author: Teammell :

text:
    Walter E. Kramer, Executor, Estate of Julius Kramer, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. Olga R. Kramer, Petitioner, v. Commissioner of Internal Revenue, Respondent. Jacob L. Schnadig, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 47247, 47329, 58943, 59191, 62842, 62843.
    Promulgated April 3, 1933.

      Pays off Tinkoff, Esq., for tlie petitioners.

      Chester A. Gwinn, Esq., for the respondent.
   OPINION.

Teammell :

These are consolidated proceedings for the redetermi-nation of deficiencies in income tax as follows:

The petitioner, Olga R,. Kramer, agreed at the hearing that the deficiency determined against her by the respondent in Docket No. 62843 is correct, and that judgment may be entered accordingly.

At the hearing, counsel for the petitioners suggested the death of the petitioner, Julius Kramer, and moved that Walter E. Kramer, executor of the estate of said decedent, be substituted as petitioner, which motion was granted.

The issues submitted for decision are: (1) Whether or not the petitioners are entitled to deductions for exhaustion of alleged contractual rights to receive royalties from patents pooled under the terms of a certain contract dated November 8, 1916; (2) whether or not the petitioners are entitled to deduct from income for 1924 certain amounts refunded in that year to a corporation of which Julius Kramer and Schnadig were the sole directors and which amounts represented dividends unlawfully paid out of the corporation’s capital; (8) whether or not amounts distributed to Julius Kramer and Schnadig in 1924 and 1925 from reserved royalties should 'be included in income for said years; (4) whether or not the petitioners are entitled to deduct from income for 1924 amounts paid to repurchase stock from a former manager of a corporation of which said Kramer and Schnadig were directors; (5) whether or not the estate of Julius Kramer is entitled to deduct from income of said decedent for the years 1924, 1925 and 1926 amounts paid by said decedent to his son Walter E. Kramer for services rendered by the son during said years to a corporation whose stock was then owned by Julius Kramer and Schnadig; (6) whether or not the sale by Julius Kramer in 1926 of his two-thirds undivided interest in certain real estate was an installment sale within the meaning of section 212 (d) of the Revenue Act of 1926; and (7) whether or not the petitioners are entitled to deduct from income for 1928 any amounts as representing losses on the sale in said year of the capital stock of the Davoplane Bed Company.

The first issue for consideration here is whether or not the petitioners are entitled to deductions for exhaustion of alleged contractual rights to receive royalties under a certain pooling contract dated November 8, 1916. The petitioners claim that said rights were acquired on December 16, 1916, under the following circumstances:

In November, 1906, Julius Kramer and Schnadig purchased stock in the Pullman Couch Company, a corporation organized in January, 1906, which was engaged in manufacturing couches and Turkish rockers. In 1907, the Pullman Couch Company acquired for $2,500 cash certain patents, known as the “ Bostrom patents,” covering davenport beds of folding steel construction inside of a wooden frame. These patents proved to be very valuable. ■

In January 1910, a corporation known as the Davoplane Bed Company was organized for the purpose of holding the Bostrom patents, and its stock was issued one-third to one Kroehler and two-thirds to Julius Kramer and Schnadig. Just prior to that time Julius Kramer appears to have been the sole owner of the three Bostrom patents, and that he paid said patents in to the Davoplane Bed Company in exchange for 1,498 shares of its capital stock out of a total of 1,500 shares, one-third of which stock was then transferred to Kroehler for 10 shares of stock which he held in the Pul-man Couch Company. It is not shown when or in what manner Julius Kramer acquired the Bostrom patents from the Pullman Couch Company prior to the organization of the Davoplane Bed Company in January, 1910, except that he acquired said patents “ as trustee ” for the purpose of forming the Davoplane Bed Company.

Infringement litigation was instituted by the Davoplane Bed Company for the purpose of establishing the validity of its Bostrom patents, which litigation was terminated in favor of said company by a decision of the United States Circuit Court of Appeals for the Seventh Circuit on April 18,1916. Freedman v. Davoplane Bed Co., 234 Fed. 70.

As a result of the establishment of the validity of the Bostrom patents, a pool was formed in November 1916, of numerous patents, including the Bostrom patents, relating to the construction of folding davenport beds and similar devices. On November 3, 1916, a written agreement was entered into between the owners of the various patents mentioned, which provided for the granting of an exclusive license to the Seng Company (which had formerly held a license from the Pullman Couch Company under the Bostrom patents) to manufacture and sell under all of said pooled patents, the specified royalties to be divided in stated proportions among the parties to said agreement. Of the total amount of said royalties, 33 per cent was allotted to the Pullman Couch Company as the share of the Kramer-Schnadig group. The pooling contract also provided that each party or group should have a free shop right or license, and pursuant to this provision the free shop right to which the Kramer-Schnadig group was entitled was given to the Pullman Couch Company.

On December 16, 1916, a meeting of the directors of the Pullman Couch Company was held, at which a resolution was adopted directing its officers to execute an assignment or order to the Seng Company, the licensee under the pooled patents, directing said licensee to pay to Julius Kramer and Schnadig all royalties due or to become due to the Pullman Couch Company under the pooling agreement. The license contract of November 3, 1916, was signed by the Davoplane Bed Company and also by the Pullman Couch Company, as well as by Julius Kramer and Schnadig, individually. The Pullman Couch Company “ submitted ” 13 patents to be controlled by the pool agreement, including two of the Bostrom patents, and the Davoplane Bed Company “ submitted ” 7 patents, including one of the Bostrom patents. Julius Kramer likewise “ submitted ” one patent.

The foregoing facts, summarized from the evidence adduced by the petitioners, do not disclose the circumstance attending the numerous transfers of the Bostrom patents during the period from 1906 to 1916. Shortly after 1906 it is indicated that said patents had been acquired by Julius Kramer and Schnadig, and transferred to the Pullman Couch Company. In the early part of 1910, it is shown that Julius Kramer -was the sole owner of said patents and paid them in to the Davopiane Bed Company in exchange for substantially all of its capital stock. In March 1913, petitioner’s counsel states that the Bostrom patents “ technically belonged to the Pullman Couch Co.” but that Kramer and Schnadig owned all of the stock of that company. On November 3, 1916, we find two of the patents being submitted to the patent pool by the Pullman Couch Company and one of them submitted by the Davopiane Bed Company. The record fails to disclose why the entire 33 per cent of the total royalties accruing to the patent pool should have been assigned to the Pullma'n Couch Company instead of being-divided between that company, the Davopiane Bed Company and Julius Kramer in proportion to the number or value of the patents contributed to the pool by each.

However, it is clearly established that in 1916 said patents were not owned directly either by Julius Kramer or by the petitioner Schnadig. Those individuals owned all the capital stock of the Pullman Couch Company and a majority of the Davopiane Bed Company, which corporations owned all the patents contributed to the pool by the Kramer-Schnadig group except one patent submitted by Julius Kramer.

On December 16,1916, Julius Kramer and Schnadig, who were the sole stockholders and directors of the Pullman Couch Company, caused that corporation to assign and transfer to them its right to receive the royalties from the patent pool. However, they were already entitled to receive those royalties from the corporation as dividends on their stock. Instead of permitting the corporation to receive the royalties and then pay the same over to them in the form of dividends, they caused the corporation to assign the royalties to them directly. This cutting of corners did not fundamentally change the situation and the amounts which constituted royalty payments to the corporation constituted dividends when assigned to and received by the stockholders. Under these circumstances, the so-called “ contractual rights ” of the petitioners to receive the corporation’s royalties did not, in our opinion, give rise to a capital asset in respect of which amortization or exhaustion deductions are allowable.

The petitioners contend that they are entitled to exhaustion deductions on the basis of the value of the alleged contractual rights at the time of acquisition in 1916, apparently on the theory that the assignment of the corporation’s royalties to them constituted a gift. The petitioners offered evidence to establish the value at said date as distinguished from cost. It is to be observed, however, that the contract which gave rise to the royalty payments to the corporation was not assigned, but only the right to receive the payments under the contract still held by the corporation. There is no evidence that the corpus or res which gave rise to the right of the corporation to the royalties was assigned to the stockholders. The corporation merely directed that the royalties which it was entitled to receive be paid directly to its stockholders.

We are unable to distinguish this situation in principle from the principle set forth in the line of decisions of which a typical example is Rensselaer & Saratoga R. R. Co. v. Irwin, 249 Fed. 726 (certiorari denied, 246 U. S. 671). In that case, the plaintiff railroad company leased its properties to a second company which agreed to pay as rental, among other things, interest upon bonds of the lessor, and to pay directly to the lessor’s stockholders amounts equal to dividends upon their stock at the rate of 8 per cent per annum. The court held that the amounts so paid directly to the lessor’s stockholders as rental must be treated as corporate income of the lessor subject to taxation, and that as between the lessor and the stockholders these amounts constituted dividends. The court further pointed out that the provision for payment directly by the lessee was a mere labor-saving device. See also United States v. Western Union Telegraph Co., 19 Fed. (2d) 157, and other decisions therein cited to the same effect.

In the instant case, the resolution of the directors under which the corporation’s royalties were paid directly to its stockholders instead of through the corporation would not have the effect of changing the rights of the stockholders. Before the resolution was adopted, the stockholders had the right to receive as dividends the royalty payments to the corporation- After the resolution the stockholders in legal effect were in no different position, under the above cited decisions. What the stockholders received were still dividends. The right to receive dividends does not constitute a capital asset which may be made the subject of amortization deductions.

Another contention of the petitioners is that the right to receive the royalties was given by the corporation to its stockholders for prior services and for certain patent rights yielded up to the corporation; that under these circumstances the right to receive the royalties became a valuable property right which is subject to amortization allowances. But even considering without deciding that the right to receive the royalties to which the corporation was. entitled constituted “ property,” it was acquired after March. 1, 1913, and in respect to property so acquired the basis for exhaustion allowances is cost. Section 204 (c) of the Revenue Acts of 1924 and 1926. And there is in the present record no evidence of the cost of such “ property.” The cost of property is what is given for it. In this case what is claimed to have been given for the alleged contractual rights were services and patent rights, but the evidence does not establish the value of either. The contentions of the petitioners can not be sustained, and the action of the respondent on this issue is approved. National Film, Publicity Co., 4 B. T. A. 118; A. G. F. Gasoline Co., 6 B. T. A. 1337.

The second issue is whether or not the petitioners are entitled to deduct from income for 1924 certain amounts refunded in that year to a corporation, in the following circumstances: Julius Kramer and Schnadig were stockholders and directors of the Chicago Mail Order Company from 1916 to 1925. Prior to 1924 the board of directors of that company authorized the distribution to stockholders of dividends out of the corporation’s capital. On being advised by counsel that such distributions were illegal and that the directors were personally liable on that account, both civilly and criminally, Kramer and Schnadig repaid to the corporation in 1924 the amounts of such dividends received by them and the members of their families. The amount so refunded by Julius Kramer in 1924 was $41,036.24. The amount so refunded by Schnadig in 1924 was $45,353.53.

The petitioners claim that these refunds are deductible from income for 1924 as losses sustained in that year. The respondent contends that the amounts constituted contributions to the capital of the corporation, and therefore are not deductible as losses in the year in which paid. We have consistently held in a long line of decisions that assessments levied upon stockholders on account of the impairment of a corporation’s capital represent additional investments in the capital stock and are not deductible as losses. See the following cases and decisions therein cited: W. R. Banney, 16 B. T. A. 1399; affd., 46 Fed. (2d) 283; B. Estes Vaughn, 17 B. T. A. 620.

We can see no good reason why the rule announced in the cited cases should not be applicable here. It is not controlling, we think, that in the instant case the capital of the corporation was impaired through mistake or ignorance of its directors and that they may or may not have been criminally liable for such acts. When the dividends were declared and paid out of capital, the capital of the corporation was impaired, and the value of the stock owned by the petitioners was lessened; when the funds were repaid to the corporation in 1924, the impairment and value of the capital stock were t.o that extent restored. The investment of the petitioners in the capital stock was increased by these amounts. The action of the respondent in disallowing the deductions claimed is approved.

The third issue raised the question whether or not the amounts of $2,310 and $2,714.54 received by Julius Kramer in the years 1924 and 1925, respectively, and the amount of $2,310 received by Schnadig in 1924, from reserved royalties in the hands of the licensee under the pooling contract of November 3, 1916, constituted taxable income. The correctness of the respondent’s action in including these items in income was conceded by the petitioners in their reply brief filed herein on January 3, 1933. Respondent’s action on this point is, therefore, approved.

Issue (4) involves the question whether or not petitioners may deduct from income for 1924 amounts paid by Julius Kramer and Schnadig in connection with the repurchase of stock of the Chicago Mail Order Company from a former manager of that company.

The record shows that prior to 1924, one Benjamin Strauss was employed as manager of the Chicago Mail Order Company, and that his services proved to be unsatisfactory. At the time of his employment Strauss purchased from the corporation some stock then held in its treasury, and in order to terminate his connection with the corporation, his stock was repurchased by the corporation in 1924 and returned to its treasury. Julius Kramer and Schnadig each paid to the corporation in 1924 the amount of $5,147.97 to cover the alleged loss sustained by the corporation in that transaction.

The petitioners assert that these expenditures were made by the stockholders to protect their business interests and are deductible from 1924 income as business expenses. The respondent urges that the expenditures were in the nature of capital investments in the stock of the company, and are not allowable as deductions.

We have held that where a taxpayer makes an expenditure to promote or to protect his business, which is directly connected with or proximately results from his business, and no capital asset is acquired thereby, such expenditure is deductible as a business expense. See A. King Aitkin, 12 B. T. A. 692; also Louisiana Jockey Club, Inc., 13 B. T. A. 752, and Edward A. Pierce, 18 B. T. A. 447.

The principle applied in those cases, however, is not, we think, applicable here on the facts. It does not appear in the instant case that the expenditures in question were made either to promote or to protect the business interests of the stockholders. It is not clear that the corporation sustained any loss in connection with the transaction in question. If it did sustain such loss, it was prior to 1924 when it sold the treasury stock to Strauss, and the amount probably was not the same as the alleged loss for which the corporation was reimbursed in 1924 by Kramer and Schnadig. The corporation suffered no loss by the act of repurchasing its stock from Strauss, even though the price at which the stock was so repurchased was in excess of the price at which it was sold. Whether or not the corporation ultimately would sustain a loss or derive a profit on the stock repurchased could not be determined until the stock was finally sold again and a completed transaction effected. Apparently Kramer and Schnadig considered that the corporation had sustained a loss by reason of the fact that it repurchased its stock at a greater price than that at which it was originally sold to Strauss. On this point Schna-dig testified as follows:

A. Well, we hired a very good man by the name of Benjamin Strauss, and in order to obtain his services, we sold him some stock at a certain figure. The high-grade gentleman did not turn out so wonderful as he was supposed to be. In order to let him go, and clean up the indebtedness that he had against the corporation, and the stock had shrunk to a certain extent, and the directors having made the arrangement, we felt it was our duty under those circumstances — this stock had been taken out of the treasury stock, and it would go back into the treasury stock at a loss, and again we were told we did not do the proper thing, so we put the stock back, and put the difference in money back.

Obviously it was not necessary for Julius Kramer and Scbnadig to reimburse the corporation for its supposed loss in order to protect their business interests. Whatever menace, if any, Strauss may have been to the business, his connection with the corporation had been severed when his stock was repurchased by the corporation, and the subsequent payments made by Kramer and Schnadig to the corporation representing the difference between the original sale price and the repurchase price of the stock can not be regarded as having been made by them to protect their interests in the corporation against injury by Strauss. It is unnecessary for us to determine here whether the payments constituted gifts to the corporation, or represented additional investments in its capital stock. In the circumstances shown, we think they are not allowable as deductions from gross income of the petitioners for 1924 as business expenses.

Under issue (5) the estate of Julius Kramer, deceased, seeks to deduct from income for the years 1924, 1925 and 1926 amounts paid in those years by the decedent to his son, Walter E. Kramer, for services rendered to the Pullman Couch Company.

In 1924 Julius Kramer was receiving a salary of $30,000 per year from the Pullman Couch Company, and in December of that year his son, Walter E. Kramer, was employed by that company. The son rendered services to the company during the month of December 1924, and during the years 1925 and 1926. He was paid a salary of $125 per month, and gave his entire time to the company. His salary was paid by his father, Julius Kramer.

The petitioners contend that the amounts so paid are deductible from the income of Julius Kramer as business expenses on the principle discussed under the preceding issue, that is to say, that Julius Kramer was moved to pay his son’s salary in order to promote or to protect his own business interests. The respondent takes the position that the amounts in question represent gifts from the father to the son, and are not deductible.

Again, we think, the contention of the petitioners must be denied on the facts. Not only does the record fail to disclose that the payments were made by Julius Kramer to promote or to protect his business interests, but quite the contrary is indicated by the following testimony of the witness Schnadig:

A. * * * Mr. Kramer and myself had been drawing the same amount of pay all the time that we had been together. We practically drew the same amount in salary out of those firms. Walter Kramer got out of school, and he had been there, he had been working a very short time and his services were not so valuable as he thought they were, and Mr. Walter Kramer promptly got married, and he needed more money. And we discussed it, and Mr. Kramer says, “ Well, I don’t think it is fair to give him money he is not entitled to.” He says, “ But he is going to work for the Pullman Coach Company as hard as he can,” and he says, “ Instead of giving it to him from the firm,” he says, “ I will take part of my salary off, and you pay it to him.” That was about the substance of it.

In tbe absence of evidence reasonably tending to show that the amounts claimed as deductions were in fact business expenses incurred and paid as such by Julius Kramer, the respondent’s action on this issue is approved.

Issue (6) presents the question whether or not the sale by Julius Kramer in 1926 of his two-thirds undivided interest in certain real estate was an installment sale within the meaning of section 212 (d) of the Revenue Act of 1926, which provides that a taxpayer may return as income in any taxable year from a sale of real estate, where the initial payments do not exceed one-fourth of the purchase price, that proportion of the installment payments actually received in that year which the total profit realized, or to be realized when the payment is completed, bears to the total contract price.

In March 1916, Julius Kramer and Schnadig purchased a piece of real estate located at 63d Street and Ashland Avenue, in the city of Chicago, for $139,290.07. Julius Kramer took title to the property, and in November 1916, deeded an undivided one-third interest therein to Schnadig. In 1926 said Kramer and Schnadig sold the property by one contract of sale to a single purchaser for the total consideration of $450,000, of which $200,000 was paid in cash and the balance in deferred payments evidenced by mortgage notes in the amount of $250,000. The net profit realized by Kramer and Schna-dig on the sale of this real estate amounted to $298,621.42, two-thirds of which is applicable to Julius Kramer and one-third to Schnadig.

The contract for the sale of the real estate in question was executed under date of August 24, 1926. Prior thereto (on August 15, 1926), Julius Kramer and Schnadig executed a written agreement in which it was recited, among other things, that an offer had been received from one Mecklenburg (who subsequently executed the contract of October 24, 1926) to purchase this property in its entirety for the total consideration of $450,000, of which $200,000 was proposed to be paid in cash and a mortgage given for $250,000, title to the whole property to be conveyed in one deed; and further that Schnadig “ was anxious to accept this offer, as this would relieve his financial embarrassment.” In this situation and because of other matters referred to therein, Julius Kramer consented to accept the offer for his two-thirds undivided interest in the property on the express understanding that the sale should be regarded as a separate sale by each party of his respective undivided interest; that of the total consideration to be paid, Kramer should receive $300,000 as follows: $50,000 cash and “ a $250,000.00 note, Secured by a Mortgage on said Property,” and that Schnadig should receive for his undivided one-third interest $150,000 in cash.

There is no controversy between the parties respecting the proportions in which the total profit derived should be allocated to Kramer and Schnadig. In fact, the respondent concedes, and so stipulated at the hearing, that two-thirds of the total profit is applicable to Julius Kramer and one-third to Schnadig. The sole question is whether or not the sale by Kramer of his two-thirds undivided interest was an installment sale within the purview of the statute.

At the time of the sale the real estate in question was held by Julius Kramer and Schnadig in joint possession by several and distinct titles. The only unity was that of possession. This constituted them tenants in common. Stookey v. Carter, 92 Ill. 129; Harvey v. Cherry, 76 K. Y. 436; Jones v. Cohen, 82 N. C. 75; Hunter v. State, 60 Ark. 312; 30 S. W. 42; Ada R. Giles, 1 B. T. A. 1066.

Each party sold his undivided interest in the real estate, which was what he owned and held title to. The two undivided interests constituting the whole fee were sold for a lump sum or total undivided consideration of $450,000, consisting of $200,000 cash and a mortgage for $250,000. Mecklenburg did not agree in the contract of purchase and sale to buy Julius Kramer’s undivided two-thirds interest for a certain consideration and Schnadig’s undivided one-third interest for a different consideration. The contract provided for the purchase by Mecklenburg and the sale by Julius Kramer and Schnadig of the whole fee for a specified total consideration. When the sale was consummated and the total purchase price paid over in accordance with the terms of the contract, two-thirds of the proceeds of the sale belonged to Julius Kramer and one-third to Schnadig.

The interest of each party in the total proceeds of sale was the same as their respective interests in the real estate sold. Two-thirds of the cash payment of $200,000 and a two-thirds interest in the mortgage note of $250,000 belonged to Julius Kramer, and a one-third interest belonged to Schnadig. It is immaterial that they had agreed beforehand to apportion the proceeds of sale between them in different proportions. Their agreement of August 15, 1926, concerning the amount of cash to be taken by each obviously did not attach until the proceeds of salé had been received from Mecklenburg, and at the instant of receipt their respective interests therein were the same as they had been in the real estate. The effect of the agreement was merely to provide that Schnadig should have the right to exchange his interest in the mortgage note for a part of Kramer’s cash, or that Kramer should purchase Schnadig’s interest in the note for an equivalent amount of cash.

If the parties had exchanged their real estate for other real property instead of cash and notes, their respective interests in the property acquired would have been the same as in the property exchanged, even if they had previously agreed that immediately upon the acquisition of the new property it would thereupon be divided among them or that one would take the whole property and compensate the other for his interest therein.

If Mecklenburg had agreed in the contract of purchase and sale to give Julius Kramer $50,000 cash and a mortgage note for $250,000 for his undivided two-thirds interest in the real estate, a wholly different situation would be presented, but, as above pointed out, this was not done.

Under the facts disclosed here, we must hold that the initial payment made by Mecklenburg to Julius Kramer for his undivided two-thirds interest exceeded one-fourth of the purchase price, and that the transaction was not an installment sale within the meaning of the statute. The respondent’s action on this issue is approved.

The seventh and last issue is whether or not the petitioners are entitled to deduct from gross income for 1928 amounts representing losses on the sale in that year of stock in the Davoplane Bed Company. J ulius Kramer and Schnadig each sold stock of the company in that year to Walter E. Kramer for $25. The number of shares of stock so sold by Julius Kramer was 200. The number of shares sold by Schnadig is not definitely shown, although each apparently sold the same number, since the loss of each is claimed to be the same. Petitioners contend that the stock had a fair value at March 1, 1913, of $36,000 or $180 per share, and that, when it was sold in 1928 for $25, each of the parties sustained a deductible loss in the amount of $35,975.

The evidence on this point is incomplete, indefinite and in some particulars contradictory. It is shown that Julius Kramer acquired all the stock of the Davoplane Bed Company, except two qualifying shares, in 1910 in exchange for the Bostrom patents, of which he was then the sole owner according to evidence adduced by the petitioners at the hearing. It is further shown that the stock was divided between Kroehler, Kramer and Schnadig, apparently one-third to each, and that in 1928 Julius Kramer and Schnadig each sold 200 shares to Walter E. Kramer for $25.

The Davoplane Bed Company acquired the Bostrom patents in 1910 in exchange for its capital stock having a par value of $15,000, and Schnadig testified that said company had no other asset. No money was paid in to the company at the time of organization. Schnadig also testified that the Davoplane Bed Company still retains title to the Bostrom patents and improvement patents thereon; yet two of the three Bostrom patents were “ submitted ” to the patent pool in, 1916 by the Pullman Couch Company, and all royalties due to the Kramer-Schnadig group (both corporations and individuals) on account of patents contributed to the pool, were assigned to the Pullman Couch Company. The pooling agreement of November 3, 1916, to which the Davoplane Bed Company was a party, discloses that said company “ submitted ” seven patents, including only one of the Bostrom patents, issued in various years from 1907 to 1915, there being two patents issued in each of the years 1914 and 1915. The patents issued in 1914 and 1915 had not expired in 1928, but whether the Davoplane Bed Company owned those patents, or any of them, in 1928 is not definitely shown.

The last Bostrom patent expired in 1924, and apparently thereafter the Davoplane Bed Company had no asset of any kind. If it did have any asset after that year, neither the nature of such asset nor its value is established by the record. It is clearly shown, however, that the Davoplane Bed Company did not engage in active operations after November 3, 1916; that about that time it assigned its right to receive royalties under the patents owned by it, and never thereafter received any income. In the light of these facts, it would appear very doubtful whether the stock of the Davoplane Bed Company had any value in 1928. Certainly we can not affirmatively say from the evidence that this stock did have any value in that year.

The respondent disallowed the deductions claimed under this issue on the ground that the stock of the Davoplane Bed Company became worthless in 1924, and hence that no value remained to be lost on the sale of the stock in 1928. In our opinion, the petitioners have not met the burden of proving by a preponderance of the evidence that his determination was erroneous. Respondent’s action, is, therefore, approved.

In Docket No. 68843 judgment will be entered for the respondent. In Docket Nos. 47847, 47389, 58943, 59191 and 68848 judgments will be entered under Rule 50.


source: Caselaw Access Project

author: Lansdon:

license: Public Domain

text:
    Garland C. Kent, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 37657, 51826.
    Promulgated April 3, 1933.

      Geo. 8. Atkinson, Esq., for the petitioner.

      8. 8. Faulkner, Esq., and R. B. Gannon, Esq., for the respondent.
   opinion.

Lansdon:

The respondent determined deficiencies in income tax for the years 1923, 1924, 1925, and 1926 in the respective amounts of $58,147.17, $70,558.82, $36,303.90, and $13,208. The parties have stipulated the true tax liability for the years 1923, 1925, and 1926 and there is left for our consideration only the year 1924, as to which the petitioner’s sole contention is that the collector erroneously refused to accept and file separate income tax returns made on the community basis which were duly executed and timely offered. The two proceedings have been consolidated for hearing and report.

Petitioner and his wife are individuals, residing at Corsicana, Texas. They were married on August 24, 1924, on December 31 of that year were living together as man and wife and from the day of such marriage constituted a marital community under the laws of Texas. Before March 15, 1925, they executed separate income tax returns for the year 1924 which had been prepared for them by a tax accountant in their service. On March 15,1925, the accountant went with such returns to the office of the collector at Dallas and upon presentation thereof to a deputy collector was informed that they could not be received because Kent and his wife had been married within the taxable year and income received by Kent before marriage was not reportable on the community basis. Thereupon the accountant called Kent by telephone, saying that the Government would not accept the returns and asking for a check to cover the amount of additional tax under a single consolidated return. The accountant then changed figures on Kent’s individual return, made other alterations and erasures, and filed the same. The petitioner never saw the changed return and knew nothing of the alterations therein until some time later. On September 25, 1925, having been advised of their legal right so to do, Kent and his wife filed separate amended returns on the community basis. The parties have now stipulated that the petitioner received separate taxable net income for 1924 in the amount of $895,311.96 and that in the same year petitioner and his wife received community taxable income in the amount of $114,378.27.

In the circumstances set out above we think it is clear that the petitioner and his wife elected to return their income for the taxable year on the community basis, as was their right under the provisions of section 223 (b) of the Revenue Act of 1924. The returns offered should have been accepted, filed and audited by the collector and any errors therein should have been adjusted later by the determination of deficiencies or overpayments.

The parties have stipulated that the true deficiencies in tax for the years 1923 and 1926 are $42,119 and $6,843.99, respectively, and that for the year 1925 there was an overpayment of $931.10. The deficiency for 1924 will be recomputed under Rule 50, in conformity with the stipulation that jietitioner’s separate taxable income for such year was $395,311.96.

Decision will be entered, wider Rule 50.


author: Lansdon : Ajtondebl,

text:
    W. A. Sheaffer Pen Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 36604.
    Promulgated April 3, 1933.

      E. E. Pollard, Esq., for tire petitioner.

      J. B. Johnston, Esq., for the respondent.
   OPINION.

Lansdon :

The petitioner’s first contention is that by reason of the inclusion of a duly executed Form 1122 in the consolidated return, the Commissioner was without authority to assess any tax against the Kraker Pen Company. Its counsel argues that the return and the facts clearly indicate an agreement that the entire tax liability under the consolidated return should be assessed to the petitioner. In many proceedings in which no such agreement was proved, we have held that the respondent, under the law, must prorate the tax liability shown on a consolidated return to the several members of an affiliated group in proportion to their respective incomes. Phoenix National Bank, 14 B. T. A. 115; Crystal Block Coal & Coke Co., 15 B. T. A. 600; Aragon Mills, 17 B. T. A. 257; American Textile Woolen Co., 23 B. T. A. 670; Morganite Brush Co., 24 B. T. A. 776; Furniture Exhibition Building Co., 24 B. T. A. 1279. The courts have quite consistently adopted the view that in the absence of any agreement the tax shown upon a consolidated return must be ratably assessed against the several members of the affiliation. Essex Coal Co. v. Commissioner, 39 Fed. (2d) 892; Popular Priced Tailoring Co. v. Commissioner, 33 Fed. (2d) 464. In Sheffield Dentifrice Co., 13 B. T. A. 877, there was an agreement that all the tax due on a consolidated return should be paid by the New England Collapsible Tube Company, and we held that no part of such tax was assessable against another member of the affiliated group. In the light of the above decisions it is clear that the settled law requires the Commissioner to assess the tax shown on a consolidated return in conformity with the agreement between the affiliated corporations. It follows, therefore, that the Kraker Pen Company was not liable to assessment for any income and profits tax due under the consolidated return and that its assets when transferred to the petitioner at December 31, 1921, were impressed with no trust in favor of the Government for unpaid taxes for the year 1920. It is not necessary to decide whether the waivers executed for the taxpayer by the petitioner or its officers are valid. The tax in question was not assessable against the Kraker Pen Company and the validity of waivers of the time for assessment thereof is wholly immaterial to any issue here involved.

Under the terms of the agreement only the petitioner was liable for any assessment under the consolidated return, and at December 31, 1921, when it took over all the assets of the taxpayer, it became liable at law for all the unpaid obligations of the dissolved corporation. Unless extension by consent had been obtained the period within which such an assessment could be made expired on March 15, 1926. Valid waivers extended the time to December 31, 1927. No assessment was made before that date, but on January 24, 1928, the Commissioner notified the petitioner that it was liable as a transferee for the unpaid income and profits taxes of the taxpayer for the year 1920. The petitioner’s liability to assessment as a taxpayer, which it was in fact and in law in the circumstances herein, was tolled at December 31, 1927. In our opinion such liability can not later be revived by a determination under section 280. See Oswego Falls Corp., 26 B. T. A. 60.

Reviewed by the Board.

Decision will Toe entered for the petitioner.

Ajtondebl,

dissenting: I desire to state briefly the basis of my dissent from the majority opinion. Section 230, Revenue Act of 1918, imposes a tax “ upon the net income of every corporation ” and the company whose income is in question here is the Kraker Pen Company. Under section 240 of the same act the W. A. Sheafier Pen Company and the Kraker Pen Company were affiliated and were thus required to file a consolidated return, which they did. A corporation does not cease to be a taxpayer, however, by reason of affiliation. Woolford Realty Co. v. Rose, 286 U. S. 319. The provision in section 240 which permits corporations joining in a consolidated return to agree upon an apportionment of the tax among themselves is purely administrative and is for the convenience of the corporations. Thus, when the Government was advised, pursuant to the statutory provisions, that the Sheafier Company would pay the Kraker Company’s tax, it had a right to look to the Sheafier Company as the Kraker Company’s agent in this matter, as it indeed became. Several years elapsed after the filing of the consolidated return, during which period the tax liability of the Kraker Company was under examination by the Commissioner of Internal Revenue, as a result of which inquiry a deficiency was determined against it. During this period of investigation the Sheafier Company on several occasions gave the waivers which have been set forth in the majority report. The right of the Sheafier Company to waive the statutory period of limitations for its principal, the Kraker Company, seems beyond question, and the Government had a perfect right to rely upon those waivers, and in fact did so. Certainly in this proceeding which is directed against the Sheafier Company as a transferee of the assets of the Kraker Company, it should not be heard to say that it had no authority to waive the statute in behalf of the Kraker Company. Cf. Lucas v. Hunt, 45 Fed. (2d) 781; Warner Collieries Co. v. United States, 63 Fed. (2d) 34. While thus an agent of the Kraker Company in its income tax matters, the Sheaffer Company took over the assets of the Kraker Company and became a transferee thereof and under the law may be proceeded against as such transferee. The statute allows an extra year within which to proceed against a transferee beyond the period in which assessment may be made against the original taxpayer, and the facts here show that well within that time the present proceedings were initiated.

Smith and McMahon agree with the above dissent.


text:
    Frank P. Ross, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 54116, 63627.
    Promulgated April 3, 1933.

      Charles E. Dalrymple, Esq., and Edward R. Burt, Esq., for the petitioner.

      Arthur Carnduff, Esq., for the respondent.
   OPINION.

Lansdon:

The petitioner is an individual, residing at Oak Park, Illinois, where he operates as a capitalist and among other activities in line with his business buys and sells farm mortgages. The respondent has determined deficiencies against him for the years 1928 and 1929, in the respective amounts of $7,482.47 and $1,540.02. For his causes of action he avers (1) that the respondent has erroneously disallowed a deduction from income in 1928 in the amount of $109,444.33 as a loss actually sustained in that year and (2) that the alleged loss resulted in a net business loss in such year which he should be allowed to carry forward and apply against his tax liability for 1929. The two proceedings have been consolidated for hearing and report.

The facts proved at the hearing may be summarized as follows:

Some time prior to 1925 petitioner acquired farm mortgages from one Harry B. Alfree of Newton, Iowa, and paid therefor the amount of $311,750 in cash. It later developed that many of such mortgages were of doubtful value and the seller, Alfree, thereupon repurchased them from the petitoner and in settlement gave his promissory note, by the terms of which payments of $10,000 each were to be made on March 1 of the years 1927, 1928 and 1929 and the entire balance on March 1, 1930.
The note which petitioner received as set out herein was collaterally secured by the entire stock issue of a corporation to be organized for the purchase of holding and operating a business building in Newton, which was owned by Alfree but was encumbered by a mortgage in the amount of $60,000 which the said Alfree agreed to pay oil and retire. In addition to the stock of such corporation, duly organized as the Newton Improvement Company, which was turned over to the petitioner and which he still holds, petitioner was assigned two insurance policies of $25,000 each on the life of Alfree which had a cash surrender value of $3,081. He still holds such assigned policies and pays the premiums thereon from his own funds. Prior to 1928 petitioner received payments on the note in question in the amount of $15,000. The rental income from the building owned by the Newton Improvement Co. is approximately $25,000 per year, which, by agreement, was to be set apart to apply to payments on the note.
As security for the payment of the $60,000 encumbrance on the building referred to above, Alfree assigned real estate mortgages to petitioner of the total face value of $98,000. Such mortgages to the extent of $33,000 turned out to be worthless and on the remainder only $35,000 has been realized and applied to the encumbrance on the building, leaving a balance of $25,000 due and unpaid at December 3, 1928.
Some time prior to 1928 Alfree had a stroke of paralysis which incapacitated him from business for more than one year. Late in the year 1928 he was indicted for embezzlement but was never tried for the offense charged. In 1928 he owned a home in Newton, worth $40,000 or $50,000, which was mortgaged in the amount of $30,000. He filed a voluntary petition in bankruptcy on December 4, 1930, and was discharged therefrom on July 21, 1931.
In 1928 the petitioner, after assuring himself of the financial and physical condition of Alfree, decided that he could make no further collections on the note, but took no steps by suit at law or otherwise to convert the collateral to his ownership. In his income tax return for such year he deducted the amount of $109,444.33 from his gross income as a business loss sustained in 1928. He arrived at the amount claimed by subtracting from $311,750 the sum of $163,223.92, $21,000, $3,081.85 and $15,000 which represented respectively the appraised value in that year of the property owned by the Newton Improvement Company, mortgages received from Alfree, cash surrender value of the assigned life insurance policies and payments theretofore received on the note, or a total of $202,305.77. Upon audit the Commissioner disallowed such deduction for the reason that, “ since the taxpayer still holds various collaterals taken as security for the note and the amount of the loss is not, as yet, defi-nately established as contemplated by Article 171 of Regulations 74.”

A loss is deductible from income in the year in which it is sustained ; a bad debt in the year in which it is ascertained to be worthless. In either event deductibility as to any given year can be proved only b}^ evidence that establishes both the fact and the date of the alleged loss or worthlessness. In this proceeding the petitioner has failed in both respects. In 1928 he still held all the collateral taken in security for the note and had taken no steps to reduce such collateral to ownership and thereby effect a closed transaction as the basis of his claim. Only a small part of the note was due in that, year and there is no evidence that the corporation income set apart for that purpose was not sufficient to pay the balance due at the end of the year. It is obvious therefore that there is no basis for the claim that the entire balance due on the note was ascertained to be a worthless debt in 1928. In our opinion the petitioner has failed to show that the amount in controversy should be deducted from his income in the taxable year either as a business loss or a bad debt. Carl Muller, 4 B. T. A. 169; Russo Fruit Co., 23 B. T. A. 1381; R. E. Huff, 20 B. T. A. 516. Cf. Douglas Light & Power Co., 43 Fed. (2d) 904.

The deficiency for 1929 is based upon a net loss claimed in 1928 in the amount of $43,341.83. The effect of our conclusion above is that the petitioner sustained no deductible loss in 1928. It is not necessary therefore to decide whether loss was sustained in a business regularly carried on by the taxpayer.

Decision will be entered for the resfondent.


author: GoodRich :

text:
    James D. Boone, Petitioner, v. Commissioner of Internal Revenue, Respondent. D. W. Boone, Petitioner, v. Commissioner of Internal Revenue, Respondent. J. A. Boone, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. F. Boone, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of Eli J. Taylor, W. L. Burruss, Administrator, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 22760-22763, 37058.
    Promulgated April 5, 1933.

      Benjamin F. Saunders, Esq., G. E. Mahan, Esq., and Edward M. Woolf, Esq., for the petitioners.

      Arthur Clark, Esq., and Elden McFarland, Esq., for the respondent.
   OPINION.

GoodRich :

Petitioners contend that under the provisions of section 212 (d) as retroactively applied by section 1208, Revenue Act of 1926, the sale of the Brown coal properties in 1920 was an installment sale and that the taxable gain derived therefrom should be computed upon that basis or, in the alternative, if the transaction was not an installment sale, then the notes evidencing the deferred payments had no market value when received and no taxable gain is to be recognized until petitioners have returned to them their capital investment. Respondent has determined, and maintains, that the transaction was not an installment sale within the meaning of the statute because more than one-fourth of the selling price (which he contends was $550,000) was received and, further, that petitioners may not now change the basis upon which they reported the transaction in their returns.

Obviously, we must first determine the amount of the selling price and the amount of the cash payment. We are convinced that these were $500,000 and $100,000, respectively. It is true, as respondent argues, that both the contract of sale and the deed recite a total consideration of $550,000, and a down payment of $150,000, but those recitals are not necessarily conclusive. Here respondent is neither a party nor a privy to the instruments, and in such case it is well settled that the petitioners may introduce evidence at variance with or in contradiction to the terms of the written instrument to show the real nature of the transaction. Converse & Co., 1 B. T. A. 742; J. W. Solof, 1 B. T. A. 776; Arthur B. Grover, 3 B. T. A. 508; Stratton Grocery Co., 8 B. T. A. 317; Amalgamated Sugar Co., 4 B. T. A. 568, 575; C. I. & L. Ry. Co., 10 B. T. A. 1143. The evidence is conclusive that, so far as petitioners were concerned, their only agreement was to sell the property for $500,000, of which $100,000 was to be paid in cash. They neither demanded nor expected more, nor, we think, did they receive more. Stover was not their agent. He was the man who purchased from them, whether for himself or for an undisclosed principal, they did not know. The inflation of price in the recital of the contract deed was done for Stover’s purposes, at his request and under an agreement to refund to him immediately the excess of $50,000 over the cash payment the partners demanded. Consequently, that excess, when received by petitioners, was impressed with a trust to return it to Stover, to whom the money belonged, and it was not a part of the consideration for which the partnership sold its properties. Therefore, the initial payment did not exceed one-fourth of the purchase price and the transaction falls within the statutory definition of an installment sale. First Savings & Trust Co., 20 B. T. A. 272.

Respecting respondent’s contention that because petitioners in their returns for 1920 reported the profit from the sale on an accrual basis they can not now change to the installment basis, we again disagree. We have previously held that there was no statutory authority for reporting income on the installment basis under the Revenue Act of 1918. B. B. Todd, Inc., 1 B. T. A. 762; H. B. Graves Co., 1 B. T. A. 859, Hoover-Bond Co., 1 B. T. A. 929. Obviously, therefore, when petitioners filed their returns for 1920 they had no right to report the income from this sale on the installment basis. This privilege was accorded them by the provisions of section 212 (d) of the Revenue Act of 1926 as retroactively applied by section 1208 of the same act. To hold that petitioners can not change the method of reporting this installment sale would be contrary to the intention of Congress as expressed in these sections. Laurence H. Lucker, 21 B. T. A. 93; Potter Farms, Inc., 6 B. T. A. 111; Standard Computing Scale Co. v. United States, 52 Fed. (2d) 1018; M. L. Elken, 7 B. T. A. 1160; B. L. Brown Coal & Coke Co., 14 B. T. A. 609. Cf. Key Largo Shores Properties, Inc., 21 B. T. A. 1008.

In this view of the case, it is unnecessary to consider petitioner’s alternative contention.

Judgment will he entered wnder rule 50.


author: Ajrundell :

text:
    Walter E. Dunham, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 66308.
    Promulgated April 6, 1933.

      Nelson Trottman, Esg., for the petitioner.

      Frank A. Surine, Esg., for the respondent.
   OPINION.

Ajrundell :

The joint checking account of petitioner and his wife was opened in 1923, and maintained throughout 1929, pursuant to an understanding of many years that each would have an equal interest in -the income of the other. The Illinois courts hold that deposits made in a joint bank account by one of the payees under the circumstances present here constitutes a gift to the other, and that the rights of the parties in the account are equal. Illinois Trust & Savings Bank v. Van Vlack, 310 Ill. 185; 141 N. E. 546; Reder v. Reder, 312 Ill. 209; 143 N. E. 418. The title of the payees in such an account has been held to be a vested interest. Burns v. Nolette, 83 N. H. 489; 144 Atl. 848.

It was from this account, in which each had an equal interest, that the petitioner and his wife decided to withdraw funds to open and maintain a marginal stock-trading account. They agreed upon not only the initial deposit made with the broker, but the several others made during 1929 from funds withdrawn from the account. The agreement of the wife was obtained for all purchase orders issued to the broker.

The uncontradicted testimony of the petitioner and his wife is that before entering into the stock-dealing venture they agreed that the benefits therefrom would be shared equally. Under this agreement, the wife was entitled to one-half of the profit from sales of stock held in the account. The fact that the stock account was in petitioner’s name is not important. The gains realized from sales of stock credited to the stock account were held in trust for the joint owner. Hewlings Mumper, 13 B. T. A. 977.

The respondent erred in taxing the petitioner on more than one-half of the profit of $23,884.75 realized in 1929 from the sale of stock in the account. Carl W. Gillette, 18 B. T. A. 434; First National Bank of Duluth, 13 B. T. A. 1096; Francis Krull, 10 B. T. A. 1096.

The case of Stanley Pedder, 20 B. T. A. 11, affirmed in 60 Fed. (2d) 866, relied upon by the respondent, is clearly distinguishable. There was no proof in that case, as there is here, that the wife was to have a one-half interest in the property purchased from funds withdrawn from the joint bank account.

Decision will he entered under Bule 50.


author: Matthews:

text:
    Forrest Richardson and Morse Palmer, Executors of the Estate of Emma R. Morse, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 44652.
    Promulgated April 6, 1933.

      Edgar M. Morsman, Esq., for the petitioners.

      H. D. Thomas, Esq., for the respondent.
   OPINION.

Matthews:

Although it is alleged in the petition that the respondent erred in including in the decedent’s gross estate the shares of stock owned by her in two British Columbia corporations, which the respondent valued at $99,227.54, no evidence was introduced with respect to the value of this stock.

There remains for consideration the question whether the respondent erred in including in the decedent’s gross estate the property transferred by her in trust on April 13, 1927. The pertinent section of the statute, section 302 (c) of the Revenue Act of 1926, is quoted in the margin. The second provision of section 302 (c), which raises a conclusive presumption that transfers made within two years prior to the decedent’s death were made in contemplation of death, has been held by the Supreme Court of the United States to be unconstitutional (Heiner v. Donnan, 285 U. S. 312). The respondent is relying upon the first provision, under which the value of transfers made at any time in contemplation of death or intended to take effect in possession or enjoyment at or after death, except by a bona fide sale, is required to be included in the decedent’s gross estate.

We have carefully considered the evidence introduced in this proceeding and have reached the conclusion that the transfer in trust was not testamentary in character. The testimony of several witnesses indicates that the decedent’s son, who lived at Vancouver, had been borrowing considerable sums of money from the decedent and that he was in very bad shape financially. The son was asking the decedent for additional funds and she did not wish to accommodate him further. The trust which we are considering herein was created at the suggestion of her attorney, whom she had consulted with reference to arranging her affairs so that she could make no additional loans to her son. The decedent was in excellent health on April 13, 1927, and although she died the following April there is nothing to indicate that she was thinking of her approaching decease at the túne she executed the trust deed. By this instrument, which is quoted in our findings of fact, decedent transferred to trustees certain securities in trust, it being provided that the income therefrom should be paid to the decedent during her lifetime, and after her death to the unmarried daughter of the decedent so long as the daughter lived and remained single, the trust to terminate upon the death of the daughter.or upon her marriage, with remainder over to the heirs of the decedent. It will be seen that the absolute disposition of the trust property was provided for in the trust instrument and only the income was reserved to the grantor for life and to her single daughter, if the daughter survived the grantor and did not marry. The transfer was beyond recall by the decedent, title to the property being definitely fixed by the trust deed. The interest therein which the decedent possessed immediately prior to her death was obliterated by that event. The transfer was not made in contemplation of death and was not intended to take effect in possession or enjoyment at or after death, within the legal significance of those words. Under the authority of May v. Heiner, 281 U. S. 238, we hold that the corpus of the trust should not be included in the value of the gross estate of the decedent for purposes of estate tax under section 302 (c) of the Revenue Act of 1926. See also Morsman, v. Burnet, 283 U. S. 783, reversing 44 Fed. (2d) 902, which reversed the decision of this Board reported at 14 B. T. A. 108.

The petitioners are entitled to credit the estate tax determined by the respondent with the inheritance taxes paid to the State of Nebraska in the sum of $304.45, such credit not to exceed 80 per cent of the amount determined under section 301 (a) of the Revenue Act of 1926.

Judgment will be entered u/nder Bule 60.

       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—
      * * * * * * *
      (c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after Ms death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. Where within two years prior to his death but after the enactment of this Act and without such a consideration the decedent has made a transfer or transfers, by trust or otherwise, of any of his property, or an interest therein, not admitted or shown to have been made in contemplation of or intended to take effect in possession or enjoyment at or after his death, and the value or aggregate value, at the time of such death, of the property or interest so transferred to any one person is in excess of $5,000, then, to the extent of such excess, such transfer or transfers shall be deemed and held to have been made in contemplation of death within the meaning of this title. * * *


text:
    Pittsburgh Athletic Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 60569, 66964, 67422.
    Promulgated April 6, 1933.

      John B. Tates, Esq., for the petitioner.

      L. E. Bushbroolc, Esq., for the respondent.
   OPINION.

Teammell :

The Board has heretofore had occasion to consider contracts of the nature of those in question in the cases of Dallas Athletic Assn., 8 B. T. A. 1036, and Houston Baseball Assn., 24 B. T. A. 69. The provisions of the contracts considered by the Board in those cases are substantially the same as the provisions of the contracts involved in these proceedings. In the Dallas case, supra, the Board said:

It is well settled that if these contracts represent capital assets and were exhausted by the passage of time or otherwise, the petitioner is entitled to spread the amount paid for each contract over the determinable period of its life, and to deduct an aliquot part thereof in each year.

We held that the renewal clause in the contracts under the conditions presented gave the contract a life, of more than one year. In the light of the decision in the case of Bonwit Teller & Co. v. Commissioner, 53 Fed. (2d) 381, we think that we were in error, and those decisions will not be followed.

In the case of 353 Lexington Avenue Corp. et al., 27 B. T. A. 762, we said with reference to the Bonwit Teller case:

Petitioner’s principal reliance is on the case of Bonwit Teller & Co. v. Commissioner, 53 Fed. (2d) 381, in which it was held that where the original term of a lease had 19 years to run from March 1, 1913, with an option to renew for 21 years at a renewal to be based on an appraisal of the property, the lessee taxpayer was entitled to exhaust the March 1, 1913, value of the lease over the remaining life of the original term of the lease. That decision is premised upon the statutory provision that exhaustion deductions are allowable in respect of “ property used in the trade or business,” and the fact that in that case “ the property being used in the business (the leasehold) will be exhausted in nineteen years.” In so holding the court did not disregard the existence of the option to renew, but proceeded on the theory that the option was not property then being used in the business, and that in the event of its exercise new property would be created which might then be the subject of exhaustion. Counsel for respondent attempts to distinguish the present case from the Bonwit Teller decision on the ground that the court had before it a question of exhausting only the March 1, 1913, value of the unexpired term of the original lease, whereas in this case the investment by the lessee in the building and the length of its useful life mates it evident that the lessee intended to renew, and consequently exhaustion should be spread over the period that the lessee is entitled to enjoy the use of the property. We think that this is not a valid distinction. A reading of the court’s opinion discloses that the renewal privilege was taken into consideration and it was held that the result would be the same whether or not the option entered into the value of the lease. The court said:
Such an option might readily enhance the value of the lease, but it could hardly be supposed to change the period during which the lease would become exhausted.

In our opinion this case is governed by the same principle as above stated. The contracts here involved were only for one year, with the option of renewal. If renewed, there is another contract. The one year contract is the “ property used in the trade or business.” The cost of one-year contracts should be allowed as a deduction in the year acquired. This is the way in which the taxpayer handled the contracts on its returns.

In view of our decision it is not necessary to decide the questions presented as to the proper method of taking the amortization deduction with respect to contracts for prior years, or the basis of determining gain or loss with respect to sales thereof.

Reviewed by the Board.

Judgment will he entered under Rule 50.


text:
    Mary Helen Cadwalader, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46327.
    Promulgated April 6, 1933.

      Thomas F. Cadwalader, Esq., for the petitioner.

      J. C. Maddox, Esq., for the respondent.
   OPINION.

Matthews:

Petitioner is the sole distributee for life under the will of her deceased husband, the testator, of the “ net income ” of the estate. The testator appointed his two sons to hold the property in trust for their mother “ and to pay to her the net interest and bicorne of my entire estate so long as she shall live.”

Section 219 (b) (2) and (3) of the Revenue Act of 1926, applicable here and set out in the margin, provides that income, whether distributed or only distributable to a beneficiary of the trust, may be taken as a deduction by the trustees in determining the net income of the trust, but must be included in computing the net income of the beneficiary. The income of the trust here in question was not held by the trustees as a reserve to restore the corpus, nor credited for distribution later to the beneficiary, nor was it in fact distributed to the beneficiary. It was used by the trustees to pay the premiums on certain life insurance policies received by the trustees from the testator as part of the assets of the estate. The peculiar circumstances in which these policies were acquired by the trustees are set out fully in our opinion in John Cadwalader, Jr., Executor, 15 B. T. A. 1, and in our findings of fact.

The trustee and the beneficiary, it has long been decided, are under the revenue acts two distinct taxable persons. Merchants Loan & Trust Co. v. Smietanka, 255 U. S. 509. In this proceeding, therefore, we are not concerned with what the trustee might properly deduct in determining the net income of the trust, but only with what was properly includable in the income of the petitioner as beneficiary. We shall, then, leave on one side the extended discussion of counsel of both parties on the question whether premiums paid by the trustees on these life insurance policies were properly deductible by them as losses in determining the net income of the trust.

Was the income of the trust, which was used by the trustees to pay the premiums, income to the petitioner? The respondent contends that the trustees may not burden the life tenant’s income with premium payments which will come back only to the remainderman in the form of life insurance proceeds. The premiums are said to be a capital investment. This is clearly a collateral attack and involves petitioner’s rights under the will to her distributive share.

We have already said that'under the will the petitioner was to receive the “ net interest and income ” of the testator’s entire estate. No question has been raised by the interested parties, neither the petitioner nor remainderman, as to the interpretation of the will adopted by the trustees in treating these payments as necessary charges upon the trust income. The debt owed by Stafford to the testator was long since extinguished by the former’s bankruptcy, but the collateral pledged to secure it came to the trustees as assets of the estate. The trustees evidently regarded such payments as the best and only way to salvage this original loan. We have held that a long standing interpretation of a testamentary trust by the interested parties should be given great consideration and not be lightly set aside. David E. Brenneman, 10 B. T. A. 544; Anna M. Chambers, 17 B. T. A. 820. Here the testator had made no express provision for payment of the insurance policy premiums, but he had clearly said the petitioner was to receive only “ net interest and income.” Such language presupposes gross income of the trust from which the trustees should make a deduction of all necessary charges and expenses. We said in William W. Mead el al., Executors, 6 B. T. A. 752, 758:

In our opinion expenses which were necessary to he paid out over a number of years in preserving the estate, selling the property and collecting interest or deferred payments on sales, are deductible from the gross income of the estate. Such expenses come under the classification of ordinary and necessary expenses in carrying on a trade or business. Under section 219 of the Revenue Act of 1918 an estate or trust is entitled to the same deductions for such expenses as are allowed to individuals.
Considering the will in its entirety, it was manifestly the intention of the testator that the expenses of- preserving the estate, selling the timber and other expenses involved in collecting the gains and profits, were to be deducted from the income of the estate and not from the corpus. The intention of the testator in that regard, while not controlling as to whether the expenses should be deducted in determining the net income for the purposes of the tax, should be given great weight.

Cf. George W. Seligman, Executor, 10 B. T. A. 840.

We are of the opinion that “ net interest and income,” as used in the will, took into account the deduction of necessary charges to maintain the assets of the corpus. The testator had paid such premiums in his lifetime, and it must be assumed that he contemplated, the resources of his estate permitting, the continued payment of them by his executors and the trustees who took over his estate. Nor need there be any confusion between “ net income ” as used in the will and as it might be applied in determining the tax of the trust; we have said that these are separate questions, and we need not consider here what the respondent would allow to the trustees as a deduction in determining the trust’s net income.

The only real question is, then, Was the making of such payments reasonably within the discretion of the trustees as an act necessary to preserve substantial assets of the trust ? Upon this we have no doubt. True, the policies might have been surrendered by the trustees at any time and their surrender value received, but when it is recalled that the testator’s debtor, whose life was insured, had reached his eightieth year at the time of the testator’s death in 1925, it seems only prudent that counsel for the trustees should continue premium payments in the hope of obtaining the face amount of the policies. To make such payments in the circumstances was as much the duty of the trustees as to pay taxes on land embraced within the estate or any other charges, the neglect of which would result in substantial loss to the estate. It may also be pointed out that while the income of the petitioner would be reduced to the extent of such payments, a reciprocal advantage would result to her as soon as the policies matured, either as endowments or on the insured’s death, through a substantial increase in the corpus from which she drew the income; and it can not be argued, therefore, that these payments went only to increase the interest of the remainderman at the expense of the life tenant.

The present case is clearly distinguishable from the line of cases in which the institution by the trustees of depreciation reserves without express authority in the will has deprived the life tenant of income otherwise distributable to her. Baltzell v. Mitchell, 3 Fed. (2d) 428; Kaufmann v. Commissioner, 44 Fed. (2d) 144; Hubbell v. Burnet, 46 Fed. (2d) 446; Cadman v. Commissioner, 50 Fed. (2d) 163; Roxburghe v. Burnet, 58 Fed. (2d) 693; Commissioner v. Freuler, 62 Fed. (2d) 733. Here there had been no distribution of this income to petitioner, no setting up of it as a credit for petitioner or as a reserve to make whole the remainderman.

We are of the opinion, therefore, that a reasonable construction of the will would require the trustees to pay these premiums in order to conserve the estate as well as to do other necessary acts to the same end, and that until deductions of such necessary costs, charges and expenses were made from gross income, “ net income ” within the meaning of the will could not be determined. It follows that so much, of the income of _the trust as was used in making the premium payments in question was not distributable to the petitioner as beneficiary and was improperly added to her income by the respondent.

Petitioner’s counsel in his brief, and not before, raised an alternative argument that the petitioner had no taxable income from her husband’s estate in 1927, since under local law she took in lieu of dower and therefore as a purchaser for value. No evidence was offered on this point, so we need not consider it.

Nor need any consideration be given to the claim for refund set out for the first time in petitioner’s brief, as that issue is raised too late.

Reviewed by the Board.

Judgment will be entered for the 'petitioner.

       Sec. 219. (t>) Except as otherwise provided in subdivisions (g) and (h), the tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, except that—
      *******
      (2) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be hold or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under paragraph (3) in the same or any succeeding taxable year;
      (3) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.


author: MoRRis:

text:
    Old Colony Trust Company, Frank B. Bemis and Parker Converse, Trustees u/w of Harry E. Converse, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54984.
    Promulgated April 6, 1933

      Harris H. Gilman, Esq., for the petitioners.

      G. A. Bay, Esq., for the respondent.
   OPINION.

MoRRis:

The question for our determination, as announced at the outset, is whether or not the petitioners, trustees under the will of Harry E. Converse, deceased, are entitled to deduct from the gross income of the trust, under the provisions of section 219 (b) (2) and (3) of the Revenue Act of 1926 and section 162 (b) and (c) of the Revenue Act of 1928, distributions made by them to the widow of the decedent. Section 219 of the 1926 Act, which, to the extent of our present concern, is identical with section 162 of the 1928 Act, provides:

(a) Tbe tax imposed by * * * this title shall apply to the income of estates or of any kind of property held in trust, including—
* * * * * * . *
(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, * * *
*******
(b) Except as otherwise provided * * * the tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary. The net income of the estate or trust shall be computed in the same manner and on the same basis as provided in section 212, except that—
*******
(2) There shall be allowed as an additional deduction in computing the
net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, * * * but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. * * *
(3) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir or beneficiary.

The petitioners’ counsel frankly concedes the similarity of the facts in the instant case to those in Julia Butterworth, 23 B. T. A. 838, a case involving the identical issue raised here, 'but he seeks a different ruling from the one there because of a difference between a provision of the Pennsylvania statute under which the Butterworth case arose and a like provision of the Massachusetts statute governing the property settlement in the instant case.

In view of this concession on the part of the petitioners’ counsel there would seem to be no necessity for dwelling upon the decision in the Butterworth case except to say that there, as here, the respondent disallowed claimed deductions asserted by the trustees representing amounts paid by such trustees to the decedent’s widow under the will, the widow there, as here, having waived her statutory right of dower and having elected to take under the provisions of the will instead.

The statutes of both States, Pennsylvania and Massachusetts, provide for the power of election on the part of the widow, but in Pennsylvania if she elects to take her dower interest instead of under the will, “ the surviving spouse shall be entitled to one-third part of the real and personal estate ” — Pennsylvania Statutes 1920, sec. 8335— whereas, in Massachusetts, if a widow so elects, “ she shall thereupon take the same portion of the property of the deceased, real and personal, that * * * she would have taken if the deceased had died intestate; except that if * * * she would thus take real and personal property to an amount exceeding ten thousand dollars in value, * * * she shall receive in addition to that amount only the income during * * * her life of the excess of * * * her share of such estate above that amount, the personal property to be held in trust and the real property vested in * * * her for life, from the death of the deceased ” — Massachusetts General Laws, ch. 191, sec. 15. It is this statutory distinction upon which the petitioner relies to avoid the principle of the Butterworth case.

A well settled general rule of law upon which the Butterworth case is founded is that where a widow exercises her statutory right of election and takes under the will in lieu of her dower right she becomes a purchaser for value of the testamentary provisions in her favor and that, in legal effect, she purchases an annuity and that she receives under the will, as such, and not as a beneficiary. Ample citations of authorities for this rule have been collected and set forth in the Butterworth case and need not be repeated here. And, as we said in the Butterworth case: “ Considered from the viewpoint of the estate, the holdings are that what occurs in a case of this sort is the purchase by the estate, through the trustee, of the share to which the surviving spouse was entitled.”

The same provisions of the Massachusetts statute (General Laws of Massachusetts 191, sec. 15) which this petitioner differentiates from the Pennsylvania statute, thereby distinguishing the instant proceeding from the Butterworth case, were under consideration in United States v. Bolster, 26 Fed. (2d) 160, where also the kindred question of taxability of such distributions to the widow was involved. In holding such receipts to be a return of capital to the widow, hence, nontaxable, the court said: “ The payments made to Sarah A. Davenport during the years in dispute represented ‘ purchase money ’ or ‘ installment payments ’ by the estate.”

The petitioner contends, though, that the Bolster case is not authority for the question here for the reason that it did not consider the controversy from the viewpoint of the deductibility of such distributions by the trustees.

The same court which decided the Bolster case has now handed down its decision in Katherine W. Atkins et al., Trustees v. Commissioner, decided January 31, 1933, wherein the identical issue here raised was considered, that is, the deductibility of such distributions by the trustees as distinguished from taxability thereof in the hands of the recipients. In that case the court said in part:

In United States v. Bolster, 26 Fed. (2d) 760 [6 Am. Fed. Tax Rep. 7767], this court had before it for consideration the same provisions of law in the Revenue Acts of 1918 and 1921. In that case we pointed out that, under the statue of Massachusetts relating to waiver of a widow’s dower and statutory rights in the estate of husband, the courts of Massachusetts, in construing those provisions of law, had held that the widow was a purchaser for value; and applying that construction to the case then under consideration, we held that she was not only a purchaser for value and not a beneficiary but that the sum received by her in return for her dower and statutory rights was a return of capital and not taxable to her as income. The Circuit Court of Appeals in the Eighth Circuit reached a like conclusion in Allen v. Brandeis, 29 Eed. (2d) 363 [7 Am. Fed. Tax Rep. 8305].
As it is determined by these decisions that, under the circumstances here presented, Mrs. Atkins was not a beneficiary within the meaning of the taxing statute and that what she received -in the year 1927 was not in the capacity of a 'beneficiary, but of a purchaser for value, the petitioners, the trustees, were not entitled under Section 219 (b) (2) to have the payments made to her that year deducted in ascertaining the net taxable income.

In the case of George D. Harter Bank, Executor, 27 B. T. A. 941, the deductibility of distributions, similar to those here, was under consderation. The taxpayer there, as hele, attempted to distinguish his case from the ■Julia Butterwiorth case because of a distinction between the legal'status of a widow under the laws of the State of Ohio and under the laws of the State of Pennsylvania where the Butterworth case arose and the taxpayer cited a' case decided by the courts of Ohio sustaining his views. Referring to such case and after consideration of the question presented, we said: “However, we do not feel that the rule announced by the Ohio Supreme Court in that case in construing the Sections of the Ohio statutes which were before it, would have any effect to change the rule of Federal taxation which we announced in Julia Butterworth, supra, and other cases following it.”

We are of the opinion that the principle in the Butterworth case should be followed and that, irrespective of the distinction to which we have referred between the statute considered in the But-terworth case and the Massachusetts-statute, th.e Bolster case and that of Katherine W. Atkins, supra, control our action in the instant proceeding.

Since the amounts paid to the widow up to and including the years in controversy are less than the value of her dower interest, the deductions claimed by the trustees were properly disallowed by the respondent and his action in so doing is approved.

Decision will he entered for the respondent.


author: Smith :

text:
    Katherine B. Albrecht and Elizabeth L. Bebb, Executrices of the Estate of Richard E. Bebb, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41295.
    Promulgated April 6, 1933.

      Robert B. Arbaugh, Esq., for the petitioners.

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

Smith :

The first question for decision is whether the value of the Elizabeth L. Bebb Trust in the amount of $344,375 was includable in the gross estate of the decedent. TEe correctness of the determination of the value of the corpus of the trust fund is not challenged.

Section 302 of the Revenue Act of 1924 provides in part as follows:

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, or with respect to which he has at any time created a trust, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for a fair consideration in money or money’s worth.

If the Elizabeth L. Bebb Trust was a revocable trust within the meaning of the statute, the petitioners do not question the right of the respondent to include in the gross estate the value of the corpus of the trust in accordance with Saltonstall v. Saltonstall, 276 U. S. 260; Chase National Bank v. United States, 278 U. S. 327; Reineeke v. Northern Trust Co., 278 U. S. 339; Porter v. Commissioner, 60 Fed. (2d) 673. Referring to Reinecke v. Northern Trust Co., supra, the petitioners submit that that and kindred cases do not touch the identical point here involved, and state:

* * * So far as we ean ascertain, in each of those cases there was a so-called unlimited power of revocation exercisable in each instance by the grantor at such time as he felt so disposed.
We agree with the decision of the Court on trusts of that character. However, we wish to point out that in this appeal there is a very different revocation provision, the distinguishable feature being that when the year 1926 was once commenced, the trust to all intents and purposes became irrevocable for that year, and when the decedent died on January 5, 1926, he was without any power of revocation. We direct particular attention to the provisions of the statute which, as quoted above, state in substance that a transfer in trust shall become a part of the gross estate.
“ Where the enjoyment thereof was subject at the date of Ms 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.”

We are of the opinion that the “ distinguishable feature ” of the Elizabeth L. Bebb Trust, pointed out above, does not distinguish this case from that of Reinecke v. Northern Trust Co., supra. In Chase National Bank v. United States, supra, the court said:

* * * we think the power to tax the privilege of transfer at death cannot be controlled by the mere choice of the formalities which may attend the donor’s bestowal of benefits on another at death, or of the particular methods by which his purpose is effected, so long as he retains control over those benefits with power to direct their future enjoyment until his death. Termination of the power of control at the time of death inures to the benefit of him who owns the property subject to the power and thus brings about, at death, the completion of that shifting of the economic benefits of property which is the real subject of the tax, just as effectively as would its exercise, which latter may be subjected to a privilege tax, Chandler v. Kelsey, 205 U. S. 466. * * *

The decedent had the power under the trust instrument to give notice of its revocation in December of 1924, or December of any subsequent year, the revocation to be effective on January 1 succeeding. Had the decedent lived throughout the year 1926 and into 1927, he could have revoked the trust in December of 1926, and such revocation would have been effective January 1, 1927. It was his death in 1926 which cut off this power of revocation. This constituted a shifting of economic benefits with respect to the trust fund and in our opinion constituted a transfer at death which was the appropriate subject of the estate tax.

The petitioners call attention, in support of their contentions, to Lewis v. White, 56 Fed. (2d) 390; affd., White v. Lewis, 61 Fed. (2d) 1046; Langley v. Commissioner, 61 Fed. (2d) 796; Mabel A. Ashforth et al., Executors, 26 B. T. A. 1188. These decisions are concerned with the interpretation of section 219 (g) of the Revenue Act of 1926, and with section 166 of the Revenue Act of 1928. They have no application to provisions of the estate tax laws. The action of the Commissioner in including in the gross estate the value of the corpus of the Elizabeth Bebb Trust is sustained.

The second question in issue is whether the respondent properly included in the gross estate 1,954 shares of Central Steel Company common stock, which was later exchanged for 4,152 common shares of Central Alloy Steel Corporation stock and $4,288 cash. The contention of the petitioners upon this point is that this property was held by the decedent in trust and did not constitute a part of the decedent’s gross estate. The evidence of record, however, fails to disclose that the decedent held his property in trust.

The testimony is to the effect that, in 1923, $550,000 was turned over to the decedent by the Cleveland-Cliffs Iron Company; that the decedent paid $40,000 of this sum to Clarence G. Herbruck for counsel fees, and thereafter turned over one-third of the balance, $170,000, to one Stuart, and a like amount to one Griffiths; that the sum so paid to Bebb was to be available for payment of services of Bebb, Griffiths, and Stuart to be rendered in connection with the planning for and construction of a proposed blast furnace, it being expected that the furnace would be constructed and operated under their direction and supervision. It was then assumed that the Central Steel Company would promptly go forward to construct and place in operation its blast furnace with by-product ovens involving large additional services and responsibilities of these three officers, and it was anticipated that they might become entitled to considerable additional compensation. Bebb, Griffiths, and Stuart did not perform the extraordinary services contemplated, such services having been hired from the outside. The demand was then made upon the estate of Bebb and upon Griffiths and Stuart for the return to the Cleveland-Cliffs Iron Company of $170,000 from each plus 2 per cent interest. Griffiths and Stuart admitted the validity of the claim and made settlement with the Cleveland-Cliffs Iron Company. The executrices of the decedent had distributed a large portion of the estate and in settlement of the claim made by the Cleveland-Cliffs-Iron Company offered to turn over to it 4,152 shares of Central Alloy Steel Corporation stock and $4,288 in cash. The stock then had a value of $31 per share and the payment of the stock and cash, of a value of $133,000, was made by the estate in settlement of the claim made against it. It was admitted by witnesses for the petitioners that the 1,954 shares of Central Steel Company stock, later exchanged for 4,152 shares of Central Alloy Steel Corporation stock, were not held in trust by the decedent at the date of his death and that the cash was not held in trust. We think, therefore, that there is no merit in the contention of the petitioners that the 1,954 shares of Central Steel Company stock, and cash to the extent of $4,288, were held by Bebb in trust and therefore should be excluded from the gross estate.

As an alternative contention the petitioners claim the right to deduct from the gross estate $133,000 as a claim against the estate. The evidence goes to show that the claim was a valid one against the estate. Under the statute it was a legal deduction from the gross estate in the determination of the net estate.

The last point in issue relates to a credit against the Federal estate tax under section 301 (b) of the Revenue Act of 1924 of legacy or succession taxes paid to the States of Ohio, New York, and New Jersey, and to the Commonwealth of Pennsylvania in the amount of $4,345.74. In answer to the amended petition the respondent:

* * * Admits so muela of paragraph 5 (m) of the amended petition as alleges that on the 24th day of September, 1926, the petitioners paid to the Treasurer of Stark County, Ohio, as inheritance tax upon the estate of said decedent, the sum of $4,126.16. Denies all other allegations contained in said paragraph 5 (m) of the amended petition.

The evidence shows the payment of inheritance taxes to the States of New York and New Jersey in February and March of 1927 of $120 and $59.84, respectively, and to the Commonwealth of Pennsylvania on March 8, 1927, of $31.78. The total inheritance taxes paid were $4,345.74. They are a proper credit against the Federal estate tax within the limits of section 301 (b) of the Revenue Act of 1924.

Reviewed by the Board.

Judgment will be entered under Rule 50.