author: Black: Smith,

text:
    Haffenreffer Brewing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96468.
    Promulgated February 20, 1940.

      Edward J. Eeelan, Jr., Esq., and Lawrence E. Green, Esq., for the petitioner.

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

Black:

Our first question is whether the amount of $86,451.67 is deductible in computing petitioner’s “undistributed adjusted net income” as an amount “used or set aside to retire indebtedness incurred prior to January 1, 1934” under the provisions of section 351, Title IA, of the Revenue Act of 1934. That section reads in part as follows:

SEC. 351. SURTAX ON PERSONAL HOLDING COMPANIES.
(a) Imposition op Tax. — There shall be levied, collected, and paid, for each taxable year, upon the undistributed adjusted net income of every personal holding company a surtax equal to the sum of the following:
*******
(b) Definitions. — As used in this title—
(2) The term “undistributed adjusted net income” means the adjusted net income minus the sum of:
*******
(B) Amounts used or set aside to retire indebtedness incurred prior to January 1, 1934, if such amounts are reasonable with reference to the size and terms of such indebtedness; and
(O) Dividends paid during the taxable year.
(3) The term “adjusted net income” means the net income computed without the allowance of * * *
*******
(4) The terms used in this section shall have the same meaning as when used in Title I.

Our second question is whether the amount of $39,550 is deductible in computing petitioner’s “net income” as “interest paid or accrued within the taxable year on indebtedness” under the provisions of sections 21' and 23, Title I, of the Eevenue Act of 1934. The material provisions of these sections are as follows:

SEC. 21. NET INCOME.
“Net income” means the gross income computed under section 22, less the deductions allowed by section 23.
SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
*******
(b) Interest. — All interest paid or accrued within the taxable year on indebtedness * * *.

Since it is agreed that petitioner is a personal holding company, its tax liability for the year 1934 is determined by computing first its gross income and net income, respectively, under Title I, and then its adjusted net income and undistributed adjusted net income, respectively, under Title IA. The only items of this computation that are in dispute are the two items mentioned above. Under our first question we must determine whether the amount that was used in 1934 to retire a part of petitioner’s preferred stock was used to retire “indebtedness incurred prior to January 1,1934,” as that term is used in section 351 (b) (2) (B), and under our second question we must determine whether the $39,550 that was paid out as dividends on the preferred stock was in substance interest paid on “indebtedness” as that term is used in section 23 (b). By virtue of section 351 (b) (4), the term “indebtedness” used in that section shall have the same meaning as when used in section 23 (h) of Title I.

The term “indebtedness” as used in section 351 (b) (2) (B) is defined in respondent’s Regulations 86, article 351-4, as amended by T. D. 4117, Cumulative Bulletin 1931-2, p. 196, as follows:

The term “indebtedness” means an obligation, absolute and not contingent, to pay, on demand or within a given time, in cash or other medium, a fixed amount. The term “indebtedness” does not include the obligation of a corporation on its capital stock.

Did the preferred shares which petitioner issued to the English company represent a capital investment in petitioner as the respondent contends, or did they evidence an indebtedness of petitioner to the English company as petitioner contends ? The answer to this question must be determined from the terms and conditions under which the preferred shares were issued. Commissioner v. O. P. P. Holding Corporation, 76 Fed. (2d) 11; Palmer, Stacy-Merrill, Inc., 39 B. T. A. 636; United States v. South Georgia Railway Co., 107 Fed. (2d) 3.

Petitioner’s preferred shares were issued in accordance with the agreement of June 23, 1930, the material provisions of which are set forth in our findings.

The circumstances leading up to the agreement of June 23, 1930, were testified to by petitioner’s witness, Francis V. Barstow, the attorney who drew up the agreement. On direct examination Barstow testified that he was personally familiar with the circumstances surrounding the execution and delivery of the agreement; that the principal negotiators were Richard Bradfield (now deceased), representing the English company, and Haffenreffer; that the New Jersey company and R. & A. each owned a brewery’in Boston^ that Haffenreffer was the manager of both breweries; that Bradfield was the managing director of the English company; that during the prohibition era both breweries were making cereal beverages; that the business during the prohibition era was not as lucrative as it had been prior thereto; that Bradfield was continually offering suggestions to Haffenreffer as to how to run the business, which became very irksome to Haffenreffer; that in the fall of 1929 Haffenreffer wrote Bradfield that either he (Haffenreffer) would have to have control of the business or he would have to resign; that Bradfield then came to New York with power to negotiate their differences; that Bradfield was anxious Haffenreffer should continue as manager; that Barstow suggested a new, corporation to which would be transferred the shares of the New Jersey- company and the indebtedness of that, company in exchange for nonvoting preferred stock in the new corporation, Haffenreffer to receive all the common stock in the new corporation in exchange for all the common stock in R. & A.; that Bradfield objected to taking the preferred stock thus suggested by Barstow and said:

* * * bis form of investment would be entirely changed, and that, at that time, he felt it wise to get as much out of his investment as he could. Mr. Haffenreffer said that in the nature of the business, he could not expect people to put money in to buy out the English interest, but that he would loan to the new holding company one hundred thousand dollars, and that he was willing to permit approximately one-half of the earnings of the new holding company, or of the consolidated earnings of the breweries, to be used for the purpose of retiring preferred stock to be given in addition to tbe one hundred thousand dollars. Mr. Bradfield then said he would like to get a certain amount of common stock as a gamble in the future of the business. Finally, the terms of the contract were agreed to * * *. [Direct testimony of Barstow.]

Upon cross-examination Barstow was asked whether it would not have been possible for the English company to have been a creditor rather than a preferred stockholder, whereupon Barstow answered:

That was considered carefully at the time of the negotiations. The result was that I did not feel that, in a Company of this particular kind, there should be a debt with a .maturing obligation. I know we considered the question of English debentures, which have no maturity, — an attractive feature, — I did not know whether they were a proper kind of obligation to be issued by a Massachusetts corporation, so I fell back on the preferred stock.

The cross-examination of Barstow later continued as follows:

Q. Mr. HaflEenreffer did not want to have the English company in a position where they could be a creditor and throw them into receivership?
A. The business was too precarious. He did not want a debt with a date of maturity on it.

Considering all the evidence relating to the terms and conditions under which the preferred shares were issued, we can arrive at no other conclusion than that the preferred shares in question were in fact preferred stock and not evidences of indebtedness. The dividends on the shares were payable only out of earnings. Likewise, the amounts which petitioner was obliged to set aside in the sinking fund were to be from earnings only. These are factors which evidence a capital investment rather than an indebtedness. Cf. William Cluff Co., 7 B. T. A. 662; Finance & Investment Corporation v. Burnet, 57 Fed. (2d) 444; Greensboro News Co., 31 B. T. A. 812; Elko Lamoille Power Co. v. Commissioner, 50 Fed. (2d) 595. The Fifth Circuit in the recent case of United States v. South Georgia Railway Co., supra, said that “the most significant, if not the essential feature” of a debtor and creditor relationship as opposed to a stockholder relationship was the existence of a “fixed maturity for the principal sum with the right to force payment of the sum as a debt in the event of default.” That feature is not present in the instant proceeding. The preferred stock in question did not have a definite maturity date such as the bonds had in Commissioner v. O. P. P. Holding Corporation, supra. In that case the interest could be deferred, but it together with the principal had to be paid in 1954,. regardless of whether there was a surplus, which factor the court said “marks the vital difference between the shareholder and the creditor.” In the instant proceeding Haffenreffer “did not want a debt with a date of maturity on it.” Neither is there present here any guarantee of dividends or of redemption as was the fact in Palmer, Stacy-Merrill, Inc., supra. Cf. Dayton & Michigan Railroad Co., 40 B. T. A. 857. We think the evidence, taken as a whole, shows a stockholding relation rather than the relation of debtor and creditor. We think it follows from this fact that both assignments of error must be decided in favor of the respondent. Petitioner, however, strongly contends that such a finding would only decide assignment of error (B) in favor of the respondent. In its brief petitioner says that so far as assignment of error (A) is involved “the position of the petitioner is by no means dependent upon whether the security, called preferred stock, was an indebtedness of the company.”

Petitioner’s contention on this point is that regardless of whether the preferred stock as such was an indebtedness of the petitioner to the extent of its par value, the obligation of the petitioner under the terms of the contract to use $86,451.67 of the 1933 consolidated net earnings in retirement of part of its preferred stock was an “indebtedness incurred prior to January 1,1934” within the meaning of section 351 (b) (2) (B), and the sum of $86,400 so used in 1934 is deductible in computing its undistributed adjusted net income in 1934.

In support of this contention petitioner quotes from the last three paragraphs of Circuit Judge Haney’s concurring opinion in Peir v. Commissioner, 96 Fed. (2d) 642, as exactly applying to the situation in the case at bar. It argues that “even though the entire issue of preferred stock may not be an indebtedness of the petitioner, an indebtedness has come into being and accrued by the end of 1933 to the extent of 1933 earnings which were required to be set aside and used to retire preferred stock.”

In the Peir case, Peir was a stockholder and transferee of the Western Oxygen Co., hereinafter referred to as Oxygen, which company during 1929 had sold all of its assets to the Air Reduction Co. for 16,000 shares of the latter’s stock. It was the intention of Oxygen to distribute the 16,000 shares (after disposing of 342 shares not here material) to its common and preferred stockholders and dissolve. One of the preferred stockholders refused to take Air Reduction Co. stock in exchange for his Oxygen preferred. The latter stock was redeemable on any dividend date. Oxygen thereupon adopted a resolution calling all of its preferred stock for redemption on a fixe,d day, May 31, 1929. It then sold 1,811 of the 1.6,000 shares for $184,922.61 in cash, which was all used to retire its preferred stock. This sale was made at a profit to Oxygen of $140,204.22. Since Peir as transferee was charged with the tax liability of Oxygen, he contended, among other things, that the profit of $140,204.22 should not be recognized in determining Oxygen’s tax liability; that in substance Oxygen’s tax problem should be viewed as if it had sold all of its assets to the Air Reduction Co. for $184,922.61 in cash and 14,189 shares of the latter’s stock instead of for 16,000 shares; and that so viewed the only gain to Oxygen would be the gain of approximately $1,000,000 on the sale of its assets, which gain Peir contended was not recognizable under section 112 (d) (1) of the Revenue Act of 1928. Circuit Judge Haney was of the opinion that even if it be assumed that the plan contemplated receipt of stock and money, the adoption of the resolution to call the preferred stock for redemption made the preferred stockholders creditors, thus bringing into application section 112 (d) (2) of the act and rendering Oxygen taxable for the gain realized, under Minnesota Tea Co. v. Helvering, 302 U. S. 609.

We do not think that the concurring opinion of Circuit Judge Haney is applicable in the instant case. After the adoption of the resolution in the Peir case, there was a definite date fixed for the retirement of the preferred stock. It was thereby given the status of a debt with a definite date of maturity. In the instant case there was no status of debtor and creditor with a fixed maturity date prior to January 1, 1934. It is true that petitioner during 1933 realized sufficient earnings that would compel it to set aside $86,451.67 “for the said sinking fund” and that under its contract with its preferred stockholders it was under obligation to “apply the sinking fund to the redemption of preferred shares or the purchase of preferred stock”, but we do not think the mere accruing of the earnings during 1933 was sufficient to change a part of petitioner’s preferred stock into an indebtedness.

The amount of the 1933 earnings was first determined in 1934. Under the sinking fv/nd provision of the June 23,1930, agreement the shares were to be redeemed “in the manner provided for the call of the preferred shares.” This manner was set out in detail under the redemption provision of the same agreement, and there could be no fixed date of retirement until these provisions had been complied with. This did not occur until some time during 1934. It may be true that when petitioner at some time in 1934 called a certain part of its preferred shares for redemption under the sinking fund arrangement, a debtor and creditor relationship then arose between petitioner and the owners of that part of its preferred shares called for redemption. That point we do not have to decide in this proceeding. But as we view it there was certainly no creditor and debtor relationship prior to that time. Up until the call for redemption went out, petitioner had the right to “apply the sinking fund to the redemption of preferred shares at the par value thereof and accumulated dividends or to the purchase of preferred shares at not to exceed the par value thereof and accumulated dividends.” Certainly if petitioner should elect to exercise its right to purchase preferred shares at not more than par plus accumulated dividends, if there were any available at that price, there could be no relationship of debtor and creditor between petitioner and the holders* of preferred shares until some kind of a contract of purchase had actually been entered into. So it seems to us that it can not be said that any indebtedness arose prior to January 1, 1934, on the part of petitioner to the owners of the preferred shares which were redeemed in 1934. We think it follows that the $86,400 used by petitioner during 1934 to retire that much of its preferred stock was not used “to retire indebtedness incurred prior to January 1, 1934” as that phrase is used in section 351 (b) (2) (B) of the Revenue Act of 1934. Cf. Tennessee Co., 40 B. T. A. 154; American Foundation Co., 40 B. T. A. 542.

As an alternative petitioner contends that if the amount of $86,400 used in 1934 to retire preferred stock was not used to retire indebtedness, then it was a dividend paid during the year and consequently deductible under section 351 (b) (2) (C) of the Revenue Act of 1934. Under this section the respondent did allow the amount of $39,550 as dividends paid during the taxable year, and it is petitioner’s position under this alternative contention that in addition to the amount of $39,550 the respondent should also allow the amount of $86,400 as a dividend paid. Petitioner says this point depends upon section 115 (g) of the Revenue Act of 1934 as it has been construed. That section reads as follows:

(g) Rhdhmfhon of Stock. — If a corporation cancels or redeems its stools (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28,1913, shall be treated as a taxable dividend.

We do not see any merit in this alternative contention. The amount óf $86,400 was an amount paid out by petitioner during the taxable year to retire its preferred stock and seems clearly a partial liquidation under section 115 (i). There is no evidence in the case which would tend to show that the payment was essentially equivalent to the distribution of a taxable dividend. Cf. Pearl B. Brown, Executrix, 26 B. T. A. 901; affd., 69 Fed. (2d) 602; Henry B. Babson, 27 B. T. A. 859; affd., 70 Fed. (2d) 304.

Reviewed by the Board.

Decision will be entered for the respondent.

Smith,

dissenting: The tax with which we are here concerned is an “undistributed adjusted net income” tax. It is a tax in the nature of a penalty imposed upon a corporation for failing to distribute to its stockholders amounts which it could distribute. In the Ways and Means Committee Report, 73d Gong., 2d sess., Rept. 704, it was said of section 351 of the Revenue Act of 1934:

* * * Thus, a corporation which falls within this section because of the nature of its business and the number of its stockholders can always escape this tax by distributing to its stockholders at least 90 percent of its adjusted net income.

In Foley Securities Corporation v. Commissioner (C. C. A., 8th Cir.), 106 Fed. (2d) 731, affirming 38 B. T. A. 1036, the court said:

There can be no doubt that the purpose of Congress in enacting Section 351 was to compel each personal holding company to distribute its current earnings instead of accumulating them, so as to augment the income of its shareholders, thereby increasing the amount of their tax liability. There is nothing, aside from the letter of the statute, to indicate that Congress intended to impose a 30 percent surtax upon the current earnings of such a corporation not available for “dividends” but actually distributed to its shareholders. * * *

The petitioner was not able to distribute to its stockholders as dividends in 1934 $86,431.67 of its earnings for 1933 by reason of its contract which it had entered into with the English company on June 23,1930. Those earnings had to be used pursuant,to its contract in the redemption of its preferred stock. The amount was required to be set aside in a sinking fund for the redemption of those preferred shares. Of the amount thus placed in its sinking fund $86,400 was used in 1934 in the redemption of a like amount of preferred stock.

It seems to me that at the end of 1933 the petitioner was obligated to pay $86,451.67 into its sinking fund for the redemption of the preferred shares. It had a debt of that amount at the end of' 1933. The obligation was incurred prior to 1934. I think that the obligation constituted indebtedness incurred prior to January 1, 1934. See Peir v. Commissioner (C. C. A., 9th Cir.), 96 Fed. (2d) 642, 651.

If this is not so, it seems to me that the purpose of' Congress in imposing this tax only upon undistributed adjusted net income in many cases which might be visualized is frustrated. Assume that a corporation purchased an oil lease in 1933 for a cash consideration of $100,000 and that it undertook on its part to pay, in addition thereto, one-fourth of its profits from the lease for the next five years. Assume that it has profits of $100,000 from the lease in 1934, the payment of $25,000 to the vendor of the oil lease in 1934 or 1935 is additional cost to the corporation of the oil lease. The $25,000 which it must pay to the vendor corporation is not a legal deduction from gross income as an ordinary and necessary expense. Can it be denied, however, that concurrently with the earning of $100,000 in 1934 it has an indebtedness to the vendor of the oil lease of $25,000. I think not. I can perceive no difference in substance between such a case and the proceeding at bar. At the end of 1933 the petitioner was obligated, to set aside $86,451.67 in its sinking fund for the redemption of its preferred shares. It seems to me that this indebtedness was incurred prior to January 1, 1934.

I agree with the majority opinion that the outstanding preferred shares of the petitioner did not constitute an indebtedness of the petitioner considered apart from its contract with the English company dated June 23, 1930. The petitioner contends, however, that by reason of its contract with the English company it was indebted to the English company at the end of 1933 in the amount of $86,451.67. I think that contention is sound.

Mellott and HaeRON agree with this dissent.


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    Lloyd E. Wilson and Elsie M. Wilson, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96577.
    Promulgated February 21, 1940.

      GmnviUe S. Borden, Esq., for the petitioners.

      T. M. Mather, Esq., for the respondent.
   opinion.

Van Fossan:

Respondent determined a deficiency of $6.18 for the year 1936, consequent on his disallowance in part of a credit for a dependent. The facts are: Petitioners are husband and wife, residing at San Francisco, California. On August 11, 1936, a daughter, Helen Wilson, was born. In their joint return petitioners claimed a credit for a dependent in the amount of $400. Respondent allowed the sum of $166.67, being the prorated amount from the date of birth to the end of the year.

Petitioners contend that during the period prior to birth, from January 1 to August 11, 1936, the unborn child was a person, dependent on and receiving her chief support from petitioners, within the intendment of the statute. Respondent held, and here contends, that the period for computing such credit dates from the birth of the child; that an unborn child is not a person within the meaning of that term as used in the revenue act.

We sustain the respondent. The word “person” as used in section 25 (b) (2) is to be taken in its normal, everyday sense of a living human being, a man, woman, or child, an individual. In Daubert v. Western Meat Co., 139 Cal. 480; 69 Pac. 297, the court stated: “It is not necessary, therefore, to follow counsel in their discussion of the question whether a posthumous child can, under any circumstances, recover for the death of its father occurring before its birth, and when it was only a part of her mother, and not a human being or person.”

The interpretation which petitioners suggest is so obviously strained as to merit little discussion. Doubtless in this fact is to be found the reason why this question has never heretofore been presented to the Board. It may also account for the paucity of authority in petitioners’ brief.

Nor is the fact that, by common law and generally by statute, a child en ventre sa mere is deemed to be in esse for the purpose of inheritance for its own benefit persuasive here. The credit here claimed is not for the benefit of the child but of the parents.

Dvuliion will be entered for the respondent.


author: Smith :

text:
    Edward E. Rieck, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95885.
    Promulgated February 27, 1940.

      W. A. Seifert, Esq., W. W. Booth, Esq., and A. G. Wallerstedt, G. P. A., for the petitioner.

      Orris Bennett, Esq., for the respondent.
   OPINION.

Smith :

This proceeding involves an income tax deficiency of $17,-018.15 for the year 1936. The contested portion of the deficiency results from the addition to petitioner’s reported income of $86,438.75 representing that part of the income of a life insurance trust established by the petitioner in 1932 that was used in 1936 to pay the premiums on policies of insurance on petitioner’s life.

The proceeding was submitted on a written stipulation of facts, which we adopt as our findings of fact herein. Briefly stated, the facts essential to a consideration of the questions in issue ate as follows:

On May 21, 1932, the petitioner executed an agreement designated “Life Insurance Textst”, by which he transferred in trust to three named trustees a number of policies of insurance on his life, amounting in the aggregate ,to over $700,000, and certain securities. The insurance policies and the securities were transferred to the trustees irrevocably so as to vest title thereto in them and to divest the insured of all incidences of ownership therein.

Under the provisions of the trust instrument the trustees, during the lifetime of the insured, were to pay the premiums on the policies out of the “net income” from the securities held by them and distribute any surplus net income annually to the insured’s wife and four children, who were named as beneficiaries. The trust instrument further provided that:

* * * in case the net income and surplus income shall at any time be insufficient to pay all of said premiums, then the Insured may pay same, and otherwise the Trustees, in their discretion, may convert any of said securities into cash, or may borrow upon said policies, from one of the Trustees or elsewhere, or may exercise any option for the application of loan provisions to the payment of premiums. * * *

The proceeds of the policies when received by the trustees likewise were to be distributed to the beneficiaries. The trust was to continue until the death of the last survivor of the named beneficiaries, when the income and corpus were to be distributed to the settlor’s heirs at law.

At January 1, 1936, the trust had cash on hand in the amount of $9,281.51. During the taxable year 1936 it received dividends of $40,000 and paid out taxes for the year 1935 in the amount of $1,772.50, trustees’ commissions in the amount of $1,200, and premiums on policies of insurance on petitioner’s life in the total amount of $36,438.75.

When some of the premiums on the insurance policies and the 1935 taxes became due in 1936 the trust did not have sufficient funds to pay them. In June 1936 and again in August of that year, it called upon the beneficiaries to furnish the funds required for those purposes, which they did, advancing to the trust out of their individual estates a total of $12,035.74, each contributing in proportion to his interest in the trust.

On December 18, 1936, the trustees distributed to the several beneficiaries a total of $21,906.

Following is a tabulated statement of the trust’s receipts and disbursements during the year 1936:

The beneficiaries of the trust reported the amounts distributed to them by the trustees in 1936 in their individual income tax returns for that year. None of the income of the trust was reported by the petitioner in his income tax return.

In a prior proceeding brought by this petitioner for the redeter-mination of a deficiency for 1932, the Board determined in a memorandum opinion entered June 30,1936, that the petitioner was taxable in 1932 on the amount of the net income of the trust here under consideration which was used in that year to pay premiums on policies of insurance on petitioner’s life. Final decision was entered August 21, 1936, determining a deficiency of $3,173.50. On September 10, 1936, the petitioner filed a motion to reopen the case, which was granted, and amended his petition to set forth a claim for the deduction of a loss not claimed in the original petition. Upon reconsideration the Board determined in Edward E. Rieck, 35 B. T. A. 1178, that there was an overpayment of petitioner’s tax for 1932 in the amount of $2,057.98, of which $1,669.92 was paid within two years before the filing of the petition, within the meaning of section 504 (a) of the Revenue Act of 1934. The Board stated in its published report that:

* * * In this motion to reopen and amend the petition, petitioner did not contest the correctness of the Board’s holding on the only point covered by the memorandum opinion. He concedes that the Board’s holding on that point is correct and that issue is no longer before us. * * *

On appeal to the United States Circuit Court of Appeals for the Third Circuit, brought by the Commissioner, the Board, was reversed on its holding that the amount of $1,669.92 was paid by the petitioner within two years before the petition was filed. Commissioner v. Rieck, 104 Fed. (2d) 294.

The petitioner’s contentions in this proceeding are, first, that he is not taxable in 1936 on any part of the income of the trust for that year, and, second, that in any event he is taxable on only $16,256.87 of such income, since that amount only was actually used by the trustees to pay the premiums on policies of insurance on his life.

The pertinent provisions of the statute are found in section 167 (a) (3) of the Revenue Act of 1936, which reads as follows:

SEO. 167. INCOME POR BENEFIT OP GRANTOR.
(a) Where any part of the income of a trust—
****** *
(3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (o), relating to the so-called “charitable contribution” deduction) ;
then such part of the income of the trust shall be included in computing the net income of the grantor.

The first question is the same as that decided by the Board in its memorandum opinion of June 30,1936, involving the year 1932. Our ruling there was that under section 167 (a) (3) of the Revenue Act of 1932, which is identical with section 167 (a) (3) of the Revenue Act of 1936, the petitioner was taxable in 1932 on that portion of the income of the trust — the same trust now under consideration — that was used to pay premiums on the insurance policies taken out on petitioner’s life. We held that the balance of the net income of the trust which was distributable to the beneficiaries was not to be included in petitioner’s income. Our determination there was based squarely upon Burnet v. Wells, 289 U. S. 670. The Supreme Court held in that case that under the provisions of section 219 (h) of the Revenue Acts of 1924 and 1926, which are identical with the statutory provisions here applicable, the settlor was taxable on so much of the income of several insurance trusts as was used to pay the premiums on policies of insurance on his life, and that so construed the statute was not unconstitutional.

The respondent contends that in this proceeding the question of the petitioner’s liability for tax on that portion of the trust income which was used to pay the premiums on policies of insurance on petitioner’s life is res adjudicate/, by reason of the Board’s memorandum opinion of June 30, 1936, which was not affected by the Board’s later opinion published at 35 B. T. A. 1178, or by the court in its reversal of that case.

Regardless of the question of res adjudieata, however, we are still of the opinion, as previously expressed, that the question here presented falls squarely under the Supreme Court’s ruling in Burnet v. Wells, supra, both as to the applicability of the statute and its constitutionality. See also Du Pont v. Commissioner, 289 U. S. 685. We hold, therefore, that the petitioner as settlor of the trust is taxable on so much of the trust income as was applied or might have been applied to the payment of premiums on policies of insurance upon the petitioner’s life.

We are of the opinion, further, that within the intendment of section 167 (a) (3), supra, all of the premiums paid on the policies of insurance on petitioner’s life which were held by the trust in 1936 either were paid or might have been paid out of the income of the trust. The net income of the trust for the entire year amounted to $37,027.50 after the payment of taxes and trustees’ commissions, while the premiums paid on the insurance policies amounted to only $36,438.75.

Petitioner makes the contention that only $16,256.87 of the trust income is taxable to him since that is the amount of such income that was actually applied to the payment of the insurance premiums, the balance of such premiums having been paid with the funds contributed by the beneficiaries out of their own estates. The contention is without merit. The funds contributed by the beneficiaries for the payment of premiums on insurance policies are properly to be regarded as loans or advances to the trust which were to be returned to them when the trust received its dividends for that year. The trust instrument expressly empowered the trustees to borrow funds for the purpose of paying the premiums on the insurance policies. It did not authorize the trustees to accept contributions for that purpose from the beneficiaries. It was clearly the petitioner’s intention in creating the trust that the premiums should be paid out of the trust income, and the trustees were so directed. The balance of the trust income was distributable to the beneficiaries “annually.” The amount of the trust’s distributable income necessarily must be determined on an annual accounting basis. See Letts v. Commissioner, 84 Fed. (2d) 760, affirming 30 B. T. A. 800. Otherwise, the purpose of the settlor of the trust as well as the purpose of the statute might be wholly defeated by the simple expedient of the trust borrowing money each year to pay all of the insurance premiums, thereby relieving the settlor of tax liability on such amounts under section 167 (a) (3), and at the end of the year distributing all of its income to the beneficiaries and claiming a deduction of such distributions under section 162 (b).

In Frederick K. Barbour, 39 B. T. A. 910, one of the cases relied upon by the petitioner, we held that the settlor of a trust was not taxable under section 167 (a) (3) on distributable trust income that was used by the beneficiary to pay premiums on policies of insurance on the settlor’s life, which policies were owned entirely by the beneficiary. The distinguishing feature of that case, which differentiates it from both Burnet v. Wells, supra, and the instant case, is that there was no provision in the trust instrument for the payment of the insurance premiums out of the income of the trust and no restriction was imposed on the beneficiary’s use of the distributable income of the trust. This distinction was aptly pointed out in the concurring opinion by Murdock and Opper to which other members agreed. Also, in the concurring opinion the cases of George Washington, Sr., 36 B. T. A. 74, and Alfred F. Pillsbury, 19 B. T. A. 1229, were distinguished on the same grounds.

We are of the opinion that the net income of the trust for 1936 is taxable to the petitioner to the extent of the amount of the premiums on policies of insurance on his life which were paid or were payable by the trustees during that taxable year, regardless of the source of the funds from which the premiums were actually paid.

Decision will be entered for the respondent.


author: Oppee :

text:
    Estate of Norma P. Durant—Marshall & Ilsley Bank and Herman F. Friedrich, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93079.
    Promulgated February 27, 1940.

      Herman F. Friedrich, Esq., for the petitioners.

      Frank T. Homer, Esq., John E. Wheeler, Esq., F. B. Shearer, Esq., and Jonas M. Smith, Esq., for the respondent.
   OPINION.

Oppee :

Decedent transferred what came to constitute virtually her entire estate by a trust instrument operative during her lifetime, and providing for the payment to her of a stipulated income. Other provisions required the trustee to discharge her debts at death and permitted distribution to her during her lifetime of any part or all the principal if considered advisable by the trustee. This property was proposed for inclusion for estate tax purposes by respondent, one ground given being that it was “a transfer of a material part of the decedent’s property in the nature of a final disposition or distribution thereof and therefore in contemplation of death.” The stipulation of facts, which constitutes the entire record, is completely lacking in any material from which we could conclude that petitioners have sustained their burden of proving as a fact that this was not a transfer in contemplation of death. On this ground we should be required to sustain respondent’s position. See Purvin v. Commissioner, 96 Fed. (2d) 929 (C. C. A., 7th Cir.). But it is something less than a satisfactory solution of this controversy to decide it purely on the basis of failure of proof, particularly where the issue is essentially and fundamentally factual. United States v. Wells, 283 U. S. 102. Happily, we need not do so here since the same result will follow by application to these facts of other provisions of the estate tax section.

Among the interests which must be included in gross estate is property “of which the decedent has at any time made a transfer by trust or otherwise where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power either by the decedent alone or in conjunction with any person to alter, amend, or revoke * *

Powers residing in the decedent either alone or at least in conjunction with the trustee were such that the amendment, revocation, or alteration of the trust was in reality retained by decedent until the time of her death. The stipulated monthly payments were obviously materially in excess of any anticipated income from the property. It resulted, and must have been contemplated, that periodic invasions of principal would be necessary. Only decedent’s refusal to accept such fragmentary distributions of principal could prevent the estate from being dissipated in its entirety. In fact, in the period of less than ten years of the trust’s operation approximately 50 percent of the principal was so disbursed. At the same rate it would not have lasted for ten years more. Again, the primary obligation of the trustee upon decedent’s death was to pay all of her debts, so that by the simple expedient of obtaining by loans or advances such amounts of principal as she might see fit she could effectively prevent all or any part of the property from passing to the remaindermen. .

Additional considerations may be unnecessary, but, as indicating the flavor of the decedent’s provision for treatment of the trust estate, it may be added that the trustee was expressly permitted to invade the corpus to any extent for the purpose of making payments to decedent. This power was so broad as to preclude the view that there was any real limitation whatever upon the extent to which the devolution and “enjoyment” of the property might be “changed.” See Ethel K. Childers, 39 B. T. A. 904. Had it been exercised to its fullest extent at any time up to the moment of decedent’s death there would have been no property left upon which the trust instrument could operate.

Adding these elements to those previously noted, we think it impossible to escape from the necessity of applying to this property the provisions of section 302 (d). Looking at the trust instrument as a”'’ whole, it is only with reference to decedent’s death that we can determine what “shifting of the economic benefits of property which is the real subject of the tax” would result from decedent’s disposition .of the trust corpus. That event was “the source of valuable assurance passing from the dead to the living.” Porter v. Commissioner, 288 U. S. 436.

This conclusion is fortified by the Board’s decision in Daisy Christine Patterson, Executrix, 36 B. T. A. 407, where the same section was found to be inapplicable but on the limited ground that the trustee could not distribute the estate to the grantor except upon specific contingencies which were shown not to have occurred. That ground, of course, is inappropriate here in view of the wide and untrammeled discretion conferred upon the trustee. Moreover, our present conclusion seems a necessary corollary to the decision in Harriet W. Rosenau, 37 B. T. A. 468. In Estate of Sanford v. Commissioner, 308 U. S. 39, the doctrine was reiterated that “the gift tax was supplementary to the estate tax. The two áre in pari materia and must be construed together.” “There is nothing in the language of the statute * * * to suggest * * * that the test of the completeness of the taxed gift was to be any different from that to be applied in determining whether the donor has retained an interest such that it becomes subject to the estate tax upon its extinguishment at death.” In the Bosenau case a reserved power to change beneficiaries was considered sufficient to prevent the application of the gift tax. See also Hesslein v. Hoey, 91 Fed. (2d) 954; certiorari denied, 302 U. S. 756; Rasquin v. Humphreys, 308 U. S. 54; Emily Trevor, 40 B. T. A. 1241. A trust comparable to that created by decedent would apparently escape gift tax. Revenue Act of 1932, sec. 501 (c). To hold that the property also escapes estate tax would be to reach a result in direct conflict with the principle of the Sanford decision.

This is not a case where “no interest in the property held under the trust deed passed from her to the living; title thereto had been definitely fixed by the trust deed.” May v. Heiner, 281 U. S. 238, 243. Nor is it even one where “Since the power to revoke or alter was dependent upon the consent of the one entitled to the beneficial, and consequently adverse, interest,' the trust, for all practical purposes, had passed as completely from any control by decedent which might inure to his own benefit as if the gift had been absolute.” Reinecke v. Northern Trust Co., 278 U. S. 339, 346. See also Orrin G. Wood, 40 B. T. A. 905. But cf. Helvering v. City Bank Farmers Trust Co., 296 U. S. 85. Prior to decedent’s death the entire trust could, as we have noted, inure to decedent’s benefit by the invasion of the corpus for her use. At her death decedent’s interest could have been no more than to see that the property she left behind was distributed in accordance with her wishes. Both benefits she retained until the moment of her death. Upon her failure to receive the corpus during her life, at her death, and only then, did the provisions for succession to her property which she herself had designed become effective. See Helvering v. Hallock, 309 U. S. 106.

The construction which we thus place upon the 1926 Act makes it unnecessary to consider whether resort might be had to the amendment thereto contained- in the Joint Resolution of March 3, 1931, or section 803 (a) of the Revenue Act of 1932. These have been held to be inapplicable to facts comparable to those now before us, in that the trust was created prior to the enactment of that resolution but the decedent died thereafter, on the ground that retroactive force was beyond the scope of the legislative intent. Hassett v. Welch, 303 U. S. 303. But cf. Chase National Bank v. United States, supra; Reinecke v. Northern Trust Co., supra; Sanford v. Commissioner, supra; Helvering v. Hallock, supra.

For the reasons stated we conclude that the 1926 Act is applicable in its original form and that the property in question is includible as a part of decedent’s estate.

Reviewed by the Board.

Decision will he entered for the resfondent.

       Revenue Act of 1926.—
      Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      *******
      (d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. The relinquishment of any such power, not admitted or shown to have been in contemplation of the decedent’s death, made within two years prior to his death but after the enactment of this Act without such a consideration and affecting the interest or interests (whether arising from one or more transfers or the creation of one or more trusts) of any one beneficiary of a value or aggregate value, at the time of such death, in excess of $5,000, then, to the extent of such excess, such relinquishment or relinquishments shall be deemed and held to have been made in contemplation of death within the meaning of this title;
      • * * * '■ * • •

        Chase National Bank v. United States, 278 U. S. 327, 338.

       “(c) To the extent of any interest therein of which the decedent * * * has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property * *


author: Disnet :

text:
    Pittsburg Canners, Incorporated, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93560.
    Promulgated February 27, 1940.

      Walter Slack, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Disnet :

This proceeding involves deficiencies in income and excess profits taxes for the taxable year beginning July 1, 1934, and ending June 30, 1935, in the amount of $431.94 in income tax and $157.07 in excess profits tax. The return was filed with the collector for the first district of California. The only question presented for our consideration is as to the basis for depreciation and rate of depreciation suffered upon certain assets owned by petitioner. The facts were in part stipulated at the hearing. Such facts are found by us as stipulated. Other evidence was adduced, parol and documentary, facts from which will be hereinafter stated as found, in connection with a summary of the facts presented. The facts stipulated may be epitomized, so far as pertinent, as follows:

The petitioner is a corporation, organized October 20, 1933, under the laws of California, with authorized capital stock of 5,000 shares of a par value of $100 per share. Only 176 shares were issued, to seven people. The business of the corporation was the operation of a fish reduction plant, in a rented building in Pittsburg, California, with machinery and equipment purchased on credit. September to March is the operating season for that business in the locality where petitioner’s business was located. A permit from the state fish and game commission is required by law. Petitioner started operations in the fall of 1933, but its permit to operate was revoked on December 15, 1933, for failure to meet the requirements of the fish and game commission. The creditors were advised, resulting in the appointment of a creditors’ committee representing those who had sold machinery and equipment to petitioner, and eventually in a sale to them of petitioner’s assets. At the time of appointment of the committee petitioner’s debts were approximately $22,000. On December 26,1933, at a regular stockholders’ meeting, the directors were authorized to sell, assign, and transfer to the creditors’ committee petitioner’s right, title, and interest in the corporation’s assets. The terms of sale were that the corporation should assign the assets and the stockholders endorse and deliver the stock certificates to the committee and be relieved of any further liability. The creditors’ committee then started negotiations with J. G. Burnette and associates (hereinafter called Burnette), who were engaged in the fishing business, and agreed with Burnette as follows:

The creditors’ committee agree to the purchase price of $16,500 for all stock and all assets of Pittsburg Canners and will protect any change in creditors’ claims against Pittsburg Canners prior to January 12, 1934, payable as follows: $500 received; $7,000 upon signing contract; balance $1 a ton with minimum $5,000 season beginning August 1934.
[Signed, J. T. Gilmore, Chairman, Creditors’ Committee; and Pittsburg Canners, Incorporated, by J. G. Burnette.]

The agreement was carried out, the old directors resigned and new directors and officers were elected at a stockholders’ meeting held by the Burnette group on January 31, 1934. Burnette and associates made payments of $7,500, as well as further advances to the corporation, for which they were given credit on the corporation’s books, the old books being used for that purpose. The corporation further assumed the liability of Burnette in the amount of $9,000, the balance of the purchase price. The balance due the creditors’ committee was paid out of subsequent operations of the corporation, as follows: October 8, 1934, $1,766.95; November 8,1934, $4,537; December 9,1934, $2,696.05. The old certificates of stock remained endorsed in blank until they were canceled March 4 and March 5,1935, and all were reissued to J. G. Burnette except 17.6 shares which were issued to John R. Grigg, neither of whom were former stockholders. On July 1, 1934, a new set of books was opened, showing, among other items, assets, machinery, and equipment at $25,738.80; liability to J. G. Burnette, $4,600; to associates, $4,375; to creditors’ committee, $9,000.

In addition to the stipulated facts above, further facts are found by us from evidence adduced, as follows:

Petitioner’s journal used in 1933 and 1934 shows under date of January 16,1934, the following:

J. Gilmore, Chairman Cred. Comm-$16,500 -
* * ' * # # * *
To set up conditional sale as per agreement dated Jan. 16, 1934, between Creditors’ Committee of Pittsburg Canners, Inc., and Pittsburg Canners, Inc.

On February 20, 1935, the creditors’ committee executed a bill of sale to J. G. Burnette, reciting, so far as here material, as follows: that the directors of petitioner had deemed it expedient and to the best interests of the corporation to sell, assign, and transfer all of the corporation’s right, title, and interest in and to the stock and assets of the corporation to a creditors’ committee “in full satisfaction of the claims of all creditors of said corporation”, and did on December 22, 1933, “vote to sell, assign and transfer all of the corporation’s right, title and interest to the Creditors’ Committee in full satisfaction of all claims against the corporation”, and were authorized to sell by the stockholders on December 26, 1933; that the creditors’ committee “accepted the assignment of the corporation’s interest, together with all the shares of the stock outstanding, properly endorsed by the shareholders and delivered to the said Creditors’ Committee”; that J. G. Burnette about January 12, 1934, agreed to purchase from the creditors’ committee on an installment contract all of the committee’s right, title, and interest to the assets and shares, and the committee agreed to deliver upon fulfillment of the contract; that the terms of the contract had been fulfilled and completed about November 1, 1934; that therefore the committee, for a valuable consideration, do sell, assign, transfer, and set over unto J. G. Burnette all the assets and shares of stock, discharge Burnette from liability under the installment contract, and declare him to be sole owner of the assets and shares of stock of Pittsburg Canners, Inc.

The books of the corporation show the items of the assets here involved set up at a cost of $25,738,80, together with rate and amount of depreciation set up for 1933-1934, additions 1934 — 1935 amounting to $3,967.58, and depreciation set up for 1934r-1935 amounting to $4,079.59. •

The Commissioner determined that the basis for depreciation was $16,500 paid Burnette, plus costs of sale, and attorneys’ fees, making a total of $17,087.50 as of June 30, 1934, and, with $3,967.58 additions during 1934-1935, a total of $21,055.08 on June 30, 1935. Petitioner in figuring its return as of June 30, 1935, computed depreciation on the original cost of $25,738.80 as shown by its accounts, and deducted depreciation of $4,079.59 based on a cost of $29,706.38 — including additions in 1934-1935 of $3,967.58.

The question presented is, whether petitioner shall be allowed as base for depreciation its original cost, as adjusted, or whether it transferred the property, reacquired it, and must take the basis of cost upon reacquisition. The determinative question, however, is whether petitioner ever transferred the assets, for obviously if it did, the cost upon reacquisition must be its base.

Petitioner’s position is summarized in its opening brief: “While in some externals the transaction has the characteristics of a sale, fundamentally it was a pledge or hypothecation of its assets to its creditors and a redemption of them.” Also: “True there was a bill of sale from the committee to Burnette and Burnette to petitioner, but these only served to keep the title clear and reliance upon them alone ignores vital elements more properly characterizing the transaction.” Petitioner cites Commissioner v. Lazarus & Co., 101 Fed. (2d) 728 (since affirmed 308 U. S. 252), where depreciation was allowed to one who had transferred legal title, but only as security, and says that the facts here “places the apparent absolute sale to the Creditors’ Committee in the same classification as the deed-in the Lazarus case.” Petitioner also cites James D. Boone, 27 B. T. A. 1064, and cases there cited, as to the right to vary by evidence the terms of a written instrument.

We agree that petitioner has a right to explain such an instrument as here involved, the proceeding not being between the parties; also that the Lazarus case is authority that one conveying legal title, but only by way of security, should be allowed depreciation on the property conveyed. But the question here is, whether petitioner has shown a conveyance only by way of security. That there was a sale to the creditors’ committee is not denied, the contention being that it was not absolute, but as security. The burden is upon petitioner to prove that the “apparent absolute sale” was only a mortgage or security transaction. We think that such showing has not been made, but that on the contrary the evidence shows that the conveyance was not by way of security. Petitioner, as argument for its position, points out that the creditors did not wish the property, but only wished their money. But it is not what the creditors wished to do, but what they did, that is of effect. Moreover, though the creditors did not wish the assets, the stockholders quite positively wished to get rid of them, and to release the corporation from liability for the purchase price. The evidence is that the directors deemed it expedient and to the best interests of the corporation to sell the assets, and corporate stock, “in full satisfaction of the claims of all-creditors of said corporation.” The same expression is quoted in referring to the vote taken by the directors on December 22,1933. Moreover, it is stipulated that “The terms of the sale were that the corporation should assign the assets and the stockholders endorse the stock certificates and deliver them to the creditors’ committee and be relieved of any further liability.” There was no further stockholders’ liability, as the creditors realized, so the only release from liability which could be of interest was that of the corporation itself. It thus appears that the consideration for the transfer to the creditors was the release of the corporate liability. But the release of liability is wholly inconsistent, we think, with any idea that the conveyance was merely to secure the liability and the debt to the creditors. The debt was obliterated m consideration of the transfer. No element of mere security or hypothecation could remain. The corporation had nothing further to pay, and the desire, in fact the insistence, of the stockholders that the creditors take the property is out of keeping with a desire to retain equitable title and a chance to discharge the debt. The creditors tried unsuccessfully to get the stockholders to do that very thing: “we endeavored to have them agree to some plan of — an extension of their accounts, an extension of the unpaid portion, thinking that possibly within a period of three years they might be able to set aside sufficient money to retire the obligations.” But “They [the stockholders] decided to turn the entire plant over.to the creditors and let us dispose of it as best we could.”

We find it impossible to think that corporation officers in such a frame, of mind, desiring and securing a release of liability in consideration of a transfer of property, were retaining title. On such questions usually, and in fact necessarily, there is evidence that the intent was, contrary to the terms of the formal conveyance, to retain title and power to redeem. No such evidence here appears; the contrary appears. What later happened is of no consequence if the title, legal and equitable, left the corporation in the first conveyance to the creditors’ committee. Yet what later appears bears out, rather than contradicts, our conclusion that the conveyance to the committee was absolute, for the committee conveyed absolute title to Burnette with nothing in the bill of sale to indicate any right left in the petitioner corporation. This the committee would have had no fight to do, had there been a right left in the' corporation. The bill of sale recited that Burnette was the sole owner. Again, though petitioner argues that the petitioner merely redeemed and that Burnette did not purchase from the creditors’ committee, because the $7,500 paid by Burnette and associates was set up on petitioner’s books, and $9,000 paid out of petitioner’s operations, yet it is stipulated that “The corporation further assumed the liability of Burnette in the amount of $9,000, the balance of the purchase price.” But since there w;as a liability on the part of Burnette (who had not .previously had any connection with petitioner), it is plain that he did purchase; further, that petitioner could not assume a liability which, on its present theory, was already its own. Obviously, we think, all liability of petitioner was forgiven by the creditors in consideration of absolute, and plainly voluntary, conveyance by the corporation, the creditors’ committee conveyed to Burnette, and petitioner, by arrangement with him, took an equitable if not a legal title. We therefore conclude and hold that petitioner is not entitled to the original base for depreciation, and has not shown error by the respondent in that regard.

We hold, however, that the rate of depreciation should be lBys percent based upon a useful life of 7y2 years for the assets. The evidence was positive that this was the fair composite rate, and the fact that some items might have a longer, and some a shorter, life is immaterial. The respondent himself had used a composite rate.

Decision will be entered wider Bule 50.


author: Mellott : Opper,

text:
    Edwin Goodman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87799.
    Promulgated February 28, 1940.

      Louis Weinstein, C. P. A., for the petitioner.

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

Mellott :

The respondent determined a deficiency in gift tax for the calendar year 1934 in the amount of $975.

This proceeding was submitted upon an agreed statement of facts, all of which we find to be as stipulated. For the purposes of this decision the following summary will suffice:

The petitioner, a resident of New York City, under date of December 21, 1934, entered into a trust indenture with certain trustees for the benefit of his wife, son, and daughter. Pursuant to the provisions of this indenture, the petitioner transferred to the trustees 11 life insurance policies on his life, which were described therein. Under date of December 24, 1934, he executed a supplemental agreement with the same trustees and transferred to them 5 additional life insurance policies.

The presently agreed value of the policies when transferred to the trustees on the above dates was $178,247.97, and the value of the interest of each beneficiary in the transferred property exceeded $5,000. Petitioner paid a gift tax on such value, after taking exclusions of $15,000 and a specific exemption of $50,000.

The respondent in determining the deficiency disallowed the exclusions of $15,000. At the hearing he conceded that one exclusion of $5,000 should be allowed.

Under the terms of the trust indenture of December 21, 1934, as amended by the agreement of December 24,1934, the petitioner made an absolute transfer to the trustees of 16 life insurance policies upon his life. The trust indenture provided that upon the death of the grantor the trustees were to collect the proceeds of the policies of insurance, hold the entire amount in trust, and divide it into four equal funds to be known as fund A, fund B, fund C, and fund D. The trustees were directed to invest and reinvest each of these funds and to make the following payments:

Fund A. To pay over the net income to the wife of the petitioner during her life and upon her death to pay over the principal to the petitioner’s daughter, if living, but if not living then to the daughter’s issue, if any, and if none, then to petitioner’s son.
Fund B. To pay over the net income to the wife of the petitioner during her life and upon her death to pay over the principal to the petitioner’s son, if living, but, if not living, then to the son’s issue, if any, and if none, then to petitioner’s daughter.
Fund O. To pay over the net income to petitioner’s daughter during her life and upon her death to pay ever the principal to her issue, if any, and if none, then to petitioner’s son.
Fund D. To pay over the income to petitioner’s son during his life and upon his death to pay over the principal to his issue, if any, and if none, then to petitioner’s daughter.

The trust indenture authorized the trustees to borrow on the life insurance policies constituting the trust estate during the lifetime of the grantor and to lend the whole or any part of the amounts borrowed to the beneficiaries, in the event they were all living, in proportions of not more than one-half of the amount borrowed to petitioner’s wife, not more than one-fourth to petitioner’s daughter, and not more than one-fourth to petitioner’s son. Proportionately larger loans could be made in the event of the death of one or more of the beneficiaries. After the death of the grantor the trustees were authorized to pay, from time to time, out. of the principal of funds A and B, not to exceed $250,000 to the wife, and out of funds 0 and D, respectively, not to exceed $75,000 each to the daughter and son. The tnist was irrevocable and could not be altered, amended, or changed in any respect by the settlor. j

Section 501 (a) of the Revenue Act of 1932 provides for the Imposition of a tax “upon the transfer * * * by an individual * * * of property by gift”, and subsection (b) provides that “The tax shall apply whether the transfer is in trust or otherwise * * Section 504 (b) of the same act reads as follows :

(b) Gifts Less Than $5,000. — In the case of gifts (other than, of future interests in property) made to any person by the donor during the calendar year, the first $5,000 of such gifts to such person shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year.

The deficiency notice states:

A review of the trust instrument discloses the fact that the children do not receive an immediate interest in the trust property but the gift to them is a future interest in property. Therefore, the exclusions are not allowed. It appears that the only payments that can be made to the children during the life of the grantor are in reality loans or advancements which may be borrowed from the trust as provided in part 4 of the trust instrument.

Apparently respondent’s concession at the hearing was predicated upon the theory expressed by this Board in Seymour H. Knox, 36 B. T. A. 630; Katherine S. Rheinstrom, 37 B. T. A. 308; and Edwin B. Cox, 38 B. T. A. 865, all of which held that the trustee must be considered as the “person”, or donee, within the purview of section 504 (b), supra. This is the only issue discussed upon brief, respondent citing the above cases and urging that the trust itself and not the beneficiaries be considered to be the “person” and, hence, that the number of exclusions be limited to one, as he concedes; and petitioner urging that the beneficiaries be construed to be the “persons” and he be given three exclusions.

We have recently held in Wilton Rubinstein, 41 B. T. A. 220, following the reversal of the Board in Rheinstrom v. Commissioner, 105 Fed. (2d) 642, by the Circuit Court of Appeals for the Eighth Circuit, and the reversal of an unreported memorandum opinion in McBrier v. Commissioner, 108 Fed. (2d) 967, that where one trust was created for the benefit of more than one individual, the number of exclusions under section 504 (b) must be determined by the number of beneficiaries under the trust. The question discussed by the parties upon brief must, therefore, be decided in favor of the petitioner.

The notice of deficiency, as pointed out above, states that all exclusions were denied because of the fact that the children did not receive an immediate interest in the trust property, the gift to them being a future interest in property as such term is used in section 504 (b), supra. The petition alleges that the respondent erred in making such determination, paragraph 5 (f) stating that the transfers by the grantor “were transfers of his entire present interest in the said life insurance policies and therefore that the said transfers were gifts other than of future interests in property.” This allegation is specifically denied by the respondent in his answer. We thus have an issue raised by the pleadings which probably should be determined irrespective of the concession by the respondent and regardless of the fact that it is not discussed upon brief.

The trust being irrevocable, it must be held that the donor divested himself of all his present interest in the policies. In the case of Davidson v. Welch, 22 Fed. Supp. 726, the District Court of Massachusetts discussed a case analogous to the present. The settlor had created an irrevocable trust conveying to it three life insurance policies having a then present surrender value of $37,740.05. The trust instrument provided that upon the death of the settlor the proceeds should be divided into equal shares, one for each of his seven children surviving him, the income of each share to be paid to the child for whom it was to be held for life, one-half of the principal, however, to be paid to the child when it should reach the age of 45, provided 10 years hadl elapsed after the death of the settlor. The court held that the interests transferred from the donor were present interests. It interpreted the instrument as giving effect to the donor’s desire to make equal gifts to each of his seven children. It, therefore, concluded that the legal title to each one-seventh of the property conveyed vested in the children and that seven exclusions should be allowed under section 504 (b), supra. The Circuit Court of Appeals for the First Circuit adopted the same view, pointing out that the beneficiaries each had an equitable estate in the property constituting the trust and remarking “* * * that a gift, whether it is a direct one or an indirect one, through the instrumentality of a trust, is a transfer of property with donative intent.” Substantially the same view was taken by the Circuit Court of Appeals for the Eighth Circuit in Rheinstrom v. Commissioner, supra, and in Robertson v. Nee, 105 Fed. (2d) 651, and by the Third Circuit in McBrier v. Commissioner, supra.

In Charles W. Deeds, 37 B. T. A. 293, the settlor conveyed by gift to trusts created for the benefit of his children certain shares of corporate stock. The beneficiaries were not entitled immediately either to the income or the corpus, the trustee being directed to collect the income and apply so much as in his sole discretion he should deem proper to the support, education, maintenance, and benefit of each child until the age of 30 should be attained. This, the Commissioner contended, made their interests “future interests in property.” In denying this contention it was pointed out that, notwithstanding the fact neither the property nor the income was as a matter of right immediately subject to the unqualified demands of the beneficiaries, still throughout the duration of the trust the beneficiaries had the sole beneficial interest in the property which “began immediately upon the creation of the trust without any beneficial interest intervening.” It was therefore held that the beneficiary of each trust took a present interest in the property conveyed.

In the recent case of Edith Pulitzer Moore, 40 B. T. A. 1019, it was claimed that the settlor of the trust was entitled to four exclusions of $5,000 each, her husband being an income beneficiary for life, after which the corpus was to be divided, set aside, and retained by the trustee for the benefit of certain children during their lives. The amount set aside for each child was contingent upon the number of children living, the indenture providing that in the event of the death of three named sons, the whole of the trust should be paid in equal shares to such of the donor’s other sons as should survive the donor’s husband. It was held that each gift to a child under that trust instrument was of a future interest, since it was only to begin after the life of the husband had ended.

Edith Pulitzer Moore, supra, would probably be determinative of the issue before us if we were dealing only with funds A and B. It may be that petitioner’s son and daughter had only future interests in and to the portion of the property comprising these funds, inasmuch as their respective interests were to begin only after the life of their mother ended; but as to fund C, however, the daughter had a present interest and the son had a similar interest in the property comprising fund D.

The reference in the deficiency notice to the fact that the only payments which could be made to the children during the life of the grantor were in reality loans or advancements which might be borrowed from the trust and the respondent’s conclusion based thereon yet remain to be discussed. The provision contained in the trust instrument, while perhaps unusual, is readily understandable. It authorizes the trustees, within their discretion, “to borrow on the policies of life insurance” and “to lend * * * the amounts borrowed * * *” to the wife and children. The evident intention of the grantor was to provide for his wife and children both in the event of his death and during his lifetime. The instrument specifically provided, however, that, in the event the wife, daughter, and son were all living, not more than one-half of the amount borrowed by the trustees should be loaned to the wife and not more than one-fourth should be loaned to each of the children. It is apparent that the settlor was merely anticipating that it might become necessary, in effect, “to cash in” or partially to reduce to cash some of his investment in life insurance policies. The provision authorizing the so-called borrowing and lending, we think, tends rather to support the petitioner’s contention that the settlor had given his wife, son, and daughter vested interests in the policies. This is especially true when all of clause fourth of the trust instrument is considered. Thus it will be noted that in the event of the death of the wife and one of the children prior to the death 'of the grantor, the survivor might, if he chose, borrow the entire amount. During the lifetime of the wife, son, and daughter, they might, subject only to the discretion of the trustee, “borrow” the entire amount and thus terminate the trust. Applying the word “borrow” in the sense that the context indicates it was used, we think that the clause is tantamount to a general authorization that the trustee make available to the various beneficiaries such portion of the corpus of the trust as his sound discretion should dictate, subject only to the qualification that each of the beneficiaries be limited to his aliquot part of the property placed in trust. Under this interpretation of the clause the rationale of the Charles W. Deeds case, supra, is applicable. In other words, each of the beneficiaries has a present interest, not only in the income, which is to be paid to them later, but also in the corpus.

We hold that the respondent erred in denying the exclusions claimed,

Reviewed by the Board.

Judgment will he entered for the petitioner.

Opper,

dissenting: I do not view these exclusions as permissible because they require a disregard of the plain words of Congress. If there were any remaining doubt that “future interests” describes any right or share in property which is not presently subject to the donee’s use, that doubt would be resolved by unmistakable amplification in the reports of Congressional Committees. See McBrier v. Commissioner, 108 Fed. (2d) 967. In order to attach some meaning to these words the prevailing opinion evidently assumes that they extend so far as a case where there is an intervening estate, but no farther. Cf. Edith Pulitzer Moore, 40 B. T. A. 1019. However, it seems apparent that there can be situations where the beneficiary’s interest will be realizable “in possession or enjoyment” only on some “future date” without the specific intervention of an additional or intermediate present interest. See Judge Woodrough’s dissenting opinion in Rheinstrom v. Commissioner (C. C. A., 9th Cir.), 105 Fed. (2d) 642.

It seems to me this is such a case. For, under petitioner’s disposition of his life insurance so that it was not convertible into cash during his lifetime, both the possession and enjoyment of the trust estate by these beneficiaries was necessarily postponed until the grantor’s death, an occurrence which petitioner would presumably concede to be a byproduct of the future. Such a transfer presents at once the most persuasive instance of “gifts not reached, for one reason or another, by the estate tax”, and of an absence of the single designated ground for the exclusions.

Smith, Steenhagen, and HakRON agree with this dissent.

       “The term ‘future interests in property’ refers to any interest or estate, whether vested or contingent, limited to commence in possession or enjoyment at a future date.” 72 Cong., 1st sess., Sen. Rept. No. 665, p. 41; 72 Cong., 1st sess., H. Rept. No. 708, p. 29.

       Op. Cit., pp. 40 and 28.

       « * * * to fix the amount sufficiently large to cover in most cases wedding and Christmas gifts and occasional gifts of relatively small amounts.” Op. cit.


author: Disney:

text:
    Charlotte Keller, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93026.
    Promulgated February 28, 1940.

      Walter H. Linforth, Esq., and William M. Gannon, Esq., for the petitioner.,

      Alma O. Baird, Esq., for the respondent.
   OPINION.

Disney:

We are first and primarily faced with the question, Does income received out of the estate of a decedent, by one who was not an heir but a legatee under a will of the decedent, through compromise of a claim as such devisee against those claiming under a later will, constitute taxable income, or is it to be excluded under section 22 (b) (3) of the Revenue Act of 1934? Though voluminous documentary evidence was introduced, the facts necessary to decision of the question may be very briefly stated: The petitioner, though not a relative or heir of Ema Herrscher, was her residuary legatee under a will and codicil. Thereafter, and shortly before her death by suicide, Erna Herrscher made another will, not mentioning the petitioner and leaving the entire estate to others. The latter will was admitted to probate, whereupon within the statutory period the petitioner, with others, filed a contest and amendments thereto, which attacked the latter will, showing allegations of incompetency of the testatrix at the time of the last will and, in effect, fraud and undue influence exerted by the beneficiaries of the last will, and alleged the testatrix’s competency and freedom from duress or undue influence at the execution of the first will and prayed probate of the first will. Petitioner also filed a petition for probate of the earlier will in which she was residuary legatee. Another party also filed a contest, claiming to be the only heir. While these conflicting claims were pending, and during an extension of time for answer by those interested in the later will to answer the contests by petitioner and others, petitioner and the others interested in the wills settled their differences. Pursuant to such settlement, petitioner received approximately one-third of the estate and those named in the later will two-thirds, and other contestants were paid off. The executor of the later will settled the matter for as little as possible, and considered petitioner’s claim worth what was paid in settlement thereof. Petitioner received during the year 1935 her share of the estate under the compromise and, pursuant to contract with and assignment to her attorneys for their- fees on a contingent basis, paid one-third of her share to her attorneys.

The petitioner relies primarily and strongly upon Lyeth v. Hoey, 305 U. S. 188. The respondent with equal vigor contends that such decision is inapplicable, because petitioner was not, like the claimant in the cited case, an heir of the decedent. Though other cases are cited by both parties, it is apparent that the conclusion to be reached here rests largely upon construction and application of Lyeth v. Hoey, supra. In that case the Supreme Court had before it a grandson who objected to probate of the will of his grandmother, whose heir he was, and compromised with the other claimants under the will to the effect-that the will should be probated and that he receive certain amounts, more than provided for him by the will. The Court held that the amounts received by him were not taxable as being received by inheritance, under section 22 (b) (3) of the Kevenue Act of 1932. The petitioner herein argues that there is no essential difference between the situation here and that in the Lyeth case, while the respondent contends that the Supreme Court stressed the fact that the contestant there was an heir, while here the petitioner was neither heir nor relative, but only a friend of the testatrix, that the will making her a legatee was never probated, and that therefore Lyeth v. Hoey is wholly inapplicable.

We think the distinction made by the respondent is not consonant with the principles in the mind of the Supreme Court in deciding the Lyeth case. The Court said:

In exempting from the income tax the value of property acquired, by “bequest, devise, or inheritance”, Congress used comprehensive terms embracing all acquisitions in the devolution of a decedent’s estate. * * *

We think that what petitioner received was an “acquisition in the devolution of a decedent’s estate.” It was distributed to her directly by the probate court, as was the remainder of the estate to the legatees or devisees. It is true that each distribution designated her as as-signee, but the assignment was because of compromise of her own claim as legatee.

Kespondent stresses the language in Lyeth v. Hoey as to the claimant there: “Save as heir he had no standing”, and deduces therefrom that because the claimant was held not to receive by compromise, the petitioner, not an heir herein, must be held to take by compromise. The statute recites four ways of conveyance or devolution of property which exempt from income tax: gift, bequest, devise, or inheritance. Lyeth v. Hoey certainly therefore can not mean that one must be an heir and take only in the one category of “inheritance” in order to be free from taxation upon receipts from a compromise. Patently, if an heir could so compromise, one who is in fact a devisee, legatee, or donee could do the same. Petitioner was in fact a legatee as completely as was the claimant an heir in the Lyeth case. The fact of such designation by a will and codicil is not denied, nor is the competency of the testatrix or other impediment to the legality of the first will suggested, save only the fact of a later will, not naming the petitioner. That will was strenuously attacked by petitioner, and others, upon grounds of insanity, incompetency, fraud, and undue influence, which, if substantiated, would have necessarily invalidated the later will. In such a situation the petitioner', and others, compromised their claims, that is, compromised the question as to the legal effect of petitioner’s status as a legatee under a former will, and pursuant to such compromise the probate court distributed to the petitioner.

We think the petitioner had a standing as a legatee just as the claimant had a standing as heir in Lyeth v. Hoey. The mere fact of being an heir, that is, a grandson through a deceased mother, gave no rights to the claimant in the Lyeth case unless he could set aside the effect of the grandmother’s will. So here, the petitioner was a legatee, able to reap results from such status, if she could set aside the effect of the later will. In both cases the objectionable will was affected by compromise, so that property was received. In both cases the objectionable will was probated and distribution was made in the course of such probate procedure, but according to the compromise effected and contrary to the terms of the will. In both instances the claimant took contrary to the will, except as affected by compromise. We therefore think that respondent’s contention that petitioner did not take under the first will, where she was named legatee, but under a later contrary will, is no answer to the question propounded here. In the Lyeth case the claimant received property to an extent not provided by the will probated. His status was that of heir, regardless of the will; petitioner’s status was that of legatee, regardless of the will actually probated. Had she been a legatee under the later will, in some smaller amount, and by compromise had received the amount she did actually receive, the objection suggested by respondent would be obviated. Or had the earlier will under which she was legatee been probated instead of the later will, her status as legatee would preclude any idea that she had not a standing as legatee under the expression “devise or bequest” parallel with and of equal force with the standing of the claimant in the Lyeth case, and respondent could not be heard to deny a parity of standing with that in the cited case.

We believe that the mere accident of probate of one will rather than the other can not be logically controlling. The compromise, in effect dividing the estate one-third to petitioner, two-thirds to her opponents, could have been carried out by probate of either will with substantially the same facility so far as any question herein is concerned. Had petitioner assigned to her opponents two-thirds of her interests under the earlier will and the later will been withdrawn, the effect would not have been materially different. We thus see that petitioner did bave a standing as a legatee. We think the emphasis in Lyeth v. Hoey does not indicate any requirement that a claimant be an heir in order to receive the fruits of a compromise tax-free, but only that he occupy one of the four positions enumerated by the statute. Petitioner fulfilled the position referred to by devise and bequest.

This is shown, we think, by Magruder v. Segebade, 94 Fed. (2d) 117, conflict with which led to certiorari in Lyeth v. Hoey. Though actually heirs, the claimants there did not claim as such, but only as legatees. They were legatees under both the old will and the later will, in a lesser amount under the latter. Yet the plaintiffs allowed the later will to be probated, and received, by compromise, certain amounts in addition to the legacies received under the later will. This seems logically to control the situation here, for certainly the additional amounts, those involved in the tax question there presented, were received by compromise based upon the position of legatee under the former will— just as is involved here. Yet the court said the amount received through compromise was to be excluded from gross income under the statute. The court said, speaking of the taxpayers:

The plaintiffs would have received a greater amount under the first will than under the later will. Had they been successful in contesting the second will and establishing the first will as valid the amount that would have been received by them would undoubtedly have been a bequest or inheritance and no reasonable contention could be made that the whole amount was taxable income. * * *

The same language could be used as to petitioner here. Yet the court therein proceeds to follow the opinion of the District Court in Lyeth v. Hoey, 20 Fed. Supp. 619, which was affirmed by the Supreme Court, saying that “certainly there was no gain derived from either capital or labor or from a sale or conversion of capital assets” and following the definition of income laid down in Eisner v. Macomber, 252 U. S. 189, and holds the plaintiff’s receipts were excludible from gross income under section 22 (b) (3) of the Revenue Act of 1934, here involved.

We are unable to distinguish the controlling principle here from that in the Magruder case, applying, so to speak, Lyeth v. Hoey. We think the grant of certiorari in the latter because of conflict with the former indicates approval by the Supreme Court of the Magruder case, and therefore of the application of both cases here. No other case cited is found sufficiently similar to the situation here to be of material assistance. We conclude and hold that the money and property received by petitioner from the estate of Erna Herrscher was received as legatee and is to be deducted, under the statute last above cited, from gross income.

This conclusion renders it unnecessary to decide the further question as to deductibility from income of the amounts received as contingent fees by petitioner’s attorneys in the will contest.

Decision of no deficiency will be entered.


author: Van Fossan :

text:
    Hermann S. Vath, Executor of Last Will and Testament of Charles J. Vath, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95888.
    Promulgated February 29, 1940.

      Emmet W. Gottenberg, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Van Fossan :

The statute under which the petitioner claims a deduction for “property previously taxed” is section 303 (a) (2) of the Revenue Act of 1926, as amended by section 806 of the Revenue Act of 1932.

Counsel for the petitioner argues on brief that there has been no “final determination” that the estate of Frances L. Vath is or is not subject to the estate tax. He submits that only after a taxpayer has pursued his remedy to its ultimate disposition by the Board and the courts can the determination be final. He contends, however, that, since there has been no final determination that Mrs. Vath’s estate is not subject to the estate tax and no one has been given an opportunity to have that question decided on its merits, the respondent is precluded from asserting that there is no tax due from that estate.

There are several reasons why petitioner can not prevail. The statute allows a deduction for prior taxed property where such property can be identified as having been transferred to the decedent by the prior decedent by gift, bequest, devise, or inheritance. The record in this case fails to establish such identification. There was testimony as to certain properties that “they belonged to them both.” But there was no proper identification of the property. Moreover, there was no evidence as to source or quality of title or time of transfers, if any; as to disposition of rents received; as to payment of property taxes. In short, there is neither direct nor collateral evidence sufficient to establish the identity and ownership of the property alleged to have been previously taxed.

The statute further provides that the deduction shall be allowed only where an estate tax “was finally determined and paid” by or on behalf of the estate of the prior decedent. Here the Commissioner “finally determined” that there was no tax due from the estate of Frances L. Vath. No tax has been “finally determined and paid”, as provided by the statute. The check for $71.35 was not tendered to nor received by the collector as a result of a final determination. The accepting of the check was an administrative act in nowise conclusive of the rights of the Government to audit the return, to demand additional taxes, or to declare a refund due. The fact that the estate of Frances L. Yath has declined to accept the refund check gives petitioner no rights. Thus petitioner can not qualify under this provision of the statute for the sufficient reason that no tax has been “finally determined and paid” as to the estate of Frances L. Vath.

On the other hand, if we accept petitioner’s contention advanced on brief that there has been no final determination in the estate of Frances L. Yath because there has been no appeal from the ruling that no tax is due, we arrive at the same conclusion. If there has been no final determination petitioner can not qualify under the statute. It matters not that a proceeding before the Board may not be predicated on an overassessment. There is no way by which the Board can, as requested by counsel, take jurisdiction of the estate of Frances L. Yath and reverse the ruling of the Commissioner.

Decision will be entered for the respondent.

       Sec. 303. For tile purpose of the tax the value of the net estate shall be determined—
      (a) In the case of a resident, by deducting from the value of the gross estate—
      *«*«•***
      (2) An amount equal to the value of any property (A) forming a part of the gross estate situated in the united States of any person who died within five years prior to the death of the decedent, or (B) transferred to the decedent by gift within five years prior to his death, where such property can be Identified as having been received by the decedent from the donor by gift, or from such prior decedent by gift, bequest, devise, or inheritance, or which can be identified as having been acquired in exchange for property so received. This deduction shall be allowed only where a gift tax imposed under the Revenue Act of 1932, or an estate tax imposed under this or any prior Act of Congress, was finally determined and paid by or on behalf of such donor, or the estate of such prior decedent, as the case may be, and only in the amount finally determined as the value of such property in determining the value of the gift, or the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent’s gross estate. * * *


text:
    Rowena Burns Dunphy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 96765, 97645.
    Promulgated March 1, 1940.

      J. J. Lermen, Esq., for the petitioner.

      Harry B. Borrow, Esq., for the respondent.
   OPINION.

Van Fossan :

The petitioner seeks credit for income and absenteeism taxes paid to the Republic of Mexico under the provisions of section 131 (a) and (b) of the Revenue Acts of 1934 and 1936.

The respondent contends that the petitioner may not receive such credit because of the limitations of section 131 (b) and argues that the petitioner’s income from the Mexican Candelaria Co., S. A., was received as compensation for services rendered within the United States and is income from sources therein. Consequently, the re-spondeni claims, there being no income from sources without the United States, the credit here sought can not exceed zero.

However, section 131 (e) of the same acts specifically refers to the provisions of section 119 as determining the income derived from sources without the United States. Section 119 (a) (3) and 119 (c) (3) include compensation for labor or personal services performed in or without the United States in the items of gross income which shall be treated as income from sources within or without the United States, respectively. The crux of the case at bar is the phrase “compensation for labor for personal services performed in the United States.” If the petitioner performed such services without the United States it is clear that she is entitled to the credit which she claims.

The record discloses that the petitioner inherited a business controlled originally by her father and later by her husband. Upon her husband’s death, she was elected president of the company. She received an annual salary of $24,000 as such officer. The record does not reveal that she performed any services whatever for the company, either in the United States or in Mexico. That she performed no such services without the United States is inferable from the stipulated fact that she was not absent from this country at any time during 1935 or 1936. In any event, the burden is upon her to prove the contrary. See Louis D. Beaumont, 25 B. T. A. 474; affd., 73 Fed. (2d) 110; certiorari denied, 294 U. S. 715.

Nor was the petitioner’s salary paid to her as interest, dividend, or any other item of gross income which is elsewhere comprehended in, and designated by the statute as a basis for credit. She must come within the classification of section 119 (c) (3) to entitle her to the credit.

In the absence of the proof of credit required by the statute the petitioner is not entitled as a credit to the amounts paid by her as income and absenteeism taxes to the Republic of Mexico.

Decisions will he entered v/nd&r Bule 50.

       SEC. 331. TAXES OE EOREIGN COUNTRIES AND POSSESSIONS OF UNITED STATES.
      (a) Allowance op Credit. — If the taxpayer signifies in his return his desire to have the benefits of this section, the tax imposed by this title shall be credited with:
      (1) Citizen and domestic corporation. — In the case of a citizen of the united States and of a domestic corporation, the amount of any income, war-profits, and excess-profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the united States; and

        *******

      (b) Limit on Credit. — The amount of the credit taken under this section shall be subject to each of the following limitations:
      (1) The amount of the credit in respect of the tax paid or accrued to any country shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer’s net income from sources within such country bears to his entire net income for the same taxable year; and
      (2) The total amount of the credit shall not exceed the same proportion of the tax against which such credit is taken, which the taxpayer’s net income from sources without the United States bears to his entire net income for the same taxable year.

       (e)’ Proof of Credits. — The credits provided in this section shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner (1) the total amount of income derived from sources -without the United States, determined as provided in section 119, (2) the amount of income derived Irom each country, the tax paid or accrued to which is claimed as a credit under this section, such amount to be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary, and (3) all other information necessary for the verification and computation of such credits.

       SEC. 119. INCOME PROM SOURCES WITHIN UNITED STATES.
      (a) Gross Income from Sources in United States. — The following items of gross income shall be treated as income from sources within the United States :
      * * * * * * *
      (3) Personae services. — Compensation for labor or personal services performed in the United States;
      • m * * * # *
      (c) Gross Income from Sources without United States. — The following items of gross income shall be treated as income from sources without the United States:

      (3) Compensation for labor or personal service performed without the United States.