author: Black : Smith

text:
    Estate of Waldo C. Bryant, Deceased, Waldo Gerald Bryant and Ida Bryant, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72383.
    Promulgated October 19, 1937.

      David S. Day, Esq., and J. G. Korner, Jr., Esq., for the petitioners.

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

Black :

Petitioners seek redetermination of a $91,246.29 deficiency in estate tax. Respondent in his answer makes claim for an increased deficiency. The proceeding was submitted on the pleadings and a stipulation of facts. We adopt the stipulation of facts and the exhibits attached thereto as our findings of fact. Several of the issues were agreed upon in the stipulation and effect will be given thereto under Rule 50. The issues remaining are whether any part of the value of the corpora of three transfers in trust made by decedent during his lifetime in 1917, 1920, and 1902, respectively, is to be included in his gross estate under section 302 of the Revenue Act of 1926. The respondent does not contend that the transfers were made in contemplation of death.

Waldo O. Bryant, the decedent, was born December 17, 1864, and died, testate, July 5, 1930, a resident of Connecticut. Petitioners are the duly appointed and qualified executors of his estate. Ida Bryant is decedent’s widow; Waldo Gerald, his son.

1917 Transfer.—On July 2, 1917, an indenture of trust was made between decedent as party of the first part and the Bankers Trust Co. as party of the second part, sometimes called' “trustee”, under which decedent transferred to the trustee certain securities in trust, the income from which, after deducting trustee’s commissions and other trust expenses, the trustee was to pay as and when received:

* * * unto Ida Beyant, wife of the party of the first part, for and during the term of her natural life; upon the death of said Ida Bryant, to pay the net income to the party of the first part for and during the term of his life.
Upon the death of the survivor of said Ida Bryant and the party of the first part, unless this trust shall have been modified or revolved as hereinafter provided, to convey, transfer and pay over the principal of the trust fund to the executors or administrators of the estate of the party hereto of the first part.

The trust indenture contained the following provision relative to modification, alteration or revocation:

Tenth: Notwithstanding anything to the contrary herein contained, the party of the first part and said Ida Bryant during the period when both shall be living and. at any time or times during the continuance of the trusts herein provided for may, by instrument in writing executed and acknowledged or approved by them in the manner required for a deed of real estate (so as to enable such deed to be recorded in the State of New York), delivered to the Trustee, modify or alter in any manner or revoke in whole or in part this indenture and any or all of the trusts then existing and the limitations of estates and interest in property hereby created and provided for subsequent to such trusts; and in ease of such modification, alteration or revocation, such instrument shall direct the disposition to be made of the trust funds or of that part of the trust funds affected by such modification, alteration or revocation * * *. In ease of the death of either the party of the first part or his wife, the said Ida Bryant, the survivor of them shall have the same right and privilege to modify, alter or revoke the instrument in any manner whatsoever, by giving a notice in writing to the Trustee * * *.

On December 22, 1923, decedent and Ms wife modified the trust relative to trustee’s commissions. Since then there have been no alterations or other modifications. The trust has never been revoked and at the time this proceeding was submitted was still in force and effect.

Decedent was survived by his wife, Ida Bryant, born September 13, 1868. Under article 10 of decedent’s last will, executed June 14, 1930, decedent gave, devised, and bequeathed to the Bankers Trust' Co. “all my right, title and interest, and the right, title and interest of my estate in and to a certain trust fund held by said Bankers Trust Company under a deed of trust from myself to said Bankers Trust Company, dated July 2, 1917” in trust, nevertheless, for the benefit, after the death of his wife, Ida Bryant, of his children and grandchildren. Paragraph (d) of said article ten of decedent’s last will provided:

The trust herein created is not intended and shall not be construed as a modification of said trust deed of July 2, 1917, or said modification of December 22, 1923, or to affect in any way the rights, interests and powers of the said Ida Bryant thereunder, but only to dispose of the interest vested by said trust deed and modification in myself or my estate.

The value of the entire corpus of the trust executed on July 2, 1917, as of date of decedent’s death was $767,706.62; and the value of the remainder thereof, after excluding the value of the wife’s right to the income for life, was $478,918.42.

Petitioners in filing the estate tax return did not include in decedent’s gross estate the value of any part of the corpus of the July 2, 1917, trust, but submitted with the return a copy of the trust instrument and a list of the securities making up the corpus of the trust, together with the quoted prices thereof on the last business day prior to the date of decedent’s death.

The-respondent in determining the deficiency herein included in decedent’s gross estate, under the provisions of section 302 (c) of the Revenue Act of 1926, the amount of $478,918.42 as representing the “remainder value of trust created under date of July 2, 1917.” In his answer the respondent affirmatively alleged that “there should be included in decedent’s gross estate the full value of the corpus of the trust executed by the decedent under date of July 2,1917, pursuant to the provisions of subdivisions (a), (c) and/or (d) of section 802 of the Revenue Act of 1926, instead of the present worth of the reversionary interest in the corpus of such trust as of the date of decedent’s death, which said reversionary interest was included in the gross estate by respondent at a value of $478,918.42 * *

We shall first consider respondent’s affirmative allegation stated above, that the “full value” of the corpus should be included in decedent’s gross estate under subdivisions (a), (c) and/or (d) of section 302 of the Revenue Act of 1926. This allegation was made prior to the two Supreme Court decisions of Helvering v. Helmholz, 296 U. S. 93, and White v. Poor, 296 U. S. 98. Under these decisions it is settled that no part of the corpus could be included under subdivision (d), since the trust was created prior to the Revenue Act of 1924, and decedent could not alter, amend, or revoke except in conjunction with his wife, who was the life beneficiary. Mary Q. Hallock et al., Trustees, 34 B. T. A. 575, 579. Neither could the value of the wife’s life estate be included under subdivisions (a) or (c), as affirmatively alleged. Cf. May v. Heiner, 281 U. S. 238. The respondent’s contention that any value of the corpus of the July 2, 1917, trust in excess of the reversionary interest determined by him in the amount of $478,918.42 should be included in decedent’s gross estate is, therefore, denied.

We will now direct our attention to the principal issue involved in this proceeding, namely, whether on July 5, 1930, the date of decedent’s death, there was vested in decedent a reversionary interest in the corpus of the July 2, 1917, trust and, if so, whether the value of such reversionary interest should- be included in decedent’s gross estate. The parties have stipulated “that if there were in the decedent on July 5,1930, a vested reversionary interest in the corpus of the said trust, the value of which is includable in the gross estate for Estate Tax purposes, the value thereof on July 5, 1930, was $478,918.42.”

The applicable statute is the Revenue Act of 1926, the material provisions of which are as follows:

Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(a) To the extent of the interest therein of the decedent at the time of his death;
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona Me sale for an adequate and full consideration in money or money’s worth. * * *

In administering tire above statute the respondent promulgated Estate Tax Regulations No. 80, article 11 of which provides in part as follows:

The value of a vested remainder should be included in the gross estate. Nothing should be included, however, on account of a contingent remainder where the contingency does not happen in the lifetime of the decedent, and the interest consequently lapses at his death. Nor should anything be included on account of an interest or an estate limited for the life of the decedent. There should he included, however, the value of a reversionary interest retained by the decedent, which reverts upon the termination of a particular estate, or in case of his prior death passes to others. [Italics supplied.]

In determining whether on the date of his death decedent was vested with a reversionary interest in the corpus of the 1917 trust we are governed by the laws of the State of Connecticut, in which decedent was then domiciled. Kinney's Estate v. Commissioner, 80 Fed. (2d) 568, and cases therein cited on that point.

The Supreme Court of Errors of Connecticut was called upon to consider this very trust in a proceeding by William H. Hackett, tax commissioner, against Ida Bryant, executrix of the estate of Waldo C. Bryant, deceased, concerning a succession and transfer tax imposed upon the said estate by the State of Connecticut. See Bryant v. Hackett, 118 Conn. 233; 171 Atl. 664. Petitioners herein especially rely upon this case, saying at page 35 of their reply brief:

We believe the respondent’s argument is completely answered. His whole case is predicated on the assumption that Mr. Bryant had a vested remainder or vested reversionary interest at the time of his death. The Supreme Court of Connecticut has held that he did not. We believe that is a sufficient answer to his argument.

The respondent in his reply brief took issue with petitioners as to what the Supreme Court of Connecticut held.

Two questions were before the Connecticut court—(1) whether the statute in effect when the trust was created or the statute in effect when the decedent died should govern, and (2) if the statute in effect when the decedent died should govern, whether the remainder interests in the principal of the fund after the termination of Mrs. Bryant’s life estate were taxable within the intent of that statute. The statute in effect when the decedent died was enacted in 1929. See General Statutes of Connecticut, Revision of 1930, pp. 465 to 483.

The court first stated the facts relative to the July 2, 1917, trust, which were in substance the same as we have stated above, with this one exception that the court made no reference to the fact that Waldo C. Bryant left a will, but decided the case apparently on the assumption that Bryant died intestate. Whether Bryant died testate or intestate was not material in deciding the questions before the court, and we mention this difference in the facts in order that the later quoted excerpts from the court’s opinion herein can at once be reconciled with the facts as we have stated them.

In deciding the first question the court deemed it important to determine whether the decedent’s heirs at law acquired vested remainders at the time the trust was created in 1917 or at the time the decedent died in 1930. If the remainders vested in 1917, the court was of the opinion that to apply the 1929 statute would be unconstitutional, upon the authority of Coolidge v. Long, 282 U. S. 582, and that, therefore, it would be necessary to apply the statute in effect when the trust was created. The court held, however, that the remainders vested on the date of decedent’s death and that the applicable statute was the one enacted hi 1929. In so holding it said in part:

The transfer before us does not fall within that decision (Coolige v. Long, supra), because the trust agreement here in question created no vested rights aside from the life uses provided for. If the agreement was not revoked or modified, the remainder interests would pass to the executors or administrators of Mr. Bryant, that is, to those entitled to receive his estate under the statute of distributions; and who these would be could only be ascertained at his death. If the agreement were revoked before his death, the property might pass as a part of his estate to those entitled to receive that estate at his death or he might dispose of it before his death. If the agreement was revoked after his death, the property would pass as a part of his estate. Either before or after his death, the agreement might be so modified that the principal of the property would pass to persons whose identity could in no way be foreseen; while after the death of Mr. Bryant, Mrs. Bryant might no doubt so modify the agreement as to vest in her an immediate right to receive the property and it could not be known until after his death whether or not she would do this. It is essential to constitute a vested right, in contradistinction to one that is expectant or contingent, that the right to enjoyment, present or prospective, has become the property of some particular person or persons as a present interest. [Citations.] The trust agreement before us created no vested rights beyond those of Mr. and Mrs. Bryant to receive the income of the property until the death of the survivor or until the agreement was revoked or so modified as to terminate their rights.
The opinion of the majority of the court in Coolidge v. Long rests largely upon the fact that the succession and interests of the five sons were complete when the trust was created and The death of the settlors was in no sense a generating source of any right in them. In the instant case, the agreement not having been revoked or substantially modified, at the death of Mr. Bryant his heirs in law became certain and each of them then acquired an interest in remainder, subject to the life use of Mrs. Bryant and subject to being divested should she revoke the trust or so modify it as to change or destroy that interest. [Citations.] Before Mr. Bryant’s death, the only person who could look forward to receiving the property at the termination of the life uses were those who might anticipate that they would become his heirs at law, and they had a mere expectancy; by bis death those who were in fact his heirs at law acquired definite property rights in the principal of the fund. His death had, therefore, a definite and certain effect upon the rights of those who, subject to a possible later divestment, would receive the principal of the fund.
If the test of the constitutionality of the application of a statute passed after property had been transferred upon such a trust, but before the death of the transferor, be the fact that that death must be generating source of a right in remainder [citation], that condition is met in this case.

The court continued for a while on the first question, then discussed the second question, and concluded as follows:

In the ease of the Bryant estate, our answer to the questions propounded is that the taxabality of the transfers is to be determined by the statute in effect at Mr. Bryant’s death, that its appilication will not offend against any provision of the United States Constitution, and that the remainder interests in the principal of the fund consequent upon the termination of the right of Mrs. Bryant to receive the income are taxable within the intent of that statute.

In the instant proceeding petitioners, in support of their contention that the Supreme Court of Connecticut held that decedent did not on the date of his death own a vested reversionary interest in the corpus of the 1917 trust, rely particularly upon those parts of the above quoted portion of the court’s opinion which say that the trust agreement created no vested rights aside from the life uses provided for. We think the respondent correctly answers this contention in his reply brief wherein he says:

* * * The court said that the trust agreement “created” no vested rights aside from the life uses provided for. One does not “create” an estate in reversion. A reversion is whar, is left or remains in the grantor after he has created or conveyed less than his entire interest or estate in property.

The court did not specifically say in so many words that upon the creation of the trust in 1917 the grantor retained a reversionary interest in the principal of the trust fund and that such interest remained vested in him until the day of his death, but it seems to us that unless that were true there would be no basis for the court’s holding that “at the death of Mr. Bryant his heirs at law became certain and each of them then acquired an interest in remainder”; that “by his death those who were in fact his heirs at law acquired definite property rights in the principal of the fund”; and that, “His death had, therefore, a definite and certain effect upon the rights of those who, subject to a possible later divestment, would receive the principal of the fund.”

It is therefore our opinion and we so hold that on the date of his death there was vested in decedent a reversionary interest in the corpus of the July 2, 1917, trust. We think this reversionary interest, the value of which was stipulated to be $478,918.42, should be included in the decedent’s gross estate under the provisions of the above cited, statute and regulations and also upon tbe authority of Klein v. United States, 283 U. S. 231, and Luis James Phelps et al., Executors, 27 B. T. A. 1224.

Petitioners cite as controlling authority such cases as Helvering v. St. Louis Union Trust Co., 296 U. S. 39; Becker v. St. Louis Union Trust Co., 296 U. S. 48, and a great many more along the same line. The difference .between that line of cases and the instant proceeding is that in the former the decedents had only a mere “possibility of a reverter” whereas here, as we have held above, the decedent on the date of his death owned a “vested reversionary interest” subject only to being divested in case the surviving life beneficiary (Ida Bryant) exercised her power to revoke the trust and designate to whom the principal was to be paid. Petitioners say, without citing any authority therefor, that this power in the hands of the life beneficiary is tantamount in law to the fee in the trust. “But the existence of the power does not of itself vest any estate in the donee.” United States v. Field, 255 U. S. 257, and cases there cited. The court in Bryant v. Hackett, supra, held “that the remainder interests in the principal of the fund consequent upon the termination of the right of Mrs. Bryant to receive the income are taxable within the intent” of the Connecticut succession and transfer tax statute, notwithstanding the said remainder interests were subject to being divested in whole or in part. We know of no valid reason why the above mentioned vested reversionary interest should not be included in decedent’s gross estate.

Petitioners also rely to a great extent upon Frederick Davis Van Sicklen et al., Executors, 35 B. T. A. 306. That case, no doubt, comes nearer supporting petitioners’ contentions than any other case they cite, as the life beneficiary here also had the power to revoke the trust. But we believe that case is distinguishable from the instant case in one important particular. The grantor in the Van Siclden case did more than just grant a life interest, as is the case here. He created contingent remainders “to any children of the said beneficiary then living” and, if not living, then to their issue. The corpus would eventually go to the heirs of the decedent only if the life beneficiary died without descendants and without having revoked the trust. We do not think the instant case quite reaches the line of those cases that have been held to be outside of the taxing statute.

There is one more point that should be mentioned. Petitioners devoted the larger part of their reply brief to the contention that on the date of decedent’s death he could not have owned a vested reversionary interest in the corpus of the trust for the simple reason that he had in 1917 conveyed every vestige of right or estate he had in tlie property to a separate person, namely, the trustee; that thereafter the trustee held the legal title to the property; and that whatever estate passed to another thereafter would pass from the trustee and not from the decedent. It seems to us that this is substantially the same contention as was made in Estate of Winifred H. Kinney, 30 B. T. A. 604; aff'd., 80 Fed. (2d) 568. The contention was rejected by both the Board and the Circuit Court of Appeals for the Ninth Circuit, which affirmed our decision.

On the issues pertaining to the 1917 transfer we conclude, therefore, that the respondent correctly included in. decedent’s gross estate the amount of $478,918.42 as a “vested reversionary interest” in the corpus of the July 2,1917, trust, and that he is not entitled to include any value in excess of the said vested reversionary interest.

1920 Transfer.—On March 26, 1920, decedent transferred a United States Liberty bond of the face value of $5,000 to the First-Bridgeport National Bank and himself as cotrustees. After trust expenses were paid the annual net income was to be paid to Doris Bryant, daughter of decedent, during her life. Upon the death of said Doris Bryant:

* * * said trust shall terminate, and I direct said Trustees to transfer and pay over the principal of said trust fund, including any accumulations thereto, to the said Waldo O. Bryant, if he be then living, but, if he be then deceased, to Ida Bryant, the wife of the said Waldo C. Bryant, and if neither the said Waldo O. Bryant nor the said Ida Bryant be then living, to the issue of the said Doris Bryant then surviving, in equal shares per stirpes, and if the said Waldo O. Bryant, the said Ida Bryant, or issue of the said Doris Bryant be not then surviving, I direct said Trustees to transfer and pay over to Waldo Gerald Bryant, son of the said Waldo G. Bryant, said trust fund and accumulations, or, if he be not then living to his then surviving issue, in equal shares per stirpes; and, if none of the said named and described persons are then living, I direct said Trustees to pay over said trust fund and accumulations to the heirs of the said Waldo O. Bryant other than those above named and described.

The said 1920 trust contained no provision for revocation, amendment, or alteration by any person whatsoever, and was still in force and effect at the time this proceeding was submitted. Doris Bryant was born March 26, 1902, and at the time this proceeding was submitted was still living. .

Petitioners in filing the estate tax return did not include in decedent’s gross estate the value of any part of the corpus of the March 26, 1920, trust, but submitted with the return a copy of the trust instrument and a present inventory of the trust property. The respondent determined that by reason of the March 26, 1920, transfer there should be included in decedent’s gross estate “the value of a reversionary interest retained by the decedent, which reverts upon the termination of a particular estate or in case of Ms prior death passes to others.” The respondent determined the value of this alleged “reversionary interest” to be the amount of $3,605.85.

The issue pertaining to this trust requires no extended discussion. Suffice it to say that decedent’s death simply put an end to what, at best, was a mere possibility of a reverter by extinguishing it. Helvering v. St. Louis Union Trust Co., supra; Mary Q. Hallock et al., Trustees, supra. The respondent’s determination on this issue is disapproved.

1902 Transfer.—On February 20, 1902, decedent executed a trust indenture by and in which he conveyed to the Union Trust Go. of New Haven, Connecticut, certain designated securities in trust, to hold, manage, invest, and reinvest for the uses and purposes following:

2d. To pay over the net income thereof, semi-annually or oftener, in the discretion of said Trust Company, to my sister, Flora A. Bryant, of Winchendon, Massachusetts, for and during her life.
3rd. Upon the death of said Flora A. Bryant, to pay over said net income, semi-annually, or oftener, in the discretion of said Trust Company, to my mother, Almeda Bryant, for and during her life.
4th. Upon the death of said Almeda Bryant, or in case she shall die before said Flora A. Bryant, then upon the death of said Flora, to pay over said net income, semi-annually, or oftener, in the discretion of said Trust Company, to my father, Calvin T. Bryant, for and during his life.
5th. Upon the death of the last survivor of said Flora A. Bryant, said Calvin T. Bryant and said Almeda Bryant, to pay over and convey the securities and property then forming the principal of said trust fund to such of my children as may then be living, and the issue, then living, of such as may then have deceased, to be equally divided between them, share and share alike, and to be theirs absolutely and forever, the issue of a deceased child to take the share to which his, her or their parent would have been entitled if living; whereupon this trust shall cease and determine.

The said 1902 trust contained no provision for revocation, amendment or alteration, and at the time this proceeding was submitted it was still in force and effect. At the date of decedent’s death, the first named beneficiary, Flora A. Bryant, born November 17, 1862, was living and at the time this proceeding was submitted was still living. The second and third named beneficiaries, Almeda Bryant and Calvin T. Bryant, were dead.

Petitioners in filing the estate tax return did not include in decedent’s gross estate the value of any part of the corpus of the February 20, 1902, trust, but submitted with the return a copy of. the trust instrument and a present inventory of the trust property, with a statement that “All of said securities represent either original securities and reinvestments of the same or securities added to said trust prior to September 9, 1916.” The respondent in Ms determination of the deficiency did not determine or include any value on account of this trust. In his answer the respondent affirmatively avers that in redetermining the deficiency “there should be included in the decedent’s gross estate the full value, as of the date of the decedent’s death, of the corpus of the trust executed by the decedent on February 20, 1902, pursuant to the provisions of subdivisions (a) and/or (c) of the Revenue Act of 1926 * * The parties have stipulated that “the full value of the assets constituting the corpus of the said Trust, on July 5, 1930, was $10,000.00.”

In his brief the respondent stated that two questions are involved as to this trust, namely, (1) Should the entire value- of the corpus of the trust created by the decedent on February 20, 1902, be included as a part of the decedent’s gross estate? and (2), Was the decedent at the time of his death the owner of the reversion in the corpus of the trust created by him on February 20, 1902, and, if so, should the value thereof be included .as a part of the gross estate? He then proceeded to argue only the second question.

We do not think that any value whatever should be included in decedent’s gross estate as to the 1902 trust. At the time it was made it was irrevocable, complete, and was not made in contemplation of death. It was not testamentary in character and was beyond recall. Every vestige of interest of decedent passed out of him at that time. The only remote possibility of a reversion to decedent or his estate would depend upon one of the three life beneficiaries (sister, mother, and father of decedent, respectively) outliving all of decedent’s children and grandchildren. The transfer is not taxable, under such decisions as Reinecke v. Northern Trust Co., 278 U. S. 339; May v. Heiner, supra, and Helvering v. St. Louis Union Trust Co., supra; Mary Q. Hallock et al., Trustees, supra. The respondent’s contentions as to this trust are, therefore, denied.

The deficiency will be recomputed in accordance with this opinion.

Reviewed by the Board.

Decision will be entered under Rule 50.

Smith

dissents on the holding that on the date of his death the decedent owned a “vested reversionary interest” in the principal of the trust fund, the agreed value of which should be included in his gross estate under section 302 (a) and (c) of the Revenue Act of 1926.


source: Caselaw Access Project

author: Hill:

license: Public Domain

text:
    Republic Bank & Trust Company, Z. Gossett, Banking Commissioner of Texas, Statutory Receiver in Liquidation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76490.
    Promulgated October 20, 1937.

      Charles F. Byers, Esq., for the petitioner.

      James H. Yeatman, Esq., for the respondent.
   OPINION.

Hill:

The sole issue presented by the original pleadings is whether petitioner realized during the taxable year income in the amount of $20,000 upon unproven claims. However, at the first hearing at Houston, Texas, in May 1935, petitioner moved for leave to file an amended petition to raise the additional issue of the applicability of the Act of March 1, 1879, section 22, 12 U.S.C.A. 570, copied in the margin. At the same hearing, petitioner offered in evidence a certificate of the Banking Commissioner of Texas, dated April 27, 1935, to which respondent objected, reading in material part as follows:

I, E. C. Brand, Banking Commissioner of Texas, do hereby certify that the Republic Bank & Trust Company, a state bank of deposit and discount, formerly doing business in Austin, Travis County, Texas, was closed by me on April 24,1935, because it was in an insolvent and failing condition.
Stockholders of this institution are this day being assessed their full one hundred per cent liability for the benefit of its creditors.
During former years the officers of this bank charged its dormant deposits off of its depositors’ liability ledger and credited surplus to cover a material amount. These deposits are now, and always have' been, a true liability of this bank.

Its known financial condition is that assets sufficient to pay its depositors in full do not exist when and if this bank is required to pay any Federal taxes.

In a memorandum opinion filed herein June 26, 1936, we held that the above quoted certificate of the Banking Commissioner of Texas was not admissible in evidence to prove the facts therein stated, when objected to by respondent, saying:

In the first place, evidence is not admissible to prove an issue which has not been raised by the pleadings. In the next place, a mere certificate by the Banking Commissioner of Texas that “its known financial condition is, that assets sufficient to pay its depositors in full do not exist when and if this bank is required to pay any Federal taxes” is not admissible proof of the facts stated therein. Rule 29 of the Board’s Rules of Practice provides in part: “Statements in the petition, ex parte affidavits, and briefs, do not constitute evidence.”
The Banking Commissioner’s certificate, printed above, in. so far as it affects the issue here involved, is an ex parte statement. If the only question we had to determine was whether petitioner had been declared insolvent and its affairs placed in the hands of the Banking Commissioner of Texas, this certificate of the Banking Commissioner would be sufficient for that purpose. But when it comes to establishing the facts which are necessary to bring petitioner’s ease within the provisions of the Act of March 1, 1879, and thus absolve it from the deficiency which the Commissioner has determined, we think that more than the ex parte certificate of the Banking Commissioner is necessary, especially when its admission in evidence is objected to by respondent’s counsel.
To admit such a certificate as evidence of the facts therein stated would prevent respondent’s exercise of the right of cross-examination to test out the correctness of the conclusions therein stated. * * * We sustain respondent’s objection to the admission of the certificate for that purpose. Cf. Guaranty State Bank of Greenville, Texas, 12 B. T. A. 543.

We adhere to the views expressed above.

Pursuant to leave granted in an order entered June 26, 1936, petitioner filed an amended petition on March 22, 1931, all the material allegations of which were denied by respondent, raising the issue of the applicability of the Act of March 1, 1879, supra, but at the subsequent hearing held at Houston, Texas, on April 19, 1937, petitioner did not again offer in evidence the certificate of the banking commissioner, hereinabove referred to, in connection with the issue so raised, and failed to offer any evidence on such issue. While we have jurisdiction to consider the issue, West Town State Bank, 32 B. T. A. 531, its decision depends entirely upon the existence or nonexistence of certain facts, in respect of which petitioner has the burden of proof. Petitioner having offered no proof on the issue raised by the amended pleadings, we find for the respondent thereon.

This brings .us to the consideration of the issue presented by the original -pleadings, namely, whether petitioner during the taxable year derived income in the amount of $20,000, from unproven claims.

In 1927 petitioner purchased from the receiver of the State National Bank all of that bank’s assets, and as part consideration therefor, agreed to assume and pay 86 percent of any of its unknown liabilities which might thereafter be proved and accepted or established against the receivership. Upon termination of the receivership, the funds in the hands of the Comptroller of the Currency, relating to the unproven claims, were deposited with petitioner, to be used by it to pay 86 percent of any unproven claims which might be filed prior to the expiration of the statutory period of limitation of the State of Texas, which was said to be four years from the date of such deposit. To secure payment by petitioner to creditors upon proof of their claims within the time fixed by the Texas statute of limitations, petitioner agreed to and did deposit with the Treasurer of the United States, instead of the bond originally provided, bonds of the United States having a fair market value of $21,600. During the taxable year ended April 30, 1932, four years from the date of the deposit having elapsed, the Comptroller of the Currency released all of his rights in the bonds mentioned, and returned them to petitioner. Upon receipt of the bonds, petitioner, with the consent and approval of the Banking Commissioner of Texas, transferred $20,000 of such amount of $21,600, to its surplus account.

Petitioner entered the purchased assets on its books at a cost to it of the entire amount paid, plus the full amount of $21,600 placed with the Comptroller of the Currency. Prior to the taxable year all of such assets were converted through sale or otherwise, and petitioner’s net income was determined for tax purposes on the basis of the book cost or value.

Respondent contends that upon expiration of the four-year period of limitation petitioner’s contractual liability in respect of the unproven claims was extinguished. Therefore, on return of the bonds by the Comptroller of the Currency, respondent says, they became petitioner’s property unconditionally, and it therefore derived taxable income in the amount of the $20,000 transferred to its surplus account.

Petitioner argues that under Texas law limitation does not apply to the unproven claims of the depositors; that it has a continuing liability in that respect, and points to the provisions of the contract of February 15, 1928, whereby petitioner remained conditionally liable after expiration of the four-year period of limitation. Petitioner contends, therefore, that it derived no taxable income upon return of the bonds by the Comptroller of the Currency.

The point argued by the parties respecting the Texas statute of limitation, we need not decide. If the bonds, upon return to petitioner, became its property absolutely, without further liability on the part of petitioner as to unproven claims of the depositors, as contended by respondent, then petitioner does not deny that it received taxable income in the amount determined by respondent. If the bonds were not unconditionally returned to petitioner without further liability on its part, as it contends, we think, on the facts disclosed, petitioner nevertheless derived taxable income in an amount equal at least to the amount in controversy.

There is an abundance of evidence to establish that petitioner received the bonds back from the Comptroller of the Currency during the taxable year under a claim of right and without restriction as to their disposition, notwithstanding it might thereafter have been required to pay out, on claims of depositors subsequently established, an amount equal to the value of the bonds in whole or in part. The agreement between petitioner and the Comptroller of the Currency indicated that after expiration of the four-year period of limitation, petitioner “asserted an adverse claim to all of the assets” of the State National Bank “as against the holders of any and all unproven claims and liabilities against said Bank.” That petitioner claimed the bonds upon their return as its own property unconditionally is further indicated by the transfer of $20,000 thereof to the credit of its surplus account.

In these circumstances, petitioner derived taxable income in the amount stated, and. if in a later year it was or should yet be required to pay the equivalent of any part of such amount in satisfaction of claims subsequently proven, it would be entitled to deduct such amount from the income of the year in which paid. This principle was clearly established by the decision of the Supreme Court in North American Oil Consolidated v. Burnet, 286 U. S. 417, where it was held that income earned in 1916, but impounded by a receiver pending outcome of litigation and actually paid over to taxpayer in 1917, was taxable as income of 1917. In its opinion the Court said:

The net profits earned by the property in 1916 were not income of the year 1922—the year in which the litigation with the government was finally terminated. They became income of the. company in 1917, when it first became entitled to them and when it actually received them. If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is not entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. * * * If in 1922 the government had prevailed, and the company had been obliged to refund the profits received in 1917, it would have been entitled to a deduction from the profits of 1922, not from those of any earlier year.

Respondent’s determination is approved.

Judgment will be entered for the respondent.

       Whenever and after any bank has ceased to do business by reason of insolvency or bankruptcy, no tax shall be assessed or collected, or paid into the Treasury of the United States, on account of such bank, which shall diminish the assets thereof necessary for the full payment of all its depositors; and such tax shall be abated from such national banks as are found by the Comptroller of the Currency to be insolvent; and the Commissioner of Internal Revenue, when the facts shall so appear to him, is authorized to remit so much of said tax against insolvent State and savings banks as shall be found to affect the claims of their depositors.


author: Hill :

text:
    American Central Utilities Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83642.
    Promulgated October 20, 1937.

      George S. Atkinson, Esq., and M. S. Carneiro, C. P. A., for the petitioner.

      DeWitt M. Evans, Esq., for the respondent.
   OPINION.

Hill :

The sole issue for decision in this case is whether petitioner should be required to pay a tax computed on the basis of the entire amount of interest which became due and payable in the taxable year 1932 on the indebtedness owing to it by its Mexican subsidiary, the Chapala Co., or whether petitioner should be taxed only on the amount of interest actually paid to it during such year. Interest in the amount of $585,797.30 became due in the taxable year, and this amount petitioner accrued on its books and reported in its return as taxable income. Interest was paid to petitioner in Mexico in the total amount of $283,816.79, but in order to get the money into the United States, petitioner sustained an exchange loss in the amount of $118,000 and paid a Mexican income tax of $12,366.79. Thus, petitioner received in cash only the net amount of $153,450. However, in computing the deficiency, the exchange loss was deducted, and the Mexican income tax credited against the tax due the United States.

Petitioner contends that, because of the extreme doubtfulness of its collectibility, the only part of the interest in question that should have been included in its gross income was the amount of $283,816.79, which was actually collected within the taxable year. Under the facts disclosed, we think the petitioner’s contention must be sustained.

A taxpayer, even though he keeps his books and makes his income tax returns on an accrual basis, is not required to report in his income an amount which he may never receive. North American Oil Consolidated v. Burnet, 286 U. S. 417, citing Burnet v. Logan, 283 U. S. 404, 413.

It is immaterial that petitioner in this proceeding erroneously accrued the entire amount of interest due and reported it as taxable income. If it in fact was not taxable income, an entry on petitioner’s books treating it as income could not make it such. Corporate books “are no more than evidential, being neither indispensable nor conclusive. The decision must rest upon the actual facts.” Doyle v. Mitchell Brothers Co., 247 U. S. 179.

Where the accounts are kept and returns made on an accrual basis, it is the right to receive and not the actual receipt that determines the inclusion of the amount in gross income, Spring City Foundry Co. v. Commissioner, 292 U. S. 182, but an item is not properly accruable unless it is good and collectible. If it is collectible at the time the right to receive arises, it should be accrued and included in gross income, and if the obligation later becomes worthless, even within the same taxable year, the question then becomes one of deduction according to the applicable statutes. If the obligation is not collectible when the right to receive arises, such right is without substance and there is nothing to accrue. The amount then should be excluded from gross income and no question of deduction arises. Atlantic Coast Line Railroad Co., 31 B. T. A. 730, 751; aff'd., 81 Fed. (2d) 309; certiorari denied, 298 U. S. 656.

The taxation of income not actually received rests upon the basis of a reasonable expectancy of its receipt. “A taxpayer, even though keeping his books upon an accrual basis, should not be required to pay a tax on an accrued income unless it is good and collectible, and, where it is of doubtful collectibility or it is reasonably certain it will not be collected, it would be an injustice to the taxpayer to insist upon taxation.” Corn Exchange Bank v. United States, 37 Fed. (2d) 34, and authorities cited. See also Atlantic Coast Line Railroad Co., supra, at pages 747 to 752, and decisions cited.

What, then, briefly are the facts in the instant case concerning the collectibility of the interest obligations of the Chapala Co. as they appeared at the close of petitioner’s taxable year 1932? At December 31, 1926, the subsidiary company had defaulted in the payment of interest to the extent of more than two million dollars, Mexican currency. At December 31, 1931, the interest accrued and unpaid then totaled $681,579.01, United States currency, and during 1932 the company was unable to pay interest to petitioner for that year in the amount of $301,980.51, United States currency. The Chapala Co. had not only defaulted in the payment of interest, but at December 31, 1932, payments on principal of its bonds were past due and unpaid in the amount of $334,900. At December 31, 1926, the actual assets of the company exceeded its liabilities by a substantial amount, but at the close of the years 1931 and 1932’it. was in fact insolvent, its liabilities then exceeding assets in the amounts of $2,030,782.50 and $3,333,144.06, Mexican currency, respectively. At December 31,1931, the company had an operating deficit in excess of four million dollars, and at December 31, 1932, its operating deficit exceeded six million dollars, Mexican currency. Its book assets decreased approximately a million and a half dollars, and its liabilities increased approximately three million dollars, Mexican currency, during the period December 31, 1926, to December 31, 1932.

Many other facts indicating that the obligations of the Chapala Co. were of doubtful collectibility at the close of 1932 were established by the record, but we think those above cited are sufficient to show that the interest accrued by petitioner on its books and reported in its income tax return for 1932 certainly was not in its entirety “good and collectible.” The amount of interest due should, therefore, not have been accrued on petitioner’s books and only the amount actually collected during the taxable year should have been reported in its tax return.

On authority of .the decisions cited above, we hold that petitioner’s gross income as determined by respondent in computing the deficiency here in controyersy should be reduced by the amount of $301,980.51, representing interest accrued but not paid during the taxable year. The resulting tax will be entirely eliminated by applying against it as a credit the amount of Mexican income tax hereinabove referred to, and in respect of which there is no controversy. It follows that there is no deficiency in but an overpayment of petitioner’s income tax for the year 1932 in the amount of $31,912.13, the amount shown on its return. On the basis of the conclusions here reached, respondent so concedes..

Judgment will be entered for the petitioner.


text:
    Continental Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82896.
    Promulgated October 21, 1937.

      Wright Matthews, Esq., Hilary D. Mahin, Esq., and Glenn Y. Davidson, C. P. A., for the petitioner.

      Edward Tonges, Esq., and F. M. Thompson, Esq., for the respondent.
   OPINION.

Hill:

The petitioner seeks redetermination of a deficiency of $137.07 in income tax for the fiscal year ended August 31, 1933. Petitioner alleges that the respondent erroneously disallowed it depletion on the sum of $4,334 it received during the taxable year from a lease of sulphur lands which it owned in fee.

The facts have been stipulated as follows:

I.
Attached hereto, made a part hereof and marked Exhibit “A”, is copy of the notice of deficiency appealed from.
II.
Attached hereto, made a part hereof and marked Exhibit “B”, is a copy of the contract between the Continental Oil Company, Petitioner, and the Texas Gulf Sulphur Company and Gulf Production Company.
III.
The Continental Oil Company was paid the sum of $4,334.00 under the above contract on July 29, 1933. During the year, development was not commenced on the property described in the above contract, nor was there any development in progress at the beginning of the year. On its income tax return for the taxable year 1933, the petitioner claimed as depletion a deduction of 27½% on said sum of $4,334.00. In the notice of deficiency mailed by the respondent, this depletion was disallowed.

The material parts of the contract between the petitioner and its lessees, the Texas Gulf Sulphur Co. and Gulf Production Co., are as follows:

Continental is the owner of the fee simple title, subject to the mineral leases hereinafter described, to an undivided 1/16 interest in the minerals in the tract of approximately 729.7 acres of land known as the Sergent tract, located in the Jas. P. McFaddin League, in Liberty County, Texas, and described as follows, to-wit: [Here follows description of property.]
The interest of Continental in the oil, gas, sulphur, and other minerals in said tract of land is now covered by the following two mineral leases, to-wit:
(a) The lease executed by Mrs. Ruth W. Sergent, joined by her husband, Paul O. Sergent, as lessors, to A. R. Miller, as lessee, recorded in Vol. 134, page 17 et seq., of the deed records of Liberty County, Texas, covering the South half of said tract of 729.7 acres, reference being here had to said original lease and the record thereof for a more complete description of the land covered thereby, and for the terms and provisions thereof.
(b) The lease executed by Mrs. Ruth W. Sergent, joined by her husband, Paul O. Sergent, as lessors, to Erwin W. Smith, as lessee, dated July 27, 1925, and recorded in Vol. 128, page 570, of the Deed Records of Liberty County, Texas, reference being here had to said record of said lease for the terms and provisions thereof. Said lease originally covered the entire 729.7 acre tract, but at present covers only the North half of said tract.
Gulf has assigned and conveyed to Texas Gulf all sulphur, sulphur rights, and all privileges properly incident thereto which were granted to the lessee by the first lease described above in so far as said lease covers the south half of the south half of the said Sergent tract, and Texas Gulf has acquired from others the leasehold sulphur rights granted to the lessees in both of said leases above described in so far as said leases cover the balance of the said Sergent tract.
II.
Continental agrees to extend and does hereby extend both of the mineral leases above described from year to year without operations or production, except as may be necessary to comply with the obligation hereafter stated to protect against drainage, for a period of five years from date hereof for the following considerations to be paid Continental by Texas Gulf annually in advance, to-wit: For the first year, $5334.00; for each of the next four years, $4334.00.
No credit with right of reimbursement out of production will be taken for the payment made for the first year’s extension; thereafter, all base fee sulphur royalties due Continental under the terms of the mineral leases hereinabove described, because of sulphur production on said tract each year, may be applied by Texas Gulf as far as necessary to reimburse Texas Gulf for the advance extension payment made for that year to Continental. If production of sulphur starts during the five year period on said tract of land, Texas Gulf, subject to the right of surrender hereinafter expressed, agrees to pay to Continental as a guaranteed base, fee sulphur royalty, annually in advance, for the balance of the five year period, a minimum of $4334.00 per year, such payment to have effect of extending and maintaining all of the leases covering said tract in full force and effect, in so far as the fee interest of Continental is concerned, for the year for which the payment is made, regardless of the amount of production, and regardless of whether or not production stops entirely, and said payment shall have the effect of discharging all of the obligations to Continental imposed by the leases covering said tract for the year for which said payment is made, except as to drainage and the payment of any excess base fee sulphur royalties due from production over and above said payments of guaranteed base fee royalties. It is agreed that no guaranteed base fee sulphur royalty payment shall be due for any year for which an advance extension payment is made. Texas Gulf shall have the right to apply so much of the base fee sulphur royalties due to Continental under the terms of the mineral leases hereinabove described on account of sulphur produced from said tract each year as may be necessary to reimburse itself for the advance guaranteed base fee royalties paid for that year to Continental, settlement for any balance to be made monthly as the sulphur is produced, but royalties accruing during one year may not be applied to so reimburse Texas Gulf for guaranteed base fee sulphur royalty payments made for any other year.

It is stated in the stipulation that the petitioner claimed 27½ percent of its gross income as depletion. Clearly this was erroneous as depletion allowable on sulphur-bearing property is governed by section 114 (b) (4), Revenue Act of 1932, as follows: “The allowance for depletion shall be, in the case of coal mines, 5 per centum, in the case of metal mines, 15 per centum, and, in the case of sulphur mines or deposits, 23 per centum, of the gross income from the property during the taxable year, excluding from such gross income an amount equal to any rents or royalties paid or incurred by the taxpayer in respect of the property.”

It is the contention of the respondent that the $4,334 paid by the lessees to the petitioner was nothing more nor less than delay rentals and under J. T. Sneed, Jr., 33 B. T. A. 478, and Commissioner v. Wilson, 76 Fed. (2d) 766, depletion is not allowable on delay rentals. The petitioner on the other hand claims that the payment was in the nature of a bonus or advance royalty and is depletable under Murphy Oil Co. v. Burnet, 287 U. S. 299; Herring v. Commissioner, 293 U. S. 322; and Burnet v. Harmel, 287 U. S. 103.

In Commissioner v. Wilson, supra, the court defined delay rentals as follows:

The “delay rentals” on oil and gas leases are rents within the rule just announced. They accrue by the mere lapse of time like any other rent. They do not depend on the finding or production of oil or gas and do not exhaust the substance of the land. While having some likeness to a bonus payment which is held to be advance royalty, Murphy Oil Co. v. Burnet, 287 U. S. 299, 53 S. Ct. 161, 77 L. Ed. 318; Burnet, Commissioner, v. Harmel, 287 U. S. 103, 53 S. Ct. 74, 77 L. Ed. 199, the delay rental is not paid directly or indirectly for oil to be produced, but is for additional time in which to utilize the land. We hold it to be rent. Caruthers v. Leonard (Tex. Com. App.) 254 S. W. 779, 783; Sneed v. Commissioner, 30 B. T. A. 1121.
On the other hand, royalties, including bonus, are not paid for time but for oil and gas taken out, and represent an actual removal and disposition of the contents of the soil. * * *

The terms of the contract are not shown in the report of the case.

In the case of J. T. Sneed, Jr., supra, this Board held that a plain delay rental was not depletable. There the delay rental was provided for as follows:

The so-called “delay rental” is the amount received in connection with the execution of an oil and gas lease of which Exhibit No. 4 in evidence herein is a typical example. This document is called an “oil and gas lease” and provides that for and in consideration of the sum of $9,600 (which the parties denominate a “Bonus”) and of the covenants and agreements thereinafter contained, certain property is granted, leased, and let unto a lessee for the sole and only purpose of mining and operating for oil and gas. The lease is to remain in force for a term of ten years and as long thereafter as oil or gas is produced. The lessee agrees to deliver to the lessor one-eighth part of all oil produced and saved; to pay the lessor one-eighth of the net proceeds from the sale of gas; to permit the lessor to have gas free of cost for all stoves and inside lights in the principal dwelling and to pay the lessor one-eighth of the net proceeds from the sale of gas used, including casing-head gas at the wells. It does not require a well to be drilled, but contains the following clause:
If no well be commenced on said land on or before the 26th day of May, 1927 (one year after its execution) this lease shall terminate as to both parties unless the lessee on or before that date shall pay or tender to the lessor, * * * the sum of $160 ($1 per acre), which shall operate as a rental and cover the privilege of deferring the commencement of a well for twelve months from said date. In like manner and upon like payment or tender the commencement of a well may be further deferred for like periods of the same number of months successively. [Italics supplied.]

The contract dated August 1, 1932, recites that “Continental agrees to extend and does hereby extend both of the mineral leases above described from year to year without operations or production, except as may be necessary to comply with the obligation hereafter stated to protect against drainage, for a period of five years from date hereof for the following considerations to be paid Continental by Texas Gulf annually in advance, to-wit:

“For the first year, $5,334; for each year of the next four years, $4,334.”

The contract further provided that the payment of $5,334 for the first year’s extension was not reimbursable to the lessee out of base fee royalties from production of sulphur under the lease. Each of the other payments was reimbursable provided there were accrued royalties within the year of payment out of which to make such reimbursement, but the payment for one year’s extension was not reimbursable out of royalties on production in another year. The leases were extended only one year at a time upon the payment (after the first year) of $4,334. The amount of $4,334 paid July 29, 1933, for extension of the leases for the year beginning August 1, 1933, was not reimbursable for the reason that in that year there was no production and hence no royalties out of which to make such reimbursement. Up to the end of that year there had been no development of the property.

This payment was not a bonus in the nature of advance royalty. The extension of the leases in consequence of this payment terminated July 31, 1934, with no development of the property, no production of mineral and no accrual of royalties. This payment fulfilled its whole function in extending the lease for one year and so far as the consequence of such payment was concerned the lease itself expired at the end of such extension.

• The cases relied on by the petitioner are distinguishable on the facts from this case. In those cases the payments held by the court to be bonuses in the nature of advance royalties, and hence depletable, were not made on the basis of annual or other periodic extensions of the lease as was the situation here. In Herring v. Commissioner, supra, the Supreme Court held that the taxpayers were entitled to depletion allowance on a bonus received during the taxable year in which they executed an oil and gas lease, though there was no production when the lease was made or until four years thereafter and at the time the lease was executed there was no oil well within three and one-half miles of the land. However, at the end of the opinion the Court said :

As to income tax liability in the year of termination of the lease, on account of bonus paid at the execution of the lease, if no mineral has then been extracted, we express no opinion.

It is true that in the instant case the lessee had the right under the contract to an extension of the leases successively one year at a time for the next three years upon payment in advance of the sum of $4,334 for each year’s extension; but each extension depended upon such payment, was for a definite annual period, and terminated at the end of such period.

A further indication that the extension payment in question was not intended as advance royalty lies in the fact that minimum advance royalties, as distinguished from payments for extension of the leases, were specifically required under certain conditions which did not obtain in connection with the extension payment in question. The only condition under which an extension payment might be converted into advance royalty was the commencement of production within the year for which the extension payment was made. The contract provided that if and when the property should be brought into production within the five-year period provided in the contract, the lessee agreed to pay “as a guaranteed base fee sulphur royalty, annually in advance, for the balance of the five year period, a minimum of $4,334 per year.” Such payment was to be made in lieu of the “advance extension payment” and was to operate to extend the leases for the year for which made. The payment of the guaranteed base fee sulphur royalty and the advance extension payment were mutually exclusive, only one and not both being required to be paid. In other words, after the property should be brought into production the advance extension payments ceased and the guaranteed base fee sulphur royalty payments began. It appears to us that the parties to the contract plainly indicated therein their intention that the advance yearly payments for the annual extensions of the leases should not be considered as payments for mineral until production began and that the payment in question here was made for rental “without operations or production” merely to hold the property until the lessees should bring it into production. We hold that it was delay rental and was not royalty on production of mineral or a bonus in the nature of royalty. Petitioner is, therefore, not entitled to depletion allowance thereon.

Judgment will be entered for the respondent.