author: Hill:

text:
    Beck-Brown Realty Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102821.
    Promulgated May 28, 1942.

      Lawrence A. Baker, Esq., for the petitioner.

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

Hill:

This proceeding is for the redetermination of deficiencies determined by respondent as follows: Income tax for the years 1934 and 1936 in the amounts of $588.08 and $6,309.53, respectively; excess profits tax for the year 1936 in the amount of $245.96; and personal holding company surtax for the years 1934 and 1936 in the amounts of $2,150.57 and $3,268.05, respectively. Respondent also determined a delinquency penalty in the amount of $537.64 for failure to file a personal holding company return for the year 1934 within the time prescribed by law.

Petitioner assigns as error the action of respondent (1) in determining that petitioner realized income Consisting of lending fees or commissions in the year 1934 in the sum of $6,198.60, and (2) in determining that petitioner realized gain in the sum of $22,618.75 on liquidation of Sphinx Trading Corporation in the year 1936.

Petitioner is a New York corporation, with its principal office at Brooklyn. It kept its books in the taxable years and filed its income and excess profits tax returns for such years on the basis of cash receipts and disbursements. Its income tax returns for the taxable years were filed with the collector of internal revenue for the first district of New York. It derived its income principally from interest on loans and rents from real estate. All of petitioner’s stock was owned by Moses L. Parshelsky, but he was not an officer of the corporation.

Issue 1. — On January 30, 1931, petitioner loaned $40,000 to the Ageloff Realty Co., hereinafter called Ageloff, pursuant to a written agreement of the same date. The loan was evidenced by a promissory note executed by Ageloff, bearing interest at the rate of 6 percent per annum and maturing in three months from the date thereof. The written agreement stipulated that Ageloff should be entitled to three consecutive renewals of the promissory note, each for a period of three months, provided all the terms and conditions of the agreement were complied with. Ageloff was granted the option under the agreement to renew the full amount of the loan for a further period of one year upon the payment of a fee of 10 percent, exclusive of the legal interest, provided such fee and interest on the maturing note were paid at least five days prior to the due date of the note. Ageloff was also given a further option of renewing the loan for a second additional year upon the payment of a fee of 12 percent, exclusive of the legal interest. This agreement was signed on behalf of petitioner by Isaac L. Brown, its president.

On January 30, 1931, pursuant to the loan agreement, petitioner gave Ageloff a check for $40,000, signed by Brown and Charles F. Beck as president and treasurer of petitioner, respectively. Simultaneously therewith Ageloff gave petition its check for $3,200, representing the amount of the commission for the loan. Petitioner borrowed from Moses L. Parshelsky, its sole stockholder, the sum of $40,000 with which to make the above mentioned loan, and Parshel-sky’s account on petitioner’s books was credited, with that amount. On January 31,1931, Parshelsky’s account was also credited in the sum of $10,747.25, which included $3,200 representing the amount of Age-loff’s check for the loan commission. This amount of $3,200 was not recorded as income on petitioner’s books, nor otherwise recorded' except as a credit to Parshelsky’s account and as a debit to cash. Also, the amount was not included as income in petitioner’s income tax return for 1931..

In 1932 the loan in the principal amount of $40,000 was extended for an additional year. Under the original loan agreement Ageloif was required to pay $4,000 for such extension, of which amount $1,000 was paid in cash and for the remainder thereof Ageloif gave three notes of $1,000 each due July 25, August 25, and September 25, 1932, respectively. Also, on or about June 25, 1932, Ageloif paid $100.66 interest on the $4,000 for the period January 30 to July 1, 1932. The record discloses that at least two of these notes were paid in 1932. The record does not disclose whether the third of such notes was paid. Petitioner incurred in 1932 an expense of $1.40 for protest fees which it charged against and deducted from the $3,000 so collected.

In 1933 the loan in the principal amount of $40,000 was again extended for one year and a commission of $4,800 therefor was paid to petitioner by Ageloif in 1933. The amount of this commission was reported by Moses L. Parshelsky in his individual income tax return for 1933.

Petitioner recorded on its books only three $1,000 payments on account of the commission for the extension of the loan in 1932, and there is no explanation in respect of the balance. Petitioner’s books were very poorly kept, with little regard to the distinction between corporate business and individual transactions of Parshelsky. Apparently the corporation was largely treated as Parshelsky’s alter ego.

Petitioner did not report in its income tax return for 1932 any part of the $3,000 paid to it as above indicated. In 1934 the loan was repaid to petitioner in the full face amount of $40,000. Of the amount so paid, petitioner reported as income in its tax return for 1934 $2,998.60 as fees, representing $3,000 of the agreed amount of the 1932 renewal commission less protest fees of $1.40.

In computing the deficiency, respondent included in petitioner’s gross income for 1934 the amount of $3,200 representing the first commission charged for making the Ageloif loan, which was paid in 1934. Petitioner contends that such amount was not income to it in 1934 when the loan was paid, but constituted income (although petitioner says it was not the owner thereof) in 1931 when the amount was received from Ageloif.

Petitioner’s first and principal contention is that, under a prior agreement, all interest, fees, and commissions on the Ageloif loan belonged to Moses L. Parshelsky, its sole stockholder, as consideration for his furnishing the money to make the loan. For this reason petitioner argues (1) that respondent erred in including in its income for 1934 the original commission of $3,200, and (2) that it erred in reporting as income in its return for 1934 the amount of $2,998.60 representing 1932 renewal commission. Petitioner contends that it is entitled to a refund or credit of the tax paid on the latter amount.

It is now well settled that where a commission, charged for the making of a loan by a taxpayer on a cash basis, is deducted from the face amount of the loan, such commission is received and constitutes income in the year when the loan is paid. See Chicago City Bank & Trust Co., 24 B. T. A. 892; Cosmopolitan Bond & Mortgage Co., 30 B. T. A. 717; Vancoh Realty Co., 33 B. T. A. 918, and authorities cited. In Blair v. First Trust & Savings Bank, 39 Fed. (2d) 462, affirming 11 B. T. A. 1034, the court stated the principle as follows:

It is plain that until the loan is paid or rediscounted the respondent has earned no profit, but has simply parted with its funds on the faith of the security. The commission is not actually received until respondent gets back what it has previously paid out plus the commission. The deduction of the commission from the face of the loan brings nothing into the coffers of the bank.

In the present proceeding the original commission was not deducted, in form at least, from the face of the loan, and only the balance delivered to the borrower. Petitioner gave its check to Agelolf for $40,000 and Agelolf gave back to petitioner its check in the sum of $3,200 to cover the commission. The result was precisely the same as if petitioner had deducted the commission from the face amount of the loan and paid the balance to Agelolf. By either method, petitioner would have been out of pocket the net amount of $36,800, and would have had Ageloff’s promissory note for the principal amount of $40,000. Petitioner parted with its money and at-that time in fact received nothing. The commission was, therefore, not income received in 1931, but income received in 1934.

The facts pertaining to the payment of the commission for the extension of the loan in 1932 for one year were in brief as follows: The loan originally matured on or about January 30, 1932, but the term of the loan was extended for an additional year from that date. The amount of the commission for such extension was fixed at $4,000 under the terms of the original agreement between the parties respecting such loan. Subsequently, at different times during the year 1932, Agelolf paid to petitioner on account of such renewal commission the total sum of not less than $3,000. The petitioner did not treat the $3,000 so received as income to it in that year and did not report it for tax purposes for the year 1932. Petitioner treated the $3,000 in question as income received in 1934, the year in which it received $40,000 in full payment of the loan note in that face amount, and reported it (less a charge of $1.40 for protest fees) in its income tax return for that year.

It was encumbent on petitioner to credit the $3,000 received in 1932 in respect of the renewal of the loan either to the payment of the renewal commission or as a payment on the loan. Since the petitioner did not report the receipt of such amount as income in 1932, it must have treated it as a credit on the principal of the loan instead of on the commission, so that when the note in the full face amount of $40,000 was paid to petitioner in 1934 there was included in such payment the commission of $3,000 for the renewal of the loan in 1932 as well as the original commission of $3,200. We find nothing in the record to impel us to hold that petitioner did not properly report the 1932 renewal commission in its income tax return for 1934.

The second point urged by petitioner is that these commissions did not in any year constitute income taxable to it for the reason that they were to'be paid to Parshelsky, its sole stockholder, as consideration for his furnishing the money with which to make the loan. This contention, we think, can not be sustained. Parshelsky testified that he had an understanding with his brother that all interest or money coming out of that loan was to go to him because he “put up the money.” However, his brother was neither a stockholder nor officer of petitioner corporation, and no agreement with it is shown.

In any event, the fact remains that, while Moses L. Parshelsky loaned the money to petitioner, the latter executed the contract with and made the loan to Ageloff and received from Ageloff in its own right all amounts in payment of commissions and interest and in repayment of principal. Hence, commissions and interest constituted income to petitioner. We are not here concerned with the question of whether or not petitioner was obligated to pay over the same or similar amounts to its stockholder as consideration for his advancement of the money with which to make the loan, or whether or not, if so paid over, such amounts constituted taxable income to him.

To sustain petitioner’s contention would require us in effect to disregard the separate entity of the corporation and treat the transaction as having been consummated by Parshelsky. This we think we can not do under the facts shown here. The corporation was not the agent of Parshelsky in making the loan, but acted in its own behalf in the course of a business regularly carried on by it.

Parshelsky owned all of petitioner’s stock, and was in complete control of the corporation. Obviously, he could as an individual have made the loan in question to Ageloff, and any commissions and interest received would have been his income. On the other hand, it was his privilege to advance the money to petitioner and cause the loan to be made by it. He elected to make the loan in the form of a corporate transaction, and he now must abide the tax consequences, notwithstanding it may be to his financial disadvantage to do so. Higgins v. Smith, 308 U. S. 473.

A corporation is legally distinct from its shareholders and, in the absence of fraud or unfairness, their separate transactions will not be disregarded. Dalton v. Bowers, 287 U. S. 404; Burnet v. Common wealth Improvement Co., 287 U. S. 415; E. H. Nielsen Co., 26 B. T. A. 223; William F. Humphrey, 33 B. T. A. 442. The separate entity of a one-man corporation will not be disregarded where there is no evidence of fraud. Wagner v. Lucas, 89 Fed. (2d) 391. Nor will the corporate entity be disregarded merely because the corporation was a family corporation organized for convenience. Romie C. Jacks, 19 B. T. A. 559.

There are, of course, circumstances in which corporate form will be disregarded in order to prevent fraud or an unfair result in determining tax liability, but such exceptions to the general rule have no significance here. For an extended discussion of this point, see Higgins v. Smith, supra, and other cases above cited. In the present case Parshelsky dealt with the corporation as an entity, and there is no justification for saying that the business of the corporation was that of its stockholders. Dalton v. Bowers, supra.

In the light of the conclusions reached above, we need not consider respondent’s further contention that in any event petitioner is now estopped from taking the position that the amount of the 1932 renewal commission reported in its return for 1934 was income for 1932.

On the first issue, the action of respondent is approved.

Issue 2. — In 1929 the Par Holding Co. purchased 625 shares of stock of the Sphinx Trading Corporation at a cost of $62,500, or $100 per share. All of the stock of the Par Holding Co. was owned by! Isaac Parshelsky, brother of Moses Parshelsky. About December 30, 1930, the Par Holding Co. sold the 625 shares of Sphinx stock to petitioner for $6,250, or $10 per share. The stock was then worth considerably less than when it was acquired by the Par Holding Co., and it is conceded by the parties hereto that Isaac Parshelsky wanted his corporation to dispose of the stock in order to take a loss deduction for income tax purposes.

In 1936 the Sphinx Trading Corporation was liquidated, and petitioner received $28,868.75 as a liquidating dividend on the stock of that corporation owned by it. In its return for 1936 petitioner claimed that it sustained a loss by reason of the liquidation, allowable deduction for which was limited by statute to $2,000. Respondent determined that petitioner realized a capital gain, which was explained in the deficiency notice asi follows:

In 1936 you received $28,868.75 as a distribution in liquidation of 625 shares of stock of Sphinx Trading Corporation acquired by you on December 30, 1930, at a cost of $6,250. Accordingly, you realized taxable gain in the amount of $22,618.75 in 1936.

The value of the capital stock of the Sphinx Trading Corporation, based upon market quotations on January 17, 1931, for the securities owned by the corporation, was $61.05 per share.

In its tax return for the year 1930 the Par Holding Co. claimed a loss deduction of $56,250 on the sale of the Sphinx stock to petitioner, being the difference between the cost to Par of the stock in the amount of $62,500 and the amount of $6,250 received by Par from petitioner for the stock. For reasons not appearing in the present record, such deduction was disallowed by the Commissioner. Isaac Parshelsky died on March 18,1935, prior to the hearing of this proceeding.

Petitioner’s contention in substance is that the difference between $6,250, which it paid for the stock in 1930, and $38,156.25, representing the fair market value of the stock at that time, constituted a gift to petitioner; that its basis was the fair market value and, since the amount received in liquidation was less than such basis, it derived no taxable income, but sustained a loss. On brief petitioner says it is reasonable to assume that Isaac Parshelsky, being motivated by a desire for a tax loss; intended to make an indirect gift of the difference between the sale price and the value of the stock to his brother, Moses Parshelsky, through the medium of the two corporations.

We think petitioner’s argument can not be sustained. The only material facts shown by the record on this point are that the Par Holding Co., all .of whose stock was owned by Isaac Parshelsky, sold the Sphinx stock to petitioner, all of whose stock was owned by Moses Parshelsky, at a price of approximately $50 per share less than market value. From these bare facts, we are asked to conclude that the difference between the sale price and the market price represented a gift from Par to petitioner. In the absence of any persuasive evidence of donative intent, the facts stated do not in our opinion impel such an inference. Certainly the action of the Par Holding Co. in claiming a deduction from gross income for 1930 of the full amount of the difference between the cost of the stock to it and the amount of the sale price to petitioner negatives the idea that any part of such difference was intended by that corporation as a gift. Furthermore, Moses Parshelsky testified to conversations between him and his brother respecting the matter, and his testimony falls far short of establishing any declared intention on the part of Isaac or his corporation to make a gift.

As was pointed out by us in the case of E. Louis Jacobs, 20 B. T. A. 529, the transaction here involved lacks one of the essential elements of a gift, i.e., absence of a valuable consideration, and a contention in such circumstances that the transfer was intended in part to constitute a gift could be sustained only upon the most convincing evidence. Such evidence is wholly absent here.

On the second issue, we find for respondent.

Decision will be entered for resfondmt.


source: Caselaw Access Project

author: Kern :

license: Public Domain

text:
    Aptos Land and Water Co. Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103563.
    Promulgated May 28, 1942.

      Clyde C. Sherwood, Esq., and John V. Lewis, Esq., for the petitioner.

      Harry R. Horrow, Esq., for the respondent.
   OPINION.

Kern :

The first issue for our determination is whether respondent erred in disallowing a deduction taken by petitioner on its income tax return for the fiscal year 1936 in the amount of $16,121.10 as commissions paid for the sale of associate memberships in the Rio Del Mar Country Club, Inc. Respondent argues that this was not an ordinary and necessary business expense of petitioner and that the sales commissions, if deductible by anyone, were deductible only by the Country Club. As the facts disclose, the petitioner received $9.90 on each sale, credited the country club with $9.90 on a running account between the two corporations, and also paid $9.90 to Roth, the broker, as commission for the sale. The Country Club reported as' income on its return the $9.90 placed to its credit on the books. It appears that the Country Club did not also include in its income under any theory the $9.90 which petitioner paid to Roth on its behalf. Assuming that the Country Club had considered this latter $9.90 as having been income constructively received, then there is no doubt that the Country Club would have been entitled to claim a like amount as a deduction, for the net result of the sale of each associate membership was to make the Country Club $9.90 richer, to make Roth $9.90 richer, to make petitioner $9.90 poorer, and to leave the new member $9.90 poorer. But the equitable theory of constructive receipt is one to be sparingly applied and there does not appear to be sufficient ground for saying that the transaction should have been treated by the Country Club in any method other than was done, especially when the result for purposes of taxation would remain the same. Thus, we are not prepared to say that the deduction was available to the Country Club only, as respondent asserts.

Petitioner did not advertise its subdivided properties for sale, although these properties were apparently “out of the way.” It depended for its sales upon prospective purchasers becoming interested in the location mainly because of the existence of a going country club in the vicinity. But, since the properties were out of the way, this necessitated getting prospects to become interested in the club. Many realty concerns sell their lands in this manner, centering their sales talks around clubs maintained by them. It appears from the record that the reason petitioner was willing to pay the expenses of selling associate memberships in the club was to be sure of getting prospects to the location so that they might see the lots for sale and petitioner’s sales force could then start their attempt to make sales. It is reasonable to anticipate that anyone who has paid $9.90 just for the privilege of entering upon the ground of a club will take advantage of that privilege at least once. That was all that petitioner anticipated; and that was why petitioner undertook to sell the memberships and pay the sales commissions.

Balancing the outlay against the benefits to be reasonably expected, the business interests of the petitioner were probably advanced. At least, it can not be said that it would be unreasonable or extraordinary to expect them to be advanced. Each sale to an associate member proved the worth of this substitute for ordinary advertising.

Each case involving ordinary and necessary business expenses must be decided upon its own peculiar facts. Upon an analysis of the instant facts, we sustain petitioner’s contention on this issue.

The remaining issue in this proceeding is whether respondent correctly disallowed in full certain losses claimed by the petitioner in the fiscal year 1987 as deductions on its income tax return. These losses arose from two transactions involving the sale of land and a building by the petitioner to Miller and Monroe, the only two stockholders of petitioner, jointly.

Respondent contends that his disallowance of these losses should be sustained under the doctrine of Higgins v. Smith, 308 U. S. 473. In that case the transaction was the reverse of the transaction in the instant case. There, the stockholder, who owned all of the corporation’s stock, transferred properties to the corporation in order to avail himself individually of a deductible loss. The transaction took place prior to the enactment of section 24 (a) (6), but, nevertheless, the Supreme Court held that the taxpayer’s retention of control of the properties transferred prevented his sustaining a true loss.

The Court held in that case that “dominion and control is so obvious in a wholly owned corporation as to require a peremptory instruction that no loss in the statutory sense could occur upon a sale by a taxpayer to such an entity”; that, although title passed to the corporation, control over the property was retained by the sole stockholder and thus there was “not enough of substance in such a sale finally to determine a loss.”

If the Supreme Court had limited its opinion to a holding that a transfer by an individual stockholder to a wholly owned corporation was not a sale giving rise to a loss within the meaning of the revenue act because of the resulting retention of control over the property by the transferor, we might be able to distinguish that case, both as to holding and rationale from the instant proceeding, since in this case the transfer was from the corporation to its two stockholders and, obviously, there could be no retention of control by the transferoj corporation. However, the Court went ahead to discuss Burnet v. Commonwealth Improvement Corporation, 287 U. S. 415, in which a gain was held to have been realized by a corporation upon the sale of property to its sole stockholder. In reconciling its holding in that case with the holding in the Smith case, the Court made use of the following language:

* * * In the Commonwealth Improvement Company case, the taxpayer, for reasons satisfactory to itself voluntarily had chosen to employ the corporation in its operations. A taxpayer is free to adopt such organization for his affairs as he may choose and, having elected to do some business as a corporation, he must accept the tax disadvantages.
On the other hand, the Government may not he required to acquiesce in the taxpayer’s election of that form for doing business which is most advantageous to him. The Government may loot at actualities and upon determination that the form employed for doing business or carrying out the challenged tax event is unreal or a sham may sustain or disregard the effect of the fiction as Test serves the purposes of the tax statute. To hold otherwise would permit the schemes of taxpayers to supersede legislation in the determination of the time and manner of taxation. It is command of income and its benefits which marks the real owner of property.

The implication of this dictum seems unmistakably to the effect that when a corporation, formed for the purpose of carrying on a transaction or holding property as the corporate alter ego of its sole stockholder, makes a purported “sale” of property to such stockholder for the purpose of establishing a tax loss, the respondent can disregard the transaction as unreal, because, in reality, there has been no change in the ownership of the property, the transferee having had command over the property prior to the transfer by virtue of being the sole stockholder of the transferor corporation.

This being our judgment as to the implications of the opinion of the Supreme Court in Higgins v. Smith, supra, we are constrained to uphold the determination of respondent on this issue.

The fact that petitioner had two stockholders instead of one we-consider to be immaterial. It is apparent from an examination of the record in this case and the two related cases, that Miller and Monroe acted together in all respects and for, all practical purposes had a community of interests and a uniformity of action.

The reasons given by the petitioner for having transferred the properties to Miller and Monroe are too shallow to be accepted by us as reasonable explanations for its actions. Miller testified that the petitioner thought the Federal Government was going to buy the 978.332 acres for about $25 an acre and, because petitioner owed, an account to its two stockholders, it was decided that they (the stockholders) should make the sale in order to realize some cash on their account. If petitioner believed, as testified by Miller, that the Government was going to offer approximately $25,000 for the large tract, there would be nothing gained by having previously transferred the property at the same price to Miller and Monroe. Had petitioner retained the property, sold to the Government at the allegedly anticipated figure, and turned over the proceeds to Miller and Monroe and debited their accounts in such amount, the same result would have been arrived at without the necessity for this book transfer of the property. The explanation for the transfer of the administration building, i. e., to shift the mortgage burden, also appears to hold no weight. Miller testified that the reason petitioner acquired this latter property in the first place was because Penproco was in danger of losing it through foreclosure proceedings. He also testified that Miller and Monroe acquired it to save petitioner from the same fate. We conclude, however, that the real reason for both these transfers was the establishment of losses in the fiscal year 1937 for purposes of tax avoidance.

Having held on this question in favor of respondent, and to the effect the under the Smith case there was for tax purposes in reality no sale, it is unnecessary to consider the question of whether the transaction is subject to the provisions of section 24 (a) (6) of the Revenue Act of 1934, set out in the margin. Petitioner has advanced the rather technical argument that the use of the terms “individual” and “more than 50 per centum in value of the outstanding stock” precludes the application of that section to the instant facts. It is now unnecessary to determine whether we agree with the strict construction which petitioner urges should be given to the statute.

Neither is it necessary to consider the question of whether the property, the legal title to which was transferred by petitioner, constituted capital assets or property held for sale to customers in the ordinary course of petitioner’s business.

Decision will be entered wider Rule 50.

       SEC.*24. ITEMS NOT DEDUCTIBLE.
      (а) General Rule. — In computing net income no deductions shall in any case be allowed in respect of—
      *******
      (б) Loss from sales or exchanges of property, directly or indirectly, (A) between members of a family, or (B) except in the case of distributions in liquidation, between an individual and a corporation in which such individual owns, directly or indirectly, more than 50 per centum in value of the outstanding stock. For the purpose of this paragraph — (C, an individual shall be considered as owning the stock owned, directly or indirectly, by his family; and (D) the family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.


author: Smith:

text:
    Estate of Edith P. Garland, Charles P. Garland, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105777.
    Promulgated May 28, 1942.

      Percy W. Phillips, Esq., for the petitioner.

      Charles P. Reilly, Esq., for the respondent.
   OPINION.

Smith:

This proceeding involves a deficiency in estate tax of the estate of Edith P. Garland, deceased, in the amount of $'7,946.69. All of the issues raised in the original petition and answer have been waived or settled by stipulation. At the hearing the respondent was granted leave to file an amendment to his answer in which he avers:

* * * that in computing the deficiency set forth in the notice of deficiency the Commissioner of Internal Revenue erred in his method of computing the deduction for property previously taxed in that- he .used as a basis for computing said deduction an amount greater than the value of the decedent’s interest in the estate of the prior decedent at the time of the death of said prior decedent.

The question thus raised is submitted on the following stipulation of facts:

1. Edith P. Garland died May 4,1938.
2. Harry P. Garland died April 10, 1935. Edith P. Garland was the executrix and sole legatee of the Estate of Harry P. Garland.
3. Gross and net estate of Harry P. Garland as finally determined were:
Gross estate for Federal estate tax purposes_$617,651. 33
Deductions: (exclusive of exemption)_ 22,^458.41
Specific bequests_ none
Net estate_$595,192.92
The Federal estate tax liability on the above estate as finally determined was $63,742.93. The state inheritance and estate tax liability on the above estate was $13,807.72.
4. In the deficiency notice the gross estate of Edith P. Garland was determined to be $802,409.18. It is stipulated that the gross estate is $773,614.68. In the deficiency notice the deductions, exclusive of the statutory exemption and before any deductions for previously taxed property, were determined to be $49,019.46. It is stipulated that such amount should be $26,324.96.
5. There has been included in the gross estate of Edith P. Garland, property received by her from the Estate of Harry P. Garland. The value at which such property was included in the gross estate of Harry P. Garland and the value at which the same property was included in the gross estate of Edith P. Garland are as follows.
Estate of Estate of
Edith P. Garland Harry P. Garland
Real estate and securities_ $604, 651. 84 $567,224 95
At the date of death of Edith P. Garland there remained unpaid liabilities of the Estate of Harry P. Garland in the amount of $14,031.50, said liabilities consisting of the unpaid portion of the items of $22,458.41, $63,742.93 and $13,807.72 referred to in paragraph 3 above. To the extent of $35,551.18, debts of the Estate of Harry P. Garland, expenses of administration thereof and taxes thereon had been paid from income or capital gains of his estate before the death of Edith P. Garland.
6. The only question presented to the Board for decision is the determination of the proper amount to be used as a deduction for previously taxed property. All other issues are waived or disposed of by this stipulation.

An estate tax return was filed on bebalf of decedent’s estate with the collector of internal revenue for the district of Maine.

It is the respondent’s contention that in determining decedent’s net estate the deduction allowable under section 303 (a) (2) of the 1926 Act, as amended, on account of property previously taxed in the estate of the prior decedent is limited to the value of decedent’s interest in the estate of the prior decedent at the time of such prior decedent’s death. Specifically, respondent contends that the deduction allowable to the estate of this decedent on account of the previously taxed property should be computed as follows:

Gross estate (of prior decedent)_$617,651.33
Less:
Federal estate tax-$63, 742. 93
State inheritance tax- 13, 807. 72
Deductions- 22,458. 41
- 100,009.06
Deductible from decedent’s estate- 517, 642. 27

Although it is stipulated that there fell into decedent’s estate specific property which was included in the estate of the prior decedent at a value of $567,224.95 and in decedent’s estate at a value of $604,651.84, respondent contends that the excess of the latter amount over $517,-642.27 represented an interest acquired by decedent after the prior decedent’s death “as income beneficiary of the prior estate, and not an interest in the corpus of the prior decedent’s estate.” Respondent’s contention, we think, does not comport with the plain provisions of the statute. Stripped of its impedimenta the statute, section 303 (a) (2) of the Revenue Act of 1926, as amended by sections 402 and 403 (a) of the Revenue Act of 1934, and by section 806 (a) of the Revenue Act of 1932, reads as follows:

Seo. 303. For the purpose of the tax the value of the net estate shall be determined—
(a) * * * by deducting from the value of the gross estate—
****** *
(2) An amount equal to the value of any property (A) forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent, * * * where such property can be identified as having been received by the decedent * * * from such prior decedent by * * * bequest, devise, or inheritance, * * * This deduction shall be allowed only where * * * an estate tax imposed under this or any prior Act of Congress, was finally determined and paid by or on behalf of * * * the estate of such prior decedent, * * * and only in the amount finally determined as the value of such property in determining the value of * * * the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent’s gross estate, and only if in determining the value of the net estate of the prior decedent no deduction was allowable under this paragraph in respect of the property * * *. Where a deduction was allowed of any mortgage or other lien in determining the * * * estate tax of the prior decedent, which was paid in whole or in part prior to the decedent’s death, then the deduction allowable under this paragraph shall be reduced by the amount so paid. * * *

The deduction allowed is the value at which the property was taxed in the estate of the prior decedent, to the extent of its value in the present estate, reduced by the amount of any mortgage or lien thereon allowed as a deduction to the prior estate. There is no provision anywhere in the statute that the deduction allowable to the second decedent’s estate must be reduced by any and all obligations of the estate of the prior decedent. In Bahr v. Commissioner, 119 Fed. (2d) 371; affirming Estate of Eugene L. Bender, 41 B. T. A. 80, the court said with reference to section 303 (a) (2) that:

* * * The language used is adapted to one or more particular pieces of property specifically given or inherited. It is not adapted to an unadministered estate as a whole. * * *

The provision that the deduction allowable must be reduced by the amount of any mortgage or other lien allowed as a deduction in computing the estate of the prior decedent obviously has no application here. The stipulated facts make no reference to any mortgage or lien on the specific property here involved or any other property of the prior decedent. It is stipulated merely that the gross estate for Federal estate tax purposes was $617,651.33 and that there were deductions (exclusive of exemptions) of $22,458.41. We do not know what these deductions comprised and can not assume that they were secured by any mortgage or lien on any of the assets of the prior decedent’s estate.

The only provision of section 303 (a) (2) that might apply here to reduce the deduction allowable to decedent’s estate on account of the previously taxed property below $567,224.95, the amount at which it was valued in the prior estate, is the provision that “this deduction shall be allowed only where * * * an estate tax imposed under this or any prior Act of Congress, was finally determined and paid by or on behalf of * * * the estate of such prior decedent.” It is stipulated that at the death of Edith P. Garland there remained unpaid $14,031.50 of the liabilities of the estate of the prior decedent. The stipulation does not show whether such unpaid liabilities included any of the $63,742.93 of Federal estate taxes of the prior decedent’s estate or whether those taxes have since been paid. Petitioner concedes in his brief, however, that the amount of $14,031.50 should be deducted from the $567,224.95 in computing the amount allowable as a deduction to the decedent’s estate because the decedent in effect was required to return that amount of the assets of the prior decedent’s estate after they had been distributed to her. Petitioner thus concedes that the deduction properly allowable on account of the previously taxed property is $553,193.45 instead of $567,224.95, the amount allowed in the deficiency notice.

The respondent in his brief cites Estate of Eugene L. Bender, supra, as authority for his contentions in the present case. In that case the decedent acquired the assets of the estate of a prior decedent who died within less than four months of the date of death of the prior decedent. We held that the second decedent was not entitled to deduct from the gross estate the debts and taxes due from the prior decedent’s estate. That question is not before us in the instant case. The petitioner here is claiming no deduction of any liabilities of the prior decedent’s estate, but only the deduction of the value of property taxed in the prior decedent’s estate. A question was raised in the Bender case as to the amount of the deduction to which the estate of the second decedent was entitled under section 303 (a) (2), but was not deemed essential to our determination in that case and was not ruled upon. See discussion, 41B. T. A. 82.

On the basis of the stipulated facts and the concession made by the petitioner in his brief, we determine that the amount of $553,193.45 is deductible from decedent’s gross estate on account of the previously taxed property.

Decision will be entered u/nder Rude 50.


author: Tyson:

text:
    James J. Reilly, Detroit Trust Company, Trustee for Owners of Beneficial Interests, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104629.
    Promulgated May 28, 1942.

      0. Frederic Stanton, Esq., for the petitioner.

      Melvin S. Huffaker, Esq., for the respondent.
   OPINION.

Tyson:

The petitioner’s contention, that the relationship between the Detroit Trust Co. and the former owners of the mortgage bonds was that of principal and agent, is untenable. In our opinion, no extended discussion of this contention is necessary, for the “declaration of trust” executed on May 12, 1936, clearly created a legally existing trust of which the Detroit Trust Co. was the trustee and as such held legal title to the property and operated the same during 1937 for the purposes set forth in that instrument. We hold that such trust was established primarily for the acquisition and liquidation of the property involved for the benefit of the beneficiaries thereof and is subject to tax as a pure trust under section 161 of the Revenue Act of 1936, as determined by respondent. Broadway-Brompton Buildings Liquidation Trust, 34 B. T. A. 1089; cf. Girard Trust Co., Trustee, 34 B. T. A. 1066; Frederick Pitzman et al., Trustees, 36 B. T. A. 81; and Pieroni Building Trust, 45 B. T. A. 157.

The petitioner’s alternative contentions that the net income of the trust was not taxable to it for the reasons either (a) that such income was currently distributable to the beneficiaries under section 162 (b) of the Revenue Act of 1936 or (b) it was properly “paid or credited” to them during the taxable year under section 162 (c) of that act because used to discharge legal obligations of the beneficiaries, must be denied. Petitioner’s alternative contention (a) is denied because under the provisions of the trust instrument the trustee was required to deduct from current gross income all disbursements and expenses, including taxes and costs of foreclosure of the mortgage before any portion of its income might be distributed to the beneficiaries and during the taxable year 1937 all the income of the trust was expended in paying accrued taxes and foreclosure expenses, leaving no amount “to be currently distributed by the fiduciary to the beneficiaries” within section 162 (b), supra. Central Hanover Bank & Trust Co., Executor, 34 B. T. A. 741. Petitioner’s alternative contention (b) is denied; because all the trust income for 1937 was actually used to discharge accrued taxes and foreclosure expenses which had accrued prior to the trust’s acquisition of the property and thus no amount of the trust income was actually “paid” to the beneficiaries within the provisions of section 162 (c), supra; and, further, because no amount was properly “credited” to the beneficiaries under 162 (c), supra, by reason of the payment of such taxes and foreclosure expenses, since the beneficiaries of the trust never owned the premises, those premises having been acquired by the trust as a separate entity, and the beneficiaries were not personally liable for such taxes and foreclosure expenses, which were paid by the trustee in 1937 pursuant to the direction of the instrument creating it, and thus no part of the trust income for 1937 was “credited” to the beneficiaries constructively or otherwise.

Because of the necessity that the trust first pay all taxes and foreclosure expenses, there was no income for the taxable year remaining which was, or could be, held or accumulated by the trustee in its discretion, or in the discretion of the grantors, for future distribution to the grantors, nor was the payment of such taxes and foreclosure expenses made in discharge of any legal obligations of the grantors; and for these reasons, if no other, section 167 (a) (1) of the Revenue Act of 1936 has no application here, as contended by petitioner on brief.

In regard to the third issue presented, the petitioner contends that the trust is entitled to deduct depreciation computed on a basis of $31,000, representing the fair market value of the building on the premises at date of the trustee’s purchase thereof at foreclosure sale, for the reason that the bid price did not represent the actual value of the property acquired. On this issue petitioner’s contention must be sustained upon authority of Bondholder’s Committee v. Commissioner, 315 U. S. 189; Helvering v. New President Corporation, 122 Fed. (2d) 92; and Hadley Falls Trust Co. v. United States, 110 Fed. (2d) 887. We hold that respondent erred in computing depreciation for 1937 on the basis of the price bid at the foreclosure sale.

Decision will be entered wider Rule 50.


author: Arundell:

text:
    Robert A. Haughey, Petitioner, v. Commissioner of Internal Revenue, Respondent. Roger D. Mellick and Catherine G. Mellick, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 106284, 106285.
    Promulgated June 2, 1942.

      Robert J. Dixson, Esq., for the petitioners.

      Qoruway Kitchen, Esq., for the respondent.
   OPINION.

Arundell:

The partnership of Carlisle, Mellick & Co'., in computing its income for the year 1934, deducted the amount of $8,869.19 for Federal revenue stamp taxes paid and had a net income of approximately $730,000. In the taxable year the partnership received a refund of stamp taxes which included the $8,869.19 deducted from its gross income in 1934. Bespondent determined that the amount of the refund was income to the partnership in the taxable year. The deficiencies arise from respondent’s inclusion in the incomes of petitioners of amounts representing their allocable shares of the additional partnership net income derived from the refund of the stamp taxes. Petitioners contend that they received no tax benefit from the deduction of the stamp taxes by the partnership so that no part of the amount representing the reimbursement- may be included in their incomes. Bespondent maintains that reimbursement of a previously deducted item is includible in gross income irrespective of tax benefit. He also argues that petitioners in fact received a tax benefit in that each of the petitioners bad a net income for tbe year 1934 and failed to pay a tax merely because they had exemptions and credits in excess of net income.

The “tax benefit” theory, upon which petitioners rely, may be simply-stated. Where a taxpayer takes a deduction in one year but because-of other deductions has no taxable income for that year without reference to the deduction in question, a later refund of all or a part of the-amount deducted will not be treated as income. We have consistently followed this doctrine since the date of promulgation of our opinion-in Central Loan & Investment Co., 39 B. T. A. 981. National Bank of Commerce of Seattle, 40 B. T. A. 72; Walter M. Marston, 41 B. T. A. 847; Amsco-Wire Products Corporation, 44 B. T. A. 717; State-Planters Bank & Trust Co., 45 B. T. A. 630. See Citizens State Bank, 46 B. T. A. 964. Where, however, a taxpayer by virtue of a deduction paid less tax than would have been paid if the deduction were not taken, a subsequent refund to the taxpayer of the deducted item is includible in gross income to the extent that taxable-income of the prior year was offset by the deduction. Hurd Millwork Corporation, 44 B. T. A. 786; American Denial Co., 44 B. T. A. 425. With these principles in mind we turn to the question of their application to the instant case.

The partnership is not a taxable entity. Yet it is separate and distinct from its partners for purposes, of computing partnership income, which is taxed to the partners. The revenue acts provide that the net income of a partnership shall be computed, with exceptions immaterial here, in the same manner and on the same basis as that of an individual. See section 183 of the Revenue Act of 1938. Each partner’s distributive share of the partnership net income, so computed, must be included in income of that partner. Sec. 182, Revenue Act of 1938. The distributive shares of the partners in 1934 were amounts which reflected the deduction of the stamp taxes by the partnership. The distributive shares of the partners in 1938 necessarily included the allocable portions of the partnership’s net income for 1938. The fact that the partnership net income was greater by reason of including as an item the refund of taxes is of no importance.

The tax benefit theory, if applicable, should be employed to determine whether the partnership received an offset of income by virtue of the payment of stamp taxes. Since the partnership had a net income of approximately $730,000 in 1934, there can be no question that it did. The petitioners, then, can not invoke the tax benefit rule with respect to the partnership. Nor do we think it may be tested by the final tax benefit accruing to the individual partners, as here urged. That such a rule would be fraught with administrative difficulties is evident. For example, a partnership having a large number of partners might realize a tax benefit from a deduction, receive a refund of the deduction in the taxable year, and yet have the individual shares of its partners for income tax purposes vary widely, depending upon whether those partners had other deductions or credits in the year the partnership took the deduction. The tax benefit rule has never been based on a strict dollar saving in tax, Central Loan & Investment Co., supra; American Dental Co., supra, but rather on the use of the deduction in reducing the net income of the taxpayer. Estate of James N. Collins, 46 B. T. A. 765. The fact that petitioners paid no tax and would not have paid a tax even if the deduction had not been available to the partnership is not controlling. Petitioners’ income from the partnership was reduced by reason of the partnership availing itself of the deduction. That is sufficient to sustain respondent’s determination. Petitioners must include in gross income for the tax•able year their entire shares of income of Carlisle, Mellick & Co.

[Reviewed by the Board.

Decisions will be entered for the respondent.

Leech concurs only in the result.


author: Black:

text:
    William E. Boeing, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 94779, 95704.
    Promulgated June 2, 1942.
   OPINION.

Black:

These proceedings were consolidated and involve deficiencies in gift taxes which the Commissioner determined against petitioner in the amounts of $1,312.51 for tLe< year 1936 and $1,312.50 for the year 1937. The deficiency in each case resulted from the disallowance by the Commissioner of one of the two $5,000 exclusions claimed by the petitioner on liis gift tax return filed for each of the taxable years.

The following statements taken from the record in Docket No. 94779, involving the year 1936, apply equally to both proceedings, and similar statements in Docket No. 95704, involving the year 1937, need not be printed.

The Commissioner explained his determination of the deficiency in the deficiency notice as follows:

Two exclusions are claimed by you against the gifts placed in trust. However, inasmuch as it has been held by the Circuit Courts-of Appeals in the cases of Commissioner v. Wells, 88 F. (2d) 339 and Commissioner v. Krebs, 90 F. (2d) 880, that a trust represents one beneficiary, only one exclusion therefor may be allowed. See also Knox v. Commissioner, 36 B. T. A. 630.

The petitioner by an appropriate assignment of error assailed the correctness of the Commissioner’s determination.

The Commissioner’s answer denied that he had erred as alleged in the petition, and raised no affirmative issue.

Following a hearing on the merits, the Board decided in petitioner’s favor and held that there was no deficiency, basing its decision upon the ground that the two beneficiaries of the trust were the donees of the gift and not the trust itself, as the Commissioner had determined. The Commissioner thereupon petitioned for review by the United States Circuit Court of Appeals for the Ninth Circuit.

In his statement of points on review the Commissioner urged that the Board erred in failing to hold that the interests of the beneficiaries of the trust involved were future interests wit fun the meaning of the statute and in failing to hold that under section 504(b) of the Revenue Act of 1932 no exclusions are permissible with respect to the gifts of insurance premiums made by the donor. In its opinion, see Commissioner v. Boeing, 123 Fed. (2d) 86, the court held that “The Board was right in rejecting the proposition of law advanced by-the Commissioner” that the trust was the donee “person”, but further held, on the authority of Hormel v. Helvering, 312 U. S. 552; and Helvering v. Richter, 312 U. S. 561, that “on the basis of the record before it it was wrong in holding that there were no deficiencies in taxes for the two year’s.” In reaching its conclusion the court, among other things, said:

* * * Under tbe very recent decisions in United States v. Pelzer, 312 U. S. 399, and Byerson v. United States, 312 U. S. 405, it is clear that the gifts in the case before us were of future interests so far, at least, as concerns the proceeds and the income from the proceeds of the policies themselves. These mature only upon the death of the trustor. By the terms of the trust the trustee is to collect and invest all moneys “which may be due or become due” under the policies. The net income from invested funds received by the trustee is to be distributed one-balf to the wife and one-half to the son during their lives. In the event the wife does not survive the trustor, the entire trust is to be administered for the benefit of the son and his issue, if any; and conversely, if the son predeceases the trustor, leaving no issue, the entire corpus is to be transferred to the wife, or in the event of her prior death tc two named beneficiaries or their issue. Other contingencies, not here material, are provided against. Clearly, the beneficiaries have no right to the present enjoyment of the policy proceeds, and they will never have ihat right unless they survive the trustor, or, in any event, unless they survive the possible lapse of the policies. Their use and enjoyment are “postponed to the happening of a future uncertain event”, and the gifts thus import the diflicultie.s which it was the purpose of Congress to avoid. United States v. Pelzer, supra, page 404.

After stating its view on the question of “future interests” in the part of its opinion just quoted, the court concluded by stating;

* * * Accordingly, the decision must be reversed and the cause remanded to redetermine or compute the deficienees. Since the applicability of the future interests provision of the statute was not considered and no issue was made in respect of it, opportunity should be given the taxpayer to present evidence on that issue if he so desires.
As the matter stands the Commissioner has assessed deficiencies based on an exclusion of $5,000 for each of the two years, although the taxpayer appears to be entitled to none. The Board of Tax Appeals is a body authorized by statute to operate under rules of its own adoption. Whether, in the light, cf its rules and of Sec. 272(e), (f) of the 10S2 act, 20 U. S. C. A. Int. Rev. Acts, page 500, the Board may or should redetermine a greater deficiency than the amount of which notice has been given the taxpayer is a question which we litave not considered and do not undertake now to decide. The question is not before us since no assertion of an additional deficiency has yet been made by the Commissioner in conformity with the statute.

Following its opinion which reversed the Board, the court issued its mandate. This mandate was filed with the Board November 29, 1941, and, omitting formal parts, reads as follows:

On Consideration Whereof, it is now here ordered and adjudged by this Court, that the decision of the said Board of Tax Appeals in this Cause be, and hereby is reversed, and that this cause be, and hereby is remanded to the said Board of Tax Appeals for further proceedings in harmony with the opinion of this court.
You, Therefore, Are Hereby Commanded that such further proceedings be had in the said cause in accordance with the opinion and judgment of this court, * * *

On December 11, 1941, the Commissioner filed a motion in which he moved that the Board:

(1) * ⅜ * vacate and set aside its report entered February i, 1940, (2) * * * permit the respondent to file the attached amended answers claiming increases in the deficiencies as proposed in the deficiency notices dated May 13, 1938, and July 21, 1938, and (3) * * * grant the petitioner an opportunity to present evidence on the issue relating to the applicability of the future interests provision of the statute if he so desires.

On January 20, 1942, petitioner filed a reply to respondent’s motion in which he stated among other things that he did not desire to present evidence on the issue relating to the applicability of the future interests provision of the statute, but would rely on the record as heretofore made. Petitioner also in his reply opposed the granting of respondent’s motion to file amended answers asking for increased deficiencies. By direction of the Board both parties have filed their briefs in support of their respective contentions.

We construe the opinion and the mandate of the court, which we have quoted, to amount to a direction for a rehearing, the one issue ■upon rehearing to be that of future interests. If petitioner does not desire to offer any further evidence on that issue, that of course is his privilege. But his declination to offer any additional evidence .should not foreclose the right of the Commissioner, by leave of the Board, to amend his answer at or before the rehearing and claim an increased deficiency. The burden of proof will of course be upon the Commissioner to establish his right to an increased deficiency after it is properly pleaded. See Buie 32, Board’s Buies of Practice.

Section 513 (e) of Title III (relating to gift tax) of the Bevenue .Act of 1932 reads as follows:

(e) Incbease of Deficiency After Notice Mailed. — The Board shall have juris- . diction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency, notice of which has- been mailed to the donor, and to determine whether any additional amount or addition to the tax should be assessed, if claim therefor is asserted by the Commissioner at or before the hearing or a rehearing.

As we view the situation, the Commissioner has moved to amend his answer and ask for an increased deficiency before a “rehearing” within the meaning of the foregoing statute.

“Behearing” in appellate practice is defined in Cyclopedic Law Dictionary, 3d Ed., as “a second consideration on further argument, given to a cause after decision.”

As we have already stated, it seems plain to us that the court, in reversing and remanding these proceedings, has directed a rehearing at which the issue of “future interests” is to receive consideration. That is the very occasion and purpose of the reversal and remand of the Board’s prior decision.

It is of course perfectly true that the Commissioner will get no increase in the deficiencies which he has already determined unless he asserts them in a proper pleading “at or before the rehearing.” Moise v. Burnet, 52 Fed. (2d) 1071. The Moise decision clearly prohibits an increase in the deficiencies under the pleadings now on file. See also Fifth Avenue Bank of New York, Executor, 32 B.T.A. 701; affd., 84 Fed. (2d) 787; John Gerber Co., 44 B. T. A. 26; Cascade Milling & Elevator Co., 25 B. T. A. 946.

The Commissioner, however, by motion duly filed, seeks to file an amended answer in which by affirmative allegations he raises the issue of “future interests” and in which he clearly and succinctly sets forth his grounds for an increased deficiency and, after setting forth these grounds, concludes as follows:

Wheeefore, respondent respectfully prays that the deficiency claimed in his notice of deficiency be increased in accordance with the foregoing computation and now asserts a claim for such increase of deficiency as the statute in such a case provides.

We think respondent’s motion to file his amended answer raising the new issue of “future interests” and asking for an increased deficiency is, under the circumstances existing in these proceedings, a timely motion.

Bule 19 of the Board’s Buies of Practice provides in part as follows:

No motion for rehearing, further hearing, reconsideration or the like may, except by special leave of the Board, be filed more than 30 days after the opinion has been served; and no motion for vacation or revision of a decision may, except by special leave of the Board, be filed more than 30 days after the decision has been entered.

As we have already stated, we construe the opinion and mandate of the court as requiring us to rehear and reconsider these proceedings on the issue of “future interests” and therefore no motion that we do so is necessary from either party, and the foregoing language of Bule 19 is not applicable.

If we are in error, however, in concluding that the Ninth Circuit has itself directed a rehearing by the Board on the issue of future interests and that it is necessary for one of the parties to move for one, if any is to be had, then we think the motion which respondent has filed can reasonably be construed as a motion for rehearing, following the mandate of the court. This motion, coming twelve days after the mandate of the court was received by the Board, is, we think, a timely motion even though it does come more than 30 days after our prior opinion was entered and more than 30 days after our decision was entered pursuant to such opinion.

Furthermore, wre think we have the power to grant it without violating any provision of Bule 19, supra, for the rule itself provides that a rehearing may be granted by “special leave of the Board” beyond the 30-day period fixed in the rule.

Wherefore, for the reasons herein above stated, an order will be entered granting respondent’s motion for leave to file his amended answers lodged with the Board December 11, 1941, and the proceedings will be set for a rehearing in due course on the issue of “future interests.”

The present opinion replaces and supersedes the opinion herein entered March 9, 1942 (published at 46 B. T. A. 492), which was, by order of the Chairman dated March .27, 1942, referred to the Board for review.

Reviewed by the Board.

SteRNi-iageN and Hile dissent.


text:
    Orvilletta, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. Walkpete, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 107202, 107203.
    Promulgated June 3, 1942.

      Charles A. Ellis, Esq., for the petitioners.

      Lloyé W. Creason, Esq., foT the respondent.
   opinion. •

Hill:

These proceedings are for a redeterminati'on of income tax deficiencies for the calendar year 1936 in .the amounts of $459.87 and $2,664.26 determined by the respondent against Orvilletta, Inc., and Walkpete, Inc., respectively. The proceedings were .consolidated for hearing and opinion. ' ' " . “

' The only issue is.whether or not petitioners arte entitled to a loss deduction upon the sale of stock in the Chase National Bank, hereinafter referred to as the Chase Bank. The answer depends upon whether the stock of the Chase Bank and Amerex Holding Corporation (formerly Chase Securities Corporation) have separate cost bases.

The parties filed a stipulation óf facts, with certain exhibits attached and incorporated. We adopt such stipulation as our findings of fact and set forth only those deemed material to the issue,

The petitioners are corporations organized under the laws of Delaware and have their principal offices at 601 Wheeling Bank & Trust Building, Wheeling, West Virginia. Both kept their accounts on the cash basis and reported theii income and profits taxes for the calendar year 1936 upon the cash receipts and disbursements basis.

The Equitable Trust Co. was organized under the laws of the State of New York. On or about November 7, 1929, by an agreement between the stockholders and the Equitable Trust Co., the Equitable Corporation of New York was to be and later was incorporated. Thereafter, on or about December 24, 1929, there were transferred to> the Equitable Corporation securities of the then .market value of about $25,000,000, in return for the issuance of all its capital stock. In due. course the holders of the stock of Equitable Trust Co. surrendered their certificates and received in exchange certificates which, on one. side, represented shares of the Equitable Trust Co. and, on the other side, a deposit receipt for stock of the Equitable Corporation.

On or about February 11,1930, petitioners each purchased 75 shares .of the capital stock of the Equitable Trust Co., together with deposit receipt certificates for 75 shares of the Equitable Corporation, at a unit cost of $116.25 plus $18.75 commissions, or a total cost to each petitioner of $8,737.50. About February 28, 1930, petitioners each purchased 25 more units at a cost of $116.50 per unit plus $6.25 commis-. sions, or a total cost to each petitioner of $2,918.75. Thus, the total purchase price of the 100 units was $11,656.25.

The shares of the Equitable Trust Co. and the Equitable Corporation were at all times subject to the terms of an agreement which required that any sales or transfers of stock of the corporations be made, in units of one share of stock of the Equitable Trust Co. and one share-of stock of the Equitable Corporation. Neither stock could be sold otí transferred separately.

The stock of the Equitable Trust Co. was quoted and sold on tire Bank Stock Market of New York. The quotation on the market fon one share of Equitable Trust Co. was the price bid, asked, and paid for' a unit of stock consisting of one share of Equitable Trust Co. and one» share of Equitable Corporation. Neither the stock of the Equitable' Coi’poration nor of the Equitable Trust Co. was ever quoted or. sold on. the market apart from the other.

At the close of business on December 31, 1929, the capital stock of ■ the Equitable Trust Co. was $50,000,000. The surplus and undivided' profits were $63,611,004.53. At the close of business on March 27, 1930, the capital stock was $50,000,000 and the surplus and undivided profits were $63,916,251.84.

On February 14,1930, the capital of the Equitable Corporation was $25,000,000 and the profit, and loss was $329,025.51, and on February 28,1930, the capital was $25,000,000 and the profit and loss $454,531.02.,

Pursuant to an agreement between certain depositing stockholders, dated March 21,1917, a special dividend of $2,500,000 was declared by the Chase Bank, and by corporate action the money was transferred to-the Chase Securities Corporation in return for the issuance of all the capital stock pro rata to the stockholders of the Chase Bank. The stockholders then deposited their shares in each corporation with the, Bankers Trust Co. and received in exchange a deposit receipt which.! covered the identical number of shares in the Chase Bank and Chase. Securities Corporation. On or about January 15, 1930, this deposit agreement was modified and the holders of the deposit receipts were issued in exchange therefor certificates of stock in the Chase Bank and the Chase Securities Corporation. The stock of the Chase Bank was printed on one side and the stock of the Chase Securities Corporation on the other side of the same piece of paper.

About June 2, 1930, the Chase Bank and the Equitable Trust Co. were consolidated. The agreement between the depositing stock-liolders provided as follows:

Thh Stockholders Pasties Hereto.
Second: Any stockholder of the Equitable Trust Company may become a party hereto by delivering, or causing to be delivered, to the Depositary for deposit hereunder, on or before April 24, 1930, a certificate or certificates representing shares in said Trust Company of the par value of Twenty Dollars ($20) each, ¡registered or entitled to be registered in his name, properly endorsed in blank and having endorsed thereon the receipt of The Equitable Trust Company of Hew York as depositary under a certain agreement dated as of November 7, 1929, for an equal number of shares of stock of the Equitable Corporation of the par value of Ten Dollars ($10) each or accompanied by stock certificates, properly endorsed in blank, representing an equal number of shares of said equitable Corporation.
* * * * * * *

The 100 units of stock of the Equitable Trust Co. and Equitable Corporation were exchanged by petitioners for 80 units of stock of the Chase Bank and the Chase Securities Corporation. The stock certificates of the Chase Bank issued to the petitioners in the exchange bore the following legend:

The agreement of March 21, 1917, as amended, between all the shareholders ■of the Chase National Bank of the City of New York and Chase Securities Corporation, to which the holder of this certificate, by the acceptance thereof and otherwise, has become a party, provides that no shareholder of either corporation will sell, pledge or otherwise dispose of or transfer, whether voluntarily, by operation of law or otherwise, any share or interest therein in either corporation without at the same time transferring to or vesting in the same party an equal number of shares, or the same interest therein, in the other; * * *

The Chase Securities Corporation stock bore the above portion.

By virtue of the agreement of March 21,1917, as amended, the stock of the Chase Bank and the Chase Securities Corporation could be purchased or sold only in»units. The quotations on the market between May 29, 1917, and June 14, 1934, for a share of the Chase Bank stock constituted the price for a unit of stock in the Chase Bank and Chase Securities Corporation.

By virtue of so-called wash sales made in November 1931 petitioners’ original cost or other basis was reduced from $11,656.25 to a stipulated figure of $10,951.59.

On or about May 16,1933, the name of Chase Securities Corporation was changed to Chase Corporation.

On June 14,1934, the agreement of March 21,1917, as amended, was terminated. The .certificate of incorporation of the Chase Corporation was changed by eliminating therefrom all provisions preventing: the separate sale, pledge, or other disposition of a share of stock without the transfer to the same transferee of a like number of shares of stock in the Chase Bank.

On or about June 14, 1934, the name of Chase Corporation was changed to Amerex Holding Corporation, and about the same date the 80 shares of stock in this corporation held by each petitioner were reduced to 8 shares.

On June 15,1934, and thereafter, the stock of the Amerex Holding Corporation was quoted separately on the “over-the-counter market’7, and stock of the Chase Bank was quoted separately on the Bank Stock Market.

In December 1936 petitioners each sold the 80 shares of capital stock of the Chase Bank for $3,754.25. About December 1, 1937, petitioners each sold the 8 shares of stock of Amerex Holding Corporation for $127.22.

The sole issue of this proceeding is whether or not petitioners suffered deductible losses upon the sales of their stock in the Chase Bank. The answer to this question depends upon whether the stock of the Chase Bank had a cost basis separate and apart from the stock of the Chase Securities Corporation, later changed to Amerex Holding Corporation.

Petitioners have attempted to prove separate cost bases by giving the complete factual background of their original purchase of the Equitable Trust Co. and Equitable Corporation stock. They contend that at the dates of purchase of their stock in the Equitable Trust Co. and Equitable Corporation the unit cost price could and should be apportioned. They attempt to show what part of the unit, price was paid for each stock by setting forth the book values (securities at market prices) of the Equitable Corporation stock upon the dates of their purchases. Premised upon these book values petitioners, by mathematical calculation complicated somewhat by the wash sales, arrive at a figure of $9,996.56 for the Equitable Trust Co. stock and $955.03 for the Equitable Corporation stock. Then,, say petitioners, these cost bases should be carried over to the Chase Bank stock and Chase Securities Corporation stock. Thus, the loss on the Chase Bank stock is the difference between the selling price and that cost basis. Petitioners attempt to avoid the authority of Barber Securities Corporation, 45 B. T. A. 521, by pointing out that the taxpayer in that easel did not attempt to allocate its cost basis to the stock of the Equitable Trust Co. and Equitable Corporation. Petitioners place their chief reliance upon Stanley Hagerman, 34 B. T. A. 1158; affd., 102 Fed. (2d) 281.

Respondent recognizes the right of petitioners to use their original costs, reduced by the wash sales, as their basis, but he contends that the costs represent one indivisible investment which can not be allocated to the separate parts making up the unit.

We do not believe that petitioners have shown a sound basis for an allocation of the unit cost to the separate shares of the Equitable Trust Co. and Equitable Corporation. Evidence of book value and earning power are sufficient to establish fair market value if there is no evidence that the figures are unreliable. Benjamin, E. May, 35 B. T. A. 84. However, taking petitioners’ figures, we see that this relatively new corporation, Equitable Corporation, had earned approximately 11 percent at the date of purchase of petitioners’ last shares. However, the earnings between February 14 and February 28, 1930, were approximately 13 percent. It would seem that the stock of a corporation with such earning power would well exceed the market value of the securities held as assets.

However, assuming that we accept petitioners’ alleged allocations, their position is still without merit. Upon the exchange of the Equitable Trust Co. and Equitable Corporation units petitioners received stock in the Chase Bank and Chase Securities Corporation. Petitioners claim that the Equitable Trust Co. stock was exchanged for the Chase Bank stock and Equitable Corporation stock was exchanged for Chase Securities Corporation stock. If this be true it is contrary to the stipulated facts, for in the wording of the stipulation:

* * * the aforesaid 100 units of stock consisting of said 100 shares of the capital stock of The Equitable Trust Company of New York and of said 100 shares of the capital stock of The Equitable Corporation of New York were exchanged by each of these petitioners for 80 units of stock consisting of 80 shares of the capital stock of the Chase National Bank of the City of New York and of 80 shares of the capital stock of Chase Securities Corporation.

Ignoring this part of the stipulation, we refer to the documents attached and incorporated therein. From these we see that there was no real separation and that what was contemplated was an issuance of units of Chase Bank stock and Chase Securities Corporation stock at a ratio of 8 to 10 for the units of the Equitable Trust Co. and Equitable Corporation stock. Neither Chase Bank nor Chase Securities stock was transferable separately. The quotations on the market were for a unit of one share of Chase Bank stock and one share of Chase Securities stock. The legend which each certificate bore shows further that the stocks were inseparable. Therefore, even though it were possible to determine separate cost bases for petitioners’ Equitable Trust Co. and Equitable Corporation stocks, they were exchanged for inseparable units. We are unable to determine from the record that the cost of the Chase Bank stock was the Equitable Trust Co. stock and the cost of the Chase Securities stock was the Equitable Corporation stock.

Moreover, if we were able to so determine, we would be faced with a still further dilemma. It was stipulated that in November 1931 the original cost bases were reduced by certain so-called wash sales. Even if the Chase Bank and Chase Securities stocks had had separate cost bases, we would be unable to determine which of those bases was so reduced, or, if both were reduced, what amount of the reduction is allocable to each. It is inconceivable that the reduction ■on both would be in, exact proportion to the alleged cost basis of each.

We find it impossible to determine separate cost bases for the component parts of the inseparable units of Chase Bank and Chase Securities stock. Barber Securities Corporation, supra; cf. André deCoppet, 38 B. T. A. 1381; affd., 108 Fed. (2d) 787; Moore v. Hoey, 31 Fed. Supp. 478. Thus, petitioners can only compute the gain or loss after the disposition of both parts of the unit. H. A. Green, 33 B. T. A. 824; dismissed, 84 Fed. (2d) 1004.

Decisions will be entered for respondent.


author: Harron:

text:
    Pacific Gas & Fuel Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104527.
    Promulgated June 3, 1942.

      George S. Atkinson, Esq., for the petitioner.

      Donald P. Moyers, Esq., for the respondent.
   OPINION.

Harron:

The question is whether or not the amounts received by petitioner under the agreement with American Liberty Oil Co. constituted personal holding company income for the years 1936 and 1937. The definitions of personal holding company income, section 351 (b) of the Eevenue Act of 1936 and section 353 (h) of the Eevenue Act of 1936 as amended, are set forth in the margin. Since the definition is different in-the 1936 and 1937 Acts, the two years must be considered separately. • ' •

Section 351 of the 1936 Act first appeared in substantially the same form in section 351 of the 1934 Act. Therefore, the legislative history of the 1934 Act is important in determining the intent of Congress» From a study of the committee reports on the 1934 Act, it is apparent that the primary object of the personal holding company provisions was to prevent tax avoidance by wealthy individuals through use of the “incorporated pocketbook.” See Report of the Ways and Means Committee on the Revenue Bill of 1934, 73d Cong., 2d Sess., H. Rept. No. 704, p. 11; Senate Finance Committee Réport on the Revenue Bill of 1934,73d Cong., 2d sess., S. Rept. No. 558, p., 13, et seq.

Petitioner argues that it was not the purpose of the statute to reach this corporation, having regard for the purposes set forth in its own charter as well as the Congressional intent. In making the argument,, petitioner overlooks the fact that, in order to carry out its purpose of preventing tax avoidance and at the same time eliminate questions of subjective intent (cf. Ways and Means Report, swpra, p. 11), Congress determined that a corporation whose stock was owned by a limited group and whose income came from certain sources should be deemed to be a personal holding company. The method which Congress chose to attain its purpose was by definition of a personal holding company in terms of stock ownership and sources of income. Both the House and Senate recognized that such a broad definition might include corporations which were not being used for purposes of avoiding surtaxes on shareholders. H. Rept. No. 704, supra, p. 12; S. Rept. No. 558, supra, p. 15. For that reason provisions were made so that the bill would not work hardship on any corporation except those used to avoid surtaxes on the shareholders. That is, section 351 (b) (2) (C) and (d) of the 1936 Act and section 355 of the 1936 Act as amended allow credits in determining the undistributed adjusted net income upon which the surtax is levied, for dividends paid to shareholders. The fact that such provisions were made in the statutes shows that it was not the intent of Congress to exempt from the provisions of the act corporations other than “incorporated pocketbooks.” In any event, the terms of the statute, as written, must be followed. A parallel situation in which the courts have recognized that the act covers all corporations which come within the scope of statutory definitions, whether or not used to avoid surtaxes on shareholders, is found in the treatment accorded small loan companies. See Girard Investment Co. v. Commissioner, 122 Fed. (2d) 843; certiorari denied, 314 U. S. 699; Notemam v. Welsh, 108 Fed. (2d) 206.

The real question Is whether petitioner’s income came from the sources enumerated in the statute. Royalties are included among the enumerated sources. There can be no doubt that the amounts received by petitioner as lessor out of the oil produced from the leased property constituted royalties within the ordinary sense of the word. Petitioner argues, however, that the term as used in the statute does not refer primarily to oil and gas royalties.

The Eevenue Bill of 1934 which passed the House included royalties in personal holding company income. While the bill was pending before the Senate Finance Committee some attempt was made to have corporations dealing in oil and gas royalties excluded from the personal holding company provisions. Eevenue Act of 1934, Hearings Before the Committee on Finance on H. E. 7835, U. S. Senate, 73d Cong., 2d sess., pp. 145-153. Despite that attempt to gain special treatment for corporations dealing in oil and gas royalties, the act as passed contained no special mention of oil and gas royalties. The conference report on the bill did, however, contain the following explanation:

* * * The House bill defined a personal holding company as a corporation, 80 percent of whose gross income was derived from rents, royalties, dividends, interest, annuities and gains from the sale of stock or securities, and 50 percent in value of whose outstanding stock was owned by not more than five individuals. As used in the section, the term “royalty” is not intended to include overriding royalties received by an operating company [emphasis supplied]. [Conference Report on the Revenue Bill of 1934, 73d Cong., 2d sess., H. Rept., No. 1385, p. 20.]

In light of that explanation of Congressional intent, the problem arises whether petitioner was an operating company. It is stipulated that petitioner’s only activities during 1936 were incidental to handling its affairs under the agreement with American Liberty Oil Co. Its activities were not the activities of an operating company. The mere fact that petitioner’s charter gave it power to engage in active operations and the fact that petitioner had at one time, in a prior year, drilled a dry well, do not make petitioner an operating company. Likewise, we deem it unimportant that under the agreement with the American Liberty Oil Co. petitioner had the option to participate actively in the operation of the property. The fact is that petitioner did not exercise that option. Thus we conclude that royalties received by petitioner were not of the type which Congress intended to exclude from section 351 of the 1936 Act.

Since it is conceded that more than 50 percent of petitioner’s stock was owned by one individual, and that all of its income during 1936 came from the agreement with American Liberty Oil Co., we hold that petitioner was taxable as a personal holding company for the year 1936.

The Revenue Act of 193T made certain changes in the treatment of royalties for purposes of determining personal holding company income. The changes were made by the Senate Finance Committee, with the following explanation:

The committee recommends the insertion in section 353 of new title IA, which relates to the gross income of personal holding companies, of a new subsection (sec. 353 (h) ) dealing with income from mineral, oil, or gas royalties. The effect of the subsection is to exclude such royalties from personal-holding-company income if they constitute 50 percent or more of the gross income of the corporation. This provision is subject to the limitation that, in order for such income to be excluded, the amount allowable for the taxable year for expenses under section S3 (a) must constitute 15 percent or more of the gross income. Compensation to shareholders for personal services is not to be counted as part of the 15 percent. This amendment will not exclude royalty income if it constitutes less than 50 percent of the gross income, and it is believed that the 15-percent expenses requirement will furnish a satisfactory separation between companies which may be classified as operating companies and the pure holding-company type. The amendment to section 353 (a) is a technical amendment made necessary by reason of the insertion of the new section 353 (h). [Senate Finance Committee Report on the Revenue Bill of 1937, 75th Cong., 1st sess., S. Rept. No. 1242, p. 1.]

The sums received by petitioner were clearly mineral, oil, or gas royalties constituting more than 50 percent of petitioner’s gross income. However, the deductions allowable under section 23 (a) did not amount to 15 percent of petitioner’s gross income. Therefore, under the terms of the statute, the royalties received by petitioner in 1937 constituted personal holding company income. No question need be raised as to whether or not petitioner was an operating company, inasmuch as the existence of deductions under section 23 (a) amounting to more than 15 percent of the gross income was deemed by Congress to be a conclusive test of whether or not a company was an operating company. Accordingly, it is held that petitioner was taxable as a personal holding company for the year 1937.

Petitioner has not shown that its failure to file personal holding company returns was due to reasonable cause. The erroneous impression that petitioner was not a personal holding company is not the reasonable cause required by section 291 of the Revenue Act of 1936. R. Simpson & Co., Inc., 44 B. T. A. 498 (on appeal C. C. A., 2d Cir.); Saxon Trading Corporation, 45 B. T. A. 16; cf. Estate of Frederick C. Kirchner 46 B. T. A. 578. Respondent’s imposition of the 25 percent penalty must, therefore, be approved.

Decision toill Toe entered for the respondent.

       SEC. 351. SURTAX ON PERSONAL HOLDING COMPANIES [Revenue Act of 1936].
      ⅞ # * * # * «
      (b) Definitions. — As used in this title—
      (1) The term “personal holding company” means any corporation (other than a corporation exempt from taxation under section 101, and other than a bank, as defined in section 104, and other than a life-insurance company or surety company) if — (A) at least SO per centum of its gross income for the taxable year is derived from royalties, dividends, interest, annuities, and (except in the case of regular dealers in stock or securities) gains from the sale of stock or securities, and (B) at any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals. * * *
      * * * * * * #
      :SEC. 353. PERSONAL HOLDING COMPANY INCOME [Revenue Act of 1936, as amended].
      For the purposes of this title the term “personal holding company income” means the portion of the gross income which consists of:
      * ' ⅜ ⅜ » ⅜ ■ * • ⅜-
      (h) Mineral, Oil, or Gas Royalties. — Mineral, oil, or gas royalties, unless (1) constituting 50 per centum or more of the gross income, and (2) the deductions allowable under section 23 (a) (relating to expenses) other than compensation for personal services rendered by shareholders, constitute 16 per centum or more of the gross income.

       For cases discussing the meaning of the term “royalties” see Kiesau Petroleum Co., 42 B. T. A. 69; Porter Property Trustees, Ltd., 42 B. T. A. 681 (on appeal C. C. A., 9th Cir.); and Logan Coal & Timber Association, 122 Fed. (2d) 848, reversing 42 B. T. A. 629.

       The gross income shown on petitioner’s return for 1937 is $2,043.13, and the only deduction claimed under sec. 23 (a) is for legal and professional fees in the amount of $130. In the notice of deficiency respondent reduced the gross income hy $939. No adjustments were made to the deductions claimed under section 23 (a).


author: Sternhagen :

text:
    Estate of Charles Howard Wade, Deceased, Title Insurance and Trust Company, Franklin S. Wade and Richard Fitzpatrick, Executors, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 107155.
    Promulgated June 3, 1942.

      Richard Fitzpatrick, Esq., for the petitioner.

      Frank T. Horner, Esq., for the respondent.
   OPINION.

Sternhagen :

The Commissioner determined a deficiency of $1,-065.42 in estate tax by including in the gross estate the corpus of a trust consisting of insurance taken out by the decedent upon his own. life. The important facts are stipulated, and are found as stipulated. Additional evidence consisting of testimony as to the intent of the, testator does not affect the decision.

Decedent died February 9,1939. The estate tax return was filed in Los Angeles, California, where he had lived. In October 1938, by a revocable trust, he transferred in trust six policies of insurance aggregating $25,000 on his own life. They had been issued at various times between March 1906 and September 1925. Decedent’s wife had been the named beneficiary, and decedent exercised his power to change the beneficiary by naming the trustee the beneficiary under the policies. Many powers were given to the trustee by the trust instrument, among them the power to pay from corpus (which consisted entirely of then insurance policies) taxes, certain described obligations, expenses of burial and last illness, attorney’s fees, etc. Contemporaneously with, the execution of the trust instrument, decedent made his will, in which he named as executors the same trust company and two individuals as were named trustees of the trust. His wife and children were beneficiaries of the trust and of his will. The executors paid the charges against the estate, and had something left over, as disclosed by the final account filed with and allowed by the Superior Court. The trustee did not exercise the power to pay any of such charges.

The question is whether the petitioner is entitled to have the insurance excluded from the gross estate, since the amount is less than. $40,000. Section 302 (g), Revenue Act of 1926, which is now section 811 (g), Internal Revenue Code, provides that the gross estate shall include the value of property:

To the extent of the amount receivable by the executor as insurance under policies taken out by the decedent upon his own life; and to the extent of the excess over $40,000 of the amount receivable by all other beneficiaries as insurance under policies taken out by the decedent upon his own life.

Literally no part of the insurance was receivable by the executor. It was receivable by the trustee in trust for the wife and children. Whether we consider that it was receivable by the trustee, as strictly it was, or by the beneficiaries of the trust, makes no difference for present purposes, since in either case the amount was receivable by one other than the executor, cf. Boston Safe Deposit & Trust Co. v. Commissioner, 100 Fed. (2d) 266.

Respondent, however, argues that the right to receive the insurance proceeds must be imputed to the executor. If the trustee had been directed to pay charges of the estate, instead of having the power to do so, and had used the proceeds in that way, they would properly be regarded as receivable by the executor, since they would serve to discharge his obligations and would therefore be within the intendment of the statute, Marmaduke B. Morton, Administrator, 23 B. T. A. 236; Pacific National Bank of Seattle, Executor, 40 B. T. A. 128; Estate of Waldo Rohnert, 40 B. T. A. 1319; Mathilde B. Hooper, Administratrix, 41 B. T. A. 114; Estate of Silas B. Mason, 43 B. T. A. 813 (on review, C. C. A., 6th Cir.); Estate of Henry William Hofferbert, 46 B. T. A. 1101. But a mere power, as distinguished from a duty, in one other than the executor, to pay charges of the estate is not sufficient to support the imputation of the proceeds to the executor, Old Colony Trust Co., Executor, 39 B. T. A. 871, although the exercise of the power to use some of the proceeds in payment of taxes of the estate would render such part of the proceeds nonexempt and leave only the remainder of the proceeds within the $40,000 exemption, Estate of Waldo Rohnert, supra.

Since the proceeds were receivable by one other than the executor and there was in the recipient but an unexercised power to use them to discharge obligations of the executor, they are, to their full extent (which is less than $40,000) excluded from the gross estate.

The respondent argues that the insurance proceeds are properly included within the gross estate under subdivision (d), since they constitute the corpus of a trust which is, as petitioner admits, revocable. But this would only serve to disregard the trust and thus to impute the corpus to the settlor and his estate. The character of what would thus be imputed would continue to be life insurance receivable by one other than the executor, and, as if no trust had been declared, the exemption of subdivision (g) would demand ■consideration. Clearly insurance-upon the decedent’s life which by its terms is receivable by one other than the executor is no less subject to the exemption of $40,000 when held by the decedent than when held in trust at his direction. By the same reasoning, the idea that the trust was made in contemplation of death or to take effect in possession or enjoyment at or after death and is therefore within subdivision (c), lends ho force to the respondent’s argument.

Decision will be entered under Bule 50.

       Restatement of the Law of Trusts, sec. 187 :
      “(a) * * * The exercise of a power is discretionary except to the extent to which its exercise is required by the terms of the trust or by the principles of law applicable to the duties of trustees * *