author: Black :

text:
    The George D. Harter Bank, Executor of the Last Will of H. H. Ink, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53525.
    Promulgated March 16, 1933.

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

      Maxwell M. Mahany, Esq., for the respondent.
   OPINION.

Black :

The respondent determined a deficiency against the petitioner for income tax for the year 1928 in the sum of $3,266.96, only a part of which is in controversy. As to that part of the deficiency which is in controversy, petitioner alleges that the respondent erred by refusing a deduction of $24,000 distributed to Mary Ink, widow of decedent, H. H. Ink, from the income of the estate of decedent for the year 1928, and including said sum in petitioner’s income for that year. The payments in question were on account of an annuity provision in the will of H. H. Ink, deceased, which the widow elected to accept in lieu of her dower and other rights under the laws of the State of Ohio.

The facts were stipulated as follows:

The petitioner herein is executor and trustee of the Estate of Harry PI. Ink, who died testate February 20, 1926, while a resident of Canton, Ohio. The will, dated December 3, 1925, in addition to certain other provisions not here material, provided in part as follows:
“ I hereby will and bequeath unto my wife, Mary Ink, the sum of Twenty-four Thousand Dollars ($24,000.00) per year payable in monthly payments of Two Thousand Dollars ($2,000.00) each, said annuity to be received by her in full of her dower, distributive share, year’s support, and any and all other claims or demands whatsoever that she may or might have against my estate, and I hereby make said annuity a specific charge against my theatre property hereinafter referred to.”
Provision was made for the disposition of the theatre building following the death of the deceased’s widow, as well as for the remaining property comprising tlie estate of the deceased. By writing, signed, acknowledged, delivered to the executors of the decedent, and duly filed and recorded as required by the statutes of Ohio, Mary Ink, the widow, elected to take under the will in lieu of the interest allowed her in decedent’s estate by the law of Ohio.
During the year 1928 the petitioner received from the theatre property as net rental and income amounts in excess of $24,000.00, and pursuant to the terms of the will paid over or distributed to the widow during the year monthly payments aggregating $24,000.00. The sums so distributed, when added to payments of prior years, did not aggregate the sum equal to that which would have been apportionable to her as of the date of deceased’s death under the Ohio statutory provisions, had she not elected to take under the will.
In filing its return for the year 1928 the petitioner, when computing taxable net income, deducted from gross income the $24,000.00 distributed to the widow in the same manner as it deducted amounts distributed to certain beneficiaries under the testamentary trust.
In Addition to certain other adjustments not appealed from, The Commissioner, when arriving at petitioner’s taxable net income and the deficiency herein involved, disallowed as a deduction the $24,000.00 paid by the petitioner to the widow during the year 1928.

It is contended by petitioner that it was entitled as a fiduciary to deductions lor the payments made to the widow of the testator under section 162 (b) and (c), Kevenue Act of 1928, which is copied in the margin.

The question of the allowance of deductions for payment of annuities to a widow in lieu of her dower and the distributive rights has been before us in a number of recent cases and we have held that such payments were not deductible by the estate, nor taxable to the widow until they exceeded the value of her dower and distributive rights at the time she elected to take under the will. Julia Butterworth et al., Trustees, 23 B. T. A. 838; Frank Pardee, 23 B. T. A. 846; Estate of T. S. Martin, 24 B. T. A. 862; William L. Dubois, 25 B. T. A. 1359; Anthracite Trust Co. et al., Trustees, 26 B. T. A. 89; Mary W. B. Curtis, 26 B. T. A. 1103. Atkins v. Commissioner, 63 Fed. (2d) 88.

These cases were thoroughly considered and are controlling here. Petitioner recognizes the rule announced in those cases, but contends that it does not apply in the instant case for the reason that the testator here and his widow were residents of the State of Ohio, and that the property involved was situated in said state, and under the laws of that state, when a widow elects to take under the will of her deceased husband and surrenders her dower and other rights, she does not occupy the position of a purchaser for value, but is considered as any other devisee and legatee under a will. It is further argued that in Julia Butterworth el al., Trustees, supra, and other cases cited, this Board followed the decisions of state courts in which petitioners resided, and particularly the courts of Pennsylvania, and that in the instant case it should follow the decisions of the courts of Ohio, which are different.

The Ohio case relied upon by petitioner is Allen v. Tressenrider, 72 Ohio St. 77; 73 N. E. 1015. In that case a widow elected to take under a will and surrender her dower and other rights under Ohio laws. It developed that the estate was in debt and that the provisions which the testator had made in his will for the payment of his debts were inadequate and that the devisees and legatees under the will would have to be called upon to contribute as provided by sections 5973 and 5974 of the Ohio statutes. These statutes read:

Seo. 5973. Where any estate, real or personal, that is devised shall be taken from the devisee for the payment of the debts of the testator, all the other dev-isees and legatees shall contribute their respective proportions of the loss to the person from whom the estate is taken, so as to make the loss fall equally on all the devisees and legatees, according to the value of the property received by each of them, excepting as provided in the following section.
Seo. 5974. If, in such ease, the testator shall, by making a specific devise or bequest, have virtually exempted any devisee or legatee from his liability to contribute, with the others, for the payment of the debts, or if he shall, by any other provision in the will, have prescribed any appropriation of his estate, for the payment of his debts, different from that prescribed in the preceding section, the estate shall be appropriated and applied in conformity with the provisions of the will.

The question involved was whether the widow was a devisee or legatee within the meaning of the above quoted sections of the statute and could be required to contribute. The court held that she was “ a devisee or legatee ” within the meaning of said sections and could be compelled to contribute. However, we do not feel' that the rule announced by the Ohio Supreme Court in that case, in construing the sections of the Ohio Statutes which were before it, would have any effect to change the rule of Federal taxation which we announced in Julia Butterworth, et al., Trustees, supra, and other cases following it.

The situation in that respect does not seem materially different from that which the court had before it in Burnet v. Harmel, 56 Fed. (2d) 153. In that case the Circuit Court of Appeals for the Fifth Circuit held that because the Texas courts had held that bonus payments received for an oil and gas lease were payments received by the lessor as part of the consideration for a sale of oil and gas in place, the sale was of capital assets and that the capital gains provision of the Eevenue Act of 1924 was applicable.

The Supreme Court, however, in Burnet v. Harmel, 287 U. S. 103, held the lower court was in error and that notwithstanding the provisions of Texas law to the effect that an oil lease is a sale of oil in place, nevertheless the capital gains provisions of the Eevenue Act of 1924 had the same application to bonus payments received from the sale of an oil lease in Texas as in other states where an entirely different rule prevails. In deciding the pivotal point in the case the Supreme Court said:

Here we are concerned only with the meaning and application of a statute enacted by Congress, in the exercise of its plenary power under the Constitution, to tax income. The exertion of that power is not subject to state control. It is the will of Congress which controls and the expression of its will in legislation, in the absence of language evidencing a different purpose, is to be interpreted so as to give a uniform application to a nation-wide scheme of taxation. See Weiss v. Weiner, 279 U. S. 333; Burke-Waggoner Oil Ass’n. v. Hopkins, 269 U. S. 110; United States v. Childs, 266 U. S. 304. State law may control only when the federal taxing act, by express language or necessary implication, make its own operation dependent upon state law.

See also Bankers Pocahontas Coal Co. v. Burnet, 287 U. S. 308, and Strother v. Burnet, 287 U. S. 314.

The pivotal point in the instant case is: What deductions is petitioner as a fiduciary entitled to take from its gross income? There can be no question whatever but that petitioner, under the provisions of section 162, would have to include in its gross income all of the rentals from the theatre building, including the $24,000 paid over to Mrs. Ink under the provisions of the will. Petitioner is entitled to deduct the $24,000 from its gross income if it is a payment which comes within the provisions of (b) or (c) of the section, already quoted in the margin.

In Julia Butterworth et al., Trustees, supra, we held that these provisions, in so far as they affect payments of the kind we have in the instant case, provided for deduction solely of amounts paid as income to the objects of the testator’s bounty. We held that the provisions did not apply to payments, even though out of income, which were made to a widow in consideration of her relinquishment of her dower and other rights under the statute. On that point we said:

Section 219 of the Revenue Act of 1924, quoted above, deals with income. It taxes trust income primarily to the trustee, but it allows the trustee to deduct the “ income * * * which is to be distributed currently by the fiduciary to the beneficiaries.” Tbis provision in our opinion relates solely to amounts paid as income to tbe objects of the testator’s bounty. It does not apply to other payments by the trustee, as in this case where the trustee was completing the offer made to the widow for the purchase of her share in the estate; the trustee in such case was merely carrying out the “ convention or contract” (Isenhart v. Brown, supra) between the testator and his widow. The widow in such a case is in no sense a beneficiary, but, as held by the authorities above quoted, she is a “purchaser for value.” The statute taxes to a beneficiary only “ income paid as such ” (Burnet v. Whitehouse, supra) and in our opinion contemplates the deduction by the trustee only of income paid as such to a pure beneficiary as, for example, in the Gavit and Beatty cases, supra.
Petitioners call our attention to the rule that in case of doubt, taxing statutes are to be construed against the Government and in favor of the citizen. In view of the authorities quoted as to the status of the widow who takes a bequest in lieu of dower, we think there is no doubt that the amounts paid to her in this case are not “ income * * *, distributed * * * to the beneficiaries” and there is no -room for application of the rule urged.

Thus it will be seen that the basic point on which the Butterworth case was decided was that annuity payments made to a widow in consideration of the surrender of her dower rights and other rights under the state statute were not payments made to her as the object of the testator’s bounty, but were payments made in the nature of a purchase and therefore not deductible.

Notwithstanding the Ohio case, Allen v. Tressenrider, supra, cited by petitioner, the same basic situation exists in the instant case as existed in the Butterworth case. Here the bequest to Mary Ink, wife of the testator, of an annuity of $24,000 was expressly made on the condition that it was “ to be received by her in full of her dower, distributive share, year’s support, and any and all other claims or demands whatsoever that she may or might have against my estate.”

Thus it seems clear that the same rule we applied in JuUa Butter-worth et al., Trustees, supra, must apply here and it is so ordered.

Decision will he entered for respondent.

       Sec. 162. Net income.
      The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
      * * * * * * *
      (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year;
      (c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.


source: Caselaw Access Project

author: Leech:

license: Public Domain

text:
    Employees Industrial Loan Association, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44203.
    Promulgated March 16, 1933.

      Abraham Lowenhaupt, Esq., and Stanley S. Waite, Esq., for petitioner.

      J. E. Pigg, Esq., for respondent.
   OPINION.

Leech:

The Revenue Acts of 1921, 1924 and 1926, in Title II, Part III, Corporations, provide:

Sec. 231. That the following organizations shall be exempt from taxation under this title — ■
*******
(4) Domestic building and loan associations substantially all the business of which is confined to making loans to members; * * *

This section was a reenactment of section 231 (4) of the Revenue Act of 1918, with the exemption therein described expressly limited in the later acts to “ domestic building and loan associations substantially all the business of which is confmed to making loams to members.” (Italics supplied.)

The Revenue Act of 1921, as originally reported to and passed by the House of Representatives, limited the.exemption to “ domestic building and loan associations operated exclusively, for the purpose of making looms to members.” (Italics supplied.) Section 234, H. R. 8245. This significant additional limitation was inserted, undoubtedly, to prevent abuse of the exemption by “ some mortgage and investment companies * * * operating in the guise of building and loan associations.” Page 13, Report of Committee on Ways and Means, H. R. 8245. The Senate apparently refused such absolute restriction of the exemption, and amended the section in the form in which it ultimately became law. Cf. Revenue Acts of 1921, 1924 and 1926, Title II, Part III, Corporations, sec. 231 (4), supra.

While the stipulated articles of incorporation of petitioner show its organization under Article 7, Chapter 35, Revised Statutes of Missouri, 1909, this is obviously an error, for such statute refers only to juvenile courts. The same stipulation further describes the enabling act as “ governing manufacturing and business companies.” Thus, incorporation must have been effected under Article 7, Chapter 33, Revised Statutes of Missouri, 1909, (and amendments thereto) which, so far as we know, was then the only effective legislation answering this description, and section 3346 specifically excludes building and loan companies from its provisions.

The applicable statutes of Missouri, under which, alone, building and loan associations could there be incorporated at the time of incorporation of petitioner, and which carefully defined and limited their operations during the period in dispute, may be summarized as follows:

Article 9, Chapter 90, Revised Statutes, Missouri, 1919, provides for the organization of “ Mutual Savings Fund, Building and Loan Associations.” Section 10196 provides that they may be incorporated by not less than 25 persons for the purpose of assisting each other and others who may afterwards become associated with them, in acquiring real estate, making improvements thereon and removing incumbrances therefrom, by advancing to its members, out of its accumulated fund, a sum equal to the par value of their respective shares. (Laws of 1915.) Section 10197 provides that the words “ building and loan association ” or savings and loan association ” shall form a part of its name. (Laws of 1915.) Section 10205 provides that security for loans shall consist of a nonnegotiable note or a bond secured by a first mortgage or deed of trust on real estate accompanied by a transfer and pledge of the member’s shares of stock, or, the member’s shares may be accepted as security if the loan is not in excess of nine-tenths of the withdrawal value thereof. (Laws of 1915.) Compare similar provisions of Article 8, Chapter 33, Revised Statutes, Missouri, 1909, and Article 8, Chapter 32, Revised Statutes, Missouri, 1929.

Without discussing the meagre facts, all of which are stipulated and appear in our findings of fact, we are of the opinion the record conclusively establishes that petitioner was neither organized nor its business conducted pursuant to Missouri statutes governing building and loan associations, nor was it, during the years in controversy, recognized as a building and loan association by the incorporating state.

In the case of the United States v. Cambridge Loan & Building Co., 278 U. S. 55, the Supreme Court had before it only the meaning to be given the words “ domestic building and loan associations ” in the cited sections of the Revenue Acts of 1918 and 1921. The court there held that a company incorporated under the laws of a state by which it is recognized as a building and loan association and which conducts its business in accordance with such laws, is a domestic building and loan association within the meaning of section 231 (4) of the Revenue Act of 1921. Nor is this legal classification lost to a taxpayer seeking the benefit of the exemption by the mere exercise of a power given such association by a state statute authorizing the borrowing of money and acceptance of deposits from and loans to nonmembers, provided there is no gross misuse of the name and the additional qualification, expressly stated in the Act, is met. This qualification is, that substantially all the business of such associations be confined to making loans to its members.

Obviously, petitioner is not entitled to the exemption, since it does not satisfy the definition of domestic building and loan associations. Cf. United States v. Cambridge Loan & Building Co., supra; Guaranty Building & Loan Co., 27 B. T. A. 754. There is another and equally poignant reason for refusing the benefit of the exemption in the case at bar. In our judgment, petitioner herein comes squarely within the category of those organizations which Congress meant to exclude from this exemption by the express qualification mentioned. In each of the years here involved, more than 50 per cent of petitioner’s loans were made to nonmembers, so that regardless of the manner in which it was organized or its recognized status by the state of incorporation, the express qualification added in the Revenue Acts of 1921, 1924 and 1926, discussed above, is not met, for, certainly, substantially all of its business was not confined to making loans to members.

In assessing the 25 per cent penalty against petitioner for each of the years in controversy, the Commissioner was acting under authority of section 3176, Revised Statutes, as amended and reenacted by sections 1311, 1003, 1103, of the Revenue Acts of 1921, 1924 and 1926, respectively, which directs that the Commissioner shall add to the tax, 25 per cent of its amount in case of any failure to make and file a return or list within the time prescribed, except when a return is -filed, after such time and it is shown that failure to file at the proper time was due to a reasonable cause. There is no question of fraud in this proceeding. The returns prepared by the revenue agent, after an examination of the petitioner’s affairs, did not constitute belated returns of petitioner, for they were not signed and sworn to by petitioner’s officers and were not the returns required by law to be filed by this petitioner. Cf. Lucas v. Pilliod Lumber Co., 281 U. S. 245. Therefore, it can not be successfully contended that returns were filed after the due date and that the delay was due to a reasonable cause, namely, reliance upon the Commissioner’s ruling that petitioner was exempt from tax. Had the petitioner’s proper officers signed and sworn to the returns prepared by the revenue agent when requested to do so, the petitioner might have successfully avoided the imposition of the penalties. No returns having been filed by petitioner for the years in controversy, the imposition of the ad valorem penalties is required by statute, even though petitioner, relying upon an early ruling of the Commissioner as to the year 1921, may have believed that it was exempt from tax. Cf. Searles Real Estate Trust, 25 B. T. A. 1115; Moulton Green, Trustee, 24 B. T. A. 1121; Southern Ice & Fuel Co., 10 B. T. A. 1213; American Milk Products Corp. v. United States, 41 Fed. (2d) 966 (Ct. of Cls.).

The statute of limitations runs against the Government only when it assents and upon the conditions prescribed, Lucas v. Pilliod Lumber Co., supra. Section 250 (d) of the 1921 Act and section 277 (a) (1) of the 1924 and 1926 Acts prescribed the period of time within which the Commissioner may determine, assess and collect taxes after the return required by law has been filed. Section 250 (d) of the 1921 Act and section 278 (a) of the 1924 and 1926 Acts provide that in the case of failure to file a required return the assessment and collection may be made by the Commissioner at any time after the tax becomes due. The assessment and/or collection of the deficiencies in question are not barred by the statute of limitations. Cf. Lucas v. Pilliod Lumber Co., supra; Corona Coal & Coke Co., 11 B. T. A. 240; William A. Richards, 15 B. T. A. 800; Frederick L. Watson, 25 B. T. A. 971.

Section 3176 of the Revised Statutes provides that the ad valorem penalties shall be added to the tax and collected in the same manner as the tax.

We conclude that the Commissioner correctly determined the deficiencies and penalties in controversy and that the assessment and/or collection thereof is not barred. Cf. Robert Van Iderstine, Trustee, 24 B. T. A. 291.

Judgment will be entered for the respondent.


author: Lansdon:

text:
    W. M. Scott, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. W. M. Scott, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 44705, 44706.
    Promulgated March 16, 1933.

      J. B. Allred, Esq., for the petitioners.

      Frank B. Schlosser, Esg., and R. B. Cannon, Esq., for the respondent.
   OPINION.

Lansdon:

The petitioners were members of a Texas marital community throughout the year 1926, as to which the respondent has asserted deficiencies against each of them in the amount of $489.29. Such deficiencies arise from the respondent’s determination that an amount of $25,000 received by the petitioners for a ten-year lease of property owned by them to the Magnolia Petroleum Company was taxable income when received. The stipulated facts, which we incorporate by reference as our findings of fact, show that in 1926 the petitioners executed and delivered to the Magnolia Petroleum Company an oil and gas lease covering 5,000 acres of l'and owned by them in fee in consideration of the payment to them of $25,000. The lease provided that such amount was payment not only as a bonus but in lieu of any and all delayed rentals usually provided for in oil and gas leases.

A bonus paid for an oil and gas lease is in effect an addition to the royalties or rentals already determined. It is really royalty or rental in a lump sum or down payment. Work v. Mosier,'281 U. S. 352. Every bonus paid for an undeveloped oil and gas lease is an advance rental at least to a certain extent. In the instant case the total $25,000 is in the nature of advanced rental, since there is no other rental provided for in the lease. The petitioners contend that it must be spread over the ten-year term of the lease. There is no merit in such contention whether their boobs are kept on a receipts and disbursements basis or on the accrual basis. A bonus received by a lessor of an oil lease is taxable income to the lessor. See Burnet v. Harmel, 287 U. S. 103, and Murphy Oil Co. v. Burnet, 287 U. S. 299. When the execution of an oil and gas lease is followed by production of oil, and bonus and royalties are paid to the lessor, both involve at least some return of the capital investment in the oil in the ground, for which a depletion allowance must be made. In the instant case the petitioner makes no claim for depletion and there are no facts in the stipulation which disclose that they are entitled to such deductions. The respondent’s determination must be approved.

Decision vrill be entered for the respondent.


author: Lansdon : Murdock,

text:
    Cavour Hartley, Executor, Estate of G. G. Hartley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42343.
    Promulgated March 16, 1933.

      Franh W. Wilson, Esq., and H. B. Fryberger, Esq., for the petitioner.

      J. A. Lyons, Esq., and B. M. Goon, Esq., for the respondent.
   OPINION.

Lansdon :

The income of the petitioner for each of the years 1924 and 1925 included gains from the sale of capital assets, royalties from the production of iron mines held under lease and income from rental properties. In order to determine the correct tax liability for such years, it is necessary to establish the basis upon which gain from the sales must be computed. Under the applicable statute and regulations effective in those years, such basis must also be used in computing deductions from income on account of depreciation and depletion. In his income tax returns for the years under review, the petitioner computed profits from sales of property and deductions claimed on account of depreciation and depletion on the basis of the values of the several properties at date of decedent’s death, but he now contends that the correct basis is that to which the decedent was entitled in his lifetime. In the determination of the deficiencies here involved the respondent accepts the bases used by the petitioner in his original returns. There is no controversy over the facts involved in this issue. The parties have agreed that if the respondent’s determinations as to profits, depreciation and depletion are affirmed, no recomputation will be required, and that if the petitioner prevails, the figures necessary to recomputation are not in dispute and are included in the record. We are asked to decide only the question of law upon which the parties differ.

The basis for determining gain or loss from the sale of assets by the executor of an estate was in controversy for many years after the enactment of the first income tax law. In article 343, practically identical in Regulations 45, 62, 65 and 69, interpreting the Revenue Acts of 1918, 1921, 1924 and 1926, the Commissioner included the following:

Where, however, the executor sells property of the estate for more than its value at the death of the decedent, the excess is income taxable to the estate.

Notwithstanding the rule established by the regulations, many executors filed estate income tax returns in which gain or loss was computed on the basis to which the decedent was entitled in his lifetime. Early in the history of the Board proceedings involving this question were instituted and our decisions have quite consistently followed the regulations above cited. Dorothy Payne Whitney Straight, Executrix, 7 B. T. A. 177; Charles G. Barnes et al., Executors, 8 B. T. A. 360; William P. Blodgett et al., 13 B. T. A. 1243; Russel Wolfe, Executor, 15 B. T. A. 835; Central Trust Co., Executor, 19 B. T. A. 867; Richard de Z. Pierce et al., Executors, 22 B. T. A. 1070; and James C. Ayer et al., 26 B. T. A. 9. The courts very generally have adopted the rule included in the regulations above qitedi and the Board’s interpretation thereof. Bankers Trust Co. v. Bowers, 23 Fed. (2d) 901; Eldridge v. United States, 31 Fed. (2d) 924. Hereinafter this rule will sometimes be referred to as the old basis.

On May 3, 1926, the Court of Claims, in McKinney v. United States, 62 Ct. Cls. 180, adopted the view that the basis for determining gain from the sale of capital assets by an estate should be that to which the decedent was entitled in his lifetime. This rule will sometimes be referred to hereinafter as the new basis. Thereafter, on April 6, 1927, the Commissioner abrogated his regulation relating thereto which had been consistently followed for many years and promulgated T. D. 4011, VI-1 C. B. 77, giving effect to such decision. This new regulation remained in effect until July 7, 1928, when the Commissioner, interpreting Nichols v. United States, 64 Ct. Cls. 246, promulgated April 4, 1927, as a reversal of the decision in McKinney, supra, and for the purpose of giving effect to Dorothy Payne Whitney Straight, Executrix, supra, and Banker's Trust Co., supra, promulgated T. D. 4177, VII-2 C. B. 134, restoring the regulations to their original form. In Elmhurst v. United States, 69 Ct. Cls. 295, the court reaffirmed its decision in McKimiey, supra, and undertook to distinguish Nichols, supra.

In view of the conflict between the decisions of the Court of Claims, the Board and some Federal courts, and in the light of varying positions of the Commissioner, it is obvious that prior to the enactment of the Revenue Act of 1928 the matter of determining the basis for computing gain from the sale of capital assets by an estate was very much in need of clarification. Many controversies involving the question were pending in the Bureau of Internal Revenue, in the courts and before this Board. Included therein were cases in which returns had been filed prior to April 6, 1927, in accordance with Regulations 45, 62, 65 and 69, and others which had been filed while T. D. 4011 was effective. It was this chaotic condition which the Congress undertook to correct and relieve in the Revenue Act of 1928.

In his report on the provisions of the Revenue Act of 1928, Chairman Green of the Ways and Means Committee said :

In view of the decision of the Court of Claims in the McKinney v. United States, it is desirable specifically to provide what basis shall be used in determining gain or loss on the sale of property by an estate. It is believed that the basis should be the value of the property on the date of the decedent’s death. * * *
Under existing law, the basis in such case is the value at the date of “ acquisition ” which is indefinite and has given rise to controversies. The value on date of death affords an equitable and more determinable base.

In conformity with the above statement Congress enacted section 113 (5) of the Revenue Act of 1928, which, so far as pertinent herein, is as follows:

Property Transmitted at Death. — If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, the basis shall be [for determining gain or loss] the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent’s estate from the decedent, the basis in the hands of the estate shall be the fair market value of the property at the time of the death of the decedent. * * *

The Revenue Act of 1928 was approved on May 29 of that year. On July 7, 1928, the Commissioner promulgated T. D. 4177 as set out hereinbefore and thereafter included the basis then accepted by Congress in article 596 of Regulations 74. The old basis was' thus finally established in conformity with the decisions of this Board, of several courts and by Act of Congress as the legal and only rule for determining gain or loss from the sale of property in the hands of an estate in course of administration, but since section 113 (5) of the Revenue Act of 1928 is not retroactive, such basis at May 29, 1928, was settled law only as to the returns filed subsequent thereto. This enactment therefore in no way determined what the law was before the approval of the Revenue Act of 1928. One group of estates had filed returns prior thereto on the old, and another on the new, basis. A decision of the Supreme Court might establish either the one or the other as the law at the several dates of the filing of such returns. No matter which basis was recognized by the court of last resort, the estates filing to their disadvantage on that which was rejected would be entitled to relief if their returns had not been closed by agreement or by the statute of limitations, or their rights abridged by other conditions imposed by proper authority. Congress dealt with this situation by including section 702 (a) in the Act of 1928, which is as follows:

If in the return of any decedent’s estate for any taxable year preceding the taxable year 1928, the basis, upon which gain or loss realized upon the sale or other disposition of property acquired by the estate from the decedent was computed, was the value of the property at the time of the death of the decedent or was in accordance with the regulations in force at the time such return was filed, then the computation of such gain or loss shall be made upon such basis, unless claim for refund or credit in respect of such basis, or a written election not to come within the provisions of this subsection has been filed by the estate before the expiration of the period of limitation for filing claims.

In this proceeding the parties are in radical disagreement as to the effect of the election provided for in the law. The petitioner contends that having filed his return under the old, his election now entitles him to a recomputation of his tax liability under the new basis. The respondent has ruled in 9 C. M. 5215, VII-2 C. B. 97, and his counsel argues that Congress intended that only those estates which filed returns on the new basis should have the right of election. In our opinion the purposes of section 702 (a) are twofold. It is a statute of repose for all estates that were satisfied to settle their tax liabilities on the basis in effect when their returns were filed, and it is a relief provision for any estate which to its disadvantage had filed a return in conformity with regulations at date of filing, if such regulations were later held not to be in accordance with the law then effective. Congress could and did settle the basis to be used for all returns filed subsequent to the effective date of the Revenue Act of 1928, but it did not then know what would be the final judicial determination of the law prior to that date. Accordingly, section 702 (a) was framed to take care of estates coming under whichever basis was finally rejected as the law before the passage of the Act of 1928. It is now well settled that the old basis was the law at the date the petitioner filed his return. Brewster v. Gage, 280 U. S. 327. The right of election therefore gives him nothing which he did not have before. If he had an appeal pending before the Bureau of Internal Revenue, the Board, or the courts, he could still prosecute on merits, but the computation of his profits from sales of property must be made on the old basis in conformity with Brewster v. Gage, supra, and Dorothy Payne Whitney Straight, supra, and other decisions cited.

If the petitioner had filed his return under the new basis, his election would enable him to litigate his tax liability and he could properly plead that he had acted under a regulation which erroneously construed the law and ask for a redetermination on the basis finally established by judicial authority. It appears, therefore, that the only purpose of section 702 (a) is to permit an estate within the specified categories to elect whether it will settle its tax liability as shown on a return filed in conformity with regulations temporarily effective at date of filing, but later abrogated, or decline to do so and ask for a redetermination under provisions judicially determined to be the law at such filing date.

It will be observed that section 702 (a) does not specifically include any reference to allowances for depletion and depreciation. The parties have argued their respective contentions on the theory that it is not material whether the election grows out of a dispute over such allowance or over gain or loss from the sale of property. Since both are involved here, it is not now necessary to decide whether the subsection under review confers the right of election on those estates as to which the only dispute is over the correct basis for computing gain or loss. This proceeding calls for a determination of the proper basis for computing gain or loss on petitioner’s sales of real estate in 1924 and 1925. We have determined that basis and it follows under section 204 (b) (1) of the Revenue Act of 1924 that allowances for depletion and depreciation must be computed in accordance therewith.

In each of the taxable years the respondent disallowed parts of the deductions claimed by the petitioner on account of salaries and expenses, on the theory that the rejected amounts fairly represent the ratable part of such charges which should be allocated to the management of portions of the estate distributed to the heirs of the decedent and also that some part of such charges was for the management of the “ Hartley Family ” account. The administration of the “ Hartley Family ” account was confined to the very simple procedure of receiving rents from the tenants of the four buildings which constituted the corpus of that gift and distributing the same to the beneficiaries. That service required only about three days in each month and for it the manager received a salary of $1,000 per year out of the family fund. Such salary was not claimed as a deduction by the petitioner and is not a basis for the disallowance of its expense claim.

The facts disclose that no part of the estate was distributed in 1924 and that the charges for expenses and salaries claimed as deductions in that year were necessary and reasonable in a business as complicated and extensive as that of the petitioner. The determination of the respondent in this respect for the year 1924 is reversed. It is in evidence that the hulk of the Hartley estate was distributed by the proper court on February 21, 1925, but that such property continued to be managed by the executor’s business organization. We conclude from this that petitioner has failed to overcome the presumptive correctness of the respondent’s determination that one-half the charges for expenses and salaries in 1925 should be allocated to the management of distributed property then owned by the heirs of the decedent. The determination of the respondent in respect of salaries and expenses for the year 1925 is affirmed.

The petitioner has abandoned his contention that the annuity payments in 1924 and 1925 in the respective amounts of $186.15 and $17,500 are deductible from income in such years. On brief his counsel also concedes that respondent properly disallowed attorney’s fees in the amount of $5,000 in the year 1924. It follows, therefore, that the determination of the respondent as to such claimed deductions must be affirmed.

No evidence has been adduced sufficient to enable us to determine that petitioner sustained any loss in 1928. The petitioner contends that the alleged loss resulted from the payment of estate taxes in such years. Even if the proof were sufficient to establish the amount of the loss, it could not be regarded as the basis for net loss to be carried forward in the determination of tax liability in any subsequent year. H. J. Schlesinger, 5 B. T. A. 943; Lawrence J. Montgomery, 17 B. T. A. 1308. On this issue the determination of the respondent is affirmed.

Reviewed by the Board.

Decision will he entered under Rule 50.

Aeundell, Van Fossan, and McMahon concur in the result.

MoRRis dissents.

Murdock,

dissenting: The period within which a claim for refund or credit may be effectively filed begins with the time the tax was paid. The findings of fact do not disclose when any tax was paid. Consequently, I can not determine whether the election was timely filed on July 27,1928. But assuming that it was timely filed, section 702 (a) of the Revenue Act of 1928 deals only with the computation of gain or loss and has nothing whatever to do with the basis for depletion and depreciation. Some of the properties upon which depletion and depreciation are being claimed in this case were not sold and section 702 (a) can have no bearing upon the issue raised in connection with those properties.

The Board is not justified in reversing the Commissioner’s dis-allowance of the salary deduction for 1924 on the facts found.

GoodRioh agrees with this dissent.


text:
    Marquette Oil Distribution Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 39127, 48743.
    Promulgated March 20, 1933.

      II. Kennedy McCook, Esq., for the petitioner.

      ■James K. Polk, Esq., for the respondent.
   OPINION.

Lansdon:

The petitioner contends that it is not taxable on the income in question since it did not own the Horton property during the taxable years. It contends that the property was owned by Mills.

The facts show clearly that Mills received all income from the Horton property and paid it to the creditor banks. Whether he received it as trustee or as president of petitioner we are unable to determine from the facts. The trust instrument provides that petitioner should receive the Horton property in exchange for its stock and that it would pay the income therefrom to Mills for distribution to the creditors. Mills received a conveyance of the Horton property from the individuals. He also held petitioner’s stock, which had been issued to the individuals in exchange for the Horton property. In such circumstances we think the petitioner is taxable on the income in controversy. Amounts received from the sale of oil belonged to petitioner until distributed to the individuals and by them paid to their creditors. Under the terms of the trust Mills paid the amounts directly to creditors of the individuals, which can not affect tax liability. Cf. Gold & Stock Telegraph Co., 26 B. T. A. 914.

Reviewed by the Board.

Decision will he entered for the respondent.


text:
    The Bonded Mortgage Company of Baltimore, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47115.
    Promulgated March 20, 1933.

      B. B. Youngman, Esq., for the petitioner.

      Allin Pierce, Esq., for the respondent.
   OPINION.

Black :

The two issues in this proceeding are, (1) Whether or not the commissions on mortgage loans referred to in the findings of fact are to be treated as income in the year in which the mortgages are made or are to be prorated over the life of the mortgages and reported as income ratably for each year over which said loans extend, and (2) Whether or not expenses, including brokerage charges paid by the petitioner for the sale of its bonds, are to be treated as expense in the year in which paid and deducted in their entirety in that year, or are to be prorated over the life of the bonds and deducted ratably.

As to issue (1), in cases where the taxpayer keeps his accounts on an accrual basis, as has been stipulated in the instant case, we have held that commissions charged for making loans are returnable and taxable in the year when the loans are made and the services performed. Columbia State Savings Bank, 15 B. T. A. 219; affd., 41 Fed. (2d) 923; North-Western Trust & Savings Bank, 20 B. T. A. 365. In affirming our decision in Columbia State Savings Bank, supra, the court said:

In the instant ease petitioner was acting in the two capacities of lender of the money and of loan broker. It charged its commission for the services of procuring the loan, and this was earned at the time the loan transaction was closed. Had the borrower received the full amount of the loan and then paid the commission or had it paid the commission independently of the loan, there could be no question but that it constituted income at that time, taxable as of that time, even if on a cash basis.

The court in its opinion distinguished on the facts Blair v. First Trust & Savings Bank of Miami, 39 Fed. (2d) 462, pointing out that in the latter case the taxpayer kept its books and made its returns on the cash receipts basis and that, moreover, as stated by the Board of Tax Appeals, the taxpayer treated on its books the commissions as unearned until such time as the notes were paid or sold, 11 B. T. A. 1034. On issue (1) we hold for the respondent.

We will now discuss issue 2. The Board has held in numerous cases that expenses of floating bond issues, including brokerage fees for selling them and bond discount, can not be deducted in their entirety in the year when such bonds are sold, but must be spread over the life of the bonds. East Ninth Euclid, Co., 26 B. T. A. 32; Liberty Farms Co., 22 B. T. A. 1298; Pictorial Review Co., 26 B. T. A. 472.

The expenses and commissions incurred in the sale of bonds subsequent to March 1,1913, are amortized ratably over the term for which the bonds are issued. Chicago, Rock Island & Pacific Ry. Co., 13 B. T. A. 988; Kansas City Southern Ry. Co., 22 B. T. A., 949, 966.

The petitioner in its brief lays stress on the proposition that, when a taxpayer keeps its books on an accrual basis, the same treatment must be accorded gross income items as is applied to expense items and vice versa, and cites in support thereof United States v. Anderson, 269 U. S. 422, and other Supreme Court cases. Petitioner points out that in United States v. Anderson, supra, the Supreme Court said, with reference to sections 12 (a) and IB (d) of the Revenue Act of 1916, followed by similar language in later acts: “ It was to enable taxpayers to keep their books and make their returns according to scientific accounting principles by charging against income earned during the taxable period the expenses incurred in and properly attributable to the process of earning income during that period.”

Were the expenses, including brokerage fees which petitioner paid to the Baltimore Trust Company for selling its bonds, in the respective taxable years “incurred in, and properly attributable to the process of earning its commissions ” within the meaning of the Supreme Court’s decision in United States v. Anderson, so as to make such bond expense and brokerage fees deductible in their entirety in the year when incurred, notwithstanding the numerous decisions which we have cited above which hold that such bond expenses are not deductible in their entirety in the year when incurred, but must be spread ratably over the life of the bonds? We think not. The facts stipulated do not show the gross amount of loan business which petitioner was doing in any of the taxable years or what relation the amount of bonds sold in any particular year had to the amount of loan business done by petitioner in that particular year. But even if such figures had been shown, the fact remains that the sale of petitioner’s bonds from time to time to replenish its funds were transactions separate and apart from the making of loans to its customers. The bonds had a maturity ranging from one to ten years, whereas the period of the mortgage loans ranged from one to three years. This we think presents a vital distinction and emphasizes the separateness of the two transactions. True it is that petitioner’s mortgage loans were used as collateral for its bonds, but we do not think that fact would change the well established rule that expenses of floating bond issues must be amortized over the life of the bonds. The situation we have here is not the same as existed in American National Co. v. United States, 274 U. S. 99. In that case the taxpayer for its services in making loans required the borrower to execute a note due in two years without interest for 10 per cent of the total amount of the loan. The amount represented by these notes was accrued by the taxpayer on its books as income. In order to secure money with which to operate its business, the taxpayer sold the mortage notes (not the commission notes) and executed a separate contract with the purchaser of the notes to pay him one per cent annually to the maturity date of the notes as a bonus in addition to the regular interest which the maker of said mortage notes was to pay.

The taxpayer thereupon accrued on its books as an expense liability the full amount of such bonus payments which it had incurred in any particular year. The Supreme Court sustained taxpayer’s method of keeping its books and making its tax returns on that point, saying:

In the present case, we think that the amount of the bonus contracts was “ an expense incurred and properly attributable ” to the Company’s process of earning income during the year 1917. These contracts were not analogous to obligations to pay interest on money borrowed, but were expenses incurred in selling the loan notes in as real a sense as if under its original system of doing business the Company had paid these amounts to brokers as fees for selling the loans or given them notes for such fees. The Company’s net income for the year could not have been rightly determined without deducting from the gross income represented by the commission notes, the obligations which it incurred under the bonus contracts, and would not have been accurately shown by keeping its books or making its return on the basis of actual receipts and disbursements. The method which it adopted clearly reflected the true income. And, just as the aggregate amount of the commission note was properly included in its gross income for the year — although not due and payable until the expiration of two years — so, under the doctrine of the Anderson case, the total amount of the bonus contracts was deductible as an expense incurred within the year, although it did not “ accrue ” in that year in the sense of becoming then due and payable.

Manifestly in the instant case if petitioner had used the method of selling its mortgage notes to investors and had paid brokerage fees in connection therewith as, in the American National Go. case, and contracted to make bonus payments direct to investors to induce them to purchase the notes, it would have been proper to have accrued such selling expenses in their entirety in the year when the sales were made. That would be true under the doctrine announced by the Supreme Court in American National Co. v. United States, supra. But petitioner did not sell its mortgage notes, but on the contrary retained title to them, subject to their being held as collateral security to secure the payment of the bonds, ranging in maturity from one to ten years, as against maturities of the notes ranging from one to three years.

This sort of a situation we do not think is the same as in the American National Co. case, and therefore does not justify us in holding that the expenses of petitioner’s bond issues, including brokerage fees paid to the sellers of the bonds, should be accrued in their entirety in the year when the bonds were sold, but should be amortized over the life of the bonds as we have held in numerous decisions, already cited. On this issue we hold for respondent.

Reviewed by the Board.

Decision will be entered under Rule 50.


author: Trammell :

text:
    Fidelity-Philadelphia Trust Company, Louise Reach and George A. Reach, Executors, Estate of Alfred J. Reach, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51334.
    Promulgated March 20, 1933.

      John B. Peary, O. P. A., for the petitioners.

      L. 8. Pendleton, Esq., for the respondent.
   OPINION.

Trammell :

This proceeding is for the redetermination of a deficiency in estate tax of $9,395.31. The matters presented for determination are (1) whether any amount is to be included in the taxable estate of decedent as representing the value of certain bonds transferred in trust by the decedent prior to his death, the income from which was to be paid to two of his daughters during their respective lives and upon their respective deaths the entire corpus or principal of such trusts to be paid over to the decedent if living or if he be not living then unto such person or persons as he might by his will direct, limit and appoint and (2) what amount should be allowed as a deduction from the gross estate on account of bequests made by the decedent to certain charitable organizations.

The proceeding was submitted on a stipulation of facts, the pertinent portions of which are as follows:

1. That Alfred. J. Reach, the decedent in this proceeding, died on January 14th, 1928, leaving a last will and testament bearing date of December 4th, 1926, a copy of which last will and testament is attached hereto and made a part hereof as Exhibit “A” * * *.
2. That on December 26th, 1918, the decedent, Alfred J. Reach, transferred to the Girard Trust Company, Trustee, by irrevocable deed of trust, United States Liberty Bonds of the par value of $50,000.00 and Philadelphia Electric Company First Mortgage Bonds of the par value of $45,000.00, the net income from which was to be paid to Louise Gray Jeffries, daughter of the decedent, during her natural life. A copy of said deed of trust is attached hereto and made a part hereof as Exhibit B ” * * *.
3. That on December 26th, 1918, the decedent, Alfred J. Reach, transferred to the Girard Trust Company, Trustee, by irrevocable deed of trust, United States Liberty Bonds of the par value of $50,000.00 and Philadelphia Electric Company First Mortgage Bonds of the par value of $45,000.00, the net income from which was to be paid to Emma Mercer Christ, daughter of the decedent, during her natural life. A copy of said deed of trust is attached hereto and made a part hereof as Exhibit “ C ” * * *.
4. Both Louise Gray Jeffries and Emma Mercer Christ, daughters of this decedent, survived this decedent, Alfred J. Beach.
5. In the compilation of the Federal Estate Tax Keturn of this decedent by the Executors of his estate nothing was included in the gross estate representing the value of the bonds transferred to the Girard Trust Company, Trustee, as set forth in paragraphs “ 2 ” and “ 3 ” hereof.
6. The respondent, in his determination of the net taxable estate of this decedent, included in gross estate the sum of $110,217.80, which amount is the value of the Liberty Bonds of the par value of $100,000.00 and the Philadelphia Electric Company Bonds of the par value of $90,000.00 transferred to the Girard Trust Company, Trustee, on December 26th, 1918, as set forth in paragraphs “ 2 ” and “ 3 ” hereof, based upon the life expectancies of the decedent’s daughters, Louise Gray Jeffries, and Emma Mercer Christ.
7. The decedent, Alfred J. Beach, made no mention of the powers of appointment reserved in the deeds of trust herein referred to in paragraphs “ 2 ” and “ 3 ” hereof in his last will and testament, referred to in paragraph “ 1 ” hereof.
8. The decedent, Alfred J. Beach, by his will dated December 4th, 192:6, made provision for the ultimate payment from his estate of $50,000.00, each, to the Young Men’s Christian Association, the Young Women’s Christian Association, and the Salvation Army, which amounts were to be paid to these several beneficiaries upon the death of the last survivor of seven persons, aged respectively, 51, 55, 55, 57, 57, 60 and 82 years.
9. In the computation of the Federal Estate Tax liability of the estate of the decedent, Alfred J. Beach, a deduction for the charitable bequests referred to in paragraph “ 8 ” hereof was taken in the sum of $73,966.50, which amount represents the present value of $150,000.00, as of the date of the death of this decedent, using a factor of .49311, which factor is the present worth of $1.00 the payment of which is postponed until the death of a person of fifty one years of age, as set forth in Table “A” page 20 of Estate Tax Begulations 70.
10. The respondent, in his determination of the amount to be allowed as a deduction from gross estate for the charitable bequests referred to in paragraph “ 8 ” hereof, amounting in the aggregate to $150,000.00, used a factor of .32977 and allowed the sum of $49,465.50 in lieu of the amount claimed by the estate namely $73,966.50. In arriving at the said remainder factor of .32977 the actuary for the Bureau considered the possibility that the youngest of the life beneficiaries would be survived by one if not by all of the other six life tenants, as well as the other possibilities of survivorship.
11. It Is Further Stipulated and Agreed that there are only two questions before the Board for decision, namely:
(a) Whether or not anything is to be included in the value of the estate of this decedent, for purposes of Federal Estate Tax, representing the value of the bonds transferred in trust to the Girard Trust Company, trustee, by the two deeds of trust made and executed by the decedent on December 26th, 1918.
(b) What amount should be allowed as a deduction from gross estate, for the purposes of Federal Estate Tax, for the charitable bequests made to the Young Men’s Christian Association, the Young Women’s Christian Association, and the Salvation Army.
12. That this case is hereby submitted to the Board for decision upon the basis of the pleadings and this stipulation, subject, however, to the right of both parties to contest, by appropriate proceedings, any decision by the Board with respect to any issue in this case * * *.

The deed of trust by which the petitioner transferred to the trustee Liberty bonds and corporate bonds the income from which was to be paid to Louise Gray Jeffries during her life, and referred to in the stipulation as Exhibit B, is as follows:

This Indenture, made this 26th day of December in the year of our Lord One Thousand Nine Hundred and Eighteen, between Alfred J. Reach, of the City of Philadelphia, and State of Pennsylvania, hereinafter called Geantob, and Girabd Trust Company, a corporation of the State of Pennsylvania, hereinafter called Trustee, Witnesseth :
That Grantor, for and in consideration of the sum of One Dollar to him in hand paid by. Trustee at and before the ensealing and delivery hereof, the receipt whereof is hereby acknowledged, and in consideration of the covenants and agreements herein contained, and for the purpose of reserving the properties and estate hereinafter designated, and for the accomplishment of the purposes hereinafter set forth, Hath granted, bargained, sold, assigned, transferred and set over, and by these presents Doth grant, bargain, sell, assign, transfer and set over unto Trustee, its successors and assigns, the following:
$50,000. United States of America Fourth Liberty Loan 4%’s
$45,000. Philadelphia Electric Company First Mortgage 5’s and such other sums of money, securities or other property, real or personal, as may be delivered to Trustee or assigned to it or its successor or successors by endorsement hereon or otherwise placed under the trusts herein created by a proper instrument or instruments;
To Have and to Hold, Receive and Take the above mentioned stocks, securities and other properties and every part thereof unto the said Trustee, its successors and assigns, to and for its only proper use, benefit and behoof forever, In Trust Nevertheless for the following uses and purposes, that is to say:
In Trust to hold, manage, invest, reinvest and keep invested the corpus or principal thereof, and to collect and receive the income therefrom, and after the deduction of all proper or necessary charges and expenses, to pay over the net income therefrom, quarterly, unto Louise Gray Jeffries, wife of William K. Jeffries, daughter of Grantor, for and during the term of her natural life.
In Trust upon the death of the said Louise Gray Jeffries to assign, transfer and pay over the entire corpus or principal held hereunder unto Grantor, if he be living at that time, or, should Grantor not then be living, unto such person or persons as Grantor may by his last Will and Testament direct, limit and appoint.
Trustee shall have power to sell the Philadelphia Electric First Mortgage Five Per cent, bonds hereby assigned to it if, in its judgment, it shall seem advisable so to do and to reinvest the proceeds therefrom in United States of America Liberty bonds.
All payments of income hereunder shall be so made that the same shall be free and clear of the debts, contracts, engagements, alienations and anticipations of the beneficiary herein named and free and clear from the lien of judgments recovered against her and free from liability for levies, judgments, executions and sequestrations.

The deed of trust by which the petitioner transferred to the trustee Liberty bonds and corporate bonds, the income from which was to be paid to Emma Mercer Christ during her life, and referred to in the stipulation as Exhibit C, is identical with the above quoted deed of trust, with the exception of the name and partial description of the beneficiary.

While the decedent made no specific mention in his will of the powers of .appointment reserved in the above mentioned deeds of trust, the will, after providing for certain specific bequests, contains the following provision with respect to the residuary portion of the decedent’s estate: ■

Eighth : I give, devise and bequeath all the rest, residue and remainder oí my estate, real and personal, of every sort and hind, to the.Fidelity-Philadelphia Trust Company, In Trust, for the uses, persons and purposes, and with the powers following:
In Trust, to collect the rents, income and profits thereof and, after deducting the necessary expenses of the trust, to distribute the net income thereof as follows:
In Trust, to pay to my sister, Maria L. Reach, during her lifetime an annuity of Twenty-five hundred dollars ($2500) in equal quarterly payments; the first payment to be made within three months after my decease.
In Trust, until the decease of my wife and the last survivor of my four children, George A. Reach, Emma M. Christ, Louise G. Jeffries and Bertha A. Reach, and my sons-in-law, to pay over one-third of the residue of the net income during her lifetime to my wife, in equal quarterly payments, and to divide the remaining two-thirds of the net income, during her lifetime, and the whole net income after her decease, as follows:
In Trust, to divide said two-thirds or the whole, as the case may be, at each time of quarterly distribution, into as many parts or shares as at each of said times there shall be children of mine then living and children of mine then dead represented by descendants then living; to subdivide the share falling to each set of descendants of a child of mine then dead among them, per stirpes, upon the principle of representation; and to pay over to each child and descendant of a dead child who, at each of said times shall be found entitled, its share of said income in fee simple.
In Trust, in the event of the death of either of my married daughters leaving her husband but no issue, her surviving, to pay over to such husband during his lifetime, so much of the income to which such daughter would have been entitled if living, as shall not exceed interest at the rate of five per centum (5%) per annum on One Hundred Thousand Dollars ($100,000) ; such sum to be paid in like equal quarterly installments.
In Trust, upon the death of the last survivor of my wife, children and sons-in-law, to distribute one-third of the principal of the share of which each child received in his or her lifetime the income, to such persons and in such amounts as such child may by Will or instrument in the nature thereof, appoint, and to distribute so much of the entire principal of my estate as shall not have been so appointed, as follows:
To pay to the Young Men’s Christian Association of Philadelphia the sum of Fifty Thousand Dollars ($50,000) absolutely;
To the Young Women’s Christian Association of Philadelphia the sum of . Fifty Thousand Dollars ($50,000) absolutely; and
To the Salvation Army, Incorporated, of Philadelphia, the sum of Fifty Thousand Dollars ($50,000) absolutely.
To divide the remainder of my said residuary estate into as many parts or shares as at that time there shall be children of mine then dead represented by descendants then living; to subdivide the share falling to each set of descendants of a child of mine then dead among, them per stirpes, upon the principle of representation; and to pay over to each descendant of mine who shall then be found entitled, its share in fee simple.

Nothing was included in the estate tax return as a part of the decedent’s gross estate on account of the Liberty bonds of a par value of $100,000 and the corporate bonds of a par value of $90,000 transferred by the decedent under the two trust deeds to the trustee, the income from which was payable to decedent’s two daughters during their respective lives and upon their respective deaths the principal or corpus of such trusts to be paid to the decedent if living and ii he were not living then to such person or persons as the decedent might by his will direct, limit and appoint. In determining the net taxable estate of the decedent the respondent has included as a part of the gross estate the amount of $110,217.80 as representing the value of the bonds based upon the life expectancies of the decedent’s two daughters who were to receive the income from the bonds during their respective lives.

The petitioners contend that this action of the respondent is erroneous and that no amount should be included in the gross estate on account of the bonds. In support of this contention the petitioners urge that the decedent in creating the two trusts divested himself of all the incidents of ownership of the property transferred, putting it beyond his power to ever repossess it and under the laws of Pennsylvania definitely fixing the remaindermen should he fail to designate in his will to whom the property should go. The petitioners insist that the trust instruments themselves show that all right, title and interest in the trust property passed from the decedent absolutely and irrevocably upon the execution of the instruments, and not only a life interest to the daughters. The petitioners also urge that under the laws of Pennsylvania a gift of property for life with a remainder over to others vests the interests of such others. The petitioners also insist that so far as the two trusts are concerned nothing passed at the time of the death of the decedent.

By two trust deeds executed on December 26, 1918, the decedent placed in trust for two of his daughters the property in controversy. Under the provisions of these instruments the trustee was to pay over the net income from the trust property to the respective daughters for and during the term of the natural life of each. The instruments further specifically provided that upon the death of the respective daughters the trustee was “ to assign, transfer and pay over the entire corpus or principal held hereunder unto Grantor, if he be living at that time, or, should Grantor not then be living, unto such person or persons as Grantor may by his last Will and Testament direct, limit and appoint.” We fail to find anything in the trust instruments to indicate that the decedent intended for either of the daughters to receive or that either did receive anything more under the trust instruments than the net income from the property of the respective trusts “ for and during the term of her natural life.” At all times the decedent had a reversionary interest in the trust property. By the trust instruments the interests remaining after the grant of the income from the property to the daughters for their respective lives was retained by the decedent himself and was not granted or given by him to another or others. At his death the interest thus retained constituted a part of his estate just the same as any other property that he then owned. Since he did not make it the subject of a specific bequest by his will, it became a part of the residuary portion of his estate, the disposition of which the will specifically provided for as heretofore set forth. Under these circumstances the interest retained by the decedent in the property of the two trusts passed upon his death and by the terms of his will to those entitled to take under the residuary clause of the will. Those entitled to share in the residuary estate of the decedent acquired such right not by the terms of instruments creating the two trusts in controversy, but by reason of the decedent’s death and the provisions of his will.

If the decedent had provided in the trust instruments that the corpus of each trust should be paid over to him only in the event the beneficiary should predecease him, but that the corpus should go to the beneficiary or another in the event the beneficiary did not predecease him, such a provision alone would not have subjected the corpus of the trusts to tax as a part of the decedent’s gross estate. Nanaline H. Duke et al., Executors, 23 B. T. A. 1104, and authorities cited.

However, the provisions of these trust instruments went much further. It was provided that the entire corpus or principal of each trust should, upon the death of the beneficiary, be paid over to the decedent, if then living, and if not then living, it should be paid over to such person or persons as the decedent might appoint by his will. Thus .it is made clear that the decedent did not intend to transfer to the trustee anything more than the management and control of the trust estates for the purpose of paying the net income to the daughters during their respective lives, and that the decedent intended to and did reserve to himself all interest in and to the corpus of each trust, to be disposed of by him under his will as he might see fit.

These facts, we think, bring the case within the principle applied by the Supreme Court in Klein v. United States, 283 U. S. 231. In that case the decedent, Klein, prior to his death conveyed certain real estate to his wife, the deed providing that the grantee should have the land for the term of her natural life, but if she died before the grantor, the reversion in fee should be and remain vested in the grantor. The court held that the real estate was subject to tax, saying:

The two clauses of the deed are quite distinct — the first conveys a life estate; the second deals with the remainder. The life estate is granted with an express reversion of the fee * * * It follows that only a life estate immediately was vested. The remainder was retained by the grantor; and whether that ever would become vested in the grantee depended upon the condition precedent that the death of the grantor happened before that of the grantee. The grant of the remainder was, therefore, contingent. * * * It is perfectly plain that the death of the grantor was the indispensable and intended event which brought the larger estate into being for the grantee and effected its transmission from the dead to the living, thus satisfying the terms of the taxing act and justifying the tax imposed.

The facts of the instant case are less favorable for the petitioners than those of the Klein case. Here the decedent did not even grant contingent remainders to.his daughters. The trust instruments did not purport to provide for the disposition of the corpus, other than to reserve such powers to the decedent.

Each trust beneficiary survived the decedent, and upon his death the beneficial title of the corpus of each trust became vested in the persons appointed by his will. The transfer of the corpus of each trust resulted from the exercise by the decedent of his reserved powers of appointment, and was obviously intended to take effect in possession or enjoyment after his death, upon the decease of the daughters, and thus comes clearly within the purview of the taxing statute. Sec. 302 (c), Revenue Act of 1926. Sargent v. White, 50 Fed. (2d) 410; Union Trust Co. v. United States (Ct. Cls.) 54 Fed. (2d) 152.

In view of the foregoing we think the contention of the petitioners must be denied. As the respondent has included in the gross estate of the decedent only the value of the property in controversy based upon the life expectancies of the two daughters who were to receive the income therefrom during their respective lives, and there being no controversy between the parties as to such value, we think the respondent’s action is correct and it is accordingly sustained. Cf. Chemical Bank & Trust Co. et al., Executors, 25 B. T. A. 1153.

The decedent made certain charitable bequests totaling $150,000. The payment of these bequests was deferred until the death of the last survivor of seven persons, aged respectively, 51, 55, 55, 57, 57, 60 and 82 years. In the computation of the decedent’s gross estate the petitioners took a deduction of $73,966.50 as representing the present value of $150,000 as of the date of the decedent’s death. The amount of the deduction was computed by using the factor .49311 as representing the present worth of $1, the payment of which is postponed until the death of a person 51 years of age. In determining the deficiency here involved the respondent allowed only $49,465.50 of the amount of $73,966.50 taken by the petitioners. In computing the amount allowed the respondent used a factor of .32977. In arriving at the factor of .32977 the respondent considered the possibility that the youngest of the life beneficiaries would be survived by one if not by all of the other six life tenants, as well as other undisclosed possibilities of survivorship. The issue with respect to this action of the respondent is what amount should be allowed as a deduction from the gross estate on account of the charitable bequests in question.

In Henry B. Ickelheimer et al., Executors, 14 B. T. A. 1317, the will of the decedent provided that the income from certain property and specific amounts of money should be paid to the widow of the decedent during her lifetime and that at her death such property and money should be paid over to certain corporations organized and operated exclusively for religious, charitable, scientific, literary or educational purposes. We there said:

It is apparent that the corporations tools vested remainders at the time of the death of the decedent. The value of such remainders is properly deductible from the gross estate. Mercantile Trust Co., Executor, 13 B. T. A. 85.
The estate tax is a tax upon the passing of the estate of the decedent and the value of the estate must be determined as of the time of the death of the decedent. The corporations did not receive the absolute ownership of the property in question, but were entitled to the corpus only after the expiration of the life estate of the widow. In such a case it is proper to value the remainder by reducing the amount to be received by an amount representing the delayed receipt of the bequest by the charities. See Dugan v. Miles, 292 Fed. 131; United States v. Farr's Executor, 196 Fed. 996; and Simpson v. United States, 252 U. S. 547.

Where property is given to charity, but subject to the use or enjoyment of another for life, the value of the property for the purpose of determining the amount deductible from the gross estate is to be determined by the use of mortality tables. Ithaca Trust Co. v. United States, 279 U. S. 151; Cortlandt F. Bishop, Executor, 23 B. T. A. 920. Since the bequests here in controversy were to be paid upon the death of the last survivor of seven persons, whose ages ranged from 51 to 82 years, the petitioners computed the deduction taken by them on the basis of the life expectancy of a person 51 years of age, on the ground that the remaining life expectancy of a person of that age was greater than that of any of the six others, who were from four to twenty-one years older. The factor used by the petitioners on the foregoing basis was .49311. The respondent determined a factor of only .32977 on the principle that the life expectancy of the survivor of seven persons is greater than the life expectancy of one person in the group, even though that person be the youngest. The parties submitted this question on the theory that it was a question of law. In our opinion, this is a question to be determined as a fact based on the testimony of qualified witnesses. It is not a question of law as to what the life expectancy of a person is, whether that person be an individual alone or the survivor of a group of individuals. The determination of the Commissioner is presumed to be correct until overcome by evidence. There is nothing in the record here to show that the determination of the Commissioner is not correct. We accordingly approve his action in this respect.

Reviewed by the Board.

Judgment will he entered under Bule 50.


author: Smith :

text:
    Alden Anderson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45598.
    Promulgated March 20, 1933.

      E. E. Tooley, Esq., for the petitioner.

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

Smith :

The respondent has determined a deficiency in petitioner’s income tax for the calendar year 1923 in the amount of $2,317.06. In his petition, the petitioner alleges that the respondent erred in disallowing a deduction for taxes paid in that year in the amount of $34,057.25. The respondent has denied the deduction on the grounds that the amount in dispute was a part of the purchase price of the property which was acquired by the petitioner at the time the taxes were paid. The facts are stipulated as follows:

1. On or about November 26, 1923, the petitioner purchased a one-half interest in certain real estate situate within the Compton-Delevan Irrigation District in Colusa County, California.
2. At the time of and in connection with the purchase the petitioner paid his proportionate share of certain county taxes levied by the said Colusa County and certain taxes levied by the said Compton-Delevan Irrigation District which had become delinquent and were a lien upon the property. The petitioner similarly paid the current 1923-24 county taxes and irrigation district taxes already assessed and a lien upon the property. Following is a statement of the taxes so paid during the year 1923:
Colusa County Taxes
Total Petitioner’s Share (%)
Total Delinquent Taxes paid November, 1923_$5, 964.44 $2, 982. 22
First Half 1923-24 Taxes paid_ 3,151.06 1, 575.53
Total_$9,115. 50 $4, 557. 75
Compton-D elevan Irrigation District Taxes
Petitioner’s Total Share (%)
Interest on Irrigation District Bonds — Delinquent $19,965.75 $9,982.87
Interest on Irrigation District Bonds — Current 1923-24_ 14, 792.47 7, 396.24
For Interest & Penalties on Delinquent Taxes_ 13, 917. 39 6, 973. 69
For General Expenses — Delinquent_ 2,104.70 1, 052.35
For General Expenses — Current 1923-24_ 8, 208.70 4,104.35
Total___ $29, 509. 50
3. In his Federal Income Tax [return] for the calendar year 1923 the petitioner sought to take a deduction in the amount of $34,066.75 on account of the taxes paid as hereinbefore stipulated.
4. In determining the deficiency proposed in the deficiency letter herein the respondent has disallowed the proposed deduction.

The following provisions of the Revenue Act of 1921 and the statutory laws of the State of California are applicable:

Revenue Act of 1921:

Sec. 214. (a) That in computing net income there shall be allowed as deductions:
*******
(3) Taxes paid or accrued within the taxable year except * * * (c)
taxes assessed against local benefits of a kind tending to increase the value of the property assessed, * * *
*******
Sec. 215. (a) That in computing net income no deduction shall in any case be allowed' in respect of—
*******
(2) Any amount paid out for new buildings or for permanent improvements or betterments made to increase the value of any property or estate.

General Laws of California, Leering, 1923, Part One, Act 3854, being the California Irrigation District Act:

§ 35. Duty of ■ assessor. The assessor must, between the first Monday in March and the first Monday in June, in each year, assess all real estate in the district, to the persons who own, claim or have possession or control thereof, at its full cash value, * * *
*******
§ 40. Assessment lien, when. The assessment upon land is a lien against the property assessed from and after the first Monday in March for any year. * * *
*******
§ 41. Uotiee that assessments are due. When delinquent. On or before the first day of November, the secretary must deliver the assessment-boot to the collector of the district, who shall within twenty days publish a notice in a newspaper published in each county in which any portion of the district may lie, that said assessments are due and payable and will become delinquent at 6 o’clock P. M. on the last Monday of December next thereafter, * * *

We held in Andrew Little, 21 B. T. A. 911, that the interest assessed and paid as a tax under the irrigation district statutes of the State of Idaho, which are not materially different from those of the State of California, was a tax and not a payment of interest within the meaning of section 214 (a) (2) of the Revenue Act of 1921, and, not being a tax of a kind tending to increase the value of the property assessed, was deductible under section 214 (a) (3) of the act. For the purpose of the question in issue in this proceeding all of the above amounts, representing the taxes paid to Colusa County and the interest on the irrigation district bonds, are to be treated as taxes.

It is stipulated that the disputed amounts were paid by the petitioner “ at the time of and in connection with the purchase ” of his one-half interest in the real estate situated within the irrigation district. The purchase took place on November 26, 1923. A portion of both the taxes and interest paid was then past due and delinquent and a portion was for the current years 1923 and 1924, not then delinquent but assessed and constituting a lien on the property by statute.

In Grand Hotel Co., 21 B. T. A. 890, we held that certain payments of taxes to the State of Washington, under circumstances almost identical with those in the instant proceeding, were not deductible as taxes paid, but constituted a part of the purchase price of the property which the taxpayer previously acquired in that year. The facts here are even less favorable to the petitioner because, there, the taxes were paid some time after purchase of the property and not at the time of and in connection with the purchase,” as in the instant case. In that opinion we said:'

Of course it is needless to say that tbe taxes within the intendment of the statute are the taxpayer’s own taxes. For the entire period of 1921 the hotel real estate was owned by J. E. Ransome and the taxes for that year were assessed against the property while it stood in his name and became a lien on the property on March 1, 1921. It is true that when petitioner bought the property in 1922 the 1921 taxes were not yet delinquent, but nevertheless the lien had attached and when the petitioner paid the taxes which for a prior year accrued at a time when it was not the owner of the property, its action in paying the taxes can only be regarded as the payment of a part of the purchase price. Surely petitioner would not pay taxes which had accrued against property in a prior year when it was not the owner, without having due allowance made for this payment in the agreed purchase price.
At the time the petitioner purchased the property there was a lien against it held by the New York Life Insurance Oo. and as a part of the purchase price petitioner paid off the mortgage and all the accrued interest and full allowance was made for this payment in the adjustment of the purchase price. This lien by the New York Life Insurance Co. was no more valid and outstanding against the property than was the lien which the State of Washington had for 1921 taxes. Both stand on the same footing.

In People of the State of New York v. Maclay, 287 U. S. 590, the Supreme Court said:

* * * By the statutes of New York, “ every such tax of fee [including the annual franchise tax to be paid by corporations] shall be a lien and binding upon the real and personal property of the corporation * * * liable to pay the same until the same is paid in full.” N. Y. Tax Laws, Consolidated Laws, e. 60, see. 197. The lien thus created is effective for many purposes though its amount is undetermined. It is notice to mortgagees or purchasers, who are held to loan or purchase at their own risk if they take their mortgages or deeds before the tax has been assessed or paid. Carey v. Keith, Inc., 250 N. Y. 216; Engelhardt v. Alvino Realty Co., Inc., 248 N. Y. 374. In that respect it is similar to the lien of a transfer tax or duty upon the estate of a decedent. Midurban Realty Co. v. F. Dee & Realty Corporation, 247 N. Y. 307; Stock v. Mann, 255 N. Y. 100, 104. * * *

The stipulated facts in this proceeding do not afford any grounds for a reversal of the respondent’s determination that the total amount paid by the petitioner on account of both the delinquent and current taxes and interest on the irrigation district bonds was a part of the purchase price of the property acquired by him at that time, and is therefore not deductible from gross income in the year when paid.

Judgment will be entered for the respondent.


author: Lansdon :

text:
    Fort Worth Grain and Cotton Exchange, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 51538, 64201.
    Promulgated March 20, 1933.

      Eustis My res, Esq., for the petitioner.

      J. M. Leinenkugel, Esq., for the respondent.
   OPINION.

Lansdon :

The respondent has determined deficiencies for the fiscal years ended at March 31, 1926, 1927, 1928, 1929 and 1930 in the respective amounts of $110.88, $370.71, $1,329.48, $664.67 and $731.50. The single issue involved is whether the petitioner is exempt from Federal income taxation as a business league or board of trade within the meaning of sections 231 (7) and 103 (7), respectively, of the Eevenue Acts of 1926 and 1928. The two proceedings have been consolidated for the purposes of hearing and report. The parties have filed a stipulation, which we adopt as our findings of fact and incorporate herein by reference.

Since the petitioner is seeking the benefits of exemption, it must prove strict compliance with all the statutory conditions authorizing the classification claimed. Waynesboro Manufacturers Assn., 1 B. T. A. 911; (Charles A. Collin, 1 B. T. A. 305; Northwestern Jobbers Credit Bureau, 14 B. T. A. 362; affd., 37 Fed. (2d) 880. “ It follows, therefore,” as we said in Northwestern Jobbers Credit Bureau, sufra, “ that to prevail here this petitioner must prove that it is not organized for profit, and that no part of its net earnings inures to the benefit of any private shareholder or individual.”

Article II of petitioner’s constitution and bylaws set out the following as the purposes for which it was organized and is maintained:

Article II.
The objects of this Association are: To promote uniformity in the customs and usages of Merchants; to inculcate principles of justice and equity in business; to facilitate the speedy adjustment of business disputes; to insure confidence in the business methods and integrity of the members of this organization; to collect and disseminate valuable commercial and economical information ; to prescribe rules for the grading and weighing of Grain, Seeds and Hay, and all products thereof; to adopt rules, regulations and standards of classification, which shall govern all transactions connected with the cotton trade; to organize and maintain a Grain Inspection Department, and a Department for weighing carloads of Grain, Seeds and Hay, and all products thereof, and to promote the general welfare of the Cotton, Grain and Milling interests in Fort Worth.

It will observed that the last sentence of the article of the bylaws above quoted authorizes the petitioner “ to organize and maintain a Grain Inspection Department, and a Department for weighing carloads of Grain, Seeds and Hay, and all products thereof, and to promote the general welfare of the Cotton, Grain and Milling interests, in Fort Worth.” In conformity with such authority, which is additional to any purpose set out in its charter, the petitioner engaged in the business of inspecting and weighing commodities not only for its members, but for others. The stipulation shows that annual receipts for such services in the years 1926 to 1930, inclusive, were in the respective amounts of $34,619.59, $46,524.48, $60,415.79, $62,875.28 and $67,082.81. Each year there was also substantial income from rent and life insurance premiums. In 1930 the petitioner established a laboratory department from which in that year it received $16,159.40. These are all activities that are customarily carried on for profit and that as a matter of fact, as disclosed by the stipulation, resulted in substantial profits for the petitioner, since the record discloses that its net worth increased from $55,194.91 in 1926 to $101,631.35 in 1930.

Regardless of what may have been the intention of the organizers of petitioner, the record shows that profits were realized from operations. Counsel argues that this is immaterial, since none of such profits were distributed as dividends or interest to the benefit of any individual member. It is now well established that benefits arising from profits of such an organization may inure to individual members without any distribution of dividends. It is beyond dispute that the petitioner served its members in many ways from which no profits were realized. It is clear that such services were made possible by the large returns from its profit-making activities. In such circumstances it can not be said that none of the profits inure to the benefit of individual members. Northwestern Jobbers Credit Bureau v. Commissioner, supra, Houston Belt & Terminal Ry. Co. v. United States, 250 Fed. 1; Hutterische Bruder Gemeinde, 1 B. T. A. 1208.

Petitioner relies on Crooks v. Kansas City Hay Dealer’s Assn., 37 Fed. (2d) 83, but we think the situation in that case is distinguishable. There the entire income was derived from inspection fees and membership dues. Such fees and dues were usually no more than required for expenses necessary to the purposes of the association and in some years were insufficient to meet operating costs. That concern had neither capital stock nor capital. The petitioner here had no capital stock, but in all the years under review it did own substantial capital assets ranging from $55,194.91 in 1926 to $101,631.35 in 1930, some of which appears to have been invested in income-producing property, since each year’s receipts included an item of rent of about $5,000. The Kansas City Hay Dealer’s Association confined its activities to the purposes for which it was organized and conducted no operations primarily for profit. The petitioner enlarged its charter purposes in its bylaws and carried on numerous activities which customarily are conducted for profit and from which it realized a substantial income. Obviously it is not a business league in the usual sense, since its services were available to nonmembers as well as members. In our opinion it has failed to overcome the presumption of correctness which attaches to the determination of the respondent.

Decision wül be entered for the respondent.


author: Black::

text:
    Robert C. Cooley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 63282.
    Promulgated March 24, 1933.

      Robert G. Oooley, Esq., pro se.

      J. H. Yeatman, Esq., for the respondent.
   OPINION.

Black::

The pleadings present two questions for our decision, which we will discuss in their order. (1) Where husband and wife, domiciled in the State of Massachusetts, receive income from personal property held by them as tenants by the entirety, is all such income taxable to the husband, or is one half taxable to him and one half to the wife?

The petitioner contends that income from personal property held by husband and wife as tenants by the entirety in the State of Massachusetts is, for income tax purposes, taxable one half to each spouse, the same as income from community property in community property states, and cites Poe v. Seaborn, 282 U. S. 101. We find nothing in the decisions of the Massachusetts courts to support this contention.

An estate by the entirety may exist in personal as well as real property in the State of Massachusetts: Boland v. McKowen, 189 Mass. 563; 76 N. E. 206; Phelps v. Simons, 159 Mass. 415; 34 N. E. 657, and Marble v. Jackson, 139 N. E. 442.

In Licker v. Gluskin (1929), 265 Mass. 403; 164 N. E. 613, the Supreme Judicial Court of Massachusetts, after analyzing the various decisions on the subject of estates by the entirety, said:

Thus by a series of decisions, it is established that the rights of a husband in an estate by the entirety are the same as they existed at common law.

At common law the husband during coverture and as between himself and wife, had the absolute and exclusive right to the control, use, possession, rents, issues and profits of property held as tenants by the entirety. The common law rule is followed in Massachusetts.

In the case of Cunningham v. Ganley, 166 N. E. 712 (1929), the Supreme Judicial Court of Massachusetts held that where real estate is held by husband and wife as tenants by the entireties, the rents and profits belong to the husband. In the case of Pray v. Stebbins (1886), 141 Mass. 219; 4 N. E. 824, it was held that the husband has during coverture the usufruct of all the real estate which his wife has in fee simple, fee tail or for life. To the same effect see Voight v. Voight, 147 N. E. 887.

These decisions of the Massachusetts courts demonstrate that the common law estate by the entirety between husband and wife continues to exist in that state in both real and personal property, unaffected by any statutes enabling married women to own, hold and dispose of propertjr the same as a feme sole; that the entire income from property so held, as at common law, belongs to the husband and is properly returnable by him for income tax purposes. Cf. District & Security Trust Co. et al., Executors v. Commissioner, 20 B. T. A. 136, and Sylvester A. Sommers, 18 B. T. A. 768. Buies relating to income from community property have no bearing in this case, for the reason that Massachusetts is not a community property state.

On this issue we hold for respondent.

The remaining question is, Where a stockholder in a corporation receives in the taxable year as an incident to his stock ownership, rights to subscribe to bonds of the corporation which have a fair market value when received by the stockholder, do such rights constitute taxable dividends to the stockholder to the extent of their fair market value when he does not sell the rights in the taxable year, but exercises them to acquire the bonds ?

The Board considered this identical question in T. I. Hare Powel, 27 B. T. A. 55, in which case the petitioner, as a stockholder of the American Telephone and Telegraph Company, in 1929 received “ rights ” to subscribe for gold debenture bonds convertible into shares of a new issue of stock at stated prices, and we held that the market value of the subscription rights did not constitute taxable income. In that case the “ rights ” received by Powell as stockholder in the American Telephone and Telegraph Company were of the very same series as those involved here. Accordingly, in the instant case there was, as we held in the Powell case, no realization of income on which to levy a tax. The mere receipt of subscription rights to purchase convertible bonds is not income.

Decision will be entered under Rule 50.