author: Black:

text:
    Mrs. Georgie W. Rathborne, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83106.
    Promulgated May 31, 1938.

      Louis C. Guidry, Esq., for the petitioner.

      Allen T. Akin, Esq., for the respondent.
   OPINION.

Black:

This proceeding involves a deficiency in income tax for the calendar year 1932 in the amount of $1,489.94. Petitioner contends there is no deficiency and that she has overpaid her tax in the amount of $3,796.12.

The petition, as originally filed, assigned as the only error the failure of the respondent to allow as a deduction from gross income in 1932 alleged worthless bonds of the Estate Securities Corporation in the amount of $6,168. In a signed stipulation the parties have agreed that- these securities “became worthless prior to the taxable year 1932 and that therefore petitioner is not entitled to deduct the said loss for the said taxable year 1932.” The respondent’s determination as to this issue, is, therefore, sustained.

The petition, as duly amended, assigned two additional errors, as follows:

(a) The Commissioner erred in including in petitioner’s gross income for the said year 1932 the sum of $30,090 received by petitioner from the trust estate created by the last will and testament of the late Joseph Rathborne.
(b) The Commissioner erred in not finding as a fact that all of the said sum of $30,000 received by petitioner from said trust estate created by the late Joseph Rathborne was paid to petitioner by the Trustee out of tax exempt income.

The facts are set forth in a stipulation of the parties, which we adopt as our findings of fact. Only such of the facts as seem necessary to a discussion of the issues are stated herein.

Petitioner is an individual residing at Westbury, Long Island, New York, having formerly been a resident of Harvey, Jefferson Parish, Louisiana.

Joseph Rathborne, a resident of the State of Louisiana, died testate in August 1923. His last will and testament, dated June 14, 1921, was probated, proved, registered, and ordered executed on August 24, 1923, before the 28th Judicial District Court for the Parish of Jefferson, State of Louisiana. The first article of the will gave directions for the burial of the testator; the second provided for certain specific legacies of money and items of personal property, including a specific legacy to petitioner of $100,000; the third provided bequests to persons who were in the employ of the deceased; the fourth directed the payment of debts and charges and the estate and legacy taxes out of funds on hand and securities held by the deceased at his death before touching or disposing of certain timber holdings. The fifth article reads in part as follows:

Fifth: I give and bequeath the rest and remainder of my estate, wheresoever situated, to my two grand-children, Joseph Cornelius Rathborne and Kathlyn George Rathborne, share and share alike, including herein their legitime, the whole in trust however, as hereinafter set out.
I hereby create a trust for the said rest and remainder of my estate and for the universal legacy aforesaid and I give and bequeath the said residue of my estate wherever situated to Canal-Commercial Trust & Savings Bank and to any Trust Bank succeeding to the same, in trust however, for the use and benefit of the said universal legatees, my said • grand-children, Joseph Cornelius and Kathlyn George Rathborne, and within the limitations and under the conditions and restrictions hereinafter imposed to-wit:

The language immediately following that just quoted gave directions to the trustee regarding the sale of the shares of stock owned by the testator and the preservation of the investment made in certain timber holdings. The sixth article left certain general instructions with the trustee in regard to securities left at death, and in the last sentence it provided as follows:

The Trustee may from time to time and as required take from and pay out of the capital of the estate any sums of money needed for any of the purposes contemplated by thif will or to make up deficiencies in revenues and needed for the payment to beneficiaries as hereinafter set out.

The seventh article made provision for the payment to petitioner of $30,000 per annum in language as follows:

Seventh: Trustee shall pay out (of) the revenues of the trust estate and out of the principal, should it be necessary to trench upon the latter as authorized in article 6th hereof.
1st. To my brother, W. W. Rathborne, of Chicago, Five Thousand Dollars per annum in quarterly installments during the period of this trust.
2nd. To my daughter-in-law, Georgie W. Rathborne, the widow of my dear son, Joseph Cornelius Rathborne, Thirty Thousand Dollars per annum, payable in monthly or quarterly installments so long as she lives and until the expiration of the trust herein created, that is to say until ten years after the majorities respectively of her two children. But should she remarry, then the said allowance shall be reduced to Twenty Thousand Dollars per annum, payable in the manner above set forth.

The third, fourth, and fifth paragraphs of article seventh dealt with payments to be made to the testator’s two grandchildren. The sixth paragraph of article seventh provided:

6th. In case the revenues of my trust estate should not be sufficient at any time to meet the charges imposed thereon in this paragraph the several beneficiaries shall suffer a diminution and loss of their several allowances, allowances [sic] in proportion to the deficiency and in case the revenue shall thereafter increase the allowances shall be resumed as provided herein.

As provided in the eighth article, the trust estate as to each grandchild was to subsist for ten years after each grandchild reached the age of twenty-one years.

The Canal-Commercial Trust & Savings Bank was named as one of three executors and also as sole trustee.

The executors have not been discharged, except that the Canal-Commercial Trust & Savings Bank, whose name was changed to Canal Bank & Trust Co., was placed in judicial liquidation on May 30, 1933, and thereupon ceased to act as executor.

The National Bank of Commerce in New Orleans was in due course appointed in the place and stead of the Canal Bank & Trust Co.

During the calendar year 1932 the trust had a total income of $181,923.33, consisting of $71,503.11 of taxable income and $110,420.22 of tax-exempt income. During that year the trustee expended from the fund of the trust estate $92,981.59 representing a deficiency in the Federal estate tax of the estate of Joseph Bathborne, $2,466.29 in taxes, $1,615.86 for brokerage and commissions, and $2,495 for salaries of the advisory committee and caretakers. It also paid to petitioner $30,000, and to W. W. Kathborne $5,000. In the sale of securities of the trust estate a loss of $103,699.72 was incurred.

In filing her income tax return for the calendar year 1932, petitioner reported as income from fiduciaries, item 6 of her return, “Estate of Joseph Rathborne, New Orleans, La. $30,000.00.”

The petition in the instant proceeding was filed on March 2, 1936.

Petitioner contends (1) that the amount of $30,000 should be excluded from gross income under section 22 (b) (3) of the Revenue Act of 1932; (2) that if it be held that this amount should not be excluded, then, nevertheless, the $30,000 was not taxable to petitioner for the reason that after paying operating charges and the Federal estate tax deficiency the trust had no taxable income to distribute, and that, therefore, the entire $30,000 was paid out of tax-exempt income of the trust; (3) and that if the two preceding contentions be denied, then, as a further alternative, petitioner should have apportioned to her a part of the tax-exempt income of the trust. The respondent contends that his determination should be approved in all respects. We shall consider petitioner’s contentions in their order.

Regarding petitioner’s first contention, both parties are in agreement that, in view of Burnet v. Whitehouse, 283 U. S. 148, and Helvering v. Pardee, 290 U. S. 365, if the amount of $30,000 was payable to petitioner at all events, it should be excluded from petitioner’s gross income under section 22 (b) (3) of the Revenue Act of 1932. On the other hand, if the amount of $30,000 was to be paid to petitioner currently from income only, then, under section 162 (b) of the Revenue Act of 1932, Irwin v. Gavit, 268 U. S. 161, and Helvering v. Butterworth, 290 U. S. 365, the amount of $30,000 would be deductible by the trustee and included in computing the net income of petitioner as a beneficiary of the trust estate. Our problem then is to determine whether the amount of $30,000 was payable at all events, as petitioner contends, or was payable only out of income as respondent contends.

It is fundamental that our answer must be found in the will of Joseph Eathborne, the testator creating the trust. Bridgeport-City Trust Co., Trustee, 32 B. T. A. 1181, 1185; Arthur U. Crosby et al., Executors, 34 B. T. A. 433, 437; Bishop Trust Co., Ltd., et al., Trustees v. Commissioner, 92 Fed. (2d) 877, and that the construction of this will is controlled by the law of Louisiana, De Vaughn v. Hutchinson, 165 U. S. 566. Speaking on the interpretation of wills, the Supreme Court of Louisiana in Succession of La Barre, 179 La. 45; 153 So. 15 (quoted by both parties in their briefs), said:

The testator’s intention is his will. This is the primary rule of interpretation to which all others are subordinate. Succession of Blakemore, 43 La. Ann. 845, 9 So. 496. This intention must be ascertained from the whole will, and effect must be given to every part of the will as far as the law will permit. No part of a will should be rejected, except what the law makes it necessary to reject. Where it is a question of the choice between two interpretations, one of which will effectuate, and the other will defeat, a testator’s intention, the court should select that interpretation which will carry out the intention of the testator.

What was the testator’s intention in the instant proceeding? For convenience we repeat tbe salient provisions of Ms will bearing upon tlie point we have here to consider, as follows:

Siwth: * * * The Trustee may from time to time and as required take from and pay out of the capital of the estate any sums of money needed for any of the purposes contemplated by this will or to make up deficiencies in revenue and needed for the payment to beneficiaries as hereinafter set out.
Seventh: Trustee shall pay out (of) the revenues of the trust estate and out of the principal, should it be necessary to trench upon the latter as authorized in Article 6th hereof.
* * * * * * *
2nd. To my daughter-in-law, George W. Kathborne, * * * Thirty Thousand Dollars per annum * * *.
*******
6th. In case the revenues of my trust estate should not be sufficient at any time to meet the charges imposed thereon in this paragraph the several beneficiaries shall suffer a diminution and loss of their several allowances, allowances [sic] in proportion to the deficiency and in case the revenue shall thereafter increase the allowances shall be resumed as provided herein.

From reading the foregoing provisions just quoted, it would seem plain that article sixth, standing alone, placed it witMn the sole discretion of the trustee as to whether it should invade the principal of the estate in order to make up deficiencies in revenues necessary for the payment of annual allowances provided in the will for the beneficiaries of the estate. There was in this article no mandatory requirement that the trustee should invade the principal when there was a deficiency in income, but such was left to its sole discretion.

The first subparagraph of article seventh, standing alone, would seem to make it mandatory upon the trustee to invade the principal to pay the allowances provided for the beneficiaries in the event the revenues of the estate are not sufficient to pay them. But subpara-graph six of the same article seventh would seem to make it mandatory to the trustee to cut down the allowances if the revenues of the trust estate should prove insufficient to pay them. What is the proper construction to be given to these apparently contradictory provisions ?

Petitioner in support of her first contention argues that under the above provisions of the will the amount of $30,000 is payable at all events; that under the Louisiana law the annuity is a “particular” legacy and, as such, is a charge on the whole estate; and that the sixth paragraph of article seventh, when properly interpreted, is in harmony with the two foregoing propositions.

The respondent answers petitioner’s arguments with a proposition which, if correct, would end this part of the controversy. He contends that the sixth paragraph of article seventh is in direct conflict with the last sentence of article sixth and the first sentence of article seventh, and that under article 1723, Merrick’s Revised Civil Code of Louisiana, 3d ed., the sixth paragraph of article seventh, being the last salient provision written, “must prevail as being the last expression of the testator’s intention.” Ball v. Ball, 40 La. Ann. 284; 3 So. 644. Of course, if this were true, the amount of $30,000 would clearly be payable only out of income, and under section 162 (b), footnote 2, supra, would be “included” in computing petitioner’s net income.

Although, as will appear later in this opinion, we think the amount of $30,000 should be included in computing petitioner’s net income, we do not agree with the respondent that the sixth paragraph of article seventh is in conflict with any of the preceding provisions. We think this can be harmonized with the last sentence of article sixth and the first sentence of article seventh, and, if this be possible, we must so construe the will. Succession of La Barre, supra. We think the testator’s intention, as expressed in his will, was that the trustee should satisfy the amount of $30,000 only out of income of the trust estate to the extent that the revenues therefrom were sufficient to meet all the charges imposed by article seventh, and that, in case the revenues for any year proved insufficient for that purpose, then it should be entirely discretionary with the trustee whether or not it would trench upon the principal. If the trustee decided not to trench upon the principal, then the allowances would be reduced by virtue of the sixth paragraph of article seventh.

We, therefore, have a factual situation where the payment to petitioner does not specifically fall within either one of the two classifications hereinbefore mentioned. It was not a fixed annuity in that the testator did not specifically direct that it be payable col all events; neither did he specifically direct that it be payable only out of income. During the taxable year before us the income was sufficient to meet all the charges imposed by article seventh, and the amount of $30,000 was actually paid to petitioner only out of income. Under such circumstances we think the instant proceeding is controlled by our decision in John K. Howard et al., Trustees, 34 B. T. A. 57. In that case a decedent by his will created a trust and directed the trustees to pay all the income therefrom to his surviving widow during her life, and also provided that:

* * * The trustees may also, in case in their discretion they deem it proper and advisable to pay to my wife from time to time any portions of the principal of the trust property in case they believe her income to be insufficient for her own reasonable individual personal needs.

During the taxable years there involved the trustees distributed the entire income of the trust to the decedent’s widow, but did not trench upon any of the principal. We held that for the taxable years there before us the case was controlled by Irwin v. Gavit, supra, rather than by Burnet v. Whitehouse, supra, because there was no annuity payable to the widow in all events.

The only difference between the instant proceeding and the Howard case, as we see it, is that here the will provides for an annual payment of $30,000 out of income to petitioner, with authority to the trustee within its discretion to trench upon the principal of the trust estate, if there is a deficiency in income, whereas in the Howard case no fixed amounts were mentioned. But the so-called annuity here was not in any sense a fixed annuity. It was not payable at all events. Petitioner had no definite assurance that she would receive the full amount. She could not require the trustee to pay her the full amount. There is no real difference in principle we think between the present situation and that involved in the Howard case. All that we said in that case applies here with equal force.

We are not unmindful of such cases as Arthur U. Crosby et al., Executors, supra, and Bishop Trust Co., Ltd., et al., Trustees v. Commissioner, supra. Those cases involved fixed annuities and were not in any way restricted to the payment out of income alone. The decedents there had not directed how the fixed annuities were to be paid, and, in the absence of such express directions, the general rule that annuities may be paid from principal where the income is insufficient was applicable. It was, therefore, held that such fixed annuities were payable at all events and were controlled by the Whitehouse and Pardee decisions. That is not the situation here.

Petitioner, in support of her argument that under the Louisiana law the annuity is a “particular” legacy, and as such, is a charge on the whole estate, cites articles 1493, 1606, 1612, 1625, 1668, and 1671 of Merrick’s Revised Civil Code of Louisiana, 3d ed., and the cases of Duke of Richmond v. Milne's Executors, 17 La. 312; 36 Am. Dec. 613, and Succession of Chedome, 34 La. Ann. 1239. In the Duke of Richmond case a resident of Louisiana in his will bequeathed $100,000 to his home town in Scotland. The main point in the case was whether a bequest of this kind, being made to an alien, was valid. The court held that it was. The case did not involve annuities or any question of Federal taxation. A comparable situation to that case and the instant case would be the $100,000 which was bequeathed to the petitioner in the instant case by article second of decedent’s will. That $100,000 was undoubtedly a particular legacy which was a charge upon the whole estate. That $100,000 is not involved in the instant case. But the $30,000 annual payment to petitioner which we are now considering is a situation entirely different from the $100,000 specific legacy bequeathed to her, and the Duke of Richmond case has no application. In Succession of Chedome, Marie Chedome, wife of Jacques Cornu, in her will bequeathed, first, one-fourth of her succession to the five children of her sister; secondly, four particular legacies; and, lastly, the remainder after satisfaction of the foregoing legacies, to her husband. The main question was how the one-fourth was to be computed. The court held that the legatees of the fourth were entitled to one-fourth of the whole assets after payment of the debts, rather than one-fourth of what remained after the payment of the debts and the four particular legacies. We do not think this case is of any special importance in deciding the question involved in the instant proceeding.

Assuming that under article 1625, footnote 4, supra, petitioner was a particular legatee, it does not necessarily follow that what she l’eceived during the taxable year before us constituted her legacy. The so-called annuity of $30,000 mentioned in the testator’s will was not, in our opinion, payable to her at all events, and was not, therefore, a charge on the whole estate. The testator made petitioner a beneficiary of the trust. Shq was to receive income from the trust to the extent of $30,000 a year, providing the trust earned sufficient income to meet this and the other charges provided for in article seventh of the will. If the income was insufficient to meet all the charges, the testator provided that “the several beneficiaries shall suffer a diminution and loss of their several allowances” unless the trustee should exercise the discretion given it by the last sentence of article sixth to make up the deficiencies in revenue out of the capital of the trust estate. During the taxable year before us the income was sufficient to meet all the charges, and petitioner therefore received income from the trust to the extent of $30,000. Under such circumstances we think petitioner’s legacy was her right to occupy the position of a beneficiary of a trust estate, and that the amounts received by her during the taxable year should, under section 162 (b), footnote 2, supra, be included in computing her net income. Irwin v. Gavit, supra; Helvering v. Butterworth, supra; and John E. Howard et al., Trustees, supra.

As a first alternative, petitioner contends that the $30,000 received by her during the taxable year was, nevertheless, not taxable to her for the reason that, after paying operating charges and the Federal estate tax deficiency of $82,981.59, the trust had no taxable income to distribute, and, that, therefore, the entire $30,000 was paid to petitioner out of tax-exempt income. We deny this contention for the reason that it is the same contention that was made by another beneficiary of the same trust and denied by us in the case of J. Cornelius Rathborne, 31 B. T. A. 607.

As a second alternative, petitioner contends that if she be held to be a beneficiary of the trust estate, then the amount of $30,000 received by her should be allocated between taxable and tax-exempt income on the same basis as was done in the case of J. Cornelius Rathborne, supra, with respect to the amount of $21,905.20 paid to that petitioner, a beneficiary of the same trust, during the year 1932. In that case we held that the amount of taxable income to be allocated to petitioner J. C. liathborne was 37.027 percent of $21,905.20, or $8,110.84. In. the instant proceeding we likewise hold that the amount of taxable income to be allocated to the petitioner, Georgie W. Rathborne, is 37.027 percent of $30,000, or $11,108.10.

The deficiency, if any, should be recomputed by including in petitioner’s taxable net income for the year 1932, $11,108.10 of the $30,000 paid to her during that year.

Decision will be entered wnder Bule SO.

       SEC. 22. GROSS INCOME.
      *******
      (b) Exclusions from Gross Income. — Tbe following Items shall not be Included In gross income and shall be exempt from taxation under this title:
      * * *****
      (3) Gifts, bequests, and devises. — The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income);

       SEC. 162. NET INCOME.
      The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—
      * * *****
      (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year.

       Art. 1723 £1716]. Contradictory Dispositions. When a person has ordered two things, which are contradictory, that which is last written is presumed to be the will of the testator, in which he has persevered, and a derogation to what has before been written to the contrary.

      Art. 1493 [1480], Disposable Portion as to Descendants. Donations inter vivos or mortis causa can not exceed two-thirds of the property of the disposer, if he leaves, at his decease, a legitimate child; one-half if he leaves two children; and one-third, if he leaves three or a greater number.
      Under the name of children are included descendants of whatever degree they be, it being understood that they are only counted for the child they represent.
      Art. 1606 [1599]. A Universal Legacy is a testamentary disposition, by which the testator gives to one or several persons the whole of the property which he leaves at his decease.
      Art. 1612 [1604], The Legacy under a Universal Title is that by which a testator bequeaths a certain proportion of the effects of which the law permits him to dispose, as a half, a third, or all his immovables, or all his movables, or a fixed proportion of all his immovables or of all his movables.
      Art. 1625 [1618]. Particular Legacies. Every legacy, not included in the definition before given of universal legacies and legacies under a universal title, is a legacy under a particular title.
      Art. 1668 [1661]. Sale of Movables to Pay Debts. In default of funds sufficient to discharge the debts and legacies of sums of money, the testamentary executor shall cause himself to be authorized by the court to sell the movables, and if they are insufficient, the immovables, to a sufficient amount to satisfy those debts and legacies.
      Art. 1671 [1664]. Heirs Take Seisin. The heirs can, at any time, take the seizin from the testamentary executor, on offering him a sum sufficient to pay the movable legacies and on complying with the requirements of Article 1012.


source: Caselaw Access Project

author: OppeR: Keen",

license: Public Domain

text:
    Meier S. Block, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 84873.
    Promulgated May 31, 1938.

      M. M. Du/ribar, Esq., and L. L. Dimbar, Esq., for the petitioner.

      Jonas M. Smith, Esq., for the respondent.
   OPINION.

OppeR:

This proceeding involves a deficiency in the amount of $641.34 in income tax of petitioner determined by the respondent for the calendar year 1933, resulting in part from the disallowance by respondent of $1,500 of the exemption of $2,500 claimed by petitioner on the ground that he was “head of a family.” This only is in controversy.

Petitioner, during the year 1933, was married and had one child, a daughter, who was 19 years of age during that year. Although petitioner was not divorced or legally separated from his wife during that year, he did not live with his wife and daughter. Petitioner and his wife had separated several years prior to 1933, and after the separation and during the taxable year petitioner lived in one home and his wife and daughter lived in another. Neither petitioner’s wife nor his daughter had any property or independent means of support during 1933. Petitioner, during that year, furnished them money for food, clothing, living quarters, and other miscellaneous expenses. Petitioner visited his wife and daughter in their home approximately six times during the taxable year, but was consulted many times during that year with regard to his daughter’s welfare, and had, to a considerable extent, control over her conduct.

It is petitioner’s contention that he is entitled to a personal exemption of $2,500 as the head of a family, pursuant to the provisions of section 25 (c) of the Revenue Act of 1932. This section of the revenue act, together with article 292 of Kegulations 11, which is pertinent to the question presented by this proceeding, are set out in the margin.

In the case of Alfred E. Fuhlage, 32 B. T. A. 222, we considered article 292 of Kegulations 14, which is the same as article 292 of Regulations 11, and, in approving the provisions of that regulation, we used the following language:

* * * This portion of the regulations is not in conflict with the statute, but is a fair interpretation thereof. It, therefore, has the force and effect of law. Maryland Casualty Co. v. United States, 251 U. S. 342. This provision of the regulations is the same as corresponding provisions of prior and subsequent regulations, and the fact that Congress has continued to reenact, in the successive revenue acts, (be provisions regarding the personal exemption of the head of a family, without change, is persuasive evidence of legislative approval of the regulation. Brewster v. Gage, 280 U. S. 327; Helvering v. Bliss, 293 U. S. 144.

It is clear that petitioner “supports and maintains * * * one or more individuals who are closely connected with him by blood relationship * * * ” and does have a “right to exercise family control and provide for these dependent individuals * * * based upon some moral or legal obligation”, as the regulation provides. “Civilly, a father is entitled to the custody, services, and earnings of a minor child, and is under obligation to provide for the welfare of the child, and the child is subject to parental discipline and restraint”, Manners v. State (Ind. 1936), 5 N. E. (2d) 300. Other parts of the regulation, however, use the phrases “continuous actual residence together” and “in one household” and “the common home being * * * maintained” and indicate that the usual situation envisaged is the maintenance of one common home in which the benefactor and his dependents actually reside together. But it is apparent from still other parts of the regulation that unusual circumstances are recognized as justifying some relaxation of this requirement. If the examples of such unusual circumstances given in the regulation do not precisely describe the facts before us, they at least throw light on its intention, and we may arrive at our decision by determining whether this proceeding is more like the usual situation, on the one hand,' or the unusual circumstances recognized as exceptional, on the other. We have reached the latter conclusion. Indeed these facts closely resemble, if they do not exactly represent, those where “through force of circumstances a parent is obliged to maintain his dependent children with relatives.” Certainly we should not be justified in concluding that maintenance of a young daughter with the wife rather than in petitioner’s home was not dictated by “force of circumstances.” It seems to us that the essential elements requiring the designation of petitioner as the “head of a family” are present here, and that he comes within the fair intendment of the definition of that term as given in the regulation.

Reviewed by the Board.

Decision will be entered wider Bule 50.

Keen",

dissenting: I respectfully dissent from the opinion of the majority of the Board.

In the case of Alfred E. Fuhlage, cited in the majority opinion, we approved the article of the regulations in question as a whole and without reservation, on the ground that it was a fair interpretation of the statute, not in conflict therewith, and because the section of the act interpreted by the regulations had been several times reenacted without change by Congress subsequent to the writing of this article of the regulations.

A careful reading of the entire regulation leads to the conclusion that a taxpayer will be considered “a head of a family” only when he maintains a home in which he and his dependent relatives live together, except when they are separated temporarily or by necessity. Any other conclusion necessitates the ignoring of all of the regulations which we have heretofore approved as having the force and effect of law, with the exception of the first sentence.

In this case there is not a scintilla of evidence that the petitioner was obliged by “force of circumstances” or other reasons to maintain his dependent wife and daughter in one home, while he lived in another. There is no reason whatever appearing in the record for the separation. It may be conceded that if the petitioner were divorced from his wife or separated from her by judicial decree, he might be considered “a head of a family” under the regulation because in that case there would be a necessity for the separation; but that is not the case before us.

The statute allows a personal exemption of $2,500 “in the case of the head of a family or a married person living with husband or wife.” Petitioner was a married person and was not living with his wife. However, since he was supporting and maintaining her and his 19 year old daughter (for whose support he could not claim a $400 credit as a dependent) in . a separate home, it is proposed to grant him a personal exemption of $2,500 as the head of a family. This would seem to be not only contrary to the regulation which has just been discussed, but also against the legislative policy as expressed in the act.

Black and Leech agree with this dissent.

       SEC. 25. CREDITS OE INDIVIDUAL AGAINST NET INCOME.
      There shall be allowed for the purpose of the normal tax, hut not for the surtax, the foUowing credits against the net income:
      * ******
      (c) Personal Exemption. — In the case of a single person, a personal exemption of $1,000; or in the case of the head of a family or a married person living with husband or wife, a personal exemption of $2,500. A husband and wife living together shall receive but one personal exemption. The amount of such personal exemption shall be $2,500. If such husband and wife make separate returns, the personal exemption may be taken by either or divided between them.
      Abt. 292. Personal exemption of head of farmVy. — A head of family is an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. In the absence of continuous actual residence together, whether or not a person with dependent relatives is a head of a family within the meaning of the Act must depend on the character of the separation. If a father is absent on business, or a child or other dependent is away at school or on a visit, the common home being still maintained, the additional exemption applies. If, moreover, through force' of circumstances a parent is obliged to maintain his dependent children with relatives or in a boarding house while he lives elsewhere, the additional exemption may still apply. If, however, without necessity the dependent continuously makes his home elsewhere, his benefactor is not the head of a family, irrespective of the question of support. A resident alien with children abroad is not thereby entitled to credit as the head of a family. As to the amount of the exemption, see article 291.


author: Van Fossan

text:
    Walter F. Haass, Petitioner, v. Commissioner of Internal Revenue, Respondent. Lillian A. Haass, Petitioner, v. Commissioner of Internal Revenue, Respondent. Margaret H. Murphy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 83534, 83535, 83536.
    Promulgated May 31, 1938.

      Marry Allen, Esq., Marry B. Sutter, Esq., and Samuel M. Morne, Esq., for the petitioners.

      DeWitt M. Evans, Esq., Philip A. Bayer, Esq., and Wilford M. Payne, Esq., for the respondent.
   OPINION.

Van Fossan

: The first issue involves the question of the recognition of gain by reason of the assumption of the liabilities of the trans-feror (Industries) upon the transfer of its property in exchange for all of the capital stock of the transferee corporation (the new company).

No gain is recognizable under section 112 (b) (5) of the Eevenue Act of 1932, unless we regard the assumption of the Industries liabilities by tbe new company as “other property or money”, as provided by section 112 (c) (l) of the same act.

Petitioners rely chiefly on Fashion Center Building Co., 31 B. T. A. 167, and Hendler v. United States, 17 Fed. Supp. 558; affd., 91 Fed. (2d) 680. Neither of these cases can longer be regarded as authority. In Brons Hotels, Inc., 34 B. T. A. 376, the Board reconsidered the question involved in the Fashion Center Building Co. case and, having arrived at a conclusion contrary to that previously announced, overruled the cited decision. See also Estate of Theodore Ebert, Jr., 37 B. T. A. 186. The decision of the Circuit Court of Appeals affirming the District Court in the Hendler case was carried to the Supreme Court (subsequent to the filing of petitioners’ briefs) and there reversed in United States v. Hendler, 302 U. S. 680.

In Brons Hotels, Inc., supra, the Board stated:

We are not unmindful of the fact that the assumption of a mortgage is not money in a true legal sense. It is, however, part of the consideration received; it is the equivalent of money, and in our opinion must be treated as money for the purposes of this case.
* # * * * * *
It is our conclusion that the assumption of the mortgage indebtedness must be treated as money within the provisions of section 112 (c) (1), supra * * *. No alternative solution has been suggested which does not do violence to some expressed statutory provision.

Albeit in the Hendler case the facts showed that the outstanding liabilities were assumed and paid, while in the instant cases the new company “assumed and agreed to pay” the liabilities of Industries, there being no evidence of actual payment, and although in his opinion in the Hendler case, Mr. Justice Black stresses the fact of payment there present, the decision, if it may be cited as supporting either position in the present controversy, must be held to support that of respondent. Certainly there is no longer any weight in the decision of the Circuit Court of Appeals on which petitioners so strongly rely.

On the authority of Brons Hotels, Inc., supra, we hold that the gain of $151,154.46 is taxable and the petitioners are liable for their proportionate shares thereof.

The second issue raises the question whether petitioners Walter F. Haass and Margaret H. Murphy have returned the full amount of gain realized upon the forfeiture of certain land contracts or are taxable on an additional amount representing the difference between the sums returned and the whole amounts paid in by the purchasers.

The petitioners are permitted by section 44 of the Revenue Act of 1932 to return profit on real estate sales on the installment basis under the regulations prescribed by the Commissioner. They did not so make their returns in 1925, 1926, and 1927, but in 1928 the method of reporting income applicable to the years 1926 and 1927 was changed by the respondent to the installment basis and was adopted by the petitioners for 1928 and subsequent years. Upon forfeiture and repossession the respondent applied article 353 of Regulations 74 and computed petitioners’ gain accordingly.

The question of computing gain or loss upon the repossession of property which had been sold on installment contract, with subsequent forfeiture and repossession, was before the court in Boca Ratone Go. v. Commissioner, 86 Fed. (2d) 9. It was held under the facts in that case that article 353 of Regulations 74, relied on by respondent here, was invalid and that section 44 (d) of the Revenue Act of 1928 should be applied. This holding was based on the conclusion that the repossession of the land sold on the installment basis constituted a satisfaction of the installment obligation “at other than its face value.” See Eggerman Investment Co., 36 B. T. A. 1196, in which the Board followed Boca Ratone Co. v. Commissioner, supra, and applied section 44 (d) of the Revenue Act of 1932.

In the cited cases, however, facts necessary to make the computation under section 44 (d) were proved. Here we find that essential facts are lacking.

We have no means of gauging the amount realized in the taxable year. There is no evidence of the original cost or other basis at the time of the sale. The record discloses no facts upon which we may arrive at the fair market value of the property at the time of repossession. We have not before us sufficient facts to show that the result of the computation of gain under the ruling laid down in the Boca Ratone Co. case would have been different from that determined by the respondent. Since the proof of these facts was part of the burden assumed by petitioners, we have no alternative but to approve the Commissioner’s action on the point.

There remains for consideration the question of commissions amounting to $3,146.50 paid by Golden Acres during 1924 and 1925 in connection with the sale of the lots repossessed by it during 1933. No adjustment for such commissions was made by the respondent in his notice of deficiency. The petitioners claim that they are entitled to reduce the total collections on the Golden Acres forfeited lots by the amount of such commissions, relying on the provisions of article 353 of Regulations 77, that the basis for taxation on repossession of property shall be the amount of payments actually received and retained by the vendor.

We have indicated above, following the Boca Ratone Co. and Eggerman Co. cases, that section 44 (d) is applicable in these cases. This statute provides that “gain or loss shall result to the extent of the difference between the basis of the obligation and (1) * * * the amount realized”, and further, “the basis of the obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full.” We find no authority in the statute for the treatment petitioners request.

Moreover, in Highlands Trust, No. 1546, 32 B. T. A. 760 (reversed on another point, 88 Fed. (2d) 355), we held that “commissions on sales are business expenses to be deducted in the year of accrual or payment * * * and are to be deducted in arriving at net income.” Blum’s Inc., 7 B. T. A. 737. In Winmill v. Commissioner, 93 Fed. (2d) 494, the court held that commissipns paid on the purchase and sale of securities are an expenditure of carrying on that business. The commissions in question do not appear to be of an essentially different character from those described in the cases cited. They were properly deductible in the years paid and are not an element in the capital cost of the lots repossessed. Therefore, such commissions are not a proper offset against the additional profit determined by the respondent.

Decisions will Be entered under Rule SO.

       SEC. 112. RECOGNITION OF GAIN OR LOSS.
      (a) Generad Rdle. — upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
      (b) Exchanges Solely in Kind.—
      * ******
      (5) Transfer to corpobation controlled by transferor. — No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.

         (c) Gain xrom Exchanges not solely in kind—
      (1) If an exchange -would be within the provisions of subsection (b) (1), (2), (3), or (5) of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.

       SBC. 44. INSTALLMENT BASIS.
      * ******
      (d) Gam or Loss upon Disposition of Installment Obligations. — If an installment obligation is satisfied at other than its lace value or distributed, transmitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the difference between the basis of the obligation and (1) in the case of satisfaction at other than face value or a sale or exchange — the amount realized, or (2) in case of a distribution, transmission, or disposition otherwise than by sale or exchange — the fair market value of the obligation at the time of such distribution, transmission, or disposition. The basis of the obligation shall be the excess of the face value of the obligation over an amount equal to the income which would be returnable were the obligation satisfied in full. This subsection shall not apply to the transmission at death of installment obligations if there is filed with the Commissioner, at such time as he may by regulation prescribe, a bond in such amount and with such sureties as he may deem necessary, conditioned upon the return as income, by the person receiving any payment on such obligations, of the same proportion of such payment as would be returnable as income by the decedent if he had lived and had received such payment.
      ¡.Section 44 (d) of the Revenue Act of 1932 is identical.]


author: Smith :

text:
    Harris-Emery Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86060.
    Promulgated June 1, 1938.

      Arnold, F. iSchaetsle, Esq., for the petitioner.

      Paul E. 'Waring, Esq., for the respondent.
   OPINION.

Smith :

The first question for the consideration of the Board in this proceeding is the proper allowance for each of the taxable years ended January 31,1933, and January 31,1934, for the unamortized March 1, 1913, value of the Rothwell and Weitz leases. Both parties are in agreement that the March 1, 1913, value was $60,000 and that up to the beginning of the first taxable year a certain portion of that cost had been or should have been recovered through amortization allowances. The petitioner contends that such unamortized value should be spread over the period ending March 31, 1940, as determined by the Board in its opinion published at 10 B. T. A. 297, while the respondent contends that the spread should be made over the period ending March 31,1953.

In our opinion at 10 B. T. A. 297, we said:

The leases existing on March 1, 1913, expired on March 31, 1925, but in June, 1914, these leases were merged into a longer term expiring March 31, 1940. We are, therefore, of the opinion that the petitioner is entitled to an exhaustion deduction for the period here under review which should be computed upon the basis that from March 1, 1913, to March 31, 1914, a deduction had been allowed on the basis of a period of 12 years and one month, and that thereafter and during the period here under review the deduction should be based upon the unexhausted value on April 1, 1914, prorated over the years and periods ending March 31, 1940. * * *

The petitioner argues that, since in our prior opinion we determined that for 1918 the unamortized value on April 1, 1914, should be prorated over the period ending March 31, 1940, the rule should apply equally in the determination of the amortization allowance for each of the tax years 1933 and 1934. It argues that the question of the rate of the exhaustion of these leaseholds is res adjudicaba. It is to be noted, however, that both the Bothwell and the Weitz leases have been renewed or extended since the taxable year which the Board had under consideration in the prior proceeding. The facts in the instant case, therefore, being different from those previously considered by the Board for the prior taxable year, the determination in that proceeding is not binding in this one.

The petitioner further argues that it will have no net income for the fiscal years ending after March 31, 1940, since after that date all of the rental income received by the petitioner from S. Davidson & Bros., Inc., will be paid over to the lessors. The stipulated facts do not show, however, that the petitioner will have no net income from the rentals after March 31, 1940. They do not show what portion of the rentals received will belong to the Frankel interests. Neither is it made clear that all of the amounts not paid to the Frankel interests will be paid to the lessors of the Bothwell and Weitz tracts.

In Cleveland Railway Co., 36 B. T. A. 208, the question before the Board was whether the March 1, 1913, value of certain franchises enjoyed by that company should be exhausted over the term of the original franchise or over the term of that franchise as extended. In our opinion we stated:

It is generally recognized tbat a franchise is the subject of contract between the state and the grantee and a contract thus created has the same status as any other contract recognized by the law. (Cf. Blair v. Chicago, 201 U. S. 400.) In so far as the grantee is concerned, it has a right not unlike that which a lessee under a lease contract acquires. Petitioner contends that such an analogy exists and that the method of determining the amount of the amortization under its franchise and the various extensions or renewals, should be the same as that frequently approved by the courts and by this Board in cases involving leases. A typical illustration of this method is found in William Penn Hotel Co., 23 B. T. A. 566, a decision in which the Commissioner acquiesced. Therein the taxpayer acquired a lease in 1920 for $50,000. It was due to run for a period of 10 years, but in 1923, by the payment of an additional $1,000, the taxpayer secured a 10-year extension, viz., until 1940. This Board held that petitioner was entitled to a deduction as amortization during the fiscal year ending June 30, 1924, of one-seventeenth of the unexhausted cost of the lease as extended. To the same effect see also Harris-Emery Co., 10 B. T. A. 297; Pig & Whistle Co., 9 B. T. A. 668; E. M. Diebold, 19 B. T. A. 438; Bonwit Teller & Co., 53 Fed. (2d) 381; certiorari denied, 286 U. S. 690. * * *

Upon the authority of the cases referred to above, and cases cited therein, the Board is of the opinion that the unamortized value of the Bothwell and Weitz leases should be spread over the period ending March 31,1953, as contended by the respondent.

The only remaining question for decision is whether the cost of improvements of $91,784.12, as shown by the petitioner’s books of account on February 1,1928, should be spread over the period ending March 31, 1940, or over the period ending March 31, 1953. The respondent has determined depreciation allowances upon the basis that the spread should be over the longer period. The stipulated facts do not show that such improvements will be exhausted prior to March 31, 1953, except so far as they relate to improvements upon the Frankel tract. The Frankel lease will expire on March 31, 1940. All of the improvements relate to the store building extending 132 feet on Walnut Street. It is stipulated that no allocation of these improvements to the different tracts can be made except upon an arbitrary basis. Since one-third of the store building is upon the Frankel tract, we are of the opinion that a fair allocation of the improvements to the Frankel tract is one-third of the total. We are, therefore, of the opinion that one-third of the undepreciated cost of the improvements should be spread over the period ending March 31, 1940. The balance of the undepreciated cost of improvements should be allocated to the Bothwell and Weitz tracts and spread over the period February 1, 1928, to March 31, 1953.

Reviewed by the Board.

Judgment will l>e entered v/nder Rule 50.


author: Kern:

text:
    Indianapolis Glove Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82630.
    Promulgated June 1, 1938.

      Forman D. McCurdy, Fsq., for the petitioner.

      Jonas M. Smith, Esq., for the respondent.
   OPINION.

Kern:

There are two alternative questions presented in this case. The first is whether the interest on the overpayment of taxes from the date of overpayment to the date of the signing of the schedule of overassessments respecting such taxes, in August 1932, should be considered as accruing to petitioner in 1932 at the rate of 0 percent per annum. The second is whether the interest should be considered as accruing to petitioner in 1932, calculated at 6 percent up to June 30, 1932, and at 4 percent after that date.

These questions arise under section 614 of the Kevenue Act of 1928, section 319 of the Legislative Appropriation Act of June 30, 1932, and section 15 of the Treasury and Postoffice Departments Appropriations Act of March 3, 1933, which are set out in the margin.

With regard to the first question, it is petitioner’s contention that interest on the overpayment of taxes involved herein should be considered as accruing to it in 1932 at the rate of 6 percent per an-num regardless of the Act of June 30, 1932, because that act was repealed as of the date of its approval by the Act of March 3, 1933, and, therefore, should be considered as never having existed. The difficulty with this contention, however, is that in order to have the interest accrue to petitioner in 1932 and be properly includable in petitioner’s income for that year, there must have been in effect in that year a statute pursuant to which the interest claimed as accrued income was payable. The only statutes in force during that year werq the Revenue Act of 1928 and the Act of June 30,1932. The latter act was in force at the time of the signing of the schedule of overassessment by the respondent in August 1932 and was in force until March 3, 1933, when it was repealed as of the date of its approval. While the Act of March 3, 1933, made it obligatory to pay the full amount of 6 percent on overpayments of taxes during the period of June 30,1932, to March 3,1933, this obligation did not arise until March 3, 1933, and, therefore, the petitioner’s right to the payment of interest at this rate after June 30, 1932, did not exist until 1933, and tbe additional interest became accrued income to petitioner only in 1933.

In tbe alternative, the petitioner contends that although the schedule of overassessments was made up in August 1932, after the effective date of the Act of June 30, 1932, this act was not retroactive and the interest to be paid on the refund of taxes made by respondent on September 12,1932, should be calculated at the rate of 6 percent up to June 30, 1932, and at 4 percent thereafter.

Interest on refunds and credits is computed under the provisions of the act in force when the refunds and credits are allowed by the Commissioner. United States v. Boston Buick Co., 282 U. S. 476; Pottstown Iron Co. v. United States, 282 U. S. 479; United States v. Magnolia Petroleum Co., 276 U. S. 160. A claim for a refund is allowed when the Commissioner approves the schedule of refunds and credits. United States v. Swift, 282 U. S. 468. It is stipulated that the overassessments in this case were scheduled in August 1932, and the payment of the principal of the overassessments to the petitioner took place on or about September 12,1932. Petitioner’s claim for refund was, therefore, allowed during the time the Act of June 30, 1932, was in effect, and, therefore, the interest due thereon was computable under its provisions. It is inescapable that the only interest which could be considered as accrued income to petitioner was the interest provided for by the Act of June 30, 1932, which wras at the rate of 4 percent per annum.

Petitioner has cited several cases in support of its contention that the interest on the overpayment of taxes should be computed at 6 percent up to June 30, 1932, and at 4 percent thereafter. These cases are Colorado Milling & Elevator Co. v. Howbert, 57 Fed. (2d) 768; Safe Deposit & Trust Co. of Baltimore v. Tate, 3 Fed. Supp. 562; Reynolds v. Cooper, 64 Fed. (2d) 644; Huwe v. Ohmer Fare Register Co., 61 Fed. (2d) 721. These cases involved the calculation of interest on judgments entered in favor of taxpayers prior to the Act of June 30,1932, with the exception of one (Colorado Milling & Elevator Co. v. Howbert) which had to do with the construction of a compromise agreement. They are, therefore, not authority in cases such as this, where refunds and credits are computed, since in the cases cited, the right to a certain rate of interest had vested in the taxpayer prior to June 30, 1932, either by virtue of a compromise agreement, or by judgment, while in the instant case the right to interest did not vest until the Commissioner approved the schedule of overassessments in August 1932. This conclusion seems implicit in the cases cited of United States v. Boston Buick Co., supra, and United States v. Swift, supra.

Decision will be entered for the respondent-

       SEC. 614. INTEREST ON OVERPAYMENTS.
      (a) Interest shall be allowed and paid upon any overpayment in respect of any internal-revenue tax, at the rate of 6 per centum per annum, as follows :
      * * ★ * * * #
      (2) In the case of a refund, from the date of the overpayment to a date preceding the date of the refund check by not more than SO days, such date to be determined by the Commissioner.
      Sec. 319. Legislative Appropriations Act, June 30, 1932. [47 Stat. 412.]
      Hereafter the rate of interest to be allowed or paid shall be four per centum per annum whenever interest is allowed or paid upon any judgment of whatever character against the united States and/or upon any overpayment in respect of any internal revenue tax. All laws or parts of laws insofar as inconsistent herewith are hereby repealed.
      See. 15. Treasury and Post Office Departments Appropriations Act of March 3, 1933 [47 Stat. 1517.]
      Section 319 of Part II of the Legislative Appropriation Act, fiscal year 1933, is repealed as of June 30, 1932; and the rate of interest to be allowed upon judgments against the united States and overpayments in respect of internal revenue taxes shall be the rate applicable thereto prior to the enactment of section 319 of such act.


author: Opper:

text:
    Thomas C. Boswell, Annie M. Boswell, and Manufacturers National Bank of Troy, New York, Executors of the Estate of William D. Boswell, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81811.
    Promulgated June 1, 1938.

      J. Robert Sherrod, Esq., for the petitioners.

      R. F. Staubly, Esq., for the respondent.
   OPINION.

Opper:

Respondent contends, first, that decedent disposed of certain property in contemplation of death. The action involved in this branch of the proceeding is the transfer by trust indenture dated May 22,1929, to the Manufacturers National Bank, of the securities therein described. We are required to determine whether “the impelling cause” for that transfer was decedent’s contemplation of his death. United States v. Wells, 283 U. S. 102. “Contemplation” is defined as the “act of the mind in considering with attention.” Webster’s New International Dictionary, 2d ed. By the trust instrument decedent provided for distribution of the income from the trust property during his life and for its further disposition, as well as that of the corpus, thereafter. Within a short time decedent amended the trust instrument to provide for a different treatment of new investments during his lifetime from that to be applied after he had died. He could not have made these arrangements without “considering with attention” the event of his death. This being so, we assume- that decedent was contemplating his death and accept respondent’s suggestion that the proof of his sound physical condition does not affect this assumption.

It does not follow, however, that decedent’s contemplation of death was the impelling cause of the transfer, and we think the evidence indicates the contrary. It is undisputed that his primary purpose was to segregate certain of his investments and to have these kept clear of his stock market operations. To accomplish this he conveyed the property to his trustee, with instructions to pay the income to him as long as he lived. This disposition required some provision for treatment of income and principal upon his death. But that provision was itself rather a result than a cause of the transfer, a fact which seems to us to preclude from consideration as the impelling cause any contemplation of death in which decedent may incidentally have engaged. There was here no reserved power of revocation, no comprehensive plan projected or accomplished contemporaneously for the disposition of the remainder of decedent’s considerable estate, no manifestation of his intention to surrender direction of the balance of his investments, no accumulation of income pending his death. The circumstances before us are thus fundamentally at variance with those found to be controlling in Igleheart v. Commissioner, 77 Fed. (2d) 704; Updike v. Commissioner, 88 Fed. (2d) 807; and Commissioner v. Colorado National Bank of Denver, 95 Fed. (2d) 160. We have accordingly found that the transfer was not made in contemplation of death.

Respondent contends further that “A transfer with respect to which the decedent reserves the income from the property transferred for life is a transfer that takes effect in possession or enjoyment at or after death.” On this point we think the Supreme Court has held to the contrary. 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. And, the disputed transfer having taken place in 1929, the provisions of the Joint Resolution of March 3,1931, and of section 803 (a) of the Revenue Act of 1932 do not bear upon the question, since they “apply only to transfers with reservation of life income made subsequent to the dates of their adoption respectively.” Hassett v. Welch, 302 U. S. 674.

No contention is advanced that the corpus of the trust property, decreased by the value of the wife’s life estate, was transferred at decedent’s death by virtue of the terms of the trust instrument and its reference to decedent’s “heirs at law and next of kin.” See Doctor v. Hughes, 225 N. Y. 305; 122 N. E. 221; Livingston v. Ward, 247 N. Y. 97; 159 N. E. 875; Berlenbach v. Chemical Bank & Trust Co., 260 N. Y. 539; 184 N. E. 83; Restatement of the Law of Trusts, § 127; Security-First National Bank of Los Angeles, Executor, 35 B. T. A. 815. Nor does the record disclose any facts upon which an appropriate determination of value could be predicated. We accordingly refrain from discussion of this question, and, for the reasons stated, conclude that the trust property is not subject to inclusion in decedent’s gross estate.

The supposed justification for including the proceeds of tlie two insurance policies in gross estate is, according to respondent’s brief, that decedent possessed “attributes of ownership” consisting of the right to change beneficiaries, to obtain the surrender value, and to borrow upon the security, of the policies. In each of these respects we think the conclusion must be otherwise.

Whether or not the proceeds of these policies are to be included in the gross estate depends, regardless of the time or terms of their issuance, upon whether decedent had any interest in them at the time of his death. David A. Reed et al., Executors, 24 B. T. A. 166; Estate of John T. H. Mitchell, 37 B. T. A. 1; Chase National Bank v. United States, 278 U. S. 327. Respondent has himself so construed the law. “The statute requires the inclusion in the gross estate of the decedent of the proceeds of any policy * * * not receivable by or for the benefit of decedent’s estate * * * regardless of when the policy was * * * issued, if the decedent possessed at the time of his death am/y of the legal incidents of ownership A (Italics supplied.) Regulations 80, art. 27. That this qualification is intentional and restrictive appears from the elimination, at the time of its adoption, of a previous provision reading: “However, irrespective of the retention of such legal incidents of ownership, all insurance * * * must be included in the gross estate (1) of any decedent dying after the enactment of the Revenue Act of 1924 where * * * the beneficiary receiving the proceeds was named, after the enactment of the Revenue Act of 1918 * * (Italics supplied.) T. D. 4296, Aug. 6,1930, IX-2 C. B. 427.

After his final designation of beneficiaries, decedent had, throughout the remainder of his life, no further power in that respect. His authority to alter the designation so made was explicitly limited “during, the lifetime of Annie M. Boswell and Helen R. Boswell [the wife and daughter], or either of them” by the requirement that “such right is not to be exercised without their written consent.” This provision was tantamount to a surrender of control during the lifetime of decedent’s wife and daughter, they being beneficiaries under the policies. David A. Reed et al., Executors, supra; Reinecke v. Northern Trust Co., 278 U. S. 339. Since both survived him, decedent had no such power at the time of his death. “The decedent’s death merely terminated the possible contingency of the beneficiary predeceasing the insured.” Estate of John T. H. Mitchell, supra.

Nor was there at death any remnant of the privilege of surrender for cash. The policies provide, in this respect that “* * * the owner shall have the following options: 1. To surrender the Policy to the Company * * * for its cash surrender value * * Some significance may be attached to the use of the word “owner” rather than “insured” in defining the person so privileged. Pennsylvania Co. etc. v. Commissioner, 79 Fed. (2d) 295; certiorari denied, 296 U. S. 651. But, in any event, absence of the power to change beneficiaries in itself deprives an insured of authority in his own right to obtain the surrender value. Levy's Estate v. Commissioner, 65 Fed. (2d) 412; Walker v. United States, 83 Fed. (2d) 103, 110. True, the cases last cited construe the policies in litigation according to the law of the State of New York; but we think that law is also applicable here. These policies show that they were obtained through “James Q. Barcus, Geni. Agt., * * * Albany, N. Y.” and that decedent at the time of application was a resident of New York. He died a resident of that state. Under these circumstances, the New York law is applicable. Louise C. Moore, Executrix, 33 B. T. A. 108, 112. Even, however, if it be contended that New Jersey authority should be followed on the ground that the insurer was incorporated there and that the policies appear to have been approved at its home office in Newark, no different result would be justified. See Landrum v. Knowles, 22 N. J. Eq. 594; Sullivan v. Maroney, 77 N. J. Eq. 565; 78 Atl. 150.

What has been said as to a surrender of the policies applies with equal force to their use as security for a loan. Each policy provides : “The Company * * * will loan up to the limit secured by its Cash Surrender Value upon receipt of the Policy and a satisfactory Certificate of Loan.” It must be apparent that the “Cash Surrender Value” could not be pledged by one not entitled to receive it, and that no “Certificate of Loan” could be “satisfactory” which was not executed by the real persons in interest. “The rule which forbids the surrender for cash, in violation of the beneficiary’s interest, equally forbids the insured from obtaining a loan without consent of the beneficiary.” Levy's Estate v. Commissioner, supra, 415.

We are accordingly unable to sustain respondent’s determination that the two life insurance policies should be included in decedent’s gross estate.

Decision will loe entered for the petitioners.


text:
    Prudential Loan Company, a Minnesota Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78869.
    Promulgated June 1, 1938.

      Walter E. Newton, Esq., and L. A. Grmelle, Esq., for the petitioner.

      G. W. Broohs, Esq., and Alvin Pierson, Esq., for the respondent.
   OPINION.

Opper:

Respondent urges three grounds for sustaining his determination : First, that the sale of Western Bond stock by petitioner was in fact not what it appears to be, and should be treated as a nullity and entirely disregarded; second, that this stock became worthless in a prior year and no loss is allowable for the year 1929; and, third, that the loss if otherwise proper is not deductible since it was not attributable to the petitioner’s regular business.

It is not entirely clear upon what ground respondent urges that the transaction was not in fact a sale. There is some intimation that the original contract, being designed to “segregate” the individual and corporate assets, could not at the same time be a contract to sell by the respective parties. No authority is cited for this proposition and we are unable to reach that result upon an analysis of the actual agreement.

The parties were dealing with four items of property in arranging for segregation — the Western Bond and Investors Syndicate stock owned by or attributable to the Farringtons, and the corresponding stock controlled by the Ridgeways. As to two of the four items the arrangement was merely to leave the situation undisturbed; the Far-ringtons were to retain their Western Bond holdings, the Ridgeways to keep their Investors Syndicate stock. As to the Investors Syndicate stock of the Farringtons, the full cash value was to be paid to them by or through Ridgeway. There thus remained the Ridge-way share of Western Bond, which had to pass to Farrington. And the only remaining consideration — which moved from Farrington to Ridgeway — was the agreement to relieve Ridgeway of liability on the $10,000 note. It seems to us that this was similar in legal effect to an agreement to sell the Western Bond stock in consideration of the worth of Ridgeway’s release. “In a general and popular sense, the sale of an article signifies the transfer of property from one person to another, for a consideration of value, without reference to the particular mode in which the consideration is paid.” Howard v. Harris, 8 Allen, (Mass.) 297, 299; Betty Rogers, 37 B. T. A. 897.

We are the more fortified in this result by the circumstance that when these same facts were before the Board in connection with Farrington’s tax liability arising out of the identical transactions, we found that the transfer of the Western Bond stock to him was in fact a sale.

No claim is made that the organization of petitioner lacked a true business purpose nor that for any other reason the provisions of section 112 of the Revenue Act of 1928 are inapplicable. Cf. Gregory v. Helvering, 298 U. S. 465. In our consideration of these questions we are therefore justified in accepting as a premise that the organization of petitioner and the transfer to it of all of the assets of Prudential constituted a “tax free” reorganization. This much appears to be conceded by respondent. Petitioner was thus, for purposes of determining basis and depreciation of transferred assets, in the same position from a tax standpoint as its predecessor. Mente & Co., 24 B. T. A. 401; T. H. Symington & Son, Inc., 35 B. T. A. 711; Ahles Realty Corporation v. Commissioner, 71 Fed. (2d) 150.

The remaining question under this contention accordingly appears to be whether the Western Bond stock was in fact among the assets transferred by Prudential to petitioner, for if it was, and, except for respondent’s third contention, it seems to follow that petitioner must be entitled to deduct the same loss that Prudential could otherwise have deducted. To resolve this question we may consider, first, whether at the time Ridgeway and Farrington entered into their contracts the stock was in reality the property of Prudential; and, second, if it was, whether in reality it ceased to be an asset of Prudential before the transfer to petitioner.

There can be no dispute that in all outward aspects the Western Bond stock had been consistently treated as belonging to Prudential. The latter was the record owner. It received the dividends. It carried the stock on its books. Nor is it suggested that the corporation was a mere shell and not an actively functioning entity. We find no evidence that its apparent ownership was not real. True, the original contract for the sale of the stock was made by Ridgeway and not by Prudential; and the benefit of the sale as originally contemplated, that is, the liquidation of the Mildred Farrington note, was obviously to be derived by Ridgeway and not by Prudential, since the former and not the latter was the obligor on the note. But it seems to us. this demonstrates no more than a recognition by the parties that their control of Prudential made its technical concurrence a foregone conclusion. We are not justified for this reason alone in assuming that the property did not belong to Prudential. Blue Line Holding Co., 33 B. T. A. 694.

Although not specifically so stated, respondent’s position may be that title to the stock passed from Prudential to Farrington by virtue of the contract, and hence that no transfer to petitioner or sale by it could have taken place later. With this position we should be unable to concur. That title to ascertained personal property may pass without delivery must be conceded. Dee Furey Mott, 35 B. T. A. 195; Hoffman v. Commissioner, 71 Fed. (2d) 929. But whether in any such circumstances title actually passes is a question of intent. Hoffman v. Commissioner, supra; Consolidated Utilities Co. v. Commissioner, 84 Fed. (2d) 548. And, in the absence of evidence to the contrary, it will be presumed that title was not to pass until consummation of the contract. Consolidated Utilities Co. v. Commissioner, supra. Here, if anything, the intention not to pass title is emphasized. Provision for escrow of other stock dealt with by the parties is specifically included in the “Sales Agreement.” No such specific provision was made for the Western Bond stock, but, as respondent states in his brief, “Isaacs [one of the attorneys] was to hold the stock pending-performance of the Contract”, and two certificates representing part of the stock “were given by Ridgeway to Isaacs on January 19, 1929, immediately following the conference between Ridgeway and Far-rington in Minneapolis when the General Contract was signed.” This was rather an indication that the stock was to be withheld from Farrington in the meantime than that title had passed. See Ganson Depew, 27 B. T. A. 515, 522; Grand Rapids Trust Co. et al., Administrators, 34 B. T. A. 110, 172. Farrington delayed action on the Mildred Farrington note, and, pending this, the stock was not delivered. On August 20, 1929, Ridgeway wrote to Jacob, another attorney: “The Prudential Loan Co. of Minnesota nor I have received check from Mr. C. H. Farrington for Western Bond and Mortgage Co. stock. Please advise when this deal will be definitely consummated.” Correspondence and action of the parties are consistent with an intention that passage of title to the stock was conditioned upon prior or simultaneous payment, and cast serious doubt upon any other interpretation. Certainly there is no evidence that immediate passage of title was intended. Cf. Hoffman v. Commissioner, supra. And payment was not made until October, so that the actual sale took place many months after the February transfer of the stock from Prudential to petitioner.

It follows from this that the further provision for retention of the stock by Ridgeway “to offset earnings for the purpose of income tax” was inconsequential. Its only effect could have been to prevent a passage of title which would otherwise have taken place. For that purpose, as we have seen, it was unnecessary, for the result was reached by other factors, and would have been, in any case. What the conclusion would be if the arrangement had been a mere colorable attempt to disguise a contrary situation we are not called upon to decide. Cf. Clara Brunton, Executrix, 15 B. T. A. 348; William Holden, 6 B. T. A. 605.

It is true that, although insufficient to pass title, the contract created an unqualified obligation to sell the stock to Farrington, and no one else. But that is what made it a contract to sell, rather than a mere legal nullity. It may also be assumed that Ridgeway’s agreement that the stock would be sold was binding on Prudential, even in the absence of specific corporate action, see Vawter v. Rogue River Valley Canning Co. (Ore., 1928), 262 Pac. 851; Wenban Estate, Inc. v. Hewlett (Cal., 1924), 227 Pac. 723; Kentuehy Coal Lands Co. v. Mineral Development Co., 295 Fed. 255; and that, the stock having been acquired by petitioner under the circumstances before us, petitioner in turn became bound to perform. See Okmulgee Window Glass Co. v. Frink, 260 Fed. 159; Grand Rapids Trust Co. et al., Administrators, supra, p. 172; Dairy Co-Operative Association v. Brandes Creamery (Ore., 1934), 30 Pac. (2d) 338; American Bank v. Port Orford Cedar Products Co. (Ore., 1932), 12 Pac. (2d) 1014. This situation gives point to respondent’s suggestion that Farrington’s offer in September to buy the stock from petitioner was an empty formality. But this would be so not because such a transaction would do violence to the facts, but, on the contrary, because it was so much in accord with them that petitioner was already effectively disabled from refusing to perform. If we are correct in this, the delivery of the July dividend check to Prudential instead of to petitioner is of no importance. It could have been nothing more than an immaterial oversight. And the fact that the petitioner at the time it received the stock was contractually bound to make the sale would not permit us to disregard the sale and relieve petitioner of the consequences of any ensuing profit. No more does it require disallowance of the loss. J. Hampton Hoult, 24 B. T. A. 79; E. F. Simms, 28 B. T. A. 988.

As to the claim that the stock was worthless, Farrington, who of all men was in a position to know, dealing voluntarily and at arm’s length with Ridgeway, suffered a detriment by undertaking the full responsibility on the Mildred Farrington note. This liability was assumed in exchange for nothing, unless it was the Western Bond stock and unless that stock had some value. The company was a going concern; it showed a book surplus; and it stood, through the operation of the very transaction before us, to receive $200,000 in cash and notes as a contribution to its capital. Under these circumstances we can not find that the stock had no value. It may be that the precise “market value” of these securities in 1929 was difficult to estimate, or indeed that sales were so infrequent that they had no “fair market value.” But this is not to say, in the face of the record, that they were “worthless.” “Such shares may have intrinsic value, but * * * no ‘fair market value.’ ” Mount v. Commissioner, 48 Fed. (2d) 550.

It should be emphasized that here is not an instance of a private sale asserted by respondent to be at an unduly low figure, thus enabling the vendor to establish an excessive tax loss. Respondent’s contention is that the valuation here was too high, since the stock was worthless. We can not agree that it was entirely worthless, and if it was" in fact not worth quite as much as Farrington agreed to pay, an assumption it is difficult to make, the only tax result is that petitioner has taken a smaller loss than that to which it might otherwise have been entitled. Nor has petitioner attempted to escape its fair share of the consideration paid for the stock, and thus to increase its loss. That proportion of the $10,000 payment which is apparently to be ascribed to the stock owned by petitioner was in fact received by it and deducted from its basis. Had the parties followed the precise terms of the original contract and canceled the note, thus leaving Ridgeway with the proceeds of petitioner’s asset, it might have been necessary to conclude that part of “the money belongs to the petitioner and is held in trust for it by its stockholders”, Garrison Brothers State Bank v. Commissioner, 67 Fed. (2d) 486, 487; and to charge petitioner with constructive receipt of part of Ridgeway’s benefit, since “the fact that petitioner did not take action to recover the proceeds from its stockholder does not relieve it of liability for the tax.” Blue Line Holding Co., supra, p. 699. That this was avoided by the ultimate form of the transaction, with the result of a direct payment to petitioner of the value of its stock, seems to us to enhance, not diminish, the reality of its loss.

Nor can we agree that the disputed sale was not attributable to the operation of the petitioner’s regular business. Its “Articles of Incorporation” authorized it to deal in securities and it did in fact engage in other securities transactions. It does not appear to be contested that petitioner was organized to continue the business of Prudential and that it did so. Had Prudential sold the Western Bond stock, which it was created, in part, to hold, we do not see how it could be doubted that it would thereby be engaging in its regular business. We think the same conclusion follows as to petitioner.

Finally, we can not refrain from an expression of our belief that characterization of the facts before us as “tax avoidance” is not peculiarly fortunate. The actuality of the economic loss sustained can not in fairness be disputed. Nor, it seems to us, is there justification for regarding the organization of petitioner, the transfer of assets, and the dissolution of Prudential, as actuated primarily, if at all, by tax motives. Cf. C. A. Bryan, 19 B. T. A. 111. Had Prudential continued to exist it could have sold the stock and offset the loss against its income with virtually identical tax results. Clearly, then, no consequential tax advantage was to be anticipated from the proceedings regarded as a whole. That petitioner should derive the benefit of Prudential’s potential deduction, having succeeded to its property and income, is the essential justification for invoking the protection of section 112 “in order that ordinary business transactions will not be prevented on account of the provisions of the tax law.” H. R. Report No. 179, 68th Cong., 1st sess., p. 13. And if the parties took pains to make the actual transaction apparent by its ultimate form they are no more to be penalized than, in the converse situation, a taxpayer is to be protected when he attempts to conceal the true facts by a misleading disguise. “To hold otherwise would be to exalt artifice above reality * * Gregory v. Helvering, supra.

Decision will he entered u/nder Rule 50.

        C. H. Farrington, Docket No. 76847 (memorandum opinion, Pel). 5, 1936).


text:
    Rex Manufacturing Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87074.
    Promulgated June 1, 1938.

      Foreman D. McCurdy, Esq., and Troy G. Thurston, C. P. A., for the petitioner.

      Jonas N. Smith, Esq., for the respondent.
   OPINION.

Kern:

This case presents the question of whether the basis for ascertaining the amount of depreciation of the property of the petitioner should be the value of these assets while they were held by the Hex Manufacturing Co., or their value at the date of their acquisition by petitioner. It is the contention of petitioner that it acquired these assets as a result of a reorganization within the meaning of the Revenue Act of 1928, and that immediately after the transfer to it an interest or control in such property of 50 percent or more remained in the same persons.

The provisions of the statute which are pertinent are section 112 (i) (1) of the Revenue Act of 1928, and sections 113' (a) (7) and 114 (a) of the Revenue Act of 1932, which are set forth in the margin.

Since we are of the opinion that immediately after the transfer of the assets here involved from the Rex Manufacturing Co. to petitioner an interest or control in such property of 50 percent or more did not remain in the same persons or any of them within the meaning of section 113 (a) (7) of the Revenue Act of 1932, we do not consider it necessary to decide whether a reorganization took place within the meaning of section 112 (i) (1) of the Act of 1928, but shall merely assume that it did for the purpose of this discussion. We are aware that counsel for petitioner has asked for our decision on this question, regardless of our decision as to the construction of section 113 (a) (7) of the Act of 1932, but we refrain from so doing because of the fact that this phase of the case was not considered in respondent’s brief.

Petitioner contends that, since an interest or control in petitioner of more than 50 percent was in former stockholders of the Rex Manufacturing Co., the basis should be the same as it was in the hands of that company, even though these stockholders owned less than 50 percent of the stock of the Rex Manufacturing Co. Petitioner rests this contention on language used by the Circuit Court of Appeals for the Seventh Circuit in the case of Fairbanks Court Wholesale Grocery Co. v. Commissioner, 84 Fed. (2d) 18. However, that case as well as the case of Monarch Electric & Wire Co. v. Commissioner, 38 Fed. (2d) 417, also cited by petitioner, involves a different question from that presented here, as petitioner frankly recognizes by his statement that the precise point urged by the respondent in this case does not appear to have been presented in any decided case. Therefore, we feel it necessary to consider the language of the statute itself as applicable to the present case. The words of the statute are: “If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 50 percent or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.” We take this to mean that after the transfer an interest or control in such property of 50 percent or more must remain in the same persons or any of them who collectively, but not necessarily in the same individual proportion, held at least 50 percent of interest or control in the property of the transferor corporation. This seems to us to be the plain meaning of the statute and should not be affected by any surmise as to legislative intent cpntained in the opinion of the court in Fairbanks Court Wholesale Grocery Co. v. Commissioner, supra.

Out of 4,500 shares of the stock of the petitioner which were outstanding, 3,500 were owned by former stockholders of the Rex Manufacturing Co. These stockholders were C. C. Hull, George W. Ansted, Matthew R. Hull, and Nellie Ansted Huston, and collectively they owned 4,875.55 shares of the 10,000 shares of preferred stock and 4,765.55 shares of the 10,000 shares of the common stock of the Rex Manufacturing Co. Reduced to percentages, these stockholders owned 48.75 percent of the preferred stock and 47.65 percent of the common stock of the Eex Manufacturing Co., or 48.20 percent of all of its outstanding stock.

Petitioner contends that if the above construction of the statute is made by us, nevertheless, it should be considered that more than 50 percent of the interest or control in the property of petitioner remained in persons who collectively held more than 50 percent of the interest or control in the property of the Eex Manufacturing Co., and bases this contention on the fact that George W. Ansted, who held stock in both the petitioner and the Eex Manufacturing Co., was administrator of the estate of his mother, Catherine Ansted, who held 666.68 shares of Eex Manufacturing Co. stock, and the fact that James M. Heron, who owned 2,900 shares of the stock of that company, owned, after the transfer of its property to petitioner, first mortgage bonds of the petitioner in the amount of $10,000.

Petitioner, in its brief, takes the position that, since George W. Ansted was administrator of the estate of Catherine Ansted, either he must be considered as owning her stock in the Eex Manufacturing Co., or he and his sister, Nellie Ansted Huston, as heirs of Catherine Ansted. The obvious difficulty of this position is that the stock of Catherine Ansted belonged during the taxable year to her estate, and George W. Ansted held the stock not individually, but in a purely representative capacity, while the ultimate beneficial interest in such stock, which might be in George W. Ansted and Nellie Ansted Huston, would depend upon, whether there were other heirs at law, whether there was a will (he might have been administrator c. t. a.), and whether the other assets of the estate, if any, were sufficient to pay the obligation of the estate, if any. There is no evidence in the record on these questions and, therefore, no proof of such beneficial interest in the stock of Catherine Ansted in the Eex Manufacturing Co. being in George W. Ansted and Nellie Ansted Huston.

Petitioner’s contention that James M, Heron had an interest or control in the property of the petitioner by virtue of his ownership of first mortgage bonds of petitioner is answered in petitioner’s own brief, in which it is stated that “the phrase ‘interest or control’ as used in the reorganization provisions of the Eevenue Acts means the per cent of stock owned.” Petitioner then cites Evans Products Co., 29 B. T. A. 992, and Keen & Woolf Oil Co. v. Commissioner, 49 Fed. (2d) 45.

We must, therefore, conclude that the former stockholders of the Eex Manufacturing Co. who held 77.8 percent of the stock of petitioner immediately after the acquisition by petitioner of the property formerly owned by the Eex Manufacturing Co., held before the transfer only 47.65 percent of the common stock and 48.75 percent of the preferred stock of the Eex Manufacturing Co., and, therefore, the provisions of section 113 (a) (7) of- the. Eevenue Act of 1932 do not apply to the situation presented by this case, and, as covered by the stipulation of the parties, in the event 'of such finding, the proper depreciation deduction for the year 1982 is $6,182.69.

Decision will he entered u/nder Bule 50.

       SEC. 112. RECOGNITION OF GAIN OR LOSS.
      *******
      (i) Definition of reorganization. — As used in this section and sections 113 and 115—
      (1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
      SEC. 113. 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—
      * # * * * *
      (7) Transfers to Corporation Where Control of Property Remains in Same Persons. — If the property was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 50 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon. such transfer under the law applicable to the year in which the transfer was made. This paragraph shall not apply if the property acquired consists of stock or securities in a corporation a party to the reorganization, unless acquired by the issuance of stock or securities of the transferee as the consideration in whole or in part for the transfer.
      SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION.
      (a) Basis for Depreciation. — The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 113 (b) for the purpose of determining the gain or loss upon the sale or other disposition of such property.