author: Murdock:

text:
    Estate of Herbert G. Lowe, Deceased, Malcolm B. Lowe and Donald V. Lowe, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89144.
    Promulgated July 19, 1938.

      Lawrence A. Baker, Esq., and Stanley M. Moffat, Esq., for the petitioners.

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

Murdock:

The only question for decision in this proceeding is whether the transfer of June 30, 1931, was made in contemplation of death within the meaning of that term as used in section 302 (c) of the Revenue Act of 1926, as amended. The Commissioner has determined that it was made in contemplation of death and the petitioners had the burden of showing that it was not so made. The Supreme Court, in United States v. Wells, 283 U. S. 102, discussed at length the meaning of the term and said that the facts in each case must be carefully scrutinized to determine the dominant motive of the donor. If that dominant motive was one associated with life rather than with death, then section 302 (c) may not apply.

That test has been applied to the evidence in the case. It is quite clear that the decedent had conceived a plan of training his sons in his business and of having them take over that business when they had demonstrated their ability to manage and operate it. The plan originated long before 1931. It was consummated in the transfer of June 30, 1931. The provision for paying the income of the trust to the decedent’s wife for her life was incidental to the main purpose of giving Donald immediate control of the corporation through the power to vote the stock and of making present provision for the ultimate division of the stock between the two sons.

There is some evidence to indicate that this disposition was in the nature of or a substitute for a testamentary disposition of a large part, if not the bullí, of the decedent’s property to the natural objects of his bounty. However, the evidence preponderates at least slightly in favor of the view that the decedent wanted his son to have control at once, during the lifetime of the decedent, and wanted only to assure his wife of means during her life. If his wife had predeceased him, the sons would have come into full ownership of the shares during their father’s lifetime. He intended to continue his interest and aid in the'business. His health and activity somewhat negative any testamentary aspect. His sons were actually managing the business and had been for several years. He apparently thought that the time had come to reward them in accordance with his plan and agreement, so that during the remainder of his life he could see them in active control and aid them in their efforts to capably assume full control and eventually ownership of the business. As has been said, the evidence is not all one way, but it does preponderate slightly in favor of the petitioners’ contention.

Decision will he entered under Rule 50.


source: Caselaw Access Project

author: Leech :

license: Public Domain

text:
    The Oak Woods Cemetery Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 77321, 80932.
    Promulgated July 20, 1938.

      Paul E. Shorb, Esq., and John A. Stolf, O. P. A., for the petitioner.

      W. R. Lansford, Esq., and E. L. Weber, Esq., for the respondent.
   OPINION.

Leech :

In its returns for 1931 and 1932, petitioner, using values of $1.50, $1.60, $2 and $3, depending on the section or subsection from which sold, reduced the amounts received from the sale of burial spaces by $49,247.91 and $43,586.16, respectively, as representing the fair market value on March 1, 1913, of space sold in the two taxable years. The respondent, in determining the deficiencies, allowed much smaller reductions, $5,036.26 for 1931 and $4,448.83 for 1932, computing them on the basis of 23 cents per square foot and on smaller amounts of footage than were actually sold by the petitioner and used by it in its returns. He made no allowance for interior wastage. We have found as a fact that the proper amounts to be used as bases in reducing the amount realized in the taxable years are $9,926.19 for 1931 and $8,676.09 for 1932.

The respondent has cited a number of cases which hold that a cemetery company does not dispose of the fee simple title to its land and the purchaser of a lot does not acquire a fee simple title but merely a license or easement to use the land for burial purposes. However, it is apparent that the purchaser of a cemetery lot does acquire a property right in the lot which the law recognizes, which can pass to his heirs or representatives at his death, and which may be enjoyed as long as the ground continues to be used as a cemetery. People ex rel. Paxton v. Bloomington Cemetery Association, 353 Ill. 534; 187 N. E. 455; Brown v. Hill, 284 Ill. 286; McWhirter v. Newell, 200 Ill. 583; Mount Hope Cemetery Association v. New Mount Hope Cemetery Association, 246 Ill. 416; Commiunity Mausoleum Co., 33 B. T. A. 19. The respondent agrees that the amount ■which the petitioner received during the taxable years may be reduced by a basis in order to determine the portion of it that represents taxable income, even though the fee was not sold. Cf. International Cigar Machinery Co., 36 B. T. A. 124; William Robert Farmer, 1 B. T. A. 711. Neither party has presented any argument showing that the basis should be different from that part of the fair market value on March 1, 1913, of the unsold land itself, which is allocable to the lots or burial rights sold in the taxable j^ears.

Section 113 of the Bevenue Acts of 1928 and 1932, which are controlling here, provides that the basis for gain or loss from the sale or other disposition of property acquired prior to March 1, 1913, shall be the cost of such property or its fair market value as of March 1, 1913, whichever is greater. The purpose of the provision was to permit a taxpayer to recover his capital investment tax free. Cf. United States v. Ludey, 274 U. S. 295. During 1931 and 1932, the petitioner sold burial space in its cemetery, which space was a part of the land owned and held by it for such use on March 1, 1913. The only property involved in these profitable transactions which had any basis for gain or loss was the land. Mount Hope Cemetery Association, 37 B. T. A. 671. The petitioner’s basis for gain or loss upon the disposition of that remaining burial space in its cemetery was the cost of the land, including improvements, or the fair market value on March 1, 1913, whichever was greater. No contention having been made by either party that the cost on the basic date was in excess of the fair market value and the proceedings having been presented on the theory that it was not, we conclude that the fair market value on March 1, 1913, was greater than cost. Consequently, the basis which petitioner is entitled to deduct before any excess realized from the disposition of burial space is taxed, is the fair market value of the land on March 1,1913.

The total basis which the petitioner was entitled to recover from the disposition of its burial space after March 1, 1913, was the same amount, irrespective of whether the entire area was sold in one transaction or whether sold in separate parcels over a long period of years. After the entire area is sold the total of the bases for space sold in the various years should be identical with the value of the unsold area on the basic date. Therefore, the aggregate of the bases for all of the separate burial space can not exceed the fair market value on March 1, 1913, of the unsold area on that date, considered as a whole. Cf. Helvering v. Twin Bell Oil Syndicate, 293 U. S. 312; James Couzens, 11 B. T. A. 1040, 1161. It is thus immaterial whether the basis applicable to space sold in 1931 and 1932 be determined directly or whether the value of the entire unsold area on the basic date be determined first and an allocation then made to the space sold in these years. Cf. Trustees of New York & Brooklyn Bridge v. Clark, 137 N. Y. 95; 32 N. E. 1054.

In determining value the inquiry should be as broad as possible, with consideration being given to all pertinent, available information. The record before us contains opinion testimony of values by witnesses for both petitioner and respondent. It also contains a stipulation of facts, together with documentary evidence. After giving full consideration to all of this evidence, it is our duty to determine a basis. If such evidence indicates that the values given by petitioner’s witnesses are too high and those given by respondent’s witnesses are too low, it is incumbent on us to determine an intermediate value which the evidence supports. Uncasville Manufacturing Co. v. Commissioner, 55 Fed. (2d) 893; Safe Deposit & Trust Co. of Baltimore, Executor, 35 B. T. A. 259. Although absolute certainty is impossible, we must make as close an approximation as possible. Cohan v. Commissioner, 39 Fed. (2d) 540; Doric Apartment Co., 32 B. T. A. 1187; aff'd., 94 Fed. (2d) 895.

The petitioner contends that the fair market value of its unsold cemetery lands on March 1, 1913, was at least $2 per square foot. The alternative argument is made that the values of $1.50, $1.60, $2, and $3 per square foot, depending upon the sections or subsections involved, used in its returns for the years in controversy, were correct. Although in determining the deficiencies, respondent used a value of 23 cents per square foot on the basic date, he now asks us to find that such value was not in excess of 30 cents per square foot.

In support of the principal and alternative values for which petitioner contends, it relies on sales of burial space on or about the basic date, the offer of the National Construction Co. in 1912, the opinion testimony of its president and two other cemetery men, and the appraisal made by Howell and Budd about 1920.

Actual sales of similar property, occurring on or about the basic date, are substantial evidence of value, here. Elmhurst Cemetery Co. v. Commissioner, 300 U. S. 37; Fairmount Cemetery Association v. Helvering, 92 Fed. (2d) 496; West View Cemetery Association v. Commissioner, 95 Fed. (2d) 714. We do not, however, understand the Elmhurst case to require that the value in all cases is the amount for which other comparable burial space was selling on the basic date. Mount Hope Cemetery Association, supra. If the court in the Fairmount Cemetery Association or West View Cemetery Association cases interpreted the Elmhurst case differently, we respectfully disagree. The court in the Fairmount case specifically recognized that “it is reasonable and fair to give consideration to the time element— the period of holding before a market can be had.” The time element is applicable to the whole and not to the lots involved in any particular year, since there can not be a change in the basis from year to year. Reinecke v. Spalding, 280 U. S. 227. In this connection it is to be observed that in no year prior to 1913 had the average selling price of burial spaces per square foot approximated the values for which petitioner contends; that in 1913 the average selling price was only $1.3942 per square foot; that it was not until 1920 that it reached $1.50, and not until 1924 that it reached $2.

Petitioner’s president, Farwell, an experienced Chicago cemetery man and familiar with the land and selling prices on the basic date. was of the opinion that the unsold burial space had a fair market value of $2 per square foot on that date. In forming that opinion he made no allowance for the period of time it would have to be held before being sold for burial space. His opinion was that no such allowance was warranted because of the increase in value. He admitted that the cost of selling the land at $2 a square foot on the basic date would have been “considerable” but failed to state what he thought such cost would have been. He mentioned no basis upon which it could be estimated. He further stated that his opinion was, to a great extent, based on a desire to find an easier method of computing allowances for value than by using different values for different parts of the land, and the further premise that he did not know what the future of the property would be. Another witness for petitioner, Johnson, who was president of another cemetery in the Chicago area and familiar with petitioner’s property on March 1, 1913, valued the burial space at $1.60 to $1.10 a square foot on the basic date. His opinion was based on what he considered was the established fair retail selling price of the ground. Another witness for petitioner, Schrade, who is on the board of directors of another cemetery in the Chicago area and was familiar with petitioner’s unsold lands at March 1, 1913, was of the opinion that the value was $1.15 a square foot. He thought that such amount was the average selling price per square foot received by petitioner for space sold about the basic date. Having that in mind and his own judgment of the fair value of the land, he reached the opinion expressed. He gave no consideration to selling cost or future operating costs of the cemetery. The record is not clear as to how Howell and Rudd arrived at the values used in their appraisal. It shows, however, that consideration was given to retail selling prices of burial space, but what weight was accorded them is not disclosed.

The testimony of petitioner’s president indicates that the value to which he testified is subject to a considerable reduction, if for no other reason, because it does not reflect the cost that would have been required to have sold the land on the basic date. The opinions of petitioner’s witnesses Johnson and Schrade Avere based on what they considered to be retail selling prices. Often sales of comparable property on or a,bout the basic date are regarded as the best evidence of the value of the property in dispute. However, there are many situations where that is not true. Among these are cases involving a large number of units which produce no income until sold and which, due to a limited demand therefor, could not, reasonably, have been expected on the basic date to be entirely disposed of until the expiration of a considerable period during which time the risks of business had to be assumed. The reason the current retail price is not determinative in valuing the whole number of units in such situations is that such a rule would confuse the total amount of gross sales, ultimately expected, with the fair market value on the basic date. Bennett Gravel Co., 10 B. T. A. 513; Alfred A. Wheeler, 11 B. T. A. 579; Gould Paper Co., 26 B. T. A. 560, 576; H. D. Shelden, 25 B. T. A. 5; Cape Henry Syndicate, 30 B. T. A. 794; Mount Hope Cemetery Association, supra.

On March 1,1913, the petitioner had a large amount of land which it was holding for sale as burial space. There was not only a limited demand for this space but there was a large available supply of it in the Chicago area. Any reasonable person on March 1, 1913, would have foreseen that, in all probability, all of the space could not be disposed of until the lapse of a long period of years. Considering the space sold during the entire period from 1865 to the basic date, about 35 years more would have been required within which to dispose of all of petitioner’s salable land. On the basis of sales during the five-year period immediately preceding 1913, about 55 years in addition would have been required. The unsold portions would not carry themselves and petitioner would get no return on its investment until the land was sold. Expenditures of various kinds would be required and some expense would be incurred in making sales.

Fair market value is the price at which any property would change hands between a willing buyer and a willing seller where neither is under any compulsion. Each of the parties would consider the various factors involved, including the current retail selling price of burial space, the demand for and available supply of space in the area, the probable delay in disposing of all the property and receiving the purchase price therefor; the risk to be assumed, and selling and other expenses involved prior to a disposition of the property. They would probably consider the return obtainable from the use of a like amount of money in a different kind of investment which entailed no greater risk. A willing purchaser would demand some prospect of profits to compensate him for the use of his money, his time, and his efforts, as well as for assuming the risk involved. Values based on retail selling prices do not give proper consideration to the matters involved in a realization of such prices. Cf. Stern v. Paper, 183 Fed. 228.

On the basic date, petitioner had 2,453,916.78 square feet of salable burial space, exclusive of applicable interior wastage. Applying the highest values stated by its witnesses, $2, and the lowest, $1.60, to the salable footage, results in aggregate values of $4,907,833.56 and $3,926,268.85. The record discloses an annual return on petitioner’s perpetual care fund investments of between 5 and 6 percent. However, dropping to 4 percent as a return on safe investments, an investor’s annual income on the foregoing amounts would have been $196,313.34 and $157,050.75, respectively. Cf. Simpson v. United States, 252 U. S. 547. In no year was petitioner’s annual net income from all sources even comparable to the lower of those amounts. Its income of $85,074.15 for 1892, the highest annual return shown by the record, exceeded, only slightly, one-half of the lower of such amounts and its average annual net income of $58,056.94 for the period 1881 through 1913 was less than one-half. Its income of $50,247.48 for 1912 and income of $53,236.17 for 1913 were each only about one-third of the lower amount. And, for most of the years following-1913 when petitioner’s income from the sale of burial space was reported after deducting March 1, 1913, values thereof somewhat comparable to the values petitioner’s witnesses state here, the annual net income was decidedly lower. If it be assumed that the net income reported in petitioner’s returns for the period following the basic date through 1932 was understated and that all dividends, totaling $930,000, paid during that period were entirely from earnings and represented its income for the period, then the average annual income was only $48,947.37, which is even more unfavorable than the results of operations prior to March 1, 1913. While past and prospective earnings afford but one test of value, they show here quite conclusively that the values expressed by petitioner’s witnesses were grossly excessive. In our opinion the evidence as a whole shows that such values were greatly in excess of that contemplated by the term fair market value.

What has been said above is applicable to petitioner’s alternative contention respecting values of $1.50 to $3 per square foot for burial space, dependent on the section from which sold, as used by it in its returns.

In support of its contention for a valuation of $2 per square foot petitioner relies on the offer of the National Construction Co. made in September 1912, for 50,000 square feet of land in one of the unsubdi-vided sections. The evidence clearly establishes that this was not an outright offer to buy at a stated price, but was a proposal to enter into business with petitioner with respect to the erection of a large mausoleum and the sale of burial space therein. It was an undertaking into which petitioner considered it was not prepared to enter because of the risk involved. The proposal therefore does not support the contention.

In this connection it is to be observed that if petitioner’s cemetery-land had the values on the basic date for which it now contends and if, as on petitioner’s theory, such land was thereafter increasing in value, petitioner should reconcile these very substantial values with the relatively small values that it placed upon the land in its capital stock tax returns year after year. No such reconciliation is attempted and, we think, none can be made.

The respondent submitted the testimony of two witnesses respecting value, neither of whom was familiar with petitioner’s property on the basic date. One witness, Thomas, who had been on the property a number of times shortly before the hearing, was of the opinion that petitioner’s entire properties, as a unit, including its cemetery land, had a fair market value on the basic date of $987,600. He expressed no opinion as to the separate value of the land or the separate value of the other assets, nor did he furnish any basis for making an allocation of $987,600 between the land and the other properties. Since we are not called upon to determine the value of petitioner’s other properties, in addition to the land, his opinion furnishes little assistance. Respondent’s other witness, Lockwood, a Bureau engineer, expressed an opinion that the fair market value on the basic date was 30 cents per square foot. He had been on the property once. He had never been engaged in the cemetery business, had never bought or sold any cemetery lands, and knew of no sales of comparable properties around the basic date. The method used by him in reaching his opinion was to examine the data pertaining to petitioner’s sales expenses, earnings, and other related matters. From them he estimated what the future profits over an estimated period of years would be and, by the application of certain discount factors, reduced such future profits to their present worth as of the basic date. Often earnings are of much assistance in determining value and formulae or discount methods may be helpful where the evidence indicates that they are applicable and show the proper factors to be used. From the showing made by the witness we are not prepared to say that the value to which he testified can be approved as the fair market value of the property on the basic date.

Considering all the evidence before us, we have concluded that the petitioner is entitled to the allowances for value of burial space on March 1, 1918, as set out in our findings of fact, which are limited to the value of that space sold in the taxable years. We realize that others might fix other amounts and that plausible objection to our determinations might be made. However, that would be true with any determination that might be made.

The stipulation submitted by the parties shows that there is included in the unsubdivided land on the basic date, certain footage which would constitute interior wastage and would therefore be non-salable. In view of the fact that such footage was recognized by the parties as nonsalable, we have so recognized it in our determination of value which is made on the basis of the amount of net salable footage on the basic date as stipulated by the parties. Petitioner, who raised the issue as to an additional allowance for wastage, states on brief that it makes no contention for such an allowance where a valuation is made on the basis of net salable land. The issue therefore is decided adversely to petitioner. This opinion supersedes a memorandum opinion herein, entered May 2, 1938.

Reviewed by the Board.

Decision will Toe entered under Bule 50.

Tyson dissents.

       Tie respondent contends that petitioner’s earnings from other sources than the sale of burial space should not) be considered as having any effect on the value of the land on the basic date. Since the income from other sources involved the use of assets other than the land, the value of which is here being determined, there is merit in the contention. Gatliff Coal Co., 8 B. T. A. 726; aff'd., 36 Fed. (2d) 545; Eli J. Taylor, 9 B. T. A. 442. However, it is impossible from the evidence to malte even an approximate segregation of the two classes of earnings prior to the basic date. Since it is our opinion that a willing buyer and a willing seller on the basic date would have given consideration to earnings from other sources prior to that time and their effect on the disputed land values, we have considered them in reaching our conclusion here of such value on March 1, 1913. See Mount Hone Cemetery Association, supra.


author: Murdock :

text:
    The Sanford Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91217.
    Promulgated July 20, 1938.

      Theodore B. Benson, Esq., and Charles E. Foster, Jr., Esq., for the petitioner.

      Irving M. TuTlar, Esq., for the respondent.
   OPINION.

Murdock :

The petitioner contends that this dividend was constructively paid on November 29,1935, since it was then unqualifiedly subject to the demands of Mock, although it concedes that a corporation on a cash basis ordinarily may not be said to have paid a dividend by merely declaring it and crediting it on its books to the stockholder’s account. The respondent agrees that the dividend was regularly declared, but contends that it was not paid during the fiscal year. The statute allows a deduction for “dividends paid during the taxable year.”

The question seems to be novel and no direct authorities are cited. The petitioner argues by analogy from decisions and regulations holding that a stockholder is liable for tax on dividends constructively received by him where they are unqualifiedly subject to his demand. It may bo doubtful whether the facts in this record show constructive receipt by Mock prior to the close of the fiscal year on November 30, 1935. Payment was to be made by a cheek to be drawn by Mock, and a reasonable time might have to be allowed for him to learn the amount and draw the check. Constructive receipt is a principle sparingly applied. Perhaps it is never applied to the recipient’s advantage because to do so would be contrary to the purpose of the rule. However, constructive receipt would not necessarily show payment by the corporation where, in fact, there was none. That is the situation here. The statute allows the deduction only where the dividend was paid within the taxable year. The petitioner could have declared and paid the dividend earlier, but it actually did not pay it within its taxable year. Consequently, it has not shown that it is entitled to the deduction.

Decision wild be entered for the respondent.


author: Tyson:

text:
    Haggar Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89265.
    Promulgated July 21, 1938.

      O. D. Bmndidge, Esq., for the petitioner.

      Joe D. Hughes, Esq., for the respondent.
   OPINION.

Tyson:

For the calendar year 1933 the respondent determined a deficiency of $382.49 in income tax and a deficiency of $1,376.52 in excess profits tax against the petitioner herein.

This proceeding has been submitted upon a stipulation of facts which, together with the exhibits attached thereto, is adopted as oui findings of fact and included herein by reference.

The petitioner concedes as correct the deficiency of $382.49 in income tax. The sole issue is whether the petitioner may file a second or amended capital stock tax return for the year ending June 30, 1933, and thereby amend the declared value of its capital stock as reported in its first or original capital stock tax return for that year.

The petitioner, a Texas corporation, was in existence and doing business during the year 1933, and prior thereto, with its principal office and place of business in Dallas, Texas.

Pursuant to section 215 (d) and (f) and section 216 (a) of the National Industrial Recovery Act, 48 Stat. 195, 208, the petitioner on August 22, 1933, filed a capital stock tax return for the year ended June 30, 1933, setting out an original declared value of $120,000 for its entire capital stock, which was the par value thereof. Simultaneously the petitioner paid to the collector of internal revenue the capital stock tax of $120 shown to be due on that return. In filing the return the petitioner assumed that the law contemplated the declaration of the par value of its capital stock as shown by its charter rather than its actual value and the petitioner failed to give consideration to paragraph 3 of the “Instructions” attached to form 707, upon which the return was made.

Within the time for filing capital stock tax returns for the year ended June 30,1933, as extended by Treasury Decisions 4368 and 4386, the petitioner filed, on September 28, 1933, a second capital stock tax return for that year, in which it declared the value of its capital stock to be $250,000. On the same date it paid to the collector of internal revenue the capital stock tax of $250 shown to be due on that return. Such return was accepted by the collector on the assumption that it was for a corporation other than this petitioner, but upon disclosure that the two returns filed on August 22 and September 28, 1938, respectively, were for the same corporation, the petitioner was advised that the second return could not be accepted.

On or about August 9, 1937, the petitioner filed a claim for refund for the capital stock tax of $120 paid on August 22, 1933, and the claim was rejected by the Commissioner on November 26, 1937.

On or about August 13,1937, the petitioner filed a conditional claim for refund of the capital stock tax of $250 paid on September 28,1933, and on or about December 24, 1937, the Commissioner tendered a Treasury check payable to petitioner in the amount of $312.58 as a refund of the capital stock tax of $250 plus interest. The petitioner has not cashed that check and the petitioner’s tender of the check back to the Government has been refused.

On March 15, 1934, the petitioner filed its “Corporation income tax and excess-profits tax return for the calendar year 1933”, form 1120, on which it inadvertently computed its excess profits tax exemption at 12½ percent of $370,000, the total declared value shown in the two above mentioned capital stock tax returns. The petitioner now claims that its excess profits tax exemption should have been computed at 12½ percent of $250,000, the declared value of its capital stock as set out in its second capital stock tax return filed on September 28, 1933.

In determining the deficiency in excess profits tax, here in controversy, the respondent computed the exemption at 12½ percent of $120,000, the declared value of petitioner’s capital stock as shown in its original capital stock tax return filed on August 22,1933.

The question here presented was considered at length and decided adversely to petitioner’s contention in William A. Webster Co., 37 B. T. A. 800, and, with due respect for the United States Circuit Court of Appeals for the Sixth Circuit, we adhere to the rule there announced despite the contrary conclusion reached by that court in Glenn v. Oertel Co., 97 Fed. (2d) 495.

On brief and in one paragraph of four lines the petitioner presents the contention that the applicable provisions of the National Industrial (Recovery Act are unconstitutional if the tax is to be levied on the value of its capital stock as declared by the taxpayer rather than on its actual value. This raises a moot question here, since the pleadings raise no issue as to the actual value of the stock and the proof does not show its actual value. Moreover, the petitioner has failed to cite any authority in support of this contention or to make any argument with reference thereto and it is not apparent to us that the question of the constitutionality of the statute is so doubtful as to justify a holding that it is unconstitutional. Cf. Rita O'Shaughnessy, Executrix, 21 B. T. A. 1046; affd., 60 Fed. (2d) 235; certiorari denied, 288 U. S. 605. See also Chicago Telephone Supply Co. v. United States, 23 Fed. Supp. 471, wherein the United States Court of Claims held a later identical statute to be constitutional.

Decision will be entered under Rule BO.

       Sec. 215 (fl) Every corporation liable for tas under this section shall make a return under oath within one month after the close of the year with respect to which such tax is imposed * * * The Commissioner may extend the time for making the returns and paying the taxes imposed by this section, under such rules and regulations as he may prescribe with the approval of the Secretary, but no such extension shall be for more than sixty days.
      ⅜ ⅜ * * ⅝ * *
      Sue. 215 (f) For the first year ending June 30 in respect of which a tax is imposed by this section upon any corporation, the adjusted declared value shall be the value, as declared by the corporation in its first return under this section (which declaration of value can not be amended), as of the close of its last income-tax taxable year ending at or prior to the close of the year for which the tax is imposed by this section (or as of the date of organization in the case of a corporation having no income-tax taxable year ending at or prior to the close of the year for which the tax is imposed by this section). For any subsequent year ending June 30, the adjusted declared value in the case of a domestic corporation shall be the original declared value plus (1) the cash and fair market value of property paid in for stock or shares, (2) paid-in surplus and contributions to capital, and (3) earnings and profits, and minus (A) the value of property distributed in liquidation to shareholders, (B) distributions of earnings and profits, and (C) deficits, whether operating or nonoperating; each adjustment being made for the period from the date as of which the original declared value was declared to the close of its last income-tax taxable year ending at or prior to the close of the year for which the tax is imposed by this section. * * *
      *******
      Sec. 216 (a) There is hereby imposed upon the net income of every corporation, for each income-tax taxable year ending after the close of the first year in respect of which it is taxable under section 215, an excess-profits tax equivalent to 5 percentum of such portion of its net income for such income-tax taxable year as is in excess of 12½ percentum of the adjusted declared value of its capital stock ⅜ * * as of the close of the preceding income-tax taxable year (or as of the date of organization if it had no preceding income-tax taxable year) determined as provided in section 215. The terms used in this section shall have the same meaning as when used in the Revenue Act of 1032.


author: Haeron:

text:
    Montague, Miles & Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87651.
    Promulgated July 22, 1938.

      William H. West, Jr., Esq., for the petitioner.

      L. S. Young, Esq., for the respondent.
   OPINION.

Haeron:

The respondent contends that petitioner is a personal holding company under the provision of section 351 (b) (1) of the Revenue Act of 1934 and is subject to a surtax on its undistributed adjusted net income for the taxable year, together with a penalty of 25 percent of such surtax for failure to file a return for the year 1934 on form 1120-H as required by article 351-8 of Regulations 86. The applicable statute and regulations, so far as material, are set out in the margin.

The petitioner contends that it is not a personal holding company within the intendment of the statute.

The parties stipulate that more than 50 per centum of petitioner’s outstanding stock during the latter half of the taxable year was owned directly or indirectly by not more than five individuals, so that the question of whether it was a personal holding company within the statutory definition depends on whether 80 percent of its gross income for the taxable year was derived from royalties, dividends, interest, annuities and (except in cases of regular dealers in stock or securities) gains from the sale of stock or securities. The petitioner admits income from interest on loans, mortgages, Liberty bonds, and capital gain, comprising 79.64 percent of its gross income would be included in determining the necessary 80 percent, but contends that the action of the Commissioner in including in this class of income $700 realized in the taxable year as the difference between the unrecovered cost ($2,100) of the note of the board of public instruction and the payment thereon of $2,800 made in the taxable year was erroneous. If the $700 is included then 80 percent of the petitioner’s gross income was derived from sources enumerated in the statute and the petitioner comes within the statutory definition of a “personal holding company.”

The question is whether the profit of $700 realized in 1934 from payment on the note of the board of public instruction is “gain from the sale of stock or securities” within the meaning of the quoted phrase appearing in section 351 (b) (1) of the Eevenue Act of 1934. Section 351 of the Eevenue Act of 1934 is a new provision written into the revenue act for the first time in the year 1934. Subsection (b) (4) of the pertinent section states that, “The terms used in this section shall have the same meaning as when used in Title I.” It is this proviso that gives rise to much of the argument involved here because, having this proviso in mind, respondent construes the term “sale”, as used in the phrase quoted above from section 351 (b) (1), to have a broad meaning and to cover and include “exchange” of stock or securities. To support this construction of the term “sale” as applied to the transaction involved here, respondent refers to section 117 (f) of Title I of the Eevenue Act of 1934, quoted before in the margin. Eespondent argues that section 117 (f) is made applicable by section 351 (b) (4). Eespondent’s interpretation has been set forth in Eegulations 86, article 351-2 (5), quoted before in the margin but, in his brief, respondent states that his argument in this proceeding would be the same if no regulation had been issued and respondent thereby bases his argument chiefly on the phraseology and intendment of section 351 (b) (1).

The parties argue that determination of the main question necessarily requires deciding various subsidiary questions relating to whether the payment on the note in question falls within section 117(f). It is not necessary to set forth the various arguments. The main question involves construction of section 351 (b) (1), the terms of which are clear and unambiguous. Here, as in all proceedings, the question involved is to be decided with reference to the facts in the proceeding. A clear picture of the facts may avoid the confusion of much of the argument presented. Therefore, it is important to keep in mind the following. The petitioner held a note of the board of public instruction originally for $17,080.25, on which $8,680.25 remained due and unpaid at the time petitioner acquired the note. Respondent does not question the cost basis to petitioner of this note as amounting to $4,900. The payment petitioner received in 1934 was one of several annual installment payments on the note in accordance with the terms of the note. However, the installment payment on the note in 1934 resulted in admitted gain to petitioner of $700, by which amount the total payments then exceeded the petitioner’s cost basis of the note. Future payments on the note, due after 1934, will also be “gain” to this petitioner, if paid to it. These are the salient facts.

Assuming, without deciding, that the partial liquidation of a note comes within section 117 (f) as the “retirement of * * * notes * * * or 0ther evidences of indebtedness issued by any corporation (including those issued by a government or political subdivision thereof) * * *”, we fail to see that the issue here turns in any way upon the wording of section 117 (f). Section 117 of the Revenue Act of 1934 deals with capital gains and losses. It was enacted to clarify the confusion existing as to whether the retirement of bonds and other obligations was a “sale or exchange” within the meaning of‘ the capital gain section. The phrase “sale or exchange” appears throughout section 117. There is nothing in reports of the Congressional Committee to indicate that section 117 was enacted with any thought of application to the definition of personal holding companies set forth in section 351 (b) (1).

Turning then to section 351 (b) (1) we find that it speaks of “gains from the sale of stock or securities.” (Italics ours.) The liquidation or partial liquidation of an obligation evidenced by a note is not, to the holder thereof, a “sale” of the security. It is merely payment of an obligation according to its terms. We have so held with respect to the retirement of bonds. Cf. John H. Watson, Jr., 27 B. T. A. 463; Arthur E. Braun, Trustee, 29 B. T. A. 1161; Ernest W. Brown, 36 B. T. A. 178, 184. By statute, the retirement of bonds is now treated as an “exchange” for determining capital gains and losses (sec. 117 (f), Revenue Act of 1934), but Congress had not, in the Revenue Act of 1934, characterized retirement of bonds or other evidences of indebtedness as a “sale” thereof. In our opinion, the proviso set forth in section 351 (b) (4) does not have the effect of making section 111 (f) applicable in a question arising under section 351 and likewise, does not provide a foundation for interpreting the term “sale” as a broad term including a transaction that may be concluded to be an “exchange.” It is our view that the term “sale” in section 351 (b) (1) means a sale in the ordinary sense of the word. In the taxing statutes the terms “sale” and “exchange” appear separately in some instances, and in other instances the terms appear in conjunction with each other. But the two terms are not synonymous and have not been confused in the revenue laws. It appears that wherever Congress has intended to apply the terms “sale” and “exchange” of property it has written the individual terms into the statute, either alone or in conjunction with each other. If either or both terms did not cover a wide enough field Congress has then used such additional phrase as “other disposition” of property. We conclude, therefore, that Congress could not have intended that the term “sale” in section 351 (b) (1) should include “exchange” within its meaning. It may be, that, for the purposes of section 351 limitation of subsection (b) (1) to “gains from the sale of stock or securities” left a loophole through which some taxpayers might escape classification as personal holding companies and the surtax imposed on such companies. It appears that Congress recognized this very situation because, in the Eevenue Act of 1937, section 351 (b) of the then existing law was amended and section 353 (b) of the Eevenue Act of 1937 was written to include the term “exchange.” The 1937 amendment, however, was not retroactive. Eeference to the report of the Ways and Means Committee on the revenue laws of 1937 shows that the following explanation for the amendment is given:

Subsection (b) (of section 353, Act of 1937) includes as personal holding company income gains from the exchange of stock or securities. This is merely a clarifying amendment to carry out the intent of the existing law.

However, neither the amendment in 1937 nor the explanation thereof is decisive of the question as it arises under the Act of 1934 because there is no ambiguity in the pertinent provision of the Act of 1934. Cf. Penn Mutual Life Insurance Co. v. Lederer, 252 U. S. 523; Casey v. Sterling Cider Co., 294 Fed. 426.

We therefore conclude that in the transaction before us the gain petitioner realized from the partial liquidation of the note was not such gain as is covered by section 351 (b) (1) and that, accordingly, that gain does not bring petitioner within the statutory definition of a personal holding company for purposes of the surtax.

From the above conclusion, it follows that article 351-2 (5) of Regulations 86 goes beyond the statutory definition set forth in section 351 (b) (1) of the Revenue Act of 1934 in so far as it makes gains from exchanges of stock or securities a factor in classifying companies as personal holding companies. To this extent that part of the regulation in question becomes legislative in character, rather than an administrative construction of legislation, and must, therefore, be invalid. See Campbell v. Galeno Chemical Co., 281 U. S. 599; Burnet v. Marston, 57 Fed. (2d) 611; Penn Mutual Life Insurance Co. v. Lederer, supra; Morrill v. Jones, 106 U. S. 466; United States v. George, 228 U. S. 14; Ardsley Club v. Durey, 40 Fed. (2d) 293.

Reviewed by the Board.

Decision will be entered for the petitioner.

OppeR dissents.

       SEC. 351. surtax ON PERSONAL HOLDING COMPANIES.
      (a) Imposition or Tax. — There shall be levied, collected, and paid, for each taxable year, upon the undistributed adjusted net income of every personal holding company a surtax equal to the sum of the following:
      * * * * * * *
      (b) Definitions. — As used in this title—
      (1) The term “personal holding company” means any corporation [exceptions not material] if — (A) at least 80 per centum of its gross income for the taxable year is derived from royalties, dividends, interest, annuities, and * * * gains from the sale of stock
      or securities, and (B) at any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals. * * *
      * 5N ⅜ * * * *
      (4) The terms used in this section shall have the same meaning as when used in Title I.
      (c) Administbative Pbovisions. — All provisions of law (including penalties) applicable
      in respect of the taxes imposed by Title I of this Act, shall insofar as not inconsistent with this section, be applicable in respect of the tax imposed by this section * * *.
      SEC. 117. CAPITAL GAINS AND LOSSES.
      * * * * * ⅜ *
      (f) Retirement of Bonds, Etc. — Eor the purposes of this title, amounts received by the holder upon the retirement of bonds, debentures, notes or certificates or other evidences of indebtedness issued by any corporation (including those issued by a government or political subdivision thereof), with interest coupons or in registered form, shall be considered as amounts received ini exchange therefor.

        [Regulations 86.] Abt. 351-2. Classification of a personal holding company. — A personal holding company is defined as any corporation (other than a corporation specifically exempt), first, 80 per cent or more of whose gross income for the taxable year was derived * * * from the following sources:
      (1) Royalties. — * * *
      (2) Dividends. — * * *
      (3) Interest. — * * *
      (4) Annuities. — * * *
      (5) Cains from the sale of stoelc, or securities. — The term “gains from the sale of stock or securities” applies to all gains * s * from the sale or exchange of stock or securities includable in gross income under Title I. The term “stock or securities” includes shares or certificates of stock or interest in any corporation, * * * bonds, debentures, certificates of indebtedness, notes, * * * obligations issued by or on behalf of a Government, State, Territory, or a political subdivision thereof, etc. * * *.
      Abt. 351-8. Return and Payment of Tax. — A separate return is required for the surtax imposed under section 351. Such return shall be made on Eorm 1120H. In the case of a personal holding company which is a domestic corporation, the return is required to be made within the time prescribed in Section 53 * * *. If the Commissioner finds a deficiency in respect of the tax imposed by section 351, he is required to follow the same procedure which applies to deficiencies in income tax under Title I. The penalties applicable to the income taxes imposed under Title I, as well as the provisions of Title I relating to interest and additions to the tax, also apply to the surtax imposed by section 351. The administrative provisions applicable to the surtax imposed by section 351 are not confined to those contained in Title I but embrace all administrative provisions of law which have any application to income taxes.

       SEC. 353. PERSONAL HOLDING COMPANY INCOME.
      * * * * * * * *
      (b) Stock and Securities Transactions. — Except In the case of regular dealers to stock or securities, gains from the sale or exchange of stock or securities.


author: Hill :

text:
    W. S. Farish & Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87840.
    Promulgated July 22, 1938.

      Walter E. Barton, Esq., and J. L. Block, C. P. A., for the petitioner.

      DeWitt M. Evans, Esq., and Spalding Glass, Esq., for the respondent.
   OPINION.

Hill :

Section 104 of the Revenue Act of 1932, as amended by section 214 of the National Industrial Recovery Act, 48 Stat. 195, 207, applicable to petitioner’s taxable year ended October 31, 1934, provides that if any corporation, however created or organized, is formed or availed of for the purpose of preventing the imposition of any internal revenue tax upon the shareholders through the medium of permitting its gains and profits to accumulate instead of being divided or distributed, there shall be levied, collected, and paid for the taxable year upon the net income of such corporation a tax equal to 50 per centum of the amount thereof; and the fact that any corporation is a mere holding or investment company, or that the gains and profits are permitted to accumulate beyond the reasonable needs of the business, shall be prima facie evidence of a purpose to escape internal revenue tax.

For the purposes of this section it is further provided that net income shall include dividend deductions and interest on certain obligations of the United States which would bo subject to tax in the hands of an individual owner, but that the tax imposed shall not apply if all the shareholders of the corporation include, at the time of filing their returns, in their gross income their entire distributive shares of the net income of the corporation for such year.

The first question for consideration is whether or not petitioner corporation was “formed” for the purpose proscribed by the statute. W. S. Farish, Sr., was the principal stockholder of the petitioner. The balance of its stqok was owned by his wife, son, and daughter, with the exception of qualifying shares. At the time of the organization of petitioner, Farish and his wife owned an aggregate gross estate in excess of $28,000,000, embracing stocks and bonds in excess of $26,000,000. They transferred to the corporation in exchange for its capita] stock securities of a fair market value of only $1,245,875, which was less than 5 percent of the securities owned by them.

In 1930 Farish and his wife received dividends from domestic corporations in the amount of $356,656.16, while petitioner during its fiscal year 1930 received like dividends of $74,912.67; in 1931 petitioner’s stockholders received in such dividends $312,735.05, and petitioner received $66,078.80; in 1932 the stockholders received $275,-624.63 and petitioner received $41,172.02. If the petitioner corporation had been formed for the purpose of enabling its stockholders to escape tax through the medium of permitting its gains and profits to accumulate instead of being distributed as dividends, it would seem reasonable to assume that Farish and his wife would have transferred a much larger portion of their income-producing securities to the corporation.

Apparently respondent does not seriously urge the contention that petitioner was “formed” for the purpose of saving its stockholders from tax through the aeeumulation of gains and profits, but rather that it was “availed of” for such purpose in the taxable year, and was “formed” primarily for the purpose of registering tax losses.

Respondent in his brief asserts that on November 7, 1929, three days after petitioner was organized, Farish transferred certain securities to the corporation, which transfer was characterized as a sale, for the purpose of registering losses in the sum of approximately $788,000 on the individual income tax returns of himself and wife, and that they thereby escaped an enormous tax. Respondent further states:

It is realized that this precipitous utilization of the petitioner corporation to avoid surtax by registering tax losses does not in itself bring the petitioner under the scope of Section 104. While it is almost conclusive proof that the petitioner was formed to escape surtax of its stockholders, the principal medium or the method chosen to escape tax of its stockholders was by the method of registering losses rather than through the medium of non-distribution of profits as prescribed by Section 104.

Even if we should assume that the petitioner corporation was originally formed for the purpose of registering tax losses through sales of securities to it by its stockholders, and also was used for such purpose, as contended by respondent, this would not in any event bring petitioner within the provisions of section 104, which imposes a penalty for avoiding tax only through the accumulation of the corporation’s gains and profits.

Farish. testified that he did not organize petitioner for the purpose of avoiding tax; that his primary purpose was to establish an enterprise that would continue to function after his death, one that in time would become free of debt and to which he could make gifts from time to time for the purpose of increasing its value; that he and his wife expected to make petitioner executor of their respective wills, and trustee of trusts for the benefit of their children. Also, he hoped that Ms son, who was then in college, would become active in petitioner’s affairs, and this son did become treasurer of the petitioner in 1935 after he left college. Secondary reasons for the organization of the corporation were (1) to simplify the transfer of assets of Farish and his wife after their deaths, in that there would result the transfer of the stock of only one corporation instead of the securities of a large number of corporations organized under the laws of various states, and (2) to concentrate management in one company.

There was much evidence tending to support Farish on tMs point, a detailed discussion of which would unnecessarily prolong this opinion. We have carefully considered all the evidence, as well as the argument on brief of counsel for the respective parties, and it is our opinion that the preponderance of evidence clearly indicates that the actuating motive for the formation of the petitioner corporation was not to enable its shareholders to escape tax through the medium of permitting its gains and profits to accumulate instead of being divided or distributed.

The second and principal question for consideration is whether petitioner was “availed of” for such purpose during the taxable year.

Section 104, and similar provisions contained in section 220 of the Revenue Act of 1926 and prior acts, have been construed by the Board and the courts in numerous cases. For present purposes such discussion need not be repeated here. See, among others, United Business Corporation of America, 19 B. T. A. 809; affd., 62 Fed. (2d) 754; United States v. Tway Coal Sales Co., 75 Fed. (2d) 336; Cecil B. DeMille, 31 B. T. A. 1161; affd., 90 Fed. (2d) 12; Fisher & Fisher, Inc., 32 B. T. A. 211.

Application of the statute obviously depends upon the existence of “gains and profits” which have been accumulated (instead of being divided or distributed) for the purpose of preventing the imposition of tax upon the shareholders. If petitioner corporation had no accumulated gains or profits to be divided or distributed in the taxable year, it could not have been availed of for the proscribed purpose. As to so much, the parties substantially agree.

Petitioner contends that it had no gains or profits, but an operating deficit, whereas respondent holds “that there was not only no deficit, but that there was a constant and substantial accumulation of surplus during the prior years as well as the fiscal year in question.” Thus, solution of the controverted point requires consideration of the radically different methods employed by the parties in their respective computations.

At organization petitioner exchanged its capital stock of the par value of $500,000 for securities having a fair market value of $1,245,875, and assumed indebtedness of the transferors in the amount of $618,084.65. It recorded the stocks and bonds on its books as having a cost to it of $1,118,084.65, which was the aggregate sum of the par value of its capital stock and the indebtedness assumed. The fact that petitioner set up the securities on its books in two assets accounts, namely, “Stocks & Bonds” $708,466.69, which represented cost to the transferors, and “Pro-Nation of Capital Stock” $409,-617.96, we think is immaterial. The two accounts showed assets of a total cost of $1,118,084.65, and allocating to the account designated “Stocks & Bonds” an amount equal to the transferors’ cost facilitated the making of petitioner’s income tax returns, since that was the cost basis to it in computing gain or loss for income tax purposes upon subsequent sales of the securities. The difference between the fair market value of the securities and cost recorded on books might properly have been credited to paid-in surplus, but for reasons not important here this was not done. For convenience of discussion the book cost will in those circumstances be treated as the equivalent of fair market value.

In arriving at the deficit of $126,229.83 shown by its books at the end of the taxable year, petitioner used the book cost above referred to in computing gain or loss on sales of the securities in question, while respondent employed the transferors’ cost, which con-cededly is the statutory basis for computing taxable net income. Since the transferors’ cost was less than the fair market value or book cost, petitioner’s method of computation tended materially to reduce gains and increase losses over respondent’s method, while respondent’s basis, as compared with petitioner’s, correspondingly increased gains and decreased losses. This directly raises the question whether respondent’s method properly may be used in determining whether petitioner, within the meaning of the statute, realized distributable gains and profits, or sustained an operating deficit which impaired its paid-in capital. It is our opinion that such method may not be so used.

Section 112 (b) (5) of the Revenue Act of 1932 provides that no gain or loss shall be recognized if property is transferred to a corporation solely in exchange for its stock and immediately after the exchange the transferors are in control of the corporation; and section 113 (a) (8) provides that the basis for determining gain or loss in respect of such property in the hands of the corporation shall be the same as it would be in the hands of the transferors. The facts of the present case bring it squarely within these statutory provisions, which require that petitioner’s taxable net income be computed on the basis of the transferors’ cost of the securities exchanged for its capital stock. This rule was adopted because of the fact that upon the exchange no gain or loss was recognized. The gain derived or loss sustained when computed in such manner, however, does not reflect the true gain or loss as it affects the capital of the corporation. The rule is applicable only in computing taxable net income, that is, the income upon which Congress has levied a tax. Thus, taxable net income is purely a statutory concept, and bears no necessary relation to gains and profits subject to distribution as dividends. Cf. Charles F. Ayer, 12 B. T. A. 284, 287; Ida I. McKinney, 82 B. T. A. 450, 456; Susan T. Freshman, 33 B. T. A. 394, 401. It is the actual gain or loss which affects the corporation’s capital and determines whether there is earned surplus, or a deficit which impairs the capital. Section 104 itself makes a distinction. The proscribed act is the accumulation of “gains and profits” and not “net income” or “taxable net income.” However, the tax provided is 50 percent upon the “net income” as defined in subsection (c).

The cost to a corporation of property exchanged for its capital stock is the fair market value of the stock so exchanged, and where there is no other method of determining the value of the stock, its value is held to be the fair market value of the property exchanged therefor. Ida I. McKinney, supra; Reliance Investment Co., 22 B. T. A. 1287; Mead Realty Co., 21 B. T. A. 1062; L. H. Philo Corporation, 16 B. T. A. 130; Realty Sales Co., 10 B. T. A. 1217.

The cost to petitioner of the securities acquired in exchange for its capital stock was not less than $1,118,084.65, the cost entered on its books. If petitioner thereafter had sold such securities for $1,118,084.65, it would neither have derived a gain nor sustained a loss in fact, and its paid-in capital would have remained the same in amount, the form merely being changed from an investment in securities to cash. Under the statute it would have realized taxable gain in the amount of $409,617.96, or the difference between the transferors’ cost and the sales price, because it acquired the securities in a tax-free exchange. However, if petitioner has distributed such statutory taxable income to its stockholders, it would not have been a distribution out of “gains and profits” but a liquidating dividend which, to that extent, would have invaded its paid-in capital.

Surplus is the amount of net assets over liabilities, including capital stock. Helvering v. Canfield, 291 U. S. 163; Willcuts v. Milton Dairy Co., 275 U. S. 215; Edwards v. Douglas, 269 U. S. 204, 214. Conversely, a deficit is the excess of the liabilities, including capital stock, over the assets.

At the close of the taxable year 1934 petitioner had total assets of $2,029,096.59. Its total liabilities, including capital stock and paid-in surplus, amounted to $2,155,326.42. The operating deficit, therefore, after deducting the current gains and profits, was $126,-229.83, and measured the extent to which its paid-in capital had been invaded. Although the petitioner’s books showed net income of $80,131.66 for the fiscal year 1934, there could be no accumulated earnings or profits until the operating deficit was made good.

It is well settled that an impairment of capital or paid-in surplus resulting from operating losses must be restored before any earnings can be available for distribution to the stockholders. Willcuts v. Milton Dairy Co., supra; Loren D. Sale, 35 B. T. A. 938, 939; Arthur C. Stifel, 29 B. T. A. 1145; Louise Glassell Shorb, 22 B. T. A. 644; J. L. Washburn, 16 B. T. A. 1091; Crystal Ice Co., 14 B. T. A. 682.

Where a corporation, actively engaged in business, has no accum-lation of distributable gains or profits but an operating deficit, as in this case, we think it can not be said that its failure to distribute a portion of its paid-in capital equal to its net income computed under section 104 constitutes an availing of the corporation for the purpose of preventing the imposition of tax upon its shareholders.

Petitioner legitimately required the use of considerable capital in the operation of its business, which capital in large part was borrowed. The gains and profits derived in the taxable year were not beyond its reasonable business needs, and did not in any event constitute an accumulation, although not distributed for the reason that, coincident with receipt, they became capital, restoring impairment to that extent.

In Saenger, Inc. v. Commissioner, 84 Fed. (2d) 23, affirming 33 B. T. A. 135, the corporation was created to take over and hold its sole stockholder’s half of the stock of another corporation, which subsequently declared a dividend and credited half of the amount thereof on its books to the taxpayer corporation. The latter corporation paid no dividends but loaned the money to its sole stockholder. It was held that the corporation was both formed and availed of for the purpose described in section 104. That case is clearly distinguishable on the facts from the instant proceeding.

In Rands, Inc., 34 B. T. A. 1094; Nipoch Corporation, 36 B. T. A. 662; and R. L. Blaffer & Co., 37 B. T. A. 851, there were accumulations of gains and profits in the taxable years involved which were not absorbed by operating losses, but which it was claimed by petitioners in those cases were entirely wiped out by diminution of the value of capital assets. The Board held in those cases that a mere diminution in value of capital assets in an amount greater than the total of the gains and profits did not prevent the applicability of section 104, sufra. These cases are distinguishable from the instant proceeding in that neither of them involved an impairment of paid-in capital as the result of an operating deficit which precluded distribution of current earnings as dividends.

The ground last above mentioned also distinguishes Helvering v. National Grocery Co., 304 U. S. 282. In that case the Board found as a fact (35 B. T. A. 163, 165) that the petitioner corporation was availed of during the taxable year ended January 31, 1981, for the purpose of preventing the imposition of the surtax upon its sole stockholder “through the medium of permitting its gains and profits to accumulate instead of being divided or distributed”, and the Supreme Court held that there was ample evidence to support the findings of the Board. At January 31, 1931, the corporation held stocks and bonds valued at $2,989,452.14, an increase during the year of $209,134.67. There was no need of accumulating any part of the year’s earnings for the purpose of financing its business. At the close of the taxable year it had on hand cash in excess of all its liabilities, other than capital and reserves, in the amount of $1,136,820.55. Its paid-in capital had not been impaired by an operating deficit nor through depreciation in value of its capital assets. Its actual surplus, consisting apparently of earned surplus, was $7,938,965.54.

In the case at bar, the petitioner corporation did not have sufficient capital to meet the reasonable needs of its business; it operated largely on borrowed capital and at the close of the taxable year, after deducting current gains and profits, it had an actual operating deficit of $126,229.83, which to that extent impaired its paid-in capital.

For the reasons indicated above we hold that the present petitioner was neither “formed” nor, in the taxable year, “availed of” for the purpose recited in section 104, supra, and, therefore, is not subject to the tax imposed by that section.

Reviewed by the Board.

Judgment will be entered for the petitioner.

Stebnhagen, Van FossaN, Murdock, TubNER, Harkon, and Kern dissent.


author: SteRNiiagen:

text:
    Nathan R. Allen, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81654.
    Promulgated July 22, 1938.

      Floyds F. Toomey, Esq., and Ellsworth G. Al/oord, Esq., for the petitioner.

      Edward A. Tonjes, Esq., for the respondent.
   OPINION.

SteRNiiagen:

In the notice of deficiency, the Commissioner disallowed, in the computation of ordinary income, the “Losses on sales of securities to wife, $395,403.46”, and in the computation of capital net loss, the “Loss on sales of securities to wife, $59,950”, with the statement, “You are advised that losses claimed on sales of securities to your wife have been disallowed. It is held that the transfers of securities between you and your wife, due to which losses are claimed, do not represent transactions upon which losses may be recognized for income tax purposes”; and, further, as an “explanation”, said, “Losses on sales of securities to your wife have been disallowed since the transactions cannot be recognized for income tax purposes.’-’ The respondent’s answer generally denies the allegations of fact, and nothing more explicit appears in the Government counsel’s statement at the opening of trial, except to question the bona fides of the sales for the reason that “the funds wherewith these securities were acquired came from the petitioner.” In the respondent’s, brief, the additional ground for the denial is that in fact the petitioner made a gift to his wife not of the money but of the shares themselves, and therefore sustained no deductible loss.

Since the petitioner relies upon an alleged sale of securities to his wife, the evidence has been subjected to the most careful and exact scrutiny, as all such cases should be, John E. Zimmermann, 36 B. T. A. 279 (on review C. C. A., 3d Cir.). But no reason is discovered to doubt the bona fides of the transactions. The petitioner, pursuant to his earlier promise, gave his wife $350,000, free from any understanding or commitment on her part as to what she should do with it. It was not until after the gift was complete as to $300,000 and the wife was the unfettered owner of this fund that there was any thought on her part about acquiring the shares in question. When the petitioner first talked with her about buying shares from him, she had become possessed of means with which to make such a purchase and she was free to do so or not as she chose. As between them there was no suggestion cf a gift of securities and no suggestion that the gift of money or a bank account was an incident of a plan to transfer shares in order to perfect a tax deduction. Cf. Percy C. Madeira, 36 B. T. A. 456 (on review C. C. A., 3d Cir.). In order to bold otherwise, it would be necessary to regard the testimony as unworthy of belief; which is the essence of the respondent’s position. There is, however, nothing to discredit the testimony of the petitioner, the broker, the bookkeeper, all called by the petitioner, and the petitioner’s wife, who was called by the respondent. From this evidence, it must be held that the petitioner made a gift to his wife and thereafter sold to her the securities listed in the findings, and sustained the losses claimed. Behan v. Commissioner, 90 Fed. (2d) 609; John E. Zimmermmin, supra. Afterwards the wife dealt with the securities entirely as her own and they were never again acquired or controlled by the petitioner. There is in this record, therefore, no reason for the disallowance of the deduction of the losses sustained, and the respondent’s determination is reversed.

J udgmenb will be entered under Rule 50.


author: TTtt.t. :

text:
    H. Rodney Sharp, Petitioner, v. Commissioner of Internal Revenue, Respondent. Isabella du Pont Sharp, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 84259, 84260, 86704, 86705.
    Promulgated July 26, 1938.

      James 8. Y. Ivins, Esq., and Richard B. Bwriter, Esq., for the petitioners.

      Dean P. Kimball, Esq., and A. T. Ahm, Esq., for the respondent.
   OPINION.

TTtt.t. :

Petitioners’ first assignment of error relates to the action of respondent in denying deductions to the extent of $140,412.13 claimed by them on account of capital net losses alleged to have been sustained during the taxable years in the circumstances set out in our findings of fact hereinabove. This issue is involved in all four of the consolidated proceedings.

Because of the fact that petitioners are husband and wife, and each purchased on the same date and at the same market price substantially the same securities sold by the other spouse at less than cost basis in order to claim a deductible loss for tax purposes, and after 30 days the securities were resold and in some instances reacquired by the original owner, respondent contends that the transactions did not constitute bona fide sales, and therefore the alleged losses are not allowable deductions.

Petitioners readily admit that the purpose of these transactions was to reduce their income taxes. However, such purpose does not defeat allowance of the deductions claimed, if bona fide sales were made and actual losses sustained. Gregory v. Helvering, 293 U. S. 465.

Bespondent suggests that transactions between a husband and wife are to be subject to the closest scrutiny, citing Frederick H. Hoffman, 3 B. T. A. 964; James L. Robertson, 20 B. T. A. 112; Slayton v. Commissioner, 76 Fed. (2d) 497; John E. Zimmermann, 36 B. T. A. 279. While this is true, it does not mean that any different or harsher rule is to be applied in the instant case than would be applicable if the transactions had occurred between parties other than husband and wife. In substance, the question presented here is whether the stock transactions above set forth constituted bona fide sales, or whether they were merely sham or pretended sales entered into for the sole purpose of reducing tax liability through the medium of the claimed loss deductions.

Where the result of a transaction is to restore the status quo ante under circumstances indicating that the taxpayer never intended to make a bona fide sale, the Board has consistently denied the deduction of alleged losses, whether or not the transaction was between husband and wife.

In Mrs. Niels (Mellie) Esperson, Executrix, 18 B. T. A. 596; affd., 49 Fed. (2d) 259; certiorari denied, 284 U. S. 658, cited by respondent on brief, the facts show that in October 1921, prior to his death, Niels Esperson sold through a broker certain shares of stock, and caused the broker to purchase on the same date and at the same price a like number of shares of the same stock ostensibly for his secretary and brother-in-law, to whom Esperson loaned the money to pay for the stock. The stock certificates were endorsed and turned over to Esperson as collateral security for the alleged loan. In 1923, after Esperson’s death, the charges against his secretary and brother-in-law were canceled. The Board held there was no bona fide sale by Esperson; that he attempted to create a deductible loss and at the same time retain his stock.

In Harold F. Seymour, 27 B. T. A. 403, also cited in respondent’s brief, the taxpayer, on December 30, 1927, purportedly sold for $50 to a close business associate 500 shares of corporate stock, which he repurchased from his associate on April 6, 1928, for $50. On December 27, 1928, the petitioner again purported to make a sale of 500 shares of stock of the same corporation to the same business associate for $50, and repurchased the stock in April 1929 at the same price. The Board denied the deductions claimed on account of alleged losses resulting from such transactions.

In Sydney M. Shoenberg, 30 B. T. A. 659; affd., 77 Fed. (2d) 446; certiorari denied, 296 U. S. 586, cited by respondent, the taxpayer gave instructions to a broker to sell certain personally owned stocks and at the same time instructed the broker to buy identical quantities of the same stocks on behalf of a corporation of which petitioner was president and in complete control. Upon the expiration of 30 days the corporation transferred the stocks to petitioner in his personal capacity. On the evidence, the Board concluded that the corporation was for all practical purposes an alter ego of the taxpayer, being entirely dominated by him; and since the whole transaction showed a persisting intention by the taxpayer to hold title and dominion over the stocks, it did not amount to a bona fide sale.

The present proceedings, in our opinion, are clearly distinguishable from the cited cases. Here there were no direct sales between the petitioners; all sales and purchases were made through a broker at prices which, represented the fair market value of the securities sold or purchased. The proceeds of each sale were deposited in the separate bank account of the' seller, and there has been no transfer of funds or cash from either petitioner to the other. Each petitioner had sufficient separate cash funds on deposit to pay for all stocks purchased, and all stocks purchased were paid for in cash out of the bank account of the respective purchasers. At the time of the transactions there was no agreement between petitioners, express or implied, for the resale or reacquisition of any of the stocks involved.

The status quo ante of petitioners was not restored after consummation of the transactions in controversy, either in respect of their financial positions or the securities held by them. On December 19, 1932, petitioner H. Rodney Sharp sold thirteen items of securities, of which six items were never repurchased by him. On December 20,1932, the same petitioner sold two items of securities, one of which was never repurchased. Of the securities sold by the husband on December 19, 1932, the wife purchased eleven items of like securities, but did not purchase either item sold by the husband on December 20. Of the securities purchased by the wife on December 19, 1932, three of the items were not thereafter sold by her but were retained in her portfolio. Likewise, the securities originally held and sold by the wife were not all purchased by the husband, and such securities as were sold by the one spouse and purchased by the other, were not all resold by the purchasing spouse upon the expiration of 30 days, but such resales as were made occurred during periods extending from slightly more than 30 days to more than 6 months after purchase, during which intervening periods there were substantial changes in the market values of the securities. Thus, the stocks owned and held by the petitioners, respectively, prior and subsequent to the transactions in controversy, were materially different. Nor did their financial positions remain unchanged. This is apparent from an examination of the schedule of sales and purchases set out in our findings of fact above. Reference to a single item will illustrate this point sufficiently. On December 19, 1932, Mrs. Sharp sold 70 shares of B. & O. common for $654.15, and on the same date her husband purchased the same number of shares of the same stock for $670.31. He sold this stock on June 21, 1933, for $1,578.85, thus realizing a profit' in excess of $900 on his investment of $670.31, and on the same date Mrs. Sharp repurchased at a cost of $1,601.31.

In the light of the facts above set forth, we can not say that the transactions in question were not bona fide sales, merely because one petitioner saw fit to purchase at market prices with his or her separate funds securities similar-to those sold by the other, or because at some later date a portion of the securities so sold was reacquired by the original seller at market with separate funds, where there is no evidence of any agreement so to reacquire. To hold otherwise would be to deny ownership by petitioners of their separate funds and properties, since unrestricted control and dominion is a primary indicium of ownership.

On the first issue respondent’s action is reversed.

The second issue involves a bad debt deduction claimed in his return for the year 1932 by petitioner H. Rodney Sharp in the amount of $80,602.17, which was disallowed by respondent. Briefly summarized, the facts relating to this issue show that one de Yaux and petitioner had been very good friends for about 20 years prior to the taxable year. De Yaux operated a small interior decorating business in New York, and also speculated in the stock market. He had little or no assets other than his equity in certain securities he was carrying on margin. In 1929 de Yaux requested petitioner to guarantee his account with the brokers, which petitioner did by posting collateral. In the spring of 1930 the market went up and petitioner was released from his guarantee and his collateral was returned to him. Later in the same year de Vaux’s brokerage account again became under-margined, and petitioner again guaranteed the account by posting collateral. As the market declined petitioner put up additional collateral from time to time. Finally petitioner caused the account to be closed out in the spring of 1932, at which time pursuant to his guarantee petitioner paid de Yauv’s indebtedness to the brokers in the amount of $104,286.75 and took over his securities at their market value of $23,684.58. The difference of $80,602.17 petitioner set up on his books as a debt owing to him from de Yaux and wrote off the amount as worthless. That the indebtedness was then in fact worthless is not in question here.

Respondent asserts that the deduction claimed is not allowable for two reasons. First, he says that the relationship of debtor and creditor never arose between de Vaux and petitioner; that the transaction constituted a gift of the amount in controversy by petitioner to his old friend, de Vaux. Without repeating the detailed circumstances set out in our findings of fact, it is sufficient to say that we have carefully considered all of the evidence and find nothing to indicate a donative intent on the part of petitioner.

Respondent’s second contention is that, if a debtor-creditor relationship ever existed between the parties, the obligation was worthless at the time it arose, which respondent says was prior to the taxable year. Apparently respondent proceeds upon the theory that if de Yaux became indebted to petitioner at all, it was in 1930 when the petitioner guaranteed his friend’s brokerage account. We think this view is erroneous. Petitioner at that time assumed only a secondary liability. If tbe market bad advanced instead of declined, petitioner’s guarantee again would have been canceled and his collateral released, as it was in the first instance, and if the account had then been closed de Vaux would never have become indebted to petitioner in that connection in any amount.

We think it is plain, under the facts of this case, that de Vaux did not become indebted to petitioner until 1982, when petitioner paid de Vaux’s obligations to the brokers by reason of the guarantee given in 1930. Petitioner’s agreement was to guarantee the account with the brokers; it was not an agreement to indemnify the brokers. Having paid de Vaux’s indebtedness to the brokers pursuant to such guarantee, petitioner thereupon became subrogated to the claim of the brokers against de Vaux, and, this claim being worthless at that time, petitioner is entitled to the deduction claimed. See Whitcher v. Welch, 22 Fed. Supp. 763, and authorities cited.

On the second issue, respondent’s action is reversed.

Judgments will be entered under Bule 50.


text:
    William Clark Arkell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 84812.
    Promulgated July 26, 1938.

      George H. Graven, Esq., for the petitioner.

      A. T. Aldn, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined a deficiency of $17,-657.65 in the petitioner’s income tax for 1933. The only issue for decision is whether the Commissioner erred in including in the petitioner’s income $37,386.75, representing dividends received by W. C. Arkell Trust #2 and used by that trust to pay premiums on insurance policies upon the life of Bartlett Arkell. The facts were stipulated and are found, as stipulated.

The petitioner, William Clark Arkell, was married and was living during 1933 with his wife, Anne, and his three children, then aged 18,16, and 10. Bartlett Arkell is tbe father of the petitioner. Bartlett, after discussions with the petitioner and between the petitioner and Anne, created the trust involved herein on April 21,1932. These three had agreed that Bartlett would create the trust for the benefit of the petitioner and his children; Bartlett w'ould convey to the trust some existing insurance policies upon his own life; and the petitioner and Anne would convoy to the trust income-producing securities to provide for the payment of premiums on the policies. Bartlett irrevocably assigned the life insurance policies to the trust. Anne assigned to the trust 4,780 shares of Beech-Nut Packing Co. common stock and $5,000 in cash, and the petitioner assigned to it 14,000 shares of the same stock and $20,000 in cash. The income here in question was that part of the dividends on that stock received by the trust during its fiscal year ended April 30, 1933, used to pay premiums on the Bartlett Arkell life insurance policies held by the trust. Bartlett was alive and the policies were in effect during all of 1933. The petitioner reported as his income only that part of the income of the trust which. was not used to pay the premiums.

The trust indenture named Bartlett as settlor and the petitioner as trustee. The trustee was to hold the policies until they became payable and then was to hold the proceeds in trust during the life of the petitioner. Income from the proceeds was to be used for the benefit of the petitioner during his life and thereafter the corpus was to go to his issue, except that, if Bartlett’s wife, Louise, survived the petitioner, she should receive the income on one-third of the proceeds for her life.

The following powers, inter alia, were conferred upon the trustee:

Second : The Trustee shall have, with respect to each of the policies assigned hereby, or any paid-up additional insurance purchased with annual dividends thereon, or any paid-up insurance, whether extended term or otherwise, received in the event of a surrender or lapse of any policy, the sole right to exorcise any and all of the benefits, rights, options and privileges of whatsoever hind pertaining to such policy and may exercise the same, or refrain from exercising the same, at such times and in such manner as he may in his absolute discretion from time to time deem advisable, including, but not by way of limitation, the right (1) to borrow thereon; (2) in the event of the surrender or lapse of such policy, either (a) to receive the cash surrender value thereof, (b) to direct the purchase of non-participating paid-up life insurance, or (c) to continue the insurance for its face amount as paid-up extended term insurance; (3) to direct the disposition of the annual dividends on such policy. The Trustee shall direct that the dividends on such policies as are not fully paid-up, be applied in reduction of the premiums on such policies. The Trustee is hereby expressly authorized and empowered to do and perform any and all acts, and to malee, execute and deliver any and all written instruments, which ho, in his sole judgment, may deem advisable in order that all the benefits, rights, options and privileges under the policies of insurance held by him here-uhder from time to time shall be vested in the Trustee. The Trustee shall incur no liability for any action taken by him, or for his omission to take any action, in the exercise of any of the benefits, rights, options, and privileges here-inbefore conferred upon him, in good faith. The Settlor shall do and perform any and all acts, and make, execute and deliver any and all written instruments, which may be necessary in order to give full force and effect to the foregoing provisions of this Trust Agreement.

Paragraph “fifth” of the indenture was as follows:

Fifth: Notwithstanding any of the foregoing provisions: The Settlor’s said son, William Clark Arkell, shall have the power, either by deed or by last will and testament, to appoint and direct other and different uses or dispositions of the principal and/or income of the trust hereby created, Provided, However, that such power of appointment shall be, and the same is hereby expressly, limited as follows: Firstly, if exercised by deed it shall be exercised only in such manner that it will not entitle the Settlor’s said son to vest in himself, or in another for his own use or benefit, title to any part of the principal or income of the said trust: Secondly, whether exercised by deed or will, it shall be exercised in such manner that it will only be for the benefit of a person or- persons related by blood or marriage to the Settlor’s said son or the Settlor. The said power of appointment by deed may be exercised by the Settlor’s said son at any time and from time to time and either wholly or partially.

The trust indenture in paragraph “seventh” contained provisions for the resignation of the trustee without an accounting and the appointment by Bartlett, during his life, of a successor trustee in case the petitioner ceased to be the trustee. The successor was to have all powers of his predecessor as trustee. The settlor retained the right to modify or alter provisions of the indenture relating only to the powers of the trustee. Paragraph “ninth” provided as follows:

Ninth: The Trustee may receive from the Settlor, or any other person, at any time and from time to time, property delivered to the Trustee to be held subject to the trusts hereby created. Notwithstanding any of the foregoing provisions, the Settlor’s said son shall have the power at any time and from time to time to amend the provisions of this instrument to provide for the application of income and/or principal of the trust in payment of the premiums on the insurance policies from time to time subject to this Agreement, Provided Always, However, that no part of the income of property at any time added to the trust by the Settlor shall be applied to the payment of premiums upon the said policies of insurance on the life of the Settlor.

The petitioner, when the income-producing property had been conveyed to the trust, amended the indenture to provide as follows:

A. During the life of the Settlor the Trustee shall, notwithstanding anything in said instrument to the contrary, first apply the net income of the trust fund in paying the premiums on the policies of insurance on the life of the Settlor from time to time subject to said instrument, and shall apply the remaining income, if any, as provided in said instrument for all the income of the trust fund.
B. The Trustee may, however, retain out of the income of the trust fund remaining after the payment of premiums, so much thereof as in the discretion of the Trustee may be necessary to provide for the proper payment of premiums not then due.
C. If the net income of the trust fund shall at any time be insufficient to pay the premiums upon any such policy of insurance on the life of the Settlor, the Trustee may make such payment out of the principal of the trust fund. The Trustee shall be under no obligation to pay any premium on any such policy unless the Trustee shall have sufficient cash for the payment thereof on or before the expiration of the grace period for the payment of such premium.

He also amended the instrument to provide that any principal added to the trust by himself or his wife should go as if Louise had predeceased the petitioner, i. e., he provided that such property would not benefit Louise.

The respondent attempts to support the determination of the deficiency upon the ground that section 167 (a) (2) of the Revenue Act of 1932 applies. The pertinent parts of section 167 are as follows:

SEC. 1G7. INCOME FOR BENEFIT OF GRANTOR.
(a) Where any part of the income of a trust — ■
⅞: * S: Si ⅜ * *
(2) may, in the discretion of the grantor or any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor.
(3) * * ⅜ then such part of the income of the trust shall be included in computing the income of the grantor.

The petitioner concedes that he is a grantor within the meaning of that term as used in section 167.

The respondent contends that the petitioner had a choice, under the powers granted to him in paragraphs “second”, “fifth”, “seventh”, and “ninth” of the deed of trust, to use the income of the trust to pay the premiums or to simply pay that income to himself. If he did not have to use the income to pay the premiums but could use it for his own benefit, then, of course, section 167 (a) (2) applies and that income is taxable to him. The petitioner included the excess trust income in his own income, apparently upon the theory that section 167 (a) (2) applied to that and he resists as to the income in question solely upon the ground that he had no alternative but to use that income to pay the premiums.

The respondent points, first, to the powers granted to the trustee in paragraph “second.” The trustee was given the sole and absolute right to exercise or to refrain from exercising any and all of the benefits and rights pertaining to the policies, including the right to surrender, to allow them to lapse, or to convert them into paid-up policies. He was liable to no one for action thus taken in good faith. The respondent contends that by exercising these powers at any time he could have avoided the payment of the premiums and thus have received distribution of all of the current income of the trust. The petitioner answers that the powers were granted to the trustee, not to the petitioner as cograntor, and the powers could only be exercised wbon, as, and if circumstances arose which would justify the acts as being for the good of the trust, i. e., the powers were given him merely that he might act in all circumstances for the best interests of the trust.

The distinction between the petitioner as cograntor and as fiduciary is not important here, since the statute refers to a discretion of either the grantor or any other person whose interest is not adverse. Certainly the interest of the petitioner in his fiduciary capacity was not adverse to his interests otherwise. Cf. Reinecke v. Smith, 289 U. S. 172; Becker v. St. Louis Union Trust Co., 296 U. S. 48; William R. Stewart et al., Executors, 28 B. T. A. 256; Edward Jackson Holmes et al., Executors, 30 B. T. A. 97; Kaplan v. Commissioner, 66 Fed. (2d) 401. Thus, if he had the required discretion in either capacity, the statute applies.

Courts will exercise broad equitable powers to protect beneficiaries of trusts in case a trustee acts to gain some personal advantage. But we can not say that any court would intervene to prevent this trustee from converting these policies into paid-up insurance, for example, if he decided upon such a move. His reason might be that he needed the Beech-Nut dividends for some personal or family use, more or less urgent. Or he might decide that paid-up insurance would properly serve the purposes of the trust. The limitation upon his power to act is slight indeed. He merely had to act in good faith. Many possible reasons might prompt him to act which would be sufficient under the terms of this trust. This is particularly true in view of the fact that he was the first beneficiary under the trust and his own issue were the ultimate beneficiaries. The reason for giving him the powers is of importance in interpreting the instrument to determine the extent of his powers. Here, however, he is plainly given these broad powers and he could exercise them in good faith at any time to his own advantage without violating any equitable principle. The entire instrument does not indicate a different intent on the part of the grantor or grantors. Consequently, it may be said fairly that he had the discretion to act in such a way as to avoid at any time the necessity of paying additional premiums and thus gain the income for himself.

Furthermore, his amendment, directing the use of the first trust income for the payment of the premiums, could be changed by him at any time. He could have provided that a part or all of the premiums should be paid from principal. Or he might have provided for the payment of the premiums from some wholly different funds. That would have given him the use of additional trust income.

The petitioner was not the “grantor” of that part of the trust corpus contributed by his wife and he has argued that $14,340, the income from that part of the trust, can not be taxed to him under section 167 (a) (2). That question is one which will not be decided here. The deficiency notice indicates that all of the income in question was taxed to the petitioner under section 167 (a) (3). The respondent concedes that that provision is inapplicable. He makes no reply to the argument that the income from the securities contributed by the wife can not be taxed to the petitioner. The circumstances called for some reply if the respondent thinks that income can be taxed to the petitioner. Under all of .the circumstances it seems fair to assume, and we are assuming, that the point discussed in this paragraph is not urged on behalf of the respondent.

The parties have cited several cases, but none seems to be quite in point on whether or not section 167 (a) (2) applies. The case of Lucy A. Blwnenthal, 30 B. T. A. 591, is clearly distinguishable on its facts. Gail H. Baldwin, 36 B. T. A. 364, is like the Blwnenthal case. The discretion in the trustee in Higgins v. White, 93 Fed. (2d) 357, places a real limitation upon his acts. The petitioner has also contended that section 167, as here applied, is unconstitutional. The provision is constitutional. Corliss v. Bowers, 281 U. S. 376.

Decision will he entered wider Bule 50.