author: Leech :

text:
    Marjorie Fleming Lloyd-Smith, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83575.
    Promulgated June 30, 1939.

      Charles C. Parlin, Esq., and James A. Fowler, jr., Esq., for the petitioner.

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

Leech :

The contested right to deduct the sum of $6,969.92 depends here on whether petitioner was engaged in “carrying on any trade or business” during 1933, and, if so engaged, whether this amount constituted “ordinary and necessary expenses” of that business. Revenue Act of 1932, sec. 23 (a).

Respondent argues that petitioner was not carrying on any business during 1933 and that the questioned deductions represented personal and not business expenses, and were, therefore, not deductible. Sec. 24 (a) of the same revenue act.

Business, as that term is used in this section of the revenue act, has been broadly defined as “That which occupies the time, attention, and labor of men for the purpose of a livelihood or profit.” Flint v. Stone Tracy Co., 220 U. S. 107. See also St. Louis Union Trust Co. et al., Trustees, 40 B. T. A. 165. But “It is not necessary that one occupy a full day each day in carrying on one’s activity to be considered to be regularly engaged in business. It is continuity of efforts devoted to the undertaking which constitutes a business regularly carried on,” S. Rose Lloyd, 32 B. T. A. 887. Moreover, a business can be carried on, within the statute, by the taxpayer, through agents under his ultimate direction. Kales v. Commissioner, 101 Fed. (2d) 35; Cornelia W. Roebling, 37 B. T. A. 82; Austin D. Barney et al., Executors, 36 B. T. A. 446; Fremont G. Peck, 34 B. T. A. 402.

Respondent breaks petitioner’s activities down and contends that no one of them alone constitutes the carrying on of a business. Thus it is said that, although the several corporations which petitioner owned were in business, petitioner, as a stockholder, was not in that business but was a mere passive investor. It is urged likewise that, although the trusts of which petitioner was the beneficiary were in business, petitioner had no legal right to interfere in that business during 1933, since the trusts did not end until 1934. However, whether the taxpayer may be classed as a passive investor as to her investments in these wholly owned corporations and as a passive owner of a beneficial interest in these trusts, on the one hand, or was engaged in carrying on the business of protecting and handling what, together with other property, constituted her estate, is a question of fact. Certainly it can not be doubted that, as to her properties owned outright, the management of which she had assumed and directed throughout 1933, she was carrying on a business. It is likewise clear to us that the care and management of her investments in the gold mining corporation and the real estate company were not those of a passive investor but required and secured her active management and supervision. The bulk of her estate consisted of her interests in the two trusts. She has already been held to be entitled to depletion deductions on properties constituting the corpora of these trusts, before their termination, on the ground that she then possessed every important attribute of ownership in those properties. Lloyd-Smith v. Commissioner, 50 Fed. (2d) 1075. See also Merle-Smith v. Commissioner, 42 Fed. (2d) 837; cer-tiorari denied, 282 U. S. 897. But, whether she had a legal right to assume and manage these trusts before they expired by their terms, the controlling fact here is that, throughout 1933, she did supervise and direct the entire management of these trusts. See Stock Yards Bank of Cincinnati, 25 B. T. A. 964.

The volume of petitioner’s trading activities in respect of securities owned by her individually and through the trusts during the year 1933 satisfies us that no segregation of these activities, on the ground that they did not constitute the carrying on of business, is necessary. See L. T. Alverson, 35 B. T. A. 482; Richard D. Wyokoff, 19 B. T. A. 263; and Ignaz Schwinn, 9 B. T. A. 1304.

In short, confronted with the disturbing fact of her father’s maladministration of her affairs and those of the trusts, she was apparently convinced that only under her own supervision, with the aid of trusted employees, could her far-flung estate be properly handled and protected. To this end she set up an office in New York City (see Foss v. Commissioner, 75 Fed. (2d) 326) and centralized the management of her affairs there. She directed that management, in which she was engaged, practically daily.

The evidence is convincing that, during 1933, petitioner was engaged in carrying on the business of managing and protecting her estate. The items totaling the disputed deduction of $6,969.92 were not personal expenses, as respondent contends, because petitioner employed a private secretary in her own home, where her personal matters were handled. The expenses of that establishment she does not seek to deduct. Thus, the amount of $6,969.92 here in issue was in its entirety an ordinary and necessary business expense and is deductible as such.

The right to deduct the item of $45,003.93 presents a different problem. This amount constitutes the expenditures made by petitioner in connection with the readjustment of her liability on the Sugar Pine bond guaranty, and was the payment of the obligation of the petitioner, no part of which she could recover. But whether the payment of this amount was an ordinary and necessary expense of carrying on the business of the taxpayer, is not necessary to answer, since she was not in the guaranty business. Burnet v. Clark, 287 U. S. 410; Menihan v. Commissioner, 79 Fed. (2d) 304; certiorari denied, 296 U. S. 651.

The transaction involving this guaranty began when $4,000,000 of the trust funds were invested in the stock of the Sugar Pine Lumber Co. The petitioner became a guarantor of that company’s bonds because she had reason to believe that the company’s use of the funds thus secured would increase the value of her beneficial interest in its stock. Undoubtedly that stock then had value. But the stock had become worthless by the close of 1932. The payments in connection with the guaranty were not made until 1933. Obviously, when petitioner thus made them, it was not with the idea of protecting or adding to her stock investment in the company. These expenditures occurred for the sole purpose of reducing her liability under the guaranty. As such, they are deductible as losses on a transaction entered into for profit. Revenue Act of 1932, sec. 23 (e) (2). John P. Dillon, 9 R. T. A. 177; Henry Adamson, 17 B. T. A. 17; George H. Stanton, 36 B. T. A. 112; Humphrey v. Commissioned, 91 Fed. (2d) 155; First National Bank, of Skowhegan, Maine, 35 B. T. A. 876; Sam Cook, 25 B. T. A. 92; W. R. Hervey, 25 B. T. A. 1282; Thomas v. United States, 18 Fed. Supp. 942. Cf. Commissioner v. Hadley, 75 Fed. (2d) 485.

The last issue involves respondent’s disallowance of a deduction for an alleged loss on the sale of the $70,000 note of the Jorwil Corporation. The petitioner contends that the exchange in which she received this note was tax-free under section 112 (b) (5) of the Revenue Act of 1932; that the stock and note, which she then received for her property, were two classes of securities of the corporation, within the meaning of that section; and that her basis for the computation of gain or loss on her sale of the $70,000 note was an allocable part of the cost of the property thus transferred to the corporation. Sec. 113 (a) (6) of the Revenue Act of 1932.

The position of the respondent is (1) that the transaction involving the transfer of assets of petitioner to the Jorwil Corporation for all the stock in that corporation and its note for $303,000, was not an exchange under section 112 (b) (5), supra, but was a sale and the tax consequences, therefore, follow under section 112 (a); and (2) that if the transaction was an exchange within section 112 (b) (5), supra, the note of the Jorwil Corporation thus received by the petitioner was not within the meaning of the term “securities” used in that section, but, on the other hand, was within the category of “money” or “other property.”

We assume the transaction was an exchange within the statute. See L. & E. Slim, Inc., 39 B. T. A. 143. Thus we do not have the same question here that was considered in either Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U. S. 462, or Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937. See Burnham v. Commissioner, 86 Fed. (2d) 776, affirming 33 B. T. A. 147. The question for decision here is whether the note received from the Jorwil Corporation, in this exchange, was a security within the meaning of section 112 (b) (5), section 112 (c), and section 113 (a) (6).

In answering that question, we think neither the legislation itself nor its history warrants' the disregard of the concept that this term includes only that which, in itself, reflects such a “continuing interest” in the property transferred to the corporation as would dignify it as within the meaning of “securities.” See Helvering v. Bashford, 302 U. S. 454; Groman v. Commissioner, 302 U. S. 82. Since the petitioner received all the issued stock of the Jorwil Corporation, she undoubtedly had a continuing interest in that corporation and in the properties which it then held. However, does the note which petitioner received and sold give her such an interest ?

Bonds of varying maturities have been held to represent such continuing interests and to be within the term “securities” as thus used. L. & E. Stirn, Inc., supra; Kaspare Cohn Co., Ltd., 35 B. T. A. 646; Karl B. Segall, 38 B. T. A. 43. The Burnham case, supra, held that a ten-year, unsecured, confess-judgment, promissory note was within that category. However, we find no authority, in reason or otherwise, which we think supports the conclusion that the unsecured note of the Jorwil Corporation, for two years, without even a confess-judgment clause therein, rises to the dignity of the term “securities” used in section 112 (b), supra. The petitioner, as the holder of that note, was in substantially the same position as that of an ordinary general creditor. It would scarcely be held that an ordinary creditor of a corporation, by reason of that status, held such a continuing interest in the corporation as to be the owner of a security, within the cited section.

We think, rather, that the note of the Jorwil Corporation which the petitioner thus received was “other property” within that section and that the basis for the computation of gain or loss on its sale by the petitioner was its fair market value when petitioner received it. Sec. 113 (a) (6). Since the record does not disclose that this fair market value was other than the face of the note, the petitioner has not established any loss on the sale thereof.

In view of our conclusion that the note is “other property” and that its basis is therefore the same as its market value on the date of the exchange, it is not essential to discuss the allocation of basis of the note for which petitioner contends. The valuation of the assets, when transferred to the Jorwil Corporation, necessary in any such allocation, has been found from opinion testimony and circumstantial evidence offered by petitioner, to the admission of which respondent did not object. In only one instance we have refused to follow that testimony — the Arthur H. Fleming account receivable .in the form of a note for $56,954.63. The write-down urged by petitioner is based on the sole ground that petitioner did not desire to enforce collection in the year of transfer, or deemed collection impossible. In 1937, $22,000 in cash and property worth $20,000 were transferred to petitioner on account of his liability, by the guardian of Arthur H. Fleming. Therefore, we have valued this item at ,its face amount as of the time of its transfer to the Jorwil Corporation.

Decision will be entered wider Bule 50.

       SEC. 112. RECOGNITION OE GAIN OR LOSS.

      (b) Exchanges Solely in Kind.—

      (5) Transfer to corporation controlled by transferor. — No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his Interest in the property prior to the exchange.

       Seidman’s Legislative History of Federal Income Tax Laws, pp. 341, 700; Miller, Hendricks & Everett, Reorganizations and Other Exchanges in Income Taxation, p. 90 (note) ; Cortland Specialty Co. v. Commissioner, supra.


source: Caselaw Access Project

author: Artjndell :

license: Public Domain

text:
    Christopher L. Ward, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92240.
    Promulgated July 12, 1939.

      Paul E. Shorb, Esq., and Joel Barlow, Esq., for the petitioner.

      D. D. Smith, Esq., for the respondent.
   OPINION.

Artjndell :

The respondent’s determination of deficiencies was based on his conclusion that the trust income was reached by section 166 of the Kevenue Act of 1934, hence was taxable to the grantor. On brief his counsel does not attempt to support that view, and we think it is untenable. The cases of John Edward Rovensky, 37 B. T. A. 702; Meredith Wood, 37 B. T. A. 1065; affd., 104 Fed. (2d) 1013; and Daniel P. Woolley, 39 B. T. A. 802, are clear authority for the petitioner in his contention that section 166 is not applicable, and we so hold.

In the brief of counsel for the respondent the income of the 1928 trust is sought to be attributed to petitioner on the theory that the powers in the petitioner to direct investments and sales by the trustee are the equivalent of powers to revoke and to control the income of the trust. To support this view, we are cited to the cases of Benjamin F. Wollman, 31 B. T. A. 37; William C. Rands, 34 B. T. A. 1107, and others, where we found that alleged trusts were without substance. Clearly these cases are not in point. We shall not attempt a 'minute distinction, but point out only that in this case the grantor parted with physical possession of the trust corpus, that the corpus was actually conveyed to the trustee, a trust company, and that the trustee collected and distributed the income to the beneficiaries in accordance with its written agreement. The power of the petitioner to direct investments and sales of trust corpus was not a power to nullify a trust otherwise valid. Any exercise of such power to the detriment of the beneficiaries would be subject to restraint by a court of equity. A similar power in Henry A. B. Dunning, 36 B. T. A. 1222, was held not to require a disregard of the completed transfer to the trust and to tax the grantor on the trust income. We reach the same conclusion here.

Finally, the respondent contends that the 10 percent of the income of the 1935 trust that the trustee was required to retain and add to the corpus, is taxable under section 167, citing Mary Ryerson Frost, 38 B. T. A. 1402. Section 167, in so far as it may possibly relate to the facts here, taxes trust income to the grantor where such income “is * * held or accumulated for future distribution to the grantor.” The income so added to corpus could be distributed to petitioner in one of two ways. First, by termination of the trust with the consent of three-fifths of the beneficiaries; second, by the possibility that the petitioner’s wife and his children, without issue, would predecease him. Under the first possibility the income would not be reached by section 167 as the beneficiaries have substantial adverse interests. The second possibility is conceded by the respondent to be remote, and we think it is too remote to be given serious consideration. At most it was a possibility of reverter and not a present accumulation “for future distribution to the grantor.” William E. Boeing, 37 B. T. A. 178.

Decision will Toe entered wider Rule 60.


author: Hill:

text:
    Henry W. Taft and Julia W. S. Taft, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90321.
    Promulgated July 13, 1939.

      Clarence Castimore, Esq., for the petitioners.

      Sidney U. Hiken, Esq., for the respondent.
   OPINION.

Hill:

This proceeding is for the redetermination of income tax deficiencies for the years 1934 and 1935 in the respective amounts of $722.79 and $827.17. The issue is whether or not respondent correctly computed deductions allowable on account of charitable contributions made by a wife from income shown in a joint income tax return filed for herself and husband.

The petitioners are husband and wife and when referred to individually in this opinion will sometimes be called “husband” and/or “wife.” They reside in New York City, New York, and for each of the taxable years they filed a joint income tax return. Petitioners’ return for 1934 showed an aggregate net income of $83,682.99, after a deduction of $2,852 was taken from gross income on account of contributions made by both petitioners during the year to charities. Of this sum deducted, $1,477 represented contributions made by the wife and the balance represented gifts made by the husband during the year. The wife’s net income, computed without reference to such contributions for the year and reported in the return, amounted to $12.10. The petitioners’ return for 1935 reflected a joint net income of $92,374.59, after deducting $2,715.80 for charitable contributions made in the year. Of this latter sum $1,545.80 represented gifts made by the wife, and the balance gifts by the husband in the year. The wife’s net income in 1935, computed without reference to such contributions, amounted to the sum of $15.30. The wife’s contributions to charities were made from gifts to her by the husband. During the years 1934 and 1935 and for many years prior thereto the husband had made gifts to the wife through bank checks and cash. Such gifts in 1934 and 1935 totaled more than $9,000 a year. Such checks and cash were in the main deposited by the wife in her own bank account and checked out by her for such purposes as she desired, including the charitable gifts in question. No conditions were attached to the gifts of the husband to the wife and no restrictions were imposed upon the use to which the wife might devote the proceeds thereof. They became her property absolutely to use as she pleased. The husband consulted with the wife at times respecting her gifts to charity and at times made suggestions with reference thereto, but did not direct what gifts the wife should make or in any way control her actions in respect thereof. In respondent’s audit of the returns for the taxable years, he adjusted the deduction claims in each by allowing only so much of the portion attributable to gifts of the wife as equaled 15 percent of her individual net income computed without reference to such contributions for the related year. The net result of respondent’s adjustments was to reduce the amount of deduction claimed for the wife’s gifts in 1934 from $1,471 to $1.81, and the amount of deduction allowed for her gifts in 1935 from $1,545.80 to $2.30. The petitioners charge that respondent committed error in such adjustments and contend that the aggregate net income shown in each return should have been used as the base for determining the deductions for charitable contributions in each year.

The issue is governed by section 23 (o) of the Revenue Act of 1934, which provides that in computing net income of individuals deductions shall be allowed for charitable and other contributions made during the taxable year to an amount which does not exceed 15 percent of the taxpayer’s net income as computed without benefit of the subsection, and by section 51 (b) (2) of the act, which provides that where a husband and wife report their individual incomes in a single joint return the tax shall be computed on the aggregate income. The respondent’s interpretation of these provisions is found in Treasury Regulations 86, which reads in part as follows:

Aet. 23 (o)-l. Contributions or Gifts by Individuals.—
Whether a husband, and wife mate a joint return or separate returns, the 15 per cent limitation on the deduction for contributions or gifts is based on the separate net income (computed without regard to such contributions or gifts) of the spouse making the contributions or gifts. (See article 51-1.)
Art. 51 — 1. Individual returns. — * * * if the income of each [spouse] is included in a single joint return, the tax is computed on the aggregate income and all deductions and credits to which either is entitled shall be taken from such aggregate income.

The petitioners contend that the respondent had no right to break down the aggregate incomes shown in their returns and use the wife’s individual net income in each as the base in applying the statutory percentage of 15 percent to determine the allowable deduction with respect to her contributions to charities. Petitioners assign two reasons why under their theory this act of the respondent constituted error. Their first reason is based upon special facts which they seek to show the record sustains. They claim that in substance and foi all practical purposes the gifts here in dispute were made by the wife for and in behalf of the husband and should be so treated in the returns. They point to the showing made in the record to the effect that, except for the nominal sums derived from dividends upon six shares of Continental Can Co. stock, the wife had no income or source of revenue, and that all of these gifts were made from a fund built up and accumulated from money supplied by the husband. Under such circumstances the petitioners argue the gifts should be considered as family gifts, in making which the wife acted as agent for the husband.

We do not think the record warrants the findings of fact petitioners urge in this first contention. It is true that substantially all of the gifts in question were made from money which the husband had from time to time given to the wife, and that her independent income was so insignificant as to justify our ignoring it as a feature. These circumstances, however, are without importance in view of the fact the funds when given belonged to the wife and were at all times her sole property and subject to her unrestricted use and control. This question as to the wife’s clear title to the funds in question is so conclusively shown in the record as to leave no room for doubt or require argument to sustain. Nor did the husband contend otherwise when testifying on this phase of the case as a witness at the hearing, but frankly stated that he made all gifts to his wife without restrictions and for her sole use, benefit, and control.

The record shows that the husband and wife sometimes discussed with each other the question of gifts which each intended to make to charities, and the former stated in his testimony that for a number of years he had known of his wife’s gifts and that “there may have been a case” where they discussed them in order to determine the amount he would “contribute directly in addition”, but he could not recall “any particular one.” Generally speaking, he said that the wife selected the beneficiaries for and amounts of her contributions without advice from him. The petitioners attach importance to the consultations between husband and wife referred to in the above statement and argue that it supports the theory that the former in this case exercised sufficient control over the gifts to make him the principal and the wife his agent in their giving, but we do not think so. At most they show that the husband may have been influenced by the gifts made or to be made by the wife, but in no respect do they indicate that her gifts were controlled by him. Rather, we think, the explanations made by the husband on the witness stand negative the agency theory and support the respondent’s side of the controversy on this point. On this question we overrule the contentions of the petitioners and hold that the gifts here involved were made by and in behalf of the wife from her individual funds.

Petitioners next argue that, in any event, the respondent erred in using the individual income of the wife as the percentage base for computing deductions attributable to her donations. On this issue they argue that the result of the filing of a joint income tax return by husband and wife under section 51 (b) (2), supra, is to create a taxing entity with a single income from and by which all deductions are made and determined. We do not agree with this contention. The spouses do not lose their identities as individual taxpayers by joining in a single income tax return. Pierce v. Commissioner, 100 Fed. (2d) 397, and cases therein cited; Walter C. Janney, 39 B. T. A. 240.

Accordingly, the amount of the deduction in the joint return on account of the wife’s contributions to charities must be determined on the basis of her individual net income and the application thereto of the statutory formula in section 23 (o), supra, as was done by the respondent herein.

The rule contended for by the petitioners would violate the formula fixed in the statute and substitute a new one not applicable to the income of the taxpayer who gave, but to his income increased by the income of another, a stranger to the gifts. It is obvious that such construction of the provision would pervert the object of 'the law and by the enlarged deduction resulting therefrom extend its benefits to one in no way connected with' the gifts on which deductions are claimed. In our opinion such a construction is unauthorized. The regulation applied by the respondent prevents such a perversion of the act and protects all rights of both the Government and the taxpayer. It allows all deductions and credits to which either spouse to such a return would be entitled in making an individual return. In our opinion the respondent committed no error in applying law to the facts at bar and we therefore sustain his action herein.

Decision will he entered for the respondent.


author: Offer:

text:
    Frank C. Rand, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91795.
    Promulgated July 18, 1939.

      Charles Nagel, Esq., Daniel N. Kirby, Esq., R. E. Blake, Esq., R. 0. Rumer, Esq., and Harry W. Kroeger, Esq., for the petitioner.

      F. R. Shearer, Esq., D. A. Taylor, Esq., Hartford Allen, Esq., R. F. Koehler, Esq., and Homer F. Benson, Esq., for the respondent.
   OPINION.

Offer:

The first issue presented is whether petitioner is taxable on the income of six separate trusts created for the benefit of his children. Respondent bases his determination on section 167 (a) (3), Revenue Act of 1934, which provides:

SEO. 1G7. INCOME POR BENEFIT OF GRANTOR.
(a) Where any part of the income of a trust—
(3') Is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may he, applied to the payment of premiums upon policies of insurance on the life of the grantor * * *;
then such part of the income of the trust shall be included in computing the net income of the grantor.
(b) As used in this section, the term “in the discretion of the grantor” means “in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question.”

This issue can be considerably restricted by adopting for purposes of discussion a quotation from petitioner’s reply brief (p. 28):

We do not doubt that if Mr. Rand, dy the trust instruments, had authorized or directed the trustee to use or treat trust income in the manner described in section 167 (a) (3), and if it had Men so used, then such conduct by the trustee could properly have been imputed to Mr. Rand as grantor, and he would have become individually liable in respect of the amounts so used.

Bearing in mind that, at least as to the amounts actually expended, there is no doubt that “trust income” has been “so used”, this statement of petitioner’s position leaves open only the question whether the trust instrument authorized that use. We think it must be concluded that it did.

Petitioner concedes that nothing in the statutes or decisions of Missouri affirmatively prohibits “investment” of trust funds in life insurance policies, nor is there any expression in the trust instrument directly bearing upon the question. It being elementary that construction of trust deeds is dependent on the grantor’s intention, see St. Louis Union Trust Co. et al., Trustees, 40 B. T. A. 165, and that in case of doubt or ambiguity extraneous evidence of that intent may be considered, Endowment Association v. Wood, 4 Mackay (D. C.) 19, 29; see Securities Investment Co. v. International Shoe Co. (Mo.), 5 S. W. (2d) 682, 685, it seems to us that no more persuasive factor could possibly appear than the conduct of petitioner himself. It is inconceivable that his action as trustee can be viewed as inconsistent with his intention as grantor, since he is the same individual in both instances, though acting in different capacities; and we are thus relieved from having to decide what would be the situation in a case where the trustee is a different person and his actions can not be attributed to the intention of the grantor on the one hand or to the petitioner taxpayer on the other.

We may add that any different view would place petitioner in a less favorable light than that suggested. “* * * it is at least unusual that a taxpayer should be heard to assert the possibility of an adjudication of alleged misconduct and breach of trust, as relieving him from tax liability which is predicated upon the assumption of the honesty and legality of his acts. * * *” Board v. Commissioner, 51 Fed. (2d) 73, affirming 14 B. T. A. 374; certiorari denied, 284 U. S. 658. If the payment of premiums was unauthorized it was a breach of trust for which petitioner could be held to account. His motive would be immaterial. ^Restatement of the Law of Trusts, § 201, a. He could not be heard to claim a credit as trustee for the funds so used, Cornet v. Cornet, 296 Mo. 298; 190 S. W. 333, 341, 342; and the presumption would be inescapable that premiums paid for insurance policies on his own life payable to beneficiaries of his own choice, resulting in recognized indirect benefits to him, Burnet v. Wells, 289 U. S. 670, should be treated as an expenditure made for his own account. Cornet v. Cornet, supra. Any claim that he should escape taxation because he was enabled to obtain that benefit through his own wrongdoing and with income not rightfully his would be given short shrift. National City Bank of New York, Executor, 35 B. T. A. 975; affd., 98 Fed. (2d) 93 (C. C. A., 2d Cir.). And whether he would be entitled to a deduction if and when he made good to the trust for the misappropriated funds would be a question outside the present record.

Petitioner challenges- the constitutionality of section 167 (a) (3) as applied to the present facts. He urges that by taxing the income of the respective trusts to petitioner, respondent is measuring petitioner’s income tax liability by the income of another and placing a burden on petitioner unrelated to his privileges or benefits. Consideration of that question is foreclosed by Henry A. B. Dunning, 36 B. T. A. 1222.

However, respondent endeavors to charge petitioner with the entire income of the several trusts. In the recent case of Genevieve F. Moore, 39 B. T. A. 808, respondent urged the taxability of the entire trust income where authority to invest in life insurance contracts was given by the trust instrument, although it did not .appear that any policies existed in the tax year. We there said:

While on its face section 167 might appear to apply, it has, so far as can he discovered, never been considered applicable even by the respondent as broadly as is now suggested. * * *
* * * application of the provision in question depends upon the existence in the tax year of policies upon which it would have been physically possible for the trustees to pay premiums and upon the amount of the premiums so payable.

The taxability of the trust income to petitioner is thus limited to premiums paid or payable on existing policies. As to the trust income above the premiums actually paid, we hold for petitioner.

The remaining question involves a loss claimed by petitioner on the sale in 1934 of stock held by him in the Eeorganization Investment Co. The sole issue is whether the stock sold by petitioner in 1934 was worthless in a prior year. It has become a postulate that a loss deduction can not be taken in a subsequent year, if the stock was actually worthless in a prior year. Claude D. Cass, 32 B. T. A. 713; affd., 83 Fed. (2d) 841; Walter W. Moyer, 35 B. T. A. 1155. A taxpayer can not thus defer losses to his convenience.

Respondent has found that the stock in question was actually worthless in 1933. In that year petitioner had also sold some of the stock in this company at the nominal sum of $4 for 500 shares, or four-fifths of a cent a share, for shares which had cost him $1,000 each. In the taxable year petitioner received the net sum of 22 cents for 12 shares of this stock which had cost him $12,000.

To sustain his burden of proving some value in 1933, petitioner introduced the balance sheets of the Eeorganization Investment Co. as of December 31, 1933, upon which the assets are given a substantial value. It may be that the assets of a corporation are properly to be considered in arriving at the value of its stock (Lillian G. McEwan, 26 B. T. A. 726), and it may even be that in the absence of any other showing the book value of those assets may be some evidence of their actual value, and may sufficiently shift the burden of going forward to the respondent. B. F. Edwards, 39 B. T. A. 735; see Wessell v. United Stages, 49 Fed. (2d) 137; Commissioner v. Brier Hill Collieries, 50 Fed. (2d) 777. In this proceeding, however, the book figures are shown to have no bearing whatever on the actual value of this stock, by the fact that petitioner disposed of 500 shares of this stock in the year prior to the taxable year for the nominal sum of $4. A sale of stock at a nominal price may not of itself establish worthlessness or the existence of value. Claude D. Cass, supra; De Loss v. Commissioner, 28 Fed. (2d) 803. However, if bona fide, it must establish that the stock is worth no more than the sale price. Rhodes v. Commissioner, 100 Fed. (2d) 966. Hence, in the present case the book figures are shown to bear no relation to the actual worth of the stock. Thus, we are left with no evidence of any probative force that it had value prior to 1934. It follows that petitioner has failed to sustain his burden of proof. Claude D. Cass, supra; Sterling Morton, 38 B. T. A. 1270.

Petitioner urges that at all times the Reorganization Investment Co. continued in the operation of its business and was at all times able to pay its current obligations as they matured. The continued operation of the company does not of itself prove value in its stock. Claude D. Cass, supra; Floyd E. Poston et al., Administrators, 17 B. T. A. 921. Moreover, the company by its very nature was a liquidating company, and would presumably continue to operate until its purpose was fulfilled, even though the final result of its operations could leave nothing for stockholders.

Nor does the sale in 1934, if the stock was already worthless, aid the petitioner. De Loss v. Commissioner, supra. This is especially true where, as appears from this record, the purchaser was actuated solely by “speculative” motives. Gilbert H. Pearsall, 10 B. T. A. 467.

Since petitioner has not established value for the stock in 1934, the balance sheet showing of value in assets being discredited by the terms of the sale in the prior year, and the continued operation of the company not being indicative of any value, we have found the stock to have been worthless prior to 1934, as determined by respondent.

Decision will be entered wider Rule 50.


author: Disnet:

text:
    Katherine Kraft, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89426.
    Promulgated July 18, 1939.

      Earl A. Darr, Esq., for the petitioner.

      E. 0. Hanson, Esq., and Thomas H. Lewis, Jr., Esq., for the respondent.
   OPINION.

Disnet:

This proceeding involves income tax for the calendar year 1934. Respondent determined deficiency of $9,731.84, all of which is in issue. The facts were stipulated, and we find the facts as so stipulated, and will set same forth herein only in so far as necessary for consideration of tbe issue presented. The issue is as to taxability to settlor in 1934 of income of a trust set up in a prior year, made revocable in any year by an instrument served prior to the year, which notice had not been given prior to the year 1934. Respondent applied section 166 of the Revenue Act of 1934, and petitioner contends that the act should not be applied to income for the year 1934 and, if applied, the application would be violative of constitutional rights.

The salient fact is that each of the trust instruments herein involved executed in 1930, provided that the trustor, the petitioner herein, had the right:

* * * by an instrument in writing executed under lier hand and seal and served on the Trustees at least five days before the expiration of any calendar year, to revoke this trust after the end of any such calendar year; the intent hereof being that the trust hereunder shall continue from year to year unless the party of the first part revokes same after the end of any such year, hut that said power of revocation shall not exist or be in the party of the first part at any time during any calendar year but that same shall arise or come into existence only after the end of any such calendar year, nor shall there be power to revest in the party of the first part any part of the corpus of this trust during any such calendar year, but that the latter power shall arise and come into existence only after the end of such calendar year.

No instrument of revocation was executed prior to the year 1934. The trustor was not a trustee, and neither of the trustees was a beneficiary under the trust.

Is section 166, Revenue Act of 1934, which became law May 10, 1934, applicable to the situation ? Petitioner, in effect, contends that upon December 26, 1933, which was the last day upon which she could execute the instrument necessary to revocation of the trust to affect the year 1934, she had no knowledge that such law would be passed, and therefore to apply it to tax her upon the trust income for that year would be retroactive legislation, contrary to the Fifth Amendment to the Constitution of the United States.

It will be noticed that the trust provision is that the trustor had a right “by an instrument [in writing, etc., served at least five days before the end of any year] to revoke this trust after the end of any such calendar year.” No further instrument is provided for, nor notice mentioned. The revocation was to be effected by the written instrument, revoking the trust as of after the end of the year. During 1934, therefore, petitioner could have done everything necessary to revoke the trust, and the passage of time, until the arrival of the next year, was the only element necessary to full effect of revocation.

Section 166 of the Revenue Act of 1934 provides that:

Where at any time tbe power to revest in tbe grantor title to any part of the corpus of tbe trust is vested—
(1) in tbe grantor * * *

the grantor of such trust is chargeable with the income of such part of the trust.

The only requirement of revocation was action by the trustor herself in executing and serving upon the trustees a written instrument. By that action and by that instrument the trust was revoked after the end of the year in which the instrument was executed and filed. It is obvious that in order to effect revocation the trustor must, by and in the instrument served upon the trustees, state in effect “I hereby revoke, etc.” In the absence of such language, or if the trustor in the instrument merely states in effect “I intend on or after January 1 next, to revoke” the trust, it is apparent that the beneficiary could successfully challenge the attempt at revocation, for the trust indenture expressly provides that revocation is by the instrument served, prior to the end of the year by at least five days. It is undeniable, then, that dmring 193^ petitioner was vested with the right to revoke the trust, and to reinvest in herself title to the corpus thereof, subject only to the passage of time. To say that there was no power vested in the trustor would be to contradict the terms of the instrument; and to say that this was not power, by executed instrument, to reinvest herself with corpus merely because such reinvesting was subject to at least five days of interim interest by the trust, would be to say that an estate can not be vested merely because some other estate, such as a life estate, postpones enjoyment. The trust indenture herein requiring no further action by trustor than the execution and service of the written instrument, specifically stating that the revocation was by the written instrument, plainly shows vested power to reinvest trust corpus within the calendar year. By that instrument trustor was reinvested, though enjoyment was postponed. The additional language stating the intent to be that the power of revocation does not exist in the taxable year is not sufficient to overcome the positive requirement that the revocation is by the written instrument. The instrument is not merely a notice of intent to revoke, but is the revocation itself, subject to passage of time until the next year, as to enjoyment but not as to title.

It would be a strained interpretation indeed which would say that the trustor during 1984 was vested with no power over the corpus; and further strain to say that such power was not one to reinvest, for by the act and instrument, in 1934, trustor could be reinvested, with not even a condition precedent, but only a waiting period before taking possession. The statute does not require that the trustor be vested with a power to reinvest in himself possession or enjoyment of the income, but only “title to any part of the corpus.” Vested title or estate does not depend upon possession. Nonreceipt of actual income by a trustor with power to revoke was held immaterial in Simpson v. Com missioner, 77 Fed. (2d) 668, where trustor could revoke on December 31 of any year. Moreover, when trustor herein reinvests herself with title to corpus the only remaining effect of the trust is assignment of income thereafter accruing, taxable to settler under Reinecke v. Smith, 289 U. S. 172, and various other cases. Under the particular facts here, therefore, we hold that petitioner was in 1934 vested with power to reinvest title to corpus in herself. That the statute is intended to apply to trusts of this type is plainly indicated by the Conference Report on section 166 of the Revenue Act of 1934, where it is said:

Amendments nos. 96 and 97: Under existing law, the income from a revocable trust is taxable to the grantor only where such grantor (or a person not having a substantial adverse interest in the trust) has the power within the taxable year to revest in the grantor title to any part of the corpus of the trust. Under the terms of some trusts, the power to revote cannot be exercised within the taxable year, except upon advance notice delivered to the trustee during the preceding taxable year. If this notice is not given within the preceding taxable year, the courts have held that the grantor is not required under existing law to include the trust income for the taxable year in his return. The Senate amendments require the income from trusts of this type to be reported by the grantor. The House recedes. [Conference Report No. 1385, 73d Cong., 2d sess., p. 24.]

As to constitutionality, in Warren H. Corning, 36 B. T. A. 301, we sustained the statute against such attack, and though the case has been reversed, 104 Fed. (2d) 329, the reversal was not upon that ground. We think extended discussion of this issue is not necessary. We are not convinced by the cases adduced by petitioner that we should declare the statute unconstitutional. We are concerned here with a question of taxation of income derived from property owned, not retroactive treatment of a previous action or deed. Simpson v. Commissioner, supra, is, in our opinion, under the facts in this record, answer to the charge of unconstitutional legislation. There as here the Fifth Amendment to the Constitution was invoked, for substantially the same reasons as here urged, and was held not contravened, though the trustor could revoke the trust only upon the last day of the year as to which the tax was sustained. Under our conclusion above, that not only upon December 26, but at any time prior thereto during the taxable year, the trustor could revoke and reinvest title to the corpus in herself, subject only to delayed enjoyment, it is obvious that the cited decision is controlling here. See also Clapp v. Heiner, 51 Fed. (2d) 224; Corliss v. Bowers, 281 U. S. 376; and Burnet v. Wells, 289 U. S. 670. We hold that the statute involved did not effect an encroachment upon rights constitutionally guaranteed in petitioner, and that respondent did not err in including the income from the trust in computing petitioner’s net income.

Decision will he entered for the respondent.


author: Steenhagen : Black,

text:
    Anna L. Raymond, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86709.
    Promulgated July 20, 1939.

      Merritt G. Brag don, Esq., James F. Oates, Esq., and Middleton Miller, Esq., for tbe petitioner.

      D. A. Taylor, Esq., and F. F. Korell, Esq., for the respondent.
   OPINION.

Steenhagen :

1. The petitioner omitted from gross income the annuities which she received, her theory being that she had not yet recovered her capital. The Commissioner determined that only part of the value of the securities transferred to the institutions was “consideration paid” for the annuities, and that since the amounts received by petitioner aggregated more than the “consideration paid” as he had computed it, the excess was taxable gain, Eevenue Act of 1932, sec. 22 (b) (2); Revenue Act of 1934, sec. 22 (b) (2). He treats the excess over the consideration paid as a charitable gift.

The character of a transfer is not to be determined alone by the' word used to describe it. Between the parties to an agreement it may suffice to speak generally of its “consideration”; but there is room for a further inquiry when the problem is to ascertain how much in fact served as support for the obligation and how much served otherwise. A transfer under a contract may be recognized as having more than one character, even though the contracting parties for their own purposes treat it as an entirety, G. Wildy Gibbs, 28 B. T. A. 18. Indeed the treasurer of the Art Institute artlessly called the entire transfer a “splendid gift.” A sale of shares between a parent and child for a disproportionate price may be in part a gift in view of the circumstances surrounding it, May Rogers, 31 B. T. A. 994; Donald McDonald, Jr., Administrator, 28 B. T. A. 64; Harry F. Robertson, 5 B. T. A. 748. Between an employer and an employee a sale may be found to be a means of providing compensation for services, E. D. Knight, 28 B. T. A. 188; cf. Delbert B. Geeseman, 38 B. T. A. 258; A. Levy & J. Zentner Co., 31 B. T. A. 386; W. M. Ritter Lumber Co., 30 B. T. A. 231. A shareholder may contribute capital to his corporation by paying an exorbitant price in an ostensible purchase, cf. Jenkins v. Bitgood, 21 Fed. Supp. 250; reconsidered, 22 Fed. Supp. 16; Pennsylvania Indemnity Co. v. Gommissioner, 77 Fed. (2d) 92, or receive a distribution in the guise of an excessive price in sale.

* * * Certainly, where all the facts and circumstances in the ease, including the express stipulation of the parties, clearly show the making and the intent to make a gift, it cannot he con|verted into a payment for services by inaccurately describing it, in the consummating resolutions, as a bonus. {Bogardus v. Commissioner, 302 U. S. 34.]

The terminology of the parties may not be ignored, but it has less weight than the facts and circumstances to prove the nature of the payment, Bogardus v. Commissioner, supra; Alger-Sullivan Lumber Co. v. Commissioner, 57 Fed. (2d) 3; Robinson v. Commissioner, 59 Fed. (2d) 1008; cf. Commissioner v. Merrell, 93 Fed. (2d) 466; Madeira v. Commissioner, 98 Fed. (2d) 55'6.

In the present case, Mrs. Baymond, a wealthy woman over seventy-one years of age, was not interested solely in purchasing an annuity. If she had been, insurance companies were readily available whose rates for an annuity to a woman of her years were substantially less than the amount she turned over to each institution. She made no investigation to ascertain how large an annuity she could have purchased for the securities, but only as to how much each particular charitable institution would pay her annually if she transferred them to it. This was the extent of the preliminary negotiation, if negotiation it can be called. Furthermore, there was not an isolated transaction which happened to involve a charitable corporation; each was one of a series of nine such transactions, all of which were likewise with charitable organizations. This common factor of nine such occasions is important, for it denotes a gratuitous purpose and charitable intent which give color to each. It makes it unmistakable that the petitioner was not participating in nine business transactions whereby she was giving up only an amount commensurate with what she got, but that she intended as well to make a gift. While petitioner did not testify, the inference of her donative intent is inescapable; and there is no factual evidence to gainsay it. It must be recognized no less when it is coupled with a contract than if it stood alone. Irrespective of the difficulty which may arise in any such case in measuring the gift and the cost of the annuity, it seems clear that the dual nature of the transfer must be recognized. The amalgamation in a single sum as consideration does not compel a single characterization pervading the entire amount, cf. Anna M. Keller Estate, 39 B. T. A. 1047. We hold, therefore, that the transfers were in part consideration paid for an annuity and in part a gift.

Continental Illinois Bank & Trust Co. v. Blair, 45 Fed. (2d) 345, is essentially at variance with the later Supreme Court decision in Helvering v. Butterworth, 290 U. S. 365, and has not been followed since, Michael Fay et al., Executors, 34 B. T. A. 662; Sallie Cosby Wright, 38 B. T. A. 746.

F. A. Gillespie, 38 B. T. A. 673, cited by the petitioner, does not reach this case. The taxpayer there contended that the exorbitant price paid for the annuity was if so facto greater than the “consideration paid.” The large amount alone was relied upon to support that view. No part of the transfer was a gift or shown to be other than the cost of the annuity. The decision is no authority for saying that an excessive price must be adopted as the consideration paid for an annuity, but only that to limit the “consideration” to part of the transfer requires evidence showing a different character for the excess.

The testimony of persons speaking for the several charitable organizations all shows that the institutions were not making a business of selling annuities, that such contracts as these were few and that they could not afford to and would not make an annuity contract with petitioner upon terms as favorable to her as she could get from an insurance company, the point being that the amount received was regarded by them as the consideration for the annuities. This, however, does not determine the result here. To hold, as we do, that the amount transferred by the petitioner under the designation of consideration for the annuities is in reality partly a gift, is of no moment to the donee. The legal characterization of the transfer is not of the essence of the contract; it manifestly did not and would not influence the institution’s promise. There is no reason to suppose that the promise would have been refused if the petitioner had categorically offered to make two simultaneous transfers, one for an annuity and one as a gift. It is of slight importance that the entire amount received by the charity was treated as the foundation for the annuity. The transfer having been made, it is hard to see how its characterization can have any substantial significance for the charity. But in any event the question between the Government and the taxpayer is not dependent upon the institution’s conception of the contract.

Whether the charities would have competed with the insurance companies is also without significance. Probably they would not. Probably also the petitioner would not have dealt with an insurance company in any event, for she was obviously desirous of benefiting these charities. But again this does not require that for the purpose of taxing income to her the Government must measure the consideration by the amount the charity might have required. The word “consideration” is not a crystal, cf. Towne v. Eisner, 245 U. S. 418.

It is said that since the length of petitioner’s life was inevitably conjectural the price paid for the annuity was no more than a reasonable consideration. This idea proceeds from the testimony of representatives of the institutions as to the reason why they must charge more for an annuity than an insurance company. But it works both ways, as well to curtail the annuities if petitioner’s life ends earlier as to enlarge them if her life is prolonged. There is nothing in the evidence to show that she measured this chance or gave it consideration. Her intent to make a gift must be determined from the circumstances which impinge upon her and not from the reasoning of the managers of the institutions.

No matter what may be the dialectics, the fact persists that petitioner intended to make gifts to these several charities and elected to do so in conjunction with contracts for annuities. This can not be escaped by treating the consideration paid for the annuity as a blanket covering the gift. The doctrine that the determination must be based on what was done and not on what might have been done, does not belp the petitioner, for the present conclusion is in accordance with that doctrine. What was done was not only to purchase annuities but also to make the gifts.

2. To hold that part of what petitioner transferred to each of the charities was a gift requires that the amount of the gift be fixed. The Commissioner fixed it by taking the consideration paid for the annuity to be the commuted value figured according to Regulations 80, article 10, which relates to estate taxes. That table is shown to be outmoded. It adopts the so-called “Actuaries’ or Combined Experience Table of Mortality,” a table prepared in Great Britain in 1848 from experience data which have long since been regarded in this country as obsolete. The evidence shows that a later table called the “American Annuitants’ Mortality Table” is a more approved table and is now commonly in use among insurance companies in the United States. Although any mortality table, being derived entirely from average experience, is necessarily speculative in its application to a given individual, it may not be discarded for that reason unless there is something better, Simpson v. United States, 252 U. S. 547. The uncertainty as to the date of death is unlike the annual uncertainty of the yield of minerals in Burnet v. Logan, 283 U. S. 404, and does not preclude a reasonably certain valuation of the investment or a tax upon the income.

Taking the American Annuitants’ Mortality Table as the most approved table available, as shown by the evidence, the petitioner’s expectancy at the dates of the several agreements can readily be computed to arrive at the reasonable cost which petitioner would have paid to the five leading insurance companies for the annuities which she bought, May Rogers, supra. This figure in each instance is to be regarded as the consideration paid for the annuities. So much is to be taken under the Revenue Act of 1932 as the untaxed recoverable amount.

The table in the findings shows that the annuities received by petitioner in 1933 did not bring the aggregate above the consideration paid, and hence there is no amount of the annuities subject to tax in 1933.

For 1934 the decision is controlled by the later statute, Revenue Act of 1934, sec. 22 (b) (2). Under this statute the annuity is taxed to an amount equal to 3 percent of the consideration paid; after the tax-free amounts of the annuities aggregate the amount of the consideration paid, the excess received is taxable. The table in the findings shows that the first seven annuities included amounts above the consideration paid, while the last two were still short of the consideration. Thus of the first seven annuities received, the amounts shown in the last column must be included in petitioner’s taxable income of 1934. Of the remaining two, only so much shall be included in income as is equal to 3 percent of the consideration paid, as that consideration shall appear in the computation approved above.

3. The petitioner assails as unconstitutional the tax imposed by the 1934 Act upon 3 percent of the consideration. This contention has been rejected in F. A. Gillespie, supra, and we adhere to that decision. The uncertainty of petitioner’s length of life prevents the conclusion that she will not recover the cost of her annuity, and Congress may no doubt prescribe a reasonable formula for dividing each annual amount between income and restoration of capital. There is no reason to say that the 3 percent assigned to income is an unreasonable allocation, since, as said in the Gillespie opinion, it conforms to “what the legislative body believed to be the income ordinarily realized by the annuitant.” Going deeper, it is not yet clear whether an annuity is to any extent outside the term “income” in the Sixteenth Amendment. The doubt is enough to prevent this Board’s holding that the tax upon part of the annuity is a direct tax upon property by reason of its ownership and invalid if not apportioned, or so arbitrary as to be a capital levy in the guise of an income tax.

Reviewed by the Board.

Decision will ~be entered under Rule 50.

Black,

dissenting: I respectfully dissent from the majority opinion. In the view that I take of the law and the facts of this case, petitioner is taxable on the annuities received in 1934 to the extent of 3 percent of the principal amount paid for each annuity.

I agree to the conclusion reached by the majority that none of the annuities received by petitioner in 1933 are taxable to her under the provisions of section 22 (b) (2), Revenue Act of 1932. But in calculating whether the aggregate amount of the payments which petitioner has heretofore received exceeds the amounts paid as consideration for the annuity contracts, I do not agree that the basis of cost of the annuity contracts is what the insurance companies would have charged for similar annuity contracts.

It is this difference which furnishes the ground for my differing from the majority opinion on the amount which is taxable for the year 1934, under section 22 (b) (2) of the 1934 Act.

The conclusion of the majority as to what is taxable in 1934 is based upon the finding that part of the property transferred by Mrs. Raymond to the respective charitable and educational institutions represented gifts to such institutions and that part represented consideration for the annuity contracts. I do not subscribe to the theory that the evidence justifies such a finding. Cf. Madeira v. Commissioner, 98 Fed. (2d) 556. The fact that similar annuities could have been purchased from insurance companies at a less price than petitioner paid these educational and charitable institutions, it seems to me is not material.

Outside of the first annuity of $5,000 evidenced by letters on July 24,1925, with the Art Institute of Chicago, the remaining eight annuity agreements were evidenced by formal written contracts executed by the petitioner and the respective institutions. The following agreement with the Field Museum of Natural History, dated July 27, 1925, is given in petitioner’s brief as typical. This reads as follows:

This Agreement, Made and entered into this 27th day of July, A. D. 1925, by and between Anna L. Raymond, of Chicago, Illinois, the party of the first part, and Field Museum of Natural Histoby, a corporation organized and existing under and by virtue of the laws of the State of Illinois, the party of the second part,
WITNESSETH THAT:
The parties hereto, each in consideration of the covenants and undertakings on the part of the other hereinafter contained, covenant and agree to and with each other as follows:
First : The party of the first part covenants and agrees, simultaneously with the execution and delivery of this agreement, to duly assign, transfer and deliver to said party of the second part, as its own absolute property, each and all the following described securities, to-wit:
All those bonds specifically described in Schedule A, hereto annexed.
Second: Said party of the second part, in consideration of, and from and after the transfer to it of the securities hereinabove scheduled by said first party, covenants and agrees to pay to said party of the first part in each and every year during her natural life an annuity in the sum of Fifteen Thousand Dollars ($15,000), in equal quarterly installments of Thirty-seven Hundred Fifty Dollars ($3750.00) each, on the first day of each of the months of July, October, January and April in each year, the first payment to be made on the first day of October, A. D. 1925.
Third : That upon the transfer and delivery of said securities in accordance with this agreement, said securities shall become and be the absolute property of said second party without any limitation or qualification whatever, and further, that from and after the transfer and delivery of said securities to said second party its obligation to pay said annuity to said first party shall become and be binding and effective, and shall so continue during said first party’s natural life, free from any qualifications or limitations, and regardless of whether or not said securities, or the property in which the proceeds therefrom may be invested, or the income therefrom, shall at any time be diminished or altogether cease.
In Witness Whereof, the parties hereto have caused this agreement to be executed under seal all on the day and year first above written.
[Signed] Anna L. Raymond
Field Museum of Natural History
By Stanley Field
President

Notwithstanding the foregoing contract between the parties, the majority opinion holds that the transfer made by Mrs. Eaymond to the Field Museum in consideration of that institution agreeing to pay her an annual life annuity of $15,000 was in part consideration paid for an annuity and in part a gift. In F. A. Gillespie, 38 B. T. A. 673, we rejected such a contention, and I do not agree with the majority opinion in saying that the Gillespie case is distinguishable in its facts from the instant case. The amount that was paid as consideration for the annuity is found by the majority opinion to be that which would have been paid to the five leading insurance companies under the American Annuitants’ Mortality Table. The balance of the value of the transfer is found as the amount of the gift.

It seems to me, as I have already said, that in the face of the contract between the interested parties, such a finding is not justified. The property transferred to Field Museum by petitioner in consideration of the $15,000 annuity agreed to be paid her was valued at $302,150 at the time of transfer. Assuming this to be the consideration paid for the annuity, as I do, then 3 percent of this principal amount would be taxable to petitioner in 1934, which would be $9,064.50. The balance of the $15,000 would not be taxable but would be applied under section 22 (b) (2) of the 1934 Act to the principal amount paid for the annuity until such amounts added to the amounts already received tax-free equals the aggregate premiums or consideration paid for such annuity.

The discussion which I have given above as to the annuity agreement between petitioner and the Field Museum would, I think, apply equally to the other annuity agreements.

I am in agreement with the majority opinion following F. A. Gillespie, supra, that the tax imposed by the 1934 Act upon 3 percent of the consideration is constitutional.

       In some of the states and in Great Britain an annuity is taxed as income, Magill. Taxable Income, p. 367 et seq.


author: Haeron: Black,

text:
    Annette Loughran, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89464.
    Promulgated July 20, 1939.

      Annette Lough/ram, pro se.

      Harry E. Morrow, Esq., for the respondent.
   OPINION.

Haeron:

Petitioner claims a personal exemption credit of $2,500 under section 25 (b) (1) of the Eevenue Act of 1934 as a head of a family. Eespondent contends that petitioner is entitled to the personal exemption credit of $1,000, only, allowed in the case of a single person.

Petitioner bases her claim to the credit as a head of a family upon the grounds that her married mother is dependent on her for support and maintenance and that she actually supported and maintained her dependent mother in one household; that her right to exercise family control and provide for her dependent mother is based on a moral obligation. Such is our understanding of petitioner’s contentions from her testimony, petitioner being a lay person and having appeared for herself in this proceeding without counsel and without filing a brief on the law.

The facts show that petitioner was the sole support of her married mother in 1934 and that she maintained her mother in her own home. Also, that the husband of petitioner’s mother willfully failed to support and maintain his wife and placed her in the position of a poor person dependent upon an only child, petitioner, for support and maintenance. Petitioner, by selecting and maintaining the home for herself and her mother, and by paying all expenses of the household and the mother, exercised family control. The mother was not in the position of an employee of petitioner and was not capable of self-support. William Ash lived in the same household with his wife and petitioner, but he did not perform his financial duties and obligations; he did not select the place of abode. It is a reasonable conclusion that, of his own will, he relinquished his place as the head of the family to petitioner. No other conclusion can be reached upon the facts nor is it necessary to reach any other conclusion in applying and construing section 25 (b) (1) of the Revenue Act of 1934, according to our understanding of the intent of Congress.

Congress has allowed a higher personal exemption credit against net income, since the Revenue Act of 1916, to a person who is a head of a family or a married person. Finding nothing to the contrary in any express intent of Congress in making such provision in all the revenue acts since 1916, we assume that the underlying reason for the higher personal exemption credit is to make the tax burden of a person who supports and maintains others in the capacity of either a head of a family or a married person somewhat lighter than the tax burden of a single person or a person who is not a head of a family. This involves a weighing of social burdens. While Congress has not defined the term “head of a family”, the interpretation of that term made by the Commissioner is enlightening. In Regulations 86, article 25, the term is interpreted as follows:

4. Personal exemption of a head, of family. — A head of a family is an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. * * *

The interpretation adopted by the Commissioner makes it a prerequisite, as we read his interpretation of the statute, that to be classed as a head of a family there must be a legal or moral obligation to exercise family control over a dependent person or persons. This requirement appears to us to be reasonable and to be within the intendment of the statute. Cf. Alfred E. Fuhlage, 32 B. T. A. 222, 229. That interpretation applied here would allow classification of petitioner as a head of a family.

In this proceeding, so far as the record shows, petitioner’s claim to be a head of a family does not put any strain upon the statute, i. e., there are no conflicting claims by persons in the same family unit for the same personal exemption. William Ash does not claim any personal exemption credit as either a head of a family or as a married person. He has apparently claimed immunity from Federal income tax as a state employee. In such circumstances, we believe petitioner’s claim is not defeated by other considerations relating to the legal status of William Ash under local law as a married man. It is true that under local law a husband is a head of a family and has a primary legal duty to support his wife; nevertheless, where he has neglected Ms legal duty and failed to exercise his legal rights as a head of a family, then, in applying a provision of a revenue act, we believe that it is in accord with the intendment of Congress to hold that another person who acts as head of the family under exercise of a moral obligation was the head of the family for purposes of taxation. Petitioner supported and maintained her mother, a poor person, according to her concept of her moral obligation. There is even room for argument that petitioner had a legal obligation to support her mother in the existing situation under the provisions of section 206 of the California Civil Code, providing reciprocal duties of parents and children to maintain each other where either is poor and unable to maintain himself by work. Respondent’s contentions in tliis proceeding fail to give proper weight to the facts surrounding petitioner’s status and performance in unusual circumstances.

It is held that petitioner is entitled to the personal exemption credit of $2,500 as a head of a family.

Reviewed by the Board.

Decision will be entered* for the petitioner.

Opper concurs only in the result.

DisNey dissents.

Black,

dissenting: I think the Commissioner’s determination in this proceeding should be sustained. I, therefore, dissent from the majority opinion.

The findings of fact show that the taxpayer’s mother was, during the taxable year, living with her husband, William Ash, and that Ash was employed and received about $2,100 income during the taxable year. Notwithstanding this fact, William Ash and Mrs. Ash resided with petitioner and petitioner contributed the entire support of her mother. Even though this was so and was a very generous act on petitioner’s part, I don’t think it gives her the right to deduct $2,500 personal exemption as “head of a family.” Under Treasury Regulations 86, article 25, quoted in the majority opinion, in order for one to be entitled to the personal exemption of $2,500 granted to the head of a family, it is not enough to simply support and maintain in one household one or more individuals who are closely connected with him by blood relationship, relationship by marriage, or by adoption, etc. Those thus supported in the one household must be “dependent” upon the taxpayer who is claiming the $2,500 exemption.

In Mary H. Walton, 37 B. T. A. 620, in discussing the requirement just above referred to, the Board said:

* * * A reading of the applicable regulation which we have quoted above shows that the individual or individuals whom the taxpayer must maintain and support in one household in order to constitute him the “head of a family” must be dependent upon him for support. The language of the regulation is, among other things, “and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation.” [Italics ours.]

I will agree that if it can be said, under the facts found in the majority opinion, that Mrs. Ash was “dependent” upon her daughter as the word “dependent” is commonly and ordinarily understood, then there would be “moral obligation” enough on petitioner’s part to fulfill the requirement of the regulation. But how can it be said, under the facts found, that Mrs. Ash was dependent upon her daughter for support? She was living on amicable terms with her husband, and her husband was employed and received an income of about $2,100 in the taxable year, though apparently contributing nothing to the support of his wife. I think it is stretching the law beyond anything that Congress ever intended to hold that under such circumstances the mother is dependent upon her daughter for support and that the daughter, who furnished support under these circumstances in one household, maintained by her, is entitled to deduct $2,500 as the “head of a family.”

Now, if the mother had been estranged from her husband and not living with him and had no means of support of her own and on that account lived with her daughter, doubtless under such circumstances the daughter would be entitled to the $2,500 personal exemption provided by law for the head of a family. Cf. Olive Boss, 37 B. T. A. 928. Also, if Ash had been out of employment and had no income with which he could support his wife and by force of these circumstances he and Mrs. Ash had lived in the same household with petitioner during 1934 and petitioner had furnished the sole support of her mother, the personal exemption of $2,500 would perhaps apply.

But the facts here are not that kind of a case and, under the facts as found, I can not agree that petitioner is entitled to the $2,500 personal exemption provided bv law for the “head of a family.”

ARNOLD and Hill agree with this dissent.

       SEC. 25. CREDITS OF INDIVIDUAL AGAINST NET INCOME.

      (b) Credits for. Both Normal Tax and Surtax. — There shall be allowed for the purposes of the normal tax and the surtax the following credits against net income:
      (1) Personal exemption. — In the case of a single person, a personal exemption of $1,000; or in the case of the head of a family or a married person living with husband or wife, a personal exemption of $2,500. A husband and wife living together shall receive but one personal exemption. The amount of such personal exemption shall be $2,500. If such husband and wife make separate returns, the personal exemption may be taken by either or divided between them.

       Sec. 206. It is the duty of the father, the mother, and the children of any poor person who is unable to maintain himself by work, to maintain such person to the extent of their ability. The promise of an adult child to pay for necessaries previously furnished to such parent is binding.


author: Mtjedock :

text:
    Sam Pickard, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78555.
    Promulgated July 20, 1939.

      L. A. Luce, Esq., and Perry W. Shrader, Esq., for the petitioner.

      G. G. Holmes, Esq., and Jonas M. Smith, Esq., for the respondent.
   OPINION.

Mtjedock :

The petitioner held 300 shares of stock of Station. The other 200 shares outstanding were owned by Boyd and Mittendorf. Columbia desired to acquire Station and agreed with the owners of the stock to buy that stock for $292,000, $175,200 of which was to be paid to the petitioner. That agreement was entered into on October 14, 1931. It permitted the transfer to Columbia to be made through the medium of a holding company. Boyd and Mittendorf sold their station shares to Columbia directly for cash ,in accordance with the agreement. The only reason that the petitioner did not transfer his shares to Columbia for cash, in accordance with that agreement, was his desire to avoid tax. Columbia was willing to buy the stock directly for cash. The scheme which was actually followed was not designed at the request of or to benefit Columbia. It was designed wholly for the benefit of the petitioner in order to avoid taxes. His purpose to avoid tax is material only as indicating a nonbusiness purpose in organizing Holding. Gregory v. Helvering, 293 U. S. 465.

The first step in the petitioner’s plan was the exchange of his 300 shares of Station stock for 200 shares of Holding stock. That exchange, he says, comes under section 112 (b) (5) of the Revenue Act of 1928, since “immediately after the exchange” he was “in control of the corporation” and his gain is not recognized. However, this was not an independent transaction, but was a mere component step, an integral part of a single plan. “Control” is determined, for the purpose of section 112 and similar provisions of prior acts, as of the completion of the entire plan, not as of the completion of an interdependent step. Wilbur F. Burns, 30 B. T. A. 163; affd., 85 Fed. (2d) 8, under the title Bassick v. Commissioner; certiorari denied, 299 U. S. 592; Commissioner v. Schumacher Wall Board Corporation, 93 Fed. (2d) 79; Hendee v. Commissioner, 98 Fed. (2d) 937; W. K. Holding Corporation, 38 B. T. A. 830, 842. The “control” of Holding by the petitioner was, as was intended, transitory only. The plan required that he immediately surrender his Holding shares to Columbia so that it could acquire that which it sought, the Station shares. The exchange of the Station shares for the Holding shares is not within section 112 (b) (5). The profit from that exchange would be $145,-200 (Holding shares worth $175,200 received for Station shares which had cost $30,000). But, as has been said above, that was only a step.

The next steps were to organize Sampick and Esspick, to transfer to them property about equal in value to the value of the 300 Station shares, and to distribute their stock to the petitioner without the surrender by him of his Holding shares. These transactions gave the petitioner property worth about $171,000 while the 200 Holding shares were losing a like amount of value. His thought was that these transactions would be tax-free from his standpoint under section 112 (g), since stock of a corporation, a party to a reorganization, would be distributed to him pursuant to a plan of reorganization without the surrender by him of his Holding shares.

He was in error in believing that section 112 (g) would apply. These transactions were but component parts of the single transaction of transferring the Station shares to Columbia for $175,200. Holding had no business purpose. It served merely as a conduit for transferring the Station shares to Columbia and for conveying the $175,200 consideration from Columbia. There can be no statutory reorganization under such circumstances. Gregory v. Helvering, supra. There was no continuity of interest in any direction. Holding retained no interest in Sampick or Esspick and they retained none in Holding. Furthermore, the petitioner retained no interest in Holding. Three days later, pursuant to the single and inseparable plan, he transferred his Holding shares to Columbia. Thus he disposed of his Station shares and received finally property (cash and Sampick and Esspick shares) which derived none of its value directly or indirectly from any of the property transferred. Some continuity of interest in the property transferred is essential if a transaction is to be classed as a reorganization under section 112 (i) (1). Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; Electrical Securities Corporation v. Commissioner, 92 Fed. (2d) 593; Bancker v. Commissioner, 76 Fed. (2d) 1; Groman v. Commissioner, 302 U. S. 82; Hendee v. Commissioner, supra.

Several additional steps were necessary to complete the plan. Columbia purchased 200 shares of newly issued stock from Holding for $172,000 in cash and, two days later, purchased 200 shares of the same stock from the petitioner for $3,700. The unity of the plan is clearly demonstrated by this discrepancy in price. Obviously petitioner never controlled Holding, since he was always required to sell its stock for a nominal balancing amount. Had he failed to do so the purpose of the entire plan would have been defeated. Columbia, having no business purpose for Holding, soon dissolved it and finally got that which it had always desired, the 300 shares of Station stock. The plan was then complete. It constituted a single taxable transaction of exchange. Columbia received the Station stock. The petitioner received $3,700 in cash and stocks worth approximately $171,500, a total amount realized of $175,200. That was the amount for which, he had agreed to sell. The consideration was all furnished directly or indirectly by Columbia in 1931.

The acquisition by Holding of a majority of the stock of Station was not a reorganization within section 112 (i) (1), since Holding had no business purpose and a continuity of interest was lacking when the entire plan was completed. This point is not urged by the petitioner, but is mentioned merely to show it has not been overlooked in the decision of this case.

The elaborate scheme devised to avoid tax did not serve that purpose, since it did not bring the gain within any of the nonrecognition provisions but left it under the general rule of section 112 (a). The amount of the gain is not disputed. The Commissioner did not err in taxing that gain as a part of the petitioner’s income for 1931. See Hendee v. Commissioner, supra, involving facts similar in all important respects.

Reviewed by the Board.

Decision will be entered for the respondent.

Van Fossan dissents.


author: Smith:

text:
    Dickinson Trust Company, Executor, Estate of Margaret Deal, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91324.
    Promulgated July 20, 1939.

      Wilfred Jessup, Esq., and George S. Olive, C. P. A., for the petitioner.

      F. B. Shearer, Esq., for the respondent.
   OPINION.

Smith:

This is a proceeding for the redetermination of a deficiency in estate tax in the amount of $3,194.24. The respondent admits that by reason of proof of a payment of Indiana inheritance tax the correct deficiency is only $2,141.40.

The questions in issue are (1) whether the estate is entitled to deduct from the gross estate $18,000 which was paid by the petitioner to DePauw University in accordance with a contract executed by the decedent during her lifetime and (2) whether the estate is entitled to a deduction of $750 which was paid by the petitioner to Evansville College in satisfaction of a pledge made by the decedent during her lifetime.

The stipulated facts may be summarized as follows:

1. The petitioner is an Indiana corporation located at Richmond, Indiana, and is the executor of the estate of Margaret Deal, whose death occurred on August 16, 1985, the said appointment being still in full force and effect.

2. As executor of the estate of Margaret Deal the petitioner paid to DePauw University, Greencastle, Indiana, the amount of $18,000 and to Evansville College, Evansville, Indiana, the amount of $750.

3. The $18,000 above referred to was paid in accordance with the terms of a contract executed November 21, 1923, as follows:

Liberty, Indiana
November 21, 1928.
In consideration of the agreement of DePauw University of Greencastle, Indiana, to establish and maintain in perpetuity, from and after the completion of the payments herein provided for, a Memorial Ohair of Instruction, to be known as the John T. and Margaret Deal Ohair of Mathematics of DePauw University, established in memory of Otis F. Deal, the undersigned John T. Deal and Margaret Deal hereby jointly agree to pay to said DePauw University the sum of fifty thousand dollars (each agreeing to pay one-half thereof), payable as follows:
Two thousand dollars (one thousand dollars by each of us) on or before January 1st, 1924, and a like amount the first of each January thereafter until the death of either of us, when the unpaid portion of the twenty-five thousand dollars for which the one so first dying is responsible shall be payable; and thereafter the survivor agrees on account of his or her obligation hereunder to pay one thousand dollars on January 1st of each year; and unpaid balance on account of the total obligation of the survivor to he due and payable at the death of such survivor; if any annual installment is not paid when due, the time for payment may on request be extended for one year, and such installment shall bear interest at six per cent during the period of such extension.
Such funds when fully paid shall be kept invested and separated from all other funds and maintained in perpetuity by DePauw University and only the income thereof shall be used to maintain such Ohair of Mathematics.
[Signed] John T. Deal
[Signed] Margaret Deal
In consideration of the foregoing obligation of John T. and Margaret Deal, DePauw University agrees to receive and hold such funds and establish the Chair of Mathematics on the conditions therein set forth.
DePauw University
By Hugh Dougherty
Chairman Board of Trustees.

4.Payments under this agreement were made as follows:

5. The chair of mathematics provided for in the aforesaid contract was established by DePauw University in September 1929 and has since been maintained.

6. DePauw University is a corporation organized and operated exclusively for educational purposes, and no part of its earnings inures to the benefit of any private stockholder or individual.

1. In the estate tax return filed for the estate of Margaret Deal the petitioner deducted from the gross estate the $18,000 paid by it in fulfillment of the obligation of Margaret Deal under the contract of November 21, 1923. The deduction has been disallowed by the respondent in the determination of the deficiency.

8. On May 20,1929, Margaret Deal executed a pledge to Evansville College, Evansville, Indiana, which reads as follows:

EVANSVIELE COLUSGH FORWARD MOVEMENT
Mat 20, 1929.
In Consideration of my interest in Evansville College, a corporation, located in Evansville, Indiana, and for tlie purpose of liquidating indebtedness against the Said College, to increase The Endowment Fund, to supplement the current income for a period of three years, and for value received, I hereby pledge and promise to pay to Evansville College, a corporation,
the sum of Fifteen Hundred_Dollars ($1500.00),
payable in six equal semi-annual installments, covering a period of three years beginning Oct. 1st, 1929, and continuing each first day of April and first day of October thereafter until fully paid.

9. The pledge made by Margaret Deal to Evansville College was like other pledges or contributions made at or about the same time. for the purpose of liquidating indebtedness, increasing endowments, and to supplement the current income.

10. Evansville College is an Indiana corporation organized and operated exclusively for educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual.

11. At the date of the decedent’s death she still owed $750 on her pledge, which amount was duly paid by the petitioner and claimed as a deduction in the estate tax return. The deduction was disallowed by the respondent in the determination of the deficiency.

The petitioner claims that the payments of $18,000 and $750, in fulfillment of the pledges are legal deductions from the gross estate as claims against the estate.

Section 303 of the Revenue Act of 1926 reads in material part as follows:

Sec. 303. For the purpose of the tax the value of the net estate shall be determined—
(a) [As amended by section 403 (a) of the Revenue Act of 1934.] In the case of a citizen or resident of the United States by deducting from the value of the gross estate—
(1) [As amended by section 805 of the Revenue Act of 1932.] Such amounts—
(O) for claims against the estate,
as are allowed by the laws of the jurisdiction, whether within or without the United States, under which the estate is being administered, but not including any income taxes upon income received after the death of the decedent, or property taxes not accrued before his death, or any estate, succession, legacy, or inheritance taxes. The deduction herein allowed in the case of claims against the estate, unpaid mortgages, or any indebtedness shall, when founded upon a promise or agreement, be limited to the extent that they were contracted bona fide and for an adequate and full consideration in money or money’s worth. * * *

The respondent contends that the pledges made by the decedent to DePauw University and Evansville College were not contracted “for an adequate and full consideration in money or money’s worth”, and, hence, are not legal deductions as claims against the estate.

The facts in this case relating to the payment of $18,000 to De-Pauw University show that the decedent and her husband desired to contribute $50,000 in installments to DePauw University for the purpose of founding a chair of instruction to be known as the “John T. and Margaret Deal Chair of Mathematics of DePauw University.” The decedent and her husband were each to pay one-half of the amount.

The law is well established that it is not necessary that a consideration for the support of a pledge shall flow to the estate of the pledgor. See Porter v. Commissioner, 60 Fed. (2d) 673, 675; affd., 288 U. S. 436. It has also been held that a money pledge supported by similar pledges of others is deductible from the gross estate within the statute. See Jeptha E. Wade, Jr., et ah., Executors, 21 B. T. A. 339.; Frances Plumer McIlhenny et al., Executors, 22 B. T. A. 1093; David A. Reed et al., Executors, 24 B. T. A. 166; Robert A. Taft, 33 B. T. A. 671. The Board’s opinion upon this point in the last cited case was affirmed by the Circuit Court of Appeals for the Sixth Circuit in Taft v. Commissioner, 92 Fed. (2d) 667. In the course of its opinion the Circuit Court said:

* * * In respect to pledges which were contingent upon sums being contributed by others equal to or in excess of the decedent’s pledge the consideration is money, and in respect to other claims such as annuities in return for the transfer of the Cincinnati Conservatory of Music to the Institute of Arts and the work of scientific men in a research and publishing enterprise, the consideration is property or services. * * *

In this proceeding the petitioner asks the Board to find that “the decedent was to pay $25,000 to the University in consideration of the payment of a like amount by John T. Deal.” The Board can not make such finding upon the facts stipulated. There is nothing in the record which shows that the pledge made by Margaret Deal was in any wise contingent upon the pledge made by John T. Deal.

The consideration for the pledge of $50,000 stated in the agreement of November 21, 1923, was the undertaking on the part of the university to “establish and maintain in perpetuity a Memorial Chair of Instruction” to be known as above indicated. It would be a far stretch of the imagination to say that such a consideration was an “adequate and full consideration in money or money’s worth.”

In this respect the facts are similar to those which obtained in Robert A. Taft, supra, in connection with a pledge to pay $2,000,000 to the University of Cincinnati for the establishment of a memorial fund to be known as “Charles Phelps Taft Memorial Fund.” We held that the pledge paid by the executor was not deductible from the gross estate. Our decision in that case was affirmed by the United States Circuit Court of Appeals for the Sixth Circuit, and also by the Supreme Court in Taft v. Commissioner, 304 U. S. 351.

The facts with respect to the payment of the $750 to Evansville College are that the decedent pledged the full amount of $1,500 to that college and died still owing $750 on her pledge, which amount was paid by her executor. The stipulated facts are that the executive secretary of the college would have testified if he had been called to testify in this proceeding “that the said gift of Margaret Deal was one of several like gifts or contributions made for the purpose of liquidating indebtedness, increasing Endowment Funds and to supplement the current income of Evansville College.” The petitioner asks the Board to find that “the decedent agreed to pay the amount of $1,500 to the college in consideration of like pledges by others.” The Board can not make that finding upon the stipulated facts. There is no evidence that the decedent made the pledge contingent upon pledges being made by others. She simply agreed to make the payment. The fact that the pledge was enforceable by state law does not authorize the deduction.

Neither are the pledges that were paid by the petitioner deductible from the gross estate under section 303 (a) (3) of the Revenue Act of 1926, which provides for the deduction from the gross estate of bequests, legacies, devises, or transfers to or for the use of educational and charitable institutions. The payments made by the executors were not transfers of property by the decedent within the meaning of the taxing statute. See Taft v. Commissioner, 304 U. S. 351.

Reviewed by the Board.

Decision will be entered for the respondent.