text:
    Charles J. Livingood, Executor of the Will of Mary M. Emery, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 40899.
    Promulgated February 23, 1932.

      John II. More, Esq., for the petitioner.

      Arthur H. Fast, Esq., for the respondent.
   OPINION.

Van Fossan:

The first issue for consideration is whether or not the respondent erred in disallowing for each of the taxable years any deduction on account of contributions which, as stipulated, were of the character specified in section 214 (a) (10) of the Revenue Act of 1924.

It appears from the stipulated facts that the decedent’s contributions amounted to $140,000 in 1924 and for the year 1925 were $90,-433.84. In each of those years the amount of decedent’s capital net losses exceeded the amount of her ordinary net income. The respondent computed the deficiency in each year by a calculation based on an amount of net income which did not reflect any deduction on account of decedent’s contributions in the respective years. The facts disclose that while the respondent held in effect that the decedent had no net income in either of the taxable years in question from which any amount on account of contributions was deductible, nevertheless, he computed a large net taxable income for each of the said years. The contributions on account of which no deduction was allowed were of the character specified in section 214 (a) (10) of the Revenue Act of 1924.

It was conceded by counsel for the Government that this issue had been decided adversely to his contention by the Board in Hattie D. Elkins, 24 B. T. A. 572, and that if that decision be adhered to it was controlling. In that case we said:

It is untenable to say that for the purpose of computing a tax liability this petitioner has a net income of $113,151-98 and that at the same time she has no net income for the purpose of computing the amount allowable as a deduction for contributions.

The Elkins decision represents the deliberate judgment of the Board and is controlling on the issue under discussion. The petitioner is entitled to a deduction on account of the decedent’s contributions not exceeding 15 per cent of $169,143.38 for the year 1924, and 15 per cent of $482,509.11 for the year 1925.

The remaining issue relates to the respondent’s disallowance of certain attorneys’ fees paid by the decedent in the year 1925. The question is whether or not these fees were usual and necessary expenses incurred by the decedent during the year 1925 in carrying on any trade or business as provided by section 214 (a) (1) of the Revenue Act of 1924. That the decedent had been engaged in carrying on business, at least constructively, previous to the completion of the transaction hereinafter referred to is clearly disclosed by the evidence. She owned an undivided one-half interest in a business concern known as Thomas M. Emery Sons. The other undivided one-half interest was owned by the Girard Trust Company as trustee. Thomas M. Emery Sons was engaged in real estate operations as well as in other business. However, it does not necessarily follow that the attorneys’ fees in question were a usual and necessary expense of carrying on any trade or business engaged in by the decedent. It appears that in 1924 and 1925 she was about 81 years of age and was devoting her activities to philanthropies, while her interest in Thomas M. Emery Sons was managed on her behalf by a representative. She wished to consolidate her interests and to secure sole title to properties in which she then owned an undivided one-half interest in order that she might more easily and certainly manage them and dispose of them by will for the benefit of the philanthropies in which she was interested. At the same time the coowner of Thomas M. Emery Sons, namely, the Girard Trust Company, as trustee, desired to consolidate the management of its interest in that concern. To accomplish the desired end the agreement described in the facts was entered into by the decedent and the Girard Trust Company, as trustee, and pursuant to the agreement proceedings were initiated in the proper courts which secured approval by those courts of the conveyance by the Girard Trust Company as trustee of the properties in which it held an undivided one-half interest. The Girard Trust Company was the petitioner in the proceedings in court and the decedent was a party defendant. In the petition in one of these proceedings it was stated in substance, among other things, that the proceeding was brought to give “ perfect title ” to the realty to be conveyed. As a result of the agreement and court proceedings the decedent became the owner of 12 parcels of real estate of which previously she had owned only an undivided one-half interest. The attorneys’ fees in question were paid by the decedent for services related to the agreement and the court proceedings. Upon the completion of this transaction the decedent caused an Ohio corporation, without profit, known as Thomas J. Emery Memorial, to be organized for the purpose of continuing the philanthropies in which she had been interested and by her will this corporation was named as a residuary legatee for charitable purposes.

In our opinion it is clear that the attorneys’ fees were not paid as an expense of the conduct of any trade or business which the decedent was carrying on. The transaction in connection with which the attorneys were employed was entered into by the decedent to further her own personal purposes. It does not appear that the completion of this transaction added anything to the decedent’s income or was intended to add anything thereto. It is inferable from the evidence that as a consideration for the conveyance to her which resulted in the acquisition by her of the sole title to 12 parcels of realty she, on her part, conveyed assets of like monetary value, and there is no evidence that this transaction increased the total value of her assets in any degree. She was made a party defendant to the court proceedings of her own volition and the court proceedings were brought to perfect title to the property to be conveyed, a part of which was the undivided one-half interest in the parcels of realty conveyed to the decedent. The fees in question were paid for services which related to what was, in effect, an exchange of some of the decedent’s capital assets for other capital assets of like value. Therefore, the expenditure for attorneys’ fees was not an expense of a going business, but additional cost of property. We have consistently held to the effect that fees paid for legal services, where the acquisition of capital assets or the litigation of matters pertaining to assets of a purely capital nature were involved, were capital expenditures and therefore not deductible as ordinary and necessary expenses. First National Bank of St. Louis, 3 B. T. A. 807; Stephens Fuel Co., 13 B. T. A. 666; Chestnut Farms Dairy, Inc., 19 B. T. A. 192.

For the foregoing reasons the respondent’s disallowance of a deduction of the amount of attorneys’ fees is approved.

Decision will be entered under Bule 50.


source: Caselaw Access Project

author: MtjRdocK :

license: Public Domain

text:
    Charles W. Ballard, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 36479.
    Promulgated February 24, 1932.

      Milton Bindler, C. P. A., for the petitioner.

      O. J. Tall, Esq., for the respondent.
   OPINION.

MtjRdocK :

The petitioner contends that he sold his interest in the partnership of D. S. Walton & Company in 1924 and thereby suffered a loss. In his return he took a deduction of $24,375 representing this loss. In the petition he claims that the loss amounted to $28,417.10, while in his brief he computes the loss at $37,530.70. In his computations the amount of the los.s depends upon the March 1, 1913, value of his share of the intangible assets of the firm. The Commissioner not only denied the loss, but he also denied that the sale occurred in 1924. The parties have stipulated that the petitioner on March 1, 1913, had in the firm then existing a cash investment of $40,000, representing a one-eighth interest, and that such interest in the tangible assets had a fair market value at that date of $40,000. The petitioner has sought to prove in addition that his one-eighth interest had a fair market value on March 1, 1913, in excess of $40,000.

The partnership which existed on March 1, 1913, was not the same partnership that existed in 1924 and up to noon of January 1, 1925. Several partnership agreements had been entered into in the meantime. The business carried on by these various partnerships had remained much the same. There might be some question as to whether tbe March 1, 1913, value has any bearing upon the present question of the gain or loss from the sale in 1924 or 1925, although it is possible that the petitioner, after March 1, 1913, made a number of nontaxable exchanges so that the fair market value of what be owned on March 1,1913, is the basis for gain or loss upon the sale of what he had at the end of 1924. The petitioner contends that the value of the good will and other intangible assets on March 1, 1913, had dwindled to nothing and disappeared by the time the petitioner sold his interest in the firm. If this were true it might raise some other questions. Since, however, we can not determine the basis, it becomes unnecessary to decide any other question, including the question of when the sale took place. We are satisfied, however, that the sale did not take place in 1924. Lucas v. North Texas Lumber Co., 281 U. S. 11; American Bank & Trust Co., Executor, 14 B. T. A. 615; affd. sub nom. American Land & Investment Co., 40 Fed. (2d) 336; Williston on Sales, 2d ed., vol. 1, p. 1. Cf. Charles W. Dahlinger, 20 B. T. A. 176; affd., 51 Fed. (2d) 662; Commissioner v. Swift, 54 Fed. (2d) 746. The petitioner has not sought any relief in case we find that the sale took place in 1925.

The petitioner was the only witness. He gave his opinion as to the fair market value on March 1, 1913, of the intangible assets of the firm which existed on that date. But the basis for his opinion and the method of reasoning used by him in arriving at this opinion were such as to cause his own counsel to admit that his opinion was worthless and should be ignored. We agree that his opinion should be disregarded. Uncasville Mfg. Co. v. Commissioner, 55 Fed. (2d) 893. He testified, however, as to certain facts and other facts were stipulated. His counsel argues that the only method available for the computation of the fair market value of the good will of the partnership on March 1, 1913, is by use of a formula described as the third method in A. R. M. 34, C. B. No. 2, p. 31. This memorandum discloses that the Committee found itself unable to lay down any general rule for the determination of the fair market value of intangibles. It only suggested the method as one which might be utilized broadly to check upon the soundness and validity of a taxpayer’s claims. To apply the formula, average earnings for a period prior to March 1, 1913, preferably not less than five years, were required. Abnormal years should be eliminated. There were variables in the formula suggested which depended upon circumstances. The memorandum concluded as follows :

In any or all of the cases the effort should be to determine what net earnings a purchaser of a business on March 1, 1913, might reasonably have expected to receive from it, and therefore a representative period should be used for average actual earnings, eliminating any year in which there were extraordinary factors affecting earnings either way. Also, in the case of the sale of good will of a going business the percentage rate of capitalization of earnings applicable to good will shown by the amount actually paid for the business should be used as a check against the determination of good will value as of March 1, 1913, and if the good will is sold upon the basis of capitalization of earnings less than the figure above indicated as the ones ordinarily to be adopted, the same percentage should be used in figuring value as of March 1, 1913.

It will be noted at the outset that all of the sales of interests in the partnerships in this case of which we have any knowledge were made at book value, which included nothing for intangibles. Earnings for a period of only three years and eight months prior to March 1, 1913, have been shown. In this short period the earnings fluctuated greatly, but we have not been told whether or not the period included any abnormal year. Furthermore, our knowledge of the risks of the business is not sufficient to enable us to determine intelligently the percentages to be used in applying the formula. Cf. Grant Trust & Savings Co., Trustee, 3 B. T. A. 1026; Portage Silica Co., 11 B. T. A. 700; affd., 49 Fed. (2d) 985; certiorari denied, 284 U. S. 667. If we were to use the formula we would not know what part of the average earnings to attribute to the tangibles or what additional part, if any, to attribute to good management, location, firm name, and the presence and activity of the partners themselves in the business. Fair market value has been defined as the price likely to be agreed upon by a willing buyer and a willing seller, neither forced to buy or sell, but both having knowledge of the facts. Had the petitioner sold his interest on March 1, 1913, his connection with the business would have ceased together with any benefit which the business had theretofore derived from such connection. We do not know that the amount designated “ salary ” was a proper measure of his value to the business of the firm. The partnership agreement in effect on March 1, 1913, was to remain in effect only until noon of January 1, 1915. A purchaser of the petitioner’s interest on March 1, 1913, would not only have taken into consideration this circumstance, but also the fact that the partnership would have been dissolved immediately by the petitioner’s withdrawal from the firm. The location of the business, the name of H. S. Walton, and the benefit of Walton’s association with the firm might all have been lost to a prospective purchaser on March 1, 1913. We do not know how valuable to the firm was the location at which it transacted its business or the name under which it transacted its business, but the location and the name gave little value to the petitioner’s interest on March 1, 1913, since Walton could have used both after the partnership then existing was dissolved. We do not know how valuable Walton was to the firm, but if any part of the earnings over and above the normal return on tangibles was attributable to Walton, such value would have to be discounted in determining the fair market value of the petitioner’s interest on March 1, 1913. Cf. Providence Mill Supply Co., 2 B. T. A. 791. A purchaser of the petitioner’s interest on March 1, 1913, would have realized that he could gain nothing from any intangible asset such as good will unless he should be permitted to share in some way in a continuation of the going business. He would know also that in a partnership there is delectus 'personae. Thus, the value of the intangibles, in his opinion, would have depended to a very large extent upon the willingness or unwillingness of the other partners to accept him as a member of the new firm to carry on the business. This feature of a partnership makes any valuation extremely difficult. Walton and the petitioner had been associated with the business for many years prior to March 1, 1913; the firm enjoyed a good reputation in the trade; and the average earnings for the period of three years and eight months prior to March 1, 1913, probably exceeded a normal return on the tangible assets of the firm. Nevertheless, we are unable to determine from the facts in the record that the petitioner’s one-eighth interest in the partnership had a value on March 1, 1913, in excess of $40,000. That is, we can not translate any excess earnings of the firm into value of the petitioner’s interest.

The petitioner contends that the firm also had valuable contracts on March 1, 1913, particularly one with the Union Bag & Paper Company. He was quite vague as to the date, duration, and terms of the contract with the Union Bag & Paper Company in effect on March 1,1913, but it seems to have been for a short term. So far as we can see it was entered into at arm’s length and we can not find any justification for concluding that it gave the partnership any more than fair compensation for services rendered. The petitioner claimed that neither his original acquisition of a partnership interest nor his final disposition of his partnership interest was an arm’s-length transaction which would indicate the fair market value of the subject matter. He stated that he acquired his interest at a very low price because Walton was anxious to have him continue in the business, and he sold out at a very low price because of ill health. It appears, however, that the petitioner’s brother acquired his.interest at the same time the petitioner acquired his and that the brother sold at the same time the petitioner sold, but there is no reason to believe that Walton made any reduction in price in order to get the brother to come into the firm. The brother did not sell his interest because of ill health. The books never reflected any value for intangibles and, as we have heretofore pointed out, each of the sales of interests in the partnerships was made at book value. We are unable to say that the basis for gain or loss from the sale of the petitioner’s interest was any larger than the amount determined by the Commissioner. The latter made an alternative contention in case we disturbed his determination as to either year. Since we do not disturb his deter-urination as to either year, we need not discuss this alternative contention.

Judgment will be entered for the respondent.


author: Lansdon :

text:
    H. B. Folk, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 28396, 31018.
    Promulgated February 24, 1932.

      Gentry Lee, Esq., for the petitioner.

      Maxwell M. Mahany, Esq., for the respondent.
   OPINION.

Lansdon :

Petitioner’s first contention is that he received no part of the .income for 1922 upon which the deficiency herein is based. His theory is that the so-called Page interests, owners of the operating interest in the lease .in question, swindled him out of his share of the royalties that accrued prior to December 31, 1922. On the record here there is no basis for this allegation. In the year 1922 he received stock of the par value of $100,000 and a house ,in Sand Springs that was worth a substantial amount in exchange for his .interest in the accrued royalties which he assigned to Page on December 30, 1922. The evidence fails tó convince us that such property had a value less than the income reported by the petitioner for the taxable year. On this issue the determination of the respondent is affirmed.

.In computing allowable depletion for each of the taxable years the parties disagree as to the value of the petitioner’s interest in the oil reserve acquired by devise at May 24,1919, but agree that the true value at such date must be determined in conformity with the provisions of section 202 (a) of the Revenue Act of 1921. Cf. Brewster v. Gage, 280 U. S. 327. The respondent has based his computations on a valuation of $56,000, which is $2,000 in excess of the appraisal of the property for Oklahoma and Federal estate-tax purposes. There is a presumption that the respondent’s determination of a deficiency is correct. The petitioner, therefore, has the burden of proof to show that the respondent erroneously determined the value of his interest in the lease at date of his receipt thereof and that the deficiency asserted is not correct.

The evidence adduced by the petitioner consists of a valuation report of a qualified oil engineer and of the oral testimony of such engineer. Counsel argues that the record establishes the value of the petitioner’s interest in the lease at $227,076.64 at May 24, 1919. This value was determined by the use of factors of a very doubtful weight and application. The witness testified that many good wells in the Cushing field have either been destroyed or greatly impaired by salt water and that the cement process of plugging off such water had been developed about that time and, in his judgment, added to the fair market value of all oil-producing properties in the Cushing area. He also testified that his computation of value was based on a price of $2.25 per barrel, plus a premium of 75 cents. The Commissioner can hardly be called on to determine values for depletion purposes over the term of a long-time lease on the basis of the highest prices ever paid for oil in the mid-continent field. The cement method of excluding salt water from oils was only in the experimental stage in 1919 and even when generally applied it can hardly be said that it increases the recoverable reserve, although it may shorten the time of recovery. After careful consideration of all the evidence, we think it falls short of establishing the full value asserted by the petitioner, but it does indicate clearly that the petitioner’s interest in the lease in question had a fair market value in excess of $56,000 at May 24, 1919. Accordingly, we have found that the basis of depletion is $100,000.

«Judgment will be entered under Rule 50.


text:
    Cyclops Iron Works, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 34784, 40646.
    Promulgated February 24, 1932.

      H. II. Tooley, Esq., for the petitioner.

      F. B. Shearer, Esq., for the respondent.
   OPINION.

Lansdon :

In respect to the first two years in review the petitioner contends that its taxable status as a trust is fixed, in virtue of - its having filed fiduciary returns for such years, and for 1922, which were accepted and approved by the collector of internal revenue; and that such acceptance constituted a ruling within section 704 (a) of the Revenue Act of 1928, which, remaining unrevoked, commits the respondent to an acceptance of its claims now made in such respect. There is no merit to this contention under the facts shown. The act of the local collector of internal revenue in receiving petitioner’s returns when presented for filing, was a mere routine act which in no way committed the respondent in his audit which followed. We, therefore must hold against the petitioner on this contention.

The remaining question relates to the character of the petitioner’s business which produced the income in question and to its organization structure. It is obvious that the disputed income was derived from a business which a corporation might properly conduct, inasmuch as it had been so operated for many years. The petitioner contends, however, that its form of organization excludes it from classification as an association within the taxing laws and makes it a simple trust. In support of this interpretation the petitioner contends that the trust instrument denies any control to the beneficiaries over the trustees in their management of the trust business, and argues that this lack-of-control feature distinguishes its organization from an association as defined by the courts and this Board. It is true that in certain cases the question of control has been one upon which our decisions have turned; but, if that were controlling in this case, we could not find petitioner’s position sustained by the proof. On the contrary, the record shows that all of the beneficiaries had a hand in the management and control of the business carried on by their organization; three of their number serving in the double capacity of executive officers and trustees, and the other as its business manager. In such circumstances the entire and exclusive control of this organization and its business which produced the income was in the beneficiaries.

In Hecht v. Malley, 265 U. S. 144, the Supreme Court, after reviewing at great length the distinguishing features between associations and trusts, and quoting approved definitions of associations, held that “ a body of persons united without charter, but upon methods and forms used by incorporated bodies, for the prosecution of some common enterprise ” constituted an “ association ” taxable as a corporation.

It would be difficult to conceive of a business being carried on more nearly in conformity to corporate forms and methods than .The. one here considered, or of an organization' which partook so little of the essential features of a trust as that of the petitioner. Respecting corporate formalities, excepting for the election of the trustees, by the beneficiaries, the new organization which succeeded to the corporation functioned in perfect parallel to the system used by the corporation, and there was not an advantage which the laws give to corporations, or a privilege or right of its stockholders which was not preserved to the petitioner and its beneficiaries under the trust agreement. On the other hand, there is little, except name, which would indicate that these parties intended to create a trust by this agreement, and some provisions in it violate the fundamental essentials of trust relationship. Typical of this are the provisions which allow the trustees to retain profits derived through business transactions between themselves and the trust estate, and permit any trustee to deal in his individual capacity with the trust in all respects as if he were not a trustee,” including (1) the right to purchase at any public auction sale which the trustees might see fit to hold, assets of the trust; and (2) to contract with the trust without being required, in the absence of fraud, to make a fiduciary’s account of any profits realized. The further provisions which allow the trustees to fix their own salaries, irrespective of any statutory provisions for compensation of trustees or other fiduciaries, and,. in the absence of fraud, to decide all questions of dispute between themselves and the beneficiaries under the terms of the trust instrument, are so foreign to all concepts of fiduciary relationship as to put the parties claiming such powers beyond all claims of protection afforded trustees.

The corporation known as the Cyclops Iron Works was a close family corporation owned and controlled by the same individuals who now own and control this petitioner. There being no change in such ownership operation or control, except in name, we ignore the fiction and give force and effect to essential facts. The petitioner meets all of the essential requirements which constitute an association, taxable as a corporation, as heretofore construed by the courts and this Board, and the respondent committed no error in so classifying it in computing the taxes in dispute. Little Four Oil & Gas Co. v. Lewellyn, 29 Fed. (2d) 137; United States v. Neal, 28 Fed. (2d) 1022; White v. Hornblower, 27 Fed. (2d) 777; Durfee Mineral Co., 7 B. T. A. 231; Alexander Trust Property, 12 B. T. A. 1226; Woodrow Lee Trust, 14 B. T. A. 1420; Rochester Theatre Trust Estate, 16 B. T. A. 1275; J. W. Pritchett et al., Trustees, 17 B. T. A. 1056.

Decision will he entered for the respondent.


author: Matthews:

text:
    G. Allan Hancock, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 36867.
    Promulgated February 24, 1932.

      Joseph D. Peeler, Esq., and Melvin D. Wilson, Esq., for the petitioner.

      Arthur Garnduf, Esq., for the respondent.
   OPINION.

Matthews:

Section 206 (a) (1) of the Revenue Act of 1921 reads as follows: “ The term ‘ capital gain ’ means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921.”

It appears that the deficiency which has been determined by the respondent in this case resulted from the refusal of the respondent to treat as a capital net gain the sum of $96,028.99 which was included in the income reported by the petitioner for 1923. It has been stipulated that the item of $1,458.03 should be excluded from petitioner’s jncome for 1923 because it was received and reported in 1922, and that the item of $77.77 should be taxed as a capital gain for 1923. It is further agreed by the parties that the balance of $94,493.19 arose out of contracts for the sale of land entered into prior to December 31, 1921, which amount represents profits on installment payments made during 1923. The parties disagree only as to the method of taxing these profits in the total sum of $94,493.19. It is the petitioner’s position that although the contracts of sale were executed prior to December 31,1921, the sales were not consummated until after that date so that the profits are taxable as capital gains at the 1214 per cent rate. The respondent denies that section 206, quoted above, is applicable and is contending that the gains must be taxed in the usual way with other income. The facts are not in dispute and it remains only to determine whether the sales out of which the income arose were consummated after December 31, 1921, within the meaning of the statute.

In Theodore J. Swift, 20 B. T. A. 1099, we considered a situation very similar to that presented herein. There was involved a sale of real property situated in California, the deeds to the property having been deposited in escrow in accordance with an agreement to sell dated March 4, 1921, delivery of the deeds to await a final payment on the purchase price to be made in 1924. The payments provided for in the agreement to sell were finally completed and the deeds were delivered to the purchaser in 1924. We held that title to the property did not pass from the vendor until 1924, when the deeds were delivered, and that with respect to the profit resulting from the transaction the vendor was entitled to have his tax liability computed under the capital gain provisions of the Revenue Act of 1924. This decision was affirmed by the Circuit Court of Appeals for the Ninth Circuit on January 5, 1932, 54 Fed. (2d) 746. See also Charles W. Dahlinger, 20 B. T. A. 176, which involved the question whether profits on the sale of certain stock should be taxed as a capital gain at the rate of 12% per cent. In that case title to the stock passed to the purchaser in 1920, but the full purchase price was not paid until after December 31, 1921. We held that the sale was consummated when the title passed to the purchaser and that the seller’s profits were not taxable under the capital gain provisions of the Revenue Act of 1921. This decision was affirmed by the Circuit Court of Appeals for the Third Circuit, 51 Fed. (2d) 664, certiorari denied by the United States Supreme Court, 52 Sup. Ct. 128.

In the instant case it is stipulated that none of the deeds covering the property described in the contracts of sale involved herein was delivered prior to December 31, 1921. Under the authority of the above decisions we hold that the sales in question were not consummated until after December 31, 1921, and the taxpayer-is entitled to the benefit of the capital gain provisions of the statute.

There should'be excluded from net income for 1923 the item of $1,458.03, which was received and reported in 1922 and which was erroneously reported by the petitioner for 1923, and the amount of $94,570.96 which was stipulated to represent income on installment payments made in 1923 should be taxed as a capital net gain in accordance with the provisions of section 206 of the Revenue Act of 1921.

Reviewed by the,Board.

Judgment will be entered under Rule 60.

Morris, Lansdon, Marquette, Sternhagen, and Trammell dissent.


author: Goodeich: Tbammell,

text:
    Estate of John Joseph Garvan, the First National Bank of Boston, Administrator, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44746.
    Promulgated February 25, 1932.

      George H. B. Green, Jr., Esq., for the petitioner.

      R. F. Staubley, Esq., for tbe respondent.
   OPINION.

Goodeich:

This proceeding is for the redetermination of a deficiency in estate tax of $9,661.04. Petitioner also challenges the validity of the original assessment of estate tax in the amount of $71,914.58, which it has heretofore paid under protest.

The following stipulation was filed:

(1) It Is hereby stipulated by and between the parties in the above-entitled action that the following facts are admitted and need not be proved.
(2) The petitioner is the First National Bank of Boston as Administrator of the Estate of Sir John Joseph Garvan. The legal residence of the decedent, Sir John Joseph Garvan, at the time of his death and at the time he made the transfers set forth in paragraph 4 infra was Sydney, New South Wales, Australia. The decedent at the time of his death and at the time he made these transfers was not engaged in any business in the United States. His death occurred on July 18, 1927, and on May 24, 1928, the First National Bank of Boston, a corporation duly organized Under the laws of the United States and having a usual place of business in Boston, Massachusetts, was appointed administrator of said Estate with the will annexed by the Probate Court of Suffolk County, Massachusetts.
(8) The gross estate of the decedent within the United States if as a matter of law said property may be included in determining gross estate situated within the United States (not including certain property which he transferred prior to his death, a list of which is set forth in Schedule B infra, and the value of which the Commissioner of Internal Revenue included in the gross estate of the decedent within the United States) consisted of the following securities at the. values shown in the last column.
Schedule A
E'air Market Value at Date of Death
Item
1. 2,800 shs. Swift International-$51, 750. 00
2. 4,102 “ Swift & Company-480, 959. 50
3. 798 “ Libby, McNeil & Libby-’ 6, 783.00
4. 983 “ National Leather Co-2,915. 63
5. $57,000 — Dominion of Canada 5s 1952_ 59, 850. 00
Interest on above-609. 58
6. $38,000 — Dominion of Canada 5%s 1934. 39, 282. 50
Interest on above-447. 03
7. $50,000 — Province of Ontario 6s 1943— 55, 625. 00
Interest on above-1, 025.00
8. $33,000 — Province of Ontario 5s 1948— 33, 825. 00
Interest on above-426. 25
Total_ 733,498.49
At the time of the decedent’s death the securities set out in said Schedule A were held by the said bank; they were not at that time and never had been hypothecated or pledged as security for any debt or obligation nor were they employed in whole or in part in any business carried on in the United States; they were held by said bank solely for the purpose of collection of the income therefrom for the account of the decedent.
(4)Ob or about October 26, 1926, tbe decedent transferred by gift outright to his brothers and sisters four identical lots of personal property, the value of all of which the Commissioner of Internal Revenue included in the gross estate of the decedent within the United States under the provisions of the Revenue Act of 1926 for purposes of the Federal Estate Tax. The detailed items contained in each of the four lots are as follows:
Schedule) B.
E'air Market Value at Date of Death
Item
1. 970 shs. Swift & Company_ $113, 732. 50
2. 600 “ Swift International_ 13, 500. 00
S.190 “ Libby, McNeil & Libby_ 1, 615.00
4. 230 “ National Leather Co_ 718. 75
5. $15,000 — Dominion of Canada 5s 1952. 15,750. 00
Interest on above_ 160.42
6. $2,500 — Dominion of Canada 5%s 1934. 2, 584.38
Interest on above_ 29.41
7. $12,000 — Province of Ontario 6s 1943-13, 350. 00
Interest on above_ 244.00
8. $8,000 — Province of Ontario 5s 1948-8,200.00
Interest on above_ 102. 22
Total__$169, 986. 68
At the time of said transfer on or about October 26, 1926, the securities set out in Schedule B were held by said bank; from the time of said transfer to the date of death of the decedent they were held by the National City Bank of New York; they were not at any time either before or after said transfer hypothecated or pledged as security for any debt or obligation nor were they employed in whole or in part in any business carried on in the United States; they were held by said banks solely for the purpose of collection of the income therefrom for the account of the decedent prior to said transfer and thereafter for the account of the transferees.
(5)The Commissioner of Internal Revenue has determined the value of the gross estate within the United States to be $1,413,445.21, the details being as follows:
4 times $169,986.68 (total of Schedule B) equals_ $679,946.72
Total of Schedule A above_ 733, 498. 49
Grand total_$1,413,445. 21
(6) These four transfers were gifts and were made without an adequate and full consideration in money or money’s worth. The petitioner does not admit that these transfers were made in contemplation of death.
(7) All of the bonds included in Schedule A supra were physically present in the United States at the time of the decedent’s death. All of the bonds included in Schedule B supra were physically present in the United States at the time the transfers were made. All the certificates of the shares of stock in Schedule A were physically present in the United States at the time of the decendent’s death. All the certificates of the shares of stock included in Schedule B were physically present in the United States at the time the transfers were made.
(8) Compañía Swift Internacional (Swift International) is a corporation organized under the laws of the Argentine Republic.
(9) There was no property of the decedent in the United States at the time of his death, other than as listed in Schedules A and B herein.
(10) None of the bonds included in Schedule A or in Schedule B was secured by any interest in real estate situate within the United States.
(11) The value of the decedent’s gross estate situated outside of the United States was $765,314.49. The amount of the gross deductions from the decedent’s estate (Item 4, Schedule M, Federal Estate Tax Return) was $29,999.53.
(12) Either party may introduce further evidence on any of the matters in issue in this case which is not inconsistent with the facts herein stipulated.

Later an additional stipulation was filed presenting a table of the mortality statistics contained in the 29th annual report of the Bureau of the Census, the relevancy and materiality of which is denied by respondent, and showing that a tax of $'71,914.58 disclosed by petitioner’s estate-tax. return filed on May 17, 1928, was paid under protest on the same date.

It is further agreed upon the record that Swift International owned no property within the United States; that Swift & Company, Libby, McNeil & Libby, and National Leather Company are domestic corporations; and that Dominion of Canada bonds and bonds of the Province of Ontario are bonds of a foreign government, not secured by property within the United States.

Petitioner’s allegations of error amount to a contention that, because decedent was a nonresident alien, his estate can not be subjected to an estate tax by the United States. Specifically, it alleges that respondent erred in including in the estate for purposes of taxation:

(1) shares of stock of a foreign corporation, and bonds of foreign governments ;
(2) shares of stocks of domestic corporations;
(3) property transferred by decedent by gift, after the effective date of the Revenue Act of 1926 and within two years prior to his death.

Petitioner also alleges that respondent failed to allow as deductions in determining the net estate subject to tax, miscellaneous administration expenses. Such expenses should be allowed on the basis of gross deductions of $29,999.53 in determining the net estate subject to tax in accordance with the stipulation entered into between the petitioner and the respondent.

The provisions of the Bevenue Act of 1926 pertinent to the issues here read in part as follows:

Sec. 301. (a) * * * a tax * * * is hereby imposed upon the transfer of the net estate of every decedent dying after the enactment of this Act, whether a resident or nonresident of the United States.
Sec. S02. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(a) To the extent of the interest therein of the decedent at the time of his death;
* * * * * * *
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, • in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona flde sale for an adequate and full consideration in money or money’s worth. Where within two years prior to his death but after the enactment of this Act and without such a consideration the decedent has made a transfer or transfers, by trust or otherwise, of any of his property, or an interest therein, not admitted or shown to have been made in contemplation of or intended to take effect in possession or enjoyment at or after his death, and the value or aggregate value, at the time of such death, of the property or interest so transferred to any one person is in excess of $5,000, then, to the extent of such excess, such transfer or transfers shall be deemed and held to have been made in contemplation of death within the meaning of this title. Any transfer of a material part of his property in the nature of a final dispo'sition or distribution thereof, made by the decedent within two years prior to his death but' prior to the enactment of this Act, without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title;
* * * * * * *
Sec. 303. (d) For the purposes of this title, stock in a domestic corporation owned and held by a nonresident decedent shall be deemed property within the United States, and any property of which the decedent has made a transfer, by trust or otherwise, within the meaning of subdivision (c) or (d) of section 302, shall be deemed to be situated in the United States, if so situated either at the time of the transfer, or at the time of the decedent’s death.

We have previously held that bonds of a foreign government and shares of stock of a foreign corporation owned by the estate of a nonresident decedent, the paper evidences of which were held in this country for certain restricted purposes, as in the case now at bar, may not be included in determining the value of decedent’s estate situated in the United States. Ernest Brooks et al., 22 B. T. A. 71. That case arose under the Revenue Act of 1924, the pertinent provisions of which are not materially different from those of the 1926 Act above quoted. Following that decision, we reverse respondent’s action in including in decedent’s estate the bonds of foreign governments and the shares of stock of a foreign corporation. See also Shenton v. United States, 53 Fed. (2d) 249.

But, as pointed out in the Brooks case, in determining the net estate of a nonresident decedent, section 303 (d) provides that stock of a domestic corporation shall be deemed property within the United States. There is no ambiguity in this statutory provision and it is conceded that the taxability of the shares of stocks of domestic corporations here involved depends squarely upon it. Petitioner, urges that such stock was situated outside the United States and, under the rule mobilia seqmintur personam, had a situs at the domicile of the owner and contends that so much of section 303 (d) of the Revenue Act of 1926 as operates to tax stock in domestic corporations owned by a nonresident decedent is in conflict with the due process clause of the Fifth Amendment and unconstitutional.

In support of this contention our attention is called to certain recent cases in which the Supreme Court has applied the rule mobilia seqwuntur personam in fixing the situs of intangible property at the domicile of the owner for the purpose of taxation. Farmers’ Loan & Trust Co. v. Minnesota, 280 U. S., 204; Baldwin v. Missouri, 281 U. S. 586; Beidler v. South Carolina, 282 U. S. 1; Rhode Island Hospital Trust Co. v. Doughton, 270 U. S. 69; First National Bank of Boston v. State of Maine, 284 U. S. 312. All of these cases arose under the Fourteenth Amendment and, we believe, are not controlling where the power of Congress to tax is considered. These decisions indicate that the underlying reason for the application of the rule to intangibles, as between the States, is to prevent the injustice of double taxation, but this does not apply necessarily, nor has it been held to apply, where the Federal Government imposes a tax. Generally, both the Federal and State Government may tax the same object or the same transfer at the same time, and the taxation by the one is not a limitation upon the taxation by the other. See Frick v. Pennsylvania, 268 U. S. 473.

The Fourteenth Amendment is a limitation on the power of the States to tax, but the Fifth Amendment under which the issue here arises is not a limitation upon the taxing power of the Federal Government: McCray v. United States, 195 U. S. 27; Billings v. United States, 232 U. S. 261; Flint v. Stone Tracy Co., 220 U. S. 107; Brushaber v. Union Pacific Railroad Co., 240 U. S. 1, unless the exercise of the taxing power is so unreasonable and arbitrary as to amount to a confiscation rather than a tax. Brushaber v. Union Pacific Railroad Co., supra; Nichols v. Coolidge, 274 U. S. 531; Blodgett v. Holden, 275 U. S. 142; 276 U. S. 594; Untermyer v. Anderson, 276 U. S. 440. For this Board, the clear and definite statutory instruction is stronger authority than the urged analogy and possible application to this case, arising under the Fifth Amendment, of the recent decisions of the Supreme Court invoking and applying the mobilia doctrine to cases arising under the Fourteenth Amendment. Here, Congress has expressed a clear intention to tax and if that intention is not consistent with the rule mobilia sequuntur personam, we must assume that Congress intended to repeal the rule in so far as it is in conflict. Cf. In re Whiting’s Estate, 44 N. E. 715.

Petitioner has failed to indubitably demonstrate to us that this statute infringes the constitutional guarantees which he invokes; that the tax here imposed is so arbitrary or unreasonable as to cause us to disregard or reject the explicit provision of the statute under which it is laid. As said by Judge L. Hand in Cohan v. Commissioner, 39 Fed. (2d) 540, at page 545:

* * * limitations like the Fifth Amendment are not like sailing rules or traffic ordinances; they do not circumscribe the actions of Congress by metes and bounds. * * * So it does not seem to us that the situation here calls for so heroic a remedy as to declare the statute unconstitutional, nor indeed, for the lesser one of wringing the words out of their natural meaning. * * * while colloquial language is a fumbling means of expression, there are .limits to its elasticity; to deny the application of these words to the case at' bar seems to us to pass the point of rupture.

Bespondent is sustained in including in decedent’s estate, for purposes of taxation, the shares of stock in domestic corporations.

We come now to consider petitioner’s third issue, in support of which it is urged that section 302 (c) is unconstitutional in so far as it raises a conclusive presumption that gifts made within two years prior to decedent’s death were made in contemplation of death. We have so held in American Security & Trust Co. et al., 24 B. T. A. 334. But, as pointed out in that case, section 302 (c) contains two provisions, the first being set out in the first sentence of that section and demanding proof to overcome the presumption of its applicability in any case wherein the Commissioner has made a determination thereunder. It requires that the value of decedent’s interest in property which he has at any time transferred, except by a bona fide sale, in contemplation of death, or intended to take effect in possession or enjoyment at or after his death, shall be included in the estate for purposes of taxation. Where, acting under authority of that provision, the Commissioner determines that decedent has made such a transfer of an interest in property and includes the value of such interest in decedent’s estate, that determination is prima facie correct and the burden of proving it incorrect rests upon the challenger. Wickwire v. Reinecke, 275 U. S. 101.

In this case respondent has included in decedent’s estate the total value of the properties, consisting of shares of stock of domestic and foreign corporations and bonds of foreign governments, which were included in the four transfers made by decedent in October, 1926. Petitioner “ does not admit that the transfers were made in contemplation of death.” Such a denial, if it be a denial, is not the proof required to rebut respondent’s determination, which we must take to be prima facie correct, nor does it serve to shift from petitioner to respondent the burden of proof of the facts relative to the transfers. Nowhere in this record is it indicated that respondent, in so including the property transferred, is relying solely upon the conclusive presumption raised by section 302 (c). On the contrary, the fact that respondent has included in this estate the total value of the properties transferred without deducting therefrom the exemption of $5,000 on each transfer allowed by the second provision of this section, indicates that he has determined as a fact that these transfers were made in contemplation of death.

Nor does it appear upon this record that petitioner was in possession of evidence proving that the transfers in fact were not made in contemplation of death. Petitioner having faded in the proof of facts essential to his contention, we sustain respondent’s action in including in decedent’s estate the shares of stocks of the domestic corporations embraced by the four transfers. We except, however, the transferred shares of stocks of foreign corporations and the bonds of foreign governments for the reason that, under our decision in the Brooks case, supra, such stocks and bonds were not situated in the United States, either at the time of the transfer or at the time of decedent’s death, as provided in section S03 (d). Consequently, they should not be included in decedent’s estate.

Reviewed by the Board.

Judgment will be entered under Rule 50.

LaNSdon did not participate in the consideration of or decision in this report.

Maequette concurs in the result.

Tbammell,

dissenting: In so far as the prevailing opinion holds that stocks in domestic corporations, both those held by the decedent at the time of his death and those transferred by him, are subject to the estate tax, I am unable to agree.

In so far as stocks in domestic corporations are concerned, the real controversy is over the effect of section 303 (d), which is set out in the prevailing opinion.

Clearly, if the statute had not provided that stock of a domestic corporation owned and held by a nonresident decedent shall be deemed property within the United States, such stock would be governed by the rule that mobilia sequuntur personam, unless it had become a part of or used in a localized business. See Rhode Island Hospital Trust Co. v. Doughton, 270 U. S. 69; Farmers Loan & Trust Co. v. Minnesota, 280 U. S. 204; Baldwin v. Missouri, 281 U. S. 586; First National Bank of Boston v. Maine, 284 U. S. 312. It seems clear from the above opinions that the place where the paper evidences of the securities and stocks were located is unimportant and does not indicate where the. stocks and securities are situated, unless they are used in a local business, or unless they are placed beyond the control or the beneficial owner and beyond his power of removal. See Safe Deposit & Trust Co. v. Virginia, 280 U. S. 83.

Section 303 (d) of the statute, quoted in the majority opinion, does not undertake to change the general rule applicable to intangibles, including stock in domestic corporations, unless the stock is held by the decedent at the time of his death. In so far as any transferred property is concerned, it is deemed to be situated in the United States if so situated at the time of decedent’s death or at the time of transfer. There is every indication that the situs of transferred stock is intended by the statute to be governed by the general rule. No distinction between domestic stock and any other kind of stock or any other property is drawn. If it is not to be governed by the mobilia rule or the business situs rule, how can stock in a domestic corporation be situated at one place at the time of death and at another place at the time of transfer? So long as a corporation remains a domestic corporation, if the situs of its stock is changed its situs must depend upon something else than the fact that it is stock in a domestic corporation. Domicile of the owner may change or it may be placed or used in a localized business. Clearly, then, the statute contemplated that its situs was governed by the general rule. There is then no statutory provision to be considered which undertakes to change the situs of transferred stocks. Since, in so far as the transferred stocks in domestic corporations are concerned, the statute does not undertake to change the recognized rule as to where they were situated and it being shown that they were not a part of a localized business in the United States, I think that they were situated at the domicile of the owner and not in the United States, and have no taxable situs here. In so far as these stocks are concerned no question of constitutionality is involved. The statute specifically provides that certain stocks in domestic corporations shall be deemed to be situated in the United States. As to all transfen-ed property, including stocks, the statute is silent as to any situs by virtue of its being in domestic corporations. The specific provision as to stocks held, might be interpreted as an intention that other stocks in such corporations should not be so treated, or deemed, and in the absence of legislation on the subject, it seems that the general rule prescribed by the Supreme Court as to the situs of stock should govern such stock as was transferred.

In so far as the prevailing opinion treats transferred stock in domestic corporations in the same manner as stocks held, I think the opinion is clearly wrong.

The important question presented is whether Congress may by legislative fiat constitute stock in domestic corporations owned and held by a decedent at the time of his death to be situated within the United States, if otherwise it is not so situated. Conceding that Congress has unlimited and unrestricted power of taxation with regard to persons, property, business or transactions within its jurisdiction, it clearly has no power to levy a tax unless either the person, the property, business or transaction with respect to which the tax is levied is or occurs within or is subject to the jurisdiction of the United States, and if property or the transfer thereof is not within the jurisdiction of the United States, clearly Congress could not make it so by legislative declaration.

With respect to limitation on power to tax, the Supreme Court, in the case of State Tax on Foreign Held Bonds, 15 Wall. 300, said:

The power of taxation, however vast in its character and searching in its extent, is necessarily limited to subjects within the jurisdiction of the State. These subjects are persons, property and business. Whatever form taxation may assume, whether as duties, imposts, excises or licenses, it must relate to one of these subjects.

While the above decision related to the power of a State to tax, the rule applies with equal force to the Federal Government. It seems to be fundamental that one government can not tax the citizens of another government residing abroad except with respect to business transacted or .income derived, property situated or a transaction which occurs within its own jurisdiction. In our system of dual government, when the power to tax within a sphere is given to the Federal Government or reserved to the States, the States are no more limited in their sphere than the Federal Government in its sphere. The Federal Government has no more power to tax objects or subjects or the transfer thereof outside of its jurisdiction than the States. See Michigan Central Ry. Co. v. Slack, 17 Fed. Cases 263; Rose v. Himely, 4 Cranch. 240; The Appollon, 9 Wheat. 362; Hilton v. Guyot, 159 U. S. 113; United States v. Erie R. R., 25 Fed. Cases 1019. In ihe latter case, decided by the Circuit Court, Chief Justice Waite said:

Tbe Congress of the United States can have no greater power to tax persons or property not within the jurisdiction of the United States than a state has to tax persons and property not within its jurisdiction * * *. The power of the United States is limited to persons, property and business within the jurisdiction as much as that of a state is limited to the same subjects within its jurisdiction. State Tax on Foreign-Held Bonds, 82 U. S. 300.

The courts have never rejected this principle.

The Supreme Court having laid down the rule that intangible property such as stocks of domestic corporations is situated at the domicile of the owner, or may have a taxable situs at the place where it is engaged or used in business, is it situated at some other place because of a legislative enactment ? I do not think so. The statute involved here did not undertake to measure the tax by the value of property in the gross estate of a nonresident decedent unless that property was situated in the United States, but added the provision that stock in domestic corporations owned and held by a decedent would be deemed to be situated in the United States. Thus the only taxable situs imposed by the statute is upon property situated in the United States in so far as nonresidents are concerned.

Clearly the decedent was not doing business in the United States and the property involved could in no sense be said to be a part of a localized business in this country. If the rule laid down by the Supreme Court is to be accepted that intangibles follow the domicile of the owner, this property was situated in Australia and not in the United States, and the United States would have no power to subject intangible property situated in Australia to Federal estate tax than it would to tax real property situated in Australia or the transfer thereof, unless in any event this Government had jurisdiction of the person of the owner or the transfer by death occurred in the United States under its own laws or jurisdiction. Of course if the decedent had been a citizen of the United States, the power of the Federal Government over a citizen with respect to taxation would involve a different principle. As the Supreme Court said in the case of United States v. Bennett, 232 U. S. 299, Congress had the constitutional right to tax its citizens on account of the use of foreign-built yachts even if the property during the taxable period had its situs beyond the territorial limits of the United States. But that case, as we said in the case of Ernest Brooks et al., 22 B. T. A. 71, was based upon the relationship of the United States to its citizens and their relations to it and did not involve citizens and residents of foreign countries. If a person is a resident of this country, regardless of his citizenship, a different principle would be involved. This country might then be said to have jurisdiction of the person. Clearly it could not be said, however, that Congress has the power to tax a citizen of a foreign country residing in such country in connection with the use of property situated in a foreign country. Nor do I think that Congress has the power to say that property situated in a foreign country is situated in this country. This principle need not rest upon the constitutional power of Congress alone, but involves also a broader principle of sovereign power in its relation to international law. The powers of one sovereign do not extend beyond the limits of its jurisdiction.

The principle involved here is somewhat related to that involved in the case of First National Bank of Boston, Executor, supra, where the court held that Maine could not tax a transfer by death of stock in a Maine corporation; that the property was not situated in that State, nor did the transfer by death occur there. The court said that the stock had a situs at the domicile of the owner and not in the State where the corporation was organized and that the transfer occurred in the State of domicile of the owner. In my opinion the situation would have been the same even if the Maine statute had provided that stock under the above circumstances would be deemed to be situated in that State. The Supreme Court laid down the rule that intangibles, including stocks in corporation, are situated at the domicile of the owner, and that the fact that the corporation was organized in Maine gave the stock no situs there. The same rule was definitely applied to corporate stock as had been applied to other intangibles. In my opinion, the State of Maine could not have drawn to itself the power to tax the transfer by death of the stock there involved by declaring in the statute that the stock of corporations organized therein should be deemed to be situated in that State.

The courts have interpreted the word “ deemed ” to mean “ regarded ” “ considered ” or “ adjudged.” See Leonard v. Grant, 5 Fed. 11; United States v. Doherty, 27 Fed. 730; Michel v. Nunn, 101 U. S. 423; Douglas v. Edwards, 298 Fed. 229. With this meaning the statutory provision under consideration might be read that stocks in domestic corporations should be regarded, considered or adjudged to be situated in the United States. In the case of Schlesinger v. Wisconsin, 270 U. S. 230, the Supreme Court held that a statute of Wisconsin which provided that gifts of a material part of the donor’s estate within six years prior to the donor’s death shall be construed to have been made in contemplation of death ” was unconstitutional, as being a violation of the Fourteenth Amendment, and that the classification for taxation must rest on some reasonable basis. Congress has made a classification between stock held and that transferred. The Fifth Amendment requires a reasonable classification. Can Congress under that amendment consider property situated in the United States if it is not, and subject a transfer thereof by death to tax when it was not transferred under its laws or the laws of any State or Territory subject to its jurisdiction, or can Congress say that a share of stock in a domestic corporation shall be deemed situated in the United States, dependent solely upon whether or not it was transferred by decedent or held by him at a certain time.

To say that stock in a domestic corporation held by the decedent shall be deemed to be property in the United States, but stock in the same corporation transferred before decedent’s death to take effect at or after death or made in contemplation of death shall be governed by the law otherwise applicable seems to be unreasonable, arbitrary and capricious and thus contrary to the Fifth Amendment. It seems arbitrary and capricious to say that a share of domestic stock owned by decedent shall be situated in the United States, due to the fact alone that it is stock in a domestic corporation, but another share of the corporation’s stock may be situated at another place, depending solely on whether the owner had transferred it; that the fact that it is in a domestic corporation is not material if decedent had transferred it. If the fact that stock is in a domestic corporation determines its situs, the only question would be the power of Congress to so enact, but the situs of such stock does not rest on this basis. It must also be owned by the decedent at the particular time of death, to give it a situs here. It would seem that Congress would have no more power under the Fifth Amendment to provide that such stocks would be considered to be situated in the United States than a State under the Fourteenth Amendment to provide that transfers made within a certain period should be considered to have been made in contemplation of death, if contrary to the fact, or than a State would have to provide that money or securities in banks in that State should be deemed to be situated in that State. It would seem that Congress has no more power to change the situs of property than the States would have. But it would hardly be contended that a State by mere verbiage of the statute could subject property to tax when it is beyond its jurisdiction. If it be construed that Congress created a conclusive presumption as to the place where stocks in domestic corporations are situated then we must apply the principle of Railroad Co. v. Turnipseed, 219 U. S. 35; Morley v. Georgia, 279 U. S. 1; Bailey v. Alabama, 219 U. S. 219, in which the court held that a statute which creates a presumption that is arbitrary or that operates to deny fair opportunity to repel it violates the due process clause of the Fourteenth Amendment and under other decisions herein cited the same rule is applied to the Fifth Amendment. Where the statute provides that stocks in domestic corporations held by the decedent shall be deemed to be property in the United States it may fairly be interpreted ás a presumption created by statute which is governed by the above principles.

If it be regarded entirely as a question of law as to where intangibles are situated, then the Supreme Court has settled the question that the property in this case is not situated in the United States, and our problem is, Can Congress “ regard ” the property or “ consider ” or “ adjudge ” it to be situated within the United States ? This is entirely different from the question as to the power of Congress to create another taxable situs.

Congress has not undertaken to levy the tax except as to property situated in the United States.

On the other hand, if the place where property is situated be considered as a question of fact, can Congress by legislation change the fact ? Can the place where property is situated be either created or changed by legislation? I think not. A legislative body can create the law, to which the facts are applicable, but it can not create or change facts. If neither the person or property is situated in nor its transfer occurs within the jurisdiction of the United States, it seems clear that Congress could not by legislation give itself jurisdiction thereof.

It may be contended that even if Congress did not have the power to prescribe conditions as to the organization of the corporations or to control or regulate the transfer of their shares by death, this being an estate tax, an excise imposed upon the transfer by death, it still had the power under the principle of Knowlton v. Moore, 178 U. S. 41, to impose the tax upon the transfer regardless of the fact that no rights or privileges with respect to the transfer were controlled or regulated by the Federal Government. That case, however, did not involve a tax upon the transfer by death in the case of a nonresident alien whose property was not situated in the United States and where the transfer took place and was regulated by the laws of a foreign country. In the Knowlton case, supra, the transfer by death occurred and was regulated in accordance with the laws of a State of the Union and the transfer occurred within the United States. But it does not follow that Congress can impose an excise on the transfer of property where that transfer occurs in a foreign country and was governed by laws of a foreign country and where the jurisdiction of the United States did not extend to any rights or privileges with respect to such transfer. The Supreme Court in the case of Frick v. Pennsylvania, supra, said:

It is a fundamental principle that real estate descends pursuant to the law of its situs without reference to the law of the owner’s domicile and that personal property whether tangible or intangible and wheresoever situated descends pursuant to the law of the owner’s domicile * * * Where the situs of the property transfeired is outside the taming state and the deoedmt was a nonresident of the taming state the transfer is not tamable. * * * Where the property is intangible the transfer is taxable since the property passes according to the law of the domiciliary state. Bullen v. Wisconsin, 240 U. S. 625. [Italics ours.]

The case of Eidman v. Martinez, 184 U. S. 578, involved the Federal inheritance-tax law of 1898, which applied to property “passing by will or by intestate laws of any State or Territory.” The decedent was domiciled in Spain. Some of his property consisted of intangibles such as stocks and bonds, in domestic corporations the paper evidences of which were in New York. The court said: “As the property in this case did not pass under any law of any State or Territory of the United States or by the intestate laws of any such State or Territory,” such property was not subject to the Federal inheritance tax, the court further saying, “ the whole scheme of the Act evidently contemplates the application of the tax only to the property of a person domiciled in the United States or territory of the United States whose property is transmitted under our laws.” The court reaffirmed the doctrine previously established that such intangible property as was there involved, in so far as its transfer by death was concerned, was governed by the law of the domicile of the owner and under the laws of that jurisdiction it passed. Could the property in that case have passed under our laws by Congress enacting a provision that it would be deemed to have done so or to the same effect by “ deeming ” the property to be situated here ?

In connection with the Federal Estate Tax Act of 1916, which in so far as is material is no different from the act before us, the Attorney General of the United States rendered an opinion, 31 Ops. Atty. Gen. 287, in which he stated that real estate situated in a foreign country, although owned by a resident of the United States, was not subject to the provisions of that act. He expressed the opinion that Congress did not intend to tax real estate situated outside of the United States which passed by the testate or intestate laws of a foreign country; that the transfer of real estate, not only in form but in substance, that is, who shall take it, to what extent and under what conditions, is governed by the lex rei sitae. On the other hand, as to personal property, he stated that the rule was that mobiMa sequuntur personam, which had the effect of drawing intangible personal property to the jurisdiction of the domicile. He used the following language:

The plain sense of the matter is that real estate in a foreign country, unlike personal estate there, cannot be enjoyed as such in any true sense without the protection and supervision of the laws of the foreign country in which it is situated, while as to personal property the fact may very well, for obvious reasons, be different. Hence all governments agree to recognize the domicile of the decedent as the situs of the primary administration upon his personal estate while not recognizing his domicile as to his realty.

In the above situation, upon which the Attorney General rendered this opinion, the decedent was a resident of the United States domiciled here. The act of Congress involved was admittedly broad enough to include real estate situated in a foreign country when owned by a resident of the United States.

It seems clear that if the right to transmit intangibles by death or the ownership thereof is regulated and controlled by the law of tiie domicile, see First National Bank of Boston v. Maine, supra, that right in this case is controlled, protected and enforced by the law of the foreign country. This country has no power or control over property situated in a foreign country or its transmission by death. In so far as domestic stocks are concerned, their ownership can be changed regardless of any transfer on the books of the corporation. It is generally accepted that it is not necessary that certificates of stock be actually issued to the owners thereof. In the case of Pacific National Bank v. Eaton, 141 U. S. 227, the court said: “ Millions of dollars of capital stock are held without any certificate; or if certificates are made out, without their ever having been delivered. A certificate is authentic evidence of title to stock; but it is not the stock itself nor is it necessary to the existence of the stock. It certifies to a fact which exists independently of itself.”

In so far as the right of the property in stock or the transfer of the ownership thereof is concerned, no law of the United States need be resorted to. The fact that it might be necessary to resort to the courts of this country to enforce the right of transfer on the books or to enforce the right to dividends, is not important. In the case of bonds or other debts, resort must be had to the laws and courts of the jurisdiction of the debtor, but the Supreme Court has completely settled the question, to the effect that, notwithstanding this fact, the bonds are situated at the domicile of the owner in the cases herein cited, and in the case of First National Bank of Boston, supra, this rule wa,s specifically applied to stocks.

If the state of the debtor whose laws have to be resorted to for protection and collection of the debt does not have jurisdiction to tax the transfer of the debt belonging to a nonresident, and if a state in which a corporation is organized does not have the right to tax the transfer of the shares because they are not situated in that state, under the Fourteenth Amendment for lack of due process of law, it would seem that Congress would be similarly limited by the Fifth Amendment under the identical language. If a state has not jurisdiction it would seem that it could not give itself jurisdiction by declaring that debts owing in the state or stock of corporations organized therein would be deemed to be situated there. The rule that a state is limited to objects within the sphere of its jurisdiction or the limits of its sovereignty is also applicable to the Federal Government.

In this case the transfer of the stock of domestic corporations occurred outside of the jurisdiction of the United States. The transfer not being regulated or controlled or authorized by any right granted by the United States, and the occurrence upon which the excise is levied not being within the United States, the principles of the Knowlton v. Moore case, supra, have no application. I do not think that Congress has the power to levy an excise upon the happening of an event in a foreign country regulated and controlled entirely by laws of the foreign country unless this Government has jurisdiction of the person of the owner of the property transferred or unless the property transferred was the part of a localized business in the United States. The language of the court in the Baldwin v. Missouri case, supra, is pertinent on this issue. The court said:

We find nothing to exempt the efforts to tax the transfer of the deposits in Missouri bants from the principle applied in Farmers’ Loan & Trust Co. v. Minnesota,, supra. So far as disclosed by the record, the situs of the credit was in Illinois where the depositor had her domicile. There the property interest in the credit passed under her will; and there the transfer was actually taxed. This passing was properly taxable at that place, and not otherwhere.
The bonds and notes, although physically within Missouri, under our former opinions were choses in action with situs at the domicile of the creditor. At that point they, too, passed from the dead to the living, and there this transfer was actually taxed. As they were not within Missouri for taxation purposes, the transfer was not subject to her power. Rhode Island Trust Co. v. Doughton, 270 U. S. 69, 46 S. Ct. 256, 70 L. Ed. 475, 43 A. L. R. 1374.

Whj-le it may readily be conceded that everything over which sovereign power extends is an object of taxation (see Van Brocklin, v. Anderson, 117 U. S. 151; McCulloch v. Maryland, 4 Wheat. 316), our question here is, Does the sovereign power of one sovereign extend to property which is situated in another country and where the transfer thereof occurs in another country and the first country had nothing to do with any privilege or right ,in connection with the transfer %

It may be contended that a different rule should govern the Federal Government in its taxation of intangibles or the transfer thereof by death from that which is applicable to States. It is manifest that the States and the Federal Government have different powers and that the Federal Government of course is not limited by the Fourteenth Amendment as the States are. The Federal Government, however, is limited by the Fifth Amendment. The due process clause of that Amendment is a restriction on the Federal Government as the due process clause of the Fourteenth Amendment on the States. See United States v. Armstrong, 265 Fed. 683; Davidson v. New Orleans, 96 U. S. 97; Bartlett Trust Co. v. Elliott, 30 Fed. (2d) 700; Hurtado v. California, 110 U. S. 516; and extends to and includes aliens. Russian Volunteer Fleet v. United States, 282 U. S. 481.

By the due process clause of the Fourteenth Amendment, it was clearly not intended to impose on the states when exercising their power of taxation any more rigid or strict curb than that imposed on the Federal Government by the Fifth Amendment. French v. Barber, 181 U. S. 324; Tonawanda v. Lyon, 181 U. S. 389; Cass Farm Co. v. Detroit, 181 U. S. 396.

The principle in Saltonstall v. Saltonstall, 276 U. S. 260, a case arising under State law where the Fourteenth Amendment was applicable, was applied in the case of Chase National Bank v. United States, 278 U. S. 327, a case arising under the Federal statute to which the Fifth Amendment was applicable. The same principle was held applicable to both the States and the Federal Government in the cases of Nichols v. Coolidge, 274 U. S. 531, and Coolidge v. Long, 282 U. S. 582.

In so far as the transferred domestic stock, as to which the statute does not by express provision “ deem ” to be situated in the United States, it seems plain that the rule applicable to States as to where it is situated is applicable to the Federal Government. Surely it would not be situated at one place for the States and at another place or its situs based on a different rule as to the Federal Government.

In the case of DeGanay v. Lederer, 250 U. S. 376, the Supreme Court applied to the Federal Government the same tests and the same rule which it applied in the Fourteenth Amendment cases as to States in so far as the determination of the situs of property and the sources of income therefrom were concerned for the purposes of Federal taxation. The court made no attempt to distinguish its decisions involving the power to tax such property. On the other hand, it adopted the same reasoning, and applied the same doctrine and the same principles. In any event the rule for the determination of the place where property is situated would seem to be the same whether the Fourteenth Amendment or the power of Congress is involved. If intangibles are situated at the domicile of the owner in so far as States are concerned, it would seem that it would not be situated at a different place so far as the Federal Government is concerned.

In the case of Compania de Tabaros v. Collector, 275 U. S. 87 (1927), the court had before it a law of the Philippine Islands. The Philippine Organic Act contained a “ due process clause ” similar to that in the Fifth and Fourteenth Amendments. The court said:

It (the tax) is an imposition upon a contract not made in the Philippines and having no situs there and to be measured by money paid as premium in Paris, with the place of payment of loss, if any, in Paris. We are very clear that the contract and the premiums paid under it are not within the jurisdiction of the Government of the Philippine Islands.

It is of significance that even in the Deganay case, supra, the court, while it placed stocks and bonds on the same basis, did not rest its decision upon the ground that the stock was in domestic corporations, but was to some extent at least based upon the doctrine of Blackstone v. Miller, 188 U. S. 189, and the principle announced in People ex rel. Jefferson v. Smith, 88 N. Y. 576, from which the court quoted to the effect that the certificates themselves constituted property and were taxable where found. On this theory of course the securities involved here would be situated in the United States. This doctrine, however, was later repudiated in the Missouri and Minnesota cases, but the Deganay decision was also based upon the principle that the securities involved were held for business purposes in the United States, a principle later reaffirmed in the Missouri and Minnesota cases, and in the case of Hill v. Carter, 47 Fed. (2d) 869. So localized, the income therefrom was held to be from sources within the United States. This principle is not applicable here on the facts. The court did not intimate that the fact that the corporations were organized in the United States in and of itself was any basis for upholding the tax.

In the Hill case, supra, stocks, bonds and other securities were owned by a resident of Hawaii. They were in possession of a New York agent empowered to collect the income therefrom, to invest and reinvest the same and to sell any of the securities and to invest in others. The court held that the property had acquired a business situs in New York, and relied on the case of DeGanay v. Lederer, supra. That property may be held to be situated where it has a business situs is in accord with the language of the Supreme Court in the Minnesota, the Rhode Island Trust Co. and other cases. The stipulated facts in the case at bar remove it from the principle of the above case. Under the facts in this case the property had no business situs nor was it situated here under the maxim, mobilia seguuntur fersonam. It is not necessary for us to decide, as the court did in the Hill case, that intangibles, having acquired a business situs, lost their otherwise recognized situs at the place of the domicile of the owner. Nor is it necessary for us to discuss the principle of double taxation. Such principle does not affect this case. Nor do I see any principle or language in the case of Safe Deposit & Trust Co. v. Virginia, 280 U. S. 83, which is inconsistent with the views here expressed.

In my opinion, in view of the foregoing, the provisions in the statute that stocks in domestic corporations shall be deemed property situated in the United States is ineffective unless such stock is situated in the United States because its owner resides here or unless it has a business situs in this country.


author: Black:

text:
    H. C. Brown, Petitioner, v. Commissioner of Internal Revenue, Respondent. Maude Brown Plettner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 33343, 33345.
    Promulgated February 25, 1932.

      James D. Benedict, Esq., for the petitioners.

      J. E. McFarland, Esq., for the respondent.
   OPINION.

Black:

The respondent has taken the position that the estate received by the petitioners by bequest from their mother, limited as it was in duration to the life of Mary E. Fowles, falls within the exception provided in section 215 (b) of the Revenue Acts of 1921, 1924 and 1926, and accordingly precludes the taking of any deductions under section 214 (a) (8) of the same acts, either for the exhaustion of the value of the estate by the mere lapse of time, or for depreciation of the buildings and improvements on the land. Petitioners contend that this action of the respondent was' error and that petitioners are each entitled to deduct under said section 214 (a) (8) an amount of $2,712.82 for each of the taxable years, representing an amortization or exhaustion of the value of income-producing property received by each by bequest from their deceased mother. At the hearing petitioners amended their petition so as to contend in the alternative that if not allowed the full deduction claimed, they are nevertheless entitled to a reasonable deduction for depreciation on the value of the improvements apportioned between themselves and the remaindermen. The taxable years involved in this proceeding are governed by the Revenue Acts of 1921, 1924 and 1926. The taxable year 1925, one of the years involved in this proceeding, is governed by the Revenue Act of 1926, because expressly so provided by the terms of that act. Section 215 (b) of each of said revenue acts is the same and reads:

Seo. 215 (b) Amounts paid under tbe laws of any State, Territory, District of Columbia, possession of the United States or foreign country as income to the holder of a life or terminable interest acquired by gift, bequest, or inheritance shall not be reduced or diminished by any deduction for shrinkage (by whatever name called) in the value of such interest due to the lapse of time, nor by any deduction allowed by this Act for the purpose of computing the net income of an estate or trust, but not allowed under the laws of such State, Territory, District of Columbia, possession of the United States, or foreign country for the purpose of computing the income to which such holder is entitled.

Section 214 (a) (8) of the Revenue Acts of 1921 and 1924 is the same and reads as follows:

Seo. 214 (a) In computing net income there shall be allowed as deductions:
*******
(8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.

Section 214 (a) (8) of the Revenue Act of 1926 reads the same as above except Congress added at the end of paragraph (a) (8) the following language:

In the case of improved real estate held by one person for life with remainder to another person, the deduction provided for under this paragraph shall be equitably apportioned between the life tenant and the remainderman under rules and regulations prescribed by the Commissioner with the approval of the Secretary.

In Elmer J. Keitel, 15 B. T. A. 903, we considered the above sections in connection with a life interest in the hands of a taxpayer who had purchased the interest for a valuable consideration, and we there held that such purchase was a capital investment which should be exhausted over the life of the estate so acquired. In that case there was no proof of the value of the estate acquired and the deduction to which petitioner was entitled could not be determined. In that case we said:

If petitioner had purchased a lease, he would under Section 214 (a) (8) be entitled to an annual deduction for the exhaustion of his leasehold. Such has been the consistent holding of the Board since its decision in Grosvenor Atterbury, 1 B. T. A. 169. We perceive no difference in principle between the rule laid down in the above case and where one purchases a lease determinable upon the life of the lessor or any other person. In such a case the purchaser would be entitled to take his deduction for exhaustion on the basis of the life tables, if they constituted the only evidence in the case providing a method of determining the duration of the life of the lessor or other person. Nor can we perceive any difference in this respect between the purchase of a lease of a life interest and the purchaser of the life interest itself. In both cases the interest is terminable and exhaustible for income-tax purposes. This proceeding does not fall within the provisions of Section 215 (b), for the reason that petitioner did not acquire his mother’s interest “ by gift, bequest, or inheritance * * He acquired it by purchase. He purchased a terminable estate and is in the same position as one who purchases a lease, which is also a terminable interest.

The above opinion was approved and followed in Floyd M. Shoemaker et al., 16 B. T. A. 1145. See also Caroline T. Kissel, 15 B. T. A. 105.

It is the contention of the petitioners that their situations are the same as were the taxpayers’ in the above cited cases and hence they are entitled to exhaust over a period of the life expectancy of the life tenant, Mary E. Fowles, the full value of the estate which they received just the same as if they had purchased it at that price. We do not agree with this contention. Undoubtedly the purchaser, Charles Courtland Brown, under the authority of the above-cited cases, would have had the right to exhaust the purchase price which he paid for the property over the period of the life expectancy. But petitioners are not in his situation. The property came to them not by purchase, but by bequest and hence comes squarely within the terms of section 215 (b) of the respective revenue acts, already cited. On this point we hold for respondent. But we think petitioners’ alternative contention should be sustained. Under the terms of the Revenue Act of 1926 applicable to the year 1925, one of the years involved in this proceeding, a requirement is made that in case of improved real estate held by one person for life, with remainder to another person, the depreciation permitted as a deduction under section 214 (a) (8) shall be equitably apportioned between the life tenant and the remainderman under rules and regulations prescribed by the Commissioner with the approval of the Secretary. The Revenue Acts of 1921 and 1924 contain no provision requiring that depreciation should be apportioned between the life tenant and the remainderman, but nevertheless petitioners only claim depreciation for 1923 and 1924 apportioned on the same basis as under the 1926 Act.

The case of Rose v. Grant, 39 Fed. (2d) 338, which involved much the same questions as we have before us for decision in the instant case, was first heard on demurrer and is reported in 24 Fed. (2d) 115. The facts are very similar to those here presented. Therein Grant, a life tenant under his father’s will, came into possession of an Atlanta office building. The court at page 339, 39 Fed. (2d), takes note that he makes no claim for “ depletion of the land or for shrinkage in value of his property by reason of the expiration of his estate by efflux of time,” citing section 215 (b), 1921 Act. He did claim, however, depreciation on the building and fixtures including elevators. The first District Court decision recognized the propriety of allowing depreciation on building and fixtures, when used in a trade or business, although no deduction could be allowed under section 215 (b) for exhaustion of the value of the estate because of the mere lapse of time. The case was later heard on the merits by Judge Sibley, who was then district judge, and is reported in 32 Fed. (2d) 812, wherein the basis of a fair apportionment is discussed. From this decision an appeal was taken to the Fifth Circuit, which sustained the Court below in Rose v. Grant, 39 Fed. (2d) 338. Thereafter certiorari was granted by the Supreme Court in 282 U. S. 821, but subsequently dismissed on motion of the Solicitor General in 283 U. S. 867.

On appeal the Circuit Court of Appeals gave specific recognition to the distinction between the life tenant’s estate, nonexhaustive under section 215 (b), and depreciating buildings and fixtures, for which deductions should be allowed under 214 (a) (8), Acts of 1918 and 1921. The court took the view that the revenue acts make no distinction between property held in fee simple or for life, but grant generally a depreciation deduction on property used in a trade or business, adding that “ an estate for life, even if it be pur autre vie, if so used, is property within the letter and spirit of the statute and entitled the owner, that is, the holder of the legal title in possession, to the deduction.” Having considered in detail the fair apportionment between life tenant and remainderman provided in the 1926 Act, the lower court was sustained in holding that such apportionment between the two for depreciation purposes should be made even under prior acts.

Both courts expressly distinguished cases involving trusts and leases from those in which the taxpayer, as here, was owner of a freehold estate. Said Judge Sibley in 24 Fed. (2d) 115:

Also beside tbe mark are cases like Baltzell v. Mitchell, 3 Fed. (2d) 428, which refused deductions for capital losses to the beneficiary of a fixed income from a trust, because the trustee, who owns the entire fee, is the taxpayer who suffers the loss and is entitled to the deduction.

This distinction in our opinion is sufficient to differentiate the instant case from Louise P. V. Whitcomb et al., 4 B. T. A. 80; Whitcomb v. Blair, 25 Fed. (2d) 528; Codman v. Miles, 28 Fed. (2d) 823; Irwin v. Gavit, 268 U. S. 161.

On authority of the language contained in section 214 (a) (8) of the Revenue Act of 1926, as to the taxable year 1925, and Rose v. Grant, supra, as to the taxable years 1923 and 1924, we sustain petitioners’ alternative contention and hold they are entitled to depreciation in each of the taxable years on the improvements situated on said lots equitably apportioned between the life tenant and the remainderman, such apportionment to be made as follows:

The 16th Street Building, constructed in 1886 with an estimated life of 50 years had a remaining life of 18 years in 1918 when petitioner acquired it by inheritance. The autre vie's expectancy was 15.243 years. The life tenant, therefore, would hold the building for 15.243/18 of its remaining life. This fraction of its total value of $7,048.50 is $5,968.91, which, divided by 15.243, gives a quotient of $391.58, as annual depreciation. A similar computation for the Court Place Building, built in 1888, with a life of 50 years, having a remainder of 20 years, results in a life tenant’s interest of 15.243/20 of .the total, $14,115.50; this interest amounts to $10,758.12, which figure, divided by 15.243, gives an annual depreciation of $705.78.

These amounts properly divided between each of petitioners should be allowed them as deductions for depreciation in determining their respective net incomes for each of the taxable years.

Reviewed by the Board.

Decision will be entered u/nder Bule 50.