author: Aenold :

text:
    The Sutcliffe Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 94235.
    Promulgated May 1, 1940.

      Ben F. Washer, Esq., and W. Waller Grogan, O. P. A., for the petitioner.

      Stanley B. Pierson, Esq., and Philip M. Clark, Esq., for the respondent.
   OPINION.

Aenold :

Petitioner contends that the application for a loan executed February 25,1936, constituted a written agreement or contract, which prohibited the payment of dividends during the year 1936, and therefore it is entitled to the credit provided under the provisions of section 26 (c) (1) of the Kevenue Act of 1936.

Respondent contends that petitioner entered into a new agreement or contract with the bank on September 2, 1936, regarding the payment of dividends, which was in substitution for that entered into on February 25, 1936, and that the agreement or contract of September 2, 1936, fails to meet the requirements of the statute. He further contends that in any event the agreement or contract entered into on February 25, 1936, was subject to modification by mutual consent and it is, therefore, not one which falls within the terms of section 26 (c) (1) of said act.

Section 26 (c) (1) of the Revenue Act of 1936, so far as applicable, is as follows:

SEC. 26. CREDITS OE CORPORATIONS.
In the case of a corporation tlie following credits shall be allowed to the extent provided in the various sections imposing tax—
* * * * * sis *
(c) Contracts Restricting Payment oe Dividends.—
(1) Prohibition on payment oe dividends. — An. amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. * * *

The terms and conditions of the instrument of February 25, 1936, were binding on petitioner until its obligation to the bank was satisfied, unless it was abrogated or supplemented by the September 2, 1936, agreement to the extent it was rendered ineffective as an agreement or contract prohibiting or restricting the payment of dividends during the taxable year.

The letter or contract of September 2,1936, refers in express terms to the renewal of the company’s note for $30,000, balance due on the original obligation, and expresses the desire to extend the agreement made February 25, 1936. As the terms and conditions of that instrument were binding on petitioner until all the obligations to the bank were discharged, no extension or renewal was necessary. The obligation to the bank was not discharged until 1938.- While the letter or contract of September 2, 1936, modified the agreement of February 25,1936, by the removal of the prohibition or restriction against the payment of preferred dividends, in all other respects it was a confirmation of that agreement and did not otherwise abrogate or supplant its terms and conditions. The giving of the note of September 2, 1936, can not be considered as the discharge of the existing obligation and the creation of a Pew obligation, in the absence of evidence that it was so intended. Schlemmer v. United States, 94 Fed. (2d) 77; Chapman et al. v. Critchet, 95 S. W. (2d) 360; Weger v. Robinson Nash Motor Co., 340 Ill. 81; 172 N. E. 7. The evidence is to the contrary. The change in form of the September 2, 1936, note is immaterial. That form was used for the reason the bank no longer cared for the participation of the Federal Reserve Bank in the loan. All arrangements were made and transactions had with the bank. The application for the loan was directed to the bank, the original note and renewals were payable to the bank, and the money was furnished by the bank. Participation in the loan by the Federal Reserve Bank was a matter between the bank and the Federal Reserve Bank, with which petitioner was not concerned.

Petitioner produced two executives of the bank who were personally familiar with the circumstances under which the loan was made. Each of them testified in detail about the circumstances under which the bank made the loan, and that the bank preferred short term maturities because of the adverse feeling of commercial banks generally for long term obligations, and because, in case of a breach of any of the conditions under which the loan was made, a short term note afforded the bank an opportunity to demand payment. Both executives testified that the bank contemplated a loan for the purpose of providing, the petitioner with working capital for a period of years, and that the conditions, including restriction on the payment of dividends and other restrictions, would continue throughout the term of the loan. Each testified that the bank emphasized these restrictions in the various conferences held with officials of the petitioner, and we find their testimony very persuasive.

As to the respondent’s contention that, since the agreement of February 25, 1936, was subject to modification by mutual consent, it is not one which falls within the terms of section 26 (c) (1) of the act, it may be said that, if this were so, no contract could be effective to prohibit or restrict the payment of dividends, as the right to modify by mutual agreement is inherent in all contracts. The bank’s consent to the removal of the restriction, -whereby for a relatively small amount of cash a large amount of accumulated dividends could be discharged, enhanced the bank’s prospects of collection. For this reason the bank consented to the removal of the restriction to the extent provided by the letter of September 2, 1936. The removal of the restriction went no further than to permit settlement of accumulated dividends on preferred stock and payment of subsequent preferred dividends at a lower rate. Beyond this petitioner was restricted by the agreement of February 25, 1936. It can not be assumed that the bank would consent to any further modification and permit' earnings to be distributed to common stockholders so long as petitioher was indebted to it. As petitioner was prohibited or restricted from payment of dividends by written contract executed prior to May 1, 1936, it follows that it is entitled to credit under section 26 (c) (1) of the Revenue Act of 1936.

Reviewed by the Board.

Decision will be entered under Ride 50.


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    Dunlevy Milbank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93050.
    Promulgated May 1, 1940.

      Clarence Gastimore, Esq., and Charles W. Crawford, Esq., for the petitioner.

      W. FranJc Gibbs, Esq., for the respondent.
   OPINION.

Van Fossan:

The single issue to be determined is whether or not the income of three trusts created by petitioner is taxable to petitioner for the year 1934. Petitioner contends that all three trusts were valid and enforceable under New York law and that there was no such retention of the incidents of ownership or control as would cause the income of the trusts to be taxable to the petitioner. Respondent argues that the three trusts should be considered in two separate groups — (1) the Milbank trust, and (2) the Palmer and Dunlevy trusts. He concedes that the Milbank trust is a valid and enforceable trust, but asserts that the Palmer and Dunlevy trusts were without substance and, hence, not enforceable trusts.

Respondent seeks to tax the income of all three trusts to petitioner under section 166 of the Revenue Act of 1934. In addition, he urges that the income of the Palmer and Dunlevy trusts was substantially that of petitioner. This latter contention raises the question of the applicability of section 22 (a) of the Revenue Act of 1934.

Respondent also concedes upon brief that the taxability of the income from the Milbank trust falls within the purview of our decisions in Henry A. B. Dunning, 36 B. T. A. 1222; Meredith Wood, 37 B. T. A. 1065; affirmed per curiam, 104 Fed. (2d) 1013 (C. C. A. 2d Cir.); and Phebe Warren McKean Downs, 36 B. T. A. 1129. The Supreme Court has recently affirmed our position in those cases in Helvering v. Wood, 309 U. S. 344. On that authority we hold that section 166 of the Revenue Act of 1934 does not apply and that the income of the Milbank trust is not taxable to petitioner for the year 1934.

As to the Palmer and Dunlevy trusts, respondent urges that we look through form to substance and find that these trusts were not valid for income tax purposes. Respondent further maintains that the validity of the trusts under local law is not sufficient to prevent taxation of the income from the trusts to the petitioner.

The Supreme Court, in Lyeth, v. Hoey, 305 U. S. 188, said :

* * * Congress establishes its own criteria and the state law may control only when the Federal taxing act by express language or necessary implication makes its operation dependent upon state law.

Applying this statement of the law to the taxing act, there is a necessary implication that what is or is not a trust should be determined by application of the local law. Whether or not the donor of such a trust is subject to taxation on the income thereof under Federal law is another question. See Blair v. Commissioner, 300 U. S. 5.

All three trusts were set up in the State of New York. Trusts created for a short term of years but limited to the lives of two persons have been held valid by the New York courts. Montignani v. Blade, 145 N. Y. 111; In re Andrews’ Estate, 232 N. Y. S. 198. The Palmer and Dunlevy trusts were limited upon the lives of the respective beneficiaries. Morebver, all the elements of a true trust were present. There was a declaration of trust, an acceptance of the trust by the trustee, and a transfer of the trust corpus to the name of the trustee. The trusts were binding upon petitioner and enforceable by the beneficiaries.

To support his contention that we should look through form to substance and hold the income of the two trusts taxable to petitioner, respondent relies on the case of William C. Rands, 34 B. T. A. 1107, where we held that a settlor who named himself trustee with broad powers of control over a short term trust was taxable on the income from the trust. In that case, however, the evidence indicated that the settlor did not intend to create a true trust or, if he did so intend, he merely established an obligation to hold the income in trust for the beneficiaries after it was derived by him from the securities.

The facts of the present case must be distinguished from those of the Bands decision. Here there is every indication that the petitioner intended to create true trusts. The beneficiaries needed financial aid. The trusts were the petitioner’s solution for the problem.

Since the date of hearing of this proceeding the Supreme Court has handed down its decision in Helvering v. Clifford, 309 U. S. 331. The Court there held that the grantor of a short term trust in favor of his wife retained such control as to remain substantially the owner of the corpus and the income was taxable to him under section 22 (a). The Court stated:

* * * the short duration of the trust, the fact that the wife was the beneficiary, and the retention of control over the corpus by respondent all lead irresistibly to the conclusion that respondent continued to be the owner for purposes of section 22 (a).

That case differed from the one at bar with respect to the possible or exercised control, the relationship of the beneficiaries, and the identity of the trustee. In the Clifford case the grantor was trustee, having extensive powers with regard to the trust corpus, and the beneficiary was his wife. In this proceeding petitioner was not trustee, he retained or exercised no control over the trust principal during the period of the trusts, and the beneficiaries were not members of his immediate family circle. The fact that these beneficiaries were relatives of petitioner is not sufficient to bring the trusts within the doctrine of the Clifford case.

Here the dividend checks which constituted the income of the trusts were made out in the names of the beneficiaries. Moreover, the Consolidated Gas Co. of New York, the stock of which formed the corpus of the Palmer and Dunlevy trusts, was notified of the trusts. Permanent dividend orders were executed requiring that the company pay the dividends to the beneficiaries in care of Mrs. Milbank.

Respondent contends that the formation of the Palmer and Dun-levy trusts amounted to nothing more than an assignment of the dividends from the preferred stock of the Consolidated Gas Co. We can not agree with this contention. The securities upon which the dividends were declared were transferred to the name of Katherine F. Milbank and transfer stamps were paid thereon. Moreover, as owners of the beneficial interests, the beneficiaries were entitled to the income and, in turn, paid a tax on the income.

There was no legal obligation of the petitioner to support his sister-in-law or uncle. For this reason the principles laid down by the Supreme Court in Burnet v. Wells, 289 U. S. 670, and Douglas v. Willcuts, 296 U. S. 1, are not applicable.

The trust instruments made no provision for distribution to or accumulation for the benefit of the grantor, and none of the income was used for such distribution or accumulation.

For the reasons mentioned above we hold that the income of the Palmer and Dunlevy trusts is not taxable to petitioner for the year 1984.

Decision will he entered for the petitioner.


author: Disney:

text:
    Edward H. Heller, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 94794, 94795.
    Promulgated May 1, 1940.

      Sidney M. Ehrman, Esq., and Lloyd W. Dinkelspiel, Esq., for the petitioner.

      Harry B. Horrow, Esq., and H. Q. Potthof, Esq., for the respondent.
   OPINION.

Disney:

Did respondent err in including in petitioner’s income the amounts of income earned in the three accounts set up for his children? The petitioner contends that the accounts contained only gifts, from him and other relatives of the children; respondent, that no present gifts were made or completed, but, in the alternative, that if made they were by way of trust, leaving the petitioner liable for the income thereof. Petitioner denies that any trust was intended or made, with the exception of the $10,000 in cash and bonds, contributed by his mother, and $1,000 by petitioner, to Emanuel on August 17, 1926, by declaration of trust then set up.

Our first question is whether petitioner with others made present gifts to the children. Respondent urges perhaps most particularly the inability of the children under California law to be donees when they had no legal guardian, and the reservation of management by the petitioner.

The evidence here is uncontradicted that there was a custom in petitioner’s family to make gifts upon such occasions as births and birthdays and other occasions. This is demonstrated by the gifts to each child at birth and by the fact that the contributions were by the grandmother and great-aunts as well as the father and mother of the children. A birthday present is not ordinarily, we think, thought of as other than a present gift. No reservation or provision as to future enjoyment appears in the contributions from any of the female relatives. A mere provision for future enjoyment would, of course, not convert into a future interest if title vested immediately.

We can not agree with respondent’s view that a minor in California, without legal guardian, can not be a donee. The cases cited merely demonstrate that a legal guardian is necessary for a minor’s property to be disposed of, but not that the minor can not acquire by gift without a guardian. The latter does not follow from the former principle, which is of course sound. Certainly the general law is that a child, without a guardian, can be a donee. “The rule may be broadly stated that any person has the capacity to accept a gift where it is manifestly for his benefit.” 28 C. J. 627, citing McDonogh v. Murdock, 15 How. 367. There is a presumption of validity of a gift to a child. Towson v. Moore, 173 U. S. 17; Jenkins v. Pye, 12 Pet. 241. “* * * such a deed or gift is natural and reasonable, and is sustained by the presumption that it was inspired by parental affection and devotion.” Sawyer v. White, 122 Fed. 223. In Haynes v. Gwin, 209 S. W. 67, a gift to a child by the father the natural but not legal guardian, was upheld, his possession as natural guardian being held to be that of the infant. The law makes a clear distinction between delivery necessary between nonrelatives and between those living together in the same family. We decline to apply the same rule to a gift to a minor child from his father. Acceptance by a minor is presumed. McKinnon v. First National Bank, 82 So. 748 (wherein a father, not legal guardian, deposited moneys in a bank to the credit of his minor children); Emil Frank, 27 B. T. A. 1158 (involving brokerage accounts set up and managed by a father for minor children, and citing cases as to a father’s right as natural guardian to exercise dominion over a gift to his minor child); Donner v. Palmer, 31 Cal. 500; De Levillain v. Evans, 39 Cal. 120; Turner v. Turner, 173 Cal. 782; 161 Pac. 980. We hold that petitioner’s minor children were competent donees, though without legal guardians.

We think, too, that the requirements of delivery to a minor child were fulfilled. “While the mere fact that the donee is the child of the donor does not dispense with the necessity of a delivery in order to constitute a valid gift, the formal ceremony of a delivery is not absolutely necessary, but it is sufficient if it appear that the donor intended an actual gift at the time and evidenced his intention by some act which may be fairly construed into a delivery.” 46 C. J. 1320. Practically the same language appears in Allen Co. v. Edwards, 154 Pac. 1066, a California case. In fact, it appears that as to a considerable number of the contributions to the custodian accounts the delivery was sufficient even in the case of an adult, for certificates for the stocks involved appear often in the names of the different children. Placing stock in the name of the intended donee constitutes without more sufficient delivery, even though the donor actually retains the .certificates in his possession. Kathryn Lammerding, 40 B. T. A. 589, and cases there cited and discussed, including D. D. Malernee, 31 B. T. A. 662, and Marshall v. Commissioner, 57 Fed. (2d) 633. Herein, to the extent of such stocks at least, there was sufficient delivery. ■

As to others not appearing in the name of the children, and cash and other property, we believe petitioner retained only such management and control as is reasonably consistent with the position and duty of a father as natural guardian to serve the interests of his children. There is no retention of any management or control by any of the contributors except the petitioner. As to the grandmother, mother and great-aunts, there is no indication at all of incompleteness of gift by reason of retention of control. [Respondent on brief admits as to such funds, “Clearly with respect to the income from these funds the petitioner would not be taxable,” and relies only upon the failure to segregate same from those contributed by the petitioner and presumption of correctness of his determination of deficiency; and petitioner does not ask segregation but argues merely that the contributions by the other relatives, in the same general manner as his own, indicate that all were gifts. Considering respondent’s statement above quoted, and the evidence as to intention of all parties in making the contributions to the accounts, we think petitioner’s contention is sound and should be sustained, as to all sums or properties deposited. Had petitioner died and a guardian been appointed for the children, such guardian, in our opinion, clearly could have held the funds and properties in the accounts, against the executor's of petitioner’s estate had such executors made claim therefor.

Cases such as Benjamin F. Wollman, 31 B. T. A. 37, involving a short term trust and retention of “the substance of ownership” and control are not helpful, for such retention of control was inconsistent with passage of title, whereas here it is wholly consistent for a father to look after property for minor children. William C. Rands, 34 B. T. A. 1107, rests primarily upon the fact that only a right to dividends, and not corpus, was transferred. Giselman v. Starr, 40 Pac. 8 (Cal.), involved only a declaration, and no overt act to indicate gift, as the court held. Lefrooth v. Prentice, 259 Pac. 947 (Cal.), cited by respondent, involved attempted fraud upon creditors, and the proceeds of securities sold were used by the father for his own use. The record here negatives completely such an element, for the petitioner neither used for his own use, nor for the maintenance, education, or support of the child any of the funds, and never borrowed from the accounts. It is true that by error some items were placed in the petitioner’s name, but we think the record satisfactorily shows them to be error, and not intentional reservation for personal use by the petitioner.

Had the father, as the respondent argues, merely intended in the future to make gifts, his handling of these accounts was unnecessarily cumbrous, for, without the embarrassment occasioned when transfers were refused because of use of the expression “trustee”, he could have handled the funds in his own individual name and later have made the gifts. Instead, he went to considerable trouble to segregate what he had bestowed upon the children, and treated it just as he treated what were clearly gifts from his mother and aunts. He testified positively as to his intent, and, though not conclusive, the affirmative and uncontradicted assertion of intent to make gifts can not but carry weight. His actions are consistent therewith. The result might be different if systematic, or even occasional, personal use of the funds or securities by petitioner appeared; but we here see a consistent segregation and preservation of the funds for the use of the children, and, except by error, only such control as a father would in any event exercise over a child’s property, and similar to the control which in Tracy v. Commissioner, 70 Fed. (2d) 93, the court held to be not unusual between husband and wife. Such management is even more logically approved between father and minor children, particularly when starting from the date of birth. In addition, some of the contributions were accompanied by written statements, and written statements have often been held to obviate necessity for manual delivery. Petitioner, clearly, by using the descriptive term “trustee” and by separating the funds from his own, demonstrated intent to segregate the funds for the child particularly named in the custodian account. By such action and designation we think petitioner well evidenced a gift, when, as above seen, delivery to and acceptance by a minor child are not to be viewed in the same light as in case of an adult. In Reginald Fincke, 39 B. T. A. 510, a father opened a brokerage account for a minor daughter, managed and controlled it, and never converted any part of the funds for his personal use — all in a manner similar to the actions of the petitioner here. We held that the father was not taxable upon the profits from the account. After reviewing all of the evidence, we conclude and hold that petitioner made present gifts to each of his children.

The next question for determination is involved in respondent’s alternative proposition that if there were gifts they were by way of trust and that the income thereof was taxable to the petitioner under sections 166 and 167 of the Revenue Act of 1934. Respondent contends particularly that they are revocable trusts under section 166 because of section 2280, Civil Code of California, which makes voluntary trusts revocable in the absence of an express provision for irrevocability. The section is quoted by respondent, as follows:

2280. Revocation of trusts. Unless expressly made irrevocable by the instrument creating tbe trust, every voluntary trust shall be revocable by the trustor by writing filed with the trustee. When a voluntary trust is revoked by the trustor, the trustee shall transfer to the trustor its full title to the trust estate. Trusts created prior to the date when this act shall become a law shall not be affected thereby.

However, the last sentence in the statute, on the facts herein, eliminates the above statute from consideration, for the trusts, if any, for each of the three children were “created prior to the date when this act shall become a law.” If trusts were set up at all, it was when the accounts were opened. The account for Emanuel was set up in 1926, that for Edward in 1929, that for Elizabeth on August 3, 1931. Section 2280, supra, was approved June 15,1931, and therefore necessarily became effective after August 3, 1931, since under the Constitution of California, article IV, section 1, a legislative act does not go into effect until 90 days after adjournment of the legislature enacting it, and approval must be not later than 30 days after adjournment. Section 2280, prior to amendment by California Stats., 1931, p. 1955, read:

A trust cannot be revoked by the trustor after its acceptance, actual or presumed, by the trustee and beneficiaries, except by the consent of all the beneficiaries, unless the declaration of trust reserves a power of revocation to the trustor, and in that case the power must be strictly pursued.

The general law on the subject has been stated as follows:

Except as is otherwise provided by statute, although a trust is a voluntary one, in the absence of a power of revocation reserved, provided it is executed, it is irrevocable without the consent of the beneficiaries, or of all persons beneficially interested, as provided by statute. [65 O. J. 341.]

The above California statute, prior to amendment, has been construed to preclude revocation, except with the consent of the beneficiaries, of a trust not containing reservation of power of revocation. Roberts v. Taylor, 300 Fed. 257. Respondent suggests that the deposit by petitioner of moneys in bank constitutes a revocable trust. He and others deposited moneys which were invested in stocks and securities. “One holding corporate stock in trust for others could not, because of Civ. Code § 2280, by his own actions and at his own will, divest owners of such property of their interest therein.” Tillotson v. Findley, 87 Cal. App. 654; 262 Pac. 438. If we assume, arguendo, that a trust was created, plainly it was irrevocable. That the father might have secured possession of the trust res does not show revocability. Many trustor-trustees have no doubt violated trusts, which were none the less irrevocable.

It thus appears that, since acceptance by minors is presumed and none of the accounts reserves a power of revocation to the trustor, the accounts, even if they constituted trusts, were not revocable under the California statute then in force, and within the intendment of section 166 of the Eevenue Act of 1934.

Aside from the effect of the above statute, however, we think no trusts were in fact created. Section 2221 of the Civil Code of California, provides:

Voluntary trust, hoto created as to trustor. Subject to the provisions of section eight hundred and fifty-two, a voluntary trust is created, as to the trustor and beneficiary, by any words or acts of the trustor, indicating with reasonable certainty:
1. An intention on the part of the trustor to create a trust, and,
2. The subject, purpose and beneficiary of the trust.

As to the first subsection of the statute, petitioner categorically denied intent to create a trust. Such denial, of course, is only evidential, yet his letters on March 14 and 15, 1933, to the Farmers & Merchants National Bank and Anglo-California National Bank, respectively, stating that no trust agreement had been set up for Emanuel or Edward, indicate that long prior to his testimony in this proceeding he was taking the same view.

Nor under the second subdivision can we find the petitioner, “by any words or acts of the trustor indicating with reasonable certainty: * * * The subject, purpose and beneficiary of the trust.” The only words are the expression “trustee” used as to the accounts — contradicted as above set forth. The acts of petitioner are consistent with those of a father who is desirous of preserving his children’s property. The beneficiaries of the trusts, in case of the death of the children or any of them, are nowhere indicated. No term is set. We think the reasonable certainty required is absent. McMonagle v. McGlinn, 85 Fed. 88, construing section 2221 above, and pointing out failure to prove the alleged trust. The word trustee alone is only evidential. Morsman v. Commissioner, 90 Fed. (2d) 18. Petitioner did not always use it, but sometimes referred to himself as guardian, although in fact he was not legal guardian, and explained the term as merely used for the purpose of distinguishing the accounts from his own. The necessity for some designation to distinguish from petitioner’s personal accounts is plain. Petitioner’s actions are consistent with his denial of trusts at the hearing and in 1933, and with the acts of a father attending to the affairs of his minor children. We think that trusts, except the one set up for Emanuel, have been negatived.

Eespondent also suggests that the petitioner may also be deemed taxable under section 167 of the Eevenue Act of 1934, on the ground of control of trust income and power therefore to use it for the support and maintenance of his children. He cites J. S. Pyeatt, 39 B. T. A. 774. There the trustor was not trustee as here, if we assume a trust. The present situation is parallel to that in Martin F. Tiernan., Trustee, 37 B. T. A. 1048, where the trustor-father was also trustee, and we held, following E. E. Black, 36 B. T. A. 346, that section 167 did not apply, where, though the trustee might in his discretion apply income to discharge his duty to support, educate, and maintain his children, the income was not so used— precisely as is the case herein. The situation and conclusion were essentially the same in Alfred C. Berolzheimer, 40 B. T. A. 645, where the father-trustor-trustee was held not taxable on income not distributed for or used for education, maintenance, and support. We hold that petitioner is not taxable upon the income of the accounts under section 167 of the Eevenue Act of 1934.

By memorandum the respondent suggests the applicability of Helvering v. Clifford, 309 U. S. 331. That case was based squarely upon section 22 (a) of the Eevenue Act of 1934, as is emphasized in Helvering v. Wood, 309 U. S. 344, wherein the Commissioner was not allowed to rely upon section 22 (a) after relying upon section 166. Aside from the fact that section 22 (a) has herein not been earlier relied upon, we think it plain that the ratio decidendi in the Clifford case does not apply here, for the reasons above outlined, in effect that the father’s actions were consistent with the position and duty of a father to preserve the property of his child, donated by others as well as himself, and do not indicate retention of the benefits of ownership in himself. He could not retain ownership of that which was contributed by others. He treated what he had contributed in the same manner, all, we think, in a manner indicating recognition of the rights of the children, rather than claim of ownership in himself.

The trust as to Emanuel was in writing, entered into in 1929, revocable in the taxable year by the grantors by joint written instrument, or by the survivor. The mother of petitioner had no substantial interest adverse to him in the disposition of corpus or income. It is plain therefore that it comes within the ambit of section 166 of the Eevenue Act of 1934, and that petitioner is taxable upon the income of at least that part of the trust corpus contributed by him. Questions to be answered are therefore, whether the trust extended only to the original $11,000 corpus, or also to the deposits later made in account No. 3443, in which the proceeds of the $11,000 were placed, and whether, if the trust extends to such later deposits, petitioner is taxable upon the income of amounts not contributed by him. The declaration of trust specifically covers and describes $5,000 par value of bonds and $5,000 in cash, all contributed by petitioner’s mother, and $1,000 contributed by petitioner, after which it provides that the trustee:

* * * shall manage and control all of said property herein before mentioned and specified and any and all property, real or personal, which may hereafter from time to time he declared to be subject to the conditions of this agreement and be delivered by the Trustors or either of them to the Trustee or to the Substitute Trustee, and declared to be subject to the terms and, conditions of this agreement, and said Trustee, * * * may sell, exchange or otherwise dispose of any or all of said property * * * and shall invest and reinvest said trust property or the proceeds of the sale or other disposition of such property * * *. [Italics supplied.]

It is apparent from the above language that, unless both delivered to the trustee and declared subject to the conditions of the declaration of trust, later deposits do not become a part of the trust estate. Additional deposits were made in account No. 3443, but that account is not provided for by the declaration of trust. The account is in evidence, showing that the later deposits were not declared subject to the original trust agreement. Therefore the trust must be considered limited to the original $11,000 unless the later deposits in account No. 3443 become subject to the trust agreement, its terms and conditions, on the doctrine of commingling, as argued by the respondent. All moneys, securities, and property in each account were commingled, but the bank kept a ledger of all receipts and disbursements and a record of securities received, purchased, and sold in each account. Considering the specific character of the provision above quoted as to necessity for later additions being declared subject to the conditions of the agreement, the doctrine of commingling should be sparingly applied, for it is obvious that there was intent to limit the trust to the original allowance named and “specified” in the trust instrument, in the absence of express declaration. Delivery is particularly made insufficient as a reason for inclusion in the trust. Any addition must be delivered and declared subject to the trust. The expression as to declaration is repeated, apparently for emphasis. The parties have by stipulation agreed that the original $11,000 bonds and cash produced income of not more than $711 in 1934 and $1,185.77 in 1935. It thus appears that the original $11,000 was not so commingled with later deposits in account No. 3443 as to make the income ^indistinguishable or indivisible from the income of the later deposits.

We are here interested only in the income. The equitable doctrine of commingling protects a cestui que trust’s right of recovery, and to the extent necessary treats the entire commingled property as subject to the trust, but this does not necessarily answer the question of fact here at hand, namely, whether income from the entire commingled funds was a part of the trust, so that the entire income is taxable to a trustee under a declaration as to a part of the corpus. Therefore, considering the definite nature of the provision as to the necessity of additions being specifically made a part of the trust by declaration, the absence of such declaration, the fact of divisibility, and our conclusion that accounts similar to account No. 3443, for the other two children, did not establish trusts, we conclude and hold that the express written trust extended only to the $11,000 in bonds and cash and the proceeds thereof.

Of what effect is the fact that each grantor contributed separate amounts? Petitioner urges that under W. L. Honnold, 30 B. T. A. 774, neither was a grantor as to the amount contributed by the other, so that petitioner was not taxable upon the income from the $10,000 contributed by his mother. Respondent upon brief says that as to the funds contributed to the agency accounts by others than petitioner, “Clearly, with respect to the income from these funds the petitioner would not be taxable”, but points out that there has been no segregation, that respondent’s determination is presumed to be correct, and therefore the entire income must be deemed taxable to the petitioner. The same admission and contention is applicable to the income from the $11,000 under the written declaration. We think that, under the wording of section 166, the petitioner’s cotrustor had no interest in the $1,000 contributed by him, nor he in the $10,000 contributed by her. The statute speaks of power to revest “any part of the corpus”, in the grantor, apparently not intending to make the corpus an indivisible whole, even though contributed by different trustors. The interest of each grantor in having the whole fund devoted to the purpose of the trust is not such an interest as to make each taxable upon the income of the whole. By the terms of the trust instrument in case of the child’s death any part of the trust estate not already vested in him shall go to his issue; if none, then according to his will; and if none, then to his heirs at law, so that no part of the income can be said to be held or accumulated for future distribution to the grantors under section 167.

We hold that the grandmother had no substantial adverse interest in the disposition of the $1,000 and therefore that the trust to that extent was revocable by the petitioner, and that he is taxable upon the income thereof, but not upon the income from the $10,000. Though petitioner does not ask segregation, he nevertheless argues. and, as above seen, respondent inferentially admits, that (except for the commingling of funds) he is not taxable upon his mother’s contribution. For the reasons above discussed, we think that the failure to segregate is not here decisive. The maximum income of the $11,000 cash and securities or proceeds thereof is stipulated as $711 for 1984 and $1,185.77 for 1935. We hold that petitioner is taxable upon one-eleventh of these amounts.

Decision will he entered umder Bule 50.


author: Ttson:

text:
    Kerwin H. Fulton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91086.
    Promulgated May 2, 1940.

      Fred B. Angevine, Esq., for the petitioner.

      George B. Sherrijf, Esq., for the respondent.
   OPINION.

Ttson:

The sole issue presented for decision is whether the $28,427.69 expended by the petitioner during the taxable year for attorney fees and bond premiums in his suit to vacate and set aside the settlement agreement of March 18,1931, constituted such ordinary and necessary business expenses of petitioner as are deductible under the provisions of section 23 (a) of the Revenue Act of 1934.

The respondent contends that the disbursement in question constituted a capital expenditure and that, even if it was not a capital expenditure, the disbursement was not a deductible ordinary and necessary business expense.

Petitioner urges that the expenditures were ordinary and necessary expenses of his business, in that they were incurred and paid in connection with the settlement agreement made on March 18, 1931, to protect petitioner from unfavorable publicity which at the time would have impaired the confidence of his associates, with some of whom he was negotiating for the organization of a sales company, and would probably have prevented such organization, as well as damaged the business of the General Outdoor Advertising Co., of which he was president at the time the agreement was executed. Petitioner, on brief, asserts that he does not contend that the expenses involved were those of his carrying on the business of cotrustee.

The settlement agreement was entered into by petitioner while he was engaged in the business of acting as president of the General Outdoor Advertising Co. and also in the business of organizing Outdoor Advertising, Inc. Although the agreement was entered into by petitioner while he was so engaged, it was entered into by him for the two purposes of protecting those businesses and himself from the damaging effect of the publicity threatened by the beneficiaries of the trust through the introduction in their suit against him of evidence of the disparaging nature as heretofore set out.

We do not think that the purposes of the petitioner in executing the settlement agreement were the direct and proximate cause of the expenses here incurred and paid. Regardless of these purposes, the fact remains that the effect of the settlement agreement was to fix a definite personal liability in a definite amount upon petitioner. In our opinion, the direct and proximate cause of the expenses here involved was the effort of petitioner, through his suit to vacate and set aside the settlement agreement, to avoid his personal liability fixed thereby.

After a lapse of more than two years from the time of the execution of the settlement agreement of March 18, 1931, and while petitioner’s sole occupation and business was that of acting as president of Outdoor Advertising, Inc., Ralph C. Holmes, 37 B. T. A, 865, he instituted the suit to set aside that agreement, which had imposed a personal liability on him. Had he been successful in that suit in relieving himself of such liability he alone would have been benefited. Neither Outdoor Advertising, Inc., of which he was then president, nor the General Outdoor Advertising Co., of which he was president when the settlement agreement was made, would have been in any way benefited. Cf. Ernest E. Lloyd, 55 Fed. (2d) 842. affirming 22 B. T. A. 674.

The expenses here involved were not incurred or paid in the business of either the General Outdoor Advertising Co. or Outdoor Advertising, Inc., or by reason thereof, but were incurred and paid in a suit the sole purpose of which was to relieve petitioner of a personal liability and such expenses therefore were his personal expenses and not expenses paid by him “in carrying on any trade or business”; and the amount thereof is not an allowable deduction, as claimed by petitioner.

If, however, it be conceded that the expenses claimed as a deduction arose directly from the settlement agreement of March 18, 1931, and that petitioner’s purposes, as above stated, for entering into that agreement were also the direct and proximate causes of the expenses here involved, the decision here must nevertheless be against petitioner because it is controlled by the case of Ernest E. Lloyd, supra, in which it was said:

* * * In practically every case where slanderous reports are circulated about an individual and damage bis character or reputation, such reports affect indirectly, and, to a certain extent, the business in which he is engaged. Any expense, however, incurred by him in defending his good name under such circumstances, cannot be said to be ordinary and necessary expenses incurred in carrying on Ms business. ||
“Slander” has been defined to be “words falsely spoken, which are injurious to the reputation of another”. * * * This definition indicates that when the slanderous words spoken are about the reputation of an individual, such individual himself is the one who suffers the injury. Any damages recovered for such injury is recovered by the individual. Applying this rule to the instant case, the injuries were suffered by the petitioner, and had he collected the amount of the judgment, such sum would have been his own private property and would have had no connection whatsoever with his business. The E. E. Lloyd Paper Company neither profited nor lost by the suit.

There would be no important difference between the facts in the Lloyd case and those here even if the purposes of the petitioner in entering into the settlement agreement of March 18, 1931, should be considered as the direct and proximate causes of the expenses here involved. If so considered, the expenses were nevertheless incurred and paid in protecting the personal reputation of the petitioner and to prevent injury to the two businesses in which petitioner was then engaged, as was also true in the Lloyd case. Under such circumstances, the expenses here are no more attributable solely to petitioner’s businesses than the expenses incurred in the Lloyd case were solely attributable to Lloyd’s business there. In the Lloyd case the expenses involved and disallowed as a deduction were incurred and paid in good measure for the protection of petitioner’s personal reputation as well as his business, as is also true in the instant case; and for that reason the expenses here involved likewise would not be allowable as a deduction from petitioner’s gross income even though it were conceded that the purposes of petitioner in entering into the settlement agreement of March 18, 1931, constituted the direct and proximate cause of such expenses.

The determination of the respondent is approved.

Decision will be entered for the respondent.


author: ARNOLD:

text:
    West Production Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88997.
    Promulgated May 3, 1940.

      Robert Ash, Esq., and J. A. Platt, Esq., for the petitioner.

      R. P. Eertzog, Esq., for the respondent.
   _T T OPINION.

ARNOLD:

The first issue involves the gain, if any, realized by petitioner on the Sterling note transaction. Respondent determined that petitioner first realized income upon the sale of the Moss Bluff property, and thereafter upon the purchase at foreclosure of the remaining collateral. Petitioner has advanced several theories with respect to the transaction, none of which are decisive of the question presented.

There is no dispute between the parties as to the amounts involved or the values used by each party in arriving at the various gains computed from the Sterling transaction. In arriving at the item of “realized discount” of $115,302.66 respondent treated the sale of the initial portion of the collateral as a separate transaction from the foreclosure within the taxable year on the remainder of the collateral by petitioner. In our opinion this was the initial error in respondent’s determination. The entire transaction, i. e., the purchase of the notes, the sale of a portion of the collateral, and the acquisition of the remainder, all occurred within the taxable year 1932, and, as it was obviously a transaction entered into for profit by the petitioner, the gain or loss that finally materialized should govern the tax liability of the petitioner.

Ignoring the intermediate steps, which merely serve to cloud the issue, the essential factors may be summarized as follows: Petitioner purchased property (collaterally secured notes) for $324,039; it realized cash of $118,891.98 with the purchase; it sold a portion of the collateral (Moss Bluff properties) with the consent of the mortgagor, and received $165,000 of the sale price; and it, reduced to possession by purchase at foreclosure sale the remaining collateral. It is agreed that the fair market value of the remaining collateral at the date of foreclosure sale was $101,522.77, which includes $9,534.59 balance realized from the sale of the Moss Bluff properties. The total cash and property received from the transaction by petitioner was $385,414.75; its cost basis was $324,039. Thus it appears that petitioner realized a gain on the transaction of $61,375.75.

In this view of the tax significance of the Sterling note transaction, it is immaterial whether J. M. West or petitioner was acting as agent for Humble in the acquisition of the Moss Bluff Oil Field. In any event the net result of the entire transaction would be a $61,375.75 profit to petitioner. This result is forecast in petitioner’s first theory, wherein it arrives at a net cost of the Sterling notes of $40,147.02 ($324,039 less $118,891.98, less $165,000). If petitioner had then taken into account the stipulated fair market value of the property acquired by the foreclosure sale on October 4, 1932, it would have arrived at the ultimate profit of $61,375.75.

One other contention of the petitioner merits comment, namely, that the foreclosure sale price represents the fair market value of the property. The Supreme Court’s decision in Helvering v. Midland Mutual Life Insurance Co., 300 U. S. 216, is cited in support of this contention. We can not agree. We have held, in Huey & Philp Hardware Co., 40 B. T. A. 781, that the doctrine announced by the Supreme Court in the Midland case did not prohibit an independent inquiry as to the fair market value of the property at the time of the foreclosure sale. See also Hadley Falls Trust Co. v. United States, 110 Fed. (2d) 887. Obviously, we need make no independent inquiry here, as the parties themselves have stipulated the fair market value of the various properties. The decision in Tiscornia v. Commissioner, 95 Fed. (2d) 678, turned upon its own facts, and may be further distinguished by the absence of any evidence of fair market value other than the bid price at the foreclosure sale.

The second issue involves petitioner’s right to a depletion deduction by virtue of the cash payment received from the transaction of March 23,1932. (As used herein the term “cash payment” refers to petitioner’s one-half interest.) In its return for the taxable year petitioner claimed a depletion deduction on the entire cash payment, which the respondent disallowed. Subsequently, however, respondent reversed his determination and ruled that $2,557,836.86 of the cash payment was subject to depletion, and $442,163.14 thereof was not subject to depletion.

Respondent’s change in position grows out of his application of the principle announced in Palmer v. Bender, 287 U. S. 551, to a part of the leases transferred, and the application of the principle announced in Commissioner v. Fleming, 82 Fed. (2d) 324, to the remainder of the leases transferred. He apparently justifies his breakdown of the transfer into two separate transactions by the fact that the assignors retained different interests and rights of ownership in three of the leases from that retained in the other leases. Having broken the transaction down to the individual leases, respondent then allocated the cash payment among the leases upon the basis of the acreage involved.

In Palmer v. Bender, supra, the lessee of an oil and gas lease had explored and discovered oil on leased premises, which were then transferred by an assignment to a third party in consideration of a cash payment, a further payment to be made out of one-half of the first oil produced and saved, and a one-eighth overriding royalty. The Supreme Court allowed depletion upon each type of consideration, i. e., the cash payment or bonus, the oil payment or oil bonus, and the royalty payments. In its opinion the court pointed out that a taxpayer is entitled to a depletion allowance if by virtue of the leasing transaction he has retained a right to share in the oil produced. If he has such a right, he has an economic interest in the oil in place which is depleted by production. More specifically the Court stated that “When the two lessees transferred their operating rights to the two oil companies, whether they became technical sublessors or not, they retained, by their stipulations for royalties, an economic interest in the oil, in place, identical with that of a lessor.”

The facts in the Fleming case, supra, are that Fleming owned an undivided interest in two oil and gas leases which he assigned for cash plus certain amounts payable out of a fractional part of the oil produced. The court denied depletion as to the cash payment but allowed depletion as to the payments from oil produced, upon the theory that part of the income resulted from a sale of a capital asset and part of it arose from the operation of the producing property in which Fleming had retained an economic interest.

In a more recent decision, Helvering v. Elbe Oil Land Development Co., 303 U. S. 372, the Supreme Court pointed out that a conveyance of oil and gas properties for cash and deferred payments aggregating $2,000,000 was an absolute sale, even though under certain conditions the vendor would be entitled to receive one-third of the net profits resulting from production and operation. The Court pointed out that gross income from the property as used in the statute governing the allowance of depletion meant gross income received from the operation of the oil and gas wells by one who has a capital investment therein, and accordingly it denied percentage depletion to the vendor then before the Court because it had retained no investment in the properties assigned. A similar lack of investment in the mineral deposit caused the Supreme Court to deny depletion deductions to a processor who had contracted for casinghead gas, Helvering v. Bankline Oil Co., 303 U. S. 362; and to a stockholder of a corporation that owned oil and gas in place, Helvering v. O'Donnell, 303 U. S. 370. See also Blankenship v. United States, 95 Fed. (2d) 507.

Factually, the Fleming case, supra, represents a hybrid of the situations that existed in Palmer v. Bender, supra, and Helvering v. Elbe Oil Land Development Co., case, supra, in that Fleming sold a part of his interest and retained a part. The decided cases hold that where this situation exists the assignor has retained such an economic interest in the mineral deposit that production will deplete his investment, and accordingly the assignor has been allowed depletion on the gross income from the part retained, but has been denied depletion on the cash payment. Laird v. Commissioner, 97 Fed. (2d) 730, affirming 35 B. T. A. 75; Columbia Oil & Gas Co., 41 B. T. A. 38; Hammonds v. Commissioner, 106 Fed. (2d) 420. Cf. Thomas v. Perkins, 301 U. S. 655, which involved the depletion afiowable to the assignee.

The facts in this proceeding are both like and unlike the Fleming case. The leases here were disposed of as a unit or block, and there is no suggestion in the testimony or the documentary evidence that any segregation of leases was contemplated by the parties to the transaction. The transfer subjected all the leases equally to the charge of $17,000,000 to be paid out of production and the reservation by the assignors as to this payment applied to all leases equally. By the trade a five-sixths interest in the undivided half was transferred to Humble in all the leases. Petitioner and Cullen retained for themselves an undivided yi8 in all leases except three, namely, the two Wolters’ leases and the A. P. George 200-acre lease. The 14s interest in these leases had been disposed of by the assignors prior to the transfer to Humble, or had been reserved by the transferor of the assignors.

In this situation one of the questions which we are asked to decide is whether the interest in the $17,000,000 oil payment is sufficient to entitle petitioner to deplete the portion of the cash payment attributable to the three leases. Another question which the issue suggests is whether the cash payment should be considered as applicable to the entire property, disposed of as a unit, and the separate nature of the leases ignored. If the property be treated as a unit rather than as separate leases making up the unit, then there would be a clear, decisive parallel with the facts in the Palmer case, sufra, and petitioner would be entitled to deplete the entire cash payment. If the property can be broken,down, and the separate leases individually considered, then the Fleming case, supra, is parallel with respect to three of the leases. In the last analysis, therefore, we must decide whether one property was transferred, or several properties were grouped and transferred as a unit.

Our examination of the agreement of March 23, 1932, together with the other documentary evidence of record, and the testimony of the several witnesses, convinces us that to subdivide this agreement into as many separate agreements as there were leases forming the Thompson field is without justification. The transaction with Humble and the negotiations leading up to the transfer were all premised upon the assignment of five-sixths of petitioner’s interest in a producing oil field. Such an assignment in our opinion, should be viewed broadly, and not narrowly or technically. When so viewed the transfer is comparable to Palmer v. Bender, supra, in that the petitioner assigned five-sixths of its interest in a producing oil field for cash, future payments to be made out of production, and retained royalties.

That the transfer here was a “leasing transaction” is demonstrated by the various limitations placed upon the assignee’s use of the property. Humble had no right to release or reassign the leases to the original lessors without the consent of its assignors. Humble did have the right, however, at any time, to reassign all the leases to its assignors, and thereupon relieve itself of any further obligation or liability to its assignors with respect to said leases and under the contract. Humble likewise had the right at any time to surrender any one or more of said leases, or any portion of the acreage included therein, provided, however, it gave written notice to its assignors of its intention and if so requested it was to execute and deliver the said lease or leases or acreage to its assignors, in which event Humble would be relieved from any liability with respect to the lease, leases, or acreage surrendered. The leasing character of the transaction is further shown by the obligation imposed upon Humble to produce a minimum of 15,000 barrels of oil daily, a provision solely for the benefit of its assignors, which was no part of the original leases, and also by the assignors’ right to inspect Humble’s books and records relating to production in the Thompson field, by the assignor’s right to witness gauges of production, and by their right to receive logs of all wells drilled or drilling and samples of cores and cuttings from wells drilled or drilling by the assignee. Each of these provisions connotes a lease rather than a sale.

However we view the situation, we fail to see any sound basis for subdividing the assignment into the separate leases composing the Thompson field and an attempt to make an allocation based on average acre value, as the Commissioner has done. The Commissioner in his allocation treats each acre included in the transfer as of equal value. Some of the acreage was shown by wells drilled to be very productive, with much greater thickness of producing sand than others. Some of the more remote wells produced water and showed the producing sand to be thinning out and much less productive, while the greater portion of the acreage was untested and its value was then more or less speculative and could not be determined with a sufficient degree of accuracy on which to make a valuation allocation. Necessarily producing acreage is more valuable than acreage without production and remote from producing wells. Under these circumstances we would not be justified in approving any allocation based on equal valuation of the acreage included in the transfer.

Decision will be rendered wader Rule 60.


text:
    H. R. Cullen, Petitioner, v. Commissioner of Internal Revenue, Respondent. Lillie Cranz (Mrs. H. R.) Cullen, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 94021, 94022.
    Promulgated May 3, 1940.

      Palmer Hutcheson, Esq., for the petitioners.

      R. P. Hertzog, Esq., for tlie respondent.
   OPINION.

Aenold :

These proceedings, like their companion case, West Production Co., Docket No. 88997, require a determination of the tax liability resulting from the transfer of an undivided interest in the so-called Thompson Oil Field to Humble. The surtax rates applicable to individual incomes work to the disadvantage of these taxpayers, as compared with corporate rates, unless they can bring themselves within the provisions of section 102 (a) of the Eevenue Act of 1932, set forth in the margin. Even with the benefit of the limitation provisions of section 102 (a) petitioners’ tax rate would be 16 percent, as compared with the corporate rate of 13% percent.

Petitioners, therefore, have vigorously contended that the transaction of March 23, 1932, was a bona fide sale of an undivided interest in the leases, wells, and equipment making up the Thompson Oil Field. They point but that the stipulated facts, documentary evidence, testimony, and surrounding circumstances all indicate that West Production Co. and the petitioners sold five-sixths of their undivided interest to Humble. Furthermore, they rely on the language used by the Texas Civil Court of Appeals in West v. Cashin, 83 S. W. (2d) 1001, which involved a fee due Cashin for assisting “in making a sale” of these very oil properties. The use of the term “sale” as there used by the court is not controlling here. Whether the transaction was a sale or a sublease did not affect Cashin’s right to recover and the court was not called on to determine the nature of the transaction. Petitioners here are in a position similar to that occupied by the taxpayer in Palmer v. Bender, 287 U. S. 551, in which the Supreme Court rejected the Government’s argument that the transaction was a sale. See also Marrs McLean, 41 B. T. A. 565, and West Production Co., 41 B. T. A. 1043, decided this day.

In the Supreme Court case partnerships in which Palmer was a member conferred upon two separate oil companies the right to take over certain leased property for cash, oil payments, and overriding royalties. The taxpayer claimed depletion based upon discovery value. The Commissioner denied the deduction upon the theory that both transactions were sales and that the only allowable deductions in calculating the taxable gains were those based upon the cost of the properties, which was materially less than value at the date of discovery of oil. Palmer sued to recover the additional taxes paid as a result of the Commissioner’s determination. The lower courts both held the transactions were assignments or sales. The Supreme Court held it was immaterial whether the transactions were sales or subleases, and that the formal attributes of the instruments or the descriptive terminology applied to them by local law was irrelevant. The Court said that for depletion purposes “It is enough if, by virtue of the leasing transaction, he has retained a right to share in the oil produced. If so he has an economic interest in the oil, in place, which is depleted by production.” See also Thomas v. Perkins, 301 U. S. 655.

The respondent, relying upon the above decision, determined that the present transfer amounted to a sublease as to those leases in which petitioners retained an overriding royalty, coextensive with the lease, and a sale as to those leases in which petitioners retained only an oil payment, citing Commissioner v. Fleming, 82 Fed. (2d) 324. Respondent, contending that this transaction contains both the Palmer and the Fleming situations, breaks down the transfer into two separate types of transactions and applies the cited decisions to the respective situations.

We agree with the respondent that the instant transaction was more in the nature of a sublease than a sale, bqt we can not agree that the transfer is divisible into a sublease as to all but three of the leases and a sale as to those three. West Production Co., supra. The oral testimony and the documentary evidence refute respondent’s argument that this transaction was divisible into separate transfers of one or more leases for varying considerations. Wallace E. Pratt, the Humble representative, testified unequivocally that the moving consideration to Humble was the acquisition of an undivided interest in the oil field as a unit, and that no consideration was given to the value of one lease over another, or with relation to other leases. The documentary evidence shows that the property transferred was an undivided interest in a producing field as a whole and, therefore, we see no justification in the Palmer or Fleming decisions, supra, for breaking down the transfer into arbitrary classifications not contemplated or intended by the contracting parties. See discussion of this point in West Production Co., supra. The transfer was made for a consideration consisting of a cash payment, or bonus, future payments to be made from oil produced, royalties reserved for the life of the leasehold interest transferred, and certain other reserved rights. Depletion, therefore, should be allowed on the bonus payment, Marrs McLean, supra, on the oil payments, Charles Pettit, 41 B. T. A. 264, and on the oil royalties, Palmer v. Bender, supra.

Our determination that the transaction can not be considered a sale for income tax purposes disposes of petitioners’ contentions regarding the applicability of section 102 and their contentions against the respondent’s allocation of the cash payment. All of the cash payment will be subject to percentage depletion, and, as there is no dispute between the parties relative to depletion of the oil payments and oil royalties, the depletion issue can be settled under Rule 50.

The evidence indicates that percentage depletion deductions will exceed petitioners’ costs of leaseholds and equipment. Under the doctrine of Cook Drilling Co., 38 B. T. A. 291, petitioners are not limited to recovery of costs, but may recover through percentage depletion deductions much more than their investment. Under this doctrine it is unnecessary to determine whether there is a merger of equipment costs with investment costs, because, in any event, petitioners will more than recoup their total investment out of the depletion allowances.

In view of the foregoing discussion it is unnecessary to consider the issue raised by respondent’s amended answer relative to the allocation urged upon us by the taxpayer in West Production Co., Docket No. 88997.

Petitioners’ contention that respondent is estopped to claim an increased deficiency as to 1932 because of the conditions attached to the consents, is not well founded. The conditions relate to the execution of a closing agreement, not to the determination of petitioners’ correct tax liability. Furthermore, the correspondence between the parties creates a substantial doubt in our mind that respondent ever accepted the conditions petitioners tried to impose. In any event, whatever binding effect these conditions may have had with respect to the consents executed in 1936 would seem to have expired at the time the deficiency notices were issued, as further consents were executed in 1937.

The disputed expense items in 1935 are not, in our opinion, ordinary and necessary business expenses. Welch v. Helvering, 290 U. S. 111. The $500 payment to Clayton had no relationship to petitioners’ oil business. It was purely a personal expense to protect the right of petitioners to file separate income tax returns of one-half of the community income. The payments to the J. S. Abercrombie Co. and to J. M. West, trustee, were for the purpose of opposing enactment of legislation deemed detrimental to petitioners’ business and were voluntary rather than obligatory. These disbursements were too remote in their relationship to petitioners’ business to be within the scope of the term “ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” Deputy v. du Pont, 308 U. S. 488; A. Giurlani & Bro., 41 B. T. A. 403. The disbursements were extraordinary in character and were for the purpose of influencing legislation, which is outside the normal conduct of a business enterprise. Old Mission Portland Cement Co. v. Commissioner, 69 Fed. (2d) 676, 681; Sunset Scavenger Co. v. Helvering, 84 Fed. (2d) 453; Mrs. William P. Kyne, 35 B. T. A. 202.

Decision will loe entered under Bule 50.

       SEC. 102. SALE OF MINES AND OIL OR GAS WELLS.
      (a) In the ease of a bona fide sale of mines, oil or gas wells, or any interest therein, where the principal value of the property has been demonstrated by prospecting or exploration and discovery work done by the taxpayer, the portion of the tax imposed by section 12 of this title attributable to such sale shall not exceed 16 percentum of the selling price of such property or interest.


author: Smith:

text:
    Herbert Marshall, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99559.
    Promulgated May 7, 1940.

      John B. Millihen, Esq., for the petitioner.

      Byron M. Coon, Esq., and Alva C. Baird, Esq., for the respondent.
   OPINION.

Smith:

Although the petition filed in this proceeding alleges numerous minor errors made by the respondent in the determination of the net income of the petitioner for the- years 1933, 1934, and 1935, all of which have been denied by the respondent in his answer, the only real question in issue is whether the petitioner’s earnings for the three years in question constituted community property under the California statutes and whether the petitioner is liable to income tax on the entire amount of his earnings.

In his deficiency notice the respondent states with respect to the deficiency determined for 1933:

(a) Tbe division of income on a community property basis bas been denied and salary bas been increased by $25,392.98, tbe amount included in tbe return of your wife. Under tbe provisions of Mimeograph 3859, Cumulative Bulletin X-l, page 140, husband and wife domiciled in tbe State of California may each report in separate returns one half of tbe community income received by them. Tbe above is in accordance with tbe decision of the Supreme Court in tbe case of United States v. Malcolm, rendered January 19, 1931, which made effective tbe division under tbe amendment on July 29, 1927 to tbe Civil Code of California, designated section 161 (a). In view of your wife’s status as a nonresident alien, it is held that there was no domicile of husband and wife in California which carried with it community property rights.

For 1934 and 1935 tbe respondent simply states:

(a) The division of income on a community property basis has been denied and salary received bas been increased by tbe amount included in tbe return of your wife.

The petitioner contends that he was a resident of and domiciled in California during the years in controversy in this proceeding, and that, since he was a married man, his entire net income was community property. He further submits that:

Independent of any evidence on tbe matter of domicile, * * * by tbe terms of tbe statute defining community property, the California legislature has included in tbe definition of community property, property acquired in California through personal services without regard to tbe domicile of tbe owner at the time it was acquired.

We do not think that there is any merit in the last stated contention. It seems to us clear that, if a married person domiciled in a noncom-munity property state performs a contract in California from which he derives income, the income is not to be regarded as community property simply because it was earned in California. It appears to us plain that the law of the state of the domicile must control as to whether earnings are community property or noncommunity property.

Furthermore, it is noted that section 946 of the California Civil Code provides:

§ 946. By what law governed. If there is no law to tbe contrary, in tbe place where personal property is situated, it is deemed to follow the person of its owner, and is governed by the law of bis domicile.

The petitioner refers us to sections 162 and 163 of the Civil Code, which pi’ovide as follows :

§ 162. Separate property of the loife. All property of tbe wife, owned by her before marriage, and that acquired afterwards by gift, bequest, devise, or descent, with tbe rents, issues, and profits thereof, is her separate property. The wife may, without the consent of her husband, convey her separate property.
§ 163. Separate property of the hushamd. All property owned by the husband before marriage, and that acquired afterwards by gift, bequest, devise, or descent, with the rents, issues, and profits thereof, is his separate property.

Until 1911 section 164 of the California Civil Code was worded in this manner: “All other property acquired after marriage, by either husband or wife, or both, is community property. * * *” Cases construing the California law under this section of the code appeared to concede that the common law rule of comity — to the effect that the character of personal property is to be determined by the law of domicile of its owner at the time such property was acquired — prevailed. In re Frees Estate, 187 Cal. 150; 201 Pac. 112; In re Nickson's Estate, 187 Cal. 603; 203 Pac. 106.

In 1917 section 164 of the Civil Code was amended to read as follows:

* * * All other property acquired after marriage by either husband or wife, or both, including real property situated in this state, and personal property wherever situated, acquired while domiciled elsewhere, which would not have been the separate property of either if acquired while domiciled in this state is community property; * * *

The petitioner submits:

It is apparent from the language of Section 164 after its amendment in 1917 that it was the intent of the Legislature to define as community property all property not included under Sections 162 and 163, the definition of separate property.

The petitioner submits that this proposition is supported by In re Thornton’s Estate, 1 Cal. (2d) 1; 33 Pac. (2d) 1. In that case the court held that section 164 of the California Civil Code, as amended in 1917, is unconstitutional in so far as it provides that personal property acquired after marriage by husband and wife while domiciled elsewhere than in California, which would not have been the separate property of either if acquired while domiciled in California, becomes community property when the parties become domiciled therein. The petitioner’s contention is that, in holding this provision to be unconstitutional the court by inference held that income earned in this state by a person domiciled elsewhere is community property. We can not agree that this was the holding of the court. Cf. Charles A. Shea, 30 B. T. A. 1265. The well established rule in California, as well as elsewhere, is that stated in California Jurisprudence Ten-Year Supplement, vol. III, p. 499: “The character of personal property is to be determined by the law of the domicile of its owner at the time of acquisition, irrespective of the law of any subsequent domicile which may be acquired.”

It follows that if the petitioner was not domiciled in California during the years 1933, 1934, and 1935 his income earned during those years does not constitute community property under the California laws.

It is the petitioner’s contention that he went to California in July 1933, and that he has been domiciled in that state ever since. If he went to California in July 1933, with the intention of making California his permanent home we think there can be no question but that he was domiciled in that state from July 1933. The fact that the petitioner is a British subject would.have no bearing upon the question as to whether his earnings while domiciled in California constituted community property. Thus, in Joe May, 39 B. T. A. 946, we said: “The community property laws of California do not specifically exclude a resident or nonresident alien from its benefits.” See also J. P. Schumacher, 32 B. T. A. 1242.

In his brief the petitioner states:

The definitions of domicile are all in agreement in making the test of domicile depend upon two requirements (1) Residence (2) The intent to remain. In order therefore to establish a domicile the two prime factors are the taking up of a residence in a particular place with the intent to make it a permanent abode and in California it is declared in the Political Code that a residence or domicile can he changed or acquired only by “the union of act and intent.” Pol Code § 52, Subd. 7, Chambers v. Hathaway, 187 Cal. 104, 200 Pac. 931.

The respondent argues that even though the petitioner may be held to have been domiciled in California during the years 1934 and 1935, he may not be held to be domiciled in that state during the year 1933. He points to the testimony of the petitioner bearing upon this point to the effect that when the petitioner went to California in July 1933, he had no intention of making that state his permanent place of abode. On direct examination the petitioner was asked:

Q. And when would you say, Mr. Marshall, if you eould designate a time, when you decided that you would remain in California indefinitely and reside here indefinitely?
A. It was positively in that same year of 1933, Judge.
Q. What time would you say, if you can fix a time, in 1933, when you think that that conviction became certain on your part?
A. It is rather difficult, but my impression is that it occurred in October, I think, or very early in November, after I had gone on a trip to Hawaii, which, by the way, I omitted as it was part and parcel in making of a picture. Then, on my way back from there, with every increasing assurance that I was going to work here for quite a few years, obviously I was influenced by that as well. That is whén I really began to think about it, I think, on that return; it seems familiar to me then.

There is much in the record to indicate that the petitioner during the first part of his stay in California in 1933 had no definite intention to make California his permanent place of abode. In 1932 and 1933 and for some years prior thereto he was under contract to Gilbert Miller for bookings for theatrical appearances on the legitimate stage. Miller’s place of business was in New York City. In past years Miller had made arrangements for the petitioner to appear in theatricals in different places in the United States and in England. The petitioner was asked the question relative to the contract which brought him back to this country in July of 1933 for the purpose of making motion pictures:

Q. What were the terms of that contract, if you recall? Was it for a number of pictures or a number of years, or what?
A. Its original form took the shape of my signing with Paramount to do five years of pictures, options, of course, two pictures a year to be tied in with my theatrical commitments with Miller. It was a conditional thing which later flid not iron out.

The petitioner had made a success on the legitimate stage. His wife was devoted to the legitimate stage. Moving pictures had no appeal for her. She was an English woman who could not see her way clear to give up the English stage and abandon that career merely because her husband was making a success in moving pictures.

It is also quite clear from the testimony of the petitioner that he was not certain as to whether his initial success in moving pictures would offer a permanent career for him. He stated: “I would like to add to that, if I may, in 1932 it looked far less of a permanent career than it was revealed to me later, and I didn’t even think I was going to succeed.”

It is furthermore to be noted that if the petitioner was a resident of California in 1933 he was required to file an income tax return in California for 1933. He supposed that the matter of filing a return was being taken care of by Gilbert Miller in New York. This indicates that until the end of 1933 the petitioner looked upon his residence in California as temporary.

All of the gross income earned by the petitioner for 1933 was earned prior to the time that the petitioner had definitely determined to make California his permanent place of abode. His total gross income for 1933 was $59,250. His business manager, Eex Cole, testified:

* * * there was salary of $15,750 received from Metro-Goldwyn-Mayer Studios between August 1 and August 24, 1933, and there was received from Paramount Studios a total of $43,500 which was received from Paramount between August 28th and November 3, 1933, which mates a total of $59,250.

Upon the evidence of record, we sustain the respondent’s contention that the petitioner was not domiciled in California at the time he earned his compensation for 1933. The petitioner is therefore liable to income tax upon his total net income for 1933.

There can be no question but that by the end of 1933 the petitioner had definitely formed the intention of making California his permanent place of abode. He was living with his wife in California at the time he formed such intention. The evidence indicates that up until April 1934 the petitioner was domiciled with his wife in Los Angeles. At the time his wife left him, in April 1934, he had no intention of abandoning his residence in California. He hoped that his wife would rejoin him. If she had rejoined him within a reasonable time we do not think that the respondent would or could have raised any question that the petitioner was domiciled in California during the years 1934 and 1935 and entitled to claim the benefits of the statutes of California relating to community property.

The respondent requests that the Board examine the realities of the instant case. He states:

* * * In the instant case, two persons domiciled in England came to California for the first time in 1932. They stayed four months. In 1933 they came again. The husband decided to stay because his career was here hut the wife, after staying for a short time in 1933 and again for a few months in 1934, returned to England, for the reason that her career was there. Since that time they have been separated. It is submitted that such a situation does not come within the reasoning of the community property laws which is to give the wife living in the jurisdiction a share in the husband’s earnings in order to protect her and protect the marriage status. Where the wife has a separate domicile of her own outside of the jurisdiction, the reason for these laws disappears. What petitioner is seeking to do in this case is to apply a rule to a situation not within the reason for the rule. He seeks to apply the rule by invoking a fiction of the conflict of laws, namely, that the domicile of the wife follows that of the husband. This section does not apply in a case such as the instant ease where two professional people pursue their own respective careers thousands of miles apart. * * *

We do not think that the argument made meets the issue which is presented. It is rather in the nature of a protest against the provisions of the income tax law which permit a person in a community property state to exclude from his income one-half thereof upon the ground that the wife has a vested right therein. Our only query here is whether under the law of the State of California the earnings of the petitioner constitute community property. If they do the petitioner is taxable upon one-half of them. United States v. Malcolm, 282 U. S. 792. We are of the opinion that the earnings of the petitioner during the taxable years 1984 and 1935 constituted community property, upon the ground that he was a married man and domiciled in the State of California. His wife had not technically deserted him during these years. Section 52 of the California Political Code provides: “5. The residence of the husband is the residence of the wife.” It must be held that the petitioner and his wife were legally domiciled in California .during 1934 and 1935, and that the earnings of the petitioner constituted community property. The petitioner is taxable upon only one-half of the net income of the community for the years 1934 and 1935.

The respondent contends that the petitioner is liable to the 25 percent delinquency penalty under section 291 of the Revenue Act of 1932 in respect of the returns filed for 1933. The penalty is not, however, incurred where the delinquency, in the filing of a return was due to a reasonable cause and not due to willful neglect. There was clearly no willful neglect on the part of the petitioner. He knew that Gilbert Miller had withheld $4,600 of his income for 1933 and he supposed that he was making the required income tax return. When he found out that the required return had not been filed, his business agent in Los Angeles filed the return. In these circumstances we think that the penalty was not incurred.

Decision will be entered winder Bule 50.


author: HaRROn:

text:
    Alfred L. Rose and Dorothy B. Rose (Husband and Wife), Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86028.
    Promulgated May 7, 1940.

      Wilbur H. Friedman, Esq., for the petitioners.

      B. H. Transue, Esq., for the respondent.
   OPINION.

HaRROn:

The main question is whether an overpayment of $2,-011.91 in income tax which petitioners made on December 9, 1933, was made within two years before the filing of a valid claim for refund, under section 322- (d) of the Revenue Act of 1932 as amended by section 809 (c) of the Revenue Act of 1938, the pertinent provisions of which are set forth in the margin.

The original claim for refund was filed on December 9, 1935. Thus, it is evident that the payment of $2,011.91 on December 9, 1933, was made within two years before the filing of the original claim for refund. In the computation of the period of time between the making of the payment and the filing of the original claim for refund, the day on which the payment was made, December 9, 1933, is to be excluded, and the day on which the original claim for refund was filed, December 9, 1935, is to be included. Burnet v. Willingham Loan & Trust Co., 282 U. S. 437; Chambers v. Lucas, 41 Fed. (2d) 299; United Telephone Co., 1 B. T. A. 450; Harriet M. Hooper, 26 B. T. A. 758; and see Sheets v. Selden’s Lessee, 2 Wall. 177, 190, in which the Supreme Court, through Mr. Justice Field, stated in part as follows:

* * * The general current of the modern authorities on the interpretation * * * of statutes, where time is to be computed from a particular day or a particular event, as when an act is to be performed within a specified period from or after a day named, is to exclude the day thus designated, and to include the last day of the specified period.

Although the original claim for refund specified two grounds for refund, it did not specify the grounds from which the overpayment in tax resulted. Thus, the original claim for refund failed to comply with the requirements of a valid claim for refund as provided in article 1254 of Regulations 77, relating to the Revenue Act of 1932, the pertinent provisions of which are set forth in the margin. Georgie W. Rathborne, 39 B. T. A. 56.

Petitioners do not contend that, within the statutory period of limitation, respondent waived compliance with the requirements of a valid claim for refund as provided in article 1254 of Regulations 77. Cf. Tucker v. Alexander, 275 U. S. 228; United States v. Garbutt Oil Co., 302 U. S. 528. Nor do the facts establish such a waiver by respondent. It is to be noted that respondent could not waive the bar of the statutory period of limitation. See United States v. Garbutt Oil Co., supra.

Petitioners do contend that the so-called amended claim for refund, which specified one of the grounds from which the overpayment resulted, was a permissible amendment to the original claim for refund and related back to correct the insufficiency of the original claim for refund. Respondent contends that the so-called amended claim for refund was not a permissible amendment to the original claim for refund.

The original claim for refund was subject to permissible amendment prior to its final rejection by respondent. See United States v. Memphis Cotton Oil Co., 288 U. S. 62. Although respondent notified petitioners in the deficiency notice that the original claim for refund would be disallowed and that official notice of the disallowance of the claim would be issued by registered mail, there is no evidence to show a final rejection of the original claim for refund by respondent. Cf. United States v. Memphis Cotton Oil Co., supra.

The general rule as to the permissibility of an amendment to a claim for refund after the expiration of the statutory period of limitation is stated by the Supreme Court, through Mr. Justice Roberts, in United States v. Andrews, 302 U. S. 517, 524, as follows:

* * * Where a claim which the Commissioner could have rejected as too general, and as omitting to specify the matters needing investigation, has not misled him but has been the basis of an investigation which disclosed facts necessary to his action in making a refund, an amendment which merely makes more definite the matters already within his knowledge, or which, in the course of his investigation, he would naturally have ascertained, is permissible. On the other hand, a claim which demands relief upon one asserted fact situation, and asks an investigation of the elements appropriate to the requested relief, cannot be amended to discard that basis and invoke action requiring examination of other matters not germane to the first claim.

The general rule as to the permissibility of an amendment to a claim for refund after the expiration of the statutory period of limitation has also been stated by the Circuit Court, Second Circuit, through Swan, Circuit Judge, in Pink v. United States, 105 Fed. (2d) 183, 187, as follows:

* * * Whether a new ground of recovery may be introduced after the statute has run by amending a pending claim filed in time depends upon the facts which an investigation of the original claim would disclose. Where the facts upon which the amendment is based would necessarily have been ascertained by the Oommissioner in determining the merits of the original claim, the amendment is proper. Bemis Bros. Bag Co. v. United States, 289 U. S. 28, 63 S. Ct. 454, 77 L. Ed. 1011; United States v. Memphis Cotton Oil Co., 288 U. S. 62, 53 S. Ct. 278, 77 L. Ed. 619; United States v. Factors & Finance Co., 288 U. S. 89, 53 S. Ct. 287, 77 L. Ed. 633. The rule is otherwise when the amendment requires the examination of new matters which would not have been disclosed by an investigation of the original claim. United States v. Andrews, 302 U. S. 517, 58 S. Ct. 315, 82 L. Ed. 398; United States v. Garbutt Oil Co., 302 U. S. 528, 58 S. Ct. 320, 82 L. Ed. 405; Marks v. United States, 2 Cir., 98 F. 2d 564.

An analysis of the facts shows that the so-called, amended claim for refund, which was filed after the expiration of the statutory period of limitation, was not a permissible amendment to the original claim for refund under the rules which are set forth above. The original claim for refund was specific; it pointed to two specific grounds for refund: A deduction of $35,800 as a bad debt owing from the Park Murray Corporation, and a deduction of $62,088.38 as a loss from the sale of certain securities held by petitioners for less than two years, which deductions were not taken by petitioners in the joint return. Even though a general statement was added as paragraph 3 of the original claim for refund, to the effect that the original claim for refund was “also filed to protect all legal rights of taxpayers to any refund of income tax found to be due them for the year 1932”, respondent was called upon to investigate only the two grounds specified in the original claim for refund, and was not called upon to make a complete reaudit of petitioners’ joint return. United States v. Andrews, supra, in which the Supreme Court, through Mr. Justice Roberts, stated in part as follows:

* * * The very specification of the items of complaint would tend to confine the investigation to those items and there is no evidence that the examination was more extended.

It is clear that an investigation of the two grounds specified in the original claim for refund would not disclose the material facts underlying the grounds from which the overpayment resulted; there was no relation whatsoever between the facts underlying the grounds specified in the original claim for refund and the facts underlying the grounds from which the overpayment resulted.

Even if it were assumed that the general statement made in paragraph 3 of the original claim called upon respondent to make a complete reaudit of petitioners’ joint return, there is no evidence that the reaudit necessarily would have disclosed the material facts underlying the grounds from which the overpayment resulted. Cf. Pink v. United States, supra. Moreover, contrary to statements made by petitioners in their brief, there is no evidence to show that respondent in fact knew the material facts underlying the grounds from which the overpayment resulted; i. e., the facts determinative of when the investment of $21,000 in the Lexave Syndicate became worthless. See United States v. Andrews, supra.

It should be pointed out that the so-called amended claim for refund stated only one of the two grounds from which the overpayment resulted — the deduction of $21,000 as a loss occasioned by the worthlessness of the investment of petitioner Alfred L. Rose in the stock of the Lexave Syndicate, Inc. The other ground from which the overpayment resulted, the deduction of $7,200 as a bad debt owing to petitioner Alfred L. Rose from the Lexave Syndicate, Inc., was stated for the first time in the amended petition filed by petitioners on December 10, 1937. In view of the conclusion that the original claim for refund could not be amended, after the expiration of the statutory period of limitation, to specify the grounds from which the overpayment resulted, it is not necessary to consider the further question as to whether the statements in the amended petition with respect to the bad debt deduction of $7,200 could operate as an amendment to the original claim for refund. Cf. Georgie W. Rathborne, supra.

Therefore, it is held that petitioners made overpayments in income tax for the year 1932 in the total amount of $9,607.13; that the overpayment of $2,011.91 in income tax which petitioners made on December 9,1933, was not paid within two years before the filing of a valid claim for refund which stated the grounds from which the overpayment resulted; and that the overpayment of $1,559.51 in income tax which petitioners made on May 19, 1936, was made after the mailing of the notice of deficiency.

Reviewed by the Board.

Decision will be entered that there is an overpayment of tax for the year 193It in the amount of $9,607.13, and that $1,559.61 was paid after the mailing of the notice of deficiency.

       SEC. 322. REFUNDS AND CREDITS.
      * * * * * # #
      (d) Overpayment Found by Board. — If the Board finds that there is no deficiency and further finds that the taxpayer has made an overpayment of tax in respect of the taxable year in respect of which the Commissioner determined the deficiency, the Board shall have jurisdiction to determine the amount of such overpayment, and such amount shall, when the decision of the Board has become final, be credited or refunded to the taxpayer. No such credit or refund shall be made of any portion of the tax unless the Board determines as part of its decision that such portion was paid within two years before the filing of the claim or the filing of the petition, whichever is earlier, or that such portion was paid after the mailing of the notice of deficiency; 4 * *

       Art. 1254. Claims for refund 6y taxpayers. — * * *
      The claim must set forth in detail and under oath éach ground upon which a refund is claimed, and facts sufficient to apprise the Commissioner of the exact basis thereof. No refund or credit wiU be allowed after the expiration of the statutory period of limitation applicable to the filing of a claim therefor except upon one or more of the grounds set forth in a claim filed prior to the expiration of such period. A claim which does not comply with this paragraph will not be considered for any purpose as a claim for refund.