author: Arundell:

text:
    F. J. Young Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent. L. D. Pierson Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 74321, 74347.
    Promulgated April 9, 1937.

      L. T. Atherton, Esq., for the petitioners.

      I. Graf, Esq., for the respondent.
   OPINION.

Arundell:

These proceedings, duly consolidated, involve deficiencies in income taxes for the year 1930 in the amount of $80,314.59 in Docket No. 74321, and $30,674.59 in Docket No. 74347.

The issue involved is whether a distribution in kind made by a corporation to the petitioners as stockholders thereof constituted a dividend within the meaning of section 115 (a) and (b) of the Revenue Act of 1928 or a distribution within the meaning of section 115 (d) of the same act.

The facts were stipulated and we state herein only such facts as are necessary to an understanding of the questions involved.

The petitioners are Delaware corporations organized on March 29, 1930. At the time of organization they each acquired stock of Yeager, Young & Pierson, Inc., a New York corporation, as follows: 1,060 shares common, no par value; 70 shares 6 percent noncumulative preferred, $100 par value; and 37 shares 7 percent cumulative preferred, $100 par value.

At March 29, 1930, Yeager, Young & Pierson, Inc., hereinafter called Yeager, Inc., owned securities in other corporations, among which were 87,000 shares of stock in the Empire Corporation. The parties agree that the Empire Corporation shares, wore acquired by Yeager, Inc., in 1929 in a transaction on which no gain or loss was recognized under section 112 (b) (5) of the Revenue Act of 1928. The property exchanged by Yeager, Inc., for the Empire Corporation shares had a cost, and basis, of $36,000; the Empire Corporation shares received on the exchange had a fair market value of $957,000 when received in September 1929.

On April 3,1930, Yeager, Inc., declared a dividend on its common stock, payable in securities. Accordingly, on that date eacli of the petitioners, as owners of common stock of Yeager, Inc., received as a dividend securities having a fair market value of $221,758.74, including 19,061 shares of Empire Corporation stock of the fair market value of $190,610.

It was the practice of Yeager, Inc., at all times to carry its securities on its books, whether acquired for investment or resale, at cost. The cost to that corporation of the securities distributed by it on April 3, 1930, to its common stockholders was $121,931.

The holders of common stock of Yeager, Inc., were not required to and did not surrender their shares of stock in that corporation as a condition precedent to receiving the above distribution. The authorized capital of that corporation was not reduced prior to or coincident with the adoption of the above resolutions of April 3, 1930. Subsequent to such distribution of April 3,1930, Yeager, Inc., continued in business until 1932, when it became inactive due to financial difficulties.

The net income of Yeager, Inc., according to its books, from organization in 1927 to March 31, 1930, amounted to $284,347.79. During that period dividends paid by it in cash or accrued amounted to $64,389.42. In addition to cash dividends paid and accrued, the corporation in 1928 declared and paid a dividend on its common stock payable in its 7 percent preferred stock, which dividend was entered on its books as a charge to surplus in the amount of $17,144.22. Also in 1928 it increased the stated value of its common stock from $1 to $5 per share by transferring $19,372 from surplus account to common stock. In 1929 it again increased the stated value of the common stock by transferring to that account from surplus account the sum of $49,380, which was at the rate of $10 per share of common stock outstanding. The book surplus of Yeager, Inc., at April 1, 1930, was $134,062.15.

Each petitioner in its income tax return for 1930 included in gross income $206,518 as representing the fair market value of dividends in kind received from Yeager, Inc., and deducted an equal amount.

Section 23 (p) (1) of the Eevenue Act of 1928 allows corporations to take as a deduction “the amount received as dividends from a domestic corporation.” The petitioners claim a deduction under this section, saying that the Empire Corporation stock received from Yeager, Inc., was a dividend from the most recently accumulated earnings and profits of Yeager, Inc. The statutory provisions said to be applicable are subsections (a) and (b) of section 115 of the Revenue Act of 1928. These provisions are, in substance, that a “dividend” means any distribution out of corporate earnings and profits accumulated after February 28,1913, and that for the purposes of Title I of the act “every distribution is made” out of the most recently accumulated earnings or profits to the extent thereof. These provisions are quoted below. We are not concerned here with earnings or profits before 1913, as Yeager, Inc., was not organized until 1927. The respondent’s primary view is that subsection (d) of section 115 is controlling. That subsection, set out below, provides, in so far as here material, that any distribution not in liquidation and from a source other than earnings or profits shall apply first against the basis of the stock and any excess shall be treated as ordinary income. Thus the difference between the petitioners’ and the Commissioner’s view is whether or not the gain to Yeager, Inc., on the Empire Corporation stock transaction constitutes “earnings or profits” under section 115.

Yeager, Inc., in this case occupies the same position in the chain of transactions as did the Pratt & Whitney Co. in the case of Susan T. Freshman, 33 B. T. A. 394.

The similarity is readily apparent from the following comparison of the several steps in the two cases:

Freshman case

1. Pratt & Whitney Co., owning stock of Pratt & Whitney Aircraft Co., exchanged that stock solely for stock of United Aircraft Co.

2. Pratt & Whitney Co. declared and paid to its sole stockholder, Niles^ Bement-Pond Co., a dividend in the stock of United Aircraft Co.

This case

Yeager, Inc., owning stock of Empire Public Service Corporation, exchanged that stock solely for stock of Empire Corporation.

Yeager, Inc., declared and paid to its two stockholders, E. J. Young Corporation and L. D. Pierson Corporation, a dividend in the stock of Empire Corporation.

In the Freshman case the investment of the Pratt & Whitney ■ Co. in stock of the Pratt & Whitney Aircraft Co. had increased substantially by the time of the exchange, and the increase was reflected in the value of the stock received in exchange. In this case Yeager, Inc., invested $36,000 in stock of the Empire Public Service Corporation and it received therefor stock worth $951,000. In the Freshman case, speaking of the realization of the increase in value, we said:

The increase in value of the investment, which, after the exchange, was represented by the property received on exchange, was available for distribution as a dividend and was distributed by Pratt & Whitney [Co.] to its sole stockholder, Niles-Bement-Pond.

Earlier in the opinion we said that although the Pratt & Whitney Co. “realized a gain” on the exchange the gain was not recognized under section 112 (b) (3). Obviously the language quoted means an ordinary dividend as distinguished from liquidating dividends or other dividends treated specially in the statute. And the holding of that case, in so far as it involves the Pratt & Whitney Co., is that the gain on the exchange of stock for stock constitutes earnings or profits available for dividends even though that gain was of a character to come within the nonrecognition provisions. It is not a material difference that in the Freshman case the exchange was held to come within section 112 (b) (3), while here the parties have agreed that the exchange was one within section 112 (b) (5). Both are nonrecognition provisions. In Robert McCormick, Executor, 33 B. T. A. 1046, we held that a gain to a corporation under the exchange provisions of the Revenue Act of 1926 which was not recognized nevertheless “resulted in a realized gain” to the corporation and was available for dividends. In Helen Sperry Lea, 35 B. T. A. 243, we held that a profit realized by a corporation on an exchange— without deciding whether or not such profit was taxable income to the corporation — went into the corporate earnings and was available for dividends. These holdings are in line with the decisions to the effect that earnings or' profits are not the equivalent of taxable net income, Charles F. Ayer, 12 B. T. A. 284; R. M. Weyerhaeuser, 33 B. T. A. 594, and the Commissioner’s regulations of long standing providing that certain items of exempt income, when received by a corporation, become available for dividends to the same extent as other income. Art. 1541, Regulations 62, 65, and 69; art. 621, Regulations 74 and 77. The Ayer case involved distributions from a depletion reserve, which under the facts we held to be taxable dividends to the individual stockholder. We said in part:

This is not the only case where some income or profit free from tax in the hands of a corporation is, nevertheless, taxable to a stockholder upon distribution. Dividends on stock of domestic corporations, interest on bonds and obligations of States and municipalities, and statutory exemptions are not a part of the statutory net income of a corporation, but are nevertheless a part of its earnings or profits and may form a part of ordinary dividends which are taxable when received by the stockholders. On the other hand, corporations frequently make expenditures which are not deductible from gross income for income-tax purposes, but which nevertheless reduce earnings or profits. It therefore follows that the earnings or profits mentioned in section 201 (a) of the Revenue Act of 1021 are not the equivalent of the taxable net income of the corporation. In this connection see National Grocery Co., 1 B. T. A. 688, and Lynch v. Hornby, 247 U. S. 339.

Counsel for tlie respondent attempts a distinction between the effect of exempt income and nonrecognized income by saying that on the receipt of exempt income there is a realized gain or sustained loss — in short, a closed transaction. A similar distinction, without any stated reason therefor, is made in article 115-1 of Regulations 86, pertaining to the Revenue Act of 1934, in the provision th|it gains or profits under the reorganization and exchange provisions enter into earnings or profits “at the time they are recognized.” These regulations do not by their terms purport to be retroactive to reach transactions under the Revenue Act of 1928. The distinction attempted in argument does not seem based on any sound reasons. Nonrecognized income may be “realized” as fully, and may have as profound an effect on earnings or profits, as exempt income. Even cash income may be nonrecognized, as under the involuntary conversion provisions, but certainly it must affect earnings or profits. Likewise as to expenditures. We pointed out in the Weyerhaeuser case, supra, that items such as extraordinary expenses, charitable contributions, and Federal taxes, not deductible in computing taxable income, may nevertheless affect earnings or profits under ordinary methods of accounting. Nor do we see why an exchange coming within the nonrecognition provisions may not be a transaction that is “closed” as fully as one resulting in a recognized gain or loss. A transaction whereby a corporation, or an individual, becomes completely divested of ownership would seem to be “closed” whether or not anything is received in exchange.

The argument made does not convince us of error in the Freshman, McCormick, and Lea cases, supra, and, following them, we hold that the gain on the Empire stock transaction should be included in the “earnings or profits” of Yeager, Inc., within the meaning of section 115 (a) and (b) of the Revenue Act of 1928.

As to whether the' amounts capitalized in 1928 and 1929 should be considered in determining the earnings and profits available to Yeager, Inc., for distribution to its stockholders as dividends, it has been held that a stock dividend distributed by a corporation to its .stockholders “did not represent income under the provisions of our laws, as it did not in fact effect a distribution of corporate earnings.” Edward D. Untermeyer, 24 B. T. A. 906, 912; affirmed in Untermeyer v. Commissioner, 59 Fed. (2d) 1004; certiorari denied, 287 U. S. 647. In August Horrmann, 34 B. T. A. 1178, the Board stated:

Much of the argument here is addressed to the matter of the nature of dividends paid in stock and their effect on corporate earnings and surplus. A dividend in cash, of course, operates to diminish earnings and profits. A stock dividend of the type dealt with in Eisner v. Macomber, 252 U. S. 189, does not. Hugh R. Wilson, 3 B. T. A. 957; J. T. Hedrick, 24 B. T. A. 444; Edward D. Untermeyer, 24 B. T. A. 906; J. W. McCulloch, 29 B. T. A. 67; H. Y. McCord, 31 B. T. A. 342; Walker v. Hopkins, 12 Fed. (2d) 262. The dividend in the Eisner v. Macomber case, supra, was in common stock on stock of the same kind; here, it is in preferred stock on common stock, which was the only class outstanding.

If the issuance of stock as a dividend and the consequent capitalization of earnings and profits does not constitute a distribution and does not operate to diminish earnings and profits, much less does a mere book entry capitalizing earnings constitute a distribution or operate to diminish earnings and profits. The book entries took nothing from the corporation and gave nothing to the stockholders. Cf. August Horrmann, supra. The amounts transferred could have been retransferred at any time to surplus by the direction of the board of directors. We therefore hold that the amounts of $19,372 and $49,380 transferred from surplus in 1928 and 1929, respectively, to the no par common stock account should be included in the earnings and profits of Yeager, Inc., available for distribution in 1930.

At the hearing the petitioner also contended that the amount of $17,144.22, transferred from surplus account to the 7 percent cumulative preferred stock account upon the declaration and payment of a dividend of such preferred stock on common stock in 1928, should be restored to surplus for the purpose of determining the amount of earnings and profits available for dividends. Such contention, however, was omitted on brief of petitioners. Whether or not by so doing it was intended to waive such contention, in any event we are unable to determine from the facts before us whether that distribution constituted a taxable distribution or a stock dividend not subject to tax. Whether earnings and profits were reduced by such a stock dividend is dependent upon whether it was a taxable distribution or not. August Horrmann, supra. We are unable to determine whether or not both common and 6 percent and 7 percent preferred stock were outstanding when the 7 percent preferred stock dividend was distributed, Koshland v. Helvering, 297 U. S. 702, or whether at that time only common stock was outstanding. August Horrmann, supra. In the Koshland case a dividend of preferred stock oil common was held to be income, there being both common and preferred outstanding when such dividend was distributed, and in the Horrmann case a dividend, of preferred stock on common was held a pure stock dividend and not subject to tax, there being only common stock outstanding when the stock was distributed. Furthermore, it is not necessary for us to decide this question, since the book surplus of $134,062.15, increased by the gain on the Empire Corporation stock transaction in the amount of $921,000 and the $68,752 transferred from the surplus account to the no par common stock account, exceeds the fair market value of the securities distributed on April 3, 1930.

Decision will be entered wnder Bule 50.

       SEC. 115. DISTRIBUTIONS by corporations.
      (a) Definition of dividend. — The term “dividend” when used in this title (except in section 203 (a) (4) and section 208 (c) (1), relating to insurance companies) means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1913.
      (b) Source of distributions. — For the purposes of this Act every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits. Any earnings or profits accumulated, or increase in value of property accrued, before March 1, 1913, may be distributed exempt from tax, after the earnings and profits accumulated after February 28, 1913, have been distributed, but any such tax-free distribution shall be applied against and reduce the basis of the stock provided in section 113.

      (d) Other distributions from capital. — If any distribution (not in partial or complete liquidation) made by a corporation to its shareholders is not out of increase in value of property accrued before March 1, 1913, and is not out of earnings or profits, then the amount of such distribution shall be applied against and reduce the basts of the stock provided in section 113, and if in excess of such basis, such excess shall be taxable in the same manner as a gain from the sale or exchange of property. The provisions of this subsection shall also apply to distributions from depletion reserves based on the discovery value of mines.


source: Caselaw Access Project

author: Arnold:

license: Public Domain

text:
    Empire Trust Company, Levis A. Hamilton, Alexander Hamilton, Executors of Levis C. Hamilton, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78539.
    Promulgated April 14, 1937.

      Albert F. Hilliea, Esq., asid John M. Miller, Esq., for tbe petitioners. Olay O. Holmes, Esq., and Ed L. Weber, Esq., for the respondent.
   OPINION.

Arnold:

Respondent determined a deficiency in estate tax of $3,892.88 against the decedent, who died April 27,1931. It is alleged that the Commissioner erred in denying as a deduction from the gross estate an amount of $50,000 paid to decedent’s widow under an antenuptial agreement between her and her husband. The case was presented on stipulation and evidence. The facts are not in controversy.

The petitioners are the duly appointed, qualified, and acting executors of the estate of Levis C. Hamilton, deceased, who died testate and whose last will and testament and the codicils thereto were duly admitted to probate in the Supreme Court of the District of Columbia, holding probate court, on the 14th of May 1931.

On September 30, 1924, the decedent, Levis C. Hamilton, then a resident of the District of Columbia, entered into a contract in the District of Columbia with Katherine W. Bonnie, which contract is as follows:

This Contract and Agreement made in contemplation of marriage entered into on this thirtieth day of September, 1924, by and between L. O. Hamilton of Washington, District of Columbia and Katherine W. Bonnie of Louisville, Kentucky, witnesseth:
That Whereas a marriage is intended and desired to be solemnized between the parties hereto, and
Whereas each of said parties is now possessed in their own right of a considerable estate which they mutually desire to retain manage or dispose of separately by gift, will or otherwise, and' to the same extent as if they each remained single, and as to which said estates they mutually desire to contract with each other prior to their said marriage;
Now Therefore It Is Agreed by and between the parties hereto in consideration of the marriage to be solemnized between them and in consideration of the further agreements herein after set out, and the mutual understanding and undertakings herein made as follows:
That each of the parties hereto shall retain the title, management and control of the estates now owned by them, whether real, personal or mixed, and all increase or addition thereto entirely free and unmolested by the other party and may encumber, sell, dispose, give or provide by will for the disposition of, any or all of said estates so separately owned and possessed; that at the death of either, no claim by inheritance, descent, dower or curtesy, or maintenance shall be made by either of the parties hereto against the other, or against the estate of the other; that each of the parties hereto do separately waive any and all rights by dower, curtesy, or by any statute given by virtue of marriage in and to any part or parcel of the estate now owned and possessed by the other, and do hereby agree and consent that each shall have full power and control in all respects to exercise free and undisturbed ownership, management and disposition of the estates and increases thereto now owned and possessed by said parties, and each of said parties does waive and renounce any legal and statutory rights that might by any law be alleged and set up against any part or parcel of the estate of the other and does consent that the estate of each shall descend or be disposed of by will to the heirs or legatees or devisees of each of said parties free and clear of any' claim by inheritance, dower, curtesy, maintenance or any claim otherwise given by law to a husband and wife.
It is further agreed that if the party of the second part should survive party of the first part, that in the event the sum of Fifty Thousand ($60,000) Dollars shall be paid to said second party in further complete extinguishment of all and any claims given by law and which have been.in this instrument expressly waived and renounced.
In Witness Whereof the parties hereto have this 80th day of September, 1924, signed and sealed this instrument in duplicate and before witnesses.
L. O. Hamilton
Party of First Part
Katherine W. Bonnie
Party of Second Part
Witnesses:
Kathleen W. Noel
Walter F. Long

Shortly thereafter, on November 18, 1924, the parties to the contract were married and continued to be man and wife until the death of Hamilton, which occurred in the District of Columbia on April 27, 1931.

At the time the antenuptial contract was made and at the time of his death, decedent was possessed of personal property valued at approximately $1,000,000, and Katherine W. Bonnie was possessed of an estate of a very substantial amount. At the date of making the contract Levis C. Hamilton! was 67 years of age and Katherine W. Bonnie was approximately 57. Hamilton had not been married previously. He left no children or descendents of a deceased child nor father, mother, brother, or sister, but did leave surviving him two nieces and five nephews. Katherine W. Bonnie had previously married and was a widow at the time of her marriage to Hamilton.

Paragraph 3 of decedent’s will is as follows:

3. I give and bequeath, to my beloved wife, Katherine W. Hamilton, the sum of Fifty Thousand and no/100 Dollars ($50,000.00) in cash, said sum being the amount specified in a certain written antenuptial agreement.

By paragraph 4 of the will the testator gave and bequeathed to the Empire Trust Co. of St. Joseph, Missouri, as trustee, $300,000 at par of the nontaxable securities belonging to his estate, in trust for his wife so long as she should live, the securities to be set aside beforej specifying any other bequests contained in the will and the income therefrom to be paid quarterly to the widow. Upon her death the trust was to cease and the securities held in trust at that time were to be distributed in specified amounts to 12 named beneficiaries. Other bequests were made to other beneficiaries and one-half of the residuary estate was bequeathed to Alexander Hamilton and one-half to Levis A. Hamilton, nephews of the testator.

A day or two after the decedent’s death W. F. Enright, president of the Empire Trust Co. and one of the executors and trustees under the will, had a conversation with Mrs. Hamilton relative to her claim. At that time Mrs. Hamilton produced the original ante-nuptial agreement for his inspection and inquired if there was any procedure which she would be required to take concerning it. Mrs. Hamilton had made a demand of one Schooley, attorney for the estate, for the payment of the $50,000 provided in the agreement, and Schooley advised Enright of this fact.

Enright discussed the matter with his coexecutors and they concluded that the agreement was a valid claim against the estate and should be paid. Mrs. Hamilton was informed by Enright that he felt confident the executors intended to pay the claim and there was no necessity for her to file a claim. The estate did not have enough money in cash to pay the $50,000 and Enright discussed the matter with Mrs. Hamilton and explained to her that in order to meet the obligation the executors would have to sell securities at a- considerable discount. Thereupon Mrs. Hamilton agreed to waive payment for a period of at least a year, provided she was paid one year’s interest at that, time on the $50,000. Enright secured the approval of this plan of the heirs and coexecutors and Mrs. Hamilton was paid $3,000 as interest on the $50,000 which she claimed under her contract, and she executed the following receipt:

I, Katherine W. Hamilton, widow of the late Levis O. Hamilton, do hereby acknowledge to have received the sum of Three Thousand Dollars ($3,000.00) from the Executors of the Estate of Levis O. Hamilton, deceased, the same being a voluntary advance of interest on Fifty thousand dollars antenuptial contract at the rate of six per centum from April 27, 1931 to April 27, 1932.
In accepting this sum, I hereby release the executors of the Estate of Levis O. Hamilton, from any further payments until April 27, 1932.

At the expiration of the year Mrs. Hamilton was paid $50,000 from the assets of the estate by the delivery to her of $33,500 in cash and 150 shares of Potomac Electric Power Co. preferred stock at the agreed market value of $110 per share, totaling $16,500, and a receipt prepared by the attorney for the estate was signed by her. The receipt signed was as follows:

I, the undersigned, Katherine W. Hamilton, of the District of Columbia hereby acknowledge to have received from the Empire Trust Company, Levis A. Hamilton and Alexander Hamilton, Executors of the estate of Levis C. Hamilton, deceased, No. 41,958, the sum of Fifty-thousand dollars ($50,000.00) under paragraph 3 of the will of Levis C. Hamilton, which is in full payment of a certain written antenuptial agreement.
In testimony whereof I have hereunto signed my name and affixed my seal this 17th day of May A. D. 1932.
[Signed] Katherine W. Hamilton
Witness:
A. J. Upton

The $50,000 was paid by the executors as set out above without a formal order of the Supreme Court of the District of Columbia acting as probate court. All other debts and claims against the estate were paid in like manner, the executors relying upon the approval of the payment by the court when the final settlement should be made. The receipt was drawn by the attorney in the particular way in order to evidence the fact that the executors had paid the $50,000 in conformity with the antenuptial agreement and paragraph 3 of the will.

The executors filed a report in the court showing how they had disbursed the moneys of the estate, which report was approved by the court. The report notes payment of the $50,000 as follows:

Said balance partially distributed in accordance with the provisions of the last will and testament of Levis O. Hamilton, deceased, as follows: * * * Mrs. Katherine W. Hamilton, par. 3, I give and bequeath unto my beloved wife the sum of $50,000.00 in cash, said sum being the amount specified in a certain written antenuptial agreement, $50,000.00.

The petitioners contend that the payment by the executors to Mrs. Hamilton was in satisfaction of her claim against the estate under the antenuptial contract based upon the consideration of marriage and is deductible as a claim against the estate contracted in good faith for an adequate and full consideration in “money or money’s worth.”

The respondent denied the deduction on the ground that the consideration of marriage and the relinquishment of dower and other marital rights in her husband’s property was not to any extent a consideration in “money or money’s worth” within the meaning of section 303 (a) (1) of the Revenue Act of 1926, and in this connection calls our attention to section 801 of the Revenue Act of 1932.

The applicable portion of the statute is set out in the margin. We think it is clear that the purpose of the Revenue Act of 1926 was to include in the gross estate of the decedent the value of all property at the time of death which passed from the dead to the living to the extent of any interest which the decedent had therein. In Reinecke v. Northern Trust Co., 278 U. S. 339, the Supreme Court said: “In its plan and scope the tax is one imposed on transfers at death or made in contemplation of death and is measured by the value at death of the interest which is transferred.” In Crocks v. Loose, 36 Fed. (2d) 571, the court said:

Second, tlie Federal Estate Tax Law is not concerned primarily with the character of the interest or estate acquired by the beneficiary, or its subsequent status; but the law is primarily concerned with the ceasing of the interest of the decedent in the property, with the “shifting of economic benefits” of property from the decedent. If there is such a ceasing of the interest of the decedent, such a “shifting of economic benefits,” the federal estate tax comes into play.

In the instant case if there had been no antenuptial agreement and the widow had taken under decedent’s will there would have been a transfer and the value of the interest taken would have been included in the gross estate, United States v. Dietz, 33 Fed. (2d) 576; Jacobs v. Commissioner, 34 Fed. (2d) 233.

If there had been no antenuptial agreement and the decedent had died intestate there would have been a “transfer” and the value of the dower rights or statutory interests taken by the decedent’s widow would have been included in the gross estate. Allen v. Henggeler, 32 Fed. (2d) 69.

The antenuptial agreement provided that, in consideration of marriage and further agreements, the parties would retain the title management and control their respective estate and mutually waive all rights by dower, curtesy, or by any statute given by virtue of the marriage and:

It is further agreed that if the party of the second part should survive party of the first part, that in the event the sum. of Fifty Thousand ($50,000) Dollars shall be paid to said second party in further complete extinguishment of all and any claims given by law and which have been in this instrument expressly waived and renounced.

It is clear therefore that the death of L. C. Hamilton was a condition precedent to the vesting in Mrs. Hamilton of the right to receive the $50,000 “in further complete extinguishment of all and any claims given by law and which have been in this instrument expressly waived and renounced.” The $50,000 was the property of Hamilton at the time he died, and the right of his wife therein did not accrue or become consummate either under the agreement or by virtue of any statute until he died. At the moment of death it passed from the decedent to his estate and at the same instant it was acted upon by the agreement and his executors became bound to pay it to his widow. But simultaneously with the transfer the Federal estate tax accrued upon the transfer of the property from the dead to the living, cf. Knowlton v. Moore, 178 U. S. 41; Reinecke v. Northern Trust Co., supra, and became a lien upon the estate. It makes no difference, therefore, whether we consider the widow as taking as a beneficiary under the will, or as a purchaser for full and adequate consideration by the use of her statutory marital interest which was transferred from the decedent, the amount paid her by the executors is subject to the estate tax, cf. Crooks v. Loose, supra, and must be included in the gross estate. To hold otherwise would, we think, allow any spouse to nullify the plain intendment of the law by entering into an agreement whereby his wife would receive, after his death, an amount in lieu of dower or the marital interest provided by statute. Clearly section 302 (b) intended to include such statutory interests in the gross estate and we think an amount paid in lieu of such interests must also be included.

Nor do we think the $50,000 is deductible from the gross estate under section 303 (a) (1) of the Revenue Act of 1926. As indicated above, the statute specifically includes in the gross estate any interest of the surviving spouse existing as dower, curtesy, or by virtue of a statute creating an estate in law of dower or curtesy. We do not think it is open to a construction that would permit an evasion of the clear intention of Congress, by the simple means of creating an estate by contract, in lieu of the statutory marital estate of the surviving spouse and asserting the amount thereof as a claim against the estate of the decedent. This construction is evidenced by section 804 of the Revenue Act of 1932, which amended section 303 (d) of the Revenue Act of 1926 by adding at the end thereof a new sentence which is declaratory of what the law was. Section 804 reads in part as follows:

Por the purposes of this title, a relinquishment or promised relinquishment of dower, curtesy, or of a statutory estate created in lieu of dower or curtesy, or of other marital rights in the decedent’s property or estate, shall not be considered to any extent a consideration “in money or money’s Worth.”

This construction by Congress is consistent with the broad purpose of the estate tax and clarifies any ambiguity that might otherwise attach to the statute.

Decision will he entered for the respondent.

      ( Revenue Act of 1926.)
      Sec. 302. 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—
      (a) To the extent of the interest therein of the decedent at the time of his death ;
      (b) To the extent of any interest therein of the surviving spouse, existing at the time of the decedent’s death as dower, curtesy, or by virtue of a statute creating an estate in lieu of dower or curtesy ;
      (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, except in ease of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *
      Sec. 303. For the purpose of the tax the value of the net estate shall be determined—
      (a) In the case of a resident, by deducting from the value of the gross estate—
      (1) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebtedness in respect to, property (except, in the case of a resident decedent, where such property is not situated in the United States), to the extent that such claims, mortgages, or indebtedness were incurred or contracted bona fide and for an adequate and full consideration in money or money’s worth * * *

         The Report of the Finance Committee of the Senate Revenue Bill of 1932, p. 60, section 804, recites, in part as follows :
      “This amendment excludes, in determining ‘consideration in money or money’s worth,’ the value of a relinquished, or a promised relinquishment of, dower, curtesy, or other martial rights in decedent’s property. Section 302 (a) and (b) of the 1926 act require the value of such an interest to be included in the gross estate, and, if its value may, in whole or in part, constitute a consideration for an otherwise taxable transfer (as has been held to be so), or an otherwise unallowable deduction from the gross estate, the effeet produced amounts to a subversion of the legislative intent expressed in section 302 (a) and (b).”


author: Aenold :

text:
    Michael Pontarelli, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83199.
    Promulgated April 14, 1937.

      George K. Bowden, Esq., for the petitioner.

      O. W. Sweaker, Esq., for the respondent.

      Frederic Burnham,, Esq., and Harry Thom, Esq., as amicus curiae,

   OPINION.

Aenold :

Petitioner assails respondent’s determination that interest received by him on improvement bonds issued by the city of Chicago is subject to Federal income tax.

The city of Chicago is a municipal corporation and as such is a political subdivision of the State of Illinois, with power and authority to make local improvements and defray the cost thereof by special assessment upon contiguous property, or by general taxation or otherwise as it by ordinance may prescribe. It is authorized, for the purpose of anticipating collection of the second and succeeding installments of any special assessment proposed, to issue bonds payable out of the proceeds of such installments and bearing interest at a rate of not more than 6 percent and not less than 4 percent, payable annually. Prior to March 1, 1932, pursuant to its statutory power and authority in that respect, it made certain local improvements financed by special assessments imposed upon contiguous property and had issued certain bonds in anticipation of its collection of deferred installments of such special assessments, a portion of which bonds were outstanding throughout petitioner’s fiscal year ended February 28, 1933.

JBy section 90 of the Local Improvement Act of Illinois, the city is required to cause a valid special assessment or assessments to be levied and collected and pay bonds from the collections so made until all issued shall be fully paid, and any holder of the bonds is entitled to some right of relief by way of mandamus or injunction to enforce the city’s obligation in that regard. The improvement of the municipal sewer system, for payment for which the bonds were issued to anticipate the collection of special assessments levied, is a governmental function. Halsey v. Commissioner, 75 Fed. (2d) 234; (App. D. C.); John B. Hittell, 33 B. T. A. 276; Brush v. Commissioner, 300 U. S. 352. The face amount of the bonds, together with 5 percent annual interest, was payable solely out of the city treasurer’s collections of deferred installments of the assessments imposed upon contiguous property. A municipality’s issuance of improvement bonds, so payable, is authorized by the Local Improvement Act of Illinois, which expressly limits the city’s liability thereunder to a proper payment of the amount collected under the assessments, levy, and collection to be made by the city with all reasonable diligence.

The interest on petitioner’s bonds issued by the city of Chicago and the city’s promise to repay borrowed funds fall literally within the terms of section 22 (b) (4) of the Revenue Act of 1932, providing that interest on the obligations of a political subdivision of a state “shall not be included in the gross income and shall be exempt from taxation * * The bonds, moreover, are prima facie within the narrowed meaning of the term “obligation”, which for the purposes of the subdivision has been restricted to such “as might be ‘issued’ in the exercise of the borrowing power of the state.” United States Trust Co. of New York v. Anderson, 65 Fed. (2d) 575; (C. C. A., 2d Cir.); certiorari denied, 290 U. S. 683. See also Kansas City Southern Railway Co., 16 B. T. A. 665, reversed other point, 52 Fed. (2d) 372; (C. C. A., 8th Cir.); certiorari denied, 284 U. S. 676.

But although petitioner’s bonds were issued by the city and expressly recite its promise to pay principal and interest, the courts of Illinois have consistently held that the municipality is not obligated under the terms of such instruments, whether denominated bonds, notes, or tax warrants, except in the capacity of trustee for the collection and proper distribution of the proceeds of assessments made applicable to their satisfaction. Hoehamer v. Village of Elmwood Park, 361 Ill. 422; 198 N. E. 345; Rothschild v. Village of Calumet Park, 350 Ill. 330; 183 N. E. 337; Bankers Life Co. v. Village of Elmwood Park, 280 Ill. App. 524; Wells v. Village of Wilmette, 193 Ill. App. 30. In Norfolk & Western Railway Co. v. Board of Education of Chicago, 14 Fed. Supp. 475, the District Court for Northern Illinois so held in respect of tax anticipation warrants, which, like petitioner’s bonds, recited the promise of the city and of the board of education to pay the bearer a specified amount at a specified date out of 75 percent of the proceeds of a general school tax levy for 1929. Judge Woodward remarked therein that there was no primary obligation to pay resting either on the city or the board. In Berman v. Board of Education of Chicago, 360 Ill. 535; 196 N. E. 464, involving the same warrants, the Supreme Court of Illinois likewise held that:

* * * Such warrants do not constitute, and can not be construed as constituting, any promise of payment, either express or implied, on the part of the taxing body issuing them. * * *

and, under the theory that they were not debts of the city, it enjoined the issuance of municipal bonds designed to provide funds for covering- deficiencies in collections of the tax levy which alone had been pledged for payment. See also People v. Nelson, 344 Ill. 46; 176 N. E. 59.

Notwithstanding the holding of the Illinois courts that the city was obligated not as principal under petitioner’s bonds but as trustee charged with the duty of spreading and collecting the pledged assessments and a proper distribution of the proceeds to the bondholders, we are of the opinion that the interest on petitioner’s bonds is exempt from Federal income taxes. In two office decisions, O. D. 447, 2 C. B. 93, and O. D. 491, 2 C. B. 93, the Commissioner ruled in 1920 that municipal bonds, similar to petitioner’s in all material respects, were to be considered the obligations of a political subdivision of a state within the meaning of section 213 (b) (4) of the Revenue Act of 1918, which is identical with section 22 (b) (4) of the Revenue Act of 1932. The series of regulations issued by the Commissioner pertaining to the several revenue acts contain nothing which would exclude such bonds from the purport of the section, and the continuous validity of such construction has recently been recognized in G. C. M. 13469, XIII-2 C. B. 125, which, in holding taxable the interest on tax bills issued by a city, but reciting an indebtedness of the assessed lot owner to the bill holder, distinguished O. D. 477 and O. D. 491 on the express ground that they involved bonds which were obligations of the issuing municipality.

The provisions of section 22 (b) (4) of the Revenue Act of 1932 have been successively reenacted without change in every revenue act since 1913. As the cited rulings of the Commissioner indicate a consistent application of the law since 1920, we are of the opinion that legislative sanction attached to the administrative construction that such bonds as petitioner’s are to be treated as the obligations of a political subdivision of a state, and accordingly hold that interest on them should not be included in the recipient’s gross income. Massachusetts Mutual Life Insurance Co. v. United States, 288 U. S. 269; United States v. Dakota-Montana Oil Co., 288 U. S. 459; Brewster v. Gage, 280 U. S. 327. Cf. 30 Op. Atty. Gen. 252, and opinion of Attorney General Cummings of February 4, 1937.

Respondent has submitted no brief in support of his determination, but at the hearing directed our attention to G. C. M. 13469 as expository of his views. For the reasons above given, we are of the opinion that the postulated terms of tax bills therein considered are distinguishable from petitioner’s bonds.

Judgment will T>e entered under Rule 50.

       Cahill’s Revised Statutes of Illinois, 1935, ch. 24, secs. 167, 201, 216, 218, 222.

       Sec. B. Act of 1913: sec. 4, Acts of 1916 and 1917; sec. 213 (b) (4), Acts of 1918, 1921, 1924, and 1926; sec. 22 (b) (4), Acts of 1928, 1934, and 1936.

       Art. 83, Regulations 33; art. 74, Regulations 45, 62, 65, 69 ; art. 84, Regulations 74, 77; art. 22 (b) (4) — 1, Regulations 86, 94.


author: Van Fossan:

text:
    The First National Bank of Skowhegan, Maine, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77165.
    Promulgated April 16, 1937.

      Franklin R. Chesley, Esq., for the petitioner.

      E. C. Adams, Esq., for the respondent.
   opinion.

Van Fossan:

This proceeding involves a deficiency of $869.33 in income taxes for the calendar year 1931. The question presented is whether the taxpayer is entitled to a $10,000 deduction, being the amount paid by petitioner to a second bank in consideration of such bank assuming the liabilities of a certain trust company, for the alleged purpose of protecting petitioner against losses that would have resulted if the trust company had been involuntarily closed.

Throughout the calendar -year 1931 petitioner conducted a banking business in Skowhegan, Maine. During the early part of 1931 the Skowhegan Trust Co. and the Skowhegan Savings Bank were also engaged in the banking business in Skowhegan. The three banks had approximately 14,000 depositors and combined assets aggregating approximately $10,000,000.

At March 31,1931, the national bank examiner determined that the securities owned by petitioner had a value $51,962 below their book value, and later, on August 31, 1931, he determined that petitioner’s securities were $87,521 below their book value.

On or about May 1, 1931, the Skowhegan Trust Co. was in serious financial difficulty, a situation that was brought to the attention of petitioner’s officers by the state banking commissioner. The Trust Co.’s capital stock was $50,000 and it needed $73,500 of new funds to make it solvent. At or about that time the officers of the Trust Co. approached petitioner to see if a merger could be effected, but petitioner rejected the proposal.

Shortly thereafter the banking commissioner approached the petitioner and the Skowhegan Savings Bank a second time, urging the importance of immediate action and advising that unless the added capital was available within two or three days the Trust Co. would be closed.

On- May 1, 1931, the Augusta Trust Co. of Augusta, Maine, was operating nine branches. It agreed to take over the assets of the Skowhegan Trust Co., subject to liabilities, other than to stockholders, provided it received $73,500 under a certain agreement dated May 2, 1931, the terms of which are hereinafter set forth.

With this information petitioner’s board of directors, at a special meeting on May 2, 1931, obligated the bank to pay $10,000 to the Augusta Trust Co. The resolution stated that the petitioner, certain named individuals, and the Skowhegan Savings Bank “severally covenant and agree” to pay Augusta Trust Co. the amounts set opposite their names in consideration for the latter assuming all the liabilities of the Skowhegan Trust Co., except its liabilities on capital stock or to stockholders as such.

As of the same date, May 2, 1931, petitioner and the Skowhegan Savings Bank each obligated itself for $10,000, and the named individuals obligated themselves to pay the sums set opposite their names, provided the Augusta Trust Co. assumed the liabilities as aforesaid. The opening paragraph of the agreement states that “Whereas it would be detrimental to the best interests” of the petitioner “and would depreciate the value of its assets and the securities of its loans for the Skowhegan Trust Company, * * * to go into voluntary liquidation, and whereas such action was eminent \_sic] and threatened”, that if Augusta Trust Co., on or before May 5, 1931, assumes all the liabilities of Skowhegan Trust Co., except as noted, that the parties thereto would severally pay Augusta Trust a total of $73,500.

Among the parties obligating themselves to pay specified sums to the Augusta Trust Co. under the above agreement were four stockholders of the petitioner, three individuals, and the Skowhegan Savings Bank. The three individuals obligated themselves to pay $35,000.

On May 7, 1931, petitioner paid the Augusta Trust Co. $10,000 by draft drawn on the National Shawmut Bank of Boston. This payment was charged on petitioner’s books to its profit and loss account.

The Augusta Trust Co. acquired the assets and assumed the liabilities of the Skowhegan Trust Co. on June 15, 1931, and thereafter it .operated the same as a branch.

.During the taxable year petitioner’s outstanding capital stock amounted to $150,000. Its surplus and undivided profits account at May 7,1931, amounted to $501,935.97. It paid semiannual dividends on its stock of 5 percent each on May 1 and November 1, 1931.

Petitioner had no financial interest in the Skowhegan Trust Co. at any time during 1931. No agreement was made respecting the repayment of the $10,000 paid to the Augusta Trust Co., and the repayment thereof was not expected.

On its income tax return for the calendar year 1931 petitioner treated this $10,000 payment as a deduction from its gross income, reporting a net income for the year of $241.40. The respondent disallowed the deduction for the reason “that a contribution to competitive business in order to save it from bankruptcy and thereby avoid a run on taxpayer’s business does not constitute an ordinary and necessary expense of doing business, * *

In his brief respondent contends that the law applicable to national banks, Revised Statutes 5136, and the Revenue Act of 1928, must be construed together; that, when so construed, the evidence must show that in paying the $10,000 petitioner lawfully exercised •an incidental power granted to it under the National Banking Act; that the exercise of such incidental power was imperative and necessary to the conduct of its banking business; that the power was exercised by its board of directors or duly authorized agents subject to law; and that the $10,000 expenditure was an ordinary and necessary expense within the purview of the 1928 Act, paid by petitioner in 1931.

Stated differently, respondent’s first contention • regarding this issue is that petitioner exceeded its corporate powers in entering into the contract and in making the disbursement. If respondent is correct in this contention the contract was ultra, vires, and petitioner's acts were void under the Federal rule, Central Transportation Co. v. Pullman's Palace Car Co., 139 U. S. 24; McCormick v. Market Bank, 165 U. S. 538; California Bank v. Kennedy, 167 U. S. 362, it being too well settled to admit of any doubt tbat the Federal statutes relative to national banks constitute the measure of their authority. A national bank can not rightfully exercise any powers except those expressly granted, or which are incidental to carrying on its business of banking. California Bank v. Kennedy, supra; First National Bank v. Missouri, 263 U. S. 640; Texas & Pacific Railway v. Pottorff, 291 U. S. 245.

Section 5136 of the Revised Statutes, 12 U. S. C. A. 24, sets forth the corporate powers of national banking organizations. The contract which petitioner entered into on May 2, 1931, does not, in our opinion, fall under any of the so-called “express” powers referred to in section 5136. While the statute grants the right to make contracts, this grant necessarily relates to contracts within the scope of its business. Dresser v. Traders National Bank, 165 Mass. 120; 42 N. E. 567. If, therefore, the contract and payment pursuant thereto is intra vires, it must be based upon and arise out of the exercise of an incidental power, First National Bank v. Converse, 200 U. S. 425; California Bank v. Kennedy, supra; Logan County Bank v. Townsend, 139 U. S. 67.

Can it be said that the payment here involved was made in the exercise of an incidental power of the petitioner ? The question is clear-cut. The right of the bank to make the payment was duly considered, passed upon, and authorized by petitioner’s board of directors. The directors were faced with a situation which was, in their opinion, desperate. In their judgment irreparable loss faced the bank, its stockholders, and its depositors unless quick and positive action was taken.. Securities owned by the bank were $51,000 below their book value and declining. The closing of one bank in the community by the state banking authorities might shatter public confidence and cause a run on the community’s two remaining banks. The imminence of heavy cash withdrawals by frightened and panic-stricken depositors would necessitate large amounts of cash on hand. Assets would have to be sacrificed, and the bank would inevitably suffer losses therefrom. We are of the opinion that judicial notice can be taken of the fact that banks, thoroughly sound financially, can not withstand the continuous and insistent withdrawals of cash by their depositors without sustaining a loss, and that this is particularly true in periods of depression when public confidence is at its lowest ebb. In the opinion of the directors, unless action was taken petitioner faced the alternative of possible ruin or, at the least, losses in excess of the $10,000 expenditure here involved.

We have carefully, but unsuccessfully, searched the decided cases for situations four-square to the facts herein. Respondent suggests that the instant case presents a situation closely akin to that in which one bank undertakes to guarantee the payment of debts of another.

The general rule undoubtedly is that a national bank may not lend its credit to another by becoming surety, endorser, or guarantor. Howard & Foster Co. v. Citizens’ National Bank (S. C.), 130 S. E. 758; Dewey Column & Monumental Works v. Ryan (Iowa), 221 N. W. 800; Farmers & Miners Bank v. Bluefield National Bank, 11 Fed. (2d) 83; certiorari denied, 271 U. S. 669; Nakdimen v. First National Bank (Ark.), 6 S. W. (2d) 505; certiorari denied, 278 U. S. 635; O’Connor v. Bankers Trust Co., 289 N. Y. S. 252; Gardiner Trust Co. v. Augusta Trust Co. (Me.), 182 Atl. 685; 7 C. J. 595.

It does not follow, however, that a bank can not, under any circumstances, enter into a contract of guaranty. On the contrary, it may so contract if the guaranty is for its own benefit and is incidental to the banking business. Southern Exchange Bank v. First National Bank of Dublin, 37 Ga. App. 645; 141 S. E. 323; Ellis v. Citizens’ National Bank, 25 N. M. 319; 183 Pac. 34; 6 Fletcher, Cyclopedia Corporations, ¶2592; Norton Grocery Co. v. People’s National Bank, 144 S. E. 501; People’s Bank v. National Bank, 101 U. S. 181.

Furthermore, a national bank can validly contract to take over the assets and assume the liabilities of another bank in the exercise of its ordinary powers as a banking corporation. Schofield v. State National Bank, 97 Fed. 282; Wyman v. Wallace, 201 U. S. 230; City National Bank of Huron v. Fuller, 52 Fed. (2d) 870; Wannamaker v. Edisto National Bank of Orangeburg, 62 Fed. (2d) 696.

The petitioner here did not take over the assets or assume the liabilities of another bank, nor did it guarantee the debts of Skowhegan Trust. It agreed to and did furnish $10,000 of the additional capital demanded of Skowhegan Trust by the state banking authorities. Part of the consideration received by petitioner for this expenditure was the agreement by Augusta Trust that it would taka over the assets and assume the liabilities of Skowhegan Trust. Under the doctrine of Wyman v. Wallace, supra, petitioner itself, could have taken over these assets and assumed the liabilities; but the directors rejected this suggestion. It was, however, their opinion that the assumption of the burden by Augusta Trust was worth $10,000 to petitioner.

The directors realized the embarrassing and possibly disastrous consequences which would flow from a failure of the Skowhegan Trust Co. to open its doors. As a matter of self-preservation of their own institution, this contract offered the most satisfactory solution of a serious problem. In any event petitioner stood to lose as a result of banking conditions in Skowhegan. The directors selected the avenue of escape which appeared to offer the minimum loss. It is difficult to see from this record how any other alternative could have better safeguarded petitioner’s own depositors and stockholders. We are satisfied that where circumstances force a bank to act for its own self-protection, the power to so act will be found in the incidental powers necessary to carry on the business of banking.

Prior to the banking crisis of 1938 many of the stronger banks of the country were forced to aid weaker members in order to protect their own interests. In O'Connor v. Bankers Trust Co., supra, decided June 29, 1936, suit was brought on an alleged agreement by member banks of the New York Clearing House Association whereby they agreed to protect the depositors of another member bank, Harri-man National Bank & Trust Co., if the Comptroller would refrain from closing the Harriman Bank. In determining the issue presented the court used language equally applicable to the situation here involved:

The right of self-preservation applies to banks as well as to business corporations and individuals generally. When a crisis arises in which to protect its own depositors and stockholders against loss, a guaranty by one bank of the deposits of another is essential, the law does not withhold that power. It is not necessary that the bank be faced with actual ruin; it is sufficient that danger, real and immediate, of substantial loss to its depositors is present, and that the risk assumed is not out of proportion to the damage threatened, and not out of harmony with the capital structure and the financial condition of the banks involved. In this, as in so many other legal situations, the rule of reason applies. Where those charged with the management of a bank act in good faith and deliberately, with an eye to its own interests and welfare, the exercise of the power here invoked will be upheld.
* * * * * * *
Around July, 1932, business was at its lowest ebb. The banking structure was highly sensitive to the marked depression which existed. The Harriman Bank was relatively a small bank to be sure, but the slightest spark may result in a widespread conflagration difficult to control. No bank is immune when confidence is generally disturbed, and particularly when lack of confidence assumes the form of a heedless “run” on another member bank. The danger of heavy withdrawals of deposits forces a bank to provide itself with large amounts of cash; assets must be sacrified at the very time when prices are lowest. The failure of a single bank may have repercussions which make themselves felt throughout the financial structure. Statistics, however respectable, may often be deceptive. Subsequent events demonstrated that there was some rational basis at least for the fears that were entertained concerning the effect of a failure of the Harriman Bank on the depositors and stockholders of other clearing house banks. If, in such a situation action to prevent the failure of a member bank is taken by other member banks in the 'exercise of fair and honest judgment at the time, for the purpose of preserving the security and integrity of their own institutions, such action, within reasonable limitations, is not an invalid exercise of corporate power.
It is difficult for the human mind to carry itself back in point of time uninfluenced by subsequent events. With the danger past and memory short the defendants now plead that they lacked the power to do what banks throughout the country have often found it necessary to do. They plead that the law has denied them the power to conserve their own imperiled interests. The practice of the clearing house banks in this city to participate in “rescue parties” was clearly established by the evidence. The form such action assumed at various times was different from that taken in this case, but the ultimate object was the same.

See also the decisions in Norton Grocery Co. v. People's National Bank, supra; Wyman v. Wallace, supra; Morris v. Third National Bank of Springfield, 142 Fed. 25, and cases there cited.

Unquestionably, the action of petitioner and the other parties to. the agreement of May 2, 1931, was beneficial to the then depositors of the Skowhegan Trust Co. and to the credit structure and general welfare of the community. We can not say from the record that the state banking authorities actually approved the contract, but it is a fact that the contract was carried out. This would justify an inference that the state authorities approved the contract, particularly in view of their insistence that steps be taken which would make it unnecessary for the state to close the Skowhegan Trust Co. Where this situation exists it would seem that, unless the contract is prohibited by law, it should stand. First State Bank & Trust Co. of Rochester v. First National Bank, 258 N. W. 593; cf. Hamburg Bank v. Ouachita National Bank in Monroe, 78 Fed. (2d) 100.

Respondent insists that the contract is prohibited by law and is invalid. He relies upon Board of Commissioners v. Citizens' Trust & Savings Bank, 123 N. E. 130 (Indiana, 1919). He contends that the reasons advanced in that case for the banks’ actions are identical with the reasons advanced by this petitioner. In that case two state and two national banks agreed to assume certain stated percentages of the liabilities of a fifth insolvent bank. All the banks were in the same community and the action was taken in order-to prevent the insolvent bank from closing. The agreement made one of the state banks liquidating agent of the insolvent bank. The board of commissioners sued the Citizens’ Trust, as liquidating agent, for the amount of their deposit in the insolvent bank. One of the defenses raised was that the banks’ agreement was ultra vires. The court held that the state auditor had disregarded the state statutes regarding insolvent banks; that the liquidating agent’s action in taking possession of property of the insolvent was without warrant of law; that appellee banks had voluntarily assumed to supply whatever sums were necessary to pay the deficiency of the insolvent; that appellee banks might thereby be required to use all their surplus funds, or might themselves become insolvent; that the appellee banks were agreeing to spend money, not their own, but Belonging to the stockholders and depositors; that there was no legally sufficient consideration for the promise of Citizens’ Trust to pay the indebtedness of the insolvent bank to the board of commissioners.

We have been unable to find any other court following this decision of the Indiana Appellate Court. There is a very recent decision by the Supreme Court of Maine (March 6, 1936) regarding state banks, which seems to be in accord with the principle of the Indiana decision, Gardiner Trust Co. v. Augusta Trust Co., 182 Atl. 685, here-inbefore cited. We think, however, that both of these decisions are distinguishable from the instant case. The court, in the Maine case, held that a bank has no implied power to become a guarantor except to protect an investment of its own, or as an incident to the transfer of commercial paper, or to effectuate a merger with another institution, and any contract by which it seeks to do so is void. The very purpose of the agreement in this proceeding was to protect assets and investments of the petitioner bank, all of which were seriously threatened.

In the Indiana decision the court found that the state statutes had been ignored and disregarded. It found that the banks had bound themselves to pay an imdetermined liability, in the paying of which they might themselves become insolvent. It found further that there was no consideration for the agreement. In the present proceeding the state authorities proceeded in accordance with the statutory powers lodged in the state banking authorities. It is a matter of record that petitioner and others were urged to act quickly in order to prevent the closing of the bank under the mandate of the statute. Section 94, chapter 57, Maine’s Revised Statutes, 1930, grants the banking commissioner broad powers of discretion in regard to trust companies, but if the directors fail to act to protect the trust company’s creditors, the commissioner is required by statute to act. Here the petitioner bound itself to pay only a specified sum. There could be no further call upon it for additional funds. Under the agreement an out of town bank assumed all liabilities of Skowhegan Trust in consideration of petitioner’s payment, the payment of $63,-500 by other signatories to the agreement, and the transfer of the assets of Skowhegan Trust. This was, in our opinion, a valid consideration for the contract, which further distinguishes the instant proceeding from Board of Commissioners v. Citizens' Trust & Savings Bank. Moreover, it should be remembered that here the contract has been fully executed, and all parties have derived every possible benefit, while in the Citizens’ Trust case the contract was executory. Hamburg Bank v. Ouachita National Bank in Monroe, supra.

Our research convinces us that no hard and fast rule can be laid down as to when a contract is beyond the incidental powers of a national bank. Each proceeding must, in the last analysis, be bottomed upon its own facts. The legal principles can be ascertained from the statutes and the decided cases; their application is the province of the court. In the present situation we may well paraphrase the language of the Supreme Court in Wyman v. Wallace, 201 U. S. 230, 231, and say that the directors of petitioner knew that “a neglect to pay would precipitate a run” with its irreparable consequences. A contract which'would prevent these results, and completely dispose of the emergency, was within the incidental powers of a national bank, Wannamaker v. Edisto National Bank of Orangeburg, 62 Fed. (2d) 696, 700, particularly in view of the fact that petitioner’s expenditure in no way impaired its capital structure, or interfered with the payment of dividends during the taxable year on its capital stock.

Having determined that the contract was intra vires, we must next determine whether it is a statutory deduction under section 23 (a) or (f), Revenue Act of 1928. Petitioner urges that it is deductible in any one of three ways, namely, as an ordinary and necessary expense, as a loss, or as a donation from which it received a direct benefit. Both parties cite and rely upon Welch v. Commissioner, 290 U. S. 111.

In the Welch case the taxpayer paid portions of the claims of former customers of a bankrupt corporation, of which he had been secretary, in order to reestablish his relations with them and to solidify his individual credit and standing. The question was whether such payments were allowable deductions. The Court held the payments were not deductible and that they were extraordinary, instead of ordinary, expenses. The Court, however, specifically recognized that there are many phases of this problem; that it is impossible to harmonize all the cases involving deductions for ordinary and necessary business expenses; and that there are many cases whose facts require border line decisions. We are satisfied that this proceeding presents a different phase from, and is-not controlled by, Welch v. Helvering.

This Board and the courts have repeatedly allowed deductions where the disbursement was made to protect or promote the taxpayer’s business. Harold Mortenson, 3 B. T. A. 300; Alfred Le Blanc, 7 B. T. A. 256; Seufert Brothers Co. v. Lucas, 44 Fed. (2d) 528, reversing 14 B. T. A. 1023; A. King Aitkin, 12 B. T. A. 692; Louisiana Jockey Club, Inc., 13 B. T. A. 752; Edward A. Pierce, 18 B. T. A. 447; Helvering v. Community Bond & Mortgage Corporation, 74 Fed. (2d) 727, affirming 27 B. T. A. 480, cases where disbursements made to protect taxpayer’s business were held deductible as ordinary and necessary expenses; G. T. Wofford, 15 B. T. A. 1225; petition to review denied, 49 Fed. (2d) 1027; E. L. Potter, 20 B. T. A. 252; H. M. Howard, 22 B. T. A. 375; Commissioner v. Chicago Dock & Canal Co., 84 Fed. (2d) 288; Kornhauser v. United States, 276 U. S. 145, cases involving attorney fees and/or compromise of litigation held deductible as ordinary and necessary expenses; Poinsett Mills, 1 B. T. A. 6; Anniston City Land Co., 2 B. T. A. 526; Killian Co., 20 B. T. A. 80; Yamhill Electric Co., 20 B. T. A. 1232; Fairmont Creamery Corporation v. Commissioner, 89 Fed. (2d) 810, cases involving donations that were held deductible as ordinary and necessary expenses. In each of the foregoing cases there was a direct connection between the expenditure made and the business operated.

In the following cases the courts have refused to allow the deduction claimed as an ordinary and necessary expense: Voluntary assumption of debts of predecessors, Wallingford Grain Corporation v. Commissioner, 74 Fed. (2d) 453, and cases there cited; payment of $35,000 to secure a $5,000,000 loan, Bing v. Helvering, 76 Fed. (2d) 941; expenses incident to a merger, Motion Picture Capital Corporation v. Commissioner, 80 Fed. (2d) 872; expenditures to avert passage of legislation harmful to taxpayer’s business, Sunset Scavenger Co. v. Commissioner, 84 Fed. (2d) 453; benefits from donations to community chest too remote to be deductible, Helvering v. Evening Star Newspaper Co., 78 Fed. (2d) 604.

Considering the facts and circumstances under which this expenditure was made, we are of the opinion that the expense grew directly out of and proximately resulted from petitioner’s banking business. H. M. Howard, supra. We have observed that it has been recognized that banks and banking organizations participated in “rescue parties” for weaker banks prior to the banking holiday. O'Connor v. Bankers Trust Co., supra. It is a matter of common knowledge that private business was unable to cope with the depression and that governmental agencies were created to render financial assistance and protect banks, railroads, insurance companies, and individuals. This petitioner, using its own resources, sought only to protect itself with the least possible cost to its stockholders and depositors. It acquired no capital asset by the disbursement. In the opinion of its directors, this $10,000 expenditure avoided an imminent and threatening loss of a larger amount. We feel that the payment under these circumstances was an ordinary and necessary expense properly chargeable against 1931 gross income, and, we so hold.

Reviewed by the Board.

Decision will be entered for the 'petitioner.

       § 24. Corporate powers of associations. Upon duly making and filing articles of association and an organization certificate a national banking association shall become, as from the date of the execution of its organization certificate, a body corporate, and as such, and in the name designated in the organization certificate, it shall have power—
      *******
      Third. To make contracts.
      *******
      Seventh. To exercise by its board of directors, or duly authorized officers or agents, subject to law, all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin, and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes according to the provisions of this chapter.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      (a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *.
      *******
      (f) Losses by corporations. — In the case of a corporation, losses sustained during the taxable year and not compensated for by insurance or otherwise.


author: Smith:

text:
    W. C. Knoernschild et al., Executors, Estate of Charles Knoernschild, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50278.
    Promulgated April 16, 1937.

      Ernst ron Briesen, Esq., and J. H. Van Koert, G. P. A., for the petitioners.

      Dean P. Kimball, Esq., and Warren W. Cole, Esq., for the respondent.
   OPINION.

Smith:

This is a proceeding for the redetermination of a deficiency in estate tax in the amount of $11,245.78. The petition alleges the following errors on the part of the respondent in the determination of the deficiency:

(1) The failure to allow as a deduction from the gross estate the amount of a bequest to the Holy Angels Academy of the city of Milwaukee, Wisconsin, a corporation organized exclusively for religious, charitable, and educational purposes, no part of the net earnings of which inures to the benefit of any private stockholder or individual.

(2) The failure to credit the amount of tax determined as a deficiency with the amount of inheritance tax paid to the State of Wisconsin in respect of property included in the gross estate in an amount not to exceed 80 per centum of the tax imposed.

The parties have filed the following stipulation of facts.

1. Charles Knoernschild died on June 9, 1927 at the age of seventy-one (71) years.
2. He left a Will «(Exhibit I), which Will was duly admitted to probate in the County Court of Milwaukee County, and William C. Knoernschild, Hugo J. Knoernschild and Robert J. Schaefer qualified as executors and trustees. Said estate was closed in the County Court of Milwaukee County on the ISth day of June, 1931, and on said date Letters of Trust issued to William C. Knoernschild, Hugo J. Knoernschild and Robert J. Schaefer, who are now still acting as qualified trustees.
3. That the Final Decree (Exhibit II) showed a net distribution of One Hundred Twenty-three Thousand, Eight Hundred Eighteen and 36/100 ($123^-818.35) Dollars to each of four of the children of Charles Knoernschild, the same amount to William C. Knoernschild, et al., “as trustees under Clause Sixth (5),” and the same amount in trust for the benefit of Paul C. Knoern-schild, another son. That in addition to this amount each child received the sum of Nine Thousand Three Hundred Ninety-one and 06/100 ($9,391.06) Dollars life insurance, which was paid directly to the child as< beneficiary under the policies and not as part of the estate.
4. The claim for deduction is limited to One Hundred Fourteen Thousand, Nine Hundred Twenty-three and 48/100 ($114,923.48) Dollars.
5. That Charles Knoernschild left no other child or any child or children of any predeceased child, except Sister Mary Virginita.
6. That the ages of these children as of the date of the death of Charles Knoernschild were as follows:
William C. Knoernschild, aged forty-five (45) years,
Hugo J. Knoernschild, aged thirty-seven (37) years,
Katherine Schaefer, aged forty-three (43) years,
Amalie Schoetz, aged forty-one (41) years,
Paul C. Knoernschild, aged forty (40) years, and
Sister Mary Virginita, aged thirty-nine (39) years.
7.That the wife of Charles Knoernschild had predeceased him.
8.That the Holy Angels Academy is a Catholic religious and educational institution operating an academy for girls in the Cfity of Milwaukee and is exempt from the tax under Section 403 (a) (3). That the annual reports of William C. Knoernschild, et al., “as trustee under Clause Sixth (5)”, as filed in the County Court of Milwaukee County show the following payments to' Holy Angels Academy and show that no payments of any kind were made to any of the children of Charles Knoernschild;
9.That a certificate has been issued by John Schlehlein, Jr., Register of Probate in the County Court of Milwaukee County, that the total amount of inheritance tax paid to the State of Wisconsin was Twenty-five Thousand, Five Hundred Seventy-four and 31/100 ($25,574.31) Dollars and that no refund of any such taxes or any part thereof has been, made or authorized and no claim is pending. That the inheritance tax paid to the State of Wisconsin was upon the identical property as covered by the Federal Estate Return to the Internal Revenue Collector in this case.
10. That the taxpayer is entitled to the eighty per cent. (80%) credit provided by Section 801 (b) against the amount of any part of the deficiency that may be asserted.

Item 4 (b) (5) of tbe decedent’s will provides as follows:

The share which would go to my daughter Marie, who is now in the Sisterhood and who is known by the name of Sister Mary Virginita, shall be paid, upon her death, to the Holy Angels Academy of the City of Milwaukee, or if deemed advisable by my executors and/or trustees may be paid before her death to the Holy Angels Academy, but it shall be the privilege of my daughter Marie to direct said trustees to pay from said fund any part of the income or principal as my daughter may in her judgment see fit for the purpose of providing for her mother or any of her brothers or sisters in case they are in need of financial assistance.

Section 303 (a) (3) of tbe Revenue Act of 1926 provides for tbe deduction from the gross estate of bequests to institutions such as the Holy Angels Academy of Milwaukee. Article 47 of Regulations 70, promulgated under tbe provisions of the Revenue Act of 1926, and in effect in 1927, provides in part as follows: ’

Where the legatee, devisee, donee, or trustee is empowered to divert the property or fund, in whole or in part, to a use or purpose which would have rendered it, to the extent that it is subject to such power, not deductible had it been directly so bequeathed, * * * deduction will be limited to that portion, if any, of the property or fund which is exempt from an exercise of such power.

Charitable bequests are favorites of tbe law, St. Louis Union Trust Co. v. Burnet, 59 Fed. (2d) 922, and are expressly encouraged by the statute. Edwards v. Slocum, 264 U. S. 261.

Contingent bequests to charity are not legal deductions from the gross estate. Humes v. United States, 276 U. S. 487; Kahn v. Bowers, U. S. Dist. Ct., N. Y., Feb. 1926; affirmed per curiam (C. C. A., 2d Cir.), 9 Fed. (2d) 1018; Gertrude Hemler Tracy et al., Trustees, 30 B. T. A. 1156; Philip W. Blood et al., Executors, 22 B. T. A. 1000. Cf. Old Colony Trust Co. v. Commissioner (C. C. A., 1st Cir.), 87 Fed. (2d) 131.

It is tbe contention of tbe petitioners herein that tbe decedent bequeathed a fund to the Holy Angels Academy, which admittedly is a religious institution, to which bequests absolutely made are deductible from the gross estate of the decedent. The petitioners contend that under the facts which obtain in this case the possibility that the fund would be invaded for the purpose of rendering financial assistance to the daughter Marie’s brothers and sisters is so remote that it may be ignored; that each of the brothers and sisters received upon the distribution of the estate $123,818.35 and, in addition, received on life insurance policies upon the life of the decedent, $9,391.06. It is claimed that these distributions to the brothers and sisters are in such large amounts that there is no likelihood that Marie would ever have occasion to divert to them a part of the share over which she had the power of diversion and, furthermore, that distributions have been made from the fund either of income or of principal to the Holy Angels Academy during the years 1930 to 1935, inclusive.

The petitioners site in support of their contentions Ithaca Trust Co. v. United States, 279 U. S. 151; Marion M. Jackson, Executor, 18 B. T. A. 875; E. H. Hallett et al., Executors, 29 B. T. A. 494; First National Bank of Birmingham v. Snead, 24 Fed. (2d) 186; Lucas v. Mercantile Trust Co., 43 Fed. (2d) 39. In Philip W. Blood et al., Executors, supra, we said:

It is to be noted in the present proceeding that there is no basis laid down by which it may be determined whether the residuary estate will be invaded for the purpose of making payments to the beneficiary, the decedent’s widow. The latter is left entirely to the discretion of the trustees. Under the will the trustees are authorized:
“* * * whenever they deem it necessary or desirable for the maintenance or comfort of my said wife, to pay over to or use for the benefit of my said wife, from time to time, such part (or even the whole) of the principal fund of this trust as to my said trustees seems wise.”
The facts in this case are substantially different from those which obtained in Ithaca Trust Co. v. United States, supra, upon which the petitioners rely. In that ease the decedent had given the residue of his estate to his wife for life with authority to use from the principal any sum “that may be necessary to suitably maintain her in as much comfort as she now enjoys.” The Supreme Court observed—
“* * * 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. * * *”
Here the evidence does not show the income of the decedent’s widow or how much the trustees might consider necessary or desirable for her maintenance or comfort. The matter was left entirely to the discretion of the trustees. Whether the charities would receive anything from the residuary estate was entirely contingent upon the action which might be taken by them. Contingent bequests to charity are not a legal deduction from the gross estate. Humes v. United States, 276 U. S. 487. The contention of respondent upon this point is sustained.

For reasons therein stated we are of the opinion that the case of Ithaca Trust Co. v. United States, supra, is not decisive of the issue here involved. The cases of Marion M. Jackson, Executor, supra, and E. H. Hallett et al., Executors, supra, involved facts materially different from those which obtain in this proceeding. The facts here are more nearly those which obtained in the Blood case.

The will of the decedent made no absolute bequest to the Holy Angels Academy. Neither does it contain any standard for the determination of how much of the income and the principal could be diverted by the daughter Marie from the Holy Angels Academy. So far as anything is in evidence to the contrary, the daughter Marie could have diverted all of the income and all of the principal from the Holy Angels Academy to her brothers and sisters. “Need of financial assistance” affords no criterion for determining what part, if any, of the whole of the income and principal could be thus diverted. As stated by the Circuit Court of Appeals for the First Circuit in Old Colony Trust Co. v. Commissioner, supra:

* * * If the bequests in the will are specific, that is, to some named charitable institutions, the bequest is exempt from the estate tax, but if the gift is left to the discretion of a fiduciary under the terms of the will, it is held to be taxable. Helvering v. Pardee, Case No. 77, 290 U. S. 365, 370-1; Burnet v. Whitehouse, 283 U. S. 148 Mississippi Valley Trust Co. v. Commissioner, 72 Fed. (2d) 197.

Since the decedent made no absolute bequest to Holy Angels Academy, and since the Board is unable to determine what, if any, portion of the fund set up representing the daughter Marie’s share of the estate will ever go to the Holy Angels Academy, it is held that no part of the fund is a legal deduction from the gross estate.

Reviewed by the Board.

Judgment will be entered wnder Bule 50.


author: .Smith :

text:
    Wobber Brothers, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 77387.
    Promulgated April 20, 1937.

      Leon de Fremery, Esq., and F. O. Hutchens, Esq., for the petitioner.

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

.Smith :

This is a proceeding for the redetermination of a deficiency in income tax for 1930 in the amount of $3,812.28. Petitioner alleges that the respondent erred in determining the deficiency in computing a profit of $90,294.29 upon the sale of 3,024 shares of the capital stock of Paramount Publix Corporation.

The petitioner is a California corporation, with its principal office in San Francisco. In 1927 it purchased through a margin account 1,500 shares of the capital stock of Paramount Famous Players Lasky Corporation, paying therefor $158,499.58. It also, in the same year, purchased through its margin account 292 shares of the capital stock of the same corporation for $28,769. The cost of the 1,792 shares of stock purchased was $187,268.58. In 1928 it sold the 1,500 shares of stock purchased for $158,499.58 for $202,165, realizing a profit on the sale of $43,665.42. By mistake it used as the basis for computing the profit $187,268.58 and reported a profit of $14,896.42. The error in the return was not discovered by the respondent until it was too late to assess any additional tax for 1928.

The 292 shares of stock purchased at a cost of $28,769 were exchanged between 1928 and 1930 for 876 shares of Paramount Pub-lix Corporation. Petitioner also prior to 1930 purchased 2,148 additional shares of Paramount Publix Corporation, paying therefor $122,013.57. In 1930 it sold the 3,024 shares of Paramount Pub-lix Corporation stock for $212,307.86, realizing an actual gain upon the sale of $61;525.29. This is the amount of gain reported by the petitioner in its income tax return for 1930 as having been realized from the sale.

In the determination of the deficiency in this proceeding the respondent has added to the gain reported $28,769, making a total gain realized on the sale in 1930 of $90,294.29. In his notice of deficiency the respondent states:

In computing the profit on the sale of the 292 shares in the year 1930, the cost of the shares of $28,769.00, already deducted in 1928, was included. Having had the benefit of this deduction in the computation of your income tax liability for 1928, which benefit you have retained, you are now estopped to claim it again as a deduction in 1930.

For reasons stated in the deficiency notice the respondent in his answer to the petition pleads estoppel.

The parties have stipulated:

The entire deficiency asserted in the ninety-day letter is occasioned by the refusal of the Commissioner to allow deduction of any amount representing the cost of said 876 shares sold in the calendar year 1930 as aforesaid. If the Board decides in favor of the petitioner, there will be no deficiency, whereas, if the Board decides in favor of the Commissioner the deficiency will be the amount asserted in the ninety-day letter.

Section 113 (a) of the Revenue Act of 1928 states:

The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; * * *

The sole question presented by this proceeding is whether the petitioner is estopped to use the cost basis of $150,782.57 in computing profit upon the sale of the 3,024 shares by reason of the fact that by mistake it used too large a basis by $28,769 in computing the profit realized upon the sale of 1,500 shares of the Paramount Famous Players Lasky Corporation stock in 1928.

In Brant v. Virginia Coal & Iron Co., 93 U. S. 326, 335, it is stated:

It is difficult to see where the doctrine of equitable estoppel comes in here. For the application of that doctrine there must generally be some intended deception in the conduct or declarations of the party to be estopped, or such gross negligence on his part as to amount to constructive fraud, by which another has been misled to his injury. * * * [Emphasis supplied.]

In 21 Corpus Juris 1123,1124, it is stated:

Knowledge of the truth as to the material facts represented or concealed is generally indispensable to the application of the doctrine of equitable estoppel, unless the ignorance of the party against whom the estoppel is claimed was the result of gross negligence or otherwise involves gross culpability * * *.

See also United States v. Scott & Sons, Inc. (C. C. A., 1st Cir.), 69 Fed. (2d) 728, 732; Helvering v. Brooklyn City Railroad Co. (C. C. A., 2d Cir.), 72 Fed. (2d) 274, 275; Salvage v. Commissioner (C. C. A., 2d Cir.), 76 Fed. (2d) 112; Sugar Creek Coal & Mining Co., 31 B. T. A. 344; Commissioner v. Yates (C. C. A., 7th. Cir.), 86 Fed. (2d) 748.

We are of the opinion that an innocent mistake made in a tax return affords no basis for the invocation of the doctrine of estoppel. The petitioner made a mistake in filing its income tax return for 1928. The statute of limitations has operated to bar the assessment and collection of any deficiency due for that year. The mistake made by the taxpayer in that year can not be charged against it in the determination of a deficiency in income tax for a succeeding year. The cost basis of the 3,024 shares of Paramount Publix Corporation sold in 1930 is $150,782.57. That is the amount actually paid by the petitioner for the shares sold. That amount may not be reduced by $28,769 representing the error in the base used by the petitioner in computing the profit made upon the sale in 1928 of 1,500 shares of stock of Paramount Famous Players Lasky Corporation.

This case is distinguishable upon its facts from Lewis K. Walker, 35 B. T. A. 640. The facts in that case were that a taxpayer who had recovered a large part of his cost of a block of stock upon a sale in a prior year on a first in, first out basis could use as the cost basis upon the sale of the balance in the taxable year only the balance of the unrecovered cost. In our opinion we said:

As we understand tbe first in, first out rule and the other methods for allocating cost, they are not rules of law in the strict sense, but merely rules of convenience or rules of thumb for making effective in several common situations the provision- of the statute that a taxpayer can recover his cost before becoming taxable on any gain. The rules for allocation of basis are not ends in themselves, but only means to the end of returning to the taxpayer his capital investment free from tax, and if they have partially accomplished this result, even through what was perhaps an erroneous application of one method in a situation which more properly called for another, still we do not think it is now appropriate to apply retroactively a theoretically correct method and get an erroneous result. To apply petitioner’s proposal here would leave him in 1930 with a larger basis than actually remains to him in view of the amount of the basis used in computing his gain on the earlier sales. It would result in his recovery of part of his basis twice. What has happened here is that the petitioner recovered $10,600 of his $14,110 basis prior to 1930, leaving $3,510 to be recovered. The statute authorizes the recovery of basis only once. With the exact basis susceptible of determination, and with all the stock, finally disposed of, we think it would be error to substitute for the facts a theory which distorts the actual gain or loss. * * *

In the instant proceeding we are not concerned with the question of the application of the first in, first out method of computing the correct basis for the determination of the cost of the shares sold in 1928. The parties have stipulated that by mistake the wrong amount was used in the determination of the shares sold in 1928. The only question here is whether the petitioner by using the wrong amount as a basis in 1928 is estopped to use the correct basis in determining the profit upon the salé of shares in 1930. For reasons set forth above, the respondent’s plea of estoppel is not sustained.

Reviewed by the Board.

Judgment of no deficiency will be entered.

Disney dissents.