author: MuRDOCk:

text:
    Southport Mill, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 1676.
    Promulgated April 29, 1927.
    We are not convinced that stockholders contributed a paid-in surplus to the petitioner, the amount of which should be included in invested capital as defined in section 326 of the Revenue Act of 1918.

      Isom J. Guillory, Esq., and E. Barrett Prettyman, Esq., for the petitioner.

      M. N. Fisher, Esq., for the respondent.
    This proceeding involves alleged deficiencies in income and profits taxes for the fiscal years ended May 31, 1918, and May 31, 1919, in the amounts of $10,484.57 and $8,923, respectively.
    The petitioner has admitted the correctness of approximately $1,124 of the deficiency for the earlier year and approximately $3,449 of the deficiency for the later year, but in its petition it alleges the following errors:
    A. The Commissioner of Internal Revenue has refused to permit the petitioner to include in invested capital for the year 1918, bona fide paid-in surplus, amounting to $262,500.00, paid in as follows: May 1, 1916, $125,000.00; June 1, 1917, $72,500.00; and June 1, 1917, $65,000.00.
    B. The Commissioner of Internal Revenue has refused to permit the petitioner to include in invested capital for the year 1919, bona fide paid-in surplus, amounting to $276,979.47, paid in as follows: May 1, 1916, $125,000.00; June 1, 1917, $72,500.00; June 1, 1917, $65,000.00; and Jan. 1, 1918, $35,000.00. The last amount averaged for 151 days equals $14,479.47.
    FINDINGS OF FACT.
    The petitioner is incorporated Under the laws of the State of Louisiana, and has its principal office in New Orleans. It is engaged in the manufacture and exportation of cottonseed products. Its books of account were kept and its income-tax returns were made on the basis of a fiscal year ended May 31. The stockholders of record on April 20, 1916, and the number of shares held by each
    stockholder were as follows:
    Stockholders. Number of shares.
    A. D. Geoghegan- 1
    Mrs. A. D. Geoghegan_ 124
    C. B. Coate_120
    M. B. Coate_ 5
    Chas. Monsted_ 45
    Mrs. C. Monsted_ 5
    H. Guldmann_ 50
    A. Q. Petersen- 25
    N. O. Export Co. (C. Monsted)_ 50
    N. O. Export Co. (H. Guldmann)_ 50
    N. O. Export Co. (A. Q. Petersen)_ 25
    Total_ 500

      The corporation was making money in its business in 1916, and the two stockholders named Coate, who were husband and wife, wanted a large cash dividend out of the earnings of the business. Certain other stockholders deemed the payment of large cash dividends inadvisable because the corporation needed money with which to operate and had had difficulty borrowing from banks. On April 12, 1916, the following written agreement was entered into:
    On this day, the following agreement was entered into between Southport Mill, Limited, New Orleans, Louisiana party of the first part, and Chas. Mon-sted ; Mrs. Chas. Monsted; A. D. Geoghegan; Mrs. A. D. Geoghegan; H. Guld-mann and A. Q. Petersen parties of the second part as follows:
    Whereas it is contemplated on the part of the Southport Mill, Limited, that a dividend will be declared at the close of each fiscal year on May 31st, the amount -of which dividend is expected to be paid in cash to the minority Stockholders only, and
    Whereas it is understood between the parties to this Agreement that any subsequent dividends that would ordinarily accrue and be payable to the aforesaid parties of the second part along with other Stockholders is intended to remain in the Treasury of the Southport Mill, Limited as though no dividend had been declared.
    Whereas the said parties of the second part hereby agree in accordance with the foregoing that they will not avail themselves of the aforesaid dividends subsequently declared, but do hereby bind themselves to allow the aforesaid dividends to remain in the Treasury of the Company for the purpose of providing a sufficient working capital for the successful operation of the business, and
    Whereas in order to place the parties of the second part on an equal basis with the other Stockholders to whom any of the aforesaid dividends may be paid in cash,
    It is understood between the parties to this agreement that whenever any of the aforesaid dividends shall be actually paid to the parties of the second part, or any one of them that in addition to the amount of the dividends there shall be paid to the parties of the second part only an extra dividend, of 6% per annum on the dividends thus retained, until paid.
    It is the purpose of this Agreement that whenever any dividend may be declared subsequent to the date of this Agreement that so far as it may relate to the parties of the second part, it shall be a dividend deferred as to its payment until such time as, in the opinion of Southport Mill, Limited, there shall have accumulated in the Treasury a fund sufficient for the successful operation of the business. The amount ordinarily payable to the parties of the second part on the declaration of a dividend shall, therefore, remain in the Treasury of said Southport Mill, Limited, the same as a paid in surplus to be used by them in accordance with the foregoing agreement.
    New Orleans, April 12, 1916.
    (Signed) A. Q. Petersen, Charles Monsted, A. D. Geoghe-gan, Mrs. A. D. Geoghegan, Hans Guldmann, Mrs. Chas. Monsted.
    Southport Mill, Ltd.
    A. D. Geoghegan,
    Manager.

      On April 28, 1916, the directors of the petitioner declared a dividend of $250,000, payable on May 1, 1916, as is shown by the following extract from the minutes of the directors’ meeting:
    On motion of Mr. Petersen seconded by Mr. Coate it was unanimously resolved- that a dividend of 500% be, and is hereby, declared on the capital stock of the Southport Mill, Ltd. to be credited or paid' on May 1st., 1916, to Stockholders of record on April 20/16.
    A debit of $250,000, dated May 1,1916, was entered upon the books of the corporation against undivided profits and a credit of a like amount was entered under Dividend No. 6. A debit of $250,000 was then entered against Dividend No. 6 and each stockholder was credited with his proportionate share of the dividend. An entry dated the same day was made upon the books of the corporation debiting the six stockholders who were parties to the agreement of April 12, 1916, with the exact amounts which had been credited to them by way of dividends and the total amount of these debits,' or $125,000, was credited to “ Paid-in surplus, special, as per agreement dated April 12, 1916.”
    On May 9, 1917, the petitioner declared a dividend of $125,000 payable May 31, 1917, as is shown by the following extract from the minutes of the directors’ meeting:
    On motion of Mr. Geoghegan seconded by Mr. Monsted it was unanimously resolved that a dividend of 290% be and is hereby declared on the capital stock of the Southport Mill, Ltd., to be credited to stockholders on May 31st., 1917.
    Upon the books of the corporation under date of May 31, 1917, undivided profits was debited $145,000, Dividend No. 7 was credited $145,000 and was then debited $145,000 and the stockholders were credited with their proportionate shares of this dividend. Under date of June 1, 1917, those stockholders who were parties to the agreement, were debited with the exact amount which had been credited to them as dividends under date of May 31, and the total of these debits, or $72,500, was credited to “ Paid-in surplus, special, as per agreement April 12, 1916.”
    On June 1, 1917, A. D. Geoghegan, on behalf of himself and certain other stockholders, paid into the corporation the sum of $65,000, and again on January 1, 1918, he paid in $35,000. Each amount was immediately credited to “ Paid-in surplus, special.”
    No written agreement in relation to the payment of these two amounts of money was ever entered into, but it was intended that the money should be paid back to A. D. Geoghegan and that interest in the form of a special dividend would be paid on it. A. D. Geoghegan was president of the corporation. The corporation had always had difficulty borrowing sufficient money from banks with which to operate.

      From time to time after the dates of the credits to the account.called “ Paid-in surplus, special ” as above set forth, the petitioner furnished financial statements or balance sheets to some creditors, banks and others. These sheets showed the total amount then credited to “ Paid-in surplus, special ” as “ Paid-in surplus.”
    During the period involved in this case, the books of the corporation were audited by certified public accountants. Their reports showed the amount of the “ Paid-in surplus, special ” account. Excerpts from these reports were at times furnished to banks, and a complete report was furnished to any bank which was sufficiently interested to want a complete report.
    On June 1,1917, which was the beginning of the petitioner’s fiscal year ended May 31, 1918, the “ Paid-in surplus, special ” account had a credit balance of $262,500, which remained unimpaired throughout the fiscal year ended May 31, 1918, and was increased by $35,000 credited on January 1, 1918.
    On June 1, 1918, which was the beginning of the fiscal year ended May 31, 1919, the “Paid-in surplus, special,” account had a credit balance of $297,500, which remained unimpaired throughout the fiscal year ended May 31, 1919.
    On May 15, 1919, the board of directors of the petitioner adopted the following resolution:
    That WheReas Southport Mill, Ltd., is now financially in such a position as to render unnecessary the retention in the Treasury of the deferred dividends amounting to $197,500.00 entered under Paid-In Surplus
    That the said amount of $197,500.00 be paid on June 1st., 1919, to the respective stockholders, thus cancelling from that date the agreement dated April 12th., 1916, regarding retention of dividends thus far paid and to be paid in the future.
    “ Paid-in surplus, special ” was debited $197,500 on the books of the corporation under date of June 1, 1919, and the six stockholders, who were the parties to the agreement of April 12, 1916, were credited with their proportionate shares of this debit.
    On June 2, 1919, the board of directors of the petitioner adopted the following resolution:
    That Whereas Southport Mill, Ltd., is now financially in such a position as to render unnecessary the permanent retention in the Treasury of the amount of $100,000.00, being balance left unpaid in Surplus Account
    That said amount of $100,000.00 be refunded to Original Depositors.
    “Paid-in surplus, special” was debited $100,000 upon the books of the corporation under date of June 2, 1919, and A. D. Geoghegan was credited with $100,000. There were no further entries in this account. No interest was paid on the money involved in these accounts and no extra dividend of 6 per cent, as referred to in the agreement of April 12, 1916, was actually paid.

      The following are statements, furnished by the petitioner to banks and others, purporting to show the condition of its finances at the close of business on the dates indicated:

      May SI, 1916.

    Assets
    Cash-$47, 551.97
    Bills Receivable_ 8, 516.53
    Accounts Receivable-847, 650.65
    Railroad Claims-2,756.11
    Stock, Terminal Oil Mill Co_$18,875.00
    Cattle Food Supply Co-_ 9,504. 60
    Southport Service Co- 5,000.00 33, 379.60
    Bonds, Myrtle Grove P. & M. Co. 700.00
    Office Furniture_ 1,951.16
    Permanent Investment-109,121.31
    Real Estate_ 12, 250.00
    Laboratory_ 250.00
    Inventory_ 158, 664.83
    $1, 222, 792.16
    Liabilities
    Bills Payable_ $277,445.00
    Accounts Payable_ 499, 790. 81
    Capital Stock__ 50', 000.00
    Paid in Surplus_ 125, 000.00
    Undivided Profits_ 265,466. 59
    Reserve_ 5,089. 76
    $1, 222, 792.16

      May SI, 1917.
    Assets
    Cash_ $23, 092. 51
    Bills Receivable_ 8, 522. 50
    Accounts Receivable-838, 882. 87
    Stock, Cattle Food Supply Co-$24, 020.00
    Southport Service Co_ 5, 000. 00
    R. C. Burke & Co_ 5,000.00 34,020. 00
    Bonds, Myrtle Grove P. & M. Co- $700. 00
    East Palestine Rubber Co_ 150.00
    850.00
    Office Furniture-1, 969. 91
    Permanent Investment. 239, 222.95
    Real Estate_ 19, 750.00
    Laboratory-250.00
    Inventory_ 593, 676.16
    $1, 760,236.90

      Liabilities
    Bills Payable- - $464,300.00
    Accounts Payable. - 456, 367.48
    Capital Stock_ 50,000.00
    Paid in Surplus- . 125, 000. 00
    Undivided Profits. . 594, 266.34
    Reserve_ 70,303.08
    $1, 760, 236. 90

      May SI, 1918.

    Assets
    Cash in Banks and Office_ $226, 890.16
    Bonds- 15, 850. 00
    Stocks- 34,010.40
    Bills Receivable_ 7, 922. 50
    Accounts Receivable_ 766,841.39
    Mill Investments_ 572, 505. 30
    Inventory, Stock of all Products on Hand_ 909, 894.13
    $2, 533, 913.88
    Liabilities
    Capital- $550, 000. 00
    Surplus paid in- 297,500.00
    Surplus earned- 472,413.69
    Reserves- 124, 078.59
    Bills Payable- 660,000. 00
    Accounts Payable- 429,921. 60
    $2, 533, 913. 88
   OPINION.

MuRDOCk:

Our problem in this case is to decide whether the $297,500, or any part thereof, carried in this “Paid-in surplus, special ” account should go into statutory invested capital as paid-in surplus for either of the years involved and, if it should go in, the date on which it should go in.

The circumstances surrounding the two payments by Geoghegan, one of $65,000 and one of $35,000, do not lead us to believe that either amount constituted paid-in surplus and therefore invested capital within the meaning of section 326 of the Eevenue Act of 1918. He paid the amounts to the corporation and the corporation “refunded” the total amount to him. He testified that he paid in the money for and on account of all of the stockholders except Mr. and Mrs. Coate, that the corporation needed working capital, that it was having difficulty borrowing from banks, and that interest on it was waived when it was repaid. There is no evidence of what agreement or understanding, if any, existed between Geoghegan . and the corporation in regard to this money. It was credited to a special paid-in surplus account, whatever that may have been. It was only to remain with the corporation temporarily. Mr. and Mrs. Coate were never to share in a repayment or distribution of this money. Apparently no stock was issued, no notes or other security given, and on the other hand no credit was entered to Geoghegan on the books on account of it and no interest was paid for the use of it. Nevertheless, in this corporation the stock was closely held and there is nothing to convince us that this was not a loan and therefore borrowed capital as determined by the Commissioner and as defined in section 325(a) of the Revenue Act of 1918. We affirm the Commissioner on this point.

The evidence does not disclose the stock holdings for any date other than April 20, 1916. On that date, C. B. Coate and M. B. Coate, husband and wife, together held 125 shares, or one-fourth of the stock of the corporation. The N. O. Export Co. held another 125 shares. We are not informed as to what this company was or why its stock was divided among C. Monsted, II. Guldmann, and A. Q. Petersen, as set out in the findings of fact. In any event six other stockholders owned the remaining 250 shares, or one-half of the stock, and on April 12, 1916, they entered into an agreement in regard to prospective dividends to be declared on their stock. It is argued that because of this agreement something was invested capital within the meaning of section 326 of the Revenue Act of 1918, which otherwise admittedly would not have been suck invested capital. See Appeal of Wm. H. Davidow Sons Co., 1 B. T. A. 1215, and W. E. Caldwell Co. v. Commissioner, 6 B. T. A. 47.

We held in the Davidow case, supra, that where a dividend is 'declared and payable, but is permitted to remain in the business, it constitutes borrowed capital and can not be included in invested capital. In that case the agreement to leave the money in the business was subsequent to the date of the declaration of the dividends and also to the date on which they were payable. All of the stockholders in that corporation were parties to that agreement. Is this agreement entered into by only a part of the stockholders any more effective merely because it antedated the declaration of dividends?

Before we consider the merits of the petitioner’s contention there are certain features of the evidence which we want to mention. The petitioner offered and there were received in evidence two auditor’s reports, one purporting to be an audit of the corporation’s books as of May 31,1918, and the other an audit as of May 31, 1919. The first included a balance sheet which showed “ Paid-in surplus, $297,500,” and the second a balance sheet which showed “Paid-in surplus, special — $297,500.” On each this item appeared under liabilities and there appeared among the assets certain “Accounts Receivable ” in substantial amounts. Each report contained a de-\ tailed statement of the “Accounts Receivable ” in which we find the ' following items:

1918 Audit.

Mr. and Mrs. A. D. Geoghegan, special_$98,750.00

H. Guldman, special_ 39, 500. 00

Chas. Monsted, special_ 35, 500.00

Mrs. Chas. Monsted, special_ 3,950.00

A. Q. Petersen, special_ 19, 750. 00

1919 Audit.

Mr. and Mrs. A. D. Geoghegan_ 98, 750. 00

Mr. and Mrs. Chas. Monsted_ 39, 500. 00

Mr. H. Gnldxaan, special_ 39, 500.00

Mr. A. Q. Petersen- 19, 750. 00

These items are unexplained by the record. We note that in each instance they are in the exact amount of the dividends supposed to have been left in the business in accordance with the agreement of the six stockholders named. We do not understand why these amounts would be due from the respective stockholders if in fact their dividends had been left in the business to create the “ Paid-in surplus, special ” credit balance as the petitioner has contended, and as it attempted to prove by sheets of paper purporting to be copies from the books of the corporation offered in evidence by agreement of counsel. We have stated in our findings of fact the various entries shown by these sheets. If, as a matter of fact, all of these stockholders had withdrawn their dividends in cash when declared and the credit balance to the “ Paid-in surplus, special ” account then had been entered it would have been necessary to have balanced it on the books with an asset, and if this was done we can readily understand why these amounts appear in accounts receivable as owned by these six stockholders.

If the credit balance in the “ Paid-in surplus, special ” account was thus created by entering as an asset accounts receivable from each of these six stockholders in the amount of their dividends, we are unable to see how payment of the dividends was deferred in accordance with the proof offered and in accordance with the alleged purpose of the agreement.

These same audits do not show any part of the $100,000 paid in by Geoghegan as accounts receivable. No witness testified that these dividends were not drawn in cash or that they were actually left in the business. Judging by the balance sheets in evidence, the undivided profits account was always larger than the amount of dividends declared.

After considering ail of the testimony we are in doubt as to just what was done in regard to these dividends and the “ Paid-in surplus, special” account. It may be that these apparent differences can be reconciled, but they have not been explained in the record. Under such circumstances we would be justified in deciding this case in iavor of the respondent without further discussion. However, we think that even if the money actually remained in the business our decision should be the same and therefore we continue.

Section 325(a) of the Eevenue Act of 1918, defines “borrowed capital ” as “ money or other property borrowed, whether represented by bonds, notes, open accounts, or otherwise.”

Section 326, in addition to stating that invested capital shall not include “borrowed capital,” defines “invested capital” to include “Actual cash bona fide paid in for stock or shares ” and “ Paid-in or earned surplus and undivided profits; not including surplus and undivided profits earned during the year.”

In the present case it is contended that a situation was created by a contract whereby holders of 50 per cent of the stock paid in a surplus in which they alone were to share upon its distribution, a surplus which was not theirs individually, but belonged to and was embarked in the business of the corporation. The petitioner, to succeed in this contention, had the duty of proving that the contract was intended to and did accomplish the desired result.

The fourth and fifth recitals clearly show that these dividends were to be preserved for these six stockholders, that they alone were to share in the distribution of them, and that they were to receive 6 per cent per annum on their money. The declaration of a dividend creates a debtor and creditor relation between the corporation and its stockholders as to the amount of the dividend due each stockholder. W. E. Caldwell Co., 6 B. T. A. 47. Therefore, standing alone, the declarations of dividends in this case would have removed from invested capital from the dates of declaration the total amounts of the dividends declared. This would not be changed had the agreement of April 12,1916, served only to defer the payment, of that portion of the dividends due the six contracting stockholders as the last paragraph of the agreement states was its purpose. See Fletcher on Corporations, vol. 6, p. 6066, and cases there cited, especially Wallin v. Johnson City Lumber & Mfg. Co., 136 Tenn. 124; L. R. A. 1917B 323; 188 S. W. 577, and Northwestern Marble & Tile Co. v. Carlson, 116 Minn. 438; 133 N. W. 1014, to the effect that though a dividend is payable upon a day not yet appointed, or at such time as in the opinion of the directors the corporation’s finances justify such payment, nevertheless, the debtor-creditor relation arises upon the date of declaration. The last sentence of this last paragraph of the agreement, if it was intended to indicate that the money was to be invested capital and was to belong to the corporation, is directly in conflict with the sentence immediately preceding it, which merely indicates that the parties consent to the use of their money by the; corporation. \

In the second recital there is the statement, not entirely free from ambiguity, that, “ It is understood between the parties to this Agreement that any subsequent dividends that would ordinarily accrue and be payable to the aforesaid parties of the second part along with other Stockholders is intended to remain in the Treasury of the Southport Mill, Limited, as though no dividend had been declared.” Standing alone this paragraph might have the effect contended for by the petitioner. But considering this statement in the light of the entire contract and considering the entire contract in connection with all of the evidence, we are convinced neither that this money was intended to be, nor that it was embarked in the business. See La Belle Iron Works v. United States, 256 U. S. 377. Therefore, no part of these dividends, or of the amount which they represented, should be included in invested capital after the respective dates on which the dividends were declared.

It might be that as to certain creditors to whom the petitioner furnished balance sheets, such as are in evidence, that the principle of estoppel could be invoked by those creditors and that as to them it could not be. denied that this money belonged to the corporation. However, the principle of estoppel has no place in' this case. It was never demonstrated to what extent such annual statements were published, or held out to customers, banks, or other creditors, and the record does not show the name of any person or firm that was indebted or became indebted to the corporation which received any of the statements introduced. No doubt the object of introducing this evidence was to bring the case within the decision in the case of English & Mersick Co. v. Eaton, 299 Fed. 646, which was affirmed in the Circuit Court of Appeals, 7 Fed. (2d) 54. However, we feel that that decision is not in point. It was there held that a certain resolution of the directors was not a declaration of a dividend. In our case we are convinced that each of the two resolutions was a declaration of a dividend. It would be absurd to hold that the publication of an incorrect financial statement by a corporation in which it included in surplus that which, in fact, was a debt to its stockholders, permits it, as a matter of law, to retain the incorrect amount in its surplus and to include it in its statutory invested capital. Even though such a misstatement by a corporation might make the directors personally liable, and possibly criminally liable, and place the stockholders’ claim in a position secondary to the position of the creditors relying on such misstatement to their harm, providing the stockholders had knowledge of and acquiesced in the misstatement, still it does not extinguish the debt of the corporation to its stockholders, but, at most, makes the stockholders’ rights secondary to the rights of those other creditors. The fact that the debt of the corporation to the stockholders may be secondary to the debts owed general creditors does not change the debt from “borrowed money ” to “ invested capital.” Appeal of I. Unterberg & Co., 2 B. T. A. 274, and Appeal of Webb Press Co., Ltd., 3 B. T. A. 247.

The cases of United States v. Mellon, 281 Fed. 645, and United States v. Davison, 1 Fed. (2d) 465, are not in point, if for no other reasons than that in our case we are not convinced from the evidence that by the agreement the money was or was intended to be embarked in the business nor have we heard any evidence to the effect that but for the agreement no dividend would have been declared. In the two cases above cited, it was held in effect that the amount of the dividend was intended to be and was actually embarked in the business and was the property of the corporation, stock was issued for it and but for the agreement no dividend would have been declared.

Judgment will be entered for the respondent.

Phillips dissents.

Smith concurs in the result only.


source: Caselaw Access Project

author: Littleton :

license: Public Domain

text:
    Pittsburgh Knife & Forge Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7464.
    Promulgated April 29, 1927.

      W. M. Smith, Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
    The Commissioner in his sixty-day notice mailed to the petitioner notified it of his determination in respect of its tax liability as follows:
    Tear. Deficiency.
    1916- $19. 43
    1917- None.
    1918-10,112.14
    1919- 459. 60
    1920- 1,772. 85
    Petitioner assigns two errors — first, that accrued depreciation to December 31, 1916, amounted to $9,282.54 instead of $43,180.16 as determined by the Commissioner and that the amount of $33,897.62 should be restored to invested capital; secondly, that the Commissioner erroneously reduced invested capital for 1918 in the amount of $14,504.65 on account of the computation of a tentative tax of $36,877.24®in determining the amount of current earnings available for the payment of dividends declared and paid within the yeari The Commissioner moved to dismiss the petition in so far as it! related to the year 1917 for the reason that he had not determined a \ deficiency for that year. When the proceeding was called for hear- \ ing petitioner withdrew the allegations of the petition relating to the year 1917 and the error in regard to the Commissioner’s determination of accrued depreciation.
    FINDINGS OF FACT.
    Petitioner is a Pennsylvania corporation with principal office and place of business at Pittsburgh. During the year 1918 petitioner declared and paid cash dividends as follows:
    March 11_$10, 000
    April 8_ 6, 250
    May 13_ 11,250
    June 10_ 6, 875
    July 7_ 10,000
    August 12- 5, 625
    Total_$50, 000
    In determining the amount of current earnings available for the payment of dividends declared and paid during the year 19.18, the Commissioner computed and set aside out of such current earnings a tentative tax upon the income for the year of $36,877.24 resulting in the reduction of invested capital in the amount of $14,504.65.
   OPINION.

Littleton :

Petitioner’s invested capital for 1918 should not have been reduced on account of the tentative tax computed upon the income for the year in determining the amount of current earnings available for the payment of dividends. Appeal of L. S. Ayers & Co., 1 B. T. A. 1135.

Judgment will T>e entered on 15 days' notice, under Rule 50.


author: Littleton:

text:
    Louis Samuels, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10205.
    Promulgated April 29, 1927.
    The Commissioner correctly held that the petitioner and his wife were not entitled to file separate returns, reporting each one-half of the income received during the year on the eomrqjmity property basis.

      W. W. Spalding, Esq., for the petitioner.

      Dwight H. Green, Esq., for the respondent.
    The Commissioner determined a deficiency of $11,877.42 for the calendar year 1921. The petitioner claims that the Commissioner erred in refusing to permit him and his wife to file separate returns, each reporting one-half of the income received during the year.
    FINDINGS OF FACT.
    During the taxable year 1921 the petitioner was, and still is, a resident and citizen of the State of California, and married and living with his wife. During the taxable year 1921 the petitioner received a total income of $72,483.37, consisting of $24,600 as salary, $41,633.37 as petitioner’s distributive share of the profits of several partnerships, and $6,250 as dividends from the stock of domestic corporations owned by him during the taxable year. The petitioner was actively engaged in the conduct of the affairs of the partnerships, of which he was a member. For the year 1921 the petitioner and his wife filed separate returns, each reporting one-half of the income above mentioned. The Commissioner held that the petitioner and his wife were not entitled to report the income upon the community property basis and increased the petitioner’s income by the amount reported by his wife and determined the deficiency here in controversy.
   OPINION.

Littleton:

Upon the authority of United States v. Robbins, 269 U. S. 315, and the Board’s opinion in the Appeal of D. Cerruti, 4 B. T. A. 682, it is held that the Commissioner correctly increased petitioner’s income as reported by him by the amount of the income received by him during the year 1921 and reported by his wife.

Judgment will be entered for the respondent.


author: Güeen :

text:
    John M. Galvin, Administrator, Estate of A. A. Clark, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 820.
    Promulgated April 29, 1927.

      Daniel T. Sullivan, Esq., for the petitioner.

      John D. Foley, Esq., for the respondent.
    The petitioner herein seeks a redetermination of the tax liability of the estate for the year 1920, for which respondent determined a deficiency in income tax in the amount of $8,270.35. There is involved only so much of the deficiency as results from the action of the respondent in increasing over the amount returned by the petitioner, the amount of gain realized upon the sale of property in 1920. The increase results from the determination by the Commissioner that the March 1, 1913, value of the property was lower than the value used by the petitioner.
    BINDINGS OB BACT.
    A. A. Clark, deceased, acquired lot 1, James Subdivision of lot 177 of the original plat of Council Bluffs, Iowa, in 1893, at a cost of $19,000. He sold said property in 1920 for $48,000. The lot is located on the southeast corner of the intersection of Broadway and Main Streets. This location is and was on March 1, 1913, in the center of the business district and was one of the best corners in the city. The building upon the lot was constructed of brick and was three stories in height. The frontage on Broadway is 23 feet and on Main Street is 90 feet. The lower floor was divided into three rooms, one 23 feet in width fronting on Broadway, and two 20 feet in width fronting on Main Street. The fair annual rental value on March 1,1913, was $3,000. The Commissioner determined the March 1, 1913, value to be $25,000. The value of the property on that date was $30,000.
   OPINION.

Güeen :

The petitioner produced five witnesses, all men of the highest integrity, who had been familiar with the real estate in question for many years. Each of. these men testified unequivocally that the property in question had on March 1, 1913* a fair market value of $30,000. One witness was produced by the respondent. This witness placed the March 1, 1913, value at $22,500 but his testimony was far from convincing. Yfe are convinced that the property had on March 1, 1913, a fair market value of $30,000 and have so found.

Judgment will be entered after 15 days’ notice, under Rule 50.


author: Gkeen :

text:
    D. L. Larsh, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 12621.
    Promulgated April 29, 1927.

      Tom F. Carey, Esq., for the petitioner.

      Arthur E. Murray, Esq., for the respondent.
   Gkeen :

In this proceeding the petitioner seeks a redetermination of his income-tax liability for the year 1920, for which the Commissioner determined a deficiency in the amount of $1,444.23. The error alleged is the disallowance of an alleged loss resulting from the sale of certain shares of stock.

FINDINGS OP PACT.

Prior to the taxable year here in question the petitioner herein purchased 260 shares of the capital stock of the Artesia Alfalfa Milling Co. at a cost of $6,375. This company was organized to manufacture meal from alfalfa hay. The artesian wells which were the source of water supply for the alfalfa growers in that vicinity began to fail and in 1920 it ivas evident that the company could no longer hope to operate at a profit. During the year 1920 the petitioner herein sold 255 shares of said stock to his brother for the consideration of one dollar and assigned and delivered the stock certificates to the purchaser. This transfer was made upon the advice of counsel and for the express purpose of establishing losses on the stock.

The bill of sale given at the time the transfer was made contains the following recitation:

It is expressly understood that [this] is a Bona-fide sale without any reservations whatever. The stock represents no value to me for in my judgment the assets of the company if sold, would fall short several thousand dollars of paying its note indebtedness. You being in charge of the business should be entitled to the stock in preference to others. And if possible to make it of any value in the future, I will be glad to see you have the benefit.

A portion of the note indebtedness referred to in the quotation consisted of $15,000 loaned by the petitioner to the company in the year 1917. There has been paid upon the principal and interest of such note up to and including October 13, 1925, the sum of $120.

The Commissioner in his computation of the deficiency allowed no deduction for the loss sustained by reason of the sale.

The petitioner sustained a loss in the sum of $6,246.50.

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


author: TRAmmbll :

text:
    American Peanut Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6809.
    Promulgated April 29, 1927.
    Amounts paid out for the replacement of machinery and equipment destroyed, damaged and replaced as the result of an accident, are not deductible in determining net income.

      Tazewell Taylor, Esq., for the petitioner.

      A. H. Fast, Esq., for the respondent.

      This is a proceeding for the redetermination of a deficiency in income and profits taxes for the fiscal year ended October 31, 1919, in the amount of $12,452.84. The deficiency results from the action of the Commissioner in disallowing as a deduction expenditures made by the petitioner for machinery and equipment installed in its plant to take the place of property destroyed, damaged or removed as a result of an accident in the plant.
    FINDINGS OF FACT.
    The petitioner is a corporation organized under the laws of Virginia, with its principal office in Norfolk. It was, organized prior to March 1, 1913, and has been engaged in the business of cleaning and handling peanuts. On its organization it purchased all the machinery, including boilers and generators, of another company which had been engaged in the same business in Suffolk, Va. The petitioner leased the building in which this machinery and plant were located.
    In 1919 the petitioner had an accident in its plant. A flywheel on one of the engines went to pieces and, in addition to killing one man, did considerable damage to the machinery. Engines, generators, switchboards and wiring used by the petitioner for generating power were destroyed and other property was destroyed or damaged. The direct current motors and equipment used therewith were out of commission because there was no generator by which they could be operated. The plant was temporarily shut down.
    At the time of the accident the petitioner generated its own electricity and had direct current equipment. After the accident it was desired to replace equipment and make repairs as quickly as possible in order to save loss resulting from the discontinuance of operation. A secondhand alternating current motor generator was acquired at a cost of $4,500 in order to use electric current provided by the local power company. After the accident it was decided to install alternating current motors and to purchase current direct from the local power company instead of generating its own power. The power purchased was alternating current instead of direct which had been generated by petitioner. It was necessary, however, to procure transformers with which to change the current to direct. As the result of this change boilers, direct current motors and equipment for their use were removed and scrapped. The secondhand generator was sold at approximately its cost.
    After the new equipment was installed the petitioner was able to operate as before but the plant was of no greater capacity and was no more efficient than before the accident. The total amount expended for replacements and repairs, including the motor generator, which cost $4,500 and was acquired for temporary purposes, was $22,128.35. The petitioner deducted in its income and profits-tax return all the expenditures made by it in replacing and repairing this equipment. The respondent allowed as a deduction only such portion of the expenditures as he considered to be in the nature of repairs and disallowed such portion thereof as he considered was for replacements of machinery or equipment. This resulted in the' deficiency asserted.
    The actual value of the property destroyed at the time added to the value of that removed after the accident, was in excess of the amount expended for equipment installed after the accident and for repairs. A large portion of the machinery removed, however, was not damaged but was removed for the purpose of installing another kind of machinery and equipment. Nothing that was physically destroyed was replaced.
   OPINION.

TRAmmbll :

The only issue presented in this proceeding is whether the petitioner is entitled to a deduction on account of the replacements and repairs. On this issue we must approve the determination of the respondent. Eeplacements of the character here involved are capital expenditures. While repairs are deductible as expense, the respondent allowed such amounts as were shown to be for repairs in determining the‘proposed deficiency and disallowed only such portion of the amounts expended as he considered to be capital expenditures or for replacements. No portion of the amount disallowed is shown to have been expended for repairs. The machinery and equipment installed after the accident were of a different kind from that destroyed and damaged and a considerable portion of that removed was not destroyed or physically affected by the accident.

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


author: Geeen :

text:
    B. R. McGrath, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 495.
    Promulgated April 29, 1927.

      H. G-. Wellensiek, Esq., for the petitioner.

      L. O. Mitchell, Esq., for the respondent.
    In this proceeding the petitioner seeks a redetermination of his tax liability for the year 1921, for which the Commissioner determined a ' deficiency in income tax in the sum of $133.20. The issues are: First, the gain realized in 1921 from the sale of real estate; and, second, the amount to be allowed as a deduction for depreciation on an automobile.
    FINDINGS OF FACT.
    The petitioner purchased a farm in 1914 at a cost of $16,000. This farm he sold in 1921 for $21,600. In his return for the year in question, the petitioner added to the amount of the cost the amount of $1,050, being the cost of improvements, and subtracted the total from the sales price. The improvements on the premises at the time of purchase had a cash value of $3,000. In 1914 a fence was constructed at a cost of $60; in 1916 a corn crib at a cost of $165; in 1917 fencing at a cost of $450 and a windmill at a cost of $130; and in 1918, fencing at a cost of $255; an addition to the barn cost $320; or a total of $1,380. In addition the petitioner expended $210 for alfalfa seed sown on the premises. The petitioner alleged that he was entitled to depreciation on the improvements at the rate of 10 per cent and the Commissioner admitted that this was a proper rate of depreciation. Subsequently and at the hearing, the petitioner sought to prove that this rate was excessive.
    In 1919 the petitioner purchased an Oldsmobile coupe at a cost of $2,100.. For the year in question he deducted on his return as depreciation on the automobile the sum of $500, which was allowed. The car was used by the petitioner entirely in his business. The Commissioner determined the cost of the automobile to be $1,500 and the estimated useful life of the car to be three years and allowed depreciation at the rate of 33% per cent.
   OPINION.

Geeen :

The evidence adduced as to the proper rate of depreciation is not sufficient to enable us to determine the correct rate. There is evidence as to the life of some of the buildings, but except as to those added after the purchase there is no evidence as to their cost and there is no testimony relating specifically to those buildings as to which there is evidence of cost. Upon such a record we must affirm the rate of 10 per cent adopted by the Commissioner.

The gain on the sale should be computed by adding to the purchase price the cost of the improvements, which we have found to be $1,590; deducting from this amount depreciation at the rate of 10 per cent, and subtracting the amount so obtained from the sales price. The amount of $210 expended in the purchase of alfalfa seed may properly be added to the basis for gain or loss but for lack of evidence may not be included as a basis for depreciation.

The rate of depreciation used by the Commissioner, namely, 33^ per cent, should be applied to the cost of the automobile, which we have found to be $2,100. This results in an increase in the deduction in the sum of $200.

Judgment will be entered after 15 days' notice, under Rule 50.


author: Green :

text:
    John Hermalbrecht, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 752.
    Promulgated April 29, 1927.

      Arthur O. Thomsen, Esq., for the petitioner.

      L. G. MiteheTl, Esq., for the respondent.
   Green :

The petitioner herein seeks a redetermination of his tax liability for the year 1919, for which the Commissioner has determined a deficiency in income tax of $1,918.33.

In the petition and the amendment thereto made at the hearing, the petitioner alleges three errors on the part of the Commissioner in his computation of the gain resulting from petitioner’s cattle business and farming operations. The first of the allegations relates to the reduction of the cost of cattle on hand on January 1, 1919, from $75,000 as set forth on the return, to $60,478.22; the second relates to the cost of live stock purchased; and the third to the amounts expended in carrying on the business.

FINDINGS OP PACT.

The petitioner, a resident of Bancroft, Nebr., is engaged principally in the buying, feeding, and selling of live stock, and in connection with this business he owns and operates several farms.

On January 1, 1919, the petitioner had on hand live stock the cost of which was $66,478.22. During that year he expended in purchasing live stock the sum of $171,265.42. He had on hand at the close of the year live stock the cost of which was $55,000. During the year he received from the sales of live stock the sum of $286,732.85.

In carrying on the live stock business, above referred to, the petitioner made the following expenditures during the year 1919:

Corn and feed_$89,228. 99
Labor_ 3,410. 55
Freight_,_ 2,971. 06
Telephone_ 52.32

In addition to the foregoing, the petitioner expended the following amounts in carrying on his business during the taxable year:

Interest_$1, 875. 00
Repairs_,_ 851.01
Taxes_ 1,744.47

These amounts were proper deductions from gross income.

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


author: Smith:

text:
    Kendrick Coal & Dock Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6806.
    Promulgated April 29, 1927.
    Profit realized from tlie exchange of assets for shares of stock in a newly organized corporation determined.

      W. Tdle Smiley, Esg., for the petitioner.

      Thomas P. Dudley, Jr., Esg., for the respondent.
    This is a proceeding for the redetermination of a deficiency in income and profits tax for the year 1920 in the amount of $18,804.01. The petitioner alleges error on the part of the Commissioner in adding to its net income for 1920, $50,000 profit on the sale of certain assets.
    FINDINGS OF FACT.
    The petitioner is a Minnesota corporation engaged in the wholesale coal business. It was organized June 24, 1916, with a capital stock of $50,000, divided into 500 shares of a par value of $100 each. Its entire cajiital stock was issued, with the. exception of qualifying shares of directors, to Edward S. Kendrick, Jr. Kendrick had been engaged in the coal business for a number of years prior to the organization of the petitioner, first in Philadelphia, then in Cincinnati, and then in Minneapolis. He came to Minneapolis in 1911 and became associated with the BerwindFuel Co. as its sales manager for the northwestern territory adjacent to Minneapolis. For about five years subsequent and until May, 1916, Kendrick remained in this position. During this period he became acquainted with industries in the Northwest which were large purchasers of coal, and also with various coal companies which sold coal in that territory. In May, 1916, he severed his connection with the Benvind Fuel Co. and’ went into-the coal-jobbing business individually under the name of the Kendrick Coal & Dock Co.
    Kendrick continued his individual business for a period of about two months when the petitioner was incorporated. During this period lie secured numerous orders for the sale of coal, including both orders for single shipments and orders for shipments extending over a period of several months. None of the orders which were on hand and unfilled in June, 1916, provided for shipments extending beyond one year. On the organization of the petitioner, Kendrick turned over his individual coal business, including all of the unfilled orders on hand, for the entire capital stock of the petitioner.
    The books of account as of December 31, 1917, show assets and liabilities as follows:

    In 1918 Kendrick was mustered into the military service of the United States and was not mustered out until April, 1919. He returned to Minneapolis and continued the conduct of his coal business.
    Owing to keen competition, Kendrick saw that if his business was to become a large business, it would be necessary for the corporation to acquire a dock at Duluth and for it to make arrangements whereby it could get coal by water transportation from the eastern coal fields. Prior to June, 1920, Kendrick had been negotiating with certain eastern coal interests for the enlargement of Ms business. These negotiations were carried on with A. W. Thompson of the Wilson Transit Co. and F. E. Taplin of the Cleveland & Western Coal Co. In May, 1920, at a special meeting of the stockholders of the petitioner, its officers were authorized to enter into an agreement with the above-named individuals under the terms of which the petitioner was to agree in consideration of $50,000 of the stock of the Inland Coal & Dock Co. (corporation to be formed) to convey to Thompson and Taplin acting for and on behalf of such corporation “all the office furniture and fixtures, office supplies and equipment, also the good will and all of the benefits to be derived in the way of profits from the contracts which this corporation has for the purchase or sale of coal, and the contracts themselves, profits in which are estimated at $40,000 by the officers of the company, and it being understood that the purchaser is to assume all liabilities or losses which may arise in connection with said coal contracts.” Pursuant to such authorization Kendrick proceeded to Cleveland, Oliio, for the purpose of entering into the agreement referred to. Objection was raised by the attorney for the Inland Coal & Dock Co. to the issuance of any of its capital stock in payment for the assets of the petitioner above referred to. It was then agreed that the transfer should be made for $50,000 in cash, and that the petitioner should thereupon subscribe for 500 shares without nominal or par value of the common stock of the Inland Coal & Dock Co., to be paid for in cash. This change in the plan of the transaction was agreed to by Kendrick and the petitioner and a resolution in accordance therewith was duly passed by the directors of the petitioner.
    The following is the agreement entered into between Taplin and Thompson and the petitioner by E. S. Kendrick as president under date of June 1, 1920:
    Memorandum op Agreement made and entered into this first day of June, 1920, by and between A. W. Thompson and F. E. Tadlin, acting for and o-n behalf of a corporation to be formed to take over and operate the Island Creek Coal Company’s dock at Duluth, Minnesota, Parties of the First Part, and Kendrick Coal & Dock Company, a corporation of Minneapolis, Minnesota, Party of the Second Part.
    WITNESSETH :
    Whereas, a corporation is to be formed under the laws of the State of Ohio to take over and operate the Island Creek Coal Company’s dock at Duluth, Minnesota; and
    Whereas, it is desirable that said dock company so to be farmed shall have the benefits to be derived from the going organization of Second Party and the good will connected therewith, and also from certain contracts now held by the Second Party, and shall further secure the benefit of the services of E. S. Kendrick, now President of the Second Party.
    Now, Therefore, it is agreed as follows:
    (1) Parties of the First Part agree to purchase, and Party of the Second Part ag'rees to sell, all of Second Party’s office furniture and fixtures, supplies and equipment, also the Good Will of said Company, and all of the benefits to be derived in the way of profits from the contracts which Second Party has for the purchase or sale of coal, it being understood that said corporation so to be formed shall assume all liabilities or losses to arise in connection with said coal contracts.
    (2) In full payment for said property, Party of the Second Part agrees to accept, and Parties of the First Part agree to pay, the sum of Fifty Thousand Dollars ($50,000.00) in cash.
    (3) It is understood between the parties that while said coal contracts are not to be assigned or transferred to the new Dock Company, nevertheless, from and after the date hereof, all operations of Second Party in connection with said contracts are for the sole use and benefits or loss, as the case may he of said new Dock company.
    (4) Party of the Second Part agrees upon request to execute any and all papers necessary or proper to effect the transfer of the property hereby purchased by Parties of the First Part, it being understood that said transfer shall be made to the corporation before mentioned when duly organized. All physical assets covered by this agreement of purchase and sale shall he transferred free of liens or encumbrances of any sort.
    (5) It is understood that it is part of this agreement, supported by the consideration herein named, that the corporation to be formed shall employ the said E. S. Kendrick as Vice-President in charge of sales and management of the Duluth Coal Dock and of the Northwestern business of the corporation, at a salary of Fifteen Thousand Dollars ($15,000.00) a year and expenses, said employment to continue, so long as said E. S. Kendkick shall retain his stock ownership in said corporation.
    A bill of sale or assignment was then executed by the petitioner, in which it transferred to the Inland Coal & Dock Co. its office furniture and fixtures, good will and all the profits to bo derived from certain described contracts of the petitioner for the sale of coal. The contracts were 35 in number, had all been acquired by the petitioner subsequent to January 1, 1920, and were for the sale of 114,850 tons of coal. None of the orders or contracts on hand at that time were included in the orders or contracts transferred by Kendrick to the petitioner upon its organization in 1916. None of the accounts receivable or cash in the treasury of the petitioner were transferred to the Inland Coal & Dock Co. The surplus of the petitioner at the date of transfer was between $60,000 and $70,000.
    A check of the Inland Coal & Dock Co. for $50,000 was on June 12, 1920, delivered to the petitioner as the consideration for the transfer. On the same date the petitioner issued its check for $50,000 to the Cleveland & Western Coal Co. which had advanced the original subscription to the stock of the Inland Coal & Dock Co. in payment for 500 shares of the common stock of the last-mentioned company. The checks were passed simultaneously.
    The Inland Coal & Dock Co. was organized on June 1, 1920, with an authorized capital stock of 4,000 shares of preferred stock of a par value of $100 per share, and 6,000 shares of common stock of no par value. All of the common stock was subscribed for at $100 per share. The petitioner acquired 500 shares in the manner above described. It also purchased 700 shares, giving its note for $70,000 in payment therefor, $60,000 of the principal being paid as its accounts receivable were collected. E. S. Kendrick, Jr., individually subscribed for 600 shares of the stock at $100 per share. The balance of the common stock was subscribed for by the Cleveland & Western Coal Co. and the Wilson Transit Co. The company immediately acquired the dock of the Island Creek Coal Co. at Duluth. The certificate of the common stock issued provided that the transfer of them was subject to the provisions of the “ Code of Regulations ” of the company and that the shares of stock were “ accepted and held subject to all provisions of the Code of Regulations and to the designations, preferences and voting powers, or restrictions or qualifications thereof, of the preferred stock, which are set forth on the reverse side ” of each certificate. None of the ’ common stock of the Inland Coal & Dock Co. has ever been sold and no dividend has ever been paid by the company.

      The certificate for 500 shares of common stock acquired by the petitioner with its check for $50,000 bears date of June 12,1920, and was made out and is in the name of “ E. S. Kendrick.” This was retained by the petitioner up to December 31, 1920. At some time prior thereto a special meeting of the stockholders of the petitioner was called, a 100 per cent stock dividend was declared (the authorized capital stock having been increased to $200,000) and 3 shares of stock were issued to E. S. Kendrick for $300 in cash. The stockholders then voted to accept the offer of E. S. Kendrick to exchange 500 shares of the capital stock of the petitioner owned by him for the 500 shares of common capital stock of the Inland Coal & Dock Co. owned by it. The exchange was made accordingly. The petitioner returned no income for 1920 from the transaction above described. The Commissioner added $50,000 to gross income and net income for -1920, as the profit therefrom. The deficiencies arise from such adjustments of the petitioner’s return.
   OPINION.

Smith:

The question presented by this proceeding is the amount of income, if any, realized by the petitioner from the sale or exchange in 1920 of certain assets of the petitioner for $50,000 cash, which the petitioner was obligated to use and did use in the purchase of 500 shares of the common capital stock of the Inland Coal & Dock Co., an Ohio coloration. In its petition, the taxpayer alleges error on the part of the respondent in adding $50,000 to its gross income and net income for 1920 and alleges that “ said item of $50,000 constituted and represented certain capital stock which had a tangible value and was exchanged for securities of like amount and for securities of no greater par value, and hence the Commissioner of Internal Kevenue erroneously and illegally included said amount in computing the net income of this taxpayer for the calendar year 1920.”

It is the contention of the petitoner that the substance of the transaction in 1920 was an exchange by E. S. Kendrick, Jr., of $50,000 par value of the capital stock of the Kendrick Coal & Dock Co. for 500 shares of the common capital stock of the Inland Coal & Dock Co., and that no profit resulted from the transaction. The respondent alleges that the assets sold by the petitioner corporation cost it nothing, and that they were sold for $50,000 cash; consequently, that a profit of $50,000 was realized from the transaction.

The evidence discloses that the transaction was not simply a sale of assets for cash. Negotiations prior to the sale were that the petitioner should sell some of its assets for $50,000 par value of the stock of the Inland Coal & Dock Co. The attorney for that company required that the transaction go through as a cash transaction. This was effected by an exchange of checks of $50,000 each. The substance of the transaction was the exchange of certain assets of the petitioner corporation for 500 shares of the common capital stock of the Inland Coal & Dock Co. The question is whether the petitioner derived any income from such exchange. The facts that at the close of 1920 the petitioner corporation paid a stock dividend of 100 per cent, sold 8 shares of its capital stock for $300 cash, and exchanged its certificate for 500 shares of common capital stock of the Inland Coal & Dock Co. for 500 shares of its own stock appear to us to be immaterial. They do not change the fundamental character of the transaction ivhereby the petitioner sold or exchanged certain of its assets for 500 shares of the common stock of the Inland Coal & Dock Co. It is liable to income tax upon the profit, if any, which it realized from such transaction.

The applicable provisions of the Revenue Act of 1918 are sections 202(a) and 202(b), which provide:

Sec. 202. (a) That for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition of property * * * the basis shall be—
* * * * # :¡« #
(2) In the case of property acquired on or after that date [March 1, 1913], the cost thereof; * * *
(b) When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any; but when in connection with the reorganization, merger, or consolidation of a corporation a person receives in place of stock or securities owned by him new stock or securities of no greater aggregate par or face value, no gain or loss shall be deemed to occur from the exchange, and the new stock or securities received shall be treated as taking the place of the stock, securities or property exchanged.

Considering first the cost to the petitioner of the assets which it turned over to the Inland Coal & Dock Co., the evidence indicates that all of the contracts assigned to that company had been acquired by the petitioner subsequent to January 1, 1920. So far as appears none of the assets sold, except good will, were paid in to the petitioner for shares of stock upon its organization in 1916. The petitioner acquired certain contracts upon its organization, none of which ran for a period of more than one year. These appear to have been the only assets of value turned over to the petitioner corporation in 1916. Kendrick testified that these contracts were worth $50,000 at the date of organization and that earnings in excess of $50,000 were ascribable lo them. These contracts were soon translated into profits and appear upon the balance sheet as surplus at December 31, 1917. They were not capital assets after that date. The business of the Kendrick Coal & Dock Co. had been operated for a period of only about two months prior to incorporation and there is no evidence that the business had a good will of value at date of incorporation. The profits of the business were ascribable to the personality and capability of Kendrick. But personal qualifications or characteristics of an individual do not constitute good will. Appeal of Providence Mill Supply Co., 2 B. T. A. 791. The only assets turned over to the Inland Coal & Dock Co. in 1920, which may be said to have cost the petitioner anything, were furniture and fixtures, the depreciated cost of which was $2,782.89. The revenue agent’s report indicates that the books of account of the petitioner show that the depreciated cost of furniture and fixtures was charged to profit and loss in 1920, and the evidence indicates that such loss was allowed by the respondent in determining the deficiency for the year 1920. Since the respondent has computed the deficiency for 1920 by allowing the deduction from the gross income of $2,782.89, the depreciated cost of the furniture and fixtures, there is no occasion for taking this item into consideration in determining the profit, if any, realized from the transaction whereby the petitioner parted with certain assets for the 500 shares of common capital stock of the Inland Coal & Dock Co.

On the assumption that the substance of the transaction was an exchange of assets for 500 shares of stock, it is necessary to consider the fair market value of such shares at the date of receipt. The petitioner contends that no value may be ascribed to them for the reason that they were not transferable by Kendrick or by the other stockholders. The evidence indicates, however, that the shares were subscribed and paid for in 1920 at the rate of $100 per share. We think that this fact alone establishes their fair market value at $100 per share in 1920. Whether the transaction be regarded as a sale of assets for $50,000 cash, as contended by the respondent, or an exchange of assets for the 500 shares of stock appears to us, therefore, as immaterial. The same result must be reached in either case. We think that the petitioner realized a profit in 1920 from the transaction of $50,000, or of the difference between that amount and the depreciated cost of the furniture and fixtures.

Judgment will be entered on 16 days’ notice, under Bule 60.

MillikeN not participating.


author: Smiti-i :

text:
    Appeal of James Duggan, Executor, Estate of Hanna Duggan.
    Docket No. 4706.
    Promulgated April 29, 1927.
    1. On December 31, 1919, the decedent and her two brothers and a sister each owning one-fourth of the common stock of a coal-mining company transferred their respective shares of stock to trustees to liold under the terms of a declaration of trust whereby the trustees were to pay the income to the creators of the trust with rights over to the survivors upon the death of any beneficiary. Held, that the value at the date of death of the interest of the decedent in the trust estate was properly included in the gross estate under section 402 (c) of the Revenue Act of 1921.
    2. On March 31, 1920, the decedent assigned a onc-sixth interest in the trust property to a brother and another one-sixth interest to a niece, each assignment being for the joint lives of assignor and assignee. Held, that the value of the interests assigned were improperly included in the gross estate.

      Herbert Pope, Esq., and E. Barrett Prettyman, Esq., for tlie petitioner.

      J. F. G-reaney, Esq., for tlie Commissioner.
    This is a proceeding for the redetermination of a deficiency in estate tax of $19,122.42 upon the estate of a decedent who died May 18, 1928.
    BINDINGS OF FACT.
    The petitioner is the executor of the estate of Hanna Duggan, who died testate on May 18, 1923. Prior to December 31, 1919, all the capital stock of the Johnson City and Big Muddy Coal and Mining Co., an Illinois corporation (hereinafter referred to as the Company), was owned in eq'ual shares by four brothers and sisters, Michael Duggan, James Duggan, Margaret Duggan, and Hanna Duggan, all unmarried.
    On December 31,1919, the four stockholders, whose respective ages were then 67, 65, 59, and 50 years, entered into an agreement whereby they transferred their respective shares of stock in the Company to three trustees, Michael Duggan, Margaret Duggan, and Hanna Duggan, to hold under the terms and conditions of the agreement. The shares of stock in the Company at the time of the transfer had no established market price.
    The agreement of December 31, 1919, provided in part as follows:
    That Wheheas, tlie parties of the first part are the owners of all of the capital stock of the Johnson City anil Big Muddy Coal and Mining Company, an Illinois corporation, and are desirous not only of putting the control and management of said corporation and its business in said Trustees, but of giving to said Trustees power to control and manage the investment of said parties of the first part in the stock of said company with power to sell and exchange such stock and convert and invest said property in such other property as said Trustees may determine for the benefit of the beneficiaries hereinafter named.
    Now Therefore, for and in consideration of One ($1.00) Dollar and other good and valuable considerations, the receipt of which are hereby acknowledged, and for the purpose of accomplishing the objects herein set forth, said parties of the first part have assigned, transferred and set over and do hereby assign, transfer and set over unto the said Trustees, as such trustees, and to their successors in trust hereby created, all the right, title and interest which the said parties of the first part now have in and to all of the capital stock of the said Johnson City and Big Muddy Coal & Mining Company, a corporation organized and existing under the laws of the State of Illinois, together with all rights appertaining thereto, To Have An» To Hold upon the following trusts, uses and purposes:
    *******
    Third: The net income collected and received by said trustees from said trust estate shall be distributed from time to time as said trustees may in their discretion determine in equal shares to the parties of the first part, during their lives. Upon the death of one or more of said beneficiaries, the net income shall be distributed in equal shares amongst the survivors of said beneficiaries. When all of said beneficiaries shall have died except one, such sole surviving Denefieiary shall be entitled to terminate this trust if he shall so elect, in which case all of the trust estate then remaining in the hands of said trustees shall be conveyed, assigned, transferred and set over to such surviving beneficiary. If such sole surviving beneficiary shall not at any time during his life elect to terminate this trust, he shall be entitled to receive all of the net income of said trust estate during his life and upon his death all of the property of the trust estate then remaining in the hands of said trustees shall be conveyed, assigned, transferred and set over to such person or persons as said sole surviving beneficiary may by his last will and testament appoint, and in default of such appointment, shall be conveyed, assigned, transferred and set over to the heirs of said sole surviving beneficiary according to the statutes of descent of the State of Illinois then in force.
    In addition to the net income directed to be distributed amongst said beneficiaries as aforesaid, the trustees shall have power at any time and from time to time, in their discretion, to distribute in equal shares to the beneficiaries who at any time may be entitled to receive the net income of said trust estate as aforesaid, a portion or all of the principal of said trust estate at that time held by said trustees. No such distribution of principal, however, shall be made at any time unless all of the trustees hereunder shall concur in the making of such distribution.
    On March 31, 1920, the four parties to the aforesaid trust agreement each by separate instrument assigned one-sixth of his or her interest under the trust agreement to Henry Duggan, their brother, and one-sixth to Huida Duggan, their niece, the daughter of Henry, but “ only for so long as said assignee may live, and only for so long as I am alive, and provided further that said assignee shall not have any right whatsoever to assign any interest acquired by virtue of these provisions.”
    During the early part of the year 1920 the trustees under the aforesaid trust agreement determined to liquidate and dissolve the Company pursuant to the statutes of Illinois and after providing for the payment of its debts retained the balance of the assets and in due course the Company was formally dissolved and a certificate of dissolution was issued by the Secretary of State of Illinois under date of December 31, 1921. The trustees sold the assets so retained and invested a part of the proceeds in various securities. The trustees continued to administer all the trust property and at the date of the submission of this case continued to do so with the following exceptions:
    On May 1,1920, pursuant to authority granted by the trust instrument, they distributed $100,000 in cash (part of the principal of the trust property) equally between the four original beneficiaries a'nd the two assignees, each receiving one-sixth thereof. • On May 2, 1921, they distributed $396,000 par value of securities (part of the principal of the trust property) equally between the four original beneficiaries and the two assignees, each receiving one-sixth thereof. The trustees also distributed, from time to time, the income from the trust property, one-sixth to each of the four original beneficiaries and the two assignees.
    Hanna Duggan, the decedent, was the youngest of the four parties to the trust agreement. The illness which resulted in her death at the age of 53 years was contracted some five months prior to her death. The trust agreement of December 31, 1919, and the assignments of March 31, 1920, were in full force and effect at the date of decedent’s death, May 18, 1923.
    The Commissioner included in the value of the gross estate of the decedent subject to the estate tax one-fourth of the value of the trust property in the hands of the trustees on May 18, 1923.
    The petitioner, on December 23, 1924, paid the sum of $5,000 to attorneys on account for legal services in connection with the administration of the estate, which amount the Commissioner has allowed as a deduction from the gross estate.
    On or about May 21, 1924, the trustees of the above described property received from the collector at Chicago, a notice and demand for payment of $10,527.37 additional income taxes determined to be due upon the income of the trust for the year 1920. These additional taxes were duly paid by the trustees. The Commissioner in determining the value of the gross estate of decedent has allowed the deduction of only $10,000 for such taxes while the total amount paid was $10,527.37.
   OPINION.

Smiti-i :

In his petition, the executor of the estate of Hanna Dug-gan, deceased, alleges a number of facts which are denied by the Commissioner in his answer. The facts alleged are the basis of a number of assignments of error, some of which have to do with an alleged failure of the Commissioner to deduct from the gross estate, executor’s commissions payable in the sum of $3,500 and attorney’s fees payable, but not paid, in the amount of $5,000 for services rendered or to be rendered to the estate. Inasmuch as the allegations of fact have not been proven by any evidence submitted in the case, the assignments will not be further considered.

The petitioner further alleges that the Commissioner in determining the value of the trust property on May 18,1923, one-fourth of which value he included in the gross estate of the decedent, failed to deduct from such value, or otherwise to adjust that value so as to exclude therefrom, the amount of $527.37 paid by the trustees after the death of the decedent for income taxes payable for the year 1920 upon income of the trust; that while the Commissioner allowed the deduction of $10,000 for such taxes paid in 1924, the amount actually paid in 1924 was $10,527.37. The respondent admits error as alleged. Proper adjustment should be made therefor in the redetermination of the deficiency.

The remaining and principal issue is that the Commissioner erred in including in the gross estate and in the net estate, any amount representing the value of any of the property held by trustees on May 18,1923, under the trust agreement of December 31,1919. With respect to this issue, the petitioner alleges error on the part of the respondent as follows:

(1) The Commissioner included as part of the gross estate of the decedent, one-fourth of the value on May 18, 1923, of certain property then held by Michael Duggan, Margaret Duggan, and Hanna Duggan, as trustees, under an agreement made by and between the decedent, Michael Duggan, Margaret Duggan, and James Duggan as first parties and the trustees as second parties, on December 31, 1919.

(2) The Commissioner included as part of the gross estate of the decedent, the value on May 18, 1923, of certain beneficial interests under said trust agreement of December 31,1919, which beneficial interests were assigned by the decedent to two assignees on March 31, 1920.

In support of this appeal counsel for the jjetitioner relies upon the following proposition of law:

If the property transferred by Hanna Duggan by the instrument of December 31, 1919, and/or by the assignments of March 31, 1920, and/or the property or any part thereof held by the trustees on May 18, 1923, the date of decedent’s death, be held to be a part of her gross estate within the meaning of section 402 of the Revenue Act of 1921, nevertheless, a tax thereby imposed upon the transfer of such property is invalid, because the act is unconstitutional in so far as it requires the executor of the estate to pay a tax upon the transfer of property which has not and can not come into his hands as such executor; and further, because these transfers were fully executed transactions before the passage of the Revenue Act of 1921 and it can not be applied retroactively to them.

At the hearing of the appeal and in his brief, counsel for the petitioner has made many arguments which will be given consideration hereinafter.

Sections 401 and 402 of the Revenue Act of 1921, under which the tax is levied, so far as pertinent to the issues, read as follows:

Sec. 401. Tlmt, in lieu of the tax imposed hy Title IV of the Revenue Act of 1918, a tax equal to the sum of the following percentages of the value of the net estate (determined as provided in section 403) is hereby imposed upon the transfer of the net estate of every decedent dying- after the passage of this Act, whether a resident or nonresident of the United States * * *.
Sec. 402. That the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
*******
(c) To the extent of any interest therein of which the decedent lias at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death (whether such transfer or trust is made or created before or after the passage of this Act), except in case of a bona fide sale for a fair consideration in money or money’s worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such a consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.

The 1918 and 1921 Revenue Acts are identical with respect to the provisions quoted. The estate tax imposed by both Acts is a tax upon the transfer “ of the net estate of every decedent dying after the passage of ” the Act. In referring to this tax imposed by the Revenue Act of 1918 the Supreme Court of the United States in Edwards v. Slocum, 264 U. S. 61, said:

It comes into existence before and is independent of the receipt of the property by the legatee. It taxes, as Hanson, Death Duties, puts it in a passage cited in 178 U. S. 49, “ not the interest to which some person succeeds on a death, but the interest which ceased by reason of the death.”

In Y. M. C. A. v. Davis, 264 U. S. 47, the same court said:

What was being imposed here was an excise upon the transfer of an estate upon death of the owner. It was not a tax upon succession and receipt of benefits under the law or the will. It was death duties as distinguished from a legacy or succession tax.

The method of determining the net estate to which the tax attaches is clearly laid down in the statute. It is that portion of the gross estate of the decedent which remains after making certain deductions therefrom. Among the items to be included in the gross estate is property “to the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death * * * except in the case of a bona ñde sale for a fair consideration in money or money’s worth.” The petitioner does not contend nor does the evidence show that the transfer to the trustees was a bona fide sale for a fair consideration. It is the contention of the respondent that on December -31, 1919, the decedent had an interest in property with respect to which on that date she created a trust intended to take effect in possession or enjoyment at or after her death and that the value of such interest as she had in that property on the date of death was properly included in the gross estate for the purpose of determining the amount of the estate tax. Petitioner contends that the trust created was not one intended to take effect in possession or enjoyment at or after death within the meaning of section 402 (c) of the statute.

In Coolidge v. Nichols, 4 Fed. (2d) 112, it is stated:

The term “intended to take effect in possession or enjoyment at or after his death ” and the term “ in contemplation of death ’’ had both been frequently the subject of judicial definition, and it may be assumed that in drafting the act Congress had in mind these definitions. We find that the courts had held that a transfer in trust similar to the one before us in this case, where the donor had parted with all his interest in property that was to be held in trust until on or after the death of the donor, was a transfer to take effect in possession or enjoyment on or after death.

In Safe Deposit & Trust Co. v. Tait, 295 Fed. 429, a husband and wife each conveyed property to a common trustee, each to receive the income from the property conveyed by him or her during life with remainders over. The court held that such deeds did not constitute l>ona fide sales for consideration within the exception contained in section 402(c) of the Bevenue Act of 1918; that the effect of the transactions was to create a trust in contemplation of death; and that the trust created was one intended to take effect in possession and enjoyment at or after death.

It has consistently been held that the reservation of the income of a trust fund to the donor for life is a trust intended to take effect in possession or enjoyment at or after death. In re Masury's Estate, 51 N. Y. S. 331; In re Brandreth's Estate, 169 N. Y. 437; 62 N. E. 563; In re Cornell's Estate, 70 N. Y. 423; 63 N. E. 445; In re Bottomley's Estate, 92 N. J. Eq. 202; 111 Atl. 605; Carter v. Bugbee, 91 N. J. Law 438; 103 Atl. 818. See also Matter of Keeney, 194 N. Y. 281; 87 N. E. 428; affirmed 222 U. S. 525; and State Street Trust Co. v. Stevens, 209 Mass. 373; 95 N. E. 851.

In the instant case not only was the income of the trust fund reserved to the donor for the period of her life but a Iso she was entitled to receive and actually did receive distributions from the corpus of the fund. This was in accordance with the trust agreement of December 31, 1919. She possibly might have received during her lifetime her entire share of the corpus of the trust property.

On behalf of the petitioner it is argued that' the applicable section of the statute does not reach the particular kind of a trust created by the agreement of December 31, 1919, since that was an agreement made between four people by virtue of a contract and was primarily for the purpose of putting the property in the hands of trustees to sell. It is also argued that each of the donors to the trust gained, by virtue of the agreement, a contingent right in the whole of the estate and that if the respondent were to be consistent in his theory of the case he should have included not only the value of the interest of the decedent in the property which she transferred to the trust but also her contingent right to receive the whole of the estate, dependent upon survivorship.

We think that it is immaterial that the trust was primarily created for the purpose of effecting a sale of the mining property. Even though this be the primary purpose of its creation, the trust agreement went further and provided for survivorship among the donors to the trust fund. By so doing it effected a testamentary disposition of the property. It made it possible for the donors to enjoy the property during their lives and at the same time provided to whom it should pass upon the death of any donor. The respondent has not attempted to include in the value of the gross estate of the decedent the contingent interest of the decedent in the trust projierty dependent upon survivorship.

On behalf of the petitioner it is contended that section 402(c) of the taxing act does not apply to the particular property held by the trustees at the date of decedent’s death because no part of that property' was ever transferred by Hanna Duggan, the decedent, and could not on any theory be considered a part of her net estate and subject to a tax imposed only on the transfer of such net estate. We are of the opinion that this argument overlooks the provision of the statute which requires the inclusion in the gross estate of the value of the interest of the decedent in trust property, where'the trust is intended to take effect in possession or enjoyment at or after death. In the instant case the trust agreement provided that the trustees might sell the shares of stock which were transferred to them and that they could either distribute the proceeds to the beneficiaries of the trust or distribute a portion and reinvest the balance in securities or property of any kind. The situation appears to be analogous to that which obtained in the case of Reed v. Howbert, 8 Fed. (2d) 641, wherein it is stated:

Tlie trustee, pursuant to powers granted by the trust instrument, made changes in the securities, so that at the time of Mr. Reed’s death, some of the investments had never been owned by him.

In that case it was held that the value of the trust estate was to be included in the gross estate under section 402(c) of the taxing statute. In our opinion it is immaterial that the property in the hands of the trustees at date of death was not the identical property turned over to them by the creators oí the trust. The interest of the decedent persisted in the converted property. Her interest in that property ceased on her death.

What was the value of the interest of Hanna Duggan in the trust property at the date of her death? The record does not disclose the value found by the respondent in dollars and cents. No exception is taken to the value found provided the method used was proper. The respondent held that the amount to be included was the value at the date of death of one-fourth of the trust fund. This is objected to on the part of the petitioner for the reason that on March 31, 1920, Hanna Duggan assigned one-sixth of her interest under the trust to Henry Duggan, her brother, and one-sixth to Huida Duggan, her niece. These assignments were for the joint lives of assignor and assignee. While the assignees lived Hanna Duggan had no interest in the property assigned. They were living at the date of her death. It is the theory of the respondent, that since all the income at the time of the creation of the trust on December 31, 1919, was reserved to the decedent for her life, the subsequent assignment of the right to receive a part of that income for a period which might possibly extend to the time of the death of the donor but could extend no farther and where even under such circumstances the corpus of the trusts could not pass in possession or enjoyment until at or after the donor’s death, the transaction still remains a taxable transfer, that is, a transfer intended to take effect in possession or enjoyment at or after death. In re Patterson’s Estate, 146 App. Div. 286; 130 N. Y. S. 970; 204 N. Y. 677; 98 N. E. 1109; and Shukert v. Allen, 6 Fed. (2d) 551, are cited in support of this proposition.

We think that this is not the proper interpretation of the statute. On March 31, 1920, Hanna Duggan assigned and transferred what amounted to one-third of her one-fourth interest in the trust fund to others. The transfer was absolute. This point must be decided in favor of the petitioner upon the authority of Shukert v. Allen, sufra. There was a possibility that she might be revested with that of which she had been divested. But a possibility of reversion does not change the nature or fact of the transfer. Dexter v. Jackson, 243 Mass. 523; 137 N. E. 877. On the death of Hanna Duggan the interest in the trust fund theretofore enjoyed by Hanna Duggan and Huida Dug-gan passed to others, but they did not pass from the decedent. The respondent was in error in including in the value of the gross estate any amount for the value of the interest in the trust fund enjoyed by Henry Duggan and Huida Duggan up to the date of the decedent’s death.

There remains to be considered the retroactive operation of the statute upon the transfers made. The trust agreement was entered into December 31,1919. The Revenue Act of 1918 was then in effect. The applicable statute is the Act of 1921, an intervening statute which came in between the date of the transfer of the property, and the date of decedent’s death. The language of both Acts in points material to this issue was identical. The rates of tax only were changed.

It is settled that mere retroactivity of a taxing statute does not invalidate a tax. Kentucky Union Co. v. Kentucky, 219 U. S. 140; League v. Texas, 184 U. S. 156. The tax is an excise on the passing of an interest in property from a decedent. There appears to be no •question but that such a tax is valid. It was the intention of Congress to make not only the Estate Tax Act of 1921 but also that of 1918 to apply to transfers of property made before the effective dates of the taxing acts Avhere such transfers were in contemplation of death or where the transfer was of an interest in property with respect to which a trust was created to take effect in possession or enjoyment at or after death. Shwab v. Doyle, 258 U. S. 529.

On behalf of the petitioner it is exhaustively argued that the particular provision of the statute here in question (section 402(c) of the Revenue Act of 1921) must be construed with reference to the tax imposed and can not be construed in the same way as the similar provisions contained in some state inheritance tax statutes which specifically impose transfer taxes on transfers other than transfers of the estate of a decedent and base the tax on the value of the property actually transferred at the time of the transfer. If this assignment may be said to contain any specific contention it seems to be this — -that the Federal statute may not borrow support from the generally accepted validity of corresponding state statutes, since, actually, the state tax is on the value of the property transferred as at the date of transfer while the Federal tax is on the value of the property transferred as at the time of transferor’s death. Reserving a certain doubtfulness as to the relevancy of the argument, we do not see that much is to be gained by the comparison. In the case of Keeney v. New York, 222 U. S. 525, where the validity of such a state statute was upheld, Mr. Justice Lamar, speaking for the court, said:

Wherever the amount of a tax is, as here, to be measured by the value of property, it has been earnestly argued that it was to tax the property itself, and that to ignore that feature is to put the name above the fact. But when the State decides to impose such a tax the amount must be determined by some standard. To require the same amount to be paid on all transfers is not so fair as to impose the burden in proportion to the value of the property. An excise on transfers therefore does not lose that character because the amount to be paid is determined by the values conveyed. * * *
* * * ¡s * * ü¡
The fact that the assessment and payment were postponed until the death of the grantor would be a benefit to the remainderman in the many instances in which values decreased. But where the power to tax exists, it is for the State to fix the rate and to say when and how the amount shall be ascertained and paid. The fact that the liability was imposed when the transfer was made in 1903, and that payment was not required until the death of the grantor in 1907, does not present any Federal question.

This reasoning is applicable in dealing with the Federal statute. The tax is still an “ excise on transfers ” measured not by the “ values conveyed ” but by the values at the time of conveyor’s death of the property conveyed. If the value is greater the tax is greater and on the other hand if the value has decreased so has the tax.

In the case of Frick v. Pennsylvania, 268 U. S. 473, the court in discussing the relation between the state transfer tax and the Federal estate tax said—

While'the federal tax is called an estate tax and the state tax is called a transfer tax, both are imposed as excises on the transfer of property from a decedent and both take effect at the instant of transfer. Thus both are laid on the same subject, and neither has priority in time over the other. Subject to exceptions not material here, the power of taxation granted to the United States does not curtail or interfere with the taxing power of the several States. This power in the two governments is generally so far concurrent as to render. it admissible for both, each under its own laws and for its own purposes, to tax the same subject at the same time.

The petitioner points out that the New York statute imposes the tax upon all transfers intended to take effect in possession or enjoyment at or after death, “when any such person or corporation becomes beneficially entitled, in possession or expectancy, to any property or the income thereof by any such transfer,” while the Federal statute imposes the tax primarily upon the transfer of the decedent’s estate. This argument then leads to the question already raised, namely, whether the Federal statute may be said to include any more than the actual property of the estate at the time of decedent’s death. In view of the difference between the Federal and the state statutes already pointed out and the different angles from which the respective statutes must be considered with respect to constitutional validity, and in further view of the many Federal court decisions to which we have recourse, involving the particular statute, we do not feel that consideration of the state court decisions should be urged.

It is then argued by the petitioner that full effect is given to the Federal statute if it is held to apply to gifts causa mortis and that such a construction avoids not only serious inconsistencies in the statute but serious constitutional questions as well. The petitioner defines a transfer causa mortis as a transfer which is intended to take effect upon the transferor’s death and contends that there was in fact no intent here on the part of any of the parties to the trust agreement with respect to the order of their deaths and that the decedent could not have intended to die before all of the older parties to tbe agreement. We think that the argument is misleading and of no consequence. The Commissioner does not claim that it was the primary intention of the decedent that the trust created should take effect at or after death but that she did create a trust which was intended to take effect in possession or enjoyment at or after death and that she retained an interest in the trust up to the date of her death and that her' interest in the trust fund ceased on the date of death. In our opinion the value of the interest that ceased was properly included in the gross estate. But the value of that interest was one-sixth of the value of the trust property at date of death and not one-fourth.

Judgment will be entered on 16 days’ notice, under Rule 50.