author: McMahon:

text:
    Edwin M. Klein (The Foreman Trust & Savings Bank, Conservator), Petitioner, v. Commissioner of Internal Revenue, Respondent. Irving N. Klein, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 49498, 49499.
    Promulgated December 18, 1934.

      L. A. Luioe, Esq., for the petitioners.

      Isaclore Graff, Esq., for the respondent.

       Sec. 214. (a) That in computing net income there shall be allowed as deductions:
      ****** *
      (2) All interest paid or accrued within the taxable year on indebtedness, except on indebtedness incurred or continued to purchase or carry obligations or securities (other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer) the interest upon which is wholly exempt from taxation under this title.

   OPINION.

McMahon:

The first contention of the petitioners is that the amounts of $15,000 and $7,500 paid in the years 1924 and 1925, respectively, by them to their sisters pursuant to the provisions of the agreement of April 19, 1913, set forth in our findings of fact, should be excluded from their net taxable income for those years. Each petitioner paid one half of such amount in each year. The petitioners contend that these payments constituted distributions of the estate of their father and that under the contract of April 19, 1913, they became, in equity, the trustees for their sisters in connection with the distribution of these payments. They rely upon Florence L. Klein, 6 B. T. A. 617, as authority for this contention. In the first place we do not know that the respondent included these amounts in the income of the petitioners. All we know is that he refused to allow the deduction of those amounts. We are not advised as to the source of the moneys used by the petitioners to make these payments. Presumably the money was taken from the general funds of the petitioners. Florence L. Klein, supra, was a proceeding brought by the sisters of the petitioners for the purpose of determining the taxability to them of payments made to them in the years 1916 to 1922 under the agreement of April 19, 1913. We there held that this agreement created annuities payable to the sisters by the petitioners during the life of Rosalinda Klein, the mother of the petitioners, the probable term being approximately 15 years; that the sisters purchased the annuities from their brothers, the petitioners herein, by transferring to the brothers property which they, the sisters, had received by distribution of their father’s estate; that the value of each annuity at the time of acquisition was $57,753.50, which became the capital base for measuring any subsequent gain or loss in respect thereof; and finally that each yearly payment of $5,000 to each sister represented in part a return of the cost of the annuity and in part a gain, the latter being represented by the so-called discount.

It appears that Florence L. Klein, supra, does not support the position of the petitioners, but, on the contrary, establishes that the payments by the petitioners to their sisters represented cost of certain assets purchased from the sisters, rather than distributions of the estate of the father. We adhere to our holding in this regard in Florence L. Klein, supra. So far as we can determine from the evidence, there was no obligation upon the petitioners under the terms of their father’s will to make such payments to their sisters. The will was never contested so far as we know and the petitioners received all the property which the will of their father gave them. We see no reason for holding that these payments by the petitioners constituted distributions of the father’s estate through them to the sisters. See Cora K. Louis, 29 B. T. A. 1200.

Marshall Field, 15 B. T. A. 718; affirmed in Commissioner v. Field, 42 Fed. (2d) 820, cited by the petitioners, is distinguishable because there the taxpayer transferred all his right to a certain portion of the income of trust property. We there stated that the taxpayer “ completely divested himself of any interest in the right to receive such income.”

Shellabarger v. Commissioner, 38 Fed. (2d) 566, cited by petitioners, is also distinguishable. There also the taxpayer had transferred, for a valuable and legal consideration, her right to receive income from a trust.

In the instant proceeding, the amounts in question which were paid over by the petitioners to their sisters were, so far as we can determine, funds belonging to the petitioners. There was no such transfer of a specific right to income as was true in the above cited cases. See Julian L. Hamerslag, 15 B. T. A. 96. ISTone of the other cases cited by the petitioners is in point and no useful purpose would be served by discussing them.

While the petitioners do not press the question on brief, the pleadings do raise the question of whether these payments are deductible in their entirety from gross income of the petitioners. However, as pointed out above, these payments were made in order to acquire assets. They were capital expenditures which are not deductible from the gross income of the petitioners for the years in which paid.

While the petitioners do not discuss the question in their briefs, the pleadings and proof do present the question as to whether the respondent should have allowed as a deduction certain portions of the payments made as representing interest paid by the petitioners. Section 214 (a) (2) of the Revenue Acts o.f 1924 and 1926, which are identical, allow the deduction of all interest paid or accrued within the taxable year on indebtedness. To be entitled to such a deduction a taxpayer must bring himself within the provisions of the statute.

In Gilmam v. Commissioner, 53 Fed. (2d) 47, affirming W. S. Gilman, 18 B. T. A. 1277, the United States Circuit Court of Appeals for the Eighth Circuit had before it the question of whether certain amounts paid out upon so-called notes ” constituted deductible interest. The notes were specifically made payable only to the payee, were nonassignable, nontransferable, and nonnegotiable and it was specifically provided that in the case of death of the payee the notes were to be void. The notes were payable on or before 30 years after date. “ Interest ” at the rat© of 5' percent per annum was provided for and paid. The court, in holding that the payments made by the maker of the so-called notes were not deductible as interest under section 214 (a) (2) of the Revenue Act of 1921, which is identical with the provisions of the statute in question in the instant proceeding, stated:

A debt is “ that which is due from one person to another, whether money, goods or services; that which one person is bound to pay to another, or perform for his benefit.” Webster’s New International Dictionary. “ In order to create an indebtedness there must be an actual liability at the time either to pay then, or at some future time.” Bouv. Law Diet, Yol. 2, page 1531. “ Every debt must be solvendum in praesenti, or solvendum in futuro— must be certain and in all events payable; whenever it is uncertain whether a/nythAng mil ever be demandable by virtue of the contract, it cannot be called a debt While the sum of money may be payable, upon a contingency, yet in such case it becomes a debt only when the contingency has happened, the term ‘ debt ’ being opposed to ‘ liability ’ when used in the sense of an inchoate or contingent debt.” 17 Corpus Juris 1377. Emil Weitzner v. Commissioner, 12 B. T. A. 724; Saleno v. City of Neosho, 127 Mo. 627, 30 S. W. 190, 27 L. R. A. 769, 48 Am. St. Rep. 653; Lowery v. Fuller, 221 No. App. 495, 281 S. W. 968; Clinton Mining & Mineral Co. v. Beacon (D. C.), 264 F. 228; Bolden v. Jensen (D. C.), 69 F. 745. The term “indebtedness" as used in the Revenue Act implies an unconditional obligation to pay. Any definition more flexible would only encourage subterfuge and deception. The “ notes ” involved in this case did not constitute a debt of the maker because their payment was contingent upon the payees being alive at the maturity of the instruments in 1950. [Emphasis supplied.]

Likewise in the instant proceeding the liability of the petitioners to make payments in the future was contingent. The payments were to be made only so long as the mother was alive. Therefore this liability of the petitioners was not “ indebtedness ” within the meaning of the statute, and no part of the payments is deductible as interest under the statute. Furthermore, it is significant that there is no reference whatever to interest in the contract of April 19, 1918. So far as we can determine from the evidence the full amount of each payment constituted a part of the purchase price of the assets received by the petitioners from their sisters. Mills v. Commissioner, 52 Fed. (2d) 931, affirming Henrietta Mills, Inc., 20 B. T. A. 651; Daniel Bros. Co. v. Commissioner, 28 Fed. (2d) 761, affirming Daniel Bros. Co., 7 B. T. A. 1086.

This is not inconsistent with our holding in Florence L. Klein, supra, that a portion of each payment to the sisters, represented by the so-called discount, is taxable income when received. The fact that it is taxable to the recipient does not necessarily determine that it is deductible interest paid by the petitioners herein. Discount is defined in Black’s Law Dictionary, 3d ed., as follows:

Discount. In a general sense, an allowance or deduction made from a gross sum on any account whatever. In a more limited and technical sense, the taking of interest in advance. * * *

The term “ discount ” is not used in the instant proceeding in the latter sense.

The second question presented is whether the petitioner, Irving N. Klein, is entitled to take as deductions in the years 1926 and 1927, the respective amounts of $15,881 and $13,718, representing premiums paid by him in those years upon life insurance policies upon his own life. These policies were in the aggregate amount of $500,000 and were taken out for the purpose of securing a loan in excess of $800,000, in order to acquire a controlling interest in a corporation. The beneficiary under each of the policies was a bank acting as trustee which was to hold the policies or the proceeds thereof to secure the loan from another bank. The petitioner did not reserve the right to change the beneficiary. There are set forth in the margin applicable provisions of the Revenue Act of 1926.

In Rieck v. Heiner, 25 Fed. (2d) 453; certiorari denied, 277 U. S. 608, the Circuit Court of Appeals for the Third Circuit had under consideration similar provisions of the Revenue Acts of 19^8 and 1921. There the taxpayer had placed as collateral to secure a loan, an insurance policy upon his own life, the beneficiary of which was his estate. It was there held that the premiums paid by the taxpayer upon such life insurance policy were not deductible. The court stated in part:

* * * Though assigned to and held by the creditor and for two years used as collateral security, it was, none the less, a policy in which the taxpayer was “ directly or indirectly ” a beneficiary, for if it had matured when held as collateral, and payment had been made to the creditor, it would indirectly have augmented his estate by decreasing his liabilities. * * *

To the same effect are J. H. Parker, 13 B. T. A. 115; and Benjamin Barron, 14 B. T. A. 1022.

Upon the authority of the above cases we hold that the petitioner in the instant proceeding was “ directly or indirectly ” a beneficiary under the policies in question and that the premiums in question are not deductible. The petitioner urges that the instant proceeding is distinguishable for the reason that the beneficiary, which the petitioner did not reserve the right to change, was the trustee. This, however, is immaterial. As pointed out in Rieck v. Heiner, supra, if payment were made to the creditor upon these life insurance policies it would indirectly augment the petitioner’s estate by decreasing the liabilities. In both J. H. Parker, supra, and Benjamin Barron, supra, the beneficiaries under the policies were creditors of the taxpayers.

The last question presented is whether the petitioner, Irving FT. Klein, is entitled to deduct from his gross income for the year 1926 an amount of $1,175.43 alleged to represent one fifth of the depreciation sustained upon assets of the Rosalinda Klein trust. The respondent, in the notice of deficiency, increased the income reported by the petitioner from such trust and stated that in determining the income distributable by the trust the depreciation on the assets to the date of distribution to the heirs was disallowed. In the 30-day letter it was stated by the respondent that the depreciation sustained upon the trust assets was $5,877.15, but that since there' was no specific provision in the will or a decree of court construing the will or the state law authorizing the taking of depreciation, such depreciation should be disallowed in computing the net income of the trust. At the hearing counsel for the petitioner took the position that there was only a question of law involved, and that if it were determined that depreciation should be allowed, then the amount thereof could be settled under Rule 50. Counsel for the respondent at that time refused to agree that there was only a question of law. Despite this, the petitioner did not introduce evidence as to the amount of depreciation sustained upon the trust assets. In fact, there is no evidence to show the nature of the trust assets, the probable useful life thereof, or the. basis for depreciation of such assets. In this situation we are not in a position to determine the amount of depreciation sustained. The fact that the respondent, in the 30-day letter, did not raise the question of the amount of depreciation is not determinative. The respondent’s disallowance of the claimed deduction is presumptively correct and the petitioner has the burden of proving it wrong. Welch v. Helvering, 290 U. S. 111. The hearing before the Board is a complete hearing de novo. Phillips v. Commissioner, 283 U. S. 589, 598. The burden is upon the taxpayer to show all elements necessary to a proper determination of the amount of depreciation sustained. This the petitioner has not done. Furthermore, the petitioner has failed to show that the property in question meets the requirements of the statute. Section 219 of the Revenue Act of 1926 provides that trusts are entitled, generally, to the same deductions to which individuals are entitled. Section 214 of the Revenue Act of 1926 relates to deductions allowed to individuals, and the, subdivision applicable here is (a) (8). In the instant proceeding, we do not know the nature of the trust property, nor do we know whether it was used in a trade or business, as required by the statute. See Gertrude D. Walker, 20 B. T. A. 937, 947, affirmed on another issue in Walker v. Commissioner, 63 Fed. (2d) 351; certiorari denied, 289 U. S. 746. Thus, in this regard, the petitioner has also failed to show that either he or the trust is entitled to a deduction for depreciation.

In view of the above it becomes unnecessary to determine, as a matter of law, whether the petitioner, as beneficiary, would otherwise be entitled to the benefit of a deduction for depreciation of the trust assets.

Decision will be entered for the respondent.

       Sec. 215. (a) In computing net income no deduction stall in any case be allowed in respect of—
      *******
      (4) Premiums paid on any life insurance policy covering tbe life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, when the taxpayer is directly or indirectly a beneficiary under such policy.

       Sec. 214. (a) In computing net income there shall be allowed as deductions:
      * * * * * * •
      (8) A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence. In the case of improved real estate held by one person for life with remainder to another person, the deduction provided for in this paragraph shall be equitably apportioned between the life tenant and the remainderman under rules and regulations prescribed by the Commissioner with the approval of the Secretary.


source: Caselaw Access Project

author: Murdock :

license: Public Domain

text:
    Duesenberg, Inc. of Delaware, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67743.
    Promulgated December 19, 1934.

      Earle W. WaTliek, O. P. A., for the petitioner.

      Arthur Camduff, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner determined a deficiency of $14,377.22 in the petitioner’s income tax for the fiscal year ended November 30, 1930. The petitioner assigned as error the action of the Commissioner in (a) including in income $101,681.85 as a profit derived from the sale of 31 automiobiles to 4 subsidiaries of the De Kalb Co.; (b) failing to allow a deduction of $1,784.05 paid in connection with registering the name “ Duesenberg ” as a trade mark in certain foreign countries; (c) failing to allow a deduction of $81,145.79 as a part of the cost of experimental and development work on the Model “ J ” car allocable to the taxable year; (d) failing to allow as a credit $56,082.14 representing a net loss sustained during the fiscal year ended October 31, 1929; (e) failing to allow as a deduction $122,943.33 representing a part of a net loss sustained during the fiscal year ended October 81, 1928. The parties filed a stipulation of facts in which the petitioner expressly waived and withdrew the assignment of error shown as (e) above.

The petitioner is a Delaware corporation, with its principal office in Indianapolis, Indiana. The petitioner delivered 31 automobiles during the taxable year to 4 corporations which were subsidiaries of the De Kalb Co. These cars had cost the petitioner $202,587.85. Their value for sale by the petitioner was $304,269.70. Each automobile, as delivered, was accompanied by an invoice. Each invoice contained a description of the goods shipped and the price of the goods to the recipient. The words “ Open account, subject our draft ” appear on most of the invoices after the word “ Terms ”, but on a few, only the words “ Open account ” appear at that place. These invoices reflect the bookkeeping entries of the petitioner in respect to these automobiles. None of the automobiles was included in the inventory of the petitioner at the close of the taxable year. The petitioner used an accrual method of accounting in reporting its income. The Commissioner determined that the 31 automobiles had been sold by the petitioner during the taxable year and included in the petitioner’s income for the taxable year, as a profit from the sale of automobiles, $101,681.85, being the difference between the sales value and the cost of the 31 automobiles.

The following facts relating to the first issue are found in the testimony of a witness who was the only witness in the case :

The four companies to which the thirty-one automobiles were shipped acted as distributors for the petitioner’s automobiles in certain territories. The petitioner frequently shipped automobiles to each of these companies without first receiving an order from the company. Such shipments were made at the direction of the petitioner’s vice-president and sales manager who based his decision to make the shipments upon the stock which the distributor had on hand. The distributor would not pay the petitioner for a car received from the petitioner until that car had been sold to a customer of the distributor. When one of the distributors sold a car to a customer, a copy of the order was forwarded to the petitioner. The petitioner did not charge interest on its open accounts with these four distributors. In case ears were not sold, they would either remain in the stock of the distributor or else would be reshipped to some other distributor at the direction of the petitioner’s vice-president and sales manager. Payment in full for all of the thirty-one cars in question had not been received by the petitioner up to the date of the hearing on April 18, 1934.

The facts stated in the two preceding paragraphs are ail of the facts relating to the first issue which the record contains. The Commissioner has determined that the 31 automobiles were sold by the petitioner during the taxable year and, as a result, has included in income a profit from the sale of the automobiles. The petitioner concedes the correctness of the figures, but contends that none of the automobiles was sold during the taxable year. This contention is directly contrary to the determination of the Commissioner. If the contention is not supported by sufficient proof to show that it is correct and the action of the Commissioner is incorrect, then the determination of the Commissioner as to this item must be approved.

The record does not show that the 31 automobiles were not sold by the petitioner during the period in question. They were taken out of the petitioner’s inventory and were apparently included in the inventory of the four companies until disposed of to customers. The purchase price of the automobiles was charged to the four companies on open accounts on the books of the petitioner. The general practice of the petitioner in dealing with these four companies, as outlined by the witness, does not show that these particular automobiles were not sold to the four distributors. Furthermore, there is nothing in the record to indicate how many of these automobiles were disposed of by the distributors to customers during the taxable year. Thus it may be that all of them were sold to customers. The petitioner used an accrual method of accounting. It does not appear that the Commissioner erred in including the profit from the sale of these 31 automobiles in the petitioner’s income for the taxable year here involved.

The facts relating to assignment of error (b), which "facts came into the record by way of allegations in the amended petition which were admitted in the answer thereto, are as follows:

In its fiscal year ended November 30, 1930, the petitioner paid $1,784.05 to Messrs. Marks & Clerk, Attorneys of New York City, for their services and expenses in registering the name “ Duesenberg ” as a trade mark in some thirty-five foreign countries. In the preparation of its return of income for said fiscal year petitioner deducted said payment as an ordinary and necessary business expense.
The respondent disallowed the deduction and restored the said item of $1,784.05 to taxable income as representing a capital expenditure.

The benefits to be derived from the registration of the name “ Duesenberg ” in the 35 foreign countries were not limited necessarily to the year in which the expenditures were made. These expenditures were not necessarily ordinary and necessary expenses paid or incurred in carrying on the petitioner’s business during the taxable year within the meaning of section 23 (a) of the Revenue Act of 1928. Consequently, the determination of the Commissioner in respect to this item must be approved. Furthermore, it is quite probable that the benefits to be derived from the registration of the name “ Duesenberg ” in the 35 foreign countries might reasonably be expected to extend over a considerable number of taxable years. However, it is impossible to determine the extent of this probable period. If the registration was for a definite period, that fact has not been shown. If it was for an indefinite period, then the length of that period has not been established and, consequently, no allocation of the cost can be made so as to permit a deduction of any particular part for the year here involved.

The stipulation of facts, in so far as it relates to the error assigned as (c), is in part as follows:

The petitioner expended $97,697.60 in the fiscal year ended October 31, 1927, and $85,233.20 in the fiscal year ended October 31, 1928, and $17,069.20 in the fiscal year ended October 31, 1929, or a total of $200,000.00 in said three fiscal years, in development and experimental work upon a new model car called Model J, and charged the said amounts in the respective fiscal years on its books of account to expense and deducted the said amounts from its gross income in each of said fiscal years, and filed its Federal income tax returns accordingly. The Commissioner, in determining the income tax liability of the petitioner for said three fiscal years, allowed the said sums so expended as deductions for business expense.
Said development and experimental expenditures were based upon an expected production of 500 Model J cars, with an allocation of development and experimental cost of $400 to each Model J car produced.
The first Model J car was completed in the fiscal year ended October 31, 1929. In the fiscal year ended October 31, 1929, the petitioner produced 147 Model J cars at an allocated development and experimental cost of $58,800.00; in the period of the month of November, 1929, it produced 33 Model J cars at an allocated development and experimental cost of $13,200.00; in the fiscal year ended November 30, 1930, it produced 135 Model J cars at an allocated development and experimental cost of $54,000; thereafter, it has produced, or will produce, 185 Model J cars at an allocated development and experimental cost of $74,000.00.

There are additional statements in the stipulation which show that the petitioner reported and the Commissioner determined that, because of statutory net losses for the first two fiscal years, no tax was due for the fiscal years ended October 31, 1927, 1928, and 1929 and for the month of November 1929, and, furthermore, there would have been no tax due for any of these periods even though no expense deductions had been claimed or allowed on account of the development and experimental work on the Model J car.

The petitioner contends that the expenditures in question were not deductible as ordinary and necessary expenses of the years in which they were paid or incurred, but should be capitalized and deducted ratably over the period of production and sale of the Model J cars. The respondent suggests in his brief that the petitioner is estopped to make this contention. But estoppel is a defense which must be pleaded and proved, and since it was neither pleaded nor proved in the present case, it deserves no further consideration. Cf. Tidewater Oil Co., 29 B. T. A. 1208. However, no sufficient reason to change the method of accounting for these expenditures, adopted by the petitioner on its books and income tax reports and approved by the Commissioner, has been disclosed. The accounting and tax problems of when to treat an item as expense and when to treat it as a capital expenditure frequently depend for answer upon the circumstances of the particular case. See Commonwealth Life Insurance Co., 31 B. T. A. 887, and cases there cited. No detail of the expenditures nor the particular purpose for which each was made has been given. They have been lumped together and characterized in the stipulation as amounts expended “ in development and experimental work upon a new model car called Model J.” Circumstances can readily be imagined under which income would be reflected clearly by deducting as ordinary and necessary expenses amounts paid out in development and experimental work leading to the production of a new model car and, on the other hand, circumstances can easily be imagined under which it would seem more fitting to capitalize such expenditures as representing the cost of some capital asset. The asset might consist of drawings, patterns, or patents for a new model car. The petitioner has not named the capital asset which it claims cost it $200,000. It mentions a new model of its automobile, but this statement seems too abstract for the purpose. The allegations of fact set forth in the amended petition to support this assignment of error contain such items as executive salaries ”, “ office salaries ”, “ engineering salaries ”, “ miscellaneous administrative ” and general office expense ”, which are generally deductible as ordinary and necessary expenses. These allegations were denied in the answer, but they demonstrate that additional information in regard to the petitioner’s business, accounting methods, and the expenditures in question, would be necessary to justify a reversal of the determination of the Commissioner in regard to these expenditures and a direction that a portion be allowed as a deduction in the present taxable year.

The remaining assignment of error is the failure of the Commissioner to allow as a credit against the petitioner’s net income for the fiscal year ended November 80, 1930, an alleged net loss sustained by the petitioner during the fiscal year ended October 31, 1929. Unless the petitioner was entitled to deduct for the fiscal year ended October 31, 1929, a greater amount than the development and experimental expenditures actually made in that year, there would be no net loss for that fiscal year. We have held that there is no necessity to spread the deduction of these expenditures over the period of production, instead of allowing them as expenses in the year in which paid or incurred, and it follows that the petitioner had no net loss for the fiscal year ended October 31,1929. The determination of the Commissioner on this point is approved.

Decision will be entered for the respondent.


text:
    George O. Rockwood, Petitioner, v. Commissioner of Internal Revenue, Respondent. William M. Rockwood, Petitioner, v. Commissioner of Internal Revenue, Respondent. John N. Rrowning, Petitioner, v. Commissioner of Internal Revenue, Respondent. S. P. Rrowning, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 72711-72714.
    Promulgated December 19, 1934.

      John E. Keough,, G. P. A., for the petitioners.

      H. D. Thomas, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner determined the following deficiencies in the petitioners’ income tax for the year 1930:

The only issue in the cases is whether cash received by each of the petitioners in 1930 from General Fibre Products, Inc., in cancellation and redemption of preferred stock of the corporation, is to be treated as a taxable dividend under section 115 (g) of the Revenue Act of 1928, in accordance with the determination of the Commissioner, or whether it is to be treated as in part or full payment in exchange for the stock as provided in section 115 (c). The facts have been presented by a stipulation.

General Fibre Products, Inc., is an Indiana corporation, organized on August II, 1927. It issued, on or about the date of incorporation, 50,000 shares of no par common and 7,500 shares of $100 par value cumulative preferred stock in exchange for the assets of two preexisting corporations. The stipulation contains the following statement:

This stipulation, including attached exhibits, embodies all of the contracts and agreements between the parties at that time [August 17, 1927] with respect to the issuance and retirement of capital stock of General Fibre Products, Inc,

The four petitioners in these cases, at all times material hereto, have held all of the common stock and all of the preferred stock of General Fibre Products, Inc. The percentage of the total outstanding preferred stock held by each petitioner has at all times been equal to the percentage of the total outstanding common stock held by that petitioner.

The articles of incorporation provided that the corporation, at the option of the board of directors, might redeem at any time the whole or any part of the preferred stock then outstanding at $110 per share, plus cumulative dividends, and further provided that in case of the redemption of a part only of the preferred stock outstanding, such redemption should be pro rata according to the number of shares held by the respective holders thereof.

The General Fibre Products, Inc., retired 1,000 shares of preferred stock pursuant to a resolution of the board of directors, adopted July 19, 1928, and retired 500 shares of preferred stock in 1980, pursuant to a resolution of the board of directors adopted July 28, 1930. The latter resolution, which was identical with the former except for the dates and figures, was as follows-:

Whebeas; future operations of this company appear to require for working capital only a portion of the funds now available;
Be It Resolved, tbat Fifty thousand ($50,000) dollars par value of the outstanding preferred- stock of this company be called for redemption and cancellation at the price of One Hundred ten ($110.00) dollars per share, as provided by the corporation’s Bv-Laws. Said stock to be called pro rata from each of the stockholders of said total amount of outstanding preferred stock as of February 15, 1930;
Be It Obdeeed, that the treasurer set aside at once sufficient funds for the retirement of said stock;
Be It Fubtheb Obdeeed, that a dividend is hereby declared on the said Fifty Thousand ($50,000) dollars of preferred stock to be retired, at the rate of eight (8%) percent per annum from January 1, 1930 to February 15, 1930, inclusive, and the right to receive dividends on said retired stock shall cease after February 15, 1930.

General Fibre Products, Inc., bad earnings on January 28, 1930, accumulated after February 28, 1918, in excess of tbe amount of cash distributed to the stockholders in retirement of the preferred stock. It had paid dividends on its preferred stock in 1928 and 1929 and it paid a dividend of $75,000 on its common stock in 1929.

The Commissioner, in determining the deficiencies, included as dividends the total amount received by each petitioner on the retirement of his preferred stock and eliminated from taxable income any profit from the retirement of the stock reported on the returns.

The Commissioner has held that section 115 (g) of the Revenue Act of 1928 is applicable. This stock was not issued as a stock dividend, and at the time it was issued there was no agreement of any kind pertinent hereto relating to its retirement except that any future partial retirement should be pro rata. The question is whether or not the redemption of this stock was “ at such time and in such manner as to make the distribution and cancellation or redemption * * * essentially equivalent to the distribution of a taxable dividend.” The Commissioner relies upon the implied correctness of his determination and argues that the petitioner has not shown affirmatively that the distribution and retirement were for some purpose other than a disguise for the distribution of an ordinary dividend. He also points to the fact that the retirement and distribution were on a pro rata basis which did not disturb the relative interests of the stockholders in the corporation as some affirmative evidence in his favor. The decision in this case need not be based upon a failure of proof. The documentary proof seems to be complete. Although there was no testimony from the individuals who acted for the corporation, still a reason for the retirement of the stock was given in the resolution itself, and the very fact that the actions of the corporation were regular, natural, and normal tends to negative the Commissioner’s contention. It is true that the shareholders received a cash distribution from the corporation as they would have done if a dividend had been declared and paid, and the retirement might under such circumstances be availed of to disguise the distribution of an ordinary dividend. “ But ”, as was said in Pearl B. Brown, Executrix, 26 B. T. A. 901, 909, it would be stretching the legislative assimilation beyond its clear limits to regard this as decisive.” It is not unusual for preferred stock to be retired pro rata. The normal treatment of retirement of preferred stock for tax purposes is set forth in section 115 (c) and it is only where a cash redemption of shares is essentially equivalent to the distribution of a taxable dividend because of some circumstance of time or marmer that a different method of taxation becomes applicable. We see nothing in the time and manner in which the distribution and retirement were made in this case to justify the application of section 115 (g). The petitioner, through the stipulation, has made a prima facie showing that the cancellation or redemption was not made at such time and in such maimer as to make the distribution and cancellation essentially equivalent to the distribution of a taxable dividend and, on the contrary, that the distribution, cancellation, and redemption was an ordinary retirement of some preferred stock.

Decision will be entered wnder Rule 50.

       Sec. 115. (g) Redemption of stock. — If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. * * *


author: Akundell:

text:
    Arthur T. Galt, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71103.
    Promulgated December 21, 1934.

      J ohm. M. Kelley, Esq., for the petitioner.

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

Akundell:

This proceeding is for the redetermination of a deficiency of $5,306.78 in income tax for the calendar year 1930. The sole issue presented is whether petitioner is entitled to a deduction in the amount of $49,290 as taxes paid ” during the taxable year.

On account of an irregularity in the assessment rolls for Cook County, Illinois, petitioner was unable to determine the amount of his 1929 real estate taxes or to pay them to the county treasurer during 1930. However, he estimated the amount thereof by taking 60 to 75 percent of his 1928 real estate taxes and arrived at a total amount of $49,290. Petitioner deposited this amount with Burton It. Colbert & Co., a real estate firm that handled real estate matters for him, the deposit being made by petitioner’s check dated December 31, 1930, and in the lower' left-hand corner thereof he inscribed “ To pay my general Cook County taxes for the year 1929.”

A letter accompanying the check instructed Burton R. Colbert & Co. as follows: “ This money you are to keep on hand intact to pay my real estate taxes in Cook County on my property in Cook County as shown in the list hereto attached and made a part of this agreement, showing the real estate pieces and amount to be paid on each piece, as soon as the bills can be obtained and the money paid over to the proper legal authorities either in full payment of taxes for the year 1929 or on account as the case may be.” An acceptance of the funds for the above purpose was signed “ Burton R. Colbert & Company, by Burton R. Colbert ” and dated the same day, December 31, 1930.

The check was paid by the drawee bank January 2, 1931, and the money was deposited in a special account. During 1931 all the money, except $5,521.92, was applied against petitioner’s 1929 real estate taxes in Cook County; the $5,521.92 was paid out in settlement of Florida real estate taxes for 1926, 1927, and 1928.

The petitioner reported on the cash receipts and disbursements basis and in his 1930 return deducted the $49,290 as taxes paid. This deduction was disallowed by the respondent, who determined that the deposit of this sum with Burton R. Colbert & Co. did not constitute payment of petitioner’s taxes.

Where a taxpayer is on the cash receipts and disbursements basis, he is entitled to deduct only taxes actually paid. Estate of Benjamin Piller, 29 B. T. A. 799; George C. Beidleman, 7 B. T. A. 899.

The petitioner, being neither able to determine the amount nor make payment of his 1929 real estate taxes to the proper authorities in 1930, attempted to secure the deduction for these taxes in 1930 by depositing the estimated amount of his 1929 taxes with his real estate broker. The instructions accompanying the check were to pay the taxes “ as soon as the bills can be obtained and the money paid over to the proper legal authorities * * Fie contends that, by turning the $49,290 over to his real estate broker, an irrevocable trust was created and that it is immaterial when the trust funds were received by the county officials.

Assuming, without deciding, that the deposit with the brokerage firm constituted the establishment of a trust, it still was not a payment of taxes. Section 23 (c) of the Revenue Act of 1928 contem•plates a payment of taxes due to the tax authorities; it specifies “ taxes paid ”, and payment is not made when a fund is placed in another’s hands to be used to pay the petitioner’s taxes. It is established that petitioner’s taxes for 1929 were actually paid in 1931, and this, in our opinion, is the controlling factor. Cf. Morris Metcalf, 16 B. T. A. 881.

In United States v. Mitchell, 271 U. S. 9, the Supreme Court stated that “ It was not the purpose of the Act [1918] to permit income actually received to be diminished by taxes or other deductible items disbursed in a later year.” This language is equally applicable to section 23 (c) of the 1928 Act.

Decision will be entered for the respondent.


author: McMahon :

text:
    Joseph E. Uihlein, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51234.
    Promulgated December 21, 1934.

      Ward Loveless, Esq., for the petitioner.

      Paul O. Waring, Esq., for the respondent.
   OPINION.

McMahon :

On April 17,1934, the Board promulgated its findings of fact and opinion in the above entitled proceeding, which are reported at 30 B. T. A. 399. In a petition for review, by the United States Circuit Court of Appeals for the Seventh Circuit, and assignments of error, filed with the Board on August 20, 1934, the respondent assigned the following errors:

(1) In holding that where a husband and wife living together file a single joint return, a loss sustained by the husband from the sale of stock to his wife may be taken as a deduction in their joint income tax return.,
(2) In failing to hold that where a husband and wife living together file a single joint return, a loss sustained by the husband from the sale of stock to his wife may not be taken as a deduction in their joint income tax return.

In his praecipe filed November 6, 1934, the respondent requests the clerk of this Board to include in the record to be transmitted to the clerk of the Circuit Court of Appeals for the Seventh Circuit, among other things, a “ Statement of the evidence as settled and allowed.” On November 6, 1934, the respondent filed notice of lodgment of statement of evidence and his proposed statement of evidence.

On November 12, 1934, the petitioner filed an objection to respondent’s proposed statement of evidence upon the ground that, since no error -is assigned by the respondent in the admission or rejection of evidence, or on the ground that a finding of the Board is unsupported by any evidence, he is not entitled, under Buie 32 of the Circuit Court of Appeals for the Seventh Circuit, to have any statement of evidence included in the record to be transmitted to the clerk of the appellate court.

At the hearing had November 21, 1934, for the purpose of settling the record for appeal, counsel for petitioner stated in substance that if respondent is entitled to have any statement of evidence included in the record to be certified to the appellate court, the proposed statement of evidence filed by the respondent meets with his approval, but he objected to the inclusion of any statement of evidence in such record under Buie 32 of the Circuit Court of Appeals for the Seventh Circuit, on the ground that respondent, in his petition for review, has assigned no error in the admission or rejection of evidence or on the ground that a finding of the Board is unsupported by any evidence. At such hearing counsel for respondent stated, in substance, that the assignments of error in respondent’s petition for review raised a pure question of law ”; that the proposed statement of evidence stated in narrative form exactly what took place at the trial without raising any question as to the correctness of the findings made by the Board or as to its failure to find any fact or as to the admission or exclusion of evidence.

Buie 32 of the rules of the United States Circuit Court of Appeals for the Seventh Circuit provides in part as follows:

II. If error is assigned in the admission or rejection of evidence, or on the ground that a finding of the Board is unsupported hy any evidence, a statement of the evidence submitted to the Board shall be prepared by the petitioner. Such statement shall contain in narrative form the evidence material to the assignments of error, and shall be prepared hy the parties and settled by a Member of the Board in accordance with the general equity rules promulgated by the Supreme Court of the United States.

Equity Buie 75 promulgated by the Supreme Court of the United States provides in part as follows:

In case of appeal:
❖ * * * * * *
(e) If any differences arise between the parties concerning directions as to the general contents of the record- to be prepared on the appeal, such difference shall he submitted to the court or judge in conformity with the provisions of paragraph b of this rule, and shall he covered hy the directions which the court or judge may give on the subject. [Emphasis supplied.]

Section IY of Buie 32 of the Circuit Court of Appeals for the Seventh Circuit provides that the clerk of the Board of Tax Appeals shall transmit and deliver to the clerk of the Circuit Court copies duly certified as correct of documents, among others, as follows:

3. Findings of fact, opinion, and decision of the Board.
5. The statement of evidence, if mvy, as settled or agreed upon. * * * [Emphasis supplied.]

Under these rales a statement of evidence is to be included in the record only “ if error is assigned in the admission or rejection of evidence, or on the ground that a finding of the Board is unsupported by any evidence.”

In Lucas v. Mercantile Trust Co., 43 Fed. (2d) 39, a motion was presented to the Circuit Court of Appeals for the Eighth Circuit to dismiss the petition for review on the ground, among others, of failure of appellants’ praecipe to contemplate or call for the transmission of any statement of evidence. Paragraph 2 of Buie 36 of the rales of the United States Circuit Court of Appeals for the Eighth Circuit is the same as section II of Buie 32 of the Circuit Court of Appeals for the Seventh Circuit. In its opinion the court stated:

No question is raised here as to lack of substantial evidence to support the findings of fact by the Board of Tax Appeals. They are accepted by both parties. Nor is any error claimed in the rejection or admission of evidence. The only questions here relate to the construction of a will. Hence we think it would be superfluous to file a statement of the evidence. The rules of practice of this court do not require the doing of useless things. * * *

Under section IY of Buie 32 the transmission of the findings of fact is compulsory. The transmission of the findings of fact is also requested in respondent’s praecipe. The findings of fact will be included in the record. Both parties are satisfied with such findings of fact; and, as heretofore stated, no error has been assigned in respondent’s petition for review in the admission or rejection of evidence, or on the ground that a finding of the Board is unsupported by any evidence. The proposed statement of the evidence is merely an elaborate statement of all the evidence upon which the findings of fact are based and to this extent is an unnecessary duplication. We are not at liberty to encumber the record for the court with unnecessary documents or duplications thereof. See Fiorite v. Clyde Equipment Co., 2 Fed. (2d) 807, and Stephenson v. National Bank of Winter Haven, 39 Fed. (2d) 16.

The fact that the proposed statement of evidence prepared by the respondent meets with the approval of the petitioner under the circumstances herein is not sufficient reason to encumber the record with an immaterial duplication and to burden the court with a record more voluminous than necessary. Furthermore, the parties can not, by agreeing to the transmission of documents, transgress the rales of the court. It is the duty of the parties to abide by such rules and it is the duty of this Board, whenever occasion arises, to see to it that the rales are not violated. It is not within the province of the Board to enlarge or extend such rules to meet the wishes of the parties.

The petitioner’s objections to the respondent’s statement of evidence are, therefore, sustained and the clerk of the Board is directed to omit any statement of evidence in the record to be transmitted by him to the United States Circuit Court of Appeals for the Seventh Circuit.

Reviewed by the Board.


author: Murdock:

text:
    Bernard O. Kearney, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67943.
    Promulgated December 26, 1934.

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

      H. D. Thomas, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner determined a deficiency of $4,580.88 in income tax for the year 1930. In the determination of this deficiency he added to the income reported on the taxpayer’s return $23,333.34 representing income received as a result of a compromise settlement of a proceeding to contest the will of Matthew O’Doherty. This action of the Commissioner is the only error assigned. The facts of record have been stipulated.

The petitioner ig an individual, residing at Louisville, Kentucky. He was a grandnephew of Matthew O’Doherty. The latter died testate on or about November 30, 1928, while residing in Louisville, Jefferson County, Kentucky. His last will and codicils thereto were duly probated in the Jefferson County Court on December 10, 1928. That will and its codicils provided for a number of specific bequests and provided that the residue of the estate should go one third to the widow of the decedent, Kathleen O’Doherty, one third to the Roman Catholic Bishop of Louisville, and one third to the Home for the Aged of the Little Sisters of the Poor and the Sisters of the Good Shepherd. Certain heirs of the testator were not satisfied with the property received by them under the will and instituted legal proceedings in the Common Pleas Branch, Jefferson Circuit Court, to contest the order of the Jefferson County Court probating the will, in an effort to set aside the will and have the property distributed under the Kentucky laws of descent and distribution as in the case of intestacy. The petitioner was made a defendant in this proceeding. Thereafter the parties in interest entered into an agreement dated March 10, 1930. The agreement provided, inter alia, “ that in addition to the legacies and clevises under said will, the parties of the third part [the Roman Catholic Bishop of Louisville and the two other charitable corporations sharing in the residuary bequest under the will] shall pay to the parties of the fourth part [the heirs at law of Matthew O’Doherty, including the petitioner, Bernard O. Kearney] the sum of $700,000 * * The agreement further provided that the will contest action was settled and the parties to the agreement agreed that the will was the last will of the decedent and should be adjudged to be his last will and the estate administered according to the terms thereof. The heirs at law released all claims, interest, or demands of every and whatever kind they may have had against the estate of the decedent, except as provided in his will, and against the other parties to the agreement, including the widow and the executor. The petitioner received $23,333.34 in May 1930 as his share of the $700,000 paid in accordance with the agreement. The Chancery Branch of the Jefferson Circuit Court approved the agreement in so far as it affected certain infant heirs, and on April 26,1930, the Common Pleas Branch of the Jefferson Circuit Court entered an order and judgment decreeing and adjudging that the will and codicils admitted to probate by the County Court of Jefferson County as the last will and testament of Matthew O’Doherty were the true last will and testament of Matthew O’Doherty. The petitioner did not report any part of the $23,333.34 in his income tax return filed for the year 1930.

The petitioner contends that the $23,333.34 was received by him as an inheritance from the estate of Matthew O’Doherty, deceased, and for this reason should be excluded from his “gross income under the provisions of section 22 (b) (3) of the Revenue Act of 1928. He also contends that any tax on the receipt of this amount by him would be unconstitutional. Section 22 (b) (3) is as follows:

(b) Basolusions from gross income. — Tbe following items shall not be included in gross income and shall be exempt from taxation under this title:
* * * * * * *
(3) Gifts, bequests, and devises. — The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income).

The petitioner did not receive the amount in question under the decedent’s will and, consequently, it was not property acquired by bequest or devise. Furthermore, he did hot receive it as an inheritance from his granduncle. The latter disposed of all of his property by his will and the codicils thereto, and the petitioner, with the other parties to the agreement, expressly agreed that his estate should be administered according to the terms of that will and the codicils thereto. No one inherited any property from him. Therefore, it seems obvious that the petitioner did not acquire the property in question by inheritance. As a matter of fact he did not receive the property from his granduncle nor from the latter’s estate. Cf. Cochran's Executor & Trustee v. Commonwealth, 241 Ky. 656; 44 S.W. (2d) 603. Instead, he received it from an entirely different source, namely, from the Catholic Bishop of Louisville and two other corporations already referred to. These three corporations paid the money to the petitioner. It was their own money and, although they shared in the residuary estate of the decedent under the terms of his will, that fact does not make the payment an inheritance. Cf. Hu L. McClung et al., Executors, 13 B. T. A. 335. It was an amount paid under a contract in settlement of a law suit. There appears to have been no lack of adequate consideration flowing from the petitioner for the payment which he received under the agree' ment. Cf. Sellars v. Jones, 164 Ky. 458; 175 S. W. 1002; Shellabarger v. Commissioner, 38 Fed. (2d) 566. Apparently an actual controversy existed affecting the rights of the parties to the agreement. The petitioner gave up whatever rights he had which were adverse to the rights of the Bishop and the other two corporations in consideration of the payment to him of $23,333.34 by the three corporations, which were thus permitted to benefit under the will. Since there was consideration for the payment, it was not a gift. Section 22 (b) (3) does not apply.

However, the petitioner further contends that this payment was not income to him within the meaning of the term “ incomes ” as used in the Sixteenth Amendment to the Constitution of the United States and, therefore, to tax the receipt of it as if it were income would be unconstitutional. He relies upon the definition of income quoted by the Court in the case of Eisner v. Macomber, 252 U. S. 189, as follows: “ Income may be defined as the gain derived from capital, from labor, or from both combined.” The item in controversy would seem to fall within this definition rather than without. The petitioner apparently had some rights which he asserted or permitted to be asserted on his behalf. Then he gave up these rights in exchange for $23,333.34. The rights cost him nothing and had a basis of zero for gain or loss. Thus, from the assertion and disposition of his rights he derived a gain of $23,333.34. This was a gain derived from capital, from labor, or from both combined. It was income in the ordinary sense of the word and Congress had the power to tax it. Cf. Lynch v. Hornby, 247 U. S. 339. Gross income is defined in section 22 (a) of the Revenue Act of 1928 as including gains and profits of whatever kind and in whatever form paid or from sales or dealing in property, whether real or personal, growing out of the ownership or use of, or interest in such property, or from the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. This definition is very broad and includes the gain in question. The Commissioner did not err. Cf. S. A. Pierce, 8 B. T. A. 1219.

Decision will be entered for the respondent.


author: Seawell:

text:
    Transatlantic Shipping Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61932.
    Promulgated December 26, 1934.

      Modie Harris, Esq., for the petitioner.

      Frank M. Thompson, Jr., Esq., for the respondent.
   OPINION.

Seawell:

In June 1928 the Mixed Claims Commission, United States and Germany, paid to the petitioner, a New York corporation, the sum of $29,421.54 representing principal and interest due under an award made in favor of the petitioner in January 1926 based upon a claim it filed with the Mixed Claims Commission in 1922 for loss of merchandise incurred by the sinking of the steamship Kerwood. After deducting counsel fees of $9,105.38, the remainder, $20,316.16, was placed in the hands of a trustee for distribution to the parties entitled thereto. In July 1928 the trustee, pursuant to an assignment made in an agreement entered into March 6, 1924, paid $12,987.12 of the proceeds of the claim to and for the account of Ernest F. Mattutat, and $7,329.04 to the petitioner. In his determination of a deficiency of $1,558.46 in income tax against the petitioner for 1928, the respondent included the sum of $20,316.16 in gross income. The petitioner concedes that the amount of $7,329.04 it received is taxable. Whether the sum of $12,987.12 paid over to Mattutat is taxable to the petitioner, the assignor, is the only question presented for decision.

The position of the respondent is that the March 1924 agreement was nothing more than an assignment of future income, and the contention of the petitioner is that it had no property right in the claim after March 1924 other than a right to receive from Mattutat a portion of whatever he realized from the claim.

There is no longer any doubt about the rule governing questions of this sort. In William Ernest Seatree, 25 B. T. A. 396, we said, on the authority of numerous cases:

It is well settled that an assignment of income does not relieve the assignor of the tax thereon, but that if property or property rights are assigned the income subsequently arising therefrom is not taxable to the assignor, for the reason that the property no longer belongs to him and therefore the income from such property belongs, not to him, but to the new owner. * * *

See also Walter L. Ross, 30 B. T. A. 496. An examination of the facts here, none of which are in dispute, in the light of the established rule, leaves no doubt that the amount in question is not taxable to the petitioner.

On March 6, 1924, Ernest F. Mattutat, owner of four fifths of the outstanding stock of the petitioner, J. A. Martin and F. S. Hollo, owners of the remaining stock, and the petitioner entered into a written agreement by the terms of which, for valuable considerations, Mattutat agreed, among other things, to (1) assign his stock to Martin and Eolio; (2) pay certain indebtedness of others to the petitioner; (3) execute general releases in favor of the petitioner, Martin, and Eolio, except as to matters arising out of the agreement; (4) refrain for a period of five years from entering into business competitive with the petitioner; and (5) resign as an officer and director of the petitioner; and Martin, Eolio, and the petitioner agreed to do certain things. Among the things the petitioner agreed to do was:

To assign, transfer and set over to E. F. Mattutat the claim of the Company [petitioner] against the German Government heretofore filed with the Claims Commission at Washington, D. C., on or about the 11th day of January 1923, through Modie Harris, its attorney, in the sum of $27,000.00. If, when and as said claim is collected by said E. E. Mattutat, there shall first he paid therefrom all necessary and proper expenses and counsel fees, and the net proceeds thereof are to be distributed as follows — seventy-five per cent (75%) to E. E. Mattutat and twenty-five (25%) to the Company; it being understood, however, that any future expenditures made by the Company in connection with this claim are to be paid to the Company before ascertaining the net amount.

Each of the parties to the contract agreed to execute such other instruments as might be necessary and proper to effectuate the purposes and objects of the agreement. Subsequently, in March 1924, the petitioner executed an instrument reciting that in consideration of the sum of one dollar and other good and valuable considerations it—

* * * have sold, assigned, transferred and set over, and by these presents do sell, assign, transfer and set over unto Ebnest E. Mattutat * * * his executors, administrators and assigns, to his own proper use and benefit, any and all sums of moneys now due or to grow due upon the claim filed by it with the Mixed Claims Commission, at Washington, D. C., on or about January LI, 1923, and which matter is now pending. And does hereby give the said Ebnest F. Mattutat, his executors, administrators and assigns, the full power and authority, for his own use and benefit, but at his own cost, to ask, demand, collect, receive, compound and give acquittance for the same or any part thereof, and in his name or otherwise to prosecute and withdraw any suits or proceedings at law or in equity therefor.

The right of the petitioner to recover an amount for the loss of its goods was a property right, a chose in action, capable of being assigned in praesenti. The petitioner obligated itself in the March 6,1924, agreement to assign to Mattutat its claim then pending before the Mixed Claims Commission, without any reservation of interest therein beyond the right to receive from Mattutat, when, if ever, the claim was collected, a sum computed as set forth in the contract. The petitioner assigned all of its right, title, and interest in the claim to Mattutat later in the same month. Thereafter the claim, with all the rights attached to it, was owned by the assignee. Such right as the petitioner had to a portion of any proceeds of the claim did not attach until the claim was reduced to money. The income was derived from property rights in the claim. These rights, we find, were owned by Mattutat, not the petitioner, after March 1924.

The amount of the award was paid direct to the petitioner on account of a provision in the Settlement of War Claims Act of 1928, approved March 10, 1928, and regulations prescribed thereunder by the Secretary of the Treasury, limiting payment of any award to the person on whose behalf the award was made, with certain exceptions not material here. This provision against the recognition of assignments of awards did not in any way affect the property rights Mattutat had in the claim and the award made under it. The petitioner received the payment, not as the owner of the claim, but as a trustee for Mattutat.

Not in excess of $7,329.04 of the amount paid on the claim in 1928 constitutes taxable income to the petitioner. See Commissioner v. Field, 42 Fed. (2d) 820; Hall v. Burnet, 54 Fed. (2d) 443; Nelson v. Ferguson, 56 Fed. (2d) 121; Eugene Siegel, Executor, 20 B. T. A. 563; on appeal dismissed pursuant to motion of Commissioner, 59 Fed. (2d) 1055; Oscar Mitchell, 27 B. T. A. 101; Walter L. Ross, supra.

Decision will he entered under Bule 50.


author: Seawell :

text:
    Francis J. Kelly, Executor, Estate of Rose A. Kelly, Deceased Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 70899.
    Promulgated December 26, 1934.

      William 0. DeLacy, Esq., for the petitioner.

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

Seawell :

Respondent determined a deficiency in estate tax of the decedent in the amount of $3,783.16. Rose A. Kelly, decedent, was the widow of John A. Kelly, who died May 17,1927. She and their son, Francs J. Kelly, were the sole devisees and legatees under the will of John A. Kelly and sole executors of his estate. Francis J. Kelly is the sole executor of the estate of Rose A. Kelly, who died October 11, 1930. Each of these persons was a resident of Chicago, Illinois.

Petitioner alleges that respondent erred in disallowing as deductions three items of indebtedness of the estate of Rose A. Kelly, in the amounts of (a) $14,220.21, (b) $24,000, and (c) $150,000. After the hearing petitioner upon motion was allowed to amend his pleading to correspond to the proof, and (d) alleged in effect that real estate of the value of $250,000 was erroneously included in the return for Federal estate tax because decedent had only a life estate therein at the time of her death, and he prayed for proper correction of the error. All allegations of error were denied by respondent. In the brief petitioner withdrew the allegation of error as to the deductibility of item (a) above. We will treat the other claims in their order.

Item (b), $24,000. This is the balance of a note for $27,000, dated July 21, 1930, executed by Francis J. Kelly and Rose A. Kelly. The history of this note discloses that it was originally for $80,000, and was an unmatured indebtedness of John A. Kelly, evidenced by his note for money borrowed by him from the Continental & Commercial Bank and outstanding at the time of his death. On April 21, 1930, Rose A. Kelly and Francis J. Kelly made payment of $3,000 thereon and thereafter executed the $27,000 note to replace the original note, which was canceled. On August 27, 1930, the makers of the note made a further payment thereon, reducing the amount to $24,000, which is claimed as a deduction from the gross estate of Rose A. Kelly at the time of her death, under section 303 (a) (1) of the Revenue Act of 1926, as a claim against her estate. It was admitted by petitioner that the estate of John A. Kelly was solvent, and that this item of indebtedness was claimed in the return for estate tax purposes of his estate and allowed by respondent. Petitioner on the brief cites as authority for its allowance also in this case the Board’s decision in Jeptha H. Wade, Jr., et al., Executors, 21 B. T. A. 339. The case cited is not apposite, and we can discover no reason in law for allowing the deduction, and it is denied.

Item (c), $150,000. At the time of his death John A. Kelly was the owner of real property, known as the Flatiron Building, upon which he had placed a deed of trust securing an indebtedness against him of $150,000. Some accrued interest at that time was also unpaid. John A. Kelly devised the Flatiron Building to Francis J. Kelly. Upon the settlement of the Federal estate tax of John A. Kelly the whole amount of indebtedness due under the deed of trust was claimed and allowed as a deduction from his gross estate. After the death of John A. Kelly, Rose A. Kelly and Francis J. Kelly funded the balance owing on the debt, $150,000, and accrued interest, by executing a new deed of trust on the Flatiron Building, in which was included also certain other real estate, known as the Roseland property, which it was agreed belonged to Rose A. Kelly. Petitioner contends, and oral evidence was offered to support the contention, that John A. Kelly, Rose A. Kelly, and Francis J. Kelly verbally agreed among themselves that the two parcels of real estate which were included in the new deed of trust should be held together as a financial unit for the purpose of paying expenses, as the Flatiron Building “ could not carry itself ”, and that Rose A. Kelly before her death had accounted for some $72,000 on account of this agreement in carrying the Flatiron Building. The debt, however, notwithstanding the change in its form and the increase in security, we hold remained the debt of the estate of John A. Kelly, which it is admitted was solvent. This unpaid mortgage, so far as Rose A. Kelly is concerned, was not “contracted for an adequate and full consideration in money or money’s worth ”, as required by section 303 (a) (1). See Kiess v. Baldwin, 74 Fed. (2d) 470. We therefore sustain the respondent in this contention.

In the amendment to the petition, above referred to, petitioner alleges in effect that proof on the hearing showed that decedent at the time of her death did not own an inheritable interest or estate in said real estate, but no more than a life estate therein, and prayed that the amount of $250,000, item (d), be deducted from the return as made by petitioner. Respondent, before answering, excepted to the granting of the motion to amend and moved that the order allowing the same be vacated. The answer then, in effect, denies the allegations of the petition, except it admits that the value of the real estate at the date of the death of decedent was $250,000, that at the hearing a copy of the will of J ohn A. Kelly was introduced in evidence, and that items second and third thereof are correctly quoted in the amendment to the petition. Respondent in his answer specifically denies that J ohn A. Kelly “ died seized and possessed of such a right, title, or interest in ” the real estate in question “ as would enable him to transmit by will a life estate to Rose A. Kelly ”; or that the will, “ without other proof, could be taken as proof ” that Rose A. Kelly was not at the time of her death the fee simple owner thereof.

The amendment to the petition is inartistically drawn; it does not directly allege the facts, but alleges that “ respondent introduced evidence ” on the trial “ which proved that decedent had only a life estate ” in the real estate described which “ petitioner herein had listed as part of the Estate of said decedent * * * and therefore * * * should be disregarded by the respondent ” and “ deducted from the gross estate.” But construing the amended pleading liberally, and in connection with subject matter and context, as we are required to do, it appears sufficient to raise the issue as to whether the decedent at the time of her death was the owner of an inheritable estate or of only a life estate in the property described, and to require our determination of the issue so raised.

Upon evidence introduced by respondent or elicited by him on the trial, we find that there were included in the Federal estate tax return of John A. Kelly’s estate two parcels of real estate which are known as, and for convenience here called, (1) the Roseland property, at a valuation of $180,000, and (2) the Flatiron Building property, at a valuation of $185,000. The Roseland property was owned by John A. Kelly and Rose A. Kelly as joint tenants at the-time of his death. But the Flatiron Building property, acquired by them as joint tenants on August 27, 1921, by deed of the Flatiron Building Corporation, was conveyed by them to Walter H. Dehloer, September 20, 1922, and reconveyed by Walter H. Dehloer and wife to John A. Kelly alone, who was sole owner thereof at the time of his death. By his will John A. Kelly gave and bequeathed certain personal property to Bose A. Kelly, his wife, and also devised to her a life estate in the Boseland property, remainder to Francis J. Kelly, their son, in fee simple. Bose A. Kelly took under the will. The Flatiron property was devised to Francis J. Kelly and he was also made residuary legatee. Bose A. Kelly died less than five years after the death of John A. Kelly, and her executor included in her Federal estate tax return (Form 706) at a valuation of $250,000, the Boseland property, which was the same property included in the Federal estate tax return of John A. Kelly at $180,000. In the John A. Kelly estate tax return the total gross estate was $217,269.34 and the total deductions $382,350.98, net estate for tax — none. In the Bose A. Kelly estate tax return the total gross estate was $280,715.52 and total claimed deductions $298,031.92, net estate for tax — none.

We feel that, under the facts disclosed, the issue of whether at her death Bose A. Kelly was the owner of the Boseland property and whether that property should be included in her gross estate for estate tax purposes should be resolved in favor of petitioner. Scarcely any proposition is better established in the law than that which holds that one may not claim under and against a will at the same time. Utermehle v. Norment, 197 U. S. 40. As was said by Mr. Justice Brewer in Smithsonian Institution v. Meech, 169 U. S. 398, 414, “Although the testator has no legal power to dispose of the property of another, yet if he assumes to do so by his will, and such person accepts a devise or bequest under the will, it will be a confirmation of such disposition of his own property by the testator.” See also Herbert v. Wren, 7 Cranch, 370.

In Kidder v. Douglas, 194 Ill. 388; 62 N. E. 911, the court quoted approvingly from its opinion in Buchanan v. McLennan, 192 Ill. 480; 61 N. E. 448, wherein it is said in part: “ One who takes under a will cannot, therefore, insist that the provisions in his favor shall be executed while those to his prejudice be annulled.” In Wooley v. Schrader, 116 Ill. 29; 4 N. E. 658, the following language from 2 J arm. Wills is quoted with approval: “ He who accepts a benefit under a will must adopt the whole contents of the instrument, conforming to all its provisions and renouncing every right inconsistent with it. In Larger v. Crowl, 149 Ill. 465; 36 N. E. 1040, it is said: ‘ If a testator, intending to dispose of his property includes in the disposition property of another person and at the same time gives to such other person an interest in the estate of the testator, such person will not be permitted to defeat the disposition made by the will and at the same time take under it. He is put to his election whether he will retain his own property or take the benefit conferred by the will.’ ” See also Beetson v. Stoops, 186 N. Y. 456; 79 N. E. 731; Sorenson v. Carey, 96 Minn. 202; 104 N. W. 958; and Tolley v. Poteet, 62 W. Va. 231; 57 S. E. 811.

Mrs. Kelly, by taking other property under the will of her husband, became, as provided in the will, a life tenant only of the Rose-land property, and was as effectually divested of any other estate in the property at the time of her death as if she had conveyed it away by deed, reserving only an estate for life to herself. We hold, therefore, that the value of the Roseland property should not be included in her estate.

Judgment will he entered umder Rule 50.