author: Black:

text:
    Louisville Property Company, H. C. Williams, Assignee, Middlesboro, Kentucky, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96414.
    Promulgated May 24, 1940.

      Geo. E. H. Goodner, Esq., and Bernard I. Ddhlberg, O. P. A., for the petitioner.

      E. M. Woolf, Esq., for the respondent.
   OPINION.

Black:

The petitioner in this proceeding has filed a motion to change the caption of the proceeding from what it is at present to:

H. C. Williams, Successor Assignee in Trust for the Benefit of the Creditors and Stockholders of Louisville Property Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.

and to file a second amended petition.

At a hearing on this motion, respondent did not oppose so much of the motion which asked leave to file a second amended petition but did oppose that part of the motion to change the caption of the proceeding. At the hearing, although filing no motion to dismiss the proceeding for lack of jurisdiction, the petitioner raised the question in argument as to whether the Board has jurisdiction to hear and decide the proceeding, suggesting as a reason for raising the question that the taxpayer against which the Commissioner determined the deficiency is not before the Board as a petitioner. The Board must take notice of this question of jurisdiction even though it has not been raised by a formal motion. Coca-Cola Bottling Co., 22 B. T. A. 686, and cases there cited. The respondent contends that the Board does have jurisdiction and opposes any dismissal on that ground.

The facts as disclosed by the pleadings and by evidence introduced at the hearing on the motion, are as follows:

The Louisville Property Co. is a corporation. During 1919 it was in financial difficulty. As a result thereof its board of directors, on November 5, 1919, passed a resolution:

Be it resolved:

1. That the president of this company be and he is hereby authorized and directed to execute and deliver a general deed of assignment, for the benefit of creditors, to the United States Trust Company, of Louisville, or such other assignee as he may select, thereby conveying, transferring and assigning to the Assignee in said deed all of the property — real, personal and mixed, — owned by this company, in trust for the payment of the debts of the company, including the lien debt of the Louisville and Nashville Railroad Company, and distributing ratably among the stockholders tire remainder, if any, of the proceeds of the sale of the company’s property after paying expenses of administration * * *.
2. That this company will now proceed to close its business and wind up its affairs, it being understood however, that inasmuch as the deed herein provided for will direct the trustee to distribute the excess of assets over debts, if any, to the stockholders, the unhiding up of the company's a-ffaárs cannot be completed, until such distribution is made. [Italics supplied:]

As a result of the above resolution, the Louisville Property Co., on November 6, 1919, executed a deed of assignment, which is in part as follows:

This Deed of Assignment, made this November 6, 1919, by and between the Louisville Property Company, party of the first part, and the United States Trust Company, party of the second part, both being corporations organized under and pursuant to the laws of the State of Kentucky, and hereafter for convenience referred to as Assignor and Assignee, respectively, witnesseth: That
Whereas the first party is indebted to the Louisville & Nashville Railroad Company in a large sum of money, amounting to considerably more than a million dollars, which is secured by a lien upon all of its tangible property; and
Whereas circumstances have arisen which will result in the forced sale of the Assignor’s property for the payment of said indebtedness, and the officers and a majority of the stockholders of the company believe that such proceeding would result in a sacrifice of the company’s property and a great loss possibly to the creditors and certainly to the stockholders; * * * now,
In consideration' of the premises and of one dollar paid cash in hand, the receipt of which is hereby acknowledged, the assignor hereby sells, assigns, aliens, conveys and transfers all of its property of every description, — real, personal and mixed — and wheresoever located, to the assignee, its successors and assigns, absolutely and in fee simple, in trust for the payment of the debts of the Assign- or and the expenses of administration and the distribution of the remainder, if any, of the proceeds of the sale of the assignor’s property to its stockholders ratably according to their holdings at the time such distribution is made; the assignee, its successors and assigns being hereby specifically authorized to sell all of the property herein conveyed at public or private sale, and in such parcels and upon such terms as it may deem most advantageous. [Italics supplied.]

The United States Trust Co. accepted the deed in language as follows: “The United States Trust Company, of Louisville, Ky., as Assignee, hereby accepts this deed and trust thereby created. This November 6, 1919.” It served as assignee until 1935, when it filed in the Whitley Circuit Court, in No. 5484, its “Resignation as Assignee of the Louisville Property Company.” On May 11, 1935, the court ordered, considered, and adjudged in part, as follows:

1. That the Final Statement of the Accounts of the United States Trust Company, as Assignee of the Louisville Property Company under the deed of assignment dated November 6, 1919, from Louisville Property Company, as Assignor, to United States Trust Company, as Assignee, and all of its accounts and transactions as such Assignee, be, and hereby they are, confirmed and aproved;
2. That the resignation of the United States Trust Company, as Assignee of the Louisville Property Company, under such deed of assignment be, and hereby it is, accepted;
3. That, pursuant to the nomination and recommendation by the defendants, Louisville and Nashville Railroad Company, the Atlantic Coast Line Railroad Company, William S. Speed and Isaac W. Berheim, of Mr. H. C. Williams, of Middlesboro, Kentucky, as successor assignee of the Louisville Property Company, under such deed of assignment, in substitution for the United States Trust Company, the said H. C. Williams hereby is appointed as such successor Assignee of the Louisville Property Company, under such deed of assignment, in substitution for the United States Trust Company * * *.
It Is Fubtheb Okdeked that H. C. Williams, as Assignee of the Louisville Property Company, be, and hereby he is, made plaintiff herein in substitution for, and in lieu of, the United States Trust Company, Assignee of the Louisville Property Company; and that this case hereafter proceed under the style of H. C. Williams, Assignee of the Louisville Property Company, plaintiff, versus Louisville Property Company, et al. etc., defendants; and that this action is retained on the docket for such further proceedings herein as may be necessary or proper and for the settlement of the accounts herein of the said H. C. Williams, as successor Assignee of the Louisville Property Company.

Williams qualified and assumed the duties of successor assignee of the Louisville Property Co. and is still serving in that capacity. He filed returns for 1935, 1936, and 1937 as a “trust” on Forms 1041 and 1040. The 1936 returns were admitted in evidence and show that Form 1041 was filed under the caption of “Louisville Property Company, H. C. Williams, Assignee” and that Form 1040 was filed under the caption of “H. C. Williams, Assignee, Louisville Property Company.”

The respondent determined that Williams was operating the property of the Louisville Property Co. as an assignee and that under section 52 of the Revenue Acts of 1934 and 1936 he should have filed returns for such corporation in the same manner and form as corporations are required to make returns.

On November 26, 1938, a deficiency notice was mailed to “Louisville Property Company, H. C. Williams, Assignee” giving notice of deficiencies in income tax for the years 1935 and 1936.

On December 12, 1938, a petition was filed under the caption of “H. C. Williams, Trustee Louisville Property Company” and docketed as No. 96414.

On January 20, 1939, the respondent filed a motion to dismiss on the grounds that the petition was not in accordance with Pule 6 (a), (d), (e), and (h) of the Board’s Pules of Practice, in that it did not contain the proper caption, assignments of error, statement of facts, or a proper verification. This motion was set down for hearing and later continued to March 1, 1939.

On February 15, 1939, a new petition for the same years, 1935 and 1936, was filed under the caption of “Louisville Property Company, H. C. Williams, Assignee” and docketed as No. 97126.

On March 1, 1939, a hearing was held on respondent’s motion to dismiss before a division of the Board, who, on March 3, 1939, signed an order which is in part as follows:

Ordered that the respondent’s motion to dismiss filed January 20, 1939, be and it hereby is denied; that the proceeding at Docket No. 97126, together with all papers pertaining thereto, be and it hereby is transferred to and consolidated with the proceeding at Docket No. 96414; that Docket No. 97126 be and it hereby is closed of record by such consolidation, and that the respondent is allowed 60 days from the date hereof within which to file an answer to the amended petition filed February 15, 1939, or 45 days within which to move with respect thereto, and that the filing fee paid at Docket No. 97126 be refunded to the petitioner.
It Is Further Ordered that this proceeding shall proceed henceforth under the caption Louisville Property Company, H. C. Williams, Assignee, Middlesboro, Kentucky, Petitioner, as set forth in the amended petition filed February 15, 1939.

On February 19, 1940, petitioner in Docket No. 96414 filed a motion to change the caption from that as designated in the Board’s order, dated March 3, 1939, to “H. C. Williams, Successor Assignee in Trust for the Benefit of the Creditors and Stockholders of Louisville Property Company” and also for leave to file the “Second Amended Petition” which was annexed to the motion. This proposed second amended petition contains among other things, the following allegations which go to the question of jurisdiction:

In a letter dated November 26, 1938, the Commissioner of Internal Revenue, by Caruthers Wilson, Internal Revenue Agent in Charge, gave notice of his determination of deficiencies in income tax for the period May 11 to December 31, 1935, and the calendar year 1936 against “Louisville Property Company, H. C. Williams, Assignee, Middlesboro, Kentucky”. Said letter was sent by registered mail to and was received by the above designated petitioner. In so far as said notice of deficiencies is held to assert deficiencies in tax against this petitioner, petitioner hereby petitions for a redetermination thereof, and as a basis of this proceeding alleges as follows:
1. The petitioner is the successor assignee in trust for the benefit of the creditors and stockholders of Louisville Property Company, having been appointed as such by the Circuit Court of Whitley County, Kentucky, on the 6th day of May, 1935, and having qualified as such on May 11, 1935. His address is Middlesboro, Kentucky. Petitioner filed fiduciary and income tax returns for the periods here involved with the collector for the District of Kentucky.

Following these jurisdictional allegations are assignments of error which go to the correctness of the Commissioner’s determination of the deficiency. These we do not deem it necessary to set out in this opinion because there has as yet been no hearing on the merits.

The principal question we have to decide at the present time is whether the petition has been filed by the taxpayer against which the deficiency has been determined or whether Williams has merely appealed as a fiduciary or as an individual.

The Louisville Property Co. has not been dissolved. It has remained in existence apparently for the sole purpose of awaiting the outcome of the liquidation of its properties, which was carried on first by the United States Trust Co. until May 1935, and since that date by H. C. Williams. If any proceeds from the sale of the properties of the Louisville Property Co. remain after all the creditors and expenses of administration have been paid, such remainder is to be distributed to the stockholders of the Louisville Property Co. ratably “according to their holdings at the time such distribution is made.” The resolution of the board of directors of the Louisville Property Co. dated November 5, 1919, specifically provided that “the winding up of the company’s affairs cannot be completed until such distribution is made.”

From the pleadings and evidence now before us it seems that the question is clearly raised as to whether II. C. Williams is an “assignee” as the term “assignees” is used in section 52 of the Revenue Acts of 1931 and 1936. The material provisions of section 52 of both acts are identical. Section 52 is printed in the margin. If Williams was operating the property of the Louisville Property Co. during the years 1985 and 1936 as the assignee of that corporation, he would be required under section 52 to make returns for the Louisville Property Co. in the same manner and form as corporations are required to make returns. The respondent determined that Williams was operating the properties of the Louisville Property Co. as an assignee and has issued the deficiency notice upon that basis. The evidence which has been introduced, coupled with the facts as disclosed by the pleadings, confirms the correctness of respondent’s determination rather than disproves it, and brings petitioner clearly within section 52, supra.

It is our opinion that the Board has jurisdiction; that petitioner’s motion to change the caption should be denied; and that petitioner’s motion to file the second amended petition which was lodged with the Board on February 19, 1940, should be granted, except that the caption thereof is to remain the same as stated in the Board’s order dated March 3, 1939. An order disposing of petitioner’s motion filed February 19, 1940, will be entered accordingly.

       SEC. 52. CORPORATION RETURNS :
      * * * In cases where receivers, trustees in bankruptcy, or assignees are operating the property or business of corporations, such receivers, trustees, or assignees shall make returns for such corporations in the same manner and form as corporations are required to make returns. Any tax due on the basis of such returns made by receivers, trustees, or assignees shall be collected in the same manner as if collected from the corporations of whose business or properly they have custody and control.


source: Caselaw Access Project

author: Black :

license: Public Domain

text:
    R. G. Trippett, as Transferee of Texota Corporation, Dissolved, Petitioner, v. Commissioner of Internal Revenue, Respondent. A. H. Meadows, as Transferee of Texota Corporation, Dissolved, Petitioner, v. Commissioner of Internal Revenue, Respondent. Texota Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 93100, 93111, 93112.
    Promulgated May 28, 1940.

      W. H. Sanford, Esq., and Harry L. Viser, O. P. A., for the petitioners.

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

Black :

In the instant case the facts clearly show that prior to the time that Texota conveyed the lease in question to Meadows and Meadows and Trippett conveyed it to Rancho, Meadows and Trippett had entered into a binding contract with Rancho to sell the lease. This contract was signed by Meadows and Trippett, individually, as sellers and Rancho as purchaser, and nowhere in the contract does the name of Texota appear. Meadows and Trippett both testified at the hearing that they signed the contract with Rancho, individually, because they fully intended to liquidate the corporation at an early date thereafter and thereby become the owners of the lease in their own individual right upon receiving it in liquidation. They further testified that they intended thereafter to convey the lease to Rancho as individuals in fulfillment of their contract. They contend that the transactions were consummated according to the plan and that Texota is not taxable on the profits.

Under the circumstances detailed in our findings of fact, should we hold that the contract of sale made by Meadows and Trippett with Rancho on December 20, 1934, must be treated as the contract of Tex-ota, as seller ? If, under the law, we should so hold, then we must hold that the subsequent sale which Meadows and Trippett made on January 5, 1935, to Bancho was made by them as agents and representatives of Texota and that the profits from the sale are taxable to Texota. Hellebush v. Commissioner, 65 Fed. (2d) 902; Burnet v. Lexington Ice & Coal Co., 62 Fed. (2d) 906; Taylor Oil & Gas Co. v. Commissioner, 47 Fed. (2d) 108; S. A. MacQueen Co., 26 B. T. A. 1337; affd., 67 Fed. (2d) 857.

We think we must hold that the contract entered into by Meadows and Trippett on December 20, 1934, was one entered into for the benefit of Texota and therefore must be treated as its contract. True it is that Texota’s name is not mentioned in the contract, but Meadows and Trippett were the directors and sole stockholders of Texota. Meadows was its president and the two of them were in charge of its affairs. The lease was concededly owned at that time by Texota.

In the contract of sale which Meadows and Trippett made with Bancho on December 20, 1934, the following language appeared in the second paragraph: “Sellers shall deliver to purchaser, at its office in the Sinclair Building, Fort Worth, Texas, within three (3) days after the date of this contract complete abstracts of title certified to date, covering the above described property * * If this part of the contract was carried out, and there is no suggestion that it was not, then of course the abstracts of title showed that title to the property was in Texota, and Bancho must have known that it was really purchasing from Texota.

Of the several cases above cited, the one which we think comes nearest the facts of the instant case is S. A. MacQueen Co. The facts in that case are briefly as follows: On February 1, 1927, at a meeting of the three stockholders who owned the entire outstanding stock of the MacQueen Co. and were also its directors, a resolution was passed authorizing the board of directors to sell real estate owned by the corporation to S. A. MacQueen, its president, director, and majority stockholder, for the sum of $85,000. Following that meeting and on the same day, a resolution was adopted by the board of directors accepting an offer by MacQueen of $85,000 for the real estate. The following day, while'the corporation was yet the owner of the property, MacQueen entered into an agreement with Henry Beed Hatfield to convey the real estate to the latter for a consideration of $150,000. On February 11, 1927, in conformity with a prior understanding among the three stockholders, MacQueen executed a declaration of trust in which he recited the agreement of the corporation to convey the real estate to him for $85,000, his agreement to convey the same to Hatfield for $150,000, and his intention to distribute the profits to the stockholders in proportion to their holdings. On March 1, 1927, the MacQueen Co. conveyed title to MacQueen and on the same day MacQueen conveyed title to Hatfield. Subsequently MacQueen, in accordance with his declaration of trust, distributed $65,324.30, representing the profits of the sale and interest thereon, to himself and the other two stockholders.

On these facts we held that the sale to Hatfield was made by the corporation, S. A. MacQueen Co., and it was taxable on the profits resulting from the sale. The court in affirming our decision, among other things, said:

* * * Although in form there were two sales of the corporate real estate, first, the purported sale by the petitioner to MacQueen, and second, the sale by MacQueen to Hatfield, in substance the transaction was a sale by the petitioner to Hatfield through the agency of MacQueen. So also, although in form Mac-Queen was a trustee for the distribution of the profits earned by the sale of his own real estate to Hatfield, in substance he was the agent of the petitioner for the distribution of the profits from the sale of the corporation’s real estate among its stockholders.

In the instant case the purported sale by Texota to Meadows on January 5, 1934, was for $10 and other valuable considerations. In the MacQueen case the purported consideration passing from S. A. MacQueen, president, to the corporation was $85,000. As a matter of fact no consideration at all passed from MacQueen to the corporation, just as here no consideration passed from Meadows to Texota. And, just as we held in the MacQueen case that the corporation made the sale to the purchaser, notwithstanding the intermediate conveyance by the corporation to MacQueen, its president, so we think we must hold in the instant case that Texota made the sale to Sancho, notwithstanding the intermediate conveyance by Texota to Meadows, its president. Of course, the facts and circumstances of the MacQueen case and the other cases cited above are not identical with those in the instant case, but we think they are sufficiently near the same that those decisions must control our decision here.

Petitioner relies largely upon Fruit Belt Telephone Co., 22 B. T. A. 440, and Conservative Gas Co., 30 B. T. A. 552, in support of its position. We think these cases are clearly distinguishable on their facts. In both of these cases the Board pointed out that no binding contract of sale had been entered into by the corporation, or by anyone else acting as its agent, and the proposed purchaser prior to the transfer of the assets to the stockholders. In Conservative Gas Co., supra, in distinguishing a group of cases similar to those which we have cited above, we said:

* * * In each we held that the trustee or assignee merely acted for the corporaion in consummating a transaction initiated by it. In Nace Realty Co., supra, we pointed to this fact as controlling and distinguished Fruit Belt Telephone Co., 22 B. T. A. 440, on this ground, observing: “So far as appears, the corporation [Fruit Belt Telephone Co.] had made no contract for the sale of its assets prior to their transfer to the individual. That fact alone is sufficient to distinguish the case from the case now at bar.”

We should also point out, we think, that the facts in the instant case are distinguishable from those present in Falcon Co., 41 B. T. A. 1128. In that case, prior to any contract of sale, the corporation distributed in partial liquidation the eight leases which were subsequently sold. The stockholders turned in their stock and 60 percent thereof was canceled as a part of the plan of partial liquidation. Thereafter the capital stock of the corporation was only 40 percent of what it was before. After the stockholders received the .leases in liquidation, they entered into a contract on their own account to sell the leases to the East Texas Oil Refining Co. and in pursuance thereof the leases were subsequently sold to the named purchaser for the consideration specified in the contract. Under those circumstances we held that the sale of the leases was made by the stockholders to whom the leases were transferred in partial liquidation and was not made by the corporation, and that the corporation was not taxable on the profits resulting from the sale.

As we have already endeavored to point out, we do not have a similar situation in the instant case. On the strength of the authorities hereinbefore cited we hold for the respondent.

Eeviewed by the Board.

Decision will be entered for the respondent.


author: Hill:

text:
    D. W. Pierce, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92278.
    Promulgated May 28, 1940.

      Maurice G. Sparling, Esq., for the petitioner.

      E. A. Tonjes, Esq., for the respondent.
   OPINION.

Hill:

We are called on to decide here whether the petitioner’s payment of $24,506.46 on his guarantee of the indebtedness of his son is (1) a contribution to the capital cost of stock held by the petitioner which he sought to protect by his guarantee, (2) a gift to his son made when the business' affairs of the son did not warrant a prudent loan, or (3) a loan made to his son, ascertained by the petitioner to be worthless in 1933 and charged off at that time.

The first position we consider untenable here. The amounts paid out on his guarantees by the petitioner did not go into the corporations to which it is contended capital contributions were made, cf. B. Estes Vaughan, 17 B. T. A. 620; Burns v. Commissioner, 31 Fed. (2d) 399; certiorari denied, 280 U. S. 564; In re Park’s Estate, 58 Fed. (2d) 965; certiorari denied, 287 U. S. 645, nor were they applied to the discharge of corporate obligations. See J. S. Maubaules, 20 B. T. A. 359; W. F. Bavinger, 22 B. T. A. 1239; Jeremiah G. Menihan, 29 B. T. A. 169; affd., 79 Fed. (2d) 304; certiorari denied, 296 U. S. 651. Expenditures other than for these purposes which may-in some indirect way improve the position of the petitioner’s investment can not be held contributions to capital under ordinary circumstances. John P. Dillon, 9 B. T. A. 177; Seufert Brothers Co. v. Lucas, 44 Fed. (2d) 528.

In George M. Wright, 18 B. T. A. 471; affd., 47 Fed. (2d) 871, the stockholders of a corporation, among whom was the taxpayer, surrendered 50 percent of their stock holdings to the company’s bankers pursuant to a plan by which the bankers agreed to refrain from placing the corporation in bankruptcy if one-half of the shares were surrendered to them to be paid over as compensation to the new management which they had secured for the company. We held that the value of the stock surrendered could not by virtue of the indirect benefit which came to taxpayer’s remaining investment be labeled a contribution to capital and allowed its deduction as a loss. On largely similar facts we reached the same conclusion in City Builders Finance Co., 21 B. T. A. 800. See also First National Bank, of Skowhegan, Maine, 35 B. T. A. 876; Robert Gaylord, Inc., 41 B. T. A. 1119. Cf. Putnam, Trust Co., 26 B. T. A. 655.

These holdings point to the conclusion that outlays made by an owner-investor may not be considered capital contributions when they are paid to outsiders and engender only a secondary or indirect benefit for the capital invested. As we said in City Builders Finance Co., supra, at page 804:

We believe that the situation here is that petitioner, impelled by the untoward exigencies confronting it, surrendered 32% shares of. its stock * * * for which it received no direct compensation, and if any benefit of any kind inured to it, it was only the indirect benefit, as a stockholder, of having the corporation put in a more strategic position * * *

The petitioner has testified that beside the more immediate objective of protecting the position of his son, he hoped by his-guarantees to prevent the sale of the stock held as collateral in order to protect the price of similar securities held by him. Under the cases cited we think it plain that this benefit to petitioner’s investment flowing indirectly from these outlays is not sufficient to render them contributions to capital.

The respondent must fail also in his alternative contention, that the funds paid out by the petitioner may not be regarded as loans, but were gifts made to his son. Respondent’s argument is based on his allegation that the financial position of the petitioner’s son during the period of the first guarantee and the subsequent increases was so insecure as to render any advances imprudent from a business standpoint and more in the nature of gifts. He assigns the close relation between the petitioner and his son as the reason for the advances and a further basis for branding the outlays as gifts. The evidence, however, is clear that the petitioner’s son was solvent by a safe margin at the time of the original guarantee and the increase on September 29, and that petitioner felt assured during the entire period from September 4, 1930, through December 28, 1931, that the position of his son if protected at those times by petitioner’s guarantees would ultimately be saved by the later increased value of the collateral. The petitioner, as an officer of the corporations the stock of which was held as collateral, was in a favorable position to pass judgment as to the fair value of the stock so held and its future prospects, and he has stated his opinion that it was worth at least double its market value in September 1930. While we do not accept this testimony as conclusive of the value of the stock, we think it sheds light on the petitioner’s intentions and objects in making the guarantees. See Daniel Gimbel, 36 B. T. A. 539. The petitioner regarded these dealings as sound from a business standpoint and this regardless of the personal relationship which obtained between him and the debtor, his son. The guarantee which ^petitioner made in October 1930 of the indebtedness of one J. C. Howard, a legal stranger, we think strengthens this impression.

The petitioner was prompted to make the guarantees for an additional reason which we think furnishes valid basis for holding that these advances were not gifts. The primary objective, as we have noted, of the guarantees was to protect the market value of securities held by the petitioner. Advances made for such purposes are closely related to business expenses and when intended to be in the form of a loan are clearly deductible when the resultant debt becomes worthless.

Here, the evidence points conclusively to the fact that the petitioner intended to hold his son as a debtor in whatever amount he was required to pay on the guarantees. This intent is made plainer by the execution of the note in the amount of $20,000. We do not take this latter fact, however, as an indication that the additional $4,506.46 was meant as a gift. The entire amount must be reckoned as a single transaction. It seems clear, further, that D. W. Pierce, Jr., was hopelessly insolvent at the time the petitioner made his payments and that the debt became worthless as soon as it came into being. Whether the $4,506.46 difference between the debt and the note is properly explained, as the petitioner alleges, by the fact that when the note was signed the exact amount of the guarantee payment had not been ascertained or by some other fact, the entire debt was ascertained to be worthless immediately after the payments in June 1933, and it is thus a proper deduction in that year. Shiman v. Commissioner, 60 Fed. (2d) 65; H. Rodney Sharp, 38 B. T. A. 166; Daniel Gimbel, supra.

Decision will he entered, for the petitioner.


author:
Murdock:
      TURNER,

text:
    Marrs McLean, Petitioner, v. Commissioner of Internal Revenue, Respondent. Verna Hooks McLean, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 91171, 91170.
    Promulgated May 28, 1940.

      W. A. Boling er, Esq., and L. J. BencTcenstein, Esq., for the petitioners.

      Frank B. Schlosser, Esq., for the respondent.
   OPINION.

Murdock:

The Commissioner has determined deficiencies in gift taxes and penalties for failure to .file timely gift tax returns, as follows:

The parties have filed a stipulation of all of the facts, which is hereby adopted as the findings of fact. The petitioners concede that they are liable for penalties for failure to file timely gift tax returns for 1932 and 1933 based upon the deficiencies in tax, if any, due for those years. The respondent now concedes and the petitioners agree that the respondent should have increased the net gifts for the year 1932 by only $4,232.50 in the case of Marrs McLean and by only $3,322.09 in the case of Verna Hooks McLean. No issue for decision by the Board relating to the year 1932 remains.

The petitioners contend that the transfers made in 1933 were made for an adequate and full consideration in money or money’s worth and, therefore, are not subject to gift taxes. The petitioners have resided in Texas since 1919 and have been husband and wife during all of that time. They each executed a deed of trust in 1932. Marrs McLean joined pro forma in the deed executed by his wife. The trustee in each case was directed to pay .the net income of the trust to the spouse of the settlor at the election of the spouse until the death of the settlor. The trust was then to terminate and the property was to be delivered to the spouse. But if the spouse predeceased the settlor and was survived by their daughter, Ruth McLean, or her issue, then the trust income was to be paid to Ruth, or her issue, until the death of the settlor. The trust corpus was to be paid to Ruth, or her issue, in accordance with a stated plan upon the death of the settlor.' No part of the trust income or corpus was to revert to the settlor under any circumstances. The settlor reserved no power to revoke, alter, or amend the trust either alone or in conjunction with any other person. The petitioners transferred certain securities to this trust on September 27, 1933. The securities had a fair market value of $104,150 and had belonged to the marital community. The letter of transmittal to the trustee stated that the grantors had divided the securities equally between themselves and directed that one-half, or $52,075 in value, should be added to each of the trusts.

There is no statement in the stipulation to the effect that the transfer by Marrs was in consideration of the transfer by his wife, or vice versa. Neither is there any statement in the stipulation that the trusts themselves were created one in consideration of the other. The fact that the trusts were created at the same time and contained reciprocal provisions does not prove that one was created in consideration of the other, and the fact that the transfers were in equal amounts and made at the same time does not show that one was made in consideration of the other. If any agreement existed between the petitioners for the creation of the trusts and for the transfers, that fact would be best known to them and they should have proved It. We may not assume any fact for their benefit. Cf. Lehman v. Commissioner, 109 Fed. (2d) 99, affirming 39 B. T. A. 17, where the burden was to show lack of consideration and it appeared as a fact that there was consideration. Likewise, the amount of the consideration, if any, was a matter of proof. Cf. section 503 of the Revenue Act of 1932. The record does not show that the transfers of 1933 were made for an adequate and full consideration in money or money’s worth. We are unable to say that the transfers to the trusts were other than absolute gifts. Cf. Fish v. Commissioner, 75 Fed. (2d) 769, affirming 27 B. T. A. 1002.

The petitioners created two trusts on December 29, 1934, which contained reciprocal provisions. Marrs joined pro forma in the trust deed executed by his wife. Marrs transferred securities having a fair market value of $222,310.37 on December 29 and December 31 to the trust created by him. Verna, on the same dates, transferred securities having a value of $221,157.36 to the trust created by her. The securities transferred had been a part of the petitioner’s community estate, but they entered into an agreement prior to the transfers which purported to change the securities from community property into separate property. These transfers were considered by the Board in Marrs McLean, 41 B. T. A. 565. We there held that the property became the separate property of the petitioners and the transfers to the trusts were valid.

Each of the trust instruments executed on December 29, 1934, directed the trustee to accumulate and reinvest the trust income for a period of ten years, or until the death of the settlor, whichever occurred first, upon the happening of which the trustee was authorized to pay to the settlor’s spouse, for life, all, part, or none of the annual net income of the trust, at that spouse’s election. The trust corpus, plus any accumulated income, was to be distributed, upon the death of the life beneficiary, to Ruth McLean, the petitioner’s daughter, according to a certain plan, and the trust terminated. If Ruth McLean predeceased the life beneficiary without leaving issue, then the entire trust estate was to be delivered to the life beneficiary, but if she predeceased the life beneficiary leaving issue, then such issue were entitled to the remainder interest in the trust updn the death of the life beneficiary. However, if none of such issue survived the life beneficiary, or if Ruth McLean, predeceased by the life beneficiary, left no children or grandchildren surviving her, then the trust estate was to revert to the settlor, if he or she be living, unless Ruth McLean should leave a will disposing of the trust estate, in which event the trust estate was to go as her will directed. Finally, the trust instruments contained identical provisions, except as to the names of the parties, as follows:

The terms and conditions of this trust can be amended by the joint action in writing by Verna Hooks McLean [Marrs McLean], the trustee and the settlor before Ruth McLean attains the age of twenty-one years, but after Ruth McLean attains the age of twenty-one years, then this trust can be amended only by the joint action in writing by Ruth McLean, the trustee, Verna Hooks McLean [Marrs McLean], if she [he] is not deceased, and the settlor, if he [she] is not deceased, provided, however, in no event can any amendment be made at any time that will cause any part of the funds in this trust to be paid to or revert to the use and enjoyment of the settlor, as it is the intent of the settlor and the essence of this trust that the settlor has irrevocably -divested himself [herself) of all interest in this trust estate and he [she] is at no future time to have any interest in the trust estate or its income except the reversionary interest herein provided * * *, and provided further that no amendment prior to her attaining the age of twenty-five (25) years shall change the eifect of this trust, viz., that Ruth McLean is to receive all of the principal sum or corpus of this trust, regardless of any change that may be made in the disposition of the income, * * *.

The Commissioner, in determining the deficiency for 1934, held that the transfers above described were gifts of $222,310.31 and $221,-157.36, respectively. Here again the petitioners contend that the trusts and the transfers were made one in consideration of the other for “an adequate and full consideration in money or money’s worth” and, therefore, did not constitute gifts subject to tax under section 501. Our comments above relating to the 1933 transfers apply here with equal force.

Nevertheless, we conclude that the Commissioner erred in respect to the transfers to the 1934 trusts. The Board recently said in the case of Emily Trevor, 40 B. T. A. 1241

That statute is not aimed at every transfer without consideration but, instead, embraces only such transfers as have the quality of consummated gifts, Burnet v. Guggenheim, supra; that is, absolute inter vivos transfers in praesenti of the donor’s title, dominion, and control of the subject matter of the gift to the donee. Cf. Heiner v. Donnan, 285 U. S. 312. Although the two statutes are not always mutually exclusive, the gift tax statute and the estate tax statute are closely related in structure and purposes, are in pari materia, and must be construed in conjunction to ascertain the character of transfers intended to be embraced in each statute, respectively. The gift tax statute does not embrace a transfer which is so incomplete as a gift inter vivos when made, that the same transfer is, by the estate tax statute, expressly made subject to estate tax because intended to take effect at the death of the transferor. Sanford’s Estate v. Commissioner, 308 U. S. 39; Rasquin v. Humphreys, 308 U. S. 54; Burnet v. Guggenheim, supra; Hesslein v. Hoey, 91 Fed. (2d) 954; certiorari denied, 302 U. S. 756; Lorraine Manville Gould Dresselhuys, 40 B. T. A. 30; William T. Walker, 40 B. T. A. 762; John S. Mack, 39 B. T. A. 220; and Harriet W. Rosenau, 37 B. T. A. 468.

The grantor in the case of each of these 1934 trusts retained a possibility of reverter. That is, the corpus of the trust was to revert to the settlor in case the settlor survived the spouse, the daughter, and all issue of the daughter. The 1934 trust deeds gave the daughter power to defeat all possibility of reverter by will. However, in 1934 she was a minor who could not make a valid will, and under the trust instrument she was given the right to dispose of the trust property by will only after becoming 25 years of age. Consequently, there was still a possibility of reverter during 1934.

The Supreme Court held in the recent case of Helvering v. Hallock, 309 U. S. 106, that a transfer in trust with the retention of a possibility of reverter is an incomplete transfer intended to take effect in possession or enjoyment at or after death and may be included in the gross estate of the grantor for Federal estate tax purposes. The principle of the Hallock case would seem to apply to these 1934 trusts. Thus the transfers in 1934 were not completed gifts. Emily Trevor, supra. The determination of the Commissioner was erroneous. Perhaps the transfers effected completed gifts of some estates less than a fee, but the determination was not made on that basis, the values necessary to any such determination are not in the record and no such issue is suggested by the parties. Cf. Helvering v. Taylor, 293 U. S. 507. Consequently, the Board expresses no opinion on that possibility. Cf. Hughes v. Commissioner, 104 Fed. (2d) 144, decided prior to the Hallock case. •

Reviewed by the Board.

Decision will he entered v/nder Rule 50.

TURNER,

dissenting: Tlie respondent determined that gifts had been made by petitioners of their entire interests in the funds transferred and computed deficiencies on the basis of their full value. The petitioners have shown that the determination was erroneous in part in that possibilities of reverter were retained and with respect to the possibilities of reverter there were no gifts. They have made no such showing with respect to all other interests in the funds. Regardless of that fact, however, the majority has reached the conclusion that the decision should be for no deficiency, remarking that perhaps the transfers effected completed gifts of life estates but that the determination was not made on that basis. As previously stated, the respondent determined that gifts had been made of the funds in their entireties and such a determination includes a determination of gifts of all component parts, life estates or interests in the said funds. It follows, in my opinion, that petitioners, on the record here, are entitled to be relieved of only such portions of the deficiencies as are attributable to the inclusion as a part of the gifts of the property interests represented by the possibilities of reverter. The petitioners having shown the deficiencies to be erroneous only in part, the entry of a decision that there are no deficiencies is no more defensible than would be the entry of a decision for the full deficiencies under the same circumstances, and it is well settled that the latter may not be done. See Taylor v. Helvering, 293 U. S. 507; Cohan v. Commissioner, 39 Fed. (2d) 540; Wagegro Corporation, 38 B. T. A. 1225; Estate of Frank L. Driver, Sr., 36 B. T. A. 246; affd., 100 Fed. (2d) 639.

. It is my view that if the petitioners are entitled to the decisions indicated by the majority opinion it must be on the ground that each of the transfers was made in consideration of the other and does not therefore constitute a gift.

I am unable to agree with the reasoning of the majority and accordingly express my dissent.


author: OppeR: Mukdock,

text:
    Robert C. Suhr, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 94999, 96143.
    Promulgated May 29, 1940.

      William H. Annat, Esq., for the petitioner.

      Paul A. Sebastian, Esq., DeWitt M. Evans, Esq., and W. W. Kerr, Esq., for the respondent.
   OPINION.

OppeR:

These proceedings were brought for a redetermination of deficiencies in income tax of $948.12 and $4,852.45 for the years 1935 and 1936, respectively.

The only question presented is whether respondent erred in holding petitioner liable for the income of a trust.

All of the facts in the case at bar are stipulated. The facts are hereby found accordingly, the pertinent parts being as follows:

Petitioner and Lucille M. Suhr are husband and wife and have resided together in that status since their marriage on June 8, 1935. The family residence is at 12506 Edgewater Drive, Lakewood, Ohio.

For the years in question petitioner filed individual Federal income tax returns with the collector at Cleveland, Ohio. His wife filed her individual Federal tax return for the calendar year 1936 with the collector at Cleveland, reporting therein dividends in the sum of $12,600 received from the Cleveland Trust Co., trustee (as hereinafter shown), and deducting trustee’s fees in the sum of $315.

By instrument dated December 12, 1935, petitioner entered into a trust agreement with the Cleveland Trust Co. The pertinent parts of the agreement are as follows:

(a) The entire net income shall be paid to Lucille M. Suhr, of Cleveland, Ohio, wife of Hirst Party, so long as she shall live;
(b) If First Party shall be living at the time of the death of said Lucille M. Suhr, then in such event, said trust shall terminate, and the Second Party shall thereupon pay over and distribute to First Party the principal and the accrued undistributed income of said trust estate as soon as practicable;
(c) If, at the time of the death of said Lucille M. Suhr, said First Party shall not be living, the entire net income shall thereafter be paid, share and share alike, to Philip Holland, who was born September 12, 1925, and Robert Holland, who was born August 27,1927, stepsons of First Party, or to the lawful issue of either of them who shall decease (provided such issue shall take per stirpes the share of their deceased parent), until said Robert Holland shall attain the age of thirty (30) years, or, if he shall die prior to attaining such age, then until such time as, if living, he would have attained such age, at which time said trust shall terminate, and Second Party shall then, as soon as practicable, pay over the principal and the accrued undistributed income of said trust estate to the persons then entitled to the income thereof had this trust continued, the distribution of the trust estate to be in the same proportion as the distribution of income. In the event of either of said stepchildren dying without lawful issue surviving him, the other of said stepchildren, or, if deceased, then his lawful issue, shall take all, such issue to take per stirpes.
* * * * * * *
Second Party may, in its sole discretion, pay to said Lucille M. Suhr during her lifetime, in addition to the income from the trust estate, such part of the principal of the trust estate as Second Party shall deem necessary to properly care for and support her, taking into consideration such other means of support and sources of income as she shall then have, and if, after the death of said Lucille M. Suhr, the income so to be paid to any other beneficiary hereunder shall in the judgment oí Second Party be insufficient to properly care for, support and educate such beneficiary, Second Party shall have full right, power and authority to pay to or for the use of such beneficiary, from time to time, such amounts from the principal of such beneficiary’s share of the trust estate as Second Party in its judgment may see fit to use and deems for the best interest of said beneficiary.
*******

On the date of the excution of the above trust agreement petitioner transferred to the trustee 500 shares of The City Ice & Fuel Co. common stock and 400 shares of The City Ice & Fuel Co. preferred stock.

This trust agreement was in force and effect during the years in question and the trustee received dividends in the sum of $2,500 during the calendar year 1935, and deducted $62.50 for its trustee’s fees and paid or credited to petitioner’s wife the remaining balance of $2,437.50 during the calendar year 1935.

The trustee received during the calendar year 1936 dividends in the sum of $12,600 and deducted $315 for its trustee’s fees and paid or credited to petitioner’s wife the balance of $12,285 during the calendar year 1936.

During the years in question petitioner had no living children. By a prior marriage his wife had two minor children, Philip Holland, born September 12, 1925, and Robert Holland, born August 27, 1927. During the year 1938 petitioner legally adopted these two children.

Petitioner duly filed with the collector at Cleveland a gift tax return for the calendar year 1935, in which he listed for taxation the securities constituting the corpus of the trust and paid gift tax thereon.

At all times since their marriage in 1935 and during the years in question petitioner maintained a home for his wife and family and paid for and furnished the money for the maintenance and upkeep of the home and for the support and maintenance of his wife and the two children.

None of the income from the trust was used for the maintenance and upkeep of the home or for the support and maintenance of petitioner’s wife and her two children.

Respondent by notices of deficiency increased petitioner’s gross income by $2,437.50 for 1935 and $12,285.00 for 1936, which is the amount of the net trust income for the respective years in question, after deducting the fees paid the trustee.

The provision of this trust indenture whereby the “Second Party [trustee] may, in its sole discretion, pay to said Lucille M. Suhr [petitioner’s wife] during her lifetime, in addition to the income from the trust estate, such part of the principal of the trust estate as Second Party shall deem necessary to properly care for and support her,” is essentially identical with the trust for the benefit of the wife in J. Edward Johnston, 41 B. T. A. 550. As was said there (p. 556) :

* * * The limitation on the right oí the trustee to invade corpus for the wife, we think, effectively restricts her use of the income to support and maintenance. * * *

There can be no question that petitioner was responsible for the support of his wife (Title VI, ch. 1, § 7997, Page’s Ohio General Code). Accordingly, under the doctrine of Douglas v. Willcuts, 296 U. S. 1, the entire trust income is taxable to him. J. Edward, Johnston., supra.

Discussion of further contentions by respondent that petitioner is taxable on other theories is unnecessary.

Reviewed by the Board.

Decision will be entered for the respondent.

Mukdock,

dissenting: The entire net income of the trust was payable to the petitioner’s wife for life. There was absolutely no restriction placed upon her use of that income. A gift tax was paid upon the transfer. The facts further show that the petitioner has at all times maintained a home for his wife and family and has maintained and supported them fully. None of the income of the trust was used or was required to be used for maintenance, education, or support of the wife or children. The doctrine of Douglas v. Willcuts, 296 U. S. 1, does not apply under such circumstances.

Akundell agrees with this dissent.


author:
OppeR :
      Black,

text:
    The Strong Manufacturing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95626.
    Promulgated May 29, 1940.

      Arthur Morgan, Esq., Raymond S. Powers, Esq., and Sidney J. Collins, C. P. A., for the petitioner.

      DeWitt M. Evans, Esq., Paul A. Sebastian, Esq., and Stanley B. Pierson, Esq., for the respondent.
   OPINION.

OppeR :

The present issue calls for the application to the foregoing facts of the provisions of section 26 (c) (2) of Revenue Act of 1936 entitling a corporation to a “credit” against the “undistributed profits tax” if it complies with certain requirements.

On this record, compliance with these conditions is questionable only in one respect. There was a written' contract executed prior to May 1, 1936, containing a provision expressly dealing with the disposition of earnings and profits for the taxable year. The credit claimed is for an amount equal to the portion of such earnings and profits required to be paid in discharge of a debt, and this amount was paid in the taxable year. The sole remaining condition is that such portion of the earnings and profits be required by the contract to be paid or irrevocably set aside within the taxable year. We are of the opinion that the “application” to the indebtedness of the designated portion of the earnings may, for present purposes, be considered to be called for by the contract “as of” the taxable year, Michigan Silica Co., 41 B. T. A. 511, 515, and therefore to constitute the irrevocable setting aside contemplated by the statute. The credit should have been allowed and respondent’s determination to the contrary is overruled.

Repair and replacement expenses may be deducted as stipulated.

Reviewed by the Board.

Decision will be entered under Rule 50.

Black,

dissenting: I can readily agree that from tire standpoint of reason and logic there would seem just as good reason for Congress to grant a credit in determining surtax on undistributed profits to a corporation situated as was the petitioner in the instant case as there was to other corporations which had contracts of indebtedness which come more precisely within the terms of the statute (sec. 26 (c) (2), 1936 Act). But it is the precise statute which we have to construe and I do not see how it can be so broadly construed as to admit a credit to petitioner under the facts as they have been found.

The statute in question, which has been set out in the majority opinion, seems to provide four things as conditions precedent to securing the credit. These are:

(1) There must exist a written contract executed by the corporation prior to May 1, 1936. Here there was a written contract executed prior to May 1, 1936, and so that condition is fulfilled.

(2) This contract must deal with the earnings and profits of the taxable year. The contract in question does deal with 40 percent of the net earnings of petitioner for the taxable year, so that condition is met.

(3) The contract must require the payment or the irrevocable setting aside of the earnings in question during the taxable year for the discharge of the debt in question. In the instant case it is plain that the contract does not require that the 40 percent of the net earnings be paid on the indebtedness dwing the taxable year. On the contrary, petitioner was granted until April 15 of the following year in which to make payment. So it seems clear to me that, in so far as payment is concerned, the contract in question does not meet the terms of the statute. But the statute grants the credit if there is a requirement in the contract that the portion of earnings in question be HrrevocabT/y set aside” during the taxable year for the discharge of the debt. I see nothing in the contract which required the taxpayer to irrevocably set aside any of its earnings of 1936 prior to the granted time of payment which was April 15, 1937. So, in the view I take, one of the conditions precedent is not met. I can not take the view expressed in the majority opinion that when the statute says that the contract must require either payment or irrevocable setting aside of earnings within the taxable year it means “as of” the taxable year. I see no warrant for such construction.

(4) The credit granted, when all conditions have been fulfilled, is the amount which “has been so paid or set aside.” In the instant case there has been a payment all right on the indebtedness to the full extent of the credit claimed, but, as I view it, in the absence of a requirement in the contract that these earnings be paid or irrevocably set aside in 1936, their actual payment in 1936 becomes immaterial.

Congress in the Revenue Act of 1938 wrote a provision which seems to be broad enough to permit a credit under the facts and circumstances of the instant case. See sec. 27 (a) (4), Revenue Act of 1938. This section, however, has no retroactive application and, for reasons which I have already stated, I do not believe that the credit which petitioner claims can be granted under the terms of the 1936 Act. I think the Commissioner should be sustained and I, therefore, respectfully dissent from the majority opinion.

Mellott and Keen agree with this dissent.

         SEC. 26. CREDITS OE CORPORATIONS.
      In tlie case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax—
      * * * * * * *
      (c) Contracts Restricting Payment of Dividends.—
      * * * * * * *
      (2) Disposition of profits of taxable year. — An amount equal to the portion of the earnings and profits of the taxable year which is required (by a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the disposition of earnings and profits of the taxable year) to be paid within the taxable year in discharge of a debt, or to be irrevocably set aside within the taxable year for the discharge of a debt; to the extent that such amount has been so paid or set aside. Eor the purposes of this paragraph, a requirement to pay or set aside an amount equal to a percentage of earnings and profits shall be considered a requirement to pay or set aside such percentage of earnings and profits. As useci in this paragraph, the word “debt” does not include a debt incurred after April 30, 1936.


author: Mellott:

text:
    Estate of Carrie L. Jones, Deceased, St. Louis Union Trust Company, and Charles M. Polk, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91831.
    Promulgated May 29, 1940.

      Charles M. Polk, Esq., for the petitioners.

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

Mellott:

The respondent determined a deficiency in estate tax in the amount of $17,863.53. The sole question is whether or not the value of certain securities which Carrie L. Jones transferred to trustees during her lifetime is includable in her gross estate.

We find the facts to be as stipulated. For the purposes of this report the following summation will suffice :

George Prentise Jones died testate on August 26, 1918. His will, in so far as here pertinent, provided as follows:

I, Geo. Prentise Jones, of the City of St. Louis, State of Missouri, being of sound mind and disposing memory, do make, publish and declare this my last will and testament, hereby revoking all former wills by me made.
I. I give, devise and bequeath, all of my estate, real, personal and mixed, of whatever kind or description, to my beloved wife, Carrie Louise Jones, to have and to hold for her life, and at her death, then to my beloved daughter, Ina Louise Jones, absolutely in fee.
XI. It is, however, my desire that my said wife shall have power to dispose of said property and to do and act with the same as her own to devise, mortgage, or sell and deed the same in fee.
III. In the event of my wife remarrying, then it is my desire that all of the property undisposed of at that time be equally divided between my' said wife and said daughter, in equal shares, each to hold the same absolutely.

The estate of George Prentise Jones was valued at $336,991.26. It contained, among other property, certain stocks and bonds, which were retained and held by his widow, and which on February 6, 1930, had a value of $87,476.25. Some of these stocks and bonds had changed in name or character from the original securities left by George Prentise Jones, due to capital reorganizations and change of name, but the securities held by the widow were either the original securities or were derived entirely from the original securities received by her under the will of her husband.

On February 6, 1930, Carrie L. Jones executed an indenture of trust and, “in consideration of the sum of One Dollar ($1.00) and for other good and valuable considerations”, transferred to trustees named therein her securities of a value of $343,589.52, and in addition thereto the securities having a value of $87,476.25 received by her (and derived entirely from securities received by her) under the will of her husband. The trust indenture provided that the trustees were to hold, invest, and reinvest the property constituting the trust estate, and collect the income therefrom; that no investments or sales should be made without the approval of the grantor during her lifetime; that the trustees should have full power to determine whether any money or other property coming into their hands, concerning which there was any doubt, was principal or income; that the net income derived from the trust estate be paid over to the grantor, Carrie L. Jones, so long as she lived; and that upon her death, after making a distribution of $2,000 to a servant and placing $10,000 in trust for two grandchildren, the residue was to be paid over free from trust to the grantor’s daughter, Frances Jones McNeely (referred to in will of father as Ina Louise Jones, and whose present name is Frances J. Yetterlein.) The grantor reserved the power to revoke the trust agreement in whole or in part and to free any sums of money, securities, or other property from the terms of the trust at any time during her lifetime.

On February 26, 1930, Carrie L. Jones executed her last will and testament and therein devised and bequeathed her entire estate (subject to the payment of debts) to her daughter, Frances J. McNeely, as her absolute property. The testatrix died on August 13, 1935.

Petitioners filed a Federal estate tax return for the estate of Carrie L. Jones on September 9, 1936, reporting the transfer of property-valued at $343,589.52 and the distribution thereof less a certain $10,000 by the trustees under the trust indenture, and took a deduction of $16,679.48 as trustees’ commissions at 5 percent on $333,589.52. In determining the deficiency here involved the respondent allowed as a deduction the amount paid to and retained by the .trustees under the trust indenture as commissions. Petitioners, in the estate tax return, reported the transfer of securities of a value of $87,476.25 (their value on August 13, 1935, being stipulated to be the same as on February 6, 1930) but did not include them in the taxable estate, stating that Carrie L. Jones had only a life estate in them with remainder over to her daughter and that these securities were directly traceable to the estate of the husband of the decedent.

Under date of January 2, 1937, Frances Jones McNeely, the daughter of Carrie L. Jones, signed a letter drafted by her counsel and addressed to the trustees under the trust indenture of February 6, 1930, stating that she considered that she took, and she had elected to take, the securities of a value of $87,476.25 under the terms of the will and as a part of the estate of her father and not under the terms of the trust indenture or of the will of her mother.

In the statement attached to the notice of deficiency the respondent gave as the following reasons for including the value of the property here involved in the gross estate of the decedent:

The transfer by the decedent in 1930 subjects the value of the property transferred to inclusion in the decedent’s gross estate under the provisions of section 302 (c) of the Revenue Act of 1926, as amended by section 803 of the Revenue Act of 1932, since the decedent reserved the income therefrom, and under the provisions of section 302 (d) of the Revenue Act of 1926, since she reserved the power to revoke.

The pertinent provisions of the revenue acts are set forth in the margin.

Respondent contends that the will of George Prentise Jones gave his wife something more than a mere life estate in the property; that in addition to such an estate she became vested with powers to dispose, to do and act with the same as her own, to devise, to mortgage, and to sell and deed the same in fee; that, inasmuch as these powers had reference to personalty, her subsequent conveyance of the property was a valid transfer and not a mere nullity; and that the value of all the property transferred by her in trust in 1930, including the securities here involved, should be included in her taxable estate as an inter vivos transfer. In the alternative, respondent contends that even if the transfer in trust be disregarded entirely, the decedent “devised” the assets in question to her daughter by her will of February 26, 1930.

Petitioners contend that the decedent, under the will of her husband, received only a life estate in the residue of his property, with an added power of disposition; that as the life tenant she had the right to convey the property for value during her lifetime so far as might be reasonably necessary for her use, comfort, or enjoyment, but could not give it away; that the transfer of the property to the trustee was not authorized by the will of her husband and was void; that the decedent’s daughter took a vested remainder in the estate of her father, under the terms of his will, subject to the power of disposition given her mother; and that the daughter took the remainder interest in the securities here involved directly from her father, pursuant to his will, and not as the appointee of her mother or under the terms of the trust instrument. Petitioners also contend that even if it be assumed that the decedent had the right to transfer the property in trust for herself, and to direct its distribution to her daughter upon her death, the daughter had the right to elect to take under the terms of the trust indenture or the terms of her father’s will, and inasmuch as she elected to take under the will, the securities came to her from her father, and their value was not, therefore, taxable as a part of the decedent’s estate. Petitioners further contend that the decedent did not exercise the power of disposition by will.

It is apparent from this statement of the contentions of the parties that they differ as to the title or interest the decedent acquired in the securities under the will of her husband. In determining this question effect must be given to the intention of the testator as the same may be gathered from the whole instrument. Grace v. Perry, 95 S. W. 875; 197 Mo. 550; Coleman v. Haworth, 8 S. W. (2d) 931. A study of the will convinces us that decedent’s husband intended to give her a life estate, with the right to convey the property for value during her lifetime so far as might be reasonably necessary for her use, comfort, and enjoyment, or dispose of it by will, and that the power to dispose of all or any part of the property by gift inter vivos was neither intended nor given. This view finds support in a number of decisions of the courts of Missouri, where the transfer was made.

In Lewis v. Pittman, 101 Mo. 281; 14 S. W. 52, a testator gave all of his property to his wife, with the right and power in her to carry on his manufacturing business, or to dispose of the same, as to her may seem best, with the further qualification that whatever of the property she had remaining at her death should go to the children. The Supreme Court of Missouri held that under the will the wife took a life estate only in all her husband’s property, and at her death the children took the property absolutely under their father’s will, instead of under the will of their mother. The court, among other things, said:

* * * It may be conceded that a devise of an estate generally or indefinitely, with a power of disposition over it, carries a fee. Green v. Sutton, 50 Mo. 186. But there is a wide difference between that class of cases and those where there is a devise for life with a power of disposition. Where an express life-estate is created, an added power of disposition does not corwert the estate into a fee. * * * If it is the clear intention from the whole will that the first taker is to have but a life-estate, then the added power of disposition will not convert the estate into one of absolute ownership. * * *, [Italics ours.]

In Van Every v. McKay, 53 S. W. (2d) 873, the decedent in his will gave all of his property to his wife “to have and to hold for her own use and benefit during her natural life, with full power to sell and dispose of the same, and to convey an absolute title therein, and to make such disposition, of the proceeds as she may desire.” The will provided that the proceeds of such property as the wife disposed of should remain and constitute part of decedent’s estate during her lifetime, and, subject to her use and right to sell and dispose of same, should descend to his daughter and son and their heirs. The court held that the will of the decedent gave his wife a life estate, with an added power of disposition, and a remainder in fee to the two children, and that the added power of disposition did not enlarge the life estate into a fee simple.

In Cook v. Higgins, 290 Mo. 402 ; 235 S. W. 807, a testator gave his widow “all of my property both personal and real estate to have full control, to sell and dispose of it as she may see fit giving her the right to make deeds to all or any of the real estate that I may be possessed of at my death and after my wife’s death, whatever as may remain unexpended I do desire to be divided as follows”, etc. The Supreme Court of Missouri held that the will created only a life estate in the wife with power of disposition, with the remainder over at her death to legatees named, and that the widow had no right to convey a part of the property in consideration of “one dollar and other valuable considerations”, such deed being in effect a mere gift.

In Burnet v. Burnet, 148 S. W. 872, the Supreme Court of Missouri held that, where a life estate was created in the will, either by implication or in express words, with a remainder over, the life tenant had no power to defeat the remainder unless such power be expressly or impliedly given by the will. Inasmuch as the will provided that “whatever may be left undisposed of”, at the death of the life tenant should go to her descendants, the court held that the life tenant had full power to dispose of the property for her use, comfort, and enjoyment, but did not have any power to give it away, and a deed of gift made by her of property belonging to the estate was invalid.

In Holland v. Bogardus-Hill Drug Co., 284 S. W. 121, a testator provided in his will that the residue of his property should go to his wife for life, with power to dispose of it while she lived as testator could have done, and after her death the property remaining should be divided among his children. The Supreme Court of Missouri held that the wife acquired a life estate in the realty, and the children an equitable estate in remainder, subject to the widow’s life estate and power of disposition, and that the widow could not give away the property.

In Gibson v. Gibson, 239 Mo. 490; 144 S. W. 770, a will disposed of the property of the testator to his widow, with power “to sell, control, manage, and dispose of it in the same way”, that he might do if he were alive, and that it was his wish and desire, and he so willed, that at the death of the widow, “by will, or before if she so elected, that she shall divide among or settle upon” the children and grandchildren of the testator the property devised and bequeathed to her in designated shares. The Supreme Court of Missouri held that the words of the testator stated his intention, without ambiguity, to give his wife a life estate, with full power of disposal for value, but that she had no power to give away the property or any part of it, even to the children, except that she might, during her life, if she so chose, divide the whole of the property among the children and grandchildren as provided in the will.

In Garland v. Smith, 164 Mo. 1; 64 S. W. 188, land was conveyed to a trustee for use of the grantor’s wife for life, with “power to sell, mortgage, lease, or otherwise dispose of the same to such person or persons and for such uses and purposes as she may, by writing by her signed, direct and appoint” and the trustee was directed to execute the writings necessary to carry into eifect this power when directed by her. If not disposed of by her, the trustee ^yas directed to convey to the plaintiff on her death. She, without consideration, executed a warranty deed of the land to defendant, and also devised it to him in her will. The Supreme Court of Missouri held that the defendant acquired no title to the remainder under either the deed or the will, since the power to sell did not include a power to give away, and the authority to “appoint” and “otherwise dispose of” should be construed as a power to appoint or dispose of for her benefit and support.

Kespondent on brief states that the inclusion of the value of the securities in the decedent’s gross estate is not based on the exercise of the power (either by the trust instrument or by the will of Carrie L. Jones), but on the ground that she toolt, the property under her plenary powers, and transferred it by revocable trust in 1930. He argues, “If the property were hers (to take and dispose of it) there is no question as to its inclusion in her taxable estate.” We do not agree that the decedent under the will of her husband had the power to take the securities and dispose of them as she saw fit. The cases heretofore cited clearly hold that where an express life estate is created, an added power of disposal does not convert it into a fee or into one of absolute ownership. Under the will of the father the decedent’s daughter, upon his death, acquired a vested remainder in his property, subject to be divested upon the happening of a condition subsequent, namely, the exercise by this decedent of the power of disposition contained in the father’s will. Von Behrn v. Stoeppelmann,, 286 Mo. 73; 226 S. W. 875; Hamner v. Edmonds, 327 Mo. 281; 36 S. W. (2d) 929; Dunbar v. Sims, 283 Mo. 356; 222 S. W. 838; Grace v. Perry, supra; 69 C. J. 654. Unless it can be said that this power of disposition was properly exercised, either by the creation of the trust on February 6, 1930, or by the decedent’s will, we must of necessity hold that no interest in the securities in question passed from the decedent to her daughter at the time of her death, and that her daughter acquired her interest therein directly from her father pursuant to his will.

In our' opinion the transfer in trust of February 6, 1930, in so far as the remainder interest was concerned, was not a proper exercise of the power of disposition contained in the will of decedent’s husband. The power of disposition was limited to a disposition made for the benefit and support of the decedent. She was not vested with any power to give away the remainder interest, even though the gift was to the daughter, the holder of the vested remainder interest under the will of her father, and the transfer in trust for a nominal consideration was in effect a gift. Cook v. Higgins, supra; Gibson v. Gibson, supra. The attempted exercise of the power of disposition being invalid, it did not have the effect of divesting the daughter of the remainder interest vested in her under the will of her father,' and upon the decedent’s death this interest passed to her under the terms of his will. Citizens Bank v. Fogelsong, 31 S. W. (2d) 778; 326 Mo. 581.

Even if it be assumed that the trust instrument were a valid exercise of the decedent’s power of disposition, the respondent still could not prevail because the appointment of her daughter to take the remainder, an interest she would take in default of appointment, was of no effect. “The attempt to execute the power was not effective, because it did nothing. The exercise of a power which leaves everything as it was before is a mere form, with no substance.” In re Lansing's Estate, 182 N. Y. 238, 243; 74 N. E. 882, 884 (quoted with approval in Helvering v. Grinnell, 294 U. S. 153). This being so, the decedent’s daughter received no benefit from the attempted exercise of the power. Cf. James C. Webster et al., Executors, 38 B. T. A. 273, 284; Rothensies v. Fidelity-Philadelphia Trust Co., 112 Fed. (2d) 758.

There remains for consideration the respondent’s alternative contention that even if the transfer in trust of February 6, 1930, be disregarded entirely, the decedent “devised”, that is, she bequeathed the assets in question to her daughter by her will of February 26, 1930. No mention of any power of appointment conferred oh her by the will of her husband was- made in the will of the decedent, and no attempt was made in her will to show that she was attempting to exercise her power of appointment. Moreover, she could not pass title to the securities here involved to her daughter by will except through the exercise of the power of appointment. In Papin v. Piednoir, 205 Mo. 521, 536; 104 S. W. 63, the Supreme. Court of Missouri said:

An execution of a power will be held to have been intended, “where there has been some reference in the will or other instrument to the power; dr a reference to the property which is the subject on which it is to be executed; or where the provision in the will or other instrument executed by the donee of the power would otherwise be ineffectual or a mere nullity; in other words it would have no operation except as an execution of the power.” (Blagge v. Miles, 1 Story’s U. S. Cir. Ct. Rep. 426; Lee v. Simpson, 134 U. S. 572; Turner v. Timberlake, 53 Mo. 371.)

Not only was there no reference to the power in the will of the decedent, but she specifically provided therein that she gave, devised, and bequeathed to her daughter “my entire estate of whatever it may consist and wherever situate, belonging to me at the time of: my death.” The securities here in question did not belong to the decedent at the time of her death. It is our conclusion that the decedent did not exercise the power of appointment by will, and that no interest in the securities passed to her daughter under its terms.

In view of the foregoing -we hold that the respondent erred in determining, that the value of the securities, $87,476.25, was includable in the gross estate of the decedent. Sections 302 (c) and 302 (d), supra, can not be applied because there was no shifting of the economic benefits in the property from the decedent to her daughter, and section 302 (f), supra, can not be applied because there was no shifting of the economic benefits through the exercise of- a power of appointment.

At the hearing it was indicated both parties were of the opinion the executors had deducted, and the Commissioner had allowed, commissions of 5 percent upon $421,065.77 ($333,589.52+$87,476.25); If so, then it would be proper for us to order a recomputation of the deficiency; for the maximum amount which should be allowed (under the stipulation of the parties) is 5 percent upon $333,589.52 or $16,-679.48. An examination of the return, however, indicates that this was the amount claimed and allowed. Therefore,

Judgment will be entered for the petitioner.

         Sec. 302. [Rev. Act of 1926.1 The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all the property, real or personal, tangible or intangible, wherever situated—
      (a) To the extent of the interest therein of the decedent at the time of his death. * * *
      SEC. 803. FUTURE INTERESTS. [Rev. Act of 1932.]
      (a) Section 302 (c) of the Revenue Act of 1926, as amended by the Joint Resolution of March 3, 1931, is amended to read as follows :
      “(e) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his- death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title
      (b) Section 302 (f) of the Revenue Act of 1926 is amended to read as follows :
      “(f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, or (2) by deed executed in contemplation of or intended to take effect in possession or enjoyment at or after his death, or' (3)- by deed under which he has retained for his life or any period not ascertainable without reference to his death or for any period which does not in fact end before his death (A) the possession or enjoyment of, or the right to the income from, the property, or (B) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money’s worth; and”
      * * • , * * t *. *
      Sec. 302. [Rev. Act 1926.]
      * V # * * * *
      (d) To the extent of any interest therein of which the decedent has at any timé made a transfer, by trust or otherwise, where the enjoyment thereof was subject at ‘the date of the death to any change through the exercise of a power, either by the dece'dent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *


author: Leech:

text:
    George W. Mason and Hazel B. Mason, His Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97350.
    Promulgated May 29, 1940.

      Thomas 8. Forward, G. P. A., for the petitioners.

      W. W. Kerr, Esq., for the respondent.
   OPINION.

Leech:

Respondent determined a deficiency of $10,827.57 in petitioners’ income tax for the calendar year 1935. The issue presented is the propriety of the action of respondent in including in income an amount representing the fair market value of certain stock acquired by the petitioner, George W. Mason, in the taxable year.

The facts are stipulated. Petitioners are husband and wife and filed a joint return for the taxable year. The word “petitioner”, as hereinafter used, will refer to the petitioner, George W. Mason. On September 7, 1933, the petitioner entered into the following contract:

Memorandum op Agreement, made this 7th day of September, 1933, by and between Kelvinator Corporation, a corporation organized and existing under the laws of the State of Michigan, having its principal office in the City of Detroit, County of Wayne, in said State, party of the first part, hereinafter called the “corporation”, and George W. Mason, of said City of Detroit, party of the second part, hereinafter called “Mason”, Witnesseth :
Whereas, Mason has a contract of employment with this corporation expiring December 10, 1934, and
Whereas, the parties hereto desire to terminate such contract as of October 1, 1933 and to enter into a new contract extending such employment upon the terms hereinafter set forth,
It Is Hereby Agreed, as follows:
First: The corporation hereby employs Mason upon the following terms and conditions; and Mason accepts said employment upon the following terms and conditions:
(1)' The term of employment shall be four (4) years from and after the first day of October, 1933;
(2) The rate of compensation shall be
(a) Fifty thousand dollars ($50,000) per annum payable in equal semimonthly installments;
(b) One thousand two hundred and fifty (1250) shares of full paid stock of the corporation to be delivered on January 1, 1934, and quarterly thereafter to and including October 1, 1937.
(3) The corporation further agrees as further compensation to Mason to pay him on January 15, 1935, 1936, 1937 and 1938, a sum equal to ten per cent (10%) of the net earnings of the preceding fiscal year, determined as hereinafter set forth after deducting therefrom an amount equal to five per cent (5%) upon the capital and surplus of the corporation determined as hereinafter set forth. The corporation agrees to sell and Mason agrees to purchase at Ten Dollars ($10.00) per share on January 15th of each year as above set forth a number of shares of fully paid stock of the corporation equal to the sum, if any, payable to Mason on such date pursuant to the preceding section of this paragraph (3) ; provided, that hereunder the corporation will not pay in excess of $400,000 nor may Mason purchase in excess of 40,000 shares of such stock during the term of the contract; and provided further that the corporation will not pay in excess of $100,000 nor may Mason iiurehase in excess of 10,000 shares of such stock in any one yean except that (a) for any year of this contract the corporation may and will pay Mason such an amount as will make the total payment to Mason under this paragraph (3) $100,000 per annum for each year of this contract theretofore expired in case 10% of the net earnings since October 1, 1933 computed under the formula therein set forth shall equal or exceed $100,000 per annum for the years already expired and (b) Blasón may and will purchase such number of shares as will make the total number of shares purchased by him under this paragraph at $10.00 per share equal the amount paid him under the above exception (a).
(a) Net earnings as herein used shall be the amount of the net earnings of the company and its subsidiaries as determined by the Auditors of the company and approved by the board, after all necessary charges including depreciation and income taxes but before deducting the amount of this special compensation for the fiscal years ended September 30, 1934 to September 30, 1937. Net earnings shall not include any profits or losses arising from the extraordinary sale of capital assets having particular reference to the sale of any of the plants or properties of the corporation or its subsidiaries. The term subsidiaries shall mean all corporations owned in full by the corporation or its subsidiaries, and all corporations so owned in part to the extent of the earnings or losses attributable to the stock owned by the corporation.
(b) The capital and surplus of the corporation as used herein shall mean the capital and surplus and undivided profits of the corporation at the beginning of the fiscal year for which the determination of profits shall be made plus the amount of any new capital added during the year (except by way of earnings) reduced by a percentage equal to the number *of months for which such capital was not contributed in relation to the whole fiscal year.
(c) In case the fiscal year of the corporation shall be modified, the provisions of this paragraph (3) shall be deemed to be modified and readjusted accordingly.
(4) In case there shall be any rearrangement of the capital structure of the corporation which shall affect the number or kind of shares of capital stock, the purchase price per share fixed herein at Ten Dollars ($10.00) shall be adjusted accordingly.
(5) This agreement shall not be affected by the disability by reason of illness or otherwise of Mason to perform his duties for a period of not exceeding six (6) consecutive months, but it is mutually agreed that in the event of the death of Blasón or his total disability for a period of time exceeding six
(6)consecutive months, this agreement may be terminated as to the unexpired term thereof, except as to the provisions of paragraph (3) of this Article First, by the corporation, by resolution of its board of directors, by giving notice in writing to Blasón or his personal representatives fixing a date not less than thirty days after the date of said notice, upon which this agreement shall terminate as to the unexpired term thereof, and thereupon the agreement shall so terminate on the date mentioned in the notice. In the event that the corporation shall so terminate this agreement for the unexpired term thereof, then.
(a) As to the further compensation granted to Mason by paragraph (3) of this Article First, the corporation shall pay Mason or his personal representatives when provided therein, that proportion of said further compensation as his term of actual service under this contract in said fiscal year shall bear to the entire year.
(b) The coloration shall, within thirty (30) days after the date mentioned in said notice for the termination of this agreement, pay to Mason or his personal representatives the sum of One Hundred thousand dollars (100,000) in cash.
(6) The corporation shall provide all stamps required in connection with the issue and delivery to Mason of all shares of stock under this agreement provided to be delivered to him or to his personal representatives.
Second: Mason hereby agrees to devote his entire time and attention to the business of the corporation and to the performance of his duties hereunder, and as an officer of the corporation, during-such periods of the term hereof as he shall be an officer, except the ordinary duties of a director in other corporations not in a competitive business.
Third : The parties hereto mutually agree that Mason subject to the powers by law vested in the board of directors and executive committee, shall have, as general manager, the full control and management of the business and -affairs of the corporation, including, without limiting the generality of the foregoing,, the power and authority to manage and conduct all manufacturing operations,, the engineering, designing and development of the product, the sale of all products, and all details of the business, the purchase of all materials, supplies, machinery, the equipment and appliances required in the business, all work of accounting under and in accordance with the rules and methods prescribed by the board of directors or executive committee; and employ, fix the compensation of, and discharge all assistants, agents and employes. He shall make reports to the board and executive committee, and shall not be subject to any other officer or authority in the corporation.
Fourth : The corporation agrees that it will adopt all necessary resolutions to make the foregoing provisions of this contract effective.
Fifth : The corporation hereby agrees, as an independent covenant, to use its best endeavors to cause Mason to be continued in the office of director and chairman of the board and/or president during the term of this contract; and Mason agrees to accept the offices of director, chairman of the board, and/or president, and to perform the duties thereof if so elected.
Sixth: The agreement dated May 14, 1931, between the parties hereto is hereby terminated and cancelled effective as of October 1, 1933; provided, however, that Mason shall have all rights accruing to him thereunder for the fiscal year ending September 30, 1933; and in consideration for Mason’s consenting to such cancellation the Corporation agrees to deliver to him on October 2, 1933, Five thousand (5000) shares of its full paid stock.

The amount determined as payable to George W. Mason on January 15, 1935, computed upon net earnings of the corporation for the preceding year under section (3) of the foregoing contract, was $49,891.69. Pursuant to the provisions of that section, he acquired 4,989 shares of the capital stock of Kelvinator Corporation on that date, having a then fair market value of $84,189.38. On September 7, 1933, when the above contract was executed, the stock in question had a fair market value of $11.4375 per share. Petitioner devoted his entire time to the a (fairs of Kelvinator Corporation during the taxable year.

In making their return for the calendar year 1935, petitioners included in income the amount of $49,891.69. In determining the deficiency respondent increased the reported income by the difference between this amount and $84,189.38, the fair market value of the stock acquired.

Respondent contends that the contract for purchase of the stock by petitioner was an inseparable part of the contract of employment, that the stock which was received thereunder constituted compensation for services performed and, consequently, income to the extent of its fair market value when received. Petitioner insists that the agreement in the contract obligating him to purchase common stock of the company at $10 per share with the bonus payable to him under the contract for services rendered is separate and distinct from the contract of employment. It is argued that, under the employment contract, petitioner received a money bonus which was compensation for services and therefore taxable income, and with this income, under the contract to convert it into common stock of the company, he purchased stock at the agreed price of $10 per share. Petitioner relies on Omaha National Bank v. Commissioner, 75 Fed. (2d) 434, and Gordon M. Evans, 38 B. T. A. 1406. See also Hawke v. Commissioner, 109 Fed. (2d) 946. These cases hold that stock acquired by employees under stock purchase plans, with credits from- earnings of the company on the purchase price, was purchased at the agreed price and that the employee is taxable only on the amount of the credits granted.

The facts here are clearly distinguishable from those in the cited cases and do not support, we think, the reasoning or conclusion in those cases. In those cases the contract under which the right to acquire the stock and the right to the credit arose was distinct and separate from the contract of employment, and the stock was acquired voluntarily, under the former.

Here the petitioner has not subscribed for a. definite number of shares of stock for which he is obligated to pay nor has he been granted merely a right to purchase. He has executed a binding contract to render certain service, one of the considerations for which is a bonus, measured in money, computed upon the net earnings of the employer. He, in turn, by that same contract, obligates himself to convert this money, concurrently with its receipt, into stock of the employing company at $10 per share. The obligation which he assumes is a part of his contract of employment. He has no liability with respect to the so-called stock purchase except under that contract and the entire amount which he contends is the purchase price of the stock moves to him under that contract for service rendered, When received, it is impressed with the obligation that it be immediately surrendered for shares of stock. See Hazeltine Corporation v. Commissioner, 89 Fed. (2d) 513; West Texas Refining & Development Co. v. Commissioner, 68 Fed. (2d) 77; Edwin L. Dana, 36 B. T. A. 231. The only thing which he could or did receive, free to his “unfettered use”, under the bonus provision of his employment contract, restricted by his agreement thus to convert, was stock of the employing company, and all that company could or would be forced to surrender ultimately was stock. If a money payment of the bonus was actually made to petitioner, and on this point the record is silent, it was only a gesture, an incident in the transaction, the result of which would leave petitioner with stock of the company which constituted his compensation for services rendered. The bonus was stated in terms of money but, under the agreement, we think, that medium had no significance as such but was merely a measure to determine the number of shares of stock which petitioner was entitled to receive.

We do not agree with respondent that the question is controlled by Albert Russel Erskine, 26 B. T. A. 147. In that case, as in the cases of D. C. Bothwell, 27 B. T. A. 1351; 77 Fed. (2d) 35; Irving D. Rossheim, 31 B. T. A. 857; 92 Fed. (2d) 247; Delbert B. Geeseman, 38 B. T. A. 258, and Charles E. Adams, 39 B. T. A. 387, for services to be rendered, the taxpayer was granted an option to purchase stock which had a definite value when exercised. Here there was no option. We think that in the present case, under the contract executed, the petitioner has in fact agreed to render service for certain considerations. One of these was a bonus consisting of shares of stock of the employing corporation, the number of which was to be measured by the net earnings of the company during the year. This stock, in consequence, constitutes a payment for services. Petitioner has therefore realized income to the extent of its fair market value when received.

Reviewed by the Board.

Decision will be entered for the respondent.