text:
    A. W. Henn, as Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4303.
    Promulgated September 22, 1927.
    1. Terms of a trust instrument construed to require distribution of the income to those beneficiaries who had reached their majority.
    Such income held, to be taxable to the beneficiaries and not to the fiduciary.
    2. The trust instrument provided for distribution of so much of the income accruing to minor beneficiaries as was necessary or advisable, in the judgment of the trustee, for their maintenance, care, and education and for the accumulation of the balance. Held, that the income distributed was not taxable to the fiduciary and that, under the terms of the trust instrument, the balance was accumulated for future distribution and was taxable to the fiduciary.
    3. Willauts v. Ordwa/y, 19 Fed. (2d) 917, distinguished.

      David A. Gashill, Esq., for the petitioner.

      Harold Allen, Esq., for tbe respondent.
    The respondent lias determined deficiencies of $4,236.71 and $12,-289.42 in income taxes for 1918 and 1920, respectively. In so doing he has included as income to petitioner all of the income under a certain trust instrument. It is the contention of the petitioner that no part of such income is taxable to the trustee or, in the alternative, that not more than one-half is so taxable. The petition assigned as error the refusal to allow as a deduction in 1918 an alleged net loss for 1919. At the hearing this assignment of error was withdrawn.
    BINDINGS OB BACT.
    The petitioner is the trustee under a declaration of trust bearing date November 14,1916, the details of which are hereinafter referred to and set forth.
    On or about November 14, 1916, A. W. Henn, in his own right, duly executed and acknowledged a declaration of trust which, so far as is here material, provides as follows:
    Whereas, I, A. W. Henn, of Cuyahoga County, Ohio, desire to make provision for the future welfare, comfort and support of my four children, Edwin C. Henn, aged 23 years, Howard li. Henn, aged 21 years, Jeanette M. Henn, aged 16 years, and Robert B. Henn, aged 12 years, and for the survivor of them or their respective widow, husband and lawful issue, in manner as is hereinafter more fully set forth and provided, and
    Whereas, for that purpose I have caused to be issued to myself, A. W. Henn, as Trustee, four several certificates of the common capital stock of The National-Acme Manufacturing Company, a corporation organized, existing and doing business under and by virtue of the laws of the State of Ohio, with its office and principal place of business in the City of Cleveland, in the said State; each of said certificates representing Seven Hundred and Fifty (750) shares of the said common capital stock and said certificates being respectively numbered as follows: C Seven Hundred eighty-nine (C 789), 0. Seven Hundred ninety (C 790) C Seven hundred ninety-one (C 791) and C Seven Hundred ninety-two (C 792) each of said certificates being dated the fourteenth day of November, 1916.
    Now, Therefore, I, A. W. Henn, for and in consideration of the love and affection which I have for my said children and each of them, do hereby give, sell, assign, transfer and set over said shares of capital stock above mentioned and said certificates evidencing the same to A. W. Henn, Trustee, and his successors in trust as Trustee, as is hereinafter more fully provided for the uses and purposes, and subject to all the terms and conditions of this written Declaration of Trust as follows, to-wit:
    The Trustee shall have power:
    *******
    3 — -To determine whether money or property coming into the Trustee’s possession shall be treated as principal or income, and to charge or apportion expenses or losses to principal or income according as the Trustee may deem just and equitable;
    *******
    The net income derived from said Trust Estate shall be held for the equal benefit, share and share alike, of my said four children or their lawful issue and lineal descendants per stirpes and not per caifita, and the Trustee shall annually, or oftener in his discretion, pay to such of the beneficiaries hereunder as may have arrived at the age of twenty-one years, his or her share of said income, provided, however, that all payments of income herein directed to be made shall be subject to the right hereby conferred upon the Trustee to temporarily withhold or completely discontinue, in whole or in part, any such payments, due consideration being given to the age, necessities, earning capacity, possession of other resources and habits of life of each of such beneficiaries. Any income so withheld or discontinued may, at any subsequent time or times, be given to tho beneficiary from whom the same was withheld, or to the wife or husband of such beneficiary, or distributed to other of said beneficiaries, or be retained and added to said principal Trust Estate, it being the intent hereof that the Trustee shall have power to make unequal distribution of income among any of said beneficiaries according to the several needs and habits of life of each of them as the Trustee shall at such time or times determine ; it being, however, intended, and it is the purpose and spirit of the trust hereby created, that all of said Trust Estate shall, so far as possible, be devoted to the use and benefit of my said four children equally and to their lawful issue and lineal descendants who may survive thorn, it being intended that the discretion to be exercised by the Trustee in the distribution either of income or principal is to be exercised disproportionately only in the event of the bankruptcy, incompetency, improvidence, profligacy or misfortune of any of said beneficiaries.
    *******

      During the minority of any beneficiary hereunder, the Trustee may use such of the income accruing to said beneficiary, and any or all of the income withheld or retained from the share of any other beneficiary under the terms hereof, for the support, care, maintenance or education of such minor as in the judgment of said Trustee may be necessary or proper.
    Any income withheld or retained by the Trustee by reason of the minority of any beneficiary hereunder, shall, when such beneficiary shall have arrived at the age of twenty-one years, together with any increase thereof, if any, be paid over to such beneficiary; subject, always, however, to the discretion herein conferred upon the Trustee.
    This trust shall cease and determine at the expiration of twenty-one years next succeeding the date of the death of the last surviving of my said four children, provided, however, that the Trustee may determine the trust as to any one or all of the beneficiaries hereunder at such time or times prior to said date as said Trustee may deem for the best interest of said beneficiary or beneficiaries.
    *******
    The gifts of income and principal of said trust estate or either of the same hereinbefore made, shall not be alienated, disposed of, or in any manner whatsoever incumbered by said beneficiaries or any of them while so in possession and control of the Trustee; and if any of said beneficiaries shall at any time or times alienate, charge or dispose of their respective interest in said principal, income, or any part thereof, or any interest therein, or attempt so to do, before the same shall have been delivered to them under the provisions of this instrument, or if, by reason of their bankruptcy or other event happening, said income and principal or either of the same otherwise intended for said beneficiaries or any of them, shall wholly or in part cease to be enjoyed by them or any of them as above provided, and the same, or any part thereof, or any interest therein shall, or, but for this proviso, would become vested in some other person or persons, corporation or corporations than the trust hereinbefore expressed concerning said income or principal and either of the same shall thereupon cease and determine as to the beneficiary whose interest may be so affected, and all interest or principal, and each of the same otherwise hereinbefore provided for such beneficiary shall thereafter be held and distributed by the Trustee during the residue of the life of such beneficiary according to the absolute discretion of the Trustee; but the Trustee may pay to such beneficiary, or for his or her maintenance or support, or to the wife, husband, child or children of such beneficiary thereafter from such income and principal, such sums and such sums only, as the Trustee, in the Trustee’s absolute discretion shall think fit and proper, using or retaining any unexpended sums for the benefit of any one or more of the beneficiaries hereunder whose interest is not so affected.
    And provided further, in the event that in the opinion of the Trustee, the income derived from said trust estate shall be insufficient for the proper and suitable care, support, maintenance or education of said beneficiaries or any of them, said Trustee shall have full power and authority to use such part of the principal of said trust estate as may be necessary or proper therefor.
    The trust instrument contains detailed, provisions for the payment of the income, upon the death of any of the four of the trustor’s children, to their issue or in default of issue to the surviving children and issue of other deceased children. Such provision is, however, made subject to tíie discretion theretofore granted the trustee with respect to payments. Provision is also made for other trustees in the event of the death of A. W. Henn.
    The dates of birth of the four children of the trustor were as follows: Edwin C. Henn, April 25, 1893; Howard E. Henn, March 5, 3895; Jeanette M. Henn, June 4, 1900; Eobert B. Henn, April 16, 1904. Jeanette M. Henn has since married and is hereinafter referred to as Jeanette M. Henn Akers.
    The taxable income of the trust and the allowable deductions therefrom were determined by the Commissioner to be as follows:

    For the years in question, each of the said four beneficiaries accounted for and paid income taxes upon the income from said trust. The taxpayer, said trustee, during said years, paid no tax upon the income of the said trust.
    During the taxable years in question all of the children were living and none of them was or had been bankrupt, incompetent, improvident, profligate nor had any of them suffered any misfortune. All have been q’uite normal and quite successful.
    The amounts of cash paid from the income of the trusts to the children during 1918,1919, and 1920 were as follows:

    During the years 1918, 1919, and 1920, the following amounts were paid by A. W. Henn for and on behalf of his aforesaid children:

   OPINION.

Phillips : The decision of this appeal involves the interpretation of the trust instrument and the application thereto of the provisions of section 219 of the Revenue Act of 1918, the pertinent portions of which are as follows:

Seo. 219. (a) That tbe tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including—
* * * * Jj: * *
(2) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests;
(3) Income held for future distribution under the terms of the will or trust; and
(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct.
(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, * * * and in cases under paragraph (4) of subdivision (a) of this section and the fiduciary shall include in the return a statement of each beneficiary’s distributive share of such net income, whether or not distributed before the close of the taxable year for which the return is made.
(c) In cases under paragraph (1), (2), or (3) of subdivision (a) the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary, * * *. In such cases the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216.
(d) In cases under paragraph (4) of subdivision (a), * * * the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary his distributive share, whether distributed or not, of the net income of the estate or trust for the taxable year-, * * ».

Counsel have not referred us to any decisions of the courts, (if such there be) construing similar provisions with respect to the accumulation or distribution of the trust income. There are, however, certain well established principles of interpretation which will assist us. The provisions are to be construed as a whole to give effect to each and every one, if possible, without undue emphasis upon any single provision. In case of doubt the courts favor a construction creating vested interests as against contingent interests. Moreover, the courts do not look with great favor upon provisions for accumulation of income, and in case of doubt, resolve the question in favor of its distribution; this latter being in the nature of an extension of the rule favoring vested as against contingent interests.

Looking at the trust instrument as a whole it does not appear to differ materially from the usual “ spendthrift ” trust. The intention that each of the children shall share equally in the income and in the principal is clearly expressed and it is made evident that only in certain cases is the trustee to exercise any discretion in the distribution of the income or principal. It would seem that the intention of the testator could be expressed and effect given to all of the terms of the trust instrument with respect to the discretion lodged in the trustee by paraphrasing the wording somewhat as follows:

In the event of tlie bankruptcy, incompetency, improvidence, profligacy or misfortune of any of said beneficiaries the trustee may ex'ercise a discretion in the distribution either of income or of principal. In the exercise of such discretion consideration shall be given to the age, necessities, earning capacity, possession of other resources, and habits of life of each of the beneficiaries and distribution made according to the several needs and habits of life of each of them.

During the taxable years and, indeed, to the date of the hearing, none of the enumerated events giving rise to the exercise of a discretion on the part of the trustee had occurred. It is our opinion that under a proper construction of the instrument the facts are such that no discretion was lodged in the trustee during the taxable years to make any unequal distribution of the income of the trust for those years, except as distribution to the minors was limited to their necessities.

Eeferring again to the language of the trust, we find separate provision made for those beneficiaries who have reached the age of 21 and those under that age. During the years involved two of the children were in the former class and two in the latter class. As to those over twenty-one it is provided:

The Trustee shall annually, or oftener in his discretion, pay to such of the beneficiaries hereunder as may have arrived at the age of twenty-one years, his or her share of said income;

Clearly if, as we have decided is the case, the provisions for other distribution or for accumulation are ineffective in these years, the income is distributable to the beneficiaries. The evidence discloses that it was not all distributed, but this can not affect the result, for the beneficiary must include in his return his distributable share, whether distributed or not, and the fiduciary is not taxable on such share.

It might be pointed out that the amount not paid to these beneficiaries does not appear to have been withheld by the trustee because of any claim of a right to do so. The evidence regarding the amounts expended by the father, who was also the trustee in these years, from his personal funds for the benefit of these children, supports the testimony that the purpose in not making distribution was to aid in building up and preserving the property of the children.

We are of the opinion that one-half of the taxable income was properly distributable in the taxable years in equal shares to Edwin C. Henn and Howard E. Henn, is taxable as their income, and is not taxable to the fiduciary.

With respect to the minor children the trust provides:

During the minority of any beneficiary hereunder, tbe Trustee may use such of the income accruing to said beneficiary, * * * for the support, care, maintenance or education of such minor as in the judgment of said Trustee may be necessary or proper. Any income withheld or retained by the Trustee by reason of the minority of any beneficiary hereunder, shall, when such beneficiary shall have arrived at the age of twenty-one years, together with any income thereof, if any, be paid over to such beneficiary; subject, always, however, to the discretion herein conferred upon the Trustee.

It is contended by the petitioner’s counsel that the situation here presented is similar to that in the case of Willcuts v. Ordway, 19 Fed. (2d) 917, wherein the Circuit Court of Appeals determined that the income of the minors there involved was to be taxed to the beneficiaries and not to the fiduciary. The distinction seems to us to be that in that case the beneficiaries were entitled to all of the income in any event so that it could be said to be theirs, but in the present case the minor beneficiaries are entitled to the accumulated income only in the event that the discretion of the trustee to make an unequal distribution is not exercised before they reach their majority. While the rights of the .children in the trust and its income may have been vested rights, their claim to the income wa§ subject to divestment by the proper exercise of the discretion of the trustee at any time before the income which was accumulated became payable to them. This was not so in the case cited. We are of the opinion that the one-half of the income accruing to the minors which was withheld is properly to be classified as income held for future distribution under the terms of the trust and is taxable to the fiduciary.

This leaves for consideration the proper treatment of that portion of the income which was paid out to the -minor children or for their support, care, maintenance or education. It is clear that to the extent that income is distributed it does not fall within either paragraphs (2) or (3) of subdivision (a), section 219. There is no express provision in the statute that such income is to be taxed to the fiduciary. We understand the position of the respondent to be that the trustee was vested with a discretion to distribute or accumulate, that it can not be said that the income was to be distributed so as to fall within paragraph (4) of subdivision (a), section 219 and be taxable to the beneficiary and that, therefore, it must be taxable to the fiduciary. To reach this conclusion it must be assumed (1) that any income which does not fall within any of the numbered paragraphs must be taxed to the fiduciary, and (2) that paragraph (4) should read “ income which is required by the terms of the trust to be distributed.” We have heretofore held in William E. Scripps, 1 B. T. A. 491; Mary L. Barton, 5 B. T. A. 1008; and Elizabeth S. Sprague, 8 B. T. A. 173, that the second assumption is not the proper interpretation of the statute, and our decision of the instant proceeding might well be based upon the reasoning used in the opinions in those cases.

It appears, however, that even if the assumptions stated were a correct interpretation of the statute, we should decide that the trustee is not taxable upon any income distributed for the support, care, maintenance or education of the minor beneficiaries. While the trust instrument provides that the trustee may use such of the income accruing to the beneficiary as in the judgment of the trustee may be proper or necessary for those purposes, the provision must be construed as mandatory. No court of equity would permit the trustee to accumulate the income for the minor if necessary for any of the purposes enumerated. Under the terms of the instrument the trustee would be required to distribute so much of the income as might be required to care for and educate the beneficiary. The discretion of the trustee was not to determine whether any income was to be distributed but was limited to a determination of the amount necessary or advisable. Even this was a limited discretion for a court would not hesitate to take jurisdiction to compel distribution in the event that the discretion was abused. We come then to the conclusion that the trust instrument required the distribution of so much of the income accruing to the minors as was necessary or advisable for their support and education, that the only discretion in the trustee was to determine in the first instance how much was necessary or advisable for those purposes, and that the income is not taxable to the fiduciary to the extent that distribution was made from the one-half of the income accruing to the minors.

Reviewed by the Board.

Decision will be entered on 15 days'1 notice, under Rule 50.


source: Caselaw Access Project

author: Phillips :

license: Public Domain

text:
    George G. Clark, Annie M. Morse, and Walker L. Huse, Trustees, Estate of Charles H. Cummings, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.

      Docket No. 7927.
    Promulgated September 22, 1927.
    The testator created a trust of his residuary estate, directing his trustees to “ distribute the principal thereof and income therefrom to, for, in and among such charitable, fraternal, benevolent and educational uses, purposes, societies, institutions, associations and corporations public or private within the State of New Hampshire as they in their discretion shall select and designate, and in such manner and ways and with such limitations as to use as they shall deem proper, beneficial and expedient.” The trustees received income during the taxable year, but made no distribution of principal or interest until two years later. Held, that the income is taxable to the fiduciary. Held, further, that since distribution may be made to other than exempt corporations, the income is not exempt. Previous court and Board decisions distinguished.

      Henry Herrick Bond, Esq., for the petitioners.

      A. R. Marrs, Esq., for the respondent.
    This proceeding is for the redetermination of a deficiency in income tax proposed to be assessed by the respondent for the year 1921 in the amount of $109.31. The respondent determined that the income of a trust of which they were trustees was taxable to them as trustees, under the provisions of section 219 of the Revenue Act of 1921, The petitioners contend that the income of the trust was in 1921 held by the trustees under the terms of the trust to be distributed to charities and was taxable, if at all, to the beneficiaries under section 219 (a) (4) of the Revenue Act of 1921, but that since the beneficiaries are admittedly exempt, no tax is assessable.
    FINDINGS OF FACT.
    Petitioners are trustees under the will of Charles H. Cummings, deceased. The pertinent provisions of that will are:
    After tbe duties, directions and requirements imposed upon tbe trustees by the provisions of tbis item of tbis will have been performed and tbe expenses of carrying out tbe same and tbe service of the trustees therefor have been paid I direct tbe trustees to hold tbe trust fund derived from and under tbis residuary item of tbis will, including any and all funds which have or may come into tbe residue of my estate as provided in tbe seventh, eighth and ninth items thereof, and as they can, in their judgment and discretion, so do advantageously, give, expend, dispose of and distribute tbe principal thereof and income therefrom to, for, in and among such charitable, fraternal, benevolent and educational uses, purposes, societies, institutions, associations and corporations public or private within the State of New Hampshire as they in their discretion shall select and designate, and in such portions and sums and at such time or times and in such manner and ways and with such limitations as to use as they, my trustees shall deem proper, beneficial and expedient.
    During the year 1921 certain income from the trust property came into the hands of the trustees. The amount of this income was $3,732.64. No distribution was made in that year by the trustees to the beneficiaries, but in the year 1923 the trustee made distribution to certain admittedly charitable corporations as follows:
    April 10, 1923, Laconia Hospital Assn., Laconia, N. H-$1, 000
    July, 1923, Merideth Public Library, Merideth, N. H- 500
    July, 1923, New Hampshire Orphan’s Home- 2, 000
    The income at the end of the year 1921 was carried on the books of the trust to income account and not to principal account.
    In the interval between the time of the receipt of the income in 1921 and the time of the distribution thereof to the charitable beneficiaries in 1923, the trustees had conferences relative to the selection of the recipients of the distribution and weighed the merits of the particular institutions under consideration. The three mentioned above were selected on account of their particular merits and on account of the interest of the testator in them.
   OPINION.

Phillips :

Petitioner’s counsel contends that the income in question is not taxable to the trustees on two grounds: (1) that the income falls within section 219(a) (4) of the Revenue Act of 1921 as “income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals,” or (2) that the income was to be distributed to exempt corporations and falls within the decision of the Board in Appeal of Herbert Jermain Slocum, et al., Executors, 6 B. T. A. 36, and the decision of the district court in Slocum v. Bowers, 15 Fed. (2d) 400, since affirmed by the United States Circuit Court of Appeals of the Second Circuit in Bowers v. Slocum, 20 Fed. (2d) 350.

The pertinent provisions of the Revenue Act of 1921 are as follows:

Sec. 219. (a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including—
* * * :¡: * * *
(2) Income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests;
(3) Income held for future distribution under the terms of the will or trust; and
(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct.
(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, except that (in lieu of the deduction authorized by paragraph (11) of subdivision (a) of section 214) there shall also be allowed as a deduction, without limitation, any part of the gross income which, pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in paragraph (11) of subdivision (a) of section 214. In cases in which there is any income of the class described in paragraph (4) of subdivision (a) of this section the fiduciary shall include in the return a statement of the income of the estate or trust which, pursuant to the instrument or order governing the distribution, is distributable to each beneficiary, whether or not distributed before the close of the taxable year for which the return is made.
(c) In cases under paragraphs (1), (2), or (3) of subdivision (a) or in any other case within subdivision (a) of this section except paragraph (4) thereof the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary. * * *
(d) In cases under paragraph (4) of subdivision (a) * * * the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary that part of the income of the estate or trust for its taxable year which, pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or not, * * *
Seo. 214. (a) That in computing net income there shall be allowed as deductions:
#****>!< *
(11) Contributions or gifts made within the taxable year to or for the use of: * * * (B) any corporation, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including posts of the American Legion or the women’s auxiliary units thereof, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual; * * *

There is in the will no provision for the periodical distribution of income. Principal and income are treated as one. The trustees are to distribute both “ in such portions and sums and at such time, or times and in such manner and ways and with such limitations as to use as they shall deem proper, beneficial and expedient.” The argument that income must be distributed periodically goes too far, for since income and principal are to be distributed alike, it implies that the principal must be distributed periodically. We see no such direction in the will.

There must also be considered that portion of section 219(b) providing that in cases under paragraph (4) of subdivision (a) there shall be included in computing the net income of the beneficiary that part of the income which is distributable to such beneficiary.

If any meaning is to be given to this provision in construing paragraph (a) (4) it must be that the latter paragraph implies a known beneficiary, which would exclude the instant case from that paragraph.

Furthermore, in setting aside the residuary estate in the hands of trustees instead of directing its distribution by the executors, it seems clear that testator intended that the distribution should not take place for some time. In the absence of any provision for the separate distribution of income, this confirms the conclusion to be drawn from the language of the will that any income or accretions to the principal fund are to be treated as part of the entire fund. In such circumstances, it becomes impossible to say that any distribution is either principal or income, for it is merely a distribution of a part of a whole consisting of both.

Nor does the instant case fall within Appeal of Herbert Jermain Slocum et al., Executors, supra, or Bowers v. Slocum, supra, where it clearly appeared that all of the income must go to corporations of the character described in section 219 (b). Here the beneficiaries of the trust are not so confined. That the trustees should some two years after the year involved make a distribution of a part of the fund to corporations within the limitation, seems to us immaterial.

Reviewed by the Board.

Decision will be entered for the respondent.


author: Akundell:

text:
    Caughey-Jossman Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7045.
    Promulgated September 22, 1927.
    The Commissioner, in auditing the returns of two affiliated companies, determined a deficiency in the case of one and an overassessment as to the other. The notice of deficiency was sent to the company in whose case the overassessment was determined and that company filed a petition contesting the correctness of the deficiency.

      Held, that as to the company filing the petition the Board is without jurisdiction, in view of the determination of an overassessment, and the petition is dismissed. Ooi'nelms Cotton Mills, 4 B. T. A. 255.

      Held, further, that the other company, against which the deficiency had been determined, had no right of appeal to the Board as it had not been notified of the determination, and that the words “ a consolidation ” following the name of the petitioner company in the caption of the petition did not make the other company a party to the proceeding.

      J. K. Starr, Esq., for the petitioner.

      T. M. Wilkins, Esq., for the respondent.
    The Commissioner has determined a deficiency in income and profits taxes for the fiscal year ended June 30, 1918, in the amount of $5,163.63 and a penalty in the amount of $2,581.81.

      FINDINGS OF FACT.
    Under date of July 17, 1925, the Commissioner addressed a notice of deficiency to the “ Caughey-Jossman Company, 5075 Grand Elver Avenue, Detroit, Michigan,” which notice contained the following statement:
    An examination of your income and profits tax returns and those of your affiliated company for the fiscal year ended June 30, 1918, has resulted in a determination of a deficiency in the tax and penalty amounting to $5,163.63 and $2,581.81, respectively, as shown in the attached statement.
    The statement attached to the notice of deficiency reads as follows:
    Statement of Retubns Examined and Resulting Tax Liability

      Returns Mmamined

      Resulting Tax Liability

    The adjustments resulting in the above additional tax liability are based upon the reports of the Revenue Agent dated March 29 and May 26, 1924, copies of which have previously been furnished you.
    The overassessment shown above is barred by the operation of the Statute of Limitations and cannot be allowed.
    1918 Return filed May 1923.
    In connection with the above results careful consideration has been given the statement made in your claim for refund of $1,752.71.
    In accordance with the agreement reached at the conference held in this Bureau under date of June 25, 1925, the contentions as set forth in your brief dated June 3, 1925, have been disallowed.
    The 50% penalty as indicated in Bureau letter dated May 9, 1925, is subject to an offer in compromise, through the office of the Collector of Internal Revenue for your district.
    Prior to the issuance of the above-described notice of deficiency the Commissioner addressed to the Caugliey-Jossman Co. a so-called 30-day letter, nnder date of May 9, 1925, which letter had attached to it a statement which contained, among other things, the following:

      Schedule — 1—

      Adjustment of Tax for Fiscal Years.

    Fiscal Year ended June 30, 1918.
    Total tax computed under 1917 Act, Schedule Revenue Agents Report dated May 26, 192-1___ $9,517.72
    Total tax computed under 1918 Act, Schedule 10, Revenue Agents Report dated May 26, 1921- 17, 645. 93
    6/12 oí tax computed under 1917 Act_ 4, 773. 86
    6/12 oí tax computed under 1918 Act_ 8, 822.97
    Total Tax_$13,596.83
    Schedule-2—

      Allocation of Total Taw.

    Name of Company Per Cent Amount
    Caughey-Jossman Company_61.2125 $8, 322.96
    American Elevator & Storage Company- 38. 7875 5, 273. 87
    100.00 $13, 596. 83
    Schedule-3—

      Computation of Taw Liability.

    Caughey-Jossman Company.
    Correct tax liability_$8, 322.96
    Original tax assessed (Form 1120)-$6,680.68
    Original tax assessed (Form 1031)_ 1,879.97
    Total Tax assessed 8, 560. 65
    Overassessment — 237. 69

      Computation of Taw Liability.

    American Elevator & Storage Company. Tax Correct tax liability_$5,273. 87 Penalty $2, 636. 93
    Previously assessed: Penalty
    Original Tax_$15. 74 $7. 87
    Additional_ 94. 50 47.25
    - —— 110.24 55.12
    Additional Tax to be assessed_$5,163. 63
    Additional Penalty assessed- $2, 581. 81
    Under date of September 11, 1925, a petition was filed which, omitting the propositions of law, is as follows:
    United States Boakd oe Tax Appeals
    Appeal of the Caughey-Jossman Co., a consolidation. 5075 Grand River Ave., Detroit, Michigan.

      Petition

    The above named taxpayer hereby appeals from the determination of the Commissioner of Internal Revenue set forth in his deficiency letter IT-CRA-ECE-60D dated July 17, 1925, and as the basis of its appeal sets forth the following:
    1 — The taxpayer is a Michigan corporation with principal office at 5075 Grand River Avenue, Detroit, Michigan.
    2 — The deficiency letter, a copy of which is attached, was mailed to the taxpayer on July 17, 1925.
    3 — The taxes in controversy are income and profits taxes for the fiscal year ending June 30, 1918, and are less than $10,000.00, to wit: $5,103.63; and $2,581.81 penalty.
    4 — The determination of tax contained in the said deficiency letter is based upon the following errors:
    (1) The determination of tax liability against the subsidiary company by methods used in determining tax liability against a consolidation where the statute of limitations has run against the parent company, instead of its determination without consolidation.
    (2) The disallowance of officers salaries claimed where no salaries were paid because no income was earned according to books, but large earnings were shown by revenue agent after adjusting income between corporations.
    (3) The assessment of penalties for delinquency in filing return according to the provisions of the Revenue Act of 1917 instead of the Revenue Act of 1918 for return for a fiscal year ending in 1918.
    5 — The facts upon which taxpayer relies as the basis of its appeal are as follows:
    The American Elevator & Storage Company was organized July 26, 1917. Its books for the first part year showed no earnings. No salaries were authorized or paid officers. The Department consolidated this company and Caughey-Joss-man Company and the Revenue Agent adjusted income of the two companies so as to show a large income for the American Elevator & Storage Company. Taxpayer now claims that reasonable salary allowances should be made officers from adjusted income.
    * * »}< * # ífc *
    Wherefobe, the taxpayer respectfully prays that this Board may hear and determine its appeal.
    Caughey-Jossman Co.

      L. J. Simpson

      Seoy.-Treas.

    State of Michigan County of Wayne
    L. J. Simpson, being duly sworn, says that he is the Secretary and Treasurer of the Caughey-Jossman Company and the American Elevator & Storage Company, and as such is duly authorized to verify the foregoing petition; that he has read the said petition and is familiar with the statements therein contained, and that the facts therein stated are true.
    L. J. Simpson
    Subscribed and sworn to before me this 9th day of September, 1925.
    Ralph W. Shumway Notary PnbUe for Wayne GO'., Michigan

    My commission expires Dec. 28, 1928.
    The Commissioner in his answer admitted allegations contained in the petition as follows:
    (3) Admits that the American Elevator & Storage Company, mentioned in paragraph 5 of the petition, was organized July 26, 1917.

      (4) Admits that no salaries were authorized or paid the officers of the said American Elevator and Storage Company during the period begun July 26, 1917 and ended June 30, 1918.
    (5) Admits that in the determination of the tax, as shown by the said deficiency letter, the Commissioner consolidated the said American Elevator and Storage Company and the Caughey-jossman Company.
    (6) Admits that in the determination of said tax the tax was computed on a consolidated basis.
    (7) Admits that t.he tax computed by the Commissioner on a consolidated basis was allocated to the aforementioned companies in proportion to their income.
    The only evidence offered by the petitioner was the original notice of deficiency dated July 17, 1925, and the original so-called 30-day letter.
   OPINION.

Akundell:

This proceeding was initiated while the Revenue Act of 1924 was in effect. Section 274(a) of that Act provides in part:

If, in the case of any taxpayer, the Commissioner determines that there is a deficiency in respect of the tax imposed by this title, the taxpayer * * * shall be notified of such deficiency by registered mail * * *. Within 60 days after such notice is mailed the taxpayer may file an appeal with the Board of Tax Appeals * * *. (Italics supplied.)

Section 2(a) (9) of the Act of 1924 reads:

The term “ taxpayer ” means any person subject to a tax imposed by this Act.

Reading these two sections together, it seems that the right of appeal must be based on two coexistent elements, namely, (1) the determination by the Commissioner of a deficiency, and (2) the sending of notice thereof to the person subject to the tax. The determination of a deficiency against one person, and the sending of the notice thereof to another, does not meet with the requirements of the statute, which, as pointed out above, provides for the notification of the taxpayer. And this is so, even though the two are affiliated companies, for the reason that section 240 of the statute provides that, in the case of such companies, the tax shall “be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agreement, then on the basis of the net income properly assignable to each.” Thus, for purposes of assessment and collection, the separate identity of each of the corporations is recognized.

What the Commissioner has done here is to determine a deficiency against the American Elevator & Storage Co., and then send a notice of such deficiency to the Caughey-jossman Co. Clearly, on such facts, the American Elevator & Storage Co. can not take an appeal, for it has not been notified of a deficiency, and, from an examination of the petition it does not appear that it has attempted to do so. While the petition filed bears the caption, “ Caughey-Jossman Co., a consolidation,” the American Elevator & Storage Co is not thereby made a party, as “ The title or caption of the bill is no part of the bill * * Jackson v. Ashton, 8 Peters 148; Marshall v. B. & O. R. R. Co., 16 How. 314, 342. The American Elevator & Storage Co. will have its opportunity to file a petition in the event the Commissioner determines a deficiency in its tax and notifies it thereof in accordance with the statute.

As to the Caughey-Jossman Co., the respondent has determined an overassessment and we are without jurisdiction of the appeal. Cornelius Cotton Mills, 4 B. T. A. 255.

Reviewed by the Board.

Order of dismissal will he entered.

Midliken and Smith dissent.


author: Trttssell :

text:
    John N. Hughes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9104.
    Promulgated September 22, 1927.
    Loss on Sale op Property. — Upon the evidence, held,, petitioner sustained a deductible loss on the sale of property.

      John N. Hughes, Esq., pro se.

      John W. Fisher, Esq., for the respondent.
    This proceeding is for a redetermination of a deficiency in income and surtax for the calendar year 1922 in the amount of $250.90.
    The petitioner alleges that the Commissioner erred in disallowing a deduction of $3,000 representing the loss sustained on the sale of a residence during the year 1922.
    FINDINGS OF FACT.
    The petitioner is an individual residing at Des Moines, Iowa. For many years prior to the taxable year in question, the petitioner lived at 1020 Fifth Avenue, Cedar Rapids, Iowa, and held the position of state solicitor for the Chicago, Milwaukee & St. Paul Railway Co. At a stockholders’ meeting held on April 5, 1921, the petitioner was elected a director, and general attorney of the Des Moines Union Railroad Co., which road was in 1921 partially owned by the Milwaukee system, upon the condition that he move to and reside at Des Moines as soon as practicable. The Milwaukee System desired to have its state solicitor reside at Des Moines, the State Capital, and also the duties and offices petitioner was required to perform for the Des Moines Union Railroad Co., required him to reside in that city. The petitioner immediately opened an office in the Union Depot of the Des Moines Union Railroad Co., at Des Moines; sent a part of his private library to that office; made arrangements to stay at the Des Moines Club two or three nights a week, until he could move his family and commenced looking for a residence in Des Moines, suitable for his family. The petitioner intended to move his family to Des Moines as soon as it was practicable to do so.
    The petitioner had lived in his home at 1020 Fifth Avenue, Cedar Rapids, since 1902, and due to the location of the property it could not be sold readily. However, subsequent to April 5, 1921, the petitioner had an opportunity to trade in his Fifth Avenue property as a part of the purchase price of a new house at 2323 Upland Drive, Cedar Rapids. The transaction was handled by one agent with whom both properties were listed for sale, and separate deeds were given conveying the separate properties. The agreed value of the Fifth Avenue property was applied on the purchase price of $14,500 of the Upland Drive property and the petitioner assumed a mortgage of $6,000 upon the latter property, which mortgage was later paid. The said transaction was completed on or about April 28, 1921. The petitioner purchased the Upland Drive residence property, which was attractive and had never been occupied, to sell at a profit and not to use as a home, for it was necessary for him to move to Des Moines.
    Subsequent to the execution of the contract to purchase the Upland Drive property, but prior to the delivery of the deed thereto, the petitioner personally showed the residence to the pastor of the Presbyterian Church, and the chairman of a committee, who were seeking a suitable parsonage for the pastor, and petitioner offered it for sale at a price of $16,500.
    On or about the last of April or the first of May the petitioner, being compelled to move all of his Fifth Avenue property, moved his family into the residence at Upland Drive temporarily, until he could locate a suitable home in Des Moines. The petitioner lived at the Upland Drive residence until he purchased a home in Des Moiues and moved his family there in April, 1922, but during all that time the property was for sale it was listed with a number of persons, and on numerous occasions, the property was shown to prospective purchasers.
    There was a decline in the market for residence property in Cedar Rapids; petitioner was unable to sell during the time he was temporarily residing in the residence in question, and the said residence remained vacant from April, 1922, until December, 1922, at which time it was sold for $11,500.

      Apparently no depreciation has been taken nor claimed as to the Upland Drive residence which was a seven-room house of frame structure with kellastone finish on the exterior and asbestos roof.
    The petitioner deducted $3,000 from gross income in his 1922 income-tax return, as the loss sustained from the sale of the Upland Drive property, the respondent disallowed said deduction and added $3,000 to petitioner’s, net income resulting in the deficiency here in question.
   OPINION.

Trttssell :

The respondent has disallowed the deduction of the loss sustained by the petitioner in 1922, solely upon the ground that the property in question was originally acquired for residential purposes and that the transaction was not originally entered into for profit.

Section 214 (a) (4) (5) of the Revenue Act of 1921 provides:

Sec. 214. (a) That in computing net income there shall be allowed, as deductions :
»#****»
(4) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in trade or business;
(6) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * * * [Italics ours.]

The undisputed facts in the case at bar clearly establish that the transaction, the purchase of the Upland Drive residence property, was entered into for profit. The petitioner had accepted a position which required him to move from Cedar Rapids to Des Moines, at the time he purchased the property in question and he testified that he would not have purchased the property if he had not thought that he could sell it at a profit. From the time the contract to purchase was signed until the property was actually sold, petitioner made every effort to sell, for it was necessary for him to move to Des Moines.

We are of the opinion that this transaction was entered into for profit, within the purview of section 214 (a) (5) of the Revenue Act of 1921.

The petitioner is, therefore, entitled to a deduction of a loss upon the sale of the property in 1922.

Reviewed by the Board.

The deficiency may be recomputed m accordance with the foregoing findings of fact and opinion upon 15 days1 notice, pursuant to Rule 50, and judgment will be entered accordingly.


author: Smith :

text:
    John E. Mathews, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9583.
    Promulgated September 22, 1927.
    The petitioner was during the year 1923 county attorney of Duval County, Florida, and received as compensation for his services $200 per month. Held, upon the evidence, that he was during 1923 an employee of the Hoard of County Commissioners of Duval County, Florida, within the meaning of section 1211 of the Revenue Act of 1926.

      John E. Mathews, Esq., pro se.

      Joseph B. Harlaeher, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiency in income tax for the year -1923 in the amount of $1,073.53. The petitioner contends that the Commissioner erroneously included in his taxable income for the year 1923, $2,400 received as compensation for services rendered as county attorney of Duval County, Florida, during the taxable year. The allegations of error stated in the petition are as follows:
    a. The Commissioner has erroneously concluded that the taxpayer was employed by the Board of County Commissioners under the authority of section 1475 of Revised General Statutes of Florida. This section authorizes the employment of an attorney, not under the control or direction of the Board of County Commissioners and for the specific purpose of prosecuting crimes in and before the county judges court. This section has no relation whatever to the employment of the taxpayer as shown in and by the record.
    b. The Commissioner erroneously failed to recognize the common law, and general law, which authorizes governmental subdivisions to adopt an attorney at law as an instrumentality for the proper performance of governmental functions.
    c. The Commissioner overlooked the fact that the Board of County Commissioners is the administrative board of a governmental subdivision of the State of Florida, with its duties and powers set forth in sections 1475 to 1577. Attention is called to the section 1475 of Revised General Statutes of Florida and particularly the 3rd and 10th paragraphs of said section. Attention is also called to all sections in the Revised General Statutes of Florida, from 1475 to and including section 1773.
    d. The Commissioner erroneously decided that governmental Bureaus and Boards have the authority to make rules and regulations in direct conflict with the constitution of the United States.
    e. The Commissioner erroneously decided that the services of the petitioner were occasional and temporary and are not continuous.
    f. The Commissioner erroneously decided that the Board of County Commissioners failed to reserve to itself the authority to control the manner of performance of the taxpayer’s duties.
    g. The Commissioner erroneously decided that the petitioner was not a regular employee of Duval County.

      h. Tie Commissioner erroneously decided that the taxpayer was not a part of the regular force of Duval County.
    i. The Commissioner overlooked the fact that undei; the United States Constitution, the Government of the United States has not the constitutional right, power or authority to assess or collect taxes against any instrumentality adopted by Duval County for the proper performance of its governmental functions.
    FINDINGS OF FACT.
    The petitioner is an attorney at law residing in Jacksonville, Fla. On January 2, 1928, he was elected attorney of Duval County by the Board of County Commissioners of said county for the term of two years. Notice of such election was conveyed to the petitioner by the following letter:
    January 3, 1923.
    Mr. John ID. Mathews,

      Attorney at Law, Bisbee Building,

      Jaclcsonville, Florida.

    Dear, Sir: I beg to advise that on the 2nd day inst., the Board of County Commissioners of Duval County, Florida, designated you as the county attorney. You mil be expected to attend to all of the legal matters for Duval County and you will receive as your compensation the sum of $200.00 per month for attending all meetings of the Board of County Commissioners and giving advice concerning all routine matters coming before the board, and for defending or prosecuting law suits in which the county is a party or interested, or attending to all legal matters in connection with bond issues, you will receive the usual compensation allowed in this jurisdiction. This appointment is for a period of two years unless sooner modified by mutual agreement. Please advise me of your acceptance.
    Yours very truly,
    (Signed) R. H. Cabs well,

      Chairman of the Board, of County Commissioners.

    The petitioner accepted the appointment according to the terms set forth in the above letter and entered immediately upon his duties. He took no oath of office and did not sign any contract of employment.
    The duties of the attorney are to furnish legal advice to the Board of County Commissioners, draw deeds and contracts, orders, resolutions, and defend the county in any action brought against it and to do its general legal work. He is expected to give advice to the Board upon all legal matters. He is also expected to attend all meetings of the Board of County Commissioners.
    During the year 1923 the Board of County Commissioners held regular meetings twice a month and held many special meetings, so that the average number held during the year was approximately two per week. The petitioner attended all such meetings. During the year 1923 the county issued $3,000,000 in bonds and in addition expended $1,500,000, which was raised by general taxation. The petitioner had a large amount of work to do in connection with the bond issue and in giving advice and doing the legal work connected with the laying out of many county roads. In addition he was forced to work evenings and Sundays in connection with the legal work of the county.
    The Board of County Commissioners is the administrative head of Duval County under the governmental system of the State of Florida. The powers and duties of Commissioners of the several counties of the state are defined in sections 1475 to 1620 of the Revised Statutes of Florida. Section 1475 gives the Board of County Commissioners authority—
    Third — To represent the county in the prosecution and defense of all legal causes.
    * * * * * # *
    Tenth — To issue bonds in their respective counties for the purpose of erecting a courthouse, jail, to build or construct roads and to fund the present outstanding indebtedness, and to prescribe the rate of interest thereon: Provided, That no bonds shall be issued except the same shall be ordered by a majority of the registered voters in the respective counties.
    Prior lo the year 1923 the petitioner had been actively engaged in the practice of law and during the year 1923 continued this practice. He maintained a separate law office but did not allow his private practice to interfere with his duties which he owed to the county. He was always at the beck and call of the County CommissioneTs. The legal matters were referred to him and he was instructed to draw legal papers for the use of the county. The Commissioners did not instruct him how he should perform his legal work. They had no special control over the hours he was employed or engaged in practice. He was carried on the pay roll of the County Commissioners and received his salary monthly.
   OPINION.

Smith :

The question presented by this proceeding is whether the income received by the petitioner as compensation for legal services rendered the Board of County Commissioners of Duval County, Florida, during the year 1923, is exempt from taxation by the United States:

Section 1211 of the Revenue Act of 1926 provides:

Any taxes imposed by the Revenue Act of 1924 or prior revenue Acts upon any individual in respect of amounts received by bim as compensation for personal services as an officer or employee of any State or political subdivision thereof (except to the extent that such compensation is paid by the United States Government directly or indirectly), shall, subject to the statutory period of limitations properly applicable thereto, be abated, credited, or refunded.

No contention is made that the petitioner was an officer of Duval County and the record does not disclose that he was such an officer. The statutes of the State of Florida do not provide for a county attorney in addition to the prosecuting attorney (which the petitioner was not), and he took no oath of office.

The only real question before us is whether the petitioner was an employee of the State of Florida or of a political subdivision thereof within the meaning of section 1211 of the Revenue Act of 1926.

A situation similar to the instant case was before the United States Supreme Court in the case of Metcalf & Eddy v. Mitchell, 269 U. S. 514. The question there was as to whether certain consulting engineers engaged to advise States and subdivisions with reference to water and sewerage projects not required to take any oath or forego other employment as officers or employees of the State or subdivision within the meaning of section 201(a) of the Revenue Act of 1911, which contains a provision for exemption from tax as follows:

This title shall apply to all trades or businesses of whatever description, whether continuously carried on or not, except—
(a) In the case of officers and employees under the United States, or any State, Territory, or the District of Oolumbia, or any local subdivision thereof, the compensation or fees received by them as such officers or employees.

The court held that in the circumstances of the case the petitioners were not officers of any State. The court then stated:

Nor do the facts stated in the bill of exceptions establish that the plaintiffs were “ employees ” within the meaning of the statute. So far as appears, they were in the position of independent contractors. The record does not reveal to what extent, if at all, their services were subject to the direction or control of the public boards or officers engaging them. In each instance the performance of their contract involved the use of judgment and discretion on their part and they were required to use their best professional skill to bring about the desired result. This permitted to them liberty of action which excludes the idea that control or right of control by the employer which characterizes the relation of employer and employee and differentiates the employee or servant from the independent contractor. Chicago, Rock Island & Pacific Ry. Co. v. Bond, 240 U. S. 449, 406, 36 S. Ct. 403, 60 L. Ed. 735; Standard Oil Co. v. Anderson, 212 U. S. 215, 227, 29 S. Ct. 252, 53 L. Ed. 480. And see Casement v. Brown, 148 U. S. 615, 13 S. Ct. 672, 37 L. Ed. 582; Singer Mfg. Co. v. Rahn, 132 U. S. 518, 523, 10 S. Ct. 175, 33 L. Ed. 440.

The facts in this case are substantially different from those which obtained in the case of Metcalf & Eddy v. Mitchell, supra. Here the petitioner was employed for a definite period at a definite monthly salary. He was required to attend all meetings of the Board of County Commissioners; to give legal advice concerning all routine matters coming before the Board; to attend to all legal matters in connection with bond issues; and in general to do the legal work of the Board. He was under the direction of the Board during the entire taxable period and practically all of his energies during the year 1923 were devoted to tbe Board. We do not understand it to be the ruling of the Supreme Court that the relationship of employer and employee obtains only where the relationship of master and servant obtains and then only whenever the employer retains the right to direct the manner in which the business shall be done as well as the results to be accomplished, in other words, not only what shall be done, but how it shall be done. See Vane v. Newcombe, 132 U. S. 220. If this were so a physician who might be employed by a railroad company to devote his entire activities to the company could not be an employee of the company because clearly in such a case the employer would not expect to tell the physician how his work should be done. A skilled laborer is no less an employee because he uses his skill in the performance of his work. The term “ employee ” should not in our opinion be restricted only to menials. The petitioner was in our opinion an employee of the Board of County Commissioners of Duval County, Florida, during the year 1923, within the meaning of section 1211 of the Revenue Act of 1926. Cf. Robert G. Gordon, 5 B. T. A. 1047; Emma B. Brunner, Executrix, 5 B. T. A. 1135; Fred H. Tibbetts, 6 B. T. A. 827.

Reviewed by the Board.

Judgment will be entered for the petitioner on 15 dags’ notice, under Rule 50. *


author: Littleton:

text:
    Jerry Galatis, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10747.
    Promulgated September 22, 1927.
    1. Petitioner’s income for the year 1919 arising from a sale and reaequisition of certain interests in a restaurant business, and the operations of that business determined.
    2. The evidence shows that property owned in 1919 by petitioner’s wife was her separate property and that the profit realized upon the sale was her separate income.

      Douglas D. Felix, Esq., for the petitioner.

      A. R. Marrs, Esq., for the respondent.
    This proceeding involves redetermination of deficiency in income tax for the year 1919, in the amount of $7,699.94. This deficiency arises from the determination by the respondent that the petitioner received additional income in the sum of $21,599.20 by reason of certain transactions in connection with the business known as Rector’s Cafe, and from a net gain arising from the sale of certain real estate.

      BINDINGS OP PACT.
    The petitioner is an American citizen, and resides at Miami, Fla. Julia Galatis, sometimes referred to herein, is the wife of the petitioner.
    In 1913 the petitioner and his wife, Julia Galatis, and his brother, Peter Galatis, opened a restaurant in Miami, Fla., under the name of Rector’s Cafe. All books pertaining to Rector’s Cafe for the year 1919 and preceding years have been lost. The petitioner in his return for 1919 returned no income arising from this cafe or any transactions pertaining thereto. The petitioner contributed only his services to the enterprise. Mrs. Galatis contributed her services and about $500 in cash, which arose from her pledging her jewelry. Peter Galatis contributed his services and a few hundred dollars. The profits were divided, 40 per cent to Peter Galatis and 60 per cent to Jerry Galatis and Julia Galatis in equal shares. Jerry Ga-latis purchased the interest of Peter Galatis in 1911 and thereafter he and his wife ran the business together. In the early part of 1918 Jerry Galatis, being desirous of going into the business of buying and selling real estate and not desiring to give his whole time to the cafe, requested his brother Peter Galatis to procure other persons who would purchase his (Jerry Galatis’) interest in the cafe. At this time petitioner had a four-fifths interest in the cafe and his wife, Julia, a one-fifth interest. Peter Galatis thereupon procured as purchasers Nick Hantges, Tom Poppas, and Peter Gotsis. These three, together with Peter Galatis, each bought a one-fifth interest in the cafe. None of these paid any money for his interest except Peter Gotsis, who paid $800; the four named agreed to work for the cafe for five years and to pay the purchase price for their respective interests out of the profits of the cafe. The purchase price of each one-fifth share was $3,600. Each of the four was to receive as drawing account for personal expenses $75 a month. Jerry Galatis was to act as manager and to receive for his salary $2,100 per annum. As manager he had control and possession of all books and complete management of the business. The books of the cafe were kept by H. B. Graham. On them there was set up the share of each member, including that of Julia Galatis, and the amount of net profits due each.
    From the beginning in 1913 to and including the year 1919 Julia Galatis contributed her services, working nearly all of the days and evenings as well.
    At the end of 1918 there had accumulated to the account of Nick Hantges, Tom Poppas, and Peter Gotsis $7,500, being their share of the profits for the year ending December 31, 1918. This amount was on December 31, 1918, credited to these persons and turned over to the petitioner in part payment of the purchase price of the cafe. Some time in 1918, the exact date not being shown, Peter Galatis sold his share to Charles Bassis. On March 31, 1919, petitioner repossessed himself of the one-fifth interest which he had sold to Peter Gotsis. On November 9, 1919, he repossessed himself of the one-fifth interest which Peter Galatis had sold to Charles Bassis, and on November 25, 1919, he repossessed himself of the one-fifth interests sold to Nick Hantges and Tom Poppas, respectively.
    In consideration of the repossession by petitioner of the four-fifths interest which was owned by Gotsis, Bassis, Hantges, and Poppas, he paid them a total sum of $11,600 out of the net profits of the cafe which had been accrued on the books to Gotsis, Bassis, Hantges, and Poppas as their respective distributive share of the profits of the business to that date. It does not appear how much he paid each one. There is nothing in the record which indicates that the cafe was less valuable when repossessed than when the four-fifths interest was sold, nor does the record disclose that the petitioner made any gain by reason of the sale early in 1918 to the new members.
    The amount paid in salaries by the cafe during the year 1919 was $4,620. The respondent has allowed as deduction for salaries $3,350. The petitioner is entitled to a further deduction in the sum of $1,270.
    The respondent has determined that the petitioner’s income for the year 1919 from the cafe was $24,344.18. He has arrived at this computation in the following manner:
    1.Income accruing from the cafe in 1918:
    Nick Hantges_$2, 500
    Tom Poppas- 2, 500
    Peter Gotsis_ 2, 500
    Total_ $7, 500.00
    2. Profit accruing to petitioner in 1919 upon repossession by him of the interests of Nick Hantges, Tom Poppas, Peter Gotsis and Charles Bassis_ 4,996.92
    3. Share of income of cafe, of Julia Galatis, who respondent held was not a partner, transferred to account of Jerry Galatis-7, 832. 28
    4. Changes in net income of cafe by way of adjustment of partners’ salary account-1, 270. 00
    5. Iieallocation of income account accrued to Nick Hantges, Tom Poppas, Peter Galatis and Charles Bassis to date of repossession of their interests by Jerry Galatis_ 2, 744.98
    Total_ 24,344.18
    Item 5 is not contested by the petitioner.
    Item 4 should be eliminated since the amount of salaries paid by the cafe as found above was $4,620.
    The amount paid by petitioner out of the 1919 net income of the cafe to the owners of the interests which he repossessed in that year was $4,100, being $11,600 less the $7,500 which accrued in 1918 to Hantges, Poppas, and Gotsis, which Jerry Galatis retained. The cafe earned net income for the year 1919 in the amount of $19,674.18. This amount is arrived at as follows:
    Net profits to petitioner in repossessing the shares, as above set forth- «$4, 996.92
    Amount paid by petitioner out of 1919 profits_ 4,100.00
    Income transferred from account of Julia Galatis_ 7, 832.28
    Reallocation of income accrued to various partners as above set forth- 2,744.98
    19, 674.18
    Of this amount one-fifth, or $8,934.83, was the income derived by Julia Galatis from her one-fifth interest. The remaining $15,739.35 was realized by petitioner either by reason of his repossession or by reason of his being a part owner of the cafe subsequent to the acquisition of the various shares. By reason of his repossession and by reason of being a part owner of the cafe after repossession of each interest, the petitioner came into possession of the $7,500 which belonged to the share of Hantges, Poppas and Gotsis in 1918, and four-fifths of the profits arising in the year 1919, to wit, $15,739.35, making a total of $23,239.35. Of this amount he repaid $11,600, making hi$ net income for 1919 from the cafe $11,639.35.
    By general warranty deed dated May 23,1918, Zelma B. Jones and her husband, Edwin M. Jones, conveyed to Julia Galatis the west 50 feet of lot 4, and all of lots 5 and 6 of Block 3 north, in the City of Miami. On May 1, 1919, Tatum Bros. Beal Estate & Investment Co., a corporation, executed and delivered to Julia Galatis a deed, the material parts of which read:
    This Indenture, Made this 1st day of May, A. D. 1919, Between Tatum Bros. Real Estate & Investment Company, a corporation organized and existing under and by virtue of tbe laws of tbe State of Florida, having its principal place of business in tbe County of Dade, in tbe State of Florida, party of tbe first part, and Julia Galatis of tbe County of Dade, in tbe State of Florida, party of tbe second part,
    Witnesseth, That tbe said party of tbe first part, for and in consideration oí the sum of Ten ($10.00) Dollars and other valuable consideration, to it in hand paid by tbe said party of tbe second part, tbe receipt whereof is hereby acknowledged, has granted, bargained and sold to the said party of tbe second part, her heirs and assigns forever, all that certain parcel of land lying and being in the County of Dade, State of Florida, more particularly described as follows:
    Lot Eight (8) of Block One Hundred Seventeen (117) North, City of Miami, Florida, as per plat or map of said City made by A. L. Knowlton, C. E., and on file in the office of the Clerk of the Circuit Court, in and for Dade County, Florida.
    This deed is given with the understanding that the Grantee assumes a mortgage which was given by the Grantor to Miami Savings Bank and E. C. Romph, as Trustee, and due in three years from February 1st, 1917, and drawing interest at the rate of 6% per annum, which said mortgage was filed March 6, 1917 in Mortgage Book 71, page 34, in the sum of $35,000.00 and of which there has been paid $12,000.00 and interest to May 1st, 1917.
    The Grantee assumes the taxes from May 1st, 1919.

      The consideration for this transfer was $48,000 made up as follows.Julia Galatis traded in the lots which she had acquired from Zelma B. Jones and her husband, at an agreed price of $14,000, assumed a mortgage of $23,000 and paid the balance in money which was furnished either by Julia Galatis or her husband, Jerry Galatis. Lot 8, block 117, acquired by Julia Galatis from the Tatum Bros. Beal Estate and Investment Co., and the west half of lot 13 and the east half of lot 12 and south 50 feet of lot 9, block 118, theretofore acquired by her husband, Jerry Galatis, were conveyed on September 30, 1919, by deed to Thomas J. Peters, the material part of which follows:
    This Indenture, Made this 30th day of September, A. D. 1919, Between Jerry Galatis and Julia Galatis, his wife, of the County of Dade, in the State of Florida, parties of the first part, and Thomas J. Peters of the County of Dade, in the State of Florida, party of the second part.
    Witnesseth, That the said parties of the first part, for and in consideration of the sum of Ten Thousand ($10,000.00) Dollars and other good and valuable considerations to them in hand paid by the party of the second part, the receipt whereof is hereby acknowledged, have granted, bargained and sold to the said party of the second part, his heirs and assigns, forever, the following described land, situate, lying and being in the County of Dade and State of Florida, to-wit:
    The West half (W 1/2) of Lot Thirteen (13) and the east half (E 1/2) of Lot Twelve (12) and all of Lot Eight (8) and the south fifty feet (S 50 ft.) of Lot Nine (9) all of Block One Hundred and Seventeen North (Blk. 117 N.) City of Miami, Florida, as per plat or map made by A. L. Knowlton, C. E. on file in the office of the Clerk of the Circuit Court, Dade County, State of Florida, and therein recorded in Book “B” of plats at page forty-one (41).
    The above deed conveyed the west half of lot 18 and the east half of lot 12 and the south 50 feet of lot 9, all in block 117, north, which lots were the property of Jerry Galatis. The consideration for this transfer was $60,000 cash, and 14 notes secured by first mortgage, each for the sum of $10,000 and payable annually over 14 years. In the conveyance to Peters the lots belonging to Jerry Galatis were valued at $130,000, and the lots belonging to Julia Galatis were valued at $70,000. The mortgage for the unpaid purchase price of $140,000 was executed to Jerry Galatis alone. This was done in order to enable him to pay off the liens on the property. It was the understanding between Jerry Galatis and his wife that he was to repay her all that was due her by reason of the sale to Peters after the payment of all liens on the property. The cost of lot 8, block 117, sold to Peters by Julia Galatis was $48,000, and the gain realized by her in the sale was $22,000.
   OPINION.

Littleton:

The record presents considerable difficulty in arriving at the net income resulting from the operation of the cafe for the year 1919. From all the evidence we conclude that the income for 1919 was $19,674.18, as set out in the findings of fact. The only criterion to be found in the record, other than that adopted by us, by which this income may be estimated, is the return of Julia Galatis to the effect that she received $7,882.28 as her share of the net income, and her testimony that she owned a one-fifth interest in the cafe. If this be true, the net income of all persons derived from the cafe was $39,164.40, an amount far beyond the estimate of either party to this proceeding. Standing alone and without other support, that hypothesis has been rejected.

The transactions in 1919 between the petitioner on the one side and Gotsis, Bassis, Hantges, and Poppas on the other, resulted in the petitioner reacquiring all the interests in the cafe which he had transferred to them in 1918. So far as the record discloses, the cafe was in as good condition when the petitioner reacquired possession of those interests as when he parted with them. In addition to reacquiring all that he had sold, the petitioner had in his possession $7,500 (the profits remaining over from 1918) and all the profits belonging to Gotsis, Bassis, Hantges, and Poppas for the year 1919. The books have been lost and it is impossible now to determine the amount of profits which belonged to any one of the four vendees at the time he retransferred his interest to the petitioner. It is sufficient to say that all of the profits resulting during the year 1919 from the four-fifths interest reacquired by the petitioner in 1919 were retained by him. The result of this is that by reason of the reacquisition of the interests which he had transferred to Gotsis, Bassis, Hantges and Poppas, at the close of 1919, the petitioner had received back all that he had sold, and had also received $7,500, representing the distributive share upon these interests of the net profits earned for the year 1918, plus $23,-239.35, the distributive share upon the same interests of the net profits for 1919, less $11,600 which he had returned to his various vendees, leaving in his hands a net gain of $11,639.35. This amount of $11,639.35 was not an asset which had to be transmuted into money in order to ascertain gain, but was cash itself. This amount was not a gift by these vendees to the petitioner. It was gain to him by reason of transactions which took place in the year 1919.

The next question is, what interest did Julia Galatis have in this cafe? It is shown that in 1913 she pledged jewelry which she stated was her own property and borrowed $500 which she invested in the cafe. How she acquired this jewelry does not fully appear, but upon the record it is our opinion that it was her separate estate under the laws of Florida.

The laws of Florida relative to a married woman’s separate estate are to be found in section 1 of Article XI of the Constitution of Florida, and in section 3947 of the Eevised General Statutes of Florida. Section 3947 need not be quoted as it practically paraphrases section 1, Article XI of the Constitution, which is as follows:

All property, real and personal, of a wife owned by ber before marriage, or lawfully acquired afterwards by gift, devise, bequest, descent, or purchase, shall be her separate property, and the same shall not be liable for the debts of her husband without her consent given by some instrument in writing, executed according to the law respecting conveyances by married women.

The right of a married woman to her separate property is treated at length in Florida Citrus Exchange v. Grisham, 65 Fla. 46; 61 So. 123, where it is said:

Under the act of March 6, 1845, brought forward in the General Statutes as section 2589, “ the property of the wife shall remain in care and management of the husband, but he shall not charge for his care and management, nor shall the wife be entitled to sue her husband for the rent, hire, issues, proceeds or profits of her said property.” The contention of the plaintiff in error might be sound, were it not for the provision of the Constitution of 1885, art. 11, 1, declaring that “ all property, real and personal, of a wife owned by her before marriage, or lawfully acquired afterwards by gift, devise, bequest, descent, or purchase, shall be her separate property, and the same shall not be liable for the debts of her husband without her consent given by some instrument in writing, executed according to the law respecting conveyances by married women.”
The Constitution has thus vested her with the property in her separate estate, instead of the mere title thereto, which only she enjoyed prior to the Constitution of 1868, of which our present Constitution is an amendment. May the Legislature, against the will of the wife, say to her that the husband shall have absolute dominion over her “ property ” ? To so hold, it seems to us, would cut down the larger word “ property ” to the narrow word “ title,” and say to the makers of the Constitution: “You were ignorant of the meanings of the two words; the change you made was a thoughtless one, and we shall again enthrall the wife, however skillful and competent she may be in matters financial, under the yoke of the husband, however incompetent in such matters, or controlled by his appetite for strong drink or gambling, or other dissipations.”
The limit the Legislature can go in this direction is to make the husband the agent of the wife as to her separate property, confirmed in her by the organic law, only so long as it may be mutually agreeable, the husband serving without compensation; but the Legislature may not interfere with her dominion over that property, created and fixed in her by the higher law, to the extent of placing it irrevocably in the control of her husband.

A married woman can not enter into a partnership agreement so as to render herself liable as a partner. De Graum v. Jones, 23 Fla. 83; 6 So. 925; Virginia-Carolina Chemical Co. v. Fisher, 58 Fla. 377; 50 So. 504. On the other hand, a married woman may invest her separate estate in a commercial enterprise and the resulting property is her separate estate. She may compel an accounting. Porter v. Taylor, 64 Fla. 100; 59 So. 400. She may bargain for an interest in a commercial concern in consideration of her services and after the services have been rendered, compel specific performance. Le Noir v. McDaniel, 80 Fla. 500; 86 So. 435.

From the above authorities it appears that while Julia Galatis was not a partner and could not become a partner in the cafe, nevertheless she could acquire an interest in the cafe which would be her separate property, to the extent that she would be entitled to her share of the net earnings of the cafe.

The manner in which the interest of Julia Galatis was reduced on March 1, 1918, from a 30 per cent interest to a 20 per cent interest does not appear. It does not appear whether she acquired this one-fifth interest in consideration of her interest in the busin.-.ss as it existed before the new members were taken in, or whether her husband acquired her interest and gave it to her. Under the laws of Florida the husband can make a gift of personal property to his wife. See Garner v. Bemis, 81 Fla. 60; 87 So. 426; Keyser v. Milton (C. C. A.) 228 Fed. 594. Irrespective of how she acquired her one-fifth interest, the evidence clearly shows that Julia Galatis did own such an interest in the cafe after March 1, 1918. It was set apart to her on the books of the company and her interest was scrupulously kept separate from that of her husband. All this was done with the knowledge and consent of her husband and of the other members.

Lot 8 G 117 conveyed by Julia Galatis and her husband to Thomas J. Peters on September 30, 1918, had theretofore been conveyed to her by the Tatum Bros. Real Estate & Investment Co. It was, therefore, property acquired by Julia Galatis either by “ gift ” or “ purchase ” as those words are used in section 1 of Article XI of the Constitution of Florida, and was, therefore, her separate property. For the purpose of this opinion, it is immaterial whether Julia Galatis paid all the purchase price or whether part of it was paid by the petitioner. If she paid the whole, then, undoubtedly, it was her separate estate since she acquired it by purchase. If the petitioner paid part, then she acquired so much as he paid for as a gift. A case very similar to this is Alston v. Rowles, 13 Fla. 117. That case involved the right of creditors, a question not involved in this proceeding. There it was contended by the wife that a lot which was conveyed to her was purchased entirely out of her own funds. The court held that this was not the fact, but said:

The result is, that this is a case where the husband purchases property taking the conveyance in the name of his wife. As between the husband and the wife, under the circumstances, it must be regarded as a post-nuptial settlement, based upon the consideration of love and affection. It would never be held that a trust resulted to the husband; such was not the intention of the parties. It is a gift to the wife. 10 Ves., 367.

We are constrained to hold, therefore, that lot 8, block 117, conveyed by Julia Galatis in conjunction with her husband to Thomas J. Peters, was her separate estate and that the proceeds of such sale ($70,000) belonged to her. The fact that the mortgage for the purchase price was taken in the name of petitioner is immaterial since it was agreed between the petitioner and his wife that he would account to her for her share of the proceeds. In Booth v. Lenox, 45 Fla. 191; 34 So. 566, the Supreme Court of Florida held that where a husband had conveyed his wife’s separate estate without her knowledge and converted the proceeds to his own use, the facts created a resulting trust in her favor which could be established by parol testimony. If a trust can be established by parol testimony under the circumstances of that case, it follows that a trust created by express agreement can be established by such evidence. On this point the respondent erred in attributing to the petitioner the profits which arose from the sale of his wife’s lot to Peters.

Reviewed by the Board.

Judgment will he entered on 16 days’ notice, wilder Rule 60.


author: Smith: 1.

text:
    P. L. Mann, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9123.
    Promulgated September 22, 1927.
    1. The proportionate part of the profits from the operation of a plantation set aside for the manager to be paid to him in case the profits over a 10-year period amount to a given figure are not deductible from the gross income of the owner of the plantation who kept his books of account upon a cash receipts and disbursements basis.
    2. The profit realized by an individual from the sale of a half interest in real estate acquired subsequent to March 1, 1913, is to be computed on the basis of cost and not on the value at the date that the other half interest was sold to an individual who was taken in as a partner in the business conducted.
    3. The correct amount of profit on the sale of personalty determined.
    4. Pledges of contributions to charitable and religious institutions not paid within the year are not deductible from gross income in returns made on a cash receipts and disbursements basis.

      Robert Ash, Esq., and Thomas J. Reilly, Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
    This is a proceeding for the redetermination of a .deficiency in income tax for the fiscal year ended January 31, 1920, in the amount of $39,362.44, only $10,374.56 of which is in controversy.-

      FINDINGS OF FACT.
    The petitioner is a cotton planter, merchant, lender of money, director of several banks, and a member of several partnerships, with his residence and principal place of business at Glen Allan, Miss. His income-tax return for the calendar year 1919, and an amended return for the fiscal year ended January 31,1920, show that they were made on the basis of income “received.” His accounts for all of his various businesses were kept in one set of books. His accounts showing his farming operations were kept on a cash basis. The accounts showing merchandise operations showed inventories at the beginning and close of each year. His accounts showing income from interest showed the interest accrued each year whether received or not. His income-tax returns were made in accordance with his books of account.
    On January 1, 1918, the petitioner and E. L. Jordan entered into a contract whereby Jordan was employed to manage a plantation owned by the petitioner, known as the “Mound Plantation.” ‘The contract provided in part:
    Said Jordan is to receive for his services, a salary of $1,200.00 per year, to be drawn in equal monthly installments; and in addition to said salary, said Jordan is to be given an opportunity of acquiring an undivided 14 interest in said plantation, upon the following terms:—
    Said Mann has agreed to put what is known as “Mound Plantation,” all open land east of the X. & M. V. R. R., our “ Linden Plantation ” and one half interest in woodland at the price of $59,220.50: If from the earnings of said plantation, said Mann receives the sum of $59,220.00 with six per cent interest by January 1, 1929, he agrees to execute a deed conveying to said Jordan an undivided 14 interest in said property, that is, said money being received by said Mann, as the result of the management of said plantation, by said Jordan,, and this to be received net after deducting all expense of every kind incident to the management of said plantation.
    If said Jordan should die during the term of twelve years, death terminates the contract, but said Mann agrees to pay to his estate or legatees 14 of whatever the plantation may have earned up to the end of the year in which such death shall occur; and this contract shall not prevent said Mann from selling or disposing of said plantation, at any time he sees fit, but in the event of such disposition being made, said Jordan is likewise to receive 14 of whatever amount has been earned by the property up to the end of the year sale is made (by earned is meant earned net, after deducting all expenses, repairs, improvements etc).
    The six per cent is to be paid annually as part of the expenses of the plantation, upon whatever portion of the $59,220.00 that remains unpaid after deducting the earnings each year.
    It is understood that Jordan is to continue the management of property during the time specified to January 1, 1929. If he should give up the position as manager, the contract is thereby terminated and he is not entitled to any part of the earnings which may have arisen from the plantation.
    Each year the petitioner credited to Jordan, on his books, one-fourth of the earnings of the Mound Plantation in order to carry out the provisions of the contract. The Commissioner disallowed as a deduction the amounts so credited to Jordan and increased net-income correspondingly.
    ■ Prior to 1915 the petitioner was the sole owner of a plantation known as the Solitaire Plantation, which ^ cost $10,917.12. On November 23, 1915, the petitioner formed a partnership with W. P. Rhodes for the operation of this plantation, with the understanding that each party was to contribute and share in the profits share and share alike. It was agreed that the plantation had a value of $18,750. Thereupon, Rhodes paid the petitioner the amount of $9,375 for his one-half interest in the plantation.
    During the taxable year ended January 31, 1920, the petitioner and Rhodes sold the plantation to one M. R. Williams. In computing the profit on the sale the petitioner used $9,375 as the cost of Iris one-half interest in the plantation. The Commissioner determined that Rhodes’ one-half interest in the plantation cost $5,458.56, and that the difference between that amount and one-half of the selling price was the profit made by the petitioner from the sale.
    Soon after the sale of the Solitaire Plantation, the partnership sold certain personal property connected with the operation of the plantation at a price of $4,000. Included in the property sold were tenants’ accounts receivable in the amount of $1,038.13. With the exception of the accounts receivable the cost of acquiring the other property sold had been charged to plantation expenses upon the partnership books of account. The accounts receivable from the tenants, however, stood on the partnership books as assets.
    During the taxable year the petitioner signed subscriptions promising to pay $5,000 for the construction of the Kings Daughters Hospital at Greenville, Miss., and $4,500 for the construction of a Methodist Church at Glen Allan, Miss. The subscription blank signed by the petitioner for the payment of $5,000 for the Kings Daughters Hospital read as follows:
    The King’s Daughters Memoriae Hospital oe the Delta,

      Greenville, Miss., Dec. 19, 1919.

    $5,000.00 (total)
    Three months after date, $1250.00
    Six months after date, 1250.00
    Nine months after date, 1250.00
    Twelve months after date, 1250.00
    I promise to pay the above sums to the Treasurer or order of the Building Bund of the Kings Daughters’ Memorial Hospital of the Delta.
    (Signed) Name — P. L. Mann
    Address — Glen Allan.
    Name of Bant, Commercial Sav. Bant.
    N. B. — If at the expiration of six months the entire sum of $250,000.00 has not been subscribed you will be released from your pledge and your subscription returned.

      The subscription of $4,500 for the construction of a Methodist Church at Glen Allan was of a similar nature. No part of the subscription of $5,000 for the construction of the hospital had been paid up to April 1, 1926, and the subscription of $4,500 for the construction of a Methodist Church was not paid until 1924.
   OPINION.

Smith: 1.

The petitioner contends that his books of account and his income-tax returns were made on the accrual basis and not on the basis of cash receipts and disbursements. The revenue agent who examined the books of account came to the conclusion that the books were kept on a cash receipts and disbursements basis and the returns clearly indicate that they were made on that basis. The fact that inventories were used in computing the profit of the merchandising business or that interest was returned upon the basis of the interest which accrued and not on the basis of interest received is not conclusive. The evidence fails to show that the books of account or that the original return for the calendar year 1919, and the amended return for the fiscal year ended January 31, 1920, were made on an accrual basis.

The petitioner contends that he is entitled to deduct from the gross income of the taxable year the amount of the profit which he previously set aside on his books of account to be paid to B. L. Jordan in accordance with his contract with Jordan of January 1, 1918. Clearly this amount was not paid to Jordan during the taxable year. Furthermore, there was only a contingency that it ever would be paid and under the decisions of the Board a contingent reserve set up to meet a possible liability is not a proper deduction from gross income. William J. Ostheimer, 1 B. T. A. 18; Uvalde Company, 1 B. T. A. 932.

2. The second point in issue is the basis for determining the profit upon the sale of a plantation, the petitioner claiming that although his one-half interest in the plantation cost $5,458.56, nevertheless, he entered into a partnership in 1915 for the operation of the plantation and his partner, W. P. Bhodes, paid him $9,375 for his one-half interest in the partnership. The evidence would indicate that Bhodes acquired for this $9,375 an interest in certain live stock, the cost of which is not in evidence. The petitioner’s contention is that inasmuch as $9,375 is the basis for determining the profit made by his partner upon the sale, the same basis should be used for determining his own profit and not the admitted cost of $5,458.56.

There can be no question as to the amount of the profit realized by the petitioner from the transaction resulting in the sale of his half interest in the plantation. It was the difference between $5,458.56, the eost of his half interest therein, and the sale price. Section 202(a) prescribes the basis for determining the profit in the case of sale or other disposition of property. Apparently the plantation was acquired subsequent to March 1, 1913. There is no evidence that it was acquired before that date. The cost of the half interest is therefore the basis to be used in computing the gain.

3. The Commissioner computed a profit of $4,000 upon the sale of personalty for $4,000. This personalty included live stock, farming implements, harvested crops, and accounts receivable of $1,038.13. The cost of these assets with the exception of the accounts receivable had been charged to plantation expense. For lack of evidence as to the cost of such assets other than the accounts receivable it must be held that the correct profit realized from the sale was $2,961.87 — the difference between $4,000 and $1,038.13.

4. The petitioner contends that he is entitled to deduct from gross income of the fiscal year ended January 31, 1920, the amount of certain subscriptions he made to charitable organizations. In support of his contention he cites Appeal of C. H. Musselman, 1 B. T. A. 41, in which it appeared that Musselman, who kept his books of account upon an accrual basis, had become bound under an agreement to make a contribution to a charitable organization. The facts in the instant case are entirely different from those which obtain in the Musselman appeal. There is nothing in the record to show that the petitioner was in any wise bound by his subscription agreements and the evidence is conclusive that the amounts were not paid during the taxable year. We discover no error in the action of the respondent in disallowing the deductions.

Reviewed by the Board.

Judgment will be entered on 15 days’ notice, under Rule 50. ■