text:
    George W. Oldham et al., Executors, Estate of James L. Hawley, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79699.
    Promulgated September 17, 1937.

      Robert J. Riley, Esq., for the petitioners.

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

Miller :

This case involves the question whether a fee paid to the curator of an estate, appointed under the law of West Virginia, constitutes an ordinary and necessary expense, deductible from the income of the estate for tax purposes. The fee in question has already been allowed by the Commissioner as a deduction for estate tax purposes. .Consequently, it is necessary to distinguish between services rendered for purposes of administration, and services rendered for the purpose of carrying on a business and producing income for the estate.

The facts upon which the question turns are briefly summarized as follows: The decedent died, domiciled in West Virginia, on November 13, 1930,. leaving an estate of about $2,000,000 and two wills. Immediately a controversy arose in the county court as to which will was valid. On November 20, 1930, the court appointed the Wheeling Bank & Trust Co., “curator”, as provided in such circumstances by West Virginia law. The company qualified and assumed the curator’s duties, which involved the administration of a large and complicated estate, including the leasing of city realty, insuring and keeping it in repair, procuring desirable tenants, paying taxes, and collecting rents, interest, and dividends. The curatorship continued until August 18, 1932, a period of 21 months, at which time the executors, successful in the will litigation, qualified. Because of. the, large amount of work involved, the curator claimed a substantial fee for its services; this was compromised, and the flat sum of $25,000' for its services throughout the whole period was agreed to, allowed by the county commissioner of accounts, and paid in October 1932; whereupon, it surrendered the estate’s assets to the executors. This sum of $25,000 is the curator’s commission now in question.

The statute (sec. 303 (a) (1), Revenue Act of 1926) provides that administration expenses may be deducted from the value of the gross estate in determining the value of the net estate for estate tax purposes. See also Treasury Regulations 70, art. 32. The statute provides generally (sec. 23 (a), Revenue Act of 1932) for the deduction of ordinary and necessary expenses from gross income for the purpose of determining income tax (see also, in this connection, Treasury Regulations 77, art. 282 ), and in section 162 of the Revenue Act of 1932 it is provided that the net income of an estate shall be computed in the same manner and on the same basis as in the case of an individual, with several exceptions which are not material in this case.

Ordinarily the fees and commissions of executors, administrators, attorneys, and other representatives of estates are regarded as administration expenses and are applied against the gross estate in determining the estate tax. Ordinarily such fees and commissions are not allowable as deductions in determining the net income of the estate. William W. Mead et al., Executors, 6 B. T. A. 752, 757; Leonard Holden Vaughan, Coexecutor, 10 B. T. A. 140; Charles B. Power et al., Executors, 11 B. T. A. 1313; Ethel P. Hunt et al., Executrices, 12 B. T. A. 396; James C. Ayer et al., Trustees, 26 B. T. A. 9, 12; John A. Loetscher et al., Executors, 14 B. T. A. 228.

Where, however, such fees or commissions are paid for services, rendered exclusively in carrying on the affairs of the estate as a business, rather than in preparing it for settlement and distribution, such payments constitute ordinary and necessary expenses and may be deducted for income tax purposes. Grace M. Knox et al., Executors, 3 B. T. A. 143; William W. Mead et al., Executors, supra; George W. Seligman, Executor, 10 B. T. A. 840; Henrietta Bendheim, 8 B. T. A. 158; Charles Lesley Ames, Executor, 14 B T. A. 1067; Margaret B. Sparrow, 18 B. T. A. 1; Florence Grandin, 16 B. T. A. 515; Estate of William G. Peckham, 19 B. T. A. 1020, 1023; Chicago Title & Trust Co. et al., Trustees, 18 B. T. A. 395; H. Alfred Hansen, Executor, 6 B. T. A. 860.

Frequently, the facts of particular cases do not lend themselves to easy determination of the character of such expenses. Most solvent estates, such as the one in the instant case, are going concerns, producing income; though it be no more than interest from a savings account, a bond or a promissory note, or rent from a farm or dwelling house. The normal and usual activities of the representative of the estate include the collection of such income, the paying of debts and taxes, the making of repairs, the execution of leases, the placing of insurance, in order to prepare the estate for distribution. The fact that such activities also constitute the ordinary incidents of carrying on business does not constitute the expenses thereof expenses which may be charged against income if they are a part of a normal and usual process of administration.

The test most frequently used to distinguish between the two types : of expenses is whether the estate has been or is required to be kept intact beyond the period usually necessary for administration. If the process of administration goes forward in normal course, and distribution and settlement are completed within a usual and reasonable time, the expenses of the representatives of the estate are regarded as administration expenses. Leonard Holden Vaughan, Coexecutor, supra; Charles B. Power et al., Executors, supra; Ethel P. Hunt et al., Executrices, supra; H. Alfred Hansen, Executor, supra; Estate of William G. Peckham, supra, p. 1023. On the other hand, in cases where, according to the provisions of the will or testamentary trust, it is necessary to continue the estate intact over a period of years, and to carry on its affairs as a business in the interim, the fees and commissions paid to representatives of the estate for such services constitute expenses, deductible for income tax purposes. William W. Mead et al., Executors, supra; H. Alfred Hansen, Executor, supra; Florence Grandin, supra. And where the will went further and, in addition to providing for the creation of a trust to run for a long period of time, provided for the payment to the executors of annual salaries out of the income of the estate, in lieu of fees, commissions, and compensations provided by law, it was held to be apparent that such payments were intended to be applied to the carrying on of a business and were properly chargeable against-income. Grace M. Knox et al., Executors, supra; Thomas H. Franklin et al., Executors and Trustees, 11 B. T. A. 148.

In distinguishing between the two types of expense, one of the text writers draws the line between “initial expenses” and “current expenses.” Montgomery & Magill, Federal Taxes on Estates Trusts, Gifts, 1936-1937, p. 39. This suggestion is supported by the decision in Estate of William G. Peckham, supra, where the will required that the estate be kept intact for six years, and the action of the Commissioner in allowing as deductions for estate purposes only those executors’ commissions paid during the first three years of administration was held to be reasonable and proper. The opinion of the Board states: “The respondent takes the position that in computing the net estate there should be allowed as deductions only such fees and expenses as would be incurred and paid if the estate were administered within the time usually required for that purpose. We are of the opinion that the position of the respondent is well taken. * * * The executors herein, in addition to performing the usual duties of executors, also perform duties and services which are essentially those of trustees. The respondent has allowed as deductions in computing the net estate expenses incurred and paid up to July 29, 1927, which was more than three years after the decedent’s death, and more than the period that would be required for the ordinary administration of the estate; and in view of the decisions cited we are of opinion that the additional fees, commissions, and expenses in controversy are not proper deductions in computing the net estate of the decedent, and that the respondent did not err in disallowing them.”

It is apparent, upon the facts of the Peckham case, that the services performed by the executors were no more for one purpose than the other during the two periods of three years each. In fact, the final services of the executors, in distributing the estate, come within the second period. But the apportionment made by the Commissioner, although more or less arbitrary, was equitable in its result and consistent with the principle frequently enunciated by the Board concerning expenses of estates kept intact beyond the ordinary administration period.

Under such circumstances, the judgment of someone must operate and the discretion of someone must be exercised. The effect of the rule making the determination of the Commissioner prima facie correct is to uphold his judgment and his exercise of discretion, unless the petitioner successfully maintains his burden, of proof by establishing clearly that the Commissioner was wrong.

Where the taxpayer has sustained his burden, and the weight of the evidence supports his determination, it has been upheld by the Board, even though it too is patently an approximation, more or less arbitrarily made. Such an example is found in the case of George W. Seligman, Executor, supra, where the petitioner’s allocation of an unitemized attorney’s fee of $10,000, one-half for estate tax purposes and the other half for income tax purposes, was approved. There the facts showed that the executors had sold assets of the estate, attempting to convert them into other assets of an income-producing character, and in this and other ways had gone beyond the usual and necessary process of preparing the estate for distribution in the usual and normal way.

Another suggested basis for distinguishing between administration expense and income-producing expense, is that of the temporary character of the agent representing the estate and the limited duties which he has to perform. Thus, in Thomas E. Franklin et al., Executors and Trustees, supra, the Board held that a fee paid to a temporary administrator was for services rendered in producing income from the estate during the taxable year, and hence, was deductible for income tax purposes. Where, as in the Franklin, case, the services of a temporary representative are clearly identifiable as income-producing, rather than as preparing the estate for distribution in normal course, then the expenses of such services should be charged against income. But the mere fact of temporary representation of the estate, without more, is of no importance. In several cases the expenses of temporary representatives have been held to be administration expenses. James D. Bronson et al., Trustees, 7 B. T. A. 127; aff'd., 32 Fed. (2d) 112; Estate of Caroline B. Rowland, 31 B. T. A. 194, 196.

The Franklin case is strongly relied on by the petitioners. However, there are very substantial differences between the facts of that case and the instant one. The will which was finally admitted to probate in that case was under contest for over four years; the executors named therein were also designated as trustees; the will contemplated that the estate should remain intact for a long period and that annuities should be paid therefrom; provision was made for fees of the executors and trustees to be paid annually, in terms of certain percentages of the income of the estate; the order of the court appointing a temporary administrator directed him, among other things, “to continue and conduct all business or businesses in which the estate may be engaged or in which it may have an interest by corporate stock or otherwise”; the temporary administrator made an income tax return for the year in question, in which he deducted his fee as a charge against income for that year, together with a similar fee for his attorney; these amounts were paid for the tax year in question. None of the circumstances narrated above were present in the instant case. Even then the opinion of the Board stated, “It might very well be argued that at least some of the services of the temporary administrator and his attorneys were more properly chargeable against the corpus of the estate than against the income of the estate. However, the weight of the evidence supports the contention that the amounts paid were reasonable compensation for personal services actually rendered in preserving and maintaining the estate and in producing income from it during the year * * *.” The opinion is rested upon the theory that the estate- was to remain intact over a period of years and the cases relied upon were cases in which a similar continued life of the estate was contemplated.

The respondent offered evidence to prove, and we have found, that it has long been the practice of the Bureau of Internal Revenue to treat curators’ fees in the same manner as executors’ fees, namely, to allow them as administration expenses, provided they are allowed by the law of the state and approved by the proper officers; as they were in the present case.

The duties of the curator are identical with those of the executor under the West Virginia law, except as to the actual distribution of the property of the estate. And on that point his duties come within the language of the Commissioner’s regulation.

Summarizing these various considerations, therefore, the petitioners here, in order to maintain their position, must show that this estate was engaged in business during the taxable year and that the expenditures in issue were paid out in connection therewith. This they have failed to do. Their own witnesses proved that the services rendered by the curator were the usual and ordinary duties performed by executors in preparing an estate for distribution. If an executor had been appointed and acting during the period of the curatorship he would have rendered the same services and there would have been no question that the cost thereof constituted administration expenses. There was no provision in the will of James L. Hawley which required that the estate be kept intact; no trust was created; no annuities were to be paid and no annual salaries or fees; no necessity existed for awaiting better prices, or awaiting the attainment of certain ages by beneficiaries; no requirement existed for carrying on a business. The elapsed time did not extend beyond the usual and normal period for administration. As in the case of James C. Ayer et al., Trustees, supra, where the administration of the estate was delayed by a suit respecting estate tax liability, here administration was delayed by a will contest. In both cases it is obvious that the carrying on of such suits did not constitute doing business. In the Ayer case we held that the petitioner failed to show that the estate was carrying on business during the period of delay. They have failed equally in the present case. In other words, mere delay in administration does not convert administration expenses into expenses deductible from income.

In view of this conclusion it is not necessary to consider the further question of estoppel which was presented at the hearing and argued in the briefs.

Decision will be entered for the respondent.

       This report was prepared during Mr. Miller’s term of office.

       West Virginia Code of 1932, § 4124, p. 1263:
      “When Curator May Be Appointed; His Duties,—The county court, or clerk thereof during the recess of the regular sessions of such court, may appoint a curator of the estate of a decedent; during a contest about his will, or during the infancy or in the absence of an executor, or-until administration of the estate be granted, taking from him a bond in a reasonable penalty.
      “The Curator shall take care that the estate is not wasted before the qualification of an executor or administrator, or before such estate shall lawfully come into possession of such executor or administrator. He may demand, sue for, recover, and receive all debts due to the decedent, and all his other personal estate, and when there is a will may, or if a will be in contest shall, with respect to any real estate whereof the decedent or testator may have died seized or possessed, exercise such rights as the executor or administrator with the will annexed could exercise, including the collection of any rents and profits of such real estate and the leasing of the same for a term not exceeding the period of the curator’s incumbency. Upon the qualification of an executor or administrator, such curator shall account with the executor or administrator for, and pay over to him, such estate as came into such curator’s hands or for which he is liable. (Code 1849, c. 122, § 24,; Code 1860, c. 122, § 24; Code 1868, c. 118, § 3; 1882, c. 84, § 23; Code 1923, c. 77, § 23.)

       Art. 32. Administration expenses.—The amounts deductible from the gross estate as “administration expenses” are such expenses as are actually and necessarily incurred in the administration of the estate; that is, in the collection of assets, payment of debts, and distribution among the persons entitled. The expenses contemplated in. the law are such only as attend the settlement of an estate by the legal representative preliminary to the transfer of the property to individual beneficiaries or to a trustee, whether- such trustee is the executor or some other person. Expenditures not essential to the proper settlement of the estate, but incurred for the individual benefit of the heirs, legatees, or devisees, may not be taken as deductions. Administration expenses include (1) executor’s commissions; (2) attorney’s fees; (3) miscellaneous expenses. Each of these classes is considered separately in Articles 33 to 35, inclusive.

         Art. 282. * * * Expenses of the administration of an estate, such as court costs, attorneys’ fees, and executors’ commissions, are chargeable, against the corpus of the estate and are not allowable deductions. * * *

       See footnote 2.

       See footnote 3. “The expenses contemplated in the law are such only as attend the settlement of an estate by the legal representative preliminary to the transfer of the property to individual beneficiaries or to a trustee, whether such trustee is the executor or some other person.” [Italics supplied.]


source: Caselaw Access Project

author: Harron:

license: Public Domain

text:
    Fifth Avenue Bank of New York as Executor Under the Last Will and Testament of Miriam Fisher, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74826.
    Promulgated September 17, 1937.

      Orwill V. W. Hawkins, Esq., for the petitioner.

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

Harron:

The Commissioner contends that decedent was a nonresident of the United States, at the date of death, for estate tax purposes and that the provisions of section 303 (b), Revenue Act of 1926 are applicable in determining the net estate for tax purposes. The principal issue is whether decedent was a nonresident of the United States, with collateral issues relating to the taxable situs of a claim of the estate against one Marion Lozé, a resident of France, and to whether all or a proportion of administration expenses and fees is deductible from the gross estate.

The terms residence and domicil are synonymous for estate tax purposes. Bowring v. Bowers, 24 Fed. (2d) 918; certiorari denied, 277 U. S. 608; Guaranty Trust Co., Executor, 25 B. T. A. 507; Fredrick Rodiek, 33 B. T. A. 1020. Respondent admits that decedent’s domicil of origin was New York City, but argues that decedent had only a “floating” intention to return to New York City so that the prolonged residence of decedent in Paris, France, brought about a change of domicil to a prima facie domicil of choice in Paris. Respondent argues that decedent’s intention to return to her domicil of origin was a “floating intention” because in later applications for passports and affidavits, decedent used the words “undetermined” and “indefinite” in answer to the question asking when she intended returning to the United States.

The decedent’s domicil of origin was New York City. Two facts must exist to effect a change over to a new domicil of choice, both residence in the new place and intention to make the new residence a permanent home. There must be both the fact and the intent. Mitchell v. United States, 88 U. S. 350, 353.

This issue is a mixed question of fact and of law. In this proceeding we have the fact that -decedent maintained and lived in an apartment in Paris for 12 years, but it is necessary to determine whether as a fact decedent had such intent toward her residence in Paris as to require the conclusion that Paris was her domicil of choice.

A domicil of origin is presumed to continue until it is shown to have been changed. Somerville v. Somerville, 5 Vesey, 787. A prolonged absence from domicil does not change domicil without intent to acquire a new domicil, Williamson v. Osenton, 232 U. S. 619, and where residence away from the original domicil is for purposes of travel and health such presence does not usually change domicil. Also, knowledge that one will never return home because of illness does not necessarily change domicil. Treatise on the Conflict of Laws, Joseph H. Beale, pp. 142, 172, 173. In determining the question of fact of intent to effect a change of domicil there must be the intent that the new residence is to be a permanent residence, in other words, there is no intent to return to the original domicil for permanent residence; or, as stated in Ennis v. Smith, 14 Howard, 339, 442;

When there is a removal, unless it can be shown or inferred from circumstances that it was for some particular purpose, expected to be only of a temporary nature, or in the exercise of some particular -profession, office, or calling, it does change the domicil. The result is, that the place of residence is prima facie the domicil, unless there he some motive for that residence not inconsistent with a clearly established intention to retain a permanent residence in another place.

Respondent infers from decedent’s prolonged residence abroad and the general circumstances that decedent intended her residence in Paris to be permanent and so acquired a domicil of choice there. We do not agree with respondent. Without reviewing in detail the facts already set forth in the findings, we believe there is substantial proof from decedent’s own statements in applications for passports, affidavits, and to her cousin that she regarded Paris as a temporary residence and that the purpose of her long sojourn away from New York City was for travel, health, and to be near relatives for a limited period only. There is no substantial evidence that decedent intended making her home permanently near her cousin. From 1912 to 1919 we think it clear that decedent’s presence in Paris and elsewhere was intended as temporary and for the particular purposes of travel and to be near relatives. From 1920 to the date of death we are satisfied that decedent’s presence in Paris still was for temporary residence and particular purposes not inconsistent with an intention to retain her domicil of origin. The fact that decedent had sold her New York home does not present an inconsistency. She was unmarried, lived alone, and possessed the means and desire to travel, at least until her health broke. Cf. Noah C. Rogers, Executor, 17 B. T. A. 570; Guaranty Trust Co., Executor, 25 B. T. A. 507. That decedent in later years was vague as to the exact time she would return to New York is explained by decedent’s failure in health.

On a review of the facts and in considering the general circumstances it is held that decedent retained her domicil of origin and was a resident of the United States at the date of death. It follows that the claim against Marion Lozé had its taxable situs in the United States and was properly included in the gross estate of decedent situated in the United States; that the petitioners are entitled to deduct the full amount of the administration expenses and fees claimed in addition to others allowed, section 303 (a) (1), Revenue Act of 1926; and that decedent’s estate is entitled to the statutory exemption allowed a resident decedent under section 303 (a) (4).

Decision will be entered for the petitioner.


author: Sternhagen :

text:
    Daniel Gimbel, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 84542, 85476.
    Promulgated September 17, 1937.

      Albert S. Lisenby, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
   OPINION.

Sternhagen :

The deduction in 1932 of the $50,000 paid on account of the guaranty; the deduction in 1933 of the additional $50,000 paid on account of the guaranties and the $22,222.22 paid on account of the endorsement of the company’s note; and the deduction in 1934 of $22,222.22 paid on account of the endorsement, were all disallowed by the Commissioner, on the grounds, stated in the deficiency notices, that the payment by a shareholder of a corporation’s indebtedness represents additional cost of his shares and that at the time of the endorsements the corporation was insolvent, with no prospect of ever being able to repay. Neither ground supports the determination.

There is no general rule that a payment by a shareholder to his corporation or to one of its obligees to relieve it of an existing obligation is per se a contribution by him to its capital which augments the cost of his shares. The question is controlled by the circumstances in which the payment is made. If there is intent that the payment shall enlarge the stock investment* the shareholder may not for tax purposes treat it otherwise to support a loss or a bad debt deduction. Whether there is such intent, actual or to be implied, is determinable upon evidence which may vary in different cases. Cf. J. S. Maubaules, 20 B. T. A. 359; W. F. Bavinger, 22 B. T. A. 1239.

The evidence here is clear. When petitioner made his payments, both on his endorsements and his guaranties, he had no illusions about the condition of the corporation and no intention to invest more capital. He paid only because he was legally obligated to do so, and the obligation was not an incident of his being a shareholder but was incurred with the intention of creating a potential debtor and creditor relation. To attribute to him an intention to invest more money in the corporation’s shares is contrary to the express evidence and not a fair inference from the circumstances. And it is equally clear that there was no intention to make a gift.

The petitioner made his return on the basis of actual receipts and disbursements, and his deductions are therefore available in the year of payment and not in a prior year of accrual, Eckert v. Burnet, 283 U. S. 140. At the time of his payments, his prior endorsements and guaranties operated to make him immediately a creditor and the corporation his debtor. Hence the fact of his payment gave rise to no deduction. A loan never does. Instanter it became worthless and was ascertained to be so and charged off, and thus the statutory deduction was literally met, Shiman v. Commissioner, 60 Fed. (2d) 65, and is no less available to petitioner because he was a shareholder than if he were an unrelated money lender.

The deductions were all properly taken, and the Commissioner’s determination is reversed.

Judgment will be entered under Rule 50.


author: Morris :

text:
    Fleming G. Railey, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81893.
    Promulgated September 17, 1937.

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

      P. A. Bayer, Esq., for the respondent.
   OPINION.

Morris :

It is contended by the petitioner, on the one hand, that he was the legal and equitable owner of the properties conveyed, or purported to have been conveyed, to Alra, Inc., by his warranty deed of April '27, 1932, and that, therefore, notwithstanding the bare record ownership was in Alra, Inc., he was, nevertheless, entitled to deduct taxes, insurance, repairs, and depreciation on those properties. The respondent contends, on the other hand, that these properties were not owned by the petitioner but by Alra, Inc., and that, therefore, it, and not he, should report the income therefrom and claim the deductions therefor.

Fully realizing, as we must in all cases where personal advantages are a factor, that the petitioner, had the contemplated emergency actually existed, that is, had the corporate entity become necessary as a shield against judgment creditors and in the defense of his properties, would just as vehemently have asserted the validity of the corporation and its ownership of the properties transferred by his warranty deed of April 27, 1932, as he now urges contrariwise, we can not too lightly seize upon technicalities—such as the absence of activity, no formal issuance of stock, the failure of stockholders to exist of record or to hold formal meetings, and the like—in our determination of whether or not he is entitled to the deductions claimed. In such a case the general rule that substance and not form should prevail in the adjudication of tax questions (First Seattle Dexter Horton National Bank v. Commissioner, 77 Fed. (2d) 45) should be strictly adhered to.

The first and principal argument advanced by the petitioner is that under the laws of the State of Florida delivery of the deed by the grantor and its acceptance by the grantee are essential factors to the conveyance of title to real property, citing Parken v. Safford, 48 Fla. 290; 37 So. 567. This we concede. But, the general rule is that the filing of a deed for recordation by the grantor is prima facie a delivery of the deed to the grantee and acceptance by him where a beneficial interest is conferred upon the grantee. The rule is stated by the Supreme Court of Florida in Ellis v. Clark, 39 Fla. 714; 23 So. 410, as follows:

* * * delivery of a deed by the grantor, and its acceptance by the grantee, are essential to convey title; and when a grantor causes an acknowledged deed, conferring substantial benefits on the grantee, to be recorded, there can be no doubt that it will afford prima facie evidence, and even strong presumptive evidence, of a delivery to, and acceptance by, the grantee, but such presumption can be overcome by evidence that no delivery in fact was intended and none made. At least, the clear weight of authority holds that to be the correct rule. Webb, Record Titles (section 144) says: “As a general rule, delivery of a deed or other instrument is essential to its valid registration, for the reason that until delivery the deed is incomplete, and its record cannot impart constructive notice of a change of ownership that has not occurred. * * * The recording of a deed is not equivalent to delivery, but, like possession of it, is prima facie evidence of that fact, subject to be overcome by contrary proof.” The following authorities sustain this view: Metcalfe v. Brandon, 60 Miss. 685; Younge v. Guilbeau, 3 Wall. 636; Leppoc v. Bank, 32 Md. 136; Hawkes v. Pipe, 105 Mass. 560; Samson v. Thornton, 3 Metc. (Mass.) 275; Gilbert v. Insurance Co., 23 Wend. 43; Cravens v. Rossiter, 116 Mo. 338, 22 S. W. 736, s. c. 38 Am. St. Rep. 606, and note; Alexander v. Alexander, 71 Ala. 295; Devl. Deeds, § 292.

There is no evidence whatsoever indicating any change in the circumstances between the time Alra, Inc., was organized and the time when it was finally dissolved from which we might reasonably deduce that the petitioner’s intention and plan had been altered or abandoned. In fact just the contrary appears to be admitted by a sworn statement on the part of the petitioner saying that “In the spring of 1935, the emergency for which the corporation was formed having passed, I exercised my control over the corporation and caused an organization meeting to be held and the legal title to all property involved be reconveyed to me.”

While the petitioner’s brother, as a witness, so testified, as did the petitioner himself, that there was no delivery of the deed, we find ourselves unwilling to attach full significance to the former’s testimony for the reason that circumstances clearly of record convince us that he was in no position to know with reasonable certainty what had happened to the deed after its preparation by him and delivery to his brother for examination. When asked by counsel for the respondent, on cross-examination, how he happened to know that the deed was never delivered, he said that he turned it over to his brother for examination, that his brother was to return it to him if they were to proceed with the corporation, and after that, “I don’t know what else happened relative to that deed.” The petitioner, when asked what he meant when he testified that there was no delivery of the deed, said that after its recordation he put it in the files of bis safe and that he forgot all about having the deed until the question of title later arose. What he failed to tell us was whether or not those files were intended by him as, or were in fact, the depository for corporate documents of Alra, in which event the mere placing of the deed therein, by him, as grantor, would constitute a delivery through him, either as agent for the corporation or as one of its directors, to the corporation itself.

The really vital defect in the proof to overcome the presumptive correctness of the respondent’s determination, also the presumption to which we have referred, is the fact that the deed itself was executed with all the formalities of law and, notwithstanding that two witnesses affixed their signatures thereto beneath the legal terminology “Signed, sealed and delivered in the presence of us”, neither of them was called upon to testify at this proceeding. It seems to us that for the petitioner to prevail in so vitally varying the terms of that formal document it should be shown by these witnesses that that they did not mean what they said when they placed their signatures thereon, attesting the fact that the deed had not only been signed and sealed in their presence, but that it was actually “delivered.”

The evidence does not, therefore, refute the presumption of “delivery” and acceptance.

A further argument of the petitioner is that even assuming the corporation had title to the properties by reason of recordation, the petitioner, nevertheless, should be entitled to the deductions because the corporation was formed solely for the purpose of holding the title; it issued no stock; had no paid-in capital; held no regular corporate meetings; paid no dividends; and exercised none of the rights or privileges of corporate ownership. Having held that title to the properties in controversy vested in the corporation and having found as a fact that those properties had a value greatly in excess of $500, we, of course, can not agree with the petitioner that it had no paid-in capital, irrespective of the fact that it issued no stock therefor, which has repeatedly been held unnecessary to the existence of a valid stock ownership. Federal Grain Corporation, 18 B. T. A. 242. The State of Florida having breathed life into the corporation, and it having complied with the laws of that state giving it the right to transact business under its charter, even though it did nothing more than receive the properties which the petitioner conveyed to it, as we have found, by deed of April 27, 1982, a separate entity exists for tax purposes, be it de jure or de facto, it matters not, which will not be ignored except under unusual circumstances. Dalton v. Bowers, 287 U. S. 404; Burnet v. Clark, 287 U. S. 410; Burnet v. Commonwealth Improvement Co., 287 U. S. 415. As we have said heretofore (Broadway Strand Theatre Co., 12 B. T. A. 1052), “Where a corporate cloak is resorted to for its business benefits the burdens, if any, must also be assumed.”

We are, therefore, of the opinion that the deductions claimed by the petitioner were correctly disallowed by the respondent.

Judgment will be entered under Rule 50.


author: Tyson :

text:
    E. A. Roberts and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80697.
    Promulgated September 22, 1937.

      George E. H. Goodner, Esq., for the petitioners.

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

Tyson :

The respondent contends that the transfer of the 90 shares of Steamship Co. stock was not a bona fide sale made in an arm’s length transaction in good faith, but was instead a mere manipulation of property entered into for the sole purpose of reducing tax liability and to defeat the collection of taxes legally due.

It has been stated that “while a sale for tax purposes is not to be disregarded because of its motive, on the other hand a mere gesture, without the vital intent to change ownership is not to be recognized as a sale merely because superficially it resembles one.” Luella Hoyt Slayton, 29 B. T. A. 931; aff'd., Slayton v. Commissioner, 76 Fed. (2d) 497; certiorari denied, 296 U. S. 286. However, where there is an absolute sale, such sale is not invalid merely because made, as was the sale of the 90 shares of Steamship Co. stock here involved, with the purpose of reducing Federal income taxes. Helvering v. Gregory, 69 Fed. (2d) 809; aff'd., Gregory v. Helvering, 293 U. S. 465; Commissioner v. Neaves, 81 Fed. (2d) 947; Commissioner v. Dyer, 74 Fed. (2d) 685; and Joseph E. Uihlein, 30 B. T. A. 399; aff'd., Commissioner v. Brumder, 82 Fed. (2d) 944.

After carefully scrutinizing all the evidence, as we should because of the close personal and business relations of the parties to the sale of stock, Joseph E. Uihlein, supra, and cases cited; Grace A. Cowan, Executrix, 30 B. T. A. 296; aff'd., 88 Fed. (2d) 1007; Harold E. Seymour, 27 B. T. A. 403, and cases cited, we have found as facts that the Steamship Co. stock was sold by petitioner for the consideration of $90; that no inducement other than the transfer of the stock itself for that consideration was offered by petitioner to McRae, the purchaser of the stock; that no reimbursement was promised to be made or was ever made to McRae by petitioner; and that the loan of $100 made to McRae by petitioner had no relation to or bearing upon the sale of the stock. From such established facts we conclude that the sale of the Steamship Co. stock by petitioner to McRae was an actual sale made in good faith and that petitioner is entitled to the deduction of his loss thereon. The disallowance of the deduction of $8,910 as a capital net loss is therefore disapproved and as a necessary consequence the imposition of the fraud penalty by respondent is also disapproved.

The next question to be determined is whether the petitioners are entitled to a deduction in 1932 of the entire amount, principal and interest, paid in 1930 to 1932, inclusive, by the petitioner as endorser on his brother-in-law’s note, or only so much thereof as was actually paid in 1932, the taxable year here involved. The respondent disallowed the deduction of $1,060 paid in 1930 and 1931 on such note and allowed only $175, the amount actually paid in 1932, as a deduction, upon the ground that, the return being made upon a cash receipts and disbursements basis, the amount actually paid in 1932 is deductible only in 1932.

It is contended by petitioners, in substance, that the payments made on the note by the petitioner as endorser constituted an obligation of the principal, McGavock, to the petitioner in the nature of a running account and that until the last payment of $175 in 1932 there was no deductible bad debt because until such last payment, which discharged the entire indebtedness, was made by petitioner there existed no right of action on his part against the principal. In our opinion there is no merit in this contention.

The note was not introduced into evidence and it does not otherwise appear whether it was payable in installments or in one entire and indivisible amount, although it is indicated that it may have been payable in installments by the following question asked the petitioner and his response thereto: “Q. When were you first called upon to make any payments?” “A. When he failed to make a payment that was due.”

If the note was payable in installments, as so indicated,, petitioner, as endorser, was entitled under the statute laws of Alabama to commence an action against McGavock, the principal, immediately upon the payment by petitioner of any and each of the installments in 1930 and 1931 without waiting until the balance of the note had become due and been paid in 1932. Secs. 5721 and 9547, Code of Alabama, 1923.

If, on the other hand, the note was not payable in installments the petitioner, as endorser, was nevertheless also entitled under the common law to commence an action against McGavock, the principal, immediately upon the payment by petitioner of any and each of the amounts paid by him in 1930 and 1931 without waiting until the entire amount of the note had been paid in 1932. Cf. Boulware v. Robinson, 8 Tex. 327; Bullock v. Campbell, 9 Gill (Md.), 182; Minick v. Huff (Nebr.), 59 N. W. 795; Jefferson v. Century Savings Bank (Iowa), 120 N. W. 308; Faires v. Cockrill (Texas), 88 Tex. 428. It was expressly provided in section 9545, Code of Alabama, 1923, that the remedy of a surety prescribed by section 9547, supra, was not exclusive of other remedies existing at common law but was merely cumulative and additional thereto.

So, whether the note in question was payable in installments or in one entire indivisible amount, a right of action against the principal, McGavock, by petitioner as endorser arose immediately upon the payments by petitioner on the note in the years 1930 and 1931, respectively, and each payment therefore constituted a debt of the principal to petitioner as endorser on the date it was made by petitioner as endorser. The evidence shows that McGavock was financially involved at the time the note was endorsed and he took over the hotel lease; that he made no money during the three or four months in which he operated the hotel; that at the time he discontinued the operation of the hotel he had no money or property of any kind and no employment; that thereafter he did not acquire any money or property, nor did he obtain any employment until very recently prior to the hearing; that he has never been able to reimburse the petitioner; that petitioner knew the financial condition of McGavock as disclosed by these facts and for that reason never made any effort to collect from McGavock, and that petitioner knew prior to 1932 that the debts of McGavock to him created by his payments, as endorser on the notes in 1930 and 1931, the amounts involved here, were worthless. It follows that the action of the respondent in allowing, as a deduction, only the amount paid by petitioner in 1932 must be approved. Cf. Shiman v. Commissioner, 60 Fed. (2d) 65.

Decision will be entered under Rule 50.

       Section 5721. Suits for breach of contracts.—If a contract be entire, but one suit can be maintained for breach thereof; but if it be severable, or if the breaches occur at successive periods in an entire contract (as where money is to be paid by installments), an action will lie for each breach; but all the breaches occurring up to the commencement of the action must be included therein.
      Section 9547. For money paid.—Payment by a surety or indorser of a debt past due, entitles him to proceed immediately against his principal for the sum paid, with interest thereon, and all legal costs to which he may have been subjected by the default of the principal.

       Section 9545. Remedies not exclusive.—The" remedies given sureties and cosureties in this chapter are not exclusive of other remedies conferred by statute or existing at common law but are cumulative and additional.


author: Arundell :

text:
    Hudson-Duncan & Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 85220.
    Promulgated September 24, 1937.

      Albert W. Gentner, Esq., for the petitioner.

      W. W. Kerr, Esq., for the respondent.
   OPINION.

Arundell :

The respondent’s view in this case is that the designated “purchase price” in the contract represents principal in its entirety and may not be split up into principal and interest. The evidence is that the amount stated in the contract is not all principal, but is the aggregate of the two items of principal and interest. The seller wanted interest on the deferred payments and the purchaser was willing to pay interest. The president of the seller corporation and the president of the purchasing corporation (the petitioner) acted as negotiators of the deal. Both testified in this proceeding. Their testimony is that in negotiating the deal they started out by fixing the price for the building and the price for the land. They agreed upon the period over which the deferred payments were to be spread. Then they computed interest on the deferred payments at an average rate. They then totaled the several items, of principal and interest and that total, with a minor adjustment, they set out in the contract as the “purchase price (including interest).” The testimony of both is that the reason for making the calculation in the way they did was that both parties as a matter of convenience preferred to have the monthly payments in equal sums. Payments separately of principal and interest would of course have required a recomputation each month as the unpaid principal decreased and would result in payment of a different amount each month. The wording of the contract—“including interest”—indicates that the parties calculated interest in arriving at the price specified. The testimony of the negotiators does not vary the terms of the contract but explains them.

Prior to the hearing of this proceeding the State Tax Commission of the State of Oregon investigated the matter and arrived at the conclusion that a part of the payments received by the seller represented interest, and asserted a tax on such interest. The petitioner is asking that we treat as interest the same amount taxed as interest by the State Tax Commission.

Counsel for the respondent cites a number of cases in which the Board and the courts have refused to permit lump sums to be split up into alleged payments of principal and interest. Among others cited are Marsh & Marsh, Inc., 5 B. T. A. 902; Anderson & Co., 6 B. T. A. 713; Daniel Brothers Co., 7 B. T. A. 1086; aff'd., 28 Fed. (2d) 761. We do not pause to refer to more, for all in our opinion are distinguishable from the present case. For example, in the case of Marsh & Marsh, Inc., the findings disclose no mention of interest in the contract of sale, except as a measure of discount on payments made before maturity. We there said that the facts alleged by the taxpayer “were capable of proof, but have not been proven.” In the case before us there is satisfactory proof that a part of each payment was in fact interest. In Anderson & Co., the taxpayer claimed as interest an amount equal to 10 percent of the amount due at the beginning of the year. In that case, in disallowing the claim, we pointed _ out that “the records of the taxpayer make no showing of such interest and the form of contract used by the taxpayer and its customers discloses that the only interest contemplated between the parties is interest on installments not paid when due.” In Daniel Brothers Co. there was no provision in the contract for interest on deferred payments. In this case the parties stipulated in their contract that the price named included interest; the men who negotiated the deal testified that it was their intent to and they did include interest; the officials of the State of Oregon found a portion of each payment to be interest and taxed it as interest. In the face pf all this we do not see how it can be said that the price specified in the contract represents principal in its entirety and that no part of it is interest. The petitioner has established the portion that represents interest and we hold that that amount should be allowed as a deduction to the extent paid in the taxable year.

Counsel for the respondent contends, in the alternative, that he erred in computing depreciation allowances. It appears that the petitioner claimed and was allowed depreciation on the building on a basis of $181,867.93. The evidence in this proceeding shows that that basis is too high. The correct basis is cost, which under the contract of sale is $107,000, to which should be added a portion of the payment forfeited under the lease and a portion of the accrued property taxes paid by the petitioner. The evidence is insufficient to permit us to determine what portion of these two additional sums should be allocated to the building. If the parties are unable to agree on an allocation in their recomputations, they may present further evidence on this one phase of the case. There is no issue as to the depreciation rate and the rate determined by the respondent to be proper will be used on recomputation.

Decision will be entered under Rule 50.


text:
    The Atlanta and Charlotte Air Line Railway Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78077.
    Promulgated September 24, 1937.

      W. T. Joyner, Esq., for the petitioner.

      Lloyd B. Harrison, Esq., and E. C. Algire, Esq., for the respondent.
   OPINION.

Arundell :

This proceeding is before us on income tax deficiencies of $2,204.80 determined by the respondent for each of the years 1980 and 1931. The principal issue is whether the petitioner is entitled to deductions to amortize discount on bonds issued in 1914, 1915, and 1917. By amended answer the respondent raised the question of the year in which taxes paid by the petitioner’s lessee should be treated as petitioner’s income. This question grows out of one as to petitioner’s basis of accounting which was also raised by respondent’s amended answer.

The evidence consists of a stipulation of facts, and the testimony of one witness who explained the petitioner’s method of keeping books. The stipulation is lengthy and is accompanied by a number of exhibits. We summarize the facts.

The petitioner is a corporation, organized under the laws of North Carolina, South Carolina, and Georgia. It owns a line of railroad running from Charlotte, North Carolina, to Atlanta, Georgia. The railroad is operated by the Southern Railway Co., hereinafter called Southern, under an assignment of a lease dated March 26, 1881. Under the lease as it was effective prior to its amendment in 1914, the Southern maintained the property, paid all expenses of operation, including taxes, the interest on petitioner’s outstanding bonds, dividends on petitioner’s stock at the rate of 6 percent and petitioner’s expenses of maintaining its corporate organization in the amount of $2,500 per year. Prior to June 30, 1914, petitioner’s outstanding bonds, secured by a first mortgage, amounted to $5,500,000. All of the bonds were owned by the Southern, which had purchased them at par and deposited them with a trustee as collateral securing a bond issue of Southern.

In 1914 the petitioner and the Southern decided that it would be desirable to double-track the petitioner’s railroad. This required additional funds and, to secure the funds, the Southern and the petitioner executed a supplemental lease agreement under date of June 30, 1914, and the petitioner executed a first mortgage under date of July 1, 1914, as security for additional bonds. The Southern was a party to the mortgage. These two agreements together provided for the issue of first mortgage bonds in the amount of $20,000,000. The bonds were to be issued in two series. Series A bonds in the amount of $5,500,000 were to be sold and the proceeds used to retire the then outstanding bonds in the same amount. The proceeds of the series B bonds in the face amount of $14,500,000 were to be used for the purpose of double-tracking and improving the petitioner’s railroad. As to the series B bonds, it was provided in the mortgage agreement that the trustee would deliver the bonds to the railroad company only when there should be deposited with the trustee an amount of money equal to the principal amount of the bonds delivered.

In 1914 the petitioner sold its series A bonds in the face amount of $5,500,000 to the public for $5,252,500. The petitioner received that amount in cash from the brokers through whom the bonds were sold. The petitioner also received from the Southern the sum of $247,500 in cash. The sum of these two amounts, $5,500,000, was used by petitioner to redeem its old bonds which were then owned by Southern. In its income tax return for the year ending June 30, 1915, the petitioner reported as income the $247,500 paid over to it by the Southern and paid a tax thereon. The petitioner deducted from its income for that year as amortized bond discount the sum of $8,250, being one-thirtieth of the sum of $247,500.

On July 19, 1915, the petitioner sold through brokers to the public series B bonds in the principal amount of $3,500,000, at 97½ percent of par value. The petitioner received from the sale of the bonds the sum of $3,412,500. The Southern on July 19, 1915, paid over to petitioner the sum of $87,500. The total of these sums was delivered by petitioner to the trustee, who thereupon certified out bonds in the face amount of $3,500,000 which were delivered to the purchasers.

On March 20,1916, the petitioner sold to the public series B bonds in the amount of $7,000,000 at par. The Southern made no payment to the petitioner in connection with this sale.

On March 27, 1917, the petitioner sold through brokers series B bonds in the principal amount of $4,000,000 at 96½ percent of par value, and received therefor the sum of $3,860,000 in cash. Simultaneously the Southern paid over to the petitioner the sum of $140,-000. The total of these sums was paid over by the petitioner to the trustee, who then certified out bonds in the face amount of $4,000,000 which were delivered to the purchasers.

In its income tax return for the year ending June 30, 1916, the petitioner reported as income the amount of $87,500 paid to it in that fiscal year by the Southern. The petitioner deducted in that year $8,250 as amortization of bond discount on its series A bonds and also $3,017.25 as one year’s amortization of the $87,000 discount on the first block of series B bonds. In its original return for the year ended June 80, 1917, the petitioner reported as income the $140,000 paid to it in that fiscal year by the Southern. The petitioner deducted in that return one year’s amortization of each of the three discount items, namely, $247,500, $87,500, and $140,000. In a supplemental return the $140,000 was dropped as an income item and the three items of amortization were dropped as deductions.

The Southern did not buy any of the $20,000,000 face amount of bonds issued pursuant to the agreements entered into in 1914. The Southern was not a guarantor of the new bonds either as to the principal or interest. The Southern, under the agreement of June 80, 1914, agreed to pay to the petitioner, or its agent, annually amounts equivalent to 9 percent of petitioner’s outstanding stock and further amounts equivalent to the interest on the new bonds.

There was never any promise or obligation on the part of the petitioner to repay to the Southern any of the aforesaid amounts of $247,500, $87,500, and $140,000.

In its returns for 1930 and 1931 the petitioner reported as income the amounts paid to or for it by the Southern which were equivalent to dividends on stock and interest on bonds and also the amount of income tax paid by the Southern on such income. The petitioner claimed as deductions in those returns proportionate amounts of the above discount items on both the series A and series B bonds. The respondent disallowed the amortization deductions.

The petitioner, in claiming discount deductions, places emphasis on the relation between it and the purchasers of the bonds. It says that the purchasers of the bonds did not pay face value, but paid a lesser sum, and that when the bonds mature it will be obliged to pay to the holders the full face value. Southern was not a purchaser of the bonds, and petitioner says that the amounts paid in by Southern can not be treated as part of the selling price of the bonds so as to make up the discount at which the bonds were sold to the purchasers thereof.

The Commissioner regards bond discount primarily as a loss. In this case, he says, there was no loss to the petitioner in view of the fact that Southern paid in the difference between face value and issuing price.

The Commissioner’s regulations have for many years provided for the deduction of bond discount by prorating or amortizing the net amount of the discount over the life of the bonds. These regulations are interpreted by the Supreme Court as classifying discount as a loss sustained on payment of the bonds at maturity. Helvering v. Union Pacific R. Co., 293 U. S. 282. The statutory provision for losses is that “losses sustained during the taxable year and not compensated for by insurance or otherwise” are deductible. Assuming the correctness of petitioner’s premise, namely, that only the amount paid in by the purchasing public represented the selling price of the bonds, it would follow that there was a loss. It does not follow, however, that the loss is necessarily deductible either through amortization or otherwise. The statute limits the deductible losses to those not compensated for by insurance or otherwise. In this case the difference between face value and the amount paid in by the purchasers of the bonds was “compensated for” by payments made by Southern. Under the lease and mortgage agreements of 1914 one of the requirements as to series B bonds was that the full face value of the bonds was to be paid in to the trustee before the trustee would certify the bonds out for delivery. In practice, the same procedure was followed as to both series A and B bonds. That is, the petitioner actually received and had in its hands the full face value of the entire issue of $20,000,000 before the bonds were issued, and it turned over the full amount to the trustee. From the stipulated facts and the vouchers in evidence, it appears that Southern made its payments to petitioner simultaneously with petitioner’s receipt of the proceeds of the sales to the public, so that at no time was petitioner’s obligation greater than its receipts. But even if there were a short lapse between receipts from the public sales and the payments by Southern, so that petitioner’s obligations at maturity were greater than its receipts, and if that difference can be said to be a loss, that difference was compensated for by Southern’s payment and the loss is not an allowable deduction. If a question be raised as to why the Southern compensated petitioner for the difference, the answer is that the Southern was a party to the mortgage agreement under which the bonds were issued, and that agreement required the full amount to be paid in to the trustee before issuance of the bonds and before the proceeds would be available for the Southern’s use in improving the railroad. We conclude on this point that petitioner sustained no deductible loss on the sale of its bonds and there was therefore no amount to be amortized in the taxable years.

The respondent, by affirmative allegation, has raised the question of whether the petitioner’s books were kept on the cash or accrual basis. In their brief, counsel for the respondent urge this question only with reference to the income resulting to the petitioner by reason of the payment of its income taxes by Southern. At the hearing, it was urged that a taxpayer on the cash basis may not amortize bond discount. '

The accounts carried on the petitioner’s books were merely skeleton accounts. As it is not an operating company it has only a few items of income and deductions to record. Its journal entries for the

months of December of each of the years 1930 and 1931 cover, in each instance, only parts of four pages. Among the items recorded are: Unmatured interest accrued; unmatured dividends declared; rent suspense; interest matured unpaid. According to the evidence the entries were actually made in December of each year. They did, however, record the financial events of the year on an accrual basis. The descriptive terms used are not found in a cash system. We accordingly find as a fact that petitioner’s accounts were kept on the accrual basis. It follows that the amount of its taxes for 1930, which were paid by Southern, constituted accruable income for that year; likewise, the amount of its 1931 taxes were income for 1931.

Decision will be entered under Rule 50.


author: Arnold:

text:
    Stephen J. Leonard, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 65805.
    Promulgated September 28, 1937.

      J. Donald Duncan, Esq., for the petitioner.

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

Arnold:

The question for our determination is whether all or any part of the $16,191.34 received as income by the trustee from June 4 to December 31, 1929, is taxable to petitioner. The Commissioner included it all in his assessment of deficiency and petitioner claims no part of it is taxable to him.

At the time the separation agreement and the trust agreement were executed, June 4, 1929, petitioner and Adelaide Leonard were husband and wife. An action for divorce was pending by the wife against petitioner. The marriage relationship imposed on petitioner a legal obligation to support and maintain his wife. As a father he was under legal obligation to support and maintain his children during their minority.

The court has authority in dissolving the marriage relationship to make provision for the future support and maintenance of the wife and minor children. In arriving at a suitable amount for this purpose the court takes into consideration the wealth and standing of the parties, their habits of living and surrounding circumstances, and what the parties themselves consider a suitable allowance in view of their agreements.

Pending the divorce proceedings negotiations were conducted between the husband and the wife for the adjustment of this legal obligation. These negotiations culminated in the execution of the separation agreement and the trust agreement of June 4,1929. Thereafter and on July 22, 1929, petitioner’s wife obtained an interlocutory decree of divorce, which became final October 22, 1929.

The petitioner was a wealthy individual with an estate valued at about two million dollars. His family consisted of his wife and three children, two of whom were minors.

The separation agreement recited that some provision had been made in the trust agreement for the maintenance and support of the wife and children and the trust agreement was incorporated therein as though fully and at length set forth.

By the trust agreement petitioner put up cash and securities in the amount of $650,000, from the net income of which $5,000 per year was payable to each of the three children of the wife and petitioner, and the remaining net income to the wife “during her life to be used by her for her maintenance and support, and in her sole discretion for the support, maintenance and education of the children by herself and the grantor”, the portion of income of any child that might die during the lifetime of the wife likewise to be paid the wife.

We think the purpose of both instruments was to make suitable provision for the support and maintenance of the wife and minor children, that they should be construed to that end, and that in so far as provision was made in the trust agreement for the future support of the wife and minor children it was in fulfillment of the legal obligation the marriage relation imposed on petitioner and the natural obligation a father has to support his minor children.

The court had both the separation agreement and the trust agreement before it when it entered its order in the divorce proceeding. When the court by its order and decree approved and affirmed the separation agreement and made it a part of its judgment, in accordance with its provisions, the trust agreement likewise became a part of the decree and was approved and affirmed, as the separation agreement referred to the trust agreement in the following language:

*⅜ * * some provision has been made by the second party [petitioner] for the maintenance and support of the first party [wife] and the aforesaid two daughters and son, which trust agreement is incorporated herein by reference thereto as though fully and at length set forth, and is marked Exhibit “A”.

Considering the extent of petitioner’s estate, it is reasonable to suppose that, but for the benefits accruing to the wife and minor children from the trust income, she would have, asked for and the court would have awarded an amount in excess of that provided in the separation agreement for her support and maintenance and that of the children. Furthermore, the establishment of the trust fund was dependent upon an absolute decree of divorce, as petitioner reserved the power to alter, amend, or revoke in case the divorce was not made final and could have revoked it at any time had the wife not prosecuted her suit to a successful conclusion. This is inconsistent with petitioner’s contention that the establishment of the trust was an independent property settlement separate and apart from any obligation to support growing out of the marriage relationship.

Petitioner argues that as the court by its decree only ordered the husband to pay $35,000 per year to the wife during her life, as provided in the separation agreement, and did not specifically order the payments to be made under the trust, the payments of income under the trust were not intended for alimony and support. Payments of income from the trust were to be made by the trustee in accordance with the terms of the trust instrument, and approval of the separation agreement in which was incorporated the trust instrument, in effect, carries with it approval of the payments to be made for the purposes provided in the trust agreement, hence no necessity existed for specific reference in the decree for payment of the trust income for the support and maintenance of the wife and minor children.

A husband has a legal obligation for the support and maintenance of his wife and minor children,, and in New York the courts will enforce an agreement for alimony entered into between husband and wife prior to divorce, Daggett v. Daggett, 5 Paige, 509; 28 Am. Dec. 442; Hamlin v. Hamlin, 280 N. Y. S. 51. This legal obligation arises from the relation of marriage. This general obligation for support and maintenance is made specific by the decree of the court of appropriate jurisdiction. Audubon v. Shufeldt, 181 U. S. 575; Romaine v. Chauncey, 129 N. Y. 566; 29 N. E. 826. Agreement between the parties for support and maintenance executed during the pendency of the divorce proceeding, incorporated in the decree, becomes merged in the judgment, Kunker v. Kunker, 246 N. Y. S. 118. The decree of the court for the future maintenance and support of the wife may be in the form of annual payments of alimony or a part of the husband’s estate. Gould v. Gould, 245 U. S. 151. The establishment of a trust fund does not destroy the effect of the payments being for support and maintenance, Mary R. Spencer, 20 B. T. A. 58.

Douglas v. Willcuts, 296 U. S. 1, involved a trust quite similar to the one here. A trust fund was set up a few days before the wife obtained a divorce, the income from which was to be used for the purpose of paying alimony. It was held that as the income of the trust was to be used for that purpose the husband received the benefit of the trust income in discharge of his legal obligation to support and maintain his wife and the income was taxable to him.

The Supreme Court held a settlor of a trust taxable with the trust income where it was used to pay his debts in Helvering v. Blumenthal, 296 U. S. 552, in reversing the Second Circuit (76 Fed. (2d) 507), and where it was used to discharge his obligation to maintain and support his minor children in Helvering v. Schweitzer, 296 U. S. 551, in reversing the Seventh Circuit (75 Fed. (2d) 702), and in Helvering v. Stokes, 296 U. S. 551, in reversing the Third Circuit (79 Fed. (2d) 256), and where the beneficiary of a trust irrevocably assigned a part of the trust income to his wife who subsequently obtained a divorce in which the decree made no provision for alimony in Helvering v. Coxey, 297 U. S. 694, in reversing the Third Circuit (79 Fed. (2d) 661).

These decisions are predicated on Douglas v. Willouts, supra, and establish the proposition that where the income of a trust is to be used in discharge of any legal obligation which the settlor would other-, wise have to satisfy, the settlor is taxable with such income to the same extent as if it were personally received.

See also Helvering v. Grosvenor, 85 Fed. (2d) 2; Commissioner v. Hyde, 82 Fed. (2d) 174; Albert C. Whitaker, 38 B. T. A. 865.

In Helvering v. Brooks, 82 Fed. (2d) 173, the Second Circuit had before it an irrevocable trust, created the day before the divorce decree was granted. The decree made no provision as to alimony or property rights of the wife. It was stipulated, however, that the husband and wife had agreed upon the trust indenture as a settlement of their property rights “arising from the relationship of marriage.” The taxpayer sought to make a distinction between an agreement to pay alimony and an agreement for settlement of property rights. In reversing the Board of Tax Appeals and holding the income taxable to the husband, the court said:

* * * Whether the trust income is used to discharge the husband’s duty, made specific by agreement, to support the wife, or to discharge an obligation to pay her agreed sums for a release of rights in his property, cannot be material in determining the taxability of the husband. The creation of a trust the income of which is to be used to discharge any legal obligation of the settlor enables him to enjoy the benefit of the income; hence the income is properly taxable to him. Compare Helvering v. Blumenthal, 296 U. S. 552, 56 S. Ct. 305, 80 L. Ed. —; Helvering v. Schweitzer, 296 U. S. 551, 56 S. Ct. 304, 80 L. Ed. —; Helvering v. Stokes, 296 U. S. 551, 56 S. Ct. 308, 80 L. Ed. —; Helvering v. Coxey, 297 U. S. —, 56 S. Ct. 498, 80 L. Ed. —; all of which have been recently decided on the authority of Douglas v. Willcuts. Indeed, in the Douglas Case itself the trust provisions for the wife were in settlement not only of alimony but also “of any and all dower rights or statutory interests in the estate” of the husband, and the court pointed out (296 U. S. 1, at page 8, 56 S. Ct. 59, 62, 80 L. Ed. —) that this did not affect the essential quality of the payments.
On the authority of the cases above cited, the order of the Board is reversed.

Petitioner cites and relies on the case of Commissioner v. Tuttle, 89 Fed. (2d) 113, as controlling here. There an irrevocable trust was set up by the husband as a property settlement which included settlement and discharge of all claims of the wife for alimony, support, and maintenance of the wife and a complete settlement of all property rights forever under all circumstances and regardless of the outcome or disposition of. the divorce proceeding by the wife then pending against her husband. In the instant case the trust was conditioned on a final decree severing the marriage relation. The reservation of the power to amend or revoke in the event the divorce was not made final or the divorce proceeding was discontinued or dismissed, or to change or amend with his wife’s consent after the decree became final, destroys the argument of petitioner that the trust was an independent property settlement having no connection with his marital obligation to support and maintain his wife.

The effect of the creation of the trust was the appropriation of a portion of petitioner’s property for the uses and purposes specified in the trust instrument the income from which, in so far as it was payable for the maintenance and support of the wife and minor children, was in discharge of an obligation of petitioner, existing at that time. This obligation was made permanent by the decree of the divorce when it was approved and affirmed and incorporated in the decree as a part of the separation agreement.

Petitioner argues that he completely divested himself of all interest in the trust corpus and income and as no part would ever revert to him, the income is not taxable to him as income used to discharge his legal obligation. Petitioner did not part with all present interest. Under the facts and circumstances here the income distributed was charged with serving a beneficial use of the grantor, i. e., a partial discharge of his legal obligation for the support and maintenance of his wife arising by reason of the marriage relation and the support and maintenance of his minor children by reason of his parental obligation. Furthermore, he had the power with the consent of his wife to change or amend the trust agreement after the decree of divorce became final, and it is an established fact that he did exercise this power on three separate occasions. We are of the opinion and hold that the income of the trust distributed during the taxable year, except that portion paid to Jeanne Leonard in the amount of $2,083.33, is taxable to petitioner. Robert Glendinning et al., Executors, 36 B. T. A. 486.

The undistributed portion of the income received during the taxable year is not taxable to petitioner, E. E. Black, 36 B. T. A. 346; G. C. M. 18972, I. R. B. Vol. XVI—No. 33, p. 6.

Decision will be entered under Rule 50.


author: Murdock :

text:
    Charles Wesley Purdy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82421.
    Promulgated September 28, 1937.

      G. K. Richardson, Esq., for the petitioner.

      W. W. Kerr, Esq., for the respondent.
   OPINION.

Murdock :

Section 23 (r) (1) of the Revenue Act of 1932 limits the deduction for losses on stocks and bonds which are not “capital assets” to the amount of the gains from the sale or exchange of other stocks and bonds which are not “capital assets.” Section 101 imposes a tax upon capital net gains. The petitioner sustained losses from the sale of stocks and bonds which were not “capital assets.” The losses amounted to $7,109.67. He realized a gain of $14,233.68 from the sale of 1,100 shares of General Electric Co. stock. If the latter shares were not “capital assets”, the loss would be allowed in full as an offset against the gain. “Capital assets” is defined in section 101 (c) (8) as “property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business.” The petitioner contends that the General Electric Co. shares were “property held by the taxpayer primarily for sale in the course of his trade or business” and, consequently, were not “capital assets.”

The petitioner had held the General Electric Co. shares for more than two years prior to the sales in 1932. His promise not to sell them ended with his mother’s death in 1931. Thereafter, he held them like other stocks and bonds which he owned, some of which he had acquired by purchase, some by inheritance. He devoted most of his time and capital to the business of buying and selling securities. He studied market conditions to discover which stocks might be expected to rise and which to fall in price. His business consisted of buying and selling in expectation of a profit. He bought and held stocks, not as an ordinary investor, not primarily for the •security and earnings during the period of his ownership, but primarily for the profit which he hoped to make from sales at prices in excess of his cost. Sales were the essence of his business. He was at all times holding his stocks and bonds primarily for sale in the course of his business. Consequently, his stocks, including the General Electric Co. stocks, were not capital assets because by plain language of the definition they were of one of the kinds of property expressly excluded.

The foregoing is not an unreasonable interpretation of the statute. Dealers in stocks and bonds are excluded from the limitation of section 23 (r) (1). Inventorial property is not a capital asset. Stock in trade is not a capital asset. Although the petitioner was not a dealer, had no customers, and had no stock on his shelves which he could inventory under the revenue acts, nevertheless, his business, depending as it did upon the purchase and sale of stocks and bonds, was sufficiently like that of a dealer and sufficiently unlike that of an ordinary investor to be treated in this one respect like that of a dealer. Since all of his securities were held primarily for sale in the course of his trade or business, Congress has seen fit to make no distinction between them and has allowed all gains of the year to be offset by all losses.

For the reasons already stated, it is immaterial that we see no merit in the other argument of the petitioner in which he tried to show that he was a “trader” and that traders, like dealers, are excluded by section 23 (r) (3) from the limitation of 23 (r) (1).

Decision will be entered under Rule 50.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions :

      (r) Limitation on Stock Losses.—
      (1) Losses from sales or exchanges of stocks and bonds (as defined in subsection (t) of this section) which are not capital assets (as defined in section 101) shall be allowed only to the extent of the gains from such sales or exchanges (including gains which may be derived by a taxpayer from the retirement of his own obligations).


author: ARNOLD:

text:
    St. Louis Hills Syndicate Fund et al., Petitioners, v. Commissioner of Internal Revenue, Respondent. Wellston Hills Syndicate Fund et al., Petitioners, v. Commissioner of Internal Revenue, Respondent. Webster Hills Syndicate Fund et al., Petitioners, v. Commissioner of Internal Revenue, Respondent. Kingshighway Hills Syndicate Fund et al., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 80258, 80259, 80260, 80261.
    Promulgated September 28, 1937.

      George M. Raissieur, Esq., and W. A. Helm, C. P. A., for the petitioners.

      B. H. Neblett, Esq., H. P. Noneman, Esq., and J. F. Gregory, Esq., for the respondent.
   OPINION.

ARNOLD:

The principal issue in each of these proceedings is whether the syndicates are associations taxable as corporations. In discussing this issue it should be noted that the terms of the syndicate agreements are so nearly identical that a principle applicable'to one is applicable to all. Likewise, we direct attention to the fact that the method of creating and operating each syndicate was so much alike that any principle applicable to one is applicable to all.

In addition we have certain factors in these proceedings which are undisputed, or are so clearly established as to be indisputable. We are satisfied that, whatever designation may be given to the enterprises, there can be no doubt that each was essentially a business undertaking. Each subscriber put in capital with the expectation and hope of realizing a profit. Their subscriptions were pooled and the fund used to purchase unimproved property, previously acquired by Cyrus Crane Willmore or by his wholly owned corporation, the Willmore Organization. Their subscriptions were further used to improve and subdivide the property purchased, and to pay the taxes thereon. The agreements, the testimony, and the other evidence of record indicate that the undertaking was one for mutual benefit and profit to all. The business of each enterprise was the subdivision and sale of tracts of land. There was no thought or even suggestion that liquidation of any sort was involved. Since the entire record points to the business nature of the enterprise, and since there obviously was a pooling of capital by the various subscribers who were participating, the question naturally arises whether the syndicates were not, from an income tax standpoint, associations taxable as corporations.

Petitioners contend that these subdivision projects were actually Cyrus Crane Willmore’s, because he owned the Willmore Organization 100 percent, and it in turn owned the realty companies 100 percent. It is their; contention that Willmore acquired the properties, but needed capital for their development and improvement. The syndicate agreements, they say, were financial vehicles which Will-more used to raise additional capital without being obligated to repay at any definite time and without any obligation to repay if the subdivision was a failure. Willmore was able to sell the idea because of his own ability and personality and because of the opportunity to share in the profits if his subdivisions proved successful. According to the petitioners, the subscriptions were loans or advances in the nature of loans. *

The Wilhnore Organization was the syndicate manager as to each syndicate, issued checks against the syndicate fund, and determined the improvements necessary, the prices and terms of sale, and otherwise operated under the provisions of each agreement. The other operating party under the agreement was the realty company holding title to the property. It contracted for improvements, receipted for money, executed deeds of trust and purchase agreements for lots, conveyed the land sold, etc. Both the syndicate manager and the titleholder of the property were Missouri corporations. It was by virtue of the activity of these two subscribers that the syndicate members secured centralized management and conduct of the business. The subscriber, by executing the agreement, specifically delegated to these two corporations the responsibilities of operating and managing the enterprise for the common benefit of all.

The realty companies, holding title to the separate tracts, were authorized, by virtue of the corporate powers stated in their charters, to hold title to and engage in the real estate business. Since the fund subscribed was to be, and was in fact, first applied to the purchase of the unimproved property, and since title thereto was held in the name of one of the subscribers, it seems idle to contend that no subscriber, other than the titleholder, had any interest whatsoever in the property purchased. It seems to- us that each subscriber had a proportionate interest in the assets of the undertaking even though title was taken in the name of another. Cf. Central Republic Bank & Trust Co., Trustee, 34 B. T. A. 391.

Each syndicate agreement provided expressly for the transferring of the subscriber’s rights thereunder, and some of the agreements show that there were either transfers or reductions in members’ interests during the existence of the syndicate. It does not appear that the death of any subscriber would terminate or interrupt the continuity of the enterprise one way or the other. In these respects each enterprise secured the continuity of existence, without interruption by death or transfer of interest, which is peculiar to corporate organizations.

One other factor pointing to the ultimate answer is the express prohibition contained in each agreement against the unlimited liability that partners have in connection with their business. Each syndicate agreement contains an express disclaimer as to any partnership liability between subscribers, or between a subscriber and the realty company holding the land. Each subscriber’s personal liability was further limited by the guaranty of the realty company that his loss, if any, should not exceed the amount of his subscription. In this respect each subscriber secured a limitation of personal liability exactly like the liability of a corporate stockholder.

Recent decisions of the Supreme Court have set forth the distinguishing features of a trust which may be regarded as making it analogous to.a corporate organization, where the trust is created and maintained as a medium for the carrying on of a business enterprise and sharing in its gains, Morrissey v. Commissioner, 296 U. S. 344, and related cases in 296 U. S. at pages 362, 365, and 369. It is true that we do not have a trust here, but we do have “associates”, and we do have resemblance to a corporate organization. In addition to considering trusts as associations, the Supreme Court in the Morrissey decision discussed associations as corporations, saying:

The inclusion of associations with corporations implies resemblance; but it is resemblance and not identity. The resemblance points to features distinguishing associations from partnerships as well as from ordinary trusts. As we have seen, the classification cannot be said to require organization under a statute, or with statutory privileges. The term embraces associations as they may exist at common law. Hecht v. Malley, supra. We have already referred to the definitions, quoted in that ease, showing the ordinary meaning of the term as applicable to a body of persons united without a charter “but upon the methods and forms used by incorporated bodies for the prosecution of some common enterprise.” These definitions, while helpful, are not to be pressed so far as to make mere formal procedure a controlling test. The provision itself negatives such a construction. Thus unincorporated joint-stock companies have generally been regarded as bearing the closest resemblance to corporations. But, in the revenue acts, associations are mentioned separately and are not to be treated as limited to “joint-stock companies,” although belonging to the same group. While the use of corporate forms may furnish persuasive evidence of the existence of an association, the absence of particular forms, or of the usual terminology of corporations, cannot be regarded as decisive. [P. 357.]

In Swanson v. Commissioner, 296 U. S. 362, 365, the Court pointed out that the limited number of actual beneficiaries did not alter the nature and purpose of the common undertaking. Nor did the limitation of their operations to the property first acquired change the quality of that undertaking.

Again in Helvering v. Coleman-Gilbert Associates, 296 U. S. 369, 373, the Supreme Court points out that mere differences of formal procedure should not be unduly emphasized. It is stated:

* * * If such differences were to be made the test in determining whether or not an enterprise for the transaction of business constitutes an association, the subject would be enveloped in a cloud of uncertainty, and enterprises of the same essential character would be placed in different categories simply by reason of formal variations in mere procedural details. The significant resemblance to the action of directors does not lie in the formalities of meetings or records but in the fact that, by virtue of the agreement for the conduct of the business of a joint enterprise, the parties have secured the centralized management of their undertaking through designated representatives. [Emphasis supplied.]

And so it is here. These subscribers formed an organization to conduct the business of holding, improving and selling real estate, with provision for the management of the undertaking through designated representatives (two Missouri corporations), Bing & Bing, Inc., 35 B. T. A. 1170, with continuity undisturbed by death or changes in ownership, and with limited liability. The subscribers were associated in a joint enterprise for the transaction of business and the making of profits. In our opinion, therefore, each of the foregoing syndicates was an association taxable as corporations are taxed. Cf. Thrash Lease Trust, 36 B. T. A. 444.

Our decision on the taxable status of the syndicates disposes of the question raised in two of the proceedings, Saint Louis and Wellston, that distributions made by them represented interest paid. These distributions can not be treated as interest payments, and respondent’s action in disallowing deductions claimed therefor is approved.

Decision will be entered for the respondent.


text:
    Pacific Employers Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78000.
    Promulgated September 30, 1937.

      Joseph D. Peeler, Esq., for the petitioner.

      Byron M. Coon, Esq., for the respondent.
   OPINION.

Sternhagen :

1. The petitioner’s first contention is that its deduction for losses should be not $611,245.39, as taken by it on its return, but $752,838.04, as shown on its annual statement filed with the California insurance commissioner. This contention for 1931 is controlled by the Revenue Act of 1928 and is precisely the same as that made for 1980 and rejected in Pacific Employers Insurance Co. v. Commissioner, 89 Fed. (2d) 186. The deduction taken on the.return was correct.

2. The petitioner filed an opaque return, and the Commissioner held that the item of $44,621.64 “represents a contingent liability and as such does not constitute an allowable deduction from gross income.”

It can not be said that the $44,621.64 represents a contingent liability. By its original contract the petitioner was, throughout 1931, obligated to pay its agent $199,715.85, and this amount it paid. Without more it was clearly deductible. The new agreement of December 31,1931, did not change this liability or payment. It did, to be sure, purport to reduce the absolute amount and make the $44,621.64 seem to be repaid to petitioner to be paid back later by petitioner only if it could be so paid “without impairing the solvency of the company.” But, since the company always had a surplus more than sufficient to withstand the payment, there never was a contingency and the obligation was never impaired and never lapsed. Really its agent, merely to enable the company to keep up appearances, loaned the company $44,621.64 and called it artificially a “contribution to surplus”, while retaining a right to demand its repayment with interest, subject only to the possibility that the right would lapse with a vanished surplus. The amendment of 1983 further limiting the agent’s right to repayment did not operate retroactively to change the contractual rights in 1931.

The entire $199,715.85 was a proper deduction of 1931, and the Commissioner’s disallowance of $44,621.64 was in error.

Judgment will be entered under Rule 50.