author: Turner:

text:
    Estate of Robert Lyons Hague, City Bank Farmers Trust Company and Walter E. Godfrey, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent. Mary Lewis Hague, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 103352, 103355.
    Promulgated September 12, 1941.

      Fred B. Angevine, Esq., Richard O. Merrick, Esq., Aaron H. Marx, Esq., and Joseph B. Uniache, Esq., for the petitioners.

      Allen T. Akin, Esq., for the respondent.
   OPINION.

Turner:

Respondent’s determination that Hague received taxable income in the amount of $343,192.61 not reported by him in his return was based on the discovery of large deposits in his bank accounts from unexplained sources. One argument by counsel for the estate seems to be that under the circumstances here, Hague now being dead, the respondent was not justified and had no authority to determine income on the basis of bank deposits and that his determination of the deficiency herein is entitled therefore to no presumption of correctness. There is ample authority for the respondent’s action in using Hague’s deposits as a starting point in determining his income. Axel Holmstrom, 35 B. T. A. 1092; Leonard B. Willits, 36 B. T. A. 294; Joseph Calafato, 42 B. T. A. 881; Russell C. Mauch, 35 B. T. A. 617; aff'd., 113 Fed. (2d) 555; and Hoefle v. Commissioner, 114 Fed. (2d) 713. Those cases hold that deficiencies determined by the respondent on the basis of such information are prima facie correct and that the burden is on the taxpayers to show that they are wrong. By design the statute contemplates the keeping by a taxpayer of accounts and records from which his correct income can be determined, and in the absence of such books of account the respondent must determine or verify his income from the records or sources that are available. In the instant case Hague kept no books of account and the respondent has used as the starting point for his determination the only records kept by Hague from which information could be had, namely, his check stubs, canceled checks, and bank statements. The record also indicates that the respondent has made reasonable efforts to verify his conclusions from outside sources. The fact that Hague is now dead does not change the situation; it does not detract from or add to the respondent’s powers and duties; neither does it change the force and effect of his determination.

Counsel for the estate also argue that, except for some minor items not here in issue, Hague had no income over and above that reported by him on the joint return and that the deposits on which the respondent based his determination resulted from redeposits, loans, and the “kiting of checks.” It is argued that such a conclusion is borne out by the fact that Hague was shown to be eccentric with respect to money items, that he withdrew and carried substantial sums of money on his person, and that these amounts were frequently redeposited in his bank accounts; that the respondent has failed to show or indicate the source or sources of such additional income; and, further, that there is no showing of any accumulation of wealth.

The accumulation of wealth during the taxable year, like the possession and use of unexplained cash, is merely evidential, and, where a taxpayer fails to keep proper books of account and is unable to explain the source of accumulated property, such accumulations may be the basis for the determination of income, but the failure to accumulate wealth during the taxable year does not negative the realization or receipt of income, particularly where it is shown as in this case that a taxpayer has expended large sums of money during the taxable year for personal uses and there is a failure on his part to show that the amounts so expended were of a character other than income earned or realized during the year.

In the instant case the facts show that Hague received during 1936 sums of money far in excess of his salary. They further show that some of the amounts so received were not income to him, but, after the sums so identified plus Hague’s salary and other small items reported in the joint return have been eliminated, only approximately one-half of the amounts deposited by Hague during the year have been accounted for or explained. During 1936 Hague deposited or caused to be deposited in his accounts at the National City Bank and the Chase National Bank a total of $529,880.45. Of the amounts so deposited, the record shows that $39,391.92 represented salary, all of which was reported in the joint return; $1,035.94 represented a loan from the New England Mutual Life Insurance Co.; $9,510.70 represented proceeds from the sale of stock; $32,750 represented checks drawn in favor of Hague by Mary Lewis Hague on her account at the Guaranty Trust Co.; $39,000 represented checks similarly drawn in favor of Hague by his brother, Cuthbert Hague, on his account at the Corn Exchange Bank; $60,000 represented amounts received from the Standard Oil Co. and was described on its books as “Strike Expense”; $66,877.41 represented the proceeds of loans to Hague by the National City Bank less discounts; and $7,500 represented an advance on traveling expenses by the Standard Oil Co. to Hague on May 1,1936. On brief respondent concedes that of the total deposits, $49,023.37 classified as income reported on the joint return, $67,913.35 as amounts received from loans, and $60,000 as “strike expenses” received from the Standard Oil Co. should be eliminated from income in computing the deficiency herein. The $67,913.35 described as loans and the $60,000 described as “Strike Expense” received from the Standard Oil Co. are verified as to character and amount by the facts of record, while of the $49,023.37 classified as income reported on the joint return we have been able to identify among the deposits only $39,391.92 representing salary and possibly $2,700.25 representing gain from the sale of stock. The respondent, however, has apparently satisfied himself as to the correctness of the amounts so conceded and the three items in question will be excluded from income in the amounts stated. In addition to these items there should also be excluded $32,750 covered by the checks from Mary Lewis Hague, $39,000 covered by the checks from Cuthbert Hague, $7,500 representing traveling expenses advanced by the Standard Oil Co., and $6,810.45 of the proceeds from the sale of Standard Oil Co. stock. With respect to the item last mentioned, it is to be noted that the total proceeds from the sale of such stock deposited by Hague in his account at the National City Bank was $9,510.70. In his return, however, he reported $2,700.25 as gain from the sale of stock, and, inasmuch as we find no other indication of a sale of stock by Hague during the taxable year, we assume that the gain so reported represented a portion of the total proceeds of $9,510.70, leaving only $6,810.45 not excluded elsewhere. After the exclusion of the items set forth in the preceding paragraph, there remains as unidentified and unexplained bank deposits a total amount of $266,883.28.

The possession of unexplained or unidentified sums of money by an individual does not, of course, establish affirmatively or conclusively that those sums represent income. It could be possible that such sums represented loans, gifts, property or money held in a fiduciary capacity, or money or the proceeds of property acquired in prior years. In the instant case, however, there is no claim, and if there had been there is nothing in the record to substantiate a claim, that the unexplained deposits represented gifts, property or money held in trust, or money or the proceeds of property acquired in prior years, and, with respect to borrowings as a possible source of money on hand, it is to be noted that we have previously excluded all amounts shown to have been deposited in Hague’s accounts as the result of loans and the same is true of amounts received for the use of the Standard Oil Co. The record also fails to substantiate the contention that the cash deposits represented the redeposit of amounts previously withdrawn. $309,450.23 of the checks drawn and the charges made against the accounts were in favor of payees other than Hague, and there is certainly no basis for saying that any part of those withdrawals was redeposited. The cash withdrawals amounted to $213,424.69, some $42,000 less than the total cash deposits of $255,730. Furthermore, comparison of the dates and amounts of cash withdrawals, the dates and amounts of cash deposits, and regard for other facts concerning Hague’s cash disbursements negative any claim that the cash withdrawn from the two accounts was redeposited in any appreciable amount. The record contains testimony to the effect that Hague paid many of his obligations in cash, including such items as his butler’s salary and from $2,000 to $4,000 from time to time toward apartment rent and hotel charges. The deposits made by him in the accounts of Mary Lewis Hague at the Guaranty Trust Co. and of Cuthbert Hague at the Corn Exchange Bank, totaling $74,737, to cover checks received from them were, in so far as this record shows, from the cash withdrawn from the two bank accounts or represented additional funds acquired by Hague during the year from other sources also unexplained. The same thing may be said with respect to his expenditure of most if not all of the $67,500 received by him from the Standard Oil Co. as advance traveling expenses and “Strike Expense.” Clearly the theory that the unexplained deposits may be classified as redeposits is not supported by the record.

Not only do we have no explanation of the source and character of $266,883.28 of the total deposits nor any showing that the said moneys were not income, but, to the contrary and in addition to the fact that Hague did receive and disburse the amounts in question, the record does show that amounts far in excess of his salary and the amounts from other known sources were used by him as his own and for his personal enjoyment, use, and benefit. We know, for instance, that he made substantial cash payments on his obligations; that he made personal loans which totaled an amount not far below his salary for the year; and that, in addition to the amounts paid in cash to the hotel in which his apartment was located, he made further disbursements by checks to the extent of some nineteen thousand dollars. These sums were in addition to the household expense allow-anee of $12,000 to his wife, Mary Lewis Hague. The facts of record further indicate that some twenty-five to thirty thousand dollars were expended for the support, maintenance or benefit of various individuals, including his mother, a divorced wife, and other relatives. We also know that he expended some twenty thousand dollars to cover insurance premiums. There were further disbursements, amounting to several thousand dollars, to his personal attorney, physicians, dentists and opticians. Substantial sums were also disbursed for telephone and telegraph, flowers, automobiles, food, clubs, entertaining, gifts, and liquor. Check stubs covering numerous disbursements carry no explanation, and we are not otherwise advised as to their purpose. Some of the items described may have been, and probably were, for the benefit and use of the Standard Oil Co., but the record here is not susceptible of any conclusion that the disbursements made by Hague for his own personal pleasure, use, and benefit were less in amount than the unexplained receipts. Taylor v. Helvering, 293 U. S. 507, cited and relied on by counsel for the Hague estate, is accordingly not in point, and, to the extent of the amounts received by Hague during the year 1936 and not shown herein or conceded by the respondent to have been other than income, the respondent’s determination is sustained.

The final issue has to do with the liability of petitioner Mary Lewis Hague. The respondent contends that inasmuch as a joint return was filed the liability thereunder is joint and several and that the deficiency should be determined against her in the same manner as it is determined against the estate of Robert Lyons Hague. The return was executed by Robert L. Hague, and Mary Lewis Hague took no part in its preparation except to furnish information in respect of her income and expenses. The record discloses that none of the amounts herein involved belonged to Mary Lewis Hague and that she had no ownership or interest in the bank accounts of Robert Lyons Hague, which formed the basis for the respondent’s determination. Hone of the amounts in question was income to her and as to her there is no deficiency. Commissioner v. Rabenold, 108 Fed. (2d) 639; Cole v. Commissioner, 81 Fed. (2d) 485; and Crowe v. Commissioner, 86 Fed. (2d) 796. For a contrary view, see Moore v. United States (Ct. Cls.), 37 Fed. Supp. 136.

Decision will be, entered under Docket No. 10335% under Bule 50. Decision will be entered wider Docket No. 103355 for the petitioner.


source: Caselaw Access Project

author: HaRROn:

license: Public Domain

text:
    The Humphryes Manufacturing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99261.
    Promulgated September 12, 1941.

      E. G. Barey, Esq., for the petitioner.

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

HaRROn:

Petitioner admits that there was a recapitalization in 1936 within the provisions of section 112 (g) (1) (D) of the Revenue Act of 1936, and, consequently, a reorganization. There is no dispute about the facts. The stockholders of petitioner exchanged old stock for new stock of the same corporation as an incident to a reorganization by recapitalization. A small amount of cash was distributed to the stockholders along with the new stock. In spite of petitioner’s recognition that the exchanges in question were made pursuant to a reorganization, petitioner endeavors to find in the transaction a distribution of a taxable dividend to its stockholders so as to obtain a dividends paid credit under section 27 (e) , Petitioner argues that old preferred stockholders received the new preferred stock in two ways: (1) That new preferred stock was given in exchange for old preferred stock at the rate of 1 share of new preferred stock for 4 shares of old preferred stock; and (2) that other new preferred stock was given in exchange for a release by each stockholder of his right to arrears in dividends, at the rate of 1 share of new- stock having a par value of $100 per share for each $100 worth of dividends in arrears, or fractional shares of new stock were given for a lesser amount of dividends in arrears. The substance of this argument is that petitioner contends that it distributed a stock dividend along with the exchanges of preferred stocks in the transactions carried out pursuant to the reorganization.

The main question is whether the distribution of part of the new preferred stock was a taxable dividend. The same question was presented in Skenandoa Rayon Corporation v. Commissioner, 122 Fed. (2d) 268. Upon practically the same arguments from the taxpayer in that case, the court, in affirming this Board (see 42 B. T. A. 1287), rejected the taxpayer’s claim. The question here is, therefore, controlled by the SJcenandoa case. See also, South Atlantic Steamship Line, 42 B. T. A. 705; J. Weingarten, Inc., 44 B. T. A. 798.

In this case 5,516 shares of 8 percent preferred stock were exchanged for approximately 1,730 shares of new 6 percent preferred stock and 459 shares of new common stock. If we accept the contention, for purposes of argument only, that “the right to arrears of undeclared dividends was something in addition to the shares” of the old stock, and that, consequently, the stockholders received 351 shares of the new stock for release of a claim to arrears of undeclared dividends, nevertheless the 351 shares of new stock were “securities in a corporation a party to a reorganization.” See Skenandoa Rayon Corporation, supra. As such, the exchange comes within section 112 (b) (3), being an exchange of stock for stock and securities in a corporation a party to a reorganization, and the exchange is a nontaxable exchange. It follows that a dividends paid credit can not be allowed for the 351 shares of the new stock because they were distributed in a nontaxable distribution, and section 27 (h) prohibits allowance of a dividends paid credit for nontaxable distributions.

It is also pointed out that, even if it could be held, by some ingenious reasoning, that the 351 shares of new stock constituted a stock dividend, as petitioner claims, proof of the fair market value of the new stock was required, but none was offered at the hearing. See Skenandoa Rayon Corporation v. Commissioner, supra. It should be noted, also, that petitioner did not declare a stock dividend and, consequently, section 115 (f) is not applicable. See J. Weingarten, Inc., supra.

Petitioner also argues that the 351 shares of new preferred stock constituted a stock dividend within the meaning of section 115 (f) (2). We have already stated that we consider section 115 (f) inapplicable. But, in further answer to petitioner’s argument, the following applies. Petitioner refers to the General Code of Ohio, section 8623-72. Those provisions of the Ohio Code relate to relief to be given to a dissenting shareholder where articles of incorporation have been amended, or where reorganization of a corporation has been authorized. The “relief” given to a dissenting shareholder is payment of the fair cash value of his shares of stock, which is to be determined by a court of common pleas, as a last resort. Because of such relief provisions in the Ohio Code, petitioner argues that its shareholders had an election as to the medium of payment of the alleged “dividend.” The plan of reorganization did not give petitioner’s stockholders an election to take shares of new stock or cash at their option. The court in the Skenandoa Rayon case heard a similar argument, and answered it in the following words, which we apply here: “Had a large number of holders stood out for cash, the plan of recapitalization would no doubt have been abandoned.”

It is held that petitioner is not entitled to a dividends paid credit under section 21 (e) in the amount of $35,100 with respect to the distribution of the 351 shares of new stock.

There is one other question remaining for consideration.

Petitioner included in the total amount of the dividends paid credit which respondent has denied the $3,610 cash which was distributed in payment of fractional shares in the exchange of preferred stocks. Petitioner does not make clear under what subsection of section 21 it claims a credit for the cash distribution. Ho dividends, in cash or in stock, were declared on the old 8 percent stock which was surrendered under the exchange. The holders of the old stock received the cash as part of the exchange and only upon surrender of old stock. The cash distributed in the exchange can not be treated as a dividend for the same reasons that no part of the stock distributed can be treated as a dividend, under the rule of the South Atlantic Steamship Line and Skenandoa Rayon cases. Furthermore, under section 21 (h), if any part of a distribution is not a taxable dividend in the hands of the shareholders, no dividends paid credit may be allowed. It appears that petitioner’s claim for this credit must be on the ground that the cash distribution is a taxable dividend in the hands of the shareholders, and that a credit is allowable under section 21 (a). Upon this issue the burden of proof is upon the petitioner;

In J. Weingarten, Inc., supra, we held that a credit was allowable for similar distributions of cash which were made along with distributions of new stock in exchange for old stock, but the reason the credit was allowed was that the cash distributions were not’ shown to be not taxable to the distributees by the party upon whom the burden of proof rested. In other words, the credit was allowed for a failure of proof on the issue. In that case the respondent had allowed a dividends paid credit in an amount which included the cash distributions; later, he disallowed the credit by amending his answer, and, accordingly, the burden was upon the respondent to show that the credit should not be allowed. That burden required proof that the cash distributions were nontaxable in the hands of the distributees, so as to be barred from a credit by section 21 (h). In this case, the burden is upon the petitioner to prove that the cash distributions were taxable dividends in the hands of the distributees, so as to remove the bar to the credit contained in section 21 (h). Petitioner has failed to meet the burden of proof, and, accordingly, must be denied a credit' for the cash distributions. The issue must be treated here in the same way that we treated the issue in the Weingarten case, although the result is the reverse. It is held that petitioner is not entitled to a dividends paid credit for the $3,610 cash distributions.

Decision will be entered for the respondent.

       SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID.
      # * * * * * *
      (e) Taxable Stock Dividends. — In case of a stock dividend or stock right which is a taxable dividend in the hands of shareholders under section 115 (f), the dividends paid credit with respect thereto shall be the fair market value of the stock or the stock right at the time of the payment.

       SBC. 27. CORPORATION CREDIT BOR DIVIDENDS PAID.

      (h) Nontaxable Distributions. — If any part of a distribution (including stock dividends and stock rights) is not a taxable dividend in the hands of such of the shareholders as are subject to taxation under this title for the period in which the distribution is made, no dividends paid credit shall be allowed with respect to such part.

       SEC. 115. DISTRIBUTIONS BY CORPORATIONS.

      (f) Stock Dividends.—
      ****** *
      (2) Election oí shareholders as to medium of payment. — Whenever a distribution by a corporation is, at the election of any of the shareholders (whether exercised before or after the declaration thereof), payable either (A) in its stock or in rights to acquire its stock, of a class which if distributed without election would be exempt from tax under paragraph (1), or (B) in money or any other property (including its stock or in rights to acquire its stock, of a class which if distributed without election would not be exempt from tax under paragraph (1), then the distribution shall constitute a taxable dividend in the hands of all shareholders, regardless of the medium in which paid.


author: Opper:

text:
    Estate of Frederick S. Fish, Grace S. Fish, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99995.
    Promulgated September 16, 1941.

      Harold G. Jesse, Esg., for the petitioner.

      Harold F. Noneman, Esg., for the respondent.
   OPINION.

Opper:

Respondent determined a deficiency of $109,015.72 in the estate tax of decedent Frederick S. Fish. By amended answer the claimed deficiency was increased to $244,230.78.

The questions to be decided in this proceeding are what amounts, if any, of two trust funds established on December 18, 1919, one by decedent and the other by his wife, are includible in decedent’s gross estate. • It is stipulated that the sum of $10,369.82, income of the trust created by decedent’s wife, was due and owing decedent at his death and is taxable as part of his estate. In the amended answer respondent included $50,096.72 as the value of the interest which should be taxed as part of decedent’s estate of a third trust, created by decedent on November 28, 1930; but he concedes for the purpose of this proceeding that there is no estate tax liability on account of this third trust.

The facts are stipulated and as so stipulated are hereby found.

Decedent died testate a resident of New York City on August 13, 1936, and his widow instituted this proceeding as his duly qualified and acting executrix in behalf of the estate.

The estate tax return was filed with the collector of internal revenue for the third district of New York.

On December 18, 1919, and in the State of New York, decedent executed a trust indenture whereby he transferred certain securities to the Farmers’ Loan & Trust Co. (now known as City Bank Farmers Trust Co.). During the continuance of the trust the entire net income was to be paid to decedent’s wife. The trust was to terminate upon the death of decedent’s wife unless earlier terminated as provided in the indenture. Upon the wife’s death the trust corpus was to be delivered to such persons or corporations and in such proportions as she should direct and appoint in her last will; or, if such appointment should not be made so as effectively to dispose of the entire corpus, then upon her death the corpus was to be divided into as many shares as there were children, and issue, collectively, of deceased children, of decedent then surviving, and one share was to be paid to each living child and one share to the issue of any deceased child, per stirpes. The indenture provided that the trust or any part of it could be terminated at any time during the lives of decedent and his wife by an instrument or successive instruments in writing executed by decedent and his wife, and at any time after decedent’s death, if his wife survived him, by an instrument in writing executed by the wife and all the then living children of decedent who should be of full age. In the event of such termination the indenture provided that the trust corpus or any part thereof designated in the instrument should be delivered to decedent’s wife free from any trust.

On December 18, 1919, the date of the creation of the trust, the value of the corpus was $1,029,675, and the value of the wife’s right to receive the income therefrom during her life was $449,875.30. On August 13, 1936, the date of decedent’s death, the value of the corpus was $598,913, and the value of the widow’s right to receive the income therefrom for the balance of her life was $148,787.96, leaving a remainder value of $450,125.04.

On December 18, 1919, decedent’s wife executed a trust indenture whereby she transferred to the same trustee certain securities. The indenture was identical in all respects, except as to the beneficiaries, with the one executed by decedent on the same date. It gave the income from the trust to decedent for life and the corpus to such persons as he should appoint by his last will or, in default of such appointment, to the living children, and the issue of deceased children, of decedent’s wife. The power to terminate was reserved to the settlor and decedent, acting jointly, and after the settlor’s death, to decedent and the settlor’s mature children, acting jointly. In the event of such termination the corpus was to be delivered to decedent free of trust.

On August 13, 1936, the date of decedent’s death, the value of the corpus of the trust created by his wife was $388,634.

At all times subsequent to December 18, 1919, the living children of decedent and his wife have been a son, born in 1889, and a daughter, born in 1892

Neither of the trusts prior to decedent’s death had been altered, revoked, terminated, amended, or modified in any way, and they were both in existence at the date of decedent’s death. Neither of the trusts was made in contemplation of decedent’s death.

Article second of decedent’s last will, which, was duly admitted to probate, reads as follows:

It is not my intention to exercise tlie power of appointment conferred upon me by tbe trust indenture * * * made by my wife, * * * and I direct that tbis Will shall not operate as a disposition of the trust fund referred to therein, or any part thereof, nor as an exercise ,of the power of appointment conferred upon me by the said trust indenture.

It is stipulated that the right of petitioner to claim credit for estate taxes paid to the State of New York is reserved for future determination.

In the notice of deficiency respondent included as part of decedent’s gross estate the sum of $450,125.04, being the value when he died of the corpus of the trust created by him, $598,913, less the value at that time of the widow’s life estate therein, $148,187.96. By his amended answer respondent seeks also to include in the gross estate the value at the date of death of the corpus of the trust created by decedent’s wife, or $388,634.

As his first alternative, respondent argues that the value of the remainder interest in a trust executed by decedent during his lifetime should be included in his estate. The trust was subject to termination prior to decedent’s death with the consent of his wife, the life tenant. We assume, without deciding, that a power to terminate subjects the estate to tax even though the trust was executed prior to 1936 when, for the first time, the word “terminate” was expressly included in section 302 (d) and although the change from earlier acts was explicitly fashioned as prospective only. Such a construction, which accords with that applied in respondent’s regulations, would be based upon expressions of the legislative viewpoint that the addition of the word “terminate” was no more than declaratory of existing law. Mellon v. Driscoll (C. C. A., 3d Cir.), 117 Fed. (2d) 477; certiorari denied, 313 U. S. 579.

We also assume that although this trust was created in 1919 and subdivision (d) first acquired its present form in 1926, the expressly retroactive aspect of that subsection would render it applicable, provided only that termination was possible by the grantor alone or with the consent of a nonadverse interest. Reinecke v. Northern Trust Co., 278 U. S. 339; Chase National Bank v. United States, 278 U. S. 327. The question still remains whether the stipulation for the wife’s consent imports an adverse or a nonadverse interest.

Respondent’s argument for the latter view is twofold. He says first that under the concept of family solidarity and in view of the wife’s other interests, it can not be assumed that she would fail to comply with a request by decedent. Such a doctrine would proceed further than seems warranted by any principle so far established. Even under such decisions as Helvering v. Clifford, 309 U. S. 331, the concept of family unity is an economic consideration rather than one of conduct or behavior. The inclusion in the husband’s income of that derived from a trust of which members of his family are the beneficiaries results more from the view that family finances are a single unit generally furnished by the husband or father than that the action of individual members of the family group will necessarily accord with the dictates of its head. So much it seems to us appears from the multitude of cases decided under sections 166 and 167 and involving the adverse-interest concept where this Board and the courts, after the Clifford case as well as before, have uniformly refused to treat the wife’s as a nonadverse interest if she has in fact a legally unfettered command over the trust income. E. g., Paul W. Litchfield, 39 B. T. A. 1017, 1021; Smith v. Commissioner (C. C. A., 1st Cir.), 59 Fed. (2d) 56; Estate of Isaac Fish, 42 B. T. A. 260; and Commissioner v. Branch (C. C. A., 1st Cir.), 114 Fed. (2d) 985.

Nor can we say that the mere fact that the husband’s consent was necessary to the termination of a reciprocal trust created by the wife constitutes a sufficient control over the trust property to create an inference of helpless compliance by the beneficiary. And this is the only power of control possessed by decedent to which respondent directs our attention as a premise for this view. The power of the purse strings which gave rise to the decisions in such cases as Rollins v. Helvering (C. C. A., 8th Cir.), 92 Fed. (2d) 390; certiorari denied, 302 U. S. 763, and Cox v. Commissioner (C. C. A., 10th Cir.), 110 Fed. (2d) 934; certiorari denied, 311 U. S. 667, was found within the instrument itself and was of a nature and extent commensurate with the control which the courts there found to exist. Here entirely different considerations would have to effect the interplay of the two interests. Occasion for the termination of her own trust by the wife is not necessarily to be presumed. It results that there is insufficient foundation in these aspects of the present facts for treating the wife as a nonadverse party.

Secondly, respondent argues that the case of Clarence H. Mackay et al., Executors, 33 B. T. A. 765, was rightly decided by the Board and in spite of its reversal (C. C. A., 2d Cir.), 94 Fed. (2d) 558, should be followed here. This position can avail respondent nothing for even assuming the correctness of the Board’s action, notwithstanding the reversal, the doctrine of the Mackay case supports petitioner rather than respondent. There the Board held a remainder-man had no adverse interest in the life estates and for that reason these were considered taxable. In the course of the opinion, however, the Board refers to prior decisions in David J. Lit et al., Executors, 28 B. T. A. 853; affd. (C. C. A., 3d Cir.), 72 Fed. (2d) 551, and Louis C. Raegner, Jr., et al., Executors, 29 B. T. A. 1243. It points out that the justification for the difference in the conclusions reached in these two cases was that in the former a life tenant whose concurrence was necessary for revocation was held to have no adverse interest in the remainder with the result that the value of the remainder was includible in decedent’s estate; whereas in the latter the life tenant having also a power of appointment over the remainder was adversely interested in the entire property.

This principle seems to us to dispose of the question of adversity of interest in this proceeding. For here the wife was both life tenant and donee of the power of appointment. Under Louis C. Raegner, Jr., et al., Executors, supra, therefore, her participation constitutes an adverse interest and leaves the value of both life estate and remainder outside the scope of decedent’s taxable property. We come to the conclusion, therefore, that the value of this trust property is not taxable under section 302.

Respondent argues in the alternative that if the value of the trust created by decedent is not to be taxed’ then the value of the trust which his wife created at the same time and as part of the same transaction should be included in his estate under the reciprocating theory of such cases as Lehman v. Commissioner (C. C. A., 2d Cir.), 109 Fed. (2d) 99, affirming 39 B. T. A. 17; certiorari denied, 310 U. S. 637, and Purdon Smith Whiteley, 42 B. T. A. 316. In this contention we think respondent should be sustained. The facts here are not distinguishable in principle from those present in the Lehman case. The two trusts were clearly reciprocal; the property of the wife was in effect exchanged for that of the husband; and the rights each received under the trust created by the other were of the unrestricted character not essentially to be distinguished from complete ownership. See Adriance v. Higgins (C. C. A., 2d Cir.), 113 Fed. (2d) 1013. It is our view, therefore, that for estate tax purposes decedent should be regarded as the creator of the trust of which his wife was the nominal grantor.

In the Lehman case a portion of the trust assets could be withdrawn without the consent of any beneficiary, and it was only with respect to so much that the Board considered the estate to be taxable. Here no part of the trust estate was subject to withdrawal except in the event of termination under a provision identical with that discussed in the earlier portion of the present opinion. In this respect our conclusion must nevertheless be dictated by the principle of Estate of Mary H. Hughes, 44 B. T. A. 1196, in consideration that, viewing decedent as the true grantor of the trust, he had reserved to himself for life the resulting income. As the Hughes case decided, it is inconsequential that the trust was created prior to 1931, and the principle of May v. Heiner, 281 U. S. 238 and Hassett v. Welch, 303 U. S. 303, are not now to be followed. Even without regard to his retention of the income, decedent, again in the view that he was in effect the grantor, retained a power of appointment over the remainder which, whether exercised or not, subjects his estate to taxation under the provisions of section 302 (c) and (d). Commissioner v. Chase National Bank of New York (C. C. A., 2d Cir.), 82 Fed. (2d) 157; certiorari denied, 299 U. S. 552; Porter v. Commissioner, 288 U. S. 436. Respondent’s inclusion of the value of this trust at the date of decedent’s death in his taxable estate is accordingly sustained.

It is unnecessary to discuss the further alternative contention that this trust should be considered a part of decedent’s estate on an equivalence of ownership theory comparable to that announced in the Clifford, case, supra. See H. S. Richardson, 42 B. T. A, 830; affd., (C. C. A., 2d Cir.) 121 Fed. (2d) 1.

Decision will he entered wnder Rule 50.

       Revenue Act of 1936—
      SEC. 805. ESTATE TAXES — REVOCABLE TRANSFERS.
      (a) Section 302 (d) (1) of the Revenue Act of 1926, as amended, is amended to read as follows:
      “(d) (1) To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona-fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of decedent’s death.”

       [Sec. 805.] (b) Except in the ease of transfers made after the date of the enactment of this Act, no interest of the decedent of which he has made a transfer shall be included in the gross estate under such section 302 (d) (1) unless it was includible under such section before its amendment by this section.

       Regulations 80 (1937 Edition), art. 20 (in part)—
      The third change made in the subdivision by the Revenue Act of 1936 consisted of the addition of the words “or terminate” following the words “to alter, amend, revoke.” Such addition is considered but declaratory of the meaning of the subdivision prior to the amendment. A power to terminate capable of being so exercised as to revest in the decedent the ownership of the transferred property or an interest therein, or as otherwise to inure to his benefit or the benefit of his estate, is, to that extent, the equivalent of a power to “revoke,” and when otherwise so exercisable as to effect a change in the enjoyment, is the equivalent of a power to “alter.”

       House Kept. 2818, 74th Cong., 2d sess., p. 10.

       Revenue Act of 1926—
      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—
      *******
      (d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *

       Sec. 302. (h) Except as otherwise specifically provided therein subdivisions (b), (c), (d), (e), (f), and (g) of this section shall apply to the transfers, trusts, estates, interests, rights, powers, and relinquishment of powers, as severally enumerated and described therein, whether made, created, arising, existing, exercised, or relinquished before or after the enactment of this Act.

        Witherbee v. Commissioner (C. C. A., 2d Cir.), 70 Fed. (2d) 696; certiorari denied, 293 U. S. 582.


author: Arundell:

text:
    Anna M. B. Foster, Transferee of the Estate of Abbie A. Sewell, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103028.
    Promulgated September 16, 1941.

      T. J. Blackwell, Esq., for the petitioner.

      J. Marvin Kelley, Esq., for the respondent.
   OPINION.

Arundell:

We'find the facts as stipulated by the parties and set forth only those necessary to the decision of this case.

Respondent determined that petitioner is liable as transferee for a deficiency in income tax in the amount of $1,317.07 due from Abbie A. Sewell, deceased, for the calendar year 1936.

The issues are whether the sum of $10,302.20 received by petitioner’s transferor was income to her and, if so, whether the failure to include in her return this sum as gross income operates to suspend the statute of limitations.

Petitioner, a resident of Miami, Florida, is the transferee of the assets of the estate of Abbie A. Sewell, deceased, within the meaning of section 311 of the Revenue Act of 1936 (hereinafter all sections referred to are from the Revenue Act of 1936).

Elwin C. Foster died on August 18, 1931, leaving a will containing the following provisions:

To Abbie A. Sewell, sister of my said wife, of Mount Dora, Florida, the use and income of the sum1 of seventy-five thousand dollars for and during the term .of her natural life * * *.
Whereas by this will certain portions of my estate will form trust funds, now in establishing the same the person representing my estate and the person representing the trust fund are privileged at their option and by mutual agreement to establish said trust funds out of securities that form a part of my estate instead of cash, and such trustee or trustees shall have discretionary power to change from time to time the fund and securities forming any trust fund as to him may be deemed reasonably necessary and advisable.

At the time of the death of Elwin C. Foster, his holdings consisted almost exclusively of stocks and bonds which, because of financial conditions, could be converted into cash only at an enormous loss. An agreement was made by and between the personal representative of the Foster estate and Abbie A. Sewell that the corpus should be held intact until a more favorable market. As a result, no distribution was made until 1935 and 1936, four years later, when the main portion of the Foster estate was distributed. On January 20, 1936, the sum of $10,302.20 “as interest” was distributed to Abbie A. Sewell in addition to that part of the estate distributed to her trustee.

During the interim between the death of Elwin C. Foster and the distribution, the personal representatives collected the income and paid all Federal income taxes.

Abbie A. Sewell, a resident of Dade County, Florida, died on October 22, 1936. Petitioner on November 23, 1936, was appointed adminis-tratrix c. t. a. of her estate. On March 15, 1937, the petitioner, as administratrix, filed a fiduciary return (Form No. 1041) showing a gross income of $2,985.08 for the calendar year 1936, part of which was received in the lifetime of Abbie A. Sewell and part of which was received in the period when petitioner was administratrix of the estate of Abbie A. Sewell (hereinafter referred to as the estate). This return was filed with the deputy-collector of internal revenue at Miami, Florida, and it contained the following notation: “Abbie A. Sewell died October 22, 1936, and the income above set forth, accrued, principally during the lifetime of the deceased.”

T. J. Blackwell, acting as counsel for petitioner in her capacity as administratrix, enclosed with this return a request for prompt assessment of income taxes against the estate.

An amended return showing gross income of $3,967.87 was filed September 19,1937, which bore the following:

Does not include $10,302.20 received in August 1936 as beneficiary — Estate of Elwin O. Foster, deceased, (Administered in County Court of Dade County, Florida), tax on said $10,302.20 was paid by Estate of Elwin C. Foster.

A notice of deficiency for $1,317.07 in income tax was mailed to “Abbie A. Sewell, deceased, Anna M. B. Foster, administratrix” on March 31, 1939. An appeal to the Board by the administratrix was dismissed on September 9,1939, for lack of jurisdiction, since petitioner had been discharged as administratrix on December 28, 1937.

On April 30,1940, the respondent mailed a statutory notice to petitioner, as transferee, asserting the same deficiency. The present appeal is from that notice.

Petitioner contends that the determination of the respondent is in error because the estate of Elwin C. Foster paid income taxes on the $10,302.20 distributed to Abbie A. Sewell and, therefore, Abbie A. Sewell should not be taxable on this same sum when distributed to her. Petitioner’s principal contention, however, is that the request for prompt assessment was sufficient to comply with section 275 (b) of the act and thereby limited the period during which the Commissioner could determine a deficiency to 18 months, and that, since no deficiency was determined until after that period, none can nqw be determined.

The position of the respondent is that section 275 (b) is not controlling, since the sum which was omitted from the return was an amount “in excess of 25 per centum of the amount of gross income stated in tñe return”, and, therefore, section 275 (c) applies and the period of limitation is 5 years and not 18 months. The respondent also contends that the request for prompt assessment was of no effect, since it applied only to the facts disclosed by the original return and not those disclosed by the amended return.

Section 275 (b) provides as follows:

Request fob Pbompt Assessment. — In the case of income received during the lifetime of a decedent, or by his estate during the period of administration, * * * the tax shall be assessed, * * * within eighteen months after written request therefor (filed after the return is made) by the executor, administrator, or other fiduciary representing the estate * * *.

The facts show that this was “income received during the lifetime of a decedent or by his estate during the period of administration.” There was a request for prompt assessment made by the party contemplated by the statute. This request was sufficient under the statute. Estate of O. A. Wright, 12 B. T. A. 999. The statute further requires that the request be made after the return is filed.

In this case both the request and the return were filed at the same time, but it must be assumed that they were filed in the correct order. Maffitt v. Becher, 65 Fed. (2d) 880. The fact that the request was filed with the original return and not with the amended return is of no consequence, since the Board has held that the filing of the amended return in no way affects the running of the period of limitations. Estelle B. Sargent, 22 B. T. A. 1270. Thus, it can be seen that the petitioner, as administratrix, has fully complied with all the requirements of this statute. The period for determining a deficiency is limited to 18 months unless the force of this section is nullified by section 275 (c).

Section 275 (c) provides as follows:

Omission feom Gboss Income. — If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return, the tax may be assessed * * * at any time within 5 years after the return was filed.

The reports of the House Ways and Means Committee and of the Senate Finance Committee relating to this subsection, which was added in 1934, leave no doubt that it was meant to limit subsections (a) and (b). The pertinent parts of the Committee reports are set out below:

It is not believed that taxpayers who are so negligent as to leave out of their returns items of such magnitude should be accorded the privilege of pleading the bar of the statute. [House Ways and Means Committee Rept. No. 704, 73d Cong., 2d. sess., p. 35.]
The present law permits the Government to assess the tax without regard to the statute of limitations in case of failure to file a return or in case of a fraudulent return. The House bill continues this policy, but enlarges the scope of this provision to include eases wherein the taxpayer understates gross income on his return by an amount which is in excess of 25 percent of the gross income stated in the return. Tour committee is in general accord with the policy expressed in this section of the House bill. However, it is believed that in case of a taxpayer who makes an honest mistake, it would be unfair to keep the statute open indefinitely. For instance, a case might arise where a taxpayer failed to report a dividend because he was erroneously advised by the officers of the corporation that it was paid out of capital or he might report as income for one year an item of income which properly belonged in another year. Accordingly, your committee has provided for a 5-year statute in such cases. This amendment also necessitates a change in section 276 (a) of the bill. [Finance Committee Rept. No. 558, 73d Cong., 2d sess., p. 43.]

Since the statutory requirement is that an “amount properly includible” in gross income be omitted before the longer period applies, it will be necessary to determine the nature of said sum to see if it were “properly includible” in the gross income of Abbie A. Sewell, deceased.

The facts show that the personal representatives of Elwin 0. Foster, deceased, distributed this sum “as interest” to Abbie A. Sewell. If it is, in reality, interest there is no doubt but that it is “properly includible” in gross income under section 22 (a) of the act and that it is an amount “in excess of 25 per centum of the amount of gross income stated in the return.”

SEC. 22. GROSS INCOME.
(a) General Definition. — “Gross income” includes gains, profits, and income derived from salaries * * *; also from interest, * * *

The mere calling of this sum interest by the personal representatives is not enough to make it interest. Johnson Locke Mercantile Co., 15 B. T. A. 1314; affd., 51 Fed. (2d) 434. Interest is generally defined to be “compensation allowed by law or fixed by the parties, for the use or forbearance of money or as damages for its detention.” Fall River Electric Light Co., 23 B. T. A. 168, 171. However, some courts have defined it as above, but with the addition that it is usually determined as a fixed percentage of the total sum. Hogan v. Commissioner’s Court, 160 Ala. 544; 49 So. 417. The Board has held in a very recent case, Kena, Inc., 44 B. T. A. 217, that interest is not necessarily a percentage of the total sum, but could be even a percentage of the net profits which the borrower made with the loaned money. This was the holding in spite of the fact that the agreement of the parties said this percentage of the net profits was to be paid in “lieu of interest.” We said :

It is not essential that interest be computed at a stated rate, but only that a sum definitely ascertainable shall be paid for the use of borrowed money, pursuant to the agreement of the lender and borrower. * * *
The lender may forego interest if he chooses. He may agree not to charge interest or to reduce the amount of interest, provided certain events occur. * * * The possibility that no interest might be payable does not affect the character of the interest when actually paid.

The sum in question in the instant case was not paid on a loan as in the Kena case, supra, but was paid for the privilege of keeping the money or securities in the estate instead of paying them over to the trustee of Abbie A. Sewell. Thus, the sum was paid as compensation for the detention of the money rather than for the use of the money. This sum was paid as “interest or in lieu of the income”'to which she would have been entitled under the trust. In Lucile Brian Harrison, 41 B. T. A. 1217; affd., 119 Fed. (2d) 963, the petitioner was held to have received $21,000 as interest upon the principal of the trust fund to be set up in a testamentary trust. We said:

If the $21,041.41 in question was paid to petitioner as interest or as compensation in lieu of income from a delayed testamentary trust of which she was the principal beneficiary, it is taxable to her regardless of what fund it was paid from. Cf. Minnie L. Wolf, 32 B. T. A. 959; affd., 84 Fed. (2d) 390. * * *
* * X * * * *
But even if the $21,041.41 here involved can not be correctly denominated “interest” within the meaning of the word as used in section 22 (a) of the Revenue Act of 1928, we still think it is taxable to petitioner. If the $300,000 testamentary trust had been set up as directed by decedent’s will and the income therefrom paid to petitioner, it is true that it would not have been interest paid to her. Nevertheless, the income from the testamentary trust would have been taxable income to petitioner. Irwvn v. Gavit, 268 U. S. 161.
* * * :p * * *
* * * It seems perfectly clear to us that this $21,041.41 payment was made to petitioner not because she was the sole heir to John H. Harrison, but to carry out the terms of a prenuptial agreement recognized in the will, and was in lieu of income which she otherwise would have received under the will from a testamentary trust which has never been set up. * * *

Upon the authority of the Kena and Harrison cases, supra, the sum distributed must be held to be interest. As interest it was “properly includible” in gross income of Abbie A. Sewell, deceased, under section 22 (a) of the act, and it does not matter that it was paid out of income. Minnie L. Wolf, 32 B. T. A. 959, 963. Thus, since this sum should have been included in gross income, it is an amount “in excess of 25 per centum of tire amount of gross income stated in the return” and by the terms of section 275 (c) the Commissioner had five years in which to determine a deficiency. This determination was made within five years of the time when the original return was filed. Therefore, the determination of the Commissioner must be upheld.

Under the conclusion that the sum is interest, the effect of the fact that the original assessment was made within 18 months after the amended return was filed need not be considered.

The only other issue raised by the pleadings or in brief which needs to be discussed is the contention of the petitioner that the taxes which the Foster estate had paid should be credited to the deficiency which we have found. The trust and the beneficiary have been held to be entirely separate entities for income tax purposes. Anderson v. Wilson, 289 U. S. 20. Since each is a separate taxpayer, the Board can not credit one with the overpayment of the other. Cf. H. B. Perine, 22 B. T. A. 201; and Pine Ridge Mines Co., 23 B. T. A. 21.

Decision will Toe entered for the respondent.


author: Disney:

text:
    Beckridge Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103905.
    Promulgated September 17, 1941.

      Colman Gray, Esq., for the petitioner.

      Charles Oliphant, Esq., for the respondent.
   OPINION.

Disney:

This proceeding involves income and excess profits tax liability and penalties for the year 1937. The Commissioner determined income tax in the amount of $3,598.44, excess profits tax in the sum of $2,045.58, and added a 15 percent penalty in the amount, of $846.60. All of said amounts are in dispute except that it is. stipulated that delinquency penalties shall attach to any deficiencies which may be found. The question involved is whether the basis of property ¡‘sold in the taxable year by petitioner is to be adjusted by considering depreciation actually incurred in previous years, in which the petitioner had hcT income with which to offset such depreciation.

The parties filed a stipulation of facts and by reference we adopt such stipulated facts as our findings of fact herein. Such facts, so far as necessary for consideration of the issue involved, may be summarized as follows:

Petitioner is a domestic corporation, organized under the laws of New York, and filed its Federal income tax return for the taxable year 1937 in the third New York collection district. The petitioner acquired in 1931 certain real estate. No depreciation thereon was ever deducted either on the petitioner’s books of account or on its Federal income tax returns from the date of the acquisition of the property to and including the taxable year 1937. In each of the same years the petitioner operated at a net loss. In the taxable year the property was sold. The cost exceeded the sale price. The petitioner therefore in its income tax return claimed a capital loss. The respondent computed a capital gain by reducing the cost basis of the property by the amount determined by him to have been the depreciation allowable on the property.

The only question presented for our solution is whether the Commissioner properly reduced the cost basis by allowable depreciation for previous years despite the fact that during those years the petitioner operated at a net loss and had no taxable income; for the parties stipulate that in the event the Board determines that the cost basis should be reduced by depreciation allowable, where not taken, the deficiencies are in the amounts as set forth above.

This general question has received the attention of the Supreme Court of the United States in United States v. Ludey, 274 U. S. 295, of the Circuit Court of Appeals for the Third Circuit in Pittsburgh Brewing Co. v. Commissioner, 107 Fed. (2d) 155, and of the Circuit Court of Appeals for the Second Circuit in Hardwick Realty Co. v. Commissioner, 29 Fed. (2d) 498. In United States v. Ludey, supra, the Court, inter alia, speaking of depreciation upon property, says, “When the plant is disposed of after years of use, the thing then sold is not the whole thing originally acquired. The amount of the depreciation must be deducted from the original cost of the whole in order to determine the cost of that disposed of in the final sale of properties.” In Hardwick Realty Co. v. Commissioner, supra, the court had for interpretation section 234 (a) of the Revenue Act of 1918; that section allowed as deductions in the computation of net income,' “A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.” The petitioner had purchased certain premises in 1915 and sold them in. 1920. During two of tlie years during which the premises were owned by the petitioner its receipts exceeded its expenditures (exclusive of deduction for depreciation), while in the other two years its receipts were less than expenditures. It had no source of income other than the premises involved. During each of the four years the petitioner had claimed deductions for depreciation on the property, in the total amount of $22,184.03. The Commissioner increased the profit reported upon the sale by adding the amount of the depreciation reported and claimed, and the result was the deficiency in issue. The petitioner contended that depreciation allowances should be used in figuring gain derived from the sale of property only in the years during which the taxpayer actually received credit for depreciation by a reduction of taxable income. The court was of the opinion that “not only does this contention misconceive the theory upon which depreciation is used in computing the gain derived from a sale of property, but it has been definitely determined adversely to the appellant by the Supreme Court in United States v. Ludey, 274 UJ. S. 295, * * *.” The court further, after quoting from United States v. Ludey, supra, says:

* * * The theory that each year a certain amount of the property is used up, so that only the balance remains thereafter to be sold, renders entirely unimportant whether the operation of the property produces a profit or a loss during a given year. If the loss by depreciation — that is, the wear and tear — cannot be recouped for tax purposes, by using it to reduce gross income because the income is not enough, that loss cannot be reserved for use in a future year, except to the limited extent permitted by section 204 (b) of the act, and to the extent permitted the taxpayer’s loss in 1919 was used to diminish its taxable income in 1920. But the fact that the taxpayer does not get the benefit of the deduction in his yearly tax does not mean that the loss was not sustained, nor that his capital assets were not correspondingly reduced. * * *

On the other hand, Pittsburgh Brewing Co. v. Commissioner, supra, involved interpretation of section 113 (b) (1) (B) of the Revenue Act of 1932, which provided for the adjustment of basis for determining gain or loss from sale or other disposition of property for exhaustion, wear and tear and obsolescence “to the extent allowed (but not less than the amount allowable).” The petitioner, though not expressly citing the case, cites Pittston-Duryea Coal Co. v. Commissioner, 117 Fed. (2d) 436, which refers thereto. Since the Pittston-Duryea Good Co. case involved an election of depreciation method, we can not agree with the petitioner that it is helpful here. The Pittsburgh Brewing Co. case, however, requires attention. Therein the court considered and interpreted the word “allowed” in section 113 of the Revenue Act of 1932 and concluded that depreciation is not “allowed” unless it is actually taken as a deduction against taxable income. The court refers to and quotes from the Report of the Committee on Ways and Means of the House of Representatives, reading in part as follows:

* * * The Treasury has frequently encountered cases where a taxpayer, who has taken and been allowed depreciation deductions at a certain rate consistently ovér a period of years, later finds it to Lis advantage to claim that the allowances so made to him were excessive and that the amounts which were in fact “allowable” were much less. * * *

The court concludes that the Committee referred to a situation where a taxpayer having had benefit of a larger depreciation deduction than was properly allowable to him, claims, upon sale of the property, that only the smaller depreciation properly allowable to him should be considered in adjusting the basis of his property; and the court considers that the provisions of the Revenue Act of 1932 were designed to prevent the possibility of double deduction thus obtained, and that double benefit is not received where the depreciation originally claimed offsets no taxable income. With all respect for the views of the court, it seems to us that the language of the Revenue Act of 1932 “to the extent allowed (but not less than the amount allowable) ” requires adjustment of basis, first of all to the amount allowable, and, secondly, in case a greater amount has actually been allowed, to the “extent allowed”, but that in any event the “amount allowable” must be used as an adjusting figure, regardless of whether there has been allowance or effect upon taxable income.

It seems clear that prior to the Revenue Act of 1932 the language of previous statutes permitted the use, as an adjusting figure, of any “amount allowable” as depreciation and that the Act of 1932 did not change the situation in that regard, but only took care of the situation where a larger amount had been allowed to the taxpayer, in which case that amount was used as the adjusting figure. We can not disregard the parenthetical expression “(but not less than the amount allowable).” Allowable clearly means “that may be allowed” — Webster’s New International Dictionary. We conclude that the Revenue Act of 1932 did not alter the statutory power of the Commissioner to adjust bases of property sold by the amount allowable as depreciation, that is, by the amount which might have been allowed, and that it is immaterial whether claim was made therefor, actual allowance thereof made, or whether benefit thereof was or could be obtained in the previous taxable years. Any other conclusion, it seems to us, would be contrary to the rationale of United States v. Ludey, supra, and Hardwick Realty Co. v. Commissioner, supra. In addition thereto we note Kittredge v. Commissioner, 88 Fed. (2d) 632, to the effect that amounts deductible for depreciation in ascertainment of gain or loss from sale of property are independent of whether deductions were claimed therefor in the taxpayer’s annual returns.

In Herder v. Helvering, 106 Fed. (2d) 153, it is-held that in determining the adjusted cost basis of property sold it is immaterial whether petitioners availed themselves of allowable deductions for depreciation in their prior tax returns. “Failing to take depreciation when it occurs in the prior taxable years does not prevent its inclusion in the determination of the adjusted cost basis of the property.” It is true that in the Kittredge and Herder cases it does not appear whether or not the petitioners in the prior years had income from which depreciation might have been deducted, yet the lack of the appearance of such fact and the generality of the language used is indication that in the view of the two courts that fact would have been immaterial. See also Jones v. Commissioner, 72 Fed. (2d) 114.

We therefore conclude and hold that the petitioner has not shown error in the adjustment by the Commissioner of the basis of the property herein involved.

Decision will he entered for the respondent.


author: Murdock:

text:
    Estate of George S. Fiske (Deceased), George P. Davis and Edward F. McClennen, Executors under the Will of George S. Fiske, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104440.
    Promulgated September 17, 1941.

      Allison L. H. Newton, Esq., for the petitioners.

      Martin M. Lore, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined a deficiency of $6,023.53 in income tax of this estate for the taxable year ended December 31, 1936. All of the facts essential to a decision of this proceeding are contained in a stipulation filed by the parties and hereby adopted by the Board as its findings of fact. The only issue for decision is whether 348/366 of real estate taxes and a part of trustees’ commissions for the calendar year 1936 allocable to the period January 19 to the end of the year are deductible in computing the income of a trust distributable to this estate.

George S. Fiske died testate on January 18, 1936, while residing in Massachusetts. His duly authorized executors filed a return for the period January 19 to the end of 1936 with the collector in Massachusetts. They reside in Massachusetts.

The same individuals who were his executors were also trustees under a trust which he had established in 1903. The income oí the trust was payable to Fiske for life and the trust property was to be used and disposed of after his death for or to such persons as he should appoint by will. He retained the power to alter the trust in any particular. The corpus of the trust was a part of his gross estate for estate tax purposes. Fiske made a number of bequests of specific amounts and placed all of the residue of his estate, including property over which he had any power oí testamentary control, in trust.

The trustees of the 1903 trust did not distribute the trust funds promptly upon the death of the decedent, but continued to administer that trust during 1936. Meanwhile, they petitioned the probate court for instructions as to what to do with the trust funds. The court, on December 1, 1936, ordered the trustees of the 1903 trust to wind up its affairs and transfer the assets to themselves as executors, to use them, as if they had been owned outright by Fiske, along with his other assets, to pay debts, expenses, taxes, and legacies, and to place the remainder in the testamentary trust.

The 1903 trust property included a number of pieces of real estate situated in Boston upon which taxes for the year 1936 accrued on January 1, 1936. The taxes amounted to $13,870, were assessed to the trustees, and were paid by them on October 23,1936. Trustees’ commissions of $2,773.72, based upon a percentage of gross income for the entire year, were paid by the trust in 1936. The trustees accounted for each property separately, computed the net income on each for each year, carried that amount to general income from which general expenses were deducted, and paid the balance in the general income account for 1936 to the executors of Fiske. The net income of the trust for the entire year 1936 amounted to $14,006.90. The Commissioner apportioned $9,828.92 of the total gross income of the trust and $18,848.16 of the deductions to the period January 1 to January 18, 1936, and gross income of $34,984.89 and deductions of $11,958.75 to the taxable period involved herein, the remainder of the year. The entire real estate taxes and the entire trustees’ commissions are included in the deductions for the first period of 18 days.

The whole contention of the Commissioner is that the 1903 trust should be ignored and the taxes and commissions accrued up to the date of the death of Fiske as if they were due from him before he died. He does not claim that the trust was invalid in any way under the laws of Massachusetts, that it was lacking in substance so that the income was taxable to the grantor under section 22 of the Revenue Act of 1936, or that cases like Helvering v. Clifford, 309 U. S. 331, apply. He would ignore the trust merely because the income was taxable to the grantor under section 167 and the trust was a revocable one, he says, within the meaning of section 166 of the Revenue Act of 1936 and section 302 (d) (1) of the Revenue Act of 1926 as amended, which would require the inclusion of the trust property in the gross estate for estate tax purposes. He cites no authority holding that a trust should he ignored for any of these reasons. There is no authority in the revenue act for disregarding the trust. The separateness of Fiske and this long established trust was recognized under the Revenue ’ Act of 1936. Fiske was taxable as an individual. Section 161 applied to the trust and required that its income be computed separately. The two could have had different taxable periods and other differences. A specific provision was included to make the income of such a trust taxable to the grantor. Sec. 167. See also sec. 166. Cf. sec. 302 (d) (1) mentioned above. The trust may not be disregarded.

Furthermore, it did not terminate the moment Fiske died. It had to continue for a reasonable time to transfer its property to the proper persons and to wind up its affairs. Rothwell v. Rothwell, 283 Mass. 563. There was a question of what should be done with the trust property and the trust continued in operation until after the close of 1936. The trustees were allowed commissions for that period, which are involved in the issue for decision here.

The petitioners object to the method of the Commissioner whereby he taxes the estate'with $23,026.14 from a trust which realized taxable income of but $14,006.90 for the entire year. They say they should be taxed with no greater part of the trust income than they could have obtained under the laws of Massachusetts. Actually all of the trust income for 1936 was paid to the executors. The Federal income tax act requires, however, that the income be divided into that which was distributable to the decedent up to the date of his death and that which was realized thereafter by the trust and was taxable to his estate. The laws of Massachusetts govern the rights of the distributees of a trust like this.

The real estate taxes are assessed each year to the owner of the property on the first day of the year and become a personal liability of that person. The properties of the 1903 trust stood in the names of the trustees on January 1, 1936. The trustees became personally liable for the taxes and could look only to the trust property for reimbursement. Richardson v. City of Boston, 148 Mass. 508; J. I. Hammett Co. v. Alfred Peates Co., 217 Mass. 520; 105 N. E. 370. The taxes never became a personal liability of the decedent under the laws of Massachusetts, since he was not the owner of the property either on January 1 or later. The question here is not whether a portion of taxes which accrued on the property of the decedent before his death can be deducted from income realized by his estate after death. Rather it is one of determining the distributable income of the trust, how much of it Fiske was entitled to at the date of his death, and how much his executors were entitled to after his death.

Items like the real estate taxes relating to the entire trust year must be apportioned upon a time basis in determining the income of the two divisions of the year. Taylor v. Bentinck-Smith (Mass.), 24 N. E. (2d) 146. 18/366 of the taxes would be deducted in computing the income distributable to Fiske and 34%66 would be deducted in computing the trust income for the remainder of the year. The trustees’ commissions were based upon a percentage of gross income of the trust for each year and accrued only as that income accrued. United States v. Anderson, 269 U. S. 422. Those paid on account of gross income realized by the trust after the death of Fiske had certainly not accrued at the time of his death upon any sound theory. They can only reduce the income of the trust for the later period. The commissions must be apportioned in proportion to the gross income of the trust for each period.

The Commissioner relied upon section 43 that deductions for the last taxable period of decedent should be accrued up to the date of death. This argument was based upon the theory that the trust should be ignored. The result reached herein in no way conflicts with sections 42 and 43. They refer to the income and deductions of a decedent, not those of a trust. This might be clearer, perhaps, in the case of a trust the income of which was payable to A for life and thereafter to B. The rights of those claiming through A as opposed to the rights of B would depend upon the law of the situs of the trust and would not be different because of sections 42 and 43. The same is true here, where the income distributable to the estate from the 1903 trust was not changed by those sections.

Decision will be entered wader Bule 50.


text:
    Royal Palm Cemetery Syndicate, Robert B. Lassing, Managing Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102195.
    Promulgated September 17, 1941.

      Donald V. Hunter, Esq., for the petitioner.

      F. L. Van Haaften, Esq., for the respondent.
   OPINION.

Arundell:

Two issues are here for decision, the first of which involves the classification of the petitioner for tax purposes. The respondent seeks to treat it as a corporation; the petitioner opposes this action. The issue has a dual aspect involving, first, the question of whether the petitioner was in existence at all during the taxable years and, second, if the first answer is affirmative, the nature of the business carried on by it.

Decision of the first issue must turn narrowly on the question of whether the business carried on by the petitioner during the taxable years was on behalf of Batson as an individual, the syndicate members as a loose group not yet being formed into a business enterprise, or for the syndicate itself. It seems apparent, as will be developed below, that the nature of the business, the method by which it was carried on during the taxable years, and the form of the syndicate agreement render the petitioner taxable as a corporation if the syndicate was in existence then as the real party in interest.

Resort must be had first to the documents executed by the parties in the forepart of 1936. These speak plainly of a joint adventure or syndicate “operating” in St. Petersburg, Florida. They provide for purchase by the syndicate of property and for its operation by a syndicate manager. The membership of the group and its liabilities became definitely fixed under the signed agreement of purchase. From the date of the execution of that instrument the operation of the cemetery became the petitioner’s responsibility. The manager, who had functioned before as receiver, was retained. His employer, however, became the syndicate; his salary and duties were fixed by the syndicate agreement.

The full form and purpose of the syndicate was at the same time spelled out in an accompanying syndicate agreement. It provided for the immediate organization of the syndicate. It was examined and assented to by all the members. Certificates of ownership were printed and endorsed by all members at the beginning of the year 1936.

The facts so far are without inconsistency and point toward the conclusion that the syndicate was organized and functioning from the beginning of 1936. The petitioner, however, points to certain facts which do not entirely support this view. The title to the beneficial interest remained in Batson. This circumstance is, however, a matter without significance. Purchases of importance are largely made by a method similar to that provided here and do not prevent possession and management, as here, from passing to the purchaser. The petitioner points to the fact that Batson supervised operations during the taxable year, received all reports, and made all important decisions with reference to the cemetery. It remains, however, that the single objective of these operations was to pay off the debt owed to Batson in accordance with the terms of the purchase. His only benefit, as seller, from the operations was to receive his price more quickly. The profits were not his except as they applied on the price. Moreover, Batson occupied a dual role of purchaser and seller and it is as reasonable to assume that his efforts were exerted on behalf of the syndicate as that they were for himself.

It is pointed out that the syndicate certificates were not issued until 1939 and there is testimony, consistent therewith, that the parties intended the syndicate to come into existence only after the price had been paid. We think, however, that the intent of the parties is better to be collected from the syndicate agreement, which, though itself unsigned, was given written approval by the parties, and from the contract of purchase and the preparation of stock certificates. From these it seems apparent that immediate organization of the syndicate was contemplated. The action following thereon being most consistent with this view, it must be concluded that the syndicate was in existence during the taxable years.

The form of organization before us provides for a central management, a continuation of existence beyond the lives of the original members, transferability of interests with certain restrictions, and the holding of title by the syndicate as an entity. It is repeatedly stated that the syndicate is to function “as an entity.” It is to be controlled by the vote of its members. Distribution of profits is to be by way of “dividend.” Formal certificates of ownership were provided.

In these circumstances the petitioner must be held to fit within the long established definition of an association taxable as a corporation. Morrissey v. Commissioner, 296 U. S. 344; Helvering v. Coleman-Gilbert Associates, 296 U. S. 369; Kettleman Hills Royalty Syndicate No. 1 v. Commissioner, 116 Fed. (2d) 382; Huron River Syndicate, 44 B. T. A. 859.

Aside from its constitution and method of operation, moreover, the purpose for which the petitioner was organized gives further basis for our conclusion. Its function was one requiring business management and activities. It is of the sort which is ordinarily not confined within the limits of a joint venture or trust. The reasons for its establishment are more nearly those found in the case of corporations. These factors are of significance in resolving the question presently before us. The answer to be found in them supports the conclusion which we have reached above. Lewis & Co. v. Commissioner, 301 U. S. 385; Commissioner v. Vandegrift Realty & Investment Co., 82 Fed. (2d) 387.

The petitioner relies on Commissioner v. Horseshoe Lease Syndicate, 110 Fed. (2d) 748, and Commissioner v. Rector & Davidson, 111 Fed. (2d) 332, cases in which individuals desirous of developing oil properties owned by them sold participating interests to a rather large group and secured development by placing the management of the properties in one or two individuals, to whom they gave powers of attorney. In the latter case title was also transferred to the managers. There was • in each case free assignability of interests, but no limitation on personal liability. In both instances the Board held these enterprises to resemble partnerships more nearly than corporations and to be taxable as the former. These cases were affirmed by the Circuit Court, but they can have no controlling significance here, where there is a formal agreement establishing an organization, controlled by the vote of its members, and providing for formal certificates of interest and for continuity of existence. They were mere loose arrangements, without provision for continued existence. The purposes for which they were established were, moreover, more limited than those here involved. The present case must be controlled by cases considering broader business activity undertaken by an organization having some formal arrangement. See Solomon v. Commissioner, 89 Fed. (2d) 569; Tyrell v. Commissioner, 91 Fed. (2d) 500; St. Louis Hills Syndicate Fund v. Commissioner, 102 Fed. (2d) 1013. Cases such as these and those cited above lead, we think, to the conclusion that the petitioner more nearly resembled the corporate form and must be taxed as such.

There remains for decision the question of whether the petitioner was “carrying on” or “doing business” during the taxable years as provided in section 105 of the Revenue Act of 1935, as amended by section 401 of the Revenue Act of 1936, and section 601 of the Revenue Act of 1938. If so, the petitioner must be held liable for excess profits taxes.

The answer to this final issue is to be found in our decision on the first question. The petitioner was engaged in the active management and development of the Royal Palm Cemetery during the taxable years. It was patently “engaged in” or “doing business” in the taxable years. Ittleson v. Anderson, 67 Fed. (2d) 323; Harmar Coal Co. v. Heiner, 34 Fed. (2d) 725. Cases relied on by the petitioner wherein taxpayers were held not to be engaged in business when they had not completed their organization or begun active operations are not in point here, where it is plain that an active business enterprise was in progress during 1936. Cf. Nicholas v. Colorado Fuel & Iron Corporation, 112 Fed. (2d) 858; General Ribbon Mills, Inc. v. Higgins, 115 Fed. (2d) 472.

Decision will be entered under Rale 50.