author: Murdock :

text:
    The Porto Rico Coal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97338.
    Promulgated April 18, 1941.

      Harry Silverson, Esq., and Malvern B. Fink, Esq., for the petitioner.

      Henry 0. Gla/rk, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner determined a deficiency in income tax of $183.62, a deficiency in surtax of $1,305.65, and a penalty of $326.41 for the calendar year 1935. One issue has been settled by agreement. The principal issue for decision is whether the petitioner was a personal holding company within the meaning of section 351 (b) (1) of the Revenue Act of 1934. The issue of whether or not the petitioner is subject to a 25 percent penalty for failure to file a personal holding company return, Form 1120H, must be decided if the first issue is decided for the respondent. The facts have been stipulated.

The petitioner is a foreign corporation and was engaged during the taxable year in the business of selling coal in Porto Rico. Its gross income from sources without the United States, all of which was derived from the operation of the coal business, was $30,722.69, and it suffered a net loss of $14,192.06 from the operation of that business.

The petitioner maintained an office in the United States in New York and had investments in the United States consisting of stocks and bonds. The total gross income which it received from sources within the United States consisted of interest on bonds in the amount of $5,406.67 and gains from the sale of bonds in the amount of $2,451.53. The deductible expenses incurred in connection with the production of the income from sources within the United States amounted to $500.

The Berwind-White Coal Mining Co., a Pennsylvania corporation, owned all of the capital stock of the petitioner during the taxable year. The stock of the Berwind-White Coal Mining Co. was owned as follows:

Percent
Edward J. Berwind, Inc., a Delaware corporation_ 69. 796
Estate of Harry A. Berwind-IS. 903
Charles E. Dunlap_ 6.301
Thomas Fisher--- 5. 000

The stock of Edward J. Berwind, Inc., was owned 75 percent by Edward J. Berwind and 25 percent by Charles E. Dunlap. Harry A. Berwind, who died in 1932, was a brother of Edward J. Berwind, and Charles E. Dunlap was their nephew. Thomas Fisher was not related to the other persons mentioned.

The Berwind-White Coal Mining Co. was engaged in the business of mining and selling coal. Its gross sales were in excess of $9,000,000 during 1935. It was not a personal holding company within the meaning of section 351.

The petitioner filed an income tax return for 1935 with the collector of internal revenue for the second district of New York, reporting its income from sources within the United States and stating that it was not a personal holding company. It filed no return on Form 1120H.

The Commissioner, in determining the deficiency, has held that the petitioner was taxable as a personal holding company. He explained that, in the case of a foreign corporation, only income derived from sources within the United States is considered in determining whether or not 80 percent of its gross income was derived from royalties, interest, and gains from the sale of stock or securities, and, since all of the income of the taxpayer from sources within the United States was derived from interest and gain from the sale of bonds, and since more than 50 percent of its stock was owned indirectly by not more than five individuals, it was taxable under section 351.

Section 351(b)(1)(A) provides that a corporation is a personal holding company if “at least 80 per centum of its gross- income for the taxable year is derived from”, inter aMa, interest and the sale of securities. The petitioner concedes that all of its gross income from sources within the United States was from interest and gains from the sale of securities. It contends, however, that the term “gross income” as used in section 351(b) (1) (A) means, in the case of foreign corporations, gross income from all sources and not merely from sources within the United States. If the gross income of the petitioner from all sources is considered, then it is perfectly clear that section 351 has no application.

Section 351(b) (4) provides, “The terms used in this section shall have the same meaning as when used in Title I”, and section 231(a) of Title I provides, “In the case of a foreign corporation, gross income includes only the gross income fiom sources within the United States.” The Commissioner concludes that a foreign corporation is a personal holding company within the meaning of section 351(b) (1) (A) if at least 80 per centum of its gross income from sources within the United States is the kind of income described in that section, and, since all of the income of the petitioner from sources within the United States was of that sort, it is subject to the surtax. We think, after an examination of the entire statute, that the words of the provisions upon which the Commissioner relies, when given their natural and normal meaning, amply support his conclusion.

The petitioner has found two places where the term “gross income” has been used in Title I to refer to gross income of a foreign corporation from all sources. It argues that gross income, as applied to a foreign corporation in Title I, ñas not one meaning, but two. The first is gross income from sources within the United States, which is the gross income of a foreign corporation subjected to normal tax. This it refers to as the “quantum” concept. The second meaning is gross income from all sources and is used for the purpose of classifying the foreign corporation according to the nature of its income. This it refers to as the “classification” concept. The petitioner then finds a use for each of these meanings in section 351, i. e., in determining the amount of undistributed adjusted net income which is subject to the surtax, quantum being at issue, it limits the term to gross income from sources within the United States, but in section 351(b)(1), classification being at issue, the term means income from all sources. It cites Helvering v. Stockholms Enskilda Bank, 293 U. S. 84, to show that the same term, when used in different places in a statute, may have different meanings. The Court there said that although there is a natural presumption that identical words used in different parts of the same act must have been intended to have the same meaning, nevertheless, the presumption readily yields if circumstances show that different meanings were intended. The petitioner then argues that Congress in enacting section 351 did not intend to impose the surtax upon the income of bona fide operating companies received from investments of surplus funds but intended to reach only the “incorporated pocketbook” and force it to distribute its earnings to its stockholders or suffer the penalty.

This argument of the petitioner appears to be a strained and labored effort to create a doubt where none would naturally arise. Congress, in section 119(a)(1)(B) and (a)(2)(B), was using the term “gross income” to refer to the income of a foreign corporation from all sources, as an examination of those provisions will at once disclose. But that was a special meaning for the term in order to make clear the thought which Congress was there expressing. The general meaning of the term as used in Title I is found in section 231(a), and it seems reasonable to conclude that Congress meant that general definition to apply for all purposes except for the purpose of the two provisions already mentioned where the context clearly demonstrates a different intent. It follows that the meaning of the term as given in section 231(a) was intended, wherever the term was used in section 351, to apply to foreign corporations. Wb.en the words of section 351 and those of 231(a) are read and given their natural interpretation in the light of all other provisions of the statute, including those of section 119, no doubt arises in the mind of the reader as to the intent of Congress.

The petitioner argues that the legislative history shows a different intent upon the part of Congress. It points generally to the legislative history of section 351 to show that Congress intended to force distribution of earnings by “incorporated pocketbooks” under penalty of the tax, but had no intention of penalizing operating companies, companies whose operations resulted in a loss, or foreign corporations receiving most of their income from operations. If the legislative history could be examined in order to create a doubt as to the meaning of the words used by Congress in section 351, and if it further appeared from that legislative history that Congress did not intend the section to apply to a corporation such as the petitioner, then resort might be had to the petitioner’s logic to bring about the Result so obviously intended by Congress. But here no doubt arises in the mind of one who merely reads the words of the statute. Furthermore, the legislative history does not adequately support the argument of the petitioner. Congress, in enacting section 351, apparently gave no special consideration to foreign corporations. The legislative history of the provision does not disclose what the attitude of Congress would have been had it thought specifically of foreign corporations. Doubt arises for the first time when the question is asked what reason could Congress have had for applying the provision of section 351 to a foreign corporation merely upon the basis of its income from sources within the United States. But the Board has no right to resolve that doubt either one way or the other where the words of the statute are clear. Furthermore, the legislative history shows that Congress fully realized the broad scope of the language which it was using and specifically excluded certain types of corporations. Yet it failed to exclude foreign corporations. It is not unreasonable to conclude that Congress intended the provision to apply under circumstances like those here present. It permitted escape from the penalty of the tax to those corporations which would pay out their earnings in dividends and it likewise permitted escape where the shareholders would report their proper shares of undistributed earnings.

The petitioner contends that even if it met the requirements of (A) of the definition of a personal holding company contained in section 351(b) (1), still it does not meet the requirements of (B), since there was no time during the taxable year when 50 percent of its stock was owned “directly or indirectly, by or for not more than five individuals.” All of the stock of the petitioner was owned by the Berwind-White Coal Mining Co. The petitioner concedes that under the express provisions of (C) the Berwind-White Coal Mining Co. must be disregarded in determining the ownership of its stock fot the purpose of (B). It contends, however, that the actual ownership may not be further disregarded and the result is that 69.796 percent of the stock of the petitioner must be regarded as owned by Edward J. Berwind, Inc. It cites no authority in support of this argument. It concedes, of course, that if Edward J. Berwind, Inc., is to be disregarded and the 69.796 percent of the stock is to be considered as owned proportionately by the shareholders of Edward J. Berwind, Inc., then the petitioner meets the requirements of (B). It reasons that Title IA of the Revenue Act of 1936 was just like Title IA of the Revenue Act of 1934; Congress in the Revenue Act of 1937 amended Title IA of the Revenue Act of 1936 by adding section 354, particularly (a) (1) and (5); this was done to close a loophole which resulted from the fact that section 351(b)(1) of the Revenue Act of 1936, like section 351(b) (1) of the Revenue Act of 1934, did not cover the situation where the stock ownership of the individuals had to be traced through a chain of two or more corporations. We regard the amendments as merely declaratory in this respect. Section 351(b) (1) (B) refers to stock owned directly or indirectly by not more than five individuals; the section then continues as follows :

For the purpose of determining the ownership of stock in a personal holding company—(O) stock owned, directly or indirectly, by a corporation * * * shall be considered as being owned proportionately by its shareholders * * *.

These provisions, when read in their entirety, mean that the ownership of the stock of the personal holding company is to be traced through corporations to the individuals who are the ultimate beneficial and indirect owners. There is nothing to indicate that this tracing is to stop at the first corporation. Applying (C), the stock of the petitioner is owned proportionately by the shareholders of the Berwind-White Coal Mining Co. Thus, Edward J. Berwind, Inc., owns 69.796 percent of those shares. Since this is so, (C) applies again and the shareholders of Edward J. Berwind, Inc., own those shares of the petitioner for the purpose of (B). This is the interpretation placed upon the provision by the Commissioner in Regulations 86, article 351-2. Cf. C. B. 1939-1, Part 2, p. 704, at pp. 708, 709. The Commissioner did not err in holding that the petitioner was subject to tax under section 851.

The final argument of the petitioner is that it is not subject to the penalty of 25 percent provided in section 291 for failure to file a return on Form 1120H since it filed a return on Form 1120 and stated thereon that it was not filing a personal holding company tax return because it had been advised by tax counsel that it was not required to file one, citing Germantown Trust Co. v. Commissioner, 309 U. S. 304. The Germantown Trust Co., a trustee, had filed an information return as fiduciary but had not filed a corporate income tax return on Form 1120, taking the position that it was a pure trust rather than an association taxable as a corporation. The Supreme Court held that the fiduciary return was sufficient to start the statute of limitations. The fiduciary and the corporate return would each relate to the same tax. But a different situation arises here. The Board has held in Taylor Securities, Inc., 40 B. T. A. 696, that the income tax under Title I and the surtax under Title IA of the Revenue Act of 1934 are separate and distinct taxes requiring the filing of separate returns, and where no return has been filed, imposition of the penalty is mandatory. Collateral Mortgage & Investment Co., 37 B. T. A. 630; Lone Pine Lawn Corporation, 41 B. T. A. 638; Blenheim Co., Ltd., 42 B. T. A. 1248. See also Noteman v. Welch, 108 Fed. (2d) 206.

Reviewed by the Board.

Decision will he entered wnder Buie SO.

       Cf. Titles I and II of the Revenue Aet of 1937. It is “interesting to note that in amending Title IA of the Revenue Act of 1936, which corresponded to section 351 of the Revenue Act of 1934, Congress in section 352(b) inserted a specific provision excluding a foreign personal holding company and then enacted new provisions in Title II covering foreign personal holding companies.


source: Caselaw Access Project

author: Murdock:

license: Public Domain

text:
    Estate of W. M. L. Fiske, Deceased, Central Hanover Bank and Trust Company, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102055.
    Promulgated April 23, 1941.

      Charles C. Parlin, Esq., and John A. Reed, Esq., for the petitioner

      Gerald W. Brooks, Esq., for the respondent.
   OPINION.

Murdock:

Section 116 (a) of the Revenue Act of 1936 exempts from taxation, in the case of an individual citizen of the United States who is “a bona fide nonresident of the United States for more than six months during the taxable year”, amounts received from sources without the United States which would constitute earned income, as defined in section 25 (a), if received from sources within the United States. Earned income is defined in section 25 (a) to include “compensation for personal services actually rendered.” The petitioner contends that the decedent was a bona fide nonresident during all of the year 1936 and received the $37,400 as compensation for personal services actually rendered abroad.

The Commissioner contends that the facts in the present case fail to bring it within the provision of section 116 (a) in two respects— first, the decedent was not a bona fide nonresident of the United States for more than six months during the taxable year, and, second, the $37,400 which he received was not “compensation for personal services actually rendered.” He argues that the only person who can qualify as “a bona fide nonresident of the United States for more than six months during the taxable year” is one who has been physically absent from the United States for more than six months of the taxable year. He says, in this connection, that the establishment of an actual residence is unimportant, since one who has been physically absent from the United States for more than six months of the year would receive the benefit of the exemption whether or not he had a residence outside of the United States, and one who was physically present in the United States for sis months of the year would not receive the benefits of the exemption even though he had an actual residence outside of the United States. He attempts to support this narrow construction of the statute by its legislative history and by Bureau rulings.

The words “residence” and “domicile” have never been satisfactorily defined for legal purposes. See generally on this subject Kennan on Residence and Domicile. Where the word “nonresident” is defined in dictionaries, the definitions given are not sufficiently discriminative for present purposes. Although residence and domicile are sometimes regarded as synonymous, there would seem to be a difference. Domicile is the broader term, since a man may have his domicile at one place and actually reside for the time being in another. Bowring v. Bowers, 24 Fed. (2d) 918; Carstairs v. United States (Dist. Ct., E. Dist. Pa., 1936, not officially reported); J. P. Schumacher, 32 B. T. A. 1242. The basic concept involved in the term “residence” is that of being seated or abiding in a place, while the predominant element in domicile is the intention of remaining. Thus, the distinction between residence and domicile seems to lie in the difference in degree of permanency contemplated. Residence is a variable and elastic term. Its meaning generally depends upon the context and the purpose of the statute in which it is used. The addition of the words “bona fide” to the term resident or nonresident would seem to imply that the intent of the person is of considerable importance. It might also prevent a person who has more than one residence from shifting importance to one or the other, as may suit his own interests.

Looking to the context and the purpose of the statute to discover the meaning of the phrase “bona fide nonresident of the United States for more than six months during the taxable year”, we do not discover much that is helpful. This phrase appeared for the first time in section 213 (b) (14) of the Revenue Act of 1926. Paragraph 14 was one of a number of exclusions from income, but it bore no further relation to contiguous provisions. The purpose of the provision is not entirely clear. A statement was made during the hearings of the Ways and Means Committee urging the adoption of a provision which would “relieve American citizens resident in foreign countries and engaged there in the promotion of American foreign trade from tax upon the income which they earn in the country of residence.” See hearings before the Committee on Ways and Means on Eevenue Revision, 1925, beginning p. 176. The House inserted language exempting salaries and commissions arising from the sale abroad of tangible personal property produced in the United States for export. This was said to be for the purpose of encouraging foreign trade. See Ways and Means Committee Report, 69th Cong., 1st sess., H. R. 1, p. 7. The Senate struck out this provision as unnecessary in view of the credit which a citizen would receive for income tax paid to a foreign country. See Senate Finance Committee Report, 69th Cong., 1st sess., S. R. 52, p. 20. Senator Smoot, in introducing a Senate amendment, later rejected, made some comments which are not helpful for present purposes. See Cong. Rec., vol. 67, beginning p. 3781. Quite different language from that originally used by the House was finally adopted in conference without comment, and that was the same language which has continued and which now forms section 116 (a) of the Revenue Act of 1936. Conference Report, 69th Cong., 1st sess., H. R. 356, p. 2. Comments in regard to this provision in later acts are no more helpful. Cf. 72d Cong., 1st sess., S. R. 665, p. 31; Cong. Rec., vol. 75, pp. 10410-11.

Does this legislative history indicate anything in regard to the purpose of the provision other than would appear from the words used in the provision itself? It indicates that Congress did not intend to limit the exemption to persons domiciled in foreign countries. See also S. M. 5446, C. B. V-l, p. 49. If the purpose of the provision was correctly stated in the hearings before the Ways and Means Committee, that is, to relieve American citizens residing and engaged in business in foreign countries from tax upon the income which they earned in the country of residence, then the salary in question would come within the purpose of the legislation, since the decedent was a citizen residing and engaged in business in a foreign country and the income was earned in the country of residence. The use of the words “bona fide nonresident” instead of a straightforward statement that mere physical presence in or absence from the United States would be determinative, is indication enough that Congress did not mean the exemption to depend upon mere physical presence in or absence from the United States during six months of the year.

The Bureau rulings are neither clear nor controlling on the question of what was meant by “bona fide nonresident.” The exemption has been held applicable in the rulings, provided that the citizen was merely absent from the United States for more than six months during a taxable year, but it is quite another thing to say that it does not apply unless the person has been absent from the United States for more than six months during a taxable year. Physical absence from the United States for the prescribed time would be a prerequisite in the case of a person who had no actual residence outside of the United States. However, a citizen who had an actual bona fide residence outside of the United States and no residence within the United States, has been held entitled to the exemption even though he was not physically absent from the United States for more than six months during the taxable year. Carstairs v. United States, supra. While decisions relating to the words “residence” and “non-residence”, as used in other statutes, are not particularly helpful, they do indicate that the test of mere physical presence or absence is not determinative. Cf. Hall v. Godchaux, 149 La. 733; 90 So. 145. In re Conis, 35 Fed. (2d) 960; United States v. Dick, 291 Fed. 420; United States v. Rockteschell, 208 Fed. 530; United States v. Jorgenson, 241 Fed. 412. The above cases, as well as many others, are authority for the proposition that a person may be an actual bona fide resident of a place and yet be absent from that place for one reason or another.

Regulations 94, article 211-2 defines a nonresident alien as a person who is not a citizen and whose residence is not within the United States. It holds that one who is a mere transient or sojourner is not a resident, and whether he is a transient is determined by his intentions with regard to the length and nature of his stay. One who comes to the United States for a purpose which will require an extended stay and to that end makes his home temporarily in the United States is a resident, although he may have the intention at all times to return to his domicile abroad when the purpose for which he came has been consummated or abandoned. This regulation was originally promulgated in substantially the same language under the Revenue Act of 1921, and the court in Bowring v. Bowers, supra, said that congressional approval of it made it binding on the courts. Aliens have been held to be residents of the United States for income tax purposes even though they have been absent from this country for all or a part of the taxable year. Federico Stallforth, 30 B. T. A. 546; affd., 77 Fed. (2d) 548; certiorari denied, 296 U. S. 606; J. P. Schumacher, supra; L. E. L. Thomas, 33 B. T. A. 725; John Ernest Goldring, 36 B. T. A. 779. An alien may be a nonresident of the United States even though he resides in this country a substantial part of the year. Ingram v. Bowers, 47 Fed. (2d) 925; affd., 57 Fed. (2d) 65. Congress probably intended the word “nonresident” to have the same meaning in section 116 (a) as it has in Supplement H, to which the above article applies. S. M. 5446, supra.

Thus, it seems proper to conclude that the question of whether the decedent was a nonresident depends not merely upon the period of time he spent in the United States, but depends also upon the purpose of his visit, his intentions, and surrounding facts and circumstances. Carstairs v. United States, supra. The principal reasons for our conclusion that he was a resident of France, and, consequently, was a nonresident of the United States during all of the taxable year are briefly stated in this paragraph. He was not a mere visitor, transient, or temporary sojourner in France. He went there to live and to conduct the business of Dillon, Read & Co. for a long period of time. He had been there for more than ten years when he left in the latter part of 1935' for a short visit to the United States. He had an established place of abode or residence in France for a number of years before, during, and after 1936. Apparently he had an intention to return permanently to the United States eventually, but his departure in 1935 was not to carry out any such intention. On the contrary, his intention at that time was to continue to reside in France for a lengthy, if indefinite, period of years. He came to the United States in December 1935 purely as a visitor and temporary sojourner. He did not intend to take up residence in this country or to discontinue his residence in France. He left all of his personal belongings and household furnishings in France, with the exception of those personal belongings which he needed for the period of his visit. He had no household furnishings in this country and he acquired none. He intended to go back to France and use the household furnishings in his French residence. He had no permanent place of abode in this country and he did not intend to acquire any at any time during his visit. The furnished house in San Mateo was rented for a few months only to accommodate him during his visit. He was prevented by illness from returning to his residence in France, but he retained his intention to return there just as soon as his health would permit. Eventually, he did return and he continued to reside in France for several years. His business was in France, not here. The income was earned as a result of services performed outside the United States. The fact that he was actually physically present in the United States during the entire calendar year 1936 loses its importance in the face of his French connections, his intention to return to France, his lack of intent to establish any residence in the United States, the absence of any residence here, and the circumstances which prevented him from carrying out his intention to return to France.

The respondent argues further that the decedent was not a resident of France since the best evidence of his intention is contained in the statements which he made in applications for passports and in income tax returns to the effect that his residence, permanent residence, or legal residence, was in Chicago or in New York. The decedent never concealed the fact that he had been living for years in Paris, but, on the contrary, disclosed that fact in the applications for passports. He was required in those applications to give an address in the United States which, for the purposes of the passport, would represent his permanent or legal residence. The address which he usually gave, which seemed to be satisfactory for the purpose, was an office building in Chicago. Clearly, he never resided there and had no intention to reside there. Even if such evidence be regarded as tending to show residence in the United States, still it is not as persuasive as that discussed in the preceding paragraph.

The respondent contends that the amount received by the decedent was not compensation for personal services actually rendered or performed because the decedent rendered no services during 1936. He says the amount was not a gift and he suggests that it might have been a distribution of profits. The amount was not a distribution of profits since the decedent held no stock in the company. Although the decedent was away from his place of business and was too ill to perform his duties during 1936, nevertheless, he had rendered services in the past, he was expected to continue to render services in the future, and his employer continued his salary during his illness. Cf. Lucas v. Ox Fibre Brush Co., 281 U. S. 115. His place of employment was in France. He served the company only by rendering personal services. Apparently, the decedent had developed an office organization and a clientele for his employer so that the business could go on even in his absence. His employer wanted to hold him as an employee. It is difficult to draw any other conclusion from the fact that the employer paid him the $37,400 in 1936. The Commissioner has held that retired pay and pensions are earned income. Mim. 3283, C. B. IV-1, p. 14. We conclude that the amount in question was paid to the decedent as compensation for personal services actually rendered outside of the United States.

Reviewed by the Board.

Decision will be entered under Bide 50.

Smith dissents.


author: Steenhagen:

text:
    Estate of Henry H. Scholler, Deceased, Frederick C. Scholler, Surviving Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103422.
    Promulgated April 23, 1940.

      Leon Meltzer, Esq., for the petitioner.,

      Eugene G-. Smith, /¿⅜., for the respondent.
   OPINION.

Steenhagen:

The Commissioner determined a deficiency of $51,-063.70 in decedent’s estate tax' by including 833½ shares of Scholler Brothers, Inc., and 166 shares of Scholler Brothers, Inc., Ltd., in the gross estate.

The determination is made under the Revenue Act of 1932, section 803 (a), without specification. Petitioner argues (1) that the decedent’s transfer of the shares in December 1935 was not made in contemplation of death, and (2) that the transfer, even though made to take effect in possession or enjoyment at or after death, was a bona fide sale for an adequate and full consideration in money or money’s worth and thus within the express exception of the statute.

The decedent died March 23, 1936, aged forty-seven, as the result of a sudden and unexpected illness. In 1935, after serious domestic difficulty with his wife, to whom he had been married two years, he divorced her and cut her off entirely from participation in his property or affairs. He revoked an insurance trust of which sbe had been the beneficiary. He and his two unmarried brothers owned equally all the shares of two corporations which carried on their manufacturing business, and in order to prevent any possible participation or claim by the wife in the shares of decedent or' the business, they, on December 16, 1935, placed all the shares in trust. Petitioner owned 9991/3 shares, the value of which at the time of his death was $268,-393.33. His transfer was made within two years prior to his death, and it must therefore be deemed to have been made in contemplation of death, unless shown to the contrary.

It is clear from the evidence that the transfer was not made in contemplation of death. The prospect of death, either imminent or ultimate, was not a factor of consideration. When the transfer was made, the decedent was, so far as he knew, in sound physical condition except for the nervous depression brought about by worry about his wife’s conduct. He was not actuated by the thought of death. He was not making a testamentary disposition of his property. He made the transfer to preclude the possibility that his wife would now or ever derive anything from it. It is hereby found as a fact that the transfer by decedent in 1935 of the 833½ shares of Scholler Brothers, Inc., and the 166 shares of Scholler Brothers, Inc., Ltd., was not made in contemplation of death.

Under the statute, the value of the shares is within the gross estate if the transfer was to take effect in possession or enjoyment at or after death or if under the trust the settlor has retained for life the right to the income from the shares, “except in the case of a tona fide sale for an adequate and full consideration in money or money’s worth.” The decedent and his two brothers, each with each other and each with the trustee, transferred the shares in trust; irrevocably unless a writing were signed by all; the trustee to receive and distribute the income from the shares pro rata to each brother according to his contribution; the trustee to vote the shares in accordance with the written direction of the shareholder from whom they had been received; and in event of death of one, to hold all shares for the survivors. The petitioner admits that decedent retained for his life the right to the income from the shares, and that under the statute the shares must therefore be included in the value of the gross estate unless they were the subject of a tona fide sale for an adequate, and full consideration in money or money’s worth. The petitioner contends that the transfer to the trust was such a sale because there was a reciprocal transfer by all three brothers, the transfer of the other two brothers being an adequate and full consideration in money or money’s worth for the transfer by decedent.

The reason for the statutory exception of tona fide sales was primarily to prevent the inclusion in the gross estate of both the value of property transferred by a sale and the value of the consideration received. It would not do to tax the one estate upon both the proceeds of a sale and the value of the property sold. But if, as petitioner contends, the transfer of the shares must be regarded as a sale and decedent as receiving an adequate consideration in money’s worth, it must follow logically that the value of what he thus received and retained is to be included in the gross estate. All three brothers transferred exactly the same number of shares to the trust; they acquired equal interests in the trust and its corpus. The death of this decedent, the first to die, was the occasion of an enlargement of the interest of each of the others. If the decedent’s estate is not to include the value of the shares transferred, it must include the value at the time of his death of his interest in the trust, which comes to the same thing, since it is measured by the value of the shares which he contributed. The petitioner urges only that the value of the shares must be excluded. Even if this be true, the Commissioner correctly included in the decedent’s gross estate an amount equivalent to the value of the 999½ shares, cf. Lehman v. Commissioner, 109 Fed. (2d) 99; certiorari denied, 310 U. S. 637.

Decision will te entered for the respondent.


author: ARnold:

text:
    Robert S. Farrell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100139.
    Promulgated April 23, 1941.

      Ashley Greene, Esq., for tlie petitioner.

      B. M. Goon, Esq., for the respondent.
   OPINION.

ARnold:

This proceeding involves a deficiency in income tax for 1936 in the sum of $394.53. The issue is whether petitioner is entitled to a deduction of $4,843.13 as (1) interest paid, or (2) as an ordinary and necessary business expense, or (3) as a loss incurred during the taxable year and not compensated for by insurance or otherwise. The parties filed a written stipulation of facts, which are adopted as our findings of fact, and the pertinent portions thereof are hereinafter summarized.

The petitioner resides in Portland, Oregon, and filed his income fax return for the taxable year with the collector of internal revenue at Portland. In computing his income he claimed a deduction for “interest paid” of $4,843.13. The disallowance of this deduction was one of the adjustments made by respondent which resulted in the present deficiency.

Petitioner paid out the amount deducted under the following circumstances: In 1927 he was vice president and a director of the Morgan-Bushong Investment Co., an Oregon corporation organized in 1912, which owned and operated an office building in Portland. During 1927 the capital stock of the Morgan-Bushong Investment Co., hereinafter referred to as the company, issued and outstanding, consisted of 3,142 common shares having a par value of $314,200.

During 1927 the company paid cash dividends as follows:

January- $15,710
May-- 15, 710
July--__ 62,040
July- --. 315, 000
Total. ..... 408,460

At January 1, 1927, the company had a surplus of $83,995.96. In its income tax return it reported taxable income of $49,700.87 and it had nontaxable income of $476.25. During 1927 the company added $315,000 to its surplus account as “appreciation by appraisal”, which resulted from an appraisal of its assets on or about April 18, 1927. The appraisal showed the replacement cost in 1927 of a building constructed in 1913 to be approximately $1,035,000 which gave a value of $765,900 for the building in 1927, allowing 2 percent depreciation for 13 years.

Prior to June 4, 1927, the company’s outstanding bond issue had been reduced to $53,000, and negotiations were entered into on or about that date relative to placing a new bond issue on the property in the aggregate principal amount of not to exceed $500,000. Proceeds of the bond issue were to be used to retire existing bonds and for other corporate purposes including payment of current liabilities, expenses of securing the loan and issuing the bonds, and the declaring of a dividend estimated to equal $120 to $125 per share.

At a directors’ meeting held on July 29, 1927, it was determined that the company’s books reflected no good will value in its assets, that the earnings of the company had been satisfactory and its dividends had not been large, and that the appraisal and other estimates of value of the building showed that the property was worth in excess of its book value. After a thorough discussion the secretary was authorized and instructed to set up on the'books an account, to be known as “good will and appraisement of building”, in the amount of $315,000, and a corresponding credit to an account to be known as “surplus by appraisement.” The petitioner and Charles A. Shea and Grant Phegley attended this meeting of the board of directors.

Thereafter bonds were issued and dividends paid in July 1927, in accordance with the authorization of the stockholders and directors of the company.

During 1928 to 1930, inclusive, the company operated at a profit and paid the interest on its outstanding bonds. In 1931 the company sustained a large loss and defaulted on interest payments. The arrears increased during 1932 and 1933 and the bondholders threatened action against the directors on account of the dividends paid in July 1927.

The Oregon Code, at all times material, provided as follows, section 25-219:

If the directors of a corporation declare and pay dividends when the corporation is insolvent, or which render it insolvent, or pay dividends out of assets other than net profits or surplus, such directors shall be jointly and severally liable for the debts of the corporation then existing or incurred while they remain in office to the extent of such dividends so declared * * *.

As a result of tbe threatened action petitioner and Charles A. Shea and Grant Phegley, who were directors in 192T, entered into an agreement with a committee for the bondholders whereby the latter released the directors from any liability arising from the dividend distribution by the company during 1927 in consideration of their undertaking and agreement, for each of the four years beginning November 30,- 1932, and expiring November 30, 1936, to supply for distribution to the bondholders the funds necessary to meet any deficiency in any year’s net income which failed to provide 6 percent upon the unpaid principal of the company’s outstanding bonds of July 15, 1927. The agreement limited the liability of the “Guarantors” to 3 percent upon the bonds, provided for the deposit of collateral by the “Guarantors”, and contained various other provisions regarding payment, computation of net income, etc., not here material. The agreement was executed December 30, 1933.

As between themselves, petitioner and Charles A. Shea and Grant . Phegley agreed that they would make the payments guaranteed to the bondholders in the proportions of one-half by Charles A. Shea, three-eighths by petitioner, and one-eighth by Grant Phegley, and that the collateral deposited under the agreement had all been deposited by Shea and petitioner, and should be returned to them when the obligations to the bondholders were fully performed. The collateral security deposited by petitioner consisted of 1,000 shares of Caterpillar Tractor Co. stock.

During the taxable year 1936 the income of the company was insufficient to pay the interest on its bonds held by the aforesaid bondholders’ committee, and petitioner was called upon to pay and did pay “$4,843.13 as interest on the said bonds pursuant to” the agreement with the bondholders’ committee. Petitioner sustained a loss during the taxable year of $4,843.13 that was not compensated for by insur--«ice or otherwise.

Petitioner contends that he is entitled to the deduction either as interest, as an ordinary and necessary business expense, or as a loss. Although the argument is in the alternative, we deem it unnecessary to consider the first two contentions advanced since, in our opinion, the amount is deductible as a loss not compensated for by insurance or otherwise.

The stipulated facts show that petitioner paid $4,843.13 during 1936 pursuant to his agreement that bondholders would receive at least 3 percent on their bonds for a period of four years. Our examination of the agreement convinces us that it was a contract of guaranty, Howell v. Commissioner, 69 Fed. (2d) 447; certiorari denied, 292 U. S. 654, which was given the bondholders in consideration of their release of petitioner, among others, from any and all liability, claims, demands, and causes or rights of action against him as a director or stockholder growing out of the declaration and payment of dividends in July 1927. The guaranty definitely grew out of and resulted from petitioner’s business relationship to the company. The payment by petitioner was made under a promise to the bondholders that, if the earnings of the company were insufficient to pay the 6 percent intei'est due on its bonds, petitioner and Shea and Phegley would .pay at least 3 percent on the bonds. The payment was clearly a loss, Morris Sass, 12 B. T. A. 156, and petitioner is entitled to the deduction under section 23 (e) of the Revenue Act of 1936, Charles R. Stuart, 38 B. T. A. 1147, and cases cited therein; M. P. Sturdivant, 23 B. T. A. 1385. Since other adjustments were involved, the deficiency must be recomputed.

Decision will he entered u/nder Rule 50.


text:
    Elliott Paint & Varnish Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103032.
    Promulgated April 23, 1941.

      Donald E. Cwrrier, C. P. A., and Roger M. Currier, Esq., for the petitioner.

      David Altman, Esq., for the respondent.
   OPINION.

Murdock:

The petitioner contends that a portion of the total amount paid to Mary B. Elliott during each of the taxable years was interest and not purchase price. This is directly contrary to the provisions of the written contract entered into by the parties, which shows that the payments of $3,000 made in each of the taxable years were entirely a part of the purchase price and were not interest. The petitioner contends that the true agreement of the parties, as shown by parol evidence, was an agreement to pay a purchase price of $27,500 and interest thereon in the amount of $12,500. The question must turn, of course, upon what was the actual agreement of the parties. Was it an agreement to pay so much as purchase price and the balance as interest? This must be determined from all of the evidence, documentary and otherwise. Although no evidence was excluded on the ground that it was parol evidence tending to vary the terms of the written instrument, nevertheless, the evidence as a whole does not establish that the actual agreement of the parties was different from that which is expressed in their written contract.

While the figure $27,500 appears a number of times, the record, does not justify a finding that the value of the property at the time of the transaction was $27,500. No opinion evidence of the value of the property was offered. An appraisal was mentioned in a letter from the buyer to the seller, but the appraiser was not called as a witness, his qualifications were not shown, and no basis for his valuation appears. The seller rejected an offer of $27,500 in cash for the property. The parties, in agreeing upon the purchase price of $40,000, as set forth in their written contract, used some kind of a rough calculation in which interest on $27,500, at some rate not shown in the record and for a period of years not shown in the record, was computed and added to $27,500 to arrive at a figure which was approximately, but not exactly, $40,000. The only actual figures contained in the record pertaining to any such computation are on a piece of paper which the seller had in her hands and which had been furnished her by an adviser who was with her at the time the sale was made. On that paper, interest at 5 percent on $27,500 for 10 years, amounting to $13,750, was added to $27,500 to make $41,250. This total was then divided by 15 to show that 15 annual payments of $2,750 would equal $41,250. The record gives no clue whatsoever as to why the 5 percent rate and the 10-year and 15-year periods were used. Counsel for the petitioner in their briefs twice asked for a finding that the life expectancy of the seller was 15 years at the time of the sale. Although Mary B. Elliott stated that she was 71 years of age at the date of the hearing, there is no evidence in the record to show her life expectancy in December 1936, or to show that the parties had that factor in mind at the time of the deal. The parties did not incorporate any of the computations in their agreement, but, instead, adopted the written agreement of December 1, 1936. The mathematics by which parties arrive at an agreed purchase price does not represent their agreement. Hundahl v. Commissioner, 118 Fed. (2d) 349. Cf. Baltimore & Ohio Railroad Co., 29 B. T. A. 368; affd., 78 Fed. (2d) 460.

The petitioner sets out in its brief an elaborate table dividing the total payments of $40,000 over the 15-year period into semiannual payments, dividing the semiannual payments into payments of principal and payments of interest at 5½ percent on a declining balance of principal which begins with $27,500 and is reduced semiannually by the excess of the total semiannual payments over the portion thereof which is shown as interest. If the parties had actually adopted such a table as a part of their agreement, it might be pretty strong evidence in support of the petitioner’s contention. But the first time that any such computation was suggested as having any possible application to the contract of December 1, 1936, was when the auditor made the entry in closing the books of the petitioner for the year ended November 30, 1937. That entry was made more than a year after the contract was entered into. It is no more than a remarkable coincidence that the actual payments almost fit into this table. They do not actually fit into the table because the last two semiannual payments are arbitrarily adjusted by the computator in order to force the figures to come out properly. The record does not show that the parties at the time they entered into the contract gave any consideration to an interest rate of 5½ percent, to the computation of interest semiannually, or to the computation of interest upon declining balances of principal. So far as the record shows, they had no idea that any such table could be devised. The parties adopted the interest figures shown in the table in reporting their income taxes. It does not appear how important this was to the seller but it does appear that she relied entirely in this connection upon the advice of the president of the petitioner, who was her friend.

The action of the parties at the time they entered into the contract, including their consideration of the figure $27,500, and their subsequent actions in reporting a part of the payments as interest, are not without probative value. But that evidence is not entirely convincing even by itself, since it does not go far enough to show that they had agreed upon the purchase price of $27,500 with interest thereon at some particular rate of interest for a definite number of years. Cf. Marshall C. Allaben, 35 B. T. A. 327, and Marsh & Marsh, Inc., 5 B. T. A. 902. Opposed to that evidence is the written contract, which is, and was intended to be, evidence of the agreement of the parties, entered into by them deliberately after full consideration and drawn at their request and for their benefit by an attorney. The parties have never made any effort to amend or modify that written agreement to provide for the payment of interest. The written contract is clear and the record as a whole does not show that the parties, when they made their bargain, really intended to pay any portion of the $40,000 as interest. This distinguishes the case of Hudson-Duncan & Co., 36 B. T. A. 554. The sale of property for cash is quite different from a sale upon a deferred payment plan. The fact that the deferred payment sale price is greater than the cash sale price does not make interest of the difference. Anderson & Co., 6 B. T. A. 713, 717. One justification for the increase in price is to make allowance for the additional risk which the seller must assume. Cf. Marsh & Marsh, Inc., supra. The Commissioner did not err in concluding that no part of the periodic payments represented the payment of interest.

The alternative contention of the petitioner is also without factual support. The petitioner claims that it gave its note for $40,000 in exchange for property worth only $27,500 and the difference represents discount on the note which ought to be deducted ratably over the life of the note. It is not established as a fact in this record that the property was worth only $27,500 at the date of the sale. This point has been sufficiently discussed already. Furthermore, the transaction was one of purchase of a piece of property. The note was given merely as a part of the security for the unpaid purchase price. The transaction did not represent and was not intended to represent the discount of a note. It is unnecessary to consider this contention further.

The Commissioner, in computing depreciation, has used a portion of the $40,000 cost of the properties as basis. This has resulted in a larger basis than was claimed by the petitioner or than would be allowable otherwise. The Commissioner, however, used a greater estimated remaining life for each building. The final result of his computation was a smaller deduction than the amount claimed by the petitioner. The petitioner had the burden of showing that the probable useful life of each building, as that life might reasonably have been estimated during the taxable years, was less than the period used by the Commissioner. The petitioner has not sustained this burden. Indeed, arguments of its counsel in their briefs indicate a failure to realize that they have this burden. The president of the petitioner testified that, in computing the deductions claimed on the return, an estimate made by Beardsley was used. Beardsley was not called as a witness, his estimates are not a part of the record, the basis of his estimates is not shown, and it is not shown that he was qualified to make estimates of any kind. The petitioner’s counsel apparently relies upon the fact that at the time of the hearing the petitioner was vacating one of the buildings and had decided to demolish the other two. But the evidence does not show that any of these events was anticipated during the taxable years. Deductions for depreciation for 1937 and 1938 must be based, upon facts known or anticipated during those years and not upon the hindsight of subsequent years. The record does not enable the Board to make an independent estimate of the probable useful life of any one of the three buildings or the connecting link as of either of the taxable years. Therefore, the determination of the Commissioner on this point can not be disturbed.

Decision will be entered/ for the respondent.


author: TurneR:

text:
    Estate of L. W. Mallory (J. A. Mallory and Lloyd W. Hirst, Executors), Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95595.
    Promulgated April 23, 1941.

      John S. Sears, Esq., for the petitioners.

      R. P. Hertzog, Esq., for the respondent.
   OPINION.

TurneR:

Under the provisions of the will of the decedent the petitioners paid to Cora E. Mallory, the decedent’s widow, $9,000 in each of the years 1934 and 1935 and $3,000 in 1936 prior to her death on April 24 of that year. These amounts were taken as deductions in the income tax returns filed by them for the respective years, but were disallowed by the respondent. The petitioners contend that by his will the decedent made no gift, devise, or bequest to his widow of any amount which was to be paid to her at all events either from income or from principal or from both; that they were under no legal obligations to pay her any amount or amounts whatsoever either of income or principal, but that the payment to her of any amount was discretionary with them; and that the amounts paid to her during 1934, 1935, and 1936 were paid from the income of the respective years and .were properly deductible by them in computing net income and constituted income taxable to her. The respondent contends that the payments were not allowable deductions from income for the reason that they were payable out of either capital or income and that the widow improperly reported them as income on her individual income tax returns. In argument on brief counsel for the respondent alludes to the absence in the record of any showing that the payments to the widow were actually made out of income. The amounts so paid to the widow were claimed as deductions on the returns filed by the petitioners herein and were reported by the widow as income to her. The respondent has made no determination that the distributions were not made from income and no issue to that effect was raised by the pleadings. Furthermore, from the statements of the issues by counsel at the hearing there was no indication of any disagreement between the parties on that point. We accordingly assume for the purposes of this case that the payments made to the widow were from income for the respective years for which the deductions here in issue are claimed.

The Revenue Act of 1934 contains the following provisions, which are identical with the corresponding provisions of the Revenue Act of 1936:

SEO. 162. NET INCOME.
The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
* * * * • • •
(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (e) of this section in the same or any succeeding taxable year;
(c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the ease of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year, which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.

The decedent left his residuary estate in trust, with directions that the trustees pay over to his widow and 1⅛ sons, from principal and from profits and income realized thereon, such sum or sums at such time or times as in the judgment of the trustees might seem wise and provident. The widow, having elected to take under the decedent’s will in lieu of her dower rights, is accordingly a beneficiary of the trust as created by the will. In the injstant case the will did not provide for the payment currently of the net income of the estate to the widow, as was true in Helvering v. Butterworth, 290 U. S. 365, where it was held that the payments made by the trustees to the widow constituted allowable deductions by the trustees. Cf. Irwin v. Gavit, 268 U. S. 161. Nor did the will in the instant case provide for the payment to the widow of a stated amount at specified periods, at all events and independently of the amount of income of the estate, as was true in Helvering v. Pardee, 290 U. S. 365, where it was held that the payments made by the trustees to the widow did not constitute allowable deductions by the trustees for the reason that they did not represent distribution of income, but were in discharge of a gift or legacy.’ Cf. Burnet v. Whitehouse, 283 U. S. 148. Nor did the will direct the trustees to pay currently the net income of the estate to the widow and in their discretion to make payments to her from time to time out of principal to meet her needs a,s was the case in John K. Howard et al., Trustees, 34 B. T. A. 57, where it was held that a distribution of net income by the trustees to the widow was deductible by the trustees despite separate discretion given them by the will to make additional distributions out of principal to meet the needs of the widow.

In the instant case the distributions, whether out of principal or out of income, were within the discretion of the trustees. The will did not direct that any income “be distributed currently by the fiduciary to the beneficiaries” as contemplated by subsection (b) of section 162, supra, but under the will the income might, “in the discretion of the fiduciary”, be distributed to the beneficiary as contemplated by subsection (c) of section 162, supra. In the case of income which in the discretion of the fiduciary may be distributed to the beneficiary, there is to be allowed as a deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary. No contention is made by the respondent that the payments to the widow were not properly made. Under the circumstances it ⅛ our opinion that the payments here involved clearly come within the provisions of subsection (c) of section 162, supra, and constitute allowable deductions. The fact that other amounts might have been paid out of principal by the trustees is in our opinion immaterial. See John K. Howard et al., Trastees, supra. The petitioners are sustained on issue.

The remaining issues involve the deductibility, as accrued items, of fees of trustees and attorneys and certain other amounts deducted for interest, taxes, fees of accountant, and miscellaneous expenses. The petitioners contend that they were entitled to use the accrual method of reporting income for the years 1934, 1935, and 1936 for the reason that they used that method in making their first report of income, namely, for the period August 22 to December 31, 1931, as well as all subsequent reports of income, and for the further reason that it is the method that will most clearly reflect their correct income for tax purposes. The respondent’s position is that the petitioners’ original books were kept on the cash basis, that their first return as well as their returns for 1932 and 1933 were filed on that basis and, having elected to file their returns on that basis and. having failed to request or secure permission to change to the accrual basis in 1934, 1935, and 1936, they are not entitled to have their taxable net income for 1934, 1935, and 1936 computed on the accrual basis.

A taxpayer’s net income is to be computed “in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income.” Sec. 41, Revenue Acts of 1934 and 1936. “The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period.” Sec. 42, Revenue Acts of 1934 and 1936. Deductions are to “be taken for the taxable year in which ‘paid or accrued’ or ‘paid or incurred’, dependent upon the method of accounting upon the basis of which the net income is computed, unless in order to clearly reflect the income the deductions * * * should be taken as of a different period.” Sec. 43, Revenue Acts of 1934 and 1936. A taxpayer who changes the method of accounting employed in keeping his books shall, before computing his income upon such new method for purposes of taxation, secure the consent of the Commissioner, which is not to be granted unless the taxpayer and the Commissioner agree to the terms and conditions under which the change will be effected. Art. 322, Regulations 77, and art. 41-2, Regulations 86 and 94. Also see Ross B. Hammond, Inc., 36 B. T. A. 497; affd., 97 Fed. (2d) 545.

Neither the set of boohs kept by Hirst from August 22, 1931, to December 31, 1932, nor the set installed by Williams in 1933 were offered in evidence, and all we have as to the basis used prior to 1934 is certain statements stipulated by the parties and some ledger sheets submitted in connection therewith. The evidence indicates that aside from errors and duplications the only identifiable items of income and deductions that were entered on the books as accruals during the period August 22,1931, to December 31,1933, relate to interest and in fact to only a portion of interest income or interest payable as the case may be, and that all other items of income or deductions represent actual cash receipts or disbursements. Minor deviations from the cash basis are not sufficient to sustain a holding that the accrual basis was used. Cf. M. D. Rowe, 7 B. T. A. 903.

From the evidence it is our opinion, and we so conclude, that the petitioners’ books of account as originally maintained were kept on the cash basis and that the few accruals therein were erroneous and inconsistent therewith and, further, that the petitioners have failed to show that the cash method does not clearly reflect income. In the light of these conclusions, and since the consent of the respondent to change the method of accounting was neither requested nor obtained for any of the years before us, his action in determining the income for those years on the cash basis is sustained. •

Decision will he entered under Rule 50.


author: Black : Steenhagen,

text:
    The Sehtam Corporation (now) Jaruth, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101101.
    Promulgated April 24, 1941.

      D. Basil O'Gownor, Esq., for the petitioner.

      •/ames T. Haslam, Esq., for the respondent.
   OPINION.

Black :

The Commissioner has determined a deficiency of $6,511.89 in petitioner’s income tax for the fiscal year ended August 31, 1936, and a deficiency of $10,363.37 in petitioner’s personal holding company surtax for the same period.

The deficiencies are due to three adjustments which the Commissioner has made in petitioner’s income as disclosed in the return which it filed for the taxable year. Only one of these adjustments is contested. That adjustment is the addition by the Commissioner to petitioner’s net income of an item of $47,766.24. This item is explained in the deficiency notice as follows:

(a) Income from the sale of securities during the taxable year, which were received from the partnership of Mathes and Mathes in a nontaxable exchange for your stock during the year 1933, is increased $47,766.24 on the grounds that the transferors’ basis of the securities constituted your cost, the basis of the securities in the hands of the transferor partnership being the same as the cost or other basis of the contributing partners, pursuant to Section 113 (a) (13) of the Revenue Act of 1934 and/or the Revenue Act of 1936.

To this adjustment made by the Commissioner the petitioner assigns error as follows:

The Commissioner, in determining the taxable net income of The Sehtam Corporation for the fiscal year ended August 31, 1936, erred in computing the taxable gain realized by it on the sale during the fiscal year ended August 31, 1936, of 4710 shares of stock of Climax Molybdenum Company and 3900 shares of stock of General Plastics, Inc., and the Commissioner erroneously used as the basis for determining taxable gain on the sale of said stocks, the basis thereof to the individual members of the partnership of Mathes & Mathes, who had contributed the stocks to the partnership, from which partnership The Sehtam Corporation acquired the stocks in a tax-free transfer, on or about September 16, 1933; whereas the proper basis was the basis of the stocks in the hands of The Sehtam Corporation’s transferor, i. e., the partnership, and such basis was the fair market value of the stocks at the time of their contribution to said partnership.

The respondent denied that he erred in the manner above described.

The facts have been stipulated and we adopt the stipulation of facts as our findings of fact. We state such of those facts as seem necessary for an understanding of the issue which we are called upon to decide.

The petitioner is a corporation organized under the laws of the State of New York. Its address is Stamford, Connecticut. It filed its income tax return for the taxable year in question with the collector of internal revenue for the district of Connecticut.

Petitioner was incorporated on September 16,1933, with an authorized capital of 5,500 shares of preferred stock of the par value of $100 each and 5,500 shares of common stock without par value, and acquired the assets theretofore owned by the partnership of Mathes & Mathes.

James M. Mathes and Ruth D. Mathes, his wife, owned certain securities which they had acquired after March 1, 1913, but prior to September 1, 1933. On that latter date they formed a partnership named Mathes & Mathes, consisting only of James M. Mathes and Ruth D. Mathes, and transferred to the partnership the securities held by the individuals. The securities were transferred by the individuals to the partnership and recorded on the books of the partnership at the then market value, which was in excess of the cost thereof to the individuals.

On or about September 18, 1933, petitioner and Mathes & Mathes entered into an agreement whereby the partnership transferred to petitioner all of the assets then owned by the partnership, consisting principally of securities acquired on September 1,1933, from James M. and Ruth D. Mathes, in exchange for 5,500 shares of preferred stock and 5,436 shares of common stock of petitioner, which represented all of its issued and outstanding stock. Thereafter the partnership was in control of the petitioner.

In December 1933 said partnership was dissolved and the 5,500 shares of preferred and 5,436 shares of common stock of petitioner were distributed to the individual members of the partnership in proportion to their respective interests in the partnership. Neither gain nor loss was recognized either by the partners or the Commissioner upon the liquidation of the partnership in 1933.

Among the securities acquired by petitioner from the partnership were 1,570 shares of stock of Climax Molybdenum Co. (later split 3 for 1, in a nontaxable transaction, resulting in 4,710 shares) and 3,900 shares of stock of General Plastics, Inc. During the fiscal year ended August 31, 1936, petitioner sold 4,710 shares of Climax Molybdenum Co. and 3,900 shares of General Plastics, Inc., for the aggregate, sum of $274,063.50. These shares of stock, or the shares from which they were derived, had been received by the petitioner from the partnership and by the partnership from the individuals, and petitioner reported their sale in its income tax return for said fiscal year.

In computing its taxable gain on the sale petitioner took as the cost basis the sum of $55,098.24, the market value at September 1, 1933, when acquired by the partnership of Mathes & Mathes, showing a taxable gain of $218,965.26, which petitioner included in its gross income.

In computing the taxable gain derived by the petitioner on the sale the Commissioner took as the cost basis the sum of $7,332 for General Plastics, Inc., stock, and zero for the Climax Molybdenum Co. stock, which were the respective bases of those stocks to the individual members of the partnership, who contributed them to the partnership.

The pertinent sections of the applicable revenue acts are sections 112 (b) (5) and 113 (a) (8) of the Eevenue Acts of 1932 and 1936, which are the same in both acts and are printed in the. margin.

Also, for reasons which we shall presently state, we think section 113 (a) (13) of the Eevenue Act of 1936 is applicable.

It seems to be petitioner’s contention that, because petitioner, a corporation, acquired the property which was sold in the taxable year from a partnership in 1933, the basis which was applicable in 1933 must necessarily remain constant and be the basis which still controls in the year when the sale was made. This would doubtless be true in the absence of a change in statute. It is, of course, true, under the facts which we have narrated above, that under the Eevenue Act of 1932, in effect at the time of acquisition, the basis to the partnership of the property which it acquired from the partners, James M. and Euth D. Mathes, was the fair market value of. the securities at the time they were acquired in 1933. Walbridge v. Helvering, 70 Fed. (2d) 683; certiorari denied, 293 U. S. 594; Edward B. Archbald, 27 B. T. A. 837; affd., 70 Fed. (2d) 720; certiorari denied, 293 U. S. 594.

If the securities'in question had been sold either by the partnership, or by the corporation after it had acquired them from the partnership, prior to the effective date of the Revenue Aot of 1934, the basis for' ■which petitioner contends would have applied. Cyrus S. Eaton, 37 B. T. A. 715; Flannery v. United States, 25 Fed. Supp. 677; affd., 106 Fed. (2d) 315; Spaid v. United States, 28 Fed. Supp. 670; affd., 106 Fed. (2d) 315. The Revenue Act of 1934 was the first to contain the provisions of section 113 (a) (13), supra.

The Committee on Ways and Means of the House of Representatives, in its report to the House of Representatives to accompany the Revenue Bill of 1934, explained the purpose of section 113 (a) (13) as follows:

The committee also proposes two important changes in connection with the basis provisions, for the purpose of making it entirely certain that there can be no use. of the partnership as a medium of tax avoidance in cases of sales of property which has appreciated in value. The result qf the provisions of section 113 (a) 13 is that if propeirty is purchased by a partnership the basis of such property to the partnership shall be its cost; but if the property is paid in by a partner, then the basis to the partnership shall be the cost or other basis to the partner. * * *

Petitioner contends that to apply section 113 (a) (13) in the instant case would be a retroactive application of that section and that such is not permissible, and cites Flannery v. United States, supra, and Spaid v. United States, supra, in support of its contention. The taxable year involved in those cases was 1929, and clearly it would have been a retroactive application of section 113 (a) (13) of the Revenue Act of 1934 to have applied it to sales made in 1929. The year which we have before us is the taxable year 1936 and, as already stated, the applicable act is the Revenue Act of 1936. That act contains section 113 (a) (13) exactly as it appeared in the 1934 Act. The basis as to property sold or exchanged in 1936 is that determined under the Revenue Act of 1936, and not the basis as it would have been under the law in effect when the property was acquired, except that in certain ' cases the Revenue Act of 1936 provides that the basis shall be determined under the terms of prior acts. The instant case is not one of the latter.

Petitioner rightly says in its brief that the basis in the instant case is determined under section 113 (a) (8) of the Revenue Act of 1936. That section provides that, where a corporation has acquired property by the issuance of its stock under such circumstances that section H2 (b) (5) applies, “then the basis shall be the samé as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.” (Italics supplied.)

Who Was petitioner’s transferor within the meaning-.of the foregoing statute? The answer is the partnership of Mathes & Mathes. What is the basis to the partnership of the. securities transferred to petitioner by the partnership in a prior year ? The answer is that the basis to the partnership, under the provisions of section 113- (a) (13) of the Revenue Act of 1936, is the cost of the securities to the partners who originally transferred them to the partnership.

If the partnership of Mathes & Mathes had not been dissolved and had retained the securities in question until the year 1936 and had sold them in that year, there could be no question, we think, hut that section 113 (a) (13) would be applicable and the basis for determining gain or loss on the property sold would be the cost of the securities to the partners who had contributed them to the partnership.

Would there be any change in that situation where petitioner corporation acquired such securities from the partnership in a transaction which admittedly was one where no gain or loss was recognized under the statute which was applicable at the time of the transfer? We think not. Therefore, we can see no error in the computation of the basis which respondent has used in determining petitioner’s gain on the securities which it sold in 1936. On this issue we sustain respondent. Inasmuch as petitioner does not contest the other adjustments made by respondent,

Decision will ~be entered for respondent.

Reviewed by the Board.

Steenhagen,

concurring: Although the decision is clearly correct, I can not bring myself to an acceptance of the postulate, , even though it was stipulated, that there was a partnership of the husband and wife which was'substantial enough to require consideration of section 113 (a) (13). I should have to hold that petitioner received the securities directly from the individual husband and wife in exchange for all its shares and hence succeeded to their basis for determining gain or loss.

Mellott agrees with the above.

       SEC. 112. RECOGNITION OP GAIN OR LOSS.
      *******
      (b) Exchanges Solely in Kind.—
      *******
      (5) Transfer to corporation controlled by transferor.—No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
      SEC. 118. ADJUSTED BASIS POR DETERMINING GAIN OR LOSS.
      (a) Basis (Unadjusted) cot Property.—The basis of property shall be the cost of such property; except that—
      *******
      (8) Property acquired by issuance of stock or as paid-in surplus.—If the property was acquired after December 31, 1920, by a corporation—
      ‘ (A) by the issuance of its stock or securities in connection with a transaction described in section 112 (b) (5) (Including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money, in addition to such stock or securities), or
      (B) as paid-in surplus or as a contribution to capital, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.

       SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
      (a) Basis (Unadjusted) of Property.—The basis of property shall be the cost of such property; except that—
      * * * * * * *
      (13) Partnerships.—If the property was acquired, after February 28, 1913, by a partnership and the basis is not otherwise determined under any of the paragraphs (1) to (12), inelusiYe. of this subsection, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year In which the transfer was made. If the property was distributed in kind by a partnership to any partner, the basis of such property in the hands of the partner shall be Buch part of the basis in his hands of his partnership interest as is properly allocable to such property.


author: HaRron :

text:
    The Maumee Malleable Castings Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100933.
    Promulgated April 24, 1941.

      Nolan Boggs, Esq., and Thomas J. Dola/n, O. P. A., for tlie petitioner.

      Homer J. Fisher, Esq., for the respondent.
   OPINION.

HaRron :

The sole question is whether under section 26 (c) (1) of the Revenue Act of 1936 petitioner is entitled to a credit in the amount of its adjusted net income for purposes of computation of the surtax, on undistributed profits. >

Section 26 (c) (1) of the Revenue Act of 1936, in so far as pertinent to the present question, provides as follows:

In the ease of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax-—
* * * * *'*■*.
(c) Contracts Restricting Payment op Dividends.—
(1) Prohibition on payment of dividends.—An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends.

On its corporation income and excess profits tax return for the taxable year petitioner took a “Credit for contracts restricting dividend payments” (line 28 of Form 1120) in the amount of its adjusted net income. On the statement attached to the deficiency notice respondent disallowed the credit.

Petitioner relies on the prohibition on the payment of dividends contained in both the bond and the mortgage and deed of trust executed by it on November 15, 1934. The bond and the mortgage and deed of trust were written contracts executed by petitioner prior to May 1, 1936. The contracts contained a provision expresály dealing with the payment of dividends. Under that provision petitioner was prohibited from making any “distribution of earnings or surplus * * * by way of dividends” until the bond had been fully paid. Cf. Kilby Steel Co., 41 B. T. A. 1237; Page Oil Co., 41 B. T. A. 952; Sutcliffe Co., 41 B. T. A. 1009. Throughout the taxable year the bond was not fully paid; and at no time within the taxable year was petitioner under a legal obligation to pay the bond in full. See Auto Interurban Co., 40 B. T. A. 161. Apparently the mortgage and deed of trust also contained a provision under which the prohibition on the payment of dividends might be waived with the consent of the trustee. In December of the taxable year petitioner requested the trustee to consent to a waiver of the prohibition, but the trustee refused. Cf. Kilby Steel Co., supra. Thus petitioner could not distribute any amount within the taxable year as dividends without violating the provision contained in both the bond and the mortgage and deed of trust. It follows that all of . the literal requirements of section 26 (c) (1) have been met. See Auto Interurban Co., supra.

However, respondent contends in Ms brief that section 26 (c) (1) must be construed so that, in the case of a prohibition on the payment of dividends until a debt is paid, the taxpayer will be denied a credit if by its terms the debt can be paid in its entirety in the taxable year and if the taxpayer is able financially to pay the debt in its entirety in that year. He argues that such a construction is necessary to carry out the legislative intent underlying section 26 (c) (1). In support of such a construction he quotes from I. T. 3130, O. B. 1937-2, p. 107, 109, and Auto Interurban Co., supra. He then contends that petitioner is not entitled to a credit under section 26 (c) (1) because the bond by its terms could have been paid in full in the taxable year and petitioner was financially able to pay the bond in full in that year.

In our opinion, respondent’s contention is without merit. The record does indicate that petitioner at the very end of the taxable year was in such financial position as to be able to pay off the remaining balance of principal due under the bond and thus to remove the prohibition on the payment of dividends. Petitioner’s failure to pay. off the remaining balance of principal due under the bond until shortly after the end of the taxable year appears to have been actuated by sound business purposes. During the first six months of the taxable year - petitioner’s net monthly sales averaged over $70,000, but petitioner’s-net montMy sales fell to about $50,000 in July and continued at about that figure through October. Thereafter its net monthly sales dropped to about $36,000' in November, $26,000 in December, and $20,000 in January of 1938. Petitioner made substantial payments on account of the principal amount due under the bond in each month from January to September, inclusive, with the exception of April, when it made only a nominal payment. In view of the considerable shrinkage in the volume of its net monthly sales in the last half of the taxable year petitioner sought to conserve its cash and, therefore, made only relatively small payments on account of the principal amount due under the bond in October, November, and December.

■On November 30, petitioner had about $31,500 in cash. From that date up to and including December 26 the amount of its cash gradually declined. On December' 26 it had about $12,800 in cash. From December 26 up to and including December 31 the amount of its cash substantially increased. On December 81 it had about $35,000 in cash. The amount of its cash increased about $6,500 on December 30 and about $9,000 on December 31. As of December 31 the amount of petitioner’s’ cash ($35,307.61) approximately equaled the total amount of its current liabilities ($21,318.88) plus the amount of principal remaining due on the bond ($14,053.05). Petitioner deposited the substantial amounts of cash which it had received on December 30 and 31 in its bank account on January 4, 1938. And on January 5, 1938, it paid the balance of principal remaining due under the bond in the amount of $14,053.05. It is true that as of December 31 petitioner had accounts receivable in the amount of $37,345.91 in addition to cash in the amount of $35,307.61. However, this does not seem to be a case where “a corporation, with cash and liquid assets greatly in excess of both its current obligations and its secured obligations” has delayed the redemption of its secured obligations “for an unreasonable length of time for the purpose of obtaining the credit provided for by section 26 (c) (1) of the Act of 1936.” See Auto Interurban Co., supra. The preponderance of the evidence indicates that any failure to pay the bond in full in the taxable year was actuated by sound business purposes. Moreover, in the taxable year petitioner paid a total of $55,090.53 on the principal amount due under the bond, although by the terms of the bond it was required to pay only $9,325.68 in that year, and although it had a net taxable income of only $27,141.04 in that year. After a careful consideration of all the facts, we believe that the allowance to petitioner of a credit under section 26 (c) (1) in the amount of its adjusted net income will not tend to defeat the legislative intent underlying that section.

Accordingly, it is held that under section 26 (c) (1) petitioner is entitled to a credit in the amount of its adjusted net income for purposes of computation of the surtax on undistributed profits.

Reviewed by the Board.

Decision will be entered for the petitioner.

       * * * The credit above referred to would, therefore, not be allowable after the corporation becomes financially able to repay these obligations, since the restriction on the payment of dividends would then not be the result of the provisions of the contracts but the result of the corporation’s willful failure to retire the obligations. Upon the payment of the obligations or upon the corporation becoming financially able to repay them, all restrictions on the payment of dividends would be removed and the corporation would be charged with the distribution of its adjusted net income for the entire taxable year in which the restrictions were removed. (Article 26-2 (b) 2, Regulations 94.)


author: Disney :

text:
    Edith W. Balch, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95146.
    Promulgated April 24, 1941.

      'William B. Seaman, Esq., for the petitioner.

      Paul A. Sebastian, Esq., for the respondent.
   OPINION.

Disney :

The question presented is whether the petitioner is entitled to deduct as a loss an amount paid by her to the trust set up by her to pay a statutory assessment upon bank stock owned by the trust. The parties seem in agreement that the bank stock became worthless in a prior year, so that the assessment constituted a capital loss either to the trust or to the petitioner, and we so assume. The petitioner’s view is, in substance, that under section 167 (a) (2) and (b), Revenue Act of 1934, capital gains constituted income to her because the trustee, having no substantial adverse interest in the disposition of income, could in its discretion distribute such capital gains to her, and that therefore she is entitled to á capital loss in the amount of the assessment. The respondent takes the position that the loss is that of the fiduciary.

We have held that, where a trustee with no substantial adverse interest in disposition of income may distribute capital gain to the trustor, such trustor is taxable upon capital gain as income. Georgia B. Lonsdale, 42 B. T. A. 847; H. Cecil Sharp, 42 B. T. A. 336; Malcolm W. Greenough, 29 B. T. A. 315. Under such decisions, it is apparent and we hold, that here the petitioner was taxable upon any capital gains so distributable to her. Does it follow that she is entitled .to the capital loss contended for? In County National Bank & Trust Co. of Santa Barbara, Executor, 39 B. T. A. 357, we held that a capital loss sustained by an estate in process of administration is personal to the estate as a taxable entity and that a sole devisee and legatee receiving the income may not deduct from such income any part of the capital loss, and we said that no distinction could in that respect be made between estates in process of administration and trusts, the statute itself making no distinction. Our holding in Peoples National Bank of Charlottesville, Virginia, Administrator, 39 B. T. A. 565, was to the same effect. In T. Rosslyn Beatty, 28 B. T. A. 1286, the beneficiaries, like the petitioner-beneficiary herein, received income quarterly “to be made from the income, so far as possible, and if the income be not sufficient, then to be paid from the principal of said trust estate.” The beneficiaries were also the remaindermen. Yet, we held that the beneficiaries were not entitled to deduct capital losses of the trust on their individual income tax returns. In Anderson v. Wilson, 289 U. S. 20, the situation did not, .in essence, differ from that herein. The trustees were authorized by the will to distribute the proceeds of sales of corpus or retain the same, in the meantime paying net income semiannually to those entitled to receive it. Yet, the Court held that capital losses were not deductible by the beneficiaries. We have here no case of naked trust or mere conduit to the beneficiary, but a taxable entity which the petitioner’s brief expressly concedes is separate from tliat of tile petitioner. We conclude and hold that the provisions of section 167 (a) (2) do not entitle the petitioner to deduct the bank stock assessment as capital loss. The fact that she advanced the amount necessary to pay such assessment is immaterial, and amounts to a capital contribution to the trust.

The petitioner further takes the position that, regardless as to whether entitled to receive the capital gains of the trust, she is personally liable, as beneficial owner of the stock, for the assessment and therefore may deduct as loss the assessment paid. The argument we consider untenable, for the reason that the petitioner can not be said to be the complete beneficial owner of the bank stock merely because she has a right for life to the ordinary trust income, with discretion in the trustee to distribute corpus. The remainderman has an interest in the corpus, and at least participates in the beneficial ownership of the bank stock included therein, as to which the assessment was laid. In our opinion Anderson v. Wilson, supra, plainly indicates that the petitioner herein has no beneficial ownership in the corpus such as to cause disregard of the trust entity, or permit deduction by the petitioner of its capital losses. Therefore, under the provisions of the stipulation as to amount of any deficiency,

Decision will be entered that there is a deficiency in the amount of $8,119.98.

       SBC. 167. INCOME BOR BENEFIT OF GRANTOR.
      (a) Where any part of the income of a trust—•
      *******
      (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.”


author: Black:

text:
    Margaret A. McBride, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101335.
    Promulgated April 24, 1941.

      0. WalTcer Taylor, Esq., for the petitioner.

      E. M. Woolf, Esq., for the respondent.
   OPINION.

Black:

The amount of the capital gain which the Commissioner computed on the sales of the securities in question is not in dispute. If petitioner is taxable at all on the gain from the sales in question, then she concedes that the amount of the capital gain which the Commissioner has computed is correct. Petitioner contends, however, that she was not the owner of the securities in question at the time they were sold; that prior to the date of sale she had loaned them to the Clinton Distilleries Corporation of Delaware, with full power and authority to sell them for its own account; that the sales were made at its instance and for its benefit and not for hers, and that she is- not taxable on any of the gain from the sales.

The respondent disputes these contentions of petitioner. In his deficiency notice he stated with reference to this particular transaction as follows:

Your contention that the said stock had previously been loaned to Clinton Distilleries Corporation (a Delaware corporation) under an agreement to return the identical stock has not been substantiated. For this reason, your further contention, that the profit from the above sale is not taxable to you cannot be conceded.

The respondent takes the same position in his brief. As to the issue thus raised, we think petitioner must be sustained on authority of Fremont C. Peck et al., Executors, 31 B. T. A. 87, and Frank Kell, 31 B. T. A. 212. The written agreement between petitioner and Delaware dated December 6,1935, shows clearly that petitioner loaned the securities in question to Delaware and gave it the right to sell and dispose of them, and use the money thus obtained for its own benefit. Delaware obligated itself to repay the securities in kind, on or before June 10,1936.

True, the securities were loaned by petitioner to Delaware subject to the prior rights of the bank, which held them as collateral security for a note which represented money that the bank had loaned petitioner to use for Delaware’s benefit. We think this makes no difference as to the validity of the transaction. The fact that securities are up as collateral with a bank does not deprive their owner of the right to dispose of them, subject of course to the prior rights of the bank.

In Carleton H. Palmer, 40 B. T. A. 1002, we held that the execution of the trust agreement therein involved effectively passed title to the trustee of certain shares of stock without manual delivery, despite the fact that the stock transferred in trust remained registered in the set-tlor’s name and pledged as collateral security for certain loans. We held that dividends on the stock which were paid subsequent to the transfer were taxable to the trust and not to the settlor. At page 1008 of that opinion we cited numerous authorities in support of our holding.

Respondent in his brief lays much stress on the fact that before-the bank would deliver the securities to Bache & Co. for sale or before Bache & Co. would sell them, they required petitioner to sign an order directing the sale of the securities. We see nothing unusual about that procedure. The' securities, although clearly loaned by petitioner to Delaware, were subject to the prior rights of the bank and still stood in the name of petitioner. Naturally the bank was not going to release them for sale except upon the written order of petitioner. The testimony shows that the bank, after applying the proceeds of the sales to the payment of the indebtedness to it, turned the balance over to petitioner, and petitioner promptly endorsed the checks and delivered them to Delaware, which used the money for its own benefit. Delaware has never repaid to petitioner either the money or the stock.

On the authority of Fremont C. Pede et al., Executors, supra, and FranTe Kell, supra, we sustain petitioner on this issue.

Decision will be entered under Bule 50.