author: Murdock:

text:
    Edward T. Bedford Trust, Title Guarantee and Trust Company, Trustee under Deed of Trust, Dated December 1, 1928, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97260.
    Promulgated September 27, 1940.

      Holt S. McKinney, Esq., for the petitioner.

      Henry C. Clark, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined a deficiency of $242.68 in income tax for the calendar year 1935. The issue for decision is whether the basis for loss on 200 shares of stock is to be determined under section 113 (a) (2) or under section 113 (a) (3) of the Revenue Act of 1934. Hie Board adopts the stipulation of facts as its findings of fact.

Edward T. Bedford purchased 200 shares of New York, New Haven, & Hartford Railroad Co: stock on October 1, 1927, for $21,475. He created the petitioner trust on December 1, 1928, and transferred the 200 shares to it on that same day. The fair market value of the shares on that day was $15,400. The trust was to continue until the death of the last survivor of a group consisting of the grantor’s wife and four children. The net income was payable to the wife for life and thereafter to the children or their issue. The corpus was to be divided among the grandchildren of the grantor. The petitioner sold the shares in 1935 for $1,550. It computed its loss on the sale by subtracting the amount realized from $21,475 and deducted 40 percent thereof, pursuant to sections 113 (a) (3) and 117 (a). The Commissioner allowed a smaller loss, representing 40 percent of the difference between the amount realized and $15,400. He applied sections 113 (a) (2) and 117 (a).

Section 113 (a), providing the basis for gain or loss, is in part as follows:

(2) Gifts after. December 31,1920. — If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the bands of the donor or the last preceding owner by whom it was not acquired by gift, except that for the purpose of determining loss the basis shall be the basis so determined or the fair market value of the property at the time of the gift, whichever is lower. * * *
(3) Transfer in trust after December 31,1920. — If the property was acquired after December 31, 1920, by a transfer in trust (other than by a transfer in trust by á bequest or devise) the basis shall be the same as it would be in the hands of the grantor, increased in the amount of gain or decreased in the amount of loss recognized to the grantor upon such transfer under the law applicable to the year in which the transfer was made.

The Commissioner contends that the transfer was a gift, Burnet v. Guggenheim, 288 U. S. 280; the trustee “acquired by gift”, Helvering v. New York Trust Co., 292 U. S. 455; the regulations expressly provide that subparagraph (2), rather than (3), applies to a gift made by a transfer in trust; and, therefore, the basis here is the fair market value of the stock at the time of the transfer, which value was lower than the cost to the donor. Subparagraph (2) would cover this case if it stood alone, but the same could be said of (3), for clearly “the property was acquired after December 31, 1920, by a transfer in trust (other than by a transfer in trust by a bequest or devise).” Since the facts in this case bring it within the wording of each of the subparagraphs, we must try to determine which one Congress intended should cover such a case.

The Commissioner’s citation of his own regulations is not particularly helpful. The ruling contained in Regulations 86, article 113, to the effect that (2) and not (3) applies to a gift by way of transfer in trust, appeared for the first time in those regulations. It was a definite change from a series of prior regulations, beginning with those covering the Revenue Act of 1924, in which the counterpart of (3) appeared for the first time. The Commissioner had provided in those prior regulations that the provision corresponding to (3) applied to all transfers in trust, excepting transfers in trust by bequest or devise, but never excepting gift transfers. Regulations 77, art. 594; Regulations 74, art. 594; Regulations 69, art. 1595; Regulations 65, art. 1595. The change in the regulations relating to (3) was not occasioned or justified by any change in (3). Furthermore, the change in the regulations relating to (3) finds no support in the purpose behind the change in (2), as that purpose appears in the Congressional committee reports. The purpose of the new part of (2) was there stated as follows:

Section 113. Adjusted basis for determining gain or loss: Under section 113 (a) 2 of tbe present law, if a taxpayer acquires property by gift be is required to use as bis basis tbe basis tbe property bad in tbe bands of tbe donor. Tbis section bas been utilized to transfer losses from one person wbo bas little income to another person with a large income. Eor instance, a taxpayer bas property which cost him $100,000 but wbicb is now practically worthless. If be sells tbe property himself, tbe loss on tbe sale will not do him any good, due to tbe fact that be bas no income against wbicb to offset it. He transfers such property by gift to a relative or close friend with a large income, and such relative or close friend makes tbe sales and reduces bis income by a $100,000 loss. To prevent such avoidance, tbis section of the bill requires tbe donee to use, for tbe purpose of determining loss, tbe donor’s basis or tbe market value of tbe property at tbe time of tbe gift, whichever is lower. [H. Rept. No. 704 and S. Rept. No. 558, 73d Cong., 2d sess.]

The legislation was not aimed at transfers in trust, apparently, since such transfers are not mentioned in the reports and no change was made in (3). Furthermore, transfers in trust are not particularly suitable for the method of tax avoidance described by Congress. The present transfer was not made to pass on a loss. Thus, the Commissioner can not point to a long line of consistent administrative interpretation which might he said to have the effect of law and he can not find support for his changed interpretation in the legislative history of the provisions of the act.

Gifts and transfers in trust are overlapping classes, but neither is all-inclusive of the other. Consequently, the argument of the petitioner, that (3) is particular and (2) is general, is not persuasive. However, the most natural and reasonable interpretation of the statute is that (3) applies here rather than (2). Cf. Francis Francis, Guardian, 15 B. T. A. 1332, in which we said, “The difference between a gift and a trust has been too well known in the law to permit the view that Congress intended by using the word gift to include trusts and thus to involve the statute in the confusion which would necessarily result.” A strong point in support of this view is that Congress expressly excluded the application of (3) from transfers in trust by bequest or devise (to which (5) would apply) but refrained from similarly excluding gift transfers in trust, which must be one of the most common types of transfers in trust. Compare, in this connection, the wording of section 22 (b) (3), where not only bequests and devises but also gifts were expressly excluded from gross income. We conclude that the statute as a whole indicates that (3) is not limited in its application to trusts for which there is a consideration in money or money’s worth but covers as well a transfer such as occurred in this case.

Reviewed by the Board.

Dedsion will be entered u/nder Bule 50.


source: Caselaw Access Project

author: Mellott :

license: Public Domain

text:
    S. W. Pike Seedsman, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103267.
    Promulgated September 27, 1940.

      Arthur L. Podolah, O. P. A., for the petitioner.

      E. M. Woolf, Esq., for the respondent.
   OPINION.

Mellott :

The Commissioner determined deficiencies in income tax and excess profits tax of the petitioner for the years 1936, 1937, and 1938 in an amount aggregating $7,788.09, together with negligence penalties of 5 percent of the total amount of the deficiencies, under section 293 (a) of the Revenue Acts of 1936 and 1938, aggregating $389.40.

On June 10, 1040, petition was filed with the Board asking for a redetermination of the deficiency. The petition alleges: “In the spring of 1938 it was decided to liquidate the corporation but due to the seasonal nature of the business and upon advice of counsel the petitioner continued operating as a corporation for the balance of the year 1938 although legally dissolved on June 18,1938 * * (Italics ours.) The petition is verified in the following language:

Ernest 0. Pike being duly sworn says that he was the president of S. W. Pike Seedsman, Inc., and that be is duly authorized to verify the foregoing petition; that he has read the foregoing petition, or had the same read to him, and is familiar with the statements contained therein, and that the facts stated are true, except as to those facts stated to be upon information and belief, and those facts he believes to be true.

The respondent has filed a motion to dismiss the proceeding for lack of jurisdiction on two grounds: (1) That the petitioner corporation is without power to institute or prosecute the proceeding before the Board; and (2) that the verification is not in accordance with subdivision (h) of Rule 6 of the Board’s Rules of Practice (15th Ed.), which, as applicable here, reads as follows:

Where a petitioner is a corporation, the person verifying shall state in his verification that he has the authority to act for the corporation.

The respondent, in support of the first ground of his motion, calls attention to section 94 of the Illinois Business Corporation Act of July 13,1933, which reads as follows:

§ 94. Survival of remedy after dissolution. The dissolution of a corporation either (1) by the issuance of a certificate of dissolution by the Secretary of State, or (2) by the decree of a court of equity when the court has not liquidated the assets and business of the corporation, or (3) by expiration of its period of duration, shall not take away or impair any remedy given agáinst such corporation, its directors, or shareholders, for any liability incurred prior to such dissolution if suit thereon is brought and service of process had within two years after the date of such dissolution. Such suits may be prosecuted against and defended by the corporation in its corporate name. [Sec. 32.096, Jones Illinois Statutes Annotated.]

He calls attention to a statement made by the committee which drafted the legislation to the effect that the provisions of the section quoted above “* * * permit actions to be brought against a corporation, its directors, or shareholders within two years after dissolution on any liability incurred prior to dissolution, but do not permit a corporation to bring actions after its dissolution.” (Italics ours.) He also cites Billiard Table Manufacturing Corporation v. First-Tyler Bank & Trust Co. (U. S. Dist. Ct., N. Dist. W. Va., 1936), 16 Fed. Supp. 990.

In the cited case it appears that an Illinois corporation, in 1934, brought an action in assumpsit. Special pleas in bar were filed alleging the plaintiff’s dissolution and denying its right under the Illinois law to prosecute the suit. The court dismissed the action, holding that the power of the plaintiff to maintain it had been “circumscribed by the Illinois Statute.” It expressed the conclusion that “to permit the plaintiff to further maintain this action in its corporate name, even though now dissolved, would be to permit a privilege of procedure replaced by the Illinois Legislature.”

It is apparent (assuming for the purpose of this motion that the facts stated in the petition are true) that the petition in the instant proceeding was filed one year, eleven months, and twenty-two days after the corporation was dissolved. In the Billiard Table, case, supra, the court points out that: “Under the admitted common-law and Federal rule, the dissolution of a corporation, ipso facto, abates pending actions in which the corporation is a party, unless there be some specific curative or saving statute [citing cases] and the laws of the corporate domicile determine its power to maintain either local or foreign actions after dissolution.” The Supreme Court of Illinois has recognized the same rule, saying, in Singer & Talcott Stone Co. v. Hutchinson, 176 Ill. 48; 51 N. E. 622: “The law is that the corporate capacity of a corporation to sue ceases on dissolution, except as such capacity is continued by statute, or its name is used in an equitable proceeding for the purpose of distributing its assets as a trust fund.”

Singer & Talcott Stone Co. v. Hutchinson, supra, is cited by petitioner as supporting its contention that it can institute and prosecute the instant proceeding notwithstanding the fact it has been dissolved. The cited case, however, merely holds that a corporation, sued for a debt incurred previous to the expiration of its charter, may sue out a writ of error more than two years after its charter has expired, a writ of error being a “writ of right, both by the common law and our statute, as to any one who is a party to the record, or who is shown by the record to be prejudiced by the judgment.”

Inferentially petitioner indicates that it feels there is some analogy between suing out a writ of error under the state practice and instituting a proceeding before this Board for a redetermination of a deficiency; but not so. The institution of a proceeding before us by the filing of a petition is more nearly analogous to the filing of a suit. As stated by the court in California Iron Yards Co. v. Commissioner, 47 Fed. (2d) 514, 517: “The assessment by the Commissioner is in no sense an action fin court.’ The petitioner acts affirmatively and does not ‘defend an action in court’ in taking an appeal to the Board * * ⅜.” A petitioner in a proceeding before the Board has substantially the same burden as a plaintiff in a suit at law. If the court was correct in holding in the Billiard Table Manufacturing Corporation case, supra, that a dissolved Illinois corporation could not maintain an action in assumpsit because the right and power to collect debts due it and maintain suits in its corporate name for such purpose, had been “withdrawn by the Legislature by the omission of the former provisions from the new act”, — and we think that it was — by a parity of reasoning it must be held that the petitioner is without power or right to institute or prosecute the instant proceeding.

Respondent’s motion to dismiss for lack of jurisdiction must be sustained upon the first ground. It is unnecessary to pass upon or discuss the second ground.

Order will he entered dismissing the 'proceeding for lacle of jurisdiction.


author: Black :

text:
    General Securities Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 94601.
    Promulgated September 27, 1940.

      James B. Grant, Esq., and Stephen H. Hart, Esq., for the petitioner.

      Angus R. Shannon, Jr., Esq., for the respondent.
   ■opinion.

Black :

The only issue which we have to decide in this proceeding is raised by petitioner’s assignment of error B, in which it contends that in computing its “undistributed adjusted net income” for the purpose of determining its surtax, if any, as a personal holding company under section 351 of the Revenue Act of 1934, it is entitled to deduct $110,654.64 (now conceded by petitioner to be $103,898.17) on account of a dividend paid to its stockholders in property on December 1,1934.

The Commissioner in his determination of the deficiency has allowed only $1,068.33 as a deduction for “dividends paid” on account of this property dividend. This figure of $1,068.33 was the fair market value of the property on the date that it was distributed as a dividend.

The applicable sections of the Revenue Act of 1934 are sections 351 and 115 (a), printed in part in the margin.

In computing its “undistributed adjusted net income” for the purpose of arriving at its surtax, if any, as a personal holding company, petitioner is allowed to deduct the sum of all dividends paid during the taxable year. It is agreed that petitioner paid to its stockholders in 1934 cash dividends of $134,850. There is no difficulty in determining how much deduction petitioner is entitled to receive on account of these cash dividends. The Commissioner has allowed, as a matter of course, the deduction of the full amount of these cash dividends. But petitioner in 1934 also distributed to its stockholders a dividend in property. This property had an adjusted cost basis to petitioner of $103,898.17 and had an actual fair market value at the time of distribution of $1,068.33.

The question is, What amount of “dividends paid” deduction is petitioner entitled to under section 351 (b) (2) (C) of the Revenue Act of 1934 on account of this property distribution? The petitioner contends for a deduction of $103,898.17, and the Commissioner has allowed $1,068.33. We think respondent must be sustained.

It is true that property dividends reduce earnings and profits by their cost basis to the corporation which declares the dividends, but it is also true that these property dividends in the hands of the stockholders are taxable only to the extent of their fair market value at the time they are received by the stockholders. Binzel v. Commissioner, 75 Fed. (2d) 989. This fair market value may, of course, be more or it may be less than the cost of the property to the corporation.

The purpose of section 351 of the Eevenue Act of 1934 in defining personal holding companies and imposing a surtax upon them is explained by the report of the Committee on Ways and Means which accompanied H. R. 7835, in the following language:

It is recommended that a tax of 35 percent be levied on the “undistributed adjusted net income” of such corporations. This undistributed adjusted net income is determined by adding to the net income of a corporation the amount of dividends received from other corporations and the amount of partially tax-exempt interest and by subtracting therefrom Federal income taxes paid, contributions or gifts not otherwise allowed for income-tax purposes, and actual losses from the sales or exchanges of capital assets to the extent to which they are disallowed by the new provision of the bill limiting the deductibility of capital losses to the amount of the capital gains. From the result of this computation, which gives what is called the “adjusted net income”, there is to be subtracted an arbitrary allowance of 10 percent of the adjusted net income and the dividends paid to stockholders during the taxable year. The purposes of the two last-named deductions are (1) to allow such corporations a reasonable reserve for contingencies and (2) to prevent the additional tax from applying to sums actually distributed. Thus, a corporation which falls within this section because of the nature of its business and the number of its stockholders can always escape this tax by distributing to its stockholders at least 90 percent of its adjusted net income. The stockholder will, of course, be subject to the graduated surtaxes upon such distributions. Thus, the section should work no real hardship upon any corporation except one which is being used to reduce surtaxes upon its shareholders.

The Senate Committee on Finance, in its report on H. 3⅞. 7835, said with reference to the personal holding company provisions of the bill, among other things, as follows:

Many will consider the surtax imposed on these personal holding companies a harsh measure. However, a corporation which falls within this section because of the nature of its business and the number of its stockholders can always escape this tax by distributing to its stockholders at least 90 percent of its adjusted net income. The stockholder will, of course, be subject to the graduated surtaxes upon such distributions. Thus, the section should work no real hardship upon any corporation except one which is being used to reduce surtaxes upon its shareholders.

In the instant case petitioner had an adjusted net income for the year 1934, as defined by section 351 (b) (3), of $342,521.28. Can it be said that $103,898.17 of that adjusted net income was distributed to the stockholders in the distribution of property which had a fair market value of only $1,068.33 and which was taxable to the stockholders at that amount? We think not.

We think the Congressional reports from which we have quoted show that it was the intent of Congress that a personal holding company coming within the provisions of the act should receive a deduction against its “adjusted net income” for “dividends paid” of an amount equal to the amount of such dividends taxable to the stockholders. If this were not true, petitioner would receive a deduction for dividends paid of $103,898.17, which would be taxable to the stockholders only to the extent of $1,068.33. This result, we think, would be contrary to the intent of Congress.

In Foley Securities Corporation, 38 B. T. A. 1036, in discussing the House committee report on H. R. 7835, we said, among other things:

* * * But the report continues: “The stockholders will, of course, be subject to the graduated surtaxes upon such distributions”, which demonstrates that the distributions referred to were those on which the stockholders would be taxable. * * *

We went on to hold in that case that, of a distribution of $42,375 which the taxpayer made to its stockholders in the taxable year 1934, only $26,258.97 could be deducted in computing the taxpayer’s “undistributed adjusted net income” under section 351 (b) because only tha t amount was a taxable dividend to the stockholders. .

In the instant case, regardless.of the cost of the stock which petitioner distributed to its stockholders in 1934 and regardless of the way it entered it on its books, only $1,068.33 can be taxed to the stockholders, and we hold that is all that petitioner can deduct as “dividends paid” in computing its “undistributed adjusted net income.” Petitioner argues that it could have sold the stock to outsiders for $1,068.33 and distributed that amount of cash to its stockholders and in that way could have realized a loss of the difference between its adjusted cost and the selling price and could have deducted this loss on its income tax return and the same tax result would have been attained as petitioner contends for in the present proceeding. Perhaps that is true, but it takes no argument to establish the proposition that tax consequences are frequently very different on one state of facts from what they are on another state of facts.- So it is in the instant case.

Congress has prescribed how a personal holding company shall be taxed and what deductions it shall receive in determining its “undistributed adjusted net income” and we must give effect to those provisions even though the taxpayer personal holding company might have avoided the surtax if it had handled its transactions in some other way.

'Reviewed by the Board.

Decision will ~be entered under Bule 50.

       SEC. 351. SURTAX ON PERSONAL HOLDING COMPANIES.
      (a) Imposition op Tax. — There shall be levied, collected, and paid, for each taxable year, upon the undistributed adjusted net income of every personal holding company a surtax equal to the sum of the following:
      *******
      (b) Definitions. — As used in this title—
      *******
      (2) The term “undistributed adjusted net income'’ means the adjusted net income minus the sum of:
      *******
      (C) Dividends paid during the taxable year.
      *******
      (4) The terms used in this section shaU have the same meaning as when used in Title I. SEC. 115. DISTRIBUTIONS BY CORPORATIONS.
      (a) Definition of Dividend. — The term “dividend” when used in this title (except in section 203 (a) (4) and section 207 (c) (1) relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.


author: Smith :

text:
    Hotel Astoria, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97230.
    Promulgated September 27, 1940.

      Charles E. McCulloch, Esq., and Thomas B. Btoel, Jr., Esq., for the petitioner.

      John H. Plgg, Esq., for the respondent.
   OPINION.

Smith :

Petitioner’s contentions in this proceeding are that it realized no taxable gain from the payment of $16,437.82 delinquent taxes and interest, which constituted a lien upon its property, with $16,-437.82 face value of bonds and matured coupons of the city of Astoria and the Port of Astoria, except the gain on the payment of $445.64 personal property taxes and interest. This admission as to tax liability in respect of payment of the personal property taxes is based upon the theory that the personal property taxes were assessed against and were a personal liability of the petitioner. It submits that the total taxable income from this transaction was not more than $334.23 or 75 percent of the face value of the bonds and coupons utilized in paying personal property taxes and interest.

Petitioner’s argument is that the delinquent general property taxes which were a lien upon the hotel property were not assumed by the petitioner; that under the Oregon laws delinquent taxes were obligations of the prior owner and not of the petitioner; and that the fact that they were a lien upon the taxpayer’s property did not make them an obligation of the petitioner.

The respondent argues that the income taxes in the amount of $60,496.08 were a lien upon the petitioner’s property and necessarily payable by it; and that, when the petitioner acquired the municipal bonds and matured coupons at a large discount, and disposed of a portion of them in 1935 in settlement of $15,992.18 of delinquent real property taxes and interest which would otherwise have had to be paid in cash, it realized a taxable gain of the difference between the par value of the bonds and matured coupons so used and the cost Ulereof. The respondent’s argument is predicated on section 22 of Hie Revenue Act of 1934-, which provides in material part as follows:

(a) General Definition. — “Gross income” includes gains, profits, and income derived from ⅜ * * sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from * * * the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * ⅜

The petitioner does not contend that it would not be taxable upon the gain, as contended by the respondent, if it had had a personal liability for the payment, of the general property taxes which had become a lien upon the hotel property at the time of its acquisition. Its contention is, however, that it had no such personal liability for the reason that the taxes were owed by its vendor and were not assumed by the petitioner.

In United States v. Kirby Lumber Co., 284 U. S. 1, the taxpayer was held to have realized a taxable gain represented by the difference between the amount of money which it had borrowed upon its bonds and the price at which, the bonds were redeemed.. There was no question in that case but that the petitioner had realized a taxable gain upon a purely business transaction.

In Helvering v. American Chicle Co., 291 U. S. 426, the Supreme Court held that where a taxpayer purchased property and assumed the payment of bonds secured by the property purchased the difference between the face value of those bonds and the amount paid in redemption of them was taxable gain.

In our opinion the principles laid, down by the Supreme Court in the cases cited are not applicable in this proceeding; for here the petitioner did not assume the payment of the delinquent taxes, although it was necessary for it to pay them in order to prevent the property being sold for taxes.

In Lifson v. Commissioner (C. C. A., 8th Cir.), 98 Fed. (2d) 508, the court said:

When one purchases land which is subject to a Hen for taxes, the subsequent payment of those taxes by the purchaser does not constitute an allowable deduction from gross income, for the reason that the taxes accrued while the land was in other ownership and the payment of them is merely a payment of a part of the cost of acquiring the property.

Numerous cases are cited by the court in support of that proposition.

When the petitioner purchased the hotel property in 1932 it acquired only such title as the vendor had in the property. For such title petitioner paid approximately $16,000. Its cost basis for the property was only, the amount which it had paid to its vendor. If it had sold the property with such title as it then held the basis for the computation of gain would be only approximately $16,000. If it had paid $60,496.08 cash in liquidation of the delinquent taxes such payment would be a capital transaction which would have increased the petitioner’s cost basis for the property from approximately $16,000 to approximately $76,496.08. . .

By statutory enactment (§ 69-709 Oregon Code, .1930, as amended by chapter 324, Oregon Laws, 1933, p. 501, entitled “An Act to Amend Section 69-709, Oregon Code, 1930, Bela,ting to the Payment of Taxes, and Bepealing of Inconsistent Acts and Declaring an Emergency”), the tax collector was authorized and required to accept the bonds of the municipality levying the taxes at their par value, in “payment” and satisfaction of the accrued taxes here in, controversy in like manner and on the same basis as gold and silver coin of the United States. We see, therefore, that the petitioner in 1935 had an option of paying the delinquent real property taxes here in question either in cash or by purchasing bonds and matured coupons of the municipality and turning them in at face value to the tax collector in payment of such delinquent taxes. In reality the actual cost to the petitioner of the hotel property was the amount which it had paid to its vendor (approximately $16,000) plus the amount which it invested in bonds and matured coupons for the payment of delinquent taxes.

L. D. Coddon & Bros., Inc., 37 B. T. A. 393, involved the question of the realization of gain from the satisfaction of a real estate mortgage indebtedness which the taxpayer had taken over from a predecessor partnership at less than the face amount thereof. The taxpayer had expressly assumed liability for the mortgage debt when it acquired property from the partnership. At the time of the satisfaction of the indebtedness the taxpayer was solvent and the real estate had a value in excess of the mortgage. We held that the taxpayer realized a taxable gain to the extent of the difference between the face amount of the indebtedness and the amount paid in satisfaction thereof. In our opinion we said:

⅜ * ⅜ From an examination of tliese cases [United States v. Kirby Lumber Co., 284 U. S. 1; Bowers v. Kerbaugh-Empire Co., 271 U. S. 170; Helvering v. American Chicle Co., 291 U. S. 426; Commissioner v. Coastwise Transportation Co., 71 Fed. (2d) 104; certiorari denied, 293 U. S. 595; Transylvania Railroad Co., 36 B. T. A. 333, and otlier cases] tire present state of authority seems to be that where a solvent debtor is under direct'obligation to make' payments for jjliysical property purchased by him or by his assignor, which is still held by him, and satisfies this obligation by paying less than the amounts called for by the obligation, the property continuing to be of a value sufficient to pay the indcbiedness, the transaction will result in taxable income to the debtor' in the amount by which the face value of the obligation exceeds the amount paid by him for its satisfaction. * * * . .
⅜ * * * * * . ⅜
The cases cited by petitioner having to do with similar transactions, in which the debtor is insolvent or in which the debt' involved is a mere lien on the property sold and' not a personal, direct obligation of the taxpayer, are not pertinent except to give examples of the limitations contained in our statement of the general rule applicable to the instant case, supra.

In American Seating Co., 14 B. T. A. 328, the taxpayer purchased the assets of another corporation and as part of the purchase price assumed certain liabilities of the vendor corporation other than its bonded indebtedness. Thereafter, it purchased the vendor’s outstanding bonds for less than par value. We held that the purchase of these bonds did not result in taxable income. Our opinion in that case was reversed in part by the United States Circuit Court of Appeals for the Seventh Circuit, 50 Fed. (2d) 681, but not upon the point above stated.

In Fulton Gold Corporation, 31 B. T. A. 519, we held that, where property was purchased subject to a mortgage which the purchaser did not assume and the mortgage was later satisfied by payment of an amount of less than its face value, the amount so paid constituted an addition to the cost of the property. We said in our opinion that:

Here the petitioner, instead of assuming the mortgage, bought the property subject to it, and by making the purchase on such terms incurred no personal liability for the debt. Accordingly, payment of the mortgage did not result in the liquidation of a personal debt. By it the petitioner merely satisfied an encumbrance on property in which it had an equity and there was no release of assets “previously offset by the obligation” of the notes or bonds evidencing the debt secured by the mortgage. United States v. Kirby Lumber Co., supra.

In P. J. Hiatt, 35 B. T. A. 292, a reclamation district assessment on land was paid off, at face value, with the reclamation district’s bonds purchased at a discount. The assessment constituted a lien against the land but was not a personal liability of the owner. We held that the transaction did not result in taxable gain. Cf. Kalman Hirsch, 41 B. T. A. 890.

In our opinion petitioner did not acquire a taxable gain by the payment of delinquent taxes in 1935 in bonds of the city of Astoria and the Port of Astoria which it had acquired for that purpose in 1935 at a large discount. The cost of the bonds so applied simply represented an additional investment by the petitioner in the hotel property. It was a capital transaction and is to be treated just as though the amount paid by the petitioner for the bonds had been paid directly to the tax collector in settlement of the delinquent real property taxes.

The petitioner acknowledges that it derived a taxable profit of $334.23 through the application of the municipal bonds and matured coupons in the payment of its personal property taxes in the amount of $445.65, including interest. The net income of the petitioner will be recomputed accordingly.

Reviewed by the Board.

Decision will he entered under Rule 50.


author: Leech :

text:
    Minnie M. Fay Trust “A”, Virgil C. Brink and Allen M. Fay, Trustees, Petitioners, v. Commissioner of Internal Revenue, Respondent. Minnie M. Fay Trust “C”, Virgil C. Brink and Allen M. Fay, Trustees, Petitioners, v. Commissioner of Internal Revenue, Respondent. Minnie M. Fay Trust “S”, Virgil G. Brink and Allen M. Fay, Trustees, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 98900-98902, 99522-99524.
    Promulgated September 27, 1940.

      George 3. B. Green, Esq., and /S'. /S'. Dennis, 3d, Esq., for the petitioners.

      Dmis Hashin, Esq., for the respondent.
   OPINION.

Leech :

The principal issue in these proceedings is whether the basis for computing gain or loss upon the securities sold by petitioners as trustees in the taxable years is the cost of such securities to the grantor or the value of such securities at the time of the grantor’s death.

Section 113 (a) (3) of the Revenue Acts of 1934 and 1936 provides that if the property was acquired by an inter vivos transfer in trust after December 31,1920, the basis shall be the same as it would be in the hands of the grantor. Section 118 (a) (5) of, the same acts contains an exception to this rule, as follows:

SEO. 113. ADJUSTED BASIS EOE DETERMINING GAIN OR LOSS.
(a) Basis (Unadjusted) of Property. — The basis of property shall be the cost of such property; except that—
* * * * * * *
(5) Property transmitted at death. — If the property was acquired by bequest, devise, or inheritance, or by the decedent’s estate from the decedent, the basis shall be the fair market value of such property at the time of such acquisition. In the case of property transferred in trust to pay the income for life to or upon the order or direction of the grantor, with the right reserved to the grantor at all times prior to his death to revoke the trust, the basis of such property in the hands of the persons entitled under the terms of the trust instrument to the property after the grantor’s death shall, after such death, be the same as if the trust instrument had been a will executed on the day of the grantor’s death. * * *

It is not disputed that under these sections the grantor’s basis is to be used even though the transfer in trust is in contemplation of death or to take effect at or after death, and indeed that has been so held. Wurlitzer v. Helvering, 81 Fed. (2d) 928; Russell v. Bowers, 27 Fed. Supp. 13. Both parties seem to agree, moreover, that the grantor would be taxable under section 166 of the Revenue Acts of 1934 and 1936 upon the income of the trusts, if that issue were now before us, because the power of revocation could be exercised by non-adverse interests, namely, a majority of the three trustees, only one of which had a substantial adverse interest. We also assume without deciding that the grantor during his lifetime might have been taxed under section 22 (a). Helvering v. Clifford, 309 U. S. 331. It may also be stated that the corpora of the three trusts would be includable in the grantor’s gross estate on account of his retention of a possibility of reverter. Helvering v. Hallock, 309 U. S. 106.

' None of the above mentioned income and estate tax principles contradict the juristic transfer of title from the grantor to the trustees. See Otto Peterson, 42 B. T. A. 102. For the purposes of this case, they are not pertinent, since we are not concerned with the tax liability of the grantor or his testamentary estate, but only with the basis to be used by the inter vivos trustees on a sale of capital assets, a transaction which gave rise to liabilities unconnected with the liabilities of the grantor or his estate.

The litigated question revolves solely about the second sentence of section 113 (a) (5), supra. Petitioners say the statute must be construed literally and that, since there was no power of revocation reserved to the grantor of the trusts, the grantor’s basis must be used. Respondent argues that Congress did not use the words of the statute in any narrow, restricted meaning, that the statute refers to instances wherein real control over the corpus is possessed by the grantor, and that there was no necessity to provide in section 113 (a) (5) that a trust revocable by nonadverse interests was included in the classification of revocable trusts because it has always been considered that trusts so revocable effected no real transfer for tax purposes. See sections 166 and 167 of the Revenue Acts of 1934 and 1936 and section 302 of the Revenue Act of 1926.

So far as we have been able to discover, the instant question has not been decided, nor is there any aid to the construction of the statute to be found in its legislative history. Even if such extrinsic evidence existed, there is no occasion for its use, for there is no ambiguity in section 113 (a) (5). The intent of Congress, which is controlling upon us, is unequivocally expressed therein. The section plainly states that the fair market value of the property on the date of the grantor’s death is to be used as the basis only where the right to revoke is reserved to the grantor. In all other instances in the revenue acts where the vesting of a power to revoke in a person other than the grantor is to have tax consequences there is a careful and explicit statement to that effect. See sections 166 and 167 of the 1934 Act and section 302 of the 1926 Act. The absence of such a qualification here in section 113 (a) (5) contradicts, or, at least, fails to reveal any intent by Congress to cover transactions of the type at bar. As we held in Cox Motor Sales Co., 42 B. T. A. 192, “symmetry of the statute [Revenue Act of 1936] is not to be presumed.”

The Board, moreover, may not add to the language of the revenue acts (Bennet B. Bristol, 42 B. T. A. 263). Preston R. Bassett, 33 B. T. A. 182; affd., 90 Fed. (2d) 1004; Mary A. Cushing, 38 B. T. A. 948.

Finally, the language of section 113 (a) (5) is “with the right reserved to the grantor at all times prior to his death to revoke the trust.” This is not only so carefully expressed as to be plainly differentiable from sections 166 and 167, but also the word “révoke” can not “suitably be applied to the act of termination by another.” Ralph Pulitzer, 36 B. T. A. 964.

Inasmuch, then, as the right to revoke here is not reserved to the grantor, the basis to be used is the cost of the securities to the grantor under section 113 (a) (3).

In view of the above conclusion, the second issue is quickly resolved. The holding period for each security disposed of begins with the date of the grantor’s acquisition thereof and ends with the date of sale. Revenue Acts of 1934 and 1936, sec. 117 (c) (2).

Reviewed by the Board.

Decisions will be entered for the petitioners.


author: Disney: Smith,

text:
    T. H. Banfield, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 93313, 98688, 99999.
    Promulgated September 27, 1940.

      Charles E. McCulloch, Esq., for the petitioner.

      John H. Pigg, Esq., for the respondent.
   Disney:

These proceedings, consolidated for hearing, involve income tax deficiencies for the years 1935, 1936, and 1937 of $1,648.18, $3,540.75, and $6,824.69, respectively. By reason of matters affirmatively pleaded in an amended answer in Docket No. 93313, the respondent claims an increased deficiency for 1935 of $4,552.70.

The questions in issue are:

(1) Whether the petitioner is taxable on the entire net income of the partnership of Collins & Banfield for the years 1935, 1936, and 1937, as contended by the respondent, or upon only one-half of the net income, as contended by the petitioner.

(2) Whether in computing the net income of the partnership for 1935 there should be deducted from the gross income the full amount of the loss of $12,480.19 sustained from trading in grain futures on grain exchanges, or only $2,000 of that loss under the provisions of section 117 (d) of the Revenue Act of 1934.

(3) Whether the petitioner is entitled to deduct from his gross income of 1936 $1,321.53 taxes paid by him in 1936 upon real estate in Multnomah County, Oregon, purchased March 4,1935.

(4) Whether the petitioner is entitled to a bad debt deduction of $6,546.96 in the year 1937 on account of loans made to his uncle in prior years.

The issues will be considered separately in their numerical order.

Issue I.

FindiNgs oe Fact. — The petitioner is a resident of Portland, Oregon. His income tax returns for the calendar years 1935, 1936, and 1937 were made to the collector at Portland.

During the years 1935, 1936, and 1937 the petitioner was a member of a partnership, Collins & Banfield (hereinafter sometimes referred to as the partnership), which was formed under a written agreement (hereinafter referred to as the partnership agreement), with H. W. Collins on February 28,1929, reading as follows:

Joint Adventure Contract
This Agreement made this 23rd day of February, 1929, by and between H. W. Collins of Pendleton, Oregon, and T. H. Banfield, of Portland, Oregon, WITNESSETH :
Whereas, H. W. Oollins lias negotiated a contract with O. O. Perringer and others, for the purchase of the Perringer lands, leases, outfit and crops in Umatilla County, and the taking of a lease for twenty years upon approximately nine hundred sixty (960) acres of the land retained by the Perringers, and
Whereas said contract has been made by the said H. W. Collins for the benefit of the parties hereto and it is desired to reduce in writing the terms of the agreement between the parties thereto.
Therefore, the parties in consideration of the mutual covenants, hereby agree with each other as follows:
I.
T. H. Banfield has advanced Five Thousand Dollars ($5000) to apply upon said purchase, and is to advance Ninety Five Thousand Dollars ($95,000) more to make the original payment under said contract, and agrees to advance such sums hereafter as may be necessary to continue the operations conducted under this agreement.
II.
All sums advanced by T. H. Banfield shall bear interest at 6½% per annum from the time the same are advanced by him and shall be repaid to him from any moneys received from, or on account of the property embraced in the joint adventure, prior to any division of the profits.
III.
All leases, crops, lands and outfit acquired under said Perringer contract, or hereafter acquired in the farming operations conducted by the partners, shall belong equally to the parties hereto, subject only, to the repayment of the advances made by Banfield, and the parties are to share equally in all losses or profits, on account of said operations.
IV.
Oollins agrees to devote such of his time and attention as is necessary toward the management of the property so acquired, in order to keep the same in a productive state; and agrees that he will keep accurate records and books of account showing all receipts and disbursements on account of said property, which books of account shall be open to inspection by Banfield at any and all reasonable times, without compensation to Oollins, except his interest in the profits.
V.
It is agreed that Oollins may sell and dispose of wheat and other crops in the usual and ordinary course of the business and pay the expenses of .conducting the same, but Collins agrees that he will not sell or dispose of any of the land or leases, nor make any sale outside of the usual and ordinary course of business without the consent of Banfield.
VI.
Deed covering the lands purchased is to be deposited in escrow in the Inland Empire Bank of Pendleton. The name of the grantee therein is left in blank and if said lands are not transferred prior to the time said escrow is completed, then the name of the grantee in such deed shall be filled in as H. W. Collins and T. H. Banfield, unless the parties then otherwise agree.
VII.
Leases and other property held in the name of Collins, and involved in the Perringer1 deal, or hereafter acquired in connection with the operations conducted by the partners, shall be joint property, whether or not the same are taken in the name of Collins alone or otherwise.
VIII.
Books, records and bank accounts shall be kept in the name of Collins & Banfield, and the funds and property of the joint adventure shall not be mixed or commingled with other funds or property of the parties hereto.

On July 7, 1934, tlie petitioner and H. W. Collins entered into a written agreement entitled “Supplemental Joint Adventure Agreement” (hereinafter referred to as the supplemental agreement of July 7, 1934), as follows:

Supplemental Joint Adventure Agreement
This Supplemental Agreement made and entered into this 7th day of July, 3934, by and between H. AV. Coliins, of Portland, Oregon, and T. H. Banfield, of Portland, Oregon, AVitnesseth:
Whereas, said parties entered into a joint adventure contract and agreement on the 23rd day of February, 1929, and
Whereas, said agreement is not in all respects clear as regards the status of certain funds advanced, and
Whereas, it is desired that the intent of the aforesaid agreement may be clarified,
Therefore, said parties hereby mutually agree as follows:
I.
That of the One Hundred Thousand Dollars ($100,000.00) referred to in Section I of the aforesaid agreement to be advanced and subsequently advanced by T. H. Banfield, the sum of Fifty Thousand Dollars ($50,000.00) was advanced to H. W. Collins by T. H. Banfield and then advanced by H. AV. Collins to the joint adventure and constitutes the personal obligation of H. AV. Collins to T. H. Banfield, both as to principal and as to interest at the rate of 6½% per annum to be paid thereon.
II.
It was at all times the intent that the amount of One Hundred Thousand Dollars ($100,000.00) should be contributed one-half by each of the said parties and that such further advances as were required and as have been made by T. H. Banfield are the obligations of the joint adventure and are to bear interest and to be repaid in the manner specified in said agreement of February 23, 1929, and that it is not the intent of this Suppeementau Agreement to alter1 or to modify the terms of the original agreement in any manner whatsoever except as next above stated.
III.
The intent of the Joint Adventure Contract and this Supplemental Joint Adventure Agreement is that of the One Hundred Thousand Dollars ($100,000.00) first supplied by T. H. Banfield, Fifty Thousand Dollars ($50,000.00) was and is the pro rata contribution of T. H. Banfield to the capital of the joint adventure, and Fifty Thousand Dollars ($50,000.00) was and is a loan by T. H. Banfield to H. W. Collins, the proceeds to be used as the pro rata contribution of H. W. Collins to the capital of the joint adventure. It is also the intent of the joint adventure contract and this supplemental joint adventure contract that T. H. Banfield shall have a first claim against and lien upon the lands, leases, equipment and other assets of said joint adventure for the reimbursement of said T. H. Banfield for all sums of money heretofore advanced or which may hereafter be advanced by said T. H. Banfield, in connection with the original purchase of the lands of said joint adventure, together with interest thereon, and for operating expenses of said joint adventure.

Since February 23,1929, and at all times material to these proceedings, the affairs of the partnership have been conducted in accordance with the terms of the partnership agreement of February 23, 1929, and the supplemental agreement of July 7,1934.

On or about February 28,1929, the petitioner advanced the amount of $100,000, referred to in paragraph I of the partnership agreement of February 23, 1929, and paragraphs I, II, and III of the supplemental agreement of July 7, 1934, which amount was contributed to and invested in the partnership business as provided in said agreements. In addition, petitioner advanced to the partnership for the purpose of continuing the partnership operations further sums to May 10, 1934, totaling $150,491.30. Of these advances the amount of $19,591.05 was repaid to petitioner prior to January 1,1935, as follows: March 2, 1934, $15,000, and May 6,1934, $4,591.05. This left a credit balance of $130,900.25 in the ledger account entitled “T. H. Banfield— Advances” as at January 1, 1935. No advances were made by petitioner to the partnership between January 1, 1935, and December 31,1937. On September 8, 1937, petitioner was repaid $15,000 of his advances, leaving a credit balance of $115,900.25 in the ledger account entitled “T. H. Banfield — Advances” as at December 31,1937.

There was no actual distribution of cash or other property by the partnership during any of the years 1935, 1936, and 1937 on account of the partners’ respective distributive shares of the partnership net income.

The partnership’s books were kept on the accrual and calendar year bases. Petitioner’s books were kept and his returns for the years 1935,1936, and 1937 were filed on the cash basis.

Interest was credited to the petitioner’s account on the partnership books for the years 1935, 1936, and 1937 in the amounts of $20,941.75, $22,302.60, and $23,508.52, respectively.

The interest was computed at 6½ percent per annum upon the full amount of the advances made by the petitioner to the partnership, including the $100,000 referred to above, and upon the accrued interest at the beginning of each calendar year. Thus, the interest of $20,944.75 for 1935 represents:

(1) Interest on capital ($100,000)_$6,600.00
(2) Interest on advances to 1/1/85 ($130,900.25)- 8,512.08
(3) Interest on interest due or payable ($91,271.89)- 5,982.67
Total___ 20, 944. 75

Without the deduction of the above stated amounts of interest the partnership had a not loss for 1935 of $69.08, a net gain for 1986 of $11,105.14, and a net gain for 1937 of $15,294.16.

OPINION. — The petitioner contends that he is liable to income tax for each of the years 1935, 1936, and 1937 upon only one-half of the net income of the partnership; that, reading paragraphs II and HI of the partnership agreement of February 23, 1929, together, it is apparent that it was the intention of the parties that he, the petitioner, wag to get only one-half of the partnership net income, computed without deduction from the gross income of the interest which was credited to his account with the partnership.

The respondent, on the other hand, contends that the net income of the partnership, up to the amount of the interest payable to the petitioner upon his investment, belonged entirely to the petitioner, and is therefore taxable to him.

The parties are in agreement that in computing the partnership net income the amount of the interest credited to the petitioners account on the partnership books should not be taken as a deduction.

The wording of paragraph II of the partnership agreement of February 23, 1929, is:

All sums advanced by T. H. Banfield shall bear interest at 6½% per annum from the time the same are advanced by him and shall be repaid to him from any moneys received, from, or on account of the property embraced in the joint adventure, prior to any division of the profits.

We think it quite apparent from this language that the parties did not contemplate that there would be any division of profits until after the interest on petitioner’s investment had been set aside. The profits which were to be shared equally by the partners were those in excess of the interest credited to petitioner’s account. During the calendar years 1935, 1936, and 1937 there were no profits of the partnership in excess of the interest credited to petitioner. Therefore, the profits of the partnership, if the partnership had net income in those years, belonged in its entirety to the petitioner. It lias been held in many cases that the profits of a partnership which are credited or paid out as interest on partners’ capital contributions, or salaries paid to partners, constitute distributable income of the partnership to the person entitled to the interest or the salary. See Parker v. Commissioner of Corporations and Taxation, 255 Mass. 546; 152 N. E. 34; Estate of S. U. Tilton, 8 B. T. A. 914; John A. L. Blake, 9 B. T. A. 651, 655; Ella Daly King, Executrix, 10 B. T. A. 698; Charles J. Billwiller, 11 B. T. A. 841; W. W. Martin, 12 B. T. A. 1385; Augustine M. Lloyd, 15 B. T. A. 82; Guaranty Trust Co. of New York, Executor, 34 B. T. A. 384, 391.

In none of the taxable years before us did the profits of the partnership exceed the interest on petitioner’s advances to it, exclusive of one-half of the $100,000 originally advanced by the petitioner in 1929, which under the supplemental agreement of July 7, 1934, was said to be a loan to Collins and an advancement by him to the partnership. Thus, all of the profits of the partnership for the years before us are taxable to the petitioner as amounts which he was entitled to receive under the partnership agreements as interest on the undistributed amounts which he himself advanced to the partnership.

We sustain the respondent’s contention that the petitioner is liable to income tax upon the entire net income of the partnership for the years 1935, 1936, and 1937.

Issue ¾.

FINDINGS os’ Fact. — -In its income tax return for 1935 the partnership of which petitioner was a member deducted from gross income $12,480.19, in which amount the partnership had sustained in 1935 a loss as a result of its dealings in grain futures on grain exchanges, through marginal transactions handled by brokers. The facts are all stipulated. A -written stipulation filed at the hearing recites as follows:

9. During the year 1935 the partnership sustained a loss of $12,480.19, as a result of its dealings in grain futures on grain exchanges. These transactions were handled through brokers. They were marginal transactions. In arriving at the partnership book loss of $21,013.83 for the year 1935, as set forth in paragraph 8, above, the loss of $12,480.19, so sustained by the partnership from grain futures transactions, was deducted from the partnership gross income for that year.

At the hearing it was further stipulated “that no deliveries of wheat were taken under these marginal contracts, and that they were closed out before the end of the year 1935”; also, that the partnership “neither accepted deliveries nor made deliveries nor consummated those purchases or sales, whatever they were”; also that the partnership “had no inventories either at the beginning or at the close of the year * * * with respect to these marginal transactions.” In addition to the facts stipulated, the petition alleges, and the answer admits, that the petitioner during 1935 was engaged with one H. W. Collins in operating a wheat farm, in the operation of which petitioner contributed capital.

OPINION. — In the determination of the deficiency the respondent did not disallow any part of the $12,480.19 loss deducted from the partnership gross income, and no issue in that respect was set up in the petition, the only error alleged by the petitioner as to the year 1935 being the increase of petitioner’s share of partnership profits from $2,724.41 to $5,448.82, on the theory that the petitioner should have reported all instead of one-half of the partnership profits. Petitioner’s allegations in that regard were denied in the original answer, but in an amended answer the respondent alleged, in effect, that he erred in not increasing the net income as reported by petitioner by disallowing all of the loss of $12,480.19, except $2,000, alleging that the loss of $12,480.19 was sustained by the partnership from the sale or exchange of capital assets; and therefore he alleges a deficiency of $4,552.70, instead of the deficiency of $1,648.18 originally asserted in the deficiency notice.

Under such circumstances, the respondent has the burden of proof. His contention, in short, is that the deduction of the $12,480.19 loss sustained by the partnership as a result of its dealings in grain futures in 1935 is limited to $2,000 under section 117 of the Revenue Act of 1934. In our opinion the only evidence before us, the facts above recited, fails to sustain that burden. In substance, the facts shown are that the partnership, engaged in wheat farming, sustained a loss from dealings in grain futures on grain exchanges, which dealings were marginal transactions through brokers, no deliveries of wheat being taken and there being no inventories with respect to the marginal transactions, which were closed out before the end of the year. These facts are insufficient to indicate whether the transactions were hedging transactions, giving right to deduction of the entire $12,480.19 as an ordinary loss, or were transactions in the nature of sales or exchanges of capital assets, giving right to deduction of only $2,000, under the facts herein. Ben Grote, 41 B. T. A. 247; Farmers & Ginners Cotton Oil Co., 41 B. T. A. 1083.

Although' section 117 (e) of the Revenue Act of 1934 provides that gains or losses from short sales of property shall be considered as gains or losses from sales or exchanges of capital assets, the facts herein do not indicate whether the transactions were short sales. We hold that the respondent has not shown that he erred in the allowance of the entire $12,480.19 as loss in the determination of the original deficiency herein.

Issue 3.

FINDINGS of Fact. — On March 4, 1935, the petitioner acquired by purchase certain real estate situate in Multnomah County, Oregon, from the Kansas Investment Co., without any agreement with the grantor respecting the payment of taxes assessed against the property prior to the acquisition or as to the payment of taxes thereon for 1935 which would become due and payable in 1936. During the year 1936 the petitioner paid taxes to the County of Multnomah on the property in the amount of $1',321.53, which taxes were levied by the County Court for Multnomah County during its December (1935) term for the year 1935.

In his return for 1936 the petitioner claimed a deduction of the. amount of $1,321.53 as taxes paid by him during that year. In his determination of the deficiency involved for 1936 the respondent disallowed the deduction so claimed by the petitioner, stating in his deficiency notice:

In your return you deducted taxes paid on real property acquired subsequent to March 1, 1935, in the amount of $1,321.53. It is held that since the property in question was acquired subsequent to March 1, 1935, the taxes paid by you constitute an addition to the cost of the property and that they are not deductible, therefore, in the computation of your taxable income for the year 1936.

Opinion. — Section 69-722, Oregon Code 1930, in effect when the petitioner acquired the property, provided in part:

* * * ¶⅛ taxes assessed upon real property shall be a lien thereon from and including the first day of March in the year in which they are levied until the same are paid, but as between a grantor am,d a grantee the procedure in regard to the lien shall he as set forth in section, 69-710, Oregon, Code. ⅜ * *. [Italics supplied.]

Section 69-710 of the Oregon Code for 1930, likewise in effect at the túne of sale of the property here involved, provides:

As between the grantor and grantee of any land, when there is no express agreement as to which shall pay the taxes that may be assessed thereon before the conveyance, if such land is conveyed at the time or prior to the date of the warrant authorizing the collection of such taxes then the grantee shall pay the same, but if paid after the date the grantor shall pay them.

The respondent contends that the petitioner, having purchased the property after the incidence of the tax lien on March 1, under the first clause of section 69-722, Oregon Code 1930, supra, paid the taxes of his vendor, and is entitled to no deduction therefor. He relies upon Gatens Investment Co., 36 B. T. A. 309, where we held to that effect. The petitioner, on the other hand, emphasizes section 69-710, above, and that portion of section 69-722 reading “but as between a grantor and a grantee the procedure in regard to the lien shall be as set forth in section 69-710, Oregon Code.” He therefore urges that, title having passed “prior to the date of the warrant authorizing the collection of such taxes”, and “as between the grantor and grantee” there having been “no express agreement as to which shall pay the taxes that may be assessed”, the petitioner-grantee paid his own taxes and is entitled to deduction thereof. He cites Commissioner v. Plestcheeff, 100 Fed. (2d) 62, affirming 35 B. T. A. 508, and contends that Gatens Investment Co., supra, was erroneously decided.

That title passed before the date of the warrant authorizing collection of taxes can not be denied. It passed on March 4, 1985. Under the statutes of Oregon the assessor makes a return to the county clerk on an assessment roll of all property owned by taxpayers on March 1, a board of equalization meets on the last Monday in August to examine and correct the roll, the state tax commission meets in October to equalize assessments, the county court meets in December to estimate the amount of money to be raised by taxation and at that term of court to make the tax levy, within 15 days of which the county clerk delivers a copy of the assessment roll, and a warrant commanding collection of the tax, to the tax collector. The taxes become due and payable during the succeeding calendar year. What is the date governing this question? In Gatens Investment Co., supra, a case from Oregon, we followed Oregon decisions and held it to bo the date of incidence of tax lien, March 1; in Commissioner v. Plestcheeff, supra, involving realty in the State of Washington, the court construed the statute of that state as to date of tax lien as between grantor and grantee, and held that under such statute taxes did not, as between grantor and grantee, become a lien until February following March 1 upon which in general they became a lien. Does that decision require the conclusion here that the petitioner is entitled to deduction of taxes paid? We think not, for we find a difference between the statutes of Oregon and Washington in that regard, and find that the Supreme Court of Oregon has, as we said in Gatens Investment Co., supra, passed upon the question in Oregon and has held the determinative date to be March 1.

We first compare the two statutes: The Washington statute, construed in the Plesteheeff case, provides, as does the above statute of Oregon, that taxes assessed upon real property “shall be a lien thereon from and including the first day of March in the year in which they are levied until the same are paid.” The Washington statute then continues: “but as between a grantor and grantee such lien shall not attach until-the first Monday in February of the succeeding year.” (Italics supplied.) The Oregon statute, however, continues- as follows: “but as between a grantor and a grantee the procedure in regard to the lien shall be as set forth in section 69-710, Oregon Code.” It thus appears that the Washington law definitely, as between grantor and grantee, sets the first Monday in February of the succeeding year as the date before which the Hen shall not attach, while the law of Oregon not only sets no such date and does not forbid the lien to attach earlier, but merely refers to lien procedure in another section, 69-710, which likewise fails to name, as between grantor and grantee, any date of tax lien attachment different from March 1, the date named in section 69-722, saying only that as between grantor and grantee the grantee shall pay if the conveyance is prior to date of tax warrant, while if deed is thereafter, the grantor shall pay. This is obviously different from setting a tax lien date between grantor and grantee, distinct from and much later than the ordinary tax lien date, as does the Washington statute. We find no tax lien date set in Oregon, other than March 1. The Oregon statute in effect provides not a tax lien date, but a day which shall determine controversies between grantors and grantees who have not settled by contract the question as to who shall pay taxes. We think the Oregon statute can be given no such effect as was given in the Plestoheef case to the very definite Washington statute fixing February 1 as date of tax lien. Most states have statutes more or less similar to that of Oregon, and we think the intent thereof is limited to effect as between grantor and grantee and not to affect the lien of the sovereign for taxes. At any rate, the Supreme Court of Oregon has so held, in Ferguson v. Kaboth, 43 Or. 414; 73 Pac. 200, involving real property and says of section 69-710, the grantor-grantee provision: “This section, however, was simply designed to define the respective rights of a grantee and grantor of land upon which taxes had been assessed, as between themselves.” The case has never been overruled and therefore appears to control interpretation of the Oregon statute, rather than Washington cases based upon the Washington statute, above seen to be different.

The petitioner, however, urges that the Oregon statute was taken from Washington, and that the Plestoheef case interpreting the Washington statute is fully applicable here. He cites Haskins v. Dwight, 69 Or. 558. That case, however, though it states that the tax statute being interpreted is patterned after the laws of the State of Washington upon the same subject, refers only to the general statute that all taxes on real property impose a lien thereon, referring to L. O. L. 3864, not the same statute as here involved, which is not stated to be derived from Washington. At the date of that decision in 1915 the Oregon statute contained, under the law of 1907, only the provision that, as between grantor and grantee, grantee should pay if conveyance was prior to date of tax warrant, no reference being made to date of lien. In other words, the lien was not affected. Therefore, Haskins v. Dwight, supra, has no effect upon, and Washington is not shown to be the source of, section 69-722 passed in 1917, referring to “the procedure in regard to the lien”, being between grantor and grantee, “as set forth in section 69-710. Oregon Code.” We find no reason to base section 69-722 upon Washington statutes. Moreover, Port of Seattle v. Yesler Estate, 83 Wash. 166; 145 Pac. 209, the earliest Washington case cited in the Plestcheeff case upon the question whether the grantor-grantee provision is effective only between those parties was decided in 1915 some twelve years after the decision of the Oregon court in 1903 in Ferguson v. Kaboth, supra; so that the later Washington decisions can be given no effect as against the Kaboth case.

Petitioner contends that the Gatens Investment Co. case, supra, was eri’oneously based upon personal liability of the grantor, and points out that Covey v. Hurlburt, 207 Pac. 166, there cited, involved personalty. In the latter case the court was considering section 4268 Or. L., which specifically covers both personal property and real property, in providing the manner of assessment, yet the Oregon court said: “Section 4268 Or. L. has the effect to make the person who is the owner of the property on March 1 of any year liable to pay the taxes thereon.” We find in section 4268 the further justification for the general language used in Covey v. Hurlburt, supra: “Except as otherwise provided by law, every person shall be assessed in the county where he resides at the hour of one o’clock A. M., on March 1st of the year when the assessment shall be made for all real and personal property owned by him within such county * * Obviously, then, assessment is against the person who is owner of the property on March 1. The court did not distinguish between real and personal property, and considered the date of assessment or tax lien as determinative of liability. Such holding of the Oregon court is consonant with many decisions which in effect hold that taxes are those of the owner of property on a designated date, ordinarily called date of tax incidence, and that a later purchaser, in paying them, pays as a part of his investment. Whether called personal or not, the liability for tax is upon the then owner, and not his successor in title. We note among such cases Lifson v. Commissioner, 98 Fed. (2d) 508; certiorari denied, 306 U. S. 618. It involved real property in Minnesota, and the court held that the lien of the state for taxes attached upon May 1, 1933, and that one who purchased thereafter was not, under section 23 (c) of the Eevenue Act of 1934, entitled to deduction of the 1933 taxes paid in 1934. That the taxes were not yet ascertained in amount and were not payable until January 1934 was held not to govern. The taxes were not a personal liability of the owner on May 1, but the court holds that under section 23 (c) of the revenue act they “accrue” when they become a charge against and a lien upon the land. It is pointed out in a footnote that after providing the lien effective from May 1, the Minnesota statute also provides: “but, as between grantor and grantee, such lien shall not attach until the first Monday of January of the year next thereafter.”

We conclude that under Oregon statutes and decisions the owner of real property is assessed therewith on March 1, that the lien attaching for taxes on that date is not removed or changed to any later date because of conveyance thereafter, and that the purchaser in paying taxes assessed and accrued as a lien on March 1 merely pays cost of acquisition of the property and is not entitled to deduction under section 23 (c) of the Revenue Act of 1934.

Issue 4.

FindiNgs on Fact. — In 1926 the corporation of Parker & Banfield, of which the petitioner was one of the principal stockholders, loaned to M. C. Banfield, petitioner’s uncle, $3,800, taking his personal note therefor, together with collateral of 135 shares of stock in the Realty Associates of Portland. M. C. Banfield desired the loan in order to clean up an obligation he owed to a third party. On the dissolution of Parker & Banfield as of December 21, 1929, the petitioner acquired the note at its face value and also received the shares of stock put up as collateral.

During the years 1930 to 1935, inclusive, the petitioner loaned to M. C. Banfield a total of $2,746.96, represented in part by notes and in part by book accounts. These sums were used by M. C. Banfield for the payment of taxes and for extensive improvements on an apartment house operated by him. No part of the above described loans constituted contributions for the personal support of M. C. Banfield or his family.

M. C. Banfield was a substantial business man in Portland for many years and during the period here involved was manager of the Realty Associates of Portland and the owner and operator of the apartment house referred to. Through the period from 1930 to 1937 the petitioner believed that his loans to M. C. Banfield were still secured and would be paid in full.

M. C. Banfield died on November 29, 1936, survived by his widow, of the age of 78 or 79 years, and four daughters. At the date of his death Banfield owned only the 135 shares of stock in Realty Associates of Portland and the apartment house above referred to. The income from the apartment house was not sufficient to pay interest, taxes, and other charges. After canvassing the situation, M. C. Banfield’s heirs quitclaimed the property to the mortgagee in the early part of 1937 in consideration of a release from the mortgage debt. There was no estate to be administered and the estate was never probated.

The 135 shares of Eealty Associates of Portland held by the petitioner as collateral for his loans, although belonging to him, had never been transferred to his name. They were transferred to him in 1937. He then first learned the situation with regard to the company. It had a large bonded indebtedness, with practically no assets except its equity in many parcels of real estate. The petitioner found the stock to be worthless, although the corporation was still in existence. The petitioner ascertained his claim against the estate of M. C. Banfield to be worthless in 1937. At the end of 1937 he charged off as a bad debt the amount of $6,546.96 owed to him by the estate of his uncle and claimed the same as a deduction from his gross income in his income tax return. The deduction was disallowed by the respondent.

OpinioN. — The reason for the disallowance of the claimed bad debt deduction is not stated in the respondent’s deficiency notice. At the hearing of these proceedings counsel for the respondent contended that the petitioner should have known prior to 1937 that the debt was worthless. The evidence shows, however, that it was not until 1937 that the petitioner ascertained the debt to be uncollectible. He believed that his uncle was fairly prosperous and that if the debt could not be collected from his estate it, nevertheless, could be collected at least in part from the collateral which he held against the debt. It wTas not until 1937 that he learned the true condition of affairs. In good faith he ascertained the debt to be worthless in 1937. The respondent admits the charge-off of the bad debt in the amount of $6,546.96. The amount is a legal deduction from gross income.

Eeviewed by the Board.

Decisions will be entered under Bule BO.

Tuenee dissents on the second point.

Smith,

dissenting: 1. During the year .1935 the partnership of Collins & Banfield sustained a loss of $12,480.19 from trading in grain futures on grain exchanges. In the determination of the deficiency for 1935 the respondent allowed the deduction of the loss in computing the net income of the partnership. By an amendment to his answer the respondent alleges that the loss was from the sale or exchange of capital assets during that year and that he erred in allowing a loss in excess of $2,000, under section 117 (e) of the Kevenue Act of 1934.

No testimony was offered by the petitioner or by the respondent upon this issue. The parties entered into a stipulation of facts, which is incorporated in the majority report. At the hearing of these proceedings counsel for the petitioner stated:

⅝ * * There was another question involving whether certain wheat transactions, margin transactions in wheat, which involved a loss of some $12,000 in the year 1935 were ordinary losses deductible in full, or whether they were losses subject to the capital limitation provisions of the statute. The Commissioner disallowed the loss in full and applied the $2,000 limitation. After some chreful study of the facts, we shall not put on testimony with respect to that issue, although it is not covered in the stipulation, and I take it the presumption of the correctness of the Commissioner’s determination will therefore apply to that particular item.

Counsel for tlie respondent then stated that counsel for the petitioner was in error in assuming that there was any presumption of correctness in the Commissioner’s determination, since under the statute the burden of proof upon the issue was upon the respondent.

Thereafter, counsel for the petitioner and. the respondent entered into supplemental stipulations which are incorporated in the majority report.

In its opinion the Board states that “the facts herein do not indicate whether the transactions were short sales.”

In his brief counsel for the petitioner does not contend that the losses of $12,480.19 were not from “short sales of property” within the meaning of section 117 (e) of the Revenue Act of 1984. His only contention is that the respondent has not shown that they were not losses from hedging transactions, which are deductible from gross income in accordance with the Board’s opinion in Ben Grote, 41 B. T. A. 247.

I think it clear from the record that both counsel for the petitioner and counsel for the respondent considered the phrase “dealings in grain futures on grain exchanges” as synonymous with “short sales of property” within the meaning of section 117 (e) of the applicable statute.

The phrase “dealings in grain futures on grain exchanges” has a well understood meaning. If a man buys wheat for future delivery on a grain exchange he is not, of course, entering into a short transaction. The buyer is not regarded as dealing in grain futures. He has merely purchased wheat to be delivered in the future and if he does not sell his contract prior to the date of the expiration of the contract the wheat is delivered to him pursuant to the terms thereof.

Where a man has a loss upon dealings in grain futures he sustains a loss from a short sale, as the term is generally understood.

In Ben Grote, supra, tbe Board beld in its syllabus as follows:

The purchases and sales of wheat futures by a wheat farmer, made entirely for protection against price fluctuations, held, related to his business of production and sale of wheat, and losses sustained in such transactions, held, not capital losses subject to the deduction limitations of section 117, Revenue Act of 19S4.

In our findings of fact we referred to these purchases and sales of wheat futures as “short sales.”

In Anderson v. State, 2 Ga. App. 1; 58 S. E. 401, 410, it was held that the transaction termed “futures” is this:

One person says that X will sell you cotton at a certain time in the future for a certain price. You agree to pay that price, knowing that the person you deal with has no cotton to deliver at the time, but with the understanding that when the time arrives for delivery you are to pay him the difference between the market value of that cotton and the price you agreed to pay if cotton declines, and if cotton advances he is to pay you the difference between what you promised to give and the advance in market price.

To the same effect is Hentz & Co. v. Booz, 8 Ga. App. 577; 70 S. E. 108, 110. Cf. Plank v. Jackson, 128 Ind. 424; 26 N. E. 568, 569; Lemonius v. Mayer, 71 Miss. 514; 14 So. 33, 34.

The petitioner’s reliance upon Ben Grote, supra (see also Farmers & Ginners Cotton Oil Co., 41 B. T. A. 1083), is not well based. There is not a scintilla of evidence that the dealings in grain futures by the partnership of Collins & Banfield were in the nature of hedging transactions.

I think it was clearly the intention of Congress by section 117 (e) of the Revenue Act of 1934 to disallow the deduction of more than $2,000 from short sales of property. Nowhere in the taxing statute or in the Commissioner’s regulations is it provided that losses from short sales of property may be allowed in a greater amount than $2,000, even though those transactions are hedging transactions. It is true that in G. C. M. 18658, Cumulative Bulletin XVI-2, p. 77, the respondent held in a particular case that where a taxpayer was engaged in carrying on operations in commodities dealt in on organized exchanges he was entitled to inventory goods on hand at market price and hence entitled to deduct losses sustained on short transactions in certain circumstances. There is no evidence, however, that such “certain circumstances” are present in this case.

Furthermore, it should be observed that rulings reported in the Internal Revenue Bulletin are declared in each bulletin to be “for the information of taxpayers and their counsel as showing the trend of official opinion in the administration of the Bureau of Internal Revenue; the rulings other than Treasury Decisions have none of the force or effect of Treasury Decisions and do not commit the Department to any interpretation of the law which has not been formally approved and promulgated by the Secretary of the Treasury.”

Under the internal revenue acts the Commissioner, with the approval of the Secretary, is authorized to promulgate regulations for the administration of the acts. Those regulations are entitled to great weight. But the rulings of the Commissioner in particular cases are not regulations of the Commissioner. This was so held by the Supreme Court in Helvering v. New York Trust Co., 292 U. S. 455. In that case the Supreme Court said:

* * * The rulings, I. T. 1879, 1660, and. 1889, cited by the Commissioner were made before the passage of the 1924 act, but they “have none of the force or effect of Treasury Decisions and do not commit the Department to any interpretation of the law.” See cautionary notice published in the bulletins containing these rulings. * * *

In my opinion it was not incumbent upon the respondent to negative the possibility that the losses on the short sale transactions here involved were losses from hedging transactions. The stipulated facts bring the case squarely within section 117 (e) (1) of the Revenue Act of 1934. The partnership is entitled to deduct only $2,000 of the $12,480.19 losses sustained upon the short transactions here involved.

2. On March 4, 1935, the petitioner purchased certain real estate situated in Multnomah County, Oregon, without any agreement with the grantor respecting the taxes assessed against the property prior to such acquisition or as to the payment of taxes thereon for 1935 which would become due and payable in 1936. Section 69-710 of the Oregon Code for 1930 provides:

As between tbe grantor and grantee of any land, when there is no express agreement as to which shall pay the taxes that may be assessed thereon before the conveyance, if such land is conveyed at the time or prior to the date of the warrant authorizing the collection of such taxes then the grantee shall pay the same, but if paid after the date the grantor shall pay them.

The taxes upon this parcel of property which became duo and payable in 1936 were paid by the petitioner in that year in the amount of $1,321.53. The respondent has disallowed the deduction from petitioner’s gross income of the taxes paid upon the ground that the taxes constituted a part of the cost of the property and are not “taxes paid” within the meaning of the statute. I think that this ruling is clearly wrong.

If the petitioner had made his income tax returns for 1935 and 1936 upon the accrual basis the petitioner would be entitled to the deduction of the taxes here involved; for the taxes were not levied until after the petitioner had purchased the property and taxes do not accrue “until the events by which that liability is fixed have occurred.” Commissioner v. Cudahy Family Co. (C. C. A., 7th Cir.), 102 Fed (2d) 930, and authorities cited therein. Since the petitioner made his returns on the cash basis, the taxes are a legal deduction from the gross income of 1936, as the petitioner contends.

In Commissioner v. Coward (C. C. A., 3d Cir.), 110 Fed. (2d) 725, a taxpayer wlio purchased a parcel of real estate in New Jersey on October 16, 1933, and a second parcel on January 8, 1934, was held entitled to deduct on the cash basis all of the taxes paid by her in 1934 on the first piece of property and all but %65 of the taxes on the second piece of property. The taxes in question were assessed as of October 1, 1933, and would have become a lien upon the property on December 6, 1933, if not paid in 1934 when they became due. In that case, as here, the Commissioner contended that the taxes which had accrued against the property prior to the date of purchase might not be deducted from gross income when paid by the purchaser, upon the ground that they constituted a part of the cost of the property. This contention was rejected by the court. I think that the reasoning of the court in that case is sound.

It is furthermore to be observed that under section 69-710 of the Oregon Code the petitioner was liable for the payment of the taxes which became due in 1936. If the taxes had been paid by the grantor he would have had a valid claim against the petitioner for the recovery of the taxes. In this situation it seems to me that it is immaterial that a lien for the payment of the taxes later to be levied attached on March 1,1935.

The interpretation placed by the Board upon a transaction of this sort is contrary to commercial practice. Ordinarily the cost of real estate is what a man pays the seller therefor. If he contracts- with the seller to pay taxes that are owed by him the amount of such taxes becomes a part of the cost of the property. But that is not the situation here. The seller here did not know at the date of sale the amount of the taxes which would be assessed on his property for collection in 1936. The petitioner had to pay them and he did pay them. I dissent from the conclusion that the taxes paid by the petitioner in 1936 are not a legal deduction from his gross income.

Hill agrees with this dissent.


author:
Opper:
      VaN Fossan,

text:
    Frank G. Hoover, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96104.
    Promulgated September 27, 1940.

      Albert B. Arbaugh, Esq., Paul E. Shorb, Esq., and Marion P. Wormhoudt, Esq., for the petitioner.

      T. F. Gallaban, Esq., and W. W. Kerr, Esq., for the respondent.
   OPINION.

Opper:

The correctness of respondent’s inclusion in. petitioner’s income for the years 1935 and 1936 of the income of a trust created by him is the first contested issue. Originally respondent’s action was predicated only upon sections 166 and 167, Bevenue Act of 1934. The additional question of the applicability of section 22, as adjudicated in Helvering v. Clifford, 309 U. S. 331, has, however, been properly put in issue as the result of subsequent proceedings and is also open for consideration. Herbert W. Hoover, 42 B. T. A. 289.

For convenience, the taxability to petitioner of the trust income for the year 1936 will be considered first. In that year the grantor had every power and every economic interest which inured to the petitioners in Herbert W. Hoover, supra, and George H. Deuble, 42 B. T. A. 277. The circumstances are indistinguishable. On the authority of those cases the determination as to that year must be in favor of respondent.

Turning to the year 1935 we find one distinction in the facts. On the significance of that distinction may depend whether the petitioner is also taxable on the 1935 income. The provision of the trust indenture which permitted the petitioner to substitute trustees was apparently inserted by him by means of an addition dated December 26, 1935. Prior to that time this authority was not the subject of any express provision of the trust indenture. Hence it may be argued that as to the year 1935 the doctrine of Helvering v. Clifford, on the authority of which the Hoover and Deuble cases were decided, is inapplicable.

Omitting the power to substitute trustees, petitioner had still contrived to retain in himself “so long as I live the right to instruct the trustee as to any change in such investment both as to principal fund as well as the income thereof that may not be distributed * * ; “to vote or direct the voting of the stock covered by this trusteeship”; “the trustor himself during his lifetime more or less directing investments”; to obtain the reversion of the corpus on January 1, 1936, unless otherwise directed by him; and, in the meantime, to have the income remain in the family and be paid to petitioner’s wife, or if the wife had died to be paid over to trusts established by petitioner for the benefit, of his children in his will. The “principal investment” of the trust was stock of the company in which petitioner was “actively interested.”

We must compare these aspects of the present controversy with the substance of the Supreme Court’s conclusion in Helvering v. Clifford, supra, to determine whether this proceeding comes within the principle of that case. The Clifford opinion had this to say of the grantor’s relationship to the trust, the emphasis being ours:

* * * So far as his dominion and control were concerned it seems clear that the trust did not affect any substantial change. In substance his control over the corpus was in all essential respects the same after the trust was created as before. The wide powers which he retained included for all practical purposes most of the control which he as an individual would have. There were, we may assume, exceptions such as his disability to make a gift of the corpus to others during the term of the trust and to make loans to himself. But this dilution in his control would seem to be insignificant and immaterial, sinee control over investment remained. If it be said that such control is the type of dominion exercised by any trustee, the answer is simple. We have at best a temporary reallocation of income within an intimate family group. Since the meóme remains in the family and sinee the husband retains control over the investment he has rather complete assurance that the trust will not effect any substantial change in Ms economic position * * *. That might not be true if only strictly legal rights were considered. But when the benefits flowing to him indirectly through the wife are added to the legal rights he retained, the aggregate may be said to be a fair equivalent of what he previously had. * * * For where the head of the household has income in excess of normal needs it may well make but little difference to him (except income tax-wise) where portions of that income are routed — so long as it stays in the family group. In those cvrcum-siances the all important factor might be retention by him of control over the principal. * * *
The bundle of rights which he retained was so substantial that respondent can not be heard to complain that he is the “victim of despotic power when for the purpose of taxation he is treated as owner altogether.”

Applying this language to the facts now before us, we must ask which of the attributes of ownership included in the bundle of rights which petitioner retained are absent here which were present in Helvering v. Clifford, supra. Petitioner could not alienate the trust corpus. Neither could he in the Clifford case. He perhaps' was foreclosed from requiring the trustee to invest in loans to himself, although that is by no means clear. But so he was in the Clifford case. He is not entitled to receive the income from the trust in person, but obtains its economic benefits only indirectly through his wife. But that was also true in the Clifford case. He does control the form and manner of the investment of both principal and undistributed income. And he does remain in a position to participate in the affairs of the business in which he is actively interested, a prerogative which proceeds from the retained equivalent of ownership of his interest in that enterprise. This is an attribute of proprietorship frequently of greater significance than the right to receive income. When we combine it with the power to force the retention of that investment and the “benefits flowing to him indirectly through the wife” we can not avoid the conclusion that “With that control in his hands he would keep direct command over all that he needed to remain in substantially the same financial situation as before.” True, petitioner was not himself the trustee, as Clifford was. But what significant powers of enjoyment or control were vested in Clifford as trustee which the grantor here did not have as an individual? We think that petitioner’s liability to tax on the trust income for the year 1935 follows directly from the principle of Helvering v. Clifford, supra.

What we have said, however, applies only to the income from the principal of the trust which petitioner established. As to the income from the fund which represented accumulated income, the fund which was in fact withdrawn by the beneficiary on September 2, 1935, the situation is indistinguishable from that aspect of Herbert W. Hoover, supra, which involved income from investments properly withdrawn during the tax year by the beneficiaries. On the authority of that decision respondent’s determination with respect to the income from the withdrawn property is disapproved.

The facts stipulated with respect to the second issue merely show that petitioner paid certain amounts to investment counsel during the years in question. There is no showing that petitioner was engaged in any trade or business or that the claimed expenses were incurred in connection therewith. In the absence of such evidence this issue must be decided in favor of respondent. See Deputy v. duPont, 308 U. S. 488.

Reviewed by the Board.

Decision will be entered under Rule 50.

VaN Fossan,

dissenting: I am imable to agree with the majority that as to the year 1935 the present case is governed by Helvering v. Clifford, 309 U. S. 331. There is a basic difference in the facts. Clifford was both grantor and trustee of the trust with all the powers that flowed from the merger of the two personalities. In the instant case in 1935, Hoover was not and could not become trustee. The only powers specifically reserved by him as grantor were to vote the stock and to control any change in the investment of the principal and undistributed income of the trust. In my judgment the reservation of these powers was not such a retention of control as to require us to disregard the trust. Ellsworth B. Buck, 41 B. T. A. 99.

Mellott agrees with this dissent.