author: Steenhagen:

text:
    Estate of Helen Gilmore, Deceased, by Herbert C. Smyth, Jr., Administrator, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 93231, 93232, 93331, 93332, 93333, 93334, 93335.
    Promulgated November 24, 1939.

      Herbert G. Smyth, Jr., Esq., and Bernard E. Drape, Esq., for the petitioners.

      George R. Sheriff, Esq., and W. G. Ruymann, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Herbert C. Smyth; Francis G. Smyth, Jr.; Edward G. Rowley; Louise Marthe; John Anderson ; and Lester A, Thatcher.

   OPINION.

Steenhagen:

The respondent determined that the estate of Bur-ridge, being then a taxpayer in its own behalf, was the recipient of income from the corporation by way of a forgiveness of Burridge’s indebtedness of $124,904. This is said to have occurred in 1932, at the time of the final distribution of the corporate assets, of which this account receivable was one. There is, however, no evidence from which any finding of fact could be made that there was at any time a forgiveness of this indebtedness, and the evidence is sufficient to show that no such forgiveness occurred. This has been found as a fact. The respondent, however, would have the Board hold that there was a constructive forgiveness by reason of the fact that the debt was never paid and was wiped out by the liquidation of the corporation.

The evidence establishes that all of the corporation’s assets were distributed and that the Burridge account receivable was treated as an asset. This, however, can not fairly be regarded as a forgiveness of the debt. It was an item of the liquidation proceeds. Although the effect upon Burridge’s estate was similar, in that the estate was saved the inconvenience of actually paying the amount and receiving it back in distribution, nevertheless the occurrence was entirely a recognition of the subsistence of the debt and the distribution of the account to its shareholders. From both a practical and a theoretical standpoint, this is the proper conception of the final disposition of the indebtedness. The estate so treated the amount, for it included the account receivable as having been acquired by it in the liquidation distribution, thus serving as a factor of its liquidation gain or loss.

In addition to this it appears clearly that the estate tax was computed upon a gross income which included $416,396.47 as the value of Burridge’s 1,248 shares. This would mean a per share value of $333.65 at the time of Burridge’s death; which is more than the $327.14 distributed in 1932 as the per share value of the Howell shares, the difference being accounted for by a general decline in value in the interim. The Howell distribution was computed upon the corporation’s balance sheet, and the balance sheet included the Burridge debt among the corporate assets. Thus the indebtedness has at all times been consistently treated as an asset of the corporation, and we see no reason for regarding it as forgiven, as the respondent has held.

Since no deficiency in tax can be found as to the taxpayer estate, there is no occasion to consider the supplemental issue whether the petitioners here are freed from the transferee liability by the expiration of the statutory period of limitations.

Decision will be entered for the petitioners.


source: Caselaw Access Project

author: Smith :

license: Public Domain

text:
    Estate of Mary W. Cushman, The Hartford-Connecticut Trust Company, Executor of the Will of Mary W. Cushman, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. Louise C. Cushman, Transferee of the Estate of Mary W. Cushman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of Mary W. Cushman, Phoenix State Bank and Trust Company, Trustee under a Deed of Trust from Mary W. Cushman, Deceased, as Trustee and Transferee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 92882, 92881, 92883.
    Promulgated November 24, 1939.

      Charles W. Gross, Esq., for the petitioners.

      James T. Easlam, Esq., for the respondent.
   OPINION.

Smith :

The question presented by this proceeding is whether any part of the trust estate created by Mary W. Cushman on June 9, 1923, is includable in her gross estate. If no part is includable there is no deficiency in estate tax. The statutes involved are as follows:

Revenue Act of 1926.—

Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. Where within two years prior to his death but after the enactment of this Act and without such a consideration the decedent has made a transfer or transfers, by trust or otherwise, of any of his property, or an interest therein, not admitted or shown to have been made in contemplation of or intended to take effect in possession or enjoyment at or after his death, and the value or aggregate value, at the time of such death, of the property or interest so transferred to any one person is in excess of $5,000, then to the extent of such excess, such transfer or transfers shall be deemed and held to have been made in contemplation of death within the meaning of this title. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death but prior to the enactment of this Act; without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.

Revenue Act of 1932.—

SEC. SO3. FUTURE INTERESTS.
(a) Section 302 (c) of the Revenue Act of 1928, as amended by the Joint Resolution of March 3, 1931, is amended to read as follows:
“(e) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.”

1. The first question to be considered is whether the trust estate created on June 9, 1923, was “to take effect in possession or enjoyment at or after death.” By the terms of the trust intrument the property in question was conveyed to the trust as of the date of the execution of the trust instrument; Mary W. Cushman was to receive and did receive during her life the income of the trust estate. The trust instrument provided how the estate was to be handled after her death. The remainder interests vested in the remaindermen at the date of the execution of the trust instrument. There was a complete transfer of the property from Mary W. Cushman on June 9, 1923, since she had transferred the property as of that date. No part of the trust estate passed from the dead to the living as a result of her death. Her life interest in the trust property was obliterated by the event of her death. May v. Heiner, 281 U. S. 238; Burnet v. Northern Trust Co., 283 U. S. 782; Morsman v. Burnet, 283 U. S. 783; McCormick v. Burnet, 283 U. S. 784.

2. The deficiency notice upon which this proceeding, Docket No. 92882, is brought is dated January 17, 1938, prior to the decision of the Supreme Court in Hassett v. Welch, 303 U. S. 303. Since the trust estate was created prior to the effective date of the Joint Resolution of March 3, 1931, and section 803 (a) of the Bevenue Act of 1932, the amendment to the estate tax law effected by the Joint Besolution of March 3, 1931, does not apply.

Tn his contention that it does, the respondent cites Edward E. Denniston, Executor, 38 B. T. A. 1076. That case presented a situation in which stocks, bonds, and other securities were transferred in 1915 by a trust indenture wherein the donor reserved to herself the income for life. It provided that upon decedent’s death the trust property should be held:

* * * for sucb parties and persons and for such uses, intents and purposes and estates therein as the said Eleanor H. Denniston at the time of her death may by any last will and testament or instrument in the nature thereof direct, provide, limit and appoint.

In 1932 the donor relinquished the power of appointment and also transferred to her daughter certain parcels of real estate, including her home. The donor died in 1934. The Commissioner included in the gross estate the value of the stocks, bonds, etc., transferred to the trust in 1915 and the value of the real estate conveyed by deed to her daughter in 1932. The Board sustained the action of the Commissioner. Our decision in that case has been appealed to the United States Circuit Court of Appeals for the Second Circuit.

There are no parallel facts in the proceeding at bar. Mary W. Cushman did not by the trust instrument reserve unto herself any power by which she could control the devolution of the property at her death. The Denniston case is distinguishable on its facts from the proceeding at bar.

The respondent also cites Helvering v. Bullard, 303 U. S. 297. In that case an irrevocable trust was created by the decedent, in which the income for life was reserved. The decedent became dissatisfied with the trust and contemplated a proceeding to have it declared void on account of fraud. Opposition to such a proceeding threatened to disclose family discord and provide unpleasant notoriety, to avoid which counsel advised that a consent decree declaring the trust violated the rule against perpetuities be entered upon agreement of all the parties. Such an agreement was reached; it provided that the interest of the opposing beneficiary be not disturbed but that the interest of other beneficiaries be materially altered. The Supreme Court held that, since the decree of the court declared the 1927 trust void, the trust assets reverted to the decedent. A new trust was executed in 1932. The .Supreme Court observed:

* * * Both the Board and the Court held that the decree of the state court, notwithstanding its entry pursuant to stipulation, adjudicated the rights of the parties, abrogated the trust of 1927, and established the decedent’s absolute ownership of the assets. * * *

Since that was the case, the Supreme Court held that the transfer of the assets with which it was concerned took place in 1932, or after the effective date of the amendment to the! estate tax law of March 3, 1931.

There are no parallel facts in the proceeding at bar. Mary W-Cushman transferred the property here in question to the trustee in 1923. She never recovered it back; she never had any dominion or control over it from the date of its transfer on June 9, 1923. Manifestly, the principle upon which the Bullard case was decided has no application to this proceeding.

3. The final contention to be considered is whether the transfer was made in 1923 “in contemplation of” death. That depends upon whether contemplation of death was decedent’s controlling motive in making the transfer. See United States v. Wells, 283 U. S. 102.

We think that the evidence shows very clearly that contemplation of death was not a motive for the creation of the trust. All of the evidence goes to show that the real purposes for the creation of the trust were that “of conserving the property of the Donor” and of securing competent management of the estate, which would insure to the settlor an income for life and preserve the corpus for those entitled to her bounty after her death. At the date of the creation of the trust Mary W. Cushman was 68 years of age and in good health. She lived for a period of more than 12 years after the creation of the trust. There is nothing whatever in the evidence that shows that contemplation of death in any wise prompted the creation of the trust.

In Forrest Richardson et al., Executors, 27 B. T. A. 1070, the Board held that a transfer was not in contemplation of death where it was made for the purpose of protecting the transferor from the impor-tunities of an improvident son. Such clearly was one of the purposes which Mary W. Cushman had in the creation of the trust estate.

In Thomas C. Boswell et al., Executors, 37 B. T. A. 970, the decedent established an irrevocable trust four years before death, while she was in good health at the age of 63 years, without any anticipation of death, from any existing bodily infirmity. The trust reserved the income to the decedent for life and then over to her family. We held that the fact that the trust instrument provided for disposition of the property after death was itself “rather a result than a cause of the transfer.”

In Colorado National Bank v. Commissioner, 305 U. S. 23, the Supreme Court reversed a decision of the Circuit Court of Appeals for the Tenth Circuit, 95 Fed. (2d) 160, saying:

Tlie court’s opinion seems to rest upon an erroneous interpretation of tlie term “in contemplation of death.” The meaning of this was much discussed in ¡7nited States v. Wells, supra. We adhere to what was there said. The mere purpose to make provision for children after a donor’s death is not enough conclusively to establish that action to that end was “in contemplation of death.” Broadly speaking, thoughtful men habitually act with regard to ultimate death but something more than this is required in order to show that a conveyance comes within the ambit of the statute.
Here, the Board having before it all the circumstances, including the provisions of the will, concluded that they disclosed an effective motive not directly springing from apprehension of death. And as pointed out by the dissenting judge there was substantial basis for that view. * * *

Tlie respondent makes much of the fact that the trust instrument was drafted upon the plan of the decedent’s will which was executed in 1920. The argument is therefore made that the trust instrument was testamentary in character.

It is true that the making of a last will or testament contemporaneous with the execution of a trust deed may throw light upon what was the decedent’s intention in the creation of the trust estate. See Updike v. Commissioner (C.C.A., 8th Cir.), 88 Fed. (2d) 807. But that is only one factor among many to be taken into consideration in determining what was the predominant motive in making the transfer to the trust.

Here the decedent made her last will and testament in 1920. Had it not been for the fact that her estate from the time she acquired possession of it in 1921 or 1923 had dwindled alarmingly, it is possible or probable that the trust instrument would never have been executed. There is nothing in the facts in this case which tends to show that the execution of the trust instrument was testamentary in character. The transfer to the trust was not made in contemplation of death.

Decisions of no deficiency will be entered.


author: Van Fossan:

text:
    Elsie Van Vranken, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92788.
    Promulgated November 24, 1939.

      Lee McOanliss, Esq., for the petitioner.

      Alien T. Alcm, Esq., for the respondent.
   OPINION.

Van Fossan:

The question before the Board is whether the basis for determining gain or loss on sale of stocks which petitioner received by bequest of her father must be determined by their value at the time of his death or by their value at the time of distribution, after the death of her mother and the extinction of her life interest. Petitioner contends that until the death of her mother her interest was contingent and, hence, she did not acquire the property until that time. Respondent argues that petitioner had a vested interest in the property and acquired the stocks at the testator’s decease.

The basis of the property must be determined under the Revenue Act of 1934, since that was the act in effect at the time the sale was made. Elizabeth P. Patterson, 33 B. T. A. 57. The pertinent section of the 1934 Act provides:

SEO. 13 3. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
(a) Basis (Unadjusted) of Property. — The basis of property shall be the cost of such property; except that—
(5) Pkoperty transmitted at death. — If the property was acquired by bequest, devise, or inheritance, or by the decedent’s estate from the deeedent, the basis shall be the fair market value of such property at the time of such acquisition. * * *

This above provision is similar to section 202 (a) (3) of the Revenue Act of 1921 and section 204 (a) (5) of the Revenue Acts of 1924 and 1926.

The basis of the stocks sold by petitioner in 1935 must, therefore, be determined by their value at the time of acquisition. The rule has been established by cases construing section 202 (a) (3) of the Revenue Act of 1921 and section 204 (a) (5) of the Revenue Acts of 1924 and 1926, that, where a remainder interest vests upon death of a testator, the date of death is the date of acquisition by the remainderman. Brewster v. Gage, 280 U. S. 327; Warner v. Commissioner, 72 Fed. (2d) 225; certiorari denied, 293 U. S. 620; Roebling v. Commissioner, 78 Fed. (2d) 444; Pringle v. Commissioner, 64 Fed. (2d) 863; certiorari denied, 290 U. S. 656; Lome v. Corwin, 63 Fed. (2d) 767; certiorari denied, 290 U. S. 644; Harry C. Kayser, 27 B. T. A. 816.

The law of New York controls as to the question of whether the interest of petitioner was vested or contingent. Freuler v. Helvering, 291 U. S. 35; Blair v. Commissioner, 300 U. S. 5. See Erie Railroad Co. v. Tompkins, 304 U. S. 64.

The New York statutes define vested and contingent remainders:

A future estate is either vested or contingent. It is vested, when there is a person in being, who would have an immediate right to possession of the property, on the determination of all the intermediate or precedent estates. It is contingent while the person to whom or the event on which it is limited to take effect remains uncertain. (N. Y. Stat. ch. 50, Sec. 40, Book 49, McKinney’s Consolidated Laws, page 61.)

Under the statutes of New York, limitations of future or contingent interests in personal property are subject to the rules prescribed in respect to future estates in real property. N. Y. Stat., ch. 41, sec. 11; Book 40, McKinney’s Consolidated Laws, art. 2, sec. 11. Moreover, the decided cases in New York make no distinction between future interests in personal property and future interests in real property. In re Ryder, 89 N. Y. S. 460; Brooklyn Trust Co. v. Phillips, 134 App. Div. 697; affd., without opinion, 201 N. Y. 561; Vanderpoel v. Burke, 118 N. Y. S. 548.

The Court of Appeals of New York, in Moore v. Litell, 41 N. Y. 66, prescribed a test as to the vesting of remainders which has become a settled rule of construction in New York. The court stated:

If you can point to a man, woman or child, who, if the life estate should now cease, would eo instanti et ipso facto, have an immediate right to possession, then the remainder is vested.

See Harry C. Kayser, supra, and New York cases there cited.

If the above test be applied, we find that petitioner was an ascertained person in being at her father’s death and would have been entitled to an immediate right of possession if her mother, the owner of the immediately preceding estate, were to die at that instant. Under the New York law, petitioner’s interest was fixed at her father’s death. The fact that a vested interest is subject to be divested does not make the interest contingent. Warner v. Commissioner, supra.

The petitioner argues that the New York courts have construed petitioner’s interest to be contingent, citing various decisions, all clearly distinguishable on their facts. This contention is also based upon the fact that, in assessing a state transfer tax on the estate of petitioner’s father, the surrogate recognized the possibility that petitioner might not survive her mother. A minimum and a maximum transfer tax were assessed for the reason that the remainder might pass to further removed beneficiaries, upon which transfer a higher rate of tax would ensue. The surrogate did not decide that petitioner’s interest was contingent. As a matter of fact, the Surrogate’s Court, in its decree assessing and fixing the transfer tax, characterized petitioner’s interest as a “remainder * * * now vested * * * subject to be divested by her death before the death of the life tenant.” If authority were to be attributed to this order here, it would appear to be conclusive against petitioner’s contention. We do not rest our decision on such order, however, as the surrogate had not been called to rule on a contested will and did not purport so to do.

In accordance with the principles discussed above, we hold that petitioner’s interest was vested at her father’s death; that the stocks were then acquired; and that the basis for gain or loss on the stocks in question must be determined as of that date.

Decision will be entered wnder Rule 60.

       BASIS FOR DETERMINING GAIN OR LOSS.
      Sec. 202. (a) That the basis for ascertaining the gain derived or loss sustained from a sale or other disposition of property, real, personal, or mixed, acquired after February 28, 1913, shall be the cost of such property; except that—

      (3) In the case of such property, acquired by bequest, devise, or inheritance, the basis shall be the fair inarlcet price or value of such property at the time of such acquisition. The provisions of this paragraph shall apply to the acquisition of such property interests as are specified in subdivision (c) or (e) of section 402.

       BASIS FOR DETERMINING GAIN OR LOSS, DEPLETION, AND DEPRECIATION.
      Sec. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—

      (5) If the property was acquired by bequest, devise, or inheritance, the basis shall be the fair market value of such property at the time of such acquisition. The provisions of this paragraph shall apply to the acquisition of such properly interests as are specified in subdivision (c) or (e) of section 402 of the Revenue Act of 1921, or in subdivision (c) or (f) of section 302 of the Revenue Act of 1924, or in subdivision (c) or (f) of section 302 of this Act.


author: Steknhagen :

text:
    Walter H. Goodrich & Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93247.
    Promulgated November 24, 1939.

      Irving J. Angelí, O. P. Afor the petitioner.

      Gonway Kitchen, Esq., for the respondent.
   OPINIOST.

Steknhagen :

The Commissioner disallowed the deduction of $60,-000 claimed on petitioner’s 1934 return as a “reasonable addition to a reserve for bad debts” (Revenue Act of 1934, sec. 23 (k)). In its original petition the petitioner still claimed the deduction as a bad debt reserve. By an amended petition it changed the claimed deduction to that of $20,000 addition to bad debt reserve by reason of the worthlessness of the Oil Products debt, and $40,000 loss sustained in its investment in Oil Products shares.

1. The deduction of a reasonable addition to a reserve for bad debts is permitted by the statute only in the Commissioner’s discretion. Unless his refusal to permit such a deduction is capricious or arbitrary, or otherwise an abuse of discretion, the Board should be slow to override it. Certainly it may not merely substitute its judgment for that of the Commissioner as if the statute contained no such, condition and the Board were simply to decide de novo whether the claimed addition to the reserve were reasonable. C. P. Ford & Co., 28 B. T. A. 156. See Paul and Mertens, Law of Federal Income Taxation, vol. 3, § 28.95 et seq.

From the stipulation it appears that at the beginning of 1934 the petitioner’s reserve for bad debts was $86,749.91. To this it added in the taxable year $85,493.16 and the Commissioner in his discretion refused to allow $60,000, shown on the books as Oil Products stock $40,000 and Oil Products advances $20,000. The reason given to support the $20,000 deduction is that the debtor’s financial condition was known to be such that there was no reasonable probability of its being repaid and so much of the debt was in fact worthless. Even if this were so, it would not of itself prove that this amount would be a reasonable addition to the reserve, for perhaps the reserve so far set up and deducted on prior returns was ample to take care of it.

But it can not from the evidence be held that in fact this amount was in 1934 irrecoverable. The lender and the borrower were affiliated, the lender and its controlling shareholder owning all the shares of the borrower. The account was for the sale price of merchandise, and whether the debtor could pay depended somewhat on how much profit its affiliate would permit it to make. Its operating ratio was to some extent in the control of its affiliate. Its gross sales were large and had been steadily growing, and we see no reason for its creditor to abandon hope in 1934. Indeed the creditor continued to make advances during that year and the following year. The failure of negotiations for the sale of the business to the Cities Service Co. in 1934 indicates nothing significant, for no evidence shows whether the asking price was reasonable. The business was in fact sold in 1936 to the Gulf Oil Corporation for $100,000, with which Oil Products was to discharge obligations of $50,000. Furthermore, the books show that the total debt was reduced in 1936 and 1937 by $74,000, which was a large part of the debt as it stood at the beginning of 1934 and over half of the amount at the end of 1934.

Petitioner argues that its business judgment should not lightly be disregarded. It is, however, not controlling and must be supported by the evidence. In this case, the evidence falls short of showing that the Commissioner has arbitrarily or unreasonably refused to allow the addition of $60,000 or $20,000 to the bad debt reserve.

2. The claim of $40,000 as a deduction for loss is essentially a contention that the 400 shares became totally worthless in 1934. This, however, can not be found from the evidence. The book value of the assets was less than the book liabilities, but this alone does not definitively prove worthlessness of the corporation’s shares. Apparently there was still room for hope for a satisfactory business or a satisfactory sale of it. Money was still being advanced to it thereafter and gross sales were growing. The discouragement of the officers about business prospects may have been well founded, but that is less than proof that the shares were worthless. Obviously a drop in value of the shares in any one year may not be treated as the realization of a loss. While an investment in shares may be deducted as a loss even though they have not been sold or disposed of, such a loss must be supported by a clear demonstration of worthlessness. There must be something which serves as the “identifiable event” to establish the loss.

The Commissioner’s determination disallowing the deduction of $60,000 is sustained.

Decision will be entered under Rule 50.


author: Aknold :

text:
    Hughes Tool Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90002.
    Promulgated November 28, 1939.

      J. L. Lochett, Esq., for the petitioner.

      R. P. Eertzog, Esq., for the respondent.
   OPINION.

Aknold :

Petitioner contends that it is entitled to carry forward as a deduction from 1930 consolidated income the net loss of $728,-415.87 sustained by the Caddo Co., from January 1 to December 12, 1929, a period prior to affiliation, without adjustment for taxable income of $141,828.10 realized by the affiliated group from December 13 to December 31, 1929, for which period a consolidated return was filed. It further contends that the cost or aggregate basis of its Caddo stock was increased $2,579,881.94 by a contribution to capital of the Caddo Co. made under the following circumstances: Said amount was received by petitioner as part of a $3,000,000 dividend declared December 12, payable December 20, 1929, by the Hughes Tool Co. then a wholly owned subsidiary of petitioner, in the form of a claim of said Hughes Tool Co. against the Caddo Co., transfer of the claim to petitioner being reflected by entry on petitioner’s books December 31, 1929, and on the books of the Hughes Tool Co. January 2, 1930, which amount was charged by petitioner to “capital stock of subsidiaries”, and credited to the account of the Caddo Co. by entry on petitioner’s books on April 30, 1930, and forgiven, remitted, and canceled by resolution of petitioner’s board of directors on July 7, 1930.

Respondent contends that the cost or aggregate basis of the Caddo Co. stock is $5,000 and can not be increased by the remission or can-collation of the claim against the Caddo Co., as a contribution to capital stock of the Caddo Co.; that article 41 (e) of Begulations 75 limits the allowable deduction to the cost or aggregate basis of the Caddo stock in the hands of petitioner and, since the consolidated net income for that portion of 1929 covered by the consolidated return was in excess of $5,000, there is no statutory net loss carryover deductible from 1930 consolidated income. Petitioner assails Commissioner’s construction and the validity of the regulation and contends that the regulation exceeds the authority conferred on the Commissioner by section 141 (b) of the Revenue Act of 1928.

Section 117 (a) of the Revenue Act of 1928 defines net loss as the excess of the deductions allowed by this title over the gross income, with certain exceptions not here material.

Section 117 (b) provides that, if for any taxable year it appears upon the production of evidence satisfactory to the Commissioner that a taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year and, if such net loss is in excess of such net income, the excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year under regulations prescribed by the Commissioner.

Section 141 (a) of the same act gives affiliated corporations the privilege of making a consolidated return for the taxable year 1929 or any subsequent taxable year in lieu of separate returns. Such privilege is upon the condition that all corporations which have been members of the affiliated group at any time during the taxable year for which the return is made shall consent to all the regulations under subsection (b) prescribed prior to the making of such return, and the making of a consolidated return shall be considered as such consent. In the case of a corporation which is a member of the affiliated group for a fractional part of the year the consolidated return shall include the income of such corporation for such part of the year as it is a member of the affiliated group.

Section 141 (b) of the act empowers the Commissioner, with the approval of the Secretary, to prescribe such regulations as he may deem necessary in order that the tax liability of an affiliated group making a consolidated return and of each corporation in the group, both during and after the period of affiliation, may be determined, computed, assessed, collected, and adjusted in such manner as clearly to reflect the income and to prevent avoidance of tax liability.

Section 141 (c) provides that where a consolidated return is made the tax shall be determined, computed, assessed, collected, and adjusted in accordance with the regulations under subsection (b) prescribed prior to the date on which such return is made.

Pursuant to section 141 (b) the respondent, with the approval of the Secretary, promulgated article 41 (<?) of Regulations 75, which was in effect prior to the time the consolidated return covering the latter part of 1929 was filed. The regulation is as follows:

(c) Net Loss Sustained by Separate Corporation Prior to Consolidated, Return Period.
A net loss sustained by a corporation prior to tho date upon which its income is included in the consolidated return of an affiliated group (including any not loss sustained prior to the taxable year 1929) shall be allowed as a deduction in computing tho consolidated net income of such group in the same manner, to tho same extent,, and upon the same conditions as if the consolidated net income were the income of such corporation; but in no caso in which the affiliated status is created after January 1, 1929, will any such net loss bo allowed as a deduction in excess of the cost or the aggregate basis of the stock of such corporation owned by the members of the group.
(d) Taxable year.
Any period of less than 12 months for which either a separate return or a consolidated return is filed, under the provisions of article 33, shall be considered as a taxable year.

Under the authority of Commissioner v. General Machinery Corporation, 95 Fed. (2d) 759; Helvering v. Morgan’s, Inc., 293 U. S. 121; Palomas Land & Cattle Co. v. Commissioner, 91 Fed. (2d) 100; and Lefcourt Realty Corporation, 31 B. T. A. 978, that portion of the year for which a separate return is made and that portion of the year for which a consolidated return is made are to be considered as one taxable year, notwithstanding article 41 (d) of Regulations 75 to the contrary.

The authorities cited do not sustain petitioner’s contention that the entire net loss sustained by Caddo, Inc., for tho period in 1929 prior to affiliation should be carried over as a deduction from 1930 consolidated income unaffected by tire consolidated income realized during the affiliated period in 1929. Under section 117 (b) the net loss carry-over allowable as a deduction from consolidated income of the succeeding year is the net loss sustained for the taxable year, not for a portion of the taxable year.

Prior to the enactment of the Revenue Act of 3928 a consolidated group had no right to carry over a net loss sustained by one of the affiliates prior to tho affiliation as a deduction against income of an affiliated group. That was a privilege first granted by section 141 (a) and it was limited to corporations making consolidated returns for the taxable year 1929 and thereafter.

Petitioner and Caddo could have filed separate returns had they so desired. Petitioner, having elected to file a consolidated return for that portion of 3929 during affiliation and for 1930, consented to the regulations prescribed and was bound thereby. Ilfeld Co. v. Hernandez, 292 U. S. 62; Acorn Refining Co., 84 B. T. A. 506. By filing a consolidated return it consented that its income should be computed in the same manner, to the same extent, and upon the same conditions as if its income wore the income of the Caddo Co. As the two periods in 1929 constitrfie one taxable year and under the regulations the consolidated income is to be treated as the income of Caddo, it follows that Caddo’s loss of $728,415.87 sustained from January Í to December 12, 1929, should be reduced by $141,828.10, the amount of taxable income realized during the affiliated period of 1929, making the net loss carry-over to the subsequent year $586,-587.77. Cf. Northwest Bancorporation v. Commissioner, 93 Fed. (2d) 1011.

In Acorn Refining Co., supra, we held article 41 (c) of Begulations 75 a valid exercise of authority conferred upon the Commissioner by section 141 of the Bevenue Act of 1928. The particular question before the Board there was the validity of that portion of the regulation which limits the allowable deduction to the cost or aggregate basis of the stock of a subsidiary of the parent where affiliation was effected subsequent to January 1, 1929.

Petitioner says that, while the taxpayer there questioned the authority of the Commissioner to promulgate the regulation, it was not pointed out to the Board in what particular the Commissioner exceeded his author^/, and attempts to supply that omission. It is argued that as the limitation in the regulation is applicable only to groups affiliated after January 1, 1929, the regulation is discriminatory in that it does not apply to all corporations and Congress did not indicate an intention to impose a limitation on some and not on all. The purpose of the regulation in limiting the amount of the deduction to the cost or aggregate basis of the stock is to make it profitless to acquire stock or outstanding claims of a distressed, insolvent, or bankrupt corporation and gain the benefit of deductions in excess of what is paid. Woolford Realty Co. v. Rose, 286 U. S. 319; Acorn Refining Co., supra.

The incentive, or opportunity to escape tax liability through the acquisition of claims against impaired or bankrupt corporations did not exist where affiliation was effected prior to January 1, 1929, as no right existed prior thereto to carry forward net losses of an affiliate as a deduction from consolidated income in succeeding years. The regulation removes the incentive by limiting the amount of the deduction. It prevents the avoidance of tax liability, which Congress clearly intended when it empowered the Commissioner to prescribe regulations to that effect by section 141 (b). The courts and this Board have condemned attempts to escape tax liability under different circumstances, Belle G. Loewenberg, 39 B. T. A. 844, and cases there cited, and this regulation was specifically intended to prevent tax avoidance in effecting affiliations. We think the reasoning and conclusions of the Board in Acorn Refining Co., supra, are a sufficient answer to petitioner’s argument and need not here be restated.

We, therefore, hold that article 41 (c) of Regulations 75 is a valid exercise of authority conferred upon the Commissioner by section 141 of the Revenue Act of 1928.

Having concluded that the regulation is a valid exercise of authority by the Commissioner, under which whatever deduction petitioner is entitled to shall first be applied against the consolidated income realized in that portion of 1929 for which a consolidated return was filed, it becomes necessary to determine the cost or aggregate basis of petitioner’s stock in the Caddo Co. The affiliation of petitioner and the Caddo Co. was effected by the acquisition of all the capital stock of the Caddo Co., consisting of 100 shares. Fifty shares had no cost basis in petitioner’s hands, and 50 shares were acquired at a cost of $5,000.

Petitioner’s contention that its forgiveness, remission, and cancellation of its claim against the Caddo Co. resulted in an increase in the cost or aggregate basis of its Caddo Co. stock to the extent of the amount of the claim, $2,579,881.94, is without merit. The claim against the Caddo Co. was received as a dividend from its wholly owned subsidiary, the Hughes Tool Co. It does not appear that petitioner paid anything for it nor is there any evidence in the record that the claim had any value either at the time it was received or when it was canceled. It may have been worthless, as the Caddo Co. had net losses in 1929, prior and subsequent to affiliation, of $728,415.87 and $42,365.11, respectively, and a net loss in 1930, according to the deficiency notice, of $1,555,872.40. If the claim was worthless its forgiveness, remission, and cancellation would not in any manner be a contribution to capital nor would it increase the cost or aggregate basis of the Caddo Co. stock in petitioner’s hands. In the absence of proof of value of the claim so remitted and charged to capital of the Caddo Co., none can be assigned. Cf. Edward Mallinckrodt, Jr., et al., Trustees, 38 B. T. A. 960.

We, therefore, hold that the cost or aggregate basis of petitioner’s stock in the Caddo Co. is $5,000 and that amount is deductible from 1930 consolidated income.

Reviewed by the Board.

Decision will "be entered wnder Rule 50.


author: Hill:

text:
    Louise B. Jonas, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91010.
    Promulgated November 28, 1939.

      Ferdinand Tannenbaum., Esq., for the petitioner.

      Benjamin M. Brodsky, Esq., for the respondent.
   OPINION.

Hill:

The issue here is whether the income of the trusts for the taxable year is includable in petitioner’s income for tax purposes under section 166 or 167 of the Revenue Act of 1934, or upon the ground that petitioner retained such command and control of the trust properties that she did not divest herself of title and every interest therein in any permanent or definitive way. Section 166 relates exclusively to revocable trusts. The trusts here were not revocable; hence, section 166 docs not apply. Section 167 is in material part as follows:

SEO. 167. INCOME EOR BENEFIT OF GRANTOR.
(a) Where any part of the income of a trust—
(1) is. or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, he held or accumulated for future distribution to the grantor; or
(2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or
then such part of the income of the trust shall be included in computing the net income of the grantor.

For convenience of discussion we shall refer to the trust for the benefit of George E. Jonas, with the understanding that what we say relative thereto is applicable also to the trust for the benefit of James A. Jonas.

The trust instrument directed the trustees “to pay and apply the net interest and income thereof to the support and maintenance of George E. Jonas”, during the term of the trust. The trust instrument also directed that upon the termination of the trust “the principal of such trust fund and all interest and income thereof shall revert to and be paid to the party of the first part, or if she then be dead, the same shall belong to and be paid over * * * to the executors, administrators and personal representatives of the party of the first part.”

We think the correct construction of the trust instrument as indicated by the language set forth in the two quoted excerpts from such instrument is that the amount of the income of the trust which the trustee was authorized and directed to pay to the beneficiary was limited to the reasonable need of the beneficiary for support and maintenance and that if there was an excess of such income over such need it must be accumulated for distribution to the petitioner or her personal representatives upon the termination of the trust. In order to determine the amount to be distributed to the beneficiary for support and maintenance it was encumbent upon the trustee to determine as a fact the amount necessary to meet the reasonable need of the beneficiary for support and maintenance. The duty to determine such amount was mandatory. It was not a duty to be performed or not in the discretion of the trustee. Nor did the trustee have any discretion to determine that he would pay for maintenance and support an amount other than that found to be reasonably necessary, in fact, for such purpose. When the amount necessary to meet such need was so ascertained there was no discretion in the trustee to apply either a less or greater amount of the trust income to such purpose. If there should be an excess of the net income of the trust over the amount determined by the trustee to be necessary for the maintenance and support of the beneficiary, such excess was automatically accumulated under the terms of the trust. The trustee had no discretion relative to such accumulation. Under the terms of the trust the petitioner (grantor) had no control over the trust income or over its distribution or accumulation. During the taxable year all of the income of the trust was distributed to the beneficiary. Such distribution could have been made properly only upon the fact found by the trustee that the full amount of such income was reasonably necessary for the support and maintenance of the beneficiary. In fact, the respondent does not contend that the deficiency is justified on the ground that no part of the trust income was necessary for the support and maintenance of the beneficiary, or that a greater amount of such income than was necessary for such purpose was distributed to the beneficiary. There is no evidence in the record as to the amount necessary for such support and maintenance and the question is not raised or touched upon by either of the parties on brief. Since the point was not raised, we assume that the trustee acted within his mandatory power in making such distribution and that hence, in the taxable year, no part of trust income was, or in the discretion of any one might have been, held or accumulated for future distribution to petitioner or her personal representatives. Therefore, section 167 (a) (1), supra, has no application. There was no power or discretion in any one reserved or granted in the trust instrument to distribute any part of the trust income to petitioner prior to the termination of the trust and no distribution thereof was made to her in the taxable year. Hence, section 167 (a) (2), sufra, does not apply. Respondent’s main contention in support of the deficiency is that “petitioner retained such command over, and control of, the trust properties, that she did not divest herself of title in any permanent or definitive way, did not strip herself of every interest in the subject matter of the trust estates, and hence the income thereof is taxable to her.” To justify the deficiency on this ground it must appear that the income in question was in fact petitioner’s, or that under the facts here the statute specifically imposes upon petitioner a tax upon such income regardless of whether or not it was hers.

On this point respondent argues that the issue should be analyzed in the light of a broader and more fundamental concept of taxation, of which sections 166 and 167 are but a part. We do not understand that respondent contends that the income in question was that of petitioner. We think it was not and so hold. The respondent does contend that by reason of the reversionary provision of the trust and the shortness of its term petitioner did not relinquish control or command over the trust property in a permanent or definitive way and that therefore under the general concept of taxation the income in question is taxable to petitioner. In support of this contention respondent cites Burnet v. Wells, 289 U. S. 670; Du Pont v. Commissioner, 289 U. S. 685. In those cases the Supreme Court had for consideration the question of the constitutional validity of that part of section 219 (h) of the Revenue Acts of 1924 and 1928 which corresponds in substance to section 167 (a) (3) of the Revenue Act of 1934. The provision of the statute under consideration there provided in substance that income of a trust should be attributed to the creator of the trust for tax purposes in so far as it has been applied to the maintenance of insurance on his life. The Court sustained the validity of the statute and set forth in its opinions the reasons why the statute does not contravene the Fifth Amendment of the Constitution. The tax deficiency in each of those cases was determined pursuant to the specific provisions of the statute. The Supreme Court did not construe the statute. There was no occasion for such construction, as the language of the statute is plain and unambiguous. In the Wells case the Supreme Court said “the meaning of the statute is not doubtful, whatever may be said of its validity”, and again it said “the purpose of the law is disclosed by its legislative history, and indeed is clear upon the surface.” The trust involved in the Du Pont case was for a short term, with reversion of the principal of the trust to the creator. These features were not present in the trust involved in the Wells case. In the Du Pont case the Supreme Court said:

Here the grantor did not divest himself of title in any permanent or definitive way, did not strip himself of every interest in the subject matter of the trust estate. During the term of three years, the trust was to apply the income to the preservation of the policies, and while thus applying the income was to hold the principal intact for return to the grantor unless instructed to retain it longer. The situation in its legal effect would not be greatly different if the trust had been created for a month or from day to day. One who retains for himself so many of the attributes of ownership is not the victim of despotic power when for the purpose of taxation he is treated as owner altogether.

That language was used by the Court in discussing the legislative power of taxation. Congress, in the statute under consideration there, specifically provided that income of a trust devoted to the payment of insurance on the life of the creator should be taxed to him. The Court did not in either tire Wells case or Du Pont case expand the statute, by construction, beyond its literal meaning, but merely held it to lie valid as applied to the facts in those cases. The Supreme Court said that the Du Pont case was ruled by the Wells case, but indicated that the statute was valid on the facts of the Du Pont case even if it had been held invalid on the facts of the Wells case.

Bespondent also cites, as supporting the taxability to petitioner of the income in question, the cases of Clapp v. Reiner, 51 Fed. (2d) 224; Reinecke v. Smith, 289 U. S. 172; and Corliss v. Bowers, 281 U. S. 376. Each of those cases involves the constitutional validity of section 219 (g) of the Bevenue Act of 1924 (corresponding to section 166 of the Bevenue Act of 1934) under which a tax was imposed upon the grantor on the income of a revocable trust. In each of those cases the grantor, either alone or in conjunction with a trustee, had the power to revoke the trust and to revest the trust property in himself, and he had unfettered command over the trust property and the income thereof. On the basis of such facts the validity of the statute was upheld and applied according to its literal terms. Those cases are clearly not in point on the facts here and, hence, do not rule this proceeding.

In the instant proceeding we do not have the question of whether there is legislative power to attribute to the creator of a trust for tax purposes income of the trust, but merely the question of whether such legislative power has been exercised in the enactment of sections 166 and 167 (a) (1) and (2). Whether a tax may be imposed or has been imposed are entirely different propositions. Legislative power may bo broader than legislative acts, and, in determining the extent to which such power has been exercised, we look to the legislative act. A tax is specifically imposed or it is not imposed at all. A general plan of taxation or a general concept of tax is not determinative of whether a particular tax has in fact been imposed. For the latter we must look to the statute. The only statutory provisions which deal with the particular tax here under consideration are sections 1C6 and 167 (a) (1) and (2), supra. As hereinabove stated, it is our opinion that the provisions thereof do not apply to the facts in this proceeding.

In further reference to respondent’s argument that because of the short term of the trust with reversion of the trust property to petitioner she did not relinquish permanent and definitive control or command over the property and that therefore she is taxable on the income thereof, suffice it to say that neither sections 166 and 167 (a) (1) and (2), supra, nor any other statute, taxes the grantor on the income of a trust merely on such ground. In order to sustain such contention of respondent something must be read into the statutes that was not written therein by Congress and thus extend their provisions beyond the clear import of the language used. This we are not authorized to do. Gould v. Gould, 245 U. S. 151.

In Willcuts v. Douglas, 73 Fed. (2d) 130, the respondent sought to hold the creator of a trust with a reversionary interest in its corpus liable for tax upon its income. In its opinion the court said:

One contention of the Commissioner is that the entire income from this trust is taxable to the creator thereof because, under its terms, the trust estate is to revert to the creator after it has served the purpose of its creation and also the creator is entitled to the surplus annual income of the trust above the required payments to his wife. We do not see why either or both of these provisions should, of themselves, have such result; * * *
The bald fact that, after an irrevocable trust has served its purpose, the trust estate is to revert to the creator, does not, without more, make the income during the trust period that of the creator for tax or any purposes. The statute is aimed at taxation of income. It expressly recognizes trust estates as taxable entities and specifically points out the trustee or the beneficiary as the taxpayer for incomes from such estates. If the creator of the trust is beneficially entirely separated from that income under all allowable tax considerations, he is as though a total stranger thereto. The duration of the trust and the disposition of the corpus at the termination of the trust are, of themselves alone, usually quite immaterial. * * *

See also Phebe Warren McKean Downs, 36 B. T. A. 1129; Meredith Wood, 37 B. T. A. 1065.

In the instant proceeding petitioner retained no control over the trust property or the disposition of the income therefrom. Such property and its management and control and the disposition of the income therefrom were as effectively placed beyond her reach for the term of the trust as if she had absolutely alienated all her interest therein. During the taxable year she received no economic benefit therefrom, either presently or for future enjoyment. Accordingly, we hold that that part of the deficiency attributable to the inclusion of the income of the trusts in question in petitioner’s income for tax purposes is not sustained.

In harmony with his adjustment, which we here revise, the respondent allowed deductions for charitable contributions based upon the income as increased by him. In his amended answer respondent prays, in event we find in favor of petitioner on the income issue, that the deductions thus allowed on account of charitable gifts be correspondingly reduced to the amount allowed by law on petitioner’s true income. In view of our findings, the respondent’s prayer for reduction of this deduction is sustained.

Decision will be entered under Bule 50.


author: Leech:

text:
    Newport Industries, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92331.
    Promulgated November 28, 1939.

      Ellsworth G. AVoord, Esq., Floyd F. Toomey, Esq., and Alger B. Chapman, Esq., for the petitioner.

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

Leech:

Despondent proposed a deficiency of $51,049.23, plus interest as provided by law, as representing petitioner’s liability as transferee of the Newport Co. for unpaid taxes due from that company for the calendar year 1919.

Petitioner admits liability for any such tax deficiency of the Newport Co., but alleges none exists, since the tax liability of that company for the year 1919 was paid and satisfied prior to the mailing of the notice of deficiency in this proceeding.

The facts are found as stipulated.

The Newport Co., until its dissolution in 1931, was a Delaware corporation with its principal place of business at Carrollville, Wisconsin. On December 29, 1927, respondent determined a deficiency against that company for income taxes in the sum of $63,187.58 for the six-month period ended December 31,1919. On appeal from that deficiency to this Board, final judgment was entered November 30, 1936, for a deficiency of $60,000, and, on December 31, 1936, this deficiency, together with interest in the amount of $39,039.45, was assessed.

On October 24, 1928, the Newport Co. filed a claim for refund of $53,785.32, representing the total tax paid by it for itself and affiliated company for the year 1926, evidenced by a consolidated return filed for that year. On January 15, 1937, the Commissioner signed “Schedule of Overassessments No. 59410”, on which was listed an overassessment and overpayment of income taxes of the Newport Co. for 1926 in the amount of $53,785.32. This schedule was forwarded to the collector of internal revenue at Milwaukee, Wisconsin, with directions to credit this amount against any outstanding assessments against the Newport Co. On January 21, 1937, the collector credited this overassessment against the outstanding assessment of December 31,1936, made against the Newport Co. for $60,000 tax and $39,039.45 interest for the period June 30 to December 31, 1919. In compliance with instructions from the office of the Commissioner, the collector recomputed the interest after allowance of the credit of $53,785.32, and filed an office claim for abatement of $30,479, interest assessed, on account of interest allowable upon the determined overassessment of $53,785.32. This claim was allowed on schedule IT 60559, authorized and signed by the Commissioner on or about February 2, 1937, after which the balance of tax and interest then outstanding on the collector’s records against the Newport Co. for 1919 was the sum of $14,775.13.

On February 9, 1937, the petitioner, by its check, paid the sum of this outstanding balance, which payment was accepted by the collector and credited on its account witli the Newport Co. By letter dated February 10, 1937, the Commissioner mailed the original certificate of overassessment, No. 2071569, to the Newport Co. in care of petitioner.

The petitioner is a Delaware corporation, organized to take over the business of the Newport Co. By indenture of September 29, 1931, in exchange for all of petitioner’s capital stock, which was to be distributed to the stockholders of the Newport Co., petitioner acquired from the Newport Co. its entire property, business and assets, with the exception of certain cash and securities, certain of its records, and all claims against the United States for refund of income or profits taxes theretofore paid by it. On October 26, 1931, the Newport Co. was dissolved.

On September 29, 1937, more than seven months after the credit of the overassessment, determined for 1926, to the deficiency of $60,000 due for 1919 and the payment by this petitioner of the balance of the indebtedness then shown for the latter year, L. M. Simpson, head of Audit Division D of the Income Tax Unit, advised T. F. Langley, head of the Clearing Division of that unit, by memorandum, that, on reconsideration of the claim for refund filed by the Newport Co. for 1926, it appeared that the allowance of $53,785.32 was erroneous and request was made to reverse the credit. As a result, instructions were given the collector under which the record of credit of the overassessment, determined for 1926, against the deficiency of $60,000 determined for 1919, was reversed, and the interest credited on account of the overassessment was disallowed. The record after these changes showed a tax liability of the Newport Co. fon 1919 unsatisfied in the sum of $51,049.23. The records in the Commissioner’s office with respect to the account of this company were corrected to correspond with the adjustment thus made. It is the tax liability thus then outstanding on the records that is proposed for assessment against the petitioner here.

It is petitioner’s contention that the allowance of the claim for refund of taxes paid by the Newport Co. for 1926 by the issuance of a certificate of overassessment in the amount of the claim as made, the application of this allowance as a credit against the outstanding tax indebtedness of the Newport Co. for 1919, and the payment by petitioner of the balance of that indebtedness then remaining constitute a final and complete settlement of the tax liability for 1919, since the Commissioner approved the account as it was thus stated, adjusted, and satisfied.

Petitioner argues that because the credit of the determined over-assessment for 1926 taxes to the outstanding tax liability for 1919 was mandatory on the Commissioner, under section 284 (a) of the Revenue Act of 1926, that credit constitutes a refund or repayment of the taxes paid for 1926, and the application of the same in satisfaction of the outstanding liability for 1919. It is insisted that the situation is the same as if the refund had been made in cash, and that this payment and satisfaction are not disturbed and the expunged debt revived by the respondent’s determination that the medium used in making that payment was erroneously obtained. It is suggested that the possible recourse available to respondent is limited to an action to recover the credit thus mistakenly granted through a determination of a deficiency for 1926 or suit to recover the erroneous refund for that year.

We agree with petitioner. The rule appears clearly established that the crediting of an overpayment for one year against taxes then due for another period, constitutes payment of the latter taxes as effectively as if such payment had been made in cash. If it be determined later that the allowance of overpayment so credited was erroneous, the liability against which the credit was made and satisfied, remains satisfied. The only open question of tax liability pertains to the year with respect to which the erroneous allowance or overpayment was made. United States v. Swift & Co., 282 U. S. 468; United States v. Botany Worsted Mills, 98 Fed. (2d) 880; Western Wholesale Drug Co. v. United States, 47 Fed. (2d) 770.

Here, a claim by the Newport Co. for refund of 1926 taxes was allowed in full by the respondent when there was outstanding a tax liability of that company for 1919, finally determined under a decision of this Board. It thus became mandatory, under section 284 (a) of the Revenue Act of 1926, to credit the overpayment for 1926 against the deficiency determined for 1919. Such credit was duly made. Tins petitioner, the successor corporation of the Newport Co., was advised of that action and paid the remaining balance of the deficiency for 1919 in excess of the credit thus applied. We think that this action constituted a complete satisfaction of the tax liability of the Newport Co. for 1919 just as if such liability had been satisfied by payment in cash. United States v. Swift & Co., supra; United, States v. Botany Worsted Mills, supra; Western Wholesale Drug Co. v. United States, supra. Respondent’s later determination that the allowance of the claim for refund of 1926 taxes was error did not serve as a basis for a reversal of the credit in settlement of the 1919 tax and a reinstatement of the liability for that year. That later determination only based a right of respondent to proceed for recovery of this erroneous overpayment for 1926, made by his credit of the amount of that overpayment against the 1919 tax liability. Under the conditions here it appears that suit might lie in behalf of the United States for the recovery of moneys erroneously refunded, even though such refund had been made by credit against the tax liability for another year. Western Wholesale Drug Co. v. United States, supra.

We do not agree with respondent’s contention that, upon his determination that the allowance of the claim of overpayment for 1926 was erroneous, it lay within his power to correct this error by reversing the credit of the amount of this overpayment against the deficiency for 1919 and reinstating the assessment for that year. Respondent relies upon Daube v. United States, 289 U. S. 367, but that authority is not in point. There a claim for refund was allowed and a check was drawn in payment. However, before delivery of the check error was determined in the allowance and the check was canceled. In that case the Court held that the matter had not gone beyond the intradepartmental stage and that the error might therefore be corrected. Here, we think, the record establishes conclusively that the matter had gone far beyond the intradepartmental stage. The taxpayer had been notified of the allowance, credit of such allowance had been regularly made against the outstanding tax liability for 1919, the account reflecting its credit had been stated, and the remaining unsatisfied balance of the tax for 1919 shown on such statement had been paid in cash by this petitioner and credit duly made of that payment. In other words, everything had' been done both on the part of the respondent and the taxpayer to finally complete, satisfy, and close the tax liability for 1919.

Nor do we agree with respondent that his allowance of the claim can not be considered complete since the Newport Co. had been dissolved, was no longer in existence, and, consequently, could not effect a final settlement of this claim. Respondent thus insists that agreement of the taxpayer to the allowance is essential and that the taxpayer in whose favor this allowance was- made no longer existed. In this connection it need only be pointed out that the allowance of overpayment for 1926 was of the entire tax paid. The matter did not entail any compromise. Furthermore, the payment of the amount thus allowed by its credit against the outstanding tax liability for 1919 was mandatory under section 284 (a) of the Eevenue Act of 1926, supra. The liability against which it was thus credited was not subject to contest but was a determination of deficiency by decision of this Board which had become final. It is true that the tax liabilities for 1919 and 1926 were both those of the Newport Co., the predecessor of this petitioner, and that, in the transfer of the assets of that company to petitioner, title was specifically reserved in the Newport Co. to claims against the Government for overpaid taxes. It may well be, therefore, as respondent insists, that the claim for refund of 1926 taxes was a claim belonging to the liquidators of the Newport Co. and that they were entitled to any amount which might be refunded thereunder. But this does not change the fact that the liability for 1919 taxes was primarily that of the Newport Co. and any allowance on the claim for overpayment of 1926 taxes was required, by section 284 (a), supra, to be credited against that liability. We are concerned here solely with the question as to whether it was so credited, and, if so, whether the liability for that year was finally extinguished by the credit. What the effect of this might be as between the petitioner and the liquidators of the Newport Co. is beside that point. If this petitioner, through its assumption of the liabilities of the Newport Co., is, as between it and that company, liable for the payment of the 1919 deficiency and not entitled as between them to take credit for any allowance made upon the claim for refund of taxes for 1926, that question is one wholly between these two companies. It may be that this petitioner is indebted to the liquidators of the Newport Co. in the amount credited against the tax liability for 1919, but our question does not go beyond the fact of the actual credit and whether it constituted payment of the tax.

In our opinion, the credit of the amount of the allowance on the claim for refund of 1926 taxes to the outstanding deficiency of $60,000 for 1919, the adjustment of interest upon the deficiency and overpayment, and the payment in cash, by petitioner, of the balance of the remaining liability for 1919 taxes, constitute a complete payment and satisfaction of the 1919 taxes. Consequently, there is no deficiency and therefore no liability on the part of this petitioner as transferee for taxes of the Newport Co. for that year.

Decision will be entered for the petitioner.

       Sec. 284. (a) Where there has been an overpayment of any income, war-profits, or excess-profits tax imposed by this Act, the Act entitled “An Act to provide revenue, equalize duties, and encourage the industries of the United States, and for other purposes,” approved August tf, 1909, the Act entitled “An Act to reduce tariff duties and to provide revenue for the Government, and for other purposes,” approved October 3, 1913, the Revenue Act of 1910, the Revenue Act of 1917, the Revenue Act of 1918, the Revenue Act of 1921, or the Revenue Act of 1924, or any such Act as amended, the amount of such overpayment shall, except as provided in subdivision (d), be credited against any income, war-profits, or excess-profits tax or installment thereof then due from the taxpayer, and any balance of such excess shall be refunded immedialely 1o the taxpayer. fNote: Subdivision (d) not material here.l


text:
    Frank C. Deering, Petitioner, v. Commissioner of Internal Revenue, Respondent.

    Docket No. 95996.
    Promulgated November 29, 1939.

      Percy W. Phillips, Esq., for the petitioner.

      Charles P. Reilly, Esq., and James T. Haslam, Esq., for the respondent.

       By order dated November 29, 1939, this caption has been changed to read: “Estate op Frank C. Deering, Deceased, Joseph Godfrey Deering and York National Bank, Executors, Petitioners, v. Cojimissioner op Internal Revenue, Respondent."

   OPINION.

Smith :

This proceeding is for the redetermination of a deficiency of $4,462.66 in petitioner’s income tax for 1935. The deficiency, in so far as it is contested, results from the respondent’s determination that the petitioner realized a taxable net capital gain of $12,681.03, instead of a deductible net capital loss of $2,430.27 which the petitioner reported in his return, on the transfer of securities and a small amount of cash to his wife and son and daughter in consideration of the promise of each to pay him $8,333.33 annually for life.

The facts are stipulated.

On December 30, 1935, the petitioner, under three separate agreements of substantially similar form, transferred to his wife, his son, and his daughter certain stocks and bonds of a fair market value at the date of the transfer of $235,203.08, which had cost him $245,-334.64, together with $296.92 cash. The fair market value of the stocks and bonds together with the cash given to each was $78,500. Each agreement provided as follows:

This contract is based upon the principal of annuity contracts as issued by the standard insurance companies and use has been made of the approximate figures of such companies pertaining to age of annuitant and prevailing rates for the year 1936, but the contract is accepted as binding in the amount stated even though the rates and payments may vary from the results obtainable from an exact application of the practice and rules of said companies.

In his income tax return for 1935 the petitioner claimed a deduction of $2,430.27 which he computed as follows:

He compared the value, at the time of the transfer, of each of the securities transferred to members of bis family under the agreements referred to above with their cost to him and on the basis of that comparison, and the use of the various percentages applicable to the periods for which the securities had been held, computed aggregate gains of $12,681.03 and aggregate losses of $15,111.30, or a net loss of $2,430.27.

In his determination of the deficiency herein the respondent disallowed the deduction of the $15,111.30 under the provisions of section 24 (a) (6) of the Revenue Act of 1934, but determined that the amount of $12,681.03 was taxable gain to the petitioner.

The parties have stipulated that if the Board should find that the actions of the Commissioner as set forth above are in accordance with the provisions of the applicable revenue act it may enter its order of a deficiency for the year 1935 in the amount of $4,462.66; that if the Board should find that the petitioner sustained neither a taxable gain nor a deductible loss on the transactions it may enter its order under Rule 50 in accordance with such finding; and that if the Board should find that the petitioner sustained a deductible net loss of $2,430.27 on the transactions it may enter its order of no deficiency for the year 1935.

The petitioner now concedes that the loss deduction of $2,430.27 which he claimed in his return for 1935 is not allowable, but he contends that the transfers in question did not result in either a deductible loss or a taxable gain. His contentions are, first, that the exchange of the securities for an annuity contract was not a closed transaction giving rise to either a gain or loss and, second, that if it was, the transaction as a whole did not result in any taxable gain.

The respondent contends, on the other hand, that the transactions resulted in gains on some of the securities and losses on others, which, he submits, were correctly computed by the petitioner in his income tax return, but that the losses are nondeductible under the provisions of section 24 (a) (6) of the Revenue Act of 1934, which prohibits loss deductions on certain transactions between members of a family, and that the gains are taxable under the general provisions of section 22.

We are of the opinion that petitioner’s first contention is sound and that no gain or loss resulted from the transactions in question.

Petitioner received nothing in exchange for the securities and cash but the unsecured promises of his -wife, son, and daughter to pay him certain amounts annually for life. There was no assurance that he would ever get back the full value or cost of the securities, even should he exceed his life expectancy, since the payments were dependent upon the ability of the contracting parties to meet their obligations under the agreements as they became due.

The instant case is hardly distinguishable from J. Darsie Lloyd, 33 B. T. A. 903. There the taxpayer in 1930 transferred to his son, Harold C. Lloyd, 2,499 shares of Harold Lloyd Corporation stock having a cost basis of $122,567.68, in consideration for the promise of the son to pay him $100,000 annually so long as both parties should live, and, should the son predecease the father, $50,000 annually for the balance of his, the father’s life. We held that since the payments received by the father in 1980, amounting to $75,000, were not in excess of the cost to him of the securities transferred in exchange for the annuity contract and since the annuity contract itself, that is, the promise of the son to make the annual payments, had no fair market value at the date of the transfer, the taxpayer received no taxable gain in 1980. We said in our opinion that:

* * * Where marketable exchangeable promises to pay are accepted as a part of a purchase price, their fair market value is included in the “amount realized” and a taxable gain is realized immediately. Cf. Ruth Iron Co., 4 B. T. A. 1151; affd., 26 Fed. (2d) 30; and Kosmerl v. Commissioner, 25 Fed. (2d) 87. But promises to make future payments do not always have an exchangeable value (Eisner v. Macomber, 252 U. S. 189) and are not always income when received. Bedell v. Commissioner, 30 Fed. (2d) 622; Dudley T. Humphrey, 32 B. T. A. 280. In such eases the actual payments as made are taxed as income when received in excess of the basis. * * *

In finding that the annuity contract involved in that case had no fair market value, we pointed out that the obligor was not “a sound insurance company” but was an individual who was not engaged in granting annuities and whose ability to meet his future obligations under the contract was not in any way assured.

Although the facts stipulated in this case do not show the financial responsibility of the wife, the son, and the daughter to pay the annuities contracted to be paid, and although there is no evidence that the contracts did not have a fair market value, we think that the evidence warrants the conclusion that they did not have. As in the Lloyd case, the obligors were not “a sound insurance company.” In the determination of the deficiency the respondent assumed that the contracts had a total fair market value of $285,500. There is no evidence to support such valuation and it is inconceivable that they had anything like that valuation.

In Burnet v. Logan, 283 U. S. 404, the Supreme Court held that, where a woman transferred property in consideration of an agreement for the payment to her of cash and royalties over a period of years, based upon the number of tons of ore mined each year, she was not liable to income tax upon moneys received by her until she had recovered her cost basis. The Court observed:

* * * The promise was in no proper sense equivalent to cask. It bad no ascertainable fair market value. The transaction was not a closed one. Respondent [taxpayer] might never recoup her capital investment from payments only conditionally promised. * * *

In Evans v. Rothensies (U. S. Dist. Ct., E. Dist. Pa.), — Fed. Supp. -, decided July 25, 1939, the court held that no deductible loss resulted from the transfer of securities, which had a cost basis considerably in excess of their fair market value at the time of the transfer, in exchange for an annuity contract. The court observed that “the converse of the present case was presented to the Board of Tax Appeals in Lloyd, v. Commissioner, 33 B. T. A. 903.” See also F. A. Gillespie, 38 B. T. A. 673.

In his determination of a capital gain in this case the respondent would treat the transactions by which the petitioner acquired the annuities in exchange for property as being a separate sale at the stipulated fair market value of the securities on December 30, 1935, of each lot of stock or bonds transferred to the wife, son, and daughter. It is only in this manner that a capital gain can be found to have resulted. We do not think that this premise is warranted. The petitioner transferred for the annuity in each case securities which cost him more than their fair market value on the date of the transfer and we do not think that the transactions may be resolved into their component parts, as has been done by the respondent in this case. In First National Bank et al., Executors, 34 B. T. A. 631, this Board said:

In First Seattle Dexter Horton National Bank v. Commissioner, 77 Fed. (2d) 45, the general rule was stated from 13 C. J. 561, § 525, to the effect that “a contract is entire when by its terms, nature and purpose it contemplates and intends that each and all of its parts and the consideration shall be common to the other and interdependent.” * * *

We think that this rule of law is applicable to the proceeding at bar.

It should be noted that all of the transactions which the respondent claims gave rise to taxable income in 1935 happened on December 30, 1935. During 1935 the petitioner received no money under the annuity contracts. He merely purchased annuity contracts in 1935 and those annuity contracts, as we have found above, had no determinable fair market value in that year. It is rare, indeed, that a taxpayer derives taxable income from the purchase of an annuity. We hold that the petitioner has no tax liability for 1935 under section 22 (b) (2) of the Revenue Act of 1934.

Decision will be entered under Bule 50,