author: Leech :

text:
    Gibbs-Preyer Trust #1, The George D. Harter Bank, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89917.
    Promulgated February 24, 1939.

      Albert B. Arbaugh, Esq., and ~Wendell Herbrueh, Esq., for the petitioner.

      Henderson A. Melville, Esq., for the respondent.
   OPINION.

Leech :

A sine, qua non of a trust, taxable as an association, is that such trust, in the words of the Supreme Court in Morrissey v. Commissioner, 296 U. S. 344, be “created and maintained as a medium for the carrying on of a business enterprise and sharing its gains.” It has been held by the Board, on the authority of that case and its companions, that, in determining whether the trust was created and maintained for such purpose, the powers granted in the trust instrument and not only those exercised during the tax years must be considered.

Here it may be said that the powers of management and control of the trust properties, granted to the trustee by the written trust instrument, characterized it as a business trust. See Title Insurance & Trust Co. v. Commissioner, 100 Fed. (2d) 482, and Cleveland Trust Co., Trustee, 39 B. T. A. 429. But the same trust instrument, in effect, provided that the exercise of those powers was “substantially limited to the receipt and distribution of rents” so long as the trust properties were under lease requiring the tenants to pay taxes, negotiated by the beneficiaries or their agents, and maintain the properties, or were in charge of agents of the beneficiaries. And, as an inducement or consideration for the execution of that written contract, the parties thereto contemporaneously orally agreed that the members of the Gibbs family, or beneficiaries, who managed the trust properties, were to be considered agents of the beneficiaries and not of the trust.

That this was a part of the trust contract is corroborated. All of the trust properties, during the tax years, were under leases negotiated by the beneficiaries of the .trust or by their agents, under which the tenants were required to pay the taxes and maintain the properties, or were managed by the beneficiaries or members of the Gibbs family as their agents. The trustee has not exercised any powers of management or control but has limited its activities to those purely ministerial. It never asked for nor was it paid for more than those services.

Since tins contemporaneous oral agreement did not contradict the terms of the written trust, it must be considered a part of the written agreement. Atlas Petroleum Co. v. Cocklin, 59 Fed. (2d) 571; Ryder v. Faxon, 171 Mass. 206; 50 N. E. 681; Alexander v. Righter, 240 Pa. 22; 87 Atl. 427.

It follows that, under the terms of the written instrument creating the trust, as thus supplemented, during the tax years, the trustee had no powers of management and control of the trust properties, and the trust was not, therefore, “created and maintained as a medium for the carrying on of a business enterprise and sharing its gains.” It was taxable as a pure trust and not as an association. Lewis & Co. v. Commissioner, 301 U. S. 885.

Decision will be entered for the petitioner.

        Helvering v. Coleman-Gilbert Associates, 296 U. S. 369; Helvering v. Combs, 296 U. S. 365; and Swanson 7. Commissioner, 296 U. S. 362.


source: Caselaw Access Project

author: Black :

license: Public Domain

text:
    Rebekah C. Schoonmaker, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92022.
    Promulgated February 24, 1939.

      Joseph G. Robinson, Esq., for the petitioner.

      Paul E. Waring, Esq., for the respondent.
   OPINION.

Black :

The precise issue raised by petitioner’s assignment of error (a) has not, so far as we are advised, been passed upon by the Board or the courts. The Commissioner has ruled upon the question in I. T. 3011 XV-2, C. B. 132 (1936). The substance of that ruling appears in its headnote:

Interest accrued on bonds prior to donation to a trust is income taxable to the settlor and not to tbe beneficiaries even though the settlor returns his income on the cash receipts and disbursements basis.

Petitioner points out in her brief that prior to 1934 an analogous question frequently arose in dealing with decedent’s estates. It was not unusual for a taxpayer to die owning bonds on which there was umnatured interest to the date of death. Petitioner refers to the fact that in such a situation it was early held that such interest was not taxable income to the decedent for the period up to the date of death when he was on the cash basis. Antoinette B. Held, Executrix, 3 B. T. A. 408; Safe Deposit & Trust Co. of Baltimore v. United States, 64 Ct. Cls. 697. See also Paul and Mertens, vol. 2, sec. 14.06; First National Bank of Kulm, 4 B. T. A. 317; and Nichols v. United States, 64 Ct. Cls. 241.

Petitioner points out that in the Revenue Act of 1934 Congress changed the law so as to require that there be included in the income of a decedent interest accrued on the date of death even though decedent was on the cash basis. In other words, Congress, by this change, required the income of the decedent up until the date of his death to be computed upon the accrued basis instead of upon the cash basis. See section 42 of the Revenue Act of 1934 and compare the same with section 42 of the Revenue Act of 1932. In recommending this change, the Senate Committee on Finance said in its report on the 1934 Act:

The courts have hold that income accrued prior to the death of a decedent on the cash basis is not income to his estate, and under the present law, unless such income is taxable to the decedent, it escapes income tax altogether. Section 42 of the House Bill was so drawn as to require the inclusion in tbs' income-tax return for the decedent of all items of income and deductions accrued up to the date of death regardless of the fact that the decedent may. have kept his books on a cash basis. /

Petitioner points out that no corresponding change has been made in any revenue act which makes such accrued unmatured interest taxable to a donor who has made a gift of bonds with unmatured interest coupons attached. Petitioner contends that there is absolutely no difference in the two situations. Petitioner contends that, if legislation was required to tax the unmatured interest on bonds owned by a decedent on the cash basis to the legal representative of the decedent owner for the period ending with his death, likewise, legislation will be required to tax a donor who is on the cash basis with interest unmatured and uncollected at the date of the gift.

We do not agree with petitioner that there is absolutely no difference between the two situations. We think there are some differences, and yet, for reasons which we shall presently discuss, we think that the legal consequences in so far as income taxes are concerned are the same in the two situations. An important difference in the factual situation is that where a taxpayer dies leaving unmatured coupons attached to bonds which he owns upon which there is a certain amount of accrued interest, the event of death is involuntary. He does not voluntarily put it out of his power to ever collect the interest. On the other hand, where a taxpayer makes a gift inter vivos of bonds with unmatured coupons attached, upon which there is a certain amount of interest accrued but not yet due, his parting with, the bonds with the accrued interest thereon is purely voluntary. Eespondent lays much stress on this voluntary parting with the bonds. From it he argues that instead of making a gift of the bonds with the unmatured interest coupons thereto attached and therefore failing to collect the accrued interest thereon to the date of the gift, the petitioner could have sold the bonds and there would have been added to the total price received for the bonds, as such, the accrued interest of $12,048.86.

This would undoubtedly be true, and yet we do not think it proves respondent’s case. The tax consequences following a gift inter vivos of bonds with unmatured interest coupons attached are entirely different from the tax consequences of a sale of such bonds with un-matured interest coupons attached. In the latter case the seller of the bonds receives the accrued interest in addition to the sale price of the face value of the bonds. He actually, in effect, collects his accrued interest in cash. In a gift inter vivos there is no realization of income. The only way that petitioner can be taxed with the $12,048.86 here involved is under the doctrine of constructive receipt, and it is for the application of that doctrine to the facts of the instant case that respondent argues.

The fundamental basis for the doctrine of constructive receipt was stated by the United States Supreme Court in Corliss v. Bowers, 281 U. S. 376, when it said:

The income that is subject to a man’s unfettered command and that he is free to enjoy at his own option, may be taxed to him as his income, whether he sees fit to enjoy it or not.

A typical case of constructive receipt of interest is where the coupon on a bond has become due and payable, but is not collected. In such a case it is clear that the interest is subject to taxpayer’s unfettered command (see Nichols v. United States, supra), and the Treasury regulations with reference to constructive receipt clearly apply. The Treasury regulations dealing with the subject of constructive receipt are printed in the margin.

It seems clear to us that the doctrine of constructive receipt, as defined in the quoted regulations and as announced by the Board and the courts in cases involving the doctrine of constructive receipt, does not embrace a situation such as we have in the instant case.

At the time the petitioner made the transfer of the bonds in quesA tion to the irrevocable trust for the use and benefit of her grandson,! there were no matured interest coupons attached to the bonds which she could collect. She had no right to demand any of the interest which had accrued to the date of gift on the unmatured coupons. True, she could have sold the bonds, as respondent contends, instead of making the gift and in that way have collected the accrued interest, in which event she would have been taxable on income actually received, or, she might have kept the bonds until the coupons had matured and made the gift with matured interest coupons attached, in which event she would have been taxable with the matured interest under the doctrine of constructive receipt. But she did neither of these things, and tax consequences result from what a person does and not from what he might have done.

In the instant case, what petitioner did do was to make the gift of the bonds with the unmatured coupons attached, and in such a case we do not think the doctrine of constructive receipt applies. If Congress desires to tax as income the accrued but yet unmatured interest to a donor on the cash basis who makes a gift of bonds, it will have to amend the law as was done with respect to decedents who die the owners of bonds upon which there is accrued but unmatured interest at the time of death.

We decide assignment of error (a) in petitioner’s favor. That being the case, in accordance with the stipulation,

Decision will be entered that there is a deficiency of $138.73.

       Regulations 86—
      Art. 42 — 2. Income not reduced to possession. — Income which is credited to the account of or set apart for a taxpayer and which may be drawn upon by him at any time is subject to tax for the year during which so credited or set apart, although not then actually reduced to possession. To constitute receipt in such a case the income must be credited or set apart to the taxpayer without any substantial limitation or restriction as to the time or manner of payment or condition upon which payment is to be made, and must be made available to him so that it may be drawn at any time, and its receipt brought within his own control and disposition. * * *
      Akt. 42-3. Eaamples of constructive receipt. — If interest coupons have matured and are payable, but have not been cashed, such interest, though not collected when due and payable, shall be included in gross income for the year during which the coupons mature, unless it can be shown that there are no funds available for payment of the interest during such year. The interest shall be included in gross income even though the coupons are exchanged for other property instead of eventually being cashed, * * *


author: Van Fossan : Mellott,

text:
    Martha S. Stern, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90833.
    Promulgated February 28, 1939.

      Murray Seasongood, Esq., and Harry SticJcney, Esq., for the petitioner.

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

Van Fossan :

The question presented on the above facts is the determination of the basis for gain or loss on the stock withdrawn by petitioner from the trust and thereafter sold. Respondent' determined there was a gift of the stock by the trust to the grantor and applied fair market value at the time of such transfer. Sec. 113 (a) (2), Revenue Act of 193-1-. As an alternative contention respondent suggests that if the transfer was not a gift then the basis is cost, and contends that the cost to taxpayer is zero. Petitioner contends the transfer was not a gift, but was a transfer in trust, and seeks as a basis the cost to grantor as to one stock and the cost to the fiduciary as to the other. She relies on section 113 (a) (3) and regulations interpreting the same.

We start with the statutory provision that “the basis of property shall be cost, except that” — then follow numerous exceptions. The general rule, therefore, is that cost is the basis unless the case in hand falls within one of the exceptions. To qualify under an exception to a general rule, the facts must bring the case strictly within the terms of the exception. United States v. Dickson, 15 Pet. 141. Here the respondent determined that the facts brought the case within section 113 (a) (2) — “Gifts after December 1, 1920.” On consideration of the facts, though the transfer was without consideration, we are of the opinion that it lacks the first and basic essential of a gift, i. e., a donative intent by one able to be a donor. Under the trust agreement the trustee had no power to make a gift, and it did not purport to make one. It was merely quiescent and exercised no function other than the physical act of compliance by delivery on the order of the grantor of the trust. Thus it can not be said that the trust or trustee made a gift. Likewise, since one can not make a gift to himself, the grantor can not be the donor of the gift. Nor can the beneficiary, who did not have any present right to the corpus.

Petitioner suggests that the transfer comes under section 113 (a) (3), providing that in case of a “transfer in trust * * * the basis shall be the same as it would be in the hands of the grantor”, etc. Here, however, we do not have a transfer in trust. We have what might be called a “transfer out of trust” There was a partial revocation of the trust and a withdrawal of part of the corpus. Thus we can not agree that the case falls under this provision.

No other exception to the general rule is urged as applicable. We, therefore, are returned to the general rule that the basis is cost. It is a practical problem that confronts us, and some solution must be found. We are not helped by the argument of respondent, which he sums up as follows: “The evidence does not show that the stock sold by the petitioner was not acquired by gift * * This is not a case of lack of evidence. We have all the facts. Bather, it is a matter of construing and applying the law. Nor can we agree with respondent’s alternative contention that, finding the basis to be cost, the cost to petitioner is zero.

Assistance to a conclusion is furnished by considering the ruling of the Board in Pierre S. du Pont, 18 B. T. A. 1028. There the petitioner acquired certain stock in 1915. In 1918 he placed this stock in trust under the terms of an agreement by which the stock would be held by a trustee until the income therefrom should aggregate a certain amount, such income to be paid to a hospital therein designated. Upon the termination of the trust agreement in 1922 the stock was returned to the petitioner, who sold some of it in 1922 and some in 1923. We held that in determining gain or loss on the sales no reduction of the cost or acquisition value in 1915 was necessary because of the creation and existence of a trust estate between the dates of acquisition and sale. The case was treated as though the trust had never existed. Though the terms of the trust differ from those presently before us, we believed the reasoning which led us to the above result is equally applicable to the stock here withdrawn from the trust. In fact, in the opinion in the above case the Board took occasion to observe:

* * * What might have been the situation had there been a sale of the securities during the existence of the trust, or what is the proper basis for determining gain or loss on account of the sale of reversionary estates during the existence of precedent estates, are not questions here presented for consideration, though in the various situations of such character suggested by the parties, we fail to see where, consistent with the conclusion herein reached, insurmountable difficulties would be encountered.

In I. T. 1994, C. B. III-l, it was ruled that where, pursuant to a provision in a trust instrument, the trust property was reconveyed to the settlor, upon his request, prior to March 1, 1913, the basis for determining gain or loss from a subsequent sale is the original cost to the settlor or the value on March 1, 1913, as the case may be. It was there said:

It is considered tliat the taxpayer under the trust instrument was the beneficial owner of the securities in question and held the equitable title. Upon the termination of the trust the legal and equitable title merged and the settlor stood in the same position as if the trust had never been created. The transaction had no effect on the investment of the taxpayer.

G. C. M. 12309, C. B. XII-2, though involving sales by the beneficiary, is, by parity of reasoning, to the same general effect that the basis is cost to the grantor of the trust.

In G. C. M. 14350, G. B. XIY-1, reference is made to the above case of Pierre S. du Pont, in which the Commissioner acquiesced, and consideration given to a case where a taxpayer transferred in trust certain shares of stock, the income to be paid to grantor’s wife for her life; upon her death the trust was to terminate and the trust property was to be returned to the grantor; the wife died and the stock was returned to taxpayer grantor and later sold. It was held the basis was the basis in his hands prior to the trust. See also Silverthau v. United States, 26 Fed. Supp. 242.

We are of the opinion, and hold that as to the Remington Rand stock, originally transferred to the trust by petitioner and subsequently withdrawn by a fro tanto revocation of the trust, the basis for gain or loss is the cost to grantor. The situation as to such stock is the same as though the trust had never been created.

The situation as to the Lambert stock, purchased by the trustee out of trust corpus and subsequently withdrawn by the grantor of the trust, differs, but we believe the same reasoning applies and that cost to the fiduciary is the correct basis. This result would seem to be indicated, by analogy, by article 113 (a) (3)-l of Regulations 86. On acquisition of this stock taxpayer stepped into the shoes of the fiduciary and should acquire its basis. The Lambert stock was purchased out of corpus of the trust. The corpus so used was either the direct donation of taxpayer or the increase of such donation.

The holding above made as to the two lots of stock brings the case within the general statutory provision with which we started our consideration and is consonant with the rule of law that unless an exception to the general rule is clearly proved the general rule governs.

Reviewed by the Board.

Decision will be entered, wader Rule 50.

Mellott,

concurring and dissenting: I concur in the portion of the opinion of the majority holding that, under Pierre S. du Pont, 18 B. T. A. 1028, petitioner is entitled to use, as the basis for the computation of her gain or loss upon the sale of the securities turned over to and subsequently withdrawn from the trust, the original cost of such securities to her; but I am of the opinion that the conclusion upon the other issue is erroneous.

Petitioner and the trust created by her are separate taxpayers. “* * * The law has seen fit to deal with * * * [the] abstraction * * * [of a trust] for income tax purposes as a separate existence, making its own return under the hand of the fiduciary and claiming and receiving its own appropriate deductions.” Anderson v. Wilson, 289 U. S. 20; sec. 142, Revenue Act of 1934. The trust income was not includable in petitioner’s income, inasmuch as the corpus could be revested in her only with the consent of her husband, who had a substantial adverse interest in it. Cf. Jane B. Shiverick, 37 B. T. A. 454. In the event of her death the corpus probably would not have been includable in her estate. Helvering v. Helmholz, 296 U. S. 93; White v. Poor, 296 U. S. 98. If the trust had sold the property which it had purchased, it would have been taxable upon any gain, Merchants Loan & Trust Co. v. Smietanka, 255 U. S. 509, and could have deducted any loss occasioned thereby. But it made no sale. The sale was made by petitioner.

The Commissioner has gone on the theory that the trust made a gift of the Lambert stock, which had cost it $6,762.50, to petitioner. Accordingly he has allowed her, as a basis for the computation of her gain or loss, the fair market value of the stock when it was turned over to her, or $1,440.50. Inasmuch as she sold it a few days later for substantially the same amount, he has held that she neither gained nor lost by the transaction. He arrives at this conclusion by treating her acquisition of the stock as governed by section 113 (a) (2), which provides, in substance, that if property was acquired by gift after December 31,1920, the basis for the purpose of determining loss is either the cost basis of the donor “or the fair market value at the time of the gift, whichever is lower.” If petitioner is upheld in her contention that no gift was made, then cost is her basis; and under the stipulated facts that is zero.

In my opinion the Commissioner should be sustained in his holding that petitioner’s basis for the Lambert stock was its fair market value on the date she acquired it from the trust.

       SEC. 113. adjusted BASIS FOR DETERMINING GAIN OR LOSS.
      (a) Basis (Unadjusted) of Property. — The basis of property shall be the cost of such property; except that—
      *******
      (2) Gifts after December 31, 1920. — If the property was acquired by gift after December 81, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that for the purpose of determining loss the basis shall be the basis so determined or the fair market value of the property at the time of the gift, whichever is lower. If the facts necessary to determine the basis in the hands of the donor or the last preceding owner are unknown to the donee, the Commissioner shall, it possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof. If the Commissioner finds it impossible to obtain such facts, the basis in the hands of such donor or last preceding owner shall be the fair market value of such property as found by the Commissioner as of the date or approximate date at which according to the best information that the Commissioner is able to obtain, such property was acquired by such donor or last preceding owner.

       (3) Tbansfer in Trust after December 81, 1920. — If the property was acquired after December 81, 1920, by a transfer in trust (other than by a transfer in trust by a bequest or devise) the basis shall be the same as it would be in the hands of the grantor, increased in the amount of gain or decreased in the amount of loss recognized to the grantor upon such transfer under the law applicable to the year in which the transfer was made.

      Art. 113 (a) (3) — 1. Transfer in trust after December SI, 1920. — (a) Property included. — Section 113 (a) (3) applies in general to all property acquired after December 31, 1920, by transfer in trust. It does not apply to property acquired as a gift by transfer in trust, or by bequest or devise; or by an instrument which, under section 113 (a) (5), is to be treated as though it were a will. With these exceptions, section 113 (a) (3) applies to all property acquired after December 31, 1920, by any transfer in trust of whatever description. If the transfer in trust be a gift, it is not within section 113 (a) (3), but is within section 113 (a) (2) or section 113 (a) (4).
      (!)) Basis. — The basis of property so acquired is the same as it would be in the hands of the grantor, increased in the amount of gain or decreased in the amount of loss recognized to the grantor upon such transfer under the law applicable to the year in which the transfer was made. If the taxpayer acquired the property by a transfer in trust, this basis applies whether the property be in the hands of the trustee, or the beneficiary, and whether prior to the termination of the trust and distribution of the property, or thereafter.
      (c) Reinvestments by fiduciary. — If the property is an investment made by the fiduciary (as, for example, in the case of a sale by the fiduciary of property transferred by the grantor, and the reinvestment of the proceeds), the cost or other basis to the fiduciary is taken in lieu of the basis specified in paragraph (6).


author: Muedoce :

text:
    Reginald Fincke, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 85079.
    Promulgated March 3, 1939.

      John A. Wilson, Esq., and Harry W. Forbes, Esq., for the petitioner.

      G. B. Sherif, Esq., for the respondent.
   OPINION.

Muedoce :

The first question is whether the Commissioner erred in determining the deficiency. He stated in the notice of deficiency that the petitioner had sold the shares for $81,055, and he then made what seems to be an inconsistent holding, that 81,055/209,550 of the shares were sold for $81,055 and a gift was made of the remaining shares. The facts clearly show that the determination of the Commissioner was erroneous. The theory he used in computing a profit is inconsistent with what actually occurred. Cf. Kenneth K. Bechtel, 84 B. T. A. 824. None of the shares were given outright by the petitioner. One-fourth was sold to each purchaser for a certain amount of money. The total amount received by the petitioner was $81,055, which was exactly what he had paid for the stock and, consequently, he had no gain from the four sales. The Board has held in cases where property has been transferred for a substantial consideration which is less than its market value that such transfers constitute bona fide sales coupled with a gift to the extent of the excess of the market value of the property over the selling price. Harry F. Robertson, 5 B. T. A. 748; G. Wildy Gibbs, 28 B. T. A. 18; E. D. Knight, 28 B. T. A. 188. The Commissioner in his determination has not questioned the fact that sales were made and has not held that any sale was lacking in bona fides. Therefore, the petitioner has fully sustained the burden of proof which rested upon him.

The Commissioner by affirmative pleading has raised another issue. He now contends that the petitioner did not make a bona fide sale of any of the shares to the three family trusts and to the daughter, but instead sold the shares on the market for $206,816 and realized a profit of $125,761. The burden of proof on this new issue rested squarely upon the Commissioner. The contention is contrary in many important particulars to the determination which he made to justify the deficiency. He now argues that the petitioner really sold the shares on the market himself at the current market price and gave his profit to his daughter and. the three family trusts. Not only do the facts fail to support this contention, but they show affirmatively that the actual transactions were quite different.

There is no reason whatsoever to disbelieve any of the testimony of the petitioner and Choate. The petitioner’s testimony shows that he deliberately refrained from selling this stock on the market, realizing a large profit himself and subjecting himself to income tax on that profit. Cf. Gregory v. Helvering, 293 U. S. 465, as to propriety of avoiding taxes. It is likewise clear that he sold the stock to the three family trusts and his daughter at cost, having in mind that they in turn could sell the stock at a profit. The sales were complete and proper in all essentials. This was his way of increasing the corpus of the trusts and of increasing the property of his minor daughter. The income tax consequences of those acts depend upon what was actually done, not upon what might have been done. It was done in such a way that the petitioner realized no profit whatsoever.

Tlie respondent makes no criticism of tlie sale to the trust for the benefit of the petitioner's wife ívhich. requires discussion. The petitioner’s two older children were of age in May 1933 and, under the terms of the trust instrument, the corpus and accumulated income of the two trusts could and, perhaps, should have been distributed to them prior to the transactions here in question. The respondent argues from this that the two trusts were nonexistent in May 1933, and the petitioner could not have made any sales to those trusts. The two beneficiaries could have required distributions prior to the purchases and sales here in question, but the fact of the matter is that distributions had not been made, and, so far as we know, the beneficiaries had never asked for distributions. The beneficiaries may ratify the acts of the trustee under such circumstances as are here present. Matter of Miller, 257 N. Y. 349; 178 N. E. 555, 557. Not only is there no evidence to indicate that these beneficiaries failed to ratify the acts of this trustee in making these purchases and sales, but it is difficult to believe that the beneficiaries would fail to ratify acts so beneficial to them.

The respondent’s argument in regard to the purchase of one-fourth of the shares by the petitioner’s daughter Edith is that she was a minor; her account with Clark, Dodge & Co. was opened, managed, and controlled by the petitioner; therefore, either it was his account or he was acting as guardian for his minor daughter; if it was really his own account, obviously he could not sell to himself, and in any event, the profit would be his; whereas, if he was guardian for his daughter, he would have no right to buy this Celanese stock for her, because it was not the kind of stock which a fiduciary would be justified in buying under the laws of New York. The petitioner opened the account for and on behalf of his daughter Edith. None of his actions is inconsistent with the proposition that beneficial ownership of the account was in the daughter. On the contrary, his actions have always been consistent with that proposition. We are unable to conclude from the evidence that the account belonged to the petitioner. Cf. Emil Frank, 27 B. T. A. 1158; Preston R. Bassett, 33 B. T. A. 182; Marry T. Rollins, 34 B. T. A. 319. The evidence does not show that the petitioner was ever appointed guardian for his daughter. The account was originally opened with a gift of common stock. We can not believe that any court of competent jurisdiction would nullify the action of the petitioner in selling this valuable stock to his daughter at less than its current market price. The final sale on the market was made on her behalf and for her benefit, and the profit which resulted was hers from the very moment that it was realized. It never belonged to the petitioner and was never received by him.

The evidence does not support the Commissioner’s affirmative contention, and we have concluded that the petitioner realized no profit from the disposition of the 6,600 shares of Celanese stock. His action in reporting as gifts the value of the stock in excess of the purchase price received by him is not here in question, but it is interesting to note that that action on his part is in accordance with the law and regulations. See sec. 503 of the Eevenue Act of 1932?; Regulations 79, art. 8.

Decision will be entered for the petitioner.


author: Opper :

text:
    Charles O. Tichenor, Petitioner, v. Commissioner of Internal Revenue, Respondent. Ada L. Hesbacher, Petitioner, v. Commissioner of Internal Revenue, Respondent. Arthur L. Tichenor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 78423, 78424, 78425.
    Promulgated March 3, 1939.

      Chase Morsey, Esq., and John W. Snider, C. P. A., for the petitioners.

      Franh B. Sehlosser, Esq., F. B. Shearer, Esq., and E. L. Updike, Esq., for the respondent.
   OPINION.

Opper :

In these proceedings the respondent determined the following deficiencies in income tax for the year 1931:

The facts contained in a stipulation filed by the parties are hereby found. The stipulation, filed on October 26, 1938, recites:

1. The facts involved in each of the three cases are identical and the eases may be consolidated for hearing and opinion.

2. The petitioners are children of Isaac N. Tichenor, and are of the following respective ages:

Charles O. Tichenor_ 44
Ada L. Hesbacher- 49
Arthur H. Tichenor- 54
Petitioners are also grandchildren of Charles O. Tichenor, Sr.
3. Charles O. Tichenor, Sr., grandfather of petitioners, died in the City of Keokuk, Iowa, in the year 1886, and left a will and codicil, a copy of which is hereto attached and marked “Exhibit A”. The will was probated in Keokuk and the estate administered in Iowa.
4. Isaac N. Tichenor, son of Charles O. Tichenor, Sr., and father of petitioners, died in June, 1928, and left a will, a copy of which is hereto attached and marked “Exhibit B”.
5. Prior to his death in 1886, Charles O. Tichenor, Sr., acquired the title to a certain tract or parcel of land located on the corner of Pennington and Mulberry Streets, in the City of Newark, New Jersey. Under the terms of the will of said Charles O. Tichenor, Sr., the west 47' of said property was devised to his daughter, Emma C. Tichenor. The title to the remaining portion of said property was acquired by petitioners, either under the will of their grandfather, Charles O. Tichenor, Sr., or under the will of their father, Isaac N. Tichenor.
6. During the year 1931 the said interest of petitioners in the property was sold by petitioners to the State of New Jersey. The sole question involved is whether, for purposes of determining gain or loss upon such sale, the petitioners acquired their respective interests in the property under the will of their grandfather, Charles O. Tichenor, Sr., or under the will of their father, Isaac N. Tichenor.
7. If it is held that petitioners acquired the property under the. terms of the will of their grandfather, Charles O'. Tichenor, Sr., the Board may find the following deficiencies to be due for the year 1931:
Charles O. Tichenor- $978.21
Ada L. Hesbacher- 1,066.78
Arthur H. Tichenor_1,159.17
If it is held that petitioners acquired the property under the will of their father, the Board may find there are no deficiencies due from, or overpayments due to the petitioners for the year 1931.

Exhibit A, the will and codicil of petitioners’ grandfather, contains in addition to the provisions hereinafter quoted a residuary clause in the following form:

All my other property both real and personal, shall be divided equally between my wife, Celeste Tichenor and my son Isaac N. Tichenor.

Exhibit B, the will of petitioners’ father, contains the following provision:

Item Second. I give, devise and bequeath unto my children to-wit: Arthur H. Tichenor, Ada L. Hesbacher and Charles O. Tichenor all my real estate situated in the City of Newark in the State of New Jersey to be theirs absolutely in equal proportions, share and share alike.

The parties have stipulated that if petitioners took the property in question under their grandfather’s will there is a deficiency, whereas if taken, under their father’s will there is none. The question thus confines itself to a construction of the grandfather’s will and particularly of the provisions thereof reading as follows:

I give and bequeath to my son, Isaac N. Tichenor, all the remaining part of said property on the corner of Pennington Street and Mulberry Street, in the City of Newark and State of New Jersey, not heretofore bequeathed to my daughter, Emma C. Tichenor. But the said Isaac N, Tichenor shall have no power to sell the same during his natural life. This bequest to my son, Isaac N. Tichenor, shall include all additional improvements that I may make upon said property bequeathed to my son Isaac N. Tichenor, not to exceed Three Thousand Dollars in value.
The above bequest of the property in the City of Newark and State of New Jersey to Emma C. Tichenor and Isaac N. Tichenor shall be subject to this condition, to-wit: that my wife, Celeste Tichenor shall be entitled to one-third of the net income of said property during her natural life.

To these provisions there must be added for consideration the following quotation from a codicil executed some years later:

2nd. The real estate in the City of Newark and State of New Jersey heretofore devised to my son, Isaac N. Tichenor, I do now give and devise to said Isaac N. Tichenor without regard to the improvements I have heretofore made or may hereafter make on said property.
3rd. I further direct that in case Isaac N. Tichenor shall die without a child or children or shall die leaving a child or children but such child or children shall die before reaching the age of 21 years, then in either case said real estate situated in said City of Newark, devised to said Isaac N. Tichenor, shall revert to the heirs of said testator, Charles O. Tichenor, Sr., and not to the wife of said Isaac N. Tichenor or her heirs, except when said heirs of said wife shall be the children of said Isaac N. Tichenor.

Although the grandfather died a resident of the State of Iowa, where his will was probated, there seems to be no disagreement between the parties that the law to be applied is that of the State of New Jersey, where the property was situated. See De Vaughn v. Hutchinson, 165 U. S. 566, 570. To sustain respondent’s position it is necessary to conclude that, under the law of New Jersey, first, the testator’s son, petitioners’ father, took only a life estate in the property; second, the remainder was expressly or by necessary implication disposed of by the original will and not merely included in the residuary clause; third, such disposal did not take the form of a power of appointment in the life tenant; fourth, the remainder was devised, if not expressly, at least by implication to the life tenant’s children, the petitioners here; and, fifth, the estate so created constituted a vested and not a contingent remainder.

For convenience of discussion we may first examine the fourth contention, namely, that a remainder was by implication devised to these petitioners. Under the New Jersey authorities a gift by implication will arise only where it results from a necessary and impelling inference. Bishop v. McClelland's Executors, 44 N. J. Eq. 450; 16 Atl. 1; City Bank Farmers' Trust Co. v. Hentz. 107 N. J. Eq. 283; 152 Atl. 331, 335. It is resorted to to avoid intestacy, Denise's Executors v. Denise, 31 N. J. Eq. 163, or to prevent devolution to one obviously intended to be excluded. Barnard v. Barlow, 50 N. J. Eq. 131; 24 Atl. 912, 914. From this follows tbe general rule in cases of this character concisely stated in 51 L. R. A. (N. S.) 517, as follows:

Taking the cases as a whole it may be said of them that wherever it is possible to construe the gift so as to give the parent an absolute interest, the courts will do so, rather than imply a gift to descendants; but that where the interest taken by the parent is expressly, or by necessary construction, limited to an estate for life, they will be astute to imply a gift of the remainder to his descendants.

Thus where the provisions of the will were such that no estate in fee could have been conferred upon the testator’s son and daughters, a gift of the remainder by implication to their descendants arose. Kendall v. Kendall, 36 N. J. Eq. 91. See also Denise's Executors v. Denise, supra. On the other hand, in a case very similar to the present, where the words were that the estate

* * * be divided among all my children, each to have an equal share thereof * * *. Should any of my said children, son or daughter, die without leaving lawful issue him or her surviving, then the share of the surviving son in such decedent’s portion of my estate so held by my executors shall be paid said son or his heirs or legal representatives,

it was held to be unnecessary to create a gift of the remainder by implication, since the will could be so construed as to give each son an estate in fee. The court said:

* * * The precise point raised on behalf of Henry’s children is that they take an estate by implication arising out of the words, “should any of my children die without leaving lawful issue,” etc. The argument is that, as testator had not in terms provided for the care of children dying leaving issue, and has only given the estate over in case they die without leaving issue, he must have intended the issue to take if he left any, and consequently he must be assumed to have given it to the issue. It is difficult to put this contention in plausible form, as applied to a cause like the present; for we at once ask ourselves, why imply an estate in the issue of the son, when, in express words, we find it given to the son himself?

The case of Denise's Executors v. Denise, supra, is distinguished in the following language:

The will [here] gave Henry Howell an estate absolute and indefeasible, except on a contingency, which has not happened, and consequently the only ground upon which the .vice chancellor rested his decision [in Denise's Executors v. Denise], viz., the supposed necessity of averting intestacy as to a portion of the estate is here wanting. * * *. Under the law as it was before the enactment above mentioned, testator would have died intestate as to their shares of the residue unless a gift by implication had been raised in their issue, and it was this consequence which it was thus sought to avert.

The words of Turner, L. J., in Dowling v. Dowling, L. R. 1, ch. 612, are quoted with approval:

Surely, the mere fact of a testator giving over property in case there are no children does not furnish any presumption on which this court can act in favor of his giving it to the children if there are any, as against their parents. The testator might well suppose that they will be provided for from other sources, or that the parent would himself he able by means of the gift to provide for them.

Howell v. Gifford, 64 N. J. Eq. 180; 53 Atl. 1074, 1076, 1077. See also Den ex dem. Emans v. Emans, 3 N. J. Law, 967. A further distinction from Denise’s Executors v. Denise, supra, could be demonstrated here. There the primary devisee had predeceased the testator. Had that not been so, and it is not so here, it seems the court would have reached the opposite conclusion, for the opinion states (p. 169) : “There can be no doubt, according to the rule held in this state, that, under a bequest expressed in this form, the legatees take absolutely if they survive to the time of distribution * *

Cases where the original estate is expressly restricted to a life interest thus “should be carefully distinguished from situations where the first taker is held to take an absolute gift or a fee tail. If the limitations are to A, and, if he die without children, then to B, A would normally be held to take an absolute interest subject to an executory devise to B.” 2 Simes Law of Future Interests 258.

The necessity of raising an estate by implication in these petitioners therefore depends upon whether the estate devised to their father was limited for his life. The words used in the will are, at common law, Den ex dem. Wardell v. Allaire, 20 N. J. Law, 6, 23, and by New Jersey Statute, apt to devise a fee. Feit v. Richard, 64 N. J. Eq. 16; 53 Atl. 824. Neither the restriction on alienation, Feit v. Richard, supra, nor the executory devise over, Den ex dem. Wardell v, Allaire, supra, pp. 8, 24, can be said to give any indication of the testator’s desire to grant a lesser estate. In Morris v. Le Bel, 71 N. J. Eq. 43; 63 Atl. 501, where the testator was held to have devised only a life estate, the restriction on alienation was coupled with an express power of disposition by will. As the court pointed out, such a provision would have been completely superfluous had the testator intended to devise a fee. Here not only is there no similar reference to any express power of appointment, but it may be noted that if a power of appointment were to be implied and the petitioners thus acquired their interest by the appointment exercised in their father’s will, the property would still be subject to valuation as of that date rather than as of the original decedent’s death. See G. C. M. 7373, 1X-1 C. B. 132; Revenue Act of 1928, sec. 113 (a) (4).

The least forced and most reasonable construction and the one that would appear to be the closest to the testator’s actual intent is consequently to construe the estate as a fee, vested but subject to be divested by the death of the devisee without children surviving to majority. Steward v. Knight, 62 N. J. Eq. 232; 49 Atl. 535. We have been referred to no authority in the State of New Jersey reaching a contrary result where the facts are comparable to those here present, and the weight of authority appears to be in accord. To quote again from 51 L. R. A. (N. S.), at pages 493, 494:

But where the gift to the primary devisee is in general terms which, by virtue of statute, will be presumed to carry the fee in the absence of an expression of a contrary intention, * * * the preponderance of opinion [is] that no gift of a remainder is in such a case ordinarily to be implied.

It is thus unnecessary to consider whether a remainder, if there were one, would be vested or contingent. It is, however, only where the remainder is vested, Twining v. Commissioner (C. C. A., 2d Cir.), 83 Fed. (2d) 954, and not where it is contingent, Lane v. Corbin (C. C. A., 2d Cir.), 63 Fed. (2d) 767, that the property can be said to have been “acquired” as of the date of the testator’s death within the meaning of section 113 of the Revenue Act of 1928. Marry C. Kayser, 27 B. T. A. 816. And it may well be doubted that under the language of this will any remainder in the children could have been said to have vested at the testator’s death, since some of them were not then in being, and it was many years thereafter before any of them reached the age of 21. See Den ex dem. Emans v. Emans, supra.

In any event the conclusion that the property passed to the father of these petitioners in fee sufficiently disposes of the present issue and under the stipulation requires that petitioners prevail.

Decision will be entered for the petitioners.

       Statute of Wills (1784), sec. 36; 4 Comp. Stat. 1910, p. 5873, see. 36.


author: Hill :

text:
    Annie Laurie Crawford and the Union Trust Company of Pittsburgh, Executors of the Will of George W. Crawford, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88072.
    Promulgated March 3, 1939.

      David B. Buerger, Esq., and John G. Buchanan, Esq., for the petitioners.

      Ralph E. Smith, Esq., and W. G. Cullen, Esq., for the respondent.
   OPINION.

Hill :

The respondent determined an income tax deficiency of $138,-492.74 for 1932 against the petitioners as coexecutors of the will of George W. Crawford, deceased. Petitioners filed this proceeding to review that determination, and also for a determination by the Board of an alleged overpayment of taxes amounting to $39,883.56 for said year. The respondent, upon authority of Helvering v. Gowran, 302 U. S. 238, rendered since his said determination, concedes the deficiency issue in favor of the petitioners. We agree to the correctness of the concession on the part of the respondent and accordingly hold that there is no deficiency in tax herein against the petitioners. This leaves in controversy only the claim of tax overpayment. The facts are stipulated.

The petitioners are executors of the will of George W. Crawford, deceased. During his lifetime the decedent was a one-fourth coowner of the Venempa Investment Co., a partnership, formed December 26, 1928, in Pittsburgh, Pennsylvania, to engage in buying, selling, and dealing in stocks, bonds, and other commercial securities. Including contributions made at the time of the partnership’s organization, each of the four partners paid in to its capital cash in the amount of $262,815.96, and securities for which they were given capital credits on the partnership books. The securities contributed by the decedent included 10,000 shares of Western Public Service Corporation stock which cost him $25,200 when acquired in 1928; also, two blocks (of 1,250 shares each) of Lone Star Gas Corporation stock, each block costing $5,195.27 when purchased. The 10,000 shares of Western Public Service Corporation stock had a fair market value of $283,125 when contributed to the partnership, and decedent received a credit upon the partnership books in the amount of their cost ($25,200) for the same. The two blocks of Lone Star Gas Corporation stock had fair market values in the respective amounts of $82,812.50 and $81,250 when contributed to the partnership, and decedent received a credit therefor upon the partnership books in the respective amounts of $81,250 and $50,000.

In and during the years 1928 to 1932, inclusive, the partnership had net earnings which, for the whole period, exceeded its losses. It distributed no part of its earning to members and, at the end of 1932, had on hand undistributed earnings, represented principally by investments in securities, of which the value of decedent’s partnership interest amounted to $128,250.65. On December 31 of the latter year the partnership was dissolved by mutual consent and its assets distributed. The decedent received in this distribution $83.69 in cash and securities of a total market value amounting to $233,500.

In decedent’s income tax return for 1932 no deduction from gross income was claimed for any loss sustained in liquidating his interest, as aforesaid, in the partnership. The petitioners claim, and ask us to find in this proceeding, that a loss was sustained in that transaction, and that failure to take a deduction for it in decedent’s income tax return for 1932 resulted in an overpayment of taxes in the amount of $39,883.56. The issue is governed by the Revenue Act of 1932, and the pertinent provisions of Treasury Regulations No. 77.

Relating to “Readjustment of Partnership Interests,” article 604 of Regulations 77, among other things, provides that when a partner retires from a partnership, or it is dissolved, the partner realizes a gain or loss measured by the difference between the price received for his interest and the cost to him of such interest, including in such cost the partner’s share in undistributed partnership net income on which income taxes have been paid. Also, that if in a dissolution the partnership assets are distributed to the members in kind and not in cash, the partner realizes no gain or loss until he disposes of the property received in liquidation.

The petitioners contend that by virtue of the provision first above mentioned, a loss to the decedent through liquidation of his partnership interest is established. That this loss is the amount by which the cost of his partnership interest exceeds the cash ($83.69) and the market value ($233,500) of the assets distributed to him.

The parties are in accord on the cost of decedent’s partnership interest. They also agree what the “market value” of all assets distributed to decedent was when the partnership was dissolved. However, at the time the return here involved was filed, the assets distributed to decedent had not been disposed of, and the respondent contends that, under the provision of the regulation last above mentioned, no gain or loss may be recognized until a sale or disposition of them has been made. The petitioners counter this contention with the argument that application of the provision is logical and proper, only when applied to cases where the assets distributed in a partnership liquidation have no determinable value. They argue that where basic values are agreed upon, as in the case at bar, the actual gain or loss is ipso facto established and must be recognized under the provisions of such regulations, as well as under the provisions of section 111 of the Revenue Act of 1932, reading as follows:

(a) Computation op Gain or Loss. — Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 113 (b), and the loss shall be the excess of such basis over the amount realized.
(b) Amount Realized. — 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.

The petitioners also contend that the effect of respondent’s holding in the premises is to place an unconstitutional construction upon and render void the provision of the regulation relied upon by him.

In pressing their argument that the challenged portion of the article is illegal, and therefore void, the petitioners admit in their brief that they know of no case directly in point, but cite Helvering v. Walhridge, 70 Fed. (2d) 683, where the court in its opinion by way of dictum referred to the provision as “of doubtful validity”, except in cases where the asset dealt with had no fair market value. Petitioners also quote “Magill” on taxable income, where that author in discussing a related phase of the problem of partnership gains refers to reasons given by the Advisory Board of the Treasury for the rule of construction here applied by the respondent, as “not wholly convincing.”

In our opinion the portion of the regulation objected to by the petitioners is reasonable in its application to the facts before us and must be sustained. Obviously, the petitioners misconstrue the exact character of the transactions which, they conclude, resulted in a loss to the decedent. The net effect of petitioners’ reasoning is that, when a partnership dissolves and distributes its capital assets among members, each member disposes of his partnership interest for a price, or that he receives such distribution in cancellation or redemption of an interest in the partnership. The fact is that such distribution does not confer title to the assets upon the members, but is merely an apportioning among them of what they already owned jointly. Petitioners’ decedent and others contributed securities and cash to a fund to be used in the partnership business. The partnership operated this fund over a period of years. The net profits from such operation were taxable distributively to the members of the partnership and likewise the net losses of the operation were deductible proportionately by the members in determining their income tax liability. What remained of the fund at the dissolution of the partnership was the property of the members and was the residuum of what they had contributed to the fund. The partnership fund was at all times the property of the members and neither the dissolution of the partnership nor the distribution of the fund affected such ownership in any way.

The fallacy of petitioners’ assumption is clear when one considers the character of partnerships. An ordinary partnership, such as we have here, has no entity in the sense that it may own property separate and apart from the ownership thereof of its members. The members, at all times, own the partnership business and the assets employed in it, and are, therefore, never separated from title thereto. The dissolution of the partnership in question in no way affected the title to the assets of the partnership fund but the title to such assets, which, db initio had rested in the members, continued in them. Accordingly, tlie distribution of assets which took place upon dissolution of the partnership neither added to, nor took from, the economic interests of the partners. The net effect of the process was not to create new interests and values, but merely to apportion and deliver to each member, according to his ratable interest, that which represented his then investment, leaving him no richer or poorer than he was before the dissolution. Cf. William, S. Gordon, Trustee, 33 B. T. A. 460, 464; J. Henry Dick Estate, 20 B. T. A. 637. Such result, of course, does not obtain where the partnership is a business syndicate beyond the direct control of the individual members. William S. Gordon, Trustee, supra. Nor, in a case where a partner sells his interest to another, or retires from the partnership, upon an agreed consideration and the business is continued. In such cases, title to the retiring partner’s interest passes to another, and a closed transaction takes place. Hill v. Commissioner., 38 Fed. (2d) 165; Pope v. Commissioner, 39 Fed. (2d) 420.

The distinction between the transaction at bar and the cases just cited by us is obvious and clear. What the decedent received in the distribution was not a consideration in exchange for his investment in the partnership fund, but his aliquot part, in kind, of the assets comprising such fund which theretofore he and his partners owned and held at risk in the business. Obviously, there was no disposition of partnership interest or of the interest of decedent in the partnership fund in this case and the provision of the regulation aptly applied to the transaction.

The petitioners’ contention that the challenged provision denies to them the benefit of loss deductions otherwise allowable under the revenue acts is unwarranted by the facts. The petitioners assume that a loss must be conceded, because the stipulation shows that the market value of the assets distributed to decedent was less than his contributions to the partnership’s capital plus his part of its undis-bursed income. This assumption is erroneous. As hereinbefore pointed out, the assets received by the decedent on dissolution of the partnership represented his part in an investment which still exists. The fact that the investment was made through the medium of a partnership did not change its character, and the provision of the regulation, supra, which postpones realization of gain or loss until the assets are sold is obviously made to preserve such character.

The petitioners cite certain court and Board decisions which they contend support their theory that the distribution here considered must be given the effect of a sale or exchange in which a transfer of title to an interest in the assets disbursed took place. Among the cases cited in support of such theory are the Board cases of Edward B. Archibald, 27 B. T. A. 837; aff'd., 70 Fed. (2d) 720; Carroll E. Donner et al., Executors, 32 B. T. A. 364, and Cyrus S. Eaton, 37 B. T. A. 715; and Federal court cases, Chisholm v. Commissioner, 79 Fed. (2d) 14; and Helvering v. Walbridge, supra.

In our opinion, none of the cases so cited support the contentions petitioners here mate. Bather, we think, if applicable to any phase of this controversy, the cases, in so far as they throw light, support the respondent’s theory that the bare distribution of partnership assets “in kind” upon dissolution is not such a liquidation of the partner’s interest as to bring into realization gain or loss to the partner. The cases cited do not deal with dissolved partnerships, or the direct question here involved. They do deal, however, with questions involving the taxability to partners, as individuals, of the increments or values by which assets contributed to the partnership capital may have increased over their initial cost to the partner.

On the latter question, the cases cited concur in holding that no gain results to the contributing partner for the increment to assets contributed in kind to the partnership until the partnership is dissolved; because, until then, there is no liquidation of the assets whereby such increment can be realized as gain. Moreover, the cases hold that the ownership of partnership assets, at all times, is in the members; from which it follows that, when the assets are distributed “in kind”, rather than being liquidated through sale and the cash disbursed, the partner receives, individually, his interest or part of that property which he therefore already owned, although collectively or jointly with his copartners. If the corpus of the partnership is first reduced to cash, and the cash distributed to the member, then, of course, gain or loss may be realized as provided for in like cases of sales of property. We find no conflict in the decisions cited and the views we have herein expressed. We think the provision in the regulation challenged is in harmony with the law and we therefore sustain the respondent’s interpretation.

In view of our findings, we hold that the decedent suffered no loss in the taxable year for which petitioners are now entitled to take additional income tax deductions, and their claim of overpayment of taxes is, therefore, not sustained. The result of our findings makes unnecessary our consideration of respondent’s alternative prayer for readjustment of chai’itable deductions.

Decision of no deficiency and no overpayment of taxes will be entered.


author: Smith:

text:
    Clayton G. Dixon, Petitioner, v. Commissioner of Internal Revenge, Respondent.
    Docket No. 88278.
    Promulgated March 7, 1939.

      William B. Spofford, Esq., for the petitioner.

      Elmer L. Gorbm, Esq., for the respondent.
   OPINION.

Smith:

This is a proceeding for the redetermination of a deficiency in income tax for 1934 in the amount of $1,100.53. The allegation of error stated in the petition is that: .

Respondent erred in determining that petitioner received additional income in the amount of $4,986.95, said amount having been paid to petitioner’s former wife by the Girard Trust Company, Trustee, under an irrevocable deed of trust.

This case was submitted upon a stipulation of facts entered into by the parties, which we adopt as our findings of fact, together with the exhibits incorporated therein.

The petitioner is an individual, residing at Rydal, Pennsylvania, who filed his income tax return for 1934 with the collector at Philadelphia. On October 1, 1921, the petitioner, his then wife, Estelle Willoughby Dixon, and the Girard Trust Co. entered into an agreement, which was supplemented on August 14, 1931. The agreement of October 1,1921, provided in part as follows:

"Whereas differences have arisen between the party of the first part and the party of the second part, his wife, by reason of which they are now living apart, and
Whereas, the party of the first part, in recognition of his legal liability to support his wife, and pursuant to her demand, has agreed to make provision for her support.

The agreement then recites that the party of the first part has turned over to the Girard Trust Co. certain property and then provides:

3. All of the above interests, securities, moneys, etc., shall be held by Girard Trust Company as Trustee, upon the following terms:
To pay to the party of the second part, as long as she shall live, a sum sufficient to pay all taxes of every kind and which shall net her $8,000.00 per annum, in quarterly payments, without deduction of any kind whatever, provided, however, that if the said party of the second part should marry, the net amount thereafter payable to her shall be not net $8,000.00 but shall be a sum which after payment of all taxes, shall net her the sum of $5,000 per annum, payable in quarterly payments, without deduction of any kind whatever. These payments shall be made to the party of the second part without liability for her debts, contracts or engagements and without power of alienation by assignment, transfer or anticipation.
*******
6. The income derived from the property so to be held in trust from any sources, in excess of the amounts payable to the party of the second part, together with amounts payable by the Trustee for necessary expense and commissions, shall be paid to the party of the first part, free from liability for his debts, contracts or engagements and without power of alienation by assignment, transfer or anticipation.
7. On the death of the party of the second part, the principal of the trust created by this Agreement, shall revert to the party of the first part and become part of his estate.
*******
10. In consideration of the foregoing provision in her behalf, the party of the second part hereby releases the party of the first part from any claim which she now has or may hereafter have by way of dower or under the intestate laws of the State of Pennsylvania, or any other state, or any right to take against his Will.- The party of the first part hereby releases the party of the second part from any claim which he now has or may hereafter have by way of curtesy or under the intestate laws of the State of Pennsylvania or any other State, or any right to take against her Will.
*******
12. It is agreed between the parties of the first and second parts that nothing herein contained shall prevent either of them from bringing, maintaining or prosecuting to final conclusion, any suit or suits for divorce founded on proper and truthful grounds. Nothing herein contained shall prevent either of the parties from defending such suit or suits. It is agreed that, in the event of a divorce being granted, all of the terms, undertakings and agreements herein contained shall remain binding upon all of the parties hereto.

The modification of the original agreement of October 1, 1921, made on August 14, 1931, is not material to this proceeding.

On October 21,1921, Estelle Willoughby Dixon instituted an action of divorce against the petitioner in the Court of Common Pleas No. 2 of Philadelphia County, Pennsylvania, and on December 19, 1921, that court granted her an absolute divorce from the petitioner, pursuant to the laws of the Commonwealth of Pennsylvania.

Estelle Willoughby Dixon was not insane at the time the divorce was granted. On or about January 28, 1924, she was married to Cuyler Campbell Supplee, 2nd. Thereafter, in 1926, she obtained a divorce from Supplee, and in 1927 was married to Boris De Bakhtiar.

During 1934 the income distributable to petitioner’s former wife, Estelle Willoughby De Bakhtiar, by the Girard Trust Co., trustee, pursuant to the terms of the agreement of October 1, 1921, as modified by the supplemental agreement of August 14, 1931, amounted to $4,986.95. The petitioner did not include in his income tax return for 1934 any part of the $4,986.95 in question. In the determination of the deficiency the respondent has included this amount in the petitioner’s taxable income.

The petitioner alleges that he is not taxable upon the income of the trust fund which was paid to his former wife during 1934. He contends that he was under no legal obligation to support his wife after she had obtained a divorce from him on December 19, 1921. This contention is correct. See Henry Oliver Rea, 35 B. T. A. 1132; Robert Glendinning et al., Executors, 36 B. T. A. 486. It is the petitioner’s contention, therefore, that his former wife, now Estelle Wil-loughby De Bakhtiar, is liable to tax upon the $4,986.95 in question and that he is not liable to tax upon the amount.

The respondent, on the other hand, contends that this case is ruled by the opinion of the Board in Robert Glendinning et al., Executors, supra; aff'd. (C. C. A., 3d Cir.), 97 Fed. (2d) 51. The facts in the Glendinning case were that some time prior to 1918 Glendinning’s then wife obtained a support order from the Municipal Court of Philadelphia. In 1918 she instituted divorce proceedings against her husband. On October 5, 1918, the husband created an irrevocable trust providing that the income therefrom should be payable to his wife for life. On November 18, 1918, the Court of Common Pleas of Philadelphia granted an absolute divorce to the wife. In 1919 the support order in the Municipal Court was vacated on petition of the wife, which recited the divorce and the trust agreement. The Board held, upon the authority of Douglas v. Willcuts, 296 U. S. 1, that the husband was taxable upon the income of the trust paid to the wife. In affirming the decision of the Board, the Circuit Court of Appeals said:

The ruling is based on a very narrow ground. If the trust fund was a gift of its creator, the income derived therefrom is the income of the donees, not of the donor. If the trust was the payment of a debt of the creator the income is taxable to him as his income paid to his divorced wife. Under the law of Pennsylvania this taxpayer was under no legal obligation to pay his divorced wife anything by way of alimony or otherwise. The law however permits and upholds an agreement by the husband to pay. There is then an obligation, not imposed by law but self imposed, to pay. The Board held that the trust agreement created the obligation to pay. The question before us is thus reduced to that of whether any obligation to pay after divorce is found in the trust agreement. The trust created is expressly stated to be a substitute for the support order which was to be thereby superseded. The agreement was to pay to the wife “for and during her natural life” her portion of the net income and was to continue in force after and notwithstanding a divorce should be granted. This was beyond the requirement of the Court order but none the less the agreement of the taxpayer. Thereafter there was an obligation to pay for life. The distinction is that the income from a gift is the income of the donee but the income from a trust fund put up to meet an obligation of the creator of the trust, is the income of the debtor. Alsop v. Commissioner, 92 F. R. (2d), 148. * * *

In his brief counsel for the petitioner states that the Glendinning case:

* * * is distinguishable from the instant proceeding in that the trust there set up was specifically designed to take the place of the support order which the wife had from the Municipal Court of Philadelphia. In the instant proceeding the trust fund was set up primarily to release the claims of petitioner’s wife in his estate. This last factor makes the wife of the petitioner herein equivalent to a “donee” in the sense used in the Glendinning case in that the trust fund did not discharge the present obligation of the petitioner for support, but was set up for the purpose of releasing petitioner’s former wife’s future claims against his estate in the event of his death.

We do not think that the distinction sought to be made by counsel for the petitioner is substantial. In its opinion in the Glendinning case, 36 B. T. A. 486, the Board said:

It is now well settled, following the decision in Douglas v. Willcuts, 296 V. S. 1, that the income of a trust paid directly to a divorced wife is taxable to the husband who created the trust, whenever the purpose of the trust and the provision for payment of its income is to satisfy a legal obligation of the husband to support and maintain his wife, whether the satisfaction of that obligation results from the payment of alimony decreed by a competent court, or from the carrying out of a separation agreement which provides for such payments in lieu of alimony, dower, or other rights of the wife in the property of the husband. Albert C. Whitaker, 33 B. T. A. 865; Helvering v. Brooks, 82 Fed. (2d) 173. See also Helvering v. Coxey, 297 U. S. 694, reversing 79 Fed. (2d) 661; Helvering v. Stokes, 296 U. S. 551, reversing 79 Fed. (2d) 256.

The petitioner contends that the facts in the proceeding at bar are substantially the same as those in Henry Oliver Rea, supra, and that, in accordance with the opinion of the Board in that case, the Board should enter its decision in this proceeding that the petitioner is not liable for income tax in respect of the money paid by the Girard Trust Co. in 1934 to Estelle Willoughby De Bakhtiar. The Board, however, in its opinion in the Glendinning case differentiated the Glendimmng case from the Rea case and also from numerous other cases cited by the petitioner as supporting his contention.

We think it can not be doubted that the trust fund set up by the petitioner with the Girard Trust Co. was to meet an obligation to support his wife. It is very clear that at the time the trust was set up a divorce was contemplated. In point of fact the divorce proceeding was instituted only a few days after the agreement was entered into and the trust agreement specifically provides that any divorce which may be secured shall not in any wise affect the operation of the trust agreement. Furthermore, the trust agreement provided that the only effect that the wife’s remarriage should have would be a reduction in the amount of income which the trustee would pay over to her. In this case, as in the Glendimmng case, the agreement was to pay to the wife for her life an amount of income and the trust agreement was to continue in force after and notwithstanding a divorce should be granted.

In our opinion the proceeding at bar is ruled by the decision of the Circuit Court of Appeals for the Third Circuit in the Glen-dinning case.

Judgment will be entered for the respondent.


author: Hill:

text:
    Lloyd Jones, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Locket No. 90323.
    Promulgated March 7, 1939.

      Lloyd Jones pro se.

      Loren P. O alees., Esq., for the respondent.
   OPINION.

Hill:

Respondent determined a deficiency in petitioner’s income tax liability for the year 1934 in the amount of $680.42. In his return for the taxable year, petitioner deducted from gross income a capital loss resulting from foreclosure sales in the alleged amount of $16,375.20. Respondent disallowed the deduction so claimed to the extent of $14,375.20, including that amount in taxable income, and on such basis computed the deficiency in controversy. The correctness of respondent’s action on this point is the only issue presented for decision.

Petitioner is an individual, residing at North. East, Erie County, Pennsylvania.

In April 1926 petitioner purchased certain residential property, located at Long Beach, Long Island, New York, known as the “Long Beach property”, title to which was taken in his wife’s name. The purchase price of this property was $45,000. Petitioner paid $10,000 cash down; he also paid $10,000 in two annual installments of $5,000 each, and a purchase money mortgage of $25,000, signed by petitioner’s wife, was given to the vendor.

In May 1926 petitioner purchased 10 lots, located in the town of Oyster Bay, Nassau County, New York, known as the “Nassau Shores property”, title to which was also taken in the name of petitioner’s wife. The purchase price of the property was $13,150, and petitioner’s wife executed a bond and mortgage to the vendor for the sum of $5,858 of the purchase price.

Although the titles were taken in the name of petitioner’s wife, petitioner furnished all money paid on the purchase price of both properties above mentioned.

Petitioner’s wife died testate on May 1, 1929. Petitioner was the sole beneficiary under her will, and the executor thereof.

In 1931 petitioner executed extension agreements, and thereby assumed personal liability on the purchase money mortgages on both the Long Beach and Nassau Shores properties.

Both of the mortgages mentioned were foreclosed in 1934, and as a result of the foreclosure proceedings the properties were sold to the respective mortgagees.

In consideration of the agreement of the mortgagee not to take a deficiency judgment against him, petitioner turned over to the holder of the mortgage on the Long Beach property certain furniture that remained in the house at the time of the foreclosure proceedings.

The Long Beach property was originally purchased for the sole purpose of providing a home for petitioner’s wife and their six children. Some time after the death of his wife in 1929, petitioner rented the property. It was rented during 1931, and it was for that year that petitioner first claimed deductions for depreciation and reported rentals. Petitioner reported no rental for the year 1932, and the property was not rented during 1933. Petitioner, with some of his family, spent part of the summer of 1933 there in residence. Thereafter, the property was vacant until the mortgage was foreclosed in 1934.

In computing the deficiency, respondent determined that petitioner sustained a loss of $5,000 in 1934 from the sale of the Long Beach property pursuant to the foreclosure proceeding. Such loss was computed as follows: Respondent held that this property had a value in 1931, when converted to income-producing purposes, of $35,000, from which he deducted the unpaid mortgage of $25,000, plus depreciation allowable and allowed in 1931-1933 in the total amount of $5,000.

Respondent likewise determined that petitioner sutained a loss of $5,942 during the taxable year from the sale of the Nassau Shores property under the foreclosure proceedings. The amount of loss claimed by petitioner on this property is the same as computed by respondent, except that petitioner did not deduct from the purchase price of $13,150, in addition to the unpaid mortgage of $5,858, the amount of $1,350 representing depreciation allowed (which was in excess of the amount allowable) for 1932. The method used by respondent in computing the amount of this loss must be approved, since the depreciation allowed was properly deducted under the provisions of section 113 (b) (1) (B) of the Revenue Act of 1934.

Thus, respondent determined that petitioner sustained an aggregate loss on the two properties referred to in the amount of $10,942, but since petitioner had held the properties “for more than 2 years but not for more than 5 years”, only 60 percent or $6,565.20 of such loss could be taken into account in computing net income, pursuant to the provisions of section 117 (a). However, since petitioner reported no capital gains for the taxable year, respondent held that the amount of the allowable deduction for capital losses was further limited to $2,000 by the provisions of subsection (d) of section 117. Respondent now contends that petitioner is not entitled to any deduction for loss on account of the Long Beach property for the reason that (1) such property was not being used for income-producing purposes at the time of the foreclosure sale, and (in the alternative) (2) that by the time this property had been appropriated to income-producing purposes its value had so decreased that petitioner’s equity therein was worthless, and accordingly no loss was sustained from the foreclosure sale. Respondent further contends that, in any event, a loss from foreclosure is a capital loss, and that petitioner’s total capital losses allowable are limited to $2,000 under section 117 (d), supra.

Petitioner argues that he sustained total deductible losses of about $23,792.

In our opinion petitioner is not entitled to a deduction of the loss sustained from the foreclosure sale of the Long Beach property, if in fact a loss resulted therefrom, and hence we need not determine the value of the property or other factor which would enter into the computation of such loss. It is not essential to the allowance of a loss deduction that the property be purchased or constructed by the taxpayer in the first instance for the purpose of subsequent sale for a pecuniary profit. Even though the property were originally purchased for use as a personal residence, if it is thereafter abandoned for such purpose and devoted to business uses in the production of taxable income wntil sold, a loss from the sale is properly allowable. Heiner v. Tindle, 276 U. S. 582. But if a taxpayer (1) purchases or constructs a property for use as a personal or family residence and so uses it, (2) then abandons it for such use and rents it, (3) then reoccupies it as a residence for a time, and thereafter it remains vacant until sold at a loss, such loss is not a business loss and is not deductible is computing taxable income. W. H. Moses, 21 B. T. A. 226, 228. The use of property to produce revenue constitutes a transaction entered into for profit, but unless there is some appropriation of the property to rental purposes, which continues wntil it is sold, it retains its character as a residence rather than as a business property from the date it is last used as a residence. Cf. Joseph F. Cullman, Jr., 16 B. T. A. 991. See also Frances G. Smith, 23 B. T. A. 1134; D. A. Belden, 30 B. T. A. 601; R. C. Bayliss, 35 B. T. A. 1128; Howard Oots, 37 B. T. A. 571.

A more difficult question is presented in determining whether petitioner is entitled to deduct the full amount of the loss, or only a portion of the loss, admittedly sustained by him from the foreclosure sale of the Nassau Shores property. Section 117 (d), supra, plainly limits the allowance of capital losses only where such losses result from “sales or exchanges.” The loss involved in this case was a capital loss. The question, then, is whether or not such loss resulted from a “sale or exchange”; and the answer to this question depends upon whether or not a transfer pursuant to a proceeding for the foreclosure of a mortgage lien constitutes a “sale or exchange” by the mortgagor within the meaning of the statute.

In Commonwealth, Inc., 36 B. T. A. 850, the owner of realty subject to a mortgage, but on which personal liability was not assumed, deeded the property to the mortgagee without consideration and thereby sustained a loss, which we held was deductible in full and not subject to limitation under section 117 (d) of the Revenue Act of 1934.

In Sol Greisler, 37 B. T. A. 542, petitioners purchased property in 1927 subject to a first mortgage, which they did not assume. In 1934 the property was sold under foreclosure proceedings for less than the amount of the mortgage and petitioners received nothing by virtue of the sale. The loss sustained we held to be deductible in full and not subject to limitation under section 117 (d), supra, following the Commonwealth decision. In our opinion, we said:

In the instant case, just as in the Commonwealth case, the petitioners received nothing in exchange for their property, not even an acquittance of a liability under the first mortgage, because, as in the Commonwealth case, petitioners had purchased the property subject to the first mortgage and had not assumed any personal liability thereon. Petitioners neither sold nor exchanged anything. They lost their property through the operation of the law of foreclosure. The sale by the sheriff effected a transfer of title to the property, but it did not constitute a sale or exchange by petitioners.

In Betty Rogers, 37 B. T. A. 897, decedent and his wife purchased property for which they paid cash in part, assumed a note secured by a mortgage on the property, and executed a second note secured by deed of trust on the same property. The first note was paid, but the second note was not paid when it became due in 1932. In 1933, pursuant to an agreement of the parties, the property was conveyed to the holder of the second note and the note was surrendered and canceled. We held that the voluntary conveyance of the property by the mortgagors in consideration of the cancellation of the debt constituted a “sale” within the meaning of section 101 of the Revenue Act of 1932 and the loss sustained was a capital loss.

Harry Payne Bingham, 38 B. T. A. 913, involved a taxpayer-mortgagee instead of a mortgagor, as in the other cases cited. In that case the petitioner, who had sold real estate for cash and promissory notes secured by a mortgage, reacquired the property by means of a voluntary settlement, and thereby sustained a loss. The mortgagee released the mortgage and canceled and surrendered the notes. For-lowing Betty Rogers, supra, we held the loss was a capital loss under section 101 of the 1932 Act.

The Rogers and Bingham decisions were predicated upon the conclusion that where, by mutual agreement of the parties, the mortgagor conveys the property to the mortgagee in consideration of the release of the mortgagor from personal liability for payment of the debt secured by the mortgage, the creditor or mortgagee thereby relinquishing his right to collect such debt, the transaction constitutes either a sale of the mortgagor’s right, title, and interest in the property for the price of his obligation, or is an exchange of the real estate for the obligation, both properties having an equal value.

In the Commonwealth and Greisler, cases, supra, it was held that the transactions did not constitute either sales or exchanges for the reason that, there being no personal liability on the part of the owners to pay the mortgage debts, there was no consideration for the transfers. In the Commnonwealth case there was a voluntary conveyance of the property to the mortgagee, while in the Greisler case the property was sold at sheriff’s sale, without equity of redemption.

The instant proceeding, while similar in some respects to each of the cited decisions, we think is not ruled by either of them. Here, the petitioner was personally liable for the mortgage debt, but the property was transferred to the mortgagee under a foreclosure sale. Thus, petitioner was not acquitted of his personal liability by reason of a mutual agreement of the parties, and there was no voluntary conveyance by petitioner.' As we said in the Greisler case, supra, petitioner received nothing in exchange for his property; he neither sold nor exchanged anything. He lost his property through the operation of the law of foreclosure. The sale pursuant to the foreclosure proceedings effected a transfer of the title to the property, but did not constitute a sale or exchange by petitioner.

In order to constitute a “sale” there must be a purchaser as well as a seller, and there must be a meeting of the minds on a sale as between the seller and buyer. Matteis v. United States, 57 Fed. (2d) 999, 1001. In addition to the assent of the parties that the transaction shall be a sale, there must be a price or consideration moving from the purchaser to the seller for the transfer. Borland v. Nevada Bank of San Francisco (Cal.), 83 Pac. 737. Neither of those factors is present in the case at bar. Petitioner received no price or consideration, and did not convey the property or assent to its transfer. Petitioner did not “sell” his right, title, and interest in the property for the price of his obligation, nor did he exchange his real estate for the obligation. The debt was merely paid, or his obligation extinguished, to the extent of the proceeds of the forced sale. Neither full nor partial payment of a debt constitutes a “sale or exchange.” James B. Stewart, 39 B. T. A. 87; Charles T. Carlson, 39 B. T. A. 185; Hale v. Helvering, 85 Fed. (2d) 819, affirming 32 B. T. A. 356.

We hold, therefore, that the transaction in controversy was not a “sale or exchange”, and that allowance of the loss sustained by petitioner from the foreclosure sale of the Nassau Shores property is not limited by the provisions of section 117 (a) or (d), supra. The deficiency will be redetermined by allowing such loss in the full amount of $5,942, as computed by respondent. C. Griffith Warfield, 38 B. T. A. 907.

Decision will be entered wnder Bule 50.

       SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
      *******
      (b) Adjusted Basis. — The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided.
      (1) General bule. — Proper adjustment in respect of the property shall in all cases be made—
      *******
      (B) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent allowed (but not less than the amount allowable) under this Act or prior income tax laws. * * *

       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:
      *******
      60 per centum if the capital asset has been held for more than 2 years but not for more than 5 years; * * *

       (d) Limitation on Capital Losses. — Losses from sales or exchanges of capital assets shall be allowed only to the extent of $2,000 plus the gains from such sales or exchanges. * * *