franchise of another whose stock it has acquired. The merged corporation ceases to exist, and the merging corporation alone survives. A consolidation involves a dissolution of the companies consolidating and a transfer of corporate assets and franchise to a new company.

If a given transaction in strictness can be designated as either a merger or a consolidation, it is a reorganization within the meaning of the definition, and the words in parenthesis are unimportant. If, however, a particular transaction, which in strictness cannot be designated as either a .merger or consolidation, nevertheless partakes of the nature of a merger or consolidation, it must be tested by the words in the parenthesis to see whether or not it is a reorganization within the meaning of the statute.

The National Bank did not acquire “substantially all the properties ” of the State Bank. Assets of the State Bank having a substantial value as compared to the value of all of the assets of that bank were not acquired by the National Bank. We refer to 1,000 shares of Pullman, Inc., stock and 1,000 shares of Nashua Manufacturing Co. preferred stock which had a value of $148,125 at the time of the transaction in question. These assets were distributed to the stockholders of the State Bank as an essential part of the very transaction in question. The distribution of the Pullman, Inc., and Nashua Manufacturing Co. stock was a part of the plan which was to result in the dissolution of the State Bank. That distribution was not an ordinary dividend, but was a distribution in liquidation. Sec. 115 (c). It cannot be disregarded in determining whether or not the National Bank acquired substantially all of the assets of the State Bank within the meaning of. section 112 (i). The cash distribution, although in a fractional amount to correspond to the usual dividend rate, was likewise a liquidating dividend. Since the National Bank did not acquire substantially all of the properties of the State Bank, the transaction was not a “ reorganization ” within the meaning of the parenthetical part of the definition. The case of Howard v. Commissioner, 56 Fed. (2d) 781, affirming 20 B.T.A. 207, is not in point, since in that case substantially all the properties were acquired.

However, the fact that the National Bank did not acquire substantially all of the properties of the State Bank would be immaterial if the transaction was one which in strictness could be designated as either a merger or a consolidation. Mergers and consolidations are inherently statutory. 7 Fletcher Cyclopedia Corporations, § 4670; First State Bank v. Lock, 113 Okla. 30; 237 Pac. 606; Knapp v. Supreme Commandery, 121 Tenn. 212; 118 S. W. 390; Jones v. Rhea, 107 S. E. (Va.) 814. Cf. Grange National Bank, 22 B. T. A. 1209; R. D. Musser, 2 B. T. A. 1031. If statutory provision has been made for mergers and consolidations and the necessary steps have been taken, a merger or consolidation occurs by operation of law. The enfranchisement of the resulting corporation is dependent upon some prior legislative enactment. The petitioners here contend that a consolidation or merger occurred under a Federal statute providing for the consolidation or merger of a state and national bank under the charter of the national banking association. See Act of November 7, 1918, 40 Stat. 1043, sec. 3, as added by Act of February 25, 1927, 44 Stat. 1224. The Federal statute provides for the consolidation of a state bank with a national bank after certain required steps have been taken to accomplish that result. A majority of the board of directors of each bank proposing to consolidate must lawfully agree upon terms and conditions upon which they desire to consolidate under the charter of the national banking association. The directors must call a meeting of the stockholders of each bank and publish notice of the time, place, and object of the meeting as provided in the Federal statute, and the agreement of the directors must be ratified and confirmed by the affirmative vote of at least two thirds of the shareholders at the meeting. The various steps must then be carried out and the Comptroller of the Currency must certify his approval of the consolidation. If these things are all clone in the proper manner, a consolidation of the two or more banks under the charter of. the national bank results. But if any essential step is omitted, there is no consolidation or merger under this act. Cf. City National Bank of Huron v. Fuller, 52 Fed. (2d) 870, affirming 52 Fed. (2d) 865.

The Commissioner has held that there was no reorganization. Thus the petitioners must establish by the evidence that there was a reorganization. Since the alleged reorganization depends upon a merger or consolidation under the Federal statute cited, the petitioners must show affirmatively that a consolidation or merger took place under that statute. This they have failed to do, for they have not shown that the provisions of the act were complied with. There is no showing that the directors of either bank ever agreed upon terms and conditions of consolidation. They agreed upon terms and conditions of a sale. There is no showing that the requirements of the act in regard to publication of the notice to the stockholders of these two banks were ever complied with or that the stockholders ever approved of a plan of reorganization. They approved of a plan of sale. Nor is there any showing that the Comptroller of the Currency in fact approved this transaction as a consolidation under this provision of the Federal statutes or issued any certificate of approval of the transaction as a consolidation under the law. There is in evidence a certificate from the Comptroller of the Currency authorizing the increase in the capitalization of the National Bank, but that can not possibly be construed as an approval by the Comptroller of a consolidation under the Federal statute.

The original plan evolved by the officers and directors of the two banks might have resulted in a consolidation or .merger, and, therefore, a reorganization, if that plan had been carried out, but it was never carried out. Instead, a different plan was followed, for reasons satisfactory to the parties, under which the assets and business of the State Bank were purchased by the National Bank for cash and the stock of the National Bank was purchased by the stockholders of the State Bank for cash. A trust fund was set up to guarantee the general depositors in the State Bank until they came in and transferred their accounts to the National Bank. The notices and resolutions referred to this plan of sale rather than to any plan for a consolidation or merger of the two banks under the Federal statute. Cf. City National Bank of Huron v. Fuller, supra; Drovers & Mechanics National Bank v. First National Bank, 260 Fed. 9; Central National Bank of Lincoln, Nebraska, 29 B. T. A. 719.

Since the transaction between the two banks was not a merger or a consolidation and the National Bank did not acquire substantially all of the properties of the State Bank, there was no reorganization within the definition of that term! contained in section 112 (i) of the Revenue Act of 1928, and we are unable to follow the petitioners in the very first step of their argument. The general rule provided in section 112 for the recognition of gain or loss is that upon the sale or exchange of property the entire amount of the gain determined under section 111 shall be recognized. The parties are agreed upon the basis for gain to these taxpayers on the State Bank stock. Section 111(c) provides that the amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property other than money received. The amount realized by these taxpayers from the disposition of their State Bank stock is therefore the total fair market value of the Pullman stock, the Nashua Manufacturing Co. stock, and the Second National Bank stock received by each, plus $1.33 per share received in cash. These total amounts were distributed in complete liquidation of a corporation and, therefore, under section 115(c) are to be treated as in full payment in exchange for the stock.

Reviewed by the Board.

Decision will be entered under Buie 50.

YaN FossaN dissents.

Black,

dissenting: It seems to me that the substance of the transactions involved in this proceeding is this: The stockholders of two banks, one a state bank and the other a national bank, were anxious to merge them. Certain difficulties were encountered and the final agreement or plan was that a certain amount of cash and the stock in Pullman, Inc., and the Nashua Manufacturing Co. owned by the Old Guaranty Savings Bank of Nashua should be distributed to the stockholders of that bank, and the remainder of its assets should be exchanged with the Second National Bank of Nashua for 1,500 shares of its capital stock, these shares to be ratably distributed to the shareholders of the state bank in exchange for their shares in the proportion of three shares of the national bank for each four shares owned in the state bank.

If my interpretation of these transactions is correct, then I think the provisions of section 112 (b) (3) and section 112 (c) (1) of the Revenue Act of 1928 apply, and the gain is to be recognized only to the extent of the cash and the stock in Pullman, Inc., and the Nashua Manufacturing Co., which were distributed to the stockholders of the state bank.

It is true that the form of a sale of the remaining assets of the state bank to the national bank for $461,947.74 was carried out, and this $467,947.74 was immediately used to purchase 1,500 shares of stock in the national bank, and these shares were ratably distributed to the stockholders of the state bank, and it was dissolved. Was not this at least akin to a merger? Was the form of a sale of the assets and the immediate purchase of stock with the check so as to comply with the national banking laws substantially different from that which we had before us in Harry C. Howard, 20 B. T. A. 207?

The Circuit Court, in affirming our decision in the Howard case, 56 Fed. (2d) 781 (certiorari denied, 287 U. S. 619), among other things, said:

The section of the 1921 act just cited provides that: “ When in the reorganization of one or more corporations a person receives in place of any stock or securities owned by him, stock or securities in a corporation a party to or resulting from such reorganization,” no gain or loss shall be recognized. The word “ reorganization ” is defined by the section itself as including merger and consolidation (including the acquisition by one corporation of substantially all the properties of another corporation). Had the substance of what was contemplated and done been a disposition of the assets of the Michigan corporation for the sum of $625,000, paid or to bo paid in cash, whether such sum was in fact temporarily paid by a ninety day note or by other evidences of indebtedness in amounts certain, and whether such other evidences of indebtedness were held by the vendor company, or were then or subsequently distributed among the preferred stockholders, we do not doubt that the petitioner would be entitled to deduct the loss claimed; but we cannot see in the transaction disclosed by the present record aught but a financial reorganization of the Michigan corporation wherein and whereby the preferred stockholders were to acquire a proportionate interest in common stock of the Illinois or purchasing corporation.
The evidence discloses that there was some doubt whether the Michigan corporation law permitted a corporation to sell its assets for anything but cash. The note was given to allay such misgivings, but it would.seem clear that the course pursued was merely a subterfuge whereby assets could be purchased with stock. There was, it would seem, no intention to pay the note in cash. The giving of the note with the accompanying option was merely the means whereby the preferred stockholders were to acquire an interest of diminished value in the new corporation in exchange for and in lieu of their stock in the old: The present case falls within the letter of. section 202 (e) (2) of the Revenue Act of 1921, and, we think, also within its spirit. The transaction would therefore not be closed until the petitioner eventually disposed of his stock in the Illinois corporation or until its value finally became extinct within the meaning of the Royal Packing Company and De Loss cases above cited.

Of course it seems clear that whatever gain resulted to petitioners from the distribution to them of the cash and the stock in Pullman, Inc., and stock in the Nashua Manufacturing Co. was taxable to them under section 112 (c) (1), but, in my judgment, the transfer to the national bank of all the remaining assets of the state bank after the foregoing distribution to its stockholders, and the receipt therefor by the state bank of 1,500 shares of stock of the national bank and the distribution thereof to the stockholders of the state bank, three shares for four, and the subsequent dissolution of the state bank, ivas a reorganization within the provisions of section 112 (i) of the Revenue Act of 1928, and the exchange of stock for stock by petitioners is, under section 112 (b) (3), nontaxable. As said in the Howard case, supra, the transaction would not be closed until the petitioners eventually disposed of their stock.

AeuNdeix and Adams agree with this dissent.


source: Caselaw Access Project

author: Adahs : Black,

license: Public Domain

text:
    Mrs. W. W. Turney, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. W. Turney, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 65257, 65258.
    Promulgated October 12, 1934.

      Nelson Phillips, Br., Esq., and Nelson Phillips, Jr., Esq., for the petitioners.

      P. A. Bayer, Esq., and R. B. Cannon, Esq., for the respondent.
   OPINION.

Adahs :

Under the constitution and laws of the State of Texas the public lands of the state ivere appropriated and dedicated to the public free schools, to counties, to asylums, and to the State University and its branches. The state had the right to sell these lands and cover the proceeds into the permanent school fund established for educational purposes.

In the sale of these lands the state inaugurated a system of classification of the lands into grazing and mineral lands. When lands classified as grazing lands were sold there was no reservation of any interest by the state. In the sale of lands classified as mineral lands the state reserved to itself the minerals and oils beneath the surface and the purchaser obtained only the surface rights. As the state or its vendee or lessee of the mineral rights had an easement of going upon the land for the purpose of prospecting and producing oil or other minerals and to use the land, timber, and water necessary therefor, this caused great hardship, damage, and dissatisfaction to the owners of mineral classified-lands.

This condition led to the passage by the Texas Legislature in 1919 of an act known as the Belinquishment Act, under which the landowner was constituted the agent of the state to dispose of these mineral rights. Under this act, as construed by the Supreme Court of Texas, the landowner and the state were each entitled to receive a one-sixteenth royalty, .and the state was to receive a minimum of 10 cents per acre per annum. Any additional sums by way of increased rentals or bonuses were to be equally divided between the state and the landowner.

The Belinquishment Act was construed and held constitutional by the Supreme Court of Texas in the case of Greene v. Robison, 117 Texas 516, 8 S.W. (2d) 655, where the court said in part:

We think the act, as it says in article 5367, creates the owner of the soil the state’s agent for the purposes mentioned therein. For the accomplishment of those purposes, said agent is authorized, “ to sell or lease * * * the oil and gas * * * upon such terms and conditions as such owner may deem best, subject only to the provisions ” of the act. There is no vesting' of title or interest in the oil and gas in the owner of the soil. No rights pass to any one until a sale or lease is effected according to the terms of the act. What is sold, the consideration therefor, the provisions inuring to the benefit of the owner of the soil, what are the proceeds of the sale, and their application, must all be determined from the act.
We interpret the act to fix a minimum price of 10 cents per acre per annum and the value of one-sixteenth of the gross production free of cost to the state, for which the state is willing to sell the oil and gas, and the agent is authorized to secure the highest price obtainable for the benefit of the fund to which the land belongs; like amounts received by the state to be paid by the purchaser to the owner of the soil. If a bonus is paid, if a larger royalty or other amounts are contracted for, the state and the owner of the soil receive equally in like amounts.

To the same effect is the case of Empire Gas & Fuel Co. v. State (Civ. App.), 21 S. W. (2d) 376; idem (Sup. Ct.), 121 Tex. 138; 47 S. W. (2d) 265.

During the year 1929 petitioner W. W. Turney was a member of a partnership known as the 0-2 Banch, owning a 90 percent interest therein. Acting in behalf of the partnership, he was the title holder of 15,040 acres of mineral classified land in which the state had reserved the minerals. Acting under his powers as agent for the state under the Belinquishment Act, during 1929 he sold leases of these mineral classified lands to the Humble Oil & Befining Co. and received in consideration therefor the sum of $29,283.02. In his determination of the deficiencies in controversy, the respondent included in the income of each of the petitioners his or her community one half of a 90 percent interest in $29,283.02, which was received by the 0-2 Banch in 1929, or the sum of $13,177.36.

Clearly, under the decisions of the Supreme Court of Texas cited above, one half of this sum collected as bonus was the property of the State of Texas, and the respondent has included in the income of each petitioner the sum of $6,588.68, which was the property of the state.

It is earnestly argued by counsel for petitioners that this was erroneous, as the inclusion of the state’s half of the bonus in their incomes and taxing it to them would be unconstitutional, as it would be taxing the income or property of the sovereign State of Texas. The petitioners do not deny the state’s right to one half of the bonus and it appears that W. W. Turney was active in securing the passage of an act of the Texas Legislature of 1933, Vernon’s Annotated Texas Statutes, art. 5367a, which provides that payment may be made in cash, or if not able to pay in cash, payment may be made in 20 annual installments.

The Revenue Act of 1928, section 22 (b) (9), provides that “The following items shall not be included in gross income and shall be exempt from taxation under this title: * * * Miscellaneous items. — The following items, to tiie extent provided in section 116: * * * Income of States, municipalities, and other political subdivisions.”

Section-116 referred to provides in part: “ In addition to the items specified in section 22 (b), the following items shall not be included in gross income and shall be exempt from taxation under this title: * * ' * (d) Income derived from any public utility or the exercise of any essential governmental function and accruing to any State, Territory, or the District of Columbia, or any political subdivision of a.State or Territory, or income accruing to the Government of any possession of the United States, or any political subdivision thereof.”

We conclude that, under the decisions of the Texas courts cited above, one half of the bonuses collected by petitioner W. W. Turney and the 0-2 Ranch was the property of the State of Texas and that, under section 116 of the Revenue Act of 1928 and many decisions of the Federal courts it is nontaxable by the United States. Upon recomputation, the state’s portion of the bonuses will be eliminated from petitioners’ incomes.

In making his determination of the deficiencies respondent relied upon the ease of J. H. Tippett, Administrator, 25 B.T.A. 69, decided by this B'oard January 4, 1932. That case is distinguishable from the instant case and is not applicable as an authority, as the facts and legal conditions were different. Tippett had collected large sums in bonuses on mineral classified lands, which he did not pay over to the state. In a suit by the state to which he was a party he denied the claim of the state and claimed to be the owner of the entire bonus. In support of his position he claimed that the Relinquishment Act did not authorize the construction put upon it in Greene v. Robison, supra, and that under an act known as Senate Bill 310, approved by the Governor of Texas on March 13, 1931, he was relieved of making payment of the bonus to the state, and it was further provided that no claim should be made by the state therefor.

In the case before this Board, Tippett contended to the contrary, viz., that the state was part owner of the bonuses. Our decision was based mainly on the Act of March 13, 1931, which relieved landowners of mineral classified lands of paying the state its part of the bonus. On February 24, 1932, the Supreme Court of Texas, in Empire Gas & Fuel Co. v. State, 121 Tex. 138; 47 S.W. (2d) 265, in which case Tippett was a party, reaffirmed Greene v. Robison, supra, and in addition it held the Act of March 13,1931, unconstitutional. There is no such act in force now, but, on tho contrary, the Act of 1933 reasserts the rights of the state to its portion of the bonuses on mineral classified lands and provides for payment by the landowners.

It seems to us that, so far as this controversy is concerned, it is immaterial whether petitioners have paid the state its portion of the bonus or not. That question concerns the State of Texas and its agent only.

We have examined the other cases cited by respondent with care, but in none of them was the question of the right to tax property of a state involved and therefore they are not applicable.

Reviewed by the Board.

Decision will be entered under Rule 50.

VaN FossaN dissents.

Black,

dissenting: I see no distinction in substance in the facts in the instant case from those which the Board had before it in J. H. Tippett, Administrator, 25 B.T.A. 69, and in which we held directly contrary to the conclusion reached in the majority opinion. It seems clear that in tho instant case the lessor and the lessee were agreed that the oil royalty was to be paid equally to the State of Texas and to the partnership, the 0-2 Ranch. One sixteenth of the oil produced under the terms of the lease was to be paid to the State of Texas and one sixteenth was to be paid to the 0-2 Ranch. Of course the Commissioner is making no contention that the one sixteenth oil royalty paid to the State of Texas is taxable to anyone. It is exempt from taxation. As to the $29,283.02 bonus, it was all to be paid to the 0-2 Ranch; it was in fact paid to the 0-2 Ranch and the 0-2 Ranch placed the funds in its own business, used them as its own, and, so far as the facts show, still has them there and has never paid over one penny of this $29,283.02 to the State of Texas.

The facts on this point are shown by the stipulation, as follows. Paragraph 7 of the stipulation says:

When tho bonuses aggregating $29,283.02 referred to in paragraph (5) above, were paid to the 0-2 (Ranch, a partnership in 1029, the partnership took the money so received and used it generally in its business.

Again, in paragraph 9 of the stipulation, it is said:

Neither in taxable year 1929, nor at any time since, have petitioners or the 0-2 Ranch, a partnership, paid over to tho State of Texas, or any person or corporation, any portion of the bonuses aggregating $29,283.02 referred to in paragraph (5) of this stipulation.

Under these circumstances it seems clear to me that petitioners are taxable with their part oí this bonus under the doctrine laid down by the Supreme Court in North American Oil Consolidated v. Burnet, 286 U.S. 417. The Supreme Court’s decision in the latter case had not been made at the time we decided J. H. Tippett, Administrator, supra, but it seems to me it confirms the correctness of our decision in that case.

The Supreme Court in the North American Oil Consolidated case, laid down the rule as follows:

* * * If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. See Board v. Commissioner of Internal Revenue, (O. C. A.) 51 F. (2d) 73, 75, 76. Compare United States v. S. S. White Dental Manufacturing Co., 274 U. S. 398, 403, 47 S. Ct. 598, 71 L. Ed. 1120. If in 1922 the government had prevailed, and the company had been obliged to refund the profits received in 1917, it would have been entitled to a deduction from the profits of 1922, not from those of any earlier year. Compare Lucas v. American Code Co., supra.

If the petitioners in this case ever pay over to the State of Texas any of this bonus payment, it will be soon enough then for them to take the deduction.

Having thus far paid none of it and during the taxable year involved having received it all and “ used it generally in its business ” (as agreed in the stipulation), it is taxable to petitioners, under North American Oil Consolidated v. Burnet, supra, and I think the majority opinion is erroneous in holding otherwise.


author: Murdock : Adams,

text:
    Martha H. Reybine, Executrix of the Last Will and Testament of Alpheus Reybine, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60660.
    Promulgated October 12, 1934.

      Brooks Fullerton, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner determined a deficiency in estate tax of $8,100. The only question for decision is whether or not the proceeds of two policies of insurance in the Connecticut Mutual Life Insurance Co. should be included in the decedent’s gross estate. The Commissioner added 62.18 percent of the proceeds and post mortem dividends of four policies, including these two, to the reported gross estate in determining the deficiency. The Commissioner amended his answer to plead affirmatively that the donor retained the right to change beneficiaries and therefore the entire proceeds and post mortem dividends on these two policies should be included in the gross estate. He concedes in his brief that two of the four. policies should not be included in the gross estate and now contends that only the proceeds and dividends of the two Connecticut Mutual policies should be included in the gross estate. The petitioner contends that the proceeds and dividends of none of the policies should be included in the gross estate. The facts of record were stipulated

The decedent died on August 31, 1929. He was survived by his wife, Martha, and three- minor children, Eleanor, Robert, and Lawrence. The decedent had executed three trust indentures on June 10, 1925, in which he named the United States Mortgage & Trust Co. and William B. Ward trustees. Each trust instrument names one of the three children of the grantor as principal beneficiary. The instruments are identical except for the names of the children and the same kind and amount of property was placed in each trust. The grantor stated in each instrument that it was his intention to make the trust the beneficiary of certain insurance policies on his life, and, in case he did so, the premiums thereon, paid out of the trust property, were to be held to be for the use and benefit of the beneficiary and the trustees were authorized to pay the premiums out of trust income so long as they thought such payments were not depriving the beneficiary of needed education and support during minority.or proper care in illness during majority. The grantor retained the power to name the trust as beneficiary under any policy of insurance taken out on his life, to remove either trustee or any successor, and to name a successor or additional trustees to have all of the rights, powers, and duties of the original trustees. He agreed to execute any further assignments or instruments which the trustees might deem necessary to effectuate the purpose of the trust. Each trust was for the life of the child named, then for the life of the mother, with remainder to others named. The grantor retained no power to revoke any of the three trusts. Ward died in February 1929, and on March 6, 1929, Martha H. Reybine was appointed trustee in his place.

A jJoiicy in the amount of $50,000 was assigned to the trustees for Eleanor on July 2, 1925, by a change of beneficiary clause making it payable to “U. S. Mortgage & Trust Company of New York and William B. Ward, in trust.” Another policy in the amount of $20,000 was assigned to the trustees for Lawrence on July 14, 1925, by an endorsement thereon changing the beneficiary to “United States Mortgage & Trust Company and William B. Ward, trustees under the trust dated June 10, 1925, for the benefit of Lawrence H. Reybine.” The respondent now concedes that these policies have no place in the decedent’s gross estate.

Policy No. 537418 of the Connecticut Mutual Life Insurance Co. in the amount of $30,000 on the life of the decedent—

* * * was assigned to the trustees under the trust agreement for the benefit of Lawrence I-L Reybine, by a change oC beneficiary clause as follows: To the Connecticut Mutual Life Insurance Company:
I hereby waive the privilege of making any change in the benefit of policy No. 537,418 on my life, under the change of beneficiary provision thereof during llie continuance of the trusteeship of the United States Mortgage & Trust Company and William B. Ward, trustees, under the trust dated June 10, 1925, for the benefit of Lawrence IT. Reybine.
Dated at New York this 14th day of September, 1925.
Alpheub REYBINE,
Insured.
Witness:
John Damm

This policy thus endorsed was delivered to the trustees under the trust for Lawrence and was held by them at the death of the insured. 'These trustees then collected the proceeds of the policy and held them under the trust for the benefit of Lawrence.

Policy No. 537417 of the Connecticut Mutual' Life Insurance Co. in the amount of $50,000 on the life of the decedent “ ivas assigned to the trustees under the trust agreement for the benefit of Robert F. Reybine, by a change of beneficiary clause ” like the one above quoted on policy No. 537418. This policy thus endorsed was delivered to tlie trustees under the trust for Robert and was held by them at the death of the insured. These trustees then collected the proceeds of the policy and held them under the trust for the benefit of Robert.

The decedent paid the premiums on all four policies for 1925,1926, and 1927. The premiums on the policies for 1928 and 1929 were paid by the respective trusts. The decedent paid 62 percent of the total premiums on policy No. 537418 and 61.96 percent of the total premiums on policy No. 537417. The 1929 premiums were paid in June 1929.

The executrix filed an estate tax return on which she reported insurance proceeds in the net amount of $186,822.51, but she did not report any of the four policies above mentioned.

Section 302 of the Revenue Act of 1926 is in part as follows:

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

Article 25 of Regulations 70 (1929 ed.) provides that insurance shall be deemed to have been taken out by the decedent “ in the proportion that the premiums paid by him bear to the total of premiums paid ” and article 28 provides that a corresponding proportion of the policy value shall be included in the gross estate. Article 27 provides that “ all insurance in excess of $40,000 receivable by beneficiaries other than the estate, regardless of when taken out, must be included in the gross estate where the decedent during his life retained legal incidents of ownership in the policies of insurance, as, for example, a power to change the beneficiary * *

The rationale of the respondent is that since the decedent waived his right to change the beneficiaries in the two Connecticut Mutual policies only “ during the trusteeship ” of the two original trustees and reserved to himself the right to remove those trustees, therefore he retained the power to change the beneficiary of each policy, a legal incident of ownership, and an interest in the policies subject to estate tax. He does not claim that the decedent retained an interest in the policies of any other kind or in any other way or that there is any other basis for his contention.

The stipulation is not entirely clear as to who was named as beneficiary in the two Connecticut Mutual policies. However, a failure of proof would cut both ways, for the Commissioner has made an affirmative plea in regard to a part of the proceeds of each of these two policies. The language in the endorsements on the two Connecticut Mutual policies upon which the Commissioner relies is ambiguous. Still we are unable to adopt the respondent’s interpretation of those endorsements. It is reasonably clear from all of the facts that the decedent intended the three trusts to be identical and to provide equally for his three children. The language of the endorsements when read in connection with the provisions of the trust instruments indicates that the decedent retained no rights in the policies. Premiums on the two policies in question were paid by the trusts. Those for 1929 were paid after Ward had died and his successor had been appointed. Thereafter a court would probably have denied to the decedent any right, such as the respondent contends he had, to change the beneficiary of either policy to defeat the interest of the trust. The decedent at the time of his death had no taxable interest in either of the Connecticut Mutual policies.

Reviewed by the Board.

Decision will be entered v/nder Bule 50.

Van Fossan dissents.

Adams,

dissenting: The waiver under consideration reads as follows :

To the Connecticut Mutual Life Insurance Co.:
I hereby waive the privilege of making any change in the beneficiary of policy No. 537418 on my life, under the change of beneficiary provision thereof S/wrvng the continuance of the trusteeship of the United Slates Mortgage & Trust Company and Wm. B. Ward, trustees, under the trust dated June 10, 1925, for the benefit of Lawrence H. Reybine. [Emphasis supplied.]

The effect of the majority opinion is to read out of the waiver the provision that it shall be effective during the continuance of the trusteeship of the United States Mortgage & Trust Co. and Wm. B. Ward, trustees, and make it read:

I hereby waive the privilege of making any change in the beneficiary of policy No. 537418 on my life, under the change of beneficiary provision thereof during the continuance of the trust dated June 10, 1925, for the benefit of Lawrence H. Reybine.

So read, it is not the waiver executed by Alpheus Reybine. It is unambiguous and should be construed strictly according to the clear import of its language. Its terms cannot be extended by construction, the language being clear.

As I read this waiver, it was executed under the express condition that it was to be valid so long, and only so long, as the United States Mortgage & Trust Co. and Wm. B. Ward acted as trustees. Reybine reserved the right in the trust instrument to remove either or both of the trustees or any successor and name successors or additional trustees at his pleasure.

It is clear that had the waiver not been executed, the proceeds of the two policies in question would have constituted a part of the gross income of the estate. Chase National Bank v. United States, 278 U. S. 327. Had Reybine not executed the waiver, he would have been free to change the beneficiaries named in the policies at any time. Having executed a conditional waiver and that condition having arisen, it ceased to be effective and Reybine had the same power to change the beneficiaries in the policies which he had before its execution. I think that under the terms of the waiver it was revocable upon the condition therein stated and, the condition having arisen, it no longer had any legal effect.

The assignment of the policies here was not such as to take away from Reybine the right to change the beneficiaries in the policies as was the case in Guettel v. United States, 67 Ct. Cls. 613. There, there was an absolute and unconditional assignment of a policy for value received, by the terms of which the insured was divested of all rights and title to the policy and all beneficial interest therein vested in the assignee. After the assignment, the insured was without authority to change the beneficiary or exercise any control, whatever, over the policy during the existence of the assignment. We have no such situation here.

I am of the opinion that the proceeds of the policies numbered 537417 and 537418 should he included in the decedent’s gross estate, subject to such adjustments as may have arisen by reason of some of the premiums having been paid by the trust.

MoReis, Leech, and Turner agree with this dissent.


author: TukneR:

text:
    W. C. Coleman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74328.
    Promulgated October 12, 1934.

      Robert G. Foulston, Esq., for the petitioner.

      E. L. Corbin, Esq., and Oarroll Walker, Esq., for the respondent.
   OPINION.

TukneR:

It is the contention of the petitioner that the common stock of the .Mountain Cross Granite Co. became worthless in 1930, and the cost of such stock to him was a deductible loss in that year. The respondent, in his deficiency letter, disallowed the deduction claimed, on the ground that the stock did not become worthless in 1930, and, further, determined that the stock was exchanged within that year for stock of another corporation, within the meaning of section 112 (b) (3) of the Revenue Act of 1928. .

It is apparent that the facts do not support the petitioner’s claim that the common stock of the Mountain Cross Granite Co. was worthless at the time of or prior to the organization of the successor company. It .is true that the company was in straits for operating funds and that it liad iiressing obligations. It is also true that on June 30,1930, the day prior to the transfer of its business to the new corporation, the balance sheet did not show any book value for the common stock. This might be taken as an indication that if the company had been dissolved and its assets distributed at that time, the holders of common stock would have received nothing for their stock. The fact is, however, the company was not dissolved and its assets distributed, but a new corporation was formed to continue the business and the stockholders received an interest in the new. company for and on the basis of their stockholdings in the old company. It is also to be noted that the company owned valuable properties which it was believed could be profitably operated if immediate and pressing obligations could be cared for. Furthermore, the holders of common stock had absolute control of these valuable properties, the preferred stock having no voting power whatever. That some value was attributed to the common stock is also shown by the facts that the plan for acquisition of the property by the new company, Mountain Cross Granite Corporation, required the surrender of one share of common stock for each share of common stock in the new company subscribed for by the holders of common stock in the old company.

There is the further fact that, to holders of common stock who held no so-called major securities, warrants were issued giving the right to subscribe to common stock of the new company at $7.50 per share. In this connection the petitioner cites the decision of the Board in Union C. De Ford, 19 B. T. A. 339, where it was held that the common stock of the old corporation was worthless prior to reorganization and its cost constituted a deductible loss even though holders of such stock were later permitted to subscribe to common stock of the new corporation at the rate of $20 for units of 2 shares each. In that case, however, it appears that people not connected with the old company in any way, and not parties to the reorganization or underwriting agreement, were permitted to subscribe to common stock on the same basis as the holders of the common stock in the old company, and we found, as a fact, that the right to purchase two shares of stock in the new company at $20 had no market value. Here such was not the case. Only stockholders of the Mountain Cross Granite Co. were permitted to subscribe for stock in the Mountain Cross Granite Corporation. Even It. C. Walgren, who put the additional cash .into the enterprise, was a holder of prior preferred and class A common stock and, except for Walgren, it does not appear that any person other than those who bought common stock under the right of common stock warrants put anything into the new company other than stock or bonds of the old company. Furthermore, there is no showing of the condition of the new company after the scaling down of the bonded indebtedness and the preferred, prior preferred, and class A common stock. Under such circumstances the record does not support the contention that the holders of common stock in the old company did not receive for their stock something of value in the warrants permitting the purchase of common stock in the new company at $7.50 per share.

Based on these considerations, it is our opinion that the common stock of the Mountain Cross Granite Co. did not become worthless in the year 1930 and that the petitioner did not sustain a deductible loss on that account.

Since it is the petitioner’s contention that the common stock of the Mountain Cross Granite Co. was not exchanged for stock or securities of the Mountain Cross Granite Corporation, by way of reorganization or otherwise, and since we have found that the stock was not worthless in 1930, it might be sufficient to consider this case disposed of on that point alone. In view of the fact, however, that the deficiency letter, which is incorporated as a part of the petition, indicates that respondent’s determination was based largely on a contention that petitioner’s stock was exchanged for stock by way of a reorganization within the meaning of the statute, it is deemed necessary to determine the question as to whether an exchange of stock and securities did take place, and, if so, whether it was a nontaxable exchange, as shown by respondent’s determination, or an exchange resulting in the realization of gain or loss.

Section 112 (b) (3) of the Revenue Act of 1928 provides in part as follows:

SEO. 112. RECOGNITION OF GAIN OR LOSS.
* * * * * * *
(b) E&changes solely m 7oinil.—
*******
(3) Stock fob stock on eeoeganization.- — No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are. in pursuance of the plan of reorganization, exchanged solely for stock- or securities in such corporation or in another corporation a party to the reorganization.

The term “ reorganization ” is defined in section 112 (i) (1) of the act in the following manner:

(i) Definition of reorganization. — As used in this section and sections 113 and 115—
(1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of the assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.

It is our opinion that the transaction whereby the Mountain Cross Granite Corporation was organized and acquired the assets of the Mountain Cross Granite Co. clearly comes within the meaning of section 112 (i) (1) quoted above. We have pointed out, in John J. Watts, 28 B. T. A. 1056, and J. S. Rippel & Co., 30 B. T. A. 1146, that in a strict merger “ one of the corporations loses its identity by merging into another which survives and absorbs the property and assets of the merged corporation ”, but that Congress extended the term reorganization beyond strict mergers and consolidations by inserting the parenthetical clause in section 112 (i) (1) to provide that mergers and consolidations included “ the acquisition by one corporation of at .least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation.” Referring to the language just quoted, the Supreme Court, in Pinellas Ice Gold Storage Co. v. Commissioner, 287 U. S. 462, at page 469 said:

The words within the parenthesis may not be disregarded. They expand the meaning of “merger” or “ consolidation ” so as to include some things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words — so as to embrace circumstances difficult to delimit but which in strictness cannot be designated as either merger or consolidation.

It is essential, however, as was pointed out in Cortlandt Specialty Co. v. Commissioner, 60 Fed. (2d) 931, that there be a “ continuity of interests under modified corporate forms.”

In the light of these decisions and on the facts, there can be no doubt that the transaction here involved, even if not a strict merger, constituted a reorganization within the meaning of section 112 (i) (1) (A) of the Revenue Act of 1928. Prior to the transaction of July 1, 1930, the petitioner and his associates held stock and securities of the Mountain Cross Granite Co., which owned certain assets and had certain liabilities. After that date they held, in the place of such stock and securities of the Mountain Cross Granite Co., stock of the Mountain Cross Granite Corporation, which owned the same assets subject to the same liabilities as before.

Regardless of the short cut taken in effecting the issuance of the stock of the new company and its procurement of the assets of the old company, the result, so far as the application of the statute here involved is concerned, is exactly the same as if there had been an actual exchange of the stock of the new company for the stock of the old company, or an exchange of the stock of the new company directly for the assets of the old company, and then a distribution of the new stock. It matters little that the plan of reorganization provided that the stockholders of the old company, instead of transferring their securities to the new company in exchange for its stock, should receive their stock in the new company upon surrender of the old company stock to the old company for cancellation and it does not change the situation in the least that a formal transfer of assets was made by the directors of the old company, reciting as consideration the agreement of the new company to assume the old company’s liabilities. The final result by either course -would have been exactly the same.

Neither do we consider that this transaction, on the facts disclosed, was any the less a reorganization within the meaning of section 112 (i) (1) (A) because the new corporation sold some of its stock to R. C. Walgren for cash-.

The stock, both common and preferred, and securities of the Mountain Cross Granite Co. were exchanged for stock of the Mountain Cross Granite Corporation within the meaning of section 112 (b)(3) of the Revenue Act of 1928, and since we have already found that the common stock did not become worthless prior to such exchange, the petitioner did not sustain a deductible loss in 1930 with reference to such stock.

Reviewed by the Board.

Decision will be entered for the respondent.

Black, Smith, and Akundell dissent.


author: Murdock: A.eundkll,

text:
    The Equitable Trust Company of New York, as Ancillary Administrator of the Goods, Chattels and Credits of Vivien Helen de la Poer Beresford, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67259.
    Promulgated October 16, 1934.

      James 0. Wynn, Esq., and W. CL Ilayatham, Esq., for the petitioner.

      Frank P. Horner, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner, in determining a deficiency m estate tax of $86,861.34, added, inter alia, the following items to the decedent’s gross estate as reported:

1. Interest of decedent under deed of trust made by Daniel S.
Miller dated Nov. 21, 1865 to U. S. Trust Company as trustee. $266. 33
2. Accrued income due decedent under deed oí trust made by decedent on December 14, 1920 to Equitable Trust Company, trustee, Cbase National Bant, successor trustee- $20,112.15
3. Accrued income due decedent from trust for her benefit under the will of her mother, Edith Kingdon Gould, deceased, Chase National Bant, trustee_ 3,223.30
4. Undistributed income due decedent, subject to tax litigation in above estate of Edith Kingdon Gould- 12, 773. SO
5. Accrued income due decedent from trust under will of her father, George J. Gould, deceased, Commercial Trust Company of New Jersey, trustee- 1,250. 48
6. Accrued income from trust fund under the will of George J. Gould, deceased_ 1,168.27
7. Accrued income due decedent in the possession of the executors of the will of George J. Gould_ 7,249.36
8. Value of annuity payable to decedent or her executors during the lives of Howard Gould and Helen G. Shepard_ 76, 248.00
9. Principal of the trust created by the decedent on December 14, 1920_ 1, 353, 511. 41

The petitioner does not question values or the figures used by the Commissioner. The issues raised by the petitioner, after eliminating those waived or disposed of by the stipulation, are:

(a) Has the property, above listed, a situs for tax purposes within the United States where the decedent was a nonresident alien?
(b) Did the Commissioner err in including in the decedent’s gross estate item 8, listed above, representing “ the commuted value of certain interest payable to the decedent and after her death to her administrators on portions of the trust held for the benefit of Howard Gould and Helen G. Shepard, respectively, in the residuary estate of Jay Gould, deceased?
(c) Did the Commissioner err in including in the decedent’s gross estate item 9, representing the corpus of an irrevocable trust created by the decedent ?

The parlies have agreed, upon most of the facts of record.

The decedent, Vivien Helen de la. Poer Beresford, was the wife of Lord Decies, a British subject, and was from the date of her marriage, February 7, 1911, to the date of her death, February 3, 1931, domiciled in and a resident of England. She died intestate, leaving three children, domiciled in England, to survive her. The petitioner is the ancillary administrator of the goods, chattels, and credits of the decedent.

Daniel S. Miller on November 21, 1865, created a trust of which the United Trust Co. of New York was trustee. The grantor’s daughter died on January 5, 1931, leaving no child or descendant of a child to survive her. Thereupon the decedent, under the terms of the trust, as one of the next of kin of the daughter, became entitled to receive from the trustee $266.33 of the corpus of the trust, but she did not receive the money prior to her death about one month later.

The decedent owned at the time of her death $15,997.10 in accrued and undistributed income to which she was entitled under certain trusts created by the will of her mother, Edith Kingdon Gould. Of this amount, $12,773.80 was being held subject to some tax litigation, the nature of which is not shown by the record. The trustee named in the will of Edith Kingdon Gould was the Equitable Trust Co. of New York.

George J. Gould, the decedent’s father, placed certain property in trust with the Commercial Trust Co. of New Jersey and provided that certain income from the trust property should be payable to the decedent for life. The decedent at the time of her death was the owner of accrued and undistributed income of $9,668.11 to which she was entitled under this trust.

Jay Gould, the decedent’s grandfather, died in 1892, survived by six children, George J. Gould, Edwin Gould, Howard Gould, Helen Gould (later Helen Gould Shepard), Anna Gould (later the Duchess de Talleyrand), and Frank Gould. He provided in his will that the residue of his estate should be divided into six equal parts and each held in trust separately by his executors as trustees. Each child was to receive the income from one part for life. Upon the death of any child the share held for that child was to go to the issue of that child in such proportions and at such times as the child might appoint by will, or, if no appointment should be made, then, to such issue in the proportions provided by the laws of New York in the case of intestacy, but, if no issue survived the child, then to the other surviving children or their issue per stirpes. George J., Edwin, Howard, and Helen became executors and trustees. These executors and trastees had rendered no accounting up to 1916 and in that year an action was commenced in the New York Superior Court for the settlement of their accounts. This litigation continued until May 31, 1927, when a judgment was entered confirming a compromise settlement or agreement. In this litigation Frank Gould, the Duchess de Talleyrand (formerly Anna Gould), their children, and various remaindermen claimed the right to surcharge the four trustees for various things which they had done. A referee’s report made in 1925 was favorable to some of these claims and the trustees finally agreed to pay $2,000,000 into each trust. Three million dollars had been demanded, but it was pointed out that since Howard and Helen had no children and were not likely to have any, the amount of $4,000,000 received by the two trusts for their benefit would eventually be divided among and become a part of the other four trusts, so that each would eventually receive $3,000,000. The objectors demanded, however, that the trustee pay annually during the joint lives of Howard and Helen a certain amount, and during the life of the survivor a correspondingly smaller amount, to compensate for the loss of income due to the fact that the $4,000,000 paid into the trusts for Howard and Helen would not benefit the other four trusts until Howard and Helen died. A settlement along these lines was agreed upon. The judgment confirming the agreement ordered that Edwin Gould, Howard Gould, and Helen G. Shepard “ pay annually to the seven children of George J. Gould by his first wife, considered as a group, to-wit, to Kingdon Gould, Jay Gould, George J. Gould, Jr., Marjorie Gould Drexel, Lady Decies, Edith Gould Wainwright, and Gloria Gould Bishop and their respective executors and administrators in equal shares the aggregate sum of Fifty-four Thousand ($54,000) Dollars * * * so long as Howard Gould and Helen G. Shepard shall both live and after the death of one of them the sum of Thirty Thousand ($30,000) Dollars during the life of the survivor of said Howard Gould and Helen G. Shepard * * The decedent’s share of the amounts thus payable was $7,? 14.29 during the joint lives of Howard and Helen, and $4,285.72 during the life of the survivor. The Commissioner determined that these payments represented an annuity having a value at the decedent’s death of $76,248, which he added to the gross estate as above set forth.

The decedent’s husband, Lord Decies, was indebted to various persons, and in the fall of 1920 the decedent borrowed a sufficient amount from her father, George J. Gould, to pay off these debts. George J. Gould, in order to protect the children of the decedent and to assure repayment of the amount advanced by him so that all of his children would be upon an equal basis to share in his estate, required the decedent to create a trust relating to her share of her grandfather’s estate which she would receive when her father died. The trust deed was dated December 14, 1920, and the Equitable Trust Co. of New York was made trustee. The Chase National Bank succeeded as trustee. The decedent provided in the trust that after repayment to her father’s estate of the amount advanced by her father, the remainder of the property should be held in trust and the net income paid to her for life. Any income accrued at the date of her death was to be paid to her executor or administrator. The principal at her death was to be paid “ to the lawful descendants of the party of the first part [the decedent] in such proportions as the party of the first part shall in and by her last will and testament appoint, and in case of failure to make such testamentary appointment, then to such descendants absolutely in equal shares per stirpes and not per capita; or if there shall be no such descendants living at the time of the death of the party of the first part, to the person or persons named in her last will and testament, and failing such testamentary disposition, then to the person or persons and in the interests and proportions to whom and in which under the laws of the State of New York existing at the time of the death of the party of the first part said Trust Fund would have been distributed had all thereof been personal property and had the party of the first part died possessed thereof and intestate and a resident of the State of New York.” The trust was irrevocable. The decedent’s three children were all living when this trust was created. George J. Gould died testate in 1923 and provided in his will that the share of the estate of his father, Jay Gould, held in trust for his benefit should be equally distributed among his seven children, of whom the decedent was one. The corpus of the trust at the date of the decedent’s death consisted of the property which the Commissioner has valued at $1,353,511.41.

All of the tangible property and all paper evidences of ownership of the intangible property, including all documents evidencing rights to income, certificates of stock and bonds, involved in this proceeding were actually and physically located within the United States at the time of the decedent’s death. The various corporate trustees were all domestic corporations.

All of the property which the Commissioner has included in valuing the gross estate of this decedent was within the jurisdiction of the United States for purposes of the Federal estate tax at the time of the decedent’s death. The petitioner has argued this point very briefly. It has cited no case to support its contention and we know of none. The source of the income involved was in the United States. The property not only had a situs in the United States, but also received “ the full protection ” of the laws of the United States. See the full discussion of the question of situs for tax purposes in Burnet v. Brooks, 288 U. S. 378.

The petitioner also argues briefly that “ the commuted value of the interest payable after the death of the decedent to her administrators, pursuant to the terms of a judgment of the Supreme Court of the State of New York entered May 31, 1927, should not be included in the decedent’s gross estate for purposes of the federal estate tax.” The argument advanced is that the decedent had no interest in this property within the meaning of section 302(a) of the Eevenue Act of 1926 because by the terms of the judgment the decedent’s rights were limited to the period of her own life, and the rights of her administrator were separately founded upon the provisions of the judgment itself and were not derived through or from the decedent by reason of any law with respect to intestacy. The only basis for such an argument is that the judgment provided that the payments should be made to the seven children “ and their respective executors and administrators.” We are unable to see why the use of this language, made necessary by the possibility that Howard or Helen might outlive (as they did) some of their seven named nephews and nieces, prevents this decedent from having an interest in the payments to be made after her death which would be subject to the tax. She could absolutely control the use to be made of such payments. This argument does not deserve further discussion.

The only remaining question, the one most strenuously argued by the petitioner, is whether or not the value of the principal of the trust created by the decedent on December 14, 1920, was properly included in determining the value of the gross estate under any of the provisions of section 302 of the Revenue Act of 1926. The petitioner would group the principal and the accrued income of the trust at the date of death. However, the two are quite different. The accrued income belonged to the decedent and was clearly subject to the tax. The Commissioner has mentioned subdivisions (a), (c), and (d) in attempting to justify his determination that the corpus was subject to the tax.

The Supreme Court has held that subdivision (a) of section 302 of the Revenue Act of 1926 does not in any way refer to or purport to modify (d); (d) is not a mere specification of something covered by (a), but covers something not included in (a); and (a) standing alone would not extend to the transfers brought into the gross estate by (d). Porter v. Commissioner, 288 U. S. 436. The property involved in that case was held subject to the tax because the transfers were covered by subdivision (d). The Court there was apparently of the opinion that (a) refers to a vested estate in the property. Cf. Warner v. Commissioner, 72 Fed. (2d) 225. But obviously the Court was of the opinion that Porter had no interest in the property within the meaning of (a). That being so, it seems even more clear that the decedent in the present case had no interest within the meaning of (a) in the corpus of the trust created on December 14, 1920. Cf. United States v. Field, 255 U. S. 257. Her powers over that property were certainly no greater than those retained by Porter over the property which he placed in trust. The corpus of the trust in the present case did not pass from the decedent at her death. Title to the property had passed from her previously. Her descendants, a class consisting of three children living at the time she created the trust and also at her death, were remaindermen who had a vested remainder in the property prior to her death. She retained no power to divest this remainder. It could have been divested only by the death of all of her descendants during her lifetime. See sec. 40, Real Property Laws of Hew York, 49 McKinney’s Consol. Laws of Hew York, Anno. p. 53; 40 McKinney’s Consol, etc., p. 16 et seq.: Tiffany on Real Property, §§ 139, 315, 330; Elizabeth B. Wallace, Executrix, 27 B. T. A. 902; affd., 71 Fed. (2d) 1002; Louis C. Baegner, Jr., et al., Executors, 29 B. T. A. 1243; Coolidge v. Long, 282 U. S. 582. Thus (a) does nob bring this property within the decedent’s gross estate. Cf. Nanaline H. Duke et al., Executors, 23 B. T. A. 1104; affd., 62 Fed. (2d) 1057 ; 290 U. S. 591.

The decedent retained some control over the title to and the enjoyment of the corpus. Her death terminated that control and was the source of valuable assurance passing from the dead to the living in respect of the .title to that property which Congress might have reached. Cf. Porter v. Commissioner, supra; Saltonstall v. Saltonstall, 276 U. S. 260. However, the gross estate is specifically defined in section 302 and includes only the property therein specified. Porter v. Commissioner, supra. Therefore some provision must be found which includes the property in question — otherwise it was erroneously subjected to tax by the Commissioner.

Section 302(c), as it was at the date of the death of this decedent, required that the gross estate include the value of all property at the date of death “to the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after death.” The respondent concedes that this trust was not made in contemplation of death, but he contends that the transfer was made to take effect in possession or enjoyment at the death of this decedent. The fact that the income was payable to the decedent for life is not a sound basis for holding that the transfer was one intended to take effect in possession or enjoyment at or after death. Burnet v. Northern Trust Co., 283 U. S. 782, and Morsman v. Burnet, 283 U. S. 783, following May v. Heiner, 281 U. S. 238. If the transfer was one intended to take effect in possession or enjoyment at death, as the Commissioner contends, it must be because of its provisions relating to the remaindermen, including those provisions whereby the decedent retained the right to designate the proportions in which her descendants should share the corpus. Less than one month after this decedent died section 302 (c) was amended to include “ a transfer under which the trans-feror has retained for his life * * * (1) the possession or enjoyment of, or the income from, the property or (2) the right to designate the persons who shall possess or enjoy the property or the income therefrom.” House Joint Resolution No. 529, approved March 3, 1931. The amendment had no retroactive effect upon estates of decedents who died prior to its enactment. Charles H. W. Foster et al., Executors, 26 B. T. A. 708. It is at least doubtful whether this section as it existed prior to this amendment applied in a case like the present. Cf. Charles H. W. Foster et al., Executors, supra; Elizabeth B. Wallace, Executrix, supra; Nanaline H. Dulce et al., Executors, supra. Such a doubt must be resolved in favor of the taxpayer. Gould v. Gould, 245 U. S. 151.

The Commissioner included the principal of this trust in the gross estate because “ under the terms of the trust agreement the decedent reserved the right to appoint in her will the proportions of the principal distributable to her lawful descedants ” and “ such a reservation constitutes a power to alter or amend the trust and brings it within the provisions of section 302(d) of the Revenue Act of 1926.” That provision of the act is as follows:

The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated * * * to the e'xtent of any interest therein 'of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke * * *.

The petitioner argues that the decedent had no' power to alter or amend the provisions of this trust; she had power under the trust agreement to designate the proportions in which her descendants were to receive the trust property, but that was a power given in the trust instrument, not a power to alter or amend the trust, and even an exercise of that power would have been a compliance with, rather than an alteration or amendment of, those provisions; therefore the value of the property is not to be included in the gross estate because of the provisions of section 302(d). The decedent retained the power to fix the share of each one of the group of takers. But as she had not theretofore fixed the share each was to take, the retained power to fix for the first time was not a power to change. If she failed to exercise the power an alternative provision of the trust instrument became effective, under which they were to take equally. The retained power was a power to supplement, amplify, or make more specific, but not to alter or amend. Congress chose words which do not cover this case and we have no power to enlarge the provision, even though the power in question might afford as good a basis for a tax as the powers mentioned in the act.

The present case differs from one wherein the grantor does not divest himself of the remainder in the trust deed, but reserves the right to name a remainderman by some other instrument. Cf. Luis James Phelps et al., Executors, 27 B. T. A. 1224. In that case the transfer was incomplete until death, (a) and (c) might both apply. The present case differs also from one wherein a power to change remaindermen is retained, (d) would apply to that ease. Cf. Day Kimball et al., Administrators, 29 B. T. A. 60; H. T. Cook et al., Executors, 23 B. T. A. 335; affd., 66 Fed. (2d) 995; certiorari denied, 291 U. S. 660. Here the decedent could not divest the class named as remaindermen, but could only designate the proportions in which the members of the class would take. In so far as the trust provided that the grantor could name other remaindermen in ■her will in case all of her descendants had predeceased her, this case is like Stephen Peabody et al., Executors, 24 B. T. A. 787, and like that case could be distinguished from Union Guardian Trust Co., Executor, 26 B. T. A. 1321. However the reasoning1 used by the Board in the later case was not adopted by the appellate court. Dort v. Helvering, 69 Fed. (2d) 836. Cf. Porter v. Commissioner, supra.

Reviewed by the Board.

Decision, will be entered under Rule 50.

A.eundkll,

dissenting: The majority opinion proceeds upon the theory that the retained power of the decedent to fix the share of each of the group of remaindermen, being but a “power to supplement, amplify or make more specific ”, was not a power to “ alter ” or “ amend ”, hence does not come within the literal words of the statute. The power to fix the share of each one of the group would seem to be a power' to change the enjoyment through the exercise of a power to alter or amend. On failure to exercise the power, each of the remaindermen would share equally; by an exercise of it the shares could be verjr materially changed. As long as the creator of the trust lived there was the possibility of exercise, and her death was “ the source of valuable assurance passing from the dead to the living. That is the event on which Congress based the inclusion of property so transferred * *.” Porter v. Commissioner, 288 U. S. 436. It is no doubt true, as contended by petitioners, that each of the remaindermen had a vested interest in the trust property. But it is equally true that the decedent had the power-to change materially the portion which any oaie, or all, would ultimately enjoy. The statute requires the inclusion of all. property transferred in trust “ the enjoyment of which remains at the time of his death subject to any change by the exertion of a power by himself alone or in conjunction with another.” Porter v. Commissioner, supra. If the trust instrument “contain a right to change the enjoyment, it is within the terms of the act.” Dort v. Helvering, 69 Fed. (2d) 836. Granting the correctness of the majority opinion that the power was one to “ supplement ” or “ modify ” it woidd seem that any supplement or modification of the share of any of the group of remainder-men would effect a “ change by the exertion of a power.” Porter v. Commissioner, supra. The fact that the power to change is given in the trust instrument and that any exercise would have been in compliance with the provisions of the instrument seems entirely immaterial. Powers to alter, amend, or revoke, where they exist, are usually contained in the trust instrument, and they must be exercised in accordance with the provisions thereof.

It seems to me that the question presented here is governed by the decision in H. T. Cook et al., Executors, 23 B. T. A. 335; affirmed by the Circuit Court of Appeals for the Third Circuit, 66 Fed. (2d) 995, on authority of the Porter case. In that case, as here, the power of the creator of the trusts ivas limited to those of a group of beneficiaries, and it was held that the trust property was part of the gross estate under section 302(d).

Smith, Seawell, and Turner agree with this dissent.


author: Leech:

text:
    Alfred Hafner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 48389, 57132.
    Promulgated October 16, 1934.

      Newton K. Fox, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Leech:

The record contains considerable evidence seeking, apparently, to establish that respondent erred in including in petitioner’s income, the entire net profits derived from G. E. Stechert & Co. during the years here involved, upon the ground that one half of such income was that of his wife. Neither in the petition nor the amendments thereto, made at the hearing, is that error assigned nor facts declared sustaining it. Ordinarily, at least, such failure is fatal to the consideration of an issue, thus formally raised for the first time on brief. Jean Conrad, 27 B. T. A. 741; Coosa Land Co., 29 B. T. A. 389. Moreover, the evidence on this question is unconvincing. The petitioner, though returning only one half the gains, dividends, and interest derived from the ownership and sale of real estate and securities, here formally in issue, returned as his own income for all the years here involved, the entire net income received from G. E. Stechert & Co. The evidence that in 1916 petitioner created a partnership by giving his wife a 4 percent interest and his sister-in-law a 1 percent interest in the 'business, the status of which ownership during the years now involved is not explained, even considered with petitioner’s reason therefor, is inconsistent with his primary position that his wife owned a one-half interest through his ownership in the business. Upon this failure in pleading and proof, we sustain the respondent as to that item.

The principal issue remaining here is, Did petitioner and his wife own jointly, one-half interest each, excepting only the petitioner’s interest in G. E. Stechert & Co., all of the securities and real estate owned by them, so that, each was entitled to one half of the gains, dividends, and interest derived from such investments and each was entitled to a deduction of one half of the expenses, interest, depreciation, and losses sustained in connection with such investments? No question has been raised as to the allowable deductions, except as to the deduction of $2,600 claimed for 1926 as a loss sustained on worthless stock.

The evidence submitted by petitioner and his wife is clear, convincing, and uncontradicted upon this question. In 1894 petitioner and his wife established a joint bank account to which the wife contributed a substantial sum. Whether they each deposited an equal sum of money is immaterial, for where money is deposited in a bank in the name of husband and wife, it will be presumed to belong to each equally. Witherow v. Lord, 41 App. Div. 413; 58 N. Y. S. 778. Furthermore, at that time petitioner and his wife agreed that all their money and property should be owned jointly, a one-half interest each, and such agreement has continued throughout the succeeding years, including those here in controversy. Their original commin-. gled joint funds and through the years the increments thereto, have been invested in various properties. Under the Married Woman’s Acts of New York, a wife is regarded as sole with regard to. her property rights and may unite with her husband in the purchase of property with her separate funds and where husband and wife each contribute to a joint investment, they become tenants in common, each having all the rights and incidents of such ownership. In re Albrecht's Estate, 136 N. Y. 91; 32 N. E. 632; In re Baum, 121 App. Div. 496; 106; N. Y. S. 113; Wilcox v. Murtha, 41 App. Div. 408; 58 N. Y. S. 783.

Upon consideration of the facts in this case and the law of New York, we conclude that the beneficial ownership of all of the property, real and personal, except the interest in G. E. Stechert & Co., held by petitioner and/or his wife during the years in question, was owned jointly, each owning a one-half interest. Accordingly, petitioner is taxable upon only one half of the income from such investments and entitled to deductions of only one half of the expenses, interest, depreciation, and losses in connection therewith (cf. Norman B. Livermore & Co., 11 B. T. A. 428; First National Bank of Duluth, Administrator, 13 B. T. A. 1096; Warren MacPherson, 19 B. T. A. 651; Stewart Forshay, 20 B. T. A. 537), and the respondent erred in determining otherwise.

With reference to the claimed loss of $2,600 in the year 1926, section 214 (a) (5) of the Revenue Act of 1926 provides for a deduction of Losses sustained during the taxable year * * The loss on the stock was sustained in the year in which the stock actually became worthless, Forbes v. Commissioner, 62 Fed. (2d) 571. Petitioner has shown only that the worthlessness was ascertained in 1926 and has failed to establish the year in which the worthlessness occurred. Respondent’s disallowance of a deduction in 1926 on account of such alleged loss, is sustained.

Decision will be entered under Rule 50.


author: SteRnhagen:

text:
    H. Y. McCord, Petitioner, v. Commissioner of Internal Revenue, Respondent. E. M. Hudson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ida B. Summers, Petitioner, v. Commissioner of Internal Revenue, Respondent. Citizens & Southern National Bank, Trustee, Frank B. Coleman Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent. Catherine M. Williamson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 65680-65682, 65738, 65888.
    Promulgated October 16, 1934.

      Theodore B. Benson, Esq., for the petitioners.

      John D. Eiley, Esq., for the respondent.
   OPINION.

SteRnhagen:

The petitioners were shareholders of the McCord-Stewart Co., a Georgia corporation. In 1928 and 1929 they received distributions of securities which were among the corporation’s assets. The Commissioner treated the distributions as a dividend and, by taxing it all in 1929, determined deficiencies for that year as follows: H. Y. McCord, $20,334.40; E. M. Hudson, $5,100.17; Ida B. Summers, $65.86; Coleman Trust, $518.86; and Catherine M. Williamson, $117.48. The facts are stipulated in more detail than it is necessary to set forth, and the question at issue is common to all the petitioners as shareholders.

The corporation’s earned surplus on March 1, 1913, was $196,766. In 1923 it increased its stock to 4,000 common shares by a stock dividend of 3,000 shares, thus capitalizing $300,000 of its surplus. In 1928 it reduced its common to 500 shares and to its shareholders pro rata it issued 750 shares of 7 percent cumulative preferred. At the same time and as part of the same plan it resolved to distribute its assets in excess of the $125,000 capital stock, which was all its business was thereafter expected to need. The assets were to be and were distributed partly in 1928 and partly in 1929.

It seems clear that the change in capital structure from 4,000 common shares to 500 common and 750 preferred was a recapitalization, and therefore within the statutory definition of reorganization, [Revenue Act of 1928, sec. 112 (i) (1) (C). Kistler v. Burnet, 58 Fed. (2d) 687; Walter F. Haass, 29 B. T. A. 900; H. E. Muchnic, Administrator, 29 B. T. A. 163; 875 Park Avenue Corp., 23 B. T. A. 969. The gain or loss involved in such reorganization is only to be recognized if section 112 provides for recognition. By subsection (b) (3), an exchange of stock for stock in reorganization involves no recognition of gain or loss, and by subsection (c) (1), if such an exchange also brings money or property, the gain is recognized, limited by the money or value of the property. These subsections, however, apply to exchanges, and there is nothing to indicate whether the word exchange is to be so broadly construed as to- include every instance where, irrespective of the terms or circumstances thereof, a shareholder gives up shares and comes out of the arrangement with other shares or something else. Cf. Edison Securities Corp., 29 B. T. A. 483.

The present record indicates that the assets distributed out of corporation’s surplus were not received by way of exchange for the shares surrendered or by way of liquidation of the capital stock; but were, after the recapitalization, a division among the shareholders of the corporation’s surplus. That is a dividend, as defined in section 115 (a). For income tax purposes, the $300,000 which had been capitalized by the stock dividend of 1923 was still surplus, the distribution of which was a dividend. Hugh R. Wilson, 3 B. T. A. 957; J. T. Hedrick, 24 B. T. A. 444; J. W. McCulloch, 29 B. T. A. 67. No question arises under section 115 (g) because, as we have seen, the cancellation of outstanding shares was not for cash, but only in exchange for new common and preferred shares.

But if it were such a distribution as could be called an exchange under section 112 (c) (1), it would nevertheless have the effect of a taxable dividend and hence, by subsection (c) (2), be taxed as such. That subsection has been applied broadly enough to embrace the present circumstances. Commissioner v. Owens, 69 Fed. (2d) 597; John S. Woodard, 30 B. T. A. 1216.

Being taxable as a dividend, and having been received in 1928 and 1929 in accordance with its terms, we see no reason to tax it all in 1929. Only the amount distributed to each shareholder in 1929 should be taxed in that year, and such tax should be that applicable to an ordinary dividend.

Judgment will be entered under Rule 50.


author: Sternpiagen;

text:
    The Sugar Creek Coal and Mining Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73758.
    Promulgated October 16, 1934.

      Evert L. Bono, Esq., for the petitioner.

      Arthur H. Fast, Esq., and Harold D. Thomas, Esq., for the respondent.
   OPINION.

Sternpiagen;

The respondent determined a deficiency of $67,535.47 in petitioner’s income tax for the fiscal year ended May 31, 1931, in part by including in income the aggregate amount of advanced royalties received in former years from a lessee obligated to pay an annual minimum mining royalty. By virtue of the cancellation, in July 1930, of the lessee’s right to apply such former advanced payments against future extractions of coal in excess of the minimum, respondent included all prior advances in 1931 income, on the ground that petitioner’s failure to report them when received now estops it to deny that they constitute income in the year of cancellation. The Division opinion promulgated April 18, 1934, 30 B. T. A. 420, was directed by the Chairman to be reviewed by the Board.

The facts are all stipulated.

Petitioner has, since 1904, been the owner of coal lands in Ohio which were under mining leases obligating the lessee to pay minimum annual royalties. The lessee, however, had the right to have the royalties paid by it in excess of actual tonnage applied cumulatively to any subsequent excess tonnage mined. The lessee never mined above the prescribed minimum except in 1917, 1918, 1920, and 1921. The minimum royalities paid above the tonnage mined from 1904 to the end of the fiscal year 1927 aggregated $563,319.25, after applying the proper deductions for excess tonnage of 1917,1918,1920, and 1921. Of the accumulated excess royalties of $563,319.25, the amount of $241,112.97 covered the period from March 1, 1913, to May 31, 1927. No coal was mined or payments made during the fiscal years 1928, 1929, and 1930.

On its books, petitioner accounted for the royalties received each year by debiting cash for the full amount and crediting profit and loss with so much as was attributable to tonnage mined and crediting advanced royalty with the excess.

By a new agreement of July 14, 1930, the terms of the lease were changed and the accumulated royalty of $563,319.25 was “ cancelled and released.” On petitioner’s books, the “ advanced royalty ” was charged off by a debit of $563,319.25 and a credit to “ distributed reserves ”, a surplus account.

On its tax returns, beginning with 1909, petitioner annually reported only so much of the amounts received as were allocable to tonnage mined, and omitted the excess of minimum royalties. Its depletion deductions were measured by the tonnage mined. In July 1931 it filed an amended return for 1927, reporting total royalties received in that year and deducting depletion measured by the minimum tonnage, and paid the additional tax. At that time the statute of limitations barred assessment or collection of taxes for the years prior to 1927.

It is agreed that revenue agents made examinations of petitioner’s books for the fiscal years 1922 to 1927, inclusive, and made reports. Whether examinations were made for other years does not appear. The respondent determined a deficiency for 1931 by including in petitioner’s income the aforesaid $563,319.25, and said in the notice of deficiency dated August 5, 1933, “ The latter amount has been added to net income in accordance with the doctrine of quasi estop-pel, the principles of which do not permit a party to act in a manner inconsistent with its former position to the injury of another. The collection of taxes on all years prior to the year ended May 31, 1931. are now barred by the statute of limitations and you cannot now be permitted to change to the received basis without injury to the Government.”

An amended answer filed at the hearing contains the following:

Further answering, respondent alleges:
* # * * *
(6) That in its return of annual net income filed with the Collector of Internal Revenue for all years prior to the taxable year, petitioner did not report as income any portion of the advanced royalties in question; and that by reason of such action and representations thereby made, petitioner is precluded and estopped from claiming that the amount of advanced royalties is not taxable in the taxable year involved in this appeal.

At the. hearing it was stated for respondent that the doctrine of estoppel alone was his defense; that the amounts should properly have been reported each year whén received, but that, since the taxpayer failed to report them and for some reason the Commissioner failed to notice the omission, the taxpayer is estopped to deny the propriety of their inclusion in taxable income when the account was canceled and when it was too late, under the statute of limitations, to tax them in the years when they constituted income and should properly have been taxed; that the amounts received prior to 1913 were not taxable prior to 1909, and probably not taxable prior to March 1, 1913, and therefore such part of the $563,319.25 as came in prior to March 1,1913, was admitted to be not within taxable income and the deficiency should be fro tanto reduced; that a further reduction should be made because of the amended return and payment for 1927, thus leaving only the amount of $217,353.33, covering the period from March 1, 1913, through 1926, in issue; that the method of bookkeeping, whether accrual or actual receipts, makes no difference; and that the Government does not claim that the returns for earlier years were fraudulent, but only that the advanced royalty items were mistakenly omitted.

Estoppel is not an element of income but only a doctrine affecting liability. It cuts across substantive principles in order to promote an assumed fairness thought to be more important than an adherence to conventional legal considerations. It does not create a right but only affects remedy. The burden is upon the party asserting it to establish both the facts relied on to support it and the necessity in fairness for its application. Helvering v. Brooklyn City R. R. Co., 72 Fed. (2d) 275. This the Commissioner has assumed and undertaken. His affirmative proposition may be abstractly stated thus: A taxpayer who, for a long period of years beginning prior to 1913, annually receives taxable income and erroneously (but not fraudulently) omits it from his return, and is not required by the Commissioner to pay tax thereon, although official examinations have for a number of years informed the Commissioner of the facts before the expiration of the statutory period of limitations, is estopped to deny liability for tax on the aggregate amount of such income in a single subsequent year, when such income is neither received nor accrued, because the statute of limitations bars the tax for the earlier years when it was properly due.

This proposition would operate as a complete frustration of the statute of limitations. Congress having expressly provided such a bar, the Commissioner would thrust it aside whenever it seemed to him or to the Board or the courts unfair, although there is in the act neither express nor implied exception of such a nature. This is also true of refunds of overpayments, for the Commissioner may not act merely upon his sense of fairness to allow a claim long after it is outlawed by statutory limitation. In the absence of fraud or at least of conscious deception, Congress has fixed a period of time as a limit upon collectibility,, and this may not give way to an elusive concept of fairness.

There may be a tinge of unfairness in the thought that a taxpayer may, because of the statutory limitation, avoid a tax otherwise unquestionably due. But, on the other hand, it may be unfair that an honest taxpayer should be made to answer for an innocent mistake long afterward. These matters Congress has considered and in its legislative wisdom it has enacted the limitation period at the price of losing the tax. The administrative officer may not interpose his judgment to the contrary, Dupree v. Mansur, 214 U. S. 161.

But, if the question of the essential unfairness of this petitioner’s position be open to consideration, there is still not enough to support the respondent’s affirmative plea. The petitioner has not misled the respondent. So far as the evidence shows, petitioner has merely filed erroneous returns in which the Commissioner has acquiesced. There is no explanation of the error by either side. Both have known all the facts, certainly since 1922, and we may assume,, in the absence of contrary evidence at least, that the Commissioner before that did his official duty and likewise ascertained them. Cf. Helvering v. Brooklyn City R. R. Co., supra. Perhaps throughout the entire period both the taxpayer and the Government held a mistaken view of the legal theory or proper time for taxing the royalties. There is nothing to indicate that the contract was not known to both or that petitioner’s books omitted any facts. Neither an affirmative misstatement nor a concealment is suggested, nor an act of the Commissioner in reliance on petitioner’s word or conduct. A mutual mistake of law is no foundation for estoppel. Tide Water Oil Co., 29 B. T. A. 1208. If it were, there would be just as much ground for the taxpayer to claim that the Government is estopped to change its position.

That there is no substantive reason to tax these advanced royalties in 1930 is impliedly conceded in the agreement that they were taxable when received. C. H. Mead Coal Co., 31 B. T. A. 190. In 1930 the petitioner derived no part of this amount. The lessee neither had nor claimed any right to it after payment. Its right to extract coal to the extent of the royalties paid did not affect the lessor’s ownership of the royalties. Hence, by no theory could a tax be imposed in 1930. As to, say, the 1914 royalties, there is no more reason to tax them in 1930 than in 1923. If estoppel alone is the ground, it was as well founded in 1923 as in 1934. And if there is no basis for tax in the 1930 contract or charge-off, then estoppel would be equally operative to impose a cumulative tax in 1950 as in 1930. If this principle is sound, an individual taxpayer who failed to pay tax at the low rate of 1914 would be subject to the high brackets of 1930 upon the accumulation of royalties for all the intervening years. This would be a serious penalty upon one admittedly free from fraud.

We therefore see nothing to support the claimed estoppel. As a general proposition, estoppel does not support a belated assessment merely because the taxpayer has omitted the income from his earlier returns and the statute of limitations has barred the correct assessment.

There are prior decisions involving the doctrine of estoppel, but we find no clear authority to support the respondent’s contention. Cases where the taxpayer has knowingly postponed the tax by an affirmative act or statement upon which the Commissioner reasonably relied do not support the broad rule urged upon us here. And the doctrine of estoppel is not to be confused with that of election.

Reviewed by the Board.

Judgment will be entered under Bule SO.

Adams concurs in the result.

Smith dissents.

         Askin & Marine Co. v. Commissioner, 66 Fed. (2d) 776 (C. C. A., 2d Cir.) ; Mattern v. Commissioner, 61 Fed. (2d) 663 (C. C. A., 9th Cir.) ; Haag v. Commissioner, 59 Fed. (2d) 516 (C. C. A., 7th Cir.) ; Lucas v. Hunt, 45 Fed. (2d) 78) (C. C. A., 5th Cir.) ; Burnet v. San Joaquin Fruit & Investment Co., 52 Fed. (2d) 123 (C. C. A., 9th Cir.) ; Rockwood v. United States, 38 Fed. (2d) 707 (Ct. Cls.) ; McDonald Coal Co. v. Heiner, 9 Fed. (2d) 292; 16 Fed. (2d) 274 (C. C. A., 3d Cir.) ; Swartz v. Commissioner, 69 Fed. (2d) 633 (C. C. A., 5th Cir.).

      Cf. Buttolph v. Commissioner, 29 Fed. (2d) 695 (C. C. A., 7th Cir.) ; Radiant Glass Co. v. Burnet, 54 Fed. (2d) 718 (C. A., D. C.) ; Moran v. Commissioner, 67 Fed. (2d) 601 (C. C. A., 1st Cir.) ; Crane V. Commissioner, 68 Fed. (2d) 640 (C. C. A., 1st Cir.).