author:
Goodeioh :
      McMahon,

text:
    G. Ridgely Sappington, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51944.
    Promulgated April 30, 1932.

      William L. Marbury, Jr., Esq., and D. H. Hamilton, Jr., Esq., for tbe petitioner.

      G. A. Bay, Esq., for the respondent.
    By leave of the Board briefs were filed by S'oeinbjorn Johnson, Esq., on behalf of the University of Illinois, and Robinson Brown, Esq., on behalf of the University of Alabama, as amici cuHae.

       A brief filed by the University of Illinois as amicus curiae, through Svein-bjorn Johnson, its counsel, was concurred in by Oscar E. Carlstrom, Attorney General of Illinois; John Fletcher, Attorney General of Iowa; Roland Boynton, Attorney General of Kansas; James W. Cammack, Attorney General of Kentucky ; M. B. Halsfield, Assistant Attorney General of Kentucky; Henry N. Benson, Attorney General of Minnesota; George T. Mitchell, Attorney General of Mississippi; L. A. Foot, Attorney General of Montana; C. A. Sorensen, Attorney General of Nebraska; John J. Bennett, Jr., Attorney General of New York; James Morris, Attorney General of North Dakota; Gilbert Bettman, Attorney General of Ohio; James V. Allred, Attorney General of Texas. A further statement of concurrence therein was filed by U. S. Webb, Attorney General of California; Lawrence C. Jones, Attorney General of Vermont; Stuart & Stuart, counsel for Purdue University; and also by the Executive Committee of the Association of Land Grant Colleges and Universities, the University of Alabama, Alabama Polytechnic Institute, University of Arizona, University of Arkansas, the Regents of the University of California, University of Colorado, Connecticut Agricultural College, University of Delaware, University of Georgia, State College of Agriculture and Mechanic Arts, University of Hawaii, University of Kentucky, University of Maine, University of Mississippi, Mississippi. Agricultural and Mechanical College, University of Montana, University of Nebraska, University of Nevada, University of New Mexico, University of North Carolina, University of North Dakota, North Dakota Agricultural College, Ohio University, Miami University, University of Oklahoma, Pennsylvania State College, University of South Carolina, Clemson Agricultural College, University of South Dakota, University of Tennessee, University of Texas, University of Utah, University of Virginia, University of Washington, University of Wyoming, West Virginia University.

   OPINION.

Goodeioh :

The compensation received by petitioner in 1928 for his services as a part-time instructor in the Law School of the University of Maryland must be included in his gross income for purposes of taxation under the provisions of section 22 of the Revenue Act of 1928 unless while rendering such services he was an officer or employee of the State of Maryland, or a political subdivision thereof, engaged as an instrumentality or agent of the state in administering or executing an essential governmental function of the state; or, if an independent contractor, unless it further appears that a Federal tax upon his compensation substantially impairs his ability to discharge his duties and obligations to the state, or the ability of the state, or its subdivisions to procure the services of private individuals to aid them in their undertakings. Collector v. Day, 11 Wall. 113; Auffnorat v. Hedden, 137 U. S. 310; United States v. Weitzel, 246 U. S. 533; Metcalf & Eddy v. Mitchell, 269 U. S. 514; Lucas v. Howard, 280 U. S. 526; Lucas v. Reed, 281 U. S. 699; Miller v. McCaughn, 27 Fed. (2d) 128; Blair v. Matthews, 29 Fed. (2d) 892; Blair v. Byers, 35 Fed. (2d) 326; Burnet v. Livezey, 48 Fed. (2d) 159; Elam v. Commissioner, 45 Fed. (2d) 337; Hugh Ogden, 24 B. T. A. 1239. It is admitted that petitioner was not an officer of the state. The record discloses that the matter of a Federal tax upon his compensation was never discussed between petitioner and the officials of the Law School or the University, from which we may infer that there was no impairment of petitioner’s ability to discharge his duties nor of the state’s ability to contract for his services. Our task, then is to determine, (a) whether the University of Maryland and the Law School thereof are state institutions, integral parts of the state government; (b) whether these institutions are instru-mentalities through which the state performs an essential governmental function; (c) whether petitioner, as an instructor in the Law School of the University, was an employee of the state engaged in administering or executing a governmental function of the state. A determination in the negative of any one of these propositions must result in holding subject to the tax the compensation here involved.

These identical issues were presented in the appeal of Mary W. Niles, Executrix, heretofore decided by this Board and reported in 20 B. T. A. 949. Niles was a part-time professor in the Law School of the University of Maryland. The appeal was brought by his executrix, and contested the right of the United States to subject to income tax the compensation received by him in the years 1925 and 1926 for his services so rendered. The Board decided that the compensation was subject to tax because the University of Maryland was a private eleemosynary corporation, not an instrumentality of the state; that in conducting the University no governmental function, essential or otherwise, was discharged, which by necessary implication was immune from such interference as Federal taxation of the salary of one of the professors of its Law School; and that Niles was not an official of the state.

In the case now at bar, the petitioner comes with the avowed purpose of presenting facts respecting the relation of the University to the state beyond those disclosed in the record previously considered. He comes to convince us that the University is a state institution, one of its governmental agencies wholly under its control; that its Law School is an integral part of the University, and also under state control; that in conducting the University and its LaAv School the state is discharging or performing an essential function of Government; and that petitioner, in his capacity of instructor in the Law School, is an employee o*f the University and of the state. He has succeeded in so doing. The record now before us discloses a relationship between the University, the state and this petitioner quite different from that which existed in the Niles case and quite different from that considered by the court in Regents of the University of Maryland v. Williams, 9 Gill, and J. (Md.) 365, upon which we relied.

It is true, as pointed out in our prior opinion, there is a distinction between “ schools conducted by the state itself or by a political subdivision thereof such as a county, municipality or school district, on the one side, and a college or university, even though given the name of the state, conducted by a separate, private eleemosynary corporation on the other hand.” The great weight of authority holds that, in conducting schools of the first class, the state or subdivision thereof is engaged in a governmental function. School District v. Gage, 30 Mich. 484; Sullivan v. School District, 191 N. W. 1020; Anderson v. Board, 190 N. W. 806; Board v. McHenry, 106 Ohio Statutes 357; 140 N. E. 169; Kimare v. City, 171 Ill. 332; Hill v. Boston, 122 Mass. 344; State v. Frederick Co., 94 Md. 334; 51 Atl. 289.

It is true also, as further pointed out in the Niles case, that prior to 1920 the University of Maryland was an institution of the latter class. Though aided financially, it was not controlled by the state. It existed independently under its own charter, and its contractual status could not be impaired by legislative enactment. Regents of the University of Maryland v. Williams, supra. By statute in 1920 the Legislature of Maryland provided (chapter 480, Acts of 1920) for the consolidation of the old University of Maryland with the Maryland State College of Agriculture, then a state institution, to form a “ new corporation ” to be known ns the University of Maryland. Section 6 of that act provided:

And 5e it further enacted, That this Act shall take effect on the first day of July, in the year 1920, provided that before that date, the Regents of the University of Maryland, as constituted under the Act passed at the November session, 1912 (1812), Chapter 159, as amended and supplemented, by the said Act passed at the January session, 1882, Chapter 88, shall signify their assent thereto by a resolution adopted by a meeting of said Regents, and by filing in the office of the Secretary of State of Maryland, a copy of such resolution of acceptance, certified by the hands of the Provost and of the Secretary of said Board of Regents, and under its common and public seal, and shall be further accepted before said date by the Maryland State College of Agriculture, by a resolution adopted by its Board of Trustees, and by filing in the Office of the said Secretary of State of Maryland, a copy of such resolution of acceptance, certified by the hands of the President and Secretary of said Board, and under its seal, and upon the receipt of both of said resolutions, and not before, the Secretary of State shall issue a certificate that such resolutions of acceptance have been duly filed with him and such Certificate shall be evidence that the acceptances provided for in» this Act have been duly given.

The assents required by section 6 were duly filed and the two institutions were consolidated into a new corporation exclusively under the administration and control of the state. Thus, by its own volition, the old University changed from a private to a public corporation. By its own consent it gave over to the state its identity, its properties, and its control. The fact that the corporation had assented to the merger or consolidation of itself with the Maryland State College of Agriculture to form a new institution, to be entirely under the ownership and control of the state, was not disclosed by the record before us in the Niles case, and that fact is essential to a determination of the status of the University as it exists today as a state institution. We think that, beyond doubt, when the old University assented to the proposed merger and filed public, official notice of that assent as required by the act, it did voluntarily what it could not have been forced to do by legislative fiat, namely, relinquished its status as an independent, self-governed, private corporation, and gave itself and its properties into the control of the state to become a public corporation.

The act of 1920 provided that the control, management and government of the consolidated institution and title to all properties of both the consolidated institutions should vest in the regents, who should exercise the powers already granted to the trustees of the Agriculture College, and also the powers possessed by the University regents under the old charter. The regents were to be chosen as provided in the act of 1916 respecting the board of trustees of the Agriculture College, namely, by appointment by the governor, by and with the advice and consent of the senate. The act of 1916 assigned to the board of trustees complete power of management, government and control of that institution, and subjected their management to the scrutiny of the legislature. To all these powers and to all the duties the regents of the consolidated institution succeeded.

By the Act of the General Assembly of 1922, chapter 29, the State Government of Maryland was reorganized into various executive and administrative departments, of which the fifth was “ the State Board of Agriculture and the Regents of the University of Maryland.” By this act the Board of Regents was charged with the performance of many duties previously delegated to the Board of Agriculture. It also took over the functions of the State Board of Forestry, the State Geological and Economic Survey Commission, and the State Weather Service.

The act of 1922 further provides (ch. 29, p. 73, Bagby’s Annotated Code of Maryland, art. 41, sec. 14) for an advisory council for the governor, composed of officers who are the heads of administrative departments of the state “ for the purpose of promoting coordination, and effective supervision over the conduct of State Government.” The president of the University, by authority of this statute, is a member of the governor’s advisory council, which meets from time to time “ for the consideration of general State policies, finances, departmental and institutional work and conditions.” By statute also the Attorney General of Maryland is designated as legal advisor of the University. Prior to the consolidation in 1920, appropriations made by the legislature to the University were listed as “ State aid institutions,” as distinguished from those made to the College of Agriculture, listed as “ departments, boards and commissions ” or “ State institutions.” Since that time, however, appropriations to the University have been listed as “ governmental appropriations,” under the subtitle “ public schools.” It appears clear, therefore, that since 1920, the University of Maryland must be regarded as an administrative department of the Government of Maryland, a state institution, conducted, operated and governed by the state through its legally chosen representatives.

We think the fact that the Legislature of Maryland saw fit to create a new governing body to control the new state institution rather than assign its government to the already established State Board of Education is not determinative of the status of the institution, nor does it serve to create a distinction in law between the lower public schools and the public institutions devoted to higher and professional learning. The Board of Regents is as fully an instrumentality or department of the state as the General Board of Education. The fact that the state exercises control through the corporation does not divest it of its sovereign character. Cf. Emergency Fleet Corporation v. Western Union, 275 U. S. 415. Its creation served merely for greater convenience in exerting the state’s sovereign power over the general field of education and we know of no limitation which may be imposed upon a state to control the number or form of the departments or agencies which it may create through which to exercise its powers. The fact that the old University was a private institution does not prevent it from becoming a public corporation, Lewis v. Whittle, 77 Va. 415, nor does the fact that tuition or other fees are collected from its students make the University any less a state institution. McLeod v. Lincoln Medical College, 69 Nebr. 550; 96 N. W. 265. Incidents of the collection of costs or fees by the agencies of the state admittedly engaged in discharging the functions of the state government, such as a filing fee collected upon invoking the protection of the courts, or the fees of a justice of the peace, could be given in great number. The University is not operated for profit. Private individuals have no interest or control over it. Its property, its management and control are in the hands of the state and this has been recognized by the legislature by taking over such income as comes to the institution by way of tuition and other fees, and by making appropriations for the erection of buildings and to defray expenses. Control of and responsibility for the operation of the University by the state mark it as a public institution, and such institutions have generally been held to be instru-mentalities or departments of the state. Auditor General v. Regents of the University, 83 Mich. 467; 47 N. W. 440; University of Tennessee v. People's Bank, 157 Tenn. 87; 6 S. W. (2d) 328; Phillips v. Rector, etc. of University of Virginia, 97 Va. 472; 34 S. E. 66; State v. Regents of University, 55 Kan. 389; 40 Pac. 656.

In the Niles case it was pointed out that the act of 1920 permitted the Regents, in their discretion, to permit any department, faculty, or school of the University to govern itself in whole ór in part and to use available funds, including tuition fees, for its own purposes. The record before us does not disclose whether any department of the old University attempted to carry on its own existence nor if any did so for what period. It does disclose, however, that during the period here involved the Law School had no such separate existence, but was an integral part of the University governed by University officials and, through them, subject to state control, receiving state appropriations and remitting to the state all fees collected by it. In our opinion, therefore, this provision of the act is not determinative of the status of the Law School, at least during 1928. The Lav/ School was merely a department of the University and as such was unquestionably a part of the administrative government of the state. Act 1920, ch. 480; Spalding v. People, 172 Ill. 40; 49 N. E. 993; Foltz v. Hoge, 54 Cal. 28; People v. Kewen, 69 Cal. 215; 10 Pac. 393; Russell v. Trustees of Purdue University, 201 Ind. 367; 168 N. E. 529.

But respondent contends that even though the University be held an instrumentality of the state, still petitioner is liable for the tax here imposed for the reason that in its conduct and operation the state was not exercising an essential governmental function. In support of his contention respondent cites the opinion of the United States Customs Court in University of Illinois v. United States, Treasury Decision 43023 (vol. 54, No. 19), holding that education is,a proprietary, not a governmental function, and that at the time of the adoption of the Constitution education was a matter of private, not public concern, whose constitutional status can not later be changed.

We respectfully decline to be bound by this decision for it stands practically alone against the great weight of authority to the contrary. It must be recognized that state educational agencies lack those functions which generally distinguish public corporations which are classed as proprietary or fiscal from those which are essentially governmental in character. In its proprietary capacity the state or political subdivision has been considered as engaging in business, which is either operated for profit, cf. South Carolina v. United States, 199 U. S. 431; Green v. Frazier, 253 U. S. 233, or for the economic benefit of the local community, as in the operation of public utilities such as waterworks, electric light and power plants, and gas works, cf. Omaha Water Co. v. Omaha, 141 Fed. 1; City and County of Denver v. Mountain States T. & T. Co., 76 Col. 225; 184 Pac. 604; Wagner v. Rock Island, 146 Ill. 139; 34 N. E. 546; Denver v. Davis, 86 Pac. 1027; Blair v. Byers, 35 Fed. (2d) 326, where the acts and functions are those of management, control and public service, and not acts of public power, and are of local and not general public concern. The distinction between the two classes of powers as it arises in tort is well expressed by Mr. Justice Butler in City of Trenton v. New Jersey (1923), 262 U. S. 182, where he says:

It has been held that municipalities are not liable for such acts and omissions in the exercise of the police power, or in the performance of such municipal faculties as the erection and maintenance of a city hall and court house, the protection of the citys’ inhabitants against disease and unsanitary conditions, the care of the sick, the operation of fire departments, the inspection of steam boilers, the promotion of education and the administration of public charities. On the other hand they have been held liable when such acts or omissions occur in the exercise of the power to build and maintain bridges, streets and highways, and waterworks, construct sewers, collect refuse and care for the dump when it is deposited. Recovery is denied where the act or omission occurs in the exercise of what are deemed to be governmental powers, and is permitted if it occurs in a proprietary capacity.

Proprietary functions have not been extended to public corporations by means of which the state carries out its educational policies. While such institutions may and do hold property, they hold it as a public trust and subject to the plenary control of the state government. This distinction has been recognized almost universally and the authorities generally hold that the dissemination of education as carried out by .state instrumentalities is not a proprietary but an essential governmental function of the state.

What a governmental function is depends not upon what was so considered at the time the Constitution was adopted, but upon the necessity of exercising the function today. Whether it is of general public concern is the criterion by which to determine what is a governmental function. Public needs vary with the changing conditions under which mankind finds itself. New scientific discoveries, new economic situations, new means of transportation, and increased complexity in social relations cause new governmental functions to become necessary to the welfare of society. Cf. Group No. 1 Oil Corporation v. Bass, 38 Fed. (2d) 680, 683.

When the danger from infectious and contagious diseases was discovered, methods for prevention and control of them', such as vaccination, quarantine, and inspection of milk and other foods, became public functions. It became necessary to have persons with scientific training to watch over the public health. The state began to place severe requirements upon doctors, nurses, and veterinarians and immediately facilities for training to meet these' requirements became matters of public interest. When the citizen was given the ballot and so placed in control of government, a new need for the education of all persons was manifest. This need was met by establishing public schools which admittedly serve a public interest. It is obvious that law, engineering, teaching, pharmacy, and government, no less than medicine, require trained individuals if our modern complex society is to survive. In fact today there is as great a need of persons with wide training in these fields as there is in the rudiments of education. This has been recognized by France and Germany, who have placed all their universities upon a public basis; it has been recognized by the states in the establishment of state universities; and it has been recognized by the United States both in the aid it has given to state universities and in the high educational requirements it has demanded from public servants.

We disagree also with respondent’s contention, supported by the Illinois case, that the field of higher education had not been occupied by the states at the time the Constitution was adopted. The Constitution was adopted in 1787. Long before that time the Massachusetts Colony expended public funds for the promotion of higher education and when, in 1780, it adopted its own constitution, it was provided (ch. 5, sec. 2) : “ * * * it shall be the duty of legislatures and magistrates in all future periods of this Commonwealth, to cherish the interests of literature and the sciences, and all seminaries of them especially the University of Cambridge, public schools and grammar schools in the town.” In Connecticut, as early as 1715, public property and funds were applied to the advancement of college education at the institution which later was to become Yale University, and support was also contributed to the University of Cambridge, 11 C. J. 973. New Hampshire, in 1693 and again in 1719, provided for the support of education through taxation and its constitution of 1784 makes it the duty of legislators and magistrates “ to cherish the interests of literature and the sciences and all seminaries and public schools.” In 1764 Rhode Island adopted legislation providing for the incorporation of the schools and pertaining to secondary, as well as primary education. Kings College was founded by public act in New York in 1764 and in 1784 the Board of Regents of the University of the State of New York was created. In 1740 an appropriation was made by the city of Philadelphia for the support of an academy and Pennsylvania’s constitution, adopted in 1776 (section 44), after providing for schools in every county, provides: “ * * * and all useful learning shall be duly encouraged and promoted in one or more universities.” A similar provision appears in the Constitution of North Carolina of 1776. Prior to the Revolution, Virginia had supported the College of William and Mary by means of grants of public land and public money. Vermont, in its constitution of 1777 provided “ one grammar school in each county and one University in this State ought to be established by direction of the General Assembly.” In 1782 a college at Chester-town was founded by the Legislature of Maryland and a permanent fund provided for the establishment of Washington College, thus showing that in Maryland also, before the Federal Constitution was adopted, higher education was regarded as a state function. See “ Educational Legislation and Administration of the Colonial Government,” by E. W. Clews. In view of the foregoing it can not be denied that before the Constitution was adopted the several Colonies had recognized that the maintenance and operation of schools of both elementary and higher grade at public expense was a proper function of Government. Moreover, a review of Congressional policy from the Ordinance of 1787, through the various land grant acts beginning in 1826 to the Purnell Act of 1925, discloses that the Federal Government has always regarded education as a proper and essential governmental function of the states and has repeatedly appropriated Federal properties and funds for the support of state educational' institutions.

Nor can it be denied that the carrying out of the educational policies? of the state, whether with respect to elementary or higher education, is an operation of the state “ essential to the execution of its governmental functions, and which the state can only do itself ” (Flint v. Stone Tracy Co., 220 U. S. 107). The process of discharging its duty to educate its citizens is an essential function of state government, carried out equalty through the operation of primary and secondary schools. Gillespie v. Oklahoma, 257 U. S. 501; Group # 1 Oil Corporation v. Bass, 283 U. S. 279; Burnet v. Coronado Oil & Gas Co., 285 U. S. 393.

While it is true that a state may, if it so elects, rely upon the efforts of individuals and private corporations to supply its citizens with the facilities for either primary or higher education, whether it shall do so or not is a matter of discretion on its own part and may not here be questioned.

With respect to the relation between the state and this petitioner, we conclude that, in his capacity as instructor in the Law School, he was an employee of the state. In serving as an instructor, he was not undertaking the ordinary duties of a lawyer, serving the state as he would another client. He was not free to exercise his full discretion in the discharge of his duties to the school. He was instructed as to what he should do, when he should do it, and how he should report the results of his efforts as reflected by the progress of his students. He was subject to the supervision, direction and control of the state, through its administrative officers, even though his own experience, skill and application to his duties made it unnecessary for them to interfere with the conduct of his courses. He was paid by the state from state funds. The state listed him as one of its employees, a classification which finds support in numerous decisions of state courts defining the status of persons in positions similar to that occupied by petitioner, although usually employed upon a full-time basis; Steinson v. Board of Education, 165 N. Y. 431; 59 N. E. 300; Wiley v. Board of Education, 225 Mich. 237; 196 N. W. 417; Hartigan v. Board of Regents of W. Va. University, 49 W. Va. 14; 38 S. E. 698; cf. Burnet v. Lively, 48 Fed. (2d) 159.

Measured by the tests laid in the several decisions first cited in this opinion, after considering all the facts before us, we hold that petitioner is an employee of the state of Maryland and engaged in carrying out, as an instrumentality of the state, an essential administrative function of the state government. As such, his compensation is not subject to Federal tax.

Reviewed by the Board.

Judgment will be entered wider Rule 50.

McMahon,

concurring: The correct result has been reached in this proceeding.

However, the majority opinion contains the following, to which I can not agree:

What a governmental function is depends not upon what was so considered at the time the Constitution was adopted, but upon the necessity of exercising the function today. Whether it is of general public concern is the criterion by which to determine what is a governmental function. Public needs vary with the changing conditions under which mankind finds itself. New scientific discoveries, new economic situations, new means of transportation, and increased complexity in social relations cause new governmental functions to become necessary to the welfare of society. Cf. Group No. 1 Oil Corporation v. Bass, 38 Fed. (2d) 680, 683.

The language which supports this view will be found at page 684 of the opinion in that case, which is the opinion of the District Court of the United States for the Western District of Texas. However, the Circuit Court of Appeals, Fifth Circuit, reversed the District Court (41 Fed. (2d) 483), and the Supreme Court of the United States affirmed the Circuit Court (283 U. S. 279). Neither the Circuit Court nor the Supreme Court approved the language used by the District Court.

The language used by the District Court is contrary to that of the United States Supreme Court in South Carolina v. United States, 199 U. S. 437, 456, which is in part as follows:

* * * The exemption of the State’s property and its functions from Federal taxation is implied from the dual character of our Federal system and the necessity of preserving the State in ail its efficiency. In order to determine to what extent that implication will go ioe must turn to the condition of things at the time the Constitution was framed. What, in the light of that condition, did the framers of the convention intend should be exempt? [Italics ours.]

I am aware that there is some support for what the District Court said in Group No. 1 Oil Corporation v. Bass, supra, and for what is said in the opinion of the majority of the Board, in the opinion of Chief Justice Winslow, speaking for a majority of the court in Borgnis v. Falk Co., 133 N. W. (Wis.) 209, 215-216, which however, does not involve the question of an essential governmental function, the question involved in the instant proceeding and in South Carolina v. United States, supra.

What is said in the concurring opinions of Justices Barnes and Marshall in Borgnis v. Falk Co., supra, is supported by the case of South Carolina v. United States, supra.

I quote from the concurring opinion of Justice Barnes (pp. 222-3), as follows:

I concur in the opinion of the Chief Justice, except in so far as it is said in effect that our Constitutions may mean one thing to-day and something different to-morrow, depending on whether conditions and ideals have in the meantime undergone a change. I regard our Constitutions as immutable, except when changed in the manner therein prescribed. * * * To hold otherwise is to say that the courts may change our fundamental laws. This would be a clear usurpation of power, never vested nor intended to be vested in the courts, and one which was reserved to the people themselves. * * * I do not share the belief that our Constitutions have become archaic, or that they have outlived their usefulness. * * *

I quote also from the concurring opinion of Justice Marshall (pp. 223, 225) as follows:

* * * The fertile method of dealing with the Constitution has been eliar-a eterized as one which has “ furnished a mode of argument which would on the one hand leave the Constitution crippled and inanimate, or on the other give it an extent of elasticity subversive of all rational boundaries.” Story, Constitution, 389.
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If the Constitution is to efficiently endure, the idea that it is capable of being resquared, from time to time, to fit new legislative or judicial notions of necessities in praesenti, instead of new legislation being tested by it, must be combated whenever and wherever advanced, and wrong impressions in regard to the matter carefully guarded against. To even, significantly, speak of making the Constitution adaptable to new conditions by means of interpretation, when the selection of new and constitutional means, adaptable to such conditions, is meant, is liable to confuse and weaken that high regard all should have for the fundamental law as a broad, definite, certain, comprehensive, unvarying and unvariable system, other than by the means therein pointed out. Dark will be the day, if that day will ever come, for the people of this country, and dark to the people of all countries whose attention is directed here for lessons in constitutional government, when our system shall not be held up by the courts as speaking the same at one time as at another, except in so far as changes shall be made in the particular way. That is the doctrine of Marbury v. Madison, 1 Cranch, 137, 2 L. Ed. 60. No one can read that great exposition of our system without appreciating how illogical it is to speak of interpretation as an instrumentality for giving, from time to time, a different cast to the fundamental law. * * *

What Justices Barnes and Marshall said applies with equal, if not greater, force to the question as to what an essential governmental function is, which is involved in this proceeding.

To say that a “governmental function” “depends not upon what was so considered at the time * * * the Constitution was adopted ” and that present “ general public concern is the criterion by which to determine what is a governmental function,” is to disregard our Constitution.

For a discussion of what is meant by essential governmental function and a distinction between that and public use and public purpose, see T. P. Wittschen, 25 B. T. A. 46.

Furthermore, the reasoning of the majority opinion, set forth in the foregoing quotation, is unnecessary to sustain the result reached in this proceeding, since it appears clearly from that opinion that education was considered to be an essential governmental function at the time of the adoption of the Federal Constitution. This brings this proceeding within the language quoted from South Carolina v. United States, supra.

In the light of the foregoing discussion, I address myself further to the question as to whether petitioner was engaged in the performance of an essential governmental function.

In Vestal v. Pickering, 267 Pac. (Oreg.) 821, at p. 823, it is stated by the Supreme Court of Oregon: “ It must be conceded that under our form of government the conduct of the public schools is a governmental function.”

The real question before us is as to whether the governmental function in question in this proceeding is an essential one.

In Veazie Bank v. Fenno, 8 Wall. 533, it is stated:

* * * that the reserved rights of the states, such as the right to pass laws, to give effect to laws through executive action, .to administer justice through the courts, and to employ all necessary agencies for legitimate purposes of state government are not proper subjects of the tawing power of Congress. [Italics ours.]

In Trustees of Dartmouth College v. Woodward, decided in 1819, 17 U. S. 517, at p. 632, the Supreme Court of the United States, speaking through Chief Justice Marshall, used this significant language:

That education is an object of national concern, and a proper subject of legislation, all admit. That there may be an institution, founded by government, and placed entirely under its immediate control, the officers of which would be public officers, amenable ewolusively to government, none will deny. [Italics ours.]

Apparently, this was said in response to the argument of counsel for the defendant in error in that case at p. 600, as follows:

The education of youth, and the encouragement of the arts and sciences, is one of the most important objects of civil government. Yattel lib. 1, c. 11, Sections 112-13. [Italics ours.]

An argument of similar import, but more elaborate, is found in the following excerpt from the brief filed in this proceeding by counsel for the University of Illinois as arnica curiae and concurred in by the Attorneys General of Illinois, Iowa, Kansas, Kentucky, Minnesota, Mississippi, Montana, Nebraska, New York, North Dakota, Ohio, and Texas:

* * * general enlightenment is one of the first conditions of permanent and successful democratic government. Education everywhere concerns the state; but in a republic, where all ultimate power rests in the citizen, expres-ing his will through the instrumentality of a secret ballot, it is simply impossible to overestimate the importance of his bringing to the task of casting his ballot a large measure of cultivated intelligence and correct information. Ignorance and indifference are the two arch enemies of free institutions. Both can be routed if our public school system fulfills its promise. * * *

This is a compelling reason for the conclusion that the education by a state of the citizens of a state is an essential governmental function.

As stated in South Carolina v. United States, supra, at p. 448:

* * * We Rave in this Republic a dual system of government, National and state, each operating within the same territory and upon the same persons; and yet working without collision, because their functions are different. There are certain matters over which the National Government has absolute control and no action of the State can interfere therewith, and there are others in which the State is supreme, and in respect to them the National Government is powerless. To preserve the even balance between these two governments and hold each in its separate sphere is the peculiar duty of all courts — preeminently of this — a duty oftentimes of great delicacy and difficulty.

Thus, to the extent that there is reserved to the state, under the Federal Constitution, control over the subject of education, the state is supreme and “the National Government is powerless.” That there is reserved to the State of Maryland the power to do what it did upon the subject of education, as appears from the facts in this proceeding, is not questioned here and can not be successfully challenged.

Since the state, like the Federal Government, is supreme, each within its sphere, as pointed out by the United States Supreme Court, it follows irresistibly that each state must have reasonable latitude in the exercise of its powers, functions and duties and also similar latitude in determining what governmental functions are essential and when and how and by whom and by what instru-mentalities they will be performed, subject to such limitations as those pointed out in Pierce v. Society of the Sisters, 268 U. S. 510, which have no application here. Otherwise, what is said by the United States Supreme Court in the above quotation would have little, if any, meaning.

Furthermore, the Federal Government should accord very great respect to a state when a state is acting within its sphere; and should not disturb such action of the state unless clearly not well founded. Cf. Jones v. Portland, 245 U. S. 217, and Fall Brook Irrigation District v. Bradley, 164 U. S. 112.

In Jones v. Portland the United States Supreme Court said (p. 221) :

The act in question has the sanction of the legislative branch of the state government, the body primarily invested with authority to determine what laws are required, m the public interest. [Italics ours.]

In Fall Brook Irrigation District v. Bradley, 164 U. S. 112, the United States Supreme Court said (p. 160) :

For these reasons, while not regarding the matter as concluded by these various declarations and acts and decisions of the people and legislature and courts of California, we yet, in the consideration of the subject, accord to and treat them with very great respect, and we regard the decisions as embodying the deliberate judgment and matured thought of the courts of that State on this question. [Italics ours.]

While each of these cases deals with the question of a public use, I see no reason why the reasoning in them should not apply with equal, if not greater force, to the exercise by a state of an essential governmental function, such as is involved in this proceeding.

It is obvious from the facts in this proceeding that the State of Maryland determined that the education offered by the University of Maryland and its law school was essential. Among other things, it levied taxes and used funds derived therefrom for the maintenance and operation of such university and law school. It can not be said that in these respects it has exceeded that reasonable latitude to which it is entitled in the performance of its essential governmental functions.


source: Caselaw Access Project

author: Trammell :

license: Public Domain

text:
    Estate of Irving Lee Stone, Irving K. Stone and Marcus M. Farley, Executors and Trustees, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43830.
    Promulgated May 5, 1932.

      Richard H. Wilmer, Esq., for the petitioner.

      Ralph F. Staubley, Esq., for the respondent.
   OPINION.

Trammell :

The first issue for consideration here is whether or not the value of the corporate stock transferred by the decedent to a trustee under the trust agreement of July 18,1923, should be included in determining the value of the gross estate of the decedent for purposes of the estate tax, under the provisions of section 302 (d) of the Eevenue Act of 1924.

Paragraph 15 of the trust instrument, set out in our findings of fact above, provided that the terms of said instrument might be added to or modified by the joint written agreement of the decedent and five of the seven named beneficiaries, one of whom was also named as trustee. This fact, the respondent contends, brings the case within the purview of the cited statute. The provisions of the Eevenue Act of 1924, pertinent here, read as follows:

Sec. S02. Tie value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(a) To the extent of the interest therein of the decedent at the time of his death * * *
* * * Si! * * ‡
(d) To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for a fair consideration in money or money’s worth.

In computing the deficiency the respondent included the stock, comprising the corpus of the trust, in the gross estate of the decedent at a valuation of $555,310. The petitioner contends that no part of the value of the trust property may properly be included in the value of the gross estate.

Subdivision (d) of section 302, supra, was enacted for the first time in the Revenue Act of 1924, and the substance of its provisions was continued in the corresponding section of the Revenue Act of 1926.

Prior to the Revenue Act of 1924, where a grantor reserved the power, acting alone, to alter, amend or revoke a trust agreement, the value of the property thereby transferred was included in the value of the gross estate and taxed under section 402 (c) of the Revenue Acts of 1918 and 1921, as a transfer taking effect in possession or enjoyment at or after death, on the theory that prior to the death of the grantor the transfer was not complete. Chase National Bank v. United States, 278 U. S. 327; Reinecke v. Northern Trust Co., 278 U. S. 339.

In the case last cited, the court, in speaking of the general nature of the Federal estate tax, said:

In its plan and scope tlie tax is one imposed on transfers at death or made in contemplation of death and is measured by the value at death of the interest which is transferred. * * * It is not a gift tax and the tax on gifts once imposed by. the Revenue Act of 1924 * * * has been repealed * * *. One may freely give his property to another by absolute gift without subjecting liimseif or his estate to a tax * * *,

In Reinecke v. Northern Trust Co., supra, the court held in effect that, where the donor reserved the power to modify the trust only with the consent of one or more of the beneficiaries, the transfer was immediately complete, and was not a transfer which occurred at the subsequent date of death; hence, the value of the trust property should not be included in the gross estate subject to tax. On this point the court said:

Since the power to revoke or alter was dependent on the consent of the one entitled to the beneficial, and consequently adverse, interest, the trust, for all practical purposes, had passed as completely from any control by decedent which might enure to his own benefit as if the gift had been absolute.

See also May v. Heiner, 281 U. S. 238.

In the instant case, the decedent reserved the power to modify the trust instrument only by the joint written agreement of himself and five of the seven named beneficiaries, one of whom was the trustee who acted as such for himself and the remaining-six beneficiaries, all of whose interest were adverse to that of the decedent. Under the doctrine laid down in Reinecke v. Northern Trust Co., supra, it is our opinion, therefore, that the transfer was not of a testamentary character, but was as fully completed at date of execution of the trust instrument as if the gift had been absolute. At decedent’s death no transfer occurred, nor was there any shifting of economic benefits in the property. The decedent had no interest in the trust property at the time of his death, and hence it should not be included in determining ’the válu'e of th'e gross-testate imdte'r-'siibdivisioii -(&’) of section 802 of'the Reverme Act of 1924:, supra.

We adopted the foregoing view in Colonial Trust Co. et al., Executors, 22 B. T. A. 1377, 1386, where the decedent had reserved the 'right to amend, alterJor modify the trust in 'conjunction with the trustees and beneficiaries. That cáse involved section 302 (d) of the 'Revenue Act’of 1924, Which is the same statute relied upon by the respondent as authority for his action in the prcsentmaSe.

The same interpretation of the law has repeatedly-been adopted by the courts. In White v. Erskine, 47 Fed. (2d) 1014, the decedent reserved the right to amend the trust instrument with' the assent only of the trustee. The c’as'e arose under th‘e Revenue Act - of 1926. 'In affirming the decision of the District Court that the value of the trust property should not be included in the gross estate-'subject to tax, the United States Circuit Court of Appeals for the Firát-Circuit, 'in its opinion at page 1016, said:

The government now contends in effect that by subdivision (d) [óf section 302] Congress has undertaken to impose a new form of excise tax, viz., a tax on-the power to alter or revoke before death a trust created by'the grantor, whether the power be of a general or limited nature. We do not think Congress intended by the addition of subdivision (d) to add a new form of tax. It was only “to the extent-of the interest” of the-decedent-in the trust fund, and-at his death, that subdivision (’d) adds anything to theválue of the gro'ss estate. If the ■ decedent "há‘d no beneficial interest in the trust fund at his death, under the construction of the Supreme Court in the above-cited cases, there was nothing transferred from him at death within the meaning of' section 301, which imposes the tax.
![’ v * *]i v v
In other words, where a grantor, either alone or in conjunction with anyone not a beneficiary under the trust, has retained “ the power to- revest ih himself title to any part of the trust,” * * * then the body of the trust at the death of the decedent may be included in the value of the gross estate, but where the decedent hás no such power except by the consent of an a’dverse party as one of the beneficiaries, or"as in this instance of the trustee for the beneficiaries, the right of revocation is gone from the donor and also all beneficial interest for taxing purposes under section 301 of the act.
To hold that Congress under subdivision (d) intended under the guise of a tax on the transfer of' property'at death to'impose a tax solely'on 'a limited powftr of appointment under it, would be contrary, not only to the spirit of the act, but'the express terms of section "301 * * * and-so doubtful a construction that the contrary intent ■ should be resolved in favor of the taxpayer * * *.

To the same effect, see Brady v. Ham, 45 Fed. (2d) 454, which involved section 302 (d) of the Revenue Act of 1924, and in which case the decedent had retained very broad powers'to alter the trust, change the trustees and name other beneficiaries,- except ■herself.

See also Cover v. Burnet, 53 Fed. (2d) 915, Where the decedent reserved the power to modify the trust, except that-no part of the corpus should be withdrawn by him, and the Commissioner sought to exact an estate tax under section 302 (d) of the Revenue Act of 1926. The Court of Appeals for the District of Columbia held that the value of the trust property in that case should not be included in the value of the gross estate, subject to the tax.

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

The second issue has been settled by the stipulation of the parties, and pursuant thereto the petitioner is entitled to additional deductions from the value of the gross estate, as determined by the respondent in his deficiency letter, in the amounts of $15,000 and $647.48 on account of expenditures for- executors’ fees and legal services, respectively.

The third issue arises from the affirmative averments contained in paragraph 7 of the respondent’s amended answer, wherein it is alleged that in determining the deficiency certain amounts were allowed as deductions from the gross estate, under the heading of debts of the decedent and mortgages, in excess of the amounts properly so allowable, and the respondent prays that the deficiency be increased accordingly.

The stipulated facts, which we have incorporated in our findings of fact, show that the respondent allowed as deductions from the gross estate (a) the indebtedness of the decedent to Minnie S. and Abbie S, Moore, represented by his unsecured promissory note in the principal amount of $8,500, plus accrued interest in the amount of $36.84, an,d (b) decedent’s promissory note in the principal amount of $75,000, payable to the Northwestern Mutual Life Insurance Company, secured by a mortgage on certain real estate of the decedent, together with accrued interest in the amount of $1,409.38. Both of said items of principal indebtedness are included among those referred to in paragraph 3 of the trust agreement.

In respect of the indebtedness due to the insurance company which was secured by a mortgage upon the decedent’s real estate, the facts show that the real estate was owned by the decedent at the time of his death and the value thereof was included in the value of the gross estate as finally determined by the respondent. The amount of this indebtedness we think is clearly allowable as a deduction under section 303 (a) (1) of the Revenue Act of 1924, which expressly provides that:

Sec. 803. For the purpose of the tax the value of the net estate shall he determined—
(a) In the ease of a resident, by deducting from the value of the gross estate-—
(I) Such amounts for * * * unpaid mortgages upon, or any indebtedness in respect to, property * * * to the extent that such * * * mortgages, or indebtedness were incurred or contracted bona fide and for a fair consideration in money or money's worth,

Section 302 of the same act provides that the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, “ to the extent of the interest therein of the decedent at the time of his death,” with restrictions not material here. The interest of a decedent in mortgaged realty extends only to the value of the realty, less the amount of the mortgage, and that Congress intended that the amount of a bona fide mortgage should, therefore, be allowed as a deduction from the gross estate in the case of a resident decedent, where the value of such real estate is included in the value of the gross estate, is. made plain by the express provisions of section 303, supra, and the right to such deduction can not be defeated because of a conditional provision for the payment of the indebtedness out of a trust fund where the indebtedness has not in fact been so discharged. In our opinion, the original action of the respondent in allowing as a deduction the aggregate amount of the principal and accrued interest on the mortgage here in question was correct, and his prayer that the deficiency be increased by disallowing said amount as a deduction and including same in the gross estate, is denied.

The unsecured promissory note of the decedent in the principal amount of $8,500, plus accrued interest of $36.84, which respondent allowed as a deduction in computing the deficiency, presents a different problem. This item is properly allowable, if at all, only as a claim against the estate. The respondent now contends that he erred in allowing said deduction on the theory that the indebtedness did not constitute a claim against the estate for the reason that the payment of the indebtedness, under the provisions of the trust instrument, was impressed upon the property transferred to the trustee by the decedent during his lifetime.

We are unable to agree with this contention of the respondent. In the first place, the decedent’s direction that the trustee pay the indebtedness in question was not absolute, but conditional. The trust instrument provided only that the cash dividends upon the transferred stock, if any, should be applied on the indebtedness, and that the principal of said stock might be used for the same purpose at the discretion of the trustee. However, if the decedent had unconditionally directed the trustee to pay said indebtedness out of trust funds or property, unless and until it was in fact so paid the amount of such indebtedness would constitute a claim against the decedent’s estate, unless the creditors had agreed to look to the trustee for payment, which would in effect amount to a novation. It is the generally accepted rule that a creditor may look to the debtor for satisfaction of his claim, which right can not be defeated by a transfer or assignment of the debtor’s property to a trustee, without the consent of the creditor. And this is the recognized rule in Michigan. Parsons v. Clark, 59 Mich. 414; 26 N. W. 656; Detroit Stove Works v. Osmun, 74 Mich. 7; 41 N. W. 845; Warner v. Littlefield, 89 Mich. 329; 50 N. W. 721. In the last case cited the Supreme Court of Michigan summarized the rule as follows:

The creditors are not compelled to accept the terms proffered in the assignment; they may stand aloof from the assignment, and may rely npon the liability of their debtor to pay.

In the instant proceeding, the respondent has affirmatively alleged that in computing the deficiency he erred in allowing as a deduction the amount of the decedent’s unsecured note of $8,500 plus accrued interest of $36.84. If the holders of this note assented to the assignment of the decedent’s stock and agreed to look to the trustee for payment, or if for any other reason the amount of this indebtedness did not, upon decedent’s death, become a claim against the estate, the burden is upon the respondent to establish such fact by competent evidence. This burden respondent wholly failed to discharge; he offered no evidence on this point, nor was any evidence offered thereon by the petitioner. Eespondent’s contention and prayer for relief in respect to this item are denied. Schilling Grain Co., 8 B. T. A. 1048.

Judgment will "be entered under Rule 50.


author:
Trammell :
      Black,

text:
    James C. Ayer et al., Trustees, Estate of Frederick Ayer, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43862.
    Promulgated May 6, 1932.

      James Graig Peacock, Esq., for the petitioners.

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

Trammell :

At the hearing the petitioners were granted permission to amend their petition to conform to the facts set forth in the stipulation. The petition as thus amended presents for our determination the issues raised by the following allegations of error:

Tbe Commissioner erred in disallowing the deduction of $10,000 legal lees paid by the estate in connection with the defense of the ease of United States v. Ayer, 7 Fed. (2d) 478.
The Commissioner erred in using the March 14, 1918 values, instead of the original costs to testator or March 1, 1913 values (whichever were higher), as a basis for determining profit or loss on the sales in 1925 by the estate of National Reserve Bank, American Investment Securities Company, and National Shawmut Bank stock.
The Commissioner erred in including as taxable income from dividends any amount in excess of 21.86 per cent of the diyidends of $609 received in 1925 by the estate on stock of the St. Mary’s Mineral Land Company.

On March 10, 1924, the United States Government brought an action in the District Court of the United States for the District of Massachusetts against the petitioners as executors of Frederick Ayer, deceased, to recover an additional estate tax of $2,521,743.29 which they had theretofore refused to pay. On August 6, 1925, the court entered judgment for the defendants. United States v. Ayer, 7 Fed. (2d) 478. On April 23, 1926, the judgment of the District Court was reversed by the Circuit Court of Appeals for the First Circuit, 12 Fed. (2d) 194. During 1925 there were accrued and paid by the estate in connection with this suit legal fees .in the amount of $10,000. This amount was deducted as an expense in the income-tax return filed for the estate for 1925, but was disallowed by the respondent as being a charge against the corpus of the estate.

In support of their contention that the legal fees of $10,000 constitute an allowable deduction as an expense in determining the net .income of the estate for 1925 the petitioners rely on our decision in Florence Grandin, 16 B. T. A. 515, which was followed in Chicago Title & Trust Co., 18 B. T. A. 395. In those cases we held that attorney fees paid by trustees of a trust for services in prosecuting a claim for refund of Federal estate tax constituted an ordinary and necessary business expense and as such were allowable deductions in computing the net income of the trust. From the purposes of the trusts involved .in those cases, we reached the conclusion that the trusts were engaged in business; hence, our holding that the fees in question were an ordinary and necessary business expense.

In the instant case the testator’s estate was still in the process of administration during the taxable year, apparently for the sole reason that the suit respecting the estate-tax liability was pending. But be that as it may the petitioners have, with the exception of three sales of stock and the receipt of a small amount of dividends, not seen fit to furnish us with any facts indicating that the estate was engaged in business during the taxable year. Ordinarily the purpose of the administration of an estate is to collect together the assets, pay the debts and claims against the estate and make distributions of remaining assets according to the terms of the will or according to the law of the jurisdiction. The respondent’s demand for the payment of an additional estate tax would come within the classification of debts and claims against the estate and any action taken by the executors toward the settlement of it either by contesting it in court or by paying it would not constitute the carrying on of business, but would be the performance of a usual and ordinary duty arising from the administration of an estate. Consequently, any legal expenses incurred in performing such a duty would be in the nature of pure administration expenses.

Where a suit or action against a taxpayer is directly connected with or proximately results from his business, the expense incurred in defense of a suit or action is a business expense within the meaning of the income-tax law. Kornhauser v. United States, 276 U. S. 145. But where as here the expense was incurred in connection with a suit which was neither directly connected with nor proximately resulted from any business carried on by the estate, but which arose entirely in connection with the administration or settlement of the estate of the decedent, and related to a claim asserted against the estate, such expense can not be said to constitute an ordinary and necessary expense incurred in carrying on a business.

For the foregoing reasons we are of the opinion that our decisions in the cases relied on by the petitioners are not applicable here.

In John, A. Loetscher et al., Executors, 14 B. T. A. 228, reversed on another point in Loetscher v. Burnet, 46 Fed. (2d) 835, we held, that, for the purpose of determining the net estate of the decedent subject to estate'tax, attorney fees incurred in connection with a pro-' ceeding before this Board to redetermine a deficiency in estate tax are properly allowable as a deduction on the ground that such proceeding is an incident to the administration of the estate. We think the rule laid down in that case is applicable here, and accordingly hold that the deduction for legal expenses contended for by the petitioners was a charge against the corpus of the estate and is not deductible in determining net income for the taxable year.

The petitioners contend that the profit or loss on the sale of the shares of stock of the National Eeserve Bank, American Investment Securities Company and National Shawmut Bank should be computed on the basis of the cost to the testator or the value on March 1,1913, whichever is greater, all of the stocks having been purchased by the testator prior to March 1, 1913. The respondent has determined the gain or loss on the basis of the value of the stock on the date of the testator’s death, March 14, 1918, and contends that his action should be sustained.

With respect to the basis for computing the profit or loss on the sale of property by an estate prior to 1928, the Revenue Act of 1928 contains the following provisions:

SEC. 7 02. BASIS OB BROBERTY UBON SALE BY ESTATE-RETROACTIVE.
(a) If in tlie return of any decedent's estate for any taxable year preceding the taxable year 1928, the basis, upon which gain or loss realized upon the sale or other disposition of property acquired by the estate from the decedent was computed, was the value of the property at the time of the death of the decedent or was in accordance with the regulations in force at the time such return was filed, then the computation of such gain or loss shall be made upon such basis, unless claim for refund or credit in respect of such basis, or a written election not to come within the provisions of this subsection, has been filed by the estate before the expiration of the period of limitation for filing claims.
(b) In every other case the computation of the gain or loss realized by an estate in any taxable year preceding the taxable year 1928 from the sale or other disposition by it of property acquired by the estate from the decedent, shall be made on such basis as is in accordance with the law properly applicable thereto, without regard to any provision of this Act.

Since neither of the parties have made any reference to the foregoing provisions of the 1928 Act, and as we do not have before us facts upon which to determine the applicability of the provisions of subsection (a) to the proceeding, we must assume that the issue is to be disposed of on the basis of the provisions of subsection (b) and without regard to any provision of the 1928 Act.

The petitioners concede that the question here presented has been decided adversely to them by this Board in Dorothy Payne Whitney Straight, Executrix, 7 B. T. A. 177, and several subsequent cases citing and following our decision in that case. They contend that our decision in the Straight case was “ overruled ” by the Court of Claims in Elmhirst v. United States, 69 Ct. Cls. 295; certiorari denied, 282 U. S. 851. (Mrs. Straight having become Mrs. Elmhirst in the meantime.) Our decision in that case, however, is the view subsequently adopted by the United States District Court for the Southern District of New York in the case of Bankers Trust Co. v. Bowers, 23 Fed. (2d) 941, and by the Circuit Court of Appeals for the Sixth Circuit in the case of Eldridge v. United States, 31 Fed. (2d) 924.

In the Straight case, which was taken under submission by us prior to the enactment of the Revenue Act of 1926, the decedent acquired certain ¡property subsequent to March. 1, 1913. Upon his death the property passed to his executrix, who thereafter sold it. We held that under the Revenue Act of 1918 the basis for determining the gain or loss resulting from the sale was the value of the property at the date of the decedent’s death, and not the cost to the decedent. The tax involved was subsequently paid by the executrix, who thereafter under the name of Elmhirst brought suit in the Court of Claims for its recovery. Prior thereto that court in McKinney v. United States, 62 Ct. Cls. 180, had held that under the Revenue Act of 1918 the basis for determining gain or loss on the sale of stock by executors of an estate was the cost of the stock to the decedent or its value on March 1, 1913, and not the value as of the date of death of the decedent. Certiorari was denied in that case at 273 U. S. 716.

The court in the Elmhirst case, after considering among other things the question of the effect of the denial of the application for certiorari by the Sxipreme Court in the McKinney case, followed its decision in that case and entered judgment for the executrix. Certiorari having been denied by the Supreme Court in the Elmhirst-case, the petitioners now request that we reconsider the position heretofore taken by us on the question, overrule our prior decisions and enter a decision in the instant case in conformity with the rule followed by the Court of Claims in the McKinney and Elmhirst cases. As pointed out in the Straight case, we were aware of the position taken by the Court of Claims on the question as set forth in the McKinney case. With due deference to that court, we were at that time and still are unable to acquiesce in the viewpoint of the question taken by it. We are also unable to acquiesce in the view taken by the petitioners that the denial of certiorari by the Supreme Court in the McKinney and Elm-hirst cases has given those cases “ almost the full sanction of a decision by the Supreme Court.” We think our prior decisions on this question are correct and are applicable here. The action of the respondent is accordingly sustained. See Eldridge v. United States, supra; Bankers Trust Co. v. Bowers, supra.

The issue relating to the taxable portion of dividends is disposed of by the stipulation of the parties. The issue as to rents in the original petition is apparently abandoned. No evidence or stipulation relates to it and no discussion appears in the brief. On this issue the determination of the respondent is approved.

Reviewed by the Board.

Judgment will be entered m>4er Rule 50.

Black,

dissenting: I dissent from the prevailing opinion wherein it holds that legal expenses paid by the executors of an estate in the process of administration in defending an action for an additional Federal estate tax is not an allowable deduction in determining the net income of the estate for the. taxable year in which the payment was made.

The facts have been stated as a prelude to the prevailing opinion and need not be repeated. Section 219 of the Revenue Act of 1924, applicable to this proceeding, reads:

Seo. 219. (a) The tax imposed by Parts I and II of this title shall apply to the income of estates or of any kind of property held in trust, including—
* * * * * * *
(3) Income received by estates of deceased persons during the period of administration or settlement of the estate; and
SJs ’ * Jji :*c H5
(b) Except as otherwise provided in subdivisions (g) and (h), the tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, except that — ■ [exceptions not needed}.
*******

One of the deductions permitted a taxpayer in determining his net income under the provisions of section 212, above referred to, is prescribed in section 214 (a) (1) :

Seo. 214. (a) In computing net income there shall be allowed as deductions: (1) All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *.

In Muriel H. Wurts-Dundas, 17 B. T. A. 881, we held that attorney fees paid by the guardian of a minor’s estate, to assert her rights to one half of the net income of the trust estate of J. Bandas Lippincott during the life of Isabel A. Lippincott, were deductible expenses in computing the net income of the estate, because they constituted an ordinary and necessary expense in carrying on the business of guardian of the minor’s estate. Our decision was affirmed in Commissioner v. Wurts-Dundas, 54 Fed. (2d) 515. The court, in affirming our decision, said:

The sole question presented, is whether the attorneys’ fees paid by the guardian in 1923 were deductible from gross income as ordinary and necessary expenses paid during the taxable year in carrying on a trade or business.
That the guardian was acting in this litigation strictly in the discharge of its duties as such admits of no doubt. In so doing, it is beyond question that reasonable fees paid to attorneys to represent the guardian in an action to which it was a proper party were ordinary and, necessary expenses of the guardianship. Cf. Kornhauser v. United States, 276 U. S. 145, 152. If they were also expenses of a trade or business they were deductible, otherwise not. Such expenses are contrasted in the statute with personal, Jiving, or family expenses which are expressly made nondednctible by see. 215. That they were neither living nor family expenses is plain enough. Nor could they have been personal expenses since the guardian was acting only in a representative capacity to establish its rights as guardian. There is no difference in the nature of expenses incurred and paid for attorneys’ fees in securing additional income for the guardianship estate from expenses for the salaries of any employees to care for the income thus made available. When the guardian incurred and paid the expenses involved in this action, it was, to be sure, acting for the benefit of its ward but it was also acting in the performance of the duties required of it by law and to enable it to perform those duties in the furtherance of its business in doing its work as guardian.

Cf. Florence Grandin, 16 B. T. A. 515; Chicago Title & Trust Co., 18 B. T. A. 395.

I can see no distinction in substance between the claimed deduction which we have before us in the instant case and that which we had before us in Muriel H. Wurtz-Dundas, supra. The prevailing opinion attempts to draw such a distinction by citing John A. Loetscher et al., Executors, 14 B. T. A. 228, wherein we held that certain administration expenses, including the expenses incurred by attorneys in connection with the proceedings then pending before the Board, should be allowed as a deduction as a part of the administration expenses in determining the amount of decedent’s net estate subject to tax.

It should be pointed out that in the Loetscher case we had before us the determination of a deficiency in an estate tax. We held that petitioners had shown themselves entitled to take as a deduction in determining the net estate, $500 representing the amount disbursed in contesting the deficiency in estate tax then pending before the Board.

It seems to me that the situation we have before us in the instant case is somewhat different from what we had before us in the Loetscher case. In the instant case respondent has determined a deficiency in income tax against the executors of the estate of Frederick Ayer, not a deficiency in an estate tax. The taxable year before us is 1925 — seven years after the death of decedent, which took place in 1918. Returns of the executors for estate-tax purposes must be filed within one year after decedent’s death. See Regulations 68, relating to estate tax under Revenue Act of 1924. I fail to see how executors are going to get credit in determining estate tax due by decedent for attorney fees incurred and paid seven years after the death of the decedent.

Here we have before us an estate which in' 1925 is still in the course of administration and which in that year had taxable income and made a return of such income for taxation and took as a deduction attorney fees of $10,000 paid in that year in the course of carrying on the business of the estate.

I think it is deductible under the section of the statute which 1 have already cited and under the authority of the cases which I have cited.


author: MuedocK:

text:
    Wade L. Street, Minnie Livingston, and Jennie L. Mahon, as Executors of the Last Will and Testament of Jefferson Livingston, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 39515.
    Promulgated May 9, 1932.

      George E. H. Goodner, Esq., for the petitioners.

      Hartford Allen, Esq., and F. &. Gettle, Esq., for the respondent.
   OPINION.

MuedocK:

The parties agree that if the decedent sustained a net loss within the meaning of section 204 (a) of the Revenue Act of 1921, the amount of the loss was ample to wipe out income for 1924 so there would be no deficiency for the year. The taxpayer lias paid no tax. Our only question is to determine whether or not the facts in this case establish a “ net loss ” within the meaning of section 204 (a) of the Revenue Act of 1921, which is made applicable by section 206 (f) of the Revenue Act of 1924. Section 204 (a) provides that “ the term £ net loss ’ means only net losses resulting from the operation of any trade or business regularly carried on by the taxpayer (including losses sustained from the sale or other disposition of real estate, machinery, and other capital assets, used in the conduct of such trade or business)The Commissioner has held that the loss of 1923 was not a business loss within the meaning of the above section. The petitioners contend that it was a loss sustained by the decedent in his business on either one of the two following theories: (1) It was a loss sustained by decedent in carrying on and winding up the T. A. Snider Preserve Company business, or (2) it was a loss sustained by the decedent in the course of his business of buying and selling securities for profit regularly carried on by him over a period of years.

The decedent’s loss did not result from the operation or winding up of the T. A. Snider Preserve Company business, nor was this business regularly carried on by him in 1923. The corporation carried on its own business. It was engaged in the business of packing and canning food products. The decedent’s loss did not result from the business of packing and canning food products, but resulted from the sale of some stock. Plis was a capital investment loss. The corporate entity may not be disregarded in this connection. The corporation, for all we know, may have had a profitable year in 1923, but in any event, the loss in question did not result from the operations of that company during the year. The decedent may not have his net loss carried over on this first theory. Dalton v. Bowers, 56 Fed. (2d) 16, Anderson v. United, States, 48 Fed. (2d) 201; cf. Pabst v. Commissioner, 36 Fed. (2d) 614; Goldberg v. Commissioner, 36 Fed. (2d) 551; Bedell v. Commissioner, 30 Fed. (2d) 622; Schuette v. Anderson, 55 Fed. (2d) 902.

The petitioners next contend that the loss was sustained by the decedent in the course of his business of buying and selling securities for profit, which was a business regularly carried on by him over a period of years. We will assume, since we need not decide, that the decedent’s activities in buying and selling securities for profit were a business regularly carried on by him during the year 1923. The statute requires, in addition, that the net loss result from the operation of the business. It may include losses sustained from the sale of capital assets used in the conduct of such trade or business. The decedent’s ownership of the T. A. Snider Preserve Company stock was quite unlike his ownership of other stocks. He did not acquire or own the Preserve Company stock for the same purposes which he acquired and owned the other stock. He was not an ordinary stockholder in the Preservb Company as he was in the other companies. He was the principal, if not the sole owner of the company, its president, treasurer, and general manager. He was the principal person in the company and conducted its business affairs for it. The decedent, in his stock market activities, purchased only securities listed on the New York Stock Exchange; seldom sold securities in blocks larger than 100; was prompted in his purchasing and selling by market considerations; and traded actively. He made no effort to sell the Preserve Company stock in small blocks. It was not listed on the New York'Stock Exchange. He did not buy and sell it depending upon market fluctuations. He made no effort to sell less than all of his stock in this company, i. e., either complete ownership of the corporation or at least a majority interest. The Preserve Company stock was not an asset used in the conduct of the business of buying and selling stocks and bonds, but was an asset quite apart from that business and held for an entirely different purpose and under different circumstances. It had no relation whatever to that business. Some of the capital assets used in the conduct of that business were shares of stock similar to the Preserve Company stock, but there the similarity ends. Under such circumstances we hold that the loss did not result from the operation of a business of buying and selling securities regularly carried on by the decedent.

Judgment will l>e entered for the respondent.


author: Van Fossan:

text:
    Leonard Marshall Wright, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45508.
    Promulgated May 9, 1932.

      Watson Washburn, Esq., for the petitioner.

      John D. Kiley, Esq., for the respondent.
   OPINION.

Van Fossan:

In J. V. Leydig, 15 B. T. A. 124; affd., 43 Fed. (2d) 494, we stated “ the rule to be that income per se can not be assigned to relieve the assignor of the tax levy, but where the thing assigned was a property right, real or personal, productive of income, income thereafter arising from such property is income to the assignee by virtue of his ownership.”

A situation very similar to the instant case was considered by the Board in Charles W. Walworth, 6 B. T. A. 788. There petitioner signed a contract on November 29, 1920, to sell his home for $115,000, receiving $25,000 on account. Pursuant to a previous oral promise-, on December 29, 1920, he deeded a one-half interest in the property to his wife, at the same time assigning to her a one-half interest in the contract to sell. The closing took place on January 8, 1921. The husband, with the wife’s consent, deposited the entire purchase price in his personal bank account, crediting his wife with one-half thereof on his books of account and subsequently turning over to her an equivalent amount of assets. The Board held that the wife effectively acquired a one-half interest in the property and the contract to sell and when the sale was later consummated she -was taxable with one-half the profit.

If there be any substantial difference between the above case and the case at bar the advantage thereby accruing is all with the petitioner. In the instant case the deed to the wife preceded the signing of the contract to sell. The contract to sell was actually signed by both petitioner and his wife, no assignment being involved. Further, we note that the purchase money was paid in two checks, one each to the petitioner and his wife, and that petitioner never received or controlled in any way the share intended for his wife, a more conclusive state of facts than obtained in the Walworth case.

The reasoning which impelled the Walworth decision, which has been cited with approval in Oscar Deinert, 11 B. T. A. 651; J. V. Leydig, supra; and William Ernest Seatree, 25 B. T. A. 396, we believe to be sound and to apply with equal or greater force in the instant case.

The transfer of the undivided one-half interest in the corpus of the property preceded the sale. This transfer was of a very real interest in the property itself and was not a mere assignment of income. The present case presents a consistent treatment — an expressed intention to deed half the property to the wife, the deed in pursuance of the intention, the joining of both husband and wife in the contract to sell and the consequent deed, the individual payments to each, and the permanent retention of the proceeds by each.

Under these facts we hold respondent to be in error in taxing the entire profit to petitioner.

Decision will be entered for the petitioner.


text:
    Arthur L. Lougee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45391.
    Promulgated May 10, 1932.

      Nelson B. Vanderhoof, Esq., for the petitioner.

      W. E. Wattles, Esq., for the respondent.
   OPINION.

Van Fossan:

Whether a payment is a gift depends, first, on the intention of the alleged donor. If the intention be present, then the acceptance and factual accomplishment are important elements. If the intention of the donor be absent it matters not how the recipient considered or treated the payment.

Intention may gathered from expressed purpose or inferred from surrounding facts and circumstances. Here the record reveals that Greenwood promised orally to pay an additional year’s salary. When asked to put the promise in writing he complied, again characterizing the same as salary. Though he suggested that “ in a way these future payments are not in the nature of salary, but are rather an honorarium, he went further and clearly expressed the reason impelling the payments as in recognition of an obligation on our part to one who has served the corporation for over forty years earnestly and faithfully.” This statement clearly shows the payments to have been considered by Greenwood to be in consideration of the services rendered and, therefore, additional compensation.

In the next communication, that terminating the payments, Greenwood again suggests the consideration for the payments when he says, “ I hope you will feel even though the time has been shortened a quarter, that the corporation has treated you fairly.”

Corroborative of the above is the entry on petitioner’s employment record, “ Mr. Lougee’s salary is to continue for one year * *

But perhaps more persuasive as showing the corporate intention are the facts that the books of the corporation showed the payments as expense items and the corporation claimed the same as deductions in its tax return.

Thus the record of the company, consistently from first to last, negatives the contention of petitioner that the payments were gifts. That being our conclusion, the intention is absent, and it is unnecessary to consider other elements. See Schumacher v. United States (Ct. Cls.), 55 Fed. (2d) 1007, and cases cited.

Eeviewed by the Board.

Decision will he entered' for the respondent.


author: Black :

text:
    Estate of Edward M. Marble, Deceased, Standard Trust & Savings Bank of Chicago, et al., Executors, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 40622.
    Promulgated May 10, 1932.

      J. G. Ristine, Esq., for the petitioner.

      Eugene G. Smith, Esq., for the respondent.
   OPINION.

Black :

In the stipulation of facts filed with the Board the petitioner has waived several issues and the respondent has conceded that the item of $5,000 representing the valuation of five $1,000 Eddy Paper Company bonds, included by him in the taxable estate of' petitioner, is not taxable for Federal estate tax purposes, pursuant to the provisions of section 303 (a) (2) of the 1924 Eevenue Act, having been purchased with the proceeds from the sale of $5,000 par value Wilson and Company bonds previously taxed within five years prior to the date of death of the decedent, Edward M. Marble. The only remaining issue for decision of the Board is the following:

Did the respondent erroneously include in the gross estate of petitioner, subject to Federal estate tax, an item of $27,500 representing the value of certain real estate situate in the State of Illinois, under the provisions of section 302 of the 1924 Revenue Act ?

The applicable provisions of the Revenue Act of 1924 read as follows:

Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated:
(a) To the extent of the interest therein of the decedent at the time of his death which after his death is subject to the payment of the charges against bis estate and the expenses of its administration and is subject to distribution as part of his estate;
****** *

This statute must be construed conjunctively and not disjunctively; in other words, the value of the interest of the decedent is not to be included unless it is (a) “ subject to the payment of the charges against his estate ” and (b) “ the expenses of its administration,” and (c) “is subject to distribution as part of his estate” — not one, but all three provisions must be met. United States v. Field, 255 U. S. 257; Crooks v. Harrelson, 282 U. S. 55.

At common law, real estate of a decedent was not subject to the payment of his debts, nor to the payment of expenses of administering his estate. This rule of the common law is in force in Illinois, except to the extent it has been modified by statute. It has been modified to some extent, as will be seen by an examination of Smith’s Illinois Revised Statutes, ch. 3, par. 99, which is printed in the margin.

From a reading of the article of the Illinois statutes printed in the margin it will be seen that if a decedent leaves debts and his personal property is insufficient to pay them, the executor or administrator may, by complying with the terms of the statute, secure an order of the proper court to sell real estate and out of the proceeds of the sale pay not only the debts of the decedent, but also the expenses of the administration. Upon this point there seems to be no doubt.

Petitioner seeks to bring the instant case within the rule applied by the Supreme Court to real estate situated in the State of Missouri, in Crooks v. Harrelson, supra. But the situations are not the same. The Missouri statute modifies the common law rule only to the extent that the real estate is subject to the payment of the debts of the decedent in case decedent’s personal property proves insufficient for that purpose. It makes no provision that any part of the costs of administration can be paid out of decedent’s real estate. As to administration expenses, the common law rule in Missouri remains unchanged. All this was explained by the court in Crooks v. Harrelson, supra. As we have already pointed out, the Illinois statute not only provides for the payment of the debts of the decedent out of his real estate, where the personal property is insufficient for that purpose, but also provides for the payment of the costs of administration under the same state of circumstances. McKnelly v. Conley, 210 Ill. App. 609.

The petitioner cites the case of Fitzgerald v. Glancey, 49 Ill. 465, in support of its contention that in Illinois real estate can not be sold to pay administration expenses. In that case, the Supreme Court of Illinois held that where, at the time letters of administration are granted, there are no debts existing, and no question of distribution requiring the intervention of an administrator, the expenses of administration are the result of unnecessary interference and can not be regarded such a debt as would justify a proceeding to sell the lands to pay it. Such costs and expenses are not due by the deceased and only arise from the officious and unnecessary intermeddling of the administrator. The court viewed this case as an attempt to pervert the statute relating to the administration and settlement of deceased persons to purposes not contemplated by the statute, and refused to recognize it. The petitioner also cites Walker v. Diehl, 79 Ill. 473, in which case the Supreme Court of Illinois quoted with approval the rule laid down in Fitzgerald v. Glancey, supra, and said, “ The lands of one dying intestate descend to the heir. The administrator takes no estate or title in the lands. He has only a bare naked power to sell the lands for the payment of debts existing at the time of the death of the decedent, in case the personal property is insufficient.”

We have been cited to no Illinois case which holds that real estate can not, in any event, be sold to pay expenses of administration. The above cases cited by petitioner we do not regard as being in point.

Petitioner lays much stress on the fact that in the instant case it has been stipulated by the parties that at the time of the death of the said Edward M. Marble, on August 8, 1925, sufficient personal property was available to pay all the debts and administration expenses of his estate. From this petitioner argues that under the facts agreed upon it would bave been impossible under the Illinois statute to bave subjected decedent’s real estate to the payment of his debts or any part of the cost of administration because there was ample personal property to meet all such charges and expenses. Therefore, argues petitioner, the rule applied by the Supreme Court in Crooks v. Harrelson, supra, should apply in the instant case. This same contention was made in First Trust Co. v. Allen, 51 Fed. (2d) 1069. In that case the decedent at the time of his death owned lands in the States of Missouri, Iowa and Nebraska. The Commissioner included the value of all such lands as a part of decedent’s estate. The executors sued for a refund in the District Court of the United States for the District of Nebraska, on the ground that none of decedent’s real estate should have been included as a part of his gross estate. The court in its decision excluded the value of the lands situated in Missouri, following Crooks v. Harrelson, supra, but approved the action of the Commissioner in including the value of lands situated in Iowa and Nebraska. In support of its decision in that respect, the court said:

It appears clear to me that under the Nebraska and the Iowa statutes lands belonging to a decedent at the time of his death are subject to the expenses of its administration and are also subject to distribution as part of his estate. It is true that in the matter of procedure and as concerning only the order in which the different kinds of assets shall be applied in the course of administration, personal property must be used first, and then realty. But both are to be resorted to if necessary. That being so both are “ subject ” within the meaning of the statute.
It is argued that in .particular estates like this one, where there is plenty of personalty, the lands are not “ subject ” to the charges against the estate or expenses of administration because all such disbursements will be made out of the personalty and the lands will not be so applied. The argument appears to me to be without merit.

We agree with the conclusion of the court on ting point and deny petitioner’s assignment of error with reference thereto.

The petitioner makes the further contention that the real estate of a decedent in the State of Illinois is not subject to distribution as part of his estate, but descends, eo instanti by operation of law, on the heir at law, and no other person is seized thereof for any purpose. In support of its theory that real estate in Illinois is not “subject to distribution” within the meaning of section 302 (a), Revenue Act of 1924, petitioner cites Hopkins v. McCann, 19 Ill. 112, decided by the Supreme Court of Illinois in 1857, in which it is stated:

On intestacy the title to real estate is thrown, eo instanti, by operation of law, on the heirs at law, and no other person is seized thereof for any purpose, or authorized to exercise any act of ownership over it, save in the case of a guardian over the estate of wards. The administrator cannot meddle with it; he cannot employ any part of the personal assets, to the payment of taxes, or save them from forfeiture on account of non-payment; he represents and controls only the personal assets. Such power as he may have over the real estate, only commences when a deficiency of those assets, to pay debts against the intestate, is discovered. He then becomes not seized or possessed of such estate, but the instrument by which a sale of it can be held on application to the proper court, in which application the heir must be a party.

A similar issue was raised in Crooks v. Harrelson, 35 Fed. (2d) 416, where it was contended that the phrases “ subject to the payment of the charges against his estate,” “ the expenses of its administration,” and “ subject to distribution as part of his estate,” were all anciently used in connection with personalty only; that Congress knew this, and accordingly used the phrases with their ancient technical meaning, and as relating solely to personal property. In disposing of this contention the court said:

Furthermore, the argument of appellant, based upon the ancient technical meaning of the words used in section 402 (a), goes too far and defeats itself. The word distribution ” as applied to estates meant at common law the division of estates of intestates only. It was not properly applied to testate estates. 18 C. J. 803; Rogers v. Gillett, 56 Iowa, 266, 9 N. W. 204. If, therefore, the ancient technical meaning is applied in section 402 (a), personal property of intestate estates only would be covered, while personal property passing by will would not be included. Such a result plainly could not have been intended by Congress.
Our conclusion on this branch of the case is that the language of section 402 (a) is not to be given any ancient technical meaning, b'ut is to be read giving to the words their ordinary, popular meaning; and that, when so read, both real and personal property are included.

Irrespective of the ancient technical meaning of the words, the error, as we view it, in the position of the petitioner is that under the Illinois statutes, as regards descent, no distinction is made between real or personal property. As showing that real estate is subject to distribution under the statutes of Illinois, one has only to read the Illinois Statute of Descent and Distribution. Paragraph 1, section 1, of chapter 39, Illinois Statutes, reads as follows:

That estates, bbth real and personal, of residents and nonresident proprietors in this State dying intestate, or whose estates or any part thereof shall be deemed and taken as intestate estate, after all just debts and claims against such estate are fully paid, shall descend to and be distributed in manner following, to-wit: [Here sets out the persons to whom such property descends.]

Accordingly, this contention of the petitioner is denied. We hold that, within the meaning of section 302 (a) of the Revenue Act of 1924, the lands belonging to the decedent at the time of his death were subject to the expenses of administration and were also subject to distribution as part of his estate. This being so, we approve the action of the Commissioner in including the value of decedent’s real estate as a part of his gross estate.

Reviewed by the Board.

Decision will be entered under Bule 50.

      When the executor or administrator has made a just and true account of the personai estate and debts to the county court, and it is ascertained tliat tbe personal esate of a decedent is insufficient to pay tbe just claims against his estate, and there is real estate to which such decedent had claim to title, such real estate, or such portion as may be necessary to satisfy the indebtedness of such decedent, and the expenses of administration, may be sold in the manner herein provided.