source: Caselaw Access Project

author: Mello it :

license: Public Domain

text:
    Lolita S. Armour, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 88151, 93150.
    Promulgated April 5, 1940.

      Alexander F. Reichmawn, Esq., and R. W. Bwrgeson, Esq., for the petitioner.

      F. R. Shearer, Esq., and F. F. Korell, Esq., for the respondent.
   OPINION.

Mello it :

The issues are substantially the same in each proceeding. In the statements attached to the deficiency notices respondent relied upon the provisions of sections 166 and 167 of the Revenue Acts of 1932 and 1934 in support of his determinations that the income of the 1931 trust was taxable to petitioner. In each of the petitions the inclusion of said amounts is alleged to be erroneous. These allegations were denied in respondent’s answers and amended answers. In his amended answers, respondent made certain affirmative allegations, among others, that he had erred in not including in gross income the amounts paid as agent’s commissions and compensation. These allegations were specifically denied by petitioner in her replies.

Respondent contends that the distributions of $10,000 per month to petitioner’s daughter were “sums paid pursuant to an agreement between the petitioner and her daughter that was made prior to December 30, 1931, * * *”; that the trust instrument of that date is “a trust to secure or discharge the performance of either an antecedent obligation that the petitioner, was under, or a duty that she then owed to her daughter;” and that the income, which the petitioner is shown to have used and which her daughter accepted in payment and satisfaction of the petitioner’s indebtedness to her, is taxable to the petitioner without regard to whether she extracted it from a technical trust, allegedly created on December 30, 1931, or directly from her own private funds.

The respondent cites and relies upon Douglas v. Willcuts, 296 U. S. 1, and related cases, which hold that where a trust is created by a settlor as a channel for the application of the income to the discharge of his legal obligation, duty, or indebtedness, the income so used must be treated as his income and taxed to him because he “enjoys the benefit of the income as though he had personally received it.” See also Helvering v. Fitch, 309 U. S. 149; Helvering v. Blumenthal, 296 U. S. 552, reversing 76 Fed. (2d) 507; Helvering v. Stokes, 296 U. S. 551; Helvering v. Schweitzer, 296 U. S. 551; Commissioner v. Grosvenor, 85 Fed. (2d) 2; Thomas v. Commissioner, 100 Fed. (2d) 408; Louis W. Hill, 33 B. T. A. 891; affd., 88 Fed. (2d) 941; cf. Jay C. Hormel, 39 B. T. A. 244, and cases cited (on appeal C. C. A., 8th Cir.); Herbert G. Goulder, 39 B. T. A. 670 (on appeal C. C. A., 6th Cir.); and Alfred C. Berolzheimer, 40 B. T. A. 645 (on appeal C. C. A., 2d Cir.).

Petitioner argues that the above contention raises an entirely new and affirmative issue, injected into the proceedings for the first time in respondent’s brief, and that it can not be considered by this Board. She also contends that if this issue had been properly raised, the burden of proof would have been upon the respondent. No extended discussion of the burden of proof needs to be made. The pleadings indicate that the issue was raised. In paragraph 6 of the amended answers it is alleged upon information and belief:

* * * that the entire income realized upon the assets listed in the document executed by the petitioner on December 31, [30], 1931, was used by the petitioner during the calendar years * * * for her own use and benefit. [Italics supplied.]

This was specifically denied in the reply. Regardless of who had the burden of proof, the conclusion would be the same; for the evidence is insufficient to show that any part of the income was used for petitioner’s benefit.

Reviewing the evidence briefly, petitioner and her daughter had pledged properties of great value in 1923 when Armour was in financial difficulty. These properties had been given to them by him in prior years. Under the terms of the pledge agreement all income from the collateral pledged by others than Armour was to be paid to such others from time to time as it accrued, unless there was a default in the payment of his indebtedness or obligations to Armour & Co. of Delaware, or Armour & Co., an Illinois corporation. Petitioner’s daughter testified that she never received any income from the properties pledged by her after she signed the 1923 agreement. At that time she had no substantial independent income of her own. Petitioner, however, had income from stocks and bonds which she had inherited from her father, amounting to approximately $200,000 per annum. In May 1928 there was a final settlement between Armour’s estate and his creditors, as a result of which all of the securities pledged by petitioner and her daughter were taken and absorbed by the creditors of Armour.

The findings show in detail the facts relative to the purchase by petitioner from her husband of the stock of the Universal Oil Products Co. In 1926, when petitioner began to receive large dividends on this stock, she began to make payments in substantial amounts to her daughter. They were irregular in time and amount until April 1929, when she directed her bank to pay the daughter $10,000 per month. In January of 1931, when petitioner sold the stock for $9,500,000, she decided to set up a trust that would insure the receipt by her daughter of an income of $10,000 a month during her lifetime. The evidence justifies the conclusion that in creating the trust fori the benefit of her daughter petitioner was motivated by a desire to insure the receipt by the daughter of adequate income for her support, maintenance, comfort and well-being, and also by a desire to reimburse her daughter, in part, for the financial sacrifice which she had made in coming to the aid of her father during the time of his financial distress. It indicates that she intended to put into/ the trust, property which would provide her daughter with substantially the same amount of income that she had been receiving prior to the pledge for her father’s benefit and about the same amount that petitioner had been sending her, namely, $10,000 per month; and when it became apparent in February 1932, that the property might not be sufficient to provide that amount of income, she instructed her bank to make up any deficiency from her personal accounts.

Eespondent’s position seems to be that sometime between 1923, when the pledge "agreement was executed, and December 30, 1931, when the trust was created, petitioner became legally obligated to pay the daughter $10,000 per month and that the trust was created for the purpose of providing a source and security for the payment of this obligation. The evidence does not justify such conclusion. Petitioner admitted quite frankly that she felt that she had a moral) obligation to her daughter. When this testimony is considered in connection with other testimony to the effect that she and her daughter had “always been very close;” that the family was “closely knit”; that petitioner was wont to respond promptly and generously to all family needs; and that the daughter considered petitioner’s response to her needs as “a very marvelous thing to do”, the con-elusion seems to be inescapable that the trust was not established as a result of any legal obligation.

Respondent attempted to show and now argues that the obligation to pay $10,000 per month was created on February 23, 1923. He states that when the daughter pledged her securities it was necessary that she be given some assurance she would be provided with enough money for her support during the period that her securities remained subject to the pledge, and that petitioner gave her such assurance by entering into an arrangement to pay her an allowance of that amount. He also states that Armour and the petitioner had manifested their intention to make full restitution to any of the relatives who might sustain a loss by reason of their having pledged securities to secure the payment of Armour’s liabilities; that the petitioner’s daughter, as a matter of course, knew' of her parents’ intention to protect the pledgors from any loss; that it is inconceivable either of them would have permitted her to place herself in a position of dependence without having given some assurance for her future support; and that if such assurances were given they were legally binding upon Armour and petitioner, jointly and severally.

Counsel for respondent points to excerpts of testimony which he contends supports this view. He refers to the daughter’s testimony to the effect that her mother “wanted to try to reimburse me for what I had done for father”; to her affirmative answer to this question asked by him: “And the restitution or repayment about which both you and your mother have spoken relates to an arrangement to treat you the same way that you had helped others '[her] — to treat the other sureties of your father, is that right?” and to the fact that shortly after the settlement under the pledge agreement the petitioner began paying the daughter substantial amounts monthly. He asks a finding to the effect that the daughter’s “acceptance of her mother’s promise to pay her $10,000 a month in ‘repayment’, ‘reimbursement,’ ‘settlement’ and ‘restitution’ for her losses, constituted an implied understanding on the part of the daughter * * that she would not proceed against her mother * * * or her deceased father’s estate on any claim * * * [particularly for] * * *

(a) Violation of a fiduciary relationship;»
(b) Liability arising out of the February 23, 1923, transaction;
(c) Liability arising out of petitioner’s dealings with her husband or his creditors to her advantage over the co-pledgors; and
(d) Liability arising out of the May 6, 1928, transaction.”

The suggested finding — or mixed finding and conclusion — can not be made. The evidence does not indicate that it was necessary to give the daughter any assurances at the time she pledged her- property or that any assurances were given; nor can it be found as a fact that petitioner gave her such assurances by “entering into an arrangement” to pay her an allowance. Moreover, the evidence does not support the statement that Armour and the petitioner manifested their intention to make full restitution to relatives who sustained losses by reason of their pledges. It may be of some significance that petitioner did not begin making substantial payments to the daughter until 1926. Armour, it will be recalled, was alive until 1927. Whether he contributed to her support in the interim or whether she was supported by her own husband was not shown. But, however that may be, the evidence clearly indicates that petitioner did not feel herself to be legality obligated to the daughter nor did the daughter feel that any such obligation existed. When petitioner’s income from dividends on her Universal Oil Products Co. stock became substantial in 1926, she decided to make some payments to her daughter and did so, at irregular intervals, until April 1929, when she made an arrangement with her bank to pay her $10,000 per month. She advised her daughter of this voluntary arrangement that she had made for her benefit and in 1931 informed her that she was taking steps to perpetuate such payments. We do not share the respondent’s view that a mother, the owner of stock paying unusually large dividends, would not share her prosperity with her only child, an adult, married daughter, unless there was some existing liability or legal obligation which compelled her to do so. While the making of such payments by one other than a parent might carry with it an implication of a legal obligation, no such implication is justified under the present record.

It would unduly lengthen this opinion to mention and discuss every argument made by counsel for the respondent that the payments were made to satisfy a duty, legal obligation, or indebtedness of the petitioner, and that the trust instrument was executed in fulfillment thereof. We are of the opinion that what petitioner did was purely voluntary and gratuitous; that she was motivated solely by a desire to insure her daughter’s future; and that she was under no more than a moral obligation to reimburse her for the losses she had sustained in coming to the aid of her father. The rationale of Douglas v. Willcuts, supra, and related cases therefore has no application.

But should the income be taxed to petitioner upon the theory that the forty-eight $10,000 monthly payments were made pursuant to a promise which petitioner had made to her daughter that she would make future gifts to her in such amounts? Respondent so contends, citing Housman v. Commissioner, 105 Fed. (2d) 973; certiorari denied, 309 U. S. 656, affirming Stella S. Housman, 38 B. T. A. 1007.

In the cited case, the question was whether the petitioner was liable for gift tax as a result of certain payments made to her son. Her deceased husband by his will had established two separate trusts, of $250,000 each, for the benefit of his two sons. The residue of his estate was left in trust for his widow, she to receive all the income therefrom for life and the remainder to go to the sons. The testator died in 1913 and one of the sons died in 1924. Several years later the other son became discontented and threatened to try to break the father’s will, demanding one-third of the estate’s income. The mother expressed her willingness to pay him a substantial amount of the estate’s income, and he agreed to accept such payments. It was urged that the transaction was a binding contract; that the petitioner’s promise to make the payments was supported by the son’s relinquishment of his claims; and that her payment in 1933 was not a gift, since it was made in performance of an obligation which she could not have avoided.

Affirming the decision of this Board, the court held that the transaction was not a contractual one and imposed no enforceable obligation on the mother; that there was no compromise of a bona fide will contest; and that the mother’s expression of a willingness to pay her son a certain part of the estate’s income resulted from the kinship between the payer and receiver. “It was essentially donative in character, a promise or agreement to make gifts in the future.” The dissenting opinion expressed the view that the dealings between the mother and son resulted in a contract between them, based upon a good consideration, and that the payments were improperly determined to be gifts.

The Housman case is distinguishable upon its facts. The question here is not whether forty-eight payments of $10,000 per month should be included in petitioner’s income but whether the income from the trust, exclusive of tax-exempt income, should be included. The income amounted to $112,542.79 in 1932, $62,799.28 in 1933, $94,900.95 in 1934, and $112,354.30 in 1935. In the Housman case the payments were made by the mother to her son out of the income payable to her under a trust created by her husband for her benefit. In the instant proceedings the payments were made, not by petitioner, but by a trust which she had created for her daughter’s benefit. It can not be held that petitioner personally made gifts to her daughter of $10,000 per month merely because she created a trust for her benefit which paid her substantially that amount. We do not intimate that the amounts paid by the petitioner directly to her daughter or used to augment the income of the trust did not constitute gifts; but that question is not before us.

The next contention of the respondent, and the theory upon which the deficiencies were determined, is, that if it is assumed that the technical legal title to the property described in the trust instrument passed from the petitioner to herself as trustee and that a valid trust was created, she nevertheless is taxable on the income in question because she reserved the power to revoke the benefits granted to her daughter. The Revenue Act of 1932 provides:

SEO. 166. REVOCABLE TRUSTS.
Where at any time during the taxable year the power to revest in the grantor title to any part of the corpus of the trust is vested—
(1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
(2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,
then the income of such part of the trust for such taxable year shall be included in computing the net income of the grantor.

Section 166 of the Revenue Act of 1934 is the same except that the clauses “during the taxable year” and “for such taxable year” are omitted.

The respondent’s position is that, notwithstanding the provision of article YII of the trust instrument in which the grantor expressly stated “that she does not desire to retain, and has not retained, any power to change the terms of or revoke the trust”, petitioner reserved the power, in article III of the trust instrument, to regain at any time whatever she may be held to have granted to her daughter by way of benefits, without leaving the daughter any legal or equitable recourse. Article III provides:

Commencing with the date hereof, said Trustee shall pay and use the net income from said trust estate, and such portion or portions of the principal of said trust estate as, in the absolute discretion of the Trustee, may be necessary or desirable for the support, maintenance, comfort and well-being of Lolita Armour Mitchell, daughter of the undersigned, for and during the term of the natural life of the said Lolita Armour Mitchell, or until such time prior thereto when the entire principal of said trust estate shall have been either used or expended for that purpose, or shall have teen exhausted by the purchase of annuities for the benefit of and/or Ufe insurance upon the life of said Lolita Armour Mitchell, as hereinbefore provided. [Italics ours.]

Respondent urges that the practical effect of the language in italics is that petitioner declared hex property should remain subject to the terms of the trust instrument until she elected to exercise the rights and powei’s reserved in article II, and that she therefore had the right to terminate the trust and revest the corpus in herself at any time.

The dominant purpose of the trust was to provide income for petitioner’s daughter for life. The only proviso for the return of any part of the corpus or income to petitioner is contained in article IY. Under it petitioner or her estate was to receive, upon the death of the daughter, the entire trust estate and income therefrom which the trustee then had in her possession. It will be noted that this article does not provide that upon the death of the daughter “or prior termination of the trust” the corpus shall revest in the settlor; and it seems reasonable to assume she would have inserted the quoted sentence or words of similar import if she had had any intention of reacquiring any part of the corpus prior to her daughter’s death, that is, by a mere “termination of the trust.”

When article III is read in conjunction with article IY, the conclusion seems to be inescapable that the trust would have terminated upon the happening of either of two events, viz., (1) the death of the daughter, when the purpose of the trust would have been fulfilled, or (2) the distribution of the entire principal to the daughter, which distribution the trustee was empowered to make in her discretion. A reasonable interpretation of the trust seems to be that it would not have terminated by the exercise by the trustee of the power given her “to use the whole or any part of said trust estate for the purchase of either a policy or policies of insurance upon the life of her said daughter * * * or a life annuity or annuities for her said daughter; and/or a combination of life insurance * * * and annuities for her said daughter”, unless such policies or annuity contracts were distributed to the daughter. In the absence of such a distribution any policies or annuity contracts purchased would have to be retained by the trustee as part of the corpus of the trust, and the income therefrom would of necessity have to be distributed to the beneficiary. Article III does not appear to have been inserted for the petitioner’s benefit, but is a statement of the benefits petitioner intended for her daughter.

In the recent case of Helvering v. Wood, 309 U. S. 344, the Supreme Court pointed out Congress “whether wisely or not * * * has confined sec. 166 to trusts where there was a ‘power' to revest.’ ” Referring to the fact that' there was “no apparent or lurking ambiguity” in the section, the Court held that it was neither required nor permitted “to divine a broader purpose than that expressed.” The question in the instant proceedings upon this issue then, is the narrow one, Did the petitioner have the power to revest in berself title to any part of the corpus? Being of the Opinion this question must be answered in the negative, it is held that the income of the trust is not taxable to petitioner under section 166.

Is the income taxable to petitioner under section 167 ? This section is as follows:

SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
(a) Where any part of the income of a trust—
(1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or
(2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or
* * * * * * *
then such part of the income of the trust shall be included in computing the net income of the grantor.
(b) As used in this section, the term “in the discretion of the grantor” means “in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question.”

Respondent contends that “if the petitioner had caused the alleged trust to terminate prior to the death of her daughter by exercising the powers she excepted and retained in Article II of the instrument dated December 30, 1931, ‘the entire trust estate * * * including all income therefrom then remaining in the hands of the Trustee, or accrued but unpaid to the Trustee’ becomes the property of the petitioner” and that “so long as petitioner’s daughter received $10,000 a month from the petitioner from any source, she had no right to demand or receive any of the trust income.”

It has been pointed out above that the trust could not be terminated prior to the death of petitioner’s daughter unless petitioner, as trustee, distributed to her daughter its corpus and accumulated income. The provision respondent has quoted in the preceding paragraph is taken from article IV of the trust instrument wherein it is provided that “Upon the death of the said Lolita Armour Mitchell, the entire trust estate then remaining, if any, including all income therefrom then remaining in the hands of the Trustee, or accrued but unpaid to the Trustee, shall be paid over, conveyed and delivered to Lolita Sheldon Armour, if living, and if she shall not be living, then the same shall be paid over, conveyed and delivered to the Executors * * * of said Lolita Sheldon Armour as such Executors.” Under these circumstances it is apparent that if petitioner, as trustee, had used the whole or any part of the trust estate for the purchase of policies of life insurance on the life of her daughter or annuities for the benefit of her daughter, petitioner could not have received income from such investments prior to her daughter’s death. If, on the other hand, any part of the trust estate had been invested in nonincome-producing properties, there would have been no income to be received by her from this source.

We do not agree with respondent’s statement that “so long as petitioner’s daughter received $10,000 a month from the petitioner from any source, she had no right to demand or receive any of the trust income.” Apparently it was the intention of the grantor that all of the net income of the trust, with the exception of capital gains, be distributed to her daughter; for the trust instrument provides in article I that the trustee is empowered “to invest and reinvest the principal and proceeds thereof”, and in article III that “Commencing with the date hereof, said Trustee shall pay and use the net income from said trust estate, and such portion or portions of the principal of said trust estate as, in the absolute discretion of the Trustee, may be necessary or desirable for the support, maintenance, comfort and well-being of Lolita Armour Mitchell * * * for and during the term of the natural life of the said Lolita Armour Mitchell * * Petitioner’s interpretation of the above quotation, though not binding upon us, is shown in her letter to the bank in which she instructed it to pay the daughter from her personal account “the difference between the income from her trust and ten thousand dollars.”

A reasonable interpretation of the trust instrument, and especially of the provisions set out in the preceding paragraph, seems to be that the daughter, if she had seen fit to do so, could have compelled the distribution of the income of the trust, with the exception of the capital gains, to her; and it would require a strained construction to hold that the petitioner, in her discretion, could have held, accumulated, distributed, or used any of it in the manner set out in section 167.

Are the capital gains which petitioner as trustee accumulated during the years in question taxable to her under section 167 (a) (1), supra? Petitioner argues that the mere fact that capital gains are realized and added to the body of the trust res does not make such capital gains taxable to the settlor, citing Preston R. Bassett, 33 B. T. A. 182. In the cited case the taxpayer in 1929 had made an irrevocable gift in trust of certain shares of stock, naming himself as trustee. The instrument provided that the net income should be paid to the settlor’s wife for and during the term of her natural life, and, at her death, that the trust should cease and the principal sum should revert to the settlor and his heirs. The taxpayer, as trustee, sold the stock at a profit shortly after the trust was created. This Board held that the capital gain realized on the sale was not income taxable to him under section 167 of the Eevenue Act of 1928, which provides as follows:

SEO. 167. INCOME FOR BENEFIT OF GRANTOR.
Where any part of the income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to him, * * * such part of the income of the trust shall be included in computing the net income of the grantor.

The basis of our decision was that the accumulation “came about through the operation of a general rule of law” that capital gain must be credited to the corpus of the trust unless the settlor shows a clear intent to the contrary. Our conclusion was that section 167, supra, could not be applied because the capital gain was not held or accumulated for future distribution to the settlor by reason of the exercise of any discretionary powers on his part. Cf. Commissioner v. Waterbury, 97 Fed. (2d) 383, affirming 33 B. T. A. 208.

The present issue is to be determined under the provisions of the Revenue Acts of 1932 and 1934. Section 167 of these acts taxes to the grantor not only that part of the income of a trust which in his discretion or in the discretion of any person not having a substantial adverse interest may be held or accumulated for future distribution to him, but also taxes to the grantor such part of the income of a trust as is held or accumulated for future distribution to Mm. Petitioner urges that this change in phraseology does not render the principle of the Bassett case inapplicable to the facts here involved, and states that no power, either discretionary or otherwise, is given to the grantor or the trustee, to hold or accumulate for present or future distribution to the grantor, the income of the trust or capital gains or increments to the trust res. This is not consistent with the statement made in her brief that “there was lodged in the trustee the power, in the trustee’s discretion, to use any part or the whole of the trust res, including additions of increments or capital gains, for the support, maintenance, comfort, and well-being of the beneficiary, and hence there might well be nothing left to be distributed to or to revert to the grantor * * The quoted statement is, in our opinion, tantamount to a concession by petitioner that she had the discretion either to distribute or accumulate capital gains and, even under the rationale of the Bassett case, they would be includible in her income irrespective of the change in the statute.

Eegardless of any discretionary power vested in the trustee with respect to the capital gains, the changed phraseology of the later acts necessitates their inclusion in petitioner’s income if they were being held or accumulated for future distribution to her. We know that the trust realized capital gains; that these gains were retained by it and not distributed; and that for Federal tax purposes they constitute accumulated income. There remains only the question of whether they were being held for future distribution to petitioner. It is true, as petitioner points out, that she, under the terms of the trust instrument, might have used the entire trust estate, including the capital gains, for the support, etc., of her daughter, and thus left nothing to revert to her. But no such intention is manifested by her acts as trustee during the taxable years. Under the arrangement in effect during these years, namely, that any deficiency in trust income would be supplied from her personal funds rather than from the trust corpus or capital accretions, the probability that any part of these accumulated gains would ever be distributed to petitioner’s daughter, who had only a life interest, was quite remote. The only other person who could benefit from their accumulation was the petitioner, the owner of the reversionary interest. It is reasonable to conclude, under the circumstances, that they were being accumulated for future distribution to her. We hold therefore that respondent did not err in including these capital gains in petitioner’s income under the provisions of section 167 of the Revenue Acts of 1932 and 1934. Cf. Everett D. Graff, 40 B. T. A. 920.

Were the interests and powers of control which the petitioner excepted and retained over the economic benefits of the property transferred to herself as trustee of such a substantial character that she, for income tax purposes, must be regarded as remaining in substance the legal owner of the property and taxable on its income under section 22 (a) of the applicable revenue acts?

An owner of property can not relieve himself of income tax on the income produced by it by assigning the income to another. Lucas v. Earl, 281 U. S. 111. This rule has been applied to assignments of partnership profits to a third person not a member of the partnership, Burnet v. Leininger, 285 U. S. 136; to assignments of dividends on stock, Fred W. Warner, 5 B. T. A. 963; and to assignments of rents from real estate, Bing v. Bowers, 22 Fed. (2d) 450; affd., 26 Fed. (2d) 1017. “Liability may rest upon the enjoyment by the taxpayer of privileges and benefits so substantial and important as to make it reasonable and just to deal with him as if he were the owner, and to tax him on that basis”, Burnet v. Wells, 289 U. S. 670. Upon this theory the Board, in some instances, has taxed the income of “short term trusts” to the grantor. Estate of A. C. O'Laughlin, 38 B. T. A. 1120; Benjamin F. Wollman, 31 B. T. A. 37; and William C. Rands, 34 B. T. A. 1107.

Since the filing of briefs herein the Supreme Court has had occasion to review this question at length in Helvering v. Clifford, 309 U. S. 331. It held that the creator of a “short term” trust, for the alleged benefit of his wife, but who had the “absolute discretion” to determine when the payments should be made to her, to exercise all voting powers incident to the trusteed shares of stock, to sell, exchange, mortgage or pledge the securities and income upon such terms and for such consideration as he in his absolute discretion might deem fitting, and several other similar powers, remained in substance the owner of the property and taxable upon the income. It was pointed out that the trust “did not effect any substantial change” in the settlor’s dominion and control over the property; that, at best, there was but “a temporary reallocation of income within an intimate family group”; that since the income remained in the family and the husband retained control over the investment he had “rather complete assurance that the trust will not effect any substantial change in his economic position”; and that, notwithstanding the execution of the trust, he “retained the substance of all the rights which previously he had in the property.” We are in accord with these views. They constituted the basis upon which we had reached the same conclusion when the case was before us. But we are of the opinion that thei conclusion reached in that case is not justified under the evidence in the instant proceedings. The powers retained by this petitioner were not as great as those retained by the settlor in the cited case; the trust was not for a “short term”, but for the lifetime of the daughter; the beneficiary, though closely : bound to the settlor by ties of blood and affection, had established her own home and family ties and the family intimacy was not as great I as that between husband and wife.

In Helvering v. Clifford, supra, the Court said that the answer to the question whether the settlor did or did not remain, in substance, the owner of the property “must depend on an analysis of the trust and all the circumstances attendant on its creation and operation.” Making such an analysis, it will be noted that the trust effected a subA stantial change in petitioner’s economic position. It was not established primarily as a tax-saving device, but in good faith to provide) for the support of a daughter who had sacrificed the major portion of her substantial property to aid her father in his financial difficulties. All indications are that petitioner intended to deprive herself of the economic benefits in the property for an indefinite period; and near the close of the year 1935 she surrendered the reversionary interest, which she had theretofore retained. Under the circumstances it can not be held that petitioner remained, in substance, the owner of the I property giving rise to the income in question.

The remaining argument of the respondent in support of his contention that the income of the trust is taxable to petitioner is that she retained the right to invest corpus and income for her own benefit. He urges that even though the substantial interests which produce the income to be taxed are transferred, the transferor of the property remains liable for tax on the income if be uses it for bis own benefit or retains tbe right to appropriate it, regardless of whether he actually exercises such power. Corliss v. Bowers, 281 U. S. 376; Burnet v. Wells, supra; Douglas v. Willcuts, supra.

Respondent argues that the powers enumerated in article II of the trust instrument were reserved by petitioner in her individual capacity; and that, inasmuch as she was given the power “to use the whole or any part of said trust estate” in the purchase of property to be held as an investment, she had the power to use both corpus and trust income' in the purchase of nonincome-producing property and thus nullify the provisions of article III providing that the trustee pay and use the net income for the support, maintenance, comfort, and well-being of her daughter. This argument probably should have been advanced in connection with the applicability of sections 166 and 167, supra; but since the respondent has chosen to treat it separately we shall do likewise.

The provision relied upon by the respondent authorized petitioner, “as Trustee”, to make such purchases. This seems to indicate that in making such investments petitioner would necessarily be acting as fiduciary rather than in an individual capacity. Moreover, the evidence indicates that the provision was inserted because, at the time the trust was created, there was fear of inflation. Its purpose was, as set out in the findings, to permit the trustee to make investments as a “hedge” against inflation if she deemed it necessary. The fact that no such investments were made during the four years in issue tends to support the conclusion reached.

The parties are in hopeless disagreement as to the meaning of the term “trust estate” as used in article II. Respondent contends that it comprehends both corpus and income, while petitioner contends that it refers only to corpus. A decision upon this question is necessary because, if respondent’s contention is correct, the provisions of article II afford petitioner a method of accumulating the income for her own benefit. The term as used in the trust instrument is not free from ambiguity. Article I contains the statement: “If there be any uncertainty or question as to whether any part of said trust estate be principal or income”, the trustee, in her discretion, is “to settle and determine such question.” This, standing alone, would seem to indicate that petitioner intended to include both principal and income. In article III, however, the settlor speaks of the “net income from said trust estate” and “the entire principal of said trust estate”, while article IV states, “the entire trust estate then remaining, if any, including all income therefrom.” The latter statements seem to indicate that the term includes only the corpus.

Where an ambiguity exists the intention of the settlor may be ascertained from oral statements both before and after the execution of the declaration of trust (65 C. J. 601), and from the conduct of the parties affected by the instrument in their performance under it (65 C. J. 502). See also Herbert G. Goulder, supra; Phebe Warren McKean Downs, 36 B. T. A. 1129; Baird v. United States, 3 Fed. Supp. 947; affd., 65 Fed. (2d) 911; Old Colony Trust Co. v. City of Omaha, 230 U. S. 100. The petitioner testified that in the execution of the trust she had no motive or purpose other than to provide a substantial income from investments for her daughter’s maintenance the rest of the daughter’s life. She also testified that in her discussion with her attorney, and in directing him in the preparation of the trust instrument, she told him that her purpose was to provide for her daughter’s maintenance; that she wanted the trust fund to be invested in the best manner possible to produce the largest income; and that it was “for my daughter absolutely, for- my daughter alone.” The attorney testified that petitioner told him she wanted to establish a trust to make her daughter independent financially and to secure her, so that whatever should happen to petitioner or her fortune, the daughter would always have at least that income for her support and maintenance. This evidence, together with the payments actually made, tends to support petitioner’s contention that the term “trust estate” as used in article II referred only to the corpus of the trust.

The provisions of article II should be construed in harmony with, and to make effective, the dominant purpose of the trust, i. e., to provide and pay income to the beneficiary for life. So construed, it can not be said that they authorized or permitted the trustee to invest the income of the trust in property of any kind and thus accumulate it, nor that they authorized the investment of the whole of the trust estate permanently in nonincome-producing properties. In our opinion a court of equity, on the request of petitioner’s daughter, would have restrained petitioner from making any such permanent investments of this type because to do so would operate to nullify, and indirectly revoke, the trust, in the face of the express provision that it should be irrevocable.

The respondent erred in including in petitioner’s gross income for the years in question the ordinary income of the trust. He did not err in including the capital gains.

The remaining issue relates to the deductibility of agent’s compensation and commissions claimed by petitioner in her returns for the years 1932 to 1935, inclusive. The evidence does not show that petitioner was engaged in carrying on a trade or business. On the authority of Helen W. Heilbroner, 34 B. T. A. 1200, and cases therein cited (affd., 100 Fed. (2d) 382), it is held that petitioner is not entitled to the deductions claimed.

Judgment will be entered under Rule SO.


author: KeRn:

text:
    Second Carey Trust, an Express Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93611.
    Promulgated April 9, 1940.

      E. J. Imuk/, Esq., for the petitioner.

      Frcmh B. ScMosser, Esq., for the respondent.
   OPINION.

KeRn:

It is necessary to first consider the question of whether petitioner was, during the taxable year before us, an association taxable as a corporation, within the meaning of section 801 (a) (2) of the [Revenue Act of 1934, as determined by the respondent.

Petitioner contends that it is not so taxable for the reason that during the year 1934 it was not engaged in carrying on a business for profit, but was a liquidating trust, and its entire activities were in pursuance of its purpose of liquidation. It contends in the alternative that if found to be an association taxable as a corporation it is entitled: (a) to depletion and depreciation, and (b) to a deduction of 12y2 percent of the value of its capital in determining its excess profits tax liability.

The respondent contends that the petitioner was created solely for the purpose of operating, and did operate, a business in a manner so similar to the form commonly used by corporations that it must be taxed as a corporation within the rationale of the decisions of the Supreme Court in Morrissey v. Commissioner, 296 U. S. 344; Helvering v. Combs, 296 U. S. 365, and related cases.

Petitioner’s contention that it is a liquidating trust is based on the premise that its income for the taxable year was from the sale of oil and gas and constituted a pro tanto liquidation of its “sole assets.” Petitioner’s assets consisted in an interest in oil and gas leases and the same interest in the machinery and equipment necessary to explore and operate these leases. The trust was created for a period of 20 years and provided for liquidation and sale of assets at the end of that period unless terminated and liquidated sooner as therein provided. Obviously, it presupposed not only the operation of the producing wells then in existence but further exploration, drilling, and operation of new wells. The mere fact that its income was from the sale of oil and gas does not make it a liquidating trust or prevent its classification as an association for tax purposes, Helvering v. Combs, supra. The same reasoning might be applied to any corporation receiving income from a wasting asset.

Nor is the fact that the actual operation of the property was conducted by the Westgate Oil Co. determinative of the question before us. Petitioner not only owned an undivided interest in the oil property but the same interest in the machinery and equipment required for operation, and it paid its proportionate share of the cost of operation. Obviously to the extent of such undivided interest, the Westgate Oil Co. operated the property for petitioner. Cf. Helvering v. Combs, supra. The trustees were authorized to sell beneficial interests which were registered with the Securities and Exchange Commission; to use the proceeds therefrom to pay for the trust property; to take title to all property and property rights so acquired or thereafter coming into the trust; to hold such property the same as the sole and exclusive owners thereof and to convey good title to any property sold; to pay trust debts; to hold as their own any unsold beneficial interests; to operate the property and to employ agents and employees necessary in the operation and management of the property; to pay all costs incident to the operation and development of the working interest and all necessary expenses of carrying on the business of the trust; to withhold any reserves deemed necessary for future expenses and to pay over to the holders of the certificates of beneficial interest the remaining net income from the property; and to change, alter, or terminate the trust with the consent of the owners of two-thirds of the beneficial units of the trust.

The trustees, collectively, were charged with the conduct of all business and the execution of all instruments in writing in the name of the trust and they could adopt a seal. The trust instrument provided that they should elect one of their number president, one vice president, and one secretary-treasurer, and designate one of the officers so elected as “Chief Executive Officer.” The trustees had no individual liability except for willful misconduct.

The beneficial unit shares had a fixed par value. The holders of beneficial units were not personally liable for the acts of the trustees or the obligations of the trust. They owned no property of the trust and their rights as unit holders were limited to the receipt of a pro rata share of the net income of the proceeds from the sale of the assets on liquidation. Their certificates of beneficial interest, which were the sole evidence of their interest, were transferable on the books of the trust in person or by attorney when properly endorsed.

The trust provided a medium of centralized management of the enterprise and the sale and transfer of beneficial units did not affect its continuity. Under the terms of the trust the parties secured the advantage of perpetuation of trustees, limitation of liability, centralized control, and the united capital of a large group for the purposes of the enterprise — advantages usually incident to a corporate organization — and avoided the responsibilities of a partnership.

We hold the petitioner is an association taxable as a corporation. Morrissey v. Commissioner, supra; Helvering v. Combs, supra; Helvering v. Coleman-Gilbert Associates, 296 U. S. 369.

We come then to consider petitioner’s alternative contentions.

In computing the deficiency in question the respondent refused to allow any deduction for depreciation or depletion for the reason that petitioner had failed to file a statement, designated as “Form O”, containing certain information from which depreciation and depletion may be computed, as required by article 23 (m)-12 of Regulations 86. Did this result in an erroneous determination of petitioner’s tax liability ?

The determination of the respondent is prima facie correct and the burden is on the petitioner who alleges error to show by competent evidence that it is erroneous. At the hearing in this case the petitioner, who it appears was in possession of the necessary facts, introduced no evidence to show that it is entitled to depreciation or allowable depletion based on cost and there are no facts in the record upon which either depreciation or cost depletion can be computed. We are, therefore, unable to determine that petitioner is entitled to any depreciation or that allowable depletion based on cost is greater than depletion computed on the basis of 27 y2 percent of the gross income from the property in accordance with section 114 (b) (3) of the Revenue Act of 1984.

At the close of the hearing, petitioner filed a motion asking that, if the Board should hold petitioner to be an association taxable as a corporation, then a further hearing be had to determine the correct amount of the tax. It was a motion asking for a further hearing at some future date contingent upon our decision of one of the several issues then before us contrary to petitioner’s contention. This motion was made after both parties announced at the hearing that they rested. To grant the motion under the facts and circumstances of this case would be tantamount to permitting the issues to be tried piecemeal after they were submitted as a whole. This we will not do. The necessary data was in the possession of petitioner at the time of the hearing, and we see no good reason why it should not have been introduced in evidence at that time in support of petitioner’s alternative allegations of error. Obviously, it could not have prejudiced petitioner’s position on the primary issue in the case. A petitioner before this Board may make alternative allegations of error, but it may not at the hearing withhold evidence material to those allegations and, after the primary issues have been decided against it, reopen the case on motion to introduce such evidence. The motion to reopen the case for the purpose of submitting additional evidence is therefore denied.

Since petitioner has not furnished us with figures as to value or costs, we can not hold that the respondent erred in his determination as to depreciation or in his determination that petitioner is not entitled to depletion based upon cost. However, it does appear from the record that the income here in question was from oil and gas wells, and, since the petitioner has not shown that allowable depletion based on cost is greater than percentage depletion, we hold that petitioner is entitled to depletion in the amount of 27^ percent of its gross income from the properties as provided under section 114 (b) (3) of the Revenue Act of 1934.

The second alternative issue raised by the pleadings involves the question of whether petitioner is entitled to a deduction from net income of 12y2 percent of the declared value of its capital stock in computing its excess profits tax.

The petitioner did not file a capital stock return for 1934, but in 1937 a capital stock tax based upon a valuation of $500,000 was assessed against it, together with a penalty of 25 percent of the tax. This assessment was paid by the petitioner. Since petitioner did not have an income taxable year prior to June 30, 1934, the declared value of its capital stock, as expressed in the assessment, was apparently based on the value of its units of beneficial interest at the date of its organization, which were sold for $500,000.

The Revenue Act of 1934 imposed a tax upon the adjusted declared value of the capital stock of corporations and an excess profits tax upon the net income of such corporations “as is in excess of 12ys per centum of the adjusted declared value of its capital stock * * The purpose of the statute is “* * * To allow the taxpayer to fix for itself the amount of the taxable base for purposes of computation of the capital stock tax, but with the proviso that the amount thus fixed for the first taxable year shall be accepted, with only such changes as the statute prescribes for the purpose of computing the capital stock and excess-profits taxes in later years.” Haggar Co. v. Helvering, 308 U. S. 389. Obviously the amount of declared value of capital fixed for the first year, which is the year before us, is a matter of practical indifference to the Government, since the statute guards against the loss of revenue from capital stock taxes through an understatement of capital, by a corresponding increase in excess profits taxes.

The capital stock tax and the excess profits tax are interrelated and the statutes must be construed together in the light of their purpose. Cf. Haggar Co. v. Helvering, supra. The primary purpose of the excess profits tax was to assure a reasonable valuation for capital stock purposes. Finance Commitee Report No. 558, p. 5 (1), 73d Cong., Revenue Act of 1934. The provision in the capital stock tax statute that the “declaration of value” for the “first year” can not be amended was inserted in order to avoid controversy by fixing the value of capital stock for succeeding years. Finance Committee Report, supra. We held in Del Mar Addition, 40 B. T. A. 833, that these purposes were not served where the taxpayer did not file a “first return” within the time prescribed by the statute, and in a subsequent year filed a late return with the sole purpose of reducing its excess profits tax liability. But where, as here, the taxpayer has not filed any return for the “first year” and the Commissioner from the information available to him has determined and declared a value for the “first year” and has assessed and collected the capital stock tax on such declared value, we think the value so declared and determined should be considered the declared value for the purposes of the excess profits tax. We hold, therefore, that the petitioner is entitled to an adjusted declared value of its capital stock in the amount of $500,000 for the purpose of computing its excess profits tax, and direct that the computation be made accordingly.

There is some evidence to the effect that during the taxable year approximately $36,882.84 of income applicable to unsold units was permitted by the trustees to be retained by the trust for distribution to the unit holders. The reason for this action does not appear. This amount was included in income by the respondent in determining the deficiency here in question. The petitioner has raised no issue as to this in the pleadings. Under the evidence before us, we can not disturb this determination.

Reviewed by the Board.

Decision will be entered wider Bule 50.

Black dissents from the holding in the majority opinion that petitioner is an association taxable as a corporation.

       SEC. 701. CAPITAL STOCK TAX.
      (a) Eor each year ending June 30, beginning with the year ending June 30, 1934, there is hereby imposed upon every domestic corporation with respect to carrying on or doing business for any part of such year an excise tax of $1 for each $1,000 of the adjusted declared value of its capital stock.
      * * * * * * flt
      (d) Every corporation liable for tax under this section shall make a return under oath within one month after the close of the year with respect to which such tax is imposed to the collector for the district in which is located its principal place of business or, if it has no principal place of business in the United States, then to the collector at Baltimore, Maryland. Such return shall contain such information and be made in such manner as the Commissioner with the approval of the Secretary may by regulations prescribe. * * *
      *******
      (f) Eor the first year ending June 30 in respect of which a tax is imposed by this section upon any corporation, the adjusted declared value shall be the value, as declared by the corporation in its first return under this section (which declaration of value cannot be amended), as of the close of its last income-tax taxable year ending at or prior to the close of the year for which the tax is imposed by this section (or as of the date of organization in the case of a corporation having no income-taxable year ending at or prior to the close of the year for which the tax is imposed by this section). * * *
      SEC. 702. EXCESS-PROFITS TAX.
      (a) There is hereby imposed upon the net income of every corporation, for each income-tax taxable year ending after the close of the first year in respect of which it is taxable under section 701, an excess-profits tax equivalent to 5 per centum of such portion of its net income for such income-tax taxable year as is in excess of 12% per centum of the adjusted declared value of its capital stock (or in the ease of a foreign corporation the adjusted declared value of capital employed in the transaction of its business in the United States) as of the close of the preceding income-tax taxable year (or as of the date of organization if it had no preceding income-tax taxable year) determined as provided in section 701. If the income-tax taxable year in respect of which the tax under this section is imposed is a period of less than 12 months, such adjusted declared value shall be reduced to an amount which bears the same ratio thereto as the number of months in the period bears to 12 months. Eor the purposes of this section the net income shall be the same as the net income for income tax purposes for the year in respect of which the tax under this section is imposed.


text:
    The Valuation Service Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96373.
    Promulgated April 11, 1940.

      Richard R, Bolling ton, Esq., for the petitioner.

      DéWitt M. Evans, Esq., and Thos. F. Oallahan, Esq., for the respondent.
   OPINION.

Opper : As this controversy is presented the difference between the parties narrows to the single question whether for purposes of section 22 of the Act of March 1,1879, petitioner’s separate corporate identity should be disregarded in favor of the view that it and its remote sole stockholder, an insolvent bank, are to be treated as a unit. To state petitioner’s position in its own words, it is that “since the assertion of an income tax against The Valuation Service Company would diminish the assets necessary for the full payment of all depositors of The Guardian Trust Company, the Board should disregard the corporate entity and consider The Guardian Trust Company and The Valuation Service Company as one and the same enterprize, and, therefore, immune from taxation under the Act of Congress of 1879, * *

Despite such anomalous adjudications as Southern Pacific Co. v. Lowe, 247 U. S. 330, North Jersey Title Insurance Co. v. Commissioner, 84 Fed. (2d) 898 (C. C. A., 3d Cir.), and Munson Steamship Line v. Commissioner, 77 Fed. (2d) 849 (C. C. A., 2d Cir.), it must be recognized that corporations are ordinarily organized for the purpose of being treated as distinct from their shareholders, and that they should be so treated. Burnet v. Commonwealth Improvement Co., 287 U. S. 415. This result is the more necessary where the application to overlook distinctive corporate existence is submitted in behalf of those responsible for the situation to which we are asked to close our eyes. Mississippi River & Bonne Terre Railway, 39 B. T. A. 995, 1003. See United States Fidelity & Guaranty Co., 40 B. T. A. 1010. It is “when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime”. that the usual and normal view of corporate individuality may be set aside. Needless to say it is ordinarily difficult, if not impossible, for the corporation itself or its sponsors to bring its situation within that description.

The rule to be applied in such circumstances as these has recently been formulated by the Supreme Court in the following language:

* * * In the Commonwealth Improvement Compam/y case, the taxpayer, for reasons satisfactory to itself voluntarily had chosen to employ the corporation in its operations. A taxpayer is free to adopt such organization for its affairs as he may choose and having elected to do some business as a corporation, he must accept the tax disadvantages.
On the other hand, the Government may not he required to acquiesce in the taxpayer’s election of that form for doing business which is most advantageous to him. The Government may look at actualities and upon determination that the form employed for doing business or carrying out the challenged tax event is unreal or a sham may sustain or disregard the effect of the fiction as best serves the purposes of the tax statute. * * * [Higgins v. Smith, 308 U. S. 473.]

If tlie true party in interest here were this petitioner or even its ultimate sole stockholder, the bank, the matter could readily be disposed of by applying to this dispute the principle announced in the early portion of that quotation. But it is! apparently accepted as a fact by respondent that the actual loss, if this proceeding is determined adversely to the petitioner, will fall upon the depositors of the bank. His position is that if this petitioner were the bank itself he would have no question as to the applicability of the 1879 Act. It is thus inadmissible to conclude that the present petition to treat corporation and stockholder as an essential unit is advanced for the benefit of either. Hence we think it incumbent upon us to look further in order to apply here that view on the disputed issue which “best serves the purposes of the tax statute.”

It is self-evident that the objective of the enactment in question, both in its original form and as amended, was to assist and benefit depositors of insolvent banks. As the Court of Claims says in Johnston v. United States, 17 Ct. Cls. 157, the provision “was passed for the undoubted purpose of relieving depositors in national banks from the payment of certain taxes, not assessed upon them, but upon the banks of which they are only customers; taxes which, under the preexisting law, they would indirectly be obliged to pay when a bank is so insolvent that all its capital is gone and it has nothing left with which to pay taxes, except the money of its depositors.” It is clear that the depositors are no more responsible for the present situation than they were for the tax deficiencies of the bank itself. They were not the organizers of petitioner, they had no voice in its management and no direct interest in its affairs. They are in danger, however, of being the innocent victims of circumstance. For, if respondent is successful in this proceeding, the entirely collateral element of the form of petitioner’s organization as a separate corporation, instead of as the bank’s real estate department, will result in denial to the depositors of that relief which it seems evident it was the purpose of Congress to afford; relief which they would have obtained without question in the absence of petitioner’s intervening presence.

In that view we can not avoid the conclusion that it will most nearly effectuate the evident legislative purpose to treat these taxes as being due only “on account of such bank”; to treat petitioner and the bank as parts of a single organization, all of whose assets are subject to the claims of the bank’s depositors, and whose unforgiven liabilities will inevitably diminish those assets; and so to apply the statute as to find that there is no deficiency in tax due from this petitioner under its terms.

As respondent points out, it is not the purpose of the relevant legislation to relieve those having a proprietary interest in the bank from their appropriate tax liability. Jackson v. United States, 20 Ct. Cls. 298. But even if there were a possibility under the facts here that such a result might eventuate, the danger is eliminated by the provisions of the 1988 Amendment, leaving open the ultimate liability of those governed by the statute until the outcome of liquidation is apparent.

Neither party seeks to question the Board’s jurisdiction by reason of the unusual language of the section under consideration; and in any event that point has already been passed upon in favor of our power in the premises. West Town State Bank, 32 B. T. A. 531; Republic Bank & Trust Co., 36 B. T. A. 680.

Decision will be entered for the petitioner.

       Sec. 22. That whenever and after any hank 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. [20 Stat. 351.]

       This statute was amended by section 818, Revenue Act of 1938, but petitioner places no reliance on the amended language, saying in its reply brief: “Por the purpose of this brief we * * * rest our ease solely on section 22 of the Act of 1879, 20 Stat. 327 [sic 351], or its counterpart, section 22A, as amended by the Revenue Act of 1938.”

        United States v. Milwaukee Refrigerator Transit Co., 142 Fed. 247, 255.

       SEC. 818. TAXES OF INSOLVENT BANKS.
      »♦*>*** *
      (c) Any such tax so collected shall bo deemed to be erroneously collected, and shall be refunded subject to all provisions and limitations of law, so far as applicable, relating to the refunding of taxes, but tax so abated or refunded after the date of the enactment of the Revenue Act of 1938 shall be reassessed whenever it shall appear that payment of the tax will not diminish the assets as aforesaid. The running of the statute of limitations on the making of assessment and collection shall be suspended during, and for ninety days beyond, the period for which, pursuant to this section, assessment or collection may not be made, and a tax which has been abated may be reassessed and collected during the time within which, had there been no abatement, collection might have been made.


author: Disney:

text:
    J. C. Gutman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92096.
    Promulgated April 11, 1940.

      D. Benjam/m Kresch, Esq., for the petitioner.

      Eugene Smith, Esq., for the respondent.
   OPINION.

Disney:

The petitioner filed a gift tax return for 1935 covering gifts made by him during that year, but did not include in his gift tax return for 1935 any value for the home conveyed to himself and wife as tenants by the entireties. The Commissioner in determining the deficiency determined a gift tax upon a value of $8,349.46, explaining in the deficiency notice that the property had been determined to have a fair value of $16,100, that the ages of the donor and his wife, the donee, were shown to have been 46 and 42 years, that the present worth of the right to one-half the use of $16,100 so long as two persons aged 46 and 42 years, respectively, both shall live, is $3,616.06, that the present worth of the right to receive $16,100 at the death of a person aged 46 years by a survivor aged 42 at the time of the gift is $4,733.40. This amount added to $3,616.06 totals $8,349.46, which was held to be the value of the gift to the wife, computed in accordance with article 19 (8) of Regulations 79.

The petitioner contends (1) that the transfer of the home to the husband and wife as tenants by the entireties is not a taxable gift; (2) but that, if it is a taxable gift, the computation of the tax was erroneous, first, in that no allowance was made by the Commissioner for the value of the wife’s right to support from her husband, and, second, that in computing the value of the wife’s right to receive the property in the event of her survival of the husband, no allowance was made for depreciation of the property at the time it would be received by her. Since the decision in Helvering v. Hallock, 309 U. S. 106, the petitioner urges that the gift tax applies only to the first item above, i. e., the value of the wife’s right to enjoyment of one-half of the income of the property during the joint lives.

1. Petitioner in his first contention, that in general the gift tax is not applicable to a transfer by a husband to a wife and himself of an estate by the entireties, urges us to abide by former opinions of the Board, such as Harry A. Logan, memorandum opinion entered June 19, 1939, Docket No. 92509, and William H. Hart, 36 B. T. A. 1207, and not to follow the reversing opinion in Commissioner v. Hart (C. C. A., 3d Cir.), 106 Fed. (2d) 269, 271. The latter opinion, however, is to the same effect as is Lilly v. Smith (C. C. A., 7th Cir.), 96 Fed. (2d) 341; certiorari denied, 305 U. S. 604; rehearing denied, 307 U. S. 651, and the Logan case was recently reversed upon the authority of the Hart case, Commissioner v. Logan (C. C. A., 3d Cir.), 109 Fed. (2d) 1014. Upon the authority of the three opinions we hold that the petitioner is in error upon this point.

2. (a) Petitioner’s next argument is also covered by Lilly v. Smith, supra, for there the court held that a husband could not avoid payment of gift tax upon a transfer to himself and wife as tenants by the entireties on the theory “that the transfer was merely the fulfillment, by the husband, of a marital obligation to furnish a suitable residence for his family.” Here the petitioner urges the duty to support in general, but since, as in the decided case, the residence was conveyed, the contention in both cases is to the same effect. Proof was adduced that the courts of Pennsylvania would allow a wife, in an action for support, about one-third of the husband’s income, if there were children. The husband’s income was shown for only two years. The husband and wife continued to live together, the petitioner-husband furnishing marital support. We conclude and hold that such marital duty does not affect the gift tax.

2. (b) Petitioner’s next contention is that the respondent erroneoiisly computed the value of the gift of right to the property after the possible survival of the donee, on the theory that the value of the property at the transfer was used as base of computation, with no deduction for depreciation during the period of the joint lives of donor and donee. Petitioner apparently entertains a theory that from value at the date of the gift depreciation for a period ascertained from the mortality tables used by the respondent must be deducted. The error in such theory is that we are here concerned, not merely with physical, condition of a tangible property as affected by passage of time, but with the present worth of an intangible, that is the right to receive in the future a property of value not now subject to exact ascertainment. Without the power of prophecy no one can state the value of the property at some time in the future. The futility of an attempt, prior to the financial debacle in 1929 to value property in 1933 is perhaps an apt illustration of the reason why we must reject petitioner’s theory. If omniscience enabled us to value property in the future, then depreciation for the same period might logically be deducted. Absent such omniscience, the element of depreciation must obviously not enter into consideration. The property might greatly increase in value, even though there was depreciation, and might decrease in value far moré than mere depreciation. The mortality tables, as in the case of intangibles, such as stocks to be received in the indefinite future, seem to furnish the only practicable means of calculation, for we Rere deal equally ■with an intangible — the value of a property in the future. The value of such tables is commented on in Commissioner v. Hart, supra, Though petitioner says that the present question was not presented in that case, and quotes from the Board’s decision, we not.e that the court’s opinion states:

* * * It is pointed out, first, that the valuation of the tax depends upon the unsatisfactory calculations of mortality tables, second, that if the donee spouse predeceases her grantor, no estate tax credit can be taken and, third, that even where credit can be taken it does not permit of full recoupment. One of these what might be called “practical objections” does not seem sound. Mortality tables have been the legal and economic method of valuing expectancy for many years. They are based on a recognized mathematical principle of probabilities. * * *

Moreover, the value set upon the property at the date of the gift includes some consideration of future depreciation. The probable life of a building enters into calculation of its prevent value. In addition, we point out that the record herein is devoid of any evidence as to the nature and construction of the residence, its useful life, date of erection, value at the date of gift (except as determined by the Commissioner to be $16,100), or the donor’s base. The donee, of course, would not have for depreciation purposes the value at the date of gift, as apparently presumed by the petitioner. Sec. 114 (a) and sec. 113 (a) (2), Revenue Act of 1934.

The Commissioner used mortality tables, a recognized method of calculation and therefore not to be called arbitrary under Helvering v. Taylor, 293 U. S. 507. In Simpson v. United States, 252 U. S. 547, the Supreme Court approved the application of mortuary tables in determining the value of future contingent interests in property. Referring to earlier cases, the Court said: “It is much too late to successfully assail a method so generally applied, and as to this claim of error the judgment of the Court of Claims is affirmed.” Among the cases referred to was United States v. Fidelity Trust Co., 222 U. S. 158, in which the mortality tables were used in evaluating contingent interests in property, including tangible personal property. The petitioner has not demonstrated that such method resulted in an incorrect valuation. We hold that the petitioner has not shown error in the respondent’s computation of the value of the future gift.

We must also reject petitioner’s view that the recent decision in Helvering v. Hallock, supra, determines the present question. He urges, in effect, that, since under the Hallock case estate passes because of the death of a trustor, and is therefore includable in the decedent’s estate, therefore no gift tax may be applied to the present worth of the wife’s right to receive the property in the event that her husband-donor predeceases her. This thought was considered in substance in Lilly v. Smith, supra, and it was concluded that though the survivor acquired an interest subject to an estate tax, tbe gift tax is not for that reason inconsistent, that an estate was created when the deed of estate by the entireties was delivered, and that the Estate Tax Act provides a credit on the estate tax of the amount paid as gift tax. We conclude and hold that the petitioner has not shown error by the respondent in the determination of deficiency.

Reviewed by the Board.

Decision will be entered for the respondent.

Aeundell, MuRdock, Black, and Keen dissent.


author: SteRnhagen:

text:
    Charles F. Clise and James W. Clise, Jr., as Executors of the Estate of Anna H. Clise, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96151.
    Promulgated April 11, 1940.

      Warren EL. Lewis, Esq., and K. I. Ghormley, Esq., for the petitioners.

      John H. Pigg, Esq., for the respondent.
   OPINION.

SteRnhagen:

1. As to the New York Life Insurance Co. policies No. 12,073,779 and No. 12,467,023, the Commissioner held them to be annuity contracts, the value of which is included within the gross estate in its entirety and not only to the extent of the excess over $40,000. Internal Revenue Code, sec. 811 (g). This is contrary to Estate of Anna M. Keller, 39 B. T. A. 1047; on review C. C. A., 3d Cir.; Estate of Cecile Le Gierse, 39 B. T. A. 1134; on review C. C. A., 2d Cir.; and is therefore reversed.

2. The Commissioner included the value of the annuity contracts in the gross estate under section 811 (c) as property “having been transferred to take effect in possession or enjoyment at or after death.” He made no determination that they were transfers made in contemplation of death.

The petitioners concede that the value ($4,421.60) of the New York Life refund annuity No. 48,113 and the value ($8,799.40) of the Sun Life contract, in both of which decedent reserved the right to change beneficiaries, are properly within the gross estate.

The remaining 16 contracts were all made in December 1934 and provided for annuities payable to the decedent for life and then to designated survivors for life. Each was issued for a single premium and gave no rights to decedent except to receive the periodic payments. The named successor annuitant in each instance actually survived the decedent.

The evidence, irrespective of the decedent’s belief that death is but a mental aberration, establishes that the annuity contracts were made not in contemplation of death but to provide for a safer investment and a more assured income. This finding has been made and petitioners have therefore proved “to the contrary” of the two-year statutory presumption.

The Commissioner relies upon Internal Revenue Code, section 811 (c), which is the result of the amendment by the Joint Resolution of March 8, 1931, which in turn was adopted to restrict the practical effect of May v. Heiner, 281 U. S. 238, and Burnet v. Northern Trust Co., 283 U. S. 782; McCormick v. Burnet, 283 U. S. 784, and Morsman v. Burnet, 283 U. S. 783. See Hassett v. Welch, 303 U. S. 303. He regards Chemical Bank & Trust Co. et al., Executors, 37 B. T. A. 535, Commissioner’s petition for review dismissed, C. C. A., 2d Cir., Jan. 3, 1939, as inapplicable because the annuity contract there considered was made before March 3, 1931, and hence protected from the retroactive application of the amended statute. Hassett v. Welch, supra.

Annuity contracts such as these have never been brought by statute within the gross estate. Seymour Johnson et al., Executors, 10 B. T. A. 411. May v. Heiner, supra, did not consider them directly or indirectly, and the remedial resolution of March 3, 1931, did not purport to deal with them.

By contracting for an annuity in consideration for a single sum the decedent was not transferring property (even though the term property be used to include money, cf. Halliburton v. Commissioner, 78 Fed. (2d) 265, C. C. A., 9th Cir.), of which she was retaining the possession or enjoyment or the income. She was purchasing an annuity for herself and her survivor. The property (money) which she was “transferring” was irretrievably gone and for it she was getting a promise of an annuity, payment of which was not limited or related to income from the consideration which she paid, but was to be made at all events. It may not be regarded as income. Helvering v. Butterworth, 290 U. S. 365; Helvering v. Pardee, 290 U. S. 365; Ronald De Reuter, 7 B. T. A. 600, 607; affd., Burnet v. Whitehouse, 283 U. S. 148. Thus the language of the statute, either before or after the amendment, does not touch it. It is still true under May v. Heiner, supra, that the rights of decedent’s survivors are not to be regarded as attributable to the death, but to a contract made during life, and decedent did not retain for herself the possession or enjoyment of the property transferred or the income from it.

The determination including the value of the sixteen contracts in the gross estate is reversed.

Decision will be entered under Rule 50.


text:
    Joell Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96535.
    Promulgated April 12, 1940.

      Morris H. Goldman, Esq., for the petitioner.

      Bernard D. Daniels, Esq., for the respondent.
   OPINION.

Disney:

In this proceeding income and excess profits taxes are involved, deficiencies having been determined as follows:

The questions presented are as to propriety of certain deductions under section 23 (b) and (c), Revenue Act of 1934, and a credit for dividend payments within the meaning of section 26 (c) (2) of the Revenue Act of 1936.

All facts were stipulated, are found as stipulated, and may be summarized as follows:

Petitioner, a Pennsylvania corporation engaged in the business of owning and operating real estate, was organized in 1926. It filed its income tax returns for the years here involved with the collector for the first district of Pennsylvania. It reported income in the taxable years on an accrual basis. In 1926 the total outstanding common stock of the petitioner was held as follows: Joseph E. Cohen held two shares, and his daughters, Sarah Cohen, Reba Cohen, and Yetta Schweriner each held 66 shares.

On or about September 15, 1926, Joseph E. Cohen conveyed to the petitioner his residence in Philadelphia, subject to a mortgage of $4,000 bearing interest at 6 percent, on condition that the petitioner lease same to Joseph E. Cohen and/or Sarah Cohen, his daughter, at a yearly rental of $1 and assume payment of the mortgage and of all taxes, water rents, interest payments, repairs, etc. The lease was to continue during the life and until six months after the death of the survivor of the two lessees. At the date of conveyance Joseph E. Cohen was 47 years of age and Sarah Cohen was 21 years of age. During 1935 and 1936 the petitioner owned the property, and, interest having accrued at the rate of $240 per year, it claimed deduction thereof and depreciation of $140 per year. That amount is agreed to be the proper amount, if petitioner is entitled to any depreciation. The property was set up at the date of acquisition at $7,000 on petitioner’s books, and in 1931 improvements in the amount of $2,000 were made on the property. City and school taxes accrued against the property on January 1, 1935, in the amount of $195.22, and on January 1, 1936, in the amount of $186.03, and were claimed as deductions.

In 1926 petitioner acquired certain other real estate in Philadelphia, subject to first and second mortgages of $200,000 and $100,000, respectively. The deed, inter alia, recited:

Under and subject, nevertheless, to the aforesaid restrictions against offensive occupation and to payment of the aforesaid mortgage debt or principal sum of Two Hundred Thousand Dollars, and also the payment of certain mortgage debt or principal sum of One Hundred Thousand Dollars with interest.

On November 7, 1931, the petitioner entered into a written agreement with the second mortgagee and Joseph Cohen, the mortgagor. The agreement was amended in writing on December 24, 1931, and again on September 8, 1936. In effect, the agreement as amended provided for the assignment to the second mortgagee of leases upon the premises, the collection by the mortgagee of the rents and their application to payment of taxes, water rents, interest, fire insurance premiums, and payments upon the first and second mortgages. In accordance with the agreement the second mortgagee during the taxable years collected the rents, paid $2,700 principal on the first mortgage,- and retained $6,448.58 in reduction of the second mortgage. No credit was allowed the petitioner for said sums in computing undistributed net income.

The respondent determined that the interest and taxes paid upon the residence acquired from Cohen, and pursuant to the agreement of conveyance, are capital expenditures and not ordinary deductions, as contended by petitioner, who relies upon the text of section 23 (b) and (c), respectively, of the Revenue Act of 1934. The agreement of purchase expressly provides for assumption of taxes and interest, and so far as taxes and interest had accrued at the date of acquisition and formed a part of the original consideration, it is clear that they constituted capital expenditures. John Hancock Mutual Life Insurance Co., 10 B. T. A. 736; Lifson v. Commissioner, 98 Fed. (2d) 508; Norman Cooledge, 40 B. T. A. 1325 (1328). But the interest and taxes here involved were accrued for the years 1935 and 1936, whereas the property was acquired in 1926, so that the interest and taxes for the taxable years were not accrued at the date of acquisition of the property, and a different question must be answered. The cases cited by the respondent do not answer it. In MacDonald v. Commissioner, 76 Fed. (2d) 513 (C. C. A., 2d Cir.), affirming 30 B. T. A. 884, it was held that deferred payments were capital expenditures where interest was not provided for. Here provision was made in the mortgage for interest. In Commissioner v. John C. Moore Corporation, 42 Fed. (2d) 186, the court affirmed the Board in apportioning yearly payments between capital and interest, and allowing deduction of the latter. In Hudson-Duncan & Co., 36 B. T. A. 554, we held that a portion of monthly payments upon sale of realty represented interest and was therefore deductible as such. The same logic applies to taxes. Only so far as accrued at the date of acquisition do they form part of the purchase price and constitute capital expenditures. In taxes thereafter arising the vendor is not interested, and can not reasonably be considered as including them in the'sale price. The cases confine the capital expenditure to interest and taxes which have accrued. We, therefore, conclude and hold that the taxes and interest for 1935 and 1936 are properly to be allowed as deductions in the amounts set forth above.

Petitioner claimed depreciation of $140 per year. Respondent contends that it is not deductible for the reason that the property, being leased to the president of the corporation and the secretary, his daughter, for their lives, for $1 per year, was not “used in the trade or business” within the language of section 23 (c) (1) of the Revenue Act of 1934. In our opinion, under the circumstances here involved the respondent’s position should be sustained. The property was the residence of the grantor. By the terms of acquisition of the property it was retained, at a nominal rental, by the grantor for his life and/or that of his daughter, and six months thereafter. We think it was not during such period property used in trade or business, but was, in effect, retained for the life of grantor and daughter. In Gertrude D. Walker, 20 B. T. A. 937, 942; affd., 63 Fed. (2d) 351; certiorari denied, 289 U. S. 746, we denied deduction for depreciation upon the residence of petitioner’s father, which had been purchased by her with hopes of sale and after seven years was sold, but during the interim was used for no purpose except as residence by the petitioner for three months and by her stepmother for a short time without payment of rent. In Elsie A. Drexler, 25 B. T. A. 79, petitioner’s property was used during the taxable years by relatives without payment of rent. Depreciation was disallowed. See also Des Moines Title Co., 39 B. T. A. 729, 733. The respondent’s action in denying deduction of the depreciation is approved.

The remaining question is whether, under section 26 (c) (2) of the Revenue Act of 1936, the petitioner is entitled to a credit, in computing undistributed net income, of the amounts paid in 1936 on the first and second mortgages on certain other property owned and acquired by it subject to the mortgages. This depends upon whether the amounts were paid upon a debt within the meaning of the statute. They were required to be paid by a written contract executed prior to May 1, 1936, providing for application of the income from the property upon the mortgages. The respondent argues (a) that the agreements do not restrict payments of dividends, (b) that the mortgages being neither made by nor assumed by the petitioner, the contracts do not provide for payment of a debt due by petitioner, and (c) that they do not expressly deal with the disposition of earnings or profits of the taxable year. Petitioner agrees that the agreements do not restrict payments of dividends, but says that is immaterial under section 26 (c) (2), argues that the debt need not be owing from petitioner and need be only a “debt” under the expression of the statute, but that even though, as petitioner admits, the mortgages were not its debts or direct obligations of the corporation, they were charges upon its property, and that the contract that the rents he applied to payment thereof created a debt within the meaning of the statute. As to respondent’s point (c) petitioner urges that rents must be considered as earnings and profits. On this last point we agree with the petitioner. Rents can not in logic be eliminated from earnings or profits, and come within the statutory expression. In G. B. R. Oil Corporation, 40 B. T. A. 738, we applied the statute to income from oil leases. Here income from real estate is involved. Certainly there can be no distinction. We hold that the income from the real estate herein was “earnings and profits” under section 26 (c) (2). We also hold that the contract “expressly deals with the disposition” of such “earnings and profits of the taxable year.” In G. B. R. Oil Corporation, supra, we said that the contract there, made in 1931, “did not refer specifically to the taxable year 1936, but the language of the assignments was certainly broad enough to include the taxable year 1936.” The same is true herein.

This leaves for consideration only the question as to whether the contract provided for “discharge of a debt” within the intendment of section 26 (c) (2) of the Revenue Act of 1932. The statute uses the word “debt” without modification or explanation. Shall the statute be applied where the debt, though not a primary or personal liability of the corporation, is a charge against its property? We are unable to see any reason to distinguish between a corporation discharging, through a contract applying rents, a mortgage signed or assumed by it, and one which in the same manner discharges an encumbrance upon property at date of its acquisition. In G. B. R. Oil Corporation, supra, we said:

The general purpose of section 26 (e) (2), it seems to us, is to give a credit where a dividend paid credit can not be secured. In other words, the basic intent of Congress seems to have been to include in the provision only contracts 'which inevitably require in their performance a drawing on current earnings, thus removing current earnings as a source of dividend payments. * * *

In the light of this language, it is immaterial whether the corporation, in drawing on its current earnings to discharge an indebtedness on its property, is paying a debt of its own creation. It is interested in the payment because of the burden on its property, and is “removing current earnings as a source of dividend payments” to the same extent as if the debt were of its own creation or had specifically been assumed. We hold that the contract here dealt with the discharge of a debt within the purview of the statute; and that petitioner is therefore entitled to credit of $9,148.59. It is therefore unnecessary to pass upon petitioner’s further contention that the contract itself created a debt within the meaning of the statute.

Decision will he entered, voider Rule 50.

       SEC. 26. CREDITS OF CORPORATIONS.
      In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax—

        *******

      (c) Contracts Restricting Payment of Dividends.—
      *******
      (2) Disposition of profits of taxable year. — An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside. For the purposes of this paragraph, a requirement to pay or set aside an amount equal to a percentage of earnings and profits shall be considered a requirement to pay or set aside such percentage of earnings and profits. As used in this paragraph, the word “debt” does not include a debt incurred after April 30, 1936.


author: Turner :

text:
    Leopold E. Block, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92709.
    Promulgated April 12, 1940.

      Benjamin A. Bagir, Esq., for the petitioner.

      F. F. KoreTl, Esq., for the respondent.
   OPINION.

Turner :

This proceeding involves a deficiency in gift tax for the year 1935 in the amount of $11,251.50. The only question presented is whether the petitioner is entitled, under section 504 -(b) of the Revenue Act of 1932, to five exclusions of $5,000 each, as claimed in his gift tax return, or whether he should be limited to only one exclusion of $5,000, as determined by the respondent.

Petitioner is a resident of Chicago, Illinois, and filed a gift tax return for the calendar year 1935 with the collector of internal revenue at Chicago, Illinois.

Under a trust agreement dated December 28, 1935, the petitioner, as trustor, named himself, Joseph L. Block, and Leigh B. Block as trustees, and irrevocably transferred and delivered to the said trustees securities having a value on that date of $486,250. The corpus was to be held by the trustees, or by the survivors or survivor of them, for the uses and upon the following terms and conditions:

First: (a) The Trustee shall pay all of tbe net income of the trust estate to Cora B. Block, the wife of the Trustor, during her lifetime.
(b) If the said wife of the Trustor shall predecease the Trustor, then from the time of the death of the said wife or the Trustor until the said Trustor shall die, the net income of the trust estate in each year or such part thereof as the Trustees may deem advisable, may at any time and from time to time be distributed during said year in equal shares per stirpes to the descendants of the Trustor surviving at the time of such distribution, and any amount of said net income not so distributed shall be accumulated and added to the corpus of the trust estate.
(c) At the death of the survivor of the Trustor and his said wife, the corpus of the trust estate shall be distributed per stirpes to the descendants of the Trustor then surviving.

Under the terms of the trust instrument the trustees were given full power and authority to manage, control, invest, and reinvest, convey, exchange, sell, etc., the corpus of the trust, and the trustor, with the consent of the trustees, had the right at any time to add other property to the trust.

On December 28, 1935, the date of the creation of the trust, there were then living: Cora B. Block, wife of the trustor; Joseph L. Block, son of the trustor; Leigh B. Block, son of the trustor; Babette B. Block, daughter of the trustor; and Eleanore B. Saidenberg, daughter of the trustor.

In his gift tax return the petitioner reported a value of $425,000 for the securities transferred to the trust. In the notice of deficiency the respondent increased this valuation to $486,250, and the parties now agree that this latter valuation is correct.

On his gift tax return, the petitioner represented that there were five donees and claimed an exclusion of $5,000 for each donee. In determining the deficiency, the respondent disallowed the exclusions with respect to all donees except as to Cora B. Block, on the ground that the other gifts were gifts of future interests.

In support of his determination, the respondent’s first contention is that the trust, considered as an entity, is the donee and therefore only one $5,000 exclusion is allowable. He relies upon our earlier decided cases, including Seymour H. Knox, 36 B. T. A. 630; Katherine S. Rheinstrom, 37 B. T. A. 308; and Edwin B. Cox, 38 B. T. A. 865. His second contention is that in the instant case the gifts, except as to Cora B. Block, wife of the donor, were gifts of future interests with respect to which the statute provides no exclusion.

Since this case was submitted, our decision in Katherine S. Rheinstrom, supra, has been reversed by the United States Circuit Court of Appeals for the Eighth Circuit, 105 Fed. (2d) 642, and McBrier v. Commissioner, 108 Fed. (2d) 967, to the same effect, has been decided by the United States Circuit Court of Appeals for the Third Circuit; Welch v. Davidson, 102 Fed. (2d) 100, reaching the same conclusion, previously had been decided by the United States Circuit Court of Appeals for the First Circuit. Following those courts, we have recently decided Wilton Rubinstein, 41 B. T. A. 220, and if the question as to future interests were not present here the decision would be for the petitioner. It appears, however, that except as to Cora B. Block, who received an intervening life estate, all other gifts were gifts of future interests, with respect to which the statute does not provide the exclusions claimed. Edith Pulitzer Moore, 40 B. T. A. 1019.

The petitioner cites Wyeth v. Crane, 342 Ill. 545, and McKibben v. Pioneer Trust & Savings Bank, 365 Ill. 369, for the proposition that under the trust instrument Joseph L. Block, Leigh B. Block, Babette R. Block, and Eleanore Saidenberg, children of petitioner, received vested rather than contingent remainders, and argues that an exclusion of $5,000 is therefore allowable as to each child. Even though we assume that the petitioner’s four children did acquire vested and not contingent remainders, there, is still no ground on which we may sustain the petitioner. The test is whether the interests in question were future interests and not whether they were contingent. That the term “future interests” includes both contingent and vested remainders is, in our opinion, elementary and requires no discussion. The petitioner during the taxable year made a gift of his entire interest in securities having a value on the date of gift in the amount of $486,250. To his wife he gave the entire beneficial interest so long as she lived. To his “descendants” surviving at the date of his wife’s death or the death of the survivor of his wife and himself he gave the remainder or the beneficial interest in the property from and after such date. During the lifetime of his wife, Cora B. Block, all of the income was to be paid to her and there were to be no accumulations of income for and no payments to any other person. Neither did the “descendants” surviving have any right to receive any part of the corpus prior to her death. Except as to Cora B. Block the gifts were gifts of future interests with respect to which the statute does not permit the exclusions claimed. Edith Pulitzer Moore, supra.

The parties have stipulated the amount of the deficiency in the event the Board should reach the conclusion stated above. Decision will be entered in accordance with the stipulation.