author: MilltkeN: Smith,

text:
    Ronald De Reuter, Petitioner, v. Commissioner of Internal Revenue, Respondent. Henrietta D’Aramon, Petitioner, v. Commissioner of Internal Revenue, Respondent. Sybil Whitehouse, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 6243, 10644, 13220.
    Promulgated July 8, 1927.
    Where the testator bequeathed to petitioner an annuity and where his will contained no direction to pay the annuity out of the income of his estate, Held, that the moneys received by petitioner as payments of his annuity is exempt from income táx, under the provisions of section 213(b) (3) of the Revenue Act of 1921.

      FredericJc B. Coudert, Esq., Thomas Kelly, Esq., Blowrit Balls, Esq., Bobert W. Candler, Esq., and S. D. Bowers, Esq., for the petitioners.

      Thomas P. Dudley, Jr., Esq., for the respondent.
    The above proceedings were, by agreement, consolidated and heard together and involve deficiencies in income tax in the case of Ronald De' Reuter, for the calendar year 1923 in the sum of $1,470; in the case of Henrietta D’Aramon, for the calendar year 1923 in the sum of $630; and in the case of Sybil Whitehouse, for the calendar year 1921 in the sum of $920.79. These deficiencies arise by reason of the fact that the Commissioner included in gross income for each petitioner, a' certain annuity bequeathed to petitioner by the will of James Gordon Bennett. Petitioner Sybil Whitehouse further contends that the Commissioner erred in not permitting the deduction of certain death taxes paid by the estate of James Gordon Bennett to the States of New York, New Jersey, and Rhode Island. In a brief filed in behalf of said petitioner, this last contention has been withdrawn.
    findings of fact.
    The petitioner, Ronald De Reuter, is a nonresident alien, a citizen of. France, and resides at' 37 Avenue d’lena, 'Paris, France. Petitioner Henrietta D’Aramon is a nonresident alien, a citizen of France, resident at No. 1 Boulevard La Tour, Maubourg, Paris, France. Petitioner Sybil Whitehouse is a resident of the City of Newport, R. I., and her principal place of business is at Stone Villa, Newport, R. I.
    James Gordon Bennett, a citizen of the United States and a resident of the State of New York, died in the Republic of France, May 24, 1918, leaving a last will and testament, the material portions oí which are:
    THIRD: I give and bequeath to my wife Maud an annuity of Fifty thousand dollars to he paid to her in equal quarterly payments in each year during her life reckoning the years from the time of my death and I hereby declare that this provision is made to her in lieu of her dower and right of dower in all my real estate situated in the State of New York or elsewhere in the United States of America.
    Fourth : I give and bequeath unto my sister Jeannette Bell the sum of Fifty thousand dollars and make no further provision for her because she is already amply provided for.
    Fifth : I give and bequeath unto my nephew Isaao Bell an annuity of Thirty thousand dollars, to be paid to him in equal semiannual payments in each year during his life, reckoning the years from the time of my death.
    Sixth : I give and bequeath to my niece Norah, wife of Major Ricardo, late of the British Army, an annuity of Ten Thousand dollars, to be paid to her personally and upon her individual receipt, in equal semiannual payments in each year during her life, reckoning the years from the time of my death.
    Seventh: I give and bequeath to my niece Henrietta, wife of Count Paul D’Aramon, an annuity of Ten Thousand dollars, to be paid to her personally, and upon her individual receipt, in equal semiannual payments, in each year during her life, reckoning the years from the time of my death.
    Eighth : I give and bequeath to my step-son Ronald De Reuter an annuity of Twenty Thousand dollars to be paid to him in equal semiannual payments in each year during his life, reckoning the years from the time of my death.
    Ninth: I give and devise absolutely and in fee simple, to Sybil Douglas, wife of William Whitehouse, my Cottage or stone Villa, consisting of a parcel of land and buildings thereon, situated at Newport, in the State of Rhode Island, known as “ Stone Villa ” to have and to hold the same to her, her heirs, and assigns forever; and if during my life I shall sell the said Cottage, then and in such case I give and bequeath unto the said Sybil Douglas, wife of William Whitehouse a sum equal to the amount for which I shall have sold the said Cottage.
    Tenth : I also give and bequeath to the said Sybil Douglas wife of William Whitehouse, an annuity of Five thousand dollars.
    By the eleventh to twenty-fifth clauses, inclusive, the testator bequeaths annuities ranging from $500 to $5,000 to various persons. Then follows:
    All the above annuities mentioned in paragraphs ten to twenty-five of this my Will shall be paid in equal semiannual payments reckoning from the time of my death.
    Twenty-Sixth : I give and bequeath unto each and every one of my domestic servants who shall be in my employ at the time of my death, and to whom I do not give an annuity, a sum equal in amount to the amount of his or her wages for one year at the time of my death.
    Twenty-Ninth : It is my long-cherished intention and purpose and it is my will to establish a substantial, appropriate and permanent memorial to my father, the late James Gordon Bennett, the founder and for many years the proprietor of the “New York Herald,” and therefore to that end and to effectuate my said intention and purpose, I direct the Executors of this my Will hereinafter named and such of them as shall qualify and the survivors and survivor of them and their successors and successor, as soon as practicable after my death and during the lives of Isaac Bell and James Gordon Douglas and the life of the longest liver of them, to cause or procuro tó be incorporated a corporation to be named “Tiiic James Gordon Bennett Memorial Home for New York Journalists” in memory of my father and for whom the same shall be a perpetual memorial, the general objects and purposes of which corporation, which shall, if possible, have perpetual existence, shall be to provide and maintain a suitable and comfortable home or to provide pecuniary aid for persons who shall have been employed for at least ten years upon or by or in connection with any daily newspaper or journal which is now or shall be hereafter regularly published in the Borough of Manhattan in the City of New York, and who shall by reason of old age, accident or bodily infirmity, and through lack of means be unable to care for themselves or need such home or aid, each of which persons shall be nominated and recommended for the benefits of such homo or for such aid by the proprietor or owner or publisher of any such newspaper or journal (whether an individual or a corporation) and shall bo approved and accepted by the Board of Directors of such home in its uncontrolled discretion, and which Board of Directors shall always in the selection, approval and acceptance of persons to receive the benefits of such home or such aid, give the preference to any person who shall be or shall have been employed by or associated with the New York Herald Company or The New York Herald Company Société Anonyme Erancaise uixm or in connection with either the Now York or the European Edition of the Now York Herald newspaper or the Evening Telegram Newspaper. The said Memorial Home Corporation shall establish and maintain a suitable building or suitable buildings and grounds and appurtenances to provide a home or homes for the persons so to- be benefited or aided and may also aid any such person or persons by pecuniary or other contributions or by pensions or otherwise as its Board of Directors may, in its uncontrolled discretion, from time to time deem best. And I give, devise and bequeath all the rest, residue and remainder of all the estate and property real and personal and of every kind and nature and wheresoever situated which shall belong to me or be subject to my disposal at the time of my death, unto such The James Gordon Bennett Memorial Home for New York Journalists Corporation so to be formed, when and as soon as the same shall be duly incorporated, to be used and apxilied for its corporate purposes; and all income of my said residuary estate and property which shall accrue after my death and until such Home Corporation shall he so duly incorporated and entitled to receive such residuary estate and property, I give and bequeath absolutely unto my friends Eugene Higgins and Hodman Wana-maicer and James Ktillman and to such of them as shall survive me. It is my desire and will that such Memorial Home Corporation shall own and as soon as the due administration of my estate shall permit, receive and that it shall hold as long as practicable all capital stock of The New York Herald Company and tlio New York Herald Company Société-Anonyme Erancaise which shall belong to me at my death and form part of my residuary estate and properly, and that by virtue of its ownership of such stock, it shall from time to time elect such persons as directors of said The New York Herald Company and said The New York Herald Company Sociétó Anonyme Erancaise as shall continue to manage each of said companies and conduct the business and publication and management of The New York Herald newspaper in both its New York and European editions and The Evening Telegram upon the same principles and traditions and with the same policy and in the same manner so far as practicable, as the same shall be conducted at the time of my death. It is also my wish and hope and I request that the directors of said New York Herald Corporations shall so manage the business and affairs thereof as to accomplish such desire and to that end that they establish and set aside so much of the earnings and profits of said Corporations or either of them as shall provide reserve or surplus funds sufficient in their judgment to provide for all possible contingencies of the business and to maintain the high standard, efficiency, independence, and wide influence of the newspapers published by said Corporation, and if deemed desirable to that end, to reduce the selling-price of any of said newspapers or the charges for advertisements therein or to increase the costs of production by improvements in any of said newspapers, always having in view these objects rather than an increase of net profits. It is also my wish and hope that each of the Executors of this my Will hereafter named and each persons who may at any time be an Executor of my Will, shall be and act as a director of such Memorial Home Corporation and a director of each of said corporations The New York Herald Company and The New York Herald Company Société Anonyme Francaise. It is also my will and I direct that each Executor of this my Will who shall act as a director of such Memorial Home Corporation shall be paid and receive as compensation for his services as such director and his services as a director of either or both of said New York Herald Corporations, if he shall also be a director of them or either of them, the sum of Five thousand dollars per annum in addition to any commissions or compensations which he may receive or be entitled to for his services as an Executor of this Will.
    Thirtieth : I hereby nominate and appoint my friends Etjoene Higqins, Hodman Wanahaker and James Stillman to be the Executors of this my Will, and I request and direct that no bond or security for the performance of his duties be required of any of them or of any other Executor of this my Will and that each such Executor may be permitted to act as such Executor without giving any bond or other security. For the purpose of paying any legacy or legacies, or satisfying or providing for the payment of any of my debts or obligations or of any annuity or annuities, or for the execution of this my Will or for the administration of my estate or for any other purpose, I authorize and empower the Executors or Executor for the time being of this my Will, in their or his uncontrolled discretion, to sell, assign, convey, transfer, mortgage, lease or exchange any real or personal property which may belong to me at my death or which may at any time belong to or form part of my estate and property, and to execute and deliver any and all deeds, conveyances, assignments, mortgages, leases and other instruments which may be necessary or proper to carry any such sale, assignment, mortgage, lease, exchange or other disposition into effect, and any and all property so sold, conveyed, assigned, mortgaged, leased or exchanged shall be free from all lien or charge of or by reason of any devise, bequest, or annuity given or made by this my Will or any Codicil thereto. I authorize and empower said Executors or Executor to retain and hold any personal property which may belong to me at the time of my death and to set aside and hold any part thereof to provide for the payment and satisfaction of any annuity given by me. I especially request and charge said Executors and Executor not to sell or part with any of the capital stock of The New York Herald Company or The New York Herald Company Société Anonyme Francaise unless it shall be absolutely necessary to do so, but to transfer all of such capital stock to said Memorial Home Corporation as part of my residuary estate when and as soon as practicable to do so in due course of the administration of my estate and the execution of this my Will.

      All the annuities involved in these proceedings, to wit, those paid the petitioners Ronald De Reuter and Henrietta D’Aramon in the year 1923, and to Sybil Whitehouse in the year 1921, were paid by executors of the will of James Gordon Bennett out of the income of the estate. In November, 1921, the executors of the will of James Gordon Bennett filed in the Surrogate’s Court for the County of New York, State of New York, an intermediate account of settlement which was thereafter approved by said court. That account showed that all of the annuities herein involved were, prior to November 14,1920, paid out of the corpus of the estate and all such annuities were, on and after November 14, 1920, paid out of the income of the estate. The total amount of the annuities payable in 1920 was $144,000. The account of settlement shows that the executors, on December 30, 1920, permanently set aside to the James Gordon Bennett Memorial Home for Netv York Journalists Corporation, which was organized under the laws of New York in May, 1919, the residuary devisee and legatee under said will, but subject to taxes, annuities and other charges, the following assets:
    Promissory notes of Prank A. Munsey Co_$2,000, 000. 00
    Bonds and mortgages on Port Washington property, balance of • principal due thereon_ 1,097,990.00
    Bond and mortgage of Norman Countryman, balance of principal due tliereon_ 460.00
    $34,900 U. S. Victory Loan bonds, amount invested therein_ 34, 741. 24
    Balance of cash uninvested_ 78. 76
    Total_ 3,133,260. 00
   OPINION.

MilltkeN:

In view of the conclusion which we have reached, we find it necessary to discuss but one question and that is, whether the annuities received by the petitioners under the will of James Gordon Bennett constitute income which is taxable by reason of the provisions of the Revenue Act of 1921. The applicable provisions of that Act are:

Sec. 213. That for the purposes of this title (except as otherwise provided in section 233) the term “gross income”-—
(a) Includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including in the case of the President of the United States, the judges of the Supreme and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof, or the District of Columbia, the compensation received as such), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. The amount of all such items (except as provided in subdivision (e) of section 201) shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period; but
(b) Does not include the following items, which shall be exempt from taxation under this title:
*******
(3) The value of property acquired by gift, bequest, devise, or descent (but the income from such property shall be included in gross income) * * *
Sec. 219. (a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including—
(1) Income received by estates of deceased persons during the period of administration or settlement of the estate;
*******
(4) Income which is to be distributed to the beneficiaries periodically, whether or not at regular intervals, and the income collected by a guardian of an infant to be held or distributed as the court may direct.
* * * * * ' * *
(c) In cases under paragraphs (1), (2), or (3) of subdivision (a) or in any other case within subdivision (a) of this section, except paragraph (4) thereof the tax shall be imposed upon the net income of the estate or trust and shall be paid by the fiduciary, except that in determining the net income of the estate of any deceased person during the period of administration or settlement there may be deducted the amount of any income properly paid or credited to any legatee, heir, or other beneficiary. In such cases the estate or trust shall, for the purpose of the normal tax, be allowed the same credits as are allowed to single persons under section 216.
(cl) In cases under paragraph (4) of subdivision (a), and in the case of any income of an estate during the period of administration or settlement permitted by subdivision (c) to be deducted from the net income upon which tax is to be paid by the fiduciary, the tax shall not be paid by the fiduciary, but there shall be included in computing the net income of each beneficiary that part of the income of the estate or trust for its taxable year which, pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or not, or, if his taxable year is different from that of the estate or trust, then there shall be included in computing his net income his distributive share of the income of the estate or trust for its taxable year ending within the taxable year of the beneficiary. * * *

The question presented is whether the annuity received by each of petitioners was a “bequest” which was exempt from income tax under section 213, or constituted distributive income which was taxable under section 219. This question depends upon the construction of the will of James Gordon Bennett. The seventh, eighth and tenth clauses of that will bequeathed to the respective petitioners “ an annuity.” No limit is placed 'upon the payment of these annuities. The only direction is that they be paid. The whole estate is charged with their payment. The only way in which any part of the estate can be freed from this charge is found in the thirtieth clause where the executors are given the power to convert property into money and where it is provided that the property “ so sold, conveyed, * * * or exchanged shall be free from all lien or charge of or by 'reason of any devise, bequest, or annuity given or made by this, my Will, or any Codicil thereto.” It is to be noted, however, that this very power of sale or conversion is given to the executors for, among other purposes, the payment of the annuities. So that while the property sold is free of the charge, it is clear that the proceeds remain subject to the payment of the annuities.

Respondent invites our attention to the following excerpt from the thirtieth clause:

I authorize and empower said executors or executor to retain and hold any personal property which may belong to me at the time of my death and to set aside and hold any part thereof to provide for the payment and satisfaction of any annuity given by me.

Giving this provision its broadest construction, it is apparent that there is nothing therein to the effect that any annuity is payable out of the income of the personalty so to be set apart. If such fund, if created, should fail, it is our opinion that the remaining corpus of the estate would remain liable for the satisfaction of the annuities. In those cases where it was the clear intention of a testator that an annuity should be paid out of income or out of a particular fund, such intention must be given full effect. See Delaney v. Van Aulen, 84 N. Y. 16, and Irwin v. Wollpert, 128 Ill. 527; 21 N. E. 501. On the other hand, where an annuity is given without limitation and the will merely indicates that the annuity may be paid out of income, the corpus is liable when the income becomes insufficient. Thus, it was said by Judge Denio in Pierrpont v. Edwards, 25 N. Y. 128

The only Question which I think it necessary to consider, in this case, is whether the bequest of the annuity of $7,000 a year, to the testator’s wife, was specific, in the sense that if it could not be paid out of the fund indicated — namely, the income of the trust estate — it was to fail, or to abate, in proportion that the indicated fund should prove deficient; or on the other hand, whether it was intended by the testator that it should be paid; at all events the income of his property given to the trustees being pointed out by way, it is called, of demonstration. I am of opinion that the last mentioned construction is the one which we are bound to place upon the instrument, * * * The leading principle of the cases is that when the testator bequeaths a sum of money, or which is the same thing, a life annuity, in such a manner as to show a separate and independent intention that the money shall be paid to the legatee at all events, that intention will not be permitted to be overruled merely by a direction in the will that the money is to be raised in a particular way or out of a particular fund. (Sir James Wigram in Dickin v. Edwards, 4 Hare. 273.)

Reading the will of James Gordon Bennett as a whole, it at once becomes apparent that the annuities which it bequeaths are charges upon its whole estate, income, personalty and realty. The James Cordon Bennett Memorial Home is a residuary legatee and devisee, and gets only what may be left after the annuity charges are paid.

That the annuities provided by the will are in fact bequests, seems clear. See Pierrpont v. Edwards, supra; Clark v. Clark, 147 N. Y. 639; 42 N. E. 275; Canal Bank v. Hudson, 111 U. S. 66; 3 C. J. 202.

Are these annuities bequests of income within the meaning of section 219, or are they bequests as that term is used in section 213?

Long before the Sixteenth Amendment to the Constitution became effective, a broad distinction had been drawn between a bequest of a pure annuity and a bequest of income. Thus, it is said in section 2 of Chapter XIII of Itemsen on the Preparation and Contest of Wills (1907) :

An annuity is substantially different from a gift of the income or use of property. An annuity is a fixed amount directed to be paid absolutely and generally without contingency. An income embraces only the net profits after deducting all necessary expenses and charges, and consequently is uncertain in amount.
Annual taxes on principal are deducted from a use or income but not from annuities. * * *
Where the testator sets aside a fund to provide for the payment of an annuity, his will should clearly indicate whether he intends the annuity to be a charge on the corpus or payable only out of the income. Thus, under “ a clear gift of an annuity, a direction to set a fund apart to secure it, which is to fall into the residue upon the death of the annuitant,” the corpus is still liable to make good arrears. “ But if there is a direction to set apart a sum of money in order to i>ay an annuity out of the dividend with a gift over, the annuitant is not entitled to come upon the corpus, and it is a simple case of tenant for life and remaindermen,” So if it is clear that the annuity is to be paid only out of the income each year, or that the corpus is to be looked upon as an entirety after the annuitant’s death, the corjius will not be liable for arrears. In the absence of an expressed intent to the contrary, the testator’s personal estate is primarily liable for the payment of an annuity. In some states it is provided by statute that, if the funds or property out of which annuities are payable fails, resort may be had to the general assets, as in case of a general legacy. Some testators provide for the purchase of annuities; some create a trust for their payment; others simply direct their payment out of the estate.

In Peck v. Kinney (C. C. A.), 143 Fed. 76, it is said:

There is this distinction between income and an annuity. The former embraces only the net profits after deducting all necessary expenses and charges; the latter is a fixed amount directed to be paid absolutely and without contingency. Ex parte McComb, 4 Bradf. Sur. (N. Y.) 151, 152. “An annuity is defined as ‘a stated sum, payable annually’ (Pearson v. Chace, 10 R. I. 455), or as ‘ a yearly payment of a certain sum of money granted to another in fee, for life, or for years.’ Kearney v Cruikshank, 117 N. Y. 95, 22 N. E. 580; Bartlett v. Slater, 53 Conn. 102, 22 Atl. 678, 55 Am. Rep. 73.” Goodyear Shoe Machinery Co. v. Dancel, 119 Fed. 692, 56 C. C. A. 300. It is a grant of a certain sum of money payable at the expiration of fixed, consecutive periods, for a definite term or for life. Lumley’s Law of Annuities, 1.

The court then quotes from the oft-cited case of Booth v. Ammerman, 4 Bradf. 129. From the last case we make the following excerpt:

An annuity is a stated sum per annum, payable annually unless otherwise directed. It is not income or profits, nor indeterminate in amount varying according to tlie income or profits, though a certain fund may be provided, out of which it is to be payable. * * * The income or interest of a certain fund is not an annuity, but simply profits of certain property, to be earned, which may vary more or less.

To the same effect see Dulaney's Administrator v. Dulaney, 105 Va. 429; 54 S. E. 40, and Overton v. Lea, 108 Tenn. 505; 68 S. W. 250.

From the above, three things become apparent: (1) That each annuity herein involved is in fact a bequest; (2) that these annuities do not constitute bequests of income; and (3) that each annuity is a charge upon the whole estate.

Since no income, nor any share of income, has been bequeathed to any one of the petitioners, it can not be held that such petitioner was entitled to a “ distributive share of the income of the estate or trust,” which is taxable under section 219. We can not see that the fact that the number of years during which a legacy is payable is determinable by the life of the beneficiary makes that income which otherwise is not income.

Respondent contends that these proceedings are governed by Irwin v. Gavit, 268 U. S. 161, and Heiner v. Beatty, 17 Fed. (2d) 743. In our opinion, these cases are not in point. In the Gavit case, there was a bequest of a certain share of income arising from a certain trust fund. In these proceedings, we have no bequests of income, but a bequest of a sum certain, payable at all events each year so long as the legatee lives. In the Beatty case the testator, Carnegie, did bequeath an annuity but he made the annuity payable (in the case the executors did not purchase it from an insurance company) out of the income of a trust fund. The Circuit Court of Appeals reversed the decree of two judges of the lower court (10 Fed. (2d) 390) holding the annuity exempt from income tax, but in so doing-placed their decision squarely on the ground that the bequest was one of income from a trust. Thus the appellate court said:

The first part of the Carnegie will with which we are concerned is the Fifth Article. It reads as follows:
Fifth: I give to each of the persons hereinafter in this Fifth Article named an annuity of the annual amount in this Fifth Article set after his or her name, to be paid semhumually during the annuitant’s life, that is to say, to * * * Mr. Beatty Art-Dept wife succeeding five thousand dollars.
If the will had stopped there, it is possible the testator’s provision for John W. Beatty would have been a bequest, payable in semi-annual installments directly from the estate, and all payments made to him year by year would have been exempt from taxation under paragraph 3 of subdivision (b) of section 213 of the cited act (Clomp. St. §6336 l/8ff). However, the will did not stop there, but, going on, it provided in the very next article, by words whose significance we have emphasized by italics, as follows:
Sixth: I direct my executor and trustee either to set apart, hold m trust, invest and keep inpested, in separate funds, one for each annuitant, sufficient sums to produce by the clear net interest and income thereof respectively, the several annuities provided in the Fifth Article of this will, * * * and to pay the said several annuities from the interest and income of the respective funds in semi-annual payments, or to purchase such annuities in life insurance companies. * * *
By the Eighth Article the testator authorized his executor and trustee (who is one corporate person), “in its discretion, to retain for investment of the principal of any of the trusts, herein provided for, any of the securities left by me.” And, finally, by the same article he authorized the executor and trustee to sell any of the securities coming into its hands and reinvest the proceeds.
Recapitulating, these provisions created, somewhat inartificially, yet, we think with no lack of certainty, out and out trusts. They provided a capital sum for each annuitant, directed that it be “ set apart ” and “ held in trust ” for him and that from the interest and income therefrom accruing payment of a definite sum to be made to him semi-annually. Having all the earmarks of formal trusts, the executor and trustee, believing itself charged therewith, exercised the election given it to create capital trust funds by withdrawing from the body of the estate sufficient securities to produce the amounts to be paid annually to the more than forty annuitants. For John W. Beatty it took, “ set apart” and “held in trust” one $100,000 United States Steel Corporation Registered 50 year 5 per cent Gold Bond and two $5,000 bonds of the same issue, and of the interest received therefrom it paid him $5,000 a year. This is what was done. But the testator directed, in the alternative and at the trustee’s election, another way by which the trustee could provide for the payment of the annuities, namely; by taking a part of the principal of the estate and with it buy annuities. Thus, in both ways the testator willed that parts of the corpus of his estate be appropriated as capital sums from which income in amounts sufficient to pay the annuities could be obtained. In neither way- — -indeed, nowhere in the will — did he provide for payment of annuities from the principal of his estate. In other words, the testator, through alternative ways, specifically indicated and fully provided the sources of income to be paid the annuitants. What the will intended the annuitant here to receive and what actually he did receive was the income derived from a source which we think is sufficiently definite to fall within the statute’s denomination of “ income derived from any source whatever.”

We look in vain for a provision in the Bennett will similar to that in the Carnegie will. We find no bequest of income.

Respondent cites Cummings' Executor v. Cummings, 146 Mass. 501; 16 N. E. 401, to the effect that annuities such as those before us are payable primarily from income. The same would be true of any legacy, for no court would permit an executor to sell property to pay a legacy if he had income available. So also such a legacy is payable out of personalty rather than realty. All these are matters of administration with which annuities have no concern.

Next, it is contended that since the annuities were paid in the taxable years involved, from income, the annuities constitute income. It may be noted that during the first two years after Bennett’s death all the annuities herein involved wore paid out of the corpus of the estate. The same, for all we know, may be done later. It is because certain testators have thought that they had ample means to pay annuities and their expectations have failed, that the cases which we have cited, have arisen. The fact that income is used to pay an obligation does not necessarily make what was income to the payor, income to the payee. The payment by one from his salary of borrowed money without interest, does not make the money so paid income to the recipient. Neither would the payment of a simple legacy from income of an estate, make the legacy taxable as income.

Respondent calls our attention to the language of Mr Justice Holmes in Irwin v. Gavit, supra, where he states that if the income therein involved was not taxable, Congress “ has missed so much of the general purpose that it expresses at the start.” We have not before us the question of the extent to which the income of the estate of James Gordon Bennett is taxable, and express no opinion on that question. All we have before us is whether these annuities constitute taxable income in the hands of the beneficiaries. But even if our decision should result in this income becoming nontaxable at all events, we can only say that this results from the provisions of the law. The Supreme Court, construing the same act that was construed in the Gavit case, held in Smietanka v. First Trust & Savings Bank, 257 U. S. 602, that income received by a trustee to be accumulated for unborn and unascertained beneficiaries, was not taxable.

We are aware that the British courts have held that annuities similar to those here involved, are subject to the British income tax, but in Merchants’ Loan & Trust Co. v. Smietanka, 255 U. S. 509, it was said:

The British income tax decisions are interpretations of statutes so wholly different in their wording from the acts of Congress which we are considering that they are quite without value in arriving at the construction of the laws here involved.

We have for application, sections 213 and 219 of the Revenue Act of 1921. It is only by a strained construction that we can by any possible means arrive at the conclusion that these annuities are taxable under section 219, to the petitioners, as distributive income. On the other hand, section 213 grants an exemption in cases of bequests. There is no doubt that each of these annuities is a bequest and there is no doubt that none of them is made payable by the will of James Gordon Bennett, out of income. To hold that the mere fact that in the taxable years involved, the annuities were paid out of income and therefore were distributive income to the recipients, would give a construction to the taxing statute far beyond the meaning of the words used. When we are compelled to choose between clear words of exemption and a strained construction of a taxing provision, we accept that which is clear rather than that which involves doubt.

Judgment mil be entered on 15 days’ notice, under Rule 50.

Smith,

dissenting: I perceive no valid distinction between this case and that of Irwin v. Gavit, 268 U. S. 161. That case arose under the Revenue Act of 1913, which imposed an income tax upon income “ arising or accruing from all sources ” and included “ the income, from but not the value of property acquired by gift, bequest, devise or descent.” During the years 1913, 1914, and 1915 Gavit received the income from a certain fund as a bequest. The court held that it was liable to income tax and said:

But we think that the provision of the act that exempts bequests assumes the gift of a corpus and contrasts it with the income arising from it, but was not intended to exempt income properly so called simply because of the severance between it and the principal fund * * * The money was income in the hands of the trustees and we know of nothing in the law that prevented its being paid and received as income by the donee.” (Italics ours.)

If the gift of a corpus is the “ bequest ” that is not liable to income tax then the petitioners in the case at bar did not receive a bequest. They simply received an annuity which, during the taxable year, was paid from the income of the estate. Clearly, under section 219(d) of the Revenue Act of 1921, the fiduciary making the estate income-tax return ivas entitled to deduct from gross income the amount of the annuity paid to each of the petitioners during the taxable year. Under the decision of the Board neither thé fiduciary nor the beneficiary can be held liable to income tax in respect of the income received.

Furthermore, under the decision of the court in Irwin v. Gavit, supra, the petitioners in the case at bar had an interest in the estate of the decedent and the income from that interest is liable to income tax the same as the income which Gavit received in the above cited case.


source: Caselaw Access Project

author: Littleton:

license: Public Domain

text:
    W. S. Forbes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7141.
    Promulgated July 8, 1927.
    Cost of stock to petitioner in 1916 for the purpose of the determination of gain or loss upon the subsequent sale thereof in 1919, determined.

      A. E. James, Esq., and James H. Rindfleisch, G. P, A., for the petitioner.
    ■ ' Thomas P, Dudley, Jr., Esq., for the respondent,

      The Commissioner determined a deficiency in income tax for the year 1919 in the amount of $158,213.88. The petitioner claims that the Commissioner erred in determining the cost in 1916 of the 4,000 shares of the capital stock of W. S. Forbes & Co., Inc., as the basis for his determination of gain or loss upon the sale of said shares for $757,500 in August, 1919.
    FINDINGS OP PACT.
    Petitioner is a citizen and resident of Richmond, Va. For many years prior to December 30, 1916, he was engaged in business as a jobber of meat products in the City of Richmond. During 1908 he constructed a plant for the slaughter of hogs and cattle, the dressing of fresh meat and the curing of hams, the rendering of lard and other meat products. The cost of acquiring land for this plant was incurred personally by Forbes and was not charged as a portion of his business capital. The cost of land thus omitted from the books of account of the business amounted to $62,000.
    Subsequent to the construction of the abattoir and manufacturing plant petitioner constructed an ice plant in that portion of the manufacturing plant located between Tenth and Eleventh Streets and fronting on Byrd Street in Richmond. The cost of this ice plant constructed in or about 1910 was $65,000, of which approximately $32,000 was paid from Forbes’ personal funds and was not entered in the books of the business or capitalized as an asset thereof.
    On December 30, 1916, the petitioner transferred the business as so carried on by him to a corporation bearing the name of “W. S. Forbes & Co., Inc.” in exchange for $400,000 par value common capital stock of that corporation. The entire going business then conducted by petitioner at Tenth, Eleventh, and Byrd Streets, Richmond, and the abattoir on Hermitage Road in that city was so transferred, including therein the land and ice plant above mentioned. The buildings, cash, merchandise, inventory and accounts receivable, subject to accounts and bills payable.
    The cash appearing on the books amounted to $87,224.90 and was cash actually on hand at that date. The inventory of merchandise stood on the books at that date at $326,155.21. This was current inventory and was reasonably worth $326,155.21 at December 30, 1916. The accounts receivable stood on the books at that date at $206,054.48, all of which were current accounts and were worth the said amount. The plant so carried on the books at December 30, 1916, amounted to $317,037.99 and this plant had a cost and a fair market value on December 30, 1916, of an amount substantially in excess of the said book value.
    The corporation assumed and paid accounts payable in the amount of $26,860.60, and bills payable in the amount of $429,500.

      The net worth of the business as shown by the books at the date of the transfer was $480,111-98. In exchange for the assets and going business transferred at December 30, 1916, capital stock in the amount of $400,000 par value was duly issued to and received by petitioner. The net worth of the business, as shown by the books of account, was transferred from petitioner’s proprietorship account to capital stock in the amount of $400,000 and to surplus in the amount of $80,111.98.
    The statement of the net worth was below the cost of the assets so transferred in that it did not include $62,000, the cost of the land, and $32,000, the cost of the ice plant, not entered on the books or capitalized at any time. The statement of the net worth was below the actual value of the assets transferred in respect of real estate, buildings and other structures and the going business as a whole. The land upon which the plants were situated, located at Tenth and Eleventh Streets between Byrd and Canal Streets, and transferred to the corporation, was reasonably worth on December 30, 1916, $65,220, and the land upon which the abattoir was built, located on Hermitage Hoad, was reasonably worth at said date $73,062.50, the total of said land value at the date amounting to $138,282.50.
    The plants located upon the land, including a stable situated at Ninth and Byrd Streets and transferred to the corporation with the other property, were of the value on December 30, 1916, of $314,432 in their then condition and had a fair market value- on that date of the said amount. This value included structural value only and did not include the value of equipment in the plants.
    The equipment in the plants had on December 30, 1916, a fair market value of $135,000 as a part of the going plant and the going-business.
    The entire value of the property transferred by petitioner to the corporation, subject to its liabilities, was $750,788.49, as shown by the following statement.

      Minimum actual value of assets turned over

    Cash_ $87, 224. 90
    Inventory-326,155. 21
    Accounts receivable. 206, 054. 48
    Land_ 138,282. 50
    Buildings-314, 432. 00
    Equipment-135, 000.00
    - $1, 207,149. 09

      Liabilities assumed and paid

    Accounts payable-$26, 860. 60
    Bills payable_ 429, 500. 00
    -:- 456, 360. 60
    Net worth December 30, 1916. 750,788.49

      The actual fair market value of the entire going business transferred by petitioner operating under the name of W. S. Forbes & Co. to W. S. Forbes & Co., Inc., was $757,500 at December 30, 191G, and the cost of the 4,000 shares of stock received by petitioner in exchange for the assets and going business on December 30, 1916, was therefore $757,500.
    On December 30,1916, the books of account of W. S. Forbes & Co., operating as an individual, showed assets and liabilities and net worth as follows;
    ASSETS
    Gash_$87,224.90
    Inventory- 326,155. 21
    Accounts receivable- 206, 054. 48
    Plant_ 317,037.99
    - $936,472. 58
    LIABILITIES
    Accounts payable-$20, 860. 60
    Bills payable_ 429, 500. 00
    - 456,360.60
    Book net “worth_ 480,111.98
    In August, 1919, petitioner sold the stock acquired by him in exchange for the assets transferred to W. S. Forbes & Co., Inc., at December 30, 1916, for $757,500.
    On December 30, 1916, the principal market for the products of the business of the petitioner was Virginia, North Carolina and South Carolina. Between December 30, 1916, and August 1, 1919, branch houses were installed in the principal towns of North and South Carolina by.the Swift, Armour, and Wilson companies. This resulted in a material reduction in the sale of products of W. S. Forbes & Co., Inc., in both North and South Carolina. This condition was reflected in the earnings of W. S. Forbes & Co., Inc., in 1917 and 1918, which showed a 15ss of $10,753.34 for the period October 31,1917, to December 31, 1917, and a loss of $83,775.09 for the period ending October 31, 1918, as compared with the profit of $33,976.79 for the period ending October 31, 1917. On December 30, 1916, there was little, if any, available land in Richmond situated on railways or railroad sidings that would lend itself favorably to the requirements of a business such as that operated by the petitioner. Subsequent to December 30, 1916, additional railroad trackage was constructed making available a large area of land suitable for manufacturing purposes, which had a tendency to prevent a similar appreciation in value of the W. S. Forbes land to that which characterized the general appreciation of land values throughout that section of the country during the period from 1916 to 1919.
    In his determination of the deficiency involved in this proceeding the Commissioner used the book net worth of petitioner’s business as above shown of $480,111-98 without regard to the actual value of the assets and business at the time of the transfer to the corporation on December 30, 1916, and determined that the petitioner realized a profit upon the sale by him of his stock in 1919 of the difference between the sales price of $757,500 and the book net worth of the business of $480,111.98, to wit, $277,388.02.
   OPINION.

Littleton:

The Commissioner based his determination of the profit on the sale by the petitioner of the stock of W. S. Forbes & Co., Inc., upon the book net worth of the property and business transferred to the corporation in 1916. The petitioner instituted this proceeding claiming that the Commissioner’s determination of the cost of the stock was erroneous, and has submitted to the Board much competent evidence in support of his contention. The petitioner testified in detail concerning the cost and values of the various properties and the business, and, in addition, called ten witnesses who testified concerning the circumstances surrounding the business and the value of the assets transferred to the corporation in 1916.

From a consideration of all of the evidence submitted, which is specific and in great detail, and unnecessary to be here set forth, the Board is of the opinion that the fair market value of the assets and business transferred to W. S. Forbes & Co., Inc., by the petitioner on December 30, 1916, was $757,500. This value therefore represented the cost to the petitioner of the stock of W. S. Forbes & Co., Inc., which he sold in August, 1919, for $757,500. The petitioner therefore realized no taxable gain upon the sale of this stock and the Commissioner was in error in holding that he realized a profit of $277,388.02.

Judgment will be entered for the petitioner upon the issue raised on 10 days’ notice, u/nder Rule 50.


author: Phillips : SterNhageN,

text:
    Paul E. Weiss, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10059.
    Promulgated July 8, 1927.

      Paul E. Weiss pro se.

      W. F. Gibbs, Esq., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits taxes for 1922. The amount in controversy is a part of the deficiency amounting to $538.46. No testimony was introduced, all of the facts being stipulated.
    FINDINGS OF FACT.
    The petitioner is an individual residing in Cook County, Illinois. He reported in his income-tax return for 1922 income from the Weiss-Meyer Co. in the sum of $2,000.
    The following transactions took place between the petitioner and the Weiss-Meyer Co. during the year 1922 as shown in the personal account of the petitioner on the books of the Weiss-Meyer Co.:
    Paul E. Weiss, Personal Account.
    debits. CREDITS.

      1922 1922

    Apr. 25. Cash_ $500.00 Jan. 31. Compensation_ $450.00
    June 14. Cash_ 500. 00 Eeb. 28. Compensation'_ 450. 00
    July 8. Cash_ 2,000.00 Mar. 31. Compensation_ 450. 00
    Aug. 14.. Cash_ 500. 00 Apr. 30. Compensation- 450. 00
    Sept. 8. Cash_ 1, 500. 00 May 31. Compensation_ 450. 00
    Oct. 14. Cash_ 1, 000.00 June 30. Compensation_ 450. 00
    23. Cash_._ 500.00 July 31. Compensation_ 450. 00
    Aug. 31. Compensation- 450. 00
    , Sept. 30. Compensation_ . 450. 00
    20. Cash_ 3, 500. 00
    Oct. 31. Cash_ 1,000.00
    Oct. 31. Compensation_ 450. 00
    Nov. 30. Compensation- 450. 00
    Dec. 31. Compensation_ 450. 00
    6, 500. 00 9, 900. 00
    A synopsis of the above account is as follows:
    Total compensation credited to petitioner_$5,400
    Total cash credit to petitioner_ 4, 500
    Total cash withdrawn_’- 6, 500
    The petitioner reported his income for the year 1922 on the receipts and disbursements basis.
    In the determination of the deficiency under appeal the respondent included income from the Weiss-Meyer Co. in the sum of $6,500.
    The petitioner claims that the original amount reported by him in the sum of $2,000 is the net amount received by him from the Weiss-Meyer Co. and is the correct amount to be included in his income for 1922 from this source.
   OPINION.

Phillips :

It is stipulated that certain transactions took place between the petitioner and the Weiss-Meyer Co. as shown in his account on the books. On the basis of that stipulation we are asked to determine what income the petitioner received in 1922 from that company.

It appears from the stipulation that there are two bases upon which the petitioner became entitled to receive money from the company during the year involved. He was entitled to receive $5,400 as compensation for services. Another $4,500 he was entitled to receive because of cash paid in to the company by him or on his account. Against this he withdrew $6,500.

The cash credit to his account can only mean that the company has received cash and can not possibly be construed as a receipt of income by the petitioner from the company. One does not derive income from another by the deposit of cash with that other. On the facts stipulated, no more than $5,400 of the amount withdrawn can be considered as income to the petitioner unless we go outside the record to assume that there was either a balance of salary carried over from a previous year or an advance of salary paid in excess of compensation credited. This we are unwilling to do.

Only $2,000 of the amount withdrawn or credited was returned as income by the petitioner. There is nothing in the record from which we may conclude that only this amount was income. The compensation credited amounted to $5,400. During the year he withdrew $6,500 in cash. In the absence of some further showing that the amount withdrawn was not on account of salary and that the relationship of the petitioner to the company was not such that amounts credited could have been withdrawn at any time and were available to him to such an extent as to constitute constructive receipt, wé must hold that the petitioner derived income from the company for salary in 1922 in the amount of $5,400.

Decision will be entered on 10 days’ notice, under Bule 50.

SterNhageN,

dissenting: There are so many possible situations of fact which may be represented by this cryptic ledger account that it seems to me the absence of evidence as to what the facts were makes it necessary to sustain the deficiency. The prevailing opinion is based upon the inference from the cash credits that the petitioner in 1922 actually paid casli to the corporation which he received back in the same year. This is inferred notwithstanding the fact that the second cash credit was. on October 81, and the last cash debit was on October 23. It seems to me that this inference of cash paid is no more warranted from the ledger credits than several other possible inferences against the petitioner. The truth is there is not enough evidence to enable the Board intelligently to determine what the facts are.

MillikeN and Murdock concur in this dissent.


author: Littleton :

text:
    Equity Fire Insurance Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 9257, 14847.
    Promulgated July 8, 1927.
    Where a fire insurance company which is on the accrual basis reinsures the risk of an original insurer, another fire insurance company, and a fire occurs and is reported in one year, but the amount of the loss is not determined and paid until the following year, the loss accrues to the company reinsuring the risk in the year in which the fire occurred.

      Henry J. Richardson, Esq., for the petitioner.

      John D. Foley, Esq., for the respondent.
    These proceedings are the result of deficiencies proposed by the Commissioner of income and profits tax for 1919, 1920, and 1921 in the respective amounts of $4,404.61, $107.32, and $468.29. While tivo appeals are involved and were consolidated for the purpose of hearing and decision, the issue relates primarily to 1919, question being raised as to 1920 and 1921 only in so far as the ultimate determination of the deficiency for 1919 may affect the tax liability of these subsequent years.
    FINDINGS OF FACT.
    Petitioner is a corporation organized under the laws of 'Missouri, with its principal office at Kansas City. It is engaged chiefly in reinsuring risks which are insured originally by the Reciprocal Exchange, a company which carries on the business of issuing policies of fire insurance.
    In 1918, the Reciprocal Exchange issued policies of fire insurance on certain jiroperty of the Salisbury Ice Co., Salisbury, Md., to the extent of $57,000 and at the same time reinsured this risk with the petitioner to the extent of $37,000. The petitioner in turn reinsured $12,000 of its risk with another company.
    On December 12, 1918, a fire occurred in the plant of tlie Salisbury Ice Co. which caused damage to the extent of $34,110.53. The Reciprocal Exchange and the petitioner were advised of the loss on December 14, 1918, and, between that date and January 20, 1919, the loss was in process of adjustment, such time lapsing while the usual proof of loss on the claim was being secured;
    Upon presentation of the final proof of loss to the Reciprocal Exchange, it made payment of $34,110.53 to the Salisbury Ice Co., and on the same day, January 20, 1919, the petitioner paid $22,141.93 to the Reciprocal Exchange on account of its reinsurance policy on the same risk. The company with which petitioner had reinsured a part of its risk made payment on account thereof in September, 1919,

      The petitioner claims tlie loss as a deduction from gross income in 1919, when the loss was finally adjusted and paid, whereas the Commissioner contends the loss is a proper deduction for 1918 when the fire occurred.
    Other losses, smaller in amount, but similar in nature, i. e., fire occurred in 1918 but adjustment not made until 1919, are contended for by the petitioner and the Commissioner on the respective bases indicated above.
   OPINION.

Littleton :

Petitioner claimed in its original petition that the Commissioner erred in computing its tax upon the accrual basis. The Commissioner followed the accrual method in his determination and no evidence was submitted by petitioner to show that it regularly employed a different method in keeping its books, or that the method used by the Commissioner did not clearly reflect income. The petitioner tried the case upon the theory that the loss in question was not sustained in 1918 upon the accrual method of accounting.

In these circumstances we have the situation where the petitioner, a fire insurance company, is on the accrual basis and has sustained a loss under a policy of reinsurance. The fire occurred and was reported in 1918, the loss was not resisted but, because of the time required to secure the necessary proof of loss, payment was not made by the original insurer to the insured, and, likewise, by the petitioner to the original insurer, until 1919. The further fact exists that the petitioner did not receive payment on account of its reinsured risk until some months later, but during 1919.

At the outset it should be noted that these proceedings do not involve the question of whether a reserve set up by a fire insurance company against unpaid losses is a reserve within the meaning of the provisions of the Revenue Act of 1918, permitting a deduction from gross income in the case of insurance companies, of the “ net addition required by law to be made within the taxable year to reserve funds.” Such a question was before the Supreme Court in the case of McCoach v. Insurance Co. of North America, 244 U. S. 585, and also in the case of United States v. Boston Insurance Co., 269 U. S. 197, wherein it was held that the additions to such a reserve are not deductible from gross income.

In denying such a deduction, the court was not passing on the question of when a loss is deductible.

In the Appeal of Retailers Fire Insurance Co., 3 B. T. A. 1186, the question here presented was before us and in disposing of the case, the Board said:

The question remains, however, whether the amount of the policy loss by fire’ is to be taken as a deduction in 1920, when the fire occurred and liability under the policy arose, or in 1921, when the amount of the loss was adjusted and paid. Section 234 (a) (10) of the Revenue Act of 1918 allows as a deduction in the case of insurance companies “(b) the sums other than dividends paid within the taxable year on policy and annuity contracts.” Section 200 provides:
The term “paid,” for the purposes of the deductions and credits under this title, means “ paid or accrued ” or “ paid or incurred,” and the terms “ paid or incurred ” and “ paid or accrued ” shall be construed according to the method of accounting upon the basis of which the net income is computed under section 212.
* ***** *
After careful consideration of the decisions of the Supreme Court, the rulings of the Bureau of Internal Revenue, and the legislative history of the tax statutes as they affect this deduction, we are of the opinion that the taxpayer is entitled to deduct in 1920 the amount of $3,225.58 paid by it in January, 1921, in settlement of the fire losses which occurred in December, 1920, liability for which it appears to have recognized when it set up reserves on its books in December, 1920.

Prior to December 31, 1918, the Reciprocal Exchange recognized a liability as existing on account of fire. The evidence shows that during 1918 an insurance adjuster for the Reciprocal Exchange had partly completed the proof of loss claim and that at the close of 1918, the petitioner recognized the liability as existing when it rendered its report to the State of Missouri.

Petitioner seeks to distinguish its case from one of the foregoing type on the ground that the petitioner is a reinsurer of risks and, therefore, could suffer no loss until a loss was realized by the original insurer, meaning by “ realized ” when the loss is paid. In this we can not concur. A loss accrued to the Reciprocal Exchange when the fire occurred on December 12, 1918, and, since the petitioner had insured the Reciprocal Exchange against a part of this loss, ipso facto an obligation arose, a liability accrued at the same time, to the extent of its policy with the original insurer. In a similar manner a liability accrued to the third insurance company with which the petitioner had insured a part of its risk.

It is true that on December 12, 1918, and for some time thereafter the exact extent of the loss could not be determined, but this does not change the fact that a loss had been sustained and it was merely a matter of determining the quantum of the loss. In effect, the original insurer said to the insured immediately after the fire, “ We recognize a loss has been sustained by you on your policy with us; when the exact amount has been determined, we will make payment to you,” and similarly said to the petitioner, “We have become liable under the policy which the Salisbury Ice Co. holds with us and on which you are a reinsurer; as soon as the amount of the loss is determined, we will advise you to the extent of your liability.” The petitioner recognized its liability for the loss to the extent that it had reinsured the Reciprocal Exchange. The liability for the amount in question accrued and was recognized by petitioner, the only thing remaining was to determine the extent of the loss.

In view of the foregoing, the Board is of the opinion that the losses here in question accrued in 1918 when the fires occurred and, therefore, are not deductible by the petitioner when paid in 1919.

Reviewed by the Board.

Judgment will he entered for the respondent.


text:
    Estate of William B. Pratt, Petitioner, v. Commissioner of Internal Revenue, Respondent. James A. Bell, Petitioner, v. Commissioner of Internal Revenue, Respondent. W. H. Patterson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8858, 8859, 8901.
    Promulgated July 11, 1927.
    Salaries credited to petitioners upon the books of the corporation of which they were officers and stockholders, but not received within the taxable years nor available for their use, were not income to them upon the cash receipts and disbursements basis.

      Galvin Clarice, Esq., and H. J. Richardson, Esq., for the petitioners.

      Bruce A. Low, Esq., for the respondent.
    These proceedings were consolidated for hearing and decision. Since the petition was filed by William B. Pratt his death has been suggested and on proper motion the proceeding was revived in the name of the Estate of William B. Pratt.
    In the case of the Estate of William B. Pratt, the Commissioner determined deficiencies of $2,485.20 for 1919 and $864.16 for 1920. In the case of James A. Bell, he determined deficiencies of $3,430.04 for 1919 and $950.25 for 1920, and in the case of W. H. Patterson deficiencies of $2,164.35 for 1919 and $1,485.63 for 1920.
    The one question involved in all three cases, is whether the petitioners, who made returns on a cash receipts and disbursements basis, should report as income amounts not actually received in cash or its equivalent.
    FINDINGS OF FACT.
    During the years 1919 and 1920 William B. Pratt, James A. Bell, and W. PI. Patterson were residents of Elkhart, Ind., and were officers of and actively engaged in the conduct of the business of the Elkhart Carriage & Motor Car Co., an Indiana Corporation engaged in the manufacture of automobiles. Pratt was president; Bell, treasurer and chairman of the board of directors; and Patterson, vice president. Thejr together owned 90 per cent of the stock of the corporation and each were allowed a fixed salary plus an additional amount annually based on increased sales.
    The corporation closed its books on a fiscal year basis as of October 31, and during the calendar years 1919 and 1920 it credited to the individual accounts of the three petitioners the following amounts as salaries:

    The petitioners in their tax returns prepared by their auditor for years 1919 and 1920, which were upon the cash receipts and disbursements basis, reported the following amounts as salaries received from the Elkhart Carriage & Motor Car Co.:

    Amounts actually received by each of the petitioners in payment of salary for each of the years, in cash, Liberty bonds and merchandise, were as follows:
    William B. Pratt:
    In 1919, $26,154.94—
    Merchandise_$1, 083.91
    Cash and Liberty bonds_ 25, 071. 03
    26,154. 94
    In 1920, $19,766.57—
    Merchandise_ 3, 574. 56
    Cash and Liberty bonds_ 16,192. 01
    19, 766. 57

      J. A. Bell:
    In 1919, $28,824.18—
    Merchandise_ 2, 935. 00
    Cash and Liberty bonds_ 25, 889.18
    28, 824.18
    In 1920, $20,380.12—
    Merchandise_ 6,254. 86
    Cash and Liberty bonds 14,114. 26
    20, 380.12

      W. H. Patterson:
    In 1919, $28,538.30—
    Merchandise_$1, 776. 75
    Cash and Liberty bonds- 26, 761. 55
    28, 538. 30
    In 1920, $17,021.03—
    Merchandise- 644. 22
    Cash and Liberty bonds_ 16,376. 81
    17, 021. 03
    In addition to the cash, Liberty bonds, and merchandise included in the above mentioned amounts petitioners received first preferred stock and notes of the Elkhart Carriage & Motor Car Co., and common stock of the Motor Finance Co., all of which was charged to their salary accounts as follows:

      William B. Pratt

    In 1919. First preferred stock of lliu Elkhart Carriage & Motor Car Co., $6,200.00 par value, less $5,150.00 issued for note given him for salary in 1918-$1, 050. 00
    In 1920. Note, August 5, 1920, given by the Elkhart Carriage & Motor Car Co_ 1,400.00
    Motor Finance Go. stock, par value- 1, 000.00

      J. A. Bell

    In 1919. First preferred stock of the Elkhart Carriage & Motor Car Co., $8,700.00 par value, less $5,200.00 issued for note given him in 1918- 3, 500. 00
    In 1920. Motor Finance Co. stock, par value-:- 1,000.00
    Note of Elkhart Carriage & Motor Car Co- 1,400. 00

      W. H. Patterson

    In 1919. First preferred stock of Elkhart Carriage & Motor Car Co., $9,500.00 par value, less $5,499.75 issued for note given by corporation for 1918 for salary ($500.00 of this stock represented undrawn salary for 1918)- 4, 000.25
    In 1920. Mo-tor Finance Co. stock, par value- 1, 000. 00
    Note Elkhart Carriage & Motor Car Co- 2, 000. 00
    The fair market value of the first preferred stock of the Elkhart Carriage & Motor Car Co. at the time received in 1919 in payment of salary was $90 a share, par value $100. The stock of the Motor Finance Co. had no market value at the time received by petitioner or at any time subsequent thereto. There was an agreement between the four executives and the Elkhart Carriage & Motor Car Co. that the salaries credited to the accounts of the petitioners could not be drawn upon by them without the consent of J ames A. Bell, treasurer and chairman of the board of directors, and then only in the event the company had sufficient funds available to make payment without embarrassment.
    The credit balances to the accounts of the petitioners in each of the years involved, were not available to and could not be draivn by them, the consent of Bell and the requisite funds both being lacking.
   OPINION.

Littleton:

The Commissioner held that the total amounts credited to petitioners as salary upon the books of the Elkhart Carriage & Motor Car Co. for each of the years 1919 and 1920 were actually or constructively received in each year and computed the tax accordingly. In these proceedings the petitioners conceded that the total of the items consisting of cash, Liberty bonds and merchandise, received in each of the years, should be taxed as salary, but they claim that the preferred stock and interest-bearing promissory notes of the Elkhart Carriage & Motor Car Co. and the common stock of the Motor Finance Co. should not be included as income in the year in which received for the reason that such stock and notes had no fair market value at the time received. As to the first preferred stock and notes of the Elkhart Carriage & Motor Car Co., two of the petitioners testified at considerable length concerning the amount of money borrowed by that company and as to its strained financial condition at times. The only evidence relating to the value of the first preferred stock is the testimony of the petitioner Bell, who was treasurer and chairman of the board of directors of the company, wherein he stated that about the time the stock was received by the petitioners in 1919 he offered some of it for sale at $90 a share, but found no purchaser at that price and made no effort to sell it for less because he considered the stock to be worth $90 a share. From the record we are of the opinion that the first preferred stock of the Elkhart Carriage & Motor Car Co. to the extent that it was specifically received for salary in 1919 should be included as income to the petitioners to the extent of $90 a share.

The amount of first preferred stock of the Elkhart Carriage & Motor Car Co. to be considered in determining the income for 1919 follows: William B. Pratt, $1,050 par value; J. A. Bell, $3,500 par value; William H. Patterson, $4,000 par value. A portion of the preferred stock received by petitioners in 1919 was given by the corporation in exchange for its promissory notes given petitioners in 1918 in payment for salary then due and had nothing to do with the salary credited to petitioners during 1919. No evidence was offered as to the market value of the interest-bearing promissory notes of the Elkhart Carriage & Motor Car Co. given in 1919 for salary. In view of the record we affirm the Commissioner in holding that such notes represented income to the extent of their face value. As to the common stock of the Motor Finance Corporation, we are of the opinion that this stock had no market value at the time received by the petitioners in part payment of salary or at ai^ other time. Prior to the organization of the Motor Finance in August, 1920, a Missouri corporation, known as the Seberin Company, was engaged in the business of selling automobiles and supplies at Kansas City and was a customer of the Elkhart Carriage & Motor Car Co. The Seberin Company failed in 1920 and went out of business. The persons who had been identified with that company organized the Motor Finance Corporation to carry on the same business and in August, 1920, the Motor Finance Corporation purchased certain merchandise from the Elkhart Carriage & Motor Car Co. to the extent of $4,000, and gave in payment therefor its common stock of the par value of $4,000. The Elkhart Carriage & Motor Car Co. transferred this stock to petitioners in equal amounts and charged the same to their salary accounts. The Motor Finance Corporation was not successful and failed in November, 1920.

The petitioners question the correctness of the Commissioner’s determinations for the years 1918 and 1921, but in those years he determined that the tax shown due by petitioners upon their returns exceeded the correct amount of the tax due for those years. The Board is therefore without jurisdiction as to the years 1918 and 1921. Appeal of Cornelius Cotton Mills, 4 B. T. A. 255. The deficiencies for 1919 and 1920 should be recomputed in accordance with the foregoing.

Judgment will be entered on 15 days'1 notice, under Bule 50.

Considered by Teussell, Smith, and Love.


author: Tkussell :

text:
    N. P. Christensen, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 4380.
    Promulgated July 11, 1927.
    Worthless Corporate Stock. — Upon the evidence, held, that certain stock became worthless during the year 1920 and that petitioner sustained a deductible loss in that year.

      W. Carey Martin, Esq., for the petitioner.

      John W. Fisher, Esq., for the respondent.
    This proceeding is for a redetermination of the petitioner’s income-tax liability for the calendar year 1920, for which year the respondent has asserted a deficiency in the amount of $132.36. The petitioner claims that there has been an overpayment in amount of $266 for the year 1920.
    The petitioner alleges that the respondent erred (1) in disallowing the deduction in the year 1920 of $4,123, representing a loss alleged to have been sustained during that year, and (2) in including in income for the year 1920, $1,239.05, representing commissions, alleged not to have been received.
    The second allegation of error was abandoned at the hearing on this proceeding.
    BINDINGS OK FACT.
    The petitioner is a resident of Atlantic, Iowa.
    During the months of December, 1919, and January, 1920, the petitioner purchased $15,000 worth of stock of the Commonwealth Mortgage Bond Co. of Iowa, hereinafter referred to as the company, which was organized in the fall of 1919. For the said stock the petitioner paid $4,125 in cash and gave his notes for the sum of $10,875.
    During the first few months of 1920, petitioner sold stock in the company and for such services earned commissions totaling $1,239.05, which was credited on his notes during 1920. During 1921 the notes were paid, some in full and others at less than face value.
    During 1920 the company commenced the construction of a combined office and theater building in Des Moines. Its debts mounted, it became insolvent, and in September, 1920, a receiver was appointed to liquidate the company’s assets. The building was partially completed in September, and there were filed against it mechanics’ liens amounting to $284,990.17, which was approximately $200,000 more than the uncompleted building and the lease for the land upon which it was being constructed could be sold. The building stood in the uncompleted state for two years, during which time the highest offer therefor was $50,000. The structure and the lease were later sold for $75,000. In September, 1920, the company’s liabilities were greatly in excess of its assets. Its office furniture, which had a value not in excess of $2,000, was given to the lessor in payment of office rent then due. Notes receivable for the sum ai $188,971.39, all of which had been given in payment for stock, were worth in September, 1920, not more than 10 cents on the dollar and a total of $18,128.77 was collected on all those notes.
    In September, 1920, the stock of the Commonwealth Mortgage Bond Co. was worthless.
    In his audit of the petitioner’s income-tax return for the year 1920 the respondent included in income $1,239.05 as commissions constructively received, which action resulted in the deficiency here involved. The petitioner now admits the constructive receipt of the commissions and there is no controversy as to the inclusion of the said $1,239.05 in gross income, but the petitioner now claims a deduction of the loss of $4,125 and that the allowance of such deduction would result in an overpayment of tax for the year 1920.
   OPINION.

Tkussell :

There has been submitted in evidence a public accountant’s statement of the assets and liabilities of the Commonwealth Mortgage Bond Co. of Iowa as of June 30, 1920, two months prior to the receivership. That statement and the testimony as to recoveries upon the liquidation of the company’s assets show that in September, 1920, the assets and liabilities of the company appeared to be as follows:

ASSETS
_ $280.38 Cash-
Notes receivable:
$18,128. 77 Subscribers for stock.
10, 000. 00 Real estate_
3, 750. 00 Officers_
31, 878.77
Accounts receivable_ 246. 58
Securities_ 15,642.50
ITarm_ 90, 000.00
Construction and lease_ 75, 000. 00
Accrued interest_■ 120.29
Total. 213,174. 52
LIABILITIES
Notes payable to banks-10, 000. 00
Accounts payable:
On construction_ $284, 990.17
On leasehold_ 25, 000. 00
To Kirkpatrick-101.16
- 310, 091.33
Miscellaneous accrued expenses— _ 16, 943. 08
Mortgage on farm-_ 60,000.00
Capital stock:
Issued_-___$109,309.20
Subscriptions partly paid- 285, 650. 00
Surplus paid in- 18, 650. 00
- 413, 609. 20
Total_ 810, 643. 61
Deficit_ 597,469.09

The record in this proceeding establishes that the stock of the Commonwealth Mortgage Bond Co. of Iowa, became worthless during 1920.

The petitioner has admitted the constructive receipt of $1,239.05 as commissions earned during 1920 and applied during that year on his notes given to the Commonwealth Mortgage Bond Co. of Iowa in payment for stocks. That amount, having been paid in to the company during 1920 for stock which became worthless, constitutes a loss in addition to the $4,125 initial payment. The deficiency here involved resulted from the respondent’s action of adding the said commissions to income and a deduction for the loss of $1,239.05 wipes out the deficiency.

The petitioner having paid $5,364.05 for stock which became worthless in 1920, sustained a loss of that amount which is a proper deduction from gross income for the year 1920, under section 214 (a) (4) and (5) of the Revenue Act of 1918.

The petitioner's income-taxe liability for the yea/r 1920 should be recomputed in accordance with the foregoing findings of fact and opinion. Judgment for petitioner will be entered upon 15 days' notice, pursuant to Rule 50.

Considered by Trussell, Love, and LittletoN.


author: Smith:

text:
    Max Roth, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 21365.
    Promulgated July 13, 1927.
    From January 1, 1921, to May 11, 1923, inclusive, two stores were conducted at Daytona Beach, Fla., in the name of the petitioner. All purchases of merchandise and all bank accounts were carried in the name of the petitioner. The petitioner filed income-tax returns accounting for the profits of the entire business. One of the stores was managed by the petitioner and the other by the petitioner’s father. Held,, that the evidence does not warrant a finding that the petitioner and his father were in partnership during the period in question.

      Ernest Olay ton, O. P. A., for the petitioner.

      Henry Ravenel, Esq., for the respondent.
    This is a proceeding for the redetermination of deficiencies in income tax for the years 1921 to 1924, inclusive, in the amount of $133.25. The question in issue is whether a partnership existed between the petitioner and his father for the period January 1, 1921, to May 11, 1923, inclusive. It was stipulated that a partnership existed from May 12,1923, to December 31,1924, inclusive.
    FINDINGS OF FACT.
    The petitioner is a resident of Daytona Beach, Fla.
    In 1909 the petitioner’s father, Hyman Roth, was adjudged a bankrupt in New York Siu-te and various judgments were obtained against him. He has never received a discharge in bankruptcy. In 1911 he opened a store in Daytona Beach, Fla., under the name of “ The Princess Shop.” The father’s credit was bad but the son’s credit was good. Goods were therefore purchased in the name of the son and all business was conducted in the son’s name. A lease was, however, taken in the name of the father. The son entered the military service in 1918 and he was not mustered out of the service until some time in 1919. In that year an additional store was opened in Daytona Beach under the name of “The Mack Shop.” Approximately $2,000 was advanced by the father for the purchase of goods for this store and substantially a like amount was advanced by the son. All purchases of merchandise for both stores during the taxable years under review were made in the name of the son and the money was banked in a single account in the son’s name. The son, the petitioner herein, attended to the financial operations of both stores. All goods were purchased in his name. The father managed “ The Princess Shop ” as he had from the beginning and the son managed “The Mack Shop.” The books of account prior to May 12, 1928, were kept by single entry. No capital accounts were carried. The petitioner and his father each had a drawing account of $35 per week. All of the earnings of the business in excess of the amounts paid as salaries to the petitioner and his father were retained in the business and not credited to either individual.
    The petitioner filed income-tax returns for the years 1921 and 1922 and accounted for the entire profits of the business therein. The petitioner was married in October, 1922. On May 12, 1923, petitioner and his father entered into the following partnership agreement:
    Memorandum of Agreement, Made and entered into this 12th day of May, A. D. 1923, by and between Max Roth, of Daytona, Volusia County, Florida, party of the first part, and Hyman Roth of Daytona, Volusia County, Florida, party of the second part.
    Witnesseth: That for and'in consideration of the sum of ten ($10.00) Dollars and other good and valuable considerations, the receipt of which is herewith acknowledged, the party of the first part does hereby sell to the party of the second part and the said party of the second part does herewith purchase one-half interest in and to any and all business now owned and operated and hereafter owned by the said party of the first part, it being the intention herein to convey a one-half interest in and to the business known as the “ Princess Shop ” and “ Mack Shop ”, as well as any and. all other business in which- the party of the first may be interested.
    It is mutually understood and agreed by and between the parties hereto that the said party of the first part shall, during his lifetime, be the general mánagér of ¿11 of said business with full power to do any and all things in connection therewith.
    The business was incorporated in July, 1926, and stock was issued one-half to the petitioner and one-half to his father, except that one share was issued to the petitioner’s wife and one share to.his mother.
    A partnership existed between the petitioner and his father from May 12, 1923, to December 31, 1924, inclusive.
   OPINION.

Smith:

The only point in issue in this proceeding is whether an ordinary partnership existed between the petitioner and his father from January 1, 1921, to May 11,1923, inclusive. In his petition the petitioner alleges the existence of a partnership between himself and his father prior to May 12, 1923, based upon an oral contract. There is not sufficient evidence in the record, however, of the entering into any such contract on the part of father and son. The father’s credit was ruined by reason of the bankruptcy proceedings. The father had judgments outstanding against him and it was apparently the intention of both parties that the assets of the business should be beyond the reach of the father’s creditors. We are of the opinion that the evidence does not warrant any finding of fact that a partnership existed between the father and son prior to May 12, 1923.

Reviewed by the Board.

Judgment will be entered on 15 days’ notice, under Bule 50.


author: Smith :

text:
    Henry DeFord, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10114.
    Promulgated July 13, 1927.
    Deduction for loss resulting from sale of residence disallowed.

      Herbert P. Mason, Esq., for the petitioner.

      J. L. Deveney, Esq., for the respondent.
    This proceeding involves a deficiency in income tax for the year 1921 in the amount of $639.89.
    FINDINGS OF FACT.
    The petitioner is an individual residing in Brookline, Mass. In 1890 he purchased a residence at 3 Fillmore Terrace, later 340 Tap-pan Street, Brookline, Mass., for $1T,500. The house was a detached brick house in a subdivision that was being developed by one Knapp. It had twelve rooms outside of servants’ rooms. The house, with other houses of the subdivision, was to be heated from a central heating plant. This proved impracticable, however, and the petitioner had a furnace installed in the house and also an additional bath room. At the time of purchase the petitioner was desirous of acquiring a'bouse in the country but he thought that with all of the restrictions on the place the property would appreciate in value, and that within a few years he would have an opportunity to turn the property over at some profit. Knapp failed in 1893 or 1894 and never developed the entire subdivision as originally planned. The petitioner made some effort to sell his house prior to 1900 but could not find a purchaser. In 1900 he listed it with a real estate broker. During the winters of 1900 and 1901 the house was vacant and the petitioner witli his family was in Porto Rico. The house was again vacant for certain periods in 1904 and 1905. Not being able to find a purchaser for the house the petitioner occupied it as his permanent home for practically the entire period from the date of purchase to 1920, when he permanently left it. He succeeded in selling it in 1921 for $8,300. At the time of purchase the property was encumbered with a mortgage of $15,000. In 1913 the mortgage was $9,000. This was subsequently reduced to $8,000 or $6,500. The fair market value of the property on March 1, 1913, was $12,800.
    In his income-tax return for 1921 the petitioner claimed as a deduction from gross income $4,500 as a loss upon the sale of the property. This amount was obtained by deducting from the March 1, 1913, value, $12,800, the amount for which the property was sold in 1921, $8,300. The deduction of this loss was disallowed by the respondent.
   OPINION.

Smith :

The Revenue Act of 1921 permits an individual to deduct from gross income in his income-tax return “ losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business.” (Section 214(a) (5).)

The petitioner deposed as follows:

Q. Would you say that when you purchased this real estate you did or did not have a view to its subsequent sale for pecuniary profit?
A. I expected to sell it at a pecuniary profit.
Q. Do you say that this was or was not a transaction entered into by you for profit?
A. Well, that was the main object in my buying the place. I expected to live somewhere, of course, meantime. It was not bought solely as a speculation in real estate, but I expected to live there for a couple of years and to loolc around and to make a profit while I was there.

What the petitioner did in 1890 was to purchase a residence for himself and family. The surrounding and attendant circumstances are not persuasive that the purchase was a transaction entered into for profit.

Reviewed by the Board.

Judgment will he entered for the respondent.


author: Phillips :

text:
    National Products Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6136.
    Promulgated July 13, 1927.
    1. The pro visions of section 278(d) of the Revenue Act of 1924, providing that a tax assessed within the statutory period may be collected by distraint or by a proceeding in court, begun within six years after the assessment of the tax, have no application to an assessment made before the enactment of that Act.
    2. Collection of the deficiency asserted in the instant appeal held to be barred by the period of limitation prescribed by law.

      Ewing Laforte, Esq., for the petitioner.

      A. B. Marrs, Esq., for the respondent.
    The petitioner takes this appeal from the action of the Commissioner in denying in part a claim for the abatement of an assessment of income and profits taxes for 1917 of $19T,84T.T8, all of such amount being in excess of the tax shown upon the return filed by the petitioner. The petitioner assigns various errors, some upon the merits of the respondent’s determination and others in the nature of pleas in bar upon its contention that collection of the tax is barred by the period of limitation prescribed by statute. The answer of the respondent admits many material allegations with respect to the plea in bar, and the proceeding came on for hearing upon petitioner’s motion for judgment on the pleadings, at which time, by agreement of counsel for the parties and on order of the Board, a hearing was had and evidence introduced with respect only to the issues raised by the plea in bar.
    FINDINGS OF FACT.
    The petitioner is a West Virginia corporation with its principal place of business in Pittsburgh, Pa.
    The petitioner’s original income and profits-tax return for 1917 was filed April 29, 1918. Thereafter the petitioner executed and forwarded to the Commissioner a consent, dated February 13, 1923, prepared by the Commissioner and accepted by him on or about February 21, 1923, which reads as follows:
    February 13, 1923.
    Income and Profits-Tax Waiver.
    In pursuance of tbe provisions of subdivision (d) of section 250 of the Revenue Act of 1921, National Products Company, of Pittsburgh, Pennsylvania and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said Corporation for the years 1917 under the Revenue Act of 1921, or under prior income, excess-profits, or war-profits tax Acts, or under Section 38 of the Act entitled “An Act to provide revenue, equalize duties, and enaourage the industries of the United States, and for other purposes”, approved August 5, 1909. This waiver is in effect for one year from the date it is signed by the taxpayer.
    Corporate Seal. National Products Company,

      Taxpayer.

    (Signed) By F. W. Finley, President.

    D. H. Blair — AHF., Commissioner.

    Attest:
    (Signed) M. E. Eberle, Secretary.

    Feb. 21, 1923.
    Thereafter petitioner executed and forwarded to the Commissioner a consent dated January 7, 1924, prepared by the Commissioner and accepted by him on or about January 10,1924, which reads as follows:
    January 7, 1924.
    Income and Proeits-Tax Waiver.
    In pursuance of the provisions of subdivision (d) of section 250 of the Revenue Act of 1921, National Products Company of West Virginia, Pittsburgh, Pennsylvania, and the Commissioner of Internal Revenue, hereby consent to a determination, assessment, and collection of the amount of income, excess-profits, or war-profits taxes due under any return made by or on behalf of the said Company for the year 1917 under the Revenue Act of September 8, 1910, as amended by the Act of October 3rd, 1917. This waiver is effective for one year from date signed by taxpayer.
    Corporate Seal. • National Products Company oe W. Va.

      Taxpayer,

    _(Signed) By F. W. Finley, President.

    D. H. Blair — SA., Commissioner.

    Attest:
    (Signed) M. E. Eberle, Secretary.

    Jan. 10, 1924.
    On March 22, 1924, an assessment of an additional tax of $197,-847.78 for income and profits tax for 1917 was made by the Commissioner, being the tax here involved. On April 14, 1924, the petitioner filed a claim for the abatement of this tax. On July 1, 1925, the Commissioner mailed to the petitioner the deficiency notice in which it ivas determined that a portion only of the additional tax so assessed should be abated. No part of such additional assessment has been paid. The petitioner filed his petition with the Board on August 10, 1925.
    On July 7, 1926, petitioner filed with the collector of internal revenue of the district in which such assessment was made a letter in which it contended that the period of limitations for the collection of the tax had expired and requested that the assessment “ be certified back to the Commissioner of Internal Revenue on Form 53.” Such form consists of a report by the collector to the Commissioner that taxes assessed have not been collected, that the collector is unable to collect such taxes and provides for the statement of the reason therefor. The collector filed such form with the Commissioner and, as ground for his failure to collect, attached thereto a copy of the letter from the petitioner claiming that collection was barred. The Commissioner thereafter, on July 17, 1926, signed and delivered to the said collector a schedule known and entitled “ Schedule of assessments abated as uncollectible,” which authorized the collector to take credit on his accounting forms and records for the taxes thereon specified, which had been, reported as uncol-lectible and were allowed as uncollectible. Such schedule listed and included the taxes here in controversy. The petitioner was advised by the collector of such action. Thereafter under date of August 28, 1926, the respondent mailed a letter to the said collector with respect to said additional assessment which read in part as follows:
    Tlie Income Tax Unit states that the uncollectible claim has been reconsidered in view of the fact that the case is pending before the United States Board of Tax Appeals. Therefore, it will be necessary for your office to reverse the uncollectible assessment of $180,810.56.
    Your accounts should be adjusted by delating account Ca and crediting account 18 in this amount. Please attach a copy of this letter to the Form 820 in which this transaction is reflected. Appropriate notation should be made on your copy of the schedule.
    Thereafter the collector made an entry on his assessment list, purporting to reverse (.he entry abating the assessment.
   OPINION.

Phillips :

The contentions made by the petitioner are divided into two groups: (1) that collection of any additional tax for 1917 is barred by the period of limitation within which such collection may be made, and all liability is extinguished under section 1106(a) of tbe Revenue Act of 1926; and (2) that the assessment of such additional tax for 1917, having been abated pursuant to the petitioner’s claim or request in writing and the period for further assessments having expired, tliere is no deficiency. The Commissioner contends that under the Revenue Act of 1924 he has six years from the date of assessment within which to collect the tax. The first contention of the petitioner is based upon two grounds: (a) that under tbe law the period for collection lias expired, and (b) that if the statute (Revenue Act of 1924) can be construed to allow a longer period for collection, there is a specific agreement between the petitioner and the respondent, authorized by the Revenue Act of 1921, by which the right to collect expired January 7, 1925.

The consent dated February 13, 1923, was by its express terms in effect only for one year after its date. No action was taken thereunder. Before it expired, a similar consent dated January 7, 1924, was executed by the parties. It is with the latter that we are principally concerned. This was executed by the parties pursuant to the terms of section 250(d) of the Revenue Act of 1921 which, so far as is here material, provides:

Tlie amount of income, excess-profits, or war-profits taxes due * * * under prior income, excess-profits, or war-profits tax Acts, * * * shall be determined and assessed within five years after the return was filed, unless both the Commissioner and the taxpayer consent in writing to a later determination, assessment, and collection of the tax; and no suit or proceeding for the collection of any such taxes * * * shall be begun, after the expiration of five years after the date when such return was filed * * *.

The assessment here involved was made under the provisions of such Act on March 22, 1924.

On June 2, 1924, the Revenue Act of 1924 became effective. This Act, so far as here material, provided:

Sec. 277. (a) * * * (2) The amount of income, excess-profits, and war-profits taxes imposed by * * * the Revenue Act of 1916, the Revenue Act of 1917, * * * shall be assessed within five years after the return was filed, and no proceeding in court for the collection of such taxes shall be begun after the expiration of such period.
Sec. 278. * * * (c) Where both the Commissioner and the taxpayer have consented in writing to the assessment of the tax after the time prescribed in section 277 for its assessment the tax may be assessed at any time prior to the expiration of the period agreed upon.
(d) Where the assessment of the tax is made within the period prescribed in section 277 or in this section, such tax may be collected by distraint or by a proceeding in court, begun within six years after the assessment of the tax. Nothing in this Act shall be construed as preventing the beginning, without assessment, of a proceeding in court for the collection of the tax at any time before the expiration of the period within which an assessment may be made.
(e) This section shall not (1) authorize the assessment of a tax or the collection thereof by distraint or by a proceeding in court if at the time of the enactment of this Act such assessment, distraint, or proceeding was barred by the period of limitation then in existence, or (2) affect any assessment made, or distraint or proceeding in court begun, before the enactment of this Act.
Sec. 283. This title shall take effect as of January 1, 1924.
Sec. 1100 (a) The following parts of the Revenue Act of 1921 are repealed, to take effect (except as otherwise provided in this Act) upon the enactment of this Act, subject to the limitations provided in subdivisions (b) and (c) :
Title II (called “Income Tax”) as of January 1, 1924;
*******
(b) The parts of the Revenue Act of 1921 which are repealed by this Act shall * * * remain in force * * * for the assessment and collection, to the extent provided in the Revenue Act of 1921, of all taxes imposed by prior income, war-profits or excess-profits tax acts * * *.

The decision of this case is controlled by that of the Supreme Court in Bowers v. New York & Albany Lighterage Co., 273 U. S. 346, and collection is barred unless the time for collection was extended by the Revenue Act of 1924.

While the 1924 Act provides that Title II, which includes section 278, shall take effect as of January 1, 1924, it is expressly provided in subdivision (e) of section 278 that such section shall not affect any assessment made before the enactment of the Act. The general provision of the Act must give way before this specific provision. The assessment having been made before the enactment of the 1924 Act, section 278(d), granting six years after assessment within which the tax may be collected, has no application. United States v. Whyel, 19 Fed. (2d) 260; United States v. Cabot, 5 Am. Fed. Tax Rep. 6172; Wilhelm Co. v. Heiner, 21 Fed. (2d) 463. The respondent must then look to the provisions of the Revenue Act of 1921, preserved as to assessment and collection of taxes under that Act and prior Acts, by the saving clause of the Revenue Act of 1924, quoted supra. The consent executed under that Act expired on Ja.nuary 7, 1925. Thereafter the collection of any deficiency was barred. The deficiency notice was mailed to the petitioner on July 1, 1925, some six months later and no proceeding to collect had theretofore been taken. Under section 1106 of the Revenue Act of 1926 the statute of limitations not only bars the remedy but extinguishes the liability. There is no deficiency.

Reviewed by the Board.

Decision will be entered accordingly.