author: Leech: Black,

text:
    Elizabeth G. Augustus, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96061.
    Promulgated December 20, 1939.

      Carmi A. Thompson, Esq., Orville Smith, Esq., Joseph B. Shepler, Esq., and Erwin N. Griswold, Esq., for the petitioner.

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

Leech:

Respondent Ras determined deficiencies in income tax ox $75,944.65 and $41,386.34 for the calendar years 1935 and 1936, respectively. Tke proceeding was submitted upon stipulations of fact under Rule 30 of tke Board’s Rules of Practice. In determining gain or loss upon disposition by petitioner of certain securities and property received by ker from tke estate of ker fatker, respondent kas used as a basis to petitioner tkeir fair market value at tke date of deatk of ker fatker, wkereas petitioner contends tkat suck basis is tke value of tke property wken distributed to ker upon tke termination of a trust created by her father’s will. Tkat controversy presents tke first issue. A decision of this question, under the stipulation, will supply tke basis for measuring tke capital gain or loss to be recognized for tax purposes. A subsidiary issue is tke fair market value, on the date of deatk of petitioner’s mother, of certain stock acquired by petitioner from the latter’s estate.

Petitioner is a resident of Waite Hill Village, Lake County, Ohio. On July 13, 1922, ker fatker, Daniel Good, died testate, a resident of Buffalo, New York, leaving a widow, Sarah E. Good, and, as his only descendants, two daughters, Margaret Jane Good and this petitioner, named in tke will as Frances Elizabeth Good. Daniel Good’s last will and testament was duly admitted to probate in tke Surrogate’s Court of Erie County, New York. Item eleventh of this will is as follows:

Eleventh : — It is further my will and I hereby direct that after the payment of the legacies hereinbefore specified and also after my said executors shall have set aside the sum of Two Hundred thousand dollars ($200,000.) as herein specified, in trust for the lives of my two children, all the rest, residue and remainder of my estate, of every name and nature, I hereby direct my executors, or the survivor of them, to divide into four equal parts and to dispose of the same as follows:
(1) To pay over one of each said parts to my said children, Frances Elizabeth Good and Margaret Jane Good, respectively, and to their heirs and assigns forever.
(2) The other one-half part of my said residuary estate I give, devise and bequeath to my executors in trust, to invest and re-invest the same in first-class, interest-bearing securities as hereinafter specified, and to pay over the interest and income thereof to my wife, Sarah Elizabeth Good, as long as she may live.
And it is further my will and I hereby direct my said trustees that in case my said wife shall so desire, she shall have the right and privilege of taking and appropriating to her own use so much of the principal of said sum as she may wish, in addition to the interest and income thereof, my intention being that my wife shall be the sole judge as to whether the interest and income of said part is sufficient for her needs, and in case she finds that said income is not sufficient, she shall have the right to use so much of the principal of said fund as she may desire, and only the residue of the principal of said fund so remaining at her death shall be disposed of as herein next provided.
(3) I hereby give to my said wife, and expressly invest her with power and authority to dispose of one-half of the balance of said fund so invested in trust for her by her last will and testament in such manner as to her may seem best; and the other one-half of the balance of said trust fund I hereby give, devise and bequeath to my legal heirs and assigns forever.

The decedent’s widow, Sarah Elizabeth Good, was duly appointed as sole executrix and sole trustee under the will of Daniel Good and continued in such capacities until her death, the coexecutor and trustee named under item fourteenth of the will having predeceased the testator.

On November 9, 1928, Sarah E. Good died intestate, a resident of Buffalo, New York, and left surviving her as her only heirs at law and the only heirs at law of Daniel Good, their aforesaid two daughters, Margaret Jane Good and this petitioner. Sarah E. Good died without having exercised her rights under the will of Daniel Good to consume the principal of the trust fund or to dispose, by will, of one-half of the balance of the fund remaining at her death, as provided by item eleventh above set out.

Upon the death of Sarah E. Good, petitioner became entitled to receive, and did receive, certain securities from the trust fund as provided by the will of her father under item eleventh. The property of the Daniel Good testamentary trust, created under item eleventh, was not considered property belonging to the estate of Sarah E. Good, deceased, for Federal estate tax purposes.

In the year 1935, petitioner sold 2,525 shares of the common stock of the F. W. Woolworth Co. for a total sum of $149,203.99, which shares were not a part of the Daniel Good testamentary trust but were acquired by her from the intestate estate of her mother, Sarah E. Good. These shares were appraised as of November 9, 1938, for Federal estate tax purposes, under the blockage theory, at $207,050 and the Federal estate tax liability of the estate of Sarah E. Good was determined on that basis. The value of such shares, based on market quotations and average sale prices on November 9, 1928, was $218,917.50.

In the year 1935, petitioner sold certain shares of common, stock of the F. W. Woolworth Co. and her interest in real estate situate in Canada, both of which were acquired by her under paragraphs (2) and (3) of item eleventh of the will of Daniel Good. The number of shares of stock sold, the price received, and the value of this stock on July 13, 1922, and on November 9, 1928, are stipulated, together with the value of the real estate in question, on the former date, which value petitioner contends was also its fair market value on November 9, 1928.

During 1936, petitioner sold certain shares of stock of the F. W. Woolworth Co., Standard Oil Co. of California, the Atchison, Topeka & Santa Fe Eailroad Co., and Willys-Overland Co., and bonds of Westchester County, New York, all of which she had acquired under paragraphs (2) and (3) of item eleventh of the will of Daniel Good. The number of shares of each stock sold, in each instance, the price received on each sale, and the fair market value thereof on July 13, 1922, and November 9, 1928, are stipulated.

The correctness of the major portion of the deficiency for 1935 and all of that for 1936 depends upon the gain or loss on this sale of property which petitioner acquired under paragraphs (2) and (3) of item eleventh of the will of her father, Daniel Good.

Since sections 113 (a) (5) of the Revenue Acts of 1934 and 1936, which sections are identical and are controlling here, provide that “the basis [to be used in this computation] shall be the fair market value of such property at the time of such acquisition”, a decision of what is meant by “time of such acquisition”, under the stipulation, will furnish the basis for determining the amount of capital gain or loss realized and the length of petitioner’s holding of the property for the purpose of limiting the amount of that gain or loss which is to be recognized for tax purposes. Secs. 117, Revenue Acts of 1934 and 1936. See McFeely v. Commissioner, 296 U. S. 102.

As stated, in determining gain or loss on the sale of this property, respondent has used as the basis for computing gain or loss, the fair market value of this property on June 13, 1922, the date of Daniel Good’s death. He construes “time of such acquisition” to mean the date of death of Daniel Good, the petitioner’s testator. His position is that petitioner acquired a vested interest in this property upon the death of her father but that, irrespective of whether the interest was vested or contingent, “the time of such acquisition” of this property was the date of the death of the testator because petitioner unquestionably took title to such property under the provisions of the will or by intestacy and, therefore, “by bequest, devise, or inheritance.” See Regulations 86, art. 113 (a) (5)-l (5).

Petitioner contends that the “time of such acquisition” denotes the time when her interest in the property she sold became vested. She then argues that, under the law of New York, which is controlling here, she acquired only a contingent interest in that property at her father’s death, under his will, which did not vest until her mother’s death and the termination of the testamentary trust created by her father.

It is apparently not doubted, and no doubt exists, we think, that petitioner acquired all the property in question “by bequest, devise, or inheritance” from her father. Moreover, in considering the meaning of the disputed phrase, it is apparent and noteworthy that, since the pertinent statutory provisions have to do only with the basis which shall be used in determining gain or loss on the disposition of the property thus acquired, it is wholly immaterial whether the petitioner’s interest in the property disposed of was contingent at the death of the testator, to become vested upon the occurrence of a condition subsequent, or was vested at the testator’s death, subject to divestiture upon the happening of such a condition. The first has happened or the latter failed before the taxable disposition occurs. Thus, the significance of any differences, practical, legalistic or otherwise, between contingent and vested estates, has disappeared before the pertinent statutory provision can come into play.

However, the decision of the issue turns directly upon the meaning Congress intended to convey by its use of the words “time of such acquisition” in sections 113 (a) (6) of the Revenue Acts of 1934 and 1936.

Although this provision is similar to that included in all the revenue acts prior to those of 1928 and 1932, we are concerned here only with the Congressional meaning of the disputed expression when used in the Revenue Acts of 1934 and 1936. Cf. Helvering v. Wilshire Oil Co., 308 U. S. 90.

In construing this statute, as any other, of course, extrinsic aids, including the legislative history of the statute and the Congressional Committee Reports, are relevant only if the meaning of the statute is ambiguous. Helvering v. Morgan’s, Inc., 293 U. S. 121; McFeely v. Commissioner, supra.

That ambiguity in the proper meaning to be attributed to the phrase under discussion existed when it, or a similar expression, was used in the revenue acts preceding those for 1928 and 1932, is clearly established by the large volume of litigation which arose over the construction of that phrase in the earlier acts. See, among other cases, Roebling v. Commissioner, 78 Fed. (2d) 444; Commissioner v. Igleheart Trust Estate, 75 Fed. (2d) 151; Warner v. Commissioner, 72 Fed. (2d) 225; certiorari denied, 293 U. S. 620; Pringle v. Commissioner, 64 Fed. (2d) 863; certiorari denied, 290 U. S. 656; Brewster v. Gage, 25 Fed. (2d) 915; Grace L. Wright, 29 B. T. A. 1033; Harry C. Kayser, 27 B. T. A. 816; Melville A. Stern, Executor, 22 B. T. A. 1319; Rodman E. Griscom, 22 B. T. A. 979; Central Trust Co., Executor, 19 B. T. A. 867; Maude Enella Brickell, 17 B. T. A. 711; Elizabeth W. Boykin, 16 B. T. A. 477; Louis Kalb, 15 B. T. A. 886; F. W. Matthiessen, Jr., 2 B. T. A. 921. The very fundamental change from the earlier acts, enacted in sections 113 (a) (5) of the Revenue Acts of 1928 and 1932 (see Lane v. Corwin, 63 Fed. (2d) 767), “was made because there was some doubt as to the meaning of the term ‘date of acquisition’, which was the term used under the Revenue Act of 1926.” Report of Ways & Means Committee, 73d Cong., 2d sess., H. Rept. 704. See also discussion in McFeely v. Commissioner, supra.

The courts and the Board have construed “date [or time] of such acquisition”, as used in the revenue acts preceding the Act of 1928, in the sections comparable to those presently controlling. Likewise, the meaning of the word “acquired”, in sections 113 (a) (5) of the Revenue Acts of 1928 and 1932, has been interpreted.

But these cases are not impressive here, since they have to do with revenue acts other than those of 1934 and 1936. Moreover, the cases which considered the meaning of “acquired” in the Revenue Acts of 1928 and 1932 are not in point here for another reason. The basic question in those cases was not as to the date or time of acquisition of property but was whether the property, if personal, was acquired by speeifie bequest and, if real, by general or specific devise or by intestacy. Upon the answer to those questions the act, itself, expressly fixed whether the basis on disposition of the property should be its value at the date of death of the decedent or the date of distribution of the property. Those cases are important, if at all here, in showing the purpose Congress had in making the changes appearing in the pertinent provisions of the Revenue Acts of 1934 and 1936, which reenacted section 113 (a) (5) as it had appeared in the acts prior to those of 1928 and 1932. The decisions of the courts in the cases arising under these latter acts had disclosed that, under section 113 (a) (5), as there appearing, where property passed by a bequest or devise of a contingent remainder, all increase in the value of the property between the date of death of the decedent and the date of the ultimate distribution, escaped tax altogether. Congress desired to correct that situation. In the meantime, the Supreme Court had decided Brewster v. Gage (280 U. S. 327), on January 6, 1930. Congress believed that the Supreme Court there determined finally that the “time of such acquisition” of all property acquired “by bequest, devise, or inheritance” was the date of death of the decedent. Acting under that belief — the soundness of which is immaterial here — Congress adopted the Revenue Act of 1934. This seems to be conclusively established by the Report of the Ways & Means Committee accompanying the Revenue Act of 1934, explaining the pertinent change in that act. That report, in part, reads:

Section 113 (a) (5) of the Revenue Act of 1932 is a reenactment of a similar provision contained in the 1928 act. The change in the 1928 act was made because there was some doubt as to the meaning of the term “date of acquisition”, which was the term used under the Revenue Act of 1926. Since the 1928 act was passed, the Supreme Court has defined “the date of acquisition” to mean the date of death in the case of all property passing by bequest, devise, and inheritance, whether real or personal. (Brewster v. Gage, 280 U. S. 327.) Section 113 (a) (5) of the bill conforms to the language contained in the Revenue Act of 1926, so that a uniform basis rule may be required in the case of property passing at death, whether real or personal. The section also includes a provision relating to general powers of appointment exercised by will, which was explained in connection with section 113 (a) (4).

See also Report of the Senate Finance Committee, 73d Cong., 2d sess., Senate Report 558.

Undoubtedly therefore, we think, “time of such acquisition”, as used in sections 113 (a) (5) of the Revenue Acts of 1934 and 1936, means the date of death of the decedent as to all property acquired from the decedent “by bequest, devise, or inheritance”, regardless of whether the title to the property thus acquired as of the date of death of decedent was contingent or vested. The respondent is affirmed on this issue.

There remains only the issue with respect to the stock acquired by petitioner from the estate of her mother and sold in 1935. It is stipulated that in determining the estate tax liability of the estate of petitioner’s mother, the estate holdings of the F. W. Woolworth Co. stock were valued by application of the blockage rule at an amount equivalent to $82 a share, whereas the average selling price of this stock from sales made on the Hew York Stock Exchange on the critical date was $86.10 per share. Respondent contends that the valuation, at which the stock was appraised, for estate tax purposes, in the estate of petitioner’s mother, and upon which value that tax was paid, must be held to be correct, as against this petitioner, and as establishing the fair market value here of the stock received by petitioner from that estate. Petitioner argues that the determination of value for purposes of estate tax does not conclusively establish fair market value, and that her gain or loss, upon sale of the stock, must be computed upon the basis of actual fair market value on the date of her mother’s death, if it is established that value be different from the value at which the stock was included for estate tax purposes.

We agree with petitioner. Anson Evans et al., Trustees, 29 B. T. A. 710; Northport Shores, Inc., 31 B. T. A. 1013; Lillian G. McEwan, 26 B. T. A. 726; May Rogers, 31 B. T. A. 994; affd., 107 Fed. (2d) 394.

Whether the petitioner has established that value is a question of fact. No evidence supporting the application of the blockage rule appears in the record. However, the facts stipulated disclose that the volume of trading in this particular stock at or about the date of death of petitioner’s mother was not only very large, compared with the block of stock to be valued, but that the price trend was upward. In our judgment, this record thus overcomes the presumption of correctness attaching to respondent’s determination of basis. We find that on November 9,1928, the fair market value of the 2,525 shares of stock sold by petitioner in 1935 was $86.70 per share. See John J. Newberry, 39 B. T. A. 1123.

Reviewed by the Board.

Decision will be entered wader Rule 50.

Black,

dissenting: It is petitioner’s contention in this proceeding that the interest which she received in the property conveyed by her father’s will to a testamentary trust was a contingent remainder and that this interest in such property did not become vested until the date of the death of her mother, November 9,1928.

The law of New York controls the question. Forbes v. Commissioner, 82 Fed. (2d) 204. Under the laws of the State of New York, I think petitioner had only a contingent remainder under the terms of the testamentary trust. Under the will of petitioner’s father, petitioner’s mother, the life tenant, had not only the right to the income from the property, but also the right to take for her own use so much of the principal as she might wish or desire, she being the sole judge as to whether she should consume the principal. By the terms of the will it was only the residue of the principal of the fund so remaining in the testamentary trust at her death which was to be disposed of by the trustee to the remaindermen. The remainder thus created was contingent and not vested. See In Matter of Dinkel, 133 Misc. 868; 234 N. Y. S. 97; Matter of Nugent, 142 Misc. 594; 255 N. Y. S. 236; Matter of Dormer, 157 Misc. 810; 285 N. Y. S. 283; Louis Kalb, 15 B. T. A. 886.

If, under the testamentary trust involved in this proceeding, the remainder interest of petitioner was contingent, petitioner did not “acquire” the property within the meaning of section 113 (a) (5) of the Bevenue Acts of 1934 and 1936 until the death of the life tenant. Dane v. Corwin, 63 Fed. (2d) 767; Pringle v. Commissioner, 64 Fed. (2d) 863; Forbes v. Commissioner, supra; Louis Kalb, supra.

The language of section 113 (a) (5) of the Bevenue Acts of 1934 and 1936 is precisely the same as the language of a similar section in the 1926 Act and prior acts. Although this is true, the majority opinion construes the language of section 113 (a) (5) of the Bevenue Acts of 1934 and 1936 to fix the date of “acquisition” as the same whether the remainder interest is vested or contingent.

This construction given by the majority opinion seems to rest largely upon reports of the House Ways and Means Committee and the Senate Finance Committee, which accompanied the bill which became the Bevenue Act of 1934. It seems to me that the reports to which the majority opinion refer went no further than to make plain that the purpose of the language was to adopt the construction which the Supreme Court of the United States had put upon similar language in Brewster v. Gage. I think that the court in Pringle v. Commissioner, supra, makes clear that Brewster v. Gage did not decide the question we have in the instant case. There the court (Ninth Circuit) said, among other things:

The eases of Brewster v. Gage, 280 U. S. 327 and Chandler v. Field, 63 Fed. (2d) 13, are not controlling here. In each of those cases the interest of the taxpayer became vested immediately upon the death of the testator.

To th.e same effect, I think, is Lane v. Corwin, supra, although it involved a different statute.

Under the authorities I have cited, I think the date of petitioner’s acquisition of the property in question was the date of the death of her mother, November 9, 1928, which terminated the testamentary trust and vested the property in petitioner, and not the date of the death of her father, July 13, 1922.

For the reasons I have stated, I respectfully dissent from the majority opinion.

ARundell, Van Fossan, Murdock, and Disney agree with this dissent.

       SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
      (a) Basis (Unadjusted) oe Property. — The basis of property shall Be the cost of such property; except that—

      (5) Property transmitted at death. — If the property was acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent, the basis shall be the fair market value of such property at the time of such acquisition. In the ease of property transferred in trust to pay the income for life to or upon the order or direction of the grantor, with the right reserved to the grantor at all times prior to his death to revoke the trust, the basis of such property in the hands of the persons entitled under the terms of the trust instrument to the property after the grantor’s death shall, after such death, be the same as if the trust instrument had been a will executed on the day of the grantor’s death. For the purpose of this paragraph property passing without full and adequate consideration under a general power of appointment exercised by will shall be deemed to ,be property passing frcpn the individual exercising such power .by bequest or deyisq.

       Revenue Act of 1921, see. 202 (a) (3) ; Revenue Act of 1924, see. 204 (a) (5) ; Revenue Act .of 1926, see. 204 (a) (5). See Brewster V. Gage, 280 TJ. S. 327.

       SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.

      (5) Property transmitted at death. — If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, tbe basis shall be the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent’s estate from the decedent, the basis in the hands of the estate shall be the fair market value of the property at the time of the death of the decedent. In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. In the case of property transferred in trust to pay the income for life to or upon the order or direction of the grantor, with the right reserved to the grantor at all times prior to his death to revoke the trust, the basis of such property in the hands of the persons entitled under the terms of the trust instrument to the property after the grantor’s death shall, after such death, be the same as if the trust instrument had been a will executed on the day of the grantor’s death.


source: Caselaw Access Project

author: Hill :

license: Public Domain

text:
    Central Hanover Bank and Trust Company as Executor of the Last Will and Testament of William H. Morgan, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91101.
    Promulgated December 21, 1939.

      Leonard A. Blue, Esq., for tbe petitioner.

      James 0. Maddox, Esq., for tbe respondent.
   OPINION.

Hill :

The petitioner contends that because of the renunciations the property held in trust under the will of Laura La Montagne did not pass in remainder by the exercise of the power of appointment by William H. Morgan, the decedent herein, and is not part of his gross estate for the purpose of the estate tax. Respondent contends contra.

The Revenue Act of 1926, as amended, provides as follows:

Sm 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, * * *
(f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will * * *.

The statute provides three requisites for the inclusion of appointed property in the estate of the decedent, namely, the existence of a general power of appointment, the exercise of such power by the decedent by will, and the passing of the property by reason of such exercise. If the property does not pass as a result of the exercise of the power of appointment by the decedent, then it is not to be included in the decedent’s gross estate. Helvering v. Grinnell, 294 U. S. 153.

Bearing in mind that Laura La Montagne died leaving surviving her four sons and no husband and that each of her four sons survived petitioner’s decedent, the following are in brief the provisions of her will applicable to the questions under consideration:

1. An estate for life in her residuary estate was bequeathed in trust to her four sons in equal shares, with the income from one such share payable to each son for the term of his life.

2. General power of appointment was granted to decedent to designate and appoint the person or persons who should take the remainder interest in the share of the trust property in which each of the four sons had a life estate.

3. Decedent exercised the power of appointment by will and designated the persons who should take the remainder interests in the trust property at the expiration of the several life estates. Such designation under the following conditions constituted the following described persons as such remaindermen:

(a) Upon the death of each of such sons the fee title to the property in which he had a life estate should vest in his surviving issue, if any, in equal shares.

(b) If a son should die leaving no issue surviving the fee title to the property in which he had a life estate should vest in the surviving brothers of such deceased son and in the surviving issue of any predeceased brother, by representation, in equal shares.

(c) If the last survivor of the sons should die without leaving surviving him any issue of any of the sons the fee title to the property in which he had a life estate should vest in the Metropolitan Museum of Art in the city of blew York.

Laura La Montagne’s will contains no provision for the disposition of the remainder interests in her residuary estate upon the expiration of the life estates of her several sons therein except by the exercise of the power of appointment granted to petitioner’s decedent. It is apparent, therefore, that none of the sons of Laura La Montagne acquired under her will a remainder interest in any of the property of her estate. It is also apparent that if decedent had failed to exercise the power of appointment granted him or if the exercise of such power was ineffective to pass title because of the renunciations of title thereunder by the four sons or for any other reason, the four sons as the only heirs at law of their mother would have, as of the date of her death, the fee title in equal shares to the remainder interests in the trust property upon the expiration of their several life estates therein.

That decedent exercised the power of appointment is admitted but it is contended by petitioner that the renunciations of title thereunder rendered the exercise of appointment ineffective to pass title and that hence one of the elements essential to the applicability of section 302 (f) of the Eevenue Act of 1926 is absent. The premise of petitioner’s contention is that by the renunciations of title under the appointment no title to the remainder interests in the trust property passed either under the will of decedent or under the will of Laura La Montagne, and that as to such remainder interests the latter died intestate. Upon the basis of such premise petitioner claims that the four sons of Laura La Montagne took title in fee to the remainder interests in question under the law of descent and distribution as the only heirs at law of their mother, and that they received nothing by appointment. Petitioner relies mainly for support of its contention on Helvering v. Grinnell, 294 U. S. 153, and on In re Lansing's Estate, 182 F. Y. 238; 74 N. E. 882. The GrimieTl case involved the following state of facts: John O. Stone died a resident of Few York. He left a will by which he created for the benefit of his daughter, the decedent, Annie Stone, a trust fund the income from which was to be paid to her during her life. The will directed that upon her death her share of the estate should go or be applied to such persons and such uses as she might appoint by last will and testament; but, in default of such appointment, her share of the estate should go and belong to her children or issue, respectively, by right of representation, or in default of such issue to her next of kin. Annie Stone died leaving no issue and leaving as her next of kin her two sisters, Ellen J. Stone and Sarah J. Grinnell. Annie Stone left a will by which she devised and bequeathed the property in question in equal shares to her two sisters above named. After the death of Annie Stone the two sisters in writing renounced their right to receive the property under the appointment made by Annie Stone and claimed it under the will of their father. If Annie Stone had not exercised her power of appointment, her two sisters would have taken under their father’s will the same estate that was bequeathed them under the exercise of the power of appointment. The Supreme Court held, upon this state of facts, that because of the renunciation of title under the appointment, the property involved was not includable in the estate of Annie Stone for estate tax purposes. The Court said:

Can it properly toe said that, because ttoe beneficiaries elected to taire ttoe property under a distinct and separate title, ttoe property neverttoeless passed under ttoe power? Plainly enough, we ttoink, the answer must be in ttoe negative.

The case of In re Lansing's Estate, supra, involved a state transfer tax on property passing under a power of appointment and was based upon the following state of facts: Thomas Suffiern died a resident of Few York leaving a last will and testament in which he gave and devised to his daughter, Janet S. Lansing, a certain portion of his estate during her life with the remainder to her heirs at law, subject to a testamentary power of appointment in her to dispose of the remainder in fee after the termination of her life estate “among her heirs at law and her collateral relatives in such proportion and manner and with such limitations as she may desire.” Janet S. Lansing died leaving a will in which she exercised the power of appointment by naming her only child and heir at law, Janet Lansing McVickar, to take the property in question. The surrogate imposed a transfer tax on the transfer under the appointment. Janet Mc-Vickar elected not to accept title under the appointment. The court held that no such tax was due for the reason that Janet McVickar took nothing by the power of appointment which she did not already have under the will of her grandfather, Thomas Suffern. The court said :

The property under consideration never belonged to the daughter, Mrs. Lansing, although she had the income therefrom during her life through a trust created for her benefit by her father’s will. By the same sentence which created the trust during her life, the property was given after her death to the granddaughter, Mrs. McVickar, subject to the exercise of the power of appointment. That power was limited to two classes of persons, consisting of the heirs at law and the collateral relatives of Mrs. Lansing. Mrs. McVickar was her sole heir at law, and the power of appointment, as formally exercised, gave all the property to her the same as her grandfather had given it to her more than 30 years before. In other words, the attempt to exercise the power neither increased nor diminished the estate of Mrs. McVickar, and did not affect in any degree the value of her grandfather’s gift. It did not effectively transfer any property whatever, for she took from her grandfather, and nothing was added to or taken away from the gift by the exercise of the power through the will of her mother. The execution of the power left the title where it was before, and the result is the same as if there had been no power to exercise. Mrs. McVickar was bom before her grandfather died, and upon his death she took a vested interest in remainder, because she was “a person in being, who would have an immediate right to the possession of the lands upon the ceasing of the intermediate or precedent estate” created in trust for the benefit of her mother. * * * Her rights were fixed by the will of her grandfather, and, unless changed pursuant to its provisions, her estate in expectancy would become an estate in possession upon the death of her mother. While the situation was subject to change under the power of appointment, no change was made. Although the power was exercised in form, her title was perfect without it, and she derived no benefit from it. The power was to “dispose of the remainder,” and the remainder was not disposed of, but continued where it was. The attempt to execute the power was not effective, because it did nothing. The exercise of a power which leaves everything as it was before is a mere form, with no substance.
* * * The power as it might have been exercised would have left Mrs. McVickar with no title at all, but as it was exercised it left her the same title that she had before. It gave her nothing and took nothing away from her. She is not forced to claim through the second clause of her mother’s will, for she took under the will of her grandfather. She had the right of election and could refuse to take under the appointment and still hold the property, for her title was as good without as with the exercise of the power. * * *
An appointee under a power ha^ the right of election, the same as a grantee under a deed. “It is essential to the legal operation of a deed that the grantee assents to receive it. It cannot be imposed upon him, and there can be no delivery without an acceptance.” * * * While the mother could appoint, the daughter could reject. Mrs. McVickar could therefore repudiate the action of her mother in attempting to exercise the power and hold the property from her grandfather.

The Supreme Court in the Grinnell case quoted with approval and at length from the Lansing's Estate case and adopted the reasoning thereof as to the meaning and application of the state law as being equally applicable to the question presented in the Griwnéll case under the Federal statute.

Under the facts in each of the above cited cases the persons designated as appointees under the exercise of the power of appointment were vested with the same title to the same estate from a source independent of the appointment as was given them by the appointment. In the proceeding before us an analogous state of facts does not exist. Here the title claimed for the four sons was a fee title to the remainder in equal shares by inheritance, and if they had title by inheritance it was that kind of title. Under the power of appointment as exercised neither of the sons was given such title. The appointment gave them neither an estate in fee nor an estate in equal shares in the entire remainder of the trust property. It gave them a defeasible title in different and unascertainable proportions in not to exceed three-fourths of such remainder.

For petitioner to succeed in its contention that none of the remainder of the trust property is includable for estate tax purposes in decedent’s estate it must appear from the evidence that the entire remainder was appointed to the sons and that they each had the same title by inheritance as was appointed to them. In re Lansing's Estate, supra; James C. Webster et al., Executors, 38 B. T. A. 273. Helvering v. Grinnell, supra, is not contra. Not only do such facts not so appear from the evidence, but the contrary appears therefrom. To justify the exclusion of a part only of such remainder from decedent’s estate for estate tax purposes it must appear from the evidence that title to the part so excluded was given to the sons by appointment and that they each had, independent of the appointment, title by inheritance to such excluded part. Cf. In re Duryeds Estate, 277 N. Y. 310; 14 N. E. (2d) 369; In re Slosson's Estate, 266 N. Y. 79; 110 N. E. 166; Lewis Spencer Morris et al., Executors, 39 B. T. A. 570. Also to justify such exclusion, whether on the theory that no title passed by appointment because of an existing independent title in the appointees to the same property or on the theory that renunciation of title by appointment prevented such title from passing regardless of the existence of title in appointees from another source, it must appear from the evidence what proportion of the appointed property did not pass by appointment. The burden of showing such facts is upon petitioner. It has not met the burden.

It would be an anomaly to hold that the remainder of the trust property is intestate property as a result of the renunciations by the sons of title under the appointment in view of the fact that appointees other than the sons will under the terms of the appointment, if certain contingencies happen, receive a part or all of such remainder interest to the exclusion of the sons. The rights of such other appointees are testamentary rights and affect the title to the entire remainder. Whether the sons will or will not get any part of the remainder of such property depends upon the happening or nonhappening of contingencies specified in the will of decedent in exercising the power of appointment regardless of the renunciations of the sons. The whole title to the remainder of such property was disposed of by appointment in such way that no part of it can be intestate property. It can not be intestate property as to the sons of Laura La Montague and testate property as to the other appointees under decedent’s will.

In determining the status of the titles under the appointment we must consider them as of the date of the death of petitioner’s decedent. Ithaca Trust Co. v. United States, 279 U. S. 151. In view of the contingencies with which such titles were burdened it is impossible as of the time of decedent’s death to determine what portion of the remainder of the trust property, if any, each of the sons will acquire by appointment. At least the one-fourth interest in such remainder as appointed by the donee of the power, representing the share in which the survivor of the four sons has a life interest, can under no circumstances go to the sons or either of them. If each of the sons of Laura La Montagne should die leaving no issue surviving or if only the last survivor of such sons should die leaving issue surviving, the son first to die will acquire no part of such remainder, the son second to die will receive one-twelfth of such remainder, the son third to die will receive five twenty-fourths of the remainder and the son last to die will receive eleven twenty-fourths of such remainder. Under the conditions stated the son last to die will receive more than one-fourth share of such remainder and hence a greater estate therein than if he had taken as an heir at law of his mother under the laws of intestacy. It is, of course, impossible, as of the date of the death of decedent, to determine the order in which the deaths of the four sons will occur and, hence, it can not be determined what, if any, share of the remainder of the trust property each of the sons may receive under the appointment, but one of them may receive more than a one-fourth share thereof. The contingent factor of surviving issue of either of the sons also renders impossible the determination, as of the time of the death of the decedent, what portion of the remainder, if any, such sons may respectively receive. The occurrence of such contingencies would either diminish or wholly defeat the estates in remainder which the sons, or some of them, would otherwise receive under the appointment.

At the time of decedent’s death one of the sons, Morgan E., had living two minor children. Under the appointment these children were the remaindermen to their father’s life tenancy in one-fonrth share of the trust property. Their title was defeasible only by their predeceasing their father. Such title passed to them by the appointment just as effectively as title passed to each of the four sons of Laura La Montagne by such appointment. Also the issue, if any, of the sons, whether or not in being at the time of decedent’s death, who should survive their fathers were by the appointment designated as remaindermen after their father’s life tenancy and re-maindermen, per stirpes, to the extent that their fathers, if living, would be remaindermen.

It is obvious from the foregoing that the remainder interests to the sons of Laura La Montagne, as given by the appointment, were vastly different in character and scope from the remainder interests which are claimed for them under the laws of intestacy as the only heirs at law of Laura La Montagne. It is also obvious that the four sons in question were not the only appointees under the power of appointment. There was no renunciation of title under the appointment by or on behalf of the two children of Morgan La Montagne or of the contingent titles of unborn issue.

This proceeding is clearly distinguishable on the facts from the cases of Helvering v. Grinnell and In re Lansing's Estate, supra, and hence the decisions in those cases are not controlling here. However, the principles enunciated in those cases indicate clearly, we think, that under the facts here the renunciations of title under the appointment were ineffective to prevent the passing of title by the appointment.

In re Cooksey's Estate, 182 N. Y. 92; 74 N. E. 880, involved, as did the case of Lansing's Estate, supra, a transfer tax under the laws of New York providing that when any person exercises a power of appointment such appointment when made shall be a taxable transfer.

In the case of Cooksey's Estate, supra,, the tax was resisted on the ground that the appointment granted the same estate to the same persons that was bequeathed and devised under the will of the donor of the power of appointment, subject to the exercise of such power. This was true except that under the appointment the amounts to be paid to the beneficiaries at the times stated under the donor’s will were fixed at the maximum amounts specified under the donor’s will instead of leaving such amounts to be fixed in the discretion of trustees, and except further that the discretion as to the amounts to be paid for the education, maintenance, and support of minor beneficiaries was under the appointment given to the trustees instead of to the guardian of such minors as provided in the donor’s will.

The court, in holding the transfer under the appointment taxable, said:

Again, as we have seen, under the will of Mrs. Cooksey, in exercising the power of appointment she made material changes with reference to paying over the remainder to her children from that incorporated in the will of her father. While each of her children may ultimately receive the same amount, yet she, by her will, fixes definitely the amounts that shall he paid to each of her children upon their arriving at the ages of 21 and 25 years, leaving no discretion in the trustees as to the amounts that shall be paid over to them, and then vests in the trustees the discretionary power to determine how much shall be used for the support and education of the children during their minority. It appears to us, therefore, that there was a necessity for exercising the power, that it cannot be treated as a nullity, and that, therefore, the transfer tax under the statute was properly assessed.

The facts in the instant case are much stronger than in the Coolcsey case in support of title passing by appointment. Here, the titles under the power of appointment which the sons of Laura La Mon-tagne renounced were not only not the same as they would have received as the only heirs at law of their mother if the power of appointment had not been given or had not been exercised, but they differed so essentially from such titles that there was little, if any, analogy to them.

We hold that the entire remainder of the trust property is includable in decedent’s estate for estate tax purposes.

The remaining question for determination is whether, in determining the value at which the remainder of the trust property passed under the power of appointment, there should be deducted any amount as estimated trustee’s commissions which will be payable on the distribution of the trust property at the termination of the trusts. Respondent disallowed such deduction. Petitioner contends that such deduction should be allowed.

Under section 302 of the Revenue Act of 1926, property passing under a general power of appointment exercised by will must be included for estate tax purposes in the estate of the donee of the power at its value at the time of his death. The estate tax is imposed upon the net estate of the decedent, and section 303 of such Revenue Act provides that the net estate for such purpose shall be the value of the gross estate reduced by certain enumerated deductions and exemptions. Among such deductible items are administration expenses and claims against the estate or any indebtedness in respect of the property to the extent that such claims or indebtedness were incurred or contracted bona fide and for an adequate and full consideration in money or money’s worth.

The property passing by appointment in this proceeding is the remainder interest in property now being administered by a testamentary trust. Section 285 of the Surrogate’s Court Act of the State of Hew York provides that the surrogate must allow to a testamentary trustee for his services in such official capacity commissions for “receiving and paying out all sums of money” at specified rates of percentage of the sums so received and paid out. The trustee’s commissions for “receiving” have been paid to it and were allowed by the respondent as a deduction from the gross value of the appointed property, but respondent disallowed any deduction for estimated trustee’s commissions for “paying out” any such sums of money. It is stipulated by the parties that such disallowed commissions, if computed at the rates specified in section 285 of the Surrogate’s Court Act upon the value of the property in question on October 12, 1934, the date of decedent’s death, would amount to the sum of $3,970.25, but the value of the property at the date named is not the basis upon which such commissions are computable. To justify the deduction claimed in determining the value of the property passing by appointment two things are necessary — first, authority must be found therefor in the statutes, and, second, the amount of such commissions must be established by the evidence. The deduction claimed is for an estimated amount of commissions which will be payable to the trustee of the testamentary trust upon paying out sums of money in distribution of the trust property at the termination of the several trusts. We find no provision in the revenue act authorizing such a deduction. For do we find authority in law for excluding from the value of the appointed property the amount of such estimated future commissions in determining the value of the property passing under general power of appointment. It is our duty, however, to find the value of such property and in doing so we should take into consideration all facts pertinent thereto. The value of the property involved herein has been stipulated without taking into account the obligation to pay as trustee’s commissions in the future specified percentages of the value of the property when distributed. To hold that the value of such property is its value as stipulated, reduced by estimated trustee’s commissions computed on such stipulated value, would be unsupported by evidence and, hence, an arbitrary action. It is too obvious for comment that such future commissions are not measurable by applying the statutory rates of percentage to the value of the property at the time of decedent’s death, but only by applying such rates to the value of the property when distributed or paid out. There is no evidence of record, and we doubt if any can be produced, by which the amount of such future commissions can be determined. Hence, even if in law there is authority for deducting such commissions in determining the value of the property for estate tax purposes, there is a lack of evidence from which to ascertain the amount of such, deduction, and the burden is upon petitioner to produce such evidence. Burnet v. Houston, 283 U. S. 223; Helvering v. Taylor, 293 U. S. 507.

The parties hereto stipulated the value of the property in question as of the date of decedent’s death without taking into account trustee’s commissions in amounts to become determinable and payable only upon the paying out of the trust property at the termination of the several trusts. It is not shown by the evidence to what extent the payment of such future commissions reduces the value of the property as stipulated or that it reduces such value at all. We hold, therefore, that the stipulated value of the property is the value thereof to be included in decedent’s estate for estate tax purposes.

Reviewed by the Board.

Decision will he entered under Rule 50.


author: Haekon:

text:
    Uhl Estate Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89239.
    Promulgated December 21, 1939.

      Paul A. McCarthy, Esq., and Benjamm Hichlm, C. P. A., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Haekon:

The first question is whether assessment of a deficiency in income and excess profits tax is barred by the statute of limitations. Determination of this question turns on either (a) whether the return filed by petitioner was such return as meets the requirements of section 52 (a) of the Revenue Act of 1932; or (b) whether a valid waiver was filed, pursuant to section 276 (b) of the Revenue Act of 1932, by petitioner, so as to extend the period for assessment to June 30, 1937.

(a) Petitioner stands upon the income and excess profits tax returns as filed, and contends that the filing of the income tax return started the running of the statute of limitations. Respondent, by amended answer, alleges that the return filed was not a proper return, as required by law, because it does not meet the requirements of section 52 (a), since it was not sworn to by the president of petitioner, and it was not subscribed and sworn to by the treasurer of petitioner. Respondent contends that, no proper return having been filed, the statute of limitations has not yet started to run. Respondent relies on Lucas v. Pilliod Lumber Co., 281 U. S. 245, 248, 249, and Employees Industrial Loan Association, Inc., 27 B. T. A. 945, 950.

The evidence shows that the returns of petitioner for 1933 were not sworn to by its president. He has testified that he signed the returns in Los Angeles, the returns having been mailed there to him to sign, and that he did not sign the returns before a notary. The evidence shows that Adolph Uhl signed the returns in San Francisco. On each return there appears the signature and seal of Ruth H. Cosgrove, notary public in and for the City and County of San Francisco. The president of petitioner, George Uhl, did not swear to the returns of petitioner before Ruth H. Cosgrove. Her seal and signature on the affidavits mean nothing whatever with respect to the signatures of petitioner’s president.

The record shows that petitioner had only one officer in March 1934, when the returns were filed, namely, a president. George Uhl testified (page 12 of the transcript) that there was no treasurer. It is not necessary to determine whether a return signed and sworn to by one officer of a corporation, who is the only officer, is a return which meets the requirements of section 52 (a).

Under the provisions of section 52 (a) it is mandatory that a return of a corporation “shall be sworn to by the president.’’ This requirement is not a matter of mere form, but is to fix responsibility. Indiana Rolling Mills Co., 13 B. T. A. 1141, 1144. The returns of petitioner do not meet the express requirement of the statute that the information thereon be furnished under oath. It is held that no proper returns for the year 1933 were filed for petitioner. A taxpayer must meet all the named conditions of the statute with meticulous compliance, in order to secure the benefit of the statute of limitations. Lucas v. Pilliod Lumber Co., supra. Since the petitioner did not file returns which meet the statutory requirements, there is no bar to the assessments of tax which respondent has made. It is the filing of returns that starts the running of the statutory period. See section 275 (a) of the Revenue Act of 1932; Updike v. United States, 8 Fed. (2d) 913.

(b) In view of the above holding, it is not necessary for us to consider whether or not the waiver executed by Adolph Uhl was a valid waiver.

The second question relates to the respondent’s claim for addition to the tax of the 25 percent penalty under section 291 of the Revenue Act of 1932. The reasons which require that it be held that no proper return was filed for 1933, for failure to meet the statutory requirements, require also that the addition to tax be sustained. ■ The imposition of the penalty is mandatory. National Contracting Co., 37 B. T. A. 689; affd., 105 Fed. (2d) 488.

The third question is whether petitioner is entitled to a deduction in the amount of $80,514.43 as a bad debt ascertained to be worthless and charged off, or as a loss. Petitioner deducted on its return, as a loss, $103,169.52, the amount of the joint debt of Adolph Uhl and George Uhl for which petitioner gave a discharge of liability to Adolph Uhl in November 1933. Since petitioner owed $22,655.09 to Adolph Uhl, it now claims to be entitled to a deduction for only the net amount of $80,514.43.

The respondent disallowed the deduction claimed upon the ground that no information had been submitted “to show any attempts to collect on this joint account or show how the joint account became a separable one on which the company could sustain a loss on joint debtors without an attempt to collect from both.”

In its petition, petitioner states the following:

In November 1933 petitioner bad a valid claim against Adolpb Ubl based upon bis joint indebtedness witb Georgei Ubl. At that time Adolpb Ubl was in financial difficulties and was unable to pay his proportionate one-half of said joint obligation of $226,339.03.

The petition has not been amended with respect to the above pleading.

On brief, petitioner advances an argument that the indebtedness of Adolph Uhl and George Uhl was separate and several, because of what was done in 1919 when the Uhl brothers agreed to separate their interests in the petitioner. The facts show that the 1919 transaction represents nothing material, and no more than that in that year Adolph Uhl conveyed all his stock in petitioner to George Uhl in exchange for the St. Paul building. It is impossible to read into the 1919 transaction any oral agreement that could have any bearing whatever on the nature of the obligation of the Uhl brothers under the loan account set up on petitioner’s books in 1923. There is no evidence that in 1919 the Uhl brothers agreed that„ if in the future any sums of money should be advanced to them by petitioner, they would be severally liable for repayment of one-half thereof. The theory is without merit and no consideration can be given to it.

Apart from the above theory, petitioner contends that the debt of George and Adolph Uhl, totaling $226,339.03, was a several obligation from its inception in 1923 by agreement between the parties. There is no evidence to support the contention, other than testimony of Adolph Uhl as to his attitude with respect to his own obligation, and that which is stated in the preamble to the resolution adopted on November 6, 1933. Adolph Uhl’s testimony, at page 147 of the transcript, is that he never looked upon the entire amount of the account' as his obligation; that it was always understood that “each one” was responsible for his part of the obligation. Little weight attaches to this testimony standing alone, as it does. The statement in the. preamble to the resolution adopted in 1933 is ambiguous. It states, first, that “Adolph Uhl and George Uhl are indebted to this corporation in the principal sum of $226,339.03.” Thereafter, it states that one-half of the amount is owed by Adolph Uhl. Both Adolph Uhl’s testimony and the foregoing statements from the resolution are not incompatible with the existence of a joint obligation because even where a joint obligation exists, each obligor is usually deemed to be liable for contribution to the other obligor if he is called upon to pay more than his share of the joint debt. If the wording of the resolution be taken to mean that the share of each obligor was one-half of the total debt, that alone is not a statement sufficient to show that originally it was understood that the obligation was several. The first words of the resolution would indicate that the debt was joint. Nowhere is there to be found in the record any evidence of a distinct understanding, ah initio., that the debt was several. There are no distinct words or terms of severance used to produce a several responsibility or right.

Adolph Uhl has not shown by his testimony or other evidence whether any of the sum charged against the “A” and “G” Uhl account, from 1923 through 1933, were paid to him for his use. Although George Uhl testified in this case, he gave no testimony about the account, or about the understanding of the parties as to the liability of each or both debtors. The cash advances were charged to one account, that of George and Adolph Uhl, and it appears from some of the notations on the account that the advances were applied to the purchase of real estate, title to which was held by corporations in which both brothers owned all the stock. There is no evidence to show who made repayments to petitioner of the various amounts credited to the account in 1925, 1926, and 1929. It is likely that the sums were advanced to the Uhl brothers to use in joint ventures. As for Adolph Uhl’s testimony about his attitude toward his obligation, it is not incompatible with the attitude of a joint obligor, for a joint obligor may feel himself bound, in the first instance, to pay only his share of a joint debt, and may expect his coobligor to pay his respective share. Such attitude, on the part of one obligor, has nothing to do, however, with the legal liability of the coobligor to pay the full amount of the joint debt.

Whether or not a debt is joint or several is governed by the intent of the parties. American Jurisprudence, vol. 12, par. 268. In the absence of clear evidence as to the intent of the parties, an obligation of two or more persons is presumed to be a joint obligation rather than several. See section 1431 of the Civil Code of California. Since there is no clear evidence of a several obligation to pay several sums of money, and no evidence that under a contract several distinct sums of money were advanced to several and separate persons, it is concluded and held that Adolph and George Uhl were joint obligors, jointly liable to repay to petitioner the total sum of $226,-339.03. Cf. Spangenberg v. Spangenberg, 19 Cal. App. 439; 126 Pac. 379.

It is not disputed that petitioner could release and discharge, or compromise and adjust, any debt owing to it. It discharged Adolph Uhl from any obligation to pay it $103,169.52 of the total sum owed. The ultimate question is whether, having done this, petitioner is, under the Federal revenue act applicable, entitled to deduction for all or part of the sum for which Adolph Uhl was discharged. Having concluded that the obligation was a joint obligation, and the facts showing that the coobligor, George Uhl, was solvent, it follows that the voluntary discharge of Adolph Uhl does not entitle petitioner to any deduction. In American Felt Co. v. Burnet, 58 Fed. (2d) 530, 532, it was held that a valid debt is not ascertained to be worthless where the creditor, for consideration satisfactory to itself, voluntarily releases a solvent debtor from liability. Assuming that Adolph Uhl was insolvent in 1933, a valid debt was not ascertained to be worthless where a creditor, for consideration satisfactory to itself, voluntarily releases an insolvent joint obligor, without going against the solvent coobligor.

We are satisfied that the discharge of Adolph Uhl from his obligation as a joint debtor did not operate to release George Uhl from his obligation as a joint debtor to pay the full amount of the joint debt, less the amount of the note given to petitioner by Adolph Uhl. See Restatement of the Law of Contracts, vol. 1, sec. 117; Northern Insurance Co. v. Potter, 63 Cal. 157; Wristen v. Curtiss, 76 Cal. 6; 18 Pac. 81; Brown v. Pacific Coast Agency, 53 Cal. App. 788; 200 Pac. 977. Section 1543 of the Civil Code of California provides, in part, as follows:

A release of one of two or more joint debtors does not extinguish the obligations of any of the others, * * * nor does it affect their right to contribution from him.

The courts of California have held that the release of one joint debtor from his obligation does not extinguish the obligation of any of the other joint debtors to pay the entire balance due on the joint indebtedness. Northern Insurance Co. v. Potter, supra, Wristen v. Curtiss, supra; and see Brown v. Pacific Coast Agency, supra. In the leading case of Northern Insurance Co. v. Potter, the court stated as follows (p. 158) :

Section 1543 of the Civil Code seems to give the same effect to a release in general terms as was given by the English courts to the qualified release, expressly providing that the joint debtors not mentioned in the release should not be discharged. The section provides in effect that the joint debtor who accepts a release shall he held to have consented that the liability of his joint debtor should be continued together with his own liability to contribution.

There is no merit in petitioner’s contention that after the release of Adolph Uhl from his obligation to petitioner, George Uhl was liable to petitioner for only one-half of the total amount of the joint indebtedness. After the release of Adolph Uhl, George Uhl continued to be liable for the entire balance due on the joint indebtedness. Northern Insurance Co. v. Potter, supra; Wristen v. Curtiss, supra.

It is held that petitioner is not entitled to a deduction in the year 1933 for a loss on account of the discharge of Adolph Uhl in 1933 from his obligation as a joint debtor.

It is not necessary to determine how a loss, had there been one in the taxable year, would properly be deducted, i. e., whether, under the facts, the claim for a deduction should be as a loss from a bad debt, or as an ordinary loss. But see First National Bank of Durant, Oklahoma, 6 B. T. A. 545.

As a result of the above holding, petitioner had a net taxable income for the year 1933 of about $65,210. There are deficiencies in income and excess profits tax.

Decision will he entered for the respondent.


author: Van Fossan :

text:
    Edith A. Wolf, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92429.
    Promulgated December 22, 1939.

      Julius Bloomberg, Esq., for the petitioner.

      Thomas Gallaban, Esq., for the respondent.
   OPINION.

Van Fossan :

The question for decision is whether the contribution of $1,300 made by taxpayer in 1936 as above set out was deductible under section 23 (o) (2) of the Eevenue Act of 1936. As we view it the case turns on the characterization of the “Anisfield Award Committee”, i. e., whether it was such an entity as comes within the statute. There can be no question that the statute is satisfied as to the organization, operation, and purposes of the committee. The purposes were exclusively the encouragement of literary efforts to the end of bettering race relations, the latter phase being educational. It is stipulated that “no part of the income of the fund inures to the benefit of the petitioner or to any private shareholder or individual.” The committee is not engaged in carrying on propaganda or otherwise attempting to influence legislation.

Whether the committee was an entity within the requirement of the statute is to be determined by a study of all the facts relating to its creation, composition, activity, and functions. We take it that the absence of the words “trust” or “fund” or “foundation” can not be determinative. Nor, in our opinion, is it material that no more formal document marked the creation of the committee. The committee was the result of careful planning, and was conceived as an agency adequate in form to carry out the donor’s purpose. It was formally held out to the world as an entity to which books submitted for the award might be sent. The check contributed by petitioner was payable to “Henry S. Canby, Chairman of the Anisfield Award Committee” and was deposited in an account similarly styled, he alone, in such capacity, having authority to draw thereon. It is stipulated that the withdrawal and utilization of the funds were in the sole discretion of the committee. The committee functioned as an entity for the purpose planned and made awards accordingly over several years, taxpayer each year contributing to it the requisite funds. Petitioner had no part in the selection of the recipient of the prize award and in nowise used the committee as a shield to hide private donations. We are of the opinion that the Anisfield Award Committee was such an entity as entitles it to classification within the provisions of section 23 (o) (2) and that petitioner’s donation to it was deductible. See Fifth-Third Union Trust Co. v. Commissioner, 56 Fed. (2d) 767; Bok v. McCaughn, 42 Fed. (2d) 616.

Decision will he entered under Rule 50.

       SEC. 23. deductions FOM GROSS INCOME.
      In computing net income there shall he allowed as deductions :

      (o) Charitabde and Other Contributions. — In the case of an individual, contributions or gifts made within the taxable year to or for the use of:

      (2) a corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation.


author: Sternhagen : Black,

text:
    Richard Archbold, Petitioner, v. Commissioner of Internal Revenue, Respondent. Adrian Archbold, Petitioner, v. Commissioner of Internal Revenue, Respondent. John Archbold, Petitioner, v. Commissioner of Internal Revenue, Respondent. Archbold Van Reuren, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 89669, 89732, 89752, 90823.
    Promulgated December 22, 1939.

      Charles 8. Jacobs, Esq., and William R. Spofford, Esq., for the petitioners.

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

Sternhagen :

Each of the petitioners in 1933 sold securities which he had received after 1925 from the trustee of an express inter vivos trust created prior to January 1, 1921, by each of two of his grandparents, and upon such sale computed his gain or loss upon the basis of the value of the securities at the time they were received by him from the trustee. The Commissioner held that the proper basis was that which would have been applicable to the trustee had the trustee sold. As to each petitioner, use of the trustee’s basis resulted in a greater gain or smaller loss than the taxpayer had shown on his return, and the following deficiencies in income tax were therefore determined for 1933:

Richard Archbold (Docket No. 89559)_$4,381.12
Adrian Archbold (Docket No. 89732)_ 4,387.09
John Archbold (Docket No. 89752)_ 6,897.44
Archbold van Benren (Docket No. 90823)_ 1,206.05

The cases were submitted on four separate stipulations, which, except for specific details, are similar. The only determination called for is the proper basis, the respondent defending the use of the trustee’s basis and the petitioners claiming the use of the value of the securities at the date of distribution to them. In each case the date of distribution of the securities is a different date, when each became twenty-one, between 1925 and the time of sale in 1933.

Counsel have based their opposing contentions upon the question whether the original trusts which were made prior to January 1, 1921, created vested or contingent interests, the petitioners claiming that the interests were contingent and the respondent that they were vested. It is apparently assumed by both that if the interests were contingent the securities were not acquired until actual distribution, while if the original interests were vested, the securities were acquired directly when they were transferred in trust. Thus the fulcrum of the argument is taken to be section 113 (a) (4) of the Revenue Act of 1932. While the interest of each petitioner in the trust corpus was probably a contingent interest when the trust was created and remained so until he became twenty-one and received the securities from the trustee, and a fortiori was no more than a contingent interest in the specific securities which were not originally in the trust corpus, we leave that question undecided, since it does not dispose of the issue. The word “acquisition” of the property as used in the Federal revenue act is not necessarily hedged about by the common law refinements of vested and contingent interests in the corpus of the trust; certainly not if there are other grounds upon which a proper construction should rest.

It is true that, speaking with meticulous accuracy, the property sold by petitioners — that is, the very securities — was acquired by them not by a transfer in trust but by a transfer out of trust. But such a literal construction would defeat the plain purpose of the basis provision of the statute since 1921. This purpose was primarily to tax the increment in value of gift property between the time it is bought by the donor and the time thereafter when by sale or other taxable disposition by the donee there is a taxable occasion. The purpose of the plan was expounded and approved in Taft v. Bowers, 278 U. S. 470, relating to direct gifts. In the 1924 Act, gifts by way of trust were expressly dealt with to the same effect. Taxing the increment carried with it the correlative allowance for deduction of losses.

Petitioners, however, would have it held that, although the legislative purpose is fairly plain, the statutory language “transfer in trust” falls short of achieving it. As to gifts by trust to a contingent beneficiary, the increment in value between the trustee’s acquisition and a sale by btm is taxed but the increment between thei trustee’s acquisition and its distribution to the beneficiary would escape tax. The term “transfer in trust” is not so clear that it must be construed to permit this hole in section 113, even though the refusal to exempt the gain has the incidental result of allowing the greater deduction for loss. When the distributee sells property received by virtue of a trust made before January 1, 1921, his basis is that which would have been applicable to the trustee. As to property received by the taxpayer in distribution which had been acquired by the trustee by purchase, such basis is cost to the trustee, which is the basis to the last preceding owner who acquired otherwise than by gift. As to property received in distribution which the trustee had acquired by the original transfer by the settlor, the basis is value at the time of the original transfer.

The respondent’s determination is sustained.

Reviewed by the Board.

Decision will he entered wnder Bule 50.

KeRN dissents.

Black,

dissenting: It is the contention of petitioners in these proceedings that in the deeds of trust involved there were no words mak-iiig a present gift of the remainders to the petitioners. That the only so-called “words of gift” are foundi in the direction to transfer the corpora of the trusts to the respective petitioners upon the happening of a future contingency, viz., their reaching the age of twenty-one years; that in view of this, it follows that futurity was annexed to the substance of the gifts and, therefore, the time of vesting of the remainders was suspended until the happening of the contingency upon which the gift was limited.

The law of New York controls the question whether the remainders were vested or contingent. Forbes v. Commissioner, 82 Fed. (2d) 204. Under the laws of New York, I think they were contingent. Lewisholm v. Henry, 179 N. Y. 352; Dickerson v. Sheehy, 156 App. Div. 101; affirmed without opinion, 209 N. Y. 592. If, under the deeds of trust involved in these proceedings, the remainder interests of petitioners were contingent, then they did not “acquire” the property within the meaning of section 113 (a) (4) of the Revenue Act of 1932 until the happening of the contingency upon which the remainders were limited. Then it was that their interest in the property became vested. Lane v. Corwin, 63 Fed. (2d) 767; Pringle v. Commissioner, 64 Fed. (2d) 863; Forbes v. Commissioner, supra. The vesting of the interest of the petitioners in the properties here involved occurred at the time each of them reached the age of twenty-one years and the securities were distributed to them. The fair market value on that date, I think, is the basis which should be used for determining gain or loss, rather than the basis determined in the majority opinion.

For the reasons I have stated, I respectfully dissent from the views of the majority.

AettNdell, VaN Foss AN, Murdoch, and Disney agree with this dissent.

       SEC. 113. ADHJSTED BASIS FOR DETERMINING GAIN OR LOSS.
      (a) Basis (Unadjusted) or Property. — The basis of property shall be the cost of such property; except that—

      (4) Gift or transfer in trust before January 1,1921. — If the property -was acquired by gift or transfer in trust on or before December 31, 1920, the basis shall be the fair market value of such property at the time of such acquisition. The provisions of this paragraph shall apply to the acquisition of such property interests as are specified in section 402 (e) of the Revenue Act of 1921, or in section 302 (f) of the Revenue Act of 1924 or the Revenue Act of 1926 (relating to property passing under power of appointment) regardless of the time of acquistion.


author: Tyson :

text:
    Emily Trevor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89820.
    Promulgated December 22, 1939.

      Bollin Browne, Esq., and George H. Grmen, Esq., for the petitioner.

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

Tyson :

This proceeding involves a deficiency of $37,803.26 in petitioner’s gift tax liability for the year 1935. The two issues are (1) whether in creating a trust in 1935, with reservation to herself of the income for life, the petitioner made a gift of certain future interests subject to tax within the meaning of section 501 of the Revenue Act of 1932 as amended by section 511 of the Revenue Act of 1934; and (2) if so, the value of the property involved for gift tax purposes.

The stipulation of facts is incorporated herein by reference, but only such of those facts as are deemed necessary for determination of the issues involved are set out in this opinion.

On August 9, 1935, the petitioner, a resident of New York, New York, made, executed, and delivered a trust agreement with the Royal Trust Co. of Montreal, Canada, as trustee, and transferred to the latter, in trust, certain foreign stocks and securities having a value of $437,795.15 on that date.

The trust agreement directed the trustee to hold, manage, invest, and reinvest the principal of the trust during the “trust term” of 21 years after the death of the last survivor of the settlor, the settlor’s brother, and two nephews of the settlor, and to apply the net income of the trust to the use of the settlor during her life, then to the use of her brother during his life, and after the death of the survivor of the settlor and her brother, to the use of the issue of the settlor’s brother in a certain manner. The trustee was further directed, upon termination of the “trust term”, to pay over the principal thereof to the then living issue of the settlor’s brother.

The sixth article of the trust agreement provided:

This trust shall be irrevocable, except that the Settlor reserves to herseli the right at any time and from time to time after the expiration of a period of ten '(10) years from the date hereof, with the consent in writing of the Trustee, * * * to amend or revoke this Agreement and the trust hereby created, either in whole or in part. * * *

At the time of such transfer in trust the petitioner was 61 years of age. It is stipulated that, as shown by the actuaries’ or combined experience tables of mortality, the life expectancy of a person aged 61 is 13.18 years; that the value of the right to receive $1 in the event that a person aged 61 should die within 10 years is 30.724 cents; and that the value of the unconditional right to receive $1 on the death of a person aged 61 is 61.163 cents.

The respondent determined, and now contends, that the transfer in trust on August 9, 1935, for the benefit of the settlor’s brother and others constituted a completed gift in praesenti, subject to gift tax; that the value of the property transferred in trust was $437,-795.15; and, the settlor having reserved a life interest, that the value of the gift was $267,768.65, representing the present worth of the unconditional right to receive $1 at the death of a person aged 61, that is, $437,795.15 times the factor .61163.

On the first issue petitioner contends (1) that no completed gift in praesenti, and thus no taxable gift, was made upon the creation of the trust on August 9,1935, because under the settlor’s reserved power of revocation, after 10 years, the transfer of the future interest was not complete and might never be consummated; and (2) that because the transfer of the future interest was to take effect only at the set-tlor’s death, the value of the trust corpus would be includable in her estate subject to estate taxes, and, the gift tax and estate tax laws being in pari materia and mutually exclusive, there can be no gift tax liability on the transfer in question.

By the trust instrument the petitioner, as grantor, reserved to herself a present life interest in the income of the trust and provided that certain future interests in the income and corpus of the trust should go to certain ascertainable persons upon the happening of certain events. That transfer in trust is irrevocable for a period of 10 years, after the lapse of which period, and not until then, the settlor would have the right to revoke or amend the trust with the consent of the trustee. Such trustee is a person not having any adverse interest in the disposition of the trust corpus or the income therefrom. Reinecke v. Smith, 289 U. S. 172, and Witherbee v. Commissioner, 70 Fed. (2d) 696; certiorari denied, 293 U. S. 582.

Contrary to petitioner’s first contention, we hold that the principle announced in Burnet v. Guggenheim, 288 U. S. 280, that “a power of revocation accompanying delivery would have made the gift a nullity” is not decisive of the instant case. There the grantor reserved in the instrument creating the trust the unrestricted power of revocation from the date of the instrument and the Court held that it was not until a subsequent cancellation of such power that a completed gift was made. Here, the grantor did not possess any present power of revocation immediately after the transfer in trust was made and could not thereafter have become vested with such power unless she survived the lapse of a 10-year period, a contingency over which she had no control. A power conditioned upon a contingency does not presently exist, Corning v. Commissioner, 104 Fed. (2d) 329, and John Edward Rovensky, 37 B. T. A. 702.

Having held that the grantor’s reserved power of revocation after a lapse of 10 years was not a presently existing power, we must next consider whether, under the provisions of the trust instrument, the transfer of the future interests here involved is otherwise embraced within the scope of the gift tax statute. That statute is not aimed at every transfer without consideration, but, instead, embraces only such tranfers as have the quality of consummated gifts, Burnet v. Guggenheim, supra; that is, absolute inter vivos transfers in praesenti of the donor’s title, dominion, and control of the subject matter of the gift to the donee. Cf. Heiner v. Donnan, 285 U. S. 312. Although the two statutes are not always mutually exclusive, the gift tax statute and the estate tax statute are closely related in structure and purposes, are in pari materia, and must be construed in conjunction to ascertain the character of transfers intended to be embraced in each statute, respectively. The gift tax statute does not embrace a transfer which is so incomplete as a gift inter vivos when made, that the same transfer is, by the estate tax statute, expressly made subject to estate tax because intended to take effect at the death of the transferor. Sanford's Estate v. Commissioner, 308 U. S. 39; Rasquin v. Humphreys, 308 U. S. 54; Burnet v. Guggenheim, supra; Hesslein v. Hoey, 91 Fed. (2d) 954, certiorari denied, 302 U. S. 756; Lorraine Manville Gould Dresselhuys, 40 B. T. A. 30; William T. Walker, 40 B. T. A. 762; John S. Mack, 39 B. T. A. 220; and Harriet W. Rosenau, 37 B. T. A. 468.

The trust agreement clearly evidences the grantor’s intention that the future interests should vest in certain ascertainable persons only in the event of her death either prior to the lapse of a period of 10 years after August 9,1935, or thereafter, if she died before the power to alter or revoke was exercised. After the execution of the trust agreement the beneficial remainder, as well as the life estate, was left vested in the grantor and the future interests here in question were interests contingent upon the death of the grantor, whether it occurred prior to the lapse of 10 years, or subsequent thereto without a revocation or alteration of the trust. It is apparent that the death of the grantor, within a given time, was the indispensable event which would bring the future interests here involved into being, that the transmission of such interests would be by reason of the grantor’s death, and that upon such event the property so transferred would be includable in her estate under the provisions of the estate tax statute, Klein v. United States, 283 U. S. 231. The fact that here the grantor retained a vested remainder distinguishes the instant case from Becker v. St. Louis Trust Co., 296 U. S. 48, and Helvering v. St. Louis Trust Co., 296 U. S. 39, wherein the grantor had merely a possibility of reverter of the remainder and the event of the grantor’s death merely changed that possibility into an impossibility.

We conclude that the transfer of future interests here involved was a conditional transfer to take effect only at death of the grantor and, being includable in her estate, upon her death, as a transfer by reason of her death, it was not a completed transfer by gift in praes&nti on August 9,1935, within the meaning of section 501 of the Revenue Act of 1932, as amended by section 511 of the 1934 Act. Cf. Hesslein v. Hoey, supra; John S. Mack, supra. Accordingly, petitioner is not liable for gift tax on any portion of the value of the property she transferred in trust on August 9, 1935, and the respondent erred in his determination of the deficiency in controversy.

In view of the disposition we have made of the first issue herein, it becomes unnecessary to consider the second issue.

Decision will be entered for the petitioner.


author: Mukdock:

text:
    Estate of W. T. Hales, Deceased, K. Cavett and First National Bank and Trust Company of Oklahoma City, Oklahoma, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent. Mrs. Oneta Hales, Petitioner, v. Commissioner of Internal Revenue, Respondent. George A. Hales, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. T. Hales, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 93208, 93209, 93210, 93211.
    Promulgated December 22, 1939.

      Charles H. Garnett, Esq., for the petitioners.

      Stanley B. Anderson, Esq., for the respondent.
   OPINION.

Mukdock:

The Commissioner determined deficiencies in income tax for the year 1935 as follows:

Estate of W. T. Hales_ $5,739.39
Mrs. Oneta Hales_ 566. 53
George A. Hales_ 139.48
W. T. Hales, Jr- 154. 91

The questions presented for decision in each case are identical. They are: (1) Did the Commissioner erroneously include in income the accumulated dividends declared and credited on the stock of the Local Building & Loan Association where, pursuant to a plan of reorganization, and without physically withdrawing the accumulated dividends, the owner of the stock transferred it to the Local Federal Savings & Loan Association and received in exchange stock and cash of the latter in an amount equal to the paid-in cost of his Local Building & Loan Association shares, plus the dividends accumulated thereon?

(2) If the Commissioner did not err in (1), are the accumulated dividends taxable as gains upon the sale or exchange of capital assets or as ordinary income ?

(3) Is the cash received from the Local Federal Savings & Loan Association, which is admitted to be income, taxable as a capital gain or as ordinary income?

The cases were consolidated for hearing and were submitted upon an agreed statement of facts, which is hereby adopted as the findings of fact.

The Local Building & Loan Association (hereinafter called Local Building) was a building and loan corporation originally organized ■ in 1908 under the laws of the State of Oklahoma. The petitioners owned on July 9, 1935, certain unmatured installment and prepaid stock in Local Building upon which amounts had been paid in and dividends had been accumulated as hereinafter set forth. The stock of Local Building had been acquired by the petitioners at various times in the period 1923-1935.

The bylaws of Local Building authorized it to issue full-paid stock as well as installment and prepaid stock. Subscribers to tbe installment stock were to make monthly payments on the stock and each share was to mature when the monthly payments, plus dividends declared and credited thereon, less any fines or other legal charges against the stock, equaled $100. Subscribers to the prepaid stock were required to make a down payment of $50 per share and each share was to mature when the down payment, plus dividends declared and credited, less fines and charges, equaled the sum of $100. The shareholders were entitled to surrender their stock before maturity and receive the amounts paid in on the stock and the accumulated dividends, upon giving 30 days’ notice. Holders of the installment and prepaid stock were not entitled to receive the accumulated dividends on such stock without at the same time surrendering their stock certificates and withdrawing the entire investment represented by the stock from the corporation. The bylaws of Local Building further provide as follows:

At no time, however, shall more than one-half of the receipts of the Association for any fiscal month, and when the Association is indebted on matured shares of any kind of stock, not more than one-third of said receipts to be applied to the demands of such withdrawing stockholders, without the consent of the Board of Directors. Full paid shares and all other shares shall he surrendered, can-celled and paid in order of the filing of notice of withdrawal or in the order of maturity.

Local Building began proceedings in 1934 to convert itself into a new corporation to be known as Local Federal Savings & Loan Association (hereinafter called Federal Savings) which was to be incorporated under the provisions of the Home Owners’ Loan Act of 1933. A charter was granted to the Federal Savings on January 21, 1935. Local Building was converted into Federal Savings in conformity with the rules and regulations of the Home Loan Bank Board. The conversion was ratified by the stockholders of Local Building at a meeting held on January 26, 1935. Thereafter, Federal Savings acquired all of the assets and assumed all of the liabilities of Local Building.

The petitioners did not file any application to surrender their stock in Local Building at any time prior. If they had filed application to surrender their stock at any time after January 21,1935, and prior to the exchange of the stock for Federal Savings, they would have received immediately the total book value of the stock, including the full amount of the dividends accumulated on the stock, in cash. Instead of exercising their right to turn in their shares and receive cash, the petitioners, on July 9, 1935, exchanged their stock in Local Building for full-paid stock and cash of Federal Savings. The amounts paid in and the dividends accumulated on the Local Building stock owned by each petitioner as of July 9,1935, and the amount of Federal Savings stock and cash received by each petitioner, was as follows:

Each petitioner reported the cash received from Federal Savings as ordinary income in his or her income tax returns for 1935. No part of the accumulated dividends has ever been reported as income on any of the petitioners’ returns for prior years. The record does not disclose the amount of dividends credited to the Local Building stock in either the taxable year or in any prior year.

The Commissioner, in his deficiency notices, held that the accumulated dividends were income for 1935, upon the theory that they were constructively received in that year. It has frequently been said that constructive receipt is to be sparingly applied and is not applicable unless the cash or its equivalent is unqualifiedly subject to the demand of the taxpayer. The petitioners, after January 21, 1935, and prior to the exchange of the shares of Local Building for the shares of Federal Savings, could have surrendered the shares of Local Building for cash. The respondent argues that during this period the cash was constructively received. However, the petitioners could have received the cash only by the surrender of the shares of Local Building, which would likewise have meant the surrender of their rights as holders of those shares to participate as stockholders in the new corporation, Federal Savings. They would have had to surrender their entire investment. This was a valuable right and forms a sufficient restriction to make inapplicable the doctrine of constructive receipt. Furthermore, it should be noted that the holders of the stock of Local Building could have obtained the amounts paid in on the stock and accumulated dividends by the surrender of their shares in prior years so that the doctrine of constructive receipt, if applicable at all, would go too far for the Commissioner’s purpose.

The situation here is no different from that which has obtained in many other reorganization cases where stockholders not desiring to participate were given the option of turning in their shares for cash. Yet in none of those cases has it been suggested that the doctrine of constructive receipt applied under such circumstances so that a holder of the stock would be taxable on a gain. The parties recognize that there was a reorganization in the present case, since Federal Savings acquired all of the property of Local Building. Sec. 112 (g), Kevenue Act of 1934. The stockholders of Local Building, including these petitioners, exchanged their stock in that corporation for stock in Federal Savings, and the gain which they realized from that exchange is taxable only to the extent of the cash received. See sec. 112 (b) (3) and (c) (1). This is the contention of the petitioners. The respondent contends that the surrender of the Local Building shares is a separate transaction from the receipt of the Federal Savings shares. But the facts show that the entire transaction was a single one, entered into by the parties pursuant to the plan of reorganization. It must be treated as a single plan. Wilbur F. Burns, 30 B. T. A. 163; affd., 85 Fed. (2d) 8, under the title Bassick v. Commissioner; certiorari denied, 299 U. S. 592. Thus, as the petitioners concede, their gain is taxable only to the extent of the cash which they received.

The remaining question is, How is that gain taxable? Is it taxable as profit from the sale or exchange of a capital asset, as the petitioners contend, or is it taxable as ordinary income, as the respondent contends? The respondent says that the cash was a distribution to the stockholders of Local Building of its earnings and, since it is not subject to tax, its dividends are taxable as ordinary income. Secs. 101 (4) and 25 (a) (1), Revenue Act of 1934. The cash was not a dividend but merely an adjusting item. It was not declared or distributed as a dividend. It was not paid by Local Building but by Federal Savings. Therefore, we see no justification to tax the cash as the Commissioner urges.

Decision will be entered wader Rule 50.