author: Arundell: Turner,

text:
    William H. Hart, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82652.
    Promulgated December 28, 1937.

      Thomas Hart, Esq., for the petitioner.

      Lewis S. Pendleton, Esq., for the respondent.
   OPINION.

Arundell:

In this proceeding the respondent determined a deficiency in gift tax for the year 1938 in the amount of $2,282.78, of which the petitioner concedes $57.56 and contests $2,225.22. The amount in controversy arises from the respondent’s action in treating as a taxable gift the conveyance of property by the petitioner to himself and his wife as tenants by the entirety. We incorporate in this report by reference the stipulated facts as our findings of fact and set forth here only a summary of them.

On September 20, 1933, the petitioner, who was the owner in fee, unencumbered, of a residence in Montgomery County, Pennsylvania, directly transferred the premises by deed, in which his wife joined, to himself and his wife as tenants by the entirety. The petitioner filed a gift tax return for 1933 with, the collector at Philadelphia on March 14, 1934. In that return he reported the above transfer but did not list it as a taxable gift. At the time of the transfer the petitioner was approximately 65 years of age and his wife was 56 years of age.

The total value of the property was $77,500. The respondent determined that the transfer constituted a taxable gift with a value of $45,824.20 for gift tax purposes computed as follows:

Present interest. The present worth of the right to use of one-half of $77,500.00 as long as a person of your age, 65 years, and a person of your wife’s age, 56 years, shall both live is-$9,786. 70
Future interest. The present worth of the right to receive $77,500.00 at the end of the year of death of a person of your age, 65 years, provided a person of your wife’s age, 56 years, shall survive is- 36,037. 50
Total_ 45,824.20

In addition to the facts stipulated the parties have agreed that, if as a matter of law there was a gift from petitioner to his wife, then the value of the gift is $45,824.20.

There is no issue as to the transfer effecting the creation of an estate by the entirety recognized as such under the law of Pennsylvania. It has been decided that one spouse, with the other joining, and without the intervention of a trustee, may create an entirety estate by conveyance to the two as tenants by the entirety. In re Vandergrift's Estate, 105 Pa. Super. 293; 161 Atl. 898.

The Gift Tax Act of June 6, 1932, provides in section 501 (a) for the imposition for each calendar year of a tax “upon the transfer * * * of property by gift.” Section 501 (b) provides as follows:

(b) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; * * *

The respondent’s position in asserting a gift tax on the change of title to the property is that such change created property rights in the wife and such rights were acquired from the petitioner by gift, and, further, that the provisions of the statute are broad enough to comprehend the transfer of property rights of this character.

The incidents of tenancies by the entirety have been often enough described to obviate any need for repetition other than to quote from Lang v. Commissioner, 289 U. S. 109:

An estate by the entirety is held by the husband and wife in a single ownership, by a single title. They do not take by moieties, but both and each take the whole estate, that is to say, the entirety. The tenancy results from the common-law principle of marital unity; and is said to be sui generis. Upon the death of one of the tenants “the survivor does not take as a new acquisition, but under the original limitation, his estate being simply freed from participation by the other. * * *” 1 Washburn, Real Property, 6th ed., § 912. In the present case, therefore, when the husband died, the wife, in respect of this estate, did not succeed to anything. She simply continued, in virtue of the nature of the tenancy, to possess and own what she already had. * * *

In Regulations 79, relating to the gift tax, it is provided that if either a husband or wife purchase property and cause title to be conveyed to themselves as tenants by the entirety, or if either cause to be created such a tenancy in property already owned, and neither one alone may defeat the right of the survivor to the whole of the property, then “the transfer effects a gift from the spouse owning the property at the time of the creation of the tenancy or who furnished the consideration in the purchase of the property.” Art. 19, subdivision 8. Similar provisions appear in article 2, subdivision 7, limited to purchases by a husband with title conveyed to himself and wife as tenants by the entirety.

The statute here involved does not specifically treat the creation of a tenancy by the entirety as a taxable transfer. Neither did the earlier gift tax statute, the Act of 1924, do so. The language of the earlier statute was much like the one of 1932, imposing a tax “upon the transfer * * * by gift * * * of any property * * * whether made directly or indirectly * * Regulations 67, relating to the gift tax under the 1924 Act, contained no provisions similar to those above referred to in Regulations 79. At the time that both regulations were promulgated, the statutes then in force imposing estate taxes contained specific provisions including entirety property in the estate of the decedent. In the Congressional committee reports accompanying the Revenue Bill of 1932 examples are given of transactions that would constitute transfers by gift within the meaning of the pending legislation. The creation of tenancies by the entirety is not included in the list of examples. . The only example given that has any characteristics at all approaching those of an entirety estate is that of the creation of a joint bank account by “A” for himself and “B.” And in that situation both the Senate and House committees say “there would be a gift to B when he draws upon the account for his own benefit to the extent of the amount drawn out.” (Italics ours.) (Senate Report 665, 72d Cong. 1st sess., p. 40; House Report 708, p. 28.) It may well be that in both joint tenancies and tenancies by the entirety, which have some of the same legal incidents, the creation works a sufficient change in economic benefits that Congress under its broad taxing power could embrace the creation within the term transfer as it has done under the estate tax law with respect to the enlargement of the survivor’s rights when the tenancy is terminated. See Tyler v. United States, 281 U. S. 497. So far Congress has not done so in plain words, and our consideration of the statutes and explanatory committee reports leads us to believe it did not intend to do so.

There are other reasons which lead to the belief that the statute before us does not include the creation of a tenancy by the entirety. While no doubt the creation thereof by one spouse does enlarge to some extent the property rights of the other, sight must not be lost of the substantial rights retained by the creator. In this case the husband, as well as the wife, took “the whole of the estate, that is to say, the entirety.” Lang v. Commissioner, supra. The wife took nothing that was presently disposable for her separate use and benefit. As long as the tenancy endured she had no right of severance under Pennsylvania law and she could not deprive the petitioner of his title to “the whole estate.” A restriction of this magnitude does not accord with either the common understanding or the legal incidents of a gift. This, as we read the opinion in Burnet v. Guggenheim, 288 U. S. 280, is the reasoning in that case. There the taxpayer created trusts without consideration in money or money’s worth in 1911, the income from which was currently payable to named beneficiaries, but broad powers over the corpus were reserved to the grantor. The reserved powers were eliminated from the trust deeds in 1925. The Commissioner levied a gift tax for 1925 which was sustained by the Supreme Court. The argument of the Commissioner there was that what was done in 1917 was preliminary and tentative, and that not until 1925 was there a transfer in the sense that must have been present in the mind of Congress when laying a tax on gifts in the Revenue Act of 1924. The Supreme Court, in sustaining the tax, said that as long as the grantor’s reserved powers were outstanding “the gifts were formal and unreal. They acquired substance and reality for the first time in July, 1925, when the deeds became absolute through the cancellation of the power.” In the case before us the petitioner did not even initially divest himself of the property; by his deed he retained to himself the whole estate.

Further, the Court in the Guggenheim case expressed the view that the concept of “transfer” evolved under the estate tax statutes was intended to be carried over and incorporated in the gift tax statutes. “Congress w;as aware that what was of the essence a transfer had come to be identified more nearly with a change of economic benefits than with technicalities of title.” Under this view, as a practical matter, the creation of the tenancy was but little more than a technical change of title. Not until the dissolution of the tenancy would the wife have actual command over the property sought to be used as a measure of the tax. Until that time her rights were mostly negative in that she could prevent the disposition or encumbrance of the property. Those rights she previously had to some extent under her right of dower. It is our opinion that, in view of the substantial rights retained by the husband, the creation of the entirety estate can not be said to have conferred upon the wife property rights great enough to constitute the transaction a gift.

As far as we have been informed only one case has been decided directly involving the issue here. In Lilly v. Smith (Dist. Ct., Ind., Feb. 8, 1987), not reported, the plaintiff purchased lands with his own funds in 1932 and 1933 and had the deeds issued to himself and wife as tenants by the entirety. The court, without opinion, allowed recovery of the gift tax exacted by the collector on those transactions.

We hold for the petitioner on the issue raised.

Reviewed by the Board.

Decision will be entered under Rule 50.

Turner,

dissenting: I am unable to agree with the conclusion of the majority to the effect that the transfer by the petitioner to himself and wife as tenants by the entirety did not constitute a gift to his wife within the meaning of section 501 (b) of the Revenue Act of 1932. That section provides that “the tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible.” It is my opinion that the above language is broad enough to cover the gift of any property unless specifically excepted, and there is no claim that a transfer such as we have here is excepted by any provision of the statute.

The Supreme Court, in Lang v. Commissioner, 289 U. S. 109, describes an estate by the entirety as an estate “held by the husband and wife in a single ownership, by a single title. They do not take by moieties, but both and each take the whole estate, that is to say, the entirety. The tenancy results from the common law principle of marital unity; and is said to be sui generis.” That quotation alone provides ample ground for the holding that a gift was made in the instant case by the petitioner to his wife, leaving only a question of value, and value has been stipulated.

Relying upon the theory to the effect that under an estate by the entirety the husband and wife both and each take the whole estate, it is claimed that since the petitioner after the transfer still had the whole estate it can not be said that he parted with property or a right in property or that his wife received property or property rights by reason of the grant. To say that the petitioner parted with nothing and that his wife acquired nothing by reason of the transfer is to shut our eyes to the actualities of the situation and to disregard the effect of the events that occurred. Prior to the conveyance by the petitioner to his wife and himself as tenants by the entirety, he owned the property in fee. It was his without limitations or restrictions and up to the tune of the gift his wife had no interest in the property whatever, except such rights as she may possibly have had under the laws of Pennsylvania with reference to' dower. She had absolutely no interest in the fee. After the grant the petitioner was no longer an unrestricted owner of the property in fee. He was no longer entitled to the unrestricted use of the property and could no longer dispose of the property by will, nor could he make a transfer thereof during his lifetime except with the consent and by the joining of his wife unless or until he should survive her. As to his wife, prior to the grant she had nothing except possibly a dower interest previously mentioned. After the grant she was the owner of the entire property, subject only to the restriction that she could not dispose of the property without the consent and the joining of her husband and the further restriction that the property would again become his in full ownership if he survived. Her rights were in all respects equal to the rights of the petitioner, and, if we say that she acquired nothing more than an expectancy that might ripen into property in the event she survived the petitioner, we must also say that the petitioner after the grant had nothing more than an expectancy or possibility of survivorship. Since her rights in and to the property were received from the petitioner by reason of the transfer here under consideration and those rights are in all respects equal to the rights retained by him, we can not, in my opinion, avoid a holding that the petitioner made a present gift to her of the property, or at least an interest therein, within the meaning of the statute.. A determination of value of such a property right might present serious difficulties, but with those difficulties we are not concerned, inasmuch as the parties have stipulated the value.

The untenability of the position taken in the majority opinion is at once apparent if we consider a case where the grant by the entirety is made to a husband and wife, not by the husband, but by a third party. In such case there could be no question that the grantor definitely and absolutely parted with his entire interest in the property. Could we, under such circumstances, single out the husband and say that it was he who received the property, and, as the majority opinion reasons, further say that the wife has received nothing except a right to come into full ownership and possession of the property provided she survives her husband? Obviously not; yet, in my opinion, we would have to answer that question in the affirmative in order to justify the reasoning of the majority that in the instant case the wife did not acquire any property or right in property by reason of and at the time of the grant and that as to her the creation of the tenancy “was but little more than a technical change in title.” I am unable to classify the rights with which the petitioner parted, namely, the right to exclusive use of the property, the right to dispose of the property by will, the right at any time to dispose of the property in fee, subject only to such dower interest as his wife might have had, as “little more than a technical change in title.” It seems to me to be perfectly clear that so long as tenancies by the entirety are recognized we must follow the theory of such tenancies to its logical conclusion. Under that theory the petitioner conveyed and as an individual parted with his entire interest in the property, the recipient being the marital unit, and the only reason for not holding that a gift was made by him to the extent of the full value of the property so conveyed is that he, the grantor, is also an essential part of the grantee, equal in all respects but in no way superior to that other part, his wife. The mere fact that her rights in respect of the property may be enlarged by surviving her husband can in no way postpone or lessen the rights which became hers by reason of and at the time of the original grant.

Support is sought for the conclusion of the majority in Burnet v. Guggenheim,, 288 U. S. 280, and in an attempted comparison of a grant such as we have here to the establishment of a joint bank account by one individual for himself and another. There is one essential and fundamental difference between those cases and the instant case which conclusively indicates a present gift in the latter. The decision of the Supreme Court in the Guggenheim case to the effect that there was no present gift at the time of the original grant rested entirely upon the fact that the grantor reserved the power to revoke at his pleasure and under that power he could at will reacquire the property granted and, by so doing, eliminate all rights of the grantees regardless of the wishes and desires of such grantees. Never at any time until the surrender of that power to revoke, in 1925, did the grantor relinquish his absolute power to control or dispose of the property covered by the grant.

In the case of the joint bank account, it is said that the grantee must reduce the proceeds to possession by withdrawal before it can be said there is a completed gift and that correspondingly here the wife must survive her husband, the petitioner, before it can be said there was a completed gift in respect of the property held by the entirety. The difference is plain. In the case of the joint bank account, either party may completely terminate the rights of the other by withdrawal of the full amount on deposit and under such circumstances the individual who establishes such a joint bank account does not lose his power to retake as his own the full amount deposited, or any part thereof, until the second party has actually made a withdrawal. The grantor does not therefore part with his individual power to recall the deposit until such a withdrawal is made.

The case before us is in no way comparable but entirely to the contrary. Here the petitioner, by making the transfer and at the time of the transfer, placed beyond recall all rights which he theretofore had to the exclusive use of the property, the right to dispose of the property by will and the right during his lifetime to dispose of the property without the joining of his wife unless and until he should survive her, an event over which he had no control. Furthermore, substantial rights in the property vested in his wife without restriction or power in any one to take them from her without her consent and there was none the less a present acquisition by her of an interest in and a right to the property merely because the rights which she so acquired may, under her tenancy in the property, ripen or expand into greater rights by the fortuitous circumstance of her suvivorship.

In my opinion the petitioner made a present gift to his wife within the meaning of the statute, and for the reasons stated, I respectfully express my dissent.

Leech agrees with this dissent.


source: Caselaw Access Project

author: Kern :

license: Public Domain

text:
    Ellen Hyde Scovill, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81308.
    Promulgated December 28, 1937.

      Edgar J. Goodrich, Esq., and Neil Burkinshaw, Esq., for the petitioner.

      B. H. Neblett, Esq., for the respondent.
   OPINION.

Kern :

The only question here is whether petitioner may claim the deduction of $246,000 representing the principal of advances made to the Oil Jack Co. from 1926 to 1931, inclusive, as a debt ascertained to be worthless and charged off in 1931, under section 23 (j) of the Revenue Act of 1928, set out in the margin. The petitioner contends that the advances by her to the company were bona fide loans to the corporation, not in the nature of gifts to her son, who held the major interest in the company, or capital contributions to his company; and that the time when the debt was ascertained to be worthless depended upon the judgment and discretion of the taxpayer.

On the petitioner’s deposition alone we should feel grave doubts in saying whether the advances made by petitioner to the Oil Jack Co. prior to 1931 were bona fide loans, or in the nature of gifts to her son, or capital contributions to his company. Our doubts are caused by the glaring contradictions contained in petitioner’s deposition, from which we set out the following quotations:

Q. While you were making these loans did you do so with full faith that they would ultimately be repaid in full to you?
A. Most certainly I did. My son was president.
* * * * * * *
Q. Do you recall whether or not you made any effort to collect these notes when they came due?
A. I cannot recall. But you must know, Mr. Neblett, I loaned this money to my son, and I knew he couldn’t pay me.
Q. In fact, you knew at the time you loaned him this money that he couldn’t pay you back, didn’t you, Mrs. Scovill?
A. I didn’t loan it to him personally; I loaned it to the Company and I thought the Company would repay me.
* * * * * * *
Q. As I understand it, Mrs. Scovill, you never made any effort to collect the money owed you in either 1926, 1927, 1928, 1929, 1930, 1931 from either your son or the Oiljak Corporation.
A. You see, they were synonomous. He was the Company. What I wanted to do was to help him in forming the Company. Frankly, I had no idea of making money when I made the loans. And I wasn’t mistaken.
Q. And it was very doubtful in your mind whether you would ever collect at the time you made them?
A. As far as I can remember, I never thought anything about whether X would collect. I wanted to help my son.
Q. And that was the main reason why these advances were made to the Corporation because you wanted to help your son?
A. Certainly.
* * * * * * *
Q. And your main reason for making these advances was to help your son?
A. Yes, I am not quite an idiot.

If we assume, however, in petitioner’s favor, that these advances made by petitioner were loans, we can not escape the conclusion that any reasonably prudent person, under similar circumstances, would have ascertained that such loans were worthless prior to 1931, the taxable year. Petitioner’s financial advisor testified that he was aware of the worthlessness of petitioner’s loans to the Oil Jack Co. in 1928, and petitioner herself testified that she was advised by a series of bankers in 1926 and subsequent years that these loans were worthless. The company had had consistent net losses from 1925 to 1930, inclusive. By the middle of 1930 petitioner had notes of the company in the amount of $109,000, all of which were past due, and a demand note for $15,000 upon which not a penny of principal or interest had been paid.

It is the contention of counsel for the petitioner that only the time of petitioner’s personal ascertainment of worthlessness is relevant. In other words, it is said that, because of petitioner’s maternal solicitude in the business welfare of her son, who controlled the corporation in question and was regarded by her as synonymous with the corporation, she might have disregarded the business aspects of the transaction and closed her eyes to the worthlessness of the obligations of the corporation until a time long subsequent to the time when an ordinarily prudent person would have ascertained their worthlessness. We do not conceive this to be the law.

In the case of Avery v. Commissioner, 22 Fed. (2d) 6, the Circuit Court of Appeals (5th Cir.), in a case involving this question, used the following language:

It is contended by petitioner that the evidence before the Commissioner and the board was undisputed, and that, having exercised an honest belief in ascertaining and charging off the debts sought to be deducted in the year 1919, both the Commissioner and the board were concluded by his judgment.
The Revenue Act of 1918 (40 Stat. 1057), which applies to this case, permits a taxpayer, in computing net income, to deduct debts ascertained to be worthless and charged off within the taxable year. The reasonable interpretation of the law is that, in order to secure a deduction of worthless debts, they must be charged off in the year they are ascertained to be worthless. A man is presumed to know what a reasonable person ought to know from facts brought to his attention. A taxpayer should not be permitted to close his eyes to the obvious, and to carry accounts on his books as good when in fact they are worthless, and then deduct them in a year subsequent to the one in which he must be presumed to have ascertained their worthlessness. To do so would enable him to withhold deductions in his less prosperous years, when they would have little effect in reducing his taxes, and then to apply the accumulation at another time to the detriment of the fisc. This would defeat the intent and purpose of the law.
Honesty of belief in the taxpayer is not conclusive, nor binding on the board. It is the province of the board to determine, on a review of all the facts and circumstances surrounding the particular debt sought to be deducted, whether the taxpayer knew or ought to have known its worthlessness in a prior year. If knowledge of the worthlessness of a debt sought to be deducted can thus be brought home to the taxpayer, it cannot be said that the worthlessness was ascertained in the subsequent year, when it is actually charged off.

This case was cited with approval by the Circuit Court of Appeals (8th Cir.) in McCloud v. Commissioner, 43 Fed. (2d) 351. This objective test laid down in the two preceding cases cited, is also partially recognized in the case of Jones v. Commissioner, 38 Fed. (2d) 550, where the Circuit Court of Appeals (7th Cir.), in holding that the taxpayer was justified in ascertaining the debt to be worthless during the taxable year, made use of the following language:

We think that he ascertained this fact for the first time, to his own satisfaction, in 1921, and, that in arriving at such conclusion he made reasonable investigation of the fact and drew reasonable inferences from the information thus obtained.

The point upon which petitioner cites this case has no application in the present facts, that the business was such that for the first few years of its life a prudent business man might have hoped, despite its losses, for ultimate success. The Oil Jack Co., with its increasing losses, raised no hopes in petitioner’s advisers of any ultimate recovery. This is not a case of after-acquired knowledge presently applied as in the Jones case.

Petitioner also relies upon the case of Clara Burdette, 25 B. T. A. 692; affd., 69 Fed. (2d) 410. This case should not be taken as authority for more than it actually decided. The actual holding was that an obligation held by petitioner did not automatically and by operation of law become worthless in the year in which the operation of the statute of limitations barred petitioner’s right of action on such obligation. The rest of the opinion in that case, which is dictum, apparently considers the case of Jones v. Commissioner, supra, as authority for the exclusive application of the subjective test to the ascertainment of the worthlessness of debts on the part of taxpayers. No mention is made of the case of Avery v. Commissioner, supra. The Circuit Court of Appeals for the Ninth Circuit, in affirming the Burdette case, indicated that it might have held otherwise if this Board had found as a fact, as we have done here, that an average prudent person would have ascertained the worthlessness of the debt in an earlier year, for the court quoted with approval the passage in the Avery case to the effect that it is the province of this Board to determine “whether the taxpayer knew or ought to have known its worthlessness in a prior year”, and founded its judgment on our determination in the premises. In the circumstances we must consider what was said beyond the determination itself in our decision of the case as obiter dictum.

The phrase “ascertained to be worthless” used in the statute involves two factors, actual worthlessness, or at least a state of facts from which a prudent business man would infer this ultimate fact, and actual knowledge of these facts obtained in that year by the taxpayer, or which he might have obtained had he used ordinary business sense. Since one step requires the exercise of a reasonable inference and the next step the exercise of reasonable diligence, the cases have not always clearly distinguished between the two standards of prudence, and some confusion therefore results. In the light of the decisions on this question, however, we are of the opinion that a taxpayer, even when acting in all honesty, as the petitioner was in this case, can not shut his eyes to the real facts of the business transaction and determine a debt to be worthless in a taxable year long after the year in which an ordinarily prudent person would have reached the conclusion, on facts actually ascertained by him or which he might readily have ascertained if using normal business sagacity, that such obligations were worthless.

Applying the objective standard applicable to the ascertainment of the worthlessness of obligations, as laid down in Avery v. Commissioner, supra, we must conclude, with regard to the advances made by petitioner to the Oil Jack Co. in the taxable year 1931, that such advances were made with no reasonable belief at the time that they would ever be repaid to the petitioner. Since a reasonably prudent person, under similar circumstances, would have known at the time when the advances were made that they would not be repaid, we must conclude that such advances were either in the nature of a gift to the- corporation or a contribution to its capital, and therefore were not deductible as bad debts; American Cigar Co. v. Commissioner, 66 Fed. (2d) 425.

We have held that advances made by a taxpayer, even if a note is taken for their repayment, will be considered in the nature of a gift if, at the time the advances are made and the note taken, it is reasonable to believe that the note can not be enforced; C. B. Hayes, 17 B. T. A. 86; also that advances obviously uncollectible when made, even though an understanding exists that they will be repaid, are not deductible as bad debts; Ezra H. Jones, 13 B. T. A. 1271. There is an implicit postulate in C. B. Hayes, supra, and Ezra H. Jones, supra, construing the section of the act in question to the effect that the debts sought to be deducted as worthless must have had at some time a real commercial value.

Accordingly, we hold that, according to the standard of conduct of an ordinarily prudent person under similar circumstances, petitioner should have ascertained, and therefore will be considered as having ascertained, that the advances made by her to the Oil Jack Co. during the years 1926 to 1930, inclusive, were worthless prior to the taxable year 1931, and that by application of the same standard petitioner should have known, and therefore will be considered as having known, that the advancements made by her to this company during the taxable year 1931 would not be repaid to her, and that they were, therefore, in the nature of gifts or contributions to the company’s capital.

Reviewed by the Board.

Judgment will be entered for the respondent.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions :
      *******
      (j) Bad debts.—Debts ascertained to be worthless and charged oil within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; and when, satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.


author: Harron:

text:
    Henry A. B. Dunning, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83459.
    Promulgated December 31, 1937.

      Vernon Cook, Esq., for the petitioner.

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

       SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
      (a) Where any part of the income of a trust—
      (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may he, held or accumulated for future distribution to the grantor; or
      (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or
      (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of.such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (n), relating to the so-called “charitable contribution” deduction) * * *.

   OPINION.

Harron:

Respondent contends that all of the income of the five trusts created by petitioner in 1932 is taxable to the petitioner. Respondent has added to petitioner’s taxable income for 1933 the amount of $158,610.41 explained as “trust income.” This amount is less than the total amount of the income of the five trusts during 1933 but appears to be approximately the total amount of dividends received by the trust and, since the chief stock held was the stock in Hynson, Westcott & Dunning, it appears that respondent’s chief contention is that the petitioner is taxable on the income of the trust consisting principally of dividends on the Hynson, Westcott & Dunning stock upon, which petitioner would have been taxable but for the transfer of that stock to the trusts.

Respondent argues that although the trusts created by petitioner were irrevocable for approximately 4½ years and the stock constituting the corpus of the trust was actually transferred of record to the trust, nevertheless, the petitioner’s powers and rights were so substantial that the petitioner did not “divest himself of title to the stock in any permanent or definitive way” and “did not strip himself of every interest in the subject matter of the trust estate.” In making this argument respondent relies upon Benjamin F. Wollman, 31 B. T. A. 37, and William C. Rands, 34 B. T. A. 1107. In considering this part of respondent’s argument, we first note that there are substantial differences in the facts in the Wollman and Bands cases and in the facts in this proceeding. In the Wollman case the petitioner retained title to securities, received income, and retained such interest and powers over the' securities that the Board concluded that the securities could properly be regarded as his property and the income taxable to him. In the Bands case the beneficiary was not entitled to distribution of any of the gains of the trust above dividends on stock held and it was held that the trusts were without substance. The petitioner here created valid trusts and conveyed Hynson, West-cott & Dunning stock to the trusts of record. We conclude from the facts that he conveyed the stock in question completely to the trusts. The petitioner, it is true, appointed himself as one of the trustees of the trust and the trust instrument gave to petitioner, as trustee alone, powers of management of the assets of the trust including the power to sell, to invest and reinvest property of the trusts, and to vote the H. W. and D. stock. However, the trust instruments clearly provide that $10,000 a year out of the trust income be paid to the grantor’s wife and that any income remaining after making such payments shall be held in the trust and reinvested or distributed to named beneficiaries. During the taxable year the petitioner could not in any way receive any of the income of the trust himself and the trusts were carried out so that it is clear that the income of the trusts was used to pay the stipulated amounts to Mrs. Dunning and the surplus income was reinvested in securities which were held in the trust and are still held in the trust. Therefore, we do not agree with the contention of respondent that petitioner should be taxed on the income of the trusts on respondent’s first argument. Since it is concluded that petitioner transferred completely the H. W. and D. stock to the trusts, we do not believe that powers of management of the securities in the trust, or the discretionary power with respect to the sale of\ trust property, reinvestment of proceeds, or the right to vote the' H. W. and D. stock held by the trustees constituted any such reservation of power in the petitioner, as an individual, over the economic benefits or enjoyment of the property such that we should disregard the completed transfer of the stock to the trust and tax the petitioner on dividends and income received by the trust. We do not believe that petitioner could be taxed upon the income of a trust only because he made himself a trustee, or one of the trustees, and the powers to supervise the investment of trust property, to sell and reinvest trust property, to vote stock field by the trust, and to generally manage the trust property are all part of the normal powers of a trustee. Petitioner perhaps had more confidence in his own judgment in these matters than he had in the judgment of the cotrustee, a trust company, and his assignment of these powers to himself as trustee to the exclusion of the other trustee does not appear to be a reasonable ground for sustaining the first contention of the respondent. See Reinecke v. Northern Trust Co., 278 U. S. 839, 341; Becker v. St. Louis Union Trust Co., 296 U. S. 48, 49.

It is clear that section 166 of the Revenue Act of 1932 is not applicable in determining the issues, for the grantor could not at any time during the taxable year revest in himself title to any part of the corpus or income of the trust, either alone or in conjunction with any other person.

The question remains whether the trusts created come within the provisions of section 167 (a) (1) of the Revenue Act of 1932. The trusts provide that income of the trusts above the amount distributed to beneficiaries each year shall be held in the trust and reinvested. It is respondent’s contention that income of the trusts could be accumulated or held for future distribution to the grantor. Consideration of this aspect of the question requires construction of the trust instruments. They provide that the trusts are irrevocable until January 10, 1937, and shall terminate on that date if the grantor elects to give notice that-he desires no extension of the trusts. Upon termination of the trust the corpus of the trust but not the accumulated income shall revert to the grantor. It is our construction of the trust deeds that the term “corpus” of the trust refers to the H. W. and D. stock only and not to any securities acquired by investment of the surplus income of the trusts. This construction is supported by the fact that when the trusts were terminated only the H. W. and D. stock was returned to the petitioner and that the trusts are still in existence and still possess the investments made out of surplus income. Had any of the trust property purchased with accumulated income or any of it been distributed to petitioner on termination of the trust, the trust obviously would come within section 167 (a) (1).

This is a proceeding where an unusual state of facts exists. The issue requires construing provisions of trusts in existence in the taxable year but which were terminated as to the original trust corpus prior to the hearing before this Board on the issues. The steps taken on the partial termination of the trust should not be disregarded. The right to terminate the trusts as to.the original corpus has been exercised. That is, the grantor of the trust has reacquired the H. W. and D. stock, but this was not done in the taxable year so as to make section 166 controlling and section 167 refers to income and not principal. Under the provisions of the trust instruments the trusts as to accumulated income and the investments of such'Continue for a period of twenty-one years after the death of the last survivor of the wife and four children of the grantor and the property so remaining in the trust does not revert in any respect to the grantor. Under this present continuance of the trust the current income is to be paid one-half to petitioner’s wife and one-half in equal parts to the four children. It is our understanding of the trust deeds that petitioner can not, under the trusts, reacquire any of the property now held by the trusts. The right to reacquire the corpus of the trusts has been exercised and the grantor has reacquired the orginal corpus. He may not acquire what is now the corpus derived from the investment of the accumulated income.

The above construction of the trusts was as evident in 1933 as it is now, although prior to January 10, 1937, there existed some ambiguity in the use of the term “corpus” of the trusts in that it possibly could have meant both the H. W. and D. stock and other securities acquired by investment of surplus income. But this ambiguity has been cleared by the action taken. Further, there is no provision in the trusts stating specifically or indicating that the trustees might accumulate income for distribution to the grantor or distribute income to the grantor. The contention of the respondent rests entirely upon his construction of the terms of the trusts that give to the grantor, as a trustee, the power to invest and reinvest surplus income in his sole discretion taken together with the provision that on termination of the trusts the corpus of the trusts would revert to the grantor. But we do not believe respondent’s contention is sound in the light of the facts referred to above and in relation to the lengthy provisions in the trust directing the trustee to distribute income from investments of the accumulated income and to make ultimate distributions of the principal created by reinvesting accumulated income to the beneficiaries only and to the exclusion of the grantor. Cf. Preston R. Bassett, 33 B. T. A. 182.

We now pass to the question whether petitioner is taxable for part of the income of the trust in 1933, specifically, the amount of $32,-027.28 paid on insurance premiums, the amount of $9,837.50 paid on account of household expenses, the amount of $1,780.25 expended for the benefit of adult children, and $353.04 expended for the benefit of a minor child. All of these expenditures wore made by Mrs. Dunning out of the $50,000 income from the trusts received by her and deposited in her own account.

The five trusts all contain the simple provision that out of the first income of each trust $10,000 shall be paid to Ethel Adams Dunning. The trusts do not contain any provision requiring that this income be used by Mrs. Dunning for any purpose or use. The income was the separate income of Mrs. Dunning. However, petitioner has testified that he suggested to Mrs. Dunning that she use part of the total income to pay premiums on the life insurance policies which had been assigned to her. Mrs. Dunning carried out this suggestion.

Regarding this suggested use of income, strictly, we recognize that there was no legal obligation on Mrs. Dunning to so use part of the income and there is no evidence that before the trusts were created Mrs. Dunning agreed with her husband to make such use of part of the income. Nevertheless, petitioner made the suggestion and there is this evidence of an element of control exercised, it is true, outside of any requirement in the trust agreement. Further, section 167 (a) (3) of the Revenue Act of 1932, quoted above (see also section 219 (h), Revenue Act of 1926), specifically taxes the grantor of a trust, where “any part of the income of a trust is * * * applied to the payment of premiums upon policies of insurance on the life of the grantor”, upon such part of the income of a trust so used. The intent of Congress in enacting this provision is well understood to have been to prevent avoidance of taxation. The statute makes no restriction that to tax income the income is applied to payment of premiums upon policies of insurance pursuant to the requirements of the trust deed. The language of the statute is plain and we understand it to be broad in its application. We conclude that petitioner is taxable on the amount paid in the taxable year on life insurance premiums, under the provisions of section 167 (a) (3).

Petitioner has argued forcefully that the facts take this proceeding outside the rule set forth in Burnet v. Wells, 289 U. S. 670, because the trust instruments did not require that any of the income of the trusts be applied to pay life insurance premiums. Petitioner ably argues that to tax him on this part of the income amounts to measuring the income tax of one taxpayer by the income of another and be contends that if such construction of section 167 (a) (3) is required under the statute, then the provision of the statute so construed is unconstitutional, citing Hoeper v. Tax Commission of Wisconsin, 284 U. S. 206. However, after giving careful consideration to petitioner’s thorough argument, we conclude that the conclusion reached above is in accordance with the express language of the statute. The opinion in Burnet v. Wells, supra, leaves undetermined the validity of such construction, as is indicated by the following excerpt from that opinion, at pages 681 and 682:

Trusts for the preservation of policies of insurance involve a continuing exercise by the settlor of a power to direct the application of the income along predetermined channels. In this they are to be distinguished from trusts where the income of a fund, though payable to wife or kin, may be expended by the beneficiaries without restraint, may be given away or squandered, the founder of the trust doing nothing to impose his will upon the use. There is no occasion at this time to mark the applicable principle for those and other cases. The relation between the parties, the tendency of the transfer to give relief from obligations that are recognized as binding by normal men and women, will be facts to be considered. Cf. Reinecke vs. Smith, supra, distinguishing Hoeper vs. Tax Commission, 284 U. S. 206. We do not go into their bearing now. * * *

We believe the conclusion reached upon the facts here is correct. Mrs. Dunning had never paid premiums on the policies before the trusts were created. She did so subsequently at the suggestion of the grantor of the trusts. Also, outside of the terms of the trust, the grantor did exercise an element of control over part of the income paid to Mrs. Dunning and the use of the income so as to prevent a forfeiture of the insurance contracts by failure to pay premiums was a benefit to the petitioner. The argument that the trust income of $50,000 was Mrs. Dunning’s own property and that she was not legally bound by her husband’s suggestion is an argument based upon refinements of legal title which the courts have been willing to look through in recognition of the reality of the solidarity of the family unit. Cf. Reinecke v. Smith, 289 U. S. 172.

With respect to the amounts used by Mrs. Dunning for household expenditures and for three children, two adult and one minor, the contention of respondent that petitioner is' taxable for all of these amounts is based upon the authority of the decision in Douglas v. Willcuts, 296 U. S. 1. Respondent also relies upon Helvering v. Schweitzer, 296 U. S. 551; Commissioners. Grosvenor, 85 Fed. (2d) 2, and the decision of Hill v. Commissioner, 88 Fed. (2d) 941, is also authority. In all of the above cases the facts show that the existing trust deeds contained provisions requiring that income of a trust be used for care and maintenance of individuals and that there was an obligation in the grantor of the trust to provide for such persons. In these cases, the income of the trust having been used to discharge an obligation benefiting the grantor of the trust, it was held that there was income to the grantor and the grantor was taxable. In this proceeding the trust instrument does not contain any provision requiring that any of the income of the trust be used to pay for household expenditures, or to be used for the benefit of any children. Petitioner contends that the income was the income of Mrs. Dunning and that the grantor of the trust should not be taxed on these amounts as he did not retain, through the trust instruments, such control over the use of the income that he should be taxed upon voluntary expenditures made by Mrs. Dunning. Here the argument of petitioner is that to so tax petitioner results in taxing him upon the income of another person.

There are lacking in this case the elements present in the above cited cases that made the income taxable to the creator of the trust. There is no agreement, no trust provision, no court decree requiring the expenditure of the trust income for the purposes for which it was used or for any purpose that would relieve the petitioner of any of his obligations. The facts in this proceeding show that there was no agreement or requirement that Mrs. Dunning expend part of the income she received from the trust for the expenditures in question. Clearly, there was no such requirement in the trust instruments and the evidence does not show any separate agreement between herself and her husband that she would make such expenditures. Rather Mrs. Dunning has testified that she made these expenditures voluntarily and there is no evidence to support the conclusion that Dunning did not make the major contributions to the maintenance of the home and his minor child. Under such facts we believe it is proper to regard the expenditure of Mrs. Dunning for her three children as gifts to them and the expenditures she made for her home as use of her own income for an object which would naturally be of primary interest to her and, if it is necessary to label her expenditures for her home, it is reasonable to call them gifts to her household. We do not understand the rule of Douglas v. Willcuts to be that under such facts income was received by the petitioner as the result of these voluntary expenditures by Mrs. Dunning. It is, therefore, concluded that petitioner is not taxable for these amounts.

Decision will be entered under Rule 50.


author: Mellott :

text:
    Estate of C. T. Grant, Deceased, Alnor K. Grant, Administratrix, Petitioner, v. Commissioner of Internal Revenue, Respondent. Willis C. Behoteguy and Mrs. Willis C. Behoteguy, Petitioners, v. Commissioner of Internal Revenue, Respondent. The Akron Coca-Cola Bottling Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Akron Standard Mold Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 82574, 83820, 84125, 84126.
    Promulgated December 31, 1937.

      Robert Guinther, Esq., and D. W. Maxon, Esq., for the petitioners.

      S. B. Pierson, Esq., for the respondent.
   OPINION.

Mellott :

It has been found as a fact that Behoteguy was justified in concluding, in 1933, that 40 percent of the amount which he had on deposit in the bank when it was closed was the maximum amount which he might reasonably expect to recover. The evidence clearly justifies such finding. As pointed out in American Fork & Hoe Co., 33 B. T. A. 1139, the right to deduct a portion of a debt is provided for by section 23 (j) of the [Revenue Act of 1932, and the Commissioner’s failure to allow a proper deduction may be reviewed. Behoteguy, who was an employee of the B. F. Goodrich Co., kept no formal books of account and hence could not charge off a portion of his bank deposit in the ordinary way. The deduction was claimed in the joint return and respondent does not question the deduction on that ground. Under the circumstances sufficient charge-off was made. Cf. William H. Redfield, 34 B. T. A. 967. The claimed deduction should be and is allowed.

The petitioning corporations contend that since the sole asset of the Credit Corporation, i. e., the capital stock of the bank, became worthless during the taxable year, then their stock in the Credit Corporation likewise became worthless and their investment therein was properly charged off during such year. Inferentially the respondent agrees that if the bank stock became worthless so, also, did the stock of the Credit Corporation, for upon brief he states: “With respect to the Tights of the Credit Corporation of Akron as a stockholder in the First-Central Trust Co., the facts are only slightly different from those in the Grant and Behoteguy cases.” The difference which he points out is that the Credit Corporation did not file a consent to the plan, as a result of which suit was brought against it to enforce collection of the 100 percent assessment •which had been made against it as a stockholder of the bank. It seems, therefore, that it must be held that if the bank stock was worthless the stock of the Credit Corporation was in the same category ; for such stock of the Credit Corporation clearly had no greater value than the stock of the bank.

The difference pointed out by the respondent and referred to in the preceding paragraph ultimately resulted in a judgment being entered against the Credit Corporation in the amount of $2,256,060. If the Board is wrong in concluding that the stock of the Credit Corporation became worthless because its sole asset became worthless, it probably should nevertheless be held that the corporate holders of such stock were justified in determining that it was worthless in 1933; for the suit which resulted in the judgment of more than two million dollars was imminent and the facts as they were known to exist were such that the petitioners, as such stockholders, had every reason to believe that the very thing which did happen would happen. However, in spite of what has been said, the deficiency determined by the respondent against the stockholders of the Credit Corporation will not be set aside upon this ground; but the contentions made by the respective parties, which they deem to be applicable to all four of the proceedings, will be considered.

The first question to be considered is whether or not the stock of the bank became worthless during 1933. It is unnecessary to restate the facts but a brief reference to some of them will not be amiss.

The bank had not been permitted to reopen after the “bank holiday” of 1933 for the reason that its capital was impaired. Its liabilities exceeded its assets by several millions of dollars. It was in the process of being liquidated by the state bank officials, who, being familiar with all of its affairs, were advising depositors that they could not expect to receive more than 50 or 55 percent of their deposits—an estimate which subsequent events have shown was too high. Stockholders had been formally advised that they would be required to pay an assessment equal to the par value of the stock owned. Creditors and depositors were clamoring for payment of their claims. Such, in brief, was the situation toward the end of 1933. Clearly the stock was then worthless; and sufficient “identifiable events” had occurred to justify the stockholders in forming such conclusion, United States v. White Dental Manufacturing Co., 274 U. S. 398; for “all reasonable hope and expectation of even* a partial return of capital” was gone. Gowen v. Commissioner, 65 Fed. (2d) 923; certiorari denied, 290 U. S. 687. Cf. Jeffery v. Commissioner, 62 Fed. (2d) 661; In the Matter of Lewis B. Hoffman, 16 Fed. Supp. 391.

Since it has been found as a fact that the stock of the bank became worthless during 1933, the losses were deductible unless some reason exists which requires or justifies some other holding. The respondent contends that such reason does exist, his contention being succinctly stated in his notice of deficiency in one of the proceedings in the following language:

Under the terms of the plan for resumption of business of The First-Central Trust Company of Akron, Ohio, in accordance with which the par value of the shares of stock was reduced from $50.00 to $5.00 per share and there was required the payment of not less than $5.00 of the stockholder’s statutory liability by the purchase of debentures of such bank, a recapitalization results which constitutes a reorganization within the meaning of section 112 (i) of the Revenue Act of 1932. In accordance with the provisions of section 112 (b) (3) of that Act no gain or loss resulted to a stockholder by reason of such reduction in the par value of the stock and the subscription to the capital debentures of the bank.

The portions of the revenue act referred to in the notice of deficiency and other related subsections are shown in the margin.

It will be noted that section 112 applies only in case there have been “sales or exchanges” by the petitioners of their stock in the closed bank. Clearly there were no sales. Indeed the evidence indicates that the stock could not have been sold at any price. No one would have been willing to invest his funds in such stock; for it not only had no value but it was an actual liability to the owner. But the Commissioner is not contending that any sale of the stock was made so it is unnecessary to discuss this phase of the matter any further.

The theory upon which the deficiencies were determined is: That there was a recapitalization of the bank (sec. 112 (i) (1) (C)) and hence a reorganization; that there were exchanges of stock solely for stock (sec. 112 (b) (8)) in pursuance of the plan of reorganization; and that no gain or loss is to be recognized in connection with such exchange. If, therefore, there were exchanges—if, in the language of the statute, the petitioners exchanged their “stock or securities in a corporation a party to a reorganization, * * * solely for stock or securities in such corporation, or in another corporation a party to a reorganization”—and if in fact there were a reorganization, as such term is defined in the statute, then the deficiencies must be approved. But if there were no reorganization, or if no exchange were made, then the petitioners are entitled to deduct the losses, under section 23 (e) or 23 (f) of the Revenue Act of 1932.

The essence of an exchange is a reciprocal transfer of property— “the act of giving or taking one thing in return for another regarded as an equivalent. Mutual giving and receiving of commodities without the intervention of money.” 'Webster’s. New International Dictionary. The question then is whether or not reciprocal transfers of property were made. We think not. The Credit Corporation made no transfer whatever. It had 31,601 shares of the stock of the closed bank out of the 148,329 shares outstanding. It did not consent to the plan nor to the reduction of the par value of the stock which it owned. It did not consent to the issuance of stock of the resuming bank in its name nor that the escrow agent should hold such stock and ultimately turn it over to the superintendent of banks for sale. It suffered the penalty of having a judgment taken against it for the full amount of the superadded liability which it had as a stockholder. But it did not exchange its stock in the closed bank for stock in the resuming bank.

But did the individual stockholders who consented to the plan make an exchange of their stock in the closed bank for stock in the resuming bank? While this question is more difficult than that discussed in the preceding paragraph, we are convinced that the answer must be the same, viz., that they did not.

Whether there was a recapitalization of the bank and hence a reorganization under the revenue act need not be decided. The stockholders gave up nothing and nothing was delivered to them. This fact distinguishes the instant proceeding from Coleman v. Commissioner, 81 Fed. (2d) 455, affirming the decision of the Board in W. C. Coleman, 31 B. T. A. 319; for in that case the taxpayer surrendered his stock in one corporation for stock in another corporation. But not so here. The stock of the resuming bank, though issued in the names of the old stockholders as a matter of convenience, was nevertheless owned by the superintendent of banks in his representative capacity. He, as the owner of the assets of the bank, had pledged such shares for the purpose of securing the funds forming the capital and surplus of the resuming bank. True the stockholders had the right, if they chose to exercise it, to purchase the stock of the' resuming bank provided they first paid their superadded liability as stockholders of the closed bank. But the right to purchase such stock had no value in 1933; and any purchasers of it would have subjected themselves immediately to the possibility that an additional assessment might be made against them in the event that it was unable to meet its liabilities. Nor did the consenting stockholders give up their stock in the closed bank or surrender their certificates therefor. If, preadventure, the liquidation of the closed bank should result in the collection of funds sufficient to pay all of its liabilities, the excess, if any, would belong to the stockholders; for the resuming bank was merely the agency selected by the superintendent of banks to aid him in the liquidation—“to perform all or part of such liquidation.”

“Congress intended to exempt from consideration for either profit or loss transfers of property which were really exchanges of capital assets * * *." Pinellas Ice & Cold Storage Co. v. Commissioner, 57 Fed. (2d) 188; affd., 287 U. S. 462. Since there were no exchanges in the instant proceedings, it is not necessary to discuss, nor to decide, whether or not there was a reorganization; for if no exchanges were made it necessarily follows that section 112 is wholly inapplicable.

H. Y. McCord, 31 B. T. A. 342, cited by the respondent is distinguishable upon its facts. In that case a corporation had capitalized $300,000 of its surplus by a stock dividend. Later it reduced its capital stock and distributed to its stockholders its assets in excess of par value of its new capital stock. It was held that the distribution of assets was a division among the shareholders of the corporation’s surplus and hence taxable as a dividend. The conclusion that the change in capital structure from 4,000 common shares to 500 common and 750 preferred was a recapitalization and hence within the statutory definition of a reorganization was clearly justified under the facts; but it was pointed out that section 112 applies “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 stockholder gives up shares and comes out of the arrangement with other shares or something else.” It should be noted, also, that the Board held the assets which were distributed out of the corporation’s surplus were not received by way of exchange for the shares surrendered.

Union C. DeFord, 19 B. T. A. 389, is more nearly analogous on its facts to the instant proceedings. In that case, if the corporation in which the petitioner was a common stockholder had been liquidated, there would have been nothing to be distributed among the common stockholders. Under a plan of reorganization, they were given the right to exchange one share of their old common stock for two shares of the new no par common stock upon payment of an assessment of $20. Persons who were not common stockholders could and did subscribe for and receive two no par value shares in the reorganized company at the price of $20 for the two shares. The Board held that inasmuch as the ownership of the old common stock- did not confer any special benefit or valuable privilege upon the stockholders, their investment in such stock was worthless and might be deducted from gross income. The facts in the instant proceedings justify a similar holding.

[Respondent argues that the payment of $5 for the capital debentures of the resuming bank constituted an amount paid for increasing the capital value of property. None of the petitioners are claiming that the amount so paid constituted a deductible loss during the taxable year so the issue is not before us except in so far as it may affect the issue which has been discussed. The plan, after referring to the assessment which had been made against stockholders, provides: “Payment and collection of said $50 per share shall be made as follows: (a) At least $5 thereof shall be paid by the delivery to the Superintendent of Banks of capital debentures of the resuming Bank purchased and paid for by the stockholder. The debentures so delivered to the Superintendent shall be held by him solely for the benefit of the depositors and creditors of the present Bank and may be disposed of by him at any time. The stockholder who has purchased and paid for the debentures so delivered shall have no interest therein at any time, (b) The balance of the $50.00, or such part as may be necessary shall be collected by the Superintendent three years after the time of resumption of business by the Bank * * *." Whether the purchase of such debentures is a capital transaction or the payment of a portion of the assessment made against the stockholders of the closed bank, it must nevertheless be held, for the reasons set out above, that there was not an exchange of stock solely for stock and hence section 112 of the revenue act is not applicable.

Reviewed by the Board.

Judgment will be entered under Rule 50.

       SEC. 23. deductions FROM GROSS INCOME.
      *******
      (j) Bad Debts.—Debts ascertained to be worthless and charged oil within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a deduction.

       SEC. 112. RECOGNITION OF GAIN OR LOSS.
      (a) General Rule.—upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
      (b) Exchanges Solely in Kind.—
      * * * * * * * *
      (3) Stock for Stock on Reorganization.—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.
      *******
      (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 its 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.
      (2) The term “a party to a reorganization” includes a corporation resulting from a reorganization and includes both corporations in the case of an 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.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions :
      * * * * * * * *
      (e) Losses by Individuals.—Subject to the limitations provided in subsection (r) of this section, in the ease of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
      (1) if incurred in trade or business ; or
      (2) if incurred in any transaction entered into for profit, though not connected with the trade or business ; or * * *
      (f) Losses by Corporations.—Subject to the limitations provided in subsection (r) of this section, in the case of a corporation, losses sustained during tho taxable year and not compensated for by insurance or otherwise.


author: Smith:

text:
    The Colorado & Southern Railway Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 21974.
    Promulgated December 31, 1937.

      Charles Henry Butler, Esq., John A. Kratz, Esq., J. L. Rice, Esq., and A. C. Scott, Esq., for the petitioner.

      E. C. Algire, Esq., for the respondent.

       This petition is filed in the name of “The Colorado & Southern Railway Company for itself and its affiliated corporations.”

   OPINION.

Smith:

This proceeding involves income tax deficiencies of the petitioner and its affiliates for the years 1920 and 1921 of $107,940.75 and $49,779.31, respectively. In this opinion the term “petitioner”, except where the context plainly shows otherwise, refers to all of the corporations included in the affiliated group. Several of the assignments stated in the petition have been settled by stipulation. The issues before the Board are as follows:

1. Did the respondent correctly disallow the deduction from gross income of $756,004 paid in 1920 for maintenance of ways and structures ?

2. Should the tax liability of the affiliated corporations for the year 1920 be computed by applying the equivalent of a rate of 9% percent to the portion of consolidated income subject to tax attributable to companies under Federal control and a rate of 10 percent to the portion of consolidated income subject to tax of those companies not under Federal control, or should a rate of 9% percent be applied to the income of companies under Federal control before deducting losses of companies not under Federal control and from such result a deduction be made for the amount obtained by applying 10 percent to losses of companies not under Federal control?

3. Did the amount received in final settlement with the Director General of Railroads in 1921, representing rental interest on completed additions and betterments, constitute taxable income for the year 1921 or for the period of Federal control?

4. Did the amount received in final settlement with the Director General of Railroads in 1921, representing additional compensation for the use of petitioner’s properties during the period of Federal control, constitute taxable income in 1921 or for the period of Federal control ?

5. Is petitioner entitled to a deduction for amortization of commissions paid in conection with the sale of its bonds prior to March 1, 1913?

6. Did the amounts received by the petitioner and its affiliated companies during the year 1920 in consequence of an award made by the Interstate Commerce Commission pursuant to sections 5 and 6 of the Act of Congress approved July 28, 1916, Post Office Department Appropriation, 39 Stat. 412, 425, constitute taxable income of the petitioner for 1920?

Issue No. 1.

This issue relates to the question whether the respondent correctly-disallowed the deduction from gross income of the year 1920 of $756,004 of the total amount paid by the petitioner during that period for maintenance of ways and structures.

The Colorado & Southern Railway Co., the Wichita Valley Railway Co., and the Ft. Worth & Denver City Railway Co. were common carriers engaged in interstate commerce and were required to and did keep their books and accounts under the classification of the Interstate Commerce Commission Acts and the Interstate Commerce Commission regulations during the years 1920 and 1921. Their properties were in the possession of and operated by the United States Government during the period of Federal control (January 1, 1918, to February 29, 1920, inclusive). The corporations entered into standard agreements with the Director General of Railroads on October 10, 1918. The properties were turned back to their owners by the President on March 1, 1920. Final settlement was effected with the Director General of Railroads on November 80, 1921.

Subsequent to Federal control claims for recoupment were filed by the respective corporations with the Director General of Railroads upon the grounds that the properties had been undermaintained during the period of Federal control. In the final settlement of these claims in 1921 the corporations were allowed amounts for undermaintenance of ways and structures during Federal control as follows:

Colorado & Southern Railway Co. and Wichita Valley Railroad Co_$397,746
Ft. Worth & Denver City Railway Co_ 358,258
Total_ 756, 004

During the last 10 months of 1920 the aforementioned corporations expended and charged to maintenance of ways and structures and deducted in the consolidated return for 1920 the following amounts:

Colorado & Southern Railway Co-$2, 334, 499. 79
Wichita Valley Railway Co_ 397,770.63
Ft. Worth & Denver City Railway Co_ 1,763,495,04
Total_ 4} 495, 765. 46

In the determination of the deficiency for the year 1920, the respondent allowed as a deduction the foregoing amounts expended for maintenance of ways and structures, with the exception of $756,-004 representing the amount allowed by the Director General of Railroads for undermaintenance and paid over to the owners in 1921.

The total amounts charged to maintenance of ways and structures during the period March 1 to December 31, 1920, by the Colorado & Southern Railway Co. and the Wichita Valley Railway Co. were not in excess of the amounts necessary to preserve the normal level of maintenance of the properties as they existed at March 1, 1920. Of the amount so charged by the Ft. Worth & Denver City Railway Co., $166,747.75 was in excess of the amount necessary to preserve the normal level of maintenance of the properties as they existed on March 1, 1920, and constituted improvements and betterments.

In this proceeding the petitioner contends that it is entitled to deduct from the consolidated gross income of 1920 the total amounts spent for maintenance of ways and structures during the period March 1 to December 31, 1920. The respondent, on the other hand, contends that of the amount of $4,495,765.46 paid for such purpose, $756,004 is not a legal deduction from gross income upon the ground that to that extent:

* * * expenditures were made during 1920 to rehabilitate the corporations’ properties for the undermaintenanee suffered during Federal control and that since the Director General of Railroads paid the corporations for the under-maintenance sustained they were not entitled to deduct the expenditures made to restore the undermaintenanee of their properties for which they were compensated.

The Revenue Act of 1918 provides:

Sec. 234. (a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
(1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, * * *
Sec. 215. That in computing net income no deduction shall in any case be allowed in respect of—
* ******
(b) Any amount paid out for * * * permanent improvements or betterments made to increase the value of any property or estate.

The evidence shows that the properties of the three railway companies which were under Federal control during the Federal control period were turned back to those companies by the President on March 1, 1920, in a damaged condition to the extent of $756,004. The railroad companies were reimbursed by the United States for such damage in 1921. No contention is made by the respondent in this proceeding that the receipt of this $756,004 in 1921 constituted taxable income. The respondent contends, however, that the under-maintenance was made good by the railroad companies during the last 10 months of 1920 and that $756,004 of the railroads’ expenditures of $4,495,765.46 for maintenance of ways and structures during such period was used for such purpose.

There have been many decisions of the Board and of the Circuit Courts of Appeal bearing upon the question here involved. The leading cases were carefully reviewed by Judge Parker of the United States Circuit Court of Appeals for the Fourth Circuit in Southern Railway Co. v. Commissioner, 74 Fed. (2d) 887. His opinion reads in part as follows:

The case of New York, C. & St. L. R. Co. v. Helvering (App. D. C.) 71 F. (2d) 956, 960, upon which the Commissioner relies, while disagreeing with the Seventh Circuit as to the treatment of maintenance expenditures in excess of normal, approves the rule laid down by this court in the Norfolk Southern Case, to the effect that deductions for normal expenditures for maintenance are not to be decreased by reason of the allowance for undermaintenance. The court, in an able opinion by Judge Groner, points out that, to the extent that expenditures for maintenance are abnormal, they should be treated as expenditures in restoration of capital for which the railroad is reimbursed by the government, but that, to the extent that they do not exceed normal expenditures, they should be treated as deductible expense of the period of operation over which they were incurred. * * * [Italics supplied.]

We are of the opinion that the excerpt from the cited opinion correctly states the law applicable to this question.

The only remaining question before us on this issue is, therefore, whether the expenditures charged to maintenance of ways and structures by the three railroads served to improve the railroads’ properties above the level at which the ways and structures stood on March 1, 1920. The burden is upon the petitioner to show that the expenditures made by it during the period March 1 to December 31, 1920, and charged to maintenance of ways and structures, were not in fact for improvements and betterments.

The petitioner, to meet such burden, has introduced evidence as to the relative cost of materials and labor during the test period (July 1, 1914, to June 30, 1917) and during the last 10 months of 1920. The auditor of expenditures of the Ft. Worth & Denver City Railway Co., and the Wichita Valley Railway Co., produced as a witness at the hearing, testified that he had made a study of the cost of materials and labor used in the maintenance of ways and structures by these corporations during these periods. This study disclosed that the cost of materials and labor so used during the period March 1 to December 31, 1920, was approximately 252 per cent of the cost of such materials and labor during the test period in the case of Ft. Worth & Denver City Railway Co., and approximately 259 per cent of the cost of such materials and labor in the case of Wichita Valley Railway Co. A similar study was made by the chief clerk of the disbursing department of the Colorado & Southern Railway Co. This study showed that the cost of materials and labor expended for maintenance of ways and structures during the period March 1 to December 31, 1920, was approximately 248 per cent of the cost of similar materials and labor during the test period. The general accountant of the Colorado & Southern Railway Co., produced as a witness by tbe petitioner, prepared statements for the period March 1 to December 31, 1920, to show what would be the cost of materials and labor for maintenance of ways and structures during that period, according to the standard of maintenance during the test period. In these statements consideration was given to the increase of property maintained and increase in use of property during the period March 1 to December 31, 1920.

On the basis of the foregoing studies, the equated expenditures for an average 10-month period of the test period compare with the actual expenditures for maintenance of ways and structures for 1920 as follows:

The respondent objects to the use of the tables prepared for any purpose whatever in connection with this proceeding. His objection appears to be based largely upon the fact that the witnesses responsible for the preparation of the tables did not take into account all of the expenditures which were actually used in the maintenance of ways and structures. The witnesses testified, however, that they were based upon careful studies of materials and supplies which would constitute anywhere from 80 to 95 percent of the materials and supplies used and labor employed. From a careful consideration of all the evidence, we are of the opinion that they afford a satisfactory basis for determining in this case whether or not the expenditures charged to maintenance of ways and structures during the period March 1 to December 31, 1920, were expenses deductible from gross income or expenditures for improvements and betterments of property. Upon the basis of such statements it is apparent that no part of the expenditures made by the Colorado & Southern Railway Co. and the Wichita Valley Railway Co. during the period in question and charged to maintenance of ways and structures was for improvements and betterments. We are therefore of the opinion that the Colorado & Southern Railway Co., and the Wichita Valley Railway Co. are entitled to the deduction from gross income of the entire amounts charged to maintenance of ways and structures during the, period. The situation is different, however, with regard to the Ft. Worth. & Denver City Railway Co. It there appears, according to the petitioner’s own computations, that there was an excess of expenditures charged to maintenance of ways and structures during the last 10 months of 1920 in the amount of $166,747.75. In the absence of evidence showing that this excess of expenditures was not for improvements and betterments, we are of the opinion that the Ft. Worth & Denver City Railway Co. is not entitled to deduct this amount from gross income.

It is the opinion of the Board, therefore, that the respondent correctly disallowed the deduction from 1920 gross income of $166,747.75 of the $4,495,765.46 claimed as a deduction on the consolidated return.

Issue No. 2.

This issue relates to the rate of tax to be applied to the net income shown on the consolidated return for the calendar year 1920. The respondent argues upon the basis of our opinion in Union Pacific Railroad Co., 26 B. T. A. 1126, that the rate should be 9⅔ percent of the net income. In our opinion we noted that common carriers under Federal control had been relieved from the payment of 2 percent of the income tax imposed upon such carriers during the period of Federal control. The months of January and February 1920 were within the period of Federal control. By giving effect to the law we found that the rate of tax upon common carriers under Federal control for the calendar year 1920 was 9⅔ percent.

In this proceeding it is contended that the result reached by assessing a tax at the rate of 9⅔ percent upon the consolidated net income does not reach a correct result, for the reason that one or more of the subsidiaries whose operations are included in the consolidated return were not under Federal control and were operated at a large net loss for the year 1920. In its brief the petitioner contends that the Denver & Interurban Railway Co., one of the subsidiaries of the Colorado & Southern Railway Co., had no net income for 1920 but had an actual loss from operations of $187,731.52, and that:

* * * This loss petitioner is entitled to have deducted from the gross income of the affiliated group. Since the income of the Denver & Interurban (had it received any in 1920) would have been taxable at the rate of 10%, it is (he Colorado & Southern’s contention that in tho computation of the tax of the affiliated group, the deduction on account of the Denver & Interurban loss should be dealt with at the rate of 10%, instead of 9⅔%. In other words, in order to reach a proper and fair result, the ordinary procedure of deducting the loss from gross income and then applying to the balance the income tax rate, should not be followed here; but the rate of 9⅔% should be applied only to the net taxable income of the companies under federal control; then the rate of 10% to the loss of the Denver & Interurban (not under federal control) ; and the latter result should be subtracted from the former, in order to reach the true tax assessment.

Section 230 (a) of the Revenue Act of 1918 imposes an income tax upon corporations as follows:

(1) For the calendar year 1018, 12 per centum of the amount of the net income in excess of the credits provided in section 236; and
(2) For each calendar year thereafter, 10 per centum of such excess amount.

Subdivision (b) of that section provides:

For the purposes of the Act approved March 21, 1918, entitled “An Act to provide for the operation of transportation systems while under Federal control, for the just compensation of their owners, and for other purposes,” five-sixths of the tax imposed by paragraph (1) of subdivision (a) and four-fifths of the tax imposed by paragraph (2) of subdivision (a) shall be treated as levied by an Act in amendment of Title I of the Revenue Act of 1917.

In Southern Railway Co. v. Commissioner, 80 Fed. (2d) 884, it was held that the income tax liability of a railroad for 1920 during two months of which it was under Federal control was computable by taxing 60/366 of the year’s income at “war tax” rate and the remainder at “war tax” plus “normal tax” rate, and not by applying applicable rates to actual income for such period, since the tax was imposed on annual income and the statute required apportionment of the tax and not of income. Applying this principle to the proceeding at bar, it follows that 60/366 of the calendar year net income of the members of the affiliated group under Federal control during the first two months of 1920 is taxable at the 8 percent rate and the balance of the net income of the consolidated group at the 10 percent rate.

The contention of the respondent upon this point, as we understand it, is that this ruling erroneously permits the petitioner to deduct from the consolidated net income taxable at the 10 percent rate the entire net loss for the calendar year of the affiliates not under Federal control during any portion of the year. The respondent apparently contends that 60/366 of the net loss of the non-Federal controlled subsidiaries should serve to reduce the part of the consolidated net income taxable at the 8 percent rate. We are of the opinion that there is no merit in this contention. The reduced rate applies only to the net income of Federal controlled corporations during the period of Federal control, and if the non-Federal controlled subsidiaries had operated at a profit for the calendar year we think it clear that all of such profit would be taxable at the 10 percent rate. The Board holds, in accordance with the opinion of the court in Southern Railway Co. v. Commissioner, supra, that 60/366 of the calendar year net income of the railroads under Federal control for the first two months of 1920 is taxable at the rate of 8 percent and that the balance of the net income of the consolidated group is taxable at the rate of 10 percent.

Issue No. 3.

This issue presents the question of whether the amount received by the petitioner as rental interest on completed additions and betterments in final settlement with the Director General of Railroads constituted taxable income of the year 1921.

In the final settlement negotiated by the Colorado & Southern Railway Co., Wichita Valley Railway Co., and Ft. Worth & Denver City Railway Co., with the Director General of Railroads in 1921, $76,228.64 was allowed to the corporations as rental interest upon completed additions and betterments. This amount was included in taxable income in the consolidated return filed by the corporations for 1921. No part of the amount was included in the taxable income reported by either of the corporations for any prior year nor was any part of it accrued by either of the corporations on its books of account in any prior year, but there was attached to the 1921 return as filed a letter indicating that the amount should be allocated to the years 1918, 1919, and 1920.

In determining the deficiency asserted against the petitioner for 1921 the respondent did not eliminate any part of the aforesaid rental interest from taxable income as reported.

The parties have stipulated:

* * * that if the aforesaid rental interest in the amount of $76,228.64 is judicially determined not to constitute taxable income for the year 1921 and is judicially determined to constitute taxable income for the period of Federal control as contended by the petitioner, then and in that event net consolidated taxable income as shown in the notice of deficiency for the year 1920 should be increased in the sum of $14,326.42, representing that portion of said rental interest applicable to the two months of January and February, 1920.

This question has been decided by the Board in a number of cases. It has been held that the amount received in final settlement with the Director General of Railroads for rental interest on completed additions and betterments constitutes taxable income of the Federal control period. Texas & Pacific Railway Co., 9 B. T. A. 365; Indiana Harbor Belt Railroad Co., 16 B. T. A. 279; St. Louis Southwestern Railway Co., 24 B. T. A. 917; affd. (C. C. A., 8th Cir.), 66 Fed. (2d) 633; Commissioner v. Midland Valley Railroad Co. (C. C. A., 10th Cir.), 57 Fed. (2d) 1042; Commissioner v. Old Dominion Steamship Co. (C. C. A., 2d Cir.), 47 Fed. (2d) 148.

In accordance with the stipulation above quoted the net income for the year 1920 should be increased in the amount of $14,325.42.

Issue No. 4

This issue raises the question whether the amount of $25,000 received by the petitioner and its affiliated corporations, whose properties were under Federal control, in final settlement with, the Director General of Railroads in the year 1921 constituted taxable income of that year.

In the final settlement of a claim filed by the Colorado & Southern Railway Co. and its affiliated corporations, which were under Federal control, with the Director General of Railroads in 1921 the corporations were allowed $25,000 representing additional compensation for the use of their properties during the period of Federal control.

No part of the foregoing additional compensation was included in taxable income reported by any of the corporations for the year 1921 or any prior year, nor was any part of said amount accrued by any of the corporations upon their books of account prior to 1921. In determining the deficiency for 1921 the respondent included the additional compensation in taxable income.

It has been stipulated by and between the parties hereto that:

* * * if the foregoing amount of $25,000 is judicially determined not to constitute taxable income for the year 1921 and is judicially determined to constitute taxable income for the period of Federal control, then and in that event consolidated net taxable income as shown in the notice of deficiency for the year 1920 shall be increased in the sum of $1,923.08, representing that portion of the aforesaid sum of $25,000 applicable to the two months of January and February, 1920.

The question presented under this issue, like that under Issue No. 3, has consistently been decided by the Board and the courts contrary to the position of the respondent. These decisions hold that the additional compensation received in final settlement with the Director General of Railroads constituted taxable income of the Federal control period instead, of for the year of final settlement. Commissioner v. Midland Valley Railroad Co., supra; Commissioner v. Old Dominion Steamship Co., supra; St. Louis Southwestern Railway Co., supra; Gulf, Mobile & Northern Railroad Co., 22 B. T. A. 233; Missouri Pacific Railroad Co., 22 B. T. A. 267. The petitioner’s contention upon this issue is sustained.

Pursuant to the stipulation the net income for 1920 should be increased in the amount of $1,923.08.

Issue No. 5.

This issue raises a question as to whether the petitioner is entitled to an additional deduction for amortization of discount, commissions, and expenses on bonds issued prior to March 1, 1913.

During the years 1905 to 1908, inclusive, the petitioner sold its refunding and extension mortgage 4½ percent bonds having a face value of $23,898,900 at a discount of $2,300,237.05. In connection with such sale commissions were paid of $456,195.06 and expenses were incurred and paid of $61,993.84. The commissions were paid in connection with the sale of $11,032,500 face value of the bonds to Hallgarten & Co. under an agreement dated April 22, 1905, $261,291.54 of the foregoing amount of $456,195.06 having been paid pursuant to the ninth article of the aforesaid agreement and $189,503.52 pursuant to an oral agreement extending the provisions of the ninth article of the agreement to cover the additional payment.

The petitioner concedes that it is not entitled to amortize and deduct any part of the expenses paid and incurred in the amount of $61,993.84 during the taxable years. Respondent admits that the petitioner is entitled to amortize and deduct an aliquot part of the discount sustained in determining taxable income for the years covered by this appeal.

The only question presented to the Board for decision under this issue is whether or not the aforesaid commissions may be amortized and deducted in determining taxable income for the years covered by this appeal.

This issue is decided in favor of the petitioner on the authority of Union Pacific Railroad Co. v. Commissioner (C. C. A., 2d Cir.), 69 Fed. (2d) 61; affd., Helvering v. Union Pacific Railroad Co., 293 U. S. 282.

Issue No. 6.

This issue presents the question of the taxability in 1920 of an amount awarded by the Interstate Commerce Commission as compensation for carrying United States mails.

In 1920 the Colorado & Southern Railway Co., Ft. Worth & Denver City Railway Co., and Wichita Valley Railway Co. received the sums of $31,990.25, $28,951.61, and $4,949.03, respectively, or an aggregate amount of $11,896.95 in consequence of an award made by the Interstate Commerce Commission rendered in Decision No. 9200, Railway Mail Pay, 56 I. C. C. 1, made pursuant to the provisions of sections 5 and 6 of the Acts of Congress approved July 28, 1916, Post Office Department Appropriation, 39 Stat. 412, 425. The said Decision No. 9200 of the Interstate Commerce Commission was entered December 23, 1919, but was not served on the interested parties and made public until January 15, 1920.

In the consolidated income tax return filed by the aforesaid affiliated corporations for the year 1920 there was reported as taxable income on account of said mail pay the amount of $12,822.61. The respondent eliminated this amount from taxable income as reported by the petitioner and its affiliated corporations in the consolidated return in arriving at consolidated net taxable income as shown in the notice of deficiency for 1920 on the ground that the amount received constituted taxable income for the year 1919. In this proceeding the respondent contends that the amount of $12,822.61 constituted taxable income of 1920, in view of the Board’s decisions in International-Great Northern Railroad Co., 24 B. T. A. 126; Pittsburgh & Lake Erie Railroad Co., 28 B. T. A. 259; and New York Central Railroad Co., 28 B. T. A. 437.

Since our decisions in the above entitled cases, the Board’s decision in New York Central Railroad Co., supra, has been reversed by the Circuit Court of Appeals for the Second Circuit, 79 Fed. (2d) 247. In accordance therewith it is held that the amounts received in 1920 for back mail pay were not taxable income of 1920.

Reviewed by the Board.

Judgment will be entered under Rule 50.