author: Smith :

text:
    Mary duPont Faulkner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92815.
    Promulgated April 18, 1940.

      Robert G. McKay, Esq., for the petitioner.

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

Smith :

This proceeding is for the redetermination of a deficiency of $2,262.56 in petitioner’s gift tax for the year 1935. Petitioner alleges that the respondent erred in determining her net taxable gifts for 1935 in not allowing an exclusion of $5,000 for each of four gifts in trust, one for the benefit of each of her three living children and the fourth for the benefit of an unborn child, and in not allowing the deduction of three $5,000 exclusions respecting a conveyance in trust by the petitioner of certain insurance policies on the life of her father for the benefit of two of her brothers and her sister. A further issue is raised as to the right of the petitioner to a deduction under section 505 (a) (2) (B) of the Revenue Act of 1982, as amended by section 517 (a) of the 1934 Act, for a gift of $6,000 to the Birth Control League of Massachusetts.

The facts are stipulated.

On December 30,1935, the petitioner created four irrevocable trusts, one for the benefit of each of her three minor children and a fourth for her first child born after December 30, 1935. Securities of a value of $20,681.25 were conveyed to the trustee, the Wilmington Trust Co., for each of the trusts. Each trust agreement provided that the income of the trust should be paid to the beneficiary either at the request of James M. Faulkner, or, in the absence of any such request, at the discretion of the trustee, and that any income not so paid to the beneficiary should be invested and added to the principal of the trust fund. One-third of the principal of the trust fund was to be paid to the beneficiary at the age of 21 years, one-third at the age of 25 years, and the remaining third at the age of 30 years. The petitioner’s first child born after December 30, 1935, was Charles S. Faulkner, born April 10, 1936.

On July 1, 1935, the petitioner, with others, created a trust transferring her interest in several life insurance policies on the life of her father, Lammot duPont, to the Wilmington Trust Co., trustee, for the benefit of her brothers, Reynolds duPont and David Flett duPont, and her sister, Alexandrine duPont. The value of the petitioner’s interest in the insurance policies at the time of the transfer was $65,612.84. The trust instrument provided that after “settlement day”, which was described as the day six months from the date of the death of Lammot duPont, the residue of the trust fund was to be divided into three equal parts, one for each of the three beneficiaries named. Thereafter, the income, and, in some instances, the principal, was to be paid to the beneficiaries.

In her gift tax return for 1935 the petitioner reported the gifts made under the trust instrument of December 30, 1935, at a value of $20,625 each but she did not report the gift of her interest in the insurance policies referred to above. She claimed four exclusions of $5,000 each in her return for the four separate gifts in trust to her three living children and her unborn child.

In his determination of the deficiency herein the respondent increased the value of each of the four gifts of December 30, 1935, from $20,625 to $20,681.25, which adjustment the petitioner does not protest, and disallowed all of the four exclusions claimed in respect of such gifts on the ground that the gifts were of future interests against which no exclusions are allowable. Respondent also included in petitioner’s gifts the value of her interest in the insurance policies on the life of Lammot duPont which she transferred in trust for her brothers and sister. The petitioner does not contest the inclusion of the value of her interest in the insurance policies in her gifts, but claims additional exclusions of $15,000, representing $5,000 for each beneficiary under this trust conveyance.

Also, in her gift tax return for 1935, the petitioner reported a gift of $6,000 to the Birth Control League of Massachusetts, with respect to which she claimed an exclusion of $5,000 and a deduction of $1,000. In his deficiency notice the respondent did not disallow either the $5,000 exclusion or the $1,000 deduction, but in an amended answer filed in this proceeding he asks that the deficiency be increased by such amount as would result from the inclusion in petitioner’s taxable gifts of $1,000 of the total gift of $6,000.

The respondent concedes in his brief filed in this proceeding that the petitioner is entitled to four exclusions of $5,000 each for the gifts which she made by separate trust conveyances for the benefit of her four children. The concession was made in reliance upon the Board’s decision in Seymour H. Knox, 36 B. T. A. 630, and other cited cases, wherein the Board and, in some cases, the courts have held that the exclusion of $5,000 is allowable to each trust and not to each beneficiary. We have held, however, in Wilton Rubinstein, 41 B. T. A. 220, following Welch v. Davidson, 102 Fed. (2d) 100; Robertson v. Nee, 105 Fed. (2d) 651; Rheinstrom v. Commissioner, 105 Fed. (2d) 642; and McBrier v. Commissioner, 108 Fed. (2d) 967, that the beneficiary and not the trust is the donee and that a $5,000 exclusion is allowable for each beneficiary.

Under the rule of the cases cited there is no doubt as to the petitioner’s right to an exclusion of $5,000 for each of the three gifts in trust for her three minor children. However, as to the fourth gift of a like amount which the petitioner made for her unborn child, a more difficult question is presented. All four of the gifts were made on December 30, 1935. Was the gift in trust for “her first child born after December 30, 1935” a valid gift made in the year 1935 and, if so, was it a gift of a future interest within the meaning of section 504 (b) of the Revenue Act of 1932? The section of the statute referred to reads as follows:

SEC. 504. NET 6XETTS.
*******
(b) Gifts Less Than $5,000. — In tbe case of gifts (other than of future interests in property) made to any person by tbe donor during the calendar year, the first $5,000 of such gifts to such person shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year.

A learned discussion of tire legal status of an unborn child or a child aen ventre sa meren is found in Cooper v. Heatherton, 65 App. Div. 561; 73 N. Y. S. 14, where it was said:

* * * In Long v. Blackhall, 7 Term. R. 160, it was contended that the will violated the rule of the common law against perpetuities, in that the lives were not all in being when the testator died. Kenyon, Lord Chief Justice, held that a child en ventre sa mere was within the rule. In the famous case of Thellusson v. Woodford, 4 Ves. 227, Buller, J., at page 322 et seq., discusses the doctrine, comments upon the cases, and concludes:
“Why should not children en ventre sa mere be considered generally in existence? They are entitled to all the privileges of other persons. In this case it is enough to say that such child is capable of having an estate given to him, and consequently to another person for his life.”
This decision is noticed by the chancellor in Marsellis v. Thalhimer, 2 Paige, 35, 21 Am. Dec. 66, where he says:
“That it may be considered in existence in some cases for the benefit of others may perhaps be admitted, as in the case mentioned by Buller, J., in Thellusson v. Woodford, 4 Ves. 323, of an estate given to a third person for the life of an infant en ventre sa mere."
In Stedfast v. Nicoll, 3 Johns. Cas. 18, Kent, J., notes “a late case” (Doe v. Clarke, 2 W. Bl. 400), where “the court go so far as to say that it is now settled that an infant en venire sa mere shall be considered, generally speaking, as born, for all purposes for his own benefit. In that case, Chief Justice Eyre observed ‘that an infant en ventre sa mere came clearly within the description of a child living at the time of his father’s death.’ ” A note appended to Stedfast v. Nicoll, supra, by the famous reporter, William Johnson, comments upon the force and effect of the English decisions. In the report of Thellusson v. Woodford, 11 Ves. 112, the chief baron speaks of the extension of the rule to a child en ventre sa mere at the time of the father’s death, because that contingency must necessarily happen within nine months after the death of a person in being, and therefore such construction would introduce no inconvenience. He also notes the case of Doe v. Clarke, 2 W. Bl. 399, referred to in the opinion of Kent, J., supra. And he seems to have adopted verbatim the language of Lord Chief Justice Willis in Goodtitle v. Wood, cited by the reporter in the note at the foot of the report of Long v. Blackall, 7 Term. R. 100, 1 Bl. (Cooley’s Ed.) 180, says:
“An infant en ventre sa mere, or in the mother’s womb, is supposed in law to be born, for many purposes. It is capable of having a legacy, or a surrender of a copyhold estate, made to it. It may have a guardian assigned to it, and it is enabled' to have an estate limited to its use, and to take afterwards by such limitation, as if it were then - actually born. And in this point the civil law agrees with ours.” :
4 Kent, Comm. 249, says:
“But the decision of the king’s bench upon that point was reversed by the house of lords; and it is now the settled law in- England and in this country that an infant en ventre sa mere is deemed to be in esse, for the purpose of taking a remainder, or any other estate or interest which is for his benefit, whether by descent, by devise, or under 'the statute of distributions.”
***** *
* * * I am of opinion that the child en ventre sa mere at the testator’s death, which was born alive and lived, may be regarded as a life in being at the time of the testator’s death, within the purview of the statute. * * *

In 9 Corpus Juris 140, it is stated that:

It is now settled, according to the dictates of common sense and humanity, that a child en ventre sa mere, for all purposes for his Own benefit, is considered as absolutely born.

In Folk v. Hughes, 100 S. C. 220; 84 S. E. 713, it was held that a conveyance, to A for the use of A and his children for A’s life, with remainder over to A’s children, gave a vested remainder interest to the unborn children of A. The court there said that “It is not necessary to the creation of a trust estate that the cestui que trust should be in existence at the time of its creation.” See also Perry on Trusts, 7th ed., § 66.

Also, in People v. Powers, 147 N. Y. 104; 41 N. E. 432, it was said:

* * * And. in order to create a valid trust, there must be a beneficiary or beneficiaries designated. It may not be necessary to name him. It will be sufficient if he is so designated or described that he can be identified. *' * *

The validity of a gift in trust for the benefit of an unborn child, such as the gift under consideration here, seems to be clearly established by the cited authorities. Such a gift might be of either a present interest or a future interest, depending upon the rights of the donee in the property conveyed. While the distinction between such gifts is not always readily discernible (see Edwin Goodman, 41 B. T. A. 472, there can be no doubt that there is a gift of a present interest where the donee acquires immediately the entire beneficial interest in the subject matter of the gift.

Such, we think, was the gift under consideration. The sole beneficiary of the trust, that is, the donee, was, in the language of the stipulation, the donor’s “first child born after December 30, 1935”, the date when the trust was created. Presumably these were the words that were actually employed in the trust instrument to describe the donee, although the trust instrument is not before us. In any event it was without doubt the donor’s intention to make the gift to the child en ventre sa mere which was born to her a little over three months after the gift was made.

Anticipating the objection that the donee, in that event, was incapable of accepting the gift and that the gift was therefore invalid, it is only necessary to refer to the well recognized rule that the law presumes the acceptance by a donee of a gift wholly beneficial to the donee. See 28 Corpus Juris 672, ¶ 75, and cases cited in notes 72, 75, and 76.

The case of Lloyd E. Wilson, 41 B. T. A. 456, where it was held that an unborn child is not a “person” within the meaning of the statute for the purpose of computing the amount of credit for dependents, is distinguishable from the instant case. The last paragraph of the opinion in that case reads as follows:

Nor is the fact that, by common law and generally by statute, a child en ventre sa mere is deemed to be in esse for the purpose of inheritance for its own benefit persuasive here. The credit here claimed is not for the benefit of the child but of the parents.

The gift here was wholly for the benefit of the unborn child. We ttnntr that it was a valid gift of a present interest as distinguished from a future interest. The statutory deduction of $5,000 „in respect thereof is allowed.

As to petitioner’s conveyance of her interest in the insurance policies on the life of her father in trust for the benefit of her two brothers and her sister, the respondent contends that the petitioner is entitled to only one exclusion of $5,000, there being a single trust, instead of the three exclusions which petitioner claims.

This issue is identical with the one recently determined by the Board, against the respondent’s contentions, in Wilton Rubinstein, supra. We therefore hold that the petitioner is entitled to three exclusions, one for each beneficiary of the insurance trust.

This leaves for determination the question of the deduction, under section 505 (a) (2) (B) of the Revenue Act of 1932, as amended by section 517 (a) of the 1934 Act, of the $6,000 gift to the Birth Control League of Massachusetts. That section provides:

SEO. 5 05. DEDUCTIONS.
In computing net gifts for any calendar year there shall be allowed as deductions:
(a) Residents. — In the ease of a citizen or resident—
s}: * * * i.t # #
(2) Charitable, etc. Gifts. — The amount of all gifts made during such year to or for the use of—
*******
(B) a corporation, or trust, or community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, including the encouragement of art and the prevention of cruelty to children or animals; no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence legislation.

The gift in question was made by the petitioner in December 1935.

The Birth Control League of Massachusetts, hereinafter sometimes referred to as the League, is an unincorporated association organized prior to the World War. It was inactive during the World War but was reorganized in February 1928. The objects for which it was organized are set forth in its constitution and bylaws as follows:

Section 1: to collect and correlate information regarding birth control.
Section 2: to educate the public in the social, economic, and scientific aspects of birth control.
Section 8: to enlist the support of the public and of lawyers, physicians, and legislators in effecting the liberalization or the repeal or amendment of the existing Massachusetts statutes pertaining to the prevention of conception.
Section 4: to sponsor the discoveries of the best contraceptive techniques and to sponsor the provision of instruction therein with the advice and under the supervision of the Medical Consultants of the Birth Control League of Massachusetts.
Section 5: to afford legal protection to physicians affiliated with the Birth Control League of Massachusetts giving contraceptive advice under the interpretation of the law accepted by the Birth Control League of Massachusetts.
Section 6: to provide advice pertaining to marital relations.

The principal activities of the League have consisted of organizing and maintaining mothers’ health offices such as the Brookline Mothers’ Health Office, in which physicians give contraceptive advice to sick married women unable to afford the fee of a private physician, who, for the most part, were referred to them by hospitals and various welfare agencies.

The petitioner in 1935 was a member of the executive committee of the League and was chairman of the mothers’ health office committee. She had been associated with the Brookline Mothers’ Health Office since its organization in 1932.

The mothers’ health offices, sometimes referred to hereinafter as the health offices, were closely affiliated organizations sponsored by and partially financed by the League. There were three of the health offices in the State of Massachusetts in 1935, one in Brook-line, one in Springfield, and one in Worcester. Others were later organized. The purpose of the health offices,- as set forth in the pamphlet published by the Brookline Mothers’ Health Office, was:

To provide an office under skilled medical direction, maintaining the highest medical standards, where contraceptive advice may be given to such women as are deemed eligible- by the Committee of Supervising Physicians, in order to:
Preserve the life and health of mothers.
Prevent disease.
Decrease the number of abortions both therapeutic and self-induced.
Aid the patient in her marital life.
Improve the health of children by improving the health of their mothers.
Help patients to space pregnancies when medically indicated.

Only married women who needed advice for medical or mental reasons were accepted as patients at the health offices. In every case a complete medical and social history and a thorough physical examination were made before any advice or treatments were given. Most of the patients were referred to the health offices by civic agencies, hospitals, and physicians. Patients who were able to pay were charged a fee, but many of the patients were on relief rolls and less than half were charged any fee whatever. All of the health offices were supervised by committees of local physicians under the auspices of the medical consultants of the League.

Prior to 1935 the petitioner had made gifts direct to the mothers5 health offices but had never made any substantial gifts to the League. In 1935, however, the campaign for funds for the League and the health offices was consolidated in certain areas, so that only one appeal would be made to the public for gifts, and in that year the petitioner made the $6,000 gift in question, with the understanding that the funds were to be used for the health offices only.

Early in 1935, or shortly before that time, the executive committee of the League decided to abandon the objects set forth in sections 3 and 5 of its constitution and bylaws quoted above, that is, those relating to legislative matters, and to limit its activities to the operation of the mothers’ health offices. Formal amendment to the constitution and bylaws eliminating sections 3 and 5 was not made, however, until April 1937. In 1930 the League supported a bill called the “Doctor’s Bill”, the purpose of which was to change section 21 of chapter 272 of the General Laws of Massachusetts prohibiting, generally, the sale or distribution of contraceptive devices. The statute referred to reads in part as follows:

Sec. 21. Whosoever sells, lends, gives away, exhibits, or offers to sell, lend or give away * * * any drug, medicine, instrument or article whatever for the prevention of conception * * * or writes, prints or causes to be written or printed a card, circular, book, pamphlet, advertisement or notice of any kind stating when, where, how, of whom or by what means such article can be purchased or obtained * * * shall be punished by imprisonment in the state prison for not more than five years in jail or the house of correction for not more than two and one half years by a fine of not less than one hundred nor more than one thousand dollars.

In 1937 the Brookline Mothers’ Health Office was closed by the police and in Commonwealth v. Gardner, 15 N. E. (2d) 222, decided May 26, 1938, the Supreme Court of Massachusetts held that the operation of that office was in violation of section 21 of chapter 272, quoted above.

Respondent’s position is that the Birth Control League of Massachusetts was not organized and operated exclusively for the purposes set forth in section 505 (a) (2) (B) above. In J. Noah H. Slee, 15 B. T. A. 710; affd. (C. C. A., 2d Cir.), 42 Fed. (2d) 184, it was held that contributions to the American Birth Control League and the American Birth Control League, Inc., the former an unincorporated association and the latter a corporation organized under the laws of the State of New York, were not deductible under section 23 (o) of the Revenue Act of 1934, the provisions of which are substantially the same as those of section 505 (a) (2) (B) above. The basis for the disallowance of the deduction was that one of the chief purposes of the organizations, as declared in their certificates of incorporation or constitutions, was to distribute propaganda and influence legislation favorable to the policies for which they stood. The organizations were Reid, therefore, not to have been organized and operated exclusively for charitable purposes within the meaning of the statute.

In the instant case there were similar declarations in the constitution and bylaws of the League. The evidence is to the effect that these purposes, that is, to influence legislation, were abandoned at or about the time the petitioner made her gift to the League. However, the constitution and bylaws were hot so amended until more than a year after that time.

There can be no doubt that the League was not “organized” exclusively for the purposes enumerated in section 505 (a) (2) (B) above, and therefore it fails to meet the requirements of the statute. See Frederic C. Leubuscher, Executor, 21 B. T. A. 1022; affirmed on this point, 54 Fed. (2d) 998. See also Herbert E. Fales, 9 B. T. A. 828; The Associates, 28 B. T. A. 521; James J. Forstall, 29 B. T. A. 428. In Slee v. Commissioner, supra, the court said:

* * * Political agitation as sucli is outside the statute, however innocent the aim, though it adds nothing to dub it “propaganda,” a polemical word used to decry the publicity of the other side. Controversies of that sort must be conducted without public subvention; the Treasury stands aside from them. * * *

Petitioner makes the contention that her gift was not to the League itself, but to the mothers’ health offices, which were separate organizations. It is quite plain from the evidence of record, however, that the health offices were inseparable from the League itself and were in fact mere adjuncts of the League. They operated in much the same manner as the clinics referred to in Slee v. Commissioner, supra.

Moreover, the activities of the mothers’ health offices themselves were held by the Supreme Court of Massachusetts to be in violation of section 21 of chapter 272 of the General Laws of Massachusetts in Commonwealth v. Gardner, supra, and were closed by the police. In these circumstances we think that a gift to the health offices could not be allowed as a deduction under the provisions of the Federal statute. It would be contrary to public policy, if not directly contrary to the intention of Congress, to construe the Federal taxing statute as granting privileges to taxpayers which would lend encouragement to the support of activities inimical to the laws of the several states. See Easton Tractor & Equipment Co., 35 B. T. A. 189, and cases therein cited.

We are of opinion that the gift does not fall within the deductions authorized by the statute.

Reviewed by the Board.

Decision will be entered wnder Rule 50.

Murdock and TuRNer concur only in the result.

Steenhagen, Disney, Hakron, and Oeper dissent.


source: Caselaw Access Project

author: Sternhagen: Mubdock,

license: Public Domain

text:
    Louis W. Gunby, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 98110.
    Promulgated April 18, 1940.

      William P. Arnold, Esq., for the petitioner.

      A. H. Monaoelli, Esq., for the respondent.
   OPINION.

Sternhagen:

Petitioner’s position is that, notwithstanding its deliberate purchase of Gunby’s securities for money and its intentional omission to issue its own shares for them, its acquisition of the securities must be regarded as in exchange for its shares. Thus, by reason of sections 113 (a) (8) and 112 (b) (5) of the Revenue Act of 1934, the gain or loss from the sale of the securities would be computed upon the same basis as would be applicable to Gunby, the transferor, had he sold the securities. Gunby’s basis would be his actual cost and, consistently with the Commissioner’s present determination, it may be assumed that in computing the gain or loss to him from the sale of his securities to petitioner such basis was used. It should not be used again to determine the gain or loss of a succeeding owner, especially his own corporation.

There is always a difficulty in knowing when a corporation is to be recognized as a separate taxable person and when it is to be regarded as a mere formality. Cases can be found pointing each way, and always the circumstances deprive the holding of universal significance. There is no absolute. However, the general rule is that the corporation is recognized, and that its treatment as a mere form is exceptional. Burnet v. Commonwealth Improvement Co., 287 U. S. 415; Higgins v. Smith, 308 U. S. 473.

Petitioner does not ask that the legal character of the corporation as a person be disregarded, but that the legal character of its transaction be disregarded. The form of a sale was, it says, merely “employed to obviate the necessity of submitting” to the Maryland Tax Commission the list of securities received for shares issued. By reason, therefore, of the petitioner’s willful conduct the state authorities have recognized its original stock issue as being for money. Is the Board, a Federal tribunal, to hold that this is not so and thus in an unrelated Federal proceeding intimate either that the petitioner has flouted the law of its creation or that the state has winked at the petitioner’s failure to comply with it? The evidence shows that petitioner in fact issued its shares for money and therefore that no list of securities was filed with the state tax commission. We can not permit the evidence to be warped into a finding that in reality the shares were issued in exchange for securities. Minnie C. Brackett, Administratrix, 19 B. T. A. 1154; affd., 57 Fed. (2d) 1072.

The Commissioner correctly held that the petitioner acquired the securities by purchase and that its gain or loss upon sale in the tax years was properly to be computed on the basis of the cost. The figures in the computation are not in dispute.

Reviewed by the Board.

Decision will loe entered for the respondent.

Mubdock,

dissenting: I think the substance of this transaction was an exchange within the meaning of section 112 (b) (5) of the Revenue Act of 1934. Cf. Gulf Oil Corporation v. Lewellyn, 248 U. S. 71; United States v. Mellon, 281 Fed. 645. Gunby desired to transfer his securities to the corporation and ■ to receive its stock. He tried to give the transaction the semblance of a sale so that it might appear to comply with a law of Maryland. He gave his check for $450,000 to the corporation as if he was subscribing for the preferred stock. But, as a matter of fact, he had only $17,000.10 in the bank at that time. Then the corporation gave Gunby its check for $440,827.86, as if it were buying the securities from him. But it had to see that both checks were deposited at the same time because it had only $3,861.08 in the bank. Those transactions were disingenuous and did not make a sale out of what otherwise would have been an exchange. The State of Maryland is the one to complain if any fraud was practiced in avoiding its laws. Our function is to decide whether upon this state of facts there was an exchange within the meaning of section 112 (b) (5). If the Commissioner were contending in this case that the transaction was an exchange, and not a sale, I believe the form would be disregarded and the substance adopted. The prevailing opinion seems to put undue emphasis upon the fact that the petitioner seeks the benefit of an exchange. Our decision should be the same, no matter which party is to benefit.

Smith, Leech, Disney, and EeRN agree with this dissent.


author: Tyson :

text:
    Joseph Kennard Skilling and Anna M. Reed Skilling, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95355.
    Promulgated April 18, 1940.

      JohnB. Peery, C. P. A., for the petitioners.

      Ellyne E. Strickland, Esq., for the respondent.
   OPINION.

Tyson :

The- issue here — whether income is realized by the lessor from the repossession, on default of the lessee, of a building erected by the lessee ■ without cost to the lessor — is the.same as- that decided by the Supreme Court in Helvering v. Bruun, 309 U. S. 461, and our decision is controlled by the ruling , in that case. There, a building was erected by the lessee on the leased premises and the value of the building at the time of its repossession by the lessor was held to be income to the lessor in the year of the repossession. We perceive no difference important here between the facts in the Bruun case, supra, and the instant case.

Accordingly, we hold that income of $60,000 was realized by petitioners during the taxable year 1936 from the repossession of the leased premises and the building erected thereon by the lessee.

Decision will he entered under Rule 50.


author: Sternhagen:

text:
    Kalman Hirsch, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95908.
    Promulgated April 18, 1940.

      Albert Langeluttig, Esq., for the petitioner.

      Alvin B. Peterson, Esq., for the respondent.
   OPINION.

Sternhagen:

The Commissioner determined that by settling the $15,000 mortgage debt in 1936 for $8,000 the petitioner realized income of $7,000, citing Carlisle Packing Co., 29 B. T. A. 514 (which became final, see Kelly v. United States, 90 Fed. (2d) 73).

The determination must be sustained. That gain is realized by discharging a debt for less than its principal amount may be taken as a general rule, United States v. Kirby Lumber Co., 284 U. S. 1. There are exceptions depending on the circumstances, e. g., that the debtor has become insolvent, Dallas Transfer & Terminal Warehouse Co. v. Commissioner, 70 Fed. (2d) 95, that the original debt was voluntarily incurred for no consideration except the self-imposed obligation to distribute surplus by way of dividend, Commissioner v. Rail Joint Co., 61 Fed. (2d) 751, or that the bonds were not retired and the debtor’s entire assets were so diminished in value that to acquire some of the bonds did not result in freeing assets, Transylvania Railroad Co. v. Commissioner, 99 Fed. (2d) 69. Cf. Helvering v. American Chicle Co., 291 U. S. 426.

It can not be said from the evidence that petitioner suffered a loss or that he did not in fact have a gain. It is true that the property is worth less than it cost; but that may prove to be but a temporary diminution in value and not a definitive realization of loss in the investment. Until the property is disposed of there is no knowing whether “the transaction as a whole is a loss”, as in Bowers v. Kerbaugh-Empire Co., 271 U. S. 170. See United States v. Kirby Lumber Co., supra; Helvering v. American Chicle Co., supra. The petitioner was personally liable; was not insolvent; had other property (how much does not appear); and now owns this property free from the mortgage. Thus the transaction of settlement “made available $7,000 assets previously offset by the obligation of the debt now extinct”, as said in the Kirby Lumber case.

The mortgage was not a purchase money mortgage. There was a new borrow, the proceeds of which were used to discharge an earlier obligation. It was secured by a new mortgage on the property,'which had cost $29,000, of which $11,000 had been paid and $18,000 was now being paid with the entire amount now being borrowed. The cost had therefore become fixed. It immediately became and continued to be the basis for depreciation and cognate deductions. After such cost has been carried for a number of years it may not be readjusted either because of -the fall in the value of the' property or because of the settlement of the obligation of the loan. See Commissioner v. Coastwise Transportation Co., 71 Fed. (2d) 104; L. D. Coddon & Brothers, Inc., 37 B. T. A. 393.

Decision will be entered imder Bule SO.


author: Black:

text:
    Lakeside Irrigation Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96745.
    Promulgated April 23, 1940.

      Charles F. Byers, Esq., for the petitioner.

      Wilford H. Payne, Esq., for the respondent.
   OPINION.

Black:

The question which we have to decide in this proceeding may he stated thus: Where petitioner corporation, whose stock is closely held by one family, sold at one time to one of its stockholders owning directly or indirectly within the definition of section 24 (a) (6), Revenue Act of 1936, more than 50 percent of the capital stock thereof four blocks of stock at market prices which resulted in gains as to two of the stocks and losses as to the other two, but a slight net gain on the entire transaction, are the gains subject to-tax and the losses unallowable as deductions from income under the provisions of section 24 (a) (6) of the Revenue Act of 1936?

Petitioner, by an appropriate assignment of error, contests the action of the Commissioner in taxing it with the profits from the sales of the Reed Roller Bit and the Dr. Pepper. stocks without allowing as an offset the losses from the sale of the Columbia Gas and the North American Aviation stocks. Petitioner relies upon the following points in support of its assignment of error:

I. That the sale made by Petitioner on April 28, 1936, was of 1,050 shares of stock sold in' one transaction and for one price, $26,737.50, for stock that cost petitioner $26,388.00 resulting in a gain of $349.50 and this gain was correctly reported by Petitioner on its income tax return, there being no loss whatever in the transaction.
II. That Section 117 (d) Revenue Act of 1936 does not limit, gains made on sales- neither does it require, taxpayers to forego more beneficial sales because of the family relationship of the purchaser.
III. That the word “loss” as used in Section 24 (a) (6) Revenue Act of 1936 is a relative term and is directly opposed to and offset by gains from the same or similar transactions.

We shall treat all three of petitioner’s points together, inasmuch as they are closely related. The Commissioner, in explanation of his treatment of the transaction, states in his deficiency notice as follows: .

This office holds that the disposition of each block of stocks, and bonds repr resents a separate sale or exchange; that the losses arising from the separate sales or exchanges are governed by the provisions of section 24 (a) (6) of the Revenue Act of 1936 and, therefore, constitute unallowable deductions, and, as such, are not to be applied to.reduce the gains from the sales or exchanges of other assets.

We think the • Commissioner must be sustained, on the authority of our" decision in Norman Cooledge, 40 B. T. A. 110. In that case the taxpayer, as stockholder of a certain corporation, received an aggregate amount of cash in complete liquidation of his stock, which amount exceeded the aggregate cost basis of his stock. The taxpayer had acquired his stock at various times and at various prices. Some of it had cost him more than the price which -he received in liquidation, and some of it had cost him less. In figuring his net taxable gain on the liquidation, the taxpayer contended for the right to treat all the stock together as one block and 'to offset the gains on that part of his stock which he had purchased at less than he received in the liquidation by losses on- that part of the stock which had cost him more than he had received in liquidation.

We held against this contention of the taxpayer, holding that under section 115 (c) of the Revenue Act of 1934 petitioner must return for taxation the entire amount of his. gain on that part of his stock where he had a gain, without reference to the percentages provided in section 117 of the Revenue Act of 1934, and that, his losses from the liquidation of the stock must be limited as provided in section 117.

It is true,. of course, that the sections of the statute which we had under consideration in the Cooledge case, supra, were not the same as we have in the instant case, but we think the governing principle treated separately in determining gain or loss on its sale. We think is the same, which is that each separate piece of property must be that principle holds good whether several pieces of property are sold in one transaction or in several separate transactions.

Cf. Taylor Securities, Inc., 40 B. T. A. 696. In that case one of the assignments of error was that the Commissioner erred:

* * * in not offsetting losses sustained on sales of securities in tire United States against gains on similar transactions in determining the amount of petitioner’s taxable income from such transactions for all the years.

In that case the taxpayer was a foreign corporation which had not filed any income tax return prior to the mailing of the Commissioner’s notice of deficiency. We held that the Commissioner acted properly in taxing the taxpayer with all income from sources within the United States and in allowing no deductions, including deductions from losses from sales of stock in the United States, because of the provisions of section 233 of the Revenue Acts of 1928, 1932, and 1934. We refused the taxpayer’s contention that its gains from the sale of shares of stock in the United States should be automatically offset by losses from sales of shares of stock in the United States during the same taxable years.

In Frank C. Deering, 40 B. T. A. 984, we did use some language which would seem to approve the contention which the petitioner is making in the instant case. That language was as follows:

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

The language above quoted was dicta in that case, and is not controlling here. The Deering case was decided in favor of the taxpayer, not upon the reasoning contained in the foregoing paragraph, but upon the holding that the “promises for annuities were by individuals, and that these promises had no recognizable fair market value and there could be no gain or loss in such transactions.

Petitioner in its brief lays much stress on the Commissioner’s instructions relating to the reporting of capital gains and losses which accompanied the income tax return which petitioner filed for 1936. The instructions quoted in petitioner’s brief were as follows:

Capital Gains and Losses. Report sales or exchanges of capital assets in Schedule B and enter the net amount of gain or loss as Item 11 (Capital losses are allowable only to the extent of $2,000 plus capital gains. Therefore, if the total amount of capital losses is in excess of tlie total amount of capital gains, the amount to be entered as Item 11 may not exceed $2,000). (See Section 117 relating to capital gains and losses.) Describe the property briefly and state the actual consideration or price received or the fair market value of the property received in exchange.

It is undoubtedly true that in the preparation of schedule B of petitioner’s income tax return, the Commissioner authorized the taxpayer to offset gains from the sale of shares of stock by losses from sales of shares of stock and carry forward only the net result as item II of petitioner’s income tax return. But it is perfectly plain that in authorizing losses to offset gains, the Commissioner means only those losses which are recognized as deductions by the statute. This is made plain by the language of the last paragraph in item 11 of the Cummigsioner’s instructions, which the petitioner has apparently overlooked. That last paragraph reads:

No deduction shall, be allowed in respect of loss from sales or exchanges of property, directly or indirectly, except in the case of distributions in liquidation, between an individual and a corporation in which such individual owns, directly or indirectly, more than 50 percent in value of the outstanding stock. (See section 24 (a) (6).)

The statute referred to by the Commissioner in his instructions, and which disallows petitioner the loss which it claims here, seems to be plain and unambiguous. Even though its application in the instant case may seem harsh in view of the fact that the transaction seems to have been one made for purely business reasons and not to establish a tax loss, we do not feel that we have the power to relieve petitioner from its terms. We must give effect to laws as Congress has written them, and if any changes are to be made Congress must make them.

Reviewed by the Board.

Decision will he entered under Rule 50.

       SEC. 24. ITEMS NOT DEDUCTIBLE.
      (а) General Rule.- — In computing net income no deduction shall in any case be allowed in respect ot-r-

      «****««
      (б) Loss from sales or exchanges of property, directly or indirectly, (A) between members of a family, or (B) except in the case of distributions in liquidation, between an individual and a corporation in which such individual owns, directly or indirectly, more than 50 per centum in value of the outstanding stock. For the purpose of this paragraph— (C) an individual shall be considered as owning the stock owned, directly or indirectly, by his family; and (D) the family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.


author: KeRn:

text:
    Doris Bond Sherman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95300.
    Promulgated April 23, 1940.

      Dana Latham, Esq., for the petitioner.

      Samuel Taylor, Esq., for the respondent.
   OPINION.

KeRn:

The first, question to be decided by us in the instant proceeding is whether petitioner made taxable gifts in the year 1935 and 1936. This question must be examined in the light of the opinion of the Supreme Court in Estate of Sanford v. Commissioner, 308 U. S. 39. In that: case it was held that a transfer of property upon trust, with power reserved in the donor to modify the trust so as to designate new beneficiaries other than himself, is incomplete and, therefore, not taxable as a gift. In this proceeding there were transfers of property upon trust and the trust instrument, by section VII thereof, provided in part as follows: “The trustor may * * * amend this trust * * * and limit or divest the rights of any or all beneficiaries to the extent only of * * • * adding to the beneficiaries hereof other children, if any, of the trustor.”

.Here, then, as in the Sanford case, the donor had the power to modify the trust.so as to designate new beneficiaries. However, the power here is to designate new beneficiaries from a limited class (other children of the trustor) and. during the taxable years no members of that class were in being. It should be noted that- there is nothing in the record to indicate the impossibility of the birth of other children to the trustor.

There being reserved to the trustor the power to designate new beneficiaries, does the fact that the exercise of this power is. a mere possibility distinguish this case from the Sanford case? We do not think so. As long as the trustor has such a power and the exercise of it is a, possibility, the gifts in trust can not be considered as complete, in the light of the reasoning of the opinion of the Supreme Court in that case. Its decision is not based on the probability of the exercise of the power and no distinction is made between a present possibility and a remote or contingent possibility. Cf. Helvering v. Hallock, 309 U. S. 106.

Since the gifts made by petitioner were not complete within the taxable years, they were not subject to the Federal gift tax, and it follows that there are no deficiencies, but, on the other hand, over-payments of gift taxes by the petitioner for the taxable years.

Holding as we have on this first question, it is unnecessary to consider the other issues raised.

Reviewed by the Board.

Decision will be entered pursuant to Rule 50.


author:
Murdock :
      Black,

text:
    Estate of William G. Thompson, Mary H. Thompson, Executrix u/w William G. Thompson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96358.
    Promulgated April 23, 1940.

      George E. Hears, Esq., for the petitioner.

      T. G. Histon, Esq., for the respondent.
   OPINION.

Murdock :

Section 302 (g) of the Revenue Act of 1926 provides that the value of the gross estate of a decedent shall be determined by including the .excess over $40,000 of the amount receivable by all beneficiaries other than the decedent’s estate as insurance under policies taken out by the decedent upon his own life. The policies here in question were all taken out by the decedent upon his own life, and the amount receivable by his wife in excess of $40,000 has been included in the gross estate of the, decedent under section 302 (g). The proceeds of the policies come within the words of the statute.

The Supreme Court has held, however, that this provision does not apply to the proceeds of policies taken out prior to its passage, where the right to exercise control over the disposition of the proceeds of the policies, as by changing the beneficiaries, borrowing on the policies, or surrendering them for cash, was not retained by the decedent for himself alone, that is, without the necessity of obtaining the consent of the beneficiary. Lewellyn v. Frick, 268 U. S. 238; Bingham v. United States, 296 U. S. 211; Industrial Trust Co. v. United States, 296 U. S. 220. The Court pointed out that if the law were applied in such cases, it would impose an unexpected liability on transactions then beyond recall, which liability might otherwise have been avoided. Cf. Reinecke v. Northern Trust Co., 278 U. S. 339; Nichols v. Coolidge, 274 U. S. 531; Wyeth v. Crooks, 33 Fed. (2d) 1018; Helvering v. City Bank Farmers Trust Co., 296 U. S. 85. The Commissioner provided by regulation that the proceeds of all policies not receivable by the decedent’s estate are to be included in the gross estate under section 302 (g) “regardless of when the policy was or the policies were issued, if the decedent possessed at the time of his death any of the legal incidents of ownership.” Art. 27, Regulations 80. He also provided: “Legal incidents of ownership in the .policy include, for example: The right of the insured or estate to its economic benefits, the power to change the beneficiary, to surrender or cancel the policy, to assign it, to revoke an assignment, to pledge it for a loan, or to obtain from the insurer a loan against the surrender value of the policy, etc.” Art. 25, Regulations 80. All- of the policies here in question were taken out long before the effective date of the first estate tax act. The petitioner contends that the decedent, acting alone, had no control over the disposition of the proceeds of these policies at any time after the enactment of the first estate tax act and, therefore, the proceeds are not taxable under section 302 (g-). This is obviously incorrect as to policy ISFo. 13 over which he had full control from December 9, 1929, until January'9, 1930, and section 302 (g) would clearly apply as to that policy. It will be excluded from the discussion which follows.

The respondent has at all times agreed that the decedent had no power to change the beneficiary of any of these policies without the consent of that beneficiary. The respondent, in determining the deficiency, was of the opinion that the decedent had retainéd the right to surrender the policies for cash without obtaining the consent of the beneficiary. His counsel conceded at the hearing that under the laws of Massachusetts, governing six of the policies, the decedent had retained no power to surrender or cancel those policies or tó obtain loans upon them, without obtaining the consent of the beneficiary. But, since the laws of other states governed the decedent’s rights in the other policies, he expected to show that the decedent retained the right to surrender those policies for cash and to obtain loans upon them without the consent of the beneficiary. His investigation of the law on the subject must have convinced him of his error because he did not mention the subject in his brief. Counsel for the petitioner devoted his original brief to authorities showing that the decedent had no power to change the beneficiary, no power to surrender or cancel any policy, no power to assign any policy, no power to pledge any policy for a loan and no power to obtain a loan from the insurer against the surrender value of any policy, without first obtaining the consent of his wife, the beneficiary. The authorities which we have been able to find also support this contention of the petitioner.

The' designation of a beneficiary in a policy of insurance is in the nature of an executory trust for his benefit, and, unless the insured expressly reserves the right to himself, the beneficiary can not be deprived, without his consent, of the benefits which would otherwise flow to him under the terms of the policies. Central Bank of Washington v. Hume, 128 U. S. 195; Bingham v. United States, supra; Industrial Trust Co. v. United States, supra; Ballard v. Helburn, 9 Fed. Supp. 812; Tyler v. Treas. & Rec’r. Gen'l., 226 Mass. 306; 115 N. E. 300; Mutual Benefit Life Insurance Co. v. Swett, 222 Fed. 200; David A. Reed et al., Executors, 24 B. T. A. 166; Louise C. Moore, Executrix, 33 B. T. A. 108; Thomas C. Boswell et al., Executors, 37 B. T. A. 970; Walker v. United States, 83 Fed. (2d) 103; Landrum v. Knowles, 22 N. J. Eq. 594; Sullivan v. Maroney, 77 N. J. Eq. 565; 78 Atl. 150; Pingrey v. National Life Insurance Co., 144 Mass. 374; 11 N. E. 562. The above cases hold that if the insured has not expressly reserved the right, he may not change beneficiaries, obtain loans on the policy, surrender the policy for cash, assign it, or in any other way minimize on jeopardize the rights of the beneficiary. Cooley, in his Briefs on the Law of Insurance, describes the right of an irrevocably named beneficiary as a vested interest in the policy of which he can not be divested without his consent. Vol. VII, p. 1568. See also Pennsylvania Co. for Insurances on Lives & Granting Annuities v. Commissioner, 79 Fed. (2d) 295; certiorari denied, 296 U. S. 651; Metropolitan Insurance Co. v. Clanton, 76 N. J. Eq. 4; 73 Atl. 1052; Prudential Insurance Co. v. Deyerberg, 101 N. J. Eq. 53; 137 Atl. 785; Sullivan v. Maroney, supra.

There is a law of Massachusetts to the effect that every policy of life or endowment insurance in which a married woman is the beneficiary, shall enure to her separate use and benefit regardless of whether the insured reserved the right to change the named beneficiary. General Laws of Massachusetts, ch. 175, sec. 126. The court, in Gould v. Emerson, 99 Mass. 154, while discussing this statute, said that the interest of a man’s family in his life and a man’s duty to make provision for the support of his family are not always subordinate to the claims of his creditors, and, where he has once named his wife irrevocably as beneficiary of insurance on his life, her rights are secure beyond the claims of creditors and beyond the power of the insured himself, who is restrained “from revoking, in a moment of caprice or embarrassment, the trust which he has once created upon a meritorious, and, by the statute, a sufficient consideration.” The law of Wisconsin was somewhat similar. Boehmer v. Kalk, 155 Wis. 156; 144 N. W. 182; Ellison v. Straw, 116 Wis. 207; 92 N. W. 1094.

The policies of insurance involved in this proceeding were policies of life insurance. Slurszberg v. Prudential Insurance Co. of America, 192 Atl. 451; Baranovich v. Horwatt, 113 Pa. Super. 467; 173 Atl. 676; Briggs v. McCullough, 36 Cal. 542; Cooley, vol. I, p. 19. No one contends to the contrary and the determination of the Commissioner was made on that theory. Cooley, citing In re Dreuil & Co. (U. S. Dist. Ct., La.), 221 Fed. 796, and Wallace v. Mutual Benefit Life Insurance Co., 97 Minn. 27; 106 N. W. 84, states that the right of a beneficiary irrevocably named in an endowment policy of insurance likewise has a vested interest, and his right to receive the proceeds in accordance with the terms of the policy may not be defeated by any act of the insured done without his consent. Vol. II, p. 1091; vol. VII, p. 1569. The New Jersey court in the Slur sab erg case, supra, held that creditors of one insured under an endowment policy of insurance could not obtain the cash surrender value of the policy by execution or otherwise without the consent of the death beneficiary named in the policy. An endowment policy on tlie life of Simmons was involved in tlie case of In re Summons & Griffin (C. C. A., 1st Cir.), 255 Fed. 521. He had designated his wife as beneficiary in case she survived him and the policy became payable by reason .of his death. Thereafter, he was adjudicated a bankrupt and the referee ordered him to make available to his creditors the cash surrender value of the policy. The court held that the cash surrender value was not available to creditors because the policy could not be surrendered without the consent of the beneficiary, his wife, and the bankrupt had no pecuniary interest in the policy which could pass to the trustee without the consent of the beneficiary.

The case of Philip W. Blood et al., Executors, 22 B. T. A. 1000, referred to by the respondent in explanation of his determination and cited by him in his brief, is not in point. There, the value of certain policies, including two endowment policies, was included in the gross estate solely on the ground that the decedent retained the power to change the beneficiary up to the date of his death. Here the decedent retained no such power and that difference in fact distinguishes the two cases. The same difference in the facts also distinguishes this case from that of Edith Huggard Sharp et al., Executors, 30 B. T. A. 532; 33 B. T. A. 290.

The excess of the proceeds over $40,000 amounts to only $10,644.33, and if that excess is eliminated no amount may be included in the gross estate under section 302 (g). Seven of the policies involved in this proceeding contain a statement that the insured retained no power to change the beneficiary. The proceeds of those policies amount to $20,841.46. Other policies contain a provision that the insured can make no change in the beneficiaries unless that right is expressly reserved. None of the policies contained any express reservation of a right by the insured to change a beneficiary, to surrender the policy for cash, or to borrow on the policy, without the consent of the beneficiary. It seems proper to conclude from the authorities cited by the petitioner and from others which we have examined, that the insured under these policies of insurance had no power to name another beneficiary in place of his wife, to obtain the cash surrender value, to obtain a loan upon a policy, or in any other way change the interest of the beneficiary, his wife, in the policies at any time after the effective date of the first estate tax act. Therefore, the Commissioner erred in including the amount of $10,644.33 in the gross estate under section 302 (g).

The respondent does not argue in his brief that the decedent retained the power to change the beneficiary in any policy, to surrender it for cash, or to borrow on the policy. The only contention which he makes is that the proceeds were properly included in the gross estate under section 302 (g) oí the Revenue Act of 1926, as amended by section 404 of the Revenue Act of 1934, because, the decedent was the “prime beneficiary” of each policy, entitled to receive the entire proceeds when it matured, whereas the wife had only a contingent interest entitling her to receive, the proceeds in case her husband died.prior to the maturity date of the policy while she was still alive. He cites no authorities supporting this contention, and he errs in stating that a wife who is irrevocably named a beneficiary in an endowment policy of insurance has only a contingent interest. See the authorities cited above holding that she has a vested interest. Section 404 of the Revenue Act of 1934 merely amends the general provision at the beginning of section 302 of the Revenue Act of 1926 to eliminate real property situated outside the United States. It has no significance in the present case. While it is true that the decedent would have been entitled to receive the face amount of each policy had he lived until it matured, that circumstance does not lead to the conclusion that the proceeds of the policy received by the wife are to be included in the gross estate under section 302 (g). Endowment policies of insurance like these may be divided into two parts — first, a contract of endowment, and, second, a contract of insurance. S. S. Huebner, Life Insurance, 1935 ed., p. 102. The decedent alone had a chance of benefiting from the endowment feature of the policy. He would have received that benefit had he lived until it matured, but his death put an end to the possibility.. The right to the endowment did not pass to anyone else at his death and. thus his interest in the policy was obliterated by his death. Cf. May v. Heiner, 281 U. S. 238; Carr v. Hamilton, 129 U. S. 252; Bingham v. United States, supra; Chase National Bank v. United States, 278 U. S. 327. He was not a beneficiary of the insurance feature of the contract. His wife was the beneficiary there. Although his death made it certain that she would receive the insurance proceeds, nevertheless her rights were fixed by the contract and nothing passed from him to her at his death. Cf. Walker v. United States, 83 Fed. (2d) 103; May v. Heiner, supra; Bingham v. United States, supra; Ballard v. Helburn, supra; Guaranty Trust Co. of New York et al., Executors, 33 B. T. A. 1225. The rights of the beneficiary under these policies were fixed prior to the enactment of the first estate tax act. The decedent had no power .to change those rights. ■ The contention made by the respondent does not serve to distinguish this case from the Frick and Bingham cases. The principles laid down by the Supreme Court in those cases apply to these policies of insurance so that none of the proceeds may be included in the gross estate under section 302 (g), the only section which the Commissioner seeks to apply.

Reviewed by the Board.

Decision will be entered for the petitioner.

Black,

dissenting: I accept the view of the majority opinion in saying that as to none of the policies involved in this proceeding did the decedent at the time of his death have the right to change the beneficiary of the life insurance provided by the policies, nor did he have the right to borrow on the policies or surrender them for their cash surrender value, without securing the consent of the life insurance beneficiary provided in the policies. Nevertheless, I think respondent should be sustained in his action in including the policies in decedent’s gross estate, less the statutory exemption of $40,000.

The policies were all endowment policies and had definite maturity dates, which are set out in the findings of fact. The decedent undoubtedly was the owner of these endowment policies up to the moment of his death. The interest of the life insurance beneficiary in these policies was conditioned upon her surviving the decedent. That fact is shown from the following quotation from the findings of fact:

* * * Each policy contained a provision that the amount' of the policy was payable to the insured when all the annual payments had been made, but if he should die before that date survived by his wife, then the amount was to be paid to her at his death, otherwise to his executors or administrators.

It seems to me that this state of facts brings this case within the rule laid down by the Supreme Court in Klein v. United States, 283 U. S. 231, and Helvering v. Hallock, 309 U. S. 106. It is undoubtedly true, I think, that Lewellyn v. Frick, 268 U. S. 238; Bingham v. United States, 296 U. S. 211; and Industrial Trust Co. v. United States, 296 U. S. 220, support the conclusions reached in the majority opinion. However, it seems to me that these cases are no longer controlling as to such' policies of insurance as we have in the instant case, by reason of subsequent decisions of the Supreme Court. For example, in the Industrial Trust Co. case, supra, the Supreme Court, speaking of subdivision (h) of section 302 of the Revenue Act of 1926, said:

Whether ány of these terms apply to an amount receivable by a beneficiary under a policy such as we have here, is fairly debatable. See Wyeth v. Crooks, (D. C.) 33 Fed. (2d) 1018, 1019. If any of them do apply, the provision is open to grave doubt as to its constitutionality and the rule of the Frick ease controls.

Subsequently the Supreme Court expressly decided, in United States v. Jacobs, 306 U. S. 363, that section 302 (h) of the Revenue Act of 1924 (same as in the 1926 Act) is constitutional and must be applied to cases which fall within its ambit. It is true that in the Jacobs case the question before the court related to the amount which should be included in decedent’s estate because of his joint tenancy interest in some real estate, but the constitutional question is the same as here. Section 302 (h) requires that section 302 (g), relating to insurance policies, be retroactively applied the same as the provisions of the section relating to joint tenancy. Therefore, because of the Supreme Court’s decision in United States v. Jacobs, supra, and Helvering v. Hallock, supra, I think the Commissioner should be sustained in his determination of the deficiency in this proceeding.

On this account, I respectfully dissent from the majority opinion.

Smith, Turner, Disney, and Oppee agree with this dissent.