text:
    Augustus Trask Ashton, Petitioner, v. Commissioner of Internal Revenue, Respondent.

      Docket No. 89434.

      Promulgated May 18, 1939.

      Dudley T. Easby, -Jr., Esq., for the petitioner.

      T. F. Callahan, Esq., for the respondent.
   OPINION.

Black :

Petitioner, in support of his contention that the loss which he suffered in 1934 by reason of his withdrawal as a shareholder of the Business Men’s Building & Loan Association was an ordinary loss and not a capital loss, cites Hale v. Helvering, 85 Fed. (2d) 819; John H. Watson, Jr., 27 B. T. A. 463; George A. Hellman, 33 B. T. A. 901. Those cases would undoubtedly sustain petitioner in his claim if his status when he withdrew from the Building & Loan Association had been that of a creditor.

To the aboye cited cases might be added the recent Supreme Court decision in Fairbanks v. United States, 306 U. S. 436. In the latter case the Supreme Court held that redemption of bonds before maturity by the issuing corporation is not a sale or exchange of capital assets within the meaning of section 208 (a) (1) of the 1926 Act and section 101 (c) (1) of the 1928 Act. Therefore a bondholder’s gain from surrender of bonds for retirement was not capital gain. If petitioner had been a bondholder or otherwise a creditor of the Building & Loan Association the above decision of the Supreme Court and the other named cases Avould be applicable. But petitioner was not a creditor of the association. He was a shareholder.

In Stone v. New Shiller Building & Loan Association, 302 Pa. 544; 153 Atl. 758, the Supreme Court of Pennsylvania, among other things, said: “A withdrawing stockholder is at no time a creditor of the association as that term is usually understood.” To the same effect are Petition of Philadelphia Investment Building & Loan Association, 121 Pa. Super. 148; 183 Atl. 93, and Steinon v. Great Oak Building & Loan Association (Sup. Ct. of Pa.), 185 Atl. 818. Section 1074—5098 of Purdon’s Pennsylvania Statutes, title 15, page 458, reads as printed in the margin.

When shares of stock which are capital assets within the applicable revenue act are redeemed, the resulting gain or loss is a capital gain or loss as the case may be. White v. United States, 305 U. S. 281; Mary S. Childs, 35 B. T. A. 1125.

The identical question which we have here to decide was before the United States District Court for the Eastern District of Pennsylvania in Henderson v. United States, 22 Fed. Supp. 206, and was decided for the Government. We think that case was decided correctly. Cf. Helvering v. Weaver Co., 305 U. S. 293.

Under the authorities above cited, we affirm the Commissioner.

Decision will be entered for the respondent.

      B. Holders of matured shares, or holders of shares which have been voluntarily or involuntarily withdrawn, or holders of shares who have not assented to or have dissented from a merger or a consolidation, shall be entitled to notice of, and to vote at, any meeting of shareholders, until they shall have been paid in full the amount lawfully due them on account of their shares. The exercise of such right to vote at a meeting shall not constitute waiver of, or in any way affect, any rights granted by law to such shareholders by virtue of the maturing of their shares, or of their withdrawal from the association, either Voluntarily or involuntarily, or of their failure to assent to, or their dissent from, a plan of merger or consolidation.


source: Caselaw Access Project

author: TdrneR:

license: Public Domain

text:
    Harold R. Smith, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90142.
    Promulgated May 18, 1939.

      John M. Hudson, Esq., for the petitioner.

      Vernon F. Weelcley, Esq., for the respondent.
   OPINION.

TdrneR:

The respondent contends that the petitioner’s surrender of the two land contracts and his conveyance of his interest in the properties to the vendor by quitclaim deeds, in consideration of ,the vendor’s cancellation of his debts under the contracts, constituted “sales or exchanges” of capital assets within the purview of section 117 of ,the Revenue Act of 1934. He states on brief that we have already held in Betty Rogers, 37 B. T. A. 897, that a transaction substantially the same as the transactions here involved constituted a “sale” of a capital asset and the loss sustained was therefore a capital loss. Petitioner contends that nothing was sold or exchanged by him but that the transactions in question were “merely an abandonment or surrender of the contracts and a release of the properties for which he received nothing in return.”

Upon the execution of one of the land contracts on March 1, 1929, and ,the assignment of the other on June 6, 1929, petitioner became the equitable owner of two parcels of real estate. Walker v. Casgrain, 101 Mich. 608; 60 N. W. 292; and Barnard v. Huff, 252 Mich. 258; 233 N. W. 213. He took possession of the properties and entered them for taxation in Iris own name. In Bowen v. Lansing, 219 Mich. 117; 88 N. W. 384, it was said that “In equity the land belongs to £he vendee, and may be sold, devised or encumbered by him, and on his death will descend to his heirs.” Cf. Conners v. Winans (1924), 122 Misc. 824; 204 N. Y. S. 142. The vendor retains bare legal title to secure the performance of the contract. Title & Trust Co., 33 B. T. A. 25. “The claim of ,the vendor is but an ordinary money debt, secured by the contract.” Bowen v. Lansing, supra. The status of the parties is somewhat analagous to mortgagor and mortgagee. Williston on Contracts, vol. II, par. 791; Barnard v. Huff, supra; Conners v. Winans, supra. Accordingly, we think there can be no doub,t that petitioner’s rights to and interests in the two parcels of real estate were capital assets and the losses sustained resulted from the parting with those capital assets.

Our next question is whether the transactions herein constituted sales or exchanges within the meaning of section 117 of the statute. Under the terms and conditions of the contracts the vendor, upon petitioner’s default, had the right (1) to treat the contracts as continuing in force and sue at law for the principal amount, (2) to bring action in equity for foreclosure of its vendor’s lien and for a deficiency decree, or (3), to declare the contracts forfeited. See Chicago Boulevard Land Co. v. Apartment Garages, 245 Mich. 448; 222 N. W. 697. The vendor did not exercise any of those alternatives, however, and the contracts were terminated by mutual consent and agreement of the parties, whereby petitioner voluntarily surrendered his rights to and in the lands to the vendor in consideration of the cancellation by the latter of the remaining indebtedness. Petitioner also executed and-delivered to the vendor quitclaim deeds to the two parcels of real estate, wherein it was recited that petitioner and his wife “by these presents grant, bargain, sell, remise, release and forever quitclaim” the said parcels of real estate unto the vendor. As to the lack of necessity in such case for a conveyance in writing, see Underwood v. Slaght, 213 Mich. 391; 182 N. W. 106. Petitioner argues that he merely “abandoned” the contracts, but that term does not describe the transactions. The petitioner being in default, the vendor had the right to treat such default as an abandonment by the petitioner of his rights under the contracts, Dundas v. Foster, 281 Mich. 117; 274 N. W. 731, but it did not do so. Petitioner was obligated to make further payments and we know of no way in which an attempt at abandonment of the contracts would have been effective. He would at ,the election of the vendor still have been subject to' a suit at law for the balance of the principal amount, or to an action in equity for foreclosure of the vendor’s lien on the two parcels of real estate and for a deficiency decree for the unsatisfied portion of the indebtedness. By a new agreement between the parties, however, the vendor reacquired the two parcels of real estate previously sold to petitioner, in one instance to petitioner’s assignor, and petitioner satisfied his additional personal liability under the contracts as effectively as if he had received payment for the two properties in cash and used such cash in paying the balance of his liability under the contracts. We conclude therefore that the transactions here in question were sales or exchanges within the meaning of the statute. Betty Rogers, supra. See also Henry Heldt, 16 B. T. A. 1035, wherein we held there was an exchange of property for other property under substantially similar circumstances.

The petitioner contends that the facts in Betty Rogers, supra, are distinguishable from the facts in the instant case, and, further, that if the two cases are not distinguishable the former is imsound and should be overruled. He relies principally on Commonwealth, Inc., 36 B. T. A. 850; Sol Greisler, 37 B. T. A. 542; aff'd., 102 Fed. (2d) 787; Hale v. Commissioner, 85 Fed. (2d) 819; and Dallas Transfer & Terminal Warehouse Co. v. Commissioner, 70 Fed. (2d) 95. While there are some minor distinctions in form between the instant case and the Betty Rogers case, the results sought by the parties and the effect of their acts are precisely the same. In Betty Rogers, supra, the debt in question was secured by a deed of trust rather than a land contract. The vendor retained a lien on the property as security for the balance of the purchase price, the legal title being placed in a trustee. In the instant case the vendor retained bare legal title as security for ,the payment of the balance of the purchase price and the petitioner became the equitable owner of the property. In both cases, by agreement of the parties, the properties were reconveyed to the vendor. In the Betty Rogers case that was accomplished by having the trustee convey legal title to the vendee, who in turn conveyed the property to the vendor. In the present case the same result was accomplished by ,the surrender and cancellation of the contracts. See Underwood v. Slaght, supra. In both cases the consideration flowing to the vendee was his release from his obligation to pay the balance of the purchase price.

Petitioner further contends fhat Betty Rogers, supra, is distinguishable from! the instant case in that the fair market value of the properties herein at the time of the transactions involved was less than or not in excess of the vendee’s debts under the contracts, whereas in the Betty Rogers case the deed recited that the consideration received by the grantor was equal to the fair market value of the grantor’s interest in the land. The important thing is that the vendee, in consideration for his interest in the two parcels of real estate, received valuable consideration, namely, the release from his personal liability under the contracts. The record here does not show whether ,the petitioner was financially able to pay the debts or whether the vendor might have collected the full amount of the debts by appropriate legal action. The record does show, however, that the vendor was willing to and did accept the properties in lieu of its claims under ,the contracts and that petitioner agreed to accept the cancellation of his indebtedness in lieu of his interests in the properties. The settlement was reached by agreement of the parties, and whether the ultimate result was in fac,t favorable to the vendor or to the petitioner appears of little significance. The possibility that one of the parties might, and in most sales or exchanges probably does, obtain a better bargain than the other does not serve to make a transaction any the less a sale or exchange.

Commonwealth, Inc., supra, and Sol Greisler, supra, are altogether different from the instant case and from Betty Rogers, supra. In neither of those cases did the vendee assume the mortgage liability and upon ,the conveyance of the property in the one case and its sale under foreclosure in the other, the vendee, being subject to no further liability, received no consideration. Hale v. Commissioner, supra, was discussed and distinguished in our opinion in Betty Rogers, supra, and the reasoning there is equally applicable here. Balias Transfer & Terminal Warehouse Co. v. Commissioner, supra, is obviously not in point. That case involved a question of the realization of gain, while in ,the instant case we are merely concerned with the nature of a loss. Furthermore, the decision in that case turned on the fact that the debtor was insolvent. No such facts are present in the instant case.

We accordingly conclude that the transactions herein constituted sales or exchanges of capital assets and sustain the respondent’s determination that the losses were capital losses.

Reviewed by the Board.

Decision will be entered under Rule 50.


author: Smith :

text:
    M. A. Willem, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93626.
    Promulgated May 18, 1939.

      George Landw&kr, O. P. A., for the petitioner.

      Joe D. Hughes, Esq., for the respondent.
   OPINION.

Smith :

This proceeding is for the rodetermination of a deficiency in income tax for 1986 of $47.83.

The petitioner is a resident of New Orleans, Louisiana. In his income tax return for 1936 he claimed a credit of $1,200 for the support of his three minor children, all under 18 years of age. This credit was disallowed by the respondent in the determination of the deficiency. If petitioner is entitled to the credit claimed there is no deficiency for 1936 due from the petitioner.

On November 15, 1935, the petitioner was divorced from Della McDonough Willem and the judgment of the Civil District Court of the State of Louisiana granting such divorce was entered on that date. By the decree of the court the wife was granted “the permanent care, custody and control”, of three minor children all under the age of 18 years during 1936. The court also awarded judgment in favor of Della McDonough Willem against the petitioner in the amount of $135' per month “as permanent alimony, for the support of said plaintiff and minor children.”

During the year 1936 the petitioner paid to his divorced wife $135 per month pursuant to the decree of the court and such amount constituted her entire income for the year 1936.

The applicable provisions of the statute are found in section 25 of the Revenue Act of 1936, which reads in material part as follows:

SEO. 25. CREDITS OE INDIVIDUAL AGAINST NET INCOME.
*******
(b) Credits fob Both Normal Tax and Surtax. — There shall be allowed ior the purposes of the normal tax and the surtax the following credits against net income:
*******
(2) Credit for dependents. — $400 for each person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer if such dependent person is under eighteen years of age or is incapable of self-support because mentally or physically defective.

In his brief the respondent contends that the petitioner “is not entitled to a credit for dependents by reason of the alimony payments made to his divorced wife since the judgment of the Court granting the divorce did not specify any separate amount for the support of the minor children.”

In Eleanor L. Mack, 37 B. T. A. 1101, where a wife had obtained a divorce and had been given custody of her three minor children and more than half of the amount used by the wife for the support of the children was obtained from the monthly payments which she received from the husband under a separation agreement and court order, we held that not the wife but the husband was entitled to credit for the three dependent children. To the same effect is P. L. Taylor, 11 B. T. A. 441, where after separation and divorce the wife had the custody of four minor children, but the husband furnished their entire support.

Respondent in his brief attempts to distinguish Eleanor L. Made, supra, on the ground that a division of the husband’s monthly payments to the wife could be made between the amounts that were received by the wife for her own use and the amounts that were received by her for the support of the children. Respondent argues that such an allocation is necessary in order for the husband to be entitled to the credit for support of the children. In this contention he relies upon I. T. 2096, C. B. III-2, p. 163. This ruling is as follows:

A father who furnishes the chief support of his child is entitled to the credit for a dependent whether the custody of the child has been awarded to the mother under the court decree or whether the support is furnished as the result of an agreement between husband and wife not entered into through court proceedings. If the court orders the father to pay the wife alimony and no specific mention is made in the decree as to any amount to be set aside for the support of .the child, the father is not entitled to the credit for a dependent, even though the alimony is the only means which the wife has for the support of herself and child.

This ruling, we think, imposes an unwarranted restriction on the rights granted to taxpayers by the statute. It is not required of the taxpayer claiming the credit to prove what particular amount he contributed to the support of the dependents. It is enough if he establishes that he contributed their chief support.

Although we did find in the Eleanor L. Mack case that a definite portion of the payments which the husband made to the wife was intended for the support of the minor children, the decision did not need to rest upon that point. The determining fact there was that the taxpayer claiming the credit, the wife in that case, was not the chief contributor to the support of the dependents and therefore was not entitled to the credit. It might be pointed out that the position taken by the respondent in that case was directly contrary to the one which he takes in the instant case.

In the instant case the stipulated facts are that the monthly payments made by the petitioner to his wife were, by force of the court’s decree, to be used in part at least for the support of the minor children and that these payments were the only income received by the wife during the taxable year. It follows that the minor children were dependent upon and received their chief support from the petitioner. We are of the opinion, therefore, that the petitioner is entitled to the credit claimed.

Judgment of no deficiency will be entered.


author: Murdock :

text:
    Hub Clothing House, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 94426.
    Promulgated May 18, 1939.
   OPINION,

Murdock :

The Commissioner determined for the calendar year 1936 a deficiency of $3,396.98 in income tax and a deficiency of $85.85 in excess profits tax. The only issue for decision by the Board is whether the Commissioner erred in failing to allow the petitioner a credit of $12,000 under section 28 (c) (2) of the Revenue Act of 1936 for a like amount paid during the taxable year pursuant to a contract. The facts are found as stipulated by the parties.

The petitioner on December 31, 1931, entered into a parol agreement with an individual whereby it agreed to purchase a piece of improved real estate from the individual for $135,371.61. The agreement was reduced to writing and was executed on July 16,1935. The written agreement referred to the oral agreement, which had provided that the payment of the purchase price was to be made out of profits which should thereafter be earned by the purchaser during a period of ten years from December 31, 1931, or such further time as might be reasonably necessary for such purpose. It further recited that the petitioner had paid $64,919.27 on account of the purchase price and still owed at the time of the written agreement $70,452.34. The written agreement contained the following provision:

The Purchaser agrees to pay the unpaid balance of purchase price, to-wit, the sum of $70,452.34 out of profits of the Purchaser’s business on or before December 31, 1941 or such further time as may be reasonably necessary, considering the Purchaser’s business, to effect the purpose of this agreement not exceeding five (5) years from said December 31st, 1941, together with interest on all unpaid balances of principal at the rate of seven per cent (7%) per annum from date hereof until the entire balance of said purchase price with interest thereon shall be fully paid.

The purchaser was to have use and possession of the premises until default and was to pay all taxes. The seller was to give a deed for the property when the purchase price had been fully paid.

The petitioner paid $12,000 on the purchase price of the property during 1936. The seller was indebted throughout the year 1936 on a mortgage covering the property and the payment of $12,000 was in fact paid directly by the petitioner to the mortgagee and applied in reduction of the mortgage. The same procedure had been followed in prior years.

The petitioner on its return for 1936 claimed a credit of $12,000, representing the payment on the purchase price. The Commissioner disallowed the credit claimed.

Section 26 of the Revenue Act of 1936 is entitled “Credits of Corporations.” Paragraph (c) thereof is entitled “Contracts Restricting Payment of Dividends”, and subparagraph (2) is as follows:

Disposition op profits of taxable year. — An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside. For the purposes of this paragraph, a requirement to pay or set aside an amount equal to a percentage of earnings and profits shall be considered a requirement to pay or set aside such percentage of earnings and profits. As used in this paragraph, the word “debt” does not include a debt incurred after April 30, 1936.

The contract involved in this case was a written contract executed by the corporation prior to May 1, 1936. The statute allows credit only for earnings of the taxable year which are required by a provision expressly dealing with the disposition of earnings of the taxable year to be paid within the taxable year in discharge of a debt. No part of the earnings of the petitioner for the taxable year were required by any provision of the contract to be paid within the taxable year on account of the purchase price. There is in fact no provision of the contract which expressly deals with the disposition of earnings and profits of the taxable year. The contract did not require that $12,000, or any other amount of the earnings of the year 1936, should be applied in payment of the purchase price. The petitioner merely agreed to pay the unpaid balance of the purchase price out of profits of its business during a prescribed period. It could have chosen to make no payment whatsoever in 1936 without violating the ternas of the contract. The contract did not deal with earnings of any particular year but dealt only with earnings of a much longer period. Even though no payment had been made in 1936, the contract could have been satisfied by a payment of the unpaid purchase price in later years. An examination of the legislative history of section 26 (c) (2) is not particularly helpful. However, the legislative history fails to disclose an intention on the part of Congress to allow credit in a case such as this.

Decision will l>e entered for the respondent.


text:
    Elizabeth S. Kirk, Marie Supplee Dickson and Henderson Supplee, Jr., Executrices and Executor of the Will of C. Henderson Supplee, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89363.
    Promulgated May 18, 1939.

      Harry J. ATker, Jr., Esq., and Isadore Stern, Esq., for the petitioners.

      Thomas F. Gallaban, Esq., and Lewis 8. Pendleton, Esq., for the respondent.
   OPINION.

Smith :

This proceeding is for the redetermination of deficiencies in gift tax for 1933 and 1934 of $3,650.22 and! $21,988.45, respectively. The petitioners contend that the respondent erred in the determination of deficiencies by not taking as the value! of the gifts one-half of the cancellation value of certain life insurance policies taken out by C. Henderson Supplee in 1933 and 1934 in which, the decedent’s wife, Flora D. Supplee, was irrevocably named as beneficiary, with the right to cancel the policies at any time she saw1 fit.

C. Henderson Supplee filed a gift tax return for 1933 showing $53,445.04 as the gross value of taxable gifts made by him in 1933. He likewise filed a return for 1934 showing the gross value of taxable gifts to be $140,569.75. The respondent has determined the deficiencies involved in these proceedings by finding that the gross gifts were, $153,490.75 for 1933 and $365,979 for 1934.

O. Henderson Supplee was a resident of Philadelphia, Pennsylvania, who died on September 10, 1934. He was born February 18, 1860.

During 1933 C. Henderson Supplee took out two single-premium life insurance policies issued by the Mutual Life Insurance Co. of New York. In each policy his wife, Flora D. Supplee, was irrevocably named as beneficiary, if living at the date of his death. Under each policy Flora D. Supplee had the right to surrender the policies and receive their cash surrender value. The details of these policies are as follows:

Flora D. Supplee paid one-half of the premium on each policy.

During 1934 C. Henderson Supplee took out seven single-premium life insurance policies upon his own life, irrevocably naming Flora D. Supplee his beneficiary, if living at the date of his death, giving her the right to surrender the policies at any time and receive their cash surrender value. The details of these policies are as follows:

The first three policies above listed as having been issued in 1934 were issued by the Mutual Life Insurance Co. of New York; the next two by the John Hancock Mutual Life Insurance Co., Boston, Mass.; and the last two by the Equitable Life Assurance Society of the United States. The policies issued by the Equitable Life Assurance Society were special policies providing for annuities.

As in the two policies issued in 1933, Flora D. Supplee paid one-half of the premium upon each policy, or a total of $161,062.25.

It is the contention of the petitioners in this proceeding that the gross value of the gifts made by 0. Henderson Supplee in 1933 and 1934 was one-half of the cancellation value at the dates of issuance of the policies, or $60,369.75 for 1933 and $140,616.24 for 1934. The respondent, on the other hand, contends that the value of the gross gifts in 1933 and 1934 was one-half of the premiums paid in each year, or $65,781.75 for 1933, and $161,062.25 for 1934.

Upon the issuance of the policies, Flora D. Supplee had the right to surrender the policies and receive the cash proceeds. The respondent contends that this does not measure the value of the gifts but that their value is the amount of the premiums paid by C. Henderson Supplee in 1933 and 1934, or $65,781.75 and $161,062.25, respectively. Although admittedly these are the amounts which were paid for the policies by O. Henderson Supplee, we do not think that they correctly measure the value of the gifts. This is the same question which was before the Board in Ernest A. Cronin, 37 B. T. A. 914, and Mary E. Haines, 37 B. T. A. 1013. In each of those cases we held that the value of the gift was one-half of the cash surrender value at the date of the gift. Those decisions are dispositive of the issue here presented. The gross value of the gifts made by C. Henderson Supplee in 1933 and 1934 was $60,369.75 and $140,616.24, respectively.

Judgment will be entered wider Bule 50.


author: OppeR :

text:
    Ethel K. Childers, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88829.
    Promulgated May 18, 1939.

      Robert Stone, Esq., and Ellis T). Barer, Esq., for the petitioner.

      Carroll Walker, Esq., and B. E. Maiden, Jr., Esq., for the respondent.
   OPINION.

OppeR :

In support of his determination that the entire income from the trust is taxable to petitioner, respondent urges that the trust is in fact no trust at all, due to the power and control reserved by petitioner over the trust corpus and income; and, in the alternative, that the petitioner is taxable on the entire income from the trust under the provisions of section 166 or 167 of the Revenue Act of 1934.

In support of his first contention respondent relies upon Benjamin F. Wollman, 31 B. T. A. 37; William C. Rands, 34 B. T. A. 1107; Warren H. Corning, 36 B T. A. 301 (on appeal, C. C. A., 6th Cir.); and Estate of A. C. O'Laughlin, 38 B. T. A. 1120. Although there might be merit in the application of this principle to the case at bar, we prefer to base our decision on respondent’s alternative contention. The present case, in our opinion, is clearly within section 167.

Petitioner’s interest either as grantor or as trustee was certainly not adverse within the meaning of that section, William Clark Arkell, 38 B. T. A. 177, 181. Whether all or any part of the income should be accumulated, whether it was to be treated as corpus, whether the corpus should he invaded and, if so, to what extent, and whether such accumulation or invasion should be for her benefit rested entirely within her discretion. The trust instrument on this point is too clear for argument. The power to determine what was principal, to invade the corpus, and to accumulate is specifically stated to be discretionary in the trustees and at another point the instrument expressly vests in the petitioner as trustee the right to exercise any discretion which by the instrument would otherwise rest in the trustees. And her determinations are declared to be binding and conclusive on all concerned. True, the use of the corpus is to be for her “comfort”, but the term “comfort” is so much broader than “maintenance” or “support” that it has been held that the purchase of a residence for a beneficiary is within its scope. Lord v. Roberts, 84 N. H. 517; 158 Atl. 1, 4. On the present record there is no such “irreducible minimum” of the other beneficiaries’ interests as is referred to in Kaplan v. Commissioner, 68 Fed. (2d) 401 (C. C. A., 1st Cir.). Lewis Hunt Mills, 39 B. T. A. 798.

It is argued that the discretion to be exercised is that of petitioner as trustee. Whether such refinements of individuality were within the intention of Congress in enacting sections 166 and 167, it is not now necessary to decide. Cf. William Clark Arkell, supra. See Kaplan v. Commissioner, supra. Suffice it to say that even though the discretion be that of the grantor as trustee, we have found it none the less to be within the province of section 167. Fanny M. Dravo et al., Executors, 34 B. T. A. 190, 194; Charles Kaplan, 26 B. T. A. 379, 383; affirmed on this issue, Kaplan v. Commissioner, supra. Higgins v. White, 93 Fed. (2d) 357 (C. C. A., 1st Cir.), relied upon by the petitioner, was decided under a prior act. Under the 1934 Act, with which we are here concerned, it is not necessary that the grantor, as such, be involved in any way in the exercise of the discretion or power described. So long as these are vested in a person not adversely interested, the condition of the statute in its present form is fulfilled. Petitioner even as trustee did not have that adverse interest. Wiliam Clark Arkell, supra.

It is said further that the trust instrument does not confer the power upon this petitioner effectively to accumulate income and distribute principal for her own benefit. But the argument as analyzed is essentially circular in nature. It proceeds as follows: The power is not given petitioner because under the trust she must perform her duties as trustee. As trustee she owes a duty to the beneficiaries. This duty is to consult their interests as granted by the trust instrument when she exercises her discretion as trustee. The interests granted by the trust instrument to the beneficiaries include the right not to have the trust dissipated by distribution to the grantor. It will be seen that we' have thus arrived at the point from which we started. The circle is completely broken when avc say that the rights of the beneficiaries and the corresponding limitation on the petitioner were only tliose contained in the trust instrument. In practical and legal effect these were only that petitioner conform to the terms of the instrument. As we have seen, she could while conforming to those terms effectively exclude the other beneficiaries from participation whenever she should so determine.

We have repeatedly recognized that the purpose of the enactment of sections 166 and 167 was to prevent tax avoidance by the creation of revocable trusts and to include, as revocable, trusts which might by the exercise of even a disinterested discretion be held, accumulated, or terminated for the real benefit of the grantor. Warren E. Goming, supra. It would be idle to contend that the instrument before us does not present such a situation.

Reviewed by the Board.

Decision will be entered under Ride 50.

       SEC. 166. REVOCABLE TRUSTS.
      Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested—
      (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
      (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,
      then the income of such part of the trust shall be included in computing the net income of the grantor.
      SEC. 167. INCOME FOR BENEFIT OF GRANTOR.
      (a) Where any part of the income of a trust—
      (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or
      (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or
      (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (o), relating to the so-called “charitable contribution” deduction) ;
      then such part of the income of the trust shall be included in computing the net income of the grantor.
      (b) As used in this section, the term “in the discretion of the grantor” means “in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question.”

       It is assumed for the purposes of this decision that the “E. K. Childers Trust” was one trust with a single corpus, even though there were several beneficiaries. This assumption is made because throughout the stipulation of facts it is so treated and because petitioner does not contend otherwise. In fact petitioner states in her brief: “The body of the trust is to be kept as an entirety until final distribution, and to, that total fund are to be added before distribution all undistributed accumulations.”

       “In approaching the decision of the question before ns, it is to be borne in mind that the trustee is not a trustee of the power of revocation and owes no duty to the beneficiary to resist alteration or revocation of the trust. Of course he owes a duty to the beneficiary to protect the trust res, faithfully to administer it, and to distribute the income; but the very fact that he participates in the right of alteration or revocation negatives any fiduciary duty to the beneficiary to refrain from exercising the power.” Reinecke v. Smith, 289 U. S. 172.


author: Hill:

text:
    Frederick K. Barbour, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91943.
    Promulgated May 19, 1939.

      Oharles S. McVeigh, Esq., and Arthur A. Brody, C. P. A., for the petitioner.

      Franh 8. ScKlosser, Esq., for the respondent.
   OPINION.

Hill:

Income tax deficiencies of $48,989.82 and $66,115.45, respectively, for 1934 and 1935 are at issue in this proceeding. The petitioner alleges that the respondent erred (a) in his computation of the tax for 1934 by adding an item of $92,821.54 to gross income and disallowing interest deduction in the amount of $455, and (b) for 1935 by adding $131,455.61 to gross income, and disallowing interest and tax deduction claims totaling $4,368.80. In a stipulation of facts upon which this cause is submitted for our decision the petitioner conceded that respondent correctly denied the deduction claims as to both years; and, as to such items the respondent is hereby sustained. The only question left for our decision relates to the income items.

The parties hereto filed two stipulations of facts and a number of exhibits in our record, which we include in our findings by reference. For specific details, where material, we refer to these stipulations and exhibits.

The petitioner is an individual residing at Norfolk in the State of Connecticut. On October 29, 1931, the petitioner executed a deed of trust whereby he conveyed to the trustees a number of large groups of capital stock of various corporations. No power to revoke or change the terms of the trust, or exercise any control over the trust property or its management, was reserved by the petitioner. The trustees were given full control over the corpus of the trust and directed to pay its net income in monthly or quarterly installments as follows: Four-tenths of the net to petitioner’s wife, Helen Carrere Barbour; one-tenth to each of three minor children; and three-tenths to the mother of petitioner’s wife. The trust was to terminate upon (1) the death of the grantor, (2) the death of Helen Carrere Barbour, or (3) when the latter should arrive at the age of 34 years, 11 months and 12 days, it being understood that the latter was 33 years of age on January 19, 1931, which would make the trust terminate December 31, 1932. The trust instrument provided in effect that (1) should any beneficiary, other than petitioner’s wife, die during the life of the trust, the trust income payable to such deceased beneficiary would be payable to petitioner’s wife; (2) should the trust terminate because of the petitioner’s death, the trustees were directed to deliver the trust estate to such person or persons and in such shares, proportions, or amounts as petitioner shall designate in his will, or in default of will, to petitioner’s surviving children or their heirs; (3) should the trust terminate for any reason other than petitioner’s death, the estate wras made returnable to him absolutely.

By successive agreements made March 11, 1932, and December 15, 1934, the life of this trust was extended to December 31, 1940, provided it was not terminated prior thereto by reason of the death of either the grantor (petitioner) or his wife, Helen Carrere Barbour.

On November 20, 1934, the petitioner executed a second deed of trust to the same trustees, for the- same beneficiaries, and upon terms in all essentials identical with those set out in the trust just referred to above. The corpus of this trust (originally 830 shares of common stock of the United Shoe Machinery Corporation) was increased by petitioner on December 15, 1934, by an assignment to the trustees of other corporation securities. On the same date, by separate agreement, the life of this latter trust was extended and made to expire December 31, 1940, provided it is not terminated prior thereto by reason of the death of either the grantor or his wife, Helen Carrere Barbour. Since the execution of the trust, the trustees have administered them according to their respective terms and have paid all income derived from them to the beneficiaries named in them. There is no direction, requirement or restriction in the trust instruments as to how any beneficiary thereunder may or shall apply the income received, or as to how such income may or shall be applied for or on behalf of any such beneficiary. None of the trust income was used for the maintenance and support of petitioner’s wife or for the maintenance, support or education of his children, or to discharge any legal obligation of petitioner. None of the trust income was received by petitioner.

The respondent determined that the income from the trusts is taxable to petitioner for the years when earned. The addition made by respondent to petitioner’s gross income in each of the taxable years represents, as to each, year, the amounts earned by the trusts for the year concerned. Respondent contends that the trust incomes are taxable to petitioner under section 166 of the Revenue Act of 1934, which provides that where at any time the power to revest title to trust property in the grantor, under any one of several conditions enumerated, is vested in the grantor, the income of such part of the trust shall be included in computing the net income of the grantor.

Clearly there was no power vested in petitioner to revest in himself title to any part of the trust property during the terms of the trusts. The trusts were therefore irrevocable and section 166, supra, does not apply. Meredith Wood, 37 B. T. A. 1065; Phebe Warren McKean Downs, 36 B. T. A. 1129; William E. Boeing, 37 B. T. A. 178; Henry A. B. Dunning, 36 B. T. A. 1222. Cf. Mutual States v. First National Bank of Birmingham, 74 Fed. (2d) 360.

The following statement contained in the stipulation of the parties herein is the basis of an additional contention by respondent:

* * * In the ease of Helen O. Barbour the amount shown on Exhibit 12 as the initial payment on February 19th, 1935 of $5,208.00 to the Travelers Insurance Company represents a premium paid by Helen C. Barbour on an insurance policy on life of petitioner, owned by Helen C. Barbour.

Exhibit 12, above referred to, is a part of the stipulation of facts herein and shows that the above amount of $5,208 was paid out of income received by Helen C'arrere Barbour from the trusts herein. Respondent contends in his brief that this amount should be included in petitioner’s income in computing his taxable net income for 1935 under section 16T of the Revenue Act of 1934 as interpreted in Treasury Regulations 86, article 167 (b). We think it clear that subdivisions (a) (1) and (2) of section 167, supra, have no application to the facts in relation; to such insurance or to the facts as a whole in this proceeding. This leaves for consideration the question whether subdivision (a) (3) of that section applies herein. Section 167 (a) (3) is as follows:

(a) Where any part of the income of a trust—
(3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on¡ the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (o), relating to the so-called “charitable contributions” deduction);
then such part of the income of the trust shall be included in computing the net income of the grantor.

There is no provision in the trust instruments whereby discretion or authority is lodged in the grantor or any other person to apply any part of the trust income to the payment of premiums upon policies of insurance on the life of the grantor. Respondent concedes that under no provision of the trust instruments is petitioner’s wife required or directed to pay such premiums and that there is no evidence in the record to the effect that there was any agreement that she should so apply part of the income. There is no evidence in the record of any understanding or suggestion that the income should be so applied. Hoes such payment under the facts here make the amount thereof includable in petitioner’s income for tax purposes?

Under the stipulation of the parties the premium in question was paid by petitioner’s wife as the initial payment to the insurance company on a policy of insurance owned by her. She was not merely the beneficiary of the insurance; she was the owner of the insurance contract. In Burnet v. Wells, 289 U. S. 670, the Supreme Court said:

A policy of life insurance is a contract susceptible of ownership like any other chose in action. It “is not an assurance for a single year, with a privilege of renewal from year to year by paying the annual premium.” It is “an entire contract of assurance for life, subject to discontinuance and forfeiture for nonpayment of any of the stipulated premiums.” N. Y. Life Insurance Co. v. Statham, 93 U. S. 24, 30, 23 L. Ed. 789; Vance on Insurance, pp. 260, 262, and eases there cited. * * *

The contract of insurance on which Helen Carrere Barbour paid the premium in question was, it is true, a contract of insurance on the life of the grantor of the trusts, the petitioner herein, hut it was nevertheless her property. The petitioner was not the owner of the contract and had no property therein. The privilege of preserving the contract through the payment of premiums was that of Helen Oarrere Barbour and in order to prevent the lapsing of the contract it was her obligation to pay such premiums. hTo benefit accrued to petitioner in the application of a part of the income of the trusts to the payment of the premium on the life insurance contract.

In Burnet v. Wells, supra, the trusts involved provided that the income therefrom should be devoted to the payment of premiums on the grantor’s contracts of life insurance on his own life. In the case of Henry A. B. Dunning, supra, part of the income from the trusts was used by the beneficiary, grantor’s wife, at the suggestion of the grantor to pay premiums on life insurance policies on his life which he had assigned to her, with no reserved power to change the beneficiaries. The trust instruments in that case contained no provisions as to how the trust income should be used and there was no formal agreement between grantor and his wife that she should pay the premiums on the insurance policies assigned to her. Those policies of insurance were contracts between the grantor and the insurance companies and were owned by him notwithstanding the assignment of the benefits thereunder to grant or’s wife. The preservation of the contracts through the periodical payment of premiums was the privilege of the grantor and to prevent their lapsing the grantor had the obligation of either paying such premiums himself or providing for their payment by another. In that case the payment of the premiums by his wife discharged the grantor’s obligations. In the Dwming case, we held that the payment of premiums out of income from the trusts was a benefit to the grantor, since the payment of premiums was necessary to prevent a forfeiture of the insurance contracts, and that the grantor exercised an element of control over that part of the trust income used for such payment.

In the case at hand there was neither any element of control by petitioner over the income from the trusts npr benefit to him from its use.

The basis of validity upon which the provisions of section 167 (a) (3), supra, rest is that a grantor of a trust has not divested himself of the right to the beneficial use of the trust property in so far as the income therefrom is applied for his benefit, or may be so applied in the discretion of the grantor or of one not having an interest in the disposition of such income adverse to the grantor.

The theory of the opinions in the Wells and Dunning cases is that the trust income was applied to the payment of premiums on the grantor’s contracts of insurance on his own life to the benefit of the grantor in preserving his contracts and fulfilling his contract obligations. The facts in those cases support that theory and bring them within the scope of section 187 (a) (3), supra. That theory is not applicable to the facts in the present proceeding.

The Supreme Court in Burnet v. Wells, supra, recognized the distinction between trusts for the preservation of policies of insurance and those where the trust income may be expended by the beneficiaries without restraint and without the imposition of the grantor’s will upon the use of such income. The Court, however, refrained from expressing an opinion as to the principle applicable to the latter class of cases because that question was not before it. The facts in the present case bring it within such latter class. To tax petitioner on that part of the trust income applied to the payment of the insurance premium herein would be to tax one person upon the income of another or to measure the tax of one person not by his own income, but, in part, by the income of another. It is our opinion that it was not the intent of Congress to authorize such a tax in section 167 (a) (3), supra, and, moreover, that the authorization of such a tax is not within the power of Congress. Cf. Hoeper v. Tax Commission, 284 U. S. 206.

For the reasons assigned, we hold that the additions to petitioner’s gross income, for the taxable years, of any part of the trust income were erroneous.

The plea in estoppel which the petitioner alternatively urged against respondent, under facts which we have not seen fit to set forth in these findings, is without point or importance in view of our decision, and therefore will not be considered.

Beviewed by the Board.

Decision will be entered, wnder Bule 50.

Meluott and Disney concur only in the result.

Muedooic and Oppee,

concurring: No part of the “income of a trust” was “applied to the payment of premiums.” The trust income was paid to the wife and became hers, she applied her own funds to the payment of the premium even though it was money from the trust. Congress never intended to tax such an amount to the grantor. In George Washington, Sr., 36 B. T. A. 74, 81, we said:

There was no provision of this trust, nor was there any agreement, that any of the income of the trust should be used to pay premiums on life insurance covering the life of petitioner. Cf. Burnet v. Wells, supra. It is immaterial that Lina may have used some of the income from the trust to pay a part of the premiums.

The irrelevant and conceivably perilous ground adopted by the majority could thus have been avoided. Any distinction in the application of section 167 (a) (3) between policies taken out by tbe grantor and policies taken out by others on the grantor’s life is fallacious. Policies issued, for example, in the name of the trustees, for the protection of beneficiaries of the trust, the objects of the grantor’s concern, if paid for out of the trust income, would appear to be as clearly within the express terms and obvious intent of section 167 (a) (3) as those of the grantor himself. In Alfred F. Pillsbury, 19 B. T. A. 1229, some of the policies were issued, after the trust was established, “in favor of a trustee.” The trustee was the beneficiary and had all rights of ownership including surrender and loan privileges and all option benefits under the policy. We rejected the argument that the grantor, having no rights or benefits, was not chargeable with income of the trust applied to payment of the premiums, and held that such income was nevertheless taxable to him.

It is to be assumed that the majority opinion does not purport to lay down a contrary principle. Nevertheless, its language is so broad in this respect that we are unable to concur in the opinion as written.

Sternhagen, Leech, and Arnold agree with the above.


author: MuRdocb: :

text:
    Marjorie K. Campbell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 84639.
    Promulgated May 19, 1939.

      B. M. Andrews, Esq., John L. Kenefich, Esq., and Ernest J. Brown, Esq., for the petitioner.

      W. H. SohvjatJca, Esq., and E. E. Ufdihe, Esq., for the respondent.
   opinion-.

MuRdocb: :

The Commissioner determined a deficiency of $86,937.47 in the income tax of the petitioner for the calendar year 1933. The Board adopts as its findings of fact the stipulation filed by the parties* together with the respondent’s exhibit A.

Issue I.

The petitioner disposed of certain securities in the taxable year which she had received as a distribution from a trust set up by her father’s will. The Board is asked to determine her basis for gain or loss on those securities. She contends that the basis was the fair market value of the securities at the time they were distributed to her from the trust, whereas the Commissioner contends that her basis was the same as that of the trust, that is, cost to the trust of those purchased by the trust and fair market value at the date received by the trust of those which were transferred to the trust by the decedent’s executors.

Seymour H. Knox, the father of the petitioner, died on May 16, 1915. His will provided that the residuary estate should be divided into four parts and that one part, consisting of 20 percent of the whole, should be placed in trust for this petitioner. The will provided with respect to the portion placed in trust for this petitioner that it was so placed for the following uses and purposes:

To receive, hold, and, from time to time, invest and reinvest the same, and to collect the rents, income, issues and profits on the property from time to time constituting such trust fund and to pay over so much of the net income arising therefrom, as to my said trustees shall seem wise and proper toward the support, maintenance and education of my daughter, Mabjokid Knox, until she shall arrive at the age twenty-one (21) years, and to accumulate the balance of the income during her minority for her benefit, and to pay over the accumulated income to her when she shall arrive at the age of twenty-one (21) years, and thereafter to pay over the entire net income to my said daughter, Marjorie Knox, until she shall arrive at the age of twenty-eight (28) years, at which time, I give, devise and bequeath to my said daughter, Marjorie Knox, one-half (%) of the property then constituting said trust fund and I direct my said trustees to pay over the net income on the remaining one-half (%) of said trust fund until she shall arrive at the age of thirty-five (35) years, at which time I give, devise and bequeath the remaining part of said trust fund to my said daughter, Makjorie Knox, and to her heirs and assigns forever.
In the event that my said daughter, Marjorie Knox, shall die before reaching the age of thirty-five (35) years, I give, devise and bequeath any part or por-(.ion of said trust fund, which lias not then been paid over to her, or to the possession of which at the time of her death she was not entitled, unto the issue of said Marjorie Knox, if any, surviving her, to be divided among them, share and share alike. And in case there be no issue her surviving, then I give, devise and bequeath said trust fund unto her heirs.

It further provided that the trustees should have full power to sell, exchange, or dispose of any property in the trust fund, and expressed the wish of the testator that within five years after his death, or as soon thereafter as possible, 50 percent of the value of the trust fund should be invested in securities constituting legal investments for executors or trustees or in unencumbered real property.

The trust was formally set up on July 1, 1921, and the executors on that date transferred to the trustees the property as provided in the will. The petitioner attained the age of twenty-eight years on July 10,1928, and received on that date one-half of the property then constituting the trust fund. Certain of the securities which she received at that time were sold during 1933 and certain of the bonds matured and were paid during 1933. Some of the securities sold by her had been held by her father at the time of his death, others had been purchased by the executors, and still others had been purchased by the trustees. The Commissioner, in his determination of the deficiency, used as the basis for gain or loss for securities owned by the decedent at the time of his death, and for securities purchased by the executors, the fair market value thereof on July 1,1921, and, in the case of securities purchased by the trustees, the cost thereof to the trustees.

The petitioner correctly contends that the proper basis is the fair market value of the securities on July 10, 1928, when they were distributed to her pursuant to her father’s will. She acquired the property in question by the will of her father. It was personal property and was not acquired by specific bequest. Section 113 (a) (5) of the Revenue Act of 1932 provides that the basis for gain or loss on such property is the fair market value of the property at the time of the distribution to the taxpayer. Section 113 (a) (4) by its express terms does not apply. Neither does the general rule of (a) apply. The question presented here has been decided adversely to the contention of the respondent in a number of cases, several of which have been reviewed and affirmed by the appellate courts. Ralph W. Harbison, 26 B. T. A. 896; Mary Colgate, 27 B. T. A. 506 (both of the above were reversed on other grounds, 293 U. S. 144); Lillian McDonald Brinton, 28 B. T. A. 472; Harry G. Haskell, 30 B. T. A. 855; aff'd., 78 Fed. (2d) 869; James W. Arrott, Jr., 34 B. T. A. 133; Robert A. Taft, Trustee, 34 B. T. A. 603; aff'd., 101 Fed. (2d) 1007; Bessie C. Williamson, 34 B. T. A. 668 and 924; aff'd., 100 Fed. (2d) 735; Margaret E. B. Fleming, 36 B. T. A. 773; Richard Van Nest Gambrill, 38 B. T. A. 981; Van Nostrand v. United States, 18 Fed. Supp. 295; aff'd., 94 Fed. (2d) 410; Commissioner v. Libbey, 100 Fed. (2d) 458. The respondent has filed a lengthy and thoughtful brief, but he does not distinguish the present case from the cases just cited, he is unable to cite any authority which was not fully considered in those cases, and he makes no argument which might cause the Board to change its position. Therefore, we follow the cited cases and hold for the petitioner.

Issue II.

The petitioner had certain securities which she had purchased prior to July 10, 1928. She received from the trustees on July 10, 1928, some more of the same kind of shares. She sold some of the shares in 1933. She applied the “first in, first out” rule in making up her return for 1933 and regarded her individual purchases as the stock first purchased, used the basis applicable to those shares until it was exhausted, and then used as the basis for the remaining shares sold the fair market value of the shares on July 10, 1928. The Commissioner, in determining the deficiency, held that the first shares purchased were those received from the trustees since, as a matter of fact, they were purchased by the trustees prior to the date upon which the petitioner had purchased her similar shares.

The parties are in agreement that the first in, first out rule must be applied, since the shares which the petitioner sold can not be identified as those purchased at any particular time. They disagree, however, as to which stock was the “first in.” The rule appears in the regulations, not in the statute, and provides that “when shares of stock in a corporation are sold from lots purchased at different dates or at different prices and the identity of the lots can not be determined, the stock sold shall be charged against the earliest purchases of such stock.” Neither party has suggested any statutory provision which has any bearing upon the question. There are provisions in section 101(c) (8) defining capital assets which state that the period for which a taxpayer has held property shall include, under certain circumstances, the period during which it was held by a prior owner. None of those provisions, either by their purpose or by their express wording, would have any application to the stock in question. The rule should receive a practical and reasonable application. It means purchased by the particular taxpayer. A person should not be deemed to have purchased property prior to the time that he purchased it or acquired the title to it, unless there is some express statutory provision to that effect. The estate of the decedent and the trust are governed by the laws of the State of New York. The petitioner has pointed out that she did not acquire any vested interest in the trust property until it was distributed to her on July 10, 1928. Certainly she had not acquired the particular shares and she did not hold those shares prior to that date. The Commissioner has apparently proceeded on the theory that purchase by the trust was, for tax purposes, purchase by the petitioner. He has attributed to the petitioner the same basis that the trust would have had and he has attributed to the petitioner the period of holding that the trust had. He may have been consistent in that. The trust, however, was a separate taxable entity and must be kept separate from this petitioner in the absence of any statutory provision to the contrary. It had complete ownership of these shares up to the very moment of the distribution. We have held that the basis for gain or loss on the shares was not that of the trust, but was the fair market value of the shares at the time they were distributed by the trust to the petitioner. The second contention of the respondent must fall with the first. The date of “purchase” of those shares by the petitioner for the purpose of applying the first in, first out rule was July 10, 1928. Cf. Helvering v. San Joaqidn Fruit & Investment Co., 297 U. S. 496. Decision on this point is for the petitioner.

Issue III.

The petitioner purchased $25,000 face amount of the corporate stock of the city of New York on December 29, 1982. Such so-called stock is, for all present purposes, the equivalent of bonds. It was issued on May 1, 1907, will mature on May 1, 1957, and paid interest at the rate of 4y2 percent semiannually on May 1 and November 1. She purchased a like amount of somewhat similar stock on the same day, the difference being that the second lot were issued on November 1, 1908, and will mature on November 1, 1957. Each purchase consisted entirely of registered securities. She sold both lots of stock on December 22, 1933.

She purchased on the following day $10,000 face amount of the corporate stock of the city of New York issued May 1,1907, maturing, on May 1,1957, paying interest at the rate of 4% percent semiannually on May 1 and November 1. She concedes that this purchase was of substantially identical stock or securities and that the wash sales provision, of section 118 of the Revenue Act of 1932 applies.

She purchased on December 23, 1933, an additional $50,000 face amount of the corporate stock of the city of New York. The stock involved in this purchase was issued on March 1,1913. It matures on. March 1,1963. Interest at the rate of 4% percent thereon was payable on March 1 and September 1 of each year. These bonds were coupon bonds. The Commissioner, in determining the deficiency, held that they were substantially identical securities to those sold on the previous day and he disallowed the entire loss which the petitioner realized from the sales made on December 22.

The petitioner contends that there was no wash sale in regard to $40,000 face amount of the bonds which she sold on December 22 because the $50,000 face amount of bonds purchased on December 23 were not substantially identical stock or securities to any of those sold. She points to the following differences between the bonds:

1. A difference in the date of issuance — five years and ten months in the one case and four years and five months in the other.
2. A difference in date of maturity — five years and ten months in one case and five years and five months in the other.
3. A difference in the dates upon which interest was paid, from May and November to March and September.
4. The bonds sold were registered, while those purchased bore coupons.
5. A difference of 1% in the market price of the bonds on December 23.

She cites I. T. 2672, C. B. XII-1, p. 72, wherein the Treasury ruled that bonds having different dates of issue, different dates of interest payments, different dates of maturity, and different unit values, although otherwise similar, are not substantially identical securities within the meaning of section 118 of the Revenue Act of 1932. The Commissioner cites no authority which is directly in point or even closely analogous. His argument is not supported by the facts and is mostly irrelevant. The petitioner points out that in Marne Hanlin, 38 B. T. A. 811, the Board entered into a lengthy discussion of the meaning of “substantially identical stock or securities” and went so far as to hold that bonds having a difference of only two and one-half years in dates of maturity, but redeemable at the option of the obligor at any time after about six months, were substantially identical, but said:

If there was an unconditional positive difference of two and one-half years in the maturity or redeemability of the bonds a more difficult question as to the substantiality of the difference might arise.

The differences between the bonds here in question were greater than the differences between the bonds involved in the Hanlin decision, and that difference serves to distinguish the two cases. Section 118 does not apply and the petitioner is entitled to deduct the loss sustained from the sale of $40,000 face amount of the bonds.

Reviewed by the Board.

Decision will T>e entered, wn,der Rule 5Q„_


author: Murdock:

text:
    Walter M. Hort, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89033.
    Promulgated May 19, 1939.

      Edwin Hort, Esq., for the petitioner.

      F. S. Gettle, Esq., for the respondent.
   OPINION.

Murdock:

The parties are in agreement that the petitioner sustained a capital loss of $167,535.25 from the sale of the two properties to the corporation. The petitioner contends that the loss was sustained in the calendar year 1933, whereas the respondent contends that it was not sustained until 1934. The court said in Commissioner v. Union Pacific Railroad Co., 86 Fed. (2d) 637:

A closed transaction ior tax purposes results from a contract of sale which is absolute and unconditional on the part of the seller to deliver to the buyer a deed upon payment of the consideration and by which the purchaser secures immediate possession and exercises all the rights of ownership. The delivery of a deed may be postponed and payment of part of the purchase price may be deferred by installment payments; but for taxing purposes it is enough if the vendor obtains under the contract the unqualified right to recover the consideration.

The evidence in the present case shows that the sale actually took place in 1933. The corporation accepted the petitioner’s offer, deeds conveying title were delivered, the capital stock of the corporation was delivered to the petitioner as security for the payment of the purchase price, and the corporation took possession of the properties on December 28,1933. The petitioner was then committed absolutely to the transaction, and he sustained the loss at that time.

The respondent contends that the evidence fails to show delivery of the stock to the petitioner during the year 1933. The petitioner did not state specifically the exact time at which he received the stock. The contract provided that the stock was to be delivered at the time of the delivery of the deeds. The deeds were delivered on December 28,1933. The petitioner testified that he received the stock, and he further testified that the only modification of the contract was the extension of the time for payment of the first installment of the purchase price. The finding has therefore been made that he received the stock on December 28, 1933. But the result would be no different if he had not received the stock on that date. The payment of the first installment of the purchase price was not a condition precedent to the sale. The petitioner expressly provided when he extended the time for payment that it was not to affect the sale on December 28,1933. He unqualifiedly parted with his property in that year and received in exchange a right to receive the purchase price. The Commissioner erred in disallowing this item as a loss for 1933. Cf. Henry F. McGreery, 4 B. T. A. 967; A. H. Fell, 7 B. T. A. 263; Dee Furey Mott, 35 B. T. A. 195; C. B. Dashiell, 38 B. T. A. 313; aff'd., 100 Fed. (2d) 625; Huntington National Bank, Trustee, 32 B. T. A. 342; aff'd., 90 Fed. (2d) 876; Schoellkopf Aniline & Cheical Works, Inc. v. United States, 77 Ct. Cls. 529; Standard Lumber Co., 28 B. T. A. 352; Davidson & Case Lumber Co. v. Motter, 14 Fed. (2d) 137.

The remaining question is to determine the income tax consequences of the payment to the petitioner of $140,000 by the trust company in cancellation of the lease on the petitioner’s property. The petitioner contends that he sustained a loss on the cancellation of the lease. He claims his loss is the difference between the total rent payable under the lease for the unexpired term and the probable total rental which might be obtained for that period from other tenants. There are several reasons why the petitioner is not entitled to deduct that amoimt or any other as a loss in computing his income tax liability for the calendar year 1933. The alleged loss as described by the petitioner represents only the amount of earnings which he expected to obtain from the use of his property but which he probably will never receive. A mere reduction in the amount of income to be expected does not give rise to a deductible loss. Frank F. Nicola, 1 B. T. A. 487; John F. Blanchard, 17 B. T. A. 1271; H. I. Josey, 38 B. T. A. 497. Failure to prove the present value of the future payments under the lease at the close of 1933 and the then value for rental purposes of the first floor and basement for a similar period independent of the lease is of no consequence. Comparison of those two figures would show the then value of the lease or the probable loss of future earnings which the petitioner could expect as a result of the cancellation of the lease, but such a comparison would not show any figure important in the computation of any loss for income tax purposes.

The petitioner has failed to prove any figures from which a loss could be computed. A loss from the disposition of property is computed for income tax purposes by deducting the amount realized from the adjusted basis. The amount realized from the cancellation of the lease was $140,000. Basis is always cost or some substitute therefor authorized by the revenue act. Where, as here, property was acquired by bequest in 1928, the basis would be the fair market value of the property in 1928. The evidence does not show any separate basis for the lease in question in the hands of this petitioner or that the lease had any value in itself at the time that the property was acquired by this petitioner. Certainly there is no reason to believe that the lease had a value at that time which, after adjustment for exhaustion up to the close of 1983, would exceed $140,000, the amount realized. The land and building had a basis for gain or loss in his hands. But he did not dispose of that property, and he sustained no loss in regard to it. Even if there was a shrinkage in the value of that property, he would still not be entitled to any loss on that account. Thus, even if on some theory the petitioner might be entitled to a loss, nevertheless, he has failed to prove that in fact any loss was sustained.

This lease cost the petitioner nothing and we must assume, in accordance with the Commissioner’s determination, that it had no basis in his hands for gain or loss. The payment of $140,000 which he received was income. H. I. Josey, supra. Cf. Langwell Real Estate Corporation, 47 Fed. (2d) 841, reversing 17 B. T. A. 196.

The final argument of the petitioner is that if the $140,000 was income, it was capital gain rather than ordinary income. Capital gain is defined in section 101 (c) (1) of the Revenue Act of 1932 as a gain from the sale or exchange of capital assets. A sale or exchange involves a transfer of property in goods. Williston on Sales (2d Ed.), vol. 1, ch. 1. Here the lease was extinguished, not sold or exchanged. The lessee did not acquire any valuable asset but merely obtained a release from his liabilities under the lease. The Supreme Court has held recently in Fairbanks v. United States, 306 U. S. 436, that “payment and discharge of a bond is neither sale nor exchange within the normally accepted meaning of the words” and the gain derived from the redemption of bonds is not a capital gain. Likewise, it has been held that the settlement of a note for less than its face value is not a sale or exchange and does not give rise to a capital loss. Hale v. Helvering, 85 Fed. (2d) 819. Similar holdings have been made in regard to the voluntary surrender of a life insurance and annuity contract and in regard to liquidated damages for failure to perform a contract for the purchase of stock. Frank J. Cobbs, 39 B. T. A. 642; George A. Hellman, 33 B. T. A. 901; A. M. Johnson, 32 B. T. A. 156. Cf. James R. Stewart, 39 B. T. A. 87. Neither business men nor lawyers refer to the cancellation or forfeiture of a lease for a consideration as a sale or exchange. The $140,000 received by the petitioner is not capital gain but is taxable to the petitioner as ordinary income. H. I. Josey, supra. Decision will be entered wider Rule SO.