text:
    John T. Furlong, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104844.
    Promulgated October 14, 1941.

      Jesse R. Fillmcm, Esq., for tlie petitioner.

      Meade G. Patricia, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner determined a deficiency of $453.08 in income tax of the petitioner for 1937. The issue for decision is whether the petitioner is entitled to a deduction of $1,706.08, representing $1,500 paid in settlement of a Federal income tax claim against the Barnsdall Class A Stock and Warrant Syndicate, and $206.08 paid to attorneys in that settlement. The facts have been stipulated and the stipulation is adopted as the findings of fact.

The petitioner is an individual who filed his return for 1937 with the collector for the third district of New York. He was a participant in Barnsdall Class A Stock and Warrant Syndicate, hereinafter called the syndicate. There were about 27 participants. They were called upon to pay a total of about 40 percent of their subscriptions during the life of the syndicate. Those funds were used to margin the syndicate account with brokers. The syndicate was formed in November 1927 by Hornblower & Weeks, a brokerage firm, the original syndicate managers, to trade in Barnsdall Corporation class A stock and stock purchase warrants and in no other security. The life of the syndicate was extended to March 15, 1929, but was actually terminated on January 2, 1929.

Purchases and sales of large quantities of the stock and warrants were made. A profit of $48,261.74 was realized in 1927 and one of $4,359,473.97 in 1928. A total net profit to subscribers was realized in the amount of $4,338,666.01 after deducting expenses. A partial distribution was made in 1928 and a final distribution was made on January 2,1929.

The petitioner reported Ms profits in 1928 and 1929 as he received them. The Commissioner held that all were taxable in 1928. A settlement of that difference was reached whereby the Commissioner recognized the syndicate as a joint venture, all the profits of which were taxable when distributed. The Commissioner sent a notice of deficiency to the syndicate manager late in 1934 advising that he had determined a deficiency of $436,383.75 and a penalty of $109,095.94 for 1928 upon the theory that the syndicate was an association taxable as a corporation. He later sent transferee notices to the participants. Petitions were filed with the Board. The syndicate’s case was settled by a lump sum payment of $138,000 and decisions were entered for the petitioners in the transferee cases. The payment of $138,000 was in settlement of all taxes, interest, and penalties. The Board entered a decision that the taxes, inclusive of interest,, of the syndicate for 1928 were in the amount of $138,000 and there was no penalty. The collector recorded the $138,000 as tax of $92,155.70 and interest of $45,844.30.

The participants contributed the $138,000 for the settlement and also paid the attorneys who handled the matter. The petitioner paid $1,500 in 1937 as his share of the $138,000 and $206.08 as his share of the fees. He filed all of his returns on a cash basis. He claimed a deduction of $1,706.08 on his return for 1937. The Commissioner disallowed the deduction.

The petitioner contends that the amounts which he was required to pay in 1937 are deductible as ordinary and necessary expenses paid in the taxable year in carrying on a trade or business within section 23(a), as losses incurred in a trade or business under section 23(e) (1), or as losses incurred in a transaction entered into for profit under section 23(e) (2) of the Eevenue Act of 1936. The record does not show that the petitioner was engaged in any trade or business. Therefore, neither 23(a) nor 23(e) (1) is applicable.

But the amounts were deductible as losses under section 23 (e) (2), upon authority of W. R. Hervey, 25 B. T. A. 1282. Hervey invested $100,000 in a syndicate in September 1926 for the purpose of buying stock of the Julian Petroleum Corporation. The petitioner received a profit from the transaction in 1926 and a further profit in 1927, when the syndicate was liquidated. Both years were before the Board, which held that the profit realized in each year was taxable income of that year. Eeceivers of the Julian Petroleum Corporation threatened to sue Hervey in 1927 for treble the amount of his profits, charging the syndicate had violated the usury laws. The petitioner, in order to avoid that suit, paid over all of his profits to the receivers in 1927. The Board held that the petitioner sustained a deductible loss in 1927 of the amount of the profits paid over to the receiver in settlement of the claims. The Board, in allowing the loss under section 214(a) (5) of the Eevenue Act of 1926, which corresponds to 23 (e) (2) of the Eevenue Act of 1936, stated:

* * * Admittedly, the petitioner’s investment in the pool was a transaction entered into for profit. It seems to us, too, that the compromise settlement with the trustees was directly related to this transaction. Certainly, the loss was not a personal loss in the sense that it was disassociated from any business transaction, nor did it result from any patently wrongful and extrinsic act on the part of the petitioner such as perjury (see Sarah Booker et al., Executors, 1 B. T. A. 214). The petitioner’s payment to the trustees was in settlement of an alleged civil liability which was predicated upon the very substance of the transaction upon which the profits were computed. * * *

The Board further stated:

* * * the tax liability for each taxable year must be determined upon the basis of the transactions occurring within the year (see Florence B. Fawsett, 23 B. T. A. 1148), and although we have both taxable years before us, we do not deem it proper, for tax purposes, to hold that the net result of the transactions was neither gain nor loss to the petitioner. He realized gains in both taxable years, and sustained a loss in 1927; he should be taxed accordingly.

The present case is not distinguishable. This petitioner invested in the syndicate and received taxable income from the investment which he reported and on which he paid the tax in prior years. He was called upon in 1937 to make certain additional contributions to the syndicate to pay alleged taxes and interest owed by the syndicate. The Commissioner was holding the petitioner liable as a transferee for the payment of those taxes and interest. The tax controversy arose out of the profitable transaction. The result of the transaction in prior years had been a profit, but the result in 1937 was a loss. That loss is deductible in 1937. W. B. Hervey, supra.

The Commissioner has cited the cases of O. B. Barker, 3 B. T. A. 1180; Benjamin Paschal O'Neal, 18 B. T. A. 1036; and Sigmund Spitzer, 23 B. T. A. 776, in support of his contention that the amounts paid by the petitioner in 1937 merely served to reduce the taxable income for 1928 and 1929 and did not represent loss or other deductions for 1937. The facts in the Barker case were somewhat similar to the facts in the present case and the Board held that the payment in the later year reduced the taxable income of the prior years in which the profits were distributed. The facts in the O'Neal case were also somewhat similar and the Board held that the amount paid in 1922 as additional taxes of a corporation was not a loss in that year, but simply reduced the distribution received from the corporation in a prior year when it liquidated. The Sfitzer case is not similar, but the Board there reiterated statements made in the above two cases. The Barker and O'Neal cases must now be regarded as overruled by the later decision of the Supreme Court in North American Oil Consolidated v. Burnet, 286 U. S. 417. Receipts from oil production were paid to the taxpayer in the latter case in 1917. The Federal Government had instituted a suit to obtain possession of the property. The suit was concluded in 1922 unfavorably to the Government. The amounts received by the taxpayer in 1917 were held to be income for that year, when they were received under a claim of right and without restriction as to their use, even though there was a controversy about them and they might later have to be restored. The Court said: “If in 1922 the Government had prevailed, and the company had been obliged to refund the profits received in 1917, it would have been entitled to a deduction from the profits of 1922, not from those of any earlier year. Cf. Lucas v. American Code Co., supra.See also Schramm v. United States, 36 Fed. Supp. 1021. Likewise, the holding of the Board in the Hervey case is contrary to its holding in the earlier cases relied upon by the Commissioner.

The parties have argued strenuously on the subject of whether or not the syndicate was an association taxable as a corporation, the Commissioner contending that it was an association taxable as a corporation and the petitioner arguing that it was not. It was taxable as a corporation or else was to be treated for tax purposes as a partnership. See section 1001(a)(2) and (3). The parties have not demonstrated why decision of that question is necessary in the present controversy. The same question was present and was not decided in the Hervey. case. We see no necessity for deciding it here.

Decision will he entered- under Rule 50.


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    C. P. A Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102463.
    Promulgated October 17, 1941.

      John M. Hudson, Esq., and Thomas F. Chamice, Esq., for the petitioner.

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

Smith:

The narrow question presented by this proceeding is whether the petitioner is a life insurance company within the provisions of section 201 (a) of the Bevenue Acts of 1934 and 1936. If it was, it admittedly had no income tax liability for the years 1935 and 1936. Section 201 (a) reads as follows:

SEO. 201. TAX ON LIFE INSURANCE COMPANIES.
(a) Definition. — When used in this title the term “life insurance company” means an insurance company engaged in the business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), the reserve funds of which held for the fulfillment of such contracts comprise more than 50 per centum of its total reserve funds.

It is the petitioner’s position that, since about 90 percent of its policies carry a provision that in the case of the death of the insured some amount will be paid to his beneficiary, the policy contract is a life insurance contract within the purview of the statute and that it is immaterial that the greater part of the reserves set up by it are to meet its obligations for the payment to the insured of a specific amount upon his discharge or retirement through disability or age. Petitioner furthermore contends that its retirement contract is in effect an endowment contract comparable with endowment contracts issued by life insurance companies. It submits that it is generally recognized that endowment insurance policies providing for the payment of a stated sum at the expiration of a fixed number of years, with a further provision for the payment of a stated sum in the event of the death of the insured prior to tbe maturity of the policy, constitute life insurance. See Carr v. Hamilton, 129 U. S. 252; 37 C. J. 361, 362; Heffelfinger v. Commissioner (C. C. A., 8th Cir.), 87 Fed. (2d) 991.

It is the respondent’s position, on the other hand, that the definition of a life insurance company contained in section 201 (a) of the Revenue Acts of 193é and 1936 embraces only such a company as is engaged in the “business of issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), the reserve funds of which held for the fulfillment of said contracts comprise more than 50 per centum of its total reserve funds”, and that the petitioner does not come within the definition. In the instant case the petitioner did not issue annuity contracts. Neither did it issue contracts of “combined life, health, and accident insurance.” The respondent submits that the element of life insurance or the liability of the petitioner to pay an amount of money upon the death of the insured is small compared with its liability to pay retirement insurance. He therefore submits that the reserve fund of the petitioner designated “retirement reserve” is not a reserve fund held for the fulfillment of life insurance contracts.

It is to be noted that the petitioner is not incorporated as a life insurance company under the laws of the State of Michigan. It is incorporated under section 12,402 of the Compiled Laws of the State of Michigan, 1929, which reads as follows:

Sec. 12402. Corporation to insurei against loss of position by railway employes, accidents, disability, life, bealtb and to deal in annuities; incorporators. Sec. 14. Any number of persons, not less than thirteen (13), may associate together and form an incorporated company for tbe following purposes, to-wit:
First, To insure railway employees against loss of position resulting from discharge or retirement;
Second, To insure any person against bodily injury or death by accident, or against disability on account of sickness;
Third, To insure the lives and health of persons and every insurance pertaining thereto, and to grant, purchase or dispose of annuities.

The statutes of the State of Michigan make many requirements of life insurance companies which are not made of the petitioner, such as provisions for loans to policyholders and for a return to the policyholder of a stipulated form of insurance after the policy has been in effect for three full years without the payment of .further premiums.

The record shows that the petitioner was originally organized not for the purpose of paying any death benefits whatever, but for the purpose of insuring an employee against a loss of job through discharge or retirement either by reason of disability or of age. The provision of later policies issued by the company whereby the petitioner agreed to pay the beneficiary of the policy an amount for a funeral benefit or a death benefit was strictly subsidiary to the original purpose for which the company was organized. It furthermore appears that in a great majority of cases the liability of the petitioner to pay a retirement indemnity was much greater than to pay a funeral or death benefit. Thus its preferred risk policy (exhibit B) shows that the retirement indemnity increased from $500 to a total amount of $5,000 provided the insured had been employed by a railroad company and had kept his policy in force for a period of 45 years. The death benefit in the policy designated “Funeral Benefit” was to be either $500 or the return of all premiums and installments of the annual premium which had been paid up to the time of death, whichever is greater.

With respect to the petitioner’s contention that its retirement contract is in effect an endowment contract comparable with endowment contracts issued by life insurance companies, all that needs to be said is that there are many differences between the endowment contract of a life insurance company and the retirement contract of the petitioner. In the case of a life insurance company the insurance company guarantees the payment of the face amount of the policy in case of death prior to the expiration of the endowment period. The endowment policy is a true life insurance policy, payable on the contingency of death. That is not true with respect to the policies issued by the petitioner; for in case of the death of the insured the petitioner guarantees to pay only a funeral or death benefit which in most instances is much less than the amount payable upon the retirement of the insured.

We think that the definition of a life insurance company contained in section 201 does not contemplate reserve funds which are set aside to satisfy the liability of the petitioner to pay a stated amount upon the retirement of the insured. Both the petitioner and the Insurance Department of the State of Michigan have recognized that the retirement reserve maintained by the petitioner was something entirely different from its liability to make payments contingent upon the death of the insured. The retirement reserve was at all times during the years 1935 and 1936 many times as large as the death reserve. The petitioner does not come within the definition of a life insurance company contained in the statute. Cf. Standard Industrial Life Insurance Co. of Louisiana, Inc., 42 B. T. A. 1011; Kaskaskia Life Insurance Co., 22 B. T. A. 210; National Protective Insurance Co., 44 B. T. A. 978.

The determination of deficiencies by the respondent is approved.

Keviewed by the Board.

Decision will he entered for the respondent.


text:
    Estate of Edward J. Connolly, Deceased, Elizabeth Connolly, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent. A. A. Anderson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 102587, 102624.
    Promulgated October 17, 1941.

      Fred B. Angevine, Esq., and Harvey A. Fischer, Esq., for the petitioners.

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

Smith:

These proceedings, consolidated for hearing, are for the redetermination of deficiencies in income tax for the year 1936 as follows:

The deficiencies result from the respondent’s determination that Edward J. Connolly, the decedent, and A. A. Anderson received additional compensation in the amount of the excess of the fair market value of stock, purchased by them in the taxable year in accordance with options previously granted to them, over the purchase price.

The material facts are covered by a stipulation of facts, which is adopted as our findings.

The petitioner in Docket No. 102587 is the Estate of Edward J. Connolly, deceased, Elizabeth Connolly, Executrix. She is a resident of Detroit, Michigan. Petitioner in Docket No. 102624 lives at Grand Rapids, Michigan. The returns for the taxable year were filed with the collector for the district of Michigan.

Connolly and Anderson were directors, officers, and stockholders of the Hayes Body Corporation, hereinafter referred to as the company, a Michigan corporation with headquarters at Grand Rapids. In 1933 the company gave Connolly and Anderson options to purchase shares of its stock at given prices. The options had not been exercised because of the depression, which adversely affected the market price of the shares. As of March 1, 1935, Connolly and Anderson were given new options which enabled them each to purchase 6,000 shares of the stock. Under these options each could purchase 2,000 shares during the first year of the option at 50 cents a share, 2,000 shares during the second year at $1 a share, and 2,000 shares during the third year at $1.50 per share, or the entire amount or any portion thereof during the first year at $1 a share. The options were given “by way of adjusted compensation for services theretofore and now being rendered to the corporation” by Connolly, and the resolution of the board of directors relating to the option given to Anderson reads in part:

Whereas, in the judgment of this Board, A. A. Anderson has, particularly during the period from 1930 to the present time, and is now rendering valuable services to the corporation at a rate of compensation deemed by the Board disproportionate to the value of said services, and,
Whereas, it is the sense of this Board that adjusted compensation should be accorded by the said A. A. Anderson in the form of a grant of an option to purchase shares of the capital stock of the corporation.

The resolution of the board of directors granting the option to Connolly was of like tenor.

The shares of capital stock covered by the options were authorized but unissued and were of a par value of $2 each. At the time the options were granted on March 1, 1935, the market value of the stock covered by the options, as shown by quotations on the New York Stock Exchange, was 2% per share. In their income tax returns for 1935 neither Connolly nor Anderson reported any income as received from the receipt of the options in 1935.

On January 30, 1936, both Connolly and Anderson exercised their options. Connolly purchased 5,400 shares of the stock at $1 per share, or for a total of $5,400. Anderson purchased 6,000 shares of the stock for a total price of $6,000. The fair market value of the shares at the time the options were exercised was $5 a share. Neither Connolly nor Anderson sold in 1936 any of the stock thus acquired. They did not in their income tax returns for that year report any income as received from the purchase of the stock in accordance with the terms of the options.

At the time the options were exercised the company debited its cash account with the amount of the purchase price paid by each of the purchasers and debited capital surplus with a like amount equaling the excess of the par value over the price paid by each purchaser; the capital stock account was credited with the total par value of the shares thus issued.

In the determination of the deficiencies the respondent added to the net income reported by Connolly $21,600 representing the excess of the fair market value of the shares purchased by him over the option price of the same; and in the case of Anderson added to the reported net income $24,000 representing such excess.

The respondent has added these amounts to the net incomes reported by Connolly and Anderson upon the theory that they represented additional compensation paid to them during 1936.

Section 22 (a) of the Revenue Act of 1936 defines “gross income” as including “gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid.”

Article 22 (a)-l of Regulations 94, promulgated under the provisions of the Revenue Act of 1936, provides in material part as follows:

If property is transferred by a corporation to a shareholder, or by an employer to an employee, for an amount substantially less than its fair market value, such shareholder of the corporation or such employee shall include in gross income the difference between the amount paid for the property and the amount of its fair market value. In computing the gain or loss from the subsequent iale of such property its basis shall be the amount paid for the property, increased by the amount of such difference included in gross income. * * *

There can be no question but that if the differential between the purchase price of the shares of stock acquired by Connolly and Anderson and the fair market value thereof at the time of the issuance of the stock represents additional compensation paid by the employer, such differential constitutes taxable income of the recipients. The question here is whether this differential constituted a payment made by the company as compensation for services rendered or to be rendered by the employees.

Both the Board and the courts have many times had cases before them involving questions of this character. In some the question was as to the amount of profit realized by the recipient of the stock on a subsequent sale; in others, whether the corporation issuing the stock was entitled to a deduction for the fair market value of the stock at the time it was issued as compensation paid to employees. In still others, the question has been as to whether the taxpayer was liable to tax upon the difference between the amount paid by him for the shares and the fair market value at the date of purchase.

We do not think it is possible to harmonize the cases which have been decided. In Robinson v. Commissioner (C. C. A., 6th Cir.), 59 Fed. (2d) 1008; Salvage v. Commissioner (C. C. A., 2d Cir.), 76 Fed. (2d) 112; and Hawke v. Commissioner (C. C. A., 9th Cir.), 109 Fed. (2d) 946, it was held that the cost to the taxpayer was the fair market value of the shares at the date of acquisition and that it was immaterial that the petitioners had not reported as income the differential at the time the shares were acquired. In Bothwell v. Commissioner (C. C. A., 10th Cir.), 77 Fed. (2d) 35, it was held that the basis for computing gain upon the sale was the price paid for the shares and not their fair market value at the date of acquisition. The facts in that case showed that at the time the option contract was given the market value was not in excess of the option price; but that the price of the shares advanced, making it profitable for Both-well to acquire the shares in a subsequent year, and in still a later year he sold them.

Where shares of stock have been issued by a corporation to an employee as additional compensation, the fair market value of such shares constitutes taxable income to the recipient. Crowell v. Commissioner (C. C. A., 6th Cir.), 62 Fed. (2d) 51; Olson v. Commissioner (C. C. A., 7th Cir.), 67 Fed. (2d) 726.

Where a corporation for the purpose of stimulating the interest of employees agrees to sell the employees shares of its stock at a price below the fair market value, the excess of the fair market value has been held to be deductible from gross income as an ordinary and necessary expense. Thus in Alger-Sullivan Lumber Co. v. Commissioner (C. C. A., 5th Cir.), 57 Fed. (2d) 3, the lumber company agreed in 1918 to sell 150 shares of stock to its employees at a price of $50 per share. The record does not show the fair market value of the shares at the time the agreement was entered into. The dividends declared upon the stock equaled the purchase price in 1921. At that time the stock had a fair market value of $18,875. The court held that that amount less the price paid for the stock by the employees constituted a legal deduction from gross income of 1921. The converse of that would appear to be that the employees received taxable income in 1921 of the difference between the fair market value of the shares and the contract price of $50 per share.

In Omaha National Bank, v. Commissioner (C. C. A., 8th Cir.), 75 Fed. (2d) 434, the decedent had been an employee of a company for some 29 years. He entered into a contract with the company for the purchase of a number of shares of its stock. He had been accorded this right of purchase because he was a valued employee of the company and it wished to retain his services. By the terms of the contract he acquired the right to purchase 500 shares of stock at $50 per share. The company agreed to allow credits on the purchase price equal to the declared dividends upon a like number of shares and to deliver the stock to him whenever he paid the difference between the credits and the purchase price. The decedent reported as income the credits which he received from the company. The Commissioner took the position that the taxpayer had received as additional compensation the fair market value of the stock, which at the time it was delivered to him was worth considerably more than the contract price. The court held that he was not taxable upon such difference.

In Helvering v. Palmer, 302 U. S. 63, the question before the Court was whether a stockholder of American Superpower Co. who received stock purchase warrants which enabled him to purchase shares of stock of another corporation owned by the American Superpower Co. at a price less than its then fair market value realized taxable income from the receipt of the stock purchase warrants and their exercise thereof by him. The Court held that the distribution by the American Superpower Co. of warrants to purchase the stock, even though they had a market value, did not constitute a distribution of anything by the corporation but a mere offer to sell certain of its properties, and that Palmer received no taxable income from the receipt of those warrants and the exercise thereof. The Supreme Court significantly said that no income would be received by Palmer until he sold or otherwise disposed of the shares of stock purchased.

The facts in the instant proceedings show that the options given to Connolly and to Anderson were for the purpose of granting them additional compensation for services already performed and currently being performed. If Connolly and Anderson upon the receipt of those options had immediately exercised them, we think it would have to be held that each received taxable income of the difference between the amount paid for the shares and their fair market value. See Edward J. Epsen, 44 B. T. A. 322. Connolly and Anderson did not, however, exercise the options during 1935. They waited until January 30, 1936, at which time the fair market value of the shares was $5 per share. Quite clearly the Hayes Body Corporation paid Connolly and Anderson no additional compensation during 1935. If the options had never been exercised the optionees would never have received any additional compensation. But when the options were exercised the company parted with shares of stock which could have been sold at $5 per share. Under the theory of Alger-Sullivan Lumber Co. v. Commissioner, supra, the Hayes Body Corporation paid additional compensation in 1936 of the amounts which the respondent claims should have been included in gross income. See Albert Russel Erskine, 26 B. T. A. 147; W. M. Ritter Lumber Co., 30 B. T. A. 231; and Electric Storage Battery Co., 39 B. T. A. 121. Cf. Delbert B. Geeseman, 38 B. T. A. 258; Gordon M. Evans, 38 B. T. A. 1406; and Herbert H. Springford, 41 B. T. A. 1001.

From a careful consideration of the entire record in these proceedings, we are of the opinion that the determinations of the respondent were correct and they are, therefore, approved.

Reviewed by the Board.

Decisions will be entered for the respondent.

Arundell dissents.


author: Smith :

text:
    Ellis H. Warren, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101332.
    Promulgated October 17, 1941.

      B. M. O'Hara, Esq., and Benjamin E. Jaffe, Esq., for tbe petitioner.

      Philip M. Clark, Esq., for the respondent.
   OPINION.

Smith :

The question presented by this proceeding is whether the petitioner is liable to income tax for 1937 upon the income of the three trusts which he created on December 28, 1937. It is the respondent’s contention that the petitioner is liable to income tax upon such income under section 22 (a) of the Bevenue Act of 1936, which includes in “gross income” all:

* * * gains, profits, and income derived from * * * professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *

The question before us is whether the petitioner was in substance the owner of the trust assets within the meaning of section 22 (a) of the statute. The respondent in his deficiency notice cites Willcuts v. Douglas, 73 Fed. (2d) 130; affd., 296 U. S. 1; Corliss v. Bowers, 281 U. S. 376; and Burnet v. Wells, 289 U. S. 670.

Since the respondent issued his deficiency notice in this case the United States Supreme Court has rendered its opinion in Helvering v. Clifford, 309 U. S. 331. That case involved the question whether the creator of a short term trust for the benefit of members of his family was liable to income tax upon the income of the trust. The Court held that he was and said:

* * * where the grantor is the trustee and the beneficiaries are members of his family group, special scrutiny of the arrangement is necessary lest what is in reality but one economic unit be multiplied into two or more by devices which, though valid under state law, are not conclusive so far as § 22 (a) is concerned.

It further said:

* * * We have at best a temporary reallocation of income within an intimate family group. Since the income remains in the family and since the husband retains control over the investment, he has rather complete assurance that the trust will not effect any substantial change in his economic position. It is hard to imagine that respondent felt himself the poorer after this trust had been executed or, if he did, that it had any rational foundation in fact. For as a result of the terms of the trust and the intimacy of the familial relationship respondent retained the substance of full enjoyment of all the rights which previously he had in the property. * * *
The bundle of rights which he retained was so substantial that respondent cannot be heard to complain that he is the “victim of despotic power when for the purpose of taxation he is treated as owner altogether.” * * *

The petitioner contends that the facts which obtain in this case are materially different from those which obtained in Helvering v. Clifford, supra. He points out that the trusts which he created are long term trusts, continuing at least for the life of the petitioner and perhaps longer, while the Clifford trust was only a five-year trust. He also contends that there was no provision in the trust indenture by which the principal or the income could ever be enjoyed by him.

The income of a long term trust, as of a short term trust, may be taxable to the grantor. See Morton Stein, 41 B. T. A. 994, which dealt with an irrevocable trust, the income of which was to be paid to the grantor’s wife as long as she lived; also, Commissioner v. Buck (C. C. A., 2d Cir.), 120 Fed. (2d) 775, and Reginald B. Parsons, 44 B. T. A. 1142. It all depends upon the degree of control which the grantor has over the trust.

We do not think that it is material that there is no provision of the trust instruments by which either the income or the corpora of the trusts would ever revest in the petitioner. See Commissioner v. Buck, supra. The petitioner did have the right to buy and sell to the trusts property at prices to be determined by bimself. In David M. Heyman, 44 B. T. A. 1009, such a right was held to be equal to a power of revocation. In our opinion in that case we relied upon Chandler v. Commissioner (C. C. A., 3d Cir.), 119 Fed. (2d) 623.

The simple facts here are that these trusts were created by the petitioner for the benefit of his wife and children, his heirs at law. No one outside of the family had any rights in or any control over the trusts. The mere fact that they were declared to be irrevocable is of little importance. The petitioner does not claim that he did not have the right to modify the trusts and the evidence shows that on December 9,1940, he did modify them, although he claims that the modification was only for the protection of the beneficiaries of the trusts.

In Helvering v. Elias (C. C. A., 2d Cir.), 122 Fed. (2d) 171, the court said:

* * * the court must look to the whole nexus of relations between the settlor, the trustee and the beneficiary, and if it concludes that in spite of their changed legal relations the three continue in fact to act and feel toward each other as they did before, the income remains the settlor’s; * * *

We think that the facts that obtain in the instant case are such as those stated by the court that would make the income of the trust taxable to the settlor.

After the creation of the trusts the petitioner and he alone had absolute control of the trust assets. He was not required to distribute any part of the income to any of the beneficiaries during his lifetime. He had absolute voting rights of any shares of stock which became a part of the trust estates. He had as much or greater control over the trust assets than did the taxpayer in the case of Frank G. Hoover, 42 B. T. A. 786, in which we said:

* * * He does control the form and manner of the investment of both principal and undistributed income. And he does remain in a position to participate in the affairs of the business in which he is actively interested, a prerogative which proceeds from the retained equivalent of ownership of his interest in that enterprise. This is an attribute of proprietorship frequently of greater significance than the right to receive income. * * *

In the case of a family trust of short duration, where the corpus of the trust is to return to the grantor upon the expiration of a few years, the degree of control held by the grantor is unimportant. In the case of a long term trust, however, it must appear that the grantor has a greater degree of control over the trusts. This fact was recognized in Helvering v. Elias, supra, where the court said:

* * * while it is true that the prime consideration is whether the income remains within the family, there are two other circumscribing factors; the length of the term and the powers of management reserved to the set-tlor. * * * the longer the term, the more important the reserved powers, and vice versa. * * *

As indicated above, the petitioner and no one else during his life had control over the trust assets, both principal and income. The facts in this case bring it clearly within the ambit of the opinion of the Supreme Court in Helvering v. Clifford, supra. See Commissioner v. Barbour (C. C. A., 2d Cir.), 122 Fed. (2d) 165; Commissioner v. Chamberlain (C. C. A., 2d Cir.), 121 Fed. (2d) 765; Richardson v. Commissioner (C. C. A., 2d Cir.), 121 Fed. (2d) 1; Commissioner v. Woolley (C. C. A., 2d Cir.), 122 Fed. (2d) 167.

We approve the respondent’s determination that the petitioner is liable to income tax for 1937 upon the income of the three trusts created by him during that year.

Reviewed by the Board.

Decision will be entered under Rule 50.

Kern concurs only in the result.

Aeundell dissents.


author: Murdock : Leech,

text:
    Herbert R. Graf, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ethel Alfred Graf, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 104623, 104624.
    Promulgated October 21, 1941.

      Femando J. Cuguet, Jr., Esq., for the petitioners.

      Stanley B. Anderson, Esq., for the respondent.
   OPINION.

Murdock :

The respondent contends that the dividends in question were properly taxed to the petitioner, since the latter had not sold any property right in the stock from which the dividends flowed but had assigned only the right to receive dividends to be declared in the future, citing Wood v. Commissioner, 74 Fed. (2d) 78; Helvering v. Horst, 311 U. S. 112; and Helvering v. Eubank, 311 U. S. 122. Those cases, and also the recent case of Harrison v. Schaffner, 312 U. S. 579, involved gifts, whereas the present cáse involves a sale for a valuable and substantial consideration in cash. Bond coupons, soon to become due and payable, were assigned in the Horst case. The right to receive renewal commissions on insurance was given in the Eubank case. The gift in the Schaffner case was of specified amounts in dollars to be paid from the income for the following year of a testamentary trust of which the taxpayer was the life beneficiary. The Court held in each of those cases that the income was taxable to the assignor upon the principle that control over income or the power to dispose of it is the equivalent of ownership and the exercise of that power by procuring payment to another is a realization of income within section 22(a). That is, the one who owns or controls the source of the income, and with it controls the disposition of the income, can not escape tax by any anticipatory assignment of the income, since such an assignment is the satisfaction of his wants and a realization of income. The Court recognized, however, that a gift of the ownership, or equitable ownership, of the property producing the income relieves the donor from tax on the income thereafter arising from that property. Blair v. Commissioner, 300 U. S. 5. See also Reinecke v. Smith, 289 U. S. 172; Louis Boehm, 35 B. T. A. 1108; Fontaine Fox, 37 B. T. A. 271. The beneficiary of a trust in the Blair case assigned a share of the income to another for life without retaining any form of control over the interest assigned. The Court held that the assignment was a transfer in praesenti of a life interest in the corpus and the income was, therefore, taxable to the donee. The Court said in the last paragraph of the Schaffner opinion that future decisions will have to determine precisely where the line shall be drawn between gifts of income-producing property and gifts of income from property of which the donor remains the owner for all substantial and practical purposes.

The transaction in the present case is described in the contract as a sale. A purchase price was agreed upon and paid in cash. There was no element of a gift involved. .The petitioner was free to do as he pleased with the purchase price. The record shows that he intended to sell to Alfred and Morris just as great an interest in the shares as was possible and went as far in that direction as he could. His contract with the corporation prevented him from making a complete transfer of the 50 shares to Alfred and Morris, in accordance with his desire, and required him to retain legal title to the shares. That is apparently what is meant in the second paragraph quoted above from the agreement. The respondent makes no contention that the contract was illegal or failed to accomplish the purpose of the parties. It effected some present transfer of interest in the shares. The interest sold was substantial. It was greater than the mere right to receive dividends and carried that latter right as an incident of the larger interest transferred. Thus, the petitioner did not remain the owner of the shares for “all substantial and practical purposes.” The full sale price was to go to Alfred and Morris, not to the petitioner, if the shares were ever thereafter sold. The parties could cancel the agreement under certain circumstances, but in that case the petitioner was required to repurchase the shares and pay $6,000 for them. He was required to do the same in case Alfred or Morris should die or sever connection with the firm. The contract does not clearly show the extent to which Alfred and Morris could control any later sale of the shares or whether they acquired any voting rights in the shares. It is unnecessary to determine just exactly how many incidents of ownership in the shares were acquired by Alfred and Morris, since the taxing acts are not so much concerned with the refinements of title as with the actual command oyer the income which is taxed and the actual benefit for which the tax is paid. Harrison v. Schaffner, supra. Dividends are not mentioned in the contract, but it is obvious that the parties, by the words “participating interest”, meant something more than the mere right to receive dividends. Alfred and Morris obtained substantial rigid s of ownership in the shares as a result of which they obtained command over the dividends, if any should ever be paid, and they alone benefited from subsequent dividends. The petitioner received the dividends on the 50 shares, not as his own property or not as dividends on property which he owned, but on behalf of Alfred and Morris, who owned beneficial interests in the shares which entitled them to all dividends. Cf. Shellabarger v. Commissioner, 38 Fed. (2d) 566. The $1,650 was not properly a part of the income of these petitioners.

Eeviewed by the Board.

Decision will be entered wnder Bule 50.

Van Fossan and Kern dissent.

Leech,

dissenting: Despite the payment or deposit of money by Alfred and Morris, I think the disposition of this case is controlled by the underlying rationale of James D. Robinson, 45 B. T. A. 39. Respondent should be affirmed.

Mellott agrees with the above dissent.


author: Murdock : Turner, Black, Tyson,

text:
    Robert J. Boudreau and Ruth E. Boudreau, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent. Wilmer J. Boudreau and Opal Boudreau, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 101398, 101399.
    Promulgated October 21, 1941.

      Ed. J. de Verges, Esq., for the petitioners.

      S. B. Anderson, Esq., for the respondent.
   OPINION.

Murdock :

Section 115 (c) of the Revenue Act of 1934 provides that amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and the gain or loss to the distributee resulting from such exchange shall be determined under section 111. The latter section provides that the gain shall be the excess of the amount realized over the basis, and “The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received.” Section 112 provides: “Upon the sale or exchange of property, the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.” None of the exceptions has any application in this case. Section 112 (b) (1), upon which the petitioner places some reliance, by its express terms does not cover an exchange of stock. Matthias W. Wildschutz, 22 B. T. A. 1140; affd., 60 Fed. (2d) 869; R. & M. Property Co., 27 B. T. A. 436.

The petitioners in this case were the owners of stock of the Jim Oil Co. which had cost them $50 per share. There was a complete and final liquidation of the Jim Oil Co. in the taxable year. Rights to oil payments solely from a fraction of the oil produced under a lease were distributed to the petitioners in that liquidation. That property must “be treated as in full payment in exchange for the stock.” The gain is the excess of the fair market value of that property over the basis of $50 per share. Commissioner v. Kellogg, 119 Fed. (2d) 115; Vonnegut Hardware Co., 28 B. T. A. 784; Anna L. Dirksen, Executrix, 24 B. T. A. 1152; Joseph A. Mudd, 14 B. T. A. 1417. See also Louis F. Timmerman, 42 B. T. A. 188. All of that gain must be recognized under section 112 (a). Hellmich v. Hellman, 276 U. S. 233; Rollestone Corporation, 38 B. T. A. 1093; Sam Weisberger, 29 B. T. A. 83. See Holmby Corporation v. Commissioner, 83 Fed. (2d) 548. The Commissioner has followed the statute precisely, has determined that the property received had a fair market value at the time it was received of $380,748 per unit, has computed the gain of each of the petitioners, and has included that gain in income.

The petitioners attack the determination of the Commissioner upon the ground that the property which they received had no ascertainable fair market value at the time it was received, since their rights were contingent upon the production of oil from the leased premises, a circumstance which rendered impossible the ascertainment of the fair market value of the property. The case thus presents a question of fact — Had the property the fair market value determined by the Commissioner, or was its fair market value so contingent and uncertain as to be unascertainable for the purpose of the provisions of the statute referred to above? The factual determination of the Commissioner is presumed to be correct and evidence is required to overcome that presumption. There is evidence in this record to support the determination of the Commissioner. The lease contained a number of good producing wells. One hundred and fifty thousand dollars in cash had been paid for the lease and the purchaser had agreed to pay a large additional amount from production. Over $100,000 of the $450,000 to be paid out of production had actually been paid prior to January 2, 1935. The lease was producing on January 2, 1935. Other stockholders, within a few days after the distribution, sold their rights for $380,748 per unit.

What is the evidence in opposition to the determination of the Commissioner? One of the petitioners testified that he could not have estimated on January 2, 1935, just how much oil would be produced under the lease or how valuable it would be. There is always uncertainty as to how much oil will be produced from a lease and we take judicial notice, even in the absence of proof, that there was some uncertainty as to whether the production from this lease after January 2, 1935, would be sufficient to pay all of the balance due. The only evidence in the record from which any estimate might be made of the probabilities is the actual payments made from production. That evidence tends to support the determination of the Commissioner. The petitioner received payments of almost $4,000 during 1935 and said that production ran about the same during 1936 and 1937, increased about 80 percent during 1938, and thereafter fell off about 80 percent. This would indicate that he had received almost full payment by the close of 1938. The petitioner did not say whether or not he had any opinion as to the fair market value of the rights or show that he was particularly qualified to give such an opinion if he had one, although 'it appears that he had some familiarity with the oil business. No evidence was offered to show the extent of the market for the shares on or about January 2, 1935. It does not appear that the petitioners wanted to sell their interests, that they ever tried to sell, or that they investigated the market. They regarded their interests as of value and continued to hold them. Their pleadings indicate that they thought the interests were of greater value than the price actually obtained by the others. This record does not justify a holding that the rights had no fair market value at the time they were distributed or that their fair market value was less than the amount determined by the Commissioner. Since the evidence supports rather than rebuts the determination of the Commissioner, we must follow the statute and hold that a taxable gain was realized in 1933.

The foregoing discussion completely disposes of this case unless the Supreme Court has held in Burnet v. Logan, 283 U. S. 404 that, as a matter of law, future payments, contingent upon the uncertain production of mineral from a natural deposit of unknown extent, can have no fair market value for the purpose of computing gain from the disposition of property. If that was the holding in the Logan case, then the result reached herein is erroneous and the petitioners had no gain in the taxable year from the disposition of their shares. We conclude, however, that the Supreme Court in the Logan case merely decided that the future payments had no fair market value so far as the evidence presented in that case disclosed. The uncertainty attaching to payments to be made from the production of mineral is no greater and no more difficult to make allowance for in a problem of valuation than many other contingencies. The problem of valuing a patent, for example, might be just as difficult or even more difficult. The present case presents a question of fact which must be decided upon the evidence in this case.

The Logan case has been cited by the Board in a number of cases, but none of those cases involved a situation just like the one here. Edwards Drilling Co., 35 B. T. A. 341; affd., 95 Fed. (2d) 719, dealt with the accrual, as income, of compensation for services and thus depended upon wholly different provisions and principles from those involved herein. The following cases may be similarly distinguished: United States v. Anderson, 269 U. S. 422; Willis R. Dearing, 36 B. T. A. 843; affd., 102 Fed. (2d) 91; that part of Cook Drilling Co., 38 B. T. A. 291, which dealt with compensation for services; and Rocky Mountain Development Co., 38 B. T. A. 1303. See, contra, Walls v. Commissioner, 60 Fed. (2d) 347, affirming 21 B. T. A. 1417. Cases where a taxpayer has exchanged a part of his interest in an oil lease but has- reserved to himself oil payments from his original lease, are different from this case, in which the petitioner surrendered stock and received an oil payment out of property in which he had had no previous direct legal interest. Kay Kimbell, 41 B. T. A. 940; Columbia Oil & Gas Co., 41 B. T. A. 38; E. F. Simms, 28 B. T. A. 988; Teck Hobbs, 26 B. T. A. 241, and one issue in Cook Drilling Co. Since none of the foregoing cases are just like this case, they are not deemed authority for the decision in this case.

The respondent makes no claim for an increased deficiency on the basis of his error in concluding that Robert J. Boudreau was the owner of only 28 shares, whereas the record shows that he was the owner of 30 shares.

Reviewed by the Board.

Decision will be entered for the respondent.

Turner,

concurring: In my opinion the conclusion reached in the instant case can not be reconciled with the decision of certain of the issues in the Willis R. Dearing, Rocky Mountain Development Co., Kay Kimbell, and Edwards Drilling Co. cases. I desire to note my concurrence, however, because of my belief that the conclusion here reached is the only possible conclusion under sections 115 (c), 112 (a), and 111 of the statute. The cases mentioned are in my opinion in direct conflict with the plain language of sections 111 and 112 (a) and should be overruled. In all of those cases the fair market values of the oil payment contracts were either agreed to or were determinable as a fact, and I can not believe that Burnet v. Logan, 283 U. S. 404, stands for the proposition that as a matter of law an interest in an ore body can have no fair market value in cases where such fair market value can be or has been established as a fact.

Black,

dissenting: I dissent from the views expressed in the majority opinion because I think they are directly opposed to the views which we expressed in some of the very cases which the opinion endeavors to distinguish. Among these cases are: Edwards Drilling Co., 35 B. T. A. 341; affd., 95 Fed. (2d) 719; Willis R. Dearing, 36 B. T. A. 843; affd., 102 Fed. (2d) 91; and Rocky Mountain Development Co., 38 B. T. A. 1303.

The essential holding of the above cases, in so far as they affected oil payment contracts similar to those involved in the instant case, was this: These oil payment contracts provide for contingent future payments out of the proceeds of oil if, as, and when produced and saved from the properties to which they apply, and the taxpayer’s right to receive such future oil payments is wholly contingent upon the happening of future events which, because indeterminable, may never occur. Therefore, the Board held in the above cited cases and other similar cases that such contingent oil payment contracts will not be treated as income even though they do have a definite ascertainable fair market value. Cf. Bedell v. Commissioner, 30 Fed. (2d) 622. Our decisions to which I have referred above were based upon Burnet v. Logan, 283 U. S. 404, and it seems to me they were correctly determined to be controlled by that case.

I will concede that the holding in the instant case, to the effect that the exchange of petitioners’ stock in the Jim Oil Co. for the oil payment contracts is a taxable exchange because the oil payment contracts had a fair market value, is distinguishable from such cases as Columbia Oil & Gas Co., 41 B. T. A. 38; affd., 118 Fed. (2d) 459. In the latter case the taxpayer, during 1933, sold eight oil and gas leases, together with the tangible well equipment in connection therewith, for a cash consideration of $550,000, but reserved the first oil, if, as, and when produced from certain fractional parts of each lease as an overriding royalty until certain maximum amounts would be received therefrom, the total maximum amounts being $350,000. We held that in computing the gain on the sale no part of the reserved oil payments should be considered as an amount realized from the sale.

In the instant case the Jim Oil Co. was the one which made the sale of the leases and reserved the oil payments and a comparable situation to what we had in Columbia Oil & Gas Co., case, supra, would be to have before us the Jim Oil Co. with the question to determine being as to what gain the Jim Oil Co. realized in the sale of the leases. That question we do not have before us. Therefore, I concede that the instant case is distinguishable on its facts from Columbia Oil & Gas Co., and that line of cases.

However, for reasons I have stated in the earlier part of this dissent, I do not think the instant case is distinguishable in principle from such cases as the Edwards Drilling Co. and Willis R. Dearing. Therefore, I respectfully record my dissent from the conclusions reached in the majority opinion.

Aeundelu and Leech agree with this dissent.

Tyson,

dissenting: I dissent. Although it refrains from expressly doing so, the opinion of the majority in effect overrules the holdings of the Board, on the point involved, in Edwards Drilling Co., 35 B. T. A. 341; affd., 95 Fed. (2d) 719; Willis R. Dearing, 36 B. T. A. 843; affd., 102 Fed. (2d) 91; Cook Drilling Co., 38 B. T. A. 291; Rocky Mountain Development Co., 38 B. T. A. 1303; and Kay Kimbell, 41 B. T. A. 940. In lieu of expressly overruling these cases, the opinion distinguishes all of them, except the Kimbell case, from the one here. The distinction made is based upon stated differences between the facts in the cited cases and the instant one; those differences being that in the cited cases the rights to future oil payments arose out of their acquisition as compensation for services, while in the instant case the rights to such payments were acquired through a. distribution in liquidation. Such distinction is based solely upon differing ways and methods by which the rights to oil payments were acquired and bears no material distinguishing, relation to the bare question presented in the cited cases and here, i. e., shall rights to future oil payments, by whatever method acquired, be treated as a factor in income even though they have a market value?

Moreover, the distinction consisting of such differences in fact, as above stated, if material, does not exist between the facts in the instant case and those in the Rocky Mountain Development Co. and Kay Kimbell cases, since, in both of those cases, the rights to future oil payments arose out of the acquisition of such rights through sale or exchange, whereas here, the rights were acquired in a distribution in liquidation, the equivalent, for the tax purposes here involved, of a sale or exchange. The issue as to whether the rights as to future oil payments are to be treated as factors in income was directly presented in both of the last mentioned cases.

The holdings of the Board in all the above cases were based upon Burnet v. Logan, 283 U. S. 404, as controlling, and, I think, correctly so.

Leech agrees with this dissent.


author: Smith: Mellott,

text:
    Ella E. Russell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102162.
    Promulgated October 22, 1941.

      Wallace G. Magathan, Esq., and Merman A. Tufel, Esq., for the petitioner.

      Roy N. McMillam,, Esq., for the respondent.
   OPINION.

Smith:

The respondent’s contention is that the trust conveyance described above conferred upon the petitioner such complete enjoyment of and control over the trust property, both as to income and principal, as to render her taxable under the broad provisions of section 22 (a) of the Revenue Act of 1936 on all of the income therefrom, including the profits from the sale of a portion of the trust properties.

Among the cases relied upon by the respondent are H. S. Richardson, 42 B. T. A. 830; affd. (C. C. A. 2d Cir.), 121 Fed. (2d) 1. In that case the taxpayer’s wife transferred to him in trust for the benefit of their five children certain shares of stock which the taxpayer had previously conveyed to her as a gift. In the trust instrument the taxpayer, as trustee, was given broad powers over the trust property, including the right to expend the trust income in payment of premiums for life insurance upon his own or his wife’s life, and to make loans to either of them without security or liability for any loss. In addition, the taxpayer had the right to terminate the trusts at any time and to take over the trust property as his own. We held that under the trust conveyance the taxpayer acquired such substantial rights of ownership in the trust property as to make him taxable personally on all of the trust income. In our opinion we said:

Under the facts in the instant case we are not so much concerned with the refinements of title to the property which has been ostensibly passed around the immediate family circle as with the actual dominion and control over th.e. property. Here, the property and the income therefrom is so clearly subject to the petitioner’s unfettered command that they are, in substance, his and, even, though he did not see fit to use the property or the income during the taxable, year, the latter may be taxed to petitioner as his income under the broad; general tax provisions of section 22 (a), supra, Cf. Corliss v. Bowers, 281 U. S. 376; Burnet v. Wells, 289 U. S. 670; DuPont v. Commissioner, 289 U. S. 685; Helvering v. Clifford, 309 U. S. 331; Lehman v. Commissioner, 109 Fed. (2d) 99, affirming 39 B. T. A. 17; City National Bank & Trust Co. v. United States, 109 Fed. (2d) 191; Albert Penn v. Commissioner, 109 Fed. (2d) 954; First National Bank of Chicago v. Commissioner, 110 Fed. (2d) 448; Cox v. Commissioner, 110 Fed. (2d) 934; Helvering v. Hormel, 111 Fed. (2d) 1; and Morton Stein, 41 B. T. A. 994.

The instant case is not distinguishable from the Richardson, case either in principle or on the facts, except that here the petitioner had no specific power under the trust indenture to terminate or revoke the trust, and thus acquire the trust property as her own. However, the petitioner did have the express right at any time to withdraw any part or all of the principal of the several trusts for her own use. By that method she could just as effectually terminate the trusts.

Evidence was adduced at the hearing of this proceeding through oral testimony of Norman F. S. Russell, settlor of the trusts, and George E. Lloyd, the officer of the corporate trustee who assisted in drawing up the trust agreement, that it was the intention and understanding of the settlor and all of the parties concerned that the petitioner was not to be permitted to take down any substantial part of the principal of the trusts except in the case of some emergency, and then only with the consent of the cotrustee and with authorization from the court having jurisdiction of the administration of the trust estate. These conditions, however, were not put in the trust agreement and no good reason is offered for their omission. As the trust instrument stands, there is no restriction or limitation on the petitioner’s right to take down any part or all of the principal of the trusts for her own use. The provision in the trust agreement is that:

* * * the wife of the Settlor during her life shall be entitled to receive all net income payable to minors, and such part or parts or the whole of the principal of the share of each minor as she may, by writing lodged with the Trustees, direct, for application to her own use or the maintenance, education, care and support of children and issue as she shall determine, and without liability to account for such application; * * *

It is to be noted that provision is made in a separate paragraph of the trust instrument for the invasion of the principal of any of the trusts where in the discretion of the trustees it becomes necessary by reason of “misfortune, lack of income or other cause” for the care, maintenance, and support of any of the beneficiaries. This provision, however, can not be construed to subject the petitioner’s right to withdraw the principal of the trust to any fiduciary discretion. It contemplates a situation which might arise among the several beneficiaries independently of any volition on the part of the petitioner.

The trust agreement was carefully drawn after long consideration by the settlor and his wife and with the advice and assistance of an officer of the corporate trustee with whom they had discussed the matter on several occasions. We must assume, notwithstanding the testimony of the settlor and the trust officer, that the trust instrument was drawn in accordance with the intentions of the settlor. In any event the plain provisions of the trust agreement can not be altered by oral testimony. The rulings stated in Scott on Trusts, vol. II, § 164.1, are as follows:

In determining the terms of the trust, resort is had in the first place to the instrument if any under which the trust is created. As to any matter expressly covered by the instrument, the provisions of the instrument, if unambiguous, determine the terms of the trust. In such a case, extrinsic evidence in the absence of fraud or mistake is not admissible to vary or add to the terms of the instrument. * * *
*******
* * * Such evidence [parole evidence] is inadmissible not only where it contradicts or is inconsistent with express provisions of the trust instrument, but also where it changes the legal effect of the instrument, that is where if given effect it would lead to results which would not be reached in the absence of such evidence. * * *

In Commissioner v. McIlvaine (C. C. A., 7th Cir.), 78 Fed. (2d) 787, it was said that:

* * * While the intent of the parties is a prime factor in construing such an instrument [trust instrument] and in case of doubt is accorded high evidentiary value, yet the instrument itself, where it is sufficiently plain, must determine its character and scope. Colton v. Colton, 127 U. S. 300, 8 S. Ct. 1164, 32 L. Ed. 138; State Savings Loan & Trust Co. v. Commissioner, 63 F. (2d) 482 (C. C. A. 7); Hubbell v. Burnet, 46 F. (2d) 446 (C. C. A. 8).

See also Mountain Producers Corporation, 34 B. T. A. 409, 423, and authorities there cited.

The express provisions of the trust agreement here with respect to the petitioner’s rights to the income as well as the principal of the trusts are clear and unambiguous and are binding upon the parties in the determination of their resulting tax liabilities.

It follows that all the income of the trusts, including the profits from the sale of a portion of the principal, is taxable to the petitioner by reason of her right to the complete use and enjoyment of such income.

Reviewed by the Board.

Decision will be entered under Bule SO.

Murdock dissents.

Mellott,

dissenting: The rule applied by this Board and the Circuit Court of Appeals for the Second Circuit (121 Fed. (2d) 1) in the Richardson case seems to me to be inapplicable under the facts before us. In the cited case the settlor’s husband had recently given the property to her. She conveyed the property to him as sole trustee, giving him the power to cancel and terminate the trust at any time and to take the trust corpus free from all trusts. He was given full power and authority in his absolute and uncontrolled discretion to sell or exchange the trust property at any time for such price as he should deem advisable and to reinvest the proceeds in any character of property. It was pointed out that he had complete control of the use of the res and the income therefrom, even to the extent of paying the premiums for life insurance upon the lives of himself and his wife. Holding was made, in which I concurred, that the property and the income were so cleaily subject to his unfettered command that they were, in substance, his.

In the instant proceeding petitioner had not previously owned the property; she is not the sole trustee; and it is obvious that the settlor was motivated primarily by a desire to create special trusts for his children as to four-tenths of the trust estate. The evidence indicates that the provision under which the Board holds that she could just as effectively terminate the trust as could the petitioner in the Richardson case was included in the trust instrument upon the suggestion of the trust officer; that it was adopted only after full understanding of the parties that it was to be used only in an emergency arising out of the income of the trust “evaporating” or decreasing; and that the trustees would not pay out money on a request of petitioner until a finding was made by a court having jurisdiction that a real emergency existed. Although the trust instrument does not contain these restrictions, it appears that the trust has always been operated in accordance with this understanding; that there has been no change in the corporate trustee; that there has been distributed to petitioner only the net income of the trust; and that no part of the corpus has ever been distributed to her.

The trust by its terms is to be construed under, and in accordance with, the laws of Pennsylvania. A cursory examination of the decisions by the courts of that state does not indicate that they would hold that the trust was without substance, that the settlor had made a complete inter vivos gift of the property to his wife, or that she had become owner of the trust res by operation of law. There seems to be no contention by t'he respondent or holding by the majority that capital gains under the laws of Pennsylvania must be included in trust income. They are taxable to the petitioner only in the event that she is the owner of the trust corpus or it is so clearly subject to her unfettered command as to be hers. Being of the opinion that no such conclusion is justified, I respectfully note my dissent.

Arundell, agrees with this dissent.


author: Black :

text:
    L. B. Coley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99322.
    Promulgated October 22, 1941.

      John E. McClure, Esq., for the petitioner.

      L. W. Creason, Esq., for the respondent.
   OPINION.

Black :

The question is whether the transaction whereby the Coca-Cola Co. during 1935 acquired from petitioner and retired 1,000 shares of its class A stock which petitioner had held since 1929 was, as respondent contends, a distribution in partial liquidation so that 100 percent of the recognizable gain should be taken into account in computing net income, or whether the transaction should, as petitioner contends, be regarded simply as a sale by petitioner of a capital asset so that only 40 percent of the recognizable gain should be taken into account.

Petitioner relies principally upon sections 112 (a) and 117 (a) of the Revenue Act of 1934, section 27 of the General Corporation Law of the State of Delaware, and the cases of William A. Smith, 38 B. T. A. 317, and W. C. Robinson, 42 B. T. A. 725. The respondent relies principally upon subsections (c) and (i) of section 115 of the Revenue Act of 1934 and the cases of Fox v. Commissioner, 113 Fed. (2d) 113; Benjamin R. Britt (par. 5 of syllabus), 40 B. T. A. 790; affirmed upon other issues at 114 Fed. (2d) 10; Cohen Trust v. Commissioner, 121 Fed. (2d) 689; and Marie Hammans v. Commissioner, 121 Fed. (2d) 4.

Petitioner argues that the transaction here involved constituted a “sale” within the purview of section 112' (a); that there was no “distribution” of assets within the meaning of section 115 (i); that in those cases decided by the Board and the courts in which the stock was not retired pro rata there was a tacit consent on the part of those holders whose stock was not retired; that under section 27 of the General Corporation Law of the State of Delaware there was no intent to make a call, but but that there was an intent to sell and an intent to purchase; that there was no partial liquidaion of the business of the Coca-Cola Co.; and that there was no reduction in the authorized capital stock of the company.

Petitioner has requested the Board to find the facts as stipulated and also to make three additional findings as follows:

1. The taxpayer disposed of his stock upon a sale thereof as that term is used in Section 112 (a) of the Revenue Act of 1934.
2. There was no distribution of assets by The Coca-f!ola Company as that term is used in Section 115 (i) of the Revenue Act of 1934. Hence, there was no distribution in partial liquidation. Instead, the money paid out by The Coca-Cola Company was in discharge of its contractual obligation to purchase stock.
3. The stock having been held by the taxpayer for more than 5 years but not for more than 10 years, only 40 per centum of the gain is to be taxed.

We found the facts as stipulated, but were unable to make the special findings requested by petitioner for reasons which we shall presently state.

We think it may be conceded that the transaction in question took the form of a sale by petitioner of the 1,000 shares to the Coca-Cola Co. We do not think, however, that this fact alone controls'the manner in which the gain is to be taxed under the taxing statute. We think consideration must be given to all the facts surrounding the transaction such as (1) the desire of the corporation as expressed in its minutes of August 31, 1935, to reduce its outstanding class A shares from 800,000 to 600,000 shares; (2) the fact that during the year 1935 the corporation did acquire and retire 200,000 shares of its class A stock; (3) that the 1,000 shares here in question were a part of the shares so acquired and retired; (4) that the so-called sale price was the redemption price stated in the certificate of incorporation of $52.50 per share plus accrued dividends of $1.30 per share instead of the market price of from $55 to $57.50 per share; and (5) that the retirement of the stock was charged to the earned surplus and class A capital stock accounts on the books of the corporation. We think that when consideration is given to these facts surrounding the transaction the conclusion must be that the transaction falls within the term “amounts distributed in partial liquidation” as that term is used in section 115 (c) and defined in section 115 (i) of the Revenue Act of 1934. Cohen Trust v. Commissioner, supra. In that case a Delaware corporation- in 1936 sent to all holders of its preferred stock a letter informing them that “The company will buy for retirement on December 26, 1936” 10,000 shares or more of such stock and invited them to offer their stock to the company at prices not to exceed $105 per share, which was' the redemption price of the preferred stock as stated in the bylaws of the company. At that time the company had outstanding 11,116 preferred shares out of a total authorized issue of 30,000 shares. In response to this letter the Cohen trust offered to sell its 447 shares at $105 per share. The offer was accepted and the trust delivered its stock to the company and received the sale price in full. Out of the 11,116 shares, 8,705 shares (including the 447) were thus acquired by the company and retired on or before December 31, 1936. In that case, as contended here, the Cohen trust contended that its disposition of the 447 shares must be regarded as a sale rather than a distribution in partial liquidation. The court answered this contention in part as follows:

As to the petitioner’s first contention, it may be conceded that its disposition of its stock partook of the nature of a sale in that the petitioner ceded its ownership for a consideration. * * * But, even though the transaction presents some of the elements of a sale, the gain derived therefrom does not fall within the reach of Section 117 (a). Section 115 (c) expressly provides that ‘Despite the provisions of Section 117 (a), 100 per centum of the gain * * * shall be taken into account in computing net income” in the case of gain resulting from the partial liquidation of a corporation. * * * Under well known rules of construction the general provision in Section 117 (a) would give way to Section 115 (c) where the latter is applicable. * * * Consequently, the answer to the question whether the distribution by the corporation was in complete cancellation or redemption of a part of its stock must be wholly unaffected by whether or not the transaction could in any view be deemed to have been a sale.

Counsel for petitioner suggests in his brief that of the several decisions of the Board on this question none have pointedly observed that the statutory definition of the term defined in section 115 (i) (see footnote No. 3, supra) includes the use of the word “distribution”; that a distribution contemplates a division by a corporation of assets pro rata among all of the shareholders of the corporation, or among all of the shareholders of a particular class; and that, since in the instant proceeding only a small percentage of the class A stockholders participated in the transactions whereby only a part of the class A stock was retired, the payments to such participating stockholders could not be regarded as distributions to them. And in his reply brief counsel for petitioner says that if there was a distribution in partial liquidation, the Commissioner wins. The court in Cohen Trust v. Commissioner, supra, regarded similar payments by the corporation there involved as representing distributions in partial liquidation. We think there was a “distribution” in partial liquidation in the instant case just as the court held there was one in the Cohen Trust case. The Coca-Cola Co. desired to retire 200,000 shares of its class A stock. It could have issued a call for that many shares. Instead it received as a dividend in kind from its wholly owned subsidiary a part of the needed shares and a sufficient number of stockholders agreed to sell to the corporation a part of their shares to make up the balance, for the redemption price stated in the certificate of incorporation rather than the market price. Some of the stockholders did this because they thought it better to sell at the call price than to have all or a part of their stock called for retirement. The corporation thus retired the 200,000 shares and charged $1,000,000 to its class A capital stock, account and $9,300,253.92 to its earned surplus account. We think this was an apportionment of over $10,000,000 among several or many and comes within the term “amount distributed in partial liquidation” as used in section 115 (c) and defined in section 115 (i) of the Revenue Act of 1934. In order for a distribution to come within that term we do not think it a prerequisite that every stockholder of the corporation or every stockholder of a particular class share pro rata in the assets distributed. Cohen Trust v. Commissioner, supra. Cf. Fox v. Commissioner, supra; C. W. Murchison, 32 B. T. A. 32; E. T. Schuler, 29 B. T. A. 415, 418; Christopher v. Burnet, 55 Fed. (2d) 527.

The remaining arguments advanced by petitioner likewise fail to convince us that the transaction in question was not a distribution in partial liquidation within the meaning of the statute. There is no evidence whether there was or was not a tacit consent on the part of those stockholders whose stock was not retired. There is certainly no evidence that any of the stockholders objected. Regarding section 27 of the General Corporation Law of the State of Delaware (see footnote No. 2, supra), petitioner concedes that if the Coca-Cola Co. had proceeded under section 27 (1) a distribution in partial liquidation would have occurred, but urges that since it proceeded under section 27 (2) a purchase and not a distribution in partial liquidation took place. The corporation involved in Cohen Trust v. Commissioner, supra, was a Delaware corporation. It proceeded under section 27 (2) and the transaction was held to be a distribution in partial liquidation. See also Frelmort Realty Corporation, 29 B. T. A. 181, 187; Phelps v. Commissioner, 54 Fed. (2d) 289. In order for a distribution to be a distribution in partial liquidation it is not necessary that the corporation be planning a cessation or winding up of a part of its business activities. Salt Lake Hardware Co., 27 B. T. A. 482, 486; Commissioner v. Quackenbos, 78 Fed. (2d) 156; Benjamin R. Britt, supra, pp. 796, 797.

Finally, petitioner argues that, since there was no reduction in the “authorized” capital stock of the Coca-Cola Co., there could be no distribution in partial liquidation. This argument was fully considered and held unavailing in Cohen Trust v. Commissioner, supra. The cases of William A. Smith, supra, and W. C. Robinson, supra, relied upon by petitioner, are distinguishable from the instant proceeding upon the ground that in those cases the stock acquired by the respective corporations there involved was held in the treasury, whereas in the instant proceeding it was completely retired and redeemed. Cohen Trust v. Commissioner, supra; Marie Hammans v. Commissioner, supra.

The deficiency should be redetermined by taking into account in computing net income 100 per centum of petitioner’s gain in the transaction.

Decision will be entered v/nder Rule 50.

       SEC. 112. RECOGNITION OF GAIN OR LOSS.
      (a) General Rule. — Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, * * *
      SEC. 117. CAPITAL GAINS AND LOSSES.
      (a) - General Rule. — In the case of a taxpayer, other than a corporation, only the following percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account in computing net income :
      * * * * * * *
      40 per centum if the capital asset has been held for more than 5 years but not for more than 10 years ;

       Sec. 27. — R. C. Sec. 27 — Retirement of Preferred Stoele: — Whenever any corporation organized under this Chapter shall have issued any preferred or special shares it may, subject to the provisions of its Certificate of Incorporation, (1) redeem all or any part of such shares, if subject to redemption, at such time or times, at such price or prices, and otherwise as shall be stated or expressed in the Certificate of Incorporation or (2) at any time or from time to time purchase all or any part of such shares, but in the case of shares subject to redemption, at not exceeding the price or prices at which the same may be redeemed, or (3) at any time or from time to time, by resolution of the board of directors, retire any such shares redeemed or purchased out of surplus.

       SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
      * * * * 1< w *

      (c) Distributions in Liquidation. — Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock. The gain or loss to the distributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112. Despite the provisions of section 117 (a), 100 per centum of the gain so recognized shall be taken into account in computing net income. * * *

        *******

      (i) Definition of Partial Liquidation. — As used in this section the term “amounts distributed in partial liquidation” means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.


author: Kern :

text:
    Merchants National Building Corporation, Formerly Merchants Securities Corporation, The Merchants National Bank of Mobile, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 99181, 102155.
    Promulgated October 22, 1941.

      ■George E. H. Goodner, Esq., for the petitioner.

      Frank M. Thompson, Esq., for the respondent.
   OPINION.

Kern :

Before proceeding to a discussion of the three questions for our determination, it will be well to note that certain other issues, raised by the pleadings, have been waived by the parties. In Docket No. 99181 petitioner alleged error in respondent’s computation of depreciation and profit on the sale of securities, but at the hearing waived these allegations. The bank, as trustee, had reported profits from sale of securities in the amount of $3,904.80, which figure respondent increased to $23,395.36. The pleadings also alleged error on respondent’s part in limiting to $2,000 a loss of $3,234.29 sustained on the sale of real estate in 1935. At the hearing and on brief respondent conceded that the loss should not have been limited to $2,000. In Docket No. 102155 petitioner alleged the following five errors on the part of the Commissioner: First, erroneous understatement of depreciation deduction; second, erroneous overstatement of profits on sales of securities; third, erroneous increase in income from interest and commissions and disallowance of credit for taxes paid; fourth, erroneous addition to income of cash account of $28.96; and fifth, erroneous increase of income in amount of $1,052.65, designated as “bad debts recovered.” Petitioner introduced no evidence in support of any of the foregoing allegations, and, therefore, those contentions are deemed to have been waived. In addition petitioner alleged in the pleadings that respondent erroneously overstated the surtax on undistributed profits through failure to compute it according to law.

We now arrive at the three issues remaining in these proceedings, which call for our determination of: First, whether the income realized in 1935 and 1936 from the sale of the assets of the securities corporation by the trustee liquidating them under the terms of the trust instrument dated May 31, 1934, is taxable as the income of the grantor corporation; second, whether the trustee is required to file on behalf of the grantor corporation a capital stock tax return and be subject to the excess profits tax for 1935 and 1936; and, third, whether the Commissioner’s computation of the surtax on undistributed profits is in accordance with the law.

In the taxable years the grantor corporation was nonexistent, except for the purpose of winding up its affairs, having turned over all its assets to the bank in trust, the first transfer being made in May 1934 and the second in October 1934. After the second transfer it went into dissolution. The bank’s duties under the trust indenture dated May 31, 1934, were merely to liquidate the assets transferred thereunder, pay off the creditors of the corporation, and retain the remainder for the benefit of its stockholders. This was intended to be, and was, merely a liquidating trust. It is the income from the liquidation of these assets by this trust (of May 31, 1934) which is here in question. Respondent requests us to find as a fact that the bank, as trustee, purchased securities in each of the taxable years, and to conclude therefrom that the bank, as trustee, was engaged in operating rather than merely liquidating.. Respondent relies upon one of petitioner’s exhibits to support this finding. However, the purpose of that exhibit was a limited one, and we did not accept it in evidence as establishing the truth of matters contained therein; consequently, we can not make the findings requested by respondent, without which the evidence clearly indicates that the trust was a true liquidating trust without extraordinary operations on the part of the bank. One of the petitioner’s witnesses, an assistant trust officer of the bank, testified that the trust made no purchases of securities, which evidence stands uncontradicted.

Trustees are required by section 142 of the Revenue Acts of 1934 and 1936 to make returns for the trust, stating specifically the items of gross income thereof and the deductions and credits allowable. Such returns are to be made on Form 1040 and, in certain instances, to be supplemented by a return on Form 1041. However, corporate returns, as required by section 52 of the Revenue Acts of 1934 and 1936, are necessary in certain instances where the corporations are not themselves operating the business of the corporations and where trustees are carrying on the affairs of the corporations in their behalf. As set forth in section 52, these instances are:

SEO. 52. CORPORATION RETURNS.
* * * In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns. Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or property they have custody and control.

The bank was not acting in the capacity of a receiver or a trustee in bankruptcy, nor was it an assignee of the grantor corporation. In addition, we have already found as an ultimate fact that the bank was not operating the property or business of the grantor corporation, Therefore, it seems clear that the language of section 52, supra, does not cover the instant situation. But respondent points to articles 22 (a)-21 and 52-2 of Regulations 86 and 94, as determinative of the issue here before us. In many earlier cases this Board and the courts have upheld the reasonableness of and given effect to these articles of the regulations. Taylor Oil & Gas Co., 15 B. T. A. 609; affd., 41 Fed. (2d) 109; certiorari denied, 283 U. S. 862; wherein the Circuit Court of Appeals for the Fifth Circuit approved and gave effect to article 547 of Regulations 45, which is identical with article 22 (a)-21 of Regulations 86 and 94. Northwest Utilities Securities Corporation, 27 B. T. A. 524; affd., 67 Fed. (2d) 619; certiorari denied, 291 U. S. 684, wherein the Circuit Court of Appeals for the Eighth Circuit approved article 548 of Regulations 69, which is identical with article 22 (a)-21 of Regulations 86 and 94, and also approved and gave effect to article 622 of Regulations 69, which is identical with article 52-2 of Regulations 86 and 94. See also Burnet v. Lexington Ice & Coal Co., 62 Fed. (2d) 906; Hellebush v. Commissioner, 65 Fed. (2d) 902; Boggs-Burnam & Co., 26 B. T. A. 988; affd., 71 Fed. (2d) 999; Will T. Caswell, 36 B. T. A. 816; First National Bank of Greeley v. United States, 9 Fed. Supp. 28; affd., 86 Fed. (2d) 938. While it is, of course, true that the solution of each case of this nature depends'upon its own peculiar facts, we must give due consideration to a Treasury regulation which has been so often accorded by this Board and the courts the force and effect of law. This makes application of articles 22 (a)-21 and 52-2 of Treasury Regulations 86 and 94 obligatory if the assets were all transferred as a step toward dissolution, regardless of the form of the dissolution, unless there has hi fact been a distribution in kind to the stockholders.

The record negatives the conclusion that dissolution was contemplated prior to September 1934, four months after the May 1934 transfer of assets to the hank in trust for the stockholders. In May there was no dissolution contemplated. The minutes of the directors’ and stockholders’ meetings in May, and the resolutions adopted thereat, clearly show that the action then taken was intended to effect only a liquidation of those assets of the corporation the retention of which would violate the provisions of section 20 of the Banking Act of 1933, and to continue the corporation with curtailed activities. The change of the corporate name was more fitting for the sole remaining activity, and it can not be said to evidence an intention to dissolve completely the corporate entity.

Neither expressly nor by operation of law did the bank become a trustee in dissolution of the assets conveyed under the May trust indenture. In all the cases cited above dealing with articles 22 (a)-21 and 52-2 of the regulations, it is noticeable that, where the taxpayer has been held taxable as a corporation, the transfer of assets was always directly connected with a plan of dissolution. Were such the situation in these proceedings, we should be forced to follow that line of cases; but, since the evidence is otherwise, we do not consider the bank’s activities as trustee under the May indenture governed by the articles of the regulations set out, supra. The trust was a liquidating trust, not an operating one. Liquidating trusts of this sort are not taxable a,s corporations. Fidelity National Bank & Trust Co. of Kansas City, 37 B. T. A. 473.

Since the income involved in these proceedings was derived entirely out of the assets transferred under the May 1934 indenture, we are not faced with the question of whether the petitioner is taxable as a corporation on profits realized from assets conveyed in September.

Since we find in favor of petitioner on this first issue, the second issue must be resolved in his favor as well; and, as petitioner is not taxable as a corporation, it follows that there is no liability whatsoever for undistributed profits tax.

Decision will Toe entered under Rule 50.

       Art. 22 (a) — 21. Gross income of corporation in liquidation. — When a corporation is dissolved, its affairs are usually wound up by a receiver or trustees in dissolution. The corporate existence is continued for the purpose * * *. Any sales of property by them are to be treated as if made by the corporation for the purpose of ascertaining the gain or loss. No gain or loss is realized by a corporation from the mere distribution of its assets in kind in partial or complete liquidation, however they may have appreciated or depreciated in value since the acquisition. * * *
      Art. 52-2. Returns by receivers. — Receivers, trustees in dissolution, trustees in bankruptcy, and assignees, operating the property or business of corporations, must make returns of income for such corporations. If a receiver has full custody of and control over the business or property of a corporation, he shall be deemed to be operating such business or property within the meaning of section 52, whether he is engaged in carrying on the business for which the corporation was organized or only in marshaling, selling, and disposing of its assets for purposes of liquidation. Notwithstanding that the powers and functions of a corporation are suspended and that the property and business are for the time being in the custody of the receiver, trustee, or assignee, subject to the order of the court, such receiver, trustee, or assignee stands in the place of the corporate officers and is required to perform all the duties and assume all the liabilities which would devolve upon the officers of the corporation were they in control. * * *