author: Hill:

text:
    Clarence P. Byrnes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87919.
    Promulgated March 14, 1939.

      Thomas Watson, Esq., for the petitioner.

      Arthur Carnduff, Esq., for the respondent.
   OPINION.

Hill:

The first question for decision in this case is whether or not respondent erred in including in petitioner’s gross income the amount of the net income derived by a certain trust during each of the taxable years. On January 21, 1929, petitioner created a trust, the net income of which was payable to him during his lifetime and thereafter to others. On July 8, 1932, petitioner created a trust for the benefit of his daughter and her children, and on the same date executed a purported assignment to the latter trust of all the income which he would thereafter be entitled to receive from the former trust until January 1, 193T. The net income earned by the first trust in each of the taxable years was paid over to the trustee of the second trust in accordance with such assignment, and these amounts respondent has taxed to petitioner. Under the facts disclosed by the record before us, respondent’s action, we think, must be sustained.

Lucas v. Earl, 281 U. S. 111, and Burnet v. Leininger, 285 U. S. 136, established the doctrine that future income representing compensation for personal services, such as salary and attorney’s fees, or a distributive share of future partnership income, can not be assigned so as to render it nontaxable to the assignor. But petitioner points out that the assignments in those cases passed no interest in property which produced the income attempted to be assigned, and argues that in the present proceeding a different rule should be applied, citing, among others, Irwin v. Gavit, 268 U. S. 161; Blair v. Commissioner, 300 U. S. 5; and Ellen S. Booth, 36 B. T. A. 141.

In each of the last two cited cases it was held that the trust income paid directly to the beneficiaries’ assignees, under the facts and circumstances disclosed, was taxable to the assignees and not to the original beneficiaries or assignors. Irwin v. Gavit, decided that trust income constitutes taxable income and not property acquired by bequest, while all three decisions hold that a gift of income by valid assignment transfers an equitable interest in the corpus of the trust property. The instant case is distinguishable on the facts from those cited and relied on by petitioner, in at least one important and controlling particular, namely, that in each there was no restraint upon alienation, and hence the assignment was valid.

In Blair v. Commissioner, supra, the tax was not upon earnings which were taxable to those who earned them, as in the Earl and Leininger cases, but involved a tax which, as in the present case, resulted from ownership of the income-producing property, and the assignment of such property rights was valid. In its opinion the Court said:

The will creating the trust entitled the petitioner during his life to the net income of the property held in trust. He thus became the owner of an equitable interest in the corpus of the property. Brown v. Fletcher, 235 U. S. 589, 598, 599 * * * Irwin v. Gavit, 268 U. S. 161, 167, 168 * * * Senior v, Braden, 295 U. S. 422, 432, 433 * * *. The interest was present property, alienable like any other, in the absence of a valid restraint upon alienation. * * *
We conclude that the assignments were valid, that the assignees thereby became the owners of the specified beneficial interests in the income, and that as to these interests they and not the petitioner were taxable for the tax years in question. [Italics supplied.)

Likewise, in Ellen S. Booth, supra, we pointed out in our opinion that, “The trust agreement contained no restriction upon alienation, and the income of the trust is payable to the beneficiaries, ‘their heirs and assigns.’ ”

In the present case the trust agreement was by its terms irrevocable and contained a most carefully drawn and broadly stated spendthrift clause; indeed, it would be difficult to use plainer or more unambiguous language designed to prevent assignment of the income by any beneficiary prior to its actual receipt. The provisions are set out in haec verba in our findings of fact above. It was specifically stated that neither the trust estate nor any income therefrom should be subject in any manner to the control of the eestuis que trustent, or either of them, and that none of the eestuis que trustent should have any right or title in the trust income, or power of alienation, until actually paid over in accordance with the terms of the trust instrument. There is no suggestion by either party hereto that such restraint upon alienation was invalid, and we know of no reason to question its validity.

Petitioner, as donor of the trust, undoubtedly had the legal right to limit his gift to the beneficiaries as provided in the trust instrument, and he made no exception in the application of such provisions to himself as one of the cestuis que trustent. It would follow, under the doctrine of Blair v. Commissioner, supra, and the authorities cited therein, that petitioner reserved to himself an equitable interest in the corpus of the trust property to the extent of a life interest in the income, but such interest did not attach until the income was actually paid over to him, and he, as well as succeeding beneficiaries, was prohibited from assigning the income or otherwise disposing of it prior to its actual receipt. Prior to actual receipt, petitioner had no right or title to the income and no power to assign it. The purported assignment was, therefore, void.

Prior to the attempted assignment, there can be no doubt that the income, when and as paid over to petitioner, constituted income taxable to him. Michael Fay et al., Executors, 34 B. T. A. 662. Cf. Irwin v. Gavit, supra. Therefore, since the attempted assignment was without legal effect, and the trust income in controversy had to become petitioner’s income before he could dispose of it, it was taxable to him in the same manner and to the same extent as if such assignment had never been executed. Respondent’s action on the first issue is approved.

The second question is whether or not respondent correctly included in petitioner’s taxable income for 1933 the amount of $10,000 paid on July 1, 1933, for patent No. 1,815,547 which petitioner, on May 26, 1933, had assigned to a trust created by his wife for her own benefit on January 11, 1929. This issue is solely one of fact.

On May 26,1933, the same date on which he assigned the patent to his wife’s trust, petitioner executed a nonexclusive license relative to patent No. 1,815,547 in favor of the Libbey-Owens-Ford Glass Co., which subsequently purchased the patent. This license was delivered on June 15, 1933, after the assignment of the patent to the trustee had been recorded in the United States Patent Office on May 29, 1933. The assigned patent related to the manufacture of laminated glass, and the license executed by petitioner contained a paragraph releasing the glass company from any claim by him for damages or profits resulting from the use of any inventions coming within the scope of any patents then owned by petitioner relating to sheet, flat, or laminated glass.

Respondent contends that the $10,000 paid by the glass company represented not only consideration for assignment of the patent, but also for petitioner’s release in respect of any other patents owned by him relating to the manufacture of laminated glass, and, since petitioner did not adduce evidence to establish any basis for allocation of the $10,000 between the patent and the release, the entire amount is taxable to petitioner as the proceeds of sale of an asset having no cost basis. Eespondent’s contention, we think, can not be sustained.

Petitioner testified that the glass company desired a general release from him in connection with the assignment of the patent from the trustee. Aside from the release, there is nothing in the record to indicate that petitioner owned any such other patents, and it appears that the release was in fact merely in the nature of a quit claim which petitioner was willing to execute without a monetary consideration. In any event, petitioner testified — and there was nothing to contradict his testimony — that the $10,000 was paid by the glass company as consideration for the assignment of the patent then owned by his wife’s trust.

Eespondent’s action on the second issue is reversed.

Decision will be entered vmder Ride 50.


source: Caselaw Access Project

author: Leech:

license: Public Domain

text:
    Francis L. Robbins, Jr., as Executor under the Last Will and Testament of Charles H. Allen, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87297.
    Promulgated March 21, 1939.

      Hamilton Hadley, Esq., and Henry L. Steitz, Esq., for the petitioner.

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

Leech:

The only question submitted is whether the petitioner, as executor of the will of Charles H. Allen, deceased, is entitled to have any amount deducted from the gross estate in determining the net estate for purposes of taxation, because of the provisions of the testator’s will in reference to Amherst College.

Section 303 (a) (3) of the Revenue Act of 1926 is applicable.

The following expression of the Board in Mississippi Valley Trust Co. et al., Executors, 28 B. T. A. 387; aff'd., 72 Fed. (2d) 197; certiorari denied, 293 U. S. 604; rehearing denied, 293 U. S. 631, applies here:

Tbe so-called estate tax, by virtue of which this disputed deficiency arises, is not a succession tax, but an excise on the transfer of the decedent’s estate at Ms death. The rights of the parties hereto are determined entirely by the will of decedent. They accrued finally when the will became effective, the date decedent died, December 18, 1929. Knowlton v. Moore, supra; Y. M. C. A. v. Davis, 247 U. S. 47; New York Trust Co. v. Eisner, 256 U. S. 345; Ithaca Trust Co. v. United States, 279 U. S. 151; Edwards v. Slocum, 264 U. S. 61. * * *

In that case the Board observed further that the tax was “on the transfer from decedent of rights extinguished by his death. It is imposed at death and before the beneficiary receives the gift;” The tax is measured by the net value of the decedent’s estate at death when the transfer occurs. So, bequests to charity, to be deductible here, and their value, must be reasonably certain at the time of the testator’s death. Humes v. United States, 276 U. S. 487. The Supreme Court has simply and clearly defined the approach to the determination of the existence of that certainty in T. M. C. A. v. Davis, 264 U. S. 47, in these words:

Congress was thus looking at the subject from the standpoint of the testator and not from the immediate point of view of the beneficiaries. It was intending to favor gifts for altruistic objects, not by specific exemption of those gifts, but by encouraging the testator to make such gifts. Congress was in reality dealing with the testator before his death. It said to him:
“If you will make such gifts, we will reduce your death duties and measure them, not by your whole estate, but by that amount, less what you give.”

Clearly, under the terms of the will here, as it existed at the death of the testator, the amount which could be appointed to Amherst College, after the intervening life estate of Bertha Allen Logan, the daughter of the testator, was any sum between one cent and $250,000. Obviously, therefore, at the death of the decedent, there existed no such certainty as the law requires as to the basis for and therefore the computation of the present value of any bequest to Amherst College. Ithaca Trust Co. v. United States, 279 U. S. 151; United States v. Provident Trust Co., 291 U. S. 272; Mississippi Valley Trust Co. et al., Executors, supra. However, petitioner argues that the agreement, including the modification of the will and the renunciation of the power of appointment to Amherst College, which was approved by the proper Probate Court at the time the will was probated, under a decree of that court directing that “said instrument [will] so presented for probate be proved and allowed as the last will of said deceased, that letters testamentary be issued to said petitioners, * * * and that they be directed to administer the estate of said deceased in accordance with the terms of said will and said agreement of compromise”, supplies the certainty of basis for the computation of the value of the provision for Amherst College and is effective for present purposes as a part of the will of the testator as of his death. We disagree.

It may here be observed that the decree of probate did not purport to effect a merger of the will and the agreement of compromise into one testamentary document. The compromise retained its status as an act of the heirs, so that by no fiction of law can it be said that the testator made a definite and certain bequest to Amherst. The decree only validated the will as originally written and only directed petitioners in the administration of the estate to follow both the will and the compromise agreement. The right to the contested deduction depends alone upon what the testator did. Y. M. C. A. v. Davis, Supra,

But, in any event, the validity of petitioner’s position is a question of Federal and not local law. Lyeth v. Hoey, 305 U. S. 188. In that case the Supreme Court held that where an heir acquired property in excess of that to which he was entitled under a contested will, by virtue of a compromise agreement, such property was acquired “by inheritance” under the Federal statute controlling. The Court held that petitioner took “as in case of intestacy.” The conclusion there was that:

* * * Whether he would receive any property in that capacity depended upon the validity of his ancestor’s will and the extent to which it would dispose of his ancestor’s estate. When, by compromise and the decree enforcing it, that disposition was limited, what he got from the estate came from him because he was heir, the compromise serving to remove pro tanto the impediment to his inheritance. * * *

But Amherst College was not an heir of the testator here. It was not a legatee, certainly, unless the contested will was valid. And then only to the extent provided in the will. Thus, anything it derived in the premises could not have been as in intestacy. Nor did it thus acquire anything in excess of the right to the discretionary minimum of one cent, as provided in the will. By virtue of that contested will, as a legatee, Amherst College took such excess, upon which alone the basis for any deduction here rests, solely by virtue of the compromise agreement, and that agreement occurred subsequent to the effective date of the will, the date of the testator’s death.

Although no formal renunciation of the power of appointment to Amherst College was executed by Bertha Allen Logan, the agreement which she signed and which was attached to the will when probated contained a surrender and renunciation of that power.

In the case of Davison v. Commissioner, 81 Fed. (2d) 16, affirming 31 B. T. A. 101, the facts were somewhat similar except that in the Davison case the renunciation of the power of appointment occurred six years after the death of the testator and the probate of his will. In that case the Circuit Court affirmed the Board in its holding that such renunciation did not remove the uncertainty existing at the testator’s death. It is true the court there commented on the length of time during which the power of appointment remained “in vacuo.” However, we think, the basic premise of the result the Circuit Court reached in that case controls the disposition of this question here. The court there said:

It is hard to see how the executor of the will of Mr. Eldridge is in any better position to claim that the corpus of the trust, which had been bequeathed to the charitable corporations, should be deducted in order to ascertain the net taxable estate than he would be if Mrs. Eldridge had died shortly after her husband [the testator] without exercising the power of appointment given her by his will. In the latter case it can hardly be supposed that a deduction would have been allowable, otherwise the practice of determining the value of the remainders as of tbe date of the testator’s death by the use of mortality tables, rather than by eventualities, would be erroneous. * * *

See Ithaca Trust Co. v. United States, supra.

In our opinion, no such certainty of basis for the computation of the value of a charitable bequest to Amherst College, necessary to support the deduction of such bequest, existed here. Davison v. Commissioner, supra.

None of the authorities cited by the petitioner seem to us to contradict this conclusion. In Smith v. Commissioner, 78 Fed. (2d) 897, the court held that the decedent’s net taxable estate should be determined by giving effect to a compromise agreement which made gifts to charities for which the original will did not provide. In so doing the court expressly followed a state statute, a procedure which has been disapproved by Lyeth v. Hoey, supra. Furthermore, to follow local law would not benefit petitioner here, for in Massachusetts it has been held that an estate tax applies according to the disposition made in the original will and not to the will as modified by the compromise. Baxter v. Stevens, 209 Mass. 459; 95 N. E. 854. Humphrey v. Millard, 79 Fed. (2d) 107, and Dimock v. Corwin, 99 Fed. (2d) 799, were both cases in which there was no uncertainty in the will itself as to the charitable bequests. These bequests were neither void nor uncertain. They were voidable, in part, only because in excess of the proportionate part of estates allowed to be given to charity by local mortmain statutes. Waivers of the right to object executed by the heirs between the date of death and the date of probate merely allowed the property to pass by the original terms of the will, instead of seeking to alter the will or to render it certain, as in the present case. See Lyeth v. Hoey, supra.

Our opinion that no deduction for any gift to Amherst College is permissible, is strengthened by another circumstance. Assuming, as petitioner contends, that the compromise agreement, including the renunciation of the power of appointment, is a part of the testator’s will for present purposes, it is not established that there would even be a sufficiently certain basis for the computation of the value of the gift for Amherst College to warrant its deduction for estate tax purposes.

The compromise agreement provides that Amherst, at the expiration of the lives of the two beneficiaries of the income of a trust,- shall take one-third of the then “fair market value of the principal of the trust fund”, or $250,000, “whichever sum is the lesser.”

One of these income beneficiaries was 62 and the other 59 years of age when the testator died. The only indication in the record of the net value of the estate is furnished by the statement attached to the deficiency notice which fixes the net taxable estate at about $1,000,000. The will, as modified by the agreement of compromise, makes specific bequests aggregating in excess of $400,000. Certainly there is no proof in the record that the value of the property which Amherst will receive at the termination of the lives of the two income beneficiaries will not be less, much less, than $250,000. That uncertainty makes impossible the use of any basis upon which the value of the gift to Amherst College could be computed as of the death of the testator, and so prevents the deduction here of any amount as a gift to Amherst. St. Louis Union Trust Co. et al., Executors, 21 B. T. A. 1201; aff'd., on this point, 59 Fed. (2d) 922.

Reviewed by the Board.

Decision will be entered u/rtder Rule 50.

       Sec. 303. For the purpose of the tax the value of the net estate shall be determined—
      (a) In the case of a resident, by deducting from the value of the gross estate— *******
      (3) The amount of all bequests, legacies, devises, or transfers, to or for the use of the United States, any State, Territory, any political subdivision thereof, or the District of Columbia, for exclusively public purposes, or to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private stockholder or individual, or to a trustee or trustees, or a fraternal society, order, or association operating under the lodge system, but only if such contributions or gifts are to be used by such trustee or trustees, or by such fraternal society, order, or association, exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. The amount of the deduction under this paragraph for any transfer shall not exceed the value of the transferred property required to be included in the gross estate * * *.


author: MuRdock:

text:
    American Circus Joint Venture, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 84020.
    Promulgated March 21, 1939.

      Henry Ramenel, Esq., and Lawrence A. Baker, Esq., for the petitioner.

      George R. Sherriff, Esq., and Kenneth Nelson, Esq., for the respondent.
   OPINION.

MuRdock:

The first and principal question is whether or not the petitioner was the owner of the entire Singling note and, therefore, was required to report all of the interest on that note, or whether it owned only an undivided interest of 25.8823492 percent and, therefore, was not entitled to receive and was not required to report the interest on the remainder of the note, which amounted for those years to $50,378.02. The Commissioner’s theory has been that Investors was a participant in the syndicate and the entire note was owned by the syndicate, since Allied, was merely acting for Investors. The evidence clearly shows that the Commissioner has been in error in so far as ownership of the note is concerned. The agreements provided that Investors should be a participant in the syndicate. Investors apparently continued as a participant in the syndicate until 1937 and received some compensation for its services as manager and for assuming the liability which it originally assumed. The question here turns upon how much of the note the syndicate owned and not upon who were participants in the syndicate. Investors never acquired any interest in the note as a member of the syndicate or otherwise. Investors was liable on the original note as an endorser, but it never was called upon to make good on that endorsement and it never acquired any rights of ownership in that note. The note was purchased by Allied for cash and then Allied sold an undivided 25.8823492 percent to the syndicate for cash. That is the only interest in the note which the syndicate ever acquired and it was entitled to receive and did receive only the interest on that portion of the note. Our findings completely dispose of this issue.

Sections 291 of the Revenue Acts of 1932 and 1934 provide:

In tie ease of any failure to make and file a return required by this title, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, 25 per centum of the tax shall be added to the tax, except that when a return is filed after such time and it is shown that the failure to file it was due to reasonable cause and not due to willful neglect no such addition shall be made to the tax.

Other parts of the acts provide that an association shall be taxed as a corporation and every corporation subject to tax shall make a return stating the items of its gross income and the deductions and credits allowed. Regulations of the Commissioner require that the return of a corporation shall be on form 1120, but permit the use of 1041 by fiduciaries. The petitioner now concedes that it was an association taxable as a corporation, even though the term “partnership” in the act is defined as including a syndicate and a partnership is not a tax-paying entity. Returns on the form prescribed for corporations were not filed for the taxable years on behalf of the petitioner. It filed for each year a “Fiduciary return of income” for the purpose of supplying information rather than to show that tax was due. No computation of the tax was made on those returns. No contention is made that the returns were not timely filed. The Commissioner contends that the returns filed were not the returns required by statute and do not save the petitioner from the penalties of section 291.

One of the arguments of the Commissioner is that the returns did not include the interest of $50,318.02 which is the item involved in the first issue. This argument of the Commissioner falls with our decision of the first issue, in which we held that the $50,318.02 was not income of the petitioner. The Commissioner also mentions several other items, no one of which is in excess of $23. Obviously they are too insignificant to require discussion. Therefore we conclude that the returns contained sufficient information, and the remaining question is whether the fact that they were on incorrect forms is reason to apply the penalty of section 291. The case of Hartford Connecticut Trust Co. v. Eaton, 34 Fed. (2d) 128, is directly in point. It holds that a penalty should not be imposed upon a taxpayer under a provision like that contained in section 291, where the taxpayer acted in good faith and gave complete information, even though he selected the wrong form. The question of the running of the statute of limitations under sections 275 (c) of the Revenue Acts of 1928 and 1932, which use the words “no return of the tax imposed by this title,” is a different question from the one here involved. Cf. Roosevelt & Son Investment Fund, 34 B. T. A. 38, dismissed for lack of jurisdiction, 89 Fed. (2d) 706; Lee H. Marshall Heirs, 39 B. T. A. 101. We hold on authority of Hartford Connecticut Trust Co. v. Eaton, supra, that there was not during these years a failure to make and file a return within the meaning of section 291.

Decision will be entered, under Rule 50.


author: TURNER:

text:
    Williams Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 82276, 84833.
    Promulgated March 21, 1939.

      Chester J. McGuire, Esq., for the petitioner.

      Edward C. Adams, Esq., for the respondent.
   OPINION.

TURNER:

That some trusts are of such nature as to require their classification as associations and hence as corporations within the meaning of the revenue acts (in the instant case, section 1111 (a) (2) of the Revenue Act of 1932) is well settled. Morrissey v. Commissioner, 296 U. S. 344; Swanson v. Commissioner, 396 U. S. 362; Hel-vering v. Combs, 296 U. S. 365; Helvering v. Coleman-Gilbert Associates, 296 U. S. 369; Title Insurance & Trust Co. v. Commissioner, 100 Fed. (2d) 482; Lee H. Marshall Heirs, 39 B. T. A. 101; Cleveland Trust Co., Trustee, 39 B. T. A. 429. Due, however, to the great variety of trusts, the dissimilarities in their purposes and operations, and the many variations in the powers of the trustees and the rights of the beneficiaries, it is at times difficult to distinguish between trusts which, as associations, are taxable as corporations and ordinary trusts dealt with under the statutory heading of estates and trusts.

Noting as an impossibility the translation of “the statutory concept of an ‘association’ into the particularity of detail that would fix the status of every sort of enterprise or organization”, the Supreme Court, in Morrissey v. Commissioner, supra, after reviewing its prior decisions on the subject and after discussing the development and trend of rulings and regulations seeking to apply these decisions to cases arising from time to time, declared that the recurrent disputes emphasized “the need of a further examination of the Congressional intent.” The Court then proceeded to pronounce certain principles which may be applied in determining whether or not a trust is an association and therefore a corporation within the meaning of the statute. The Court said in part:

What, then, are the salient features of a trust — when created and maintained as a medium for the carrying on of a business enterprise and sharing its gains — which may be regarded as making it analogous to a corporate organization? A corporation, as an entity, holds the title to the property embarked in the corporate undertaking. Trustees, as a continuing body with provision for succession, may afford a corresponding advantage during the existence of the trust. Corporate organization furnishes the opportunity for a centralized management through representatives of the members of the corporation. The designation of trustees, who are charged with the conduct of an enterprise, who act “in much the same manner as directors,” may provide a similar scheme, with corresponding effectiveness. Whether the trustees are named in the trust instrument with power to select successors, so as to constitute a self-perpetuating body, or are selected by, or with the advice of, those beneficially interested in the undertaking, centralization of management analogous to that of corporate activities may be achieved. An enterprise carried on by means of a trust may be secure from termination or interruption by the death of owners of beneficial interests and in this respect their interests are distinguished from those of partners and are akin to the interests of members of a corporation. And the trust type of organization facilitates, as does corporate organization, the transfer of beneficial interests without affecting the continuity of the enterprise, and also the introduction of large numbers of participants. The trust method also permits the limitation of the personal liability of participants to the property embarked in the undertaking.

With respect to the form of its organization, its methods of operation, the rights of beneficiaries in the trust and its properties, the powers of the trustees, and the relationship of the trust and its beneficiaries to third parties, there can be no doubt that the Williams trust meets the above test of an association. The legal title to the real estate is vested solely in the corporate trustee and the rights of the beneficiaries are declared to be personal. The beneficiaries have no right of possession, management, or control of the trust estate and no widow, widower, heir, or devisee of any beneficiary has any right of dower, homestead, inheritance, or partition in the trust properties. The rights are solely against and through the trustees and do not constitute a claim, title, or interest in the properties themselves. Suits are to be brought and defended in the name of the trust and the beneficiaries are not necessary parties. The beneficial interests are represented by trustees’ receipts which may be sold and transferred without termination of the trust and the existence of the trust is not affected by the death of any beneficiary. Neither the trustees nor the beneficiaries are personally liable for any money borrowed or for any other debt or liability of the trust and all persons dealing with the trust are required to look only to the property of the trust for the payment of their claims. Subject to the control of the beneficiaries through a majority vote, or a two-thirds vote on certain matters, the trustees, similar to the directors of a corporation, have the authority and power to do and perform any and all acts necessary in the management and operation of the properties belonging to the trust. The divorcement of the properties, their management, and operation from the beneficiaries is as well defined and distinct as if the properties had been transferred to any standard business corporation. And while it is not essential to the classification of a trust as an association that the beneficiaries have control over the trust comparable to that of stockholders over a corporation, Hecht v. Malley, 265 U. S. 144, and Morrissey v. Commissioner, supra, such comparable control is present in the instant case. Among other things the beneficiaries have the right, by a two-thirds vote, to remove and elect trustees. The property of the trust may not be sold and leases for periods of more than 25 years may not be entered into except with the consent of the majority in amount of the registered trustees receipts outstanding. It is also provided that the beneficiaries, by a two-thirds vote, may terminate the trust.

In stating “the salient features of a trust * * * which may be regarded as making it analogous to a corporate organization” and which formed the basis for the comparisons just concluded, it is noted that the Court assumed a trust “created and maintained as a medium for the carrying on of a business enterprise and sharing in its gains.” Previously in its opinion the Court, in discussing the characteristics of an association as distinguished from an ordinary trust, had said: “But the nature and purpose of the co-operative undertaking will differentiate it from an ordinary trust. In what are called ‘business trusts’ the object is not to hold and conserve particular property, with incidental powers, as in the traditional type of trusts, but to provide a medium for the conduct of a business and sharing its gains.” On the thought there expressed the petitioner rests its principal argument, which is that the Williams trust is not a trust organized “to provide a medium for the conduct of a business” and the sharing by the beneficiaries in its gains, but rather that it is a trust of the “traditional type” organized “to hold and conserve” the trust properties and to effect the sale thereof.

With this contention of the petitioner we are unable to agree. If, for instance, the beneficiaries herein had elected to organize a statutory corporation and to transfer the properties to it for purposes and functions similar to those of the Williams trust, there is little or no likelihood that it could be successfully contended that such a corporation, in owning, managing, leasing, and even selling the said properties, was not a business corporation engaged in business activities for profit. The only substantial difference between such a case and the instant case would be that on the one hand the functions were performed by an organization existing under statute, while on the other, by an organization of substantially the same form but existing under common law. Neither is it at all likely that the petitioner, with respect to a claim for the deduction of its operating expenses, would concede or argue that those expenses were not paid or incurred in the carrying on of a trade or business.

We are unable to conclude, as we did in Broadway-Brompton Buildings Liquidation Trust, 34 B. T. A. 1089, that the trust was organized for the “single purpose of liquidation.” Nor does the trust instrument herein contain any declaration of a purpose to liquidate or sell the trust properties such as was present in Frederick Pitzman et al., Trustees, 36 B. T. A. 81. Furthermore in that case there was an absence of operation for profit such as we have in the instant case. That same obvious distinction exists between the instant case and Lewis & Co. v. Commissioner, 301 U. S. 385, a case strongly relied upon by petitioner.

Looking to the trust instrument for the purposes of organization, as we are directed to do by the Supreme Court in Morrissey v. Commissioner, supra, and Helvering v. Coleman-Gilbert Associates, supra, we find no specific expression of purposes, but from examination of the powers and duties of the trustees it appears that the trust was to own, manage, operate, and lease the properties transferred to it, to pay all expenses incidental to such operations* and to distribute the gains derived from such activities to the beneficiaries at specified intervals, or, at the discretion of the trustees, oftener. The petitioner argues, however, that the inclusion in the trust instrument of a provision to the effect that the proceeds from the sale of any parcel of real estate were to be distributed to the beneficiaries and the omission of any provision authorizing reinvestment were tantamount to the declaration of a dominant purpose to sell the property. In our opinion, no such conclusion is indicated.

It may well be that the parties creating the trust did not desire the operations to extend beyond the management of the specific properties conveyed to the trust, but that fact alone does not change or alter the intent to own and operate the properties for profit unless and until they should be sold. Provision may be made for the termination of a corporation or association if, as, and when the property of such corporation or association is sold, but such provision is not, in our opinion, sufficient ground for the conclusion that liquidation or sale of the properties of the particular corporation or association was the dominant purpose for its organization. In Swanson v. Commissioner, supra, the operation was limited to a single property which the trustees had the power to sell. Furthermore it was provided that the trust might be terminated by such sale. There is no indication in the report of the case of any power in the trustees to reinvest the proceeds of such sale, and yet the Supreme Court held the trust to be an association. In Lee H. Marshall Heirs, supra, we have found nothing to indicate a power in the trustees to reinvest the proceeds from the sale of the trust property, but to the contrary the statement of powers and duties of the trustees indicates that the proceeds from such a sale were to be distributed. The trust instrument in Cleveland Trust Co., Trustee, supra, as in the instant case, required distribution of the proceeds from the sale of trust property and there appears to have been no power to reinvest. Similarly, in Title Insurance da Trust Co. v. Commissioner, supra, there appears to have been no specific power to reinvest the proceeds from the sale of the trust property, and yet at the time of its transfer to trust the said property was under option to sell. In each of the cases cited the organization in question was held to be an association.

In our opinion the facts of record indicate that the desire to unify and simplify the ownership and management of the properties for profit furnished the primary and dominant motive for the creation of the trust rather than the desire to sell or liquidate the properties. The properties conveyed in trust obviously had a value of three million dollars or more and were producing for the trustors a substantial annual revenue. The management of the properties through an agent was becoming more complicated and increasingly difficult. John R. Williams had died the previous year, leaving his widow and three daughters to share in his estate, none of whom resided in Detroit. The daughters were married and had children of their own. Josepha W. Douglas, who resided in Colorado, was 59 years of age and in ill health. She had one child. Gershom Mott Williams, who had seven children, was 62 years of age and was suffering from angina pectoris. According to the record he spent all of his time away from Detroit. His death occurred in 1923. It is at once apparent therefore that centralized ownership and control of the properties were equally if not more essential and desirable to their continued operations for profit than for the purpose of effecting their sale.

The record does contain some testimony tending to show an expectation that the properties transferred to petitioner should ultimately be sold. There is also some testimony to the effect that the John R. Williams beneficiaries desired to speed liquidation of the properties, which desire played its part in the creation of the trust. It also appears, however, that these same beneficiaries desired that the activities relating to the management and leasing of the properties be conducted in a more formal manner than had been the case up to that time. They felt that the divorcement of actual ownership and management of the properties from the beneficiaries by transfer to such a trust would not only facilitate conveyance in the case of sale, but would also facilitate the management and leasing of the properties. It is not without significance that the speedier liquidation of the interests of the John R. Williams beneficiaries was accomplished as a result of the organization of the Williams trust but without the sale of more than two of the parcels of real estate transferred in trust, and, further, without interference with the continued activities of the trust in holding, managing, and leasing the remaining properties and in distributing the income derived therefrom to the remaining holders of trustees’ receipts. We do not overlook the fact that two of the seven parcels of real estate were sold after conveyance to petitioner, but it should be noted that one parcel was under option of sale when the trust was created (in this connection see Title Insurance & Trust Co. v. Commissioner, supra), and the circumstances and occasion for the sale of the second parcel do not, so far as the record shows, indicate anything of particular significance unless it is that the sale provided the means for the John R. Williams beneficiaries to more speedily liquidate their interests in the trust without interfering with its continued existence as owner and manager of the remaining properties.

As an indication that the trust was never intended to serve any purpose other than that of holding and conserving the particular properties pending their sale, the petitioner points also to its policy of making net leases whenever possible so as to minimize its work. In that connection we do not understand that it necessarily follows that activities regularly carried on do not constitute the conduct of a business merely because the party in charge of the enterprise has through a particular method of operation been able to reduce those activities to a minimum. We are rather of the opinion that it is the. nature and effect of the activities when related to the subject matter, due regard being given to the circumstances, which determine the question as to the conduct of a business. Furthermore only a minority of the leases negotiated in this instance were in a strict sense net leases, while the majority were either gross leases or had some features of a gross lease. In Lee H. Marshall Heirs, supra, the trust was determined to be an association, and yet it owned one parcel of property and that parcel was under a long term net lease. A similar situation existed in Title Insuranee & Trust Co. v. Commissioner, supra.

The petitioner also regards as significant the fact that six of the seven parcels conveyed to it in 1920 were all that remained of some 126 descriptive units, or 57 parcels, of real estate devised to Josepha W. Douglas, Gershom Mott Williams, and John It. Williams in 1862 and 1876, all other parcels having been sold prior to 1920. Petitioner stresses the fact that 13 of the parcels sold were also located in the downtown section of the city of Detroit. The last of the said 18 parcels was sold in 1912. As we have indicated in our facts, the relative size and importance of the parcels sold with reference to each other or with reference to the parcels transferred in trust are not shown, and, in the light of other facts of record, we can not conclude that the sale of the 13 parcels and the other parcels sold necessarily has any bearing on the motive for transferring the remaining parcels in trust in 1920.

That the owning, managing, and leasing of properties for gain was of major and not minor importance is further indicated by the results of those operations as disclosed by the statement of operating cash receipts and disbursements. Although the evidence of record does not disclose the relative importance of the seven parcels of real estate transferred in trust in dollars and cents, it does appear that parcel No. 2 and parcel No. 6 were the major properties and were of approximately equal importance, while parcel No. 1 and parcel No. 5 were of the least importance. Parcel No. 2 was sold in 1926 for $1,200,000. Parcel No. 7 was sold in 1921, in accordance with tiic option existing prior to the creation of the trust, for $150,000. Taking into consideration the prices at which these properties were sold as some indication of the value of the respective parcels, tbe rent derived from the leasing of the properties over the period of years from September 1920, when the trust was created, through the taxable year 1933 was not insignificant. The excess of receipts over disbursements amounted to $1,214,442.75, and this even though parcel No. 2, which had been second in the production of income, was sold in 1926.

In explanation of the fact that five of the seven parcels have not been sold but are still maintained as rental properties, the petitioner offered testimony to the effect that the market for certain of these properties was adversely affected throughout the period from itg organization to 1936 by the agitation over the widening of Woodward Avenue, and from the late 1920’s on by the general depressed state of the Detroit real estate market. We note, however, that in spite of these depressing factors the trustees, in keeping with the powers given to them and in the performance of their duties as prescribed by the trust instrument, succeeded in maintaining the properties as income-producing properties from the inception of the trust in September 1920 throughout the taxable years 1932 and 1933, which are before us. It is also noticeable that, except for the one or two years when the general business depression was most pronounced, the trustees succeeded in procuring substantially increased rents on practically every parcel of real estate it owned. According to the testimony of Williams, one of the managing trustees, parcels No. 1 and No. 5 were relatively unimportant, but even so, the rent on parcel No. 1 ranged from $3,000 net in 1921 to $6,000 under a gross lease for 1929, while on parcel No. 5 the rent was $12,343.41 for 1921, $6,099.84 for 1922, and from $5,400 to $12,000 per annum for 1923 through 1929, although the rents were substantially reduced on both properties for the years 1930 through 1933. In the case of parcel No. 3 the rents increased during the period from 1921 through 1932 from $6,999.96 to $20,000.04, and continued at the latter rate until the lessee became insolvent in 1933. In the case of parcel No. 4 the rents increased from $3,499.92 in 1921 to as high as $12,499.92 in 1931. Thereafter, even though the lease did not expire until April 30, 1934, the rents were reduced to $10,416.61 in 1932 and to $6,458.68 for 1933. For parcel No. 6 the rents were maintained throughout the entire period at $60,000 per year as provided by a long term lease with S. S. Kresge Co. The production of income through the ownership and leasing of the properties was obviously of major importance.

It is our opinion therefore that the facts in this case definitely show that a primary objective in the organization of the Williams trust was the unified and simplified ownership and management of its properties for the purpose of producing profits, and, since it was organized and operated in much the same manner as a corporation, it is an association within the meaning of section 1111 (a) (2) of the Revenue Act of 1982. The fact that the properties may be, or might have been, sold if a favorable market had developed or should develop, thereby resulting in the dissolution of petitioner, does not alter the nature of the organization nor the character of its operations prior to such termination or dissolution.

Decision will be entered, wnder Bule 50.

       SEC. 1111. DEFINITIONS.
      (a) When used in this Act—
      *#**'•**
      (2) The term “corporation” includes associations, joint-stock companies, and Insurance companies.


author: Steknhagen :

text:
    Fred W. Leadbetter, Petitioner, v. Commissioner of Internal Revenue, Respondent. Pittock-Leadbetter Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 88588, 88589.
    Promulgated March 21, 1939.

      Earl S. Nelson, Esq., for the petitioners.

      John H. Pigg, Esq., and Edward 0. Adams, Esq., for the respondent.
   OPINION.

Steknhagen :

Petitioner Leadbetter, on the postulate that he was domiciled in the State of Washington, included on his tax returns for 1933 and 1934 only his share of community income. The Commissioner determined that he was “domiciled in the State of Oregon which state does not have the community property provisions”, and hence transferred several items from the return of his wife to his return. This petitioner assails and undertakes to prove his domicil in the taxable years to have been at Camas, Washington.

Since domicil is primarily determinable by evidence, direct and circumstantial, of intent, there is in the record the testimony of numerous witnesses, photographs, documents, and records covering many years. Weighing this, we find ourselves without doubt that in the years 1933 and 1934 petitioner’s home was at Camas, Washington, that this is where he and his family expected to and did return whenever they went away, that they thought of it as home, and that no other dwelling fulfills the long recognized conception of domicil. The numerous facts and circumstances which the respondent has gathered weigh but lightly against the testimony of petitioner, his wife, his son, his daughter, his old friend, his neighbor, and his employee.

The only Oregon house upon which respondent could predicate his determination of Oregon residence is the Cedar Hill place, and that was the least used of the three and can hardly be said to have been really lived in at all by petitioner for many years. Indeed, from a strict consideration of the evidence, we know not whether it was owned by him in the tax years, for the Commissioner made no determination at all about the Cedar Hill house and the evidence shows only that petitioner bought it in 1902 for $40,000, spent $200,000 on it altogether, occupied it only occasionally and never as a permanent home, and that at some unspecified time before the hearing it became the property of his daughter and her husband. It takes but little evidence to overcome a general determination of domicil in the State of Oregon having such slight support. Fredrick Rodick, Executor, 33 B. T. A. 1020, 1033; aff'd., 87 Fed. (2d) 328.

The respondent catalogs 15 particulars which he urges constitute a preponderance of evidence in favor of an Oregon domicil. While they may not be disregarded, they amount in all to little as against the story of petitioner’s domestic conduct for many years in and about the Camas place.

The ultimate and controlling fact has been found to be that petitioner was in 1933 and 1934 a resident of Camas, Washington, and it is concluded that he was domiciled in that state. He was, therefore, entitled to avail himself of the effect of its community property law, Poe v. Seaborn, 282 U. S. 101, and the Commissioner was in error in denying it.

The Commissioner made no determination whatever in the notice of deficiency which would reasonably have put the taxpayer on notice that even if he were domiciled in Washington some of the items of gross income which had been treated as community income were determined to have been separate income entirely taxable to petitioner. The pleadings do not suggest such a question. At the opening of the trial the respondent’s counsel adverted to the possibility that there might be some unspecified items of separate income which had been improperly divided between petitioner and his wife as community property, although some items were conceded to have been clearly community items. Nothing more definite was said on the subject of classifying income between community and separate items throughout the trial. In respondent’s brief, subsequently filed, a point is made that petitioner, even if domiciled in Washington, has not overcome the presumptive correctness of the determination because he has not proven that all of the divided items were community income, and therefore that he must be taxed upon all the items as separate property.

We think that, in the posture of the case as it was tried, this view must be rejected. The Commissioner did not determine any items to have been petitioner’s separate income, but only that petitioner’s contention “that you and your wife should be permitted to divide your combined income for the years 1933 and 1934 on the community property basis has been denied”, because of domicil in Oregon. Petitioner assailed this and has, as we hold, established its error. There was no reason to regard this apparently forthright determination as to domicil as covertly including an unspecified determination that each item of divided income was in fact and law the separate income of petitioner and therefore not divisible. The petitioner was in fairness justified in reading and assailing the determination according to its plain terms, as an adverse finding of domicil, a reversal of which would carry with it the exclusion of the items which had been divided as community income. If we were to judge the separate or community character by the only indication there is in the record, namely, the list of terms applied to the items in the deficiency notice, such as “salaries”, “interest”, “rents”, etc., it would be more reasonable to treat them all as community than as separate. There is a presumption in Washington to that effect, Rucker v. Blair, 32 Fed. (2d) 222. If as to any item this is not so, it is not unfair to expect a specific determination by the respondent which would call upon the taxpayer in due time to prepare to meet his burden of proof.

The Commissioner disallowed the deductions taken by Lead-better on his 1934 individual return for interest. Being on the cash basis, petitioner could not deduct interest unless it was actually paid; accrued interest availed him no deduction,’ Massachusetts Mutual Life Insurance Co. v. United States, 288 U. S. 269; Barto Co., 21 B. T. A. 1197; Oscar G. Joseph, 32 B. T. A. 1192; George S. Groves, 38 B. T. A. 727, and his right to deduct is not enhanced by his giving a new note for interest, Eckert v. Burnet, 283 U. S. 140.

The evidence shows sporadic bookkeeping entries balancing the accounts between petitioner and the corporation. This does not support the petitioner’s claim, and the Commissioner’s determination is sustained.

The corporation, Pittock-Leadbetter, took deductions on its 1933 and 1934 returns for depreciation and operating expenses of the automobiles. The Commissioner disallowed these deductions and also added to Leadbetter’s individual income amounts equivalent to such deductions, which he treated as the value of the use of the automobiles to Leadbetter. Although the two proceedings of the individual and the corporation were separately tried, they may appropriately be considered together as to these issues, since they are correlative aspects of the same facts. We find nothing to support either the- deduction taken by the corporation or the income attributed by the Commissioner to the individual. Obviously the automobiles, even though technically owned by the corporation, were a personal convenience of the Leadbetter family. Nothing in the corporation’s business required their use or that he should be given their use as compensation, and the attempt by the corporation to support a conception of them as a business facility by the testimony that one was once used to transport a person to see a yacht with a view of chartering it from the corporation is a demonstration of the unsubstantial character of the petitioner’s claim.

The Commissioner’s disallowance of the corporation’s automobile deductions is sustained, and his inclusion in petitioner’s income of the amounts treated as the value of their use is reversed.

Decision will Toe entered under Rule 50.


author: Mellott :

text:
    Alice A. Bigelow, Executrix of the Estate of Herbert M. Bigelow, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82659.
    Promulgated March 21, 1939.

      Thomas R. Dempsey, Esq., A. Colder Mackay, Esq., Arthur Mc-Gregor, Esq., and James L. Patten, Esq., for the petitioner.

      L. H. Rushbrook, Esq., for the respondent.
   SUPPLEMENTAL OPINION.

Mellott :

Under date of August 23,1938, opinion was promulgated herein (38 B. T. A. 377) in which the facts, all of which were stipulated, are set out. The decision, entered in conformity with said opinion, has heretofore been set aside.

Since our opinion was promulgated, the Circuit Court of Appeals for the Ninth Circuit, in United States v. Goodyear, 99 Fed. (2d) 523, has passed upon the identical question involved herein. The court, one member dissenting, concluded that the agreement — quite similar to the one before us — vesting in the wife “a present, existing and equal interest” with her husband, gave her “the same interest in the community property as she would have had if the property had been acquired after the effective date of |I61a of the Civil Code” of California. (See footnote, 38 B. T. A. 377, 380.) No application for certiorari was filed.

The cited case is determinative of the issue before us. (See also concluding paragraph of the dissenting opinion.) It follows, therefore, that our opinion must be, and it is, set aside.

On the authority of United States v. Goodyear, supra, it is held that the respondent erred in including in the decedent’s gross estate all, rather than 50 percent, of the property of the decedent acquired prior to the execution of the agreement shown in 38 B. T. A. at page 378.

Judgment will be entered wider Rule 50.


author: Aedndhcji :

text:
    Palmer, Stacy-Merrill, Inc., a Delaware Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87997.
    Promulgated March 22, 1939.

      Tom 8. Patterson, Esq., for the petitioner.

      B. M. Ooon, Esq., for the respondent.
   OPINION.

Aedndhcji :

In the report on this case published at 37 B. T. A. 530, we found as a fact that the petitioner agreed to pay dividends on its preferred stock “whether earned or not.” Eespondent, after publication of the report, objected to this finding on the ground that it is not supported by the documentary evidence. He concedes that counsel for the petitioner stated at the hearing that dividends were to be paid whether eai'ned or not. One of petitioner’s witnesses also testified to the same effect. Counsel for the respondent made no objection to such statements and testimony at the hearing and made no mention of them in the letter he subsequently filed in lieu of a brief.

Upon reexamination of the record we find that counsel for the respondent is correct in his contention that the written contracts do not specifically provide for payment of dividends whether earned or not. We have changed the findings of fact accordingly. However, we are of the opinion that such change does not require a reversal of the result reached in our prior report. We have, in this class of cases, consistently taken the view, as expressed in Schmoll Fils Associated, Inc., 39 B. T. A. 411, that “The intention of the parties must be accorded great weight.” And in our prior report on this case we pointed out that “corporation stock certificates are no exception to the general rule of construction of written instruments, which places intent of the parties above mere form.”

The evidence in this case establishes that the vendors of the assets acquired by the petitioner did not intend to become investors in the petitioner. They wanted to be sure of receiving the selling price, with interest, regardless of whether the petitioner’s operations were profitable or not. Cf. Proctor Shop, Inc., 30 B. T. A. 121; aff'd., 82 Fed. (2d) 792. The petitioner, equally with the vendors, intended to pay the holders of its securities sums certain on definite dates without regard to earnings. As set out in the findings of fact, the three sales contracts provided specifically that dividends “shall be paid quarterly”, and all of the stock was to be retired within a definite period, with no expressed restriction to earnings. We regard the evidence of intent of the parties too clear to be overcome by formal recitations in the stock certificates.

The facts here make a stronger case for the petitioner than did the facts in the Schmoll Fils Associated case, supra. In that case the payments to security holders were to be made only out of profits, and there was no definite maturity date. In Richmond, Fredericksburg & Potomac Railroad Co., 33 B. T. A. 895; aff'd., 90 Fed. (2d) 971, the security issued had no specified maturity date. In both cases the securities were held to be evidences of debt and the periodic disbursements to holders were allowed as interest deductions. In the latter case the court’s opinion reads in part:

The fact that the principal of the guaranteed stock is not demandable by the stockholder in the absence of default in the payment of the guaranteed dividends is not conclusive of a stock investment. In the light of the other attributes of the stock, this indicates rather a debt as to which there is a right of renewal so long as the interest is paid when due. There is nothing in the fact that the debt evidenced by the preferred stock is not payable at a fixed time which throws upon the holders thereof any of the risks with respect to the corporate enterprise which are characteristic of the position of the stockholder.

In the present case, as we have shown, there was a definite agreement to pay 7 percent quarterly and a definite promise to pay the principal at specified maturity dates. Applying the reasoning of the cited cases to the facts here, we hold, as in our prior report, that the disbursements in the taxable year amounted to interest on petitioner’s indebtedness and are deductible as such. Cf. National Grange Mutual Liability Co., 31 B. T. A. 666; aff'd., 80 Fed. (2d) 316; Brush-Moore Newspapers, Inc., 37 B. T. A. 787.

Decision will be entered for the petitioner.


author: Disney:

text:
    Gaston & Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90110.
    Promulgated March 22, 1939.

      Percwal E. Jackson, Esq., for the petitioner.

      E. O. Hanson, Esq., and H. D. Thomas, Esq., for the respondent.
   OPINION.

Disney:

This proceeding involves income tax for the year 1934. The Commissioner determined a deficiency of $4,005.10.

Petitioner is a corporation, organized on December 6, 1921, under the laws of New York, and having about 220 stockholders. It is agreed to be a holding company under the definition of section 351 of the Revenue Act of 1934. Its books were kept on the accrual basis and tax returns were made on that basis, without objection by the Government. Its business was that of exporting and importing. In the early part of 1930 it ceased to function actively as a business concern, and started liquidation of its claims and accounts. During the year 1934 it was engaged, and is still engaged, in liquidating its affairs and capital, and in no other active business. During 1934 it had income arising from securities previously realized from its liquidation of its affairs. On December 1, 1934, the directors held a meeting, at which a resolution was passed to distribute the income of 1934, also to distribute $4 per share from capital. At that date it was not possible to determine, more than approximately, the amount of the income for 1934. Resolution was passed to reduce the capital from $175,000 to $23,125, and to call a stockholders’ meeting for that purpose on December 14, 1934, declaring a dividend of $1 per share to stockholders of record December 20, 1934, payable January 2, 1935, to such extent as surplus profits (estimated at $17,872.47) when finally determined would pay the same, and out of surplus to such extent as might be necessary on account of any deficiency in surplus profits, and pursuant to the reduction in capital to return to the stockholders $4 per share, payable January 2, 1935. The resolutions were expressly made effective only if, as, and when a certificate of reduction of number of shares of stock and change of statement as to capital of the corporation should be filed in the office of the Secretary of State of New York, pursuant to authority from the stockholders. Such certificate was subsequently so filed on December 15, 1934. Entries were made in petitioner’s journal on December 15,1934, as follows:

Debit Credit
Dividend — Ordinary Stock_13125
Dividend Accrued on Ordinary Stock_ 13125
To set up accrual for dividend on Ordinary stock, declared as per Resolution of Board of Directors on Dec. 1, 1934. Dividend payable Jan. 2, 1935 to stockholders of record Dec. 20, 1934.

The same journal entry was made as to certain “management stock” debiting and crediting “10,000.”

Thereafter on January 2,1935, actual payment of the dividend was made in accordance with the journal entry, and, pursuant to the certificate of reduction of capital stock, an income tax return was later filed on an accrual basis, claiming deduction for the dividends.

There is here no serious dispute as to fact and the question is, in simplest terms, whether a personal holding company engaged in liquidating its capital may have deduction for the-year 1934, under section 351 of the Revenue Act of 1934, of the amount of dividends declared in December 1934, payable on January 2,1935, and actually paid on that date, so far as such dividend was paid from net earnings of the year 1934, on the ground that it is on the accrual basis of accounting. Petitioner on brief specifically states that it seeks credit as a dividend paid deduction only for that part of the dividends which represented net current earnings.

The petitioner has adduced no proof as to the amount of such net current earnings, and the testimony of petitioner’s secretary-treasurer was that “the distribution was made pursuant to the reduction of capital stock.” Under such circumstances we can only con-elude that the distribution was one in liquidation. Moreover, a distribution in the course of a general plan to wind up the corporate business is plainly shown by the record herein. Such a distribution is one in liquidation. Tecla M. Straub, 29 B. T. A. 216; Ward M. Canaday, Inc., 29 B. T. A. 355. The proceeds of a distribution in liquidation would not be subject to tax as an ordinary dividend in the hands of the shareholders. To allow deduction by the petitioner corporation of such a distribution would be to allow the amount involved to escape taxation altogether, except above its base, as a return of capital to the shareholders. Section 351 patently contemplates taxation of the amount involved, either in the hands of the corporation or in those of the shareholders, as is shown by the provisions of subsection (d) excusing the corporation from tax if the shareholders return the distribution as income. In that event the amount “shall be treated as a dividend received” — which would not be true of a distribution in liquidation, except above the base thereof. We therefore conclude that the distribution by petitioner was not such as to be considered a dividend under section 351 of the Revenue Act of 1934. This renders it unnecessary to consider the further question as to effect of the accrual basis of accounting upon a dividend declared but not paid within the year.

Decision ‘mill be entered for the respondent.


author: Sternhagen :

text:
    Frank J. Cobbs, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91493.
    Promulgated March 22, 1939.

      Albert B. Bidgway, Esq., for the petitioner.

      John H. Pigg, Esq., for the respondent.
   OPINION.

Sternhagen :

The Commissioner determined a deficiency of $2,178.74 in petitioner’s income tax for 1934, He treated as ordinary income and refused to recognize as capital gain the gain from the surrender of a combined life insurance and annuity contract. The facts are not in dispute and have been stipulated.

On August 27, 1926, the petitioner took out a combined life insur’ anee and annuity contract for a consideration of $50,000. On January 26, 1934, he surrendered the policy for its surrender value of $50,000, of which amount $25,000 was paid to him in cash and $25,000 was, at his direction, applied to a new single premium annuity contract. While the combined life insurance and annuity contract was in effect he had received payments aggregating $16,190.78, and upon the surrender of the contract in 1934, he reported 40 percent, $6,476.31, in his tas return as capital gain under section 117 of the Kevenue Act of 1934. The respondent, denying the classification of capital gain, increased the net income by $9,714.47, the excess over the $6,476.31 reported, stating:

The amount received by you from the surrender of a combined annuity and life insurance contract is not considered a sale or exchange within the meaning of section 117 of the Revenue Act of 1934 and has, therefore, been eliminated from capital net gain and the full amount of the gain included as ordinary income in accordance with General Counsel Memorandum 18233, Internal Revenue Bulletin XVI, May 24, 1937, No. 21, page 5, which holds that Income Tax Ruling 2261, Cumulative Bulletin XI-2, year 1932, page 39, is applicable to the 1934 Act as well as to the 1932 Act.

Thus the essential issue is whether the voluntary surrender of the policy for its face amount is a sale or exchange. There would seem to be little room for debate if the words alone were to be applied in their ordinary meaning. For the realization of the gains inherent in a contract by reason of its performance is not a sale or exchange, either in common parlance or in the language of the law, United States v. Fairbanks, 95 Fed. (2d) 794; petition for rehearing and for certiorari granted Jan. 16, 1939; Felin v. Kyle, 102 Fed. (2d) 349. And so it was held in 1936, under the Kevenue Act of 1928, as to the surrender of an exactly similar policy, George A. Helbnan, 33 B. T. A. 901.

The petitioner argues, in attempting to escape that case, that it was built upon an analogy of the surrender of an insurance policy and the redemption of a bond; and that since, by subdivision (f) of section 117 of the Kevenue Act of 1934 the retirement of bonds was thereafter required to be considered as an exchange, this must carry with it the accepted analogue. We think, however, that this presses logic too far. It would require a hypothesis that Congress, while using fairly clear language to change the law as to a specified list of securities, had intended to include also contracts which for one reason or another had been regarded as somewhat similar. This could easily have been done, if not by express specification in the statute, at least by an omnibus term broad enough to include insurance or annuity contracts. But no term in the paragraph is susceptible of such an interpretation. The broadest term used is “evidence of indebtedness”, which does not by itself denote such contracts, Hiller v. Olmstead, 54 Fed. (2d) 5, and in its context with the preceding word “other” is limited by the doctrine of noscitur. a sociis to such things as bonds, debentures, notes, and certificates of indebtedness having interest coupons or in registered form. Indeed, the clear specification of these compels the inference that insurance and annuity contracts were deliberately excluded. We agree in this with the General Counsel in G. C. M. 18233, 1937-1 C. B. 147.

Decision will he entered wider Rule 50.

       (f) Remehmen® os’ Bonds, Etc. — For the purposes of this title, amounts received by the holder upon the retirement of bonds, debentures, notes, or certificates or other evidences of indebtedness issued by any corporation (including those issued by a government or political subdivision thereof), with interest coupons or in registered form, shall be considered as amounts received in exchange therefor.


author: Sterniiagen :

text:
    Helser Machine and Marine Works, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91316.
    Promulgated March 22, 1939.

      Robert T. Jacob, Esq., for the petitioner.

      John H. Pigg, Esq., for the respondent.
   OPINION.

Sterniiagen :

The Commissioner determined a deficiency of $176 in petitioner’s income tax for 1935, solely by reason of the disallowance of a deduction of $1,280 taken as rent for property of which the petitioner was to have the right to acquire title. The facts are not in dispute and are entirely stipulated.

Under an agreement called a lease, dated April 1, 1935, the petitioner became the lessee from May 1, 1935, until April 30, 1945, of a piece of property in Portland, Oregon, and agreed to pay rent in monthly payments of $160 each. The last paragraphs of the lease are as follows:

And Whereas, the Lessors, in consideration of the entering into of this lease by the Lessee and of the payments to be made thereunder, have granted to the Lessee the right and privilege to purchase the said premises, during the term of the lease; and the payments of rental to be made hereunder are also to apply as payments on the purchase price:
Now, Thebefokb, This Witnesseth that it is covenanted by and between the parties that whenever prior to May 1, 1945, the Lessee has paid to the Lessors or their successors in ownership the total rental for said ten year term, to wit, $19,200, and has fully and faithfully performed and observed the terms and conditions of said lease, thereupon the Lessors will convey to the Lessee herein the said premises hereinabove described free and clear from encumbrances and with general warranty except as against the taxes assessed in the year 1944 and payable in the year 1945 and except such assessments as are assumed by the Lessee hereunder.

Contemporaneously with the lease a letter was written by the lessors to the petitioner, as follows:

We, the undersigned, hereby agree that whenever, prior to May 1, 1945, you have paid us the full sum of $19,200.00 as the total rental involved in the 10 year lease covering Lots (1) and (2), Bloch (24), Sherlocks Addition to Portland, and have fully and faithfully performed and observed the terms and conditions of said lease, then, and in that event, we will deed you the aforementioned real property, free and clear of incumbrance, except the taxes assessed in 1944 and payable in 1945.

In 1935 petitioner’s monthly payments aggregated $1,280.

The respondent defends his disallowance of the deduction by citing section 23 (a) of the Revenue Act of 1934, which is as follows:

In computing net income there shall be allowed as deductions:
(a) Expenses. — * * * and rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity.

From this statutory language it is clear that a taxpayer does not establish a deduction merely by showing that the amount paid is called rental, or that, regardless of nomenclature, it is rental in that the consideration for its payment is to some extent the possession, use and occupancy of the property. The only rental which may be deducted is that “of property to which the taxpayer has not taken or is not taking title or in which he has no equity.” Since deductions are only available within the limit of the terms in which they are expressed in the statute, the taxpayer must prove the statutory negatives.

This we think the petitioner is unable to do. One of the express terms of the agreement is the lessors’ promise to convey the premises whenever the lessee pays $19,200, which is the total rental for the 10-year term. The lessee, by paying the remaining rental, could at any time get title without waiting for the expiration of the 10 years. Each monthly payment lessened the remainder and eased petitioner’s burden. Clearly a lump sum so paid would be the price of a conveyance, and we think that the monthly sums have the same character. It is not necessary to hold that by payment of the rental petitioner acquires an “equity”, for that word is not eas5 to define; it is enough that tbe lease provides a right in petitioner to take title to the property for which the rental is paid.

What we have said assumes arguendo that the contract here in question is correctly called a lease, but this is questionable. Certainly it is not an ordinary lease. See Watson v. Commissioner, 62 Fed. (2d) 35; Jefferson Gas Coal Co. v. Commissioner, 52 Fed. (2d) 120; Herring-Hall-Marvin Co. v. Smith, 43 Oreg. 315; 72 Pac. 704; rehearing denied, 43 Oreg. 315; 73 Pac. 340; Grapico Bottling Works v. Liquid Carbonic Co., 163 La. 1057; 113 So. 454; Minneapolis Security Building Corporation, 38 B. T. A. 1220; Alexander W. Smith, Jr., Executor, 20 B. T. A. 27; Holeproof Hosiery Co., 11 B. T. A. 547.

Decision will be entered for the respondent.


author: Black:

text:
    Ollie V. Kessler, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87292.
    Promulgated March 23, 1939.

      MoMon C. Masterson, Esq., for the petitioner.

      R. C. Whitley, Esq., for the respondent.
   OPINION.

Black:

This proceeding presents two issues: (1) Whether the respondent erred in determining that petitioner received certain income from the Mereur Corporation for each of the years 1927 to 1931, inclusive, and (2) whether the respondent erred in determining that at least some if not all of the deficiency for each of the years 1927 to 1931, inclusive, was due to fraud with intent to evade tax. The burden of proof as to the first issue is upon petitioner. Avery v. Commissioner, 22 Fed. (2d) 6. The burden of proof as to the second issue is upon the respondent. Sec. 601, Revenue Act of 1928.

At the hearing before the Board petitioner was represented by counsel, but petitioner himself did not appear. Petitioner’s counsel offered no evidence. In his brief in support of his contention that petitioner received no income from the Mereur Corporation, he relies upon certain portions of Exhibit E introduced in evidence by the respondent, and the pleadings in a suit at law No. 82875 filed by the United States against petitioner in the Supreme Court of the District of Columbia to recover $1,913.18 as salary paid to petitioner under an alleged mistake of fact from February 21 to September 30, 1927, which suit was later discontinued upon motion of the Government. The pleadings in that suit were attached to petitioner’s brief as Exhibit A but were not introduced in evidence and must, therefore, be disregarded. James A. Bradley, 4 B. T. A. 1179.

Exhibit E introduced in evidence by the respondent is an affidavit made by petitioner as affiant which he filed with the respondent while petitioner’s tax liabilities for the years 1927 to 1931, inclusive, were being considered in the respondent’s office prior to the respondent’s final determination of the deficiencies and the additions to the tax here in question. This affidavit has been included in our findings of fact. Attached to this affidavit is a letter written by the Mercur Corporation to the Secretary of War under date of August 23, 1932. That part of the letter specifically relied upon by petitioner as proof that he received no income from the Mercur Corporation is as follows:

At first Mercur Corporation was given to understand that this monthly-charge represented the salary of the senior Government auditor. However, in September 1927 Mercur Corporation was notified by the senior Government auditor that in the future the proportion ($300) representing his salary would be transferred back to the Washington payroll and so thereafter discontinued in the Mercur Corporation accounts, but that his per diem allowance of $210 per month, being the stated regular allowance made to him on duty away from his home station at Washington, would continue to be paid through the Mercur Corporation accounts. The salary payments of $300 per month were thereupon immediately discontinued.
After the supervision of the operations was transferred from the quartermaster supply officer, Army base, to the corps area quartermaster, Governors Island, the question seems to have first arisen in the Department as to the status of the senior Government auditor as to whether or not he could any longer be considered as being away from his home station and so entitled to the per diem allowance. Under the date of March 3, 1931, Mercur Corporation was notified by the corps area quartermaster that thereafter no payments should be made on accounts pertaining to the Government auditor and his office, except for salaries, rental, of the office, telephone or water, without the prior approval of the office of the corps area quartermaster. After further consideration, this order was modified by the corps area quartermaster on April 3, 1931, so as specifically to authorize the continued payment of the per diem allowance of $210 per month. On June 23, 1931, this order was further modified so as to eliminate for the future the per diem allowance, but on July 2, 1931, the corps area quartermaster reinstated the per diem allowance for the month of July 1931. These payments were discontinued entirely after July 1931. The payments covering the salary and per diem allowance paid to the senior Government auditor were included in the monthly reports submitted by Mercur Corporation regularly to the War Department. Such accounts were audited by the designated officials of the Department and Mercur Corporation was advised from time to time of the approval of the accounts and audits by the office of the Quartermaster General and the Secretary of War. We contend that the payments questioned were made under the instructions of the duly authorized representatives of the War Department, audited and approved by the War Department, were properly made by Mercur Corporation, and are properly chargeable in the operating expenses under the lease, and cannot properly be charged back to Mercur Corporation.

It is our opinion that the above excerpt from the letter dated August 23, 1932, is of no particular help to petitioner on the question of the correctness of respondent’s determination of the deficiencies in question. This letter shows clearly that petitioner did receive from Mercur Corporation for a considerable period, $210 per month as per diem allowance, also salary of $300 per month for several months in 1927. The applicable regulations under the Revenue Acts of 1926 and 1928 are article 102 of Regulations 69 and article 122 of Regulations 74, respectively. The material part of these articles is identical and is as follows:

(b) If an individual receives a salary and is also repaid bis actual traveling expenses, he shall include in gross income the amount so repaid and may deduct such expenses.
(c) If an individual receives a salary and also an allowance for meals and lodging, as, for example, a per diem allowance in lieu of subsistence, the amount of the allowance should be included in gross income and the cost of such meals and lodging may be deducted therefrom.

Petitioner has not shown that he was entitled to any per diem allowance in lieu of subsistence, and, even if he had proved himself to be so entitled, any amount so received would first have to be included in gross income and only the actual cost to petitioner of the expenses intended to be provided for in the per diem allowance, concerning which petitioner has offered no evidence, could be deducted therefrom.

Petitioner admits that during the taxable years in question he received a per diem allowance of $210 per month from the Mercur Corporation for a period of 51 months, but he contends that none of these payments were includable in his gross income. In support of this proposition he cites Smith v. United States, 158 U. S. 346, affirming 26 Ct. Cls. 568. We have examined that case and find that it has nothing whatever to do with taxation. It is not in point. Under sections 213 of the Revenue Act of 1926 and section 22 of the Revenue Act of 1928, and the applicable regulations which we have already quoted, petitioner would have to include in his gross income for the appropriate taxable years the 51 monthly payments of $210 per month which he received from the Mercur Corporation. Then, if petitioner had certain expenses such as meals, lodging, etc., which were incurred while away from home in the pursuit of his trade or business, these would be deductible upon a proper showing made. See section 23 of the Revenue Act of 1928 and the corresponding section in the 1926 Act.

Of course petitioner’s failure to testify in his own case does not relieve respondent from carrying his full burden of proof on the issue of fraud, but it does prevent us from giving petitioner any deductions except those which have been allowed by the Commissioner in the deficiency notice. If there are any other deductions to which petitioner is entitled, it was his burden to appear at the hearing and prove them. This he failed to do. We affirm the Commissioner’s determination of the deficiencies for lack of evidence to overcome the presumption of their correctness.

Eegarding the second issue, relating to fraud, the respondent has affirmatively proved that petitioner received a net income for each of the years in question, exclusive of the so-called per diem payments received from the Mercur Corporation, which was considerably in excess of his personal exemption.

Petitioner, in his reply to respondent’s affirmative allegations of fraud, admits that during the taxable years he was employed as an auditor in the War Department of the United States Government, from which he received a salary, and admits that he received large amounts for per diem expenses, but alleges that the moneys received as per diem were paid on account of expenses in connection with official Government business; and denies that he received large amounts of income from the Mercur Corporation under the guise of per diem expenses which required the filing of Federal income tax returns, and denies that with intent to evade tax he willfully failed to file income tax returns for the taxable years 1927 to 1931, inclusive.

Section 223 of the Eevenue Act of 1926 reads in part as follows:

Sec. 223. (a) The following individuals shall each make under oath a return stating specifically the items of his gross income and the deductions and credits allowed under this title—
*******
(2) Every individual having a net income for the taxable year of $3,500 or over, if married and living with husband or wife; and
(3) Every individual having a gross income for the taxable year of $5,000 or over, regardless of the amount of his net income.

Section 51 of the Eevenue Act of 1928 reads the same.

Article 301 (b) of Eegulations 69, applicable to the Eevenue Act of 1926, reads as follows:

(b) Under the Revenue Act of 1&26 a single person is entitled to a personal exemption of $1,500 and the head of a family or a married person living with husband or wife to $3,500, regardless of the amount of the net income. A husband and wife living together have but one personal exemption, which is $3,500. If they make separate returns, such exemption may be taken by either or divided between them.

Article 291 (b) of Eegulations 74, applicable to the Eevenue Act of 1928, reads the same as the above.

Section 275 (b) of the Eevenue Act of 1926 and section 293 (b) of the Eevenue Act of 1928 are, for all material purposes, identical and provide as follows:

(b) Fraud. — If any part of any deficiency is due to fraud with intent to evade tax, then 50 per centum of the total amount of the deficiency (in addition to such deficiency) shall be so assessed, collected, and paid, in lieu of the 50 per centum addition to the tax provided in section 3176 of the Revised Statutes, as amended.

In M. Rea Gano, 19 B. T. A. 518, we said:

A failure to report for taxation income unquestionably received, such action being predicated on a patently lame and untenable excuse, would seem to permit of no difference of opinion. It evidences a fraudulent purpose.

In the instant proceeding petitioner did not appear at the hearing before the Board and offered no excuse whatever for his failure to report for taxation the income affirmatively proved by the respondent as having been received by petitioner. In Henry H. Epstein, 34 B. T. A. 925, the petitioner there failed and neglected to file any income tax return for the year 1925, although he had a net income in excess of his personal exemption for that year. In that case we found that the deficiency was due to fraud with intent to evade tax. In the instant proceeding we have found as a fact that a part of the deficiency for each of the years 1927 to 1931, inclusive, was due to fraud with intent to evade tax. We think the evidence supports that finding. Cf. Bell Lumber Co., 2 B. T. A. 564; Pincus Brecher, 27 B. T. A. 1108; Joseph Buchhalter, 29 B. T. A. 600.

In arriving at the conclusion, here reached, we have assumed, as petitioner’s counsel argues in his brief, that petitioner’s failure to report as taxable income the $210 per diem allowance monthly payment which he received from the Mercur Corporation was due to petitioner’s belief that these sums were not taxable income in view of the fact that they were paid him for subsistence. It may well be that petitioner believed in good faith that he did not have to report these amounts for taxation. That seems to be the purport of his affidavit which was filed with the Commissioner and is in evidence. But certainly petitioner must have known that the salary which he received from the United States Government for his services as senior auditor in the War Department was taxable.

Petitioner admits that he received from the United States Government a salary of $3,306.87 in 1927 and also the proof shows that he received $1,500 in salary in that year from the Mercur Corporation. Notwithstanding he received these two amounts as salary which aggregated $4,806.87 and was entitled to only $1,818.37 personal exemption, the part of the $3,500 personal exemption granted to married persons which the Commissioner has apportioned to petitioner in 1927, the correctness of which apportionment petitioner has not attacked, petitioner filed no income tax return for 1927. A similar situation, as will be seen from an examination of our findings of fact, prevailed to a more or less degree for each of the other taxable years.

Therefore, we must hold, under the authorities above cited, that at least a part of the deficiency in each year is due to fraud with intent to evade the tax. And, whenever the Commissioner has proved that a part of the deficiency is due to fraud with intent to evade the tax, then the 50 percent fraud penalty attaches to the entire deficiency, even though some of it is based upon income the failure to report which was not due to fraud with intent to evade the tax. Russell C. Mauch, 35 B. T. A. 617.

The additions to the tax of 25 percent for failure to file returns is not contested.

Decision will be entered for the respondent.