author: McMahon:

text:
    Dollie M. Stine, Petitioner, v. Commissioner of Internal Revenue, Respondent. M. Josephine Stine, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 62694, 62695.
    Promulgated April 23, 1935.

      A. M. LiverigM, Esq., for the petitioners.

      Dean P. Kimball, Esq., and Edward, 0. Adams, Esq., for the respondent.
   OPINION.

McMahon:

These proceedings, which have been consolidated for hearing and decision, involve the question of whether valid gifts of stock were made to petitioners by their uncle, Charles B. Maxwell, prior to the sale of said stock. Respondent has determined that valid gifts of 1,000 shares of stock of the American Re-Insurance Co., hereinafter referred to as the company, were made to each of the petitioners on or about March 30, 1928, and that upon the sale of this stock in April 1928 each of the petitioners realized a profit of $31,400. Respondent has determined a deficiency against each petitioner for the year 1928 in the amount of $2,253.87, and has asserted a penalty of $563.47 against each of them for failure to file a return.

The petitioners are the nieces of Charles B. Maxwell, who died on or about September 14, 1928. Prior to his death, Maxwell was president- of the Moshannon National Bank of Philipsburg, Pennsylvania, and had broad authority at that institution. For a number of years prior to September 14, 1928, the petitioners had made their home with their uncle in Morrisdale, Pennsylvania. During the winter of 1927-1928, M. Josephine Stine, hereinafter referred to as Josephine Stine, was in school at Wellesley, Massachusetts. At the time the various transactions hereinafter mentioned occurred, Josephine Stine was a minor, becoming of age in August 1929. Dollie M. Stine, hereinafter referred to as Dollie Stine, had attended a finishing school in Wellesley, Massachusetts, at her uncle’s expense and had graduated therefrom prior to March 30,1928.

On January 3, 1928, Charles B. Maxwell was a director in and owned 3,270 shares of common stock of the company. During 1928 Harry Boulton was president and legal counsel of the company, Harry Scott was treasurer, W. B. Athey was secretary, and C. C. De Bosa was auditor. The company’s offices were located at 242 South 13th Street, Philadelphia, Pennsylvania.

Early in 1928 Boulton, Scott, Athey, and Maxwell were actively negotiating for the sale of all of the stock of the company to certain New York interests. Meetings to discuss the sale with the prospective purchasers were held in New York and Philadelphia. Maxwell and Boulton attended at least one meeting in New York.' As early as February 1928 Boulton and his associates had been offered a price that they were willing to accept, but the purchasers were awaiting the result of an audit of the company’s books, which would run through the first quarter, and refused to conclude the sale until the audit was certified to by the auditors. By the latter part of March, however, the parties had agreed upon a minimum and a maximum price, had agreed that an escrow fund would be part of the plan of sale, and had agreed as to the management of the escrow fund, but the exact sale price remained subject to the results of the audit. The first written agreement between the parties was the sale agreement of April 3, 1928. See discussion of this agreement in Theodore C. Jackson et al., Administrators, Estate of Charles B. Maxwell, 32 B. T. A. 470, which involves the same alleged gifts.

On or about March 30, 1928, Boulton brought certificates C056 and C065, inclusive, representing 1,000 shares of the company’s stock, which stood in the name of Charles B. Maxwell, to De Bosa and instructed him to transfer the shares to the name of Dollie Stine. At the same time Boulton handed De Bosa certificates C066 to C075, inclusive, representing 1,000 shares of company stock, and instructed him to transfer the certificates from Charles B. Maxwell to Josephine Stine. The aforesaid certificates bore the endorsements of Charles B. Maxwell, but the endorsements were not dated. Pursuant to the instructions received from his superior, De Bosa issued 10 new certificates for 100 shares each, certificates C0761 to CO770, inclusive, in the name of Dollie Stine, and 10 new certificates for 100 shares each, C0771 to CO780, inclusive, in the name of Josephine Stine. These 20 certificates were then delivered to Boulton. Boulton signed the certificates as president, and Scott signed them as treasurer. Boulton personally deposited the certificates with the Franklin Fourth Street National Bank of Philadelphia, which had been designated as depositary of the certificates under the sale agreement.

Powers of attorney bearing the signatures of Dollie Stine and Josephine Stine are attached to certificates C0762 and C0771, respectively. The power signed by Dollie Stine covers certificates C0761 to CO770, inclusive, and gives persons other than Maxwell, and each of them, power of attorney, to transfer the 1,000 shares of stock on the books of the company. The power signed by Josephine Stine covers certificates C0771 to CO780, and gives the same persons power of attorney. The signatures were witnessed by H. B. Scott and guaranteed by the Philadelphia National Bank.

The stockholder ledger sheets of the company reflect the transfer of 1,000 shares from C. B. Maxwell to each of his nieces under date of March 30, 1928. The ledger accounts of Dollie Stine and Josephine Stine further show that the certificates standing in their names were surrendered under date of April 16,1928, and the ledger accounts balanced. On the latter date the stock was delivered to the purchasers and the cash paid for it in consummation of the sale agreement of April 3, 1928, the delivery and payment being effected in Philadelphia at the office of the Franklin Fourth Street National Bank.

Dollie Stine never had manual possession of the 1,000 shares of company stock issued in her name on March 30, 1928, nor was she notified at that time by anybody that such shares had been placed in her name on the books of the corporation. At the time she signed the power of attorney Dollie Stine knew she was signing papers for stock that stood in her name, but she had signed so many instruments and stock transfers for Maxwell that it did not seem extraordinary to her. She signed whatever Maxwell told her to sign.

Josephine Stine never had manual possession of the 1,000 shares of company stock issued in her name on March 30, 1928, nor were stock certificates representing shares of stock in the company delivered to her.

As soon as the sale of the stock was completed Boulton notified some of the stockholders, but not all of them, that the deal had been consummated. No notification was sent to either Dollie or Josephine Stine respecting the sale.

The proceeds of the sale were credited to the account of the Mo-shannon National Bank with the Franklin Fourth Street National Bank of Philadelphia. The Moshannon National Bank was formally advised of the credit, and later received instructions from H. B. Scott, treasurer of the company, regarding the distribution. Scott submitted a list of names and the amounts to be distributed to the cashier of the Moshannon National Bank, who, pursuant thereto, distributed $51,330 to each of the Stines by crediting each of their accounts with the bank in this amount under date of April 19, 1928. Dollie Stine received no notice of this deposit to her credit.

On or about April 21, 1928, Maxwell requested Dollie Stine to sign two checks that had already been prepared for her signature. The first check, dated April 21, 1928, was drawn on the Moshannon National Bank in favor of H. B. Scott for $38,335. The endorsement reads: “ H. B. Scott, for deposit Penn. Bit. Stock Syndicate.” The second check, dated April 21,1928, was drawn on the Moshannon National Bank in favor of the Moshannon National Bank for $12,995. This check is marked “ Paid ”, and marked by perforation, “ Paid April 23,1928.” Dollie Stine signed both checks as requested by her uncle and returned the checks to him. At the time she signed the checks she did not know that she had an account of that size at the bank.

The Penn Bituminous Stock Syndicate was used by Maxwell and Boulton, together and singly, in buying Penn Bituminous stock. The ledger account of this Syndicate with the Moshannon National Bank reflects a deposit in the account of $115,005 on April 23, 1923. The deposit was made up from the following checks:

H. B. Scott-$38,335
C. B. Maxwell_ 38,335
Harry Boulton_ 38,335
115,005

Charles B. Maxwell’s individual account with the Moshannon National Bank reflects a deposit to his credit on April 23, 1928, of $1,995. This sum was the balance left from a check of $12,995 drawn on the Moshannon National Bank, $11,000 of which was used to purchase a cashier’s check in favor of A. M. Loch. A. M. Loch is the sister of Charles B. Maxwell. The cashier’s check was deposited by Mrs. Loch in the First National Bank of Houtzdale, Pennsylvania, on May 7, 1928, and paid by the Moshannon National Bank on May 10, 1928.

Dollie Stine’s account with the Moshannon National Bank shows that the checks of $38,335 and $12,995 were charged against her bank balance on April 23, 1928.

On or about May 10, 1928, Charles B. Maxwell established a trust in favor of Dollie Stine by an instrument in writing, placing in the trust securities that had a par value of $50,000.

Between April 19 and April 27, 1928, Josephine Stine received a letter at Wellesley, Massachusetts, from her uncle in Morrisdale, Pennsylvania. He enclosed in the letter a check drawn to the order of the Moshannon National Bank in the sum of $51,330. which he requested her to sign and return to him by registered mail. Josephine Stine had never been notified by the bank of the deposit of April 19, 1928, and she did not know that she had a credit in this amount at the bank. Pursuant to her uncle’s request, she signed the check and returned it to him in Morrisdale, Pennsylvania. She never saw the check again, does not know where the canceled check is, and does not know what became of the proceeds of the check.

Josephine Stine’s account with the Moshannon National Bank was charged with this $51,330 check on April 27, 1928.

On or about May 10, 1928, Charles B. Maxwell established a trust in favor of Josephine Stine by an instrument in writing, placing in the trust securities having a par value of $35,000.

In a bill of complaint brought by Dollie Stine against the Mo-shannon National Bank and others, sworn to on September 12, 1928, she alleged that she became the owner of 1,000 shares of American lie-insurance Co. stock on or about April 2, 1928, by gift from Charles B. Maxwell. In a like bill of complaint Josephine Stine made similar' allegations.

Upon the foregoing findings of fact which we make, we must determine whether valid gifts of company stock were made to petitioners by their uncle on March 30, 1928. If valid gifts were made, the sale of the stock at a profit .in April 1928 resulted in taxable income to each of the petitioners, the amount of which is not in dispute. The respondent’s determination that valid gifts were made on March 30, 1928, to petitioners is prima facie correct, and the burden is placed on petitioners of adducing evidence to overcome the correctness of this determination.

The general rule respecting gifts inter vivos is stated by the Board in Adolph Weil, 31 B. T. A. 899, as follows:

* * * (1) a donor competent to make the gift; (2) a donee capable of taking the gift; (8) a clear and unmistakable intention on the part of the donor to absolutely and irrevocably divest himself of the title, dominion, and control of the subject matter of the gift, in praesenti; (4) the irrevocable transfer of the present legal title and of the dominion and control of the entire gift to the donee, so that the donor can exercise- no further act of dominion or control over it; (5) a delivery by the donor to the donee of the subject of the gift, or of the most effectual means of commanding the dominion of it; (6) acceptance of the gift by the donee; Edson v. Lucas, 40 Fed. (2d) 398, and authorities there cited. Cf. Allen-West Commission Co. v. Grumbles (C. C. A., 8th Cir.), 129 Fed. 287; Edwin, J. Marshall, 19 B. T. A. 1260; affd. (C. C. A., 6th Cir.), 57 Fed. (2d) 663; certiorari denied, 282 U. S 61.

When the petitioners establish that Maxwell failed to make a valid gift due to the absence of one or more of the above quoted essential elements, they sustain their burden of proof. The evidence adduced is concerned principally with elements (3) and (4), supra, namely, that Maxwell had no clear and unmistakable intention to absolutely and irrevocably divest himself of title, dominion, and control of the stock, in praesenti, and that there was no irrevocable transfer of the stock to the donee, so that Maxwell could exercise no further act of dominion or control over it.

The decisions of the Pennsylvania courts show that these two elements are requisites to any valid gift inter vivos in that state. Sullivan v. Hess, 241 Pa. 407; 88 Atl. 544; Packer v. Clemson, 112 Atl. 107; In re Kaufman's Estate, 127 Atl. 133; In re Scanlon's Estate, 169 Atl. 106. See also Bauernschmidt v. Bauernschmidt, 97 Md. 35; 54 Atl. 637, which quotes from Walsh's Appeal, 122 Pa. 177; 15 Atl. 470.

On the record here made we believe the petitioners have sustained their burden by showing that Maxwell had no clear and unmistakable intention to make the gift in praesenti, and by showing that he never relinquished dominion or control of the stock to the donees, but continuously acted as though he was the owner thereof. In the discussion that follows it must be borne in mind that a subsequent gift of .the proceeds would be too late, since the profits from the sale had then been realized.

The circumstances, as they existed on March 30, 1928, convince us that Maxwell’s transfer of stock was prompted by motives other than that of providing for the welfare of his nieces. Negotiations were then virtually completed for the sale of all the stock of the-company to New York interests. This sale would result in a large profit to Maxwell on his holdings. He was accustomed to having Dollie Stine sign instruments and stock transfers for him whenever he requested her signature, and his banking experience could not help but bring him in contact with the income tax statute. By transferring the stock to his nieces Maxwell certainly realized that he would have the proceeds within reach because of his control over them. If motivated by these factors in making the transfers of March 30, 1928, can it be said that Maxwell was making a gift? The answer seems obvious; such an intent would be entirely contra to the theory of a gift. While Maxwell may have had a general intention of providing for his nieces at some future time, we can not hold upon this record that he had a clear and unmistakable intention, in praesenti, to give this stock , to these petitioners by his transfers of March 30, 1928. We are convinced that he was actuated by a desire to reduce his taxes rather than an intention to irrevocably and finally give his nieces the stock in question: Estate of Charles B. Maxwell, supra. See Liberty Service Corporation, 28 B. T. A. 1067; affirmed in Liberty Service Corporation v. Commissioner, 77 Fed. (2d) 94; and also Gregory v. Helvering, 293 U. S. 465.

As to the second essential element, we believe that Maxwell’s subsequent actions are opposed to the theory that he relinquished dominion and control over the stock or the proceeds by the transfer of March 30,1928. After the stock was transferred to the names of these petitioners, the certificates were never in their possession. Boulton, who acted for the decedent in effecting the transfer, took the newly issued certificates and deposited them under the sale agreement. Maxwell procured the signatures of his nieces to the powers of attorney without disclosing the purpose or nature-of the instruments signed. The evidence does not show that petitioners signed these instruments with knowledge that they were dealing with their own property; they were obeying their uncle, with whom they lived and who provided for them. If petitioners were stockholders they were entitled to the same notice of sale of their stock as other stockholders, yet Boulton, who sent the notices, testified that no notice was sent to the petitioners.

Immediately after the sale Maxwell set about reducing to his possession the proceeds, which had been deposited in these petitioners’ bank accounts. The ease with which this was accomplished strikingly portrays the control and dominion that Maxwell exercised over the petitioners and their willingness to obey his wishes. At Maxwell’s request Dollie Stine drew a check in favor of H. B. Scott, one of decedent’s business associates, for the sum of $38,335. This check was endorsed by Scott to a stock syndicate used by Boulton and Maxwell to purchase stock. Also, at Maxwell’s request Dollie Stine drew a check in favor of the Moshannon National Bank for $12,995. Maxwell used $11,000 of this sum to purchase a cashier’s check, which was sent to his sister and cashed by her. The remaining $1,995 was. deposited to decedent’s credit in his personal account at the bank.

Josephine Stine was in school at the time the proceeds were deposited in her bank account. Maxwell drew a check for $51,330 in favor of the Moshannon National Bank and sent the check to her by mail for her signature. He requested Josephine Stine to sign the prepared check and return it to him by registered mail. This canceled check was never returned to Josephine Stine, nor did she receive any of the proceeds therefrom. These facts, together with the facts relative to Dollie Stine’s $12,995 check, justify the inference that Maxwell acquired possession of the proceeds of this check.

As appears from our findings, Maxwell created trusts for the benefit of his nieces covering securities in the value of $50,000 and $35,000. What actually happened was that Maxwell did not get around to making his gifts until he created the trusts.

Furthermore, it may be pointed out that when Maxwell died in September 1928 he had in his possession, so far as the evidence shows, at least $16,000 of the $51,330 of the proceeds of the check signed by Josephine Stine, and $1,330 of the proceeds of the checks signed by Dollie Stine.

Maxwell’s formal acts with respect to the 2,000 shares of stock resulted because his nieces were available for use as devices to avoid an increase in his tax liability. Maxwell’s other actions show that he never relinquished control and dominion over the stock or the proceeds so as to make gifts of the 'stock to his nieces.

Since we can find no clear and unmistakable intention on the part of Maxwell to absolutely and irrevocably divest himself of the title, dominion, and control of the stock, in 'praesenti, and since we can find no irrevocable transfer of the dominion and control of the entire gift to the donees, so that Maxwell could exercise no further act of dominion or control over the stock, we can not find or hold that there was a valid gift from Maxwell to either of the nieces; and, on the contrary, we find and hold that no such gift was made. Estate of Charles B. Maxwell, supra.

In view of the conclusion here reached it is unnecessary to consider the other essential elements of a valid gift set forth in Adolph Weil, supra. Estate of Charles B. Maxwell, supra.

Respondent contends that the statements made under oath by the petitioners in certain proceedings which they brought against the Moshannon National Bank and others, wherein they alleged that they were the owners of the stock in question, are admissions against interest. The general rule is that allegations contained in a pleading are admissible against the party making them in proof of the facts which they admit upon any subsequent trial of the case or upon the trial of another action, but a party is not bound by admissions or averments of legal conclusions. An allegation of ownership by gift is an averment of a legal conclusion and not a statement of fact. Furthermore, when questioned about their averments on this subject, the Stines testified that the allegations were made because the stock was in their name. They further testified that the pleadings were drawn by their counsel, and presumably they followed his advice in swearing to the bill of complaint. These explanations have been considered in reaching our decision herein. See our discussion of these averments in Estate of Charles B. Maxwell, supra.

Reviewed by the Board.

Decision will be entered for the petitioners.


source: Caselaw Access Project

author: Black:

license: Public Domain

text:
    Harry and Adele M. Sommers, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75632.
    Promulgated April 23, 1935.

      John B. Peery, O. P. A., for the petitioners.

      E. A. Ton jes, Esq., for the respondent.
   OPINION.

Black:

This proceeding is for redetermination of a deficiency in income tax for the taxable year 1931 in the amount of $1,605.19, the greater part of which is conceded by petitioners.

The only remaining issue is whether petitioners, who, as husband and wife, filed a joint return for 1931, are entitled, under section 25(d) of the Revenue Act of 1928, to a credit of $400 for each of Mrs. Sommers’ three children by a former marriage. Two other errors were assigned but were settled by stipulation. The stipulation is hereby made a part of this report by reference and effect thereto should be given under Rule 50.

Adele M. Sommers is the mother of three children who were all under eighteen years of age during the taxable year 1931. A part of the support of these children comes from trusts established by Mrs. Sommers’ first husband and father of said children, Roscoe H. Trumbull. The total income from these trusts amounts to approximately $3,000 per annum for each child, which income was all expended by Mrs. Sommers during the taxable year in question for the support, education, and comfort of the children.

The total living and family expenses of petitioners for themselves and the three children for the taxable year 1931 amounted to the sum of $44,851.69. In connection with this fact the parties have stipulated, “ That nothing in this paragraph shall be construed to mean that the living expenses of any member of the family is in any particular amount.”

An income tax return on form 1040 A was filed for each of the three children for the taxable year 1931 in which all of the trust-income was reported.

Section 25, supra, so far as is here material, provides:

There shall be allowed for the purpose of the normal tax, but not for the surtax, the following credits against the net income.
* * % * * * *
(d) Credit for dependents. — $400 for each person (other than husband or wife) dependent .upon and receiving his chief support from the taxpayer if such dependent person is under eighteen years of age * * *.

The children were all under eighteen years of age. Therefore, the question for our determination is whether the children were “ dependent upon ” and received their “ chief support ” from petitioners. Congress has not defined the meaning of “dependent upon” and “ chief support.” The Commissioner has defined these expressions in his regulations. Art. 304, Regulations 45 (1918 Act), 62 (1921 Act), 65 (1924 Act), 69 (1926 Act) ; art. 294, Regulations Y4 (1928 Act), YY (1932 Act); and art. 25-6, Regulations 86 (1934 Act), all contain the following identical provision:

The credit is based upon actual financial dependency and not mere legal dependency. It may accrue to a taxpayer who is not the head of a family. But a father whose children receive half or more of their support from a trust fund or other separate source is not entitled to the credit.

This administrative construction must be deemed to have received legislative approval, since all the revenue acts from 1918 to 1934, inclusive, have been identical in allowing a credit “ for each person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer if such dependent person is under eighteen years of age * * Sec. 216 (d), Revenue Acts of 1918, 1921, 1924, 1926; sec. 25 (d), Revenue Acts of 1928, 1932; sec. 25 (b) (2), Revenue Act of 1934. Cf. McCaughn v. Hershey Chocolate Co., 283 U. S. 488; United States v. Dakota-Montana Oil Co., 288 U. S. 459; Zellerbach Paper Co. v. Helvering, 293 U. S. 172.

' The petitioners contend that the income derived from the trust, approximating $3,000 a year for each of the children, is insufficient to support them in the manner and in the style to which they have in the past been accustomed and in which they are now living. It is argued that it constitutes less than one half of the amounts expended on their behalf in the maintenafice of the family’s standard of living. It is their contention, therefore, that under the statutes and the interpretative regulations they are entitled to a credit for three dependents.

The argument of the petitioners is based on the conclusion that because the sum of $45,000 was expended in living expenses, to maintain a family of five persons, the living expenses of one of those five persons is $9,000. We think, however, that under the stipulated facts such a holding is not justified because it is specifically provided in paragraph 5 of the stipulation “That nothing in this paragraph shall be construed to mean that the living expenses of any member of the family is in any particular amount.”

It is clear that the children were not entirely dependent upon petitioners, since, as we have already pointed out, they each received approximately $3,000 from the trusts established by their father, and this money was expended for their support, education, and maintenance.

We think it was necessary for petitioners to show under the Commissioner’s regulations cited above that the amount necessary to support each child according to his or her station in life was an amount at least in excess of $6,000 and that they furnished over one half of the amount necessary. This, we think they have failed to do, and we must, therefore, sustain the respondent’s determination on this point.

Reviewed by the Board.

Decision will be entered under Rule 50.


author: Aettndell :

text:
    Manhattan Life Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 32940.
    Promulgated April 23, 1935.

      John F. McCabe, Esq., for the petitioner.

      John D. Kiley, Esq., for the respondent.
   OFINION.

Aettndell :

The stipulation of the parties as to the amount deductible as 4 percent of the mean of its reserve funds is in accordance with the opinion in National Life Insurance Co. v. United States, 277 U. S. 508. The decrease in the amount of tax resulting from this stipulation will be given effect in the recomputation under Eule 50.

The only question for decision is whether or not petitioner is entitled to deduct taxes, expenses, and depreciation on its home office building in the sum of $67,619.30. There is no issue as to the amounts making up this sum nor as to the actual payment of taxes and expenses. It appears from the deficiency notice that the respondent’s disallowance is based on the fact that the petitioner did not own the building at the end of the year.

Paragraphs 6 and 7 of section 245 (a) of the Eevenue Act of 1926 allow deductions for taxes, expenses, and depreciation of property of life insurance companies. Section 245 (b) provides that the deductions permitted by paragraphs 6 and 7 of subdivision (a) may not be taken unless the insurance company includes in gross income the rental value of the space occupied by it. The validity of this condition to the allowance of deductions has been sustained in Helvering v. Independent Life Insurance Co., 292 U. S. 371. Section 245 (b) concludes with this provision:

* * * Such rental value shall not be less than a sum which in addition to any rents received from other tenants shall provide a net income (after deducting taxes, depreciation, and all other expenses) at the rate of 4 per centum per annum of the book value at the end of the taxable year of the real estate so owned or occupied.

The respondent’s position, as we understand it, is that literal compliance with the above quoted provision is necessary to the allowance of the deductions under section 245 (a) (6) and (7), and, as the taxpayer did not own the real estate “ at the end of the taxable year ”, it could not fully meet the statutory provision; consequently, it is not entitled to the deductions claimed. This is the respondent’s position as we gather it from the notice of deficiency. No brief has been filed on behalf of the respondent and so we do not know whether or not he has any other ground to support his position.

It is beyond question that “ Congress has power to condition, limit, or deny deductions from gross income in order to arrive at the net that it chooses to tax.” Helvering v. Independent Life Insurance Co., supra. If the last sentence of section 245 (b) could be taken to be a condition or limitation of a deduction there might be some merit to the respondent’s position. The condition is imposed by the preceding sentence, and the last sentence merely prescribes a method of calculation of the rental value to be included in income as a condition to the deductions for taxes, expenses, and depreciation. One of the factors in this calculation is “ book value at the end. of the taxable year.” If the respondent’s position is correct, a taxpayer owning property up to the last day of the year would be denied deductions in connection with it if the property were sold on the very last day. In other words, a,s said by petitioner, the only time that a sale could be made by an insurance company, and have the benefit of the deductions enumerated by statute, would be on January 1. The imposition of such a condition does not appear to us to be supported by the language of the statute. The rule of the last sentence of section 245 (b) is predicated upon that of accounting on annual periods, which is fundamental in our taxing statutes. Helvering v. Morgan’s, Inc., 293 U. S. 121. It has never been supposed that, because of the established rule of annual accounting periods, a transaction ending within the year need not for that reason be accounted .for. whether it be a matter of income or deduction. The death of a taxpayer within the year does not permit his income to escape tax. Brady v. Anderson, 240 Fed. 665.

In San Jacinto Life Insurance Co., 31 B. T. A. 397, the taxpayer did not include in 1929 income the rental value of space occupied for home office purposes in a building owned by it from January 1 to April 30, 1929. It sold the building on the latter date and in 1930 paid property taxes which were assessed against the building on January 1, 1929. It sought a deduction from 1930 income for such taxes. We sustained the respondent’s disallowance of the deduction, on the ground that the taxpayer had not complied with the statutory condition of reporting as income the rental value of the space it had occupied. But we also held that taxes accrued on property other than home office property during ownership would be deductible if paid in the following year after sale of the property. We said in part:

* * * The mere fact that it had sold the property and was no longer the owner of it in the year when the taxes were properly paid, would not deprive it of the deduction.
It would be sufficient to meet the measure of the statute if petitioner was the owner of the property at the time the tax liability legally accrued. Undoubtedly the same rule would apply to a home office building owned by an insurance company in which it occupied space for its own use, if it were not for the limitation contained in section 202 (b). * * *

The limitation referred to in the Seim, Jacinto case as contained in section 203 (b) of the 1928 Act is the same as that in section 245 (b) of. the 1926 Act, namely, the requirement of inclusion in income of rental value of space occupied as a condition to taking deductions. In the present case the limitation does not apply, inasmuch as the petitioner has reported rental value as required. Applying here the rule of the above case, we hold that petitioner is entitled to the deduction claimed for taxes, expenses, and depreciation.

The parties have stipulated the book value of the property at the time of sale, and that figure should be used in the calculation under the last sentence of section 245 (b).

Decision will be entered under Rule 50.


author: Seawell :

text:
    Henry R. Huntting, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75304.
    Promulgated April 25, 1935.

      William W. Johnston, G. P. A., and Andrew T. Smith, Esq., for the petitioner.

      G. W. BrooJcs, Esq., for the respondent.
   OPINION.

Seawell :

Upon the issue presented the applicable statute is section 23 (j) of the Revenue Act of 1928, which is as follows:

In computing net income there shall be allowed as deductions:
*******
(j) Bad debts. — Debts ascertained to be worthless and charged off 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.

Petitioner, upon whom the burden rests, says and contends that he has successfully carried the burden of the issue and shown himself entitled, under the statute quoted, to the deduction claimed.

Respondent, on the other hand, says and contends that petitioner has failed in three different ways to carry the burden of the issue, viz: (1) Petitioner exchanged his 5% bonds for 27% shares of stock of the Punta Alegre Sugar Corporation in pursuance of a plan of reorganization; (2) petitioner never charged off the alleged bad debt within the taxable year 1931; (3) petitioner failed to prove that the debts were worthless. We will consider these questions in their order.

1. Exchange of bonds for stock pursuant to a plan of reorganization. — Under section 112 (b) (3) of the Revenue Act of 1928 it is provided that 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. Petitioner says, however, that he makes no claim in this proceeding for any deductible loss because of the exchange of the 5% bonds for 27% shares of stock in the new corporation; that the exchange referred to took place in a year subsequent to the taxable year here being considered. Respondent replies that receivers were appointed in June 1930, and a committee submitted a plan of reorganization for approval; that the plan was later carried out, and the exchange of bonds for stock was made under the plan. Respondent cites two Board cases in support of his position, First National Bank of Champlain, N. Y., 21 B. T. A. 415, and Rockford Dairy, Inc., 26 B. T. A. 501. In these cases it appears that reorganization occurred in the same year in which the loss was claimed and that the claimed loss grew out of the reorganization. We find nothing in section 23 (j), quoted above, or in section 112 (b) (3), supra, which requires a holder of a bond to anticipate a reorganization of the issuing corporation, even in a case as here, where a plan has been formulated and abandoned, and a new committee named to prepare another plan, and another plan has been prepared and carried out in a subsequent year. If by reason of the crippled condition of a corporation a bond has become recoverable only in part, the Commissioner may allow the bond to be charged off in part by the owner; and there is no prohibition in such case against the owner using the bond in exchange for other securities in a reorganization in a subsequent year, gain or loss on the latter transaction to be recognized only when the new security is disposed of. In the instant case, no plan of reorganization had been adopted before the end of 1931, and the reorganization finally accomplished was in 1932, after the corporate assets had been sold on April 18,1932. We hold the exchange of the bonds for stock in the subsequent year did not affect the charge-off of partial worthlessness in. 1931.

2. Petitioner never charged off the alleged load debt in 1931.— Petitioner testified, and there was evidence of corroboration, that he ascertained in December 1931 that his bonds were “ worthless, or nearly so ”, and that he resolved to charge them off. His record of investments was kept by his bookkeeper in a small memorandum book used for the purpose, showing the stocks in which he dealt. In it was shown the following entry in reference to his Punta Alegre Sugar Co. bonds: “ December 31, 1931, Profit and Loss $5,458.75.”' This entry was not made on the purported date, but on February 3, 1932, just before his income tax return was made out and filed. On the return he deducted as a loss the full amount paid for the bonds, $5,-458.75. In his petition in this proceeding his claim for deductible loss in said bonds for 1931 is alleged to be “ not less than $4,908.75.”

Construing section 23 (j) the Commissioner has published G. C. M. 13114, Cumulative Bulletin XIII-1, p. 116, which is summarized as follows:

In order for a taxpayer to have the benefit of a deduction for debts ascertained to be partially worthless there must have been an ascertainment by the taxpayer of partial worthlessness within the taxable year. The charge-off in such a case being a technical requirement may he made after the taxable year. The allowability of the deduction is, of course, subject to the discretion of the Commissioner.

The discretion of the Commissioner, here referred to, is a legal discretion which may be reviewed by the Board and the courts. Commissioner v. Liberty Bank & Trust Co., 59 Fed. (2d) 320.

In a recent case before the Board, in which the taxpayer kept a memorandum cash journal but made no charge-off in the book, or elsewhere, in reference to a partial loss claimed on a bank deposit for the year, and made no claim for deduction in her income tax return for the year, she was held, nevertheless, entitled to the deduction claimed. Allie M. Turbeville, 31 B. T. A. 283.

In the 1932 Revenue Act there is a change in the wording of section 23 (j) which may indicate a change of policy in reference to the charge-off of partially worthless debts, but as to that we are not here concerned and intimate no opinion.

We hold the charge-off, so far as required by the statute, was timely made in this case.

3. Fail/ure of proof that the debts were worthless. — The ascertainment, under the statute, of partial (or total) worthlessness of a debt is obviously for the petitioner, in the exercise of his best judgment, first to make. Dillon Supply Co., 20 B. T. A. 404. The facts and circumstances surrounding the petitioner’s decision should establish it as that of a prudent person of sound judgment. Anna Bissell, 23 B. T. A. 572.

Evidence of the absence of assets at the time of liquidation years after the notes of the taxpayer were charged off is held admissible in confirming the taxpayer’s previous decision of worthlessness at the time of the charge-off. Peyton Du-Pont Securities Co. v. Commissioner, 66 Fed. (2d) 718.

In the year when the partial worthlessness of the Punta Alegre Sugar Co. bonds was claimed by petitioner interest on the bonds was in arrears for more than two years; receivers had been appointed for the company and all its subsidiaries; a plan of reorganization had been formulated and abandoned because impossible to accomplish ; the receivers under the order of the court had been permitted to make temporary loans to meet current expenses and to pledge the corpus of the assets; foreclosure to meet maturing gold bonds and bank debts was imminent; loans were secured only upon hard terms; the price of sugar, the only commodity it had for sale, continued to decline, and it was published in the trade journals that unless the price of sugar improved the money borrowed to harvest and manufacture the crop of cane could not be repaid out of the proceeds of the crop; bonds of the company could be sold only at nominal sums, and apparently they were taken off the market soon after November 1, 1931, when the last sale was made at the price of $35 for a $1,000 bond. In the succeeding year after petitioner’s income tax return for the taxable year was filed, the property of the Punta Alegre Sugar Co. was sold under order of the court; the pro rata share of the proceeds of sale to pay the unsecured debts amounted to less than one third of 1 percent; a reorganization of doubtful value was effected in 1932; petitioner’s unsecured bonds of $5,500 par value were exchanged for common stock of the new corporation of one half the par value of the bonds; and this stock was sold by petitioner in 1934 for $188.19. We hold proof of partial worthlessness of the bonds in 1931 was sufficiently made.

In our opinion, and we so hold, the 'indebtedness to petitioner on account of the bonds for which he paid $5,458.15 was not recoverable on December 31, 1931, in an amount greater than $550, and petitioner is entitled to a deduction from gross income in computing his income tax for 1931 in the sum of $4,908.15.

Judgment will be entered under1 Rule 50.


author: Black :

text:
    Helen H. Bullis, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 68164, 73954.
    Promulgated April 25, 1935.

      A. Colder Maehay, Esq., for tbe petitioner.

      I. Graf, Esq., for tbe respondent.
   OPINION.

Black :

The definition of separate property of husband and wife as provided in volume 13, California Jurisprudence, p. 815, sec. 22, is as follows:

All property, real or personal; owned by either husband or wife, before marriage, and that acquired afterwards by gift, bequest, devise or descent, with the rents, issues and profits thereof, is their separate property.

It has been clearly shown by the testimony in this proceeding that neither petitioner nor her husband owned any property before their marriage in 1913, that neither owned any property upon their arrival in Calif ornia in 1914, that the stocks in question, except that particular stock of the Standard Oil Co. of California which it has been stipulated and agreed was the separate property of petitioner, were not acquired by either of them by gift, devise, etc.

The respondent has not filed a brief, but his position as indicated in the deficiency notice seems to be that because the stocks were registered in petitioner’s name, they are therefore her separate property. The mere fact that stocks were carried in petitioner’s name is not conclusive that they were her separate property. This presumption has been successfully overcome by petitioner.

Section 161 of the Civil Code of California provides:

A husband and wife may bold property as joint tenants, tenants in common, or as community property.

Sections 685 and 686 of the Civil Code of California, regarding interests in common, provide as follows:

[Section 685.] An interest in common is one owned by several persons, not in joint ownership or partnership.
[Section 686.] Every interest created in favor of several persons in their own right is an interest in common, unless acquired by them in partnership, for partnership purposes, or unless declared in its creation to be a joint interest, as provided in section six hundred and eighty-three, or unless acquired as community property.

Section 687 of the Civil Code of California defines community property as follows:

Community property is property acquired by husband and wife, or either, during marriage, when not acquired as the separate property of either.

In Howard C. Hickman, 27 B. T. A. 807; affd., 70 Fed. (2d) 985, we held that an agreement (oral) existed between the petitioner and his wife, residents of California, that compensation received by her for personal services should be her separate income and separate property. She made a separate income tax return of such compensation received and asked that the compensation be not treated as community income and taxed to the husband. We upheld the validity of the agreement.

In affirming our decision in that case, the United States Circuit Court of Appeals, Ninth Circuit, quoted from the case of Wren v. Wren, 100 Cal. 276, wherein sections 158 and 159 of the California statutes are referred to as follows:

Section 158 of the Civil Code provides that “ either husband or wife may enter into any agreement or transaction with the other, or with any other person, respecting property which either might if unmarried”; and section 159 of the same code provides that a husband and wife may by contract alter their legal relations as to property and the succeeding section makes the mutual consent of the parties thereto a sufficient consideration for such an agreement, etc.

It seems reasonable to hold that, if the husband and wife can contract with each other that certain property which would otherwise be community property shall be the separate property of the wife, they can also contract that certain property acquired prior to July 1927, which would ordinarily be community property in which the wife would have only a mere expectancy, shall be owned as tenants in common, in which each owns a vested one-half interest. This it appears they have effectively done in the instant case.

Undoubtedly the stocks in question, except the one block of stock in the Standard Oil Co. of California, given petitioner by her father, would have been community property in which the wife held only a mere expectancy, if it had not been for the express agreement between the husband and wife that all their stocks should be owned by them, share and share alike. This agreement concerning only personal property did not have to be in writing and was, in our judgment, sufficient to overcome the presumption that all such property was community property under the California statutes.

The Board has held in several cases that where husband and wife have a joint bank account on which either can check at will, they are joint tenants or tenants in common in the ownership of the account, depending upon the nature of their agreement, and that shares of stock purchased with the proceeds of such account belong equally to both unless a contrary proportion is agreed upon. Cf. Alfred Hafner, 31 B. T. A. 338; L. C. Mitchell, 28 B. T. A. 767; Walter E. Dunham, 27 B. T. A. 1068.

On the strength of the foregoing cited statutes and authorities, we hold that the stocks in question were owned by petitioner and her husband, Charles G. Bullis, as tenants in common, except the stock of the Standard Oil Co. of California that was given to petitioner by her father, and the Commissioner was in error in taxing petitioner with the entire amount of dividends shown in our findings of fact, and that the deficiency should be redetermined by taxing petitioner with only one half of the dividends except as to $1,672.48 dividends received in 1930 and $1,750 dividends received in 1931 by petitioner. These latter dividends petitioner concedes were her separate property and taxable to her alone.

The facts in the instant case are distinguishable from those which we had before us in Alanson Weeks, 31 B. T. A. 627. In the Weeks case we held that, where the petitioner borrowed funds from a bank with which to purchase certain corporate stock and gave his personal note therefor, at the same time depositing the stock with the bank as security for the loan, the legal presumption in California being that the petitioner acted for and in behalf of the community and that presumption not having been overcome by evidence that the loan was made upon the faith and credit of his separate property, the community property presumption became absolute and conclusive, and, therefore the profit derived from the sale and the dividends received during the ownership of that stock constituted community income. We held that, the stocks having been acquired subsequent, to July 29,1927, the effective date of the amendment to the California community property law by which the wife was given a vested interest in community property, the dividends and profits were taxable one half to the husband and one half to the wife.

In the instant case, if we were to hold that the dividends were the community property of Charles G. Bullis and Helen H. Bullis, they would all be taxable to the husband, Charles G. Bullis, because the stocks from which the dividends were paid were acquired prior to July 29, 1927. Cf. Paul F. Hill et al., Executors, 24 B. T. A. 1144, and Hirsch v. United States, 62 Fed. (2d) 128; certiorari denied, 289 U. S. 785.

As we have already pointed out, however, we have in the instant case, contrary to what we had in the Weeks case, evidence which we think is ample to overcome the presumption of the California statute that the stocks in question acquired by Charles G. Bullis and Helen H. Bullis during coverture were community property.

Reviewed by the Board.

Decision will be entered under Rule 50.


author: McMahon :

text:
    Agnes Sitterding, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. H. Sitterding, Petitioner, v. Commissioner of Internal Revenue, Respondent. F. Sitterding, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 67011, 67030, 67031.
    Promulgated April 26, 1935.

      Ftcmh J. Albvis, E'sq., and James H. Rindfíeisch, O. P. A., for the petitioners.

      Glmde Kitchin, Esq., and L. W. Oreason, Esq., for the respondent.
   OPINION.

McMahon :

These proceedings, duly consolidated for hearing and decision, are for the redetermination of asserted deficiencies in income tax for the year 1929 in the amounts as follows:

Docket No. Amount
67011_$2,212. 30
67030_ 1, 064. 01
67031_ 440. 64

The only question at issue is whether certain distributions received in 1929 by each of the petitioners as beneficiaries of the estate of their deceased father are includable in the taxable income of each of them.

The petitioners are individuals residing at Richmond, Yirginia.

The father of petitioners, Fritz Sitterding, Sr., late of Richmond, Virginia, died testate April 14, 1928. The will of Fritz Sitterding, Sr., deceased, is incorporated herein and made a part hereof by reference. The executors and trustees named in the will of Fritz Sitter-ding, Sr., who were William H. Sitterding and Fred B. Sitterding, sons of the deceased, and the Virginia Trust Co., qualified as executors on April 30, 1928.

During the year 1929 the executors and trustees of the estate of Fritz Sitterding, Sr., made three distributions to the beneficiaries as follows:

The record kept by the executors for the estate contained an acount entitled “ Income Account ” and an account entitled “ Principal Account.” The above distributions were charged to and entered in such income account on the above dates and in the above amounts with an explanation as follows:

Miss Agnes Sitterding_% Income
W. H. Sitterding_% Income
To a/c [or “acct”] Fred B. Sitterding-% Income

Such distributions exhausted the funds as reflected in the credit balance in the income account at the respective dates of distribution.

On March 27, 1929, the estate paid Federal inheritance tax in the amount of $34,555.56, and on April 23, 1929, the estate paid state inheritance tax in the amount of $138,582.41, both of which were charged to the principal account.

The credit balance or debit balance in the income account or the principal account during 1929 at each of the dates shown was as follows:

The debit balance in the principal account represents overdrafts, i. e., moneys advanced by the Virginia Trust Co.

The record of the executors also contained an inventory account which contained a record of assets of the estate. The estate was inventoried at a little over three million dollars. The principal account did not represent the value of the estate. As and when assets included in the inventory account were liquidated or disposed of by the executors, the moneys received therefor were credited to the principal account.

During the calendar year 1929 the estate had a gross income of $96,998.84, as follows:

Interest on bank deposits, notes, corporation bonds, etc_$16,497. 65
Income from rents and royalties_ 1, 447.19
Profit from tbe sale of real estate, stocks, bonds, etc_ 5,403.00
Income from dividends on stock of domestic corporations- 73, 651.00
Total_ 96, 998.84

The estate has not been completely administered and is still in the process of administration.

The will of Fritz Sitterding, Sr., directed his executors to set aside and hold in trust $300,000, either in money or in stocks belonging to his estate, expressing, however, a preference for stock of the Life Insurance Co. of Virginia, and further directed the executors as trustees to divide the income from such trust quarterly among his three children, the petitioners herein. Pursuant to such direction, the executors set aside and held in trust 2,500 shares of stock of the Life Insurance Co. of Virginia.

The respondent increased the reported net income of each petitioner by adding thereto $16,440.88 as representing total distributions from the estate of Fritz Sitter ding, Sr., received by each petitioner during 1929. In the amount of $16,440.88 added by respondent to the reported income of each of the petitioners he included $1,181.25, or one third of $5,343.75, representing dividends on the above 2,500 shares so held in trust.

In passing to our discussion it must, at the outset, be pointed out that it was stipulated that the amount of $1,781.25 may be added to the reported income of each petitioner herein. Sec. 162 (b), Revenue Act of 1928; Walter S. Gurnee, 13 B. T. A. 262; and Everett J. Esselstyn, Executor, 26 B. T. A. 181; affd., 65 Fed. (2d) 1015; certiorari denied, 290 U. S. 678. Hence, the amount in controversy as to each petitioner is $14,659.63.

As to the amount of $14,659.63 added to the reported income of each of the petitioners, upon the foregoing facts, the petitioners contend that section 162 (c) of the Revenue Act of 1928 provides for a credit to the estate only in the event of a distribution “ properly ” paid or credited during the year to any legatee, heir, or beneficiary, and that the converse of this provision is that any distribution not “ properly ” paid or credited is not a proper deduction by the estate and is not to be included in the income of the beneficiary. They further contend that the executors qualified as such on April 30, 1928; that the distribution of January 30, 1929, was made by the executors within one year after April 30,1928, in derogation of section 5437 of the Code of Laws of Virginia, effective during 1929; that the distributions of July 30 and October 30,1929, were made at a time when tbs estate bad a substantial deficit in its accounts at the Virginia Trust Co.; that these distributions were not made from the funds of the estate, but were made from advances by the Virginia Trust Co.; that therefore all the distributions made were not proper distributions within the meaning of section 162 (c), supra, and are not proper deductions to the estate nor includable in the income of the beneficiaries. The petitioners further contend that the distributions made July 30 and October 30, 1929, are not to be considered income in the hands of the beneficiaries for the reason .that on these dates the estate had no available income for distribution and consequently any distributions made at that time constituted a distribution of corpus and were not includable in gross income of the beneficiaries under section 22 (b) (3) of the Revenue Act of 1928.

Section 5437, supra, provides that a personal representative “ shall not be compelled ” to pay any legacy or make distribution of the estate until after one year from the date of the order conferring authority on the first executor or administrator. In Bliss v. Spencer, 99 S. E. 593, the Supreme Court of Appeals of Virginia stated as follows:

' * * * It is tie duty of an administrator to distribute the personal estate after the payment of debts. 1 Am. & Eng. Ency. Law. p. 315. It is also his right so to do. 18 Cyc. p. 594. It is out of regard for creditors only that administrators cannot be “ compelled ” to mate distribution of the estate within the year from their qualification. So that, where there are no creditors, there is nothing in our statute law to forbid an administrator from distributing the personal estate within the year. And the true policy of the law, in the absence of such a statute, would seem to favor a reasonably prompt distribution amongst those entitled under the statute of distributions, rather than a holding of the estate by the fiduciary for that year. * * *

The will does not specifically authorize the distribution of the income or corpus of the residuary estate during administration. This is immaterial, however, as distribution thereof is within the discretion of the executors. The beneficiaries cannot compel them to make distribution under section 5437, supra, but the executors may do so of their own volition. There is no evidence showing that the distribution of January 30, 1929, was not a proper distribution except that it was made within the year after the authorization of the executors. The principal account had on January 30, 1929, a credit balance of $50,296.98 and the income account a credit balance of $21,727.76, which latter amount was exhausted by the distribution to petitioners. In our opinion, under section 5437, supra,, and the above decision of the Virginia court, the distribution of January 30, 1929, was not improperly made. This distribution of January 30, 1929, was paid out of the estate as income and was received as income by the petitioners, there being nothing in the record to show that.the executors or the petitioners regarded the distribution as a part of the corpus of the estate. This distribution is therefore taxable to the petitioners in the amounts received by them, respectively.

The petitioners claim that when the distributions of July 30,1929, in the aggregate amount of $11,240.52 were made there was a net deficit of $74,012.93, arrived at by offsetting the credit balance of $11,240.52 in the income account against the debit balance of “ $85,253.45 ” in the principal account; that when the distributions of October 30, 1929, in the aggregate amount of $16,354.35 were made, there was a net deficit o.f $32,596.57 arrived at by offsetting the credit balance of $16,354.35 in the income account against the debit balance of “ $48,950.92 ” in the principal account, and that at the end of 1929 there still was a deficit of $33,519.80, arrived at by offsetting the credit balance of $837.03 in the income account against the debit balance of $34,356.83 in the principal account.

For the purpose of showing “what items of income and what items of deductions were affected for the year 1929 ” the principal account, consisting of 4 pages containing some 64 entries for 1929, and the income account, consisting of 9 pages containing some 213 entries for 1929, were received in evidence. William H. Sitterding testified that as a member of the board of directors and of the executive committee of the Virginia Trust Co. and as executor of his father’s estate, he was familiar with such accounts and that the principal account and the income account thereof were designated such “ Just as a matter of convenience in keeping the account. It is principally and solely a matter of bookkeeping ”; and that there is no requirement in the State of Virginia which called for the keeping of two separate accounts covering principal and income. On cross-examination he testified further, in substance, that the principal account was not the inventory account and did not represent the value of the estate; that the principal account showed all inventory items disposed of; that it “ represented the transactions as stated at that period ”; and that the executors’ accounts contained a separate account showing the inventory of the total estate as filed by the executors. The inventory account is not .in evidence.

While the aggregate amount of the state inheritance tax of $138,-582.41 and the Federal estate tax of $34,555.56 paid in 1929 exceeds by $76,139.13 the income of the estate during 1929, there is no evidence disclosing that the petitioners actually received a part of the corpus of the estate, rather than the income thereof. William H. Sitterding merely testified that the estate had no cash with which to pay the distributions made July 30 and October 30, because “ the Principal Account had an overdraft of a considerably larger amount than was actually paid out from the account marked ‘ Income On the other hand, it appears from the accounts of the executors of the estate in evidence that the cash funds of the estate were carried in two accounts, one, the income account, representing items of income, such as interest, dividends, rents, and royalties, and the other, the principal account, containing items of inventory disposed of-; that the distributions to petitioners were not charged or debited to the principal account, but were charged or debited to the income account, and each of the distributions to each petitioner was designated as representing “ y3 income ”; that at the time of each distribution the income account carried a credit in an amount equal to the total distribution; that the principal account discloses only one distribution during 1929 to the petitioners of corpus in the form of stock of the American Glass Works at a value of $37,000; that no amount was carried or transferred from the principal account to the income account to show distribution thereof through the income account, but both accounts disclose that an amount of $24,-387.76 was transferred on April 30, 1929, from the income account, per instructions of W. H. Sitterding, to the principal account to apply on its overdraft; and that the income account is charged only with items appearing to be current expenses such as interest on notes, services, farm supplies and expense, repairs, 1928 and 1929 realty tax, 1929 personalty tax, and 1928 United States income tax.

These entries in these two accounts indicate an intent on the part of the executors, two of whom are petitioners herein, to charge all claims and administration expense to corpus and to distribute a substantial part of the income to the beneficiaries. Our attention has not been called to any law of Virginia prohibiting the distribution of income of an estate to its beneficiaries during the administration of the estate. So far as we know this rests within the discretion of the executors. None of the beneficiaries, so far as disclosed by this record, have complained. The action of the executors in distributing the income has not been disapproved by the court and, unless complaint is made by a creditor of decedent or the petitioners as beneficiaries, such action will, no doubt, be approved by the court.

Petitioners contend in substance that, if as a matter of convenience legacies are paid out of income instead of corpus, such payments should not be considered as income properly paid or credited to a beneficiary, citing some authority. However, the authority cited deals with fixed legacies only. The will contains no fixed legacies as to amounts or particular property except those contained in the first and second paragraphs relating to household furniture and equipment, personal effects and the trust, so that the amount and form of the residuary estate remains uncertain until the final closing of the administration proceedings. Furthermore, although section 22 (b)(3), supra, provides that the value of property acquired by bequest or devise is not includable in gross income of a beneficiary, it also provides that “the income from such property shall be in-cludable in gross income.” As heretofore stated, the distributions in question were paid out by the executors and apparently received by the beneficiaries as “ income ” and not as corpus. Upon the showing made we must approve the action of the respondent in including in the gross income of each petitioner all the distributions made to them respectively. Cf. Carrie G. Cox, 31 B. T. A. 819.

Decision will be entered for the respondent.

       SEC. 162. NET INCOME.
      The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
      * * * * * * sjc
      (c) In the case of income receives by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.

       Section 5437. When Disteibution To Be Made of Estate of Decedent ; Refunding Bonds To Be Given : Wiieee Recobded.. — A personal representative shall not be compelled to pay any legacy given by the will, or mate distribution of the estate of his decedent, until after one year from the date of the order conferring authority on the first executor or administrator of such decedent, and, except where it is otherwise specifically provided, he shall not then be compelled to make such payment or distribution until the legatee or distributee shall give him a bond, executed by himself or some other person, with sufficient surety, with condition to refund a due proportion of any debts or demands which may afterwards appear against the -decedent, and of the cost attending their recovery. Such bond shall be filed and recorded in the clerk’s office of the court which may have decreed such payment or distribution, or in which the accounts of such representative may be recorded. (Code 1887, section 2706; 1930, p. 631.)

       SEC. 22. GROSS INCOME.
      *******
      (1>) Sinclusions from gross income. — The following Items shall not he includes in gross inoome and shall be exempt from taxation under this title:
      * * * * * * *
      (3) Guras, bequests, AND devises. — -The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income).


author: Leech :

text:
    Herbert G. Perry and Winthrop I. Perry, Executors of the Will of Alonzo W. Perry, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74568.
    Promulgated April 26, 1935.

      Gladwin M. Nead, Esq., for the petitioners.

      Dean P. Kimball, Esq., for the respondent.
   OPINION.

Leech :

The question presented is whether the amount of the gift tax and interest thereon, from the due date of such tax to the date of decedent’s death, paid by his estate in 1931, is deductible from the income of that estate in the computation of its income tax for that year.

The right to deduct this item of interest rests upon the deductibility of the gift tax (Northwestern Motor Car Co. v. Commissioner, 45 Fed. (2d) 357, affirming 15 B. T. A. 1276), which is controlled here by the Kevenue Act of 1928, section 161 (a) (3); section 162; and particularly section 23 (c) (l). Since petitioners claim the right to a deduction, as the Supreme Court said in Helvering v. Inter-Mountain Life Insurance Co., 294 U. S. 686, “ the rule that ambiguities in statutes imposing taxes are to be resolved in favor of taxpayers does not apply. Deductions are allowed only when plainly authorized. Ilfeld Co. v. Hernandez, 292 U. S. 62, 66. New Colonial Ice Co. v. Helvering, 292 U. S. 435, 440.”

Upon this record it will be assumed that the gift tax here involved arose by virtue of the Kevenue Act of 1924, which was repealed by section 1200 of the Kevenue Act of 1926, as of January 1, 1926. That tax is one imposed upon a transfer by gift inter vivos (Revenue Act of 1924, section 319; Bromley v. McCaughn, 280 U. S. 124), and payable “ by the donor ” on or before the 15th day of March in the following tax year. Revenue Act of 1924, sec. 324.

Such taxes may be deducted from income by the donor for income tax purposes. Regulations 65, art. 131. But the donor does not here seek the deduction.

The pending question of deductibility of taxes turns, not upon the identity of the entity against which the tax was assessed (Sabina Schatzinger, Executrix, 12 B. T. A. 1353), but upon the entity against which such tax accrued. Falk Corporation v. Commissioner, 60 Fed. (2d) 204, affirming 23 B. T. A. 883; Roy J. O’Neil et al., Administrators, 31 B. T. A. 727; Alden Anderson, 27 B. T. A. 980; Grand Hotel Co., 21 B. T. A. 890; Luke W. McCrory, Trustee, 25 B. T. A. 994; affd., 69 Fed. (2d) 688.

The taxable transfer here was made by petitioners’ decedent — not his estate. He was the donor by whom the tax was payable and against whom it accrued as a tax liability. Obviously, at least-before decedent’s death, all events had occurred which fixed the tax and determined the liability to pay it. United States v. Anderson, 269 U. S. 422. These taxes then accrued as a claim against decedent. Thompson v. United States, 8 Fed. (2d) 175; Sabina Schatzinger, supra. Since they are claims against the estate, they are deductible from its corpus but not from its income. John M. Brown, Executor, 11 B. T. A. 1203; Roy J. O’Neil et al., Administrators, supra. It was only upon this theory that the disputed tax and interest were deductible and thus deducted from the gross estate of petitioners’ decedent in determining its net amount subject to estate tax.

Petitioners argue that this conclusion violates the rule that income taxes are not affected by the incidence of estate taxes. This position is unsound. The deductibility of the present gift tax and interest from income of the estate is not denied because of its deductibility from the corpus of decedent’s estate for estate tax purposes, per se. These taxes were claims against and therefore deductible from the corpus of the estate, because they accrued against decedent as his taxes upon a gift made by him, and not by his estate. Since such taxes accrued against him, as his taxes, they are not deductible by his estate, a distinct and separate entity. Falk Corporation v. Commissioner, supra; Roy J. O'Neil et al., Administrators, supra; Alden Anderson, supra; Grand Hotel Co., supra; Luke W. McCrory, Trustee, supra.

The word “ taxpayers ” used in the closing agreements mentioned in our present findings of fact, in describing petitioners in connection with the disputed gift tax and interest, did not mean to characterize such taxes as those of the estate. It meant merely that the estate was the entity paying such taxes. That nomenclature did not intend and certainly could not effect any change in the legal incidence and accrual of these gift taxes, upon which depends their disputed deductibility. Ohio Clover Leaf Dairy Co., 8 B. T. A. 1249; Victor G. Marquissee, 11 B. T. A. 334; affirmed as Lewis v. Commissioner, 47 Fed. (2d) 32.

Judgment will he entered for respondent.

       SEC. 161. IMPOSITION OP TAX.
      (a) Application of taw. — The taxes imposed by this title upon individuals shall apply to the income of estates or of any hind of property held in trust, including—
      * * * * * * *
      (3) Income received by estates of deceased persons during the period of administration or settlement of the estate; * » *
      SEC. 162. NET INCOME—
      The net income of the estate or trust shaU be computed in the same manner and on the same basis as in the case of an individual * * ».
      SEC. 23. DEDUCTXONS FROM GROSS INCOME—
      In computing net income there shall be allowed as deductions:
      *******
      (e) Tawes uenerally. — Taxes paid or accrued within the taxable year, except—
      (1) Income, war-proflts, and excess-profits taxes imposed by the authority of the united States * * *.

       Sec. 1200. (a) The following parts of the Revenue Act of 1924 are repealed, to take effect (except as otherwise provided in this Act) upon the enactment of this Act, subject to the limitations provided in subdivision (b) :
      *******
      Part II of Title III (called “ Gift Tax ”) as of January 1, 1926.

       Sec. 319. * * * a tax * * * is hereby imposed apon the transfer * * * by gift * * * of any property wherever situated * * *.

       Sec. 324. The tax imposed by section 319 shall be paid by the donor on or before the 15th day of March * * *.

       Art. 131. Tames. — * * * The gift tax imposed by section 319 of the statute is deductible from the gross income of the donor.


author: Seawell:

text:
    Max R. Bardach, Petitioner, v. Commissioer of Internal Revenue, Respondent. Leonard M. Shapoff, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 64617, 64618.
    Promulgated April 30, 1935.

      James B. H Donnell, Esq., for the petitioners.

      Philip M. Clark, Esq., and S. B. Pierson, Esq., for the respondent.
   OPINION.

Seawell:

These proceedings were consolidated for hearing and report and involve the redetermination of deficiencies in income tax for 1929 in the amount of $9,985.97 in the case of petitioner Bardach and $10,463.40 in the case of petitioner Shapoff. In the taxable year the wives of the petitioners reported as taxable to them dividends paid on and profit realized from the sale of shares of stock of the Leonard Custom Tailors Co., an Ohio corporation. In his audit of the returns the respondent determined that the sums represented taxable income of the petitioners and, accordingly, increased the taxable income of each petitioner by the amount of dividends and profit reported by his wife. Such action the petitioners claim to be erroneous. The answer to the issue depends upon whether the petitioners made gifts of the stock to their wives.

The Leonard Custom Tailors Co., hereinafter referred to as the corporation, was organized in 1923 with a capital stock of $250,000, consisting of 2,500 shares, each of the par value of $100, to take over a business then being operated by the petitioners as partners under the name of Leonard Custom Tailors. Petitioner Shapoff was elected president, and petitioner Bardach treasurer, of the corporation. Both still serve in the same capacities and since 1929 Bardach has also been secretary of the corporation. They, and E. Shapoff, wife of Leonard M. Shapoff, have been members of the board of directors of the corporation since its organization.

In July 1925, pursuant to authority of its board of directors, the corporation opened two accounts in its books, one entitled “L. M. Shapoff and Mrs. L. M. Shapoff ” and the other “ Max Bardach and Mrs. M. Bardach.” Thereafter dividends paid on stock of the corporation outstanding in the names of the petitioners and their wives were credited to the accounts and certain charges were entered in the respective accounts at their request.

In 1924 and 1925 the corporation issued stock to the petitioners as follows:

On February 15, 1924, one share of stock, evidenced by certificate No. 3, was issued to E. Shapoff. Certificates Nos. 1 to 4, inclusive, were issued for the assets of the Leonard Custom Tailors. The remaining certificates were acquired by the petitioners by subscription.

On March 1,1926, 475 shares, represented! by certificates Nos. 1, 10, and 16, of the 476 shares held by Shapoff were reissued in favor of E. Shapoff by certificate No. 24, .and .certificates Nos. 4, 11, and 17, held by Bardach, for 446 shares were reissued, 445 shares, evidenced by certificate No. 25, in favor of Bose Bardach, wife of petitioner Bardach, and one share, evidenced by certificate No. 26, in favor of Bardach. Certificate No. 18 was assigned by Bardach to Shapoff and on January 1, 1926, it was reissued in favor of E. Shapoff by certificate No. 23. These changes of record stock ownership are reflected in the following tabulation, showing the shares outstanding on March 1,1926, in the name of each party:

Thereafter, on June 30, 1926, and June 29, 1927, certificates Nos. 35 and 37, for 150 and 50 shares, respectively, were issued in favor of E. Shapoff, giving her record holdings of 706 shares. On the same dates certificates Nos. 36 and 38, for 130 and 40 shares, respectively, were issued in favor of Eose Bardach, making her record holdings of stock as of June 29, 1927, 615 shares. In each case the stock issued was charged to the allotments of stock made to the petitioners at the time the coropration was organized. The par value of the stock issued to E. Shapoff was charged to the joint account maintained by the corporation in the name of L. M. Shapoff and Mrs. L. M. Shapoff, and the stock issued in favor of Eose Bardach was charged to the joint account of Mas Bardach and Mrs. M. Bardach.

There were no changes in the record stockholdings of the petitioners and their wives from June 29, 1927, to August 2, 1929, except for the reissuance on July 2,1928, to each petitioner’s wife of a single certificate, No. 47 in the case of Eose Bardach and No. 49 in the case of E. Shapoff, for the certificates theretofore issued to them.

On August 2, 1929, Shapoff acquired 46 additional shares by subscription. On the same day certificates Nos. 47 and 49 were reissued, Bardach and his wife receiving certificates for 350 and 265 shares, respectively, for certificate No. 47, and Shapoff and his wife receiving certificates for 360 and 346 shares, respectively, for certificate No. 49.

Dividends paid by the corporation in 1926, 1927, and 1929 were computed by it on the basis of the record holdings of the petitioners and their wives. In each case the amount was credited to the joint accounts on the corporate books, a separate entry being made for the amount paid on the stock outstanding in the name of each of the respective stockholders of record.

On September 4, 1929, the capital stock of the corporation was increased to 50,000 shares of no par value. It was stipulated that 18.4 shares of no par value stock were issued to the record stockholders for each share of old stock outstanding in their names on August 2, 1929. A portion of the new stock issued in the names of the petitioners and their wives was thereafter sold. On September 10, 1929, the broker to or through whom it was sold issued and delivered to the petitioners and their wives separate checks for the selling price of the stock outstanding in their names. The check issued to lióse Bardach was deposited to the credit of her husband’s individual checking account.

It is well established that the requirements of a gift inter vivos are (1) an intention on the part of a competent donor to give; (2) an acceptance by a competent donee; and (3) a transfer of title with complete relinquishment by the donor of dominion and control of the property. Allen-West Commission Co. v. Grumbles, 129 Fed. 287; Edson v. Lucas, 40 Fed. (2d) 398; J. D. Varnell, 28 B. T. A. 231. Cf. Adolph Weil, 31 B. T. A. 899.

The testimony in the record relating to the circumstances surrounding the alleged gifts is confined to that given by the petitioners — interested parties. No reason was assigned for not offering testimony of the alleged donees. Shapoff testified that he made a gift of certificate No. 23 for 30 shares to his wife about January 15,1926, and certificate No. 24 (reissue of Nos. 1, 10, and 16) for 475 shares in March 1926; that he discussed the transfers with his wife; that she was aware that the transfers had been made; and that “ I thought it [the transfer of the 475 shares] would be a good idea for protection of herself and the children that she should own that certain amount of shares of stock in the company.” There is no proof in the record that any of the various certificates issued in favor of E. Shapoff were ever actually or constructively delivered to her with an intention to transfer ownership thereof. Certificate No. 3 for one share and certificate No. 35 for 150 shares were not placed in evidence and their whereabouts was not explained. Certificates Nos. 23, 24, and 37 bear undated blank endorsements.

Bardach testified that he “ gave ” certificate No. 25 for 445 shares to his wife about March 1,1926, “ for the protection of herself and children ”, and that for “ sometime ” after the physical delivery of it to her, she “ kept it at home with some of her private papers.” Certificates Nos. 25 and 36 were on March 24, 1927, endorsed by Rose Bardach to her husband, and nothing of record is contrary to the fact that he had possession of them at all times thereafter. Certificate No. 38 for 40 shares bears an undated blank endorsement of Rose Bardach and there is nothing of evidence to show who held it after such endorsement. For aught we know it was endorsed and delivered to Bardach promptly upon its issuance for the purpose of conveying title thereto.

There is much in the record to discredit the testimony of the petitioners and show the ingenuousness of the various stock issues and alleged gifts in question. Shapoff testified that checks! for dividends paid for the stock outstanding in his wife’s name were deposited by her in their joint checking account and Bardach testified that many of the dividends declared on the stock issued in favor of his wife were credited to their joint account in the corporation’s books, and that when a check was issued for dividends he would “ ordinarily ” show it to his wife, who would permit him to deposit it in his individual bank account. The documentary evidence of record establishes that all dividends declared after 1924 were paid by credits to the joint accounts. Nothing other than the testimony of Shapoff shows how the 1924 dividend was paid.

In 1923 the board of directors of the corporation adopted a resolution for the payment of salary bonuses to certain of its officers, including petitioners, equal to 12 percent of the stock owned by them as shown by the books of the corporation. Such bonuses were paid in 1926, 1927, and 1928, Shapoff receiving each year around $14,000, and Bardach $12,500. The amounts paid to the petitioners bear no relation to their record holdings of stock. For instance, in 1927 and 1928 when each petitioner held one share of stock according to the corporate books, Shapoff received a bonus of $14,290 and Bardach $12,530. We think this is strong evidence of the fact that the petitioners, who, as members of the corporation’s board of directors, voted for the plan and the payments, never considered their small stockholdings as representative of their true interest in the corporation. Shapoff’s wife was present at most of the meetings of the directors at which the bonuses were authorized and the stockholders’ meetings at which the action of the directors was ratified, but did not, so far as the minutes of the meetings show, register any protest. Rose Bardach attended the 1926 meeting of the corporation’s stockholders and, as a stockholder, ratified the action of the directors in authorizing a bonus for that year. She did not attend any other meeting of the stockholders. Shapoff testified on cross-examination that he had only a faint recollection of the bonus arrangment.

The petitioners received salaries from the corporation in addition to the bonuses paid to them. The salary of Shapoff was increased yearly from $115 per week in 1923 to $600 per week in 1929. The weekly salary of Bardach was $115 in 1923 and by 1928 it had been increased to $300 per week.

No receipts were given the corporation in the space provided therefor in the stock book for any of the certificates issued to the wives of the petitioners except certificates Nos. 3, 47, and 49. The receipts for certificates Nos. 3 and 49 were signed “ E. Shapoff per L. M. Shapoff” and the receipt for certificate No. 47 was signed “Mrs. Eose Bardach by Max E. Bardach.” This is significant in view of the fact that personal receipts were obtained from the persons to whom all other certificates were issued, except certificates issued on August 2, 1929, for which no receipts were given.

Some of the stock certificates were not placed in evidence and no explanation was made for failure to do so. Many of the certificates that were made of record are badly mutilated. The record does not disclose the circumstances surrounding the reissuance on August 2,1929, of certificates Nos. 47 and 49.

Considering all of the evidence, we are of the opinion, and so hold, that the petitioners have failed to prove gifts of the stock in question to their respective wives. The action of the respondent in holding the petitioners to be liable for tax on the dividends paid on the stock in 1929 and the profit realized from the sale of a portion thereof in the same year is sustained.

Eeviewed by the Board.

Decision will be entered for the respondent in each proceeding.


author: Morris :

text:
    Florence O. R. Lang and Walter Kidde, Executors of the Estate of Henry Lang, Deceased, Petitioners, v. Commissioner of Internal Revenue, Responent.
    Docket Nos. 71116, 74215.
    Promulgated April 30, 1935.

      W. 0. Morgan, Esq., and James G. Rogers, Esq., for the petitioners.

      Wm. E. Davis, Esq., and O. P. Reilly, Esq., for the respondent.
   OPINION.

Morris :

The question for our determination is whether, when the estate responded to the demands of the Corn Exchange Bank Trust Co. and paid the notes of the American Hair & Bristle Co., upon which the decedent was guarantor, the estate should be permitted to deduct the amounts so paid as debts ascertained to be worthless and charged off under sections 162 and 23 (j) of the Revenue Act of 1928, the American Hair & Bristle Co. being then liquidated, insolvent, and incapable of responding in payment itself or of reimbursing the estate for the amounts which it paid. Said sections of the act provide, in part, as follows:

SMC. 162. NET INCOME.
The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual * * *.
SEC. 23. DEDUCTIONS PROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
*******
(j) Bad Debts. — Debts ascertained to be worthless and charged off 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.

Though the decedent was, in a purely technical sense, a mere guarantor of the obligations of the American Hair & Bristle Co., he was, in the practical sense, the primary and sole obligor, having stepped into the shoes and taken the place of the American Hair & Bristle Co,, with full knowledge at the time of its inability to respond in payment. The Corn Exchange Bank Trust Co. did not renew those notes upon the strength of any credit standing of American Hair & Bristle Co. upon its promise to pay, nor upon any property it owned or posted as collateral for the payment thereof. In accepting such renewal notes the bank relied exclusively upon the promise of the decedent and upon his pledge of 4,000 shares of Ingersoll-Rand Co. common stock, not upon the financial responsibility of the American Hair & Bristle Co.

That is the only consistent position that can be adopted in this proceeding if, as the petitioner claims the right to do in a separate estate tax proceeding before us, we are to permit the deduction of the amount of these notes in the computation of the net taxable estate of the decedent. If the decedent should be considered a mere guarantor or secondary obligor, in this proceeding, hence, required to respond in payment only upon default of the primary obligor and after notice and demand of the payee, the decedent’s estate would be in no position to deduct the amount of said notes from the gross estate in the computation of the net taxable estate, as the estate would not be primarily liable for the payment thereof. The more reasonable view under the circumstances is that the decedent’s obligation was greater than this. At the time of the renewal of the notes the American Hair & Bristle Co. had no assets and was carrying on no business. The decedent was the only one to whom the bank could look for payment, and, rather than respond when the notes fell due, he had them renewed.

Being primarily liable, the estate can not now claim that it was a mere secondary obligor; that when demand was made upon it a debtor-creditor relationship sprang into existence; and that upon failure to obtain reimbursement it was entitled to take a deduction of $237,000 as a bad debt upon the theory of Shiman v. Commissioner, 60 Fed. (2d) 65, and at the same time contend that the decedent’s obligation was of such nature as to constitute a deductible claim against the estate at the time of his death. The two are inconsistent and irreconcilable.

Be vie wed by the Board.

Judgment will be entered for the respondent.


author: Moeris :

text:
    Florence O. R. Lang and Walter Kidde, Executors of the Estate of Henry Lang, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket 71117.
    Promulgated April 30, 1935.

      W. O. Mor gam,, ■¡Esq., and James G. Rogers, Esq., for the petitioners.

      Wm. E. Davis, Esq., and O. P. Reilly, Esq., for the respondent.
   OPINION.

Moeris :

The respondent having determined a deficiency in estate tax of $16,867.83, the petitioners bring this proceeding for the redetermination thereof, alleging error by reason of the refusal of the respondent to permit the credit provided for in section 301 (b) of the Revenue Act of 1926 for the amount of the transfer inheritance tax actually paid to the State of New Jersey upon property included in the gross estate of the decedent.

An additional issue has been injected by the respondent’s amended answer in which he alleges that if the Board finds for the petitioners in Dockets Nos. 71116 and 74215, that is, that the estate of this decedent is entitled to deduct $85,070.01 and $152,776.43 in the computation of net taxable income of the estate for the period November 11 to December 31, 1930, and the year 1931, then, in that event only, the Board should also find that the value of the net estate, here under consideration, for Federal estate tax purposes, should be increased by $714,803.96, i. e., from $571,695.67 to $1,286,499.63.

The petitioners are the duly appointed and acting executors of the estate of Henry Lang, deceased, who died November 10, 1930, while a resident of Montclair, New Jersey.

At the time of the death of Henry Lang, there were outstanding instruments of guaranty which he had signed during his lifetime in favor of the Chase National Bank, New York City, Corn Exchange Bank Trust Co., New York City, Bank of America, New York City, and the Standard Bank of South Africa, Ltd., New York City, upon the following obligations:

All of the foregoing obligations were unmatured on November 10, 1930.

At the time of the death of Lang, the Chase National Bank held 4,000 shares of Ingersoll-Rand Co. common stock belonging to him, which stock had been pledged by him with the said bank to secure his own demand, note held by the bank amounting to $159,751.39 with interest, and also to secure his liability as guarantor of the obligations of the above mentioned companies held by the Chase National Bank. The Corn Exchange Bank Trust Co. also held 4,000 shares of Inger-soll-Rand Co. common stock belonging to him, which stock had been pledged by him with the said bank to secure his own demand note held by that bank for $159,000 with interest, and also to secure his liability as guarantor of the obligations of the above-mentioned companies held by the Corn Exchange Bank Trust Co. The Bank of America held 1,000 shares of Ingersoll-Rand Co. common stock belonging to him, which stock had been pledged by him with the said bank to secure his liability as guarantor of the obligations of the above-mentioned companies held by the Bank of America.

The Ingersoll-Rand Co. common stock, pledged as above mentioned, totaling 9,000 shares, is included in the gross estate of the decedent as determined by the respondent for the purposes of the Federal estate tax, being so included at its market value as of the date of the death of Lang.

On the above obligations, amounting to $1,275,546.65, for which the estate of Lang was liable under the said guaranties at the time of his death, the estate paid to the banks under the guaranties, $811,152.39 in principal and $2,722.23 in interest, making $813,874.-62, and has received from the Lang-Kidde Co. and Monmouth Chemical Corporation, in partial reimbursement, $99,070.66, leaving a net payment by the estate of $714,803.96. The remainder of the guaranteed obligations existing at the time of the death of Lang have been discharged by the Lang-Kidde Co., Monmouth Chemical Corporation and Rendrock Powder Co.

The value of the net estate as finally determined by the respondent in his deficiency notice is $571,695.67 after the application of the deductions of $1,191,745.08 from the gross estate. Included in said deductions is the amount of $714,803.96 determined as hereinabove shown, which amount has been allowed by the respondent.

The net payment for guaranteed debts as above stated, amounting to $714,803.96, is made up of (1) $237,000 paid to the Corn Exchange Bank Trust Co., being the amount of the obligations of the American Hair & Bristle Co. held by the said bank and covered by the guaranty of Lang, no part of which payment has been reimbursed to the estate; and (2) $477,803.96 paid to the Chase National Bank, the Bank of America, and the Corn Exchange Bank Trust Co., being the amount of the obligations of the Lang-Kidde Co., Monmouth Chemical Corporation, and Rendrock Powder Co. held by the Chase National Bank, the Bank of America, and the Corn Exchange Bank Trust Co. and covered by tbe guaranties of Lang, after deducting the amounts received in reimbursement as above stated.

The $237,000 guaranteed debt of the American Hair & Bristle Co. owing to the Corn Exchange Bank Trust Co. at the date of the death of Lang was paid by the executors of the estate, $84,874 during the period November 11 to December 31, 1930, and $152,126 during the year 1931.

Lang was a stockholder, director, and officer of each of the companies above mentioned whose obligations were guaranteed by him, at the time when the said instruments of guaranty were executed by him, and such guaranties were executed for the purpose of procuring credits for the companies from the banks above mentioned, which credits were represented by the obligations above referred to of the said companies.

The petitioners paid to the State Tax Commission of New Jersey the sum of $32,177.87 for inheritance taxes imposed by the laws of the State of New Jersey in respect of the property included in the gross estate of the decedent as determined for the purposes of the Federal estate tax imposed by section 301 of the Revenue Act of 1926 upon the transfer of the net estate of the above named decedent.

In addition to the foregoing facts the parties have stipulated the following:

* * * The executors claim that upon the making of these payments, the American Hair & Bristle Co., Inc., became indebted to the estate for the amounts of these payments, and that, as the assets of the American Hair & Bristle Co., Inc. were completely liquidated in 1929, since which time that company has had no assets, the above amounts are deductible as bad debts owing to the said estate in determining the taxable income of the estate for the above periods, which claims constitute the issues in the appeals under Docket No. 71,116 and Docket No. 74,215. It is understood, however, that the petitioner reserves an exception to the admissibility of the facts stated in this paragraph on the ground that they are immaterial and. irrelevant to the issues in this case.
The respondent has denied that the petitioners are entitled to the deductions of $84,874. and $152,126. claimed in appeals under Docket Nos. 71,116 and 74,215 for income tax purposes on the ground that said amounts are proper deductions in determining the net value of the estate for estate tax purposes.
The executors admit the liability of the estate at the date of the death of Henry Lang, pursuant to the above-mentioned instruments of guaranty, for that part of the guaranteed debts as above set forth of the Lang-Kidde Company, Inc., Monmouth Chemical Corporation and Rendrock Powder Company not paid by those companies and for the whole of the guaranteed debt as above set forth owing by the American Hair & Bristle Co., Inc.

The only issue raised by the petitioners respecting the credit provided for in section 301 (b) of the Revenue Act of 1926 has been settled by stipulation entered into between the parties, which has been incorporated in our findings of fact hereinabove.

Having decided, in Docket Nos. 71116 and 74215 (Florence O. R. Lang and Walter Kidde, Executors, 82 B. T. A. 522), that the estate of the decedent Lang was not entitled to deduct $85,070.01 and $152,776.43 in the computation of the net taxable income of the estate for the period November 11 to December 31, 1930, and the year 1931, representing alleged bad debts, the respondent’s affirmative allegation of error herein is automatically disposed of.

Reviewed by the Board.

Judgment wiU he entered under Rule 50.