author: Seawell:

text:
    George D. Mann, Petitioner, v. Commissioner of Internal Revenue, Respondent. Bismarck Tribune Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 54223, 59660, 63370.
    Promulgated October 24, 1935.

      Frank G. Hodgson, Esq., and William H. Oppenheimer, Esq., for the petitioners.

      Hartford Allen, Esq., for the respondent.
   OPINION.

Seawell:

The contention of petitioner Mann is that the record proves a sale of the stock by his former wife to the corporation and a purchase of the stock by him from it. He admits a liability to the corporation for the purchase price of the stock and an obligation to the Government to pay a tax on the dividend credited to him to retire the debt. The position of the respondent is that the present value of $165,000 of the bonds was a distribution from the corporation’s surplus and constituted a taxable dividend in 1928, the year the bonds were delivered and the stock transaction was closed.

There is an abundance of evidence in the record showing that the transaction was concluded without any thought being given to the question of from whom petitioner Mann was buying the stock or the effect the transaction would have on his income tax liability. His chief concern was to obtain control of the corporation through stock ownership and the best means open to him were utilized to accomplish that end. In 1930 he contended before the Commissioner in protests prepared by counsel employed for that purpose that he purchased the stock from his wife. While there is evidence tending to support Mann’s present position, we think the whole record sustains the conclusion that Beatrice Mann was the seller of the stock to him.

The real purpose of the equity suit was to determine ownership of the 248 shares of stock outstanding in the name of Beatrice Mann and the conferences had between the parties to the suit at the time the case was called for trial centered around the value of her interest in the corporation, represented by the stock, and the sale of the stock to petitioner Mann. The corporation was not a party to the suit and did not intervene in the divorce action until after the trial court had entered its judgment, and then only for the purpose of determining the validity of the bonds in the appellate court. The corporation was not a party to the settlement agreement filed in the divorce suit, and no subrogation agreement was ever entered into. Both the settlement agreement and the resolutions adopted by the directors and stockholders of the corporation authorizing the issuance of the bonds show an assignment of the stock to petitioner Mann rather than to the corporation. It does not appear that an adjusting entry was ever made in the capital stock account of the corporation to show a retirement of the stock such as would have been necessary under good accounting practice if the corporation had purchased the stock. The stipulation entered in the divorce suit clearly shows a liability on the part of petitioner Mann to pay the bonds for the stock, and to make weekly payments of $200 on account pending delivery of the securities. We conclude that the transaction resulted in a purchase of the stock by petitioner Mann from his wife.

The substance of the agreement between petitioner Mann and his wife is that she was to receive for her and her sister’s stock, a total of 249 shares, the sum of $165,000, with interest at 5 percent per annum, payable, principal and interest, at the rate of $6,000 semiannually, unless the demand were satisfied by a cash payment of the principal amount. Petitioner Mann did not have the funds necessary to close the deal by a cash pajanent and, accordingly, he caused the corporation to authorize a bond issue in the amount of $165,000, payable in accordance with the terms of the agreement with his wife.

In the final analysis the corporation did nothing more than agree to pay petitioner Mann’s obligation as it matured. Neither this promise to pay nor the issuance of the bonds evidencing the promise affected the corporation’s surplus, for there was at all times an implied promise on the part of petitioner Mann to reimburse the corporation for all payments it made to liquidate the bonds. He acknowledged such a liability when the question became important. Each payment made by the corporation was on behalf of, and chargeable to, petitioner Mann. In 1928 the corporation paid Beatrice Mann $9,200 to apply against principal and interest on the bonds upon their acceptance by her. This sum was charged to petitioner Mann and a like sum was credited to him as a dividend. Of the sum of $165,000 in question, only $9,200 constitutes a taxable dividend to Mann. See Ruphane B. Iverson, 29 B. T. A. 863. Cf. George Youell, 18 B. T. A. 599; J. S. Hatcher, 18 B. T. A. 632.

Of tlie amount of $12,000 paid by the Bismarck Tribune Co. in 1929 to retire its bonds, $7,853.44 represented interest on unpaid principal. This sum was charged to petitioner Mann’s personal account in March 1930. He claims that the sum is deductible as interest on indebtedness incurred in the purchase of the stock. Looking through to the ultimate facts we agree with this contention of petitioner. The deferred debt upon which the interest was paid was the debt of petitioner Mann, and through his arrangement with the corporation petitioner Mann paid the interest. We hold the respondent was in error in refusing to allow the amount as a deduction for interest paid by petitioner Mann.

The same amount was claimed by the corporation and allowed by the respondent as interest on the bonds. The respondent now contends that he should not have allowed the deduction on the ground that the bonds do not bear interest.

The bonds do contain a provision that they are without interest, but other documents must be considered to determine the real facts. The clear intent of the settlement agreement between petitioner Mann and his wife was that she should receive for her and her sister’s stock, bonds of the Bismarck Tribune Co. of the face amount of $165,000, payable, principal and interest at 5 percent per annum, at the rate of $6,000 semiannually. This definite understanding is set forth in the resolutions adopted by the directors and sto'ckholders of the corporation authorizing the bond issue. The amortization table in the mortgage executed on all of the corporation’s real and personal property to secure payment of the bonds is made a part of the bonds by reference. This table shows the amount of principal and interest liquidated by payment of the bonds as they mature, and provides a method for computing different sums in case of prepayment of any bond. The mortgage also provides that the total amount of the bonds represents principal of $165,000 and interest at the rate of 5 percent per annum, payable semiannually, on unpaid balances. The bonds and mortgage disclose a purpose to pay the principal sum of $165,000, with interest, on the terms specified. The evidence is against a holding that the obligation incurred was $276,-395.76, without interest, payable $6,000 semiannually. The corporation could have reached the same result by issuing one bond for $165,000, at 5 percent interest, payable, principal and interest, at the rate of $6,000 semiannually. As we have held above, the deferred debt upon which the interest accumulated was the debt of petitioner Mann. Payment of that interest in the way and manner shown by the evidence was payment by Mann and not by the Bismarck Tribune Co. Accordingly, we hold that the allowance of the deduction to the Bismarck Tribune Co. was not proper.

The sum of $7,932.38 was claimed by the Bismarck Tribune Co. as a deduction in 1929 for legal fees and expenses. The respondent disallowed $2,650 as representing personal expenses of petitioner Mann. The corporation contends that the respondent should not have disallowed in excess of $500, the amount allocated and charged to petitioner Mann on the corporate books.

Of the fees in question, $1,950 was charged in 1929 for representing petitioner Mann in the equity suit and $5,000 constitutes the fee charged by counsel for representing the individual and the corporation in the divorce suit and services performed in connection with the bond issue. The corporation was not a party to the equity suit and was not an intervener in the divorce action until after a decree had been entered and then only for the purpose of obtaining a decision by the appellate court on the question of whether or not the bonds were valid. The primary purpose of both proceedings was a settlement of the disagreements between Maim and his wife. The corporation had only a remote interest in the outcome of the litigation. The respondent’s action in disallowing $2,650 of the legal fees and expenses as not being an ordinary and necessary expense of the Bismarck Tribune Co. is sustained. Forty-Four Cigar Co., 2 B. T. A. 1156.

Decision will be entered under Rule SO.


source: Caselaw Access Project

license: Public Domain

text:
    Edith Huggard Sharp, Charles C. Norris, Jr., and Fidelity-Philadelphia Trust Company, Executors, Estate of Walter P. Sharp, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48317.
    Promulgated October 25, 1935.

      Wm. Barclay Lex, Fsq., for the petitioners.

      Ralph F. Staubly, Esq., for the respondent.
   OPINION.

Seawell:

In a report promulgated April 27, 1934 (30 B. T. A. 532), we held that the value of the corpus of five trusts created by the decedent on March 12, 1926, for the benefit of his five children, was not includable in the decedent’s gross estate as transfers made in contemplation of or intended to take effect in possession or enjoyment at or after death. Reference was made in the opinion respecting the execution by the decedent at the same time of a sixth trust for the benefit of his wife, Edith Huggard Sharp, but there was no decision on the question of whether the value of the corpus of the trust constituted a part of the decedent’s gross estate. We did hold, however, that of certain property purchased with the view of ultimately including it in such trust, items of the value of $19,-926.80 should not be included in the gross estate, but that the remaining items, determined by the respondent to be of a value of $155,380.37 for estate tax purposes, never had been included in any trust or transferred by way of gift and constituted property subject to estate tax.

Upon motion of petitioners, acquiesced in by respondent, permission was granted to amend the pleadings to include a sixth trust; and the cause was reopened for a rehearing to determine the tax-ability of the value of the corpus of six trusts as transfers made in contemplation of or intended to take effect in possession or enjoyment at or after death, in the light of the record theretofore made and additional stipulated facts.

The additional evidence before us consists of the six trusts executed by the decedent on March 12, 1926, one for each of his then five living children and one for his wife, and schedule E of the estate tax return.

Each of the five trusts created for the benefit of the decedent’s children provides for the payment of the net income of the trusteed property or so much thereof as the trustees in their sole judgment may deem proper “ for the comfort, education and support ” of the child “ either by the payment of bills incurred for any of the said purposes ”, or by payment to the father or mother of the beneficiary or other persons considered by the trustees suitable to receive the money during the minority of the beneficiary, and when the beneficiary becomes of age for the payment of the net income to the beneficiary for life. Upon the death of the beneficiary the net income is payable to the surviving issue of the beneficiary in equal shares for 20 years, at which time the trust is to terminate and the corpus thereof is to be distributed in equal shares among the beneficiary’s then surviving issue. In event the beneficiary dies without surviving issue, or such issue dies within 20 years thereafter, the trust is to terminate and the corpus is to be divided into as many parts as there are then surviving children of the grantor and deceased children leaving issue at that time surviving. One of such parts is to be distributed to each of the trusts then in existence and one among the surviving children of any deceased child for whom no trust is then in existence. Provision is also made for the distribution of the corpus under the intestate law of Pennsylvania in case the trust terminates at a time when the grantor has no surviving issue.

The net income of the remaining trust is payable to the grantor’s wife for life and upon her death to the grantor, if living. Upon the death of the survivor of the grantor and his wife, the net income is to go to the grantor’s children in equal shares, and upon the death of any child to his or her issue for 20 years after the death of the survivor of the grantor, his wife, and their five children, when the trust is to terminate and the corpus is to be distributed among the issue of the grantor’s children, and, if no such issue, then to such persons as are entitled thereto under the intestate laws of Pennsylvania. The trust also contains a provision authorizing but not requiring the trustees to pay the net income distributable to beneficiaries not of age, for the comfort, education, and support of such minors by payment of bills incurred for such purpose, or to a parent or guardian of such minors.

Capital stock of Stephen F. Whitman & Son, Inc., constituted the corpus of each of the six trusts. The grantor did not reserve the power to amend, modify, or revoke any of the trusts.

Our opinion in the previous report disposes of the question of whether the items of $19,926.80 and $155,380.37 constituted a part of the sixth trust. In accordance with the conclusions reached there, the item of $19,926.80 will be excluded from, and the item of $155,-380.37 will be included in, the gross estate.

The value of the corpus of each trust is not in controversy. The question before us now is whether the value of the stock in the six trusts constituted a part of the decedent’s gross estate as transfers made in contemplation of or intended to take effect in possession or enjoyment at or after death.

No boundary line has ever been fixed as a guide for determining whether a particular transfer was made in contemplation of death. The answer depends upon the circumstances of each case. United States v. Wells, 283 U. S. 102, in which the Court said that There is no escape from the necessity of carefully scrutinizing the circumstances of each ease to detect the dominant motive of the donor in the light of his bodily and mental condition, and thus to give effect to the manifest purpose of the statute.” The Court also recognized that “ sound, health and purposes associated with life may motivate the transfer.”

We need not refer at length to the detailed findings of fact we made in our previous report respecting the circumstances surrounding the transfers. Briefly, they show that the decedent was 52 years of age at the time of his death and up to the time of his fatal illness, lasting only a few days, he had never had a serious illness. He was leading a busy life and was making plans for himself far into the future. His death occurred with little warning and only a few hours after he had performed a duty connected with his business. From these and other facts we found that the decedent’s desire was to place funds beyond his control to protect his family against financial worries, and that such desire was the primary object of the creation of the trusts. A further motive was to decrease his income tax liability. See Farmers Loan & Trust Co. v. Bowers, 68 Fed. (2d) 916; certiorari denied, 293 U. S. 565. The trusts provided the means for the accomplishment of both objects, which objects, in our opinion, were the compelling and dominating motives for the transfers. Where such motives are the impelling causes for transfers, the property is not includable in gross estate as a transfer made in contemplation of death. See Marie E. Harnischfeger et al., Executors, 31 B. T. A. 224, and numerous cases cited therein on the point. The transaction had a closer association with the thought of living than knowledge of the certainty of death.

The fact that the decedent signed his will the day he executed the trust agreement has a bearing on the motive for the transfers, but it is not controlling. Real Estate Land Title & Trust Co. v. McCaughn, 79 Fed. (2d) 602.

Without a reservation of power to amend, modify, or revoke the trusts, no interest passed from the decedent at death subject to tax as a transfer intended to take effect in possession or enjoyment at or after death. Reinecke v. Northern Trust Co., 278 U. S. 339; May v. Heiner, 281 U. S. 238. We adhere to the conclusion reached in 30 B. T. A. 532, with respect to the five trusts and make the same ruling here concerning the value of the corpus of the sixth trust.

In reference to the two contested insurance policies, while we found as a fact that there was no right reserved to change the beneficiary of either policy, we held that the face amount, less outstanding loans, should be included in the gross estate under section 302 (g) of the Bevenue Act of 1926. This holding was predicated upon the loan and cash surrender provisions of the policies. Upon further consideration of this question, we find that a slight, but material, variance of the fact, omitted by inadvertence from the former report, confirms our conclusion upon other grounds as to policy No. 87437. This policy was made payable to the insured or Ms assigns on June 28, 1935, or, in case of his death prior thereto, to his wife, if living, otherwise to the executors, administrators, or assigns of the insured. Under such a right the insured could have changed the beneficiary without the consent of any other person. N. Y. Mutual Life Insurance Co. v. Armstrong, 117 U. S. 591; vol. 11, Cooley, Briefs on the Law of Insurance, 1092. Accordingly, we adhere to the ruling made as to policy No. 87437. But the inclusion of policy No. 81384 in gross estate, as before stated, was based upon the theory that the insured could at any time have surrendered the policy for its cash surrender value, or pledged it for a loan from the insurer based upon its cash surrender value, and that, since such powers could have been exercised until the death of the insured, the ending of the possibility was sufficient to justify the tax. The right or lack of power of the insured to substitute another for his wife as the beneficiary was not discussed in the opinion.

We find that the policies of insurance contained the following provisions:

This policy is issued subject to the provisions of the General Laws of Massachusetts applicable thereto, and is a contract made and to be performed in accordance with the provisions of the Law of the said Commonwealth.

Under decisions of the courts of Massachusetts the decedent’s wife, as the beneficiary, had a vested interest in the policy which could not be divested without her consent. Boyden v. Massachusetts Mutual Life Insurance Co., 153 Mass. 544; 27 N. E. 669; Pingrey v. National Life Insurance Co., 144 Mass. 374; 11 N. E. 562; Bailey v. Wood, 202 Mass. 562; 89 N. E. 149; Wilde v. Wilde, 209 Mass. 205; 95 N. E. 295; Goldman v. Moses, 191 N. E. 873. The insured could not, without the written consent of the beneficiary, (1) surrender the policy for its cash value; (2) convert it into paid-up insurance; or (3) continue the policy in force as extended term insurance. Sec. 144, ch. 175, General Laws of Massachusetts. He could not obtain a loan on the policy except “ upon its proper assignment to the company.” Sec. 142, lb. Under provisions of the policy, the insured could not obtain a loan from the insured without “ a legal assignment and delivery of the policy as collateral security.” The beneficiary having a vested interest in the policy, her consent was necessary to obtain loans from the insured on the security of the policy. This being the case, the decedent had no power independent of the beneficiary to dispose of or alter the policy during his life for his own benefit, and upon his death nothing of value passed to his estate. It follows that no part of the proceeds of policy No. 81384 is includable in the gross estate. Pennsylvania Co. for Insurance, etc. v. Commissioner, 79 Eed. (2d) 295, reversing 29 B. T. A. 1306.

The fact that the insured did obtain a loan on the policy during his life is unimportant. We are only concerned with the face amount of the policy, less the outstanding loan. The respondent made no finding that the beneficiary gave the decedent power broad enough to permit him to surrender the policy, pledge it for a loan, or change the beneficiary, and from the fact that a loan was obtained it can not be assumed that the insured had such control.

The conclusion reached by us is not contrary to Chase National Bank v. United States, 278 U. S. 327. There the insured reserved the right to change the beneficiary.

Our report of April 27, 1934, 30 B. T. A. 532, is modified as set forth above.

Reviewed by the Board.

Decision will be entered under Bule 50.

Van Foss AN dissents.


author: Arundell :

text:
    Victor A. Dorsey, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59802.
    Promulgated October 25, 1935.

      Harry E. Kelly, Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
   opinion.

Arundell :

The respondent has determined a deficiency in income tax for the year 1928 in the amount of $22,159.50, and has asserted a 50 percent penalty of $11,079.75. The major part of the deficiency results from the respondent’s treating as ordinary income a sum reported by petitioner as capital gain. Whether that income was ordinary income or capital gain, and whether or not petitioner is subject to a penalty are the two issues presented.

The petitioner, a resident of Chicago, Illinois, is a consulting engineer, specializing in public utility investigations and reports. In 1925 he was employed by a bank to examine the properties of the New York Oil Co., a corporation with its principal place of business at Casper, Wyoming. While engaged on that work petitioner came in contact with Minal E. Young, vice president and general manager of the New York Oil Co. and one of two executors of the estate of Frank G. Curtis, deceased.

The New York Oil Co. had an authorized capital of 400,000 shares of stock and had outstanding 384,028 shares, of which the Curtis estate owned 150,000 shares and Young owned 1,600 shares. The Curtis will gave the executors power to sell the property of the estate. The petitioner learned from Young that his stock and the stock owned by the estate was for sale.

Petitioner did not have the funds to purchase the stock of the New York Oil Co., but endeavored to secure other purchasers. On August 28, 1926, petitioner wrote to Young saying that he thought he had “made a deal.” The letter read in part: “I can sell the company outright or sell control in which [event] the buyers warn, 240,000 shares. Can you get that amount. * * * Now Minal what is the minimum price for the estate stock and for what average price can you get the additional 90,000 shares.” The letter refers to another individual who was apparently interested in the stock and continues: “ * * * the lower he bids the more reasonable we can buy the estate stock and also the additional 90,000 shares.” The “ deal ” referred to in the letter evidently did not materialize. About September 1926, or later, petitioner became acquainted with Paul W. Eeize and informed him that the New York Oil Co. stock was for sale and interested Eeize in attempting to secure purchasers. In 1927 Eeize made contact with several corporations which were interested in the properties of the New York Oil Co., and on December 21, 1927, Eeize and several corporations entered into a so-called “ Stockholders Deposit Agreement.” The substance of the agreement was that a holding company organized by Eeize, the Utilities Purchasing Corporation, would purchase the stock of the New York Oil Co. deposited under the agreement and would transfer the assets of the New York Oil Co. to four corporations named in the agreement. It was stated in the deposit agreement that Eeize had for some time past been carrying on negotiations looking to the acquisition of the stock and the sale of the New York Oil Co.’s assets, and that if the transactions were consummated Eeize would receive compensation for his services from the four corporations that were to acquire New York Oil Co.’s assets. Minal E. Young and D. A. Curtis were parties to this agreement as a “ Committee ”, in which capacity they made certain representations concerning the stock and assets of the New York Oil Co. The petitioner’s name does not appear in the agreement and he was not a party thereto.

Upon deposit of 335,902 shares of New York Oil Co. stock the transactions outlined in the deposit agreement were consummated in April 1928. The New York Oil Co. stockholders received $5,280,-379.44. Thereafter in .1928 Eeize paid to the petitioner $177,404.49 in cash and delivered to petitioner bonds of the Empire State Oil Co. (one of the purchasers of New York Oil Co.’s assets) in the face amount of $54,000, but which had an actual value not in excess of $5,400. Eeize represented to petitioner that the amount so paid to petitioner was one half of the compensation that Eeize had received on consummation of the deal.

In 1929 petitioner secured at least two extensions of time within which to file his income tax return for the year 1928. Petitioner consulted his attorney with respect to the preparation of his 1928 return, and as the petitioner had had a number of transactions in securities the attorney advised the petitioner that he should have an audit made by a competent accountant. Petitioner thereupon engaged a certified public accountant to make an audit and to aid in the preparation of his return. The accountant consulted the attorney on various matters in connection with petitioner’s 1928 income. When they reached the matter of reporting the income from the New York Oil Co. deal the accountant and the attorney conferred with Eeize and secured from him certain figures in connection with the transaction. During the course of such conference it developed that Eeize had reported or proposed to report his income from the New York Oil Co. transaction as ordinary income. Petitioner’s accountant and attorney stated to Eeize that in their opinion petitioner’s share of the income from that transaction was capital gain, and they suggested to Eeize that he report his income from the transaction in the same manner. Eeize stated that he did not agree with them, that in his opinion there had been no ownership of property, and that the facts in the case did not justify reporting either his income or Dorsey’s as capital gain. He refused to make his return in the manner proposed by the accountant and the attorney.

Petitioner’s return was actually prepared by the accountant he had engaged and in schedule D thereof the income from the New York Oil Co. transaction was reported as follows:

Schedule D. — Capital Net Gain or Loss prom Sale op Assets Held More Than Two Years
1. Kind of property 2. Date acquired i. Date sold 4. Amount received 6. Cost 9. Net gain or loss
335,902 shares New York Oil Co. Juno 1925 May 1928 $5,463,183.93 $5,280,379.44 $182,804.49

The deposit agreement was not attached to the return.

The return was sworn to by petitioner on July 15, 1929, and filed with the collector at Chicago on or about that date.

The respondent has determined that the income of $182,804.49 arising from the New York Oil Co. transaction was ordinary net income and bas accordingly asserted a deficiency in income tax. Respondent has also determined that the deficiency is due to fraud with intent to evade tax and has asserted a 50 percent penalty.

Petitioner reported his income from the New York Oil Co. transaction as a capital gain and he contends that that was correct. He concedes that he did not have and did not sell the New York Oil Co. stock. His position is that he had the exclusive right to purchase the stock of the company; that such right was granted to him by Young in 1925; that he continued to hold that right until 1928, when the stock was acquired by the Utilities Purchasing Corporation ; and that the right constituted “ property.”

Petitioner’s contentions are wholly without merit. At no time did he own the stock that was sold in 1928 or any interest in the stock that can be regarded as a property right. His reporting the transaction as a sale of stock was clearly wrong. In fact, every statement in schedule D of the return, except the amount of gain realized, is false. The petitioner did not acquire 335,902 shares of stock, or any other amount, in June 1925; he did not sell that amount of stock, or any other amount, in May 1928; he did not receive $5,463,183.93; there was no cost to him of $5,280,379.44 or any other sum; the deposit agreement does not explain petitioner’s participation in the transaction, or show the source of his income.

The amount that petitioner received was in the nature of a commission for his part in discovering the deal and in assisting Reize in consummating it. There is no indication that the petitoner was ever in doubt as to the source and character of the sum he received, and if he had been it must have been dispelled by Reize when the petitioner’s return was being prepared. Throughout the record appear the terms “ option ” and property right ” in reference to the petitioner’s arrangement with Young concerning the stock. Neither term describes the facts. Young’s testimony describing the situation is: “We had an oral understanding that he could buy the stock at any time he produced the money for it.” There was no time limit on this arrangement, and it appears that Young did not consider that he had granted any exclusive right to the petitioner, for his testimony is that others were interested in the stock and he notified petitioner that “ if he wanted to take the stock he better get busy.” There does not appear to have been any price agreed upon for the stock. While Young testified that he indicated a price to the petitioner, in an affidavit made by him in 1929, and placed in evidence, he stated the price was to be fixed after appraisals and investigations had been made by the petitioner. It appears from petitioner’s letter to Young in August 1926 that no price had been agreed upon between them. The agreement, whatever it was, obviously related to only a portion of the 335,902 shares that were transferred in 1928. Young himself had only 1,600 shares. The Curtis estate had 150,000 shares and undoubtedly Young would need the consent of his coexecutor to sell that stock. Assuming that he had such consent or that he alone could sell the estate stock, the total of the estate stock and his stock is less than one half the stock sold and is insufficient to give control of the company. This situation was known to the petitioner, as shown by his letter to Young in August 1926, in which he inquired whether Young could get the additional stock necessary to give control. As far as the record shows there was no consideration for the agreement. Thus the agreement was simply that if the petitioner produced some money he could buy an unascertained portion of the New York Oil Co. stock for an unascertained price. Clearly he had no enforceable right which can be dignified by the term option or property right. “An option, as used in the law of sales, is a continuing offer or contract by which the owner stipulates with another that the latter shall have the right to buy the property at a fixed price within a certain time, or on compliance with certain terms and conditions; or which gives to the owner of the property the right to sell or demand sale.” “An option contract, to buy or sell, as in the case of other contracts, must be supported by a valuable consideration.” 55 C. J. §§ 68, 69. Petitioner’s connection with the New York Oil Co. deal was not that of an owner of any rights or property, but solely that of an intermediary who aided in bringing together the parties who purchased and sold the stock. Consequently his income from the transaction was a commission and clearly not derived from any property and the respondent correctly treated it as ordinary income.

The evidence supports the respondent’s assertion of fraud with intent to evade tax. The petitioner knew that he had not bought or sold the stock of the New York Oil Co.; he knew that he had no cost or receipts in the amounts represented; he knew that he was not a party to the deposit agreement. He testified that he read the return before signing and swearing to it. It is beyond belief that such gross misstatements of fact could be made innocently, particularly where the facts were carefully inquired into by not only the petitioner, but also his attorney and accountant. The accountant’s explanation, in part, is that by including in the schedule the footnote “ See deposit agreement 12/21/27 ” the Government would be put on notice, and that in a subsequent investigation by Government agents “ we would present the working papers, and have the facts, and all the disclosures would be made * * The deposit agreement certainly would not serve to put the Government on notice as to the source and character of petitioner’s income. As pointed out above, the petitioner was not a party to the agreement, his name does not appear therein, and he received no income under it. Had there been an honest intent to apprise the Government of the facts it would have been manifested in some way other than gross misstatements of the basic facts and figures. Instead of describing in any way approaching accuracy the source of his income, the petitioner went out of his way to report false facts and figures.

Upon consideration of all the evidence we are convinced that petitioner’s falsely reporting his income as capital gain was deliberate and fraudulent with intent to evade tax. We find as a fact that part of the deficiency is due to fraud with intent to evade tax. The respondent’s assertion of the fraud penalty is sustained.

Reviewed by the Board.

Decision will be entered for the respondent.

       See Deposit Agreement Dec. 21,1927.


author: Arnold:

text:
    Central & Pacific Improvement Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent

    Docket No. 68317.
    Promulgated October 29, 1935.

      Herschel B. Green, Esq., for the petitioner.

      I. Graff, Esq., for the respondent.

       Reversed. See 34 B. T. A. 20S.

   OPINION.

Arnold:

This appeal is for the redetermination of a deficiency asserted by the respondent in income tax for the year 1930 in the amount of $16,109.42. It is alleged that the respondent erred in determining a profit from the involuntary conversion of certain property belonging to the petitioner. The facts are stipulated.

The petitioner is a corporation organized under the laws of the State of California and has its principal place of business at 123 West Washington Boulevard, Los Angeles, California.

During the month of November 1913 petitioner, at a cost of $282,-497.12, acquired fee title to a certain parcel of real estate in Los Angeles, California, which is bounded on the north by Eighteenth Street, on the west by Hill Street, on the south by Washington Boulevard, and on the east by an alley, the lot being 484.01 feet on the north, 349.35 feet on the west, 486.60 feet on the south, and 321.59 feet on the east, less a corner on the southwest comer of Hill Street and Washington Boulevard, being 120 feet on Hill Street and 150 feet on Washington Boulevard.

During the year 1930 the city of Los Angeles by proper legal proceedings opened up Broadway Street, a public thoroughfare, and condemned a right of way through said lot owned by the petitioner running from Eighteenth Street to Washington Boulevard, the strip condemned being 88.07 feet in width on Eighteenth Street and 88.42 feet in width on Washington Boulevard. In the same year the city of Los Angeles by proper legal proceedings also condemned a portion of said lot in so far as the lot extended along Washington Boulevard to the extent of 20 feet in depth along the entire side of the lot. A special improvement district was created, and the condemnation and improvements hereinafter mentioned were part of its work.

In the year 1930 the city of Los Angeles, by order of court, awarded petitioner for the land taken from it in the condemnation proceeding the sum of $203,271.88. Petitioner received out of the award only $34,321.86 in cash and the balance was applied as a credit on the assessments hereinafter referred to. The cost to the petitioner of the land taken in the condemnation proceeding was $72,357.29.

In the year 1930 the city of Los Angeles levied special assessments against petitioner on the remaining land owned by it in the above described parcel for the work of opening, widening, paving, and lighting in said improvement district in the sum of $155,164.28.

In the year 1931 the city of Los Angeles levied special assessments against petitioner on the remaining land owned by it in the above described parcel for the work of opening, widening, paving, and lighting in said improvement district in the sum of $8,057.30, which sum was paid by petitioner in the year 1931.

In the year 1930 the city of Los Angeles levied a special assessment against other property owned by the petitioner in said improvement district for the work of opening, widening, paving, and lighting in the district in the sum of $13,785.74. No part of the property with respect to which the assessment of $13,785.74 was levied was taken by the city of Los Angeles nor was any award made with respect thereto.

In 1930 the petitioner paid the special assessments mentioned, aggregating $168,950.02, by the city of Los Angeles withholding that sum from the award of $203,271.88.

Petitioner did not sell, exchange, or otherwise dispose of the above described property in 1930, except as stated above.

The petitioner had the right either to collect its awards in full and permit the special assessments to go to bond payable over a period of years, or to apply the awards against the special assessments and receive the balance due. It chose the latter method.

The improvement district here concerned was very extensive. There were a great many property owners in the improvement district who had no property taken, but were required to pay special assessments.

In determining the deficiency here in question the respondent treated the entire award as income and computed the taxable gain by deducting therefrom the amount of $12,357.29 as the cost of the property taken.

The petitioner contends that, since the assessments were offset against the awards, the only income received by him in 1930 from the transaction was $34,321.86, which was further reduced by $8,057.30, the special assessment levied in 1931, and, as a consequence, all of the proceeds of the property involuntarily converted was expended in the acquisition of other property similar or related in service or use except $26,264.55, which is less than the cost of the property taken.

Petitioner further contends that, inasmuch as the award received was offset against and to the extent of the assessments levied for benefits, there arose simultaneously with the payment a new basis of cost for the determination of gain or loss. If either of these contentions is true there was no taxable gain for the year before us.

The amount of the award withheld in 1930 by the city of Los Angeles in payment of the special assessment levied against the petitioner for the purpose of opening, widening, paving, and lighting in the improvement district was constructively received by petitioner in that year. Washington Market Co., 25 B. T. A. 576; Old Colony Trust Co. v. Commissioner, 279 U. S. 716; United States v. Boston & Maine R. R., 279 U. S. 732; Carrano v. Commissioner, 70 Fed. (2d) 319. Therefore the entire award of $203,271.88 was received by petitioner in the taxable year.

The underlying principle of special benefit assessments is that the property upon which they are imposed is benefited by such improvements. Norwood v. Baker, 172 U. S. 269. Such assessments are not allowable as deductions under the provisions of section 23 (c) (3) of the Revenue Act of 1928, and may not be recovered by ratable annual deductions measured by the depreciation annually sustained by the public improvement in question. F. M. Hubbell Son & Co., 19 B. T. A. 612; affd., Hubbell Son & Co. v. Burnet, 51 Fed. (2d) 644. They are payments in addition to the cost of the property subjected to the assessment and may be added to such cost in determining the base on a subsequent sale. Cf. Champion Coated Paper Co., 10 B. T. A. 433; Hubbell Son & Co., supra; Carrano v. Commissioner, supra.

In Carrano v. Commissioner, supra, the court had before it the question as to when a benefit assessment which was paid in the same manner as that in this proceeding, i. e., by the city withholding the amount of the assessment from the award, was to be brought into the reckoning.

In holding that the payment of the award by the municipality should be treated as immediately added to the original basis the court, speaking through Judge L. Hand, said:

* * * On the other hand, it appears to us that this payment should be treated as immediately added to the original “ basis.” Although the assessment was not an added cost until paid, it became cost at the moment when it was set off against the award. Receipt and payment were simultaneous; it is as false to say that the award was paid before it was expended, as that it was expended before it was paid.
:¡: í¡í ‡ ‡ 3: $ ‡
In this instance the “ gain ” in dispute could arise only on the hypothesis that so much of the award as paid the assessment was received before the assessment itself was paid. This was demonstrably not the case; it was received at the same time. Thus it does not affirmatively appear to be a taxable “ gain ” at all, and the taxpayer wins. Moreover, this is the direct and natural way to loot at the transaction. The taxpayer has “ gained ” only what he has received above his cost; so far as his award has been cancelled by the assessment, it is not a “ gain ” at all, it is instantly absorbed by a new cost which arises and is paid without allowing him even a momentary possession of the “ gain.”

In Wolf v. Commissioner, 77 Fed. (2d) 455, a similar situation was considered. In its opinion the court said:

* * * However that may be, it is clear that the entire proceeding for the opening of a street is one proceeding and the result should be treated as an entirety. This was the view of the Supreme Court of California expressed in considering a somewhat similar situation under the same street opening act in the case of Spring Street v. City of Los Angeles, 170 Cal. 24, wherein a parcel of land was awarded $20,000 and assessed $20,115.20 to pay for the property thus taken. This transaction was treated as a unit for the purpose of determining whether or not there had been an infringement of the constitutional rights of the owner of the land. * * *

The parties in neither the Carrano case, supra, nor the Wolf case, supra, asked that the assessment be apportioned between the portion condemned and the portion remaining. In the Carrano case the figures were not at hand with which this could be done and the court reserved its judgment on that point. In the Wolf case such an apportionment might have been made, but the court disregarded that fact and decided the case without making any apportionment.

It does not appear that the city of Los Angeles purchased any of petitioner’s property in 1930, but only condemned and took a right of way through it and along one side for a public thoroughfare. It is the general rule in such proceedings that the fee to the property taken remains in the owner, subject to the public easement, and in the absence of evidence to the contrary title to the fee is presumed to be in the abutting land owner, cf. 29 C. J., sec. 257; 44 C. J., sec. 3666. This is the rule in California, Deering’s Civil Code of California (1927), sec. 831, and the public acquired only an easement in the part taken, cf. San Francisco-Oakland, Terminal Rys. v. Alameda County, 66 Cal. 77; 225 Pac. 304. Under such circumstances the award for the taking of the property for public use extends to the whole parcel and the assessment, being a part of the same transaction and simultaneously paid, increases the cost basis of the whole. In this view of the matter no gain can arise unless the award exceeds the cost basis thus established.

We conclude there was no taxable gain from the transaction here in question in 1930, and petitioner’s contention that there was no deficiency for that year is approved.

This conclusion makes it unnecessary to consider petitioner’s contention that a part of the proceeds of the property involuntarily converted was expended in the acquisition of other property similar or related in service or use.

Decision will be entered for the 'petitioner.


author: Black :

text:
    Uzal H. McCarter (Deceased) , Fidelity Union Trust Company, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69193.
    Promulgated October 29, 1935.

      John A. Conlim,, C. P. A., for the petitioner.

      B. L. Young, Esq., for the respondent.
   OPINION.

Black :

Under the decision of the Supreme Court in Helvering v. Bliss, 293 U. S. 144, the petitioner is entitled to include the capital gains of the decedent in his income for the purpose of computing the 15 percent deduction, under section 23 (n) of the Bevenue Act of 1928. This should be done in a redetermination of the deficiency under Eule 50.

We will next take up and decide the second issue. On September 4, 1919, the decedent, through his brokers, Johnson & Wood, sold 2,000 shares of Public Service Corporation common stock and on April 28, 1930, he sold through these same brokers 10,000 shares of the same stock. In both cases the brokers had been instructed by the decedent to sell from the later purchases and in both cases in making delivery they partially violated these instructions. The issue is whether the intention of the decedent or the actual deliveries control.

The instant case was submitted and briefs were filed prior to the decision of the Supreme Court in Helvering v. Rankin, 295 U. S. 124, but, by permission granted, petitioner has filed a supplemental brief and cites the Supreme Court’s decision in the Rankin case and urges it as supporting his contention.

In determining the meaning of the Court’s decision in the Rankin case and what application it has to the question we have here to determine, we think it is important to bear in mind that Turner, the purchaser and seller of stocks in that case, was dealing entirely on margins. At the outset of its opinion the Court said: “ When gain or loss is to be determined on the sale of stock outright as an investment, the identification of the shares sold with those purchased ordinarily presents no difficulty. But when the taxpayer has engaged in marginal transactions on a stock exchange, the identification of sales and purchases is frequently impossible.” Again, the Court pointed out in a later paragraph that: “ In none of these transactions did the broker deliver to Turner, or Turner to the broker, any stock certificate. No specific certificate of stock was ever bought or sold by the broker for Turner; and none was ever earmarked or allocated to him. The purchases and sales affecting his account were made through the medium of street certificates handled by the broker; and the transactions were evidenced solely by debits and credits to his account on the broker’s books.”

In the instant case the facts are different in certain material respects from those above quoted. It is not contended here that petitioner’s decedent was buying and selling stocks on margin. While the stocks of Public Service Corporation which McCarter carried in his account with the brokerage firm of Johnson & Wood were not issued in his name, they had been earmarked or allocated to him in such a way that the certificates were capable of identification. For example, as to the sale of 2,000 shares which the decedent made on September 4, 1929, it is stipulated that: “ the delivery clerk in the said brokerage firm of Johnson & Wood in making delivery of certificates in connection with the sale of the 2,000 shares in question, made the following delivery: 1,000 shares were delivered from certificates representing a part of the original 3,000 shares in the account as of July 29, 1929, which carried a basis to Mr. McCarter of $29.05% per share and 1,000 shares from certificates representing the shares purchased August 12, 1929.” A similar stipulation is made as to the 10,000 shares which McCarter sold on April 28, 1930, except it is stipulated that of the 10,000 shares delivered in consummating the sales, 800 shares were not identifiable.

We think these stipulated facts make the instant case distinguishable from the Rankin case, where all the purchases and sales were made on margin. We think that the substance of the Court’s opinion in the Rankin case was to hold that, while in margin transactions it is impossible to earmark or allocate any particular shares purchased or sold so as to make the shares of stock identifiable by certificates, nevertheless identification by certificates is not the only means of identification and identification may be made by lots in accordance with the dates purchased, and that, where the evidence clearly shows that the owner of stock by purchases or margin gives his broker instructions to sell a particular lot purchased on a given date and at a particular price, he is exercising his right of selection of what property he desires to sell and his right must be recognized and the profit or loss computed on the sale thus made, and that in such a case the so-called first in, first out rule is not applicable.

The Commissioner in the instant case does not seek to apply the first in, first out rule except perhaps as to 800 shares of the 10,000 shares sold April 28, 1930. Of this particular lot of shares sold, it has been stipulated that 800 shares were not identifiable. Presumably as to these 800 shares the Commissioner has used the first in, first out rule, although the stipulation does not enlighten us on that point. As to the remainder of the shares sold, the Commissioner contends that they were identifiable and as a matter of fact the stipulation which has been filed does identify them.

It is true that McCarter did give his broker specific instructions as to what particular lots of stock he should sell for him, and if he had been dealing in stocks on margin, it would seem that this would be sufficient identification according to the rule laid down by the Supreme Court in the Rankin case. But he was not dealing on margin and the parties have stipulated what shares were actually delivered in completion of the sale except 800 shares not identifiable.

In several Board and court cases it has been decided that the vendor’s intention to sell certain shares of stock is not determinative where other shares were actually delivered. Skinner v. Eaton, 34 Fed. (2d) 575; affd., 45 Fed. (2d) 568; certiorari denied, 283 U. S. 837; Horner v. Commissioner, 72 Fed. (2d) 407, affirming 28 B. T. A. 360; Mickler Holding Co., 29 B. T. A. 300; A. D. Geoghegan, 31 B. T. A. 93; Commissioner v. Merchants & Manufacturers Fire Insurance Co., 72 Fed. (2d) 408; Snyder v. Commissioner, 73 Fed. (2d) 5, affirming 29 B. T. A. 39; William W. Miller, 31 B. T. A. 192. In Commissioner v. Merchants & Manufacturers Fire Insurance Co., supra, this rule was applied to the following state of facts. An executive and finance committee of the board of directors of the insurance company controlled its investments and sales. This was done through the investment department of Corroon & Reynolds, Inc., which managed the company’s investment business. The executive committee notified Corroon & Reynolds, Inc., to sell certain stock by marking on a card the stock to be sold. The stock was deposited in a trust company. Corroon & Reynolds, Inc., did not notify the broker as to what stock was to be sold and the trust company made delivery of stock other than that which the executive committee desired to be sold. In deciding that case the court said:

The taxpayer computed its income tax as though it had sold, in each instance, the stock last acquired. The Commissioner held that the stock sold was that represented by the certificates actually delivered rather than the stock which the taxpayer intended to sell, and therefore assessed a deficiency. The Board of Tax Appeals found as a fact that the taxpayer intended to sell the later acquired stock, and sustained the taxpayer’s contention that the loss or gain on the sales should have been computed by deducting the cost oí the stock, identified by the crossmarks on the director’s cards, from the sum which it obtained by the sales of the stock. It thus disregarded the cost of the stock represented by the certificates delivered, and submitted the cost of the stock represented by other certificates, which the taxpayer intended to sell but which were not in fact sold.
We think the test should be that applied by the Board of Tax Appeals in Horner v. Commissioner, 28 B. T. A. 360, affirmed by this court on July 26, 1034, 72 F. (2d) 407; i. e., what was actually done rather than what was intended to be done. Whatever the intention may have been, the stock actually sold was that first acquired. We think the Board of Tax Appeals erred in giving effect to the intention rather than the fact.

The above case differs from this proceeding in one particular and that is that while the insurance company was careful to notify their subagents, Corroon & Reynolds, Inc., what they desired to be sold, Corroon & Reynolds, Inc., did not so inform the broker. We do not see that this makes any material difference in that in both cases the broker did precisely the same thing, sold stock generally. Besides, in this proceeding Johnson & Wood were the agents of the decedent. Their acts were his acts unless repudiated, which is not the case here. To put it differently, we see no difference between the taxpayer making a mental decision as to what he wished to be sold and confiding that intention to his agent.

It has been argued that a certificate of stock is but an evidence of the shares represented by it, and that under certain circumstances the shares may travel in one direction and the certificate in another. But here, on September 29, 1929, the decedent owned all the shares on deposit with Johnson & Wood and he was entitled to the certificates whenever he demanded them. These certificates represented certain shares of stock, and the delivery of the certificates transferred title to the shares which they represented. Indeed, this is the usual and ordinary way of transferring title to shares of stock. When the certificates were delivered, it mattered not whether in compliance with the directions of the decedent or not, they carried with them the title to the shares which they represented and vested that title in the purchaser. The deliveries, as made, have never been repudiated. Under these circumstances we are of opinion that, since the decedent, through his agent, transferred title to the shares represented by the certificates, it is too late now for him to claim that the title to the shares represented by other certificates passed to the purchaser. William W. Miller, supra. Cf. Brooks v. Burnet, 288 U. S. 378.

Reviewed by the Board.

Decision will ~be entered under Bule SO.

SterNI-iageN, Arhndell, and Matthews dissent on the second point.


author: Murdock : Smith, Akundell,

text:
    Old Colony Trust Company, Trustee under an Indenture of Trust of Paul Wilde Jackson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74928.
    Promulgated October 29, 1935.

      F. V. Barstow, Esq., for the petitioner.

      Hartford Allen, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner determined a deficiency of $21,589.91 in income tax of the petitioner for the calendar year 1931. The petitioner assigns as error the action of the Commissioner in including as taxable income for 1931, (1) “ amounts of income paid to annuitants in the year 1931 pursuant to the said Deed of Trust”, and (2) “ amounts of income, including gains from the sale of securities, that pursuant to the terms of the Deed of Trust have, in accordance with the provisions of the Revenue Act of 1928, section 162 (a), been paid or permanently set aside for the purposes and in the manner specified in section 23 (n) of the said Act or have been used exclusively for religious, charitable, or educational purposes or for the prevention of cruelty to children.”

The facts were stipulated and need not be set forth in full detail.

The petitioner is the surviving trustee of a trust established by Paul Wilde Jackson by a deed dated July 19, 1922. The trust was created for the purpose of carrying out some wishes of the grantor’s brother, who died intestate, leaving the grantor as his sole heir. The trust deed placed the property received from the brother in trust and provided for the distribution of a part of it in ways not now material. It then directed the trustees to pay the following amounts to the following persons for life:

Selina Henrietta Butler (for many years an employee of the brother) - $3, 600 per annum
Alice Eliza Butler (sister of Selina)-1, 500 “
Harriet Elizabeth Butler (sister of Selina)_ 1,500 “
Edgar Jason Ames (for many years coachman for the brother)-25 per week
Alice O. Moulton (child of a brother-in-law of the brother). 1, 000 per annum
Claribel M. Waterman (“ “ “). 1, 000 “
Mary Smith (“ “ “)_ 1, 000 “
Annie Marston (“ “ “)_ 1, 000 “
Henry W. Kendall (one-time partner of deceased brother) and after his death to his wife, Mary Josephine ICendall. 2, 000 “
Paul Wilde Jackson (the grantor) and after his death to his wife, Matilda Adelaide Jackson_ 10, 000 “
Edith Adelaide Holbrook (daughter of grantor) and, if she so directs, after her death to her husband, Irvin N. Holbrook_ 10,000 “
Frederick Henry Jackson (son of grantor) and after his death to his wife, while she remains unmarried_ 10, 000 “

It also provided that the trustees were to “ set apart ” $5,000 for a grandson of the grantor and pay it over with accumulations at the end of ten years.

Paragraph 13 of the deed of trust is as follows:

I Authorize my said trustees to pay to charities as hereinafter described such sums as in their judgment may be paid without jeopardizing the annuities herein provided for, whenever for a period of one year the trust fund held by them as then invested shall have yielded a net income equal to twice the amount of the annuities which they are then required to pay, and upon the death of the survivor of those persons, who under the terms of this instrument are to receive annual incomes under the trust hereby created, I Direct my said trustees to distribute the rest and residue remaining in their hands among corporations and trustees organized, operating and holding exclusively for religious, charitable, scientific, literary or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, the sum paid over by said trustees to such corporations or boards of trustees to be held by such corporations and boards of trustees in trust, and the income thereof to be expended for the general purposes for which such corporations and boards of trustees are organized, and I request that said funds be designated by each corporation or board of trustees as the Henry Olay Jackson Fund.

The trustees were also authorized to organize new charities and to build buildings for charities, if they deemed it wise to do so.

The first receipt of principal by the taxpayer under the trust was on May 29, 1923, and upon that date separate ledger sheets for the principal, and for the income (exclusive of profits from sales of corpus) of the trust were opened. The first receipt of income was on June 30, 1923. The principal (corpus) account has always been maintained separate and apart from the income account. No annuity payments or payments to charitable organizations have been charged on the books to the principal account, which account includes accumulated profits from sales of securities.
The amount of income of the trust for each year since the taxpayer has held the principal, has been more than twice the aggregate of the annuity payments required in such year by the terms of the trust and the taxpayer considered that it had power to pay to charities defined in the trust instrument such parts of the principal and income of the trust as in its judgment could be paid without jeopardizing the annuities, except that during the life of the grantor or his wife and daughter the trustee was obliged to confer with the grantor or his wife and daughter before mating a gift to charity. The grantor died June 21, 1928, his wife June 80, 1928 and his daughter October 26, 1923.
The taxpayer considered that it had power to make gifts from the principal and income of the trust to charities and it also has considered that all of the trust properties in excess of that part of the income which it considered necessary for the trust expenses and annuity payments belonged to charities. Since 1925 it has appropriated and/or paid certain sums to specific charities * * *.

The trustees had paid $436,242.21 to charities prior to January 1, 1931. The market value of the trust corpus- was $2,119,835.81 on January 1, 1931, and $1,488,140.43 on December 31, 1931, while the cash balance on those dates was $193,779.43 and $89,553.99, respectively. The accumulated income on hand on January 1, 1931, was $187,999.43. The amounts paid to charities during 1931 and the dates on which the payments were made were:

August 12_1_$25,000
September 9_ 25,000
September 12___ 30, 000
November 11___ 25, 000
December 16_ 85, 000
Total_*_ 190,000

The $30,000 listed above was in payment of a part of the unpaid balance of an appropriation made in 1929.

The trust received income during 1931 of $60,901.82 from the sale of securities and $114,417.36 from other sources. The Commissioner determined that the net income for the year amounted to $164,339.39. The trustees paid $22,350 to annuitants during the year.

The total annuities distributed or distributable in 1931 and the ages of the annuitants were as follows:

Annuitant Age Annuity
Selina H. Butler_ 54 $3,600
Alice E. Butler_ 62 1,500
Edgar Jason Ames_ 73 1,300
Olaribel M. Waterman. 63 1,000
Mary Smith_ 65 1,000
Annie Marston_ 74 1,000
Mary J. Kendall_ 85 2,000
Frederick H. Jackson. 59 10,000
Harriet E. Butler_ 55 1,500
$22, 900 Total.
The cost of purchasing annuities for all of the annuitants of 1931 at their ages in that year if purchased during the first six months of 1931 from The New York Life Insurance Company would have been $200,804.33.
The taxpayer’s returns were made upon a cash receipts and disbursements basis.

The petitioner filed a fiduciary return for 1931 showing income apportioned to annuitants and to itself. It also filed an individual return for the year showing total income of $80,315.16 and a deduction of a like amount “ Set aside for Charitable and Educational Purposes.” Capital gains of $49,641.07 were shown as “ Set aside for Charitable and Educational Purposes.”

The Commissioner allocated all of the taxable income to the petitioner and allowed no deductions for income distributed to annuitants or set aside for charitable and educational purposes.

The first question for decision is whether the petitioner may deduct from its gross income for tax purposes the amounts distributable to the annuitants in 1981. Section 162 (b) of the Revenue Act of 1928 provides in part as follows:

There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, * * * but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this’ paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year.

The deed of trust clearly discloses an intention on the part of the grantor to make the annuities charges upon both the income and corpus of the estate held by the trustees at any time when payments of annuities should become due. The annuities were “ payable at all events ” and did not “ depend upon income from the trust estate.” The annuities were, therefore, gifts and the trustees were not entitled to deduct the amounts paid to the annuitants in 1931. Helvering v. Pardee, 290 U. S. 365; Burnet v. Whitehouse, 283 U. S. 148; Boston Safe Deposit & Trust Co. v. Commissioner, 66 Fed. (2d) 179 (affirming 26 B. T. A. 486); certiorari denied, 290 U. S. 700; Bridgeport-City Trust Co., Trustee, 32 B. T. A. 1181.

The other question for decision is whether the petitioner is entitled to deduct “ any part of the gross income ” for 1931 under section 162 (a), which is as follows:

There shall be allowed as a deduction (in lieu of the deduction for charitable, etc., contributions authorized by section 23 (n)), any part of the gross income, without limitation, which pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in section 23 (n), or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, or for the establishment, acquisition, maintenance or operation of a public cemetery not operated for profit.

The petitioner contends that the gain from the sale of securities was deductible. It concedes that this particular gain was added to corpus and was not actually “ paid ” to any one in 1931. But it contends that this income was “ permanently set aside ” during the taxable year for charitable purposes or “ is to be used exclusively ” for purposes mentioned in section 162 (a). The Board and the court to which this case would go upon appeal have held under somewhat similar circumstances that no deduction is allowed where such gains are merely added to the corpus of the trust in accordance with the trust instrument. Boston Safe Deposit & Trust Co. v. Commissioner, supra; Bank of America National Association, Trustee, 19 B. T. A. 1273; Charles W. Jaynes et al., Trustees, 29 B. T. A. 259; Gertrude Hemler Tracy et al., Trustees, 30 B. T. A. 1156. See, contra, Hartford-Connecticut Trust Co. v. Eaton, 41 Fed. (2d) 69. This is be cause it can not be definitely determined during the taxable year that this part of the gross income of the trust has been permanently set aside for charitable purposes or is to be used exclusively for such purposes. As long as there is a possibility that the income may have to be used pursuant to the terms of the trust deed for purposes other than charitable ones, the deduction may not be allowed under the provisions of section 162 (a) and similar provisions of earlier acts. Here the same conclusion must be reached as was reached in the cases cited, since the grantor intended that not only this particular income, but also the corpus of the trust remaining at any given time, could be used to pay the annuities. Despite the large surplus of income over annuity payments in 1931, no funds of the trust were permanently set aside or were to be used exclusively for charitable purposes under this trust instrument, except such trust funds as were actually paid to charities during that year. The exception does not apply to the gains from the sale of securities, since they were not paid to charities during that year.

The grantor of the trust made certain provisions to safeguard the payments to the annuitants. But he must have realized that as the annuity payments decreased some of the trust funds could be used for charitable purposes without endangering the payment of the gifts to the annuitants, since the latter could be amply protected by the income and corpus of the remaining trust property. In the deed of trust he gave to the trustees authority to use funds of the trust for charitable purposes, under certain circumstances, during the lives of the annuitants. However, he did not direct them to use trust funds during that period for charitable purposes nor did he say whether they should use income or corpus in case they decided to make a gift to charity during that period. Yet it seems clear from the deed as a whole that the trustees had authority to pay the amounts to charities which they actually paid in 1931. They had authority to make such payments from any available source within the trust, i. e., they could use corpus, accumulated income, or excess current earnings of 1931. Since their authority was so broad, it may be important to determine, if possible, the source from which the payments to charity were actually made.

The trustees chose to make the payments from and to charge them to income, rather than corpus. The facts as stipulated show that the trustees, in making their appropriations, did not have in mind the income of the current taxable year. They considered only the income available on June 2,1931. That consisted principally of the accumulated income of a prior year. The accumulated income at the beginning of the year amounted to $187,999.43. They made appropriations of $180,000. They paid in 1931 $160,000 of the amount thus appropriated and $30,000 appropriated in 1929. These facts rather indicate that the trustees in 1931 really intended to distribute income theretofore accumulated rather than to distribute the current income of 1931. They charged the payments to income rather than to corpus. But the income account included both accumulated and current income. They did, of course, eliminate the gains from the sales of securities in 1931 by adding that to the corpus which they did not intend to touch. They also allocated a part of the 1931 income to the payment of the annuities and current expenses of that year. This left about $80,000 of the gross income of 1931 unallocated. Income of prior years on hand at the beginning of the year 1931 in the amount of $187,999.43 was available for the payments to charities. The question is, How much, if any, of the gross income of 1931 was paid to the charities in 1931 and thus used for charitable purposes pursuant to the terms of the deed creating the trust within the meaning of section 162 (a) % The deduction is based upon the use of the income subject to tax and not upon the use of accumulated income of prior years.

Under some circumstances the arbitrary acts of fiduciaries have been deemed of no significance in determining whether or not a deduction is proper for the estate. Bowers v. Slocum, 20 Fed. (2d) 350; E. Sahier Welch et al., Trustees, 9 B. T. A. 1370; Hw L. McClung et al., Executors, 13 B. T. A. 335. The petitioner was not required to use income for payment of the gifts to charities. If the above cited cases apply the petitioner would not be entitled to any deduction merely because the trustee chose to account for the payments to charities as made from income rather than from corpus. Any gifts actually paid from income of 1931 were in one sense paid pursuant to the deed of trust. The petitioner had the burden of showing the amount paid from gross income of 1931. The total payments made in 1931 exceeded the accumulated income on hand at the begimiing of that year by $2,000.57. Thus the latter amount must have been paid from income of 1931. However, the petitioner has not shown that more than $2,000.57 of the $190,000 was paid from gross income of 1931, nor has it suggested any method of determining how much more of the $190,000 was paid out of gross income of 1931. Lynchburg Trust & Savings Bank et al., Trustees, 27 B. T. A. 1182 (reversed on other grounds, 68 Fed. (2d) 356). Even the impossibility of establishing the specific amount, made essential by statute as a prerequisite to the allowance of the deduction, does not justify a deduction computed arbitrarily, but leaves the taxpayer with an unenforceable claim. Burnet v. Houston, 283 U. S. 223. Here the Board has no way of determining how much of the $190,000 payments in excess of $2,000.57 might have been made from 1931 income and how much from prior accumulations. Some arbitrary allocation might be made, of course, but no sufficient justification for such procedure appears. The right to a deduction must be proved and a failure of proof results in a loss of the deduction. Burnet v. Houston, supra; Reinecke v. Spalding, 280 U. S. 227, 233; United States v. Anderson, 269 U. S. 422, 443.

Reviewed by the Board.

Decision will be entered wider Bule 50.

Smith,

dissenting: There appears to be no question but that the net income of the trust fund for 1931, before the deduction from the gross income of amounts paid to annuitants and amounts paid or set aside for charitable and educational purposes, was $164,339.39, as determined by the respondent. The trust paid to annuitants $22,350. The deduction of this amount was correctly disallowed by the respondent.

Section 162 (a) of the Revenue Act of 1928 permits the deduction from the gross income of the trust of “ any part of the gross income, without limitation, which pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in section 23 (n).” The amount paid to charities by the trust during 1931 was $190,000 or an amount in excess of the total gross income for the year. I am of the opinion that under section 162 (a) the petitioner was entitled to deduct from its gross income the full amount of $141,989.39, the difference between the net income as determined by the respondent and the amounts paid to annuitants. I can not believe that the theory invoked in the majority opinion to the effect that the trust must show from what receipts the payments to charities were made in order to have them deductible is responsive to the legislative intent. And it is the legislative intent which should control in the construction of the taxing statute.

It is further to be noted that the entire income of the trust fund was to be paid to charitable and other organizations referred to in section 23 (n) after the payment of expenses and annuities. If the trust fund is required to pay the tax determined by the Board in this case, the payment impinges upon the amount which would otherwise go to charities. In my opinion this was never contemplated by Congress and, as stated by the Supreme Court in Lederer v. Stockton, 260 U. S. 3: To allow the technical formality of the trust, which does not prevent the Hospital from really enjoying the income, would be to defeat the beneficent purpose of Congress.”

Akundell,

dissenting: Beginning with the 1913 Revenue Act and down to date Congress has disclosed a progressively liberal attitude in dealing with contributions to charity. This beneficent purpose should not be defeated by a strained and technical approach. Lederer v. Stockton, 260 U. S. 3. In my opinion petitioner has clearly established its right to deduct a very large part of the sum actually paid by it to charities within the taxable year.

Trammell and Matthews agree with this dissent.


author: Akundell :

text:
    Home Title Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 63737.
    Promulgated October 30, 1935.

      I. Herman Slier, Esq., for the petitioner.

      Arthur Clark, Esq., and John Pigg, Esq., for the respondent.
   OPINION.

Akundell :

The respondent determined a deficiency in petitioner’s income tax for the year 1929 in the amount of $2,144-52. Petitioner claims that the respondent erroneously determined its tax liability under the general provisions of the Eevenue Act of 1928 relating to corporations, and thus included income from all sources, whereas it is an insurance company and entitled to have its income determined under section 204, which treats as taxable income only certain kinds of the income of corporations subject to its provisions. Alleged errors relating to deductions were withdrawn at the hearing.

The proceeding was submitted on a detailed stipulation of facts, which we adopt, by reference, as our findings of fact.

Petitioner is a New York corporation, organized under the laws of that state pertaining to title and credit guarantee corporations, namely article Y of the Insurance Law (Laws of 1892, ch. 690). In a proceeding which reached the Supreme Court that Court held the petitioner to be an insurance company (other than a life or mutual insurance company) and exempt from capital stock taxes for the years 1923 to 1925. United States v. Home Title Insurance Co., 285 U. S. 191. The business of the petitioner in the year before us, 1929, was the same as in the earlier years and counsel for the respondent concedes that in 1929 petitioner was an “ insurance company (other than a life or mutual insurance company)” within the purview of section 204 of the Eevenue Act of 1928.

The plan of the Eevenue Act of 1928 is to deal with insurance companies separately from other corporations and treat as gross income only (A) investment and underwriting income and (B) gain from the sale or other disposition of property. The position of the petitioner is that, being an insurance company, some of the items it returned as income and the respondent taxed are not within any of the items described by the revenue act as constituting income of insurance companies.

A brief description of the petitioner’s business and the sources of its income will suffice for the purposes of this report. Its business consisted of (1) the insurance of titles to real estate and (2) the making of loans secured by real estate mortgages and the sale of such mortgages, in connection with which it guaranteed title and payment of the principal and interest. A person desiring a policy of title insurance made written application therefor and agreed, by signing the application, to pay the petitioner certain fees set forth therein whether or not the title was approved. As preliminary steps to the issuance of policies of insurance the petitioner examined and prepared abstracts of title, made searches and procured information concerning the property. If a title was found to be insurable the petitioner issued a policy of insurance for which it received a fixed charge, collected for each policy when issued, based on a scale dependent upon the amount of the policy. The policies issued recited as follows:

This Policy of Insurance Witnesseth: That the Home Title Insurance Company in consideration of the payment of its charges for the examination of title, insures [name of insured] heirs and devisees, against all loss or damage * * *.

If the title was found to be uninsurable the petitioner was reimbursed, through payment of the charges listed in the application, for its time and expense in investigating the title.

In cases where an owner desired a first mortgage loan he would apply therefor and for an examination of title, and by signing the application he would agree to pay a listed schedule of fees for appraisals, inspections, conveyancing, etc. The petitioner would then examine the title to the property and make the necessary inspections and appraisals. If all matters were satisfactory the petitioner prepared a bond and mortgage and caused them to be executed by the applicant and recorded. It then paid to the applicant the face amount of the bond, less the charges for its services, and retained the bond and mortgage as security for repayment. The charges it received in such cases were the same as those in cases of issuing only title insurance plus fees for inspection and appraisal.

Petitioner sold to investors the bonds and mortgages issued by it or certificates of participation therein, at face value. On receipt from an investor of a request for a bond and mortgage petitioner issued a so-called policy of mortgage guaranty which guaranteed payment of the principal of the bond and a stated rate of interest which was less than the rate of interest stipulated in the bond, and also guaranteed the mortgage to be a valid first lien on a good and marketable title to the real estate on which the mortgage was placed. Petitioner, by agreement with the purchaser of the bond and mortgage, collected the interest and principal and retained as compensation all interest collected in excess of the rate guaranteed to the purchaser. This excess of interest received over interest guaranteed generally amounted to one half of one percent of the face amount of the bond and constituted the consideration received by petitioner for its guaranty of payment of principal and interest.

The primary purpose of petitioner in making loans on bonds and mortgages is not for investment, but for the sale thereof.

The gross income of the petitioner for 1929 as reported in its return and as determined by the respondent, allocated by the petitioner on its books during 1929 to the various services performed and business done, consists of the following:

(1) Premiums for insuring titles_ $47, 962.19
(2) Income consisting of the difference between the interest received and guaranteed by the petitioner in connection with its mortgage guarantees_ 370, 805. 90
(3) Fees for examining titles_ 441,065.79
(4) Fees for searches relating to titles_ 31, 807.12
(5) Fees for inspections (other than examination of titles) and appraisals- 142, 751. 50
(6) Fees for searches (other than examination of titles) and drawing extension agreements in connection with repurchases of mortgages_ 16, 327.15
(7) Fees for continuing searches (other than examination of titles) and drawing agreements to extend mortgage loans__ 127, 691. 81
(8) Conveyancing fees_ 15,308.50
(9) Fees for surveys other than examination of titles_ 1,271.93
(10)Recording fees_ 5, 323. 97
Total- 1,200, 315. 86
Other income_ 364, 726.28
Total income- 1,565,042.14

The petitioner concedes that items numbered (1) to (4) inclusive in the above tabulation are properly to be included in income. Its contention is that none of items (5) to (10) inclusive constitutes taxable income. A further description of items (5) to (10) is given in the stipulation as follows:

(5) the amount of $142,751.50 represents fees for inspections, other than the examination of any titles, and appraisals of real estate made by the petitioner; (6) the amount of $16,327.15 represents fees for searches, other than the examination of any titles, and drawing extension agreements in connection with repurchases of mortgages; (7) the amount of $127,691.81 represents fees for continuing searches (other than the examination of any titles) by the petitioner in connection with mortgage extensions and for its drawing of agreements to extend mortgage loans; (8) the amount of $15,308.50 represents fees and charges for services rendered by the petitioner in connection with drawing deeds, releases and various other papers; (9) the amount of $1,271.93 represents the petitioner’s portion of fees and charges1 for surveys, other than the examination of any titles, made by others; (10) the amount of $5,323.97 represents that portion of the petitioner’s fees and charges for recording which Was in excess of the amount which the petitioner paid for the recording of the instruments involved.

The tax imposed by section 204 (a) is on net income, which is defined by subsection (b) as gross income as defined therein less the deductions allowed by subsection (c). There is no controversy here concerning deductions; consequently, there will be none concerning net income if the amount of gross income is determined. We are therefore interested only, in those parts of the statute relating to gross income. They provide, as far as here material, that gross income means the sum of (A) the amount earned from investment income and underwriting income and (B) gain from the sale or other disposition of property. Sec. 204 (b) (1). Counsel for respondent concedes that items (5) to (10) in the schedule above are neither investment income nor gain from the sale of property. This leaves the controversy turning upon whether those items are “ underwriting income ” within the meaning of the statute. That term is defined in the statute as follows:

Sec. 204 (b) (4). Underwriting income. — “Underwriting income” means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred;
(5) Premiums earned. — “Premiums earned on insurance contracts during the taxable year ” means an amount computed as follows;
Prom the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance. To the result so obtained add unearned premiums on outstanding business at the end of the preceding taxable year and deduct unearned premiums on outstanding business at the end of the taxable year.

Thus the issue is narrowed down to whether or not items (5) to (10) above constitute “ premiums.” The petitioner quotes judicial definitions to the effect that a premium is the consideration paid for an insurance contract, and argues that none of the sums in items (5) to (10) were paid to or received by the petitioner as consideration for insurance, but were paid to and received by it for services and other matters incident to such insurance. Counsel for respondent likewise quotes definitions of the term “ premium ” to the same effect as those of the petitioner and takes the position that the services performed for which the items in controversy were received are indispensable features of petitioner’s insurance business and that those items were part of the sums which the persons insured were required to pay as consideration for the issuance by the petitioner of its policies of insurance.

Upon the facts submitted it appears that the petitioner engaged in two kinds of business, namely, the insurance of titles to real estate and the lending of money. The insurance element predominated and it was therefore held to be an insurance company under the taxing statute. United States v. Home Title Insurance Co., supra. In another case decided at the same time the corporation’s predominant business was the lending of money on real estate security, its income was largely from lending fees and extension fees and interest, and the income from the guaranteeing of mortgages was less than one third of its total income. It was held that this corporation was not an insurance company. Bowers v. Lawyers’ Mortgage Co., 285 U. S. 182. See also Lincoln Mortgage & Title Guarantee Co. v. Commissioner, 79 Fed. (2d) 585.

In connection witb its insurance of titles the petitioner rendered two classes of service. One class was directly related to its insurance business, namely the examination of titles which it insured. The fees for that service are conceded to be taxable. The other class of service appears to be only indirectly related to the insurance of titles. It is to be noted that, in the description of items 5, 6, 7, and 9, the parties have expressly stipulated that the fees were for services “ other than the examination of any titles.” Some of the items had a very remote, if any, connection with petitioner’s insurance of titles. For instance, items 6 and 7 include fees for drawing mortgage extension agreements. It is hard to see where there is any element of insurance in those items. Likewise as to item 8, fees for drawing deeds, releases, and other papers; and item 9, petitioner’s portion of fees for surveys made by others; and item 10, fees for recording in excess of the cost of recording.

The policy of insurance issued by petitioner states the consideration therefor to be the “ charges for examination of titles.” It does not say that the consideration consists of all the charges paid by an applicant for a policy of title insurance. As above pointed out, the application lists a number of fees and charges which the applicant must pay. The fees for examination of titles and the fees for services rendered in making searches relating to titles are included in items (3) and (4) of the schedule above set out and are conceded by petitioner to be premiums.

Much of what we have said thus far applies equally to the money lending phase of petitioner’s business. In this phase of the business. it rendered two classes of service, namely, (a) the lending of money secured by a mortgage or real estate and (b) the guaranteeing of title and of payment of principal and interest to the purchaser of the mortgage bonds. The petitioner issued no insurance of any kind to the borrower, and it can not be said that the borrower paid any insurance premiums. The items paid by the borrower are included in those examined and commented on above which we there pointed out were not paid as insurance premiums.

The insurance policies issued by the petitioner to purchasers of bonds were separate documents from the applications for loans. The policies provided that the petitioner “ in consideration of the premium and agreements hereinafter set forth, hereby guarantees * * * ” payment of principal and interest and that the mortgage is a first lien on a good and marketable title. The purchaser agreed “ By the acceptance of this guarantee * * * to permit the Company to retain as its premium for this guarantee all interest collected in excess of the rate hereby guaranteed * * The parties have stipulated that the excess of the interest collected over that guaranteed constituted the consideration fof petitioner’s guarantee. We fail to see by wbat reasoning the amounts paid by applicants .for loans and embraced in items (5) to (10) above can be said to be premiums in the face of these declarations in the policy and the stipulation as to what constitutes the premium. It is not exactly clear whether items (3) and (4) include any sums paid by loan applicants, but if so there is no issue concerning them as the petitioner concedes the total of these items to premium income.

Congress recognized that the situation present in this case might develop as the result of the Supreme Court’s decision in the Home Title Insurance Co. case, supra, and inserted a provision in the Beve-nue Act of 1932 to include in gross income of insurance companies other than life or mutual “ all other items constituting gross income under section 22.” Sec. 204 (b) (1), Revenue Act of 1932. In the report of the Finance Committee of the Senate on the Revenue Bill of 1932 it is said in part:

Under a recent decision of the Supreme Court, some of the title guaranty and mortgage guaranty companies are taxable as insurance companies, and since a substantial part of their income might not be classed as either underwriting or investment income, it might not come within the definition of gross income contained in this section. * * * The bill accordingly requires the inclusion in gross income of insurance companies taxable under section 204 of all items constituting gross income under section 22 other than items already specified in section 204. [Rept. 665, 72d Cong., 1st sess., p. 37.]

The change made in the Bevenue Act of 1932 was not made retroactive and does not apply to the year here involved, 1929.

We are of the opinion, and so hold, that the sums in items (5) to (10) inclusive above set out, aggregating $308,674.86, are not premiums within the meaning of the statute and are not income to the petitioner under the Bevenue Act of 1928.

Decision will he entered wider Rule 50.


author: ARUNdell:

text:
    Adolph Zukor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76120.
    Promulgated October 30, 1935.

      Lee I. Park, Esq., and Charles D. Hamel, Esq., for the petitioner.

      Harry F. Morton, Esq., and Frank M. Thompson, Jr., Esq., for the respondent.
   OPINION.

ARUNdell:

In addition to the facts stipulated in this case, the parties have filed another stipulation the effect of which, as explained by counsel at the hearing, is to estop the petitioner from claiming that any of the additional compensation reported by him in his 1931 return or added thereto by the respondent was income for any year prior to 1931. This stipulation, by its terms, leaves open the question of whether any part of the additional compensation for services rendered in 1929 was income to petitioner in 1931.

The respondent’s argument is that the case is governed by section 165 of the Revenue Act of 1928, set out in the margin, and that under petitioner’s agreements with Paramount the fund created in 1930 was available to petitioner in 1931 and constituted income to the full extent of the amount paid in by Paramount in 1930.

Petitioner’s views are that under the general provisions of the statute defining gross and net income the fund set up in 1930 was not received, actually or constructively, and was not available to him in 1931, hence was not income; that section 165 is not applicable, but even if it is, it does not and can not constitutionally require the inclusion of more than was actually received. The latter contention we take to mean that in any event no more can be included in income than the amount of cash and the value of the stock at December 31,1931.

We are of the opinion that in so far as the fund set up in 1930 on the basis of Paramount’s 1929 income is concerned, it is not necessary to decide whether or not section 165 is applicable. We do not understand that the proceeds of the 1929 fund based on 1928 earnings are in issue. Both parties have apparently treated that fund as resulting in income to the extent of cash plus the value of the stock when received on January 2, 1931. The action of the parties in so treating the 1929 fund accords with our holding in Oscar R. Olstad, 32 B. T. A. 670. That case did not involve the precise question we have here, but the reasoning is applicable. There the value of the shares plus the cash received by the employee was less than the amount of his contribution to the employees’ trust. The respondent by a literal application of section 165 treated as income the value of the shares at the time purchased by the trust, which value was in excess of the amount paid by the subscribing employee. We held that in enacting section 165 of the 1928 Act containing provisions different from section 219(f) of the 1926 Act, “The purpose * * * was, not to tax the employee where he was not taxed before, but to relieve him of all possibility of tax upon appreciation in the value of trust securities before such appreciation came to his hand by sale.”

We have said above that it is unnecessary to decide whether or not section 165 applies to the 1930 fund. The reason for this is that the proceeds of the funds embraced within that section are taxable “ in the year in which distributed or made available” to the taxpayer. This language does not lay down any different rule from the general provision of section 42 that items of gross income are to be included in income for the “ year in which received by the taxpayer.” It is under this general provision that the doctrine of “ constructive receipt ”, which depends upon the availability of the funds to the taxpayer, has been evolved. See art. 333, Begulations 74.

It is not contended in this case that the 1930 fund — either the cash or stock — was actually received in 1931. Consequently the case narrows down to the question of whether there was constructive receipt in that year. We have often said that the doctrine of constructive receipt is to be sparingly applied, John A. Brander, 3 B. T. A. 231; C. E. Cullett, 31 B. T. A. 1067. “ * * * Income should not be construed to be received prior to the time of actual receipt except where a taxpayer turns his back upon income or does not choose to receive income which he could have if he chose.” Cecil Q. Adams, 20 B. T. A. 243; affd., 54 Fed. (2d) 228. Cf. Avery v. Commissioner, 292 U. S. 210.

The agreement between petitioner and Paramount was that the trustee bank was to hold the fund set up each year “ until the December 31, two years subsequent ” to the particular year “ and shall then pay and deliver ” the fund to petitioner “ unless prior to such December 31 ” a statement was filed with the bank that petitioner had not performed his obligations. Perhaps there is room for speculation as to whether the parties intended that payment was to be made by the trustee on December 31. However, the trust officer in charge of the account testified that it was the practice of the trustee not to pay until after December 31; that in no year was payment made until after the beginning of the following year; and that if demand had been made on December 31 payment would have been refused. This established practice was apparently acquiesced in by the petitioner. Under those circumstances it does not seem to us that the fund was constructively received by the petitioner on December 31. Avery v. Commissioner, supra. To hold otherwise would leave the respondent in the inconsistent position of applying the constructive receipt doctrine to the 1930 fund but not to the 1929 fund under the same circumstances. If he is right in treating the 1930 fund as constructively received in 1931, he should treat the 1929 fund as income for 1930. This he does not do. Of course, the petitioner was inconsistent in reporting proceeds from both funds as income in 1931, but he is now asking to have the inconsistency resolved. We hold that the fund set up in respect of Paramount’s 1929 earnings was not income to petitioner in 1931.

Eeviewed by the Board.

Decision will he entered under Rule 50.

SteRNhageN dissents.

       SEC. 165. EMPLOYEES’ TRUSTS.
      A trust created by an employer as a part of a stock bonus, pension, or profit-sharing plan for the exclusive benefit of some or all of bis employees, to which, contributions are made by such employer, or employees, or both, for the purpose of distributing to such employees the earnings and principal of the fund accumulated by the trust in accordance with such plan, shall not be taxable under section 161, but the amount contributed to such fund by the employer and all earnings of such fund shall be taxed to the distributee in the year in which distributed or made available to him. Such distributee shall for the purpose of the normal tax be allowed as credits against net income such part of the amount so distributed or made available as represents the items of dividends and interest specified in section 25 (a) and (b).