author:
Lansdon : SteRnhagen and Muedoce:,
      Smith,

text:
    Pennsylvania Company for Insurances on Lives and Granting of Annuities, Executor of the Estate of A. Sidney Logan, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41194.
    Promulgated April 18, 1932.

      W. Memoh Pwrlcer, Esq., for the petitioner.

      L. S. Pendleton, Esq., for the respondent.
   OPINION.

Lansdon :

The respondent has proposed an additional assessment of estate tax in the amount of $11,657.56. The only issue is whether a bequest to the American Anti-Vivisection Society of Philadelphia is exempt from estate tax under the provisions of section 303 (a) (3) of the Revenue Act of 1924. The parties have entered into certain stipulations which the Board accepts and incorporates in this report by reference.

So far as pertinent to this proceeding, section 303 (a) (3), which governs the issue here, is as follows:

For the purpose of the tax the value of the net estate shall be determined— (a) In the case of a resident, by deducting from the value of the gross estate—
*******
(3) The amount of all bequests * * * to or for the use of any corporation organized and operated exclusively for * * * the prevention of cruelty to * * * animals * * *.

The Commissioner’s regulation for the administration of the above provision in Regulations 68 (1924) is as follows :

Religious, charitable, scientific, and educational corporations. — A corporation or association to which such a bequest was made must meet three tests: (1) It must be organized and operated for one or more of the specified purposes ; (2) it must be organized and operated exclusively for such purpose or purposes; and (3) no part of its net earnings shall inure to the benefit of private stockholders or individuals.

The American Anti-Vivisection Society is a Pennsylvania corporation chartered May 1, 1883. Its purposes as set out in the original charter were to restrict the practice of vivisection within proper bounds and to prevent the injudicious and needless infliction of suffering upon animals under the pretense of scientific and medical research. On May 23, 1885, the charter was amended by changing the name of the corporation to American Society for the Restriction of Vivisection. On May 15, 1889, it was again amended to declare the purpose of the society to be “ The total abolition of all vivisectional experiments on animals and other experiments of a painful nature ” and the name was changed to American Anti-Vivisection Society.

The American Anti-Vivisection Society engages in various activities to effect the purposes for which it was organized. It gives rent free use of certain rooms to the Animal Rescue League and contributes to the expense of that organization, which takes off the streets of Philadelphia animals that in some cases might find their way into vivisectional laboratories. It provides for free lectures and uses billboard advertising space in its propaganda work against vivisection. It publishes a monthly magazine in which there are always some articles on the cruelty of vivisectional experiments.. It has kept a man near the laboratories of the University of Pennsylvania to learn whether stolen dogs were delivered to the kennels of that institution and has sent notices to owners advising them to look not only in the city pound but in the vivisectional laboratory for missing animals.

Vivisectional experiments are conducted in various research laboratories maintained by publicly supported and/or privately endowed medical schools and endowed foundations throughout the world. The Rockefeller Institution, a research foundation engaged in investigating the causes and cures of human diseases, especially cancer, maintains its own vivisection laboratory. Similar work is done in the medical and biological departments of many of the great universities, such as Johns Hopkins of Baltimore, Pennsylvania of Philadelphia, and many others throughout the country.

Under the laws of most of our states, and of many countries, cruelty to animals is an indictable offense, subject on conviction to heavy penalties. Societies to assist the authorities in the enforcement of such laws have been established in many jurisdictions. Such organizations have done much to relieve animals from needless suffering inflicted by careless or cruel owners and others. Recognizing the social value of such work, Congress included the exemption provision here relied on in the Revenue Act of 1924. It has been held, however, that legislation to prevent cruelty to animals is not based upon consideration for animals or recognition of man’s obligation to treat them decently, but on the theory that such cruelty is “ an offense against public morals which the commission of cruel and barbarous acts tends to corrupt.” Commonwealth v. Turner, 145 Mass. 296; 14 N. E. 130.

The courts have had many occasions to discuss and define cruelty, but our research fails to disclose any material variation from Webster’s definition, that it is “ disposition to give unnecessary pain or suffering to others; in humanity, barbarity; * * * inhuman treatment; act of willfully causing unnecessary pain.” In conformity with this definition the courts have very generally held that cruelty in a legal sense is willful, wanton and unnecessary infliction of pain. It is cruel to let loose a captive fox to be harried by hounds for gratification of human spectators, Commonwealth v. Turner, supra, or to kill or maim live pigeons that have been kept in captivity. Waters v. People, 23 Colo. 33; 46 Pac. 112; Cf. State v. Porter, 112 N. C. 887; 16 S. E. 915. On the other hand, the same courts have held that the statutes against cruelty to animals should not be construed to prevent killing game in its wild state.

The domestic use of animals requires many painful operations, none of which has ever been forbidden by legislation or denounced by the courts as cruel acts. Dehorning domestic animals inflicts great suffering; but it is not only tolerated but is very generally practiced, and in Pennsylvania it has the sanction of the legislature and the courts. (Act Pa. 1895, From 25 P. L. 286.) Breaking, branding, marking, punishing, working, docking, castrating, spaying, and caponizing are ordinary incidents in keeping animals to supply food or render service to man. Such operations must cause intense pain and suffering and certainly are not for the benefit of the animals but they have never been legally outlawed or even stigmatized as cruel, inhuman or barbarous by legislation or judicial decisions. Usage and law tolerate, permit and even encourage, and in some instances require such operations with the single limitation, not always too strictly observed, that they must be done with a minimum of suffering for the helpless creatures dedicated by age old custom to man’s necessities.

Within the meaning of the law every living creature, except man, is an animal and all are either the friends or foes of human beings. Throughout all history it has been necessary and therefore laudable to exterminate the animal enemies of humanity. Snares, traps, arrows, guns, poison, fire, parasites and countless other lethal agents and deadly devices have been used to protect man, his health and property from the menaces and depredations of noxious beasts, birds, reptiles and insects. For this purpose killers have been subsidized by the nations and the states and all the agencies of science have been enlisted. Municipalities vote bounties to encourage this warfare. Even the Congress appropriates the revenues for the extirpation of weevils, grasshoppers, fruit flies and other pests that threaten the prosperity and well-being of the people. Without question this never ending conflict between man and the so-called lower forms of life has caused dreadful pain and suffering to countless sentient beings but man’s necessity knows no higher law than self preservation and must be served.

The prevention and cure of human diseases are only other phases of man’s struggle to survive and are no less necessary than the conquest of visible and powerful enemies. From the dawn of history until within the very recent past mankind has been ravaged by epidemics of contagious and infectious plagues. The migrating pests of the early and middle ages, Asiatic cholera, yellow fever, syphilis and smallpox destroyed millions of lives and impoverished whole countries of happiness and prosperity before they were vanquished by dauntless men who gave their time, talent and, in many instances, their own lives to human service in the laboratories of the scientific world. Vivisection has long been considered a vitally essential investigative method in physiology, pathology, biology and curative medicine and surgery. Cerebrospinal meningitis, long regarded as practically incurable, has been conquered by an antitoxin discovered in the vivisectional laboratories of the Kockefeller Foundation that has reduced the mortality of that scourge from more than 75 to less than 25 per cent. In the experimentation which developed that antitoxin, 100 guinea pigs and 25 monkeys were sacrificed to human necessity, but for each monkey or pig so used there are today scores of sound human beings who have been restored to health and the service of their families and society by the necessary use of lower animals in the interest of mankind.

Following the discovery of America and for more than 400 years syphilis and its sequelae in many forms ravaged the nations of the western world. This scourge, so contagious and insidious that it baffled medical science and caused untold suffering and shame to innocent and guilty alike, has been conquered within our own generation by the scientist Erlich, who discovered his famous specific after seven years of vivisectional experimentation and the trial and rejection of more than 700 alleged remedies. Space forbids more than the mention of similar results in the prevention and treatment of diphtheria, hydrophobia, tuberculosis, typhoid, and many other diseases that have yielded, or are yielding, to the attacks of science. The results already attained promise much for the future. Cancer, said to kill one person of every eight who dies after the age of forty, remains unconquered. If its germ is ever identified, and its cure determined, the vivisectional laboratories mu§t, in all probability, render that service to humanity.

Experimentation on living animals in the interest of medical progress has been endorsed with singular unanimity by learned societies and associations devoted to the curative arts and the advancement of science. On August 12, 1913, the International Medical Congress, composed of distinguished members of the profession from every civilized country in the world, without a dissenting vote approved the following resolution:

That this Congress records its conviction that experiments on living animals have proved of the utmost service to medicine and are indispensable to the future progress. That, accordingly, while strongly deprecating the infliction of unnecessary pain, it is of the opinion, alike in the interest of man and animals, that it is not desirable to restrict competent persons in the performance of such experiments.

To the like effect are resolutions adopted by the British Medical Association in 1892; and the American Medical Association and the American Association for the Advancement of Science in 1908. These resolutions represent the collective opinion of the medical profession of all countries. On the other hand, extensive research has failed to disclose a single adverse resolution of any scientific body.

For more than two generations vivisectional experiments have had the unqualified endorsement of the most distinguished investigators. In a letter written April 14,1881, Charles Darwin said:

On the other hand I know that physiology can make no progress if experiments on living animals are suppressed and I have an intimate conviction that to retard the progress of physiology is to commit a crime against humanity. * * * Unless one is absolutely ignorant of all that science has done for humanity, one must be convinced that physiology is destined to render incalculable benefits to man and even to animals. See the results obtained by M. Pasteur’s work on the germs of contagious diseases; will not animals be the first to profit thereby? How many lives have been saved, how much suffering spared by the discovery of parasitic worms following the experiments made by Vinchow and others on living animals!

As far back as 1863, Claude Bernard, one of the greatest scientists of that day wrote:

You ask me what are the principal discoveries due to vivisection. * * * All the knowledge possessed by experimental physiology can be quoted in that connection; there is not a single fact which is not the direct and necessary consequence of vivisection. From Galen, who, by cutting the laryngeal nerves, learnt their use for respiration and the voice to Harvey who discovered circulation; Pecquet and Aselli, the lymphatic vessels; Bell and Magendie the nervous functions, and all that has been learned since the extension of that method of vivisection, which is the only experimental method; in biology, all that is known on digestion, circulation, the liver, the lymphatic system, the bones, Development, — all absolutely is the result of vivisection, alone- or combined with other means of study.

Apparently it is the contention of the petitioner here that Yin-chow, Bernard, Darwin, Pasteur, and the host of less distinguished servants of humanity who have contributed so much to the well-being of mankind by their great discoveries, instead of praise for their beneficial achievements, merit censure for the use of living animals. We can not adopt such a view. To abolish vivisection would greatly retard the progress of preventive and curative medicine. It would stop the use of animals for the development of all the serums now used to immunize against disease or to relieve and cure after infection. The health and strength of its people are a nation’s greatest asset. To adopt the views of antivivisectionists would deprive medicine of one of its most effective agencies of investigation and force a return to empirical and observational methods which, however valuable, fall far short of the demands of humanity. To grant the prayers of the petitioner here would require the Government to contribute to the cost of a movement inimical to the safety and health of the people, a result that we think was not contemplated by Congress.

In our opinion vivisection does not come within the legal meaning of cruelty to animals. It is a method of research necessary to human welfare. Such pain or suffering as may result therefrom is not willfully or wantonly inflicted. We conclude, therefore, that the American Anti-Vivisection Society is not operated exclusively to prevent cruelty to animals and so is not entitled to the benefits of section 303 (a) (3) of the Revenue Act of 1924.

Reviewed by the Board.

Decision will he entered for the respondent.

SteRnhagen and Muedoce:,

concurring: When the Board concludes, as it properly and correctly does, that vivisection is not necessarily cruelty to animals within the meaning of the statute, the ground for the decision is complete. It is, in our opinion, unnecessary and probably improper to consider the general wisdom of vivisection, and we therefore refrain from participation in the discussion of that question.

Smith,

dissenting: In my opinion the deduction of the bequest to the Anti-Vivisection Society of America is authorized by the statute. Section 303 (a) (3) of the Eevenue Act of 1924 provides for the deduction from the gross estate of “the amount of all bequests * * * to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals * * The statute is concerned only with the “ purpose ” for which the corporation was organized and operated. The discussion in the majority opinion as to whether the practice of vivisection is in a legal sense a cruelty to animals or beneficent to mankind goes beyond the necessities of the case. The evidence pertaining to the organization and operation of the American Anti-Vivisection Society seems to me to indicate clearly that its purposes and practices were directed generally towards prevention of cruelty to animals. I think that the bequest is deductible.


source: Caselaw Access Project

author: Sternhagen : Matthews,

license: Public Domain

text:
    Sally S. Levy and Otto C. Sommerich, Surviving Executors of the Last Will and Testament of Joseph M. Levy, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 35226.
    Promulgated April 19, 1932.

      Saul I. Badin, Esq., for the petitioners.

      L. S. Pendleton, Esq., for the respondent.
   OPINION.

Sternhagen :

1. At the time of his death in 1925, the decedent and his wife owned as tenants by the entirety real property in New York, having, it is agreed, a value of $30,000 at the time of death. They had acquired the property June 5, 1914, by warranty deed of conveyance for a valuable consideration subject to a purchase money mortgage executed by them. There is no evidence of the circumstances of its acquisition, and it must be assumed, therefore, consistently with the respondent’s determination, that no part of the property was originally owned by decedent’s wife or acquired by her from decedent for fair consideration, etc., Henry M. Butzel, Executor, 21 B. T. A. 188.

The petitioner contends that property held by the entirety may not be included in the gross estate, because, (1) the whole property is vested in the survivor by the original deed and not by the death, (2) the New York courts have so held in respect of the New York State transfer tax, and (3) a tax may not be retroactively imposed “ to affect vested interests.”

Following Tyler v. United States, 281 U. S. 497, the Board has decided that pursuant to the provisions of section 302 of the Eevenue Act of 1924 and similar provisions of the Eevenue Act of 1921, the gross estate includes property held by entirety at the time of death, irrespective of the date when the title in the entirety was created. Ada M. Slocum, Executrix, 21 B. T. A. 169; Commerce Union Trust Co., Executor, 21 B. T. A. 174; Pennsylvania Co., etc., Executor, 21 B. T. A. 176; Henry M. Butzel, Executor, supra; Georgianna M. Romberger, Executrix, 21 B. T. A. 193; Bank of New York, Executor, 21 B. T. A. 197; Elizabeth Putnam, Executrix, 21 B. T. A. 205; Marmaduke B. Morton, Administrator, 23 B. T. A. 236; Elizabeth F. Bowditch, Executrix, 23 B. T. A. 1265. See also Third National Bank v. White, 45 Fed. (2d) 911.

The law of New York in respect of the state’s power to tax or the construction or application of its taxing statutes does not control the determination of the Federal tax and has nothing to do with the doctrine of Federal recognition of a state law of property. That doctrine fixes the legal character of the decedent’s estate as an estate by the entirety, but leaves the Federal Government free to determine whether by its own taxing statutes such an estate is a part of the taxable net estate. Weiss v. Wiener, 279 U. S. 333. This Congress has done by section 302 (e).

Although the previous decisions above cited have clearly sustained the respondent’s determination, it is now suggested by members of the Board that those decisions went too far in embracing property which had been held by entirety since before the estate tax of 1916— that is, which were acquired by the entirety at a time when no estate tax whatever was embodied in the taxing system. This view would reverse several of the Board decisions just cited, as well as subsume that in United States v. Provident Trust Co. of Pennsylvania, 281 U. S. 497, the Supreme Court was unaware of or had overlooked the fact that the entireties had been created in 1901, 1903 and 1912, and that the ground rents owned at death had been reserved at the time of the conveyance of 1923, although these facts clearly appear in the reports of the Board, 5 B. T. A. 1004, and the District Court (E. Dist. Pa., Sept. 10, 1928). The authority for this reversal is said to rest in statements found in the later opinions of the Supreme Court in Coolidge v. Long, 282 U. S. 582, and Phillips v. Dime Savings & Trust Co., 284 U. S. 160, and the dissenting opinion of Mr. Justice Stone in Heiner v. Donnan, 285 U. S. 312. It is said that these later statements narrow the ground of the Tyler decision to the prevention of tax avoidance — a thought found only in the last sentence of the court’s opinion. But, as has been stated, the Provident case involved entireties existing not only before the particular taxing-statute, but also before the advent of the system of death duties inaugurated by the 1916 Act, and as to all the entireties before it the court held them properly included within the gross estate. While there is some room in the statements found in Coolidge v. Long, supra, and Phillips v. Dime Savings & Trust Co., supra, and the dissenting opinion in Heiner v. Donnan, supra, for the view that this Board’s application of the Tyler decision was too broad, there nevertheless remains in the Tyler decision itself a discussion sufficient to support the reliance placed upon it in the earlier decision of this Board.

If, however, it were not so, there is nothing in Coolidge v. Long, supra, or Phillips v. Dime Savings & Trust Co., supra, to require the conclusion that entireties created before 1916 are beyond the reach of the later estate taxes. At most, that question would be left untouched by the Supreme Court; and would, therefore, still remain subject to the precedent of the Board’s earlier decisions. Consistently with those decisions, the respondent’s determination that the value of the property held by the decedent and his wife as tenants by the entirety is within decedent’s gross estate, is sustained.

2. In sixty-six of the policies of life insurance the insured decedent reserved until his death the right to change the beneficiary. The proceeds of these policies are properly part of the gross estate, Chase National Bank v. United States, 278 U. S. 237, irrespective of the date of the policies, Louis M. Weiller, Executor, 18 B. T. A. 1121; George R. Cook Estate, 23 B. T. A. 335; Lillian T. Latty, Executrix, 23 B. T. A. 1249; Bessie M. Ballinger, Executrix, 23 B. T. A. 1311; David A. Reed, Execiotor, 24 B. T. A. 166.

3. In forty-four of the life insurance policies the decedent had, on May 1, 1916, before any Federal estate tax, irrevocably designated his wife as the primary or direct beneficiary. He, however, retained until his death the right to designate “ contingent beneficiaries,” and, having elected the option of settlement whereby such contingent beneficiaries would receive the proceeds subject only to the prior right of the widow to a 3 per cent annuity, he thus until his death had power to control the disposition of the proceeds except such annuity. This power he exercised as late as 1921. Along with this power to shift the so-called contingent beneficiaries appears to have been the power to borrow on the policies, which, if we may draw inferences from the endorsements, was substantially exercised in 1921.

The question, therefore, is whether his death was the occasion of a statutory “ transfer.” While it must be recognized that the irrevocable designation of the primary beneficiary in 1916 is a point of difference from the situation dealt with directly in Chase National Bank v. United States, supra, we are of opinion that the situation here is within the ambit of that decision taken together with Reinecke v. Northern Trust Co., 278 U. S. 339, and Tyler v. United States, sufra. It seems clear that until his death the decedent had substantial rights which obstructed the free and assured use or expectation of ownership in the proceeds by any other, except the widow in her 3 per cent annuity for life, and that these rights embodied the economic benefit of borrowing on the fund. His death freed the contingent beneficiaries from the encumbrance of his control, shifted the economic benefit from him to them, and resulted in substantial accessions to them.

We hold, therefore, that the proceeds above $40,000 of all the policies were properly determined by respondent to be within the gross estate.

Reviewed by the Board.

Judgment will he entered under Rule 50.

Matthews,

dissenting: I dissent from the majority opinion in so far as it holds that there should be included in the gross estate the value of the estate by the entirety created in 1914 and the proceeds of the 44 insurance policies in which the decedent’s right to change the beneficiary was revoked on May 1, 1916. The Supreme Court has laid down the legal principle that transfers by gift and beyond recall, made prior to September 8, 1916, the date Congress first adopted the system of taxing transfers at death, are not to be included in the gross estate of the deceased donor, notwithstanding the fact that such transfers were made in contemplation of death or to take effect in possession or enjoyment at or after death. The creation of a tenancy by the entirety is similar to the making of a gift in contemplation of death, and the taking out of a life insurance policy payable to a designated beneficiary, with no right to change such beneficiary reserved to the insured, is similar to a gift to take effect in possession or enjoyment after death.

The Supreme Court in one opinion disposing of Tyler v. United States, United States v. Provident Trust Co. of Pennsylvania, and Commissioner v. Girard Trust Co., reported in 281 U. S. 497, held, in the case of estates by the entirety in Maryland and Pennsylvania created after the passage of the applicable act, that the provision requiring the value of such estate to be included in the gross estate, except such part as originally belonged to the survivor, was constitutionally valid.

The question here raised, of such an estate by the entirety created before the act in effect at death, or even before September 8, 1916, came before this Board after the Tyler decision, and on authority of that decision was resolved against the taxpayer in Ada M. Slocum, Executrix, 21 B. T. A. 169; Commerce Union Trust Co., Executor, 21 B. T. A. 174; Pennsylvania Co. for Insurances on Lives, etc., Executors, 21 B. T. A. 176; Elizabeth Putnam, Executrix, 21 B. T. A. 205. The basis of the Board’s decisions in these cases is stated thus in Pennsylvania Co. for Insurances, etc.:

The question presented with respect to the tenancies by the entirety set up before the enactment of the Revenue Act of 1921 is whether the transfer of the husband’s property to the wife was completed at the time the tenancy was so set up or at the time of death. If it was the death which completed the transfer of this property to the wife, a tax imposed at death is not retroactive and our decision must be governed by Reinecke v. Northern Trust Co., supra, and Chase National Bank v. United States, supra. If the transfer is a “ completed transaction” (Shwab v. Doyle) so that decedent “had in his lifetime no longer either title or control” (Knox v. McElligott), then our decision is controlled by the decisions in the Shwab and Knox cases. As we read the decision in Tyler v. United States, supra, it is based squarely and solely upon the ground that there toas a transfer at death, not in the strict sense of that word, but in the sense that the death was the generating source of important and definite accessions to the property rights of the surviving tenant; that the death passed into her hands property which had originally belonged to the decedent and which she had only then become entitled to hold and enjoy absolutely as her own. Had the court been of the opinion that the deed as tenants in the entireties was sufficient to transfer the property to the wife, the case would have been similar to May v. Heiner, supra. But since both the deed and the death were required to effect the transfer of the property from the original ownership of the decedent to the sole ownership of his wife, it would seem that, as in Reinecke v. Northern Trust Co., and Chase National Bank v. United States, supra, the transfer was not complete until the death. If this be so, there is no retroactive application of the statute merely because the tenancies were created prior to the effective date of the act which levies the tax. [Italics supplied.]
There are decisions of the Board to the contrary. They are based upon Nichols v. Coolidge and the theory that the deed transferred the property to the surviving tenant; that nothing was transferred by the death. In view of the decision in the Tyler case, these decisions can no longer be regarded as correct.

I would not at this late date register my disagreement with our prior decisions if it were not for the comments on the Tyler decision made by the Supreme Court itself in Coolidge v. Long, 282 U. S. 582, which was rendered February 24, 1931, and in the more recent decision in Phillips v. Dime Trust & Safe Deposit Co., 284 U. S. 160, rendered November 23, 1931, as well as by the comment of Mr. Justice Stone as to the basis of the Tyler decision, in his dissenting opinion in Heiner v. Donnan, 285 U. S. 312. The comments of the court and of Mr. Justice Stoné clearly show that the basis of the Tyler decision was that an estate by the entirety is an appropriate subject of estate taxes and the taxation of such estate a suitable means to prevent the evasion of taxes.

In Coolidge v. Long, supra, the fundamental question was whether rights had so vested prior to the taking effect of the tax statute that there was thereafter no occasion in respect of which the excise, a state inheritance tax, might constitutionally be imposed. In reviewing its own decisions, the court said:

No act of Congress lias been held by this court to impose a tax upon possession or enjoyment, the right to which had fully vested prior to the enactment.
Tyler v. United States, 281 U. S. 497, held constitutional sections 201 and 202 of the Revenue Acts of 1916, 39 Stat. 756, 777, 778, and of 1921, §§ 401, 402, 42 Stat. 227, 277, 278, which included in the gross estate the value of an interest held by decedent and any other person as tenants by the entirety. In each case, the estate was created after the passage of the applicable act; and none of the property constituting it had prior to its creation ever belonged to the surviving spouse. The court held that the acts did not impose a direct tax, because, putting aside a common-law fiction, and having regard to substance, the death of one of the parties was in fact the generating source of important and definite accessions to the property rights of the other. It held that the provisions were intended to prevent an avoidance of the estate tax by the creation of such tenancies, and were obviously neither arbitrary nor capricious, and so not violative of the Fifth Amendment

And, again, it was said by the court in Phillips v. Dime Trust & Safe Deposit Co., supra, with respect to estates by the entirety created after the first Federal estate tax act, but before the act effective at the grantor’s death :

But it is urged that the tax imposed with respect to Groups (2) and (3) is invalid. As the creation of the tenancies by the entirety antedated the taxing act, and the earlier corresponding sections had been repealed, it is insisted that the statute is given a retroactive operation, such as that condemned by this Court in Nichols v. Coolidge, 274 U. S. 531; Untermyer v. Anderson, 276 U. S. 440; Coolidge v. Long, 282 U. S. 582. As §302(h) of the Act of 1924 specificially makes the quoted provision of subdivision (e) applicable to estates created or existing before the passage of the statute, the question presented is not one of its construction or applicability, but of the power of Congress to impose the tax. The Government argues that the tax was laid on the devolution of rights upon the wife at the death of her husband after the passage of the Act, and that therefore the statute was not applied retroactively, even though the estate was created before its enactment. Without foreclosing consideration of this contention at another time, we find it unnecessary now, in view of the facts of the present case, to pass upon it. [Italics supplied.]
Group 2. The tenancies in all of the items of the second group were created after the the passage of the 1916 Revenue Act. Congress had by that act adopted a system of death taxes, embracing, as it lawfully might, estates by the entirety. As was pointed out in Tyler v. United States, supra, pp. 503, 505, such estates are appropriate subjects of death taxes and the taxation of them is a suitable measure to prevent evasion of a system of taxatio'n levied on estates passing at death by will or inheritance. In both respects they resemble gifts made in contemplation of death, likewise taxed by the estate tax provisions of the 1916 and later revenue acts. The considerations which led us, in Milliken v. United States, 283 U. S. 15, to uphold taxation of gifts in contemplation of death, made after the 1916 Act and before that of 1918, at the higher rate of the latter act, are equally applicable here. The knowledge available before the creation of the estate that it was embraced within an established taxing system and that its taxation, on the same basis and in the same manner as decedent’s estates, was an essential part of the system to prevent evasions, relieves the present tax of the objection that it is arbitrarily retroactive.

The Milliken case was decided March 2, 1931, a week after the Coolidge v. Long decision was rendered.

The question in issue in the instant case was present on the facts in only two cases decided by this Board since the Coolidge v. Long decision, Marmaduke B. Morton, Administrator, 23 B. T. A. 236, and Elizabeth P. Bowditch, Executrix, 23 B. T. A. 1265. In the Morton case we included in the decedent’s gross estate the full value of two tracts of land which had been conveyed, respectively, in 1909 and 1911 to the decedent and his wife as estates by the entirety. In the Bowditch case, we likewise included in the gross estate several estates by the entirety some of which had been created before the 1916 Act. It does not appear that in either case the question of retroactivity was argued or considered in the light of the comment on the Tyler case in Coolidge v. Long.

I have found no District Court or Circuit Court case decided since Coolidge v. Long which involves an estate by the entirety created before 1916.

After careful deliberation upon the principle of Tyler v. United States, as it emerges on a rereading of that case in the light of the Supreme Court’s subsequent decisions, it is clear that the principle is by no means so broad as we had at first supposed, for the decision in that case was clearly predicated upon the fundamental public policy of prevention of tax evasion, and what the court said, therefore, with respect to the propriety of including estates by the entirety in a general class with testamentary dispositions by reason of the accession of substantial property rights in such an estate to the survivor on the other tenant’s death, must be construed in the light of that policy. Here two facts to which we have already adverted assume significance, that:

In each case the estate was created after the passage of the applicable act, and none of the property constituting it had, prior to its creation, ever belonged to the surviving spouse. [Tyler v. United States, supra.]

And on these facts the court said that “the evident and legitimate aim of Congress was to prevent an avoidance ”; and pointed out that “ the provision under review is an adjunct of the general scheme of taxation of which it is a part, entirely appropriate as a means to that end.”

Moreover, in the Dime Trust Co. case, supra, in response to the Government’s argument that the tax was laid on the devolution of rights upon the wife at the death of her husband after the passage of the act, and that, therefore, the statute was not applied retroactively, even though the estate by the entirety was created before its enactment, the court said, per Mr. Justice Stone: “ Without foreclosing consideration of this contention at another time, we find it unnecessary now * * * to pass upon it.”

All of the decisions rendered by this Board since the Tyler case which involve estates by the entirety created at any time prior to the act effective at death, have been based on the view that the Supreme Court had considered and decided in the Tyler case the very question which the court so carefully reserved for future consideration in the Dime Trust Co. case. This assumption by the Board that the question had been considered and decided in the Tyler case loses all foundation.

In the Tyler case the court stated that the common law rule as to estates by the entirety was recognized by the decisions of the courts of Maryland and Pennsylvania, and that “ these decisions establish a state rule of property, by which, of course, this court is bound.” The common law rule as to estates by the entirety is that both tenants take title from the deed of conveyance and no estate passes in legal theory to the survivor upon the death of the other tenant.

What the court decided with respect to tenancies by the entirety in the Tyler case is that (1) by the inclusion of such estates created after the passage of the act effective at death, no part of which ever belonged to the survivor, in gross estate, the tax does not pro tanto become direct, but is plainly indirect, and (2), the inclusion of them is a suitable measure to prevent the evasion of a system of taxation levied on estates passing at death by will or inheritance. The present confusion, I think, has arisen from a misunderstanding of the extent of the first doctrine.

Going a step further, the court held in the Dime Trust Co. case that an estate by the entirety, created after Congress first adopted the system of taxation levied on estates passing at death by will or inheritance, which system embraced tenancies by the entirety, is subject to the tax imposed by a later estate tax act, such tax not being arbitrarily retroactive.

The court cited the Tyler case in Milliken v. United States, supra, in support of the doctrine enunciated that the inclusion of gifts in contemplation of death in a single class with decedent’s estates to prevent evasion was a permissible classification. And in the Dime Trust Co. case the assimilation of these two classes — gifts in contemplation of death and estates by the entirety— was made explicit.

In the Milliken case the court pointed out that it had held that the taxation of gifts made and completely vested beyond recall, before the passage of any statute taxing them, to be so palpably arbitrary and unreasonable as to infringe the due process clause, citing Nichols v. Coolidge; Untermeyer v. Anderson; and Coolidge v. Long, and that in Nichols v. Coolidge and Untermeyer v. Anderson the point was stressed as the basis of the decision, that the nature and amount of the tax burden imposed could not have been understood and foreseen by the taxpayer at the time of the particular volwntary act which was made the occasion of the tax.

Mr. Justice Stone, who delivered the opinion of the court in the Dime Trust Co. case and in the Milliken case, in his dissenting opinion in Heiner v. Donnan, supra, in which the court held unconstitutional the provision (§302 (c) of the Revenue Act of 1926) by which a gift made within two years of death should be conclusively presumed to have been made in contemplation of death, makes the following comments:

* * * In Tyler v. United States, 281 U. S. 497, we upheld taxation, as a part of the donor’s estate, of another selected class of gifts inter vivos, estates by the entirety donated by one spouse for the benefit of both, although the gift was not testamentary and neither title, possession, nor enjoyment passed at death. Similar taxation of gifts made inter vivos, but finally effective only at death, was sustained in Reinecke v. Northern Trust Co., 278 U. S. 339, and Chase National Bank v. United States, 278 U. S. 327; see Taft v. Bowers, 278 U. S. 470, 482.
* 4 * 9ft * $ *
* * * In Tyler v. United States, 281 U. S. 497, 505, the tax on estates by the entirety, as a part of the decedent’s estate passing to the surviving spouse, was upheld regardless of the motive which inspired it, and the decision was rested on the sole and only possible ground that “ the evident and legitimate aim of Congress was to prevent an avoidance in whole or in part, of any of the estate tax by this method of disposition during the lifetime of the spouse who owned the property, or whose separate funds have been used to procure it; and the provision under review is an adjunct of the general scheme of taxation of which it is a part entirely appropriate as a means to that end.” [Italics supplied.]

He also makes the following pertinent comment:

* * * A very different case would be presented if the taxed gift were made before the enactment of the taxing statute and many years before the death, as in Frew v. Bowers, 12 F. (2d) 625, 630. See Nichols v. Coolidge, supra. * * *

In the light of the comments of the court and of Mr. Justice Stone, the conclusion is inescapable, that an estate by the entirety created before the 1916 Act does not fall within the ambit of the Tyler case or the Dime Trust Co. case, for, as already pointed out, there could not have existed at the time of its creation any motive on the part of its grantor to evade the estate tax by creating such an estate in himself and his spouse. I think it equally clear from the decisions cited that estates by the entirety created prior to the passage of the 1916 Act are not subject to the estate tax imposed by that act or later acts, as such tax would be arbitrarily retroactive. In support of this view we have not only the cases cited in the Milliken decision, but also the express authority of the Supreme Court’s decision in Shwab v. Doyle, 258 U. S. 529, with respect to a gift in contemplation of death — to which estates by the entirety have been likened— made and completed before the 1916 Act. There a transfer made before the passage of the 1916 Revenue Act, although made in contemplation of death, and, therefore, within the estate-tax provisions of that statute, taxing such gifts made at any time, was held not includable on the ground that the act “ should be not construed to apply to transactions completed when the act became a law.” So in Knox v. McElligott, 258 U. S. 546, where the decedent was a joint tenant with his wife in an estate conveyed to them in 1912, the court refused to allow under the 1916 Act the inclusion of the one-half interest “ in respect of which Jonas [the decedent] had in his lifetime no longer either title or control.” The full vigor of the doctrine certainly seems unabated in Coolidge v. Long.

Nor does the addition of subsection (h) in the Revenue Act of 1924, making section 302(e) expressly retroactive and applicable to transfers “ whether made * * * before or after the enactment of this Act,” alter the situation, for the principle of Nichols v. Coolidge would control, and limit the effect of subsection (h) to the date of the enactment of the first estate-tax act on September 8, 1916.

The Supreme Court has held taxable as part of the gross estate transfers made before the first estate-tax statute by the decedent to the beneficiary, either immediately, or more frequently, mediately, as through trustees, in cases where the* power of revocation was reserved by the donor. In such cases the court has taken pains to point out that its decision was grounded on the presence of such ah element, and that a transfer in substance resulted at death by reason of the decedent’s reservation of powers of control over the gift for his own benefit until his death. The gift, although legally passing inter vivos, was, therefore, not completed in substance until the donor’s death. There were strings tied to it which were severed by death. There is no such element of control present here. There was no power reserved or left in the decedent alone to alter, amend, revoke or change the estate that had vested in his wife the moment the conveyance was made. The gift was irrevocable and beyond recall.

The policy of prevention of tax evasion can not be invoked to justify the laying of an excise measured by property which does not, by the state rule of property governing, pass at death, and which, being vested and beyond recall by the decedent before any taxing statute was enacted, stops all inquiry as to whether it may reason» ably be included in the general class of testamentary dispositions to prevent tax evasion. There can not be evasion of a tax not existing at the time the completed transfer is made.

In view of the decisions of the Supreme Court in Coolidge v. Long, Milliken v. United States, and Phillips v. Dime Trust Co., and the light they throw on the real basis of Tyler v. United States, the decisions of the Board following the principle of that case as hitherto understood with respect to estates by the entirety created before the 1916 Revenue Act can no longer be regarded as correct.

I think, therefore, that the estate by the entirety in the instant case, having been created before the passage of the 1916 Act, was not properly included in the decedent’s gross estate.

The majority opinion states that the above view “ subsumes ” that in United States v. Provident Trust Co., one of three cases disposed of in Tyler v. United, States, “ the Supreme Court was unaware of or had overlooked the fact that the entireties had been created in 1901, 1903 and 1912, and that the ground rents owned at death had been reserved at the time of the conveyance in 1923, although these facts clearly appear in the reports of the Board, 5 B. T. A. 1004, and the District Court (E. Dist. Pa., Sept. 10, 1928). It also states: “ But, as has been stated, the Provident case involved entireties existing not only before the particular taxing statute, but also before the advent of the system of death duties inaugurated by the 1916 Act, and as to all the entireties before it the court held them properly included within the gross estate.”

Reference to the District Court decision in the Provident case shows that the ground rent in controversy held as tenants by the entirety was reserved by decedent and his wife in a conveyance dated June 19, 1923, which conveyed the fee of the three adjoining parcels of land acquired in 1901,1903 and 1912. The other property in controversy which was held by decedent and his wife as tenants by the entirety at the date of death was acquired on June 23, 1923.

The facts with respect to the Provident case, as stated by the Supreme Court in its decision, are in part as follows:

In No. 546 which arose under the Act of 1921, the decedent and his wife, residents of Pennsylvania, held title to certain ground rent and to certain real estate in that State which had been conveyed to them as tenants by the entirety. The property had been acquired with the husband’s separate funds and no part of the purchase price was furnished by the wife. The decedent died in 1923, leaving his wife the sole beneficiary under his will.

And with respect to all of the estates by the entirety involved in the three cases, the court said:

In each case the estate was created after the passage of the applicable act and none of the property had prior to its creation ever belonged to the surviving spouse.

I accept the statement by the Supreme Court, that in each case the estate was created after the passage of the applicable act, as referring to the ground rent, as it was one of the items in dispute in the Provident Trust case, and construe it to mean that such estate was created when the rent was reserved in the conveyance of June 19, 1923. In this the Supreme Court was only following the rule of property in Pennsylvania as to when ground rent vests in the grantor. See Law of Ground Rents in Pennsylvania, by Richard M. Cadwalader (Phila. 1819), especially Ch. IY, secs. 195-199; Pur-dan’s Penn. Stat., title 68, ch. 6, Ground Rents, sec. 161, Perpetual Ground Rents not to be Created (law Apr. 22, 1850), and sec. 162, Irredeemable and Non-Extinguishable Ground Rents Prohibited (law June 24, 1885) ; Bouvier’s Law Dictionary, sub-nom. “ Exception,” “Reservation,” “Merger,” “ Ground Rent.”

I come now to the insurance policy proceeds. For the same reasons indicated above with respect to estates by the entirety and on the authority of Nichols v. Coolidge, supra, Untermyer v. Anderson, supra, and Coolidge v. long, supra, I think the proceeds from the 44 policies in which the right to change the beneficiary was waived by the insured and revoked by the company on May 1, 1916, are not in-cludable in the gross estate of decedent. Subdivision (h) of section 302, which makes subdivision (g) retroactive, does not, under the authorities cited, apply to the proceeds of policies in which the right to change the beneficiary was revoked prior to the adoption of the system of taxing insurance policy proceeds as a part of decedent’s gross estate.

The wife’s interest in the policies was vested at the moment of her designation as beneficiary and was indefeasible from the date on which the right to change the beneficiary was revoked by the insurance company. What she acquired on that date was the indefeasible right in a contract under which she was entitled to receive the insurance payable on the death of the insured under the terms of the contract. This was a property right and was acquired prior to the adoption of the system taxing insurance policy proceeds payable to beneficiaries other than insured’s estate as part of the insured’s gross estate.

The majority opinion appears to be based on the ground that the decedent had powers of control until his death of the interest or expectations of contingent beneficiaries which were freed by his death and that such powers brought the policies within the scope of the Chase case and Reinecke v. Northern Trust Co. as to the two trusts which were held taxable.

The language used in the provisions of the policies under which the cash surrender value could be obtained, either upon the surrender of the policies or as a loan, is not such as to give the insured the right to obtain such amount .on his sole request. Whitehead v. New York Life Insurance Co., 102 N. Y. 44; 6 N. E. 267; see also section 52 of the Domestic Belations Law of New York. Tire beneficiary and any contingent beneficiaries would have to join in such request. The necessity of obtaining the contingent beneficiaries’ consent could be obviated by revoking their designation as contingent beneficiaries, but this would still leave it necessary for the wife to join, as her designation could not be revoked. That this is what happened in obtaining a loan on certain of the policies may be inferred from the fact that the designation of contingent beneficiaries was revoked and the same persons redesignated within a few days subject to and without prejudice to the assignment of the policy to the company for a loan.

In the case of bankruptcy, the insured who has no right to change the beneficiary in a life insurance policy has no pecuniary interest in such policy, which passes to the trustee in bankruptcy without the consent of the beneficiary. In re Simmons, 255 Fed. 21.

The only rights which the assured alone could exercise after May 1, 1916, were the right to elect that settlement with the beneficiary be made under one of the options (in lieu of payment in one lump sum), and the right to name contingent beneficiaries and to revoke or change any contingent beneficiary not irrevocably named. The right to elect the mode of settlement to be made with the beneficiary was in effect the right to say in what form the insurance payable on his death should be paid to the beneficiary. The right to name contingent beneficiaries was nothing more than the right to say who would take in case of or after the beneficiary’s death under the option settlement selected. The contingent beneficiaries (if living at the death of the beneficiary) would succeed to the interest of the beneficiary, and upon the death of the last surviving beneficiary the amount which had been retained by the insurance company would be paid to the children, if any, of the contingent beneficiaries, or if they left no children, to their executors and administrators. In case of the death of the contingent beneficiaries with no children surviving prior to the death of the beneficiary, the amount retained by the insurance company would be paid to the executors and administrators of the beneficiary.

It does not seem to me that either the exercise or termination of these rights in any way affected the interest of the beneficiary which was the right to receive the insurance payable under the contract on the death of the insured. Certainly the rights reserved solely to the insured were not such as gave him any control over the policies or their proceeds for his own benefit. What the insured did on May 1, 1916, as to each policy, was to make an absolute gift to his wife of an interest in a contract under which she was to receive on his death the insurance payable either in a lump sum or in-such other mode of settlement provided in the contract as the insured in his lifetime had directed, with the right also to name the persons who would take at her death. The powers reserved are similar to the reserved powers of management in the five trusts in Reinecke v. Northern Trust Co., supra, and what was said in that case as to such reserved powers is also applicable here:

*******
Nor did the reserved powers of management of the trusts save to decedent any control over the economic benefits or the enjoyment of the property. * * * The shifting of the economic interest in the trust property which was the subject of the tax was thus complete as soon as the trust was made. His power to recall the property and of control over it for his own benefit then ceased and * * * the reserved powers do not serve to distinguish them from any other gift inter vivos not subject to the tax.

The shifting of the economic interest in the amount to become due under the policies at his death, which was the subject of the tax, was complete as soon as the right to change the beneficiary was revoked. The insured’s right to direct control of the amount to become due for his own benefit then ceased.

The majority view overlooks the fact that the pertinent provision of the statute requires only the amount receivable by beneficiaries as insurance on the life of the insured, at its value at the date of insured’s death, to be included in gross estate and not the amount receivable by the contingent beneficiaries upon the death of the beneficiary. If the interest of the contingent beneficiaries at the death of the insured is more than a bare possibility, and has a value, it is includable in gross estate by virtue of some other provision than that in section 302(g). Certainly it was not intended by section 314(b) to give the executor the right to recover from the beneficiary any portion of the tax paid on the value at death of the decedent of any amount which might be paid to contingent beneficiaries upon the death of the beneficiary.

Where the insurance is payable to the beneficiaries in a lump sum upon the death of the insured, the lump sum receivable is the amount to be included in gross estate, but where the amount receivable by the beneficiary as insurance is in the form of an annuity, the regulations (No. 70) provide:

Abt. 28. Valuation of Insurance.— * * * In cases where the proceeds of a policy are made payable to the beneficiary in the form of an annuity for life or for a term of years, the present worth of the annuity at the time of death should be included in the gross estate. * * *

The regulations recognize that the insurance payable under many life insurance policies is in the form of an annuity. Of the 110 policies on the life of this decedent, payable to beneficiaries other than the estate, in only 10 was the insurance payable in a lump sum. In all the others, the insured had in his lifetime elected that settlement be made under one of the options, the settlement selected being under Option A, in the Northwestern Mutual Life Insurance policies, and its equivalent in the policies issued by other companies.

As the powers reserved solely to the insured in the 44 insurance policies were not such as gave the insured any control over the policies or their proceeds for his own benefit, they do not fall within the Chase case or the two trusts in Reinecke v. Northern Trust Co., but rather within the principle applied in the case of the five trusts in Reinecke v. Northern Trust Co., supra, and of Nichols v. Coolidge, supra, Untermyer v. Anderson, supra, and Coolidge v. Long, supra.

In reviewing the prior decisions of the Board involving section 302(g) and (h) of the Revenue Act of 1924, for the light they may throw on the retroactive provision, I find this question has not before been considered in express terms. In only two cases, Philip W. Blood et al., Executors, 22 B. T. A. 1000, and David A. Reed et al., Executors, 24 B. T. A. 166, was the instant issue present on the facts, and even there it was merely implicit and does not appear to have been directly raised. In the Blood case some of the policies had been issued and a beneficiary irrevocably designated by 1915, and with respect to these this Board held that the proceeds of such policies were not includable in the gross estate. In the Reed case, with respect to the policies in which the beneficiary had been designated in 1910, with no express power reserved to change, the Board held the proceeds likewise not includable. Nothing was expressly said, however, in either case as to the application of section 302(h) of the 1924 and 1926 Acts.

For the reasons expressed above, I think that the Board was correct in its decision in the Blood case and the Reed case.

ARUNDEll agrees with this dissent.


author: Van Fossan:

text:
    Richard F. Burges, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 37712.
    Promulgated April 19, 1932.

      Richard F. Burges, Esq., pro se.

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

Van Fossan:

Article 88 of Regulations 69 reads as follows:

Compensation of State officers and employees. — Compensation paid to its officers and employees by a State or political subdivision thereof for services rendered in connection with the exercise of an essential governmental function of the State or. political subdivision, including fees received by notaries public commissioned by States and the commissions of receivers appointed by State courts, is not taxable. Compensation received for services rendered to a State or political subdivision thereof is included in gross income unless (a) the person receives such compensation as an officer or employee of a State or political subdivision, and (6) the services are rendered in connection with the exercise of an essential governmental function.
An officer is a person who occupies a position in the service of the State or-political subdivision, the tenure of which is continuous and not temporary and the duties of which are established by law or regulations and not by agreement. Am employee is one whose duties consist in the rendition of prescribed services and not the accomplishment of specific objects, and whose services are continuous, not occasional or temporary.

Originally the petitioner sought to bring himself within the definition of the above regulation as an officer of a political subdivision of a state, but he now claims that he is an employee thereof. On the facts we would have found no difficulty in deciding that petitioner was not an officer.

The question to be determined is, therefore, whether or not petitioner was an employee of political subdivisions of the states involved. In Metcalf & Eddy v. Mitchell, 269 U. S. 514, the leading case on the subject, the court said:

In each instance the performance of their contract involved the use of judgment and discretion on their part and they were required to use their best professional skill to bring about the desired result. This permitted to them liberty of action which excludes the idea of that control or right of control by the employer which characterizes the relation of employer and employee and differentiates the employee or servant from the independent contractor. Chicago, Rock Island & Pacific Ry. Co. v. Bond, 240 U. S. 449, 456; Standard Oil Co. v. Anderson, 212 U. S. 215, 227.

In H. A. Underwood, 20 B. T. A. 1117, which was affirmed as to the point under consideration, 56 Fed. (2d) 67, we said:

Although the petitioner under his contract was required to devote and did devote his entire time and attention to the performance of his contracts with the State of North Carolina, those services were such as are performed ordinarily by an architect and engineer. He drew his plans in accordance with the requirements or suggestions of his employers and he complied with their wishes with respect to the planning of the buildings and the erection of them. He did, however, maintain his own office, employ his own assistants, and bore the expense of their employment.
* * * In the performance of the work he was to comply with the instructions and directions of his employers. But he was to bring about these results through his own methods and instrumentalities. This, we think, stamps the petitioner as an independent contractor with the State of North Carolina, rather than as an employee.

In George H. Gabel, 25 B. T. A. 60, we held, under facts quite similar to those in the case at bar, that the petitioner was an independent contractor and not an officer or an employee. As in the Gabel case, the petitioner, Burges, performed services for three political subdivisions and was free to engage and did engage in the general practice of his profession to a very considerable extent, the fees derived therefrom being about twice the amount of his combined salaries from all three districts. George W. Fuller, 9 B. T. A. 708; Blair v. Byers, 35 Fed. (2d) 326; cf. United States v. Butler, 49 Fed. (2d) 52. The relation between petitioner and the several districts was that of attorney and client — a relationship essentially different from that of employer and employee.

The petitioner consulted and advised with the several boards as he would with any other clients. Though the subject matter of his attention might be suggested by their wishes, his professional acts were in no sense controlled by them. George H. Gabel, supra, and cases there cited; Burnet v. Jones, 50 Fed. (2d) 14. In fact, in the course of argument in the case the petitioner, appearing as his own attorney, compared his employment to that of one who is employed under contract at a specific salary to discharge all of the legal functions pertaining to the work of a municipal corporation.”

Petitioner was free to and did accept other law businéss. Pie paid his secretary from his own funds. His duties were intermittent and except for delinquent tax collections were not prescribed by statute. His was the decision as to methods of handling matters entrusted to him for attention.

Under these facts we are of opinion that petitioner was not an employee of the several districts within the accepted definition of that term. His salary was, therefore, not exempt from Federal tax. This decision is contrary to our holding in Richard F. Burges, 17 B. T. A. 275, a case brought by the same petitioner for the year 1924. In that decision we relied on the cases of James B. McDonough, 16 B. T. A. 556; D. F. Strickland et al., 16 B. T. A. 419; and Blair v. Mathews, 29 Fed. (2d) 892. The McDonough case was reversed by the United States Circuit Court of Appeals, Eighth Circuit, in 49 Fed. (2d) 944. The case of Blair v. Mathews was similar to Lucas v. Howard, 280 U. S. 526, and was inferentially reversed by the decision in the latter case. See Russell v. Heiner, 45 Fed. (2d) 872. The Strickland case was decided on the authority of Blair v. Mathews. In the light of later holdings we believe our decision in Richard F. Burges, supra, was erroneous and should no longer be regarded as an authority.

Reviewed by the Board.

Decision will he entered for the respondent.


author: Trammell:

text:
    A. M. Ellis, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46586.
    Promulgated April 20, 1932.

      A. E. James, Esq., for the petitioner.

      Eugene Harpole, Esq., for the respondent.
   OPINION.

Trammell:

The sole question presented is whether the $24,664.82 which the respondent added to the petitioner’s taxable income for 1927 was properly taxed to him, or whether, by reason of an alleged assignment of a portion of the trading account from which this income was derived to his two sons, the amount should have been taxed to them. The petitioner contends that on or about January 17, 1927, his sons acquired a “ present interest ” in the “ brokerage account owned by him in association ” with Ullrich and, therefore, that the profits therefrom, which were later distributed to them, were their taxable income. The respondent counters with the contention that the petitioner and Ullrich were partners in the conduct and operation of the trading account, each entitled to a stated percentage of its profits, and that the petitioner was taxable upon his distributive share of its income before any division was effected with the sons, and he cites in support of such contention Ormsby McKnight Mitchel, 1 B. T. A. 143, and Mitchel v. Bowers, 9 Fed. (2d) 414; affd., 15 Fed. (2d) 287; certiorari denied, 273 U. S. 759. George M. Cohan, 11 B. T. A. 743; affd., 39 Fed. (2d) 540; Noble v. Commissioner, 12 B. T. A. 1419; Leininger v. Commissioner, 19 B. T. A. 621; and Heinickle v. Commissioner, 20 B. T. A. 155.

We can not agree with the petitioner that the transaction here effected the assignment of an interest, “present,” future or otherwise, in the “ brokerage account ” itself,, and we can not so find as a fact, notwithstanding the witnesses constantly referred to the account as the object of assignment. The account was opened in the petitioner’s own name and it continued in his name, in so far as the record discloses, until liquidation. The brokerage firm with which the account was carried knew nothing whatsoever about the alleged interest of the sons in the account, nor was it even apprised of Ullrich’s interest in or to the profits until dissolution of the existing arrangement was effected. And, more important still, neither Ull-rich nor the two sons had any interest whatsoever in the securities deposited by the petitioner in, and which became a part of, the trading account. In fact, the securities themselves were the account — without them the account would have been a mere empty vault and, indeed, the account would not even have existed. Therefore, what he purportedly assigned was not, as the petitioner contends, an interest in the trading account itself, but, as we have stated in our findings of fact, an “ interest in the prospective profits accruing to his 70 per cent interest in the trading account.” In other words, we believe the foregoing factors and the testimony of record are wholly inconsistent with the petitioner’s contention and that the alleged assignment was not of an interest in the account itself, but an interest in the petitioner’s interest in the profits, as, if, and when realized by him.

The principles involved here are squarely controlled by those laid down in many of the previous decisions of this Board and of the courts. In Hazel T. Power, 23 B. T. A. 428, a recently decided case, after thorough examination of the cases upon the subject, we said, “ The rule is well established that notwithstanding the document of grant or assignment itself may be perfectly valid and enforceable between the parties thereto, the liability for income tax upon future income or profits which will or may accrue to the assignor by reason of the ownership of or an interest in property can not be avoided by the assignor or grantor through the grant or assignment of such income or profits to another.” Ormsby McKnight Mitchel and Mitchel v. Bowers, supra, T. J. Rogers et al., 15 B. T. A. 638; petition for review dismissed, 41 Fed. (2d) 1012; J. T. Browning et al., 16 B. T. A. 485; L. Brackett Bishop, 19 B. T. A. 1108; Alexander S. Browne, 3 B. T. A. 826; and Edward J. Luce, 18 B. T. A. 923; affirmed by the Court of Appeals, D. C., January 18, 1932, holding the assigned income taxable to the assignor or grantor. This principle has been established by the U. S. Supreme Court. Burnet v. Leininger, 285 U. S. 136.

Based upon the record made, we have found as a fact, speaking of the petitioner’s two sons, that “ Their interests pertained solely to prospective profits to be derived from the securities traded in.” This finding is supported by the following testimony given by the petitioner himself:

Q. What was your conversation with your two sons on January 17, 1927; what was the actual arrangement that you made with them? In other words, were they to have a portion of your original principal in that account?
A. An interest of seventeen and a half per cent each in whatever profit the account may bring.
Q. And that was just an interest in the profits that might arise?
A. That is right, and each one I considered had $1,000 invested, and it was practically a gamble by them as to any amount that they might take out, if there should be a profit.

The petitioner, in our opinion, was the sole owner of the trading account, certainly in so far as his two sons were concerned, and of the securities deposited therein, and the income accrued to him by reason of such ownership. His rights naturally arose before the rights of others could possibly have arisen. The profits were his, accruing by virtue of such ownership of property, and the tax thereon can not be avoided by him through the medium of an assignment to his sons. In the Leininger case, supra, petitioner assigned to his wife an interest in his partnership interest, but the court held that the profits arising from his interest were taxable to him and that he was not relieved therefrom by the assignment. In this case the profits came in to the petitioner. The tax is not to be avoided by what petitioner afterwards does with his profits.

Nor do we consider that any different rule should apply to the paper profit of $3,030.18 which had accrued to the account in January, 1927, but which had not been realized at the time of such assignment. It was merely a prospective profit. It had not been subjected to tax. If and when realized it was no different from any other future profit.

For the above and foregoing reasons we are of the opinion that the respondent’s determination should be approved. In thus deciding we deem it unnecessary to consider whether or not there was a copartnership between the petitioner and Ullrich as the respondent urges.

Keviewed by the Board.

Judgment will ~be entered for the respondent.


author: Steenhagen : Teammell,

text:
    Mt. Plymouth Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42409.
    Promulgated April 20, 1932.

      George B. Garter, Esg., for the petitioner.

      Eugene Hargole, Esg., for the respondent.
   OPINION.

Steenhagen :

The petitioner, admitting that in the years in question it sold 1,398 lots for an amount which does not appear in evidence, omitted from the gross income shown on its income-tax returns for the years in question $139,800 of the amount so received. The respondent treated this amount as part of petitioner’s income for the years in question, and thus determined the present deficiency. The original petition alleged that this amount was a “ reserve for golf course maintenance ” and in an amendment to the petition filed at the hearing this designation is omitted and it is alleged that the petitioner recognized the existence of a trust liability for maintaining golf courses and clubs for members given privileges and set aside out of each lot sale $100.” The present theory of the petitioner’s claim is that the aggregate sum of $100 per lot is excluded from its gross income because it constitutes a trust fund, of which the petitioner is trustee, analagous to that of the Portland Cremation Association in 31 Fed. (2d) 843.

The evidence, in our opinion, does not establish a trust or anything less than full ownership by the petitioner of the entire amount received in the sale of each lot. Although it has been said that it needs no prescribed form of words to express a trust, Chicago Railway v. Des Moines Railway, 254 U. S. 196, it does not follow that circumstances wholly lacking in the manisfestation of a trust intent, either in words or conduct, and wanting likewise in any practical demonstration that a trust has been in operation, should be characterized by this Board as a trust for the purpose of releasing from tax such receipts as are otherwise plain business income. A trust is taxable as such by section 219, Revenue Act of 1926, and the fiduciary is required by section 225 to file a return. It is not suggested here that this petitioner is subject to these provisions, and from the present record clearly it was not.

The most that can be said from the evidence is that the petitioner was obligated by its contract to accord to lot owners the privileges of the golf course and the clubhouse, but this falls far short of saying that the petitioner was trustee in respect of any fund or other property in its possession, even if its refusal to provide such privileges might give rise to the equitable remedy of specific performance. There is nothing here to justify a decree of the existence of a trust or requiring its enforcement. For all that appears the petitioner rightfully might and did use the entire amount indifferently as its own without accountability to anyone. Even if the evidence established that a definite reserve had been set up by the petitioner for the maintenance of the golf facilities, such a reserve could not qua reserve be either excluded from gross income, Consolidated Asphalt Co., 1 B. T. A. 79; Uvalde Co., 1 B. T. A. 932, or deducted therefrom to arrive at taxable net income, William J. Ostheimer, 1 B. T. A. 18.

The petitioner introduced in evidence a newspaper advertisement purporting to prove that it had publicly undertaken in 1926 to establish a trust fund. Despite the oral testimony as to its publication in 1926 there is irrefutable evidence on the exhibit itself to the contrary, for the petitioner’s advertisement itself contains a statement of oranges shipped throughout 1926 and, on the reverse side of the exhibit, is a statement of copyright in 1927. The exhibit is entitled to no weight.

The petitioner is, as the respondent admits, entitled to deduct its actual maintenance expenses paid or accrued, and these have, we must assume in the absence of complaint on that score, been deducted in the Commissioner’s audit and determination.

The cemetery cases to which the petitioner has referred, all, in our opinion, contained evidence of an undertaking far more specific, definite and binding, and, therefore, more susceptible of being construed as a trust than the circumstances at bar. The respondent’s determination is sustained.

Reviewed by the Board.

Judgment will be entered under Rule 50.

Teammell,

dissenting: The precise question for determination in this case is whether or not a trust relationship existed between the petitioner and the lot owners in respect of the “ special fund ” set aside for maintenance of the golf course and clubhouse. The correct answer to this question is not dependent solely upon the statements contained in the contract of purchase and sale or other written instrument, nor the covenants contained in the deed. A valid trust may be created by parol in respect of personal property, such as we are dealing with here. Metairie Cemetery Association, 4 B. T. A. 903. And such a trust may be created without particular words of trust. It may be inferred from the surrounding facts and circumstances. In Portland Cremation Association v. Commissioner, 31 Fed. (2d) 843, the court said:

It is true that a mere honorary obligation which one may perform or not at his will does not create a trust. But a trust may be created by parol, and' its creation does not depend on the use of particular words of trust. Chicago, etc., Ry Co. v. Des Moines, etc. Ry. Co., 254 U. S. 196, 208, 41 S. Ct. 81, 65 L. Ed. 219. It may be inferred from facts and circumstances * * * and any words which indicate with sufficient certainty a purpose to create a trust will be effective in so doing. [Citing authorities.]

In the Chicago, etc. Ry. Co. case, above cited, the Supreme Court in its opinion said:

It needs no particular form of words to create a trust, so there be reasonable certainty as- to the property, the objects, and the beneficiaries.

See also Colton v. Colton, 127 U. S. 300; Holden v. Circleville Light & Power Co., 216 Fed. 490; Helfenstein's Estate, 77 Pa. St. 328; In re Smith's Estate, 144 Pa. St. 428; 22 Atl. 916; Hibbard, Spencer, Bartlett & Co., 5 B. T. A. 464, 472.

The principles of law applicable to parol trust being clearly established by abundant authority, it is only necessary to examine the evidence in the instant case to see whether the facts established bring it within those principles.

The evidence here shows that the officers of the petitioner corporation, prior to the sale of any lots, conceived the plan of including in the sales price of each lot the sum of $100, which, upon the sale of the lot, was to be set aside as a “ special fund ” for the maintenance of the golf course over the period of 21 years. This plan was approved and adopted by the board of directors, and the salesmen were instructed to inform all prospective purchasers that said sum would be so set aside for such purpose from the sale of each lot. Such representations were thereafter in fact made to the prospective purchasers by the salesmen and also by the executive officers of the corporation, and in many cases were the moving cause which induced the prospects to become purchasers of lots. And said “ special fund ” was thereafter in fact created by the setting aside of $100 from the sales price of each lot as and when sold. In my opinion, this is only a fair inference or conclusion to be drawn from the evidence.

Louis C. Block, a witness for the petitioner, testified that he lived at Elkins Park, Philadelphia, and spent his winters in Florida. He purchased two lots at Mt. Plymouth. He testified further:

Q. What representations were made to you in regard to the golf course or golf club at the time that you were negotiating the purchase of these lots?
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A. Why, we were not interested particularly in buying more lots in Florida, but the proposition was that by joining this organization we would have the privilege of playing golf there and a proportion of the money paid for .the lots would be applied to the maintenance of the golf course, and * * * I would not have been interested, but they assured us that $100 from the purchase price of each lot would be put into a fund for the maintenance of the course. * * *
Q. Would you have bought a lot if it had not been for that assurance?
A. Most assuredly not.

J. C. Otey, a witness for the petitioner, after stating that he was connected with the corporation as a salesman, testified:

Q. What instructions, if any, were given to you in regard to representations to make to prospective lot purchasers of Mt. Plymouth lots pertaining to the golf privileges?
A. With each lot went a membership for twenty-one years, that they would take out one hundred dollars of each sale, and use this as a trust fund for maintenance of the golf course.

E. F. Sliriver, wbo was connected with the petitioner as a salesman and closer, testified:

Q. What instructions were given to you and have been given to you since you became connected with it (petitioner) in regard to representations to make to prospective lot purchasers as to the golf privileges and rights?
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A. I became interested in the proposition on resigning from the company I was with for the reason you could buy membership in Mt. Plymouth good for twenty-one years, or, good until 1947, on the purchase of a lot without dues, or assessments of any kind. There was $100 set aside, put in trust for the maintenance with each lot to hold until 1947 when that money would come back to Mt. Plymouth if there was any left.

Much additional testimony was offered to the same general effect, which it is unnecessary to quote at length here. This evidence, in my opinion, establishes a parol trust in respect to personal property. The facts bring it within the requirements stated by the Supreme Court in the Chicago etc. Ry. Co., case, supra. The record, I think, establishes with reasonable certainty (1) the property, (2) the objects, and (3) the beneficiaries of the trust. The property, which was the subject matter of the trust, consisted of $100 set aside out of the purchase price of each lot sold; the object of the trust was the maintenance of the golf course out of said fund for the period of 21 years, or until 194?; and the beneficiaries were the lot owners.

The case at bar is clearly distinguishable from those cases in which the taxpayer merely set up a reserve fund as a protection against contractual liability. In such a case the taxpayer might diminish the fund by devoting it to other uses, or might abolish it entirely, for which acts it would not be answerable as for breach of a trust agreement, blit its liability, if any, would be for breach of covenant or contract. See Springdale Cemetery Association, 3 B. T. A. 223; Spring Canyon Coal Co., 13 B. T. A. 189; affd., 43 Fed. (2d) 78; certiorari denied, 284 U. S. 654.

In the case last cited, the Industrial Commission of Utah under the workmen’s compensation law of that state, required the petitioner, a coal mining company which elected to become a “ self-insurer,” to set aside an amount of money equal to that which would be required as premiums if the employer were insured under the state insurance fund, such amount to be used for payment of compensation for medical and other benefits under the act. We held that the amounts so reserved by the petitioner were not deductible in computing net taxable income, and in affirming our decision the Circuit Court of Appeals in effect held that the fund in question was a reserve to cover contingent liability, not deductible from gross income. And in that connection, the court distinguished the case on the facts from Portland Cremation Association v. Commissioner, supra.

In the latter case, the cremation association set aside a percentage of the selling price of its niches and vaults to be used as a permanent maintenance fund, and in making sales, represented to prospective purchasers that perpetual maintenance was guaranteed by such fund. The court held that the amount so set aside constituted a trust fund which the association was entitled to exclude from gross income, saying:

In the case at bar, the representations went no further than to say that a portion of the purchase price would be placed in a maintenance fund. * * * While the petitioner here may be said to have had control of the money which it placed in the maintenance fund, diversion of that fund for corporation purposes or any purpose other than that designated by its promise to maintain the same, and the specific resolution of its board of directors to devote to that purpose 20 per centum of its receipts from sales, might be enjoined by a suit in equity as a violation of the trust agreement. The crucial question is, Did the petitioner’s patrons possess the right to protect themselves and demand the preservation of the fund which the petitioner had covenanted with them to maintain and by its resolution had set apart for maintenance? That question is by the authorities answered in the affirmative.

On the facts, and the principles of law applicable thereto, the instant case is not, in my opinion, distinguishable from Portland Cremation Association, supra. If this petitioner had unconditionally represented to prospective purchasers that it would maintain the golf course for 21 years at its own expense and without cost to the lot owners, and then, in order to protect itself against its contingent liability in that regard, had set up a reserve fund of $100 from the sale of each lot, it could at any time have devoted such fund, or any portion thereof, to other corporate purposes, or it could have abolished the fund at any time, and unless and until the corporation breached its contract by failing to maintain the golf course in accordance with its agreement, the lot owners could not have complained. Such a reserve fund would have represented merely a segregated portion of the corporation’s profits or surplus. And if such reserve had been insufficient to maintain the golf course for the designated period, the petitioner would have been obliged to use additional funds for that purpose or have been liable to respond in damages for breach of its agreement.

However, the petitioner made no such agreements or representations. It represented to prospective purchasers only that it would establish a maintenance fund of $100 from the sale of each lot and would administer that fund for the purpose stated. If the fund so set aside is properly and fairly administered, and nevertheless proves insufficient to maintain the golf course for the 21 years or until 1947, the petitioner will be under no contractual or other legal obligation to maintain the golf course out of its own funds. On the expenditure of the special fund consisting of $100 from the sale of each lot, its obligation in that respect will have been fulfilled. On the other hand, the petitioner can not devote said fund to any other use, and at the instance of a property owner, a court of equity would undoubtedly enjoin the petitioner from so doing.

These considerations lead me to the conclusion that the fund in question constitutes a trust fund in the hands of the petitioner, and that it is entitled to exclude from gross income for the taxable year the amounts added to such fund in said year.