author:
Yan Fossan :
      Tyson,

text:
    Caroline Mills, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100343.
    Promulgated May 1, 1941.

      W. A. Sutherland, Esq., and B. F. Boyldn, Esq., for the petitioner.

      J. Mamin Kelley, Esq., for the respondent.
   OPINION.

Yan Fossan :

The only issue for our determination is whether or not petitioner is entitled to a credit under section 26 (c) (1) of the Revenue Act of 1936 for purposes of the surtax on undistributed profits. Petitioner contends that it was restricted in payment of dividends in the taxable year because of limitations imposed by its charter and by the agreement set forth in the minutes of the shareholders’ meeting held January 19, 1934. It maintains that the shareholders’ resolution was a written contract executed by petitioner within the purview of the statute. Respondent’s position is that the minutes of the shareholders’ meeting indicate a mere authorization to the elected trustees to carry into effect the oral agreement which had been reached by the committee representing the bondholders and the shareholders.

Since the date of hearing of this proceeding the Supreme Court handed down its decisions in Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46, and Crane-Johnson Co. v. Helvering, 311 U. S. 54. In those cases the Supreme Court held that a corporate charter was not a contract within the meaning of section 26 (c) (1) of the Revenue Act of 1936. Petitioner’s charter, therefore, is not a contract restricting payment of dividends and does not entitle petitioner to the credit granted by the statute. It thus becomes necessary that we consider petitioner’s contention that the resolution adopted by the shareholders on January 19, 1934, was a written contract executed by petitioner.

In Davison-Joseph Campau Realty Co., 41 B. T. A. 675, we held that a corporate bylaw is not a “written contract executed by the corporation” within the meaning of section 26 (c) (1). We reiterated our position in that case in Atlas Supply Co., 43 B. T. A. 324. Recently, we held that an agreement between preferred and common stockholders which was recorded in the minutes of a shareholders’ meeting was not a contract executed by the corporation. Henry Mill & Timber Co., 43 B. T. A. 1073.

We are of the opinion that the agreement among stockholders, bondholders, and trustees which is recited in the corporate minutes of the shareholders’ meeting of January 19, 1934, is not a written contract executed by petitioner. It does not appear that there was any intention that a contract be executed by petitioner at that time. The embodiment of the agreement in the minutes seems a mere recitation for the purpose of corporate records. Moreover, although petitioner’s contracts were customarily signed by its president and secretary, these minutes were signed by the secretary and by the chairman of the meeting.

Nor does the fact that petitioner’s board of directors, on February 8, 1934, approved the minutes of the shareholders’ meeting of January 19, 1934, make the agreement a written contract executed by petitioner. The directors approved the minutes of the meeting which included the resolution here under consideration, but that approval can not transmute an oral agreement into a written one. Tire agreement among the bondholders, shareholders, and trustees was not a written contract.

We hold that the facts do not show a written contract executed by petitioner which restricted payment of dividends in the taxable year.

Reviewed by the Board.

Decision will be entered for the respondent.

Tyson,

dissenting: I agree with the majority opinion in its holding that petitioner’s charter is not a contract restricting the payment of dividends within the purview of section 26 (c) (1) of the Revenue Act of 1936.

However, I disagree with the holding in that opinion that the resolution adopted at the stockholders’ meeting and thereafter approved by the board of directors did not constitute a written contract executed by petitioner restricting the payment of dividends under the cited section.

The majority opinion predicates its latter holding primarily upon the conclusion that the agreement between the petitioner and its bondholders was oral and that the embodiment of that oral agreement in the resolution set out in the minutes of the stockholders’ meeting was a mere recitation for the purpose of corporate records; and the opinion seems also to imply that the latter holding might also be additionally based upon the fact that the minutes of the stockholders’ meeting at which the resolution was adopted were signed by the chairman of that meeting rather than by the president of the corporation.

In my opinion, the embodiment in the resolution of the only oral agreement shown by the record, i. e., that between the bondholders’ committee and the stockholders’ committee, was not a mere recitation for the purpose of the corporate records, but constituted the only contract between the parties after its adoption; and I do not think that at the time of the adoption of the resolution it is correct to state, as is done in the majority opinion, that “it does not appear that there was any intention that a contract be executed by petitioner at that time.”

The undisputed evidence, not all of which is shown in the majority opinion, discloses: That the bondholders’ committee, with full authority to act for the bondholders, and a committee of the stockholders met together and made an oral agreement containing the same terms and provisions as are set out in the resolution in question; that after this oral agreement was made the bondholders’ committee appeared in person at the meeting of the stockholders on January 19,1934, for the purposes of making a report of the petitioner’s defaults in payment of interest on its bonds and of requesting the stockholders to confirm the oral agreement made by the two committees for the protection of the bondholders; and that after the report of the bondholders’ committee to the stockholders’ meeting, and while that committee was present, the resolution in question was adopted in response to the request of that committee.

Under the facts as above stated it seems clear that at the time of the adoption of the resolution it was the intention of the bondholders’ committee and the stockholders to execute the contract here in question and it seems equally clear that the contract was so executed by incorporating in the written resolution the terms of the precedent oral agreement between the bondholders’ committee and the stockholders’ committee.

From all the facts and attendant circumstances, I can reach no conclusion other than that the oral agreement previously made by the two committees became merged in the written resolution under the elementary principle stated in 17 Corpus Juris Secundum, p. 872, § 381, as follows: “* * * in the absence of fraud, a written contract merges all prior and contemporaneous negotiations on the subject, together with all prior oral contracts * *

In concluding that the oral agreement made by the two committees was merged in like provisions of the resolution, I do so by applying the principle that a resolution embracing the terms of an oral request or proposal made by the other party to an agreement, or embracing terms orally accepted by or acquiesced in by such other party, constitutes a binding obligation and a written contract of the corporation when adopted by it and spread in writing upon its minutes. This principle is established by the following authorities: Schlens v. Poe, 97 Atl. 649 (Md.); Sears v. Kings County El. R. Co., 25 N. E. 98 (Mass.); Bankers Trust Co. v. Economy Coal Co., 276 N. W. 16 (Iowa) ; Lafean v. American Caramel Co., 114 Atl. 622 (Pa.); Soffer v. Coatesville Boiler Works, 101 Atl. 744 (Pa.); Alabama Lime & Stone Co. v. Adams, 119 So. 853 (Ala.); cf. Altavista Cotton Mills v. Lane, 112 S. E. 637, 641, (Va.); Indiana Bermudez Asphalt Co. v. Robinson, 63 N. E. 797 (Ind.); Beach & Clarridge Co. v. American Steam G. & V. Mfg. Co., 88 N. E. 924 (Mass.) ; Mountain Waterworks Const. Co. v. Holme, 113 Pac. 501 (Colo.).

The implication in the majority opinion that its holding might be additionally based upon the fact that the minutes of the meeting of the stockholders were signed by “E. T. Steed, Chairman” of that meeting rather than by the president of the corporation is, in my opinion, unsound. The minutes show that Steed was duly selected as chairman thereof and in signing the minutes with the secretary was properly performing the functions of such a position. The minutes were binding on the corporation, under the controlling principle as stated in 18 Corpus Juris Secundum, pp. 1233,1234, §545: “While provision is frequently made that the president shall preside at stockholders’ meetings, where no provision is made, a chairman may be selected by the stockholders.”

In my opinion the resolution in question constituted a written contract executed by the petitioner corporation which restricted payment by it of dividends in the taxable year.

ARuNdell, Muepock, Black, Leech, and HaRkon agree with this dissent.

       SEC. 26. CREDITS OF CORPORATIONS.
      In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax—
      * * * ‡ * * •
      (c) Contracts Restricting Payment op Dividends.—
      (1) Prohibition on payment op dividends.—An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. » * *


source: Caselaw Access Project

author: Smith: Murdock,

license: Public Domain

text:
    Estate of Carolyn G. Caughey, Union Trust Company of the District of Columbia, Executor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 99655.
    Promulgated May 6, 1941.

      George E. Hamilton, Jr., Esq., and Leo N. McGuire, Esq., for the petitioner.

      Lloyd W. Oreason, Esq., for the respondent.
   OPINION.

Smith:

Our first question is whether under the decedent’s will there was a completed gift of the residuary estate to the Girl Scouts, which admittedly is a charitable organization within the meaning of section 303 (a) (3) of the Revenue Act of 1926, as amended.

' It is to be noted that by the provisions of the decedent’s will the remainder of her estate, upon the death or remarriage of her husband, was to be divided into two equal parts, one of which was to be paid over to the Girl Scouts “if they still be operating Rockwood Manor” and the other to be held in trust for 20 years and then paid over to the Girl Scouts upon the same condition. The use of the first half of the remainder estate was restricted to the “development and improvement of the property”, but there was no restriction on the use of the other half except that from such funds a bell tower was to be erected at Rockwood Manor.

It was only in the event that the Girl Scouts should abandon Rock-wood Manor or cease to use it “for character building purposes” that any of the residuary estate was to go to the Esther Chapter of the-Eastern Star. This same condition attached to the conveyance of Rockwood Manor, that is, if it should ever be abandoned or cease to be used for character building purposes it was to go to the Esther Chapter of the Eastern Star.

We do not think that any of the conditions imposed upon the gift of the remainder of the estate to the Girl Scouts made it contingent or conditional, so as to prevent its vesting in the donee immediately upon the decedent’s death. Article 47 of Regulations 80 provides as to “Conditional bequests” that:

If the transfer is dependent upon the performance of some act or the happening of some event in order to become effective, it is necessary that the performance of the act or the occurrence of the event shall have taken place before the deduction can be allowed.

The transfer of the remainder of the decedent’s estate to the Girl Scouts was not dependent upon the performance of any act by the donee or the happening of any event. Neither was it dependent upon the voluntary act of any third party. Cf. John Nicholas et al., Executors, 40 B. T. A. 1040. It was to take place, certainly, upon the death or remarriage of John Wilson Caughey as to the first half, and 20 years from that date as to the second half, provided only that the Girl Scouts should not have abandoned Eockwood' Manor but should have continued to operate it for character building purposes. We shall assume that the respondent does not regard the possibility of the use of the property by. the Girl Scouts for purposes other than “character building” as a serious contingency. Actually, then, the Girl Scouts have only to remain in possession and operation of Eockwood Manor! in order to qualify for the entire residue of the estate, after termination of the intermediate estates. Their duty is a passive and not an active one.

In First National Bank v. Snead, 24 Fed. (2d) 186, a bequest to a charitable institution of the income of a residuary estate after the death of the life tenant was held to vest at the time of the testator’s death where at that time the institution was in existence and capable of taking the bequest.

The respondent has ruled in E. T. 13, Cumulative Bulletin 1939-2, p. 326, on facts quite similar to those in the instant case, that á bequest to an orphans’ home of the income of a residuary estate, after a life estate in the testator’s wife, was deductible from the gross estate although subject to the condition that the orphans’ home should not move from a certain county in Arizona or- cease to operate' for the same purpose as it had operated before the testator’s death. The ruling states that:

The M Association, by virtue of A’s will, has a vested remainder in the trust income subject to being divested by reason of its removal from N County or the cessation of its operation of a home for orphan children, which are' conditions subsequent. (See Fargason v. Commissioner, 21 B. T. A. 1032, acqiescence, C. B. X-2, 22 (1931).) Conditions subsequent are those whose effect is not produced until after the vesting of the estate. “* * ⅜ a condition subsequent defeats the estate in case it does not happen or is not performed.” (United States v. Fourth National Bank in Wichita, Kans., 83 Fed. (2d) 85.) * * *

Whether conditions imposed upon a testamentary gift to charity are sufficient to defeat the deduction of the gift in computing the Federal estate tax depends upon the degree of likelihood that the conditions will prevent the ultimate possession and enjoyment of the gift by the donee. The deduction must be denied where the bequest is so uncertain that its value can not be determined from any known data but depends upon mere speculation. Humes v. United States, 276 U. S. 487. However, if the contingency is reasonably certain not to happen or is so remote as not seriously to affect the value of the gift the deduction will be allowed. United States v. Provident Trust Co., 291 U. S. 272; City Bank Farmers’ Trust Co. v. United States, 74 Fed. (2d) 692; Boston Safe Deposit & Trust Co. et al., Executors, 20 B. T. A. 1159.

In United States v. Fourth Nat. Bank in Wichita, 83 Fed. (2d) 85, a bequest to a church on the condition that the church would contribute an equal amount, and other conditions not shown to have been complied with at the time of the testator’s death, was held not deductible. See also Davison v. Commissioner, 81 Fed. (2d) 16; Delaware Trust Co. v. Handy, 53 Fed. (2d) 1042; Old Point National Bank, Executor, 39 B. T. A. 343; Francis L. Robbins, Jr., Executor, 39 B. T. A. 599; affd., 111 Fed. (2d) 828. The cases cited in which the deductions were disallowed all contain facts which distinguish them from the instant case.

In the construction of wills the intention of the testator is always the first consideration. There is no doubt that in the instant case it was the intention and purpose of the testatrix to leave all of the residue of her estate, after termination of the intervening estates, to the Girl Scouts. We do not think that the conditions which the testatrix imposed upon the gift negative that purpose. They serve merely, as a precaution against the diversion of the gift from the charity for which it was intended.

The respondent further contends that, even though there was a completed, unconditional gift of the residue of the estate, the deduction claimed must be disallowed because the value of the gift is not definite in amount and can not be determined. The computation of the value of the gift, he contends, does not take into consideration:

(1) The possible or probable invasion of corpus of the trust estate upon the demand of John W. Caughey on account of some misfortune or for his comfort.
(2) The value of the right of John W. Caughey to the exclusive use of two rooms and private bath on the first floor of Rockwood Manor for life.
(3) The payment of $1,000.00 per year to Henry F. Harding and $600.00 per year to Nora Huffman for the life of John W. Caughey and for a period of 20 years thereafter.

In Ithaca Trust Co. v. United States, 279 U. S. 151, the Supreme Court held that gifts to charity of the remainder of a trust estate after a life estate in the testator’s wife, with authority to use from the principal .any amount “that may be necessary to suitably maintain her in as much comfort as she now enjoys”, were not so uncertain in amount as to prevent their deduction in computing the estate tax. The Court said in its opinion that:

* * * The principal that could be used was only so much as might be necessary to continue the comfort then enjoyed. The standard was fixed in fact and capable of being stated in definite terms of money. It was not left to the widow’s discretion. The income of the estate at the death of the testator and even after-debts and specific legacies had been paid was more than sufficient to maintain the widow as required. There was no uncertainty appreciably greater than the general uncertainty that attends human affairs.

In the case at bar the principal could be invaded only “should illness, accident or misfortune require more than the net income monthly for the proper care and comfort of my husband.” Not only was the standard fixed by the words “proper care and comfort”, but even that invasion of the principal was permissible only if “illness, accident or misfortune require.” The income of the estate here was more than ample for any probable requirements of the husband and, under the rule of Ithaca, Trust Co. v. United States, supra, the right of the trustee to invade the principal did not render the gift to charity so uncertain in amount as to prevent its deduction. See also Lucas v. Mercantile Trust Co., 43 Fed. (2d) 39; Humphrey v. Millard, 79 Fed. (2d) 107.

The right of the husband to the “exclusive use” of “two rooms and private bath” in Rockwood Manor for life did not in any manner affect the gift of the remainder of the estate. That was a condition subsequent imposed upon the gift of Rockwood Manor, and the respondent has allowed the deduction of that gift without question.

The payments of $1,000 per year to Henry F. Harding and $600 per year to Nora Huffman were for the purpose of compensating them for services which they were to render to the trustee so long as each should live but not beyond the term of the trust. In the administration of the trust estate these payments were treated by the trustee as a part of the expenses of the estate and were apparently claimed as deductions from gross income for the years 1936 to 1939, inclusive. We do not have before us in this proceeding the question as to the liability of the estate for income taxes for any year. There is nothing in the record, however, to indicate that the respondent ever questioned the right of the estate to claim that the payments were legal deductions from the gross income of the estate, or that John Wilson Caughey ever claimed that the net income of the estate distributable to him was greater than the amounts shown by the trustee’s books. In this situation we do not think that it is necessary to take into account the payments to be made to Henry F. Harding and to Nora Huffman in the determination of the value of the remainder interest which was devised and bequeathed to the Girl Scouts. In any event there was only the remotest likelihood that the income from the trust estate would not at all times be more than ample to meet these payments. In the years 1936, 1937, 1938, and 1939 the net income of the trust after the deduction of the annuity payments amounted to over $8,000 a year, while it is stipulated that the yearly expenses of the husband for those years amounted to not more than $4,000.

The amount which is deductible from decedent’s gross estate on account of the gifts to the Girl Scouts is the value of Rockwood Manor, which the respondent has allowed in the amount of $38,375, plus the value at the date of decedent’s death of the remainder of the estate after termination of the trust, computed by the use of mortality tables. Ithaca Trust Co. v. United States, supra. It is stipulated that for the purpose of such computation the factor of .78264 may be taken as the present worth of $1 due at the death of a person 76 years of age.

Reviewed by the Board.

Decision will he entered imder Rule 50.

Murdock,

dissenting: The issue in this case is whether or not there was such a bequest or devise to the National Girl Scouts, Inc., a charitable organization, as to entitle this estate to a deduction. There was no absolute bequest or devise under the will. The bequest would be defeated to the extent that the corpus might have to be invaded to properly care for the husband of the decedent in case of illness, accident, or misfortune. The devise of the property known as Rockwood Manor was subject to the condition that the National Girl Scouts, Inc., would continue to use it for the specified purposes. One-half of the proceeds from the sale of certain property, after the death of the husband, was to go to the National Girl Scouts, Inc., but only for the development and improvement of Rockwood Manor and only upon condition that the National Girl Scouts, Inc., would continue to operate Rockwood Manor for the prescribed purposes. The remaining one-half of the proceeds of the sales was to go to the National Girl Scouts, Inc., 20 years after the death of the husband if they were still in possession of Rockwood Manor at that time.

The prevailing opinion starts off on a false foundation by assuming that the National Girl Scouts, Inc., will fully qualify and take the entire residue under the will by meeting all of these conditions. These are the very matters at issue in the case and should be decided upon proof or lack of proof and not upon assumption. The National Girl Scouts, Inc., was not in existence 25 years before the death of this decedent, and we have no right to assume, as a basis for decision for the petitioner, that it will be in existence 26 years after the death of the decedent and that it will remain in possession of Rockwood Manor and use it as required by this will in order to fully qualify and take all of the residuary estate. If the proof is difficult, or even impossible, the petitioner, upon whom the burden rests, is left with an unenforceable claim. Burnet v. Houston, 283 U. S. 223. I think the proof is inadequate to show that the Commissioner erred;

SterNHAgeN and Harron agree with this dissent.


author: Van Fossan :

text:
    Corporation de Ventes de Salitre y Yoda de Chile, Petitioner, v. Commissioner of Internal Revenue, Respondent.

      Docket No. 97315.
    Promulgated May 6, 1941.

      George E. Oleary, Esq., for tbe petitioner.

      George B. Sherriff, Esq., for the respondent.
   OPINION.

Van Fossan :

The basic issue in the case at bar is whether or not the petitioner realized a gain or profit from the purchase of its own debentures at less than their face value. A negative decision of this question would automatically dispose of the case.

The petitioner contends primarily that it realized no income because it did not gain by the entire transaction, but only paid to debenture holders a part of its earnings. It fortifies its contention by three arguments:

1. The petitioner received no money or property upon the issue of its 5 percent debentures and hence the retirement of the debentures at a discount produced no gain.
2. The purchase of the debentures at a discount freed no assets because the petitioner’s liability for payment was limited and conditioned.
3. The petitioner was insolvent both before and after the purchase. Thus no gain was realized.

If the petitioner’s primary contention should not be sustained, it argues further that its income should not be taxed since it was not derived from sources within the United States and that the interest it paid on its American issue of debentures should be allowed as a deduction from any income realized by it from the purchase of its debentures at a discount.

The respondent controverts all of the petitioner’s contentions.

The detailed historical facts and circumstances relating to the formation of the petitioner and to the specific issue of this case are set forth in our findings of fact. The facts essential to an understanding of the issue may be briefly summarized as follows:

On January 2, 1933, by presidential decree, Cosach was ordered liquidated. A liquidating commission proceeded to liquidate its affairs by returning the Lautaro and Anglo-Chilena stock to their former owners and by transferring the nitrate lands and plants to Antofagasta. The only remaining assets of Cosach were stocks of nitrate and iodine on hand. Their .value was offset by Cosach obligations equal to or exceeding it.

The petitioner was organized January 8, 1934, under Law 5350, whose peculiar features will be discussed later. Pursuant to that law a monopoly of the exportation of and trade in nitrate and iodine was granted to the petitioner, and the liquidating commissioner transferred the Cosach stocks of nitrate and iodine on hand to the petitioner, which assumed the obligations above mentioned. Law 5350 also required the petitioner to assume the service and amortization of Cosach 7 percent bonds for the account of the producers, but only of those bonds whose holders accepted the modifications established by the law and by future contracts with the trustees.

On. October 31, 1934, the petitioner executed a trust indenture (a “future contract” contemplated by article 24 of Law 5350) securing its 5 percent debentures, to be exchanged for the Cosach 7 percent bonds and the temporary debentures. The terms of the indenture conformed to the limitations contained in Law 5350. The indenture permitted the petitioner to purchase its own 5 percent debentures out of a redemption fund authorized by that instrument. The 5 percent debentures were issued and all but $492,000 thereof were exchanged for Cosach 7 percent bonds.

During the taxable year the petitioner purchased its 5 percent debentures of the par value of $189,000 for $102,881.25 and was reimbursed therefor by the trustee out of the redemption fund.

The facts of the case at bar are unusual in many respects. Although the obligations purchased by the petitioner have been denominated “debentures” and are regarded as bonds, they possess peculiar features which, as to the petitioner, may impute a relationship wholly unlike that of the obligor of an instrument customarily considered a bond or indenture.

In the promissory clause of the debenture the petitioner promises to pay to the bearer or registered owner the principal sum of $1,000 and interest thereon at 5 percent. However, this promise is conditioned and limited later in the document to the proportion of the petitioner’s consolidated net earnings available for debenture service, as defined in Law 5350. Thus the petitioner is under no obligation whatever to pay either the interest or the principal unless it has net earnings sufficient for that purpose. But the “adhering” companies are charged with the unconditional liability for such payment, upon default of the .petitioner, its dissolution or the maturity of the debentures. Therefore, those companies are virtually the primary obligors of the debentures as to both principal and interest.

The obligation may be regarded as a joint and several one assumed by the petitioner and the adhering companies but greatly restricted as to the petitioner. If may have been somewhat difficult to determine the precise amount of the petitioner’s liability to pay the principal and interest of its debentures, yet the liability was real and monetarily measurable.

So also the monopoly granted by the Government of Chile was of great value. While the 25 percent of the net consolidated earnings was fixed as the current price of its enjoyment, it does not follow that it had no capital value. Many intangibles such as good will, contractual rights, equitable interests, etc., are valuable assets and are includible in their owner’s financial statements. The omission of both of these items, the debentures and the monopoly, from the petitioner’s balance sheets does not prove their nonexistence. They should have been included therein in order to arrive at the petitioner’s true net worth. In view of their exclusion we can not say that the petitioner had no assets other than current stocks, etc., nor that it was insolvent.

The character of the petitioner itself is also anomalous. It was created as a selling agency for the producers, to control the production and to secure the sale of nitrate and iodine, to provide revenue for the Government, and to establish an orderly and healthy condition of the industry. Although given a corporate form and entity by Law 5350, it had no stockholders as such. No provision was made for the distribution of its assets upon liquidation.

If we should assume that the net liquidated assets, if any, would follow the 25-75 percent division of its net earnings, we would doubtless he met with the argument of the producers that the 25 percent was payable to the Chilean Government for nitrate and iodine currently produced and that, therefore, they would be entitled to any enhancement of capital value. But, regardless of the manner of the ultimate adjustment of that problem, it is obvious that the producers are the principal beneficiaries of the petitioners profits. For practical purposes they correspond to stockholders of the petitioner corporation.

The petitioner was engaged in a highly profitable business. While its structure prevented its own enjoyment of its gains, yet they inured to the ultimate benefit of the adhering companies which used the petitioner as a means of deriving profit from the production of the commodities. Therefore, any tax upon the petitioner will fall upon the adhering companies where it properly belongs.

With these facts in mind we may proceed to a discussion of the petitioner’s contentions. It first argues that it received no money or property upon the issuance of its 5 percent debentures, and hence received no gain upon the retirement of such debentures at a discount. We do not agree.

Cosach had been organized by Law 4863. It had issued its I percent bonds by authority of that law. It acquired the stock of the large competing companies and the assets, including nitrate lands, of some thirty smaller companies. It thus obtained control of practically the entire nitrate producing industry in Chile. In the early part of 1932 it needed additional working capital. Shortly thereafter it defaulted in its bond obligations. In January 1933 the president of Chile held that Cosach had been illegally organized and operated and ordered its liquidation. Law 5133 created a liquidating commission which took charge of Cosach’s affairs. The commission proceeded to perform its duties.

In contemplation of the situation thus outlined, Law 5350 was enacted to restore the nitrate industry to a firm foundation. That law required the petitioner to assume certain debts of Cosach and the stocks of nitrate and iodine were transferred to the petitioner. The law also required the petitioner to assume “for the account of the producers” the service of Cosach 7 percent bonds and granted the monopoly heretofore described. Although the consummation of the various steps required to carry out these details occupied some time, such steps were all parts of the same reorganization plan.

- The petitioner maintains that it received neither money nor property upon the issuance of its debentures. The petitioner seems to regard the issuance of its debentures as a gratuitous act- based on no valuable consideration. In our opinion that view of the matter is in error.

The petitioner was required to assume Cosach’s liability on its bonds as a contemporaneous condition of its enjoying the government monopoly. Its own bonds were merely a substitution for the Cosach bonds, but they imposed a charge of only 5 percent as against the 7 percent payable formerly. Thus the petitioner was in a better financial position after the issuance of the debentures than before and had received a valuable right in addition to those acquired directly under Law 5350.

The petitioner further argues that no assets were freed from a liability to which they were theretofore subject. By the purchase under discussion the petitioner needed $86,118.75 less to extinguish its $189,000 worth of debentures than it would have required if they had been allowed to mature. To that extent, therefore, its other assets, including earnings from operations, werfe freed to contribute to the promotion of sales, the circulation of propaganda, and other activities which in turn would result in increased profits, all redounding to the benefit and advantage of the petitioner and, through it, of the producers.

The petitioner next maintains that it was at all times insolvent. This argument has been considered in the previous general discussion. We need only to repeat that the petitioner has not proved that it was or is insolvent. The facts before us indicate quite the contrary. If the petitioner’s position were correct we would behold this incongruous spectacle: Active and prosperous companies, owning practically all of Chile’s nitrate and iodine producing lands worth millions of dollars; enjoying through the petitioner a monopoly in their industry; making a handsome yearly profit (over $5,000,000 in 1934 and over $9,000,000 in 1935), enough in fact to enable them to reduce their outstanding obligations by many thousands of dollars; and yet entrusting their entire sales and collections therefrom, aggregating about $20,000,000, to a hopelessly insolvent concern. We can follow neither the petitioner’s reasoning nor its assumptions of fact in this respect.

Since we have decided adversely to the petitioner in its major contention, we must now consider its second point. The petitioner asserts that the income, if any, is not taxable, since it was derived from sources without the United States.

Petitioner argues that section 119 (a) of the Revenue Act of 19341 specifies those classes of income which shall be treated as arising from sources within the United States and that, since the gain in question does not fall in any of those classes, it is not taxable. We considered this argument in Zander & Cia, Ltd., 42 B. T. A. 50, and there held that the statute intended no exclusive enumeration of the types of taxable income from sources within the United States and that income primarily originating in this country is to be taxed without reference to the enumeration. Hubert De Stuers, 26 B. T. A. 201; Carding Gill Ltd., 38 B. T. A. 669; and see Helvering v. Suffolk Co., Ltd., 104 Fed. (2d) 505.

The petitioner further renews its contentions that it received no consideration for the original issuance of its debentures and that the purchase thereof freed no assets. However, assuming that both points should be decided adversely (as they are), it argues that the Commissioner should have promulgated a regulation specifically applicable to the type of income here involved and that, in the absence of such a regulation, the income can not properly be regarded as income from United States sources.

In Carding Gill Ltd., supra, we observed that the petitioner overlooked the provisions of section 119 (e) of the Revenue Act of 1934, and said :

It is true the statute contains no express reference to personal propery both purchased and sold within the United States. Gains therefrom, however, are obviously items of gross income, and are consequently to be treated, under specific legislative direction, by regulation. * * * The applicable provision of Regulations 74 makes the place of sale the test; and it is conceded on petitioner’s brief that the securities involved were sold in the United States. * * *

The transaction which the respondent asserts gives rise to income was the petitioner’s purchase of its own debentures. Their original value in the United States was no less than par. The debentures were exchanged for Cosach bonds in the United States and delivered here. The purchase was made in the United States from holders of the bonds in this country. The trustee was a New York trust company and provision was made in the trust indenture for service of notice in the United States. The trustee also canceled the debentures in the United States.

In the face of these facts it is obvious that the petitioner’s contention can not be sustained. We find no statutory exemption anywhere excluding from income gain derived from the petitioner’s purchase of its own debentures. (See I. T. 3119, 1937-2, C. B. 227.) Therefore, the familiar principles established in the Kirby Lumber Co. case (United States v. Kirby Lumber Co., 284 U. S. 1) control the taxation of the gain. See also Helvering v. American Chicle Co., 291 U. S. 426, in which the bonds were those of a predecessor and had been assumed by the taxpayer. B. F. Avery & Sons, Inc., 26 B. T. A. 1393; Montana, Wyoming & Southern Railroad Co., 31 B. T. A. 62.

The petitioner’s final contention is that the interest accrued and paid by it on its American issue of debentures should be allowed as a deduction from any income realized by it from sources within the United States through its purchase of its American debentures.

The statute governing the deduction is section 232 of the Bevenue Act of 1934. It limits the deductions allowed to a foreign corporation to those “connected” with income from sources within the United States. The income in the case at bar from such a source is the gain derived from the petitioner’s purchase of its own debentures at a discount. That was the only transaction consummated during the taxable year by the petitioner in this country.

Funk & Wagnalls New Standard Dictionary defines the word “connect” as meaning:

(1) To join together as by links or fastenings; unite or combine in any way; bring into correlation; associate.
(2) To unite or join; be in close relation; be associated.

I. T. 2792, XIII-1, C. B. 85, states:

* * * To be allowable, therefore, the deduction must be “connected” with income from sources within the United States. The word “connected” means “joined or linked together by some tie, as of causality, relationship, or intimacy.” The meaning at once suggested is that the requisite tie between the deduction and the income is that of causality, that is, that the expenditure for which the deduction is claimed must enter into, and be directly related to, the production of the income.

The purchase under discussion was an isolated transaction unassociated with the payment or accrual of current interest charges. The payment of interest was required by the trust indenture and had to be made in any event. It bore no relation to the purchase and did not contribute to the realization of the petitioner’s income. The interest accrued by the petitioner was not “connected” with or related to the purchase of the debentures and hence is not deductible.

The position which we took in Royal Insurance Co., Ltd., 38 B. T. A. 955, is not in conflict with our conclusion here. In that case we held that the limitation section 232 and its predecessors applied not only to depreciation, amortization, and depletion, but also to other deductions, such as losses, which were actually “connected with income arising from a source within the United States.”

The reference to the legislative history there made is also appropriate to the situation here. The Report of the Senate Finance Committee relating to the Revenue Act of 1918 states (p. 8) :

In the case of nonresident alien individuals and foreign corporations, expenses, losses, debts, depreciation, amortization, and depletion are, under the language of the House bill, allowed only to the extent that they are connected with a trade or business carried on within the United States, and the depreciation, amortization, and depletion deductions are allowed only with respect to property within the United States. In many cases, however, property outside of the United States is directly concerned in the production of income taxable in the United States. Accordingly, the limitation with respect to nonresident aliens and foreign corporations has been modified so that the specified deductions shall be allowed to the extent that they are connected, with income arising from a source within the United States (sec. 214 (b) and sec. 234 (b)). [Emphasis supplied.]

Thus, in view of our decision that the interest was not connected with the purchase, the amount of the interest is not deductible within the purview of the statute. Cf. Stockholm Enskilda Bank, 40 B. T. A. 107.

Decision will be entered for the respondent.

       (e) Income From Sources Partly within and Partly Without united States.— Items of gross income, expenses, losses and deductions, other than those specified in subsections (a) and (c) of this section, shall be allocated or apportioned to sources within or without the United States, under rules and regulations prescribed by the Commissioner with the approval of the Secretary. Where items of gross income are separately allocated to sources within the United States, there shall be deducted (for the purpose of computing the net income therefrom) the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of other expenses, losses or other deductions which can not definitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as net income from sources within the United States. In the case of gross income derived from sources partly within and partly without the United States, the net income may first be computed by deducting the expenses, losses, or other deductions apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which can not definitely be allocated to some items or class of gross income; and the portion of such net income attributable to sources within the United States may be determined by processes or formulas of general apportionment prescribed by the Commissioner with the approval of the Secretary. Gains, profits, and income from—
      (1) transportation or other services rendered partly within and partly without the United States, or
      (2) from the sale of personal property produced (in whole or in part) by the taxpayer within and sold without the United States, or produced (in whole -or in part) by the taxpayer without and sold within the United States,
      shall be treated as derived partly from sources within and partly from sources without the United States. Gains, profits and income derived from the purchase of personal property within and its sale without the United States or from the purchase of personal property without and its sale within the United States, shall be treated as derived entirely from sources within the country in which sold, except that gains, profits, and income derived from the purchase of personal property within the United States and its sale within a possession of the United States or from the purchase of personal property within a possession of the United States and its sale within the United States shall be treated as derived partly from sources within and partly from sources without the United States.

       SEC. 232. DEDUCTIONS.
      In the case of a foreign corporation the deductions shall be allowed only if and to the extent that they are connected with income from sources within the united States; and the proper apportionment and allocation of the deductions with respect to sources within and without the United States shall be determined as provided in section 119, under rules and regulations prescribed by the Commissioner with the approval of the Secretary.


author: Disney :

text:
    Jennie Arrott Adams, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 98106.
    Promulgated May 6, 1941.

      James M. Houston, Esq., for the petitioner.

      WUUam A. Schmitt, Esq., for the respondent.
   opinion.

Disney :

This proceeding involves an appeal from a determination of deficiencies in income tax for the taxable years 1934 and 1935 in the amounts of $3,950.58 and $125.11, respectively. The question for determination is whether there should be included in petitioner’s income certain proceeds of the sale of corporate stock by the trustees of a trust of which the petitioner was a beneficiary.

The petition assigned errors, in substance, as follows:

(a) The inclusion by the respondent in petitioner’s taxable income for the year 1934 of any part of the proceeds from the sale of 6,800 shares of American Eadiator & Standard Sanitary Corporation common stock, sold by the trustees of a trust of which petitioner is a life beneficiary.
(b) The inclusion in petitioner’s taxable income for the year 1934 of the sum of $3,380.16, as being income from the aforementioned trust, distributable to petitioner as a life tenant thereof, in the year 1934.
(c) The inclusion in petitioner’s taxable income for the year 1935 of any part of the proceeds from the sale of 400 shares of American Eadiator & Standard Sanitary Corporation common stock sold by the trustees, for the petitioner.
(d) The inclusion in petitioner’s taxable income for the year 1935 of the sum of $199.92 as being income from the aforementioned trust, distributable to petitioner as a life tenant thereof in the year 1935.

The facts stipulated, including the joint exhibits, are adopted as a part of our findings of fact. The stipulated facts, so far as pertinent to consideration of the issues, may be summarized as follows:

The petitioner is a widow and resides at 940 Beaver Street, Sewick-ley, Pennsylvania. Petitioner’s returns for the calendar years 1934 and 1935 were filed with the collector of internal revenue at Pittsburgh, Pennsylvania. Her books were kept and her returns made for the taxable years involved on the basis of cash receipts and disbursements. Her father, James W. Arrott, died December 29, 1902, leaving a last will and testament dated July 10,1902, which was duly probated before the Eegister of Wills of Allegheny County, Pennsylvania.

James W. Arrott, the testator, left surviving him as his next of kin his widow, four sons, and two daughters and appointed his wife and sons executors and trustees under his will. Subsequently, the Union Trust Co. of Pittsburgh, Pennsylvania, and two of his sons became the trustees of the trust, one son later resigning. The testator in his will made separate but identical trust provisions for his two daughters, Jennie Arrott Adams, petitioner herein, and Isabel Arrott Eider, mentioned in the Orphans’ Court proceedings of Allegheny County, Pennsylvania, hereinafter described. The seventh paragraph of the will of the testator provided in part:

One of said shares, less the sum of Ten Thousand ($10,000.00) Dollars, I give, devise and bequeath to my executors hereinafter named, the survivor and successor of them, In Trust, for my daughter, Jennie, to invest the principal in good and approved interest-bearing securities and pay over the interest to her, my said daughter, as same is got in and received, for and during the term of her natural life, said interest or income not to be liable or subject in any manner to attachment or seizure for any debt or debts of her, my said daughter, nor to be assigned, transferred, pledged or parted with by way of anticipation, and upon her death to divide the said share equally among any children of hers, should she die leaving children who may then survive her, the issue of any deceased child to represent and take the share of such deceased child; and in the event of her death without leaving child or children or the issue of any deceased child, then surviving her, then to divide the said corpus or principal equally among her then surviving brothers and sisters and the issue of any who may then be deceased, such issue also to represent and take the share of their deceased parent.

An identical provision was made for the decedent’s daughter, Isabel Arrott Rider. The trustees received the stock in 1910. Subsequently a stock dividend of 100 percent in 1920, of 40 percent in 1922, and of 25 percent in 1925, and a change of corporate name and structure of the Standard Sanitary Manufacturing Co., resulted in the trustees holding for petitioner’s trust a total of 52,569 shares of American Radiator & Standard Sanitary Corporation stock, by 1929.

About October 1, 1925, the trustees for petitioner filed their second trustees’ account in the Orphans’ Court of Allegheny County, Pennsylvania. The account covered the administration of the trust for the period June 13, 1916, to approximately the date of its filing. The account contained, under the heading “Principal—Receipts”, entries relating to the 100 percent stock dividend received in 1920 and the 40 percent stock dividend received in 1922, but indicated the value by zero marks; and contained no entry as to the 25 percent stock dividend received in 1925, though the number of shares of stock received in 1925 was included in the number of shares shown in the “Principal” balance. An audit statement as to the account, also filed, recited, among other things, that the income from the trust during the period covered by the account, except the balance shown as on hand, had been paid to the beneficiary, the petitioner herein, and that “There is no distribution to be made on this accounting either of principal or income, this account being filed for the purpose of having the administration of this trust for the period covered in said account confirmed by the Court. There are no questions raised in connection with the administration of this trust”; also, “The Court is respectfully requested to decree the balance both of income and principal as shown in the account back to the accountant for the purposes specified in the will of James W. Arrott, deceased.” The account was confirmed absolutely by a decree of the Orphans’ Court dated March 2, 1926, and the principal balance shown by the account, including stock dividends of 1920, 1922, and 1925, “was awarded back to the trustees,”

The record at the time when the account was presented to the court for audit contains, among other recitations, the following;

By the Court: Oughtn’t that interest to be represented? .... Oughtn’t you to do that? This is a large amount of money. I have not stopped to look at the provisions of Mr. Arrott’s will or where this goes.

The decree recited that the funds in the hands of the accountant be paid in accordance with the schedule of distribution attached, and the schedule recited:

Balance for distribution
To James W. Arrott, Jr., Albert E. Arrott and The Union Trust Co. of Pittsburgh, Trustees in trust for Jennie Arrott Adams, for the purposes specified in Item 7 of will, said balance, viz.
Corpus, Cash & Securities, per Account-$180,496. 63
Income, Cash- 2,107. 57

Another account and audit statement, with recitations the same as in the previous account and audit of 1925, were filed by the trustees for the petitioner herein at the June term, 1932, and the account was confirmed absolutely by a decree of the Orphans’ Court, dated July 21, 1932, and the principal balance shown by the account, including the shares representing stock dividends, was “again awarded back to the trustees”, with the same recitations as contained in the decree of March 2,1926.

It is stipulated:

During the year 1934 and in the first two months of the year 1935, the trustees for Jennie Arrott Adams sold a total of 7200 shares of American Radiator and Standard Sanitary Corporation stock. The proceeds of these sales were retained in the corpus of the trust in an account which was filed in the Orphans’ Court at No. 274 June Term, 1935. The account was duly audited and confirmed absolutely by the court in a decree dated December 27, 1935, which awarded back to the trustees as corpus the entire proceeds of the stock sales aforesaid. Petitioner has never received nor has there ever been credited to her any portion of the proceeds of said sales.
In accordance with the provisions of the Pennsylvania Fiduciaries Act and the rules of the Orphans’ Court of Allegheny County, Petitioner received notice of the filing of the accounts of her trustees filed in 1925, 1932 and 1935, together with copies of said accounts. At each accounting' a guardian or trustee ad litem was appointed by the Orphans’ Court to represent possible unborn persons contingently interested in the remainder. In each ease a report of the guardian or trustee ad litem, approving the account, was filed with the court.
The trustees for Jennie Arrott Adams filed income tax returns for the years 1934 and 1935 and paid a tax on the gain realized by the sales of American Radiator and Standard Sanitary Corporation shares sold in the years 1934 and 1935.

The trustees of petitioner’s sister, Isabel Arrott Eider, treated the receipt of stock dividends as additional corpus receipts, as did the trustees of petitioner. Accounts by the Eider trustees, showing stock dividends as corpus receipts in 1925 and 1932, were filed and were confirmed absolutely as were those of petitioner’s trustees. In 1935, the Eider trustees filed an account showing the sale of 7,200 shares of American Radiator & Standard Sanitary Corporation stock in 1934 and tbe first two months of 1935. To this account Mrs. Rider filed exceptions and also filed a petition to review the prior accounts and decrees confirming the same in 1925 and 1932. The exceptions and bill of review sought to apportion the stock dividends of 1920, 1922, and 1925 received by the trustees on the proceeds of their sale and also the proceeds of the sale of rights to subscribe to additional shares which were received and sold by her trustees in 1929. She was joined in her exceptions and petition by her two sons, remaindermen of her trust.

The Orphans’ Court of Allegheny County appointed a guardian or trustee ad litem to represent the interests of possible unborn re-maindermen which would be adversely affected by sustaining the exceptions and granting the prayers of the petition for review of the prior accounts. The guardian or trustee ad litem filed a report opposing the contentions of Mrs. Rider and contested her right to a review and apportionment in a hearing before the Orphans’ Court. Reports were prepared setting forth an apportionment of stock dividends and stock rights to which all parties agreed, provided the Orphans’ Court should decide that Mrs. Rider was entitled to an apportionment.

On the basis of the above reports and the testimony adduced at the hearing in support of the exceptions and petition for review, the Orphans’ Court in its opinion stated, in part, that the Rider trust was a spendthrift trust which imposed special duties upon the trustees to care for the interests of Mrs. Rider and that it was admitted by the trust officer that the trustees did not seek the advice of counsel in giving the stock dividends and the other amounts mentioned to corpus, but that the trustees merely followed the usual practice of the trust company adopted in such cases.

The Orphans’ Court, in sum, held that in the adjudication of the two accounts sought to be reviewed by Mrs. Rider an injustice had inadvertently been done her and that “the allocations by the trustees of the stock dividends and the proceeds of sale of stock and rights, to corpus, instead of to income, were at least equivalent to fraud which entitles her to relief, and that the prayer of the petition should be granted.”

The petitioner herein filed no action and did not receive an apportionment of the stocks received as dividends or the proceeds of sale thereof, as did her sister, through her exceptions and petition for review. The status remained in respect to her as reflected by the accounts originally approved in the Orphans’ Court, whereby the trustees retained the stock, stock dividends, and proceeds of the sales.

In addition to the stipulated facts above epitomized, we find:

The same officer of the Union Trust Co., cotrustee, handled the affairs of both the Eider and Adams trusts. The cotrustee did not discuss with the petitioner the case of Mrs. Eider pending in 1935 in the Orphans’ Court, nor did the cotrustee discuss with petitioner the question of apportionment of corpus and income of her trust estate.

The reason the trustees made no apportionment of stock dividends as income to the life tenants in the Eider and Adams trusty, but treated all dividends as corpus, was, as stated in the testimony of the trust officer in this proceeding, because:

They considered that as long as they kept them in the principal account and they remained in the possession of the trustee, that when it was ascertained as to what portions, if any, would properly be distributable to a life tenant, they would have it and they could make that distribution. In other words, the general policy was as long as they had it in their own possession that no one, including themselves, could be hurt, whereas if they attempted an apportionment and paid it out to a life tenant—and that should later prove to be erroneous, they would [not] have it under their control to rectify the mistake.

That was the reason behind the general policy of the trustee, and was followed in the Jennie Arrott Adams case.

The game trust officer testified in the matter of the audit of the trustees’ account before the Orphans’ Court on November 18, 1925.

The deficiency notice for the taxable years shows that the total shares sold in 1934 were 6,800, and the number apportionable to the life beneficiary, the petitioner, was 4,788. The profit from the sale thereof, $58,278.17, was held by the respondent to be taxable to the petitioner to the extent of 30 percent thereof, or $17,483.45, which was added to her income for 1934. Of the 400 shares sold in 1935, respondent determined that 281 were apportionable to petitioner and that 30 percent of the gain of $3,168, or $950.40, was taxable to her.

In the deficiency notice the respondent states that 2,012 shares of the 6,800 above mentioned were not included in his computation of gain or profit above set forth, but that the court in the Eider case held that certain accumulated income accrued to the life ben-ficiary from the 2,012 shares and that the amount so determined by the court was $3,380.16 and the same amount the respondent herein held represented distributable taxable income to petitioner for 1934 and he so included it.

With respect to 119 shares—the difference between the 400 shares reported as sold in 1935 and the 281 apportioned to the petitioner— the respondent states that in accordance with the court’s decision in the Eider case he determined that the income arising from the 119 shares of stock was $199.92, and he included it in taxable income of petitioner for the year 1935;

The Orphans’ Court in the Rider case did not decide that Mrs. Rider was entitled as life beneficiary to said sums of $3,380.16 and $199.92 as representing distributable accumulated taxable income.

Under the above facts, should the proceeds of the sales of stock (to the extent of 30 percent as determined by the Commissioner) be included in petitioner’s income for the taxable years, under section 162 (b) of the Revenue Act of 1934? The answer depends upon whether the petitioner, in the taxable years, had the right to a portion of the sales proceeds as income as life tenant, or whether the stocks sold were corpus of the trust. The fact that she did not demand or actually receive the proceeds does not relieve her of taxability therefor; if she had a right to receive it, that fact controls. Blair v. Commissioner, 300 U. S. 5; Freuler v. Helvering, 291 U. S. 35; Mary Clark de Brabant, 34 B. T. A. 951; affd., 90 Fed. (2d) 433; Malcolm v. Commissioner, 97 Fed. (2d) 381.

The record shows that the number of shares in the trust of petitioner had largely increased because of stock dividends received. Under Pennsylvania law as to stock dividends received by trustees where there are remaindermen and a life beneficiary of the trust:

Extraordinary dividends, commonly called stock dividends, are distributed and apportioned as follows: The presumption is that an extraordinary stock dividend is from earnings and belongs to the life tenant. * * *
In the distribution of a stock dividend, the “intact value” must be preserved. When it appears that the distribution of a stock dividend to the life tenant will impair the intact value of the trust estate by reducing it, then there must be an apportionment between the life tenant and the remain-derman, so as to preserve the intact value of the corpus of the estate, plus any increase in that value through share purchases, or from contributed surplus or any proper capital increase, and less any decrease for capital losses, [In re Waterhouse’s Estate, 308 Pa. 422; 162 Atl. 295.]

The existence of the Pennsylvania apportionment rule was recognized by this Board in Anna M. Chambers et al., Trustees, 33 B. T. A. 1125, and in Anna M. Chambers et al., Trustees, 29 B. T. A. 971; affd., 77 Fed. (2d) 95.

That a portion of the stock dividends received by the trustees in 1920, 1922, and 1925 should under the “Pennsylvania Rule” have been apportioned to the petitioner as income instead of being retained by the trustees as principal seems not to be questioned by the petitioner. We find that the petitioner under the Pennsylvania law was so entitled. The petitioner’s position is in effect that the Orphans’ Court had more than five years prior to the taxable years adjudicated that the dividend stock belonged to corpus and that under section 843, Pur don’s Pennsylvania Statutes, such adjudication was conclusive in the absence of fraud; that no fraud appears; that under Freuler v. Helvering, supra, and other cases to the same effect, the adjudication of the Orphans’ Court is conclusive; that therefore the petitioner had no right in the taxable years to any apportionment of the sales proceeds and therefore no duty of paying income tax thereon. The respondent’s position, in substance, is that the petitioner had been entitled to apportionment under the “Pennsylvania Pule,” that her trust was identical with that of her sister, Mi’s. Eider, that in the case of her sister the Orphans’ Court, upon exceptions and bill of review filed by the sister, held that the sister was entitled to apportionment, that the petitioner is in the same position and her inaction or the failure of the trustees to treat her trust property similarly did not affect her present right to receive said income, and that, even if under the five-year statute of limitations her remedy against the adjudications is gone, her rights remain and she is therefore taxable.

We think we should not give to the adjudication by the Orphans’ Court in favor of petitioner’s sister the effect for which respondent argues. It is clearly not res judicata in this matter, since it was res inter alios acta and the respondent does not in fact contend that it is otherwise, but seems to take the view that, since the two trusts are identical, it follows that the Orphans’ Court, if the petitioner had applied for relief, would have necessarily rendered the same judgment as in the case of the petitioner’s sister. We think it obvious that such result does not follow. The principal remaindermen in the Eider case were Mrs. Eider’s two sons, her only children, and they joined her in the request for relief. We can not assume that here, where the record shows nothing as to the remaindermen, there would not have been a real contest in petitioner’s matter or that the result would have been the same as in the case of her sister.

The question for our determination, therefore, is whether the record here shows such facts as would have given the petitioner in the taxable years a right to have set aside the adjudication by the Orphans’ Court in 1926, upon an audit filed in 1925. The adjudications in 1932 and 1935 do not require attention, for they both come within five years prior to the taxable years and, under section 843, Purdon’s Pennsylvania Statutes, review thereof by the Orphans’ Court was a matter of right, upon application within five years. Ember’s Affeal, 62 Pa. 318; Meckel's Appeal, 112 Pa. 554; 4 Atl. 447. It is plain, however, that if the adjudication in 1926, more than five years before the taxable years, which decreed the stock dividends as corpus to the trustees, could not have been set aside by the petitioner, she could not have established a taxable right to a portion of the stock dividends, even if she had, as did her sister, filed exceptions to the account filed in 1935 and as to that accounting had been successful. Thus it is seen that her rights in the taxable years depend upon the effect of the adjudication in 1926.

Freuler v. Helvering, supra, holds that an order of a state court as to whether there is distributable income or trust corpus, as between trust and beneficiary, establishes the law in that respect “until reversed or overruled.” Section 219 of the Revenue Act of 1921, in effect the same as section 162 (b) here involved, was there being interpreted. To the same general effect is Blair v. Commissioner, supra; Susan B. Armstrong, 38 B. T. A. 658; Letts v. Commissioner, 84 Fed. (2d) 760; and Helvering v. Rhodes, 117 Fed. (2d) 509, affirming 41 B. T. A. 62.

Freuler v. Helvering, supra, however, seems to make an exception to the general rule above stated in case the proceeding in the state court “was a collusive one—collusive in the sense that all the parties joined in a submission of the issues and sought a decision which would adversely affect the Government’s right to additional income tax.” There is no contention herein that the adjudications before the Orphans’ Court were collusive with intent to deprive the Government of income tax.

It is necessary to consider here, however, the question of fraud, since the respondent in substance argues that the petitioner should be held to be in the same position as her sister, Mrs. Rider, and that Mrs. Rider in 1935 succeeded in setting aside the adjudication in 1926 on the ground of fraud. However, if we assume that fraud, as well as collusion, constitutes an exception to the rule of the binding effect of adjudication as laid down in Freuler v. Helvering, we must still answer the question as to whether the facts here disclose fraud such as would have given the petitioner the right in the taxable years to set aside the adjudication of 1926. After careful examination of all the facts appearing in the record, we are of the opinion that the facts available for attack by the petitioner in the taxable years did not comprise fraud of the nature necessary to set aside the earlier adjudication. The fraud necessary to constitute sufficient reason for vacating a judgment “must be extrinsic and collateral to the matter tried, and not a matter which was actually or potentially in issue in the action, unless the interposition of such defense was prevented by fraud, accident, or the act of the opposite party * * 34 C. J. 280 (citing many cases)—a fair statement of the body of law on the subject, in our opinion. We think that although, as found by the Orphans’ Court in the proceeding instituted by petitioner’s sister, there was in these matters fraud in the violation of the duty of a trustee to make full disclosure to cestui que trust, and in the representations and statements filed in the accounting in 1925, nevertheless there was not fraud “extrinsic and collateral to the matter tried”, but that it was “actually or potentially in issue” in the proceeding before the Orphans’ Court. We therefore conclude and hold that the petitioner did not have a right on the facts herein disclosed to vacate the adjudication made in 1926 and therefore that the respondent erred in including in her income a proportion of the proceeds of sale of stock dividends, as set forth in the deficiency notice. We disagree with the respondent’s idea that the petitioner could have a right to the income though her remedy was gone. The old maxim that there is no wrong without a remedy indicates that if remedy has been lost, as here, by passage of time it can not be said that the affected party has a right.

We have above found as fact that the Orphans’ Court did not in the Eider case decide that Mrs. Eider was entitled as life beneficiary to $3,380.16, also $199.92, as accumulated taxable income. That is the only reason stated for including the amounts in income. The dividend stock involved was covered by the adjudication in 1926; therefore our conclusions set forth above cover these amounts also. We hold on this issue also, that the respondent erred in including such amounts in petitioner’s income.

Decision of no deficiency will be entered.

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


author: Muedock:

text:
    Emmett J. McCarthy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101607.
    Promulgated May 6, 1941.

      Raymond A. Duggan, C. P. A., for the petitioner.

      Gerald W. Brooks, Esq., for the respondent.
   OPINION.

Muedock:

The petitioner realized in 1936 that the value of this property had declined until it was less than the amount of the mortgage. He knew that the property would not produce enough income to pay the carrying charges. He concluded that he had lost forever the amount which he had already invested in the property and he believed that he would probably have additional loss on account of the mortgage notes. He desired to terminate the transaction in so far as he could do so for income tax purposes, to fix his loss up to that time, and to obtain the benefit of a deduction on his income tax return of the amount of that loss. He executed the instrument of February 6, 1936, to evidence his abandonment of the property and he now contends that he thereby absolutely and completely abandoned every interest which he had in the property from which he might ever possibly recoup any of his loss as represented by his cash outlay up to that time. The respondent has not pointed to any flaw in this argument or to any distinction between this case and that of Park Chamberlain, 41 B. T. A. 10. We hold, following that case, that the petitioner is entitled to a deduction for loss on the property. Cf. John J. Seerley, 43 B. T. A. 50.

This is so despite the obvious fact that by reason of the mortgage notes the petitioner still had a liability in connection with this property and could not be unconcerned as to what happened to it. This circumstance was present in the case of Park Chamberlain, supra, and it would also be present in a case where the owner of property on which ha had given a mortgage accompanied by his bond sold it at a loss, subject to the mortgage. Obviously, the seller in the hypothetical case would be entitled to deduct his loss at the time of the sale, even though he might sustain further loss by reason of his personal liability for the debt.

The petitioner contributed $19,400.24 of his money, whereas McCabe contributed only $7,287.91 of his money to the purchase and improvement of the property itself. However, there was an agreement between McCabe and the petitioner that McCabe would reimburse the petitioner until their investments were equal. McCabe had reimbursed the petitioner to the extent of $6,100 up to February 6, 1936. But thereafter he still recognized his obligation to make further payments and actually paid to the petitioner $2,917.21. The record is not entirely clear as to the purpose of the last payment of $2,417.21, but we must assume that it was like' the rest, since the petitioner knew the facts and should have proved them if they were to his advantage. Cohan v. Commissioner, 39 Fed. (2d) 540. These payments reduced the cash payments by the petitioner to $10,383.03 and his loss must be limited to this amount, since the record does not show that on February 6, 1936, his loss was any greater than his total cash outlay less the amounts which McCabe was to pay back to him.

The petitioner received no consideration for the instrument of February 6, 1936, and the transaction was not a sale or exchange. Polin v. Commissioner, 114 Fed. (2d) 174; Commonwealth, Inc., 36 B. T. A. 850; Warner G. Baird, 42 B. T. A. 970.

The Commissioner has raised an affirmative issue and has the burden of proof on that issue. He says that he erred in allowing the petitioner a personal exemption of $2,500 as head of a family and should have allowed him a personal exemption of only $1,000 as an unmarried person. The record shows that the petitioner had maintained a home for his father, his brothers, and sisters for a number of years and continued to maintain this home during the taxable year even though his father had died in the preceding year. Two brothers and two sisters lived with him in that home during the taxable year. They were all over 18 years of age, the youngest being 23. They contributed nothing towards the expenses of the family home and the petitioner paid all of those expenses during the taxable year. The statute does not define thei head of a family, but the definition given by the Commissioner in his Regulations 94, article 25-4, is “an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship * * * and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation.” These persons were closely connected with the petitioner by blood relationship. He actually supported and maintained them in one household. His one brother was crippled, his one sister was in poor health, and we do not know anything about his other sister. The Commissioner, in determining the deficiency, allowed the petitioner a credit of $400 for one dependent person. The record as a whole does not justify the conclusion that the petitioner was not the head of a family within the meaning of the statute during that year. The determination of the Commissioner on this point will not be disturbed.

Decision will ~be entered wnd&r Rule 50.


author: Sternhagen :

text:
    Lehigh Structural Steel Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102565.
    Promulgated May 6, 1941.

      Floyd F. Toomey, Esq., and Clarence L. Turner, C. P. A., for the petitioner.

      Bernard D. Daniels, Esq., for the respondent.
   OPINION.

Sternhagen :

The petitioner claims a credit for the amount set aside in the sinking fund for the purchase and retirement of its preferred stock. The Commissioner has disallowed the credit “because the instrument on which your claim for credit is based does not satisfy the conditions as prescribed in section 26 (c) (1), Revenue Act of 1936.” If the share be called a contract, the statute is literally met, for it is in writing, was executed in 1933, and contains a provision which prohibits the payment of dividends until after the required credit to the sinking fund. The question is whether such an application of the statute is consistent with its manifest purpose and intendment, for no other interpretation is permissible.

The legislative intent was primarily to tax corporate earnings to the shareholders; and any attempt to frustrate the tax through the nondistribution of earnings was to be futile. The method adopted was the levy of a surtax upon earnings, with credits for dividends paid and for earnings which the corporation was contractually prevented from distributing. Obviously, to recognize a voluntary restriction not imposed from outside would defeat the purpose. A charter importing a state statute expressly prohibiting dividends under certain circumstances is not within the statutory provision, despite the fact that it is a written contract with the state of its creation. It is not “a routine contract déaling with ordinary debts.” Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46.

The preferred stock clause in the present case, although for some purposes a contract, has no better ground for recognition under the credit statute than the charter provision in the Northwest Steel case. It derives no greater strength from the fact that it is spread upon the share certificate, for this is but a reprint of the charter provision. For some purposes the charter is a contract with the shareholders; but the shareholders are in many respects the corporation itself, and in that conception the charter provisions are more constitutional than contractual. The present charter provision prescribes a method for liquidating the preferred shares out of earnings, cf. May Hosiery Mills, Inc., 42 B. T. A. 646 (on review C. C. A., 4th Cir.) ; Auto Intenurban Co., 40 B. T. A. 161. A distribution of dividend to the common shareholders before setting aside the required sinking fund contribution would be a violation of the charter provision not in the sense of a contract but as one of the constitutional restraints of the corporation with regard to its shareholders. A charter provision that a corporation would use some or all of its income in the acquisition or construction of a plant, even though it were spread on the share certificates or stated in a written agreement with the shareholders, would not be ground for a credit. It would be an inhibition against distribution, but to regard it as a contract would defeat the plain purpose of the statute. There is no more virtue in a corporation’s undertaking with its shareholders to retire their shares out of earnings than there is in its undertaking to use its earnings for acquiring a capital asset. Cf. Alaska Sunset Mines, Inc., 44 B. T. A. 207.

The Commissioner’s determination is sustained.

Decision will be entered for the respondent.

      (c) Contracts Restricting Payment of Dividends.—
      (1) Prohibition of payment of dividends.—An amount equal to the excess of the adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. If a corporation would be entitled to a credit under this paragraph because of a contract provision and also to one or more credits because of other contract provisions, only the largest of such credits shall be allowed, and for such purpose if two or more credits are equal in amount only one shall be taken into account.


author: Mubdock:

text:
    American Dental Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102977.
    Promulgated May 7, 1941.

      John E. Hughes, Esq., for the petitioner.

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

Mubdock:

The petitioner, near the end of his brief, makes what might be construed as an argument that the forgiveness of this rent and this interest was not income. That point has really not been placed in issue in this case, but, in any event, the forgiveness of indebtedness to a solvent debtor is income to the extent that it frees assets of the debtor from claim. United States v. Kirby Lumber Co., 284 U. S. 1; Lakeland Grocery Co., 36 B. T. A. 289. This rule has been applied to the forgiveness of a debt for interest. Consolidated Gas Co. of Pittsburgh, 24 B. T. A. 331 and 901; United States v. Little War Greek Coal Co., 104 Fed. (2d) 483; Helvering v. Jane Holding Co., 109 Fed. (2d) 933. There was no contention here that the petitioner was insolvent.

The principal contention of the petitioner is that the forgiveness of the debt for the rent and the forgiveness of the debts for the interest occurred in prior years. It contends that the rent was forgiven in 1934 when John B. Mailers, Jr., the renting agent of the Mailers Building, told the president of the petitioner to pay him $7,500 and forget about the rest of the back rent. Although the record contains what might seem to be a verbatim statement of the conversation between the president of the petitioner and Mailers in April 1934, we think that, in fairness to the witness, his statement of the conversation should be regarded as no more than his present recollection of the substance of the 1934 conversation. Counsel for the respondent apparently thought that the witness’ statement of the 1934 conversation left ambiguous the question of whether or not the cancellation of the back rent was conditioned upon and was to await the payment of $7,500. He asked the witness whether or not the forgiveness of the back rent in the amount of $7,798.99 was conditioned upon the payment of the $7,500 and the witness replied in the negative. If this were the only evidence in the record, it would justify a finding that the forgiveness took place in 1934, but there is other evidence which, if it stood alone, would lead to the conclusion that the forgiveness took place in 1937 because it was conditioned upon and was to await the payment of the $7,500. This evidence consists of entries in the books of the petitioner and, particularly, entries in the books of the creditor. Those entries show further that the indebtedness for the back rent was not actually canceled on the books until 1937. Cf. Walker v. Commissioner, 88 Fed. (2d) 170; certiorari denied, 302 U. S. 692. There is thus a conflict in the evidence and the Board must decide which evidence is the more reliable. The conversation took place six and one-half years before the hearing and it is possible that the recollection of the witness is not entirely accurate as to the terms of the agreement. We are unwilling on this state of the record to make the finding essential to the petitioner’s argument, that the rent was canceled prior to 1937.

The same witness testified that the creditors to whom interest was owed had agreed unqualifiedly, in November 1936, to cancel all interest accruing on the notes after January 1, 1932. Here again, if his testimony stood alone, a finding that the debts were canceled prior to 1937 would be proper. But there is other evidence which casts serious doubt upon the accuracy of his testimony. The petitioner on its return for 1936, filed in March 1937, claimed a deduction for the interest accruing in 1936 on these same notes. The witness had signed that return and had sworn thereon that he had examined it and found it to be correct. Furthermore, entries on the books of the petitioner recording the cancellation of the interest were made for the first time in closing the books for 1937 and disclosure that the interest and the rent had been forgiven was made for the first time on the return for 1937. The attention of the witness was called, on cross-examination, to the inconsistency of his testimony as to the rent and interest and entries pertaining thereto on the books and returns. He was unable to reconcile the inconsistency or to give any satisfactory explanation thereof. Here again, the record does not justify a finding which would reverse the determination of the Commissioner that the debts were canceled in 1937. The petitioner next contends that the cancellation of the rent and interest items represented gifts. No evidence was introduced to show a donative intent upon the part of any creditor. The evidence indicates, on the contrary, that the creditors acted for purely business reasons and did not forgive the debts for altruistic reasons or out of pure generosity. In none of the four instances was the forgiveness a gift. Fitch v. Helvering, 70 Fed. (2d) 583; Reginald Denny, 33 B. T. A. 738; Rufus S. Cole, 42 B. T. A. 1110; Haden Co. v. Commissioner, 118 Fed. (2d) 285.

The Commissioner has included in income only that part of the forgiven debts which served to offset income in prior years. Cf. G. M. Standifer Construction Corporation, 30 B. T. A. 184; Helvering v. Jane Holding Co., supra; Pittsburgh Brewing Co. v. Commissioner, 107 Fed. (2d) 155. The petitioner does not claim that a larger amount should be included in income, but he makes a contention in his brief that the tax for 1937 can not exceed the actual tax benefit in dollars which the petitioner realized by deducting these items in prior years. This contention is rejected upon authority of Central Loan, & Investment Co., 39 B. T. A. 981, where a similar argument was made by the Commissioner. See also Estate of William H. Block, 39 B. T. A. 338, 341, where we said: “When recovery or some other event which is inconsistent with what has been done in the past occurs, adjustment must be made in reporting income for the year in which the change occurs.”

Decision will be entered, for the respondent.


author: Van Fossan:

text:
    Estate of Lester L. Fletcher, Deceased, Thomas L. Fletcher, Executor, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101174.
    Promulgated May 7, 1941.

      Joseph D. Peeler, Esq., for the petitioner.

      Samuel Taylor, Esq., and Byron M. Coon, Esq., for the respondent.
   OPINION.

Van Fossan:

The sole issue for our consideration is whether or not respondent erred in including in decedent’s gross estate certain property which petitioner alleges was owned by decedent’s wife. The applicable provisions of the statute are section 302 (c) of the Revenue Act of 1926, as amended by section 803 of the Revenue Act of 1932 and section 302 (e) of the Revenue Act of 1926.

Petitioner contends that Mrs. Fletcher contributed $1,000 cash and her services to the business of operating the store and that she, by agreement with decedent, became a tenant in common with an undivided one-half interest in all the property held by decedent. Petitioner maintains that when decedent and Mrs. Fletcher went to California and all their property was placed in joint tenancy Mrs. Fletcher’s interest as tenant in common formed one-half the consideration for the joint tenancy. Finally, petitioner contends that decedent and Mrs. Fletcher made an oral agreement on May 4,1937, which effected a partition of the jointly owned property so that at decedent’s death Mrs. Fletcher owned, as her separate property, investments valued at $207,249.94.

Respondent argues that petitioner has failed to prove the existence of an oral agreement between decedent and his wife at the time of their marriage and that he has not proved that there was a partition of the joint tenancy properties on May 4,1937.

Respondent also argues that unless Mrs. Fletcher contributed consideration to the joint tenancy the partition agreement of May 4,. 1937, must have caused a transfer in contemplation of death. Therefore, we find it necessary to consider the alleged oral agreement entered into by decedent and his wife shortly after their marriage. Mrs. Fletcher had capacity to enter into a contract with her husband. Ohio Rev. Stat., § 3112 (now Ohio G. C., § 7999).

We have found as a fact that decedent and Mrs. Fletcher agreed that Mrs. Fletcher should have a half share in decedent’s business and property and that that agreement continued in effect until the death of decedent. The evidence from which we made that finding is substantial. Mrs. Fletcher testified to the agreement. It was fully corroborated by other testimony. The fact that decedent later placed all the property in" joint tenancy, stating that it belonged equally to himself and his wife, indicates that decedent intended to give the oral agreement full effect and recognize its validity. The courts have considered similar evidence and testimony as to oral agreements between husband and wife and have found them sufficient proof of the existence of agreements. Richardson v. Helvering, 80 Fed. (2d) 548; Berkowitz v. Commissioner, 108 Fed. (2d) 319. The cases of Bushman v. United States, 8 Fed. Supp. 694, and Fox v. Rothensies, 115 Fed. (2d) 42, cited by respondent, are not controlling in the present proceeding, since the courts in those cases held that the evidence was not sufficient to establish a contract implied from the circumstances. In the instant case petitioner has established an express agreement. Mrs. Fletcher’s contribution of $1,000 and her services were adequate consideration for the agreement that she should have a one-half interest in the business and property. The proceeds from the sale of the store were invested in Cleveland real estate. Later, after the Fletchers moved to California, everything was placed in joint tenancy. It seems clear that Mrs. Fletcher’s share in the marital property before it was placed in joint tenancy was that of an undivided one-half interest as tenant in common. Thereafter it was that of a joint tenant.

Respondent has taken the position that there was no partition of the property held in joint tenancy by the agreement of May 4, 1937, and that all of the jointly owned property should be included in decedent’s estate. We are of the opinion, however, that petitioner has demonstrated that one-half of the consideration for the joint tenancy was furnished by Mrs. Fletcher. The original contribution of $1,000 and Mrs. Fletcher’s subsequent services in the store constitute “an adequate and full consideration in money or money’s worth.” See Richardson v. Helvering, supra. All subsequent accretions or accumulations related back to the original consideration.

There seems to be no question as to the validity of the oral partition agreement of May 4, 1937. Richardson v. Helvering, supra; Berkowitz v. Commissioner, supra; Estate of 3. Harold Dollar, 41 B. T. A. 869; Lagar v. Erickson, 13 Cal. App. (2d) 365. That agreement caused the inclusion in decedent’s estate for estate tax purposes of property of greater value than would have been includible if there had been no partition agreement. Decedent, by virtue of the partition, was enabled to leave property to his son and Mrs. Fletcher agreed to the disposition. Petitioner does not ask us to disturb the inclusion of the total value of the bearer bonds in decedent’s gross estate.

We have held that Mrs. Fletcher furnished adequate and full consideration in money or money’s worth for one-half of the jointly owned property. It is obvious that decedent did not make a gift of the real estate investments in contemplation of death. Decedent did not give his wife anything by the partition. If there were any gift involved Mrs. Fletcher, who received the smaller share, and not the decedent, would be the donor. The fact that one-half the property still remaining in the joint names of decedent and his wife at decedent’s death was erroneously reported on the estate tax return filed for decedent’s estate is not controlling. Petitioner has overpaid the tax due. The overpayment will be adjusted under Rule 50.

Petitioner incurred additional expenses in behalf of decedent’s estate relative to the deficiency in estate tax here under consideration. Effect will be given to those expenditures upon recomputation.

Decision will he entered under Rule 50.

       SEC. 803. FUTURE INTERESTS.
      (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 :
      “(c) 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 ifce 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.”

       Sec. 392. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      * ******
      (e) To the extent of the interest therein held as joint tenants by the decedent and any other person, or as tenants by the entirety by the decedent and spouse, or deposited, with any person carrying on the banking business, in their joint names and payable to either or the survivor, except such part thereof as may be shown to have originally belonged to such other person and never to have been received or acquired by the latter from the decedent for less than an adequate and full consideration in money or money’s worth: Provided, That where such property or any part thereof, or part of the consideration with which such property was acquired, is shown to have been at any time acquired by such other person from the decedent for less than an adequate and full consideration in money or money’s worth, there shall be excepted only such part of the value of such property as is proportionate to the consideration furnished by such other person: * * *