author: BlaCK :

text:
    Falcon Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92001.
    Promulgated May 14, 1940.

      Leonard M. Levy, Esq., and Warner Evans, Esq., for the petitioner.

      James E. Teatman, Esq., U. L. R. Wade, Esq., and James L. Badk-strom, Esq., for the respondent.
   OPINION.

BlaCK :

The issue to be decided is whether the sale of the eight oil and gas leases in question to the East Texas Oil Refining Co. was a sale by petitioner, or whether the sale was made by petitioner’s stockholders for their own account.

Petitioner claims that the transactions, as intended by the'parties and as actually recorded by the minutes of the corporation and by the documentary evidence which evidences the transactions, show that the sale was made by the stockholders after they became the owners of the leases in their own right and that the profit, if any, is taxable to the stockholders and not to petitioner. It relies chiefly upon Chisholm v. Commissioner, 79 Fed. (2d) 14.

The respondent contends that the sale was made by the corporation, or if not by the corporation itself, then by its stockholders as agents for the corporation, and cites the case of Nace Realty Co., 28 B. T. A. 467, as a case almost exactly in point.

We think petitioner must be sustained, on authority of the Chisholm case. See also Conservative Gas Co., 30 B. T. A. 552, and Grand Rapids Trust Co. et al., Administrators, 34 B. T. A. 170. In the Chisholm case, the facts were briefly as follows: Taxpayers (George and Harry Chisholm) each owned 300 shares of the Houde Engineering Corporation. On September 26, 1928, taxpayers and certain other stockholders of Houde for a valuable consideration gave Krause & Co. the right for a period of 30 days to purchase all the stock of Houde for $4,000,000 in cash. On October 11, 1928, taxpayers were advised by letter from Krause & Co. “that we elect to exercise our option as of this date * * On October 20, 1928, the taxpayers, the two Chisholm brothers, executed an agreement of partnership between themselves, to commence on October 22, 1928, and continue for ten years. The capital contribution of each partner was stated as 300 shares of Houde stock. The assignments of the stock to the partnership were made expressly subject to the option. On October 24, 1928, the partnership received payment for the stock. The partnership remained in existence and did not distribute any of the proceeds to the partners. On these facts the Board decided for the Commissioner but was reversed by the Second Circuit, and the Supreme Court denied certiorari, 296 U. S. 641.

In the instant case a brief résumé of the facts shows that the petitioner, Falcon Oil Co., was the one-half owner of a seven-eighths working interest in four certain oil and gas leases in which East Texas was the owner of the other one-half working interest. Petitioner was the part owner of two' other leases in which a partnership by the name of Bass & Dillard owned an interest and East Texas also owned an interest. Petitioner was also the owner of a seven-eighths working interest in two other leases in which no one else held any interest except the owner of the one-eighth overriding royalty.

Petitioner on February 3, 1934, received an oiler from the Tide Water Oil Co. to purchase these eight leases for a consideration of $1,005,200 in cash and $265,000 to be paid out of oil, if and when produced from the leases. This offer included not only petitioner’s interest in the leases but also the interests of Bass & Dillard and East Texas.

On February 8, 1934, this offer was submitted by petitioner’s vice president, Herbert, to Bass & Dillard and East Texas to find out whether they wanted to join petitioner in a sale or to elect to purchase under certain options contained in prior agreements. The nature of these options is fully set out in our findings of fact. In pursuance of giving further consideration to Tide Water’s offer to purchase, petitioner’s directors and stockholders held conferences at petitioner’s office in Fort Worth, Texas, at one of which they received report of tax counsel to the effect that a large tax would be due the Federal Government if petitioner made a sale to Tide Water. After considerable discussion these directors and stockholders definitely decided that petitioner would hot sell to Tide Water, but instead would distribute in liquidation to its stockholders its interest in the eight leases in question. It was estimated that petitioner’s interest in the eight leases in question constituted 60 percent of its total assets and that 60 percent of each stockholder’s stockholdings should be turned in for cancellation and retirement in consideration for the liquidating dividend in question. This plan was carried out in the manner agreed upon, which is detailed in our findings of fact. Petitioner is still in existence and active in business, but with a capital stock reduced to 40 percent of what it was prior to the liquidating dividend in question. Petitioner has declared several cash dividends since that time, always on the basis of its reduced capital stock.

After the distribution by petitioner to its stockholders of its interest in the eight leases in question, these stockholders, through Herbert, notified East Texas at its office in Dallas, Texas, of what had been done. EEerbert also informed East Texas that the four parties to whom the leases had been assigned by the corporation were willing to sell to East Texas for the same consideration offered by Tide Water. Thereupon, Freeman W. Burford, president of East Texas, addressed an acceptance of this offer to the four stockholders who had received the leases in liquidation, agreeing to purchase the leases at the same price previously offered by Tide Water. This acceptance was conditioned upon the parties entering into a formal contract of purchase and sale, satisfactory to all parties.

The evidence further shows that immediately thereafter the attorneys representing the four stockholders who had received the leases in liquidation and attorneys representing East Texas were set to work to draw up the required contract of purchase and sale. After consultation between the attorneys extending over a period of several days, the contract was drawn and signed by all parties thereto on March 2, 1934.

On March 15,1934, the formal assignments and conveyances of the eight leases in question were executed by Venita S. Weaver, Roy D. Golston, the Herbert Oil Co., and the First National Bank of Fort Worth, Texas, as trustee, as sellers, to East Texas, as purchaser.

Each seller received a separate check payable to him for his part of the consideration and deposited it to his own bank account and never in any way turned it over to petitioner, or used it for petitioner’s benefit. Under these circumstances we see no reason to hold that the sale was made by petitioner and the profits therefrom taxed to it. On the contrary, we think that under authority of Chisholm v. Commissioner, supra, Conservative Gas Co., supra, and Grand Rapids Trust Co., supra, we should, and do, hold that the sale was not made by petitioner but was made by the four named parties to whom the leases were distributed in liquidation, and the profits resulting from the sale are taxable to them and not to the petitioner.

As has already been stated, the Commissioner urges Nace Realty Co., supra, as the case most nearly in point to the facts of the instant case. In that case, the taxpayer was an Ohio corporation. All its stock was owned by two Nace brothers. In 1921 the brothers transferred to the corporation as paid-in capital or surplus a 99-year lease, renewable forever on Inlot #491, which lease carried with it an option to purchase the fee for $55,000 upon 60 days’ notice. On August 26, 1926, the Nace Realty Co., granted to the Postmaster General of the United States an option to purchase prior to December 1, 1926, the fee simple to Inlot #491 for $150,000, which option the Postmaster General assigned to Jacob Kulp. On November 24, 1926, the corporation joined in a four-party agreement with Kulp as purchaser, Harvey Cashott, who owned property adjoining Inlot #491, as a vendor, and a bank as trustee. Under this agreement the Nace Realty Co. and Cashott agreed to sell their respective properties to Kulp, each at the price of $150,000 cash, to be paid upon delivery of proper deed. Conveyances were to be made within 60 days, and unrestricted possession given Kulp immediately. Kulp deposited $30,000 with the bank, to be returned to him should the vendors fail to carry out the transaction. On January 3, 192V, but effective from January 7, 1927, the lease on Inlot #491 was reassigned by the Nace Realty Co. to the Nace brothers for a consideration of $12,061.36. On January 7, 1927, the Nace brothers delivered to Kulp an assignment of the lease to Inlot #491, and received Kulp’s check for $95,000, $12,061.35 of which was paid to the corporation. Kulp in a separate transaction on December 16, 1926, and January 7, 1927, acquired the fee to lot #491 from the heirs of the original grantor for $55,000. On these facts we held that the corporation had already entered into a binding contract of sale prior to the assignment by it of the lease to the two Nace brothers, and that, in consummating the sale which the corporation was already legally bound itself by contract to make, the Nace brothers were merely acting as agents for the corporation, the Nace Realty Co. Other cases cited by respondent: Hellebush v. Commissioner, 65 Fed. (2d) 902; Burnet v. Lexington Ice & Coal Co., 62 Fed. (2d) 906; Taylor Oil & Gas Co. v. Commissioner, 47 Fed. (2d) 108; James Duggan, 18 B. T. A. 608; S. A. Macqueen Co. v. Commissioner, 67 Fed. (2d) 857; Will T. Caswell, 36 B. T. A. 816; and Tazewell Electric Light & Power Co. v. Strother, 84 Fed. (2d) 327, are distinguishable on similar grounds.

The court in Chisholm v. Commissioner, supra, distinguishes this same line of cases on the same ground as we have here given. So did the Board in Conservative Gas Co., supra.

Respondent in his brief lays considerable stress on several letters written by East Texas to petitioner and vice versa after the date of the consummation of the sale, which were introduced in evidence on behalf of the respondent. Respondent calls attention to the fact that references in these letters were to “your transaction with us”, “your recent transaction with us”, “regarding our recent transaction with you”, etc. From these expressions in the letters, respondent argues that the parties themselves considered that the transaction was between petitioner and East Texas and that the stockholders never became the owners of the leases.

We admitted these letters in evidence because we thought they were relevant to the issue to be decided. We still think so. We do not think, however, that the expressions in these letters are sufficient to overcome the documentary evidence in the record which shows that the sale was not made by petitioner and that it was not intended that petitioner should make the sale.

Herbert, vice president of petitioner, testified that all the letters written on behalf of the stockholders after the sale had been consummated were sent in the name of the Falcon Co. merely for convenience, because they all had their offices together in the same building, and that the correspondence had theretofore been carried on in the name of the Falcon Co. and it was continued in this manner for the convenience of the parties as to the few items that had yet to come up for consideration in one way or another.

For reasons already stated, we sustain petitioner in the only issue left for our decision, all other issues having been either abandoned or agreed upon.

Reviewed by the Board.

Decision will be entered under Rule 50.

TotNer dissents.


source: Caselaw Access Project

author: Disney:

license: Public Domain

text:
    Cooperative Power Plant, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95291.
    Promulgated May 15, 1940.

      J. Howard Beber, Esq., Clarence L. Turner, Esq., Ellsworth C. Alvord, Esq., and Floyd Toomey, Esq., for tbe petitioner.

      Brooks Fullerton, Esq., C. L. Orpin, C. P. A., Murray Baffe, O. P. A., and A. O. Barth, C. P. A., for the respondent.
   OPINION.

Disney:

While the question whether an enterprise is an association taxable as a corporation must in the final analysis rest upon the peculiar facts involved, John J. Raskob, 37 B. T. A. 1283; Commissioner v. Horseshoe Lease Syndicate, 110 Fed. (2d) 748, certain characteristics of an association are set forth in decisions of the Supreme Court. There is no absolute rule by which the question can be determined. In Morrissey. v. Commissioner, 296 U. S. 344, (a) centralized management, (b) continuity throughout the period of the trust without interruption by death of a participating member, (c) provision for transferring beneficial interests, and (d) limitation of personal liability of the participants to their capital investment were found to be sufficient to classify the trust involved as an association. The Court said that the object of a business trust is “to provide a medium for the conduct of a business and sharing its gains” and that the term association implies resemblance of corporate form, not identity. The powers conferred by the instrument creating the enterprise determine its character, Lee H. Marshall Heirs, 39 B. T. A. 101, and the purpose of the venture is “probably the most important single fact.” Cleveland Trust Co., Trustee, 39 B. T. A. 429; Del Mar Addition, 40 B. T. A. 833. It has been said that the real test is whether the enterprise “more nearly resembles in general form and mode of procedure a corporation than a partnership.” Bert v. Helvering, 92 Fed. (2d) 491. The resemblance to one form or another should be balanced to test the character of the venture. Commissioner v. Brouillard, 70 Fed. (2d) 154. The petitioner contends that the enterprise in controversy resembles a partnership or joint venture and in no respect resembles a corporation.

Bespondent argues that petitioner was a “live business organization”, in “reality a power company in the form of an association.” Petitioner, without extended discussion of the point, contends that the business purpose test is applicable only in distinguishing pure trusts from business trusts. An enterprise may be engaged in business, yet lack the features necessary to make it analogous to a corporation. Lewis & Co. v. Commissioner, 301 U. S. 385. The three corporations entered into a joint arrangement for supplying such steam, electricity, etc., as each required in connection with the operation of its manufacturing business. No provision was made for supplying the service to others at cost or any other price, and none was furnished. Such business as petitioner performed was carried on as a department of the three corporations which had formed it. It had no business distinct from the corporations for whose sole account it was operated. Obviously it was not a power company engaged in furnishing service to the public.

The purpose of the venture was to supply the service to the three corporations at cost, no profit being contemplated. The service furnished the three corporations was measured and, except from 1916 to 1926, inclusive, was first charged to the recipients at rates estimated to recover the cost of production, and then adjustments were made on the basis of cost by making refunds for overcharges or collecting additional amounts for undercharges. During the years 1916' to 1926, inclusive, the three corporations purposely made overcharges for service to build up a reserve fund out of which to construct a new power plant. Refunds were made, not upon the basis of the capital investment of the respective corporations, but proportionate to the service received. By this arrangement no participating corporation could benefit by refunds at the expense of any other participant. Such gain as the three corporations derived from the venture was only through savings in the cost of their requirements of electricity, steam, etc. They realized no gain from dealings with other corporations or individuals. Thus gain, as the term is generally understood, was not an object of the cooperative arrangement.

The petitioner had earnings from investments made of funds in the reserve account maintained for charges paid by the three corporations for service in excess of cost of production. The assessments made in excess of cost did not constitute gain for more than bookkeeping purposes. The amounts represented indebtedness, and therefore a liability. Valley Waste Disposal Co., 38 B. T. A. 452; Uniform Printing & Supply Co. v. Commissioner, 38 Fed. (2d) 75. The fact that the three corporations deducted the excess charges as ordinary and necessary business expenses, thereby decreasing their income tax liability, is not material in this proceeding.

In Morrissey v. Commissioner, supra, the Court said that “A corporation, as an entity, holds the title to the property embarked in the corporate undertaking.” See Commissioner v. Whitcomb Coca-Cola Syndicate, 95 Fed. (2d) 596. The power plant was owned by Textile and at all times material was under lease to the three corporations, who also held title to the equipment in the plant. The proceeds of a sale or other disposition of the equipment were payable to the three corporations, not petitioner.

The agreement of May 1, 1914, made no provision for the issuance of certificates of beneficial interest or any other evidence of interest in petitioner. Neither did the agreement provide for assignment. The agreement was binding on the participating corporations for a period of ten years and for two additional terms of five years each, unless by written notice, given at least one year prior to the expiration of the current term, a participant elected to withdraw. Withdrawal by any corporation did not entitle it to receive any amount for its interest in the equipment of the power plant prior to the termination of the agreement, except at the option of the remaining corporations. Provisions of that sort generally appear in articles of copartnership and have no place in corporate organizations.

There was no centralized management here analogous to a corporation. Directors of corporations are elected by stockholders and are subject to removal by them, acting collectively. Here each corporation appointed one of its officers to represent it in the management of the power plant. A majority vote of the three representatives so selected determined all questions involved in the operation of the plant. Each representative was subject to the control of, and subject to'removal at will by, his corporation. The representation was several, not joint. Each representative was nothing more than the agent of his principal, not the agent of the group of corporations. See C. A. Everts, 38 B. T. A. 1039.

Provision was made in the agreement of May 1, 1914, for the continuity of the undertaking for a definite period of years, but bank-i'uptcy or other termination of the existence of the three corporations in the meantime would have necessarily brought an end to the arrangement made for the operation of the power plant. We find nothing in the agreement under which the three corporations limited their liability. They undertook to pay the cost of the service and their agents had broad powers of management which included authority to contract for the necessary equipment and material to produce the service. As between the corporations there can be no doubt about the liability of the corporations for debts incurred in the venture according to the amount of service received. The three corporations, as principals, were liable for any obligations created by their agents, irrespective of their capital investment in the venture. Upon review of all of the evidence, we hold that the petitioner was not an association taxable as a corporation. Accordingly,

Decision will be entered for the petitioner.


text:
    Cooperative Insurance, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95292.
    Promulgated May 15, 1940.

      J. Howard Reber, Esq., Clarence L. Turnen•, Esq., Ellsworth C. Al/oord, Esq., and Floyd Toomey, Esq., for the petitioner.

      Broolcs Fullerton, Esq., C. L. Orpin, C. P. A., Murray Rafe, C. P. A., and A. 0. Barth, C. P. A., for the respondent.
   OPINION.

Disney:

The principles governing the question involved are set forth in Cooperative Power Plant, 41 B. T. A. 1143, decided this day, in which the three corporations were involved, and need not be restated. Petitioner contends that it was nothing more than a joint account, operated as a department of Co-operative Service, through which the three corporations administered their agreement jointly to share loss resulting from their respective liabilities as self-insurers. The respondent argues that throughout the taxable years petitioner was “engaged actively in a large business enterprise.”

No formal agreement was entered into for the creation or operation of petitioner. Enterprises to conduct business for profit are generally formed with more formality than an oral agreement, especially when the participants are corporations. Petitioner was not qualified to act as an insurer and the authority of the participating corporations was limited to self-insurers under the Workmen’s Compensation Law of Pennsylvania. Petitioner administered only the liabilities of the respective corporations as self-insurers of their employees under the law. Reports to the state authorities of injuries were made by the employer corporation through the facilities of petitioner and the agreements entered into for compensation were between the employer and employee. Such acts as petitioner performed were not as principal, but as agent for the insuring corporation. No profit was contemplated. The contributions to the joint arrangement were fixed by state statute and the liability for injuries sustained by employees of the participants was also regulated by law. An undertaking so restricted may not be said to be a business operated for profit. The participants had no investment in the undertaking analogous to stockholders of corporations. The income from investments of reserve funds was incidental and not a primary object of the plan. The amount paid out by petitioner for the account of the respective participants was less each year than the deposit made by it for that purpose.

No provision was made for the issuance of certificates of beneficial interest or the introduction of additional members. Neither did the participants provide for assignment of their interests or for a definite life for the joint plan. The participating corporations could have withdrawn their-participation at any time and the withdrawal of any two of the corporations would have terminated the undertaking. Thus the plan lacked the continuity found in corporate organizations.

There was no administration of the fund by individuals analogous to a board of directors or shareholders. The situation here in that respect is not materially different from the Cooperative Power Plant case. Neither was there limitation of liability similar to stockholders of corporations. The petitioner was simply a joint agency designated by the three corporations to administer their respective liabilities as self-insurers under the Workmen’s Compensation Law of Pennsylvania. Its resemblance to a corporation is not sufficient to classify it as an association taxable as a corporation. Accordingly,

Decision will be entered for the petitioner.


author: Murdock :

text:
    Estate of John H. Storer, Deceased, State Street Trust Company, John H. Storer, Jr., Robert Treat Paine Storer, Theodore L. Storer, and Henry S. Hall, Jr., Exrs., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 98356.
    Promulgated May 15, 1940.

      Abbot P. Mills, Esq., and Alexander B. Smith, Esq., for the petitioners.

      J. T. Haslam, Esq., for the respondent.
   OPINION.

Murdock :

Section 302 (d) of the Revenue Act of 1926, as amended, provides that the gross estate of a decedent shall include the value of property transferred in trust by the decedent “where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke * * The Commissioner takes the position that the decedent expressly reserved to himself the power to change the enjoyment of the trust by amendment. The petitioners contend that the power to amend reserved by the decedent was not a power to change the enjoyment of the trust but was merely a power to amend as to “the mechanics or details.” They cite Dort v. Helvering, 69 Fed. (2d) 836, which in turn cited Porter v. Commissioner, 288 U. S. 436, to the effect that the act would not apply to powers affecting the mere mechanics of a trust.

The limitation upon the decedent’s power to amend is shown, according to the petitioners, first by the context of paragraph eighth of the declaration of trust, wherein it is provided that after the death of the donor and his wife the State Street Trust Co. or its successor and any duly appointed cotrustee may amend the trust “in a similar manner.” The argument is that the same power which the decedent reserved for himself might become exercisable by the Trust Co. alone and it is highly improbable that a settlor would give an inanimate trustee the power to amend the provisions of the trust so as to change the rights of the beneficiaries. The petitioners also argue that the intent of the settlor to so limit his power to amend is shown by his desire to provide equally. for his children and by the construction which he and the Trust Co. placed upon paragraph eighth.

An assistant trust officer of the State Street Trust Co. testified that he was1 consulted in 1934 in regard to an income tax controversy involving the year 1931.' He told Robert Storer that the Trust Co. interpreted the deed as permitting only minor changes for better administration and as not permitting revocation or material changes in the beneficial interests. There is testimony of statements by the decedent that he desired to provide equally for his children and believed he could not disturb the equal shares fixed by the original deed but was permitted to amend only as to details. Nevertheless, he made a substantial change in the second paragraph, which seems to have changed the enjoyment of the trust property. Cf. Boston Safe Deposit & Trust Co., et al., Executors, 34 B. T. A. 911. Since the first sentence of paragraph eighth provides in so many words that the declaration of trust may be amended at any time after the death of the wife by the settlor acting alone, it would require clear and convincing evidence to show that the settlor did not intend to give and did not actually give himself full power to amend. Our best judgment, after consideration of all of the evidence, is that the enjoyment of the trust was subject at the date of the death of the decedent to a change through the exercise of a power by the decedent alone to amend within the meaning of section 302 (d). Cf. Porter v. Commissioner, 288 U. S. 436; Dort v. Helvering, 69 Fed. (2d) 836; certiorari denied, 293 U. S. 569.

The petitioners make two alternative contentions in case it is held that the power to amend could affect the enjoyment of the trust property. The first is that “the power to amend was also exercisable by the surviving trustee and, therefore, upon the decedent’s death no assurance passed from the dead to the living and there was no taxable event.” This argument is specious. The decedent had a power to alter up to the time of his death and that power ceased at his death. That circumstance is sufficient to support the tax. Cf. Porter v. Commissioner, supra; Reinecke v. Northern Trust Co., 278 U. S. 339. The power in the surviving trustees did not prevent the decedent’s power over the trust property from terminating at his death. He could have exercised his power of amendment by striking out the last sentence of paragraph eighth had he so desired. This circumstance distinguishes the case of Fanny M. Dravo et al., Executors, 40 B. T. A. 309.

The petitioners’ other alternative contention is based upon the proposition that section 302 (d), which first appeared in the Revenue Act of 1924, should not be applied to property transferred to the trust prior to its enactment, over which the decedent retained no power in himself acting alone. They point out that originally he had to have the consent of his wife, who had an adverse interest.

An adequate answer to this argument is that he could have surrendered the power and escaped tax on the trust property, but instead he chose to retain the power which he was free to exercise acting alone after the death of his wife in 1924. Commissioner v. Chase National Bank, 82 Fed. (2d) 157; certiorari denied, 299 U. S. 552; Stewart W. Bowers, Trustee, 34 B. T. A. 597. Thus, no retroactive effect results here from the application of section 302 (d).

Decision will he entered imder Rule 50.


author: Hill :

text:
    Suffolk Securities Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86018.
    Promulgated May 15, 1940.

      David A. Buckley, Jr., Esq., and Harvey L. Babbitt, Esq., for the petitioner.

      W. Frank Gibbs, Esq., for the respondent.
   OPINION.

Hill :

The first question for decision in this case is whether or not petitioner is subject to the tax imposed by section 104 (a) of the Beve-nue Act of 1928, by reason of the fact that it was formed, or during the taxable year ended November 30, 1930, was availed of, for the purpose of preventing the imposition of the surtax upon its sole shareholder through the medium of permitting its gains and profits to accumulate instead of being divided or distributed.

Petitioner reported a net loss on its 1930 income tax return in the amount of $565,025.52, which respondent reduced to a net loss of $47,674.60 by eliminating prior year net loss and certain deductions for bad debts and stock losses claimed by petitioner. The parties agree, therefore, that in no event is any tax due from petitioner under section 13 of the 1928 Bevenue Act. Bespondent determined the deficiency in controversy on the basis that petitioner was subject to tax under section 104, supra, and accordingly included in net income dividends received in the amount of $160,762.52, which dividends are not taxable to petitioner under section IB.

Petitioner alleges that respondent erred in computing its tax liability under section 104, and, in the event we should hold it is subject to the tax imposed by that section, assigns as additional error the disallowance by respondent of certain deductions for bad debts and stock losses, more fully referred to hereinbelow.

If petitioner was either (1) formed, or (2) availed of in the taxable year for the purpose described in the cited statute, it is subject to the penalty tax as determined by respondent. Fisher & Fisher, Inc., 32 B. T. A. 211, 217.

Petitioner on brief indulges in considerable argument in an effort to show that it was not formed for the prohibited purpose. We need not consider this point, for reasons which presently appear. Conceding that petitioner was formed, as its contends, for the sole purpose of taking over certain assets and assuming certain liabilities of the partnership of B.; H. Howell Son & Co. with a view to discontinuance of the partnership business, it does not necessarily follow that petitioner in the taxable year 1930 was not availed of for the purpose of enabling its sole stockholder to escape surtax.

Petitioner corporation was organized in December 1922, with three stockholders who were members of the partnership mentioned, but in February 1925 James H. Post became petitioner’s sole shareholder. Thereafter, and until the death of Post in 1938, the evidence, in our opinion, justifies the conclusion that Post, who possessed securities worth several million dollars, used petitioner merely as his personal holding or investment company. Under section 104 (b), the fact that any corporation is a mere holding or investment company constitutes prima facie evidence of a purpose to escape the surtax, and the burden is on petitioner to disprove the statutory presumption and the Commissioner’s determination, R. L. Blaffer & Co., 37 B. T. A. 851, 856; affd., 103 Fed. (2d) 487. The evidence, we think, falls measurably short of such disproof.

It is not contended that in the taxable year petitioner was a business corporation; that is, one engaged in carrying on a business enterprise. It was merely holding a limited amount of securities transferred to it by Post, and in that connection buying and selling securities, and investing and reinvesting its funds.

Petitioner urges that it was not in fact availed of in 193.0 for the purpose of enabling Post to escape surtax through accumulation of its gains and profits, for the reason that it had no such accumulation. Substantially, this is the only ground upon which petitioner defends against respondent’s contention that it was availed of in the tax year for the prohibited purpose. It is not denied that at the end of the fiscal year 1930 petitioner’s balance sheet disclosed a book surplus of $72,947.03, nor that it then held assets having a book value or cost which exceeded its accounts, notes, and debts payable by the amount of $1,838,637.87. It further appears that the market value of its assets exceeded its obligations payable by the amount of $930,368.09. Thus, disregarding capital stock, petitioner was not insolvent on the basis of either cost or market value of its assets. - But petitioner says that, if its surplus had been computed on the basis of the then present value of its assets instead of original cost, its balance sheet at the end of the taxable year would have shown a deficit of over a million dollars instead of a small book surplus. We rejected a similar contention, strongly urged, in R. L. Blaffer & Co., supra, saying at page 857:

The Board has already held that when considering a holding or investment company the diminution in market value oí its securities may not he offset against income derived through gains and profits, interest, and dividends, so as to establish that the corporation was not availed of to save the shareholders from surtax. Rands, Inc., 34 B. T. A. 1094; * * * Nipoch Corporation, 36 B. T. A. 662 * * *. As to a business corporation actually engaged in commercial operations, the effect of market values upon its surplus has been recognized as more substantial and the argument more engaging, C. H. Spitzner & Son, Inc., 37 B. T..A. 511.

Petitioner received dividends from domestic corporations during the years 1923 to 1930, inclusive, in the total amount of $817,055.85. hTo dividends were declared or paid by petitioner during that period. It received dividends from domestic corporations during the tax year in the amount of $160,762.52, which it accumulated instead of distributing to its sole stockholder. It thereby did in fact save its sole stockholder from surtax. The statute does not operate merely because of such actual effect — only if such effect was the purpose, Cecil B. de Mille, 31 B. T. A. 1161; affd., 90 Fed. (2d) 12; certiorari denied, 302 U. S. 713; C. H. Spitzner & Son, Inc., 37 B. T. A. 511. But here the presumption is that the accumulation of the dividends received by petitioner from other domestic corporations was for the purpose actually effected and petitioner has not disproved that such purpose was to enable its stockholder to escape surtax.

The dividends received by petitioner and in controversy here would have been taxable in the hands of its sole stockholder, irrespective of the diminution in market value of securities he did not sell, “and hence the purpose to enable him to escape surtax is not disproved by evidence of market value of securities held by his corporate instrument.” R. L. Blaffer & Co., supra, and decisions therein cited.

Respondent’s determination that the petitioner is subject to the tax imposed by section 104 is approved.

Respondent argues that the $1,098,176.16 received by petitioner in 1923 from the payments made by the Sugar Equalization Board constituted income to it and should have been reflected in its surplus account at the end of the taxable year, which would have more than offset the deficit petitioner contends would have resulted from valuing its securities at market, instead of cost. Respondent further says that because the partners transferred their claim against the Government to petitioner and thereafter treated the matter as a capital transaction of the corporation, they escaped tax on the payments received from the Sugar Equalization Board in 1923. Respondent interprets these facts as persuasive proof that petitioner was “formed” for the purpose described in section 104. While some support for respondent’s contentions in this connection undoubtedly may be found in the evidence, we prefer to rest our decision on the ground hereinabove set out. We deem it unnecessary, therefore, to devote further discussion to this point.

Petitioner contends that, even if we should hold on the facts that it is subject to tax under section 104, no penalty tax can be imposed upon it for the taxable year before us for the reason that respondent erroneously disallowed, or failed to allow, deductions which exceed the net income determined by him under section 104, and thus there is no basis for computation of the tax.

The first deduction in respect of which petitioner complains involves the so-called claim against the Hoyt estate. The circumstances surrounding this claim and how it arose are fully set forth in our findings of fact above. Petitioner acquired the claim in exchange for shares of its stock, and included it in its asset account at the agreed valuation of $407,500, but in 1925 in connection with the transaction with the Rockland Securities Corporation it reduced the amount to $203,750. In 1926 a suit was instituted against the Hoyt estate for the amount of $467,001, which suit was subsequently compromised and settled on May 4, 1929, for $212,600. As a result of this settlement petitioner delivered or .destroyed the certificates of stock in the El Salvador Silver Mines Co. and the proceeding was thereupon terminated. Of the amount received in settlement, petitioner’s share amounted to $94,870, leaving an unpaid balance on its books of $114,290.54, including $5,410.54 auditing and legal fees, which amount was charged off its books on December 1, 1929. Such amount was not claimed as a deduction in petitioner’s income tax return, but it alleges that respondent erred in failing to allow the amount as a deduction in computing the net income taxable under section 104.

The facts do not support petitioner’s contention. The suit instituted to enforce collection of the Hoyt claim was compromised and settled on May 4, 1929, and the amount of petitioner’s claim, in excess of its share of such settlement, became worthless on that date. The loss was sustained prior to the beginning of the taxable year 1930, notwithstanding the entry charging the amount off petitioner’s books was recorded on December 1, 1929, the first day of the taxable year. Whatever amount of loss was sustained, if any, is allowable only in the year when sustained. The book entry is not controlling. Cf. Lucas v. American Code Co., 280 U. S. 445; Doyle v. Mitchell Brothers Co., 247 U. S. 179. Respondent’s action on this issue is approved.

Petitioner assails respondent’s action in failing to allow as deductions from gross income for the taxable year the amounts of $11,110 invested in capital stock of the Triangle Agricultural Corporation, and' $2,993.39 and $8,980.28 representing loans to that corporation and to C. C. Smith, its president. The facts are fully set out here-inabove, and in our opinion definitely preclude the relief sought by petitioner.

It is shown that the business of this corporation was discontinued about April 1929, at which time it was hopelessly insolvent and unable to pay its debts. The circumstances existing at that time, we think, would have caused any reasonably prudent business man to conclude that the stock in the Triangle Corporation was worthless, as well as any debts owing by it. True, it owned a small amount of assets which were sold in 1932 for $2,250, but the corporation’s indebtedness, including stock subscriptions, amounted to approximately $35,000. There is no evidence to show that Smith personally was in a position to meet his obligations or had assets which would have given value thereto.s

The statute contemplates the deduction from gross income of losses which are fixed by identifiable events, such as the sale of property or its destruction or injury, or “in the case of debts, by the occurrence of such events as preclude their collection.” However, “the taxing act does not require the taxpayer to be an incorrigible optimist.” United States v. White Dental Manufacturing Co., 274 U. S. 398.

On October 16, 1930, Smith wrote a letter to James H. Post, petitioner’s sole stockholder, in which he promised personally to pay the indebtedness of the Triangle Corporation, including all stock subscriptions, and expressed the hope that in the following year, he would be able to begin “paying you part of the moneys you so generously advanced.” There is nothing in the evidence to indicate what, if anything, this promise was worth, but if it was regarded by Post as worthless, then both petitioner’s investment in Triangle stock and the loans made to that corporation and to Smith became valueless not later than the taxable year 1929; but on the other hand if the situation was such that Post might reasonably have relied on Smith’s promise, then petitioner’s investment and loans did not become worthless until sometime subsequent to the taxable year 1930. Whatever may be the true facts, there is no evidence before us to establish that any identifiable event occurred in the taxable year to fix the incidence of loss in respect of the deductions claimed. The burden of proof is on petitioner, and, for failure to meet such burden, respondent’s determination must be, and is, approved. Burnet v. Houston, 283 U. S. 223.

The remaining deduction disallowed by respondent involves wash sales of 200 shares of National City Bank stock. One hundred shares each were sold on August 8 and August 11, 1930, and petitioner thereafter purchased 200 shares of the same stock within 30 days, that is, on September 2, 1930.

Petitioner sold other shares of National City Bank stock on August 11 and August 12, sustaining a total loss of $13,465.70, which amount it claimed as a deduction in its 1930 income tax return. Respondent disallowed the losses sustained on the first two sales in the aggregate amount of $7,351.60, under the wash sales provisions of section 118 of the Revenue Act of 1928. Petitioner assigned error, but on brief made no reference to the issue thus raised.

Apparently petitioner has abandoned the issue, but in any event we approve respondent’s action, which is plainly in accordance with the provisions of the statute. Richard Coulter, 32 B. T. A. 617.

Decision will he entered for respondent.


author: Hill:

text:
    Arthur Letts, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 92857.
    Promulgated May 16, 1940.

      Wellman P. Thayer, Esq., T. R. Dempsey, Esq., and A. Calder Machay, Esq., for the petitioner.

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

Hill:

The several issues raised here for decision are (1) whether the petitioner is taxable on the income of a trust distributed to his divorced wife where the trust was established pursuant to a pre-divorce agreement by which the petitioner’s wife released him from all claims to support and maintenance in return for his establishment of the trust here involved, and (2) whether any part of the income so distributed is taxable to the petitioner because used by the beneficiary for the support of petitioner’s children as provided in the trust instrument.

The petitioner urges as an additional contention that if he is taxable on the income of the trust distributed he is entitled to a deduction . for compensation paid to the trustee which was disallowed by the Commissioner in computing the net income of the trust.

Our decision on the first point is controlled by Helvering v. Fuller, 310 U. S. 69, which differs in no material respect from the case presently before us. The significant facts in both cases are that by the terms of the agreement entered into before the divorce the husband was released unconditionally from all obligations to support his wife in return for setting up the trust; that the settlor did not undertake to guarantee or underwrite in any manner either the value of the corpus of the trust after its establishment or the continuance of any given income from the trust; and that the decree'of divorce absolving the parties from all rights and claims against each other was final and not subject to any later modification by the court. See also Tuttle v. Commissioner, 89 Fed. (2d) 112. Cf. Helvering v. Fitch, 309 U. S. 149; Helvering v. Leonard, 310 U. S. 80.

We note the slight difference as to the last mentioned point between the Fuller case and that one before us now in that the Nevada court in the former mentioned and approved the agreement of the parties in its decree whereas here the decree of the court is barren of any reference to the agreement reached before the divorce or of any provision for alimony. In either case, we think, it is plain that the failure of the decree to reserve any rights of modification deprives the court of all power to subsequently alter the decree, whether or not it makes provision for alimony or approves any agreement entered into by the parties as a rough substitute therefor. The law of Nevada is correctly stated in Sweeney v. Sweeney, 42 Nev. 431; 179 Pac. 638:

* * * A decree a vinculo is final, and the jurisdiction of tlie court over the parties is after the expiration of the term at an end; and just as there can be no grant of alimony after such a divorce, so there can be no change in the award of alimony, unless the right to mate such a change is reserved by the court in its decree, as it may be, or is given by statute, as it often is. * * * But when there is no such statute (and we have none), and where the decree does not reserve the right to the court (as it does not here) to alter the decree for alimony, no such authority exists. * * * The same is true as to provisions in a final judgment of divorce for the support of children of the marriage. * * *

See also Lewis v. Lewis, 53 Nev. 398. Cf. Aseltine v. 2d. Judicial District Court, 57 Nev. 269.

On tbe first point the petitioner is sustained.

The next issue presented — that of the taxability of petitioner on the income of the trust used for the support of his children — poses, first, the question of whether the petitioner had any obligation to supply their maintenance. Under the Civil Code of California, where the children were domiciled with their mother during the years in question, the parent into whose custody the children are given is required to support and educate them:

Obligation of parents for the support of their children. The parent entitled to the custody of a child must give him support and education suitable to his circumstances. If the support and education which the father of a legitimate child is able to give are inadequate, the mother must assist him to the extent of her ability. [California, Civil Code, Sec. 196.]

This section has been held not to relieve the father in any ease from the obligation to support his children where the mother having their custody is unable to support them. Pacific Gold Dredging Co. v. Industrial Acc. Com., 184 Cal. 462; 194 Pac. 1; White v. White, 83 Cal. App. 356; 256 Pac. 579, and cases there cited.

The record does not show that Bessie B. Hann was able to support the children during the taxable years except by means of the amounts paid her from the income of the trust for that purpose. In the absence of any showing to the contrary, we must assume therefore that the support and maintenance of petitioner’s children was supplied during the taxable years out of the trust income paid to Bessie E. Hann for that purpose and that the petitioner’s continuing obligation under California law to supply the keep of his children, who would have been otherwise without support and maintenance, was thereby discharged. The petitioner is, therefore, taxable on the amounts of trust income used during the taxable years for the support of his two children.

There is no evidence in the record as to the amounts which were actually expended for the two children' during the taxable years by Bessie E. Hann out of the trust income paid over to her. We think, however, that the provisions of the trust instrument offer an accurate estimate of the amounts thus utilized. The settlor has provided that one-third of the income of the trust is to be paid in equal shares to his children after they have attained the age of 21 years. This amount reduces .by that much the trust income to be paid to Bessie E. Hann commensurate with the obligations of which she is relieved on the coming of age of the children. The same measure is used in setting off a portion of the trust corpus for distribution on the termination of the trust to the heirs or devisees of the two children. We think the parties to the trust instrument have unmistakably indicated that one-third of the trust corpus is in effect set aside for the use of the children, the income from that portion of the principal being paid to the mother of the children for their maintenance during their minority and to them directly after they have attained the age of 21 years and the principal itself being subject to their disposition at death.

We hold therefore that one-third of the trust income paid over to Bessie E. Hann during the taxable years was intended and was used for the support and maintenance of David and Diane Letts. Murray Brookman, 41 B. T. A. 557; Ernestine Mitchell, 38 B. T. A. 1336. These amounts are taxable to the petitioner as trust income applied in satisfaction of his continuing obligation to support his minor children.

The.final contention of the petitioner is that, if he is held taxable on any part of the trust income he is entitled to deduct compensation paid by the trust to the trustee, taxes, and other miscellaneous expense of the trust, all of which were disallowed by the Commissioner in computing the income of the trust. On this point the respondent must be sustained. The petitioner is taxed on a portion of the trust income not on any theory that the trust is a mere, agency and indistinguishable from the trustor’s own affairs, but rather for the reason that such portion of the trust income was applied on his obligations and thus represents income to him in that amount. The trust is still a separate taxable entity and entitled to deduct its own allowable expenses. See Anderson v. Wilson, 289 U. S. 20; T. Rosslyn Beatty, 28 B. T. A. 1286; J. Cornelius Rathborne, 37 B. T. A. 607; affd., 103 Fed. (2d) 301. Whether or not the Commissioner erred in disallowing these deductions in computing the taxable income of the trust we, of course, do not decide here. In any event, the petitioner is not entitled to such deductions.

Decision will be entered under Bule 50.


author: OppeR: Black,

text:
    Estate of Cordelia Y. Abendroth, City Bank Farmers Trust Company, as Executor of the Last Will and Testament of Cordelia Y. Abendroth, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of Kate Read Blacque, City Bank Farmers Trust Company, as Executor of the Last Will and Testament of Kate Read Blacque, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 94755, 97857.
    Promulgated May 17, 1940.

      James D. Ouchterloney, Esq., George H. Craven, Esq., and Earle J. StairJeey, Esq., for the petitioners.

      E. O. Hanson, Esq., and Benjamin M. Brodsky, Esq., for the respondent.
   OPINION.

OppeR:

These proceedings were brought for a redetermination of deficiencies in estate tax. In Docket No. 94755 the amount of the deficiency assailed is $432.83; in Docket No. 97857 the amount is $13,996.28. The dates of death were October 9, 1936, and April 3, 1937, respectively. '

The sole question presented ,by both cases is whether, upon an election by an executor to exercise the option given in section 302 (j) of the Revenue Act of 1926, as added by section 202 (a) of the Revenue Act of 1935, to value the estate as of a date subsequent to decedent’s death, there must be included in the gross estate the income thereon between the date of death and the optional valuation date.

All the facts in both proceedings have been stipulated. They are hereby found accordingly.

The stipulations show that in each case the executors elected upon the return to have the gross estate valued at the optional valuation dates provided by the section referred to. As permitted by that provision, retained assets were valued as of one year after decedent’s death, and those disposed of in the interim were valued as of the date of disposition.

Respondent included in the respective gross estates items of income consisting of interest and dividends, collected or accruing between the date of death and the optional valuation date. The deficiency resulting from that adjustment is the subject of this controversy.

The question presented here was considered by the Court of Appeals, Second Circuit, in Saks v. Higgins, 111 Fed. (2d) 78, and was there answered in the affirmative. On the authority of that decision, respondent’s inclusion in the gross estate of the interim estate income is sustained.

Reviewed by the Board.

Decision will be entered for the respondent.

Black,

dissenting: Undoubtedly the Commissioner in determining the deficiencies in each of these proceedings was following article 11 of Treasury Regulations 80 (1937 Edition). If the provisions of these regulations which require interest earned after decedent’s death and ordinary dividends declared and paid after decedent’s death to be included in the value of decedent’s estate are valid, then, of course, the majority opinion is correct. However, it seems to us that the regulations clearly go beyond the statute. A regulation which goes beyond the statute is invalid and should not be enforced. Manhattan General Equipment Co. v. Commissioner, 297 U. S. 129, and cases there cited.

Under the terms of section 302 of the Revenue Act of 1926, the value of the property which is to be included in decedent’s gross estate is the value of such property at the time of decedent’s death. Subdivision (j), which was added by the Revenue Act of 1935, did not change in. the slightest degree the property which was to be included in decedent’s estate. It simply postponed the date at which such property was to be valued, if the executor of the estate elected to avail himself of such privilege. Of course, if any particular piece of property increases in value between the date of decedent’s death and the date of the postponed valuation, the increase in value must be taken into account, but nevertheless, it is the same property. Interest earned after decedent’s death and ordinary dividends declared and paid after decedent’s death, are not items of property on hand at decedent’s death. They are not items which represent mere increase in value. They are items of property which have been acquired by the estate since decedent’s death and are taxable income to the estate. We see nothing in the language of section 302 (j) which would indicate that Congress intended that such items of newly acquired property should be added to decedent’s gross estate merely because the valuation date is postponed for one year. A perusal of the statement of the managers on the part of the House which accompanied the Conference Report on the Revenue Bill of 1935 (74th Cong., 1st sess., H. R. 8974, Conference Report No. 1885, pp. 10-11), seems to indicate to the contrary.

We recognize, of course, that the views which we have herein expressed are contrary to Saks v. Higgins, 111 Fed. (2d) 78, cited in the majority opinion. While we have great respect for the views of the learned court which handed down that decision, we are compelled, for reasons we have already stated, to differ from the majority opinion of that court, and to file our dissent in this proceeding.

Van Fossan, Arnold, and Harron agree with this dissent.


author: Arnold : Smith,

text:
    Snyder & Berman, Inc., Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 99409, 99952.
    Promulgated May 21, 1940.

      Frank G. Davidson, Jr., Esq., and O. H. Tufts, O. P. A., for the petitioner.

      E. L. Oorbin, Esq., for the respondent.
   OPINION.

Arnold :

Petitioner contends that the foregoing facts entitled it to deduct $2,400 in each of the taxable years as an ordinary and necessary business expense under section 23 (a) of the Bevenue Acts of 1934 and 1936. It is urged that these payments are in the nature of a pension to a valued employee who had been paid a small salary in prior years and who was expected to return to the corporation upon his recovery. Stress is laid upon the provisions of section 23 (q), Revenue Act of 1934, and section 23 (p), Revenue Act of 1936, which relate to pension trusts and permit deductions by an employer of payments thereto under circumstances not here material. Petitioner likewise cites the provisions of Regulations 86 and 94 relating to pensions.

In our opinion the present facts fail to support the pension theory advocated by petitioner. It does not appear that any employee of the company had been paid a pension at any time during its long existence as a business organization, nor does it appear that a pension trust had been set up for the benefit of petitioner’s employees. In fact it wasn’t until after the last taxable year before us that Gus Berman was voted a pension as such. Prior thereto his account was credited with a salary as an officer of the company, and it wasn’t until the resolution adopted in July 1938 that petitioner’s disbursements were referred to as a pension. Certainly, there is no indication here that Gus Berman was employed with the understanding that he would be paid regardless of whether he rendered any personal services. His disability did not grow out of his employment, and we can see no valid reason to characterize these credits to and disbursements for Gus Berman as pension payments.

We are persuaded by the facts of record that the father and other brothers of Gus Berman used the family corporation to satisfy an obligation that would otherwise have fallen upon them individually. By continuing Gus Berman on petitioner’s payroll as an officer and employee the necessary funds were provided to meet Gus Berman’s personal expenses and the expenses of his family. The evidence establishes that the funds thus provided were in fact used for this purpose by the petitioner. It is undisputed that Gus Berman rendered no personal services to the petitioner during any of the taxable years which would entitle him to these salary credits, and evidence is lacking to establish that his personal services from December 1929 to July 1934 were of sufficient value to the corporation to merit the additional compensation of $2,400 claimed for each of the taxable years.

In weighing the evidence adduced we have recognized that the acts of the directors and the entries on petitioner’s books of account are consistent with the theory advanced. Nevertheless, it is our opinion that the disbursements here involved were neither ordinary nor necessary for the conduct of petitioner’s business. The disbursements were extraordinary in character, and the corporate directors were influenced in authorizing them by family considerations and blood relationship. L. Schepp Co., 25 B. T. A. 419, 429. In voting these disbursements to Gus Berman it was not the business interest of the petitioner which primarily concerned its directors, but the welfare of a son and brother and those dependent upon him. The revenue acts specifically declare that personal and family expense items are not deductible, section 24, Revenue Acts of 1934 and 1936, and this petitioner can not be used as a means of deducting personal and family expense items of Gus Berman under the guise of a salary paid to him as an officer and employee.

The cases cited by petitioner have been considered, but are deemed distinguishable on their facts. Petitioner particularly relies upon our decision in C. Wildermann Co., 8 B. T. A. 771, as being precisely in point. We think the decision demonstrates the fallacy of petitioner’s position. One issue in that case involved an annuity to be paid to any member of the Wildermann family who had been continuously employed by the company for a term of 15 years. The provision for the annuity had been adopted in 1912 and pursuant thereto the company paid its retired president an annuity during the taxable years 1920 and 1921. We allowed the corporation to deduct the annuity payments as ordinary and necessary business expenses. The facts in that case further show, however, that additional sums were paid by the corporation for the benefit of its retired president which it attempted to deduct as ordinary and necessary expenses. We denied the deduction of these amounts because the retired president had “rendered no services to the corporation during the taxable year.” Our holding in the instant case is, therefore, in accord with our holding in the Wildermann, case, as no corporate policy has been adopted by the instant petitioner respecting retired, injured, or incapacitated employees. Similar distinctions exist as to the petitioner’s other citations.

Reviewed by the Board.

Decision, will be entered for the respondent.

Smith,

dissenting: The Revenue Acts of 1934 and 1936 permit the deduction from gross income of “All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered.”

Article 23 (a)-9 of Regulations 86 and 94 provides in part as follows:

Art. 23 (a)-9. Pensions — Compensation for injuries. — Amounts paid by. a taxpayer for pensions to retired employees or to their families or others dependent upon them, or on account of injuries received by employees, and lump-sum amounts paid or accrued as compensation for injuries, are proper deductions as ordinary and necessary expenses. Such deductions are limited to the amount not compensated for by insurance or otherwise. * * *

One of the petitioner’s officers became ill in 1934. The petitioner’s officers, believing that his illness would be only temporary, continued to pay him a salary at a reduced rate ($2,400 per annum). The petitioner’s president testified that during the taxable years the ill officer:

* * * was a valuable employee, and be bad been paid a small salary in tbe past years that be bad been working, and didn’t have any particular amount of money saved, or didn’t accumulate anything, and we wanted bis good will, and we wanted bim to come back to work, when and if be did recover. We thought, in fairness to bim and in the interest of tbe business, we should continue these payments of $2,400.

I think that these payments constituted ordinary and necessary expenses of carrying on a trade or business within the intendment of the statute and the Commissioner’s regulations. I can not believe that the respondent would have disallowed the deduction of the salary paid if he had had before him the evidence before the Board in this record.

Black, and Leech agree with this dissent.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions :
      (a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including a reasonable allowance for salaries or other compensation for personal services actually rendered; * * *


author: Smith: TuenbR,

text:
    Estate of G. Percy McGlue, Deceased, M. Edith McGlue, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 98446.
    Promulgated May 21, 1940.

      Lionel B. Farr, C. P. A., for the petitioner.

      Elmer L. Corbin, Esq., for the respondent.
   OPINION.

Smith:

The first question for our determination is whether the executors’ fees or commissions from the estates of B. F. Saul and James F. Shea are includable in the gross income of the estate of the decedent, G. Percy McGlue, for the year in which his death occurred.

Section 42 of the Revenue Act of 1934 provides:

SEO. 42. PERIOD IN WHICH ITEMS OE GROSS INCOME INCLUDED.
The amount of all items of gross income shall he included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period. In the case of the death of a taxpayer there shall he included in computing net income for the taxable period in which falls the date of his death, amounts accrued up to the date of his death if not; otherwise properly includable in respect of such period or a prior period.

The respondent in his regulations, Regulations 86, article 42-1, has construed this provision of the statute as requiring the net income of a deceased taxpayer for the year in which his death occurs to be computed on the accrual basis. The pertinent part of the article reads as follows:

* * * If a taxpayer has died there shall also be included in computing net income for the taxable period in which he died amounts accrued up to the date of his death if not otherwise properly includible in respect of such period or a prior period, regardless of the fact that the decedent may have kept his books and made bis returns on the basis of cash receipts and disbursements. If no determination of compensation is had until the completion of the services, the amount received is ordinarily income for the taxable year of its determination, if the return is rendered on the accrual basis; or, for the taxable year in which received, if the return is rendered on the receipts and disbursements basis. If a person sues in one year on a pecuniary claim or for property, and money or property is recovered on a judgment therefor in a later year, income is realized in the later year, assuming that the money or property would have been income in the earlier year if then received. * * *

Referring to tbe above section of the statute, we said in Lillian O. Fehrman, Executrix, 38 B. T. A. 37, after reviewing its legislative history, that:

It is obvious from the language of the act and the legislative intent as disclosed by the committee reports quoted above that the purpose of Congress was to treat the income of a decedent as though he were on an accrual basis even though he was actually on a cash basis and kept his books on a cash basis, and that the phrase “amounts accrued up to the date of his death” means those amounts which would be properly included in a decedent’s income if he were on an accrual basis as distinguished from a cash basis.

See also Estate of Wilton J. Lambert, 40 B. T. A. 802.

The respondent’s contentions in this proceeding are that the executors’ fees to which the decedent was entitled from the estates of B. F. Saul and James F. Shea had accrued at the date of the decedent’s death and are therefore includable in decedent’s gross income for that year. The petitioner contends, however, that the executors’ fees were not accruable income at the date of decedent’s death because under the laws of the District of Columbia an executor is not entitled to any fees or commissions until he has filed his final account as executor and the payment of the fees or commissions has been approved by the Probate Court, neither of which events had taken place at the rim pi of the decedent’s death. The parties have cited a number of cases involving questions of the accrual of various items of income. As stated in Ernest M. Bull, Executor, 7 B. T. A. 993, “the word ‘accrue’ has no definite meaning but must be interpreted in accordance with the statutory requirement that the accounts must clearly reflect income.”

The factors governing the accrual of items of income and items of deduction are substantially the same; that is, all the events must have occurred which determine the taxpayer’s rights or obligations with respect thereto. Thus, as to the accrual of the munitions tax in United States v. Anderson, 269 U. S. 422, the Court said:

* * * In a technical legal sense it may be argued that a tax does not accrue until it has been assessed and becomes due; but it is also true that in advance of the assessment of a tax, all the events may occur which fix the amount of the tax and determine the liability of the taxpayer to pay it. * * *

In Jackson v. Smietanka, 272 Fed. 970, it was held that the additional compensation paid to a receiver at the end of his receivership, pursuant to a preexisting agreement, was taxable to him in the year when allowed by the court having jurisdiction of the receivership. The court there called attention to the provisions of article 32 of Regulations 45 that:

Where no determination of compensation is had until the completion of the services, the amount received is income for the taxable year of its determination, if the return is rendered on the accrual basis; or, for the taxable year in which received, if the return is rendered on a receipts and disbursements basis. * * *

A substantially similar provision is found in article 42-1 of Regulations 86, promulgated pursuant to the Revenue Act of 1934, referred to above.

Relying upon Jackson v. Smietanka, supra, the Commissioner ruled in S. M. 1929, C. B. IV-1, p. 125, that executors’ fees in the State of Maine, where such fees are allowable at the discretion of the court, were taxable to the executor in the year when allowed by the court although they had been advanced to him in a prior year. However, in G. C. M. 20296, C. B. 1938-2, p. 198, the Commissioner ruled that fees received by an executor in the State of Massachusetts were taxable to him in the year of their receipt, even though they were not allowed by the Probate Court in that year. The distinction was based largely upon the difference in the laws of the jurisdictions.

In Commissioner v. Cadwalader, 88 Fed. (2d) 274; certiorari denied, 301 U. S. 706, the United States Circuit Court of Appeals for the Third Circuit held, reversing the Board, that in the State of New Jersey, where executors are not entitled to fees or commissions until the final account is filed and the fees or commissions are allowed by the Orphans’ Court, the executrices were taxable on commissions in the year when they were allowed by the Orphans’ Court, although such commissions had been advanced to them in a prior year.

In Brosnan v. Fox, 52 App. D. C. 143; 284 Fed. 923, the court said:

The commissions were granted under section 865, Code D. C., which provides that an executor or administrator may be allowed “Commissions, which shall be at the discretion of the court, not under one percentum nor exceeding ten per-centum on the amount of the inventory or inventories, excluding what is lost or perished.” This places a limitation beyond which the court may not go in allowing compensation for the services of an executor or administrator, or executors or administrators, in administering an entire estate. In other words, the limitation operates and commissions are available only when the administration is closed and a final settlement approved. It is then, and only then, that the court has before it complete evidence of the amount and character of services performed, upon which he may intelligently base an allowance. It follows, therefore, that an executor prior to final settlement of the estate, or the termination of his services in connection with the estate, is not entitled to an allowance of commissions.

The services of the decedent as coesecutor of the B. F. Saul estate were terminated by his death on October 31,1935, and the coexecutor, the American Security & Trust Co., has since carried on the administration of the B. F. Saul estate. The facts do not show to what extent the estate had been administered up to the date of the decedent’s death, although it is stipulated that up to that time no final accounting had been filed with the Probate Court and no executors’ fees or commissions had been allowed by the Probate Court or claimed by either of the executors.

The Code of the District of Columbia provides, in section 75 of chapter 5, Title 29, that:

If an executor or administrator shall die before the administration of the estate is completed, letters of administration de bonis non or de bonis non cum testa-mento annexo, as the case may require, shall be granted, in the discretion of the court, * * *

Section 270 of chapter 11, provides that:

The executor or administrator of the deceased executor or administrator shall return, on oath, to the court, on or before the day named as aforesaid, a list of the bonds, notes, accounts, and money aforesaid, and shall be entitled to retain out of the money such commission as the court shall allow, not exceeding ten per centum on the principal inventory, and the personal estate and money turned over by him shall be assets in the hands of the administrator de bonis non, to be accounted for by him as such.

Apparently, under the provisions of section 270 the fees or commissions which the decedent, McGlue, may have earned as executor of the B. F. Saul estate will be paid to his executor or administrator in such amount as the court shall allow “not exceeding ten percentum on the principal inventory.”

The amount of the executors’ fees which the respondent has determined was accrued at the time of McGlue’s death is one-half of the total amount of executors’ fees of $141,612.29, which was the amount claimed as a deduction in the Federal estate tax return filed on behalf of the B. F. Saul estate as “estimated at 3% of the gross estate of $4,720,409.75, as shown on the said return.”

Even if we assume that 3 percent of the gross estate is the total amount of the executors’ fees that the court eventually will allow (there is no evidence that B. F. Saul entered into any agreement as to the amount of executors’ fees with the decedent’s coexecutor, the American Security & Trust Co.), it does not follow that the amount will he divided equally between the coexecutors and that one-half of the amount, or $70,806.14, will be allowed to the decedent McGlue’s estate. It may appear to the Probate Court that by reason of McGlue’s death before completion of the administration of the B. F. Saul estate his services as coexecutor were not commensurate with those of the other executor, which has carried on the administration of the estate since McGlue’s death.

While the agreement which McGlue entered into with B. F. Saul to act as coexecutor of his, Saul’s, estate for a fee of 1% percent of the gross estate appears to be valid and while such agreements have been held enforceable by the courts of the District of Columbia (see Washington Loan & Trust Co. v. Convention of Protestant Episcopal Church, etc., 54 App. D. C. 14; 293 Fed. 833), it is quite obvious that the agreement contemplated that McGlue should serve as coexecutor until the estate should be completely administered. Then, and not until then, could he have claimed the right to his compensation under the terms of the agreement.

In Lillian O. Fehrman, Executrix, supra, the decedent was manager of an F. W. Woolworth store and under his employment contract was entitled to a percentage of the profits each year. The decedent died October 14, 1934. We held that the portion of the profits for 1934, which was not determined until after the close of the year and was not paid to the decedent’s estate until some time in January 1935, was not an amount accrued up to the date of decedent’s death, within the meaning of section 42 above. Although the facts here differ somewhat, the same principle is involved in each case. At the time of decedent’s death the services giving rise to the right to compensation had been performed, but there were other events to take place before the decedent’s right to such compensation would become fixed and determined. In the Fehrmam case it was the taking of the inventory and the determination of the profits of the store; in the instant case, it was the filing of the final executors’ account and the allowance of the executors’ fees by the Probate Court.

In Estate of Wilton J. Lambert, supra, we held that legal fees which the decedent had earned and which were due and payable at the time of his death were accrued income and includable in his gross estate under section 42 above. There, all of the events had happened at the date of decedent’s death which fixed his rights to the fees. We said, referring to section 42 above, that “The effect of that provision, together with its complement in section 43, infra, was merely to place decedent on the accrual basis of accounting for the period of the year, 1935, in which he died.”

There is nothing to indicate that Congress intended section 42 to have any broader application than merely to require the inclusion in a decedent’s gross income of such amounts as, under ordinary accounting practice, would be treated as accrued at the date of his death.

In Spring City Foundry Co. v. Commissioner, 292 U. S. 182, Chief Justice Hughes, speaking for the Court, said: “When the right to receive an amount becomes fixed, the right accrues.”

We do not see how in the instant case it can be said that at the time of McGlue’s death he' had any fixed and determined right to receive any amount as executors’ fees or commissions from the B. F. Saul estate, which in the ordinary sense of the term had “accrued” to him.

We hold therefore that the amount of $70,806.14 representing the estimated executors’ fees from the estate of B. F. Saul was not income accrued to the decedent at the time of his death.

Most of what we have said in the foregoing discussion regarding the accrual of the executors’ fees from the B. F. Saul estate applies to the other item, the $9,926.75 representing the executors’ fees from the estate of James F. Shea, deceased, of which McGlue also served as co-executor up to the time of his death. In his will James F. Shea named McGlue as coexecutor of his estate, specifying that he should be entitled to receive the usual executors’ commissions. At the time of decedent’s death, which occurred a little over one year after the death of James F. Shea, no accounting on the estate had been filed by the executors and no executors’ fees had been claimed or allowed by the Probate Court. The first accounting on the estate was filed by the surviving coexecutor in February 1936, and in that report the a,mount of $9,926.75 was claimed as executors’ fees on behalf of McGlue’s estate. The claim was allowed by the court in that amount on February 20, 1936.

For reasons stated above, we are of the opinion that the amount of $9,926.75 representing the executors’ fees from the estate of James F. Shea was not income accrued to McGlue at the time of his death.

The remaining question is whether the dividend on the Bourjois, Inc., stock, which was declared “during the week of October 19,1935” and was payable on November 15, 1935, to the stockholders of record on November 1, 1935, had accrued at the date of decedent’s death, October 31,1935, and is therefore includable in decedent’s gross estate under section 42 above. We think not. Although the facts are somewhat lacking, we assume that at the time of his death the decedent was the owner of a sufficient number of the shares of stock in question to entitle him to the amount with which he is charged as a dividend accrued at that' time. It is to be noted, however, that the dividend, although declared prior to decedent’s death and “during the week of October 19, 1935”, was not payable to the stockholders of record at the time of the declaration, but to those who might be the stockholders of record on November 1, 1935. If by his will McGlue had specifically bequeathed the shares the legatee would have received and been taxable upon the dividend payable November 15, 1935. Until the latter date there was no certainty who would be the stockholders of record on November 1, 1935, and therefore would be entitled to receive the dividend. See Sharp v. Commissioner, 91 Fed. (2d) 802. Cf. William K. Vanderbilt et al., Executors, 11 B. T. A. 291. This uncertainty of the decedent’s right at the time of his death, October 31, 1935, ever to receive the dividend was sufficient, we think, to defeat the accrual of the dividend on that date. In other words, at the time of decedent’s death the right to receive the dividend on the Bourjois, Inc., stock had not become fixed. Spring City Foundry Co. v. Commissioner, supra.

Reviewed by the Board.

Decision will be entered wider Bule SO.

TuenbR,

dissenting: In my opinion, the fees and commissions owing to McGlue for services rendered as coexecutor of the Saul and the Shea estates were accrued at his death and under section 42 of the Revenue Act of 1934 are to be included in net income for the taxable period ended with his death. See reports of the Committee on Ways and Means and the Committee on Finance covering the bill which became the Eevenue Act of 1934. Decedent G. Percy McGlue kept his books of account on the cash receipts and disbursements basis and unless the second sentence of section 42 is applicable, the compensation due McGlue for services rendered to the Saul and Shea estates will escape income tax altogether. In a concurrent estate tax proceeding, we have held that the rights of McGlue to such compensation at the time of his death constituted property belonging to him and passing as a part of his estate. Being a part of the decedent’s estate, it follows that such compensation will not constitute taxable income to the estate when received. Jackson B. Kemper, Administrator, 14 B. T. A. 931, and Antoinette B. Held, Executrix, 3 B. T. A. 408. It is the view of the majority that McGlue’s compensation as executor of the Saul and Shea estates was not accrued at his death and that the second sentence of section 42 above does not cover that compensation.

In the majority opinion it is said that “At the time of decedent's death the services gi/ving rise to the right to compensation had been performed but there were other events to take place before the decedent’s right to such compensation should become fixed and determined.” (Emphasis supplied.) The other events referred to are described as the “filing of the final executors’ account and the allowance of the executors’ fees by the Probate OourtP It is thereafter concluded that there was no accrual of compensation at McGlue’s death because at the date of his death he had no “fixed and determined right to receive any amount as executors’ fees or commissions.” (Emphasis supplied.) In Spring City Foundry Co. v. Commissioner, 292 U. S. 182, the Supreme Court, discussing the reporting of income by the accrual method, said, “It is the right to receive * * * that determines the inclusion in gross income”, and, further, that “When the right to receive an amount becomes fixed, the right accrues.” It seems to me thus apparent that the conclusion of the majority that there was no accrual of compensation at McGlue’s death can not be reconciled with the views of the Supreme Court for two reasons, the first being that the right to compensation had become fixed at McGlue’s death, and the second that the events yet “to take place” had to do with the determination of the amount of compensation and not the right to receive compensation.

The conclusion that the right to receive fees or commissions for the services rendered by McGlue had not become fixed at his death and were not therefore accrued is, in my opinion, foreclosed by our holding in the concurrent estate tax proceeding and the pronouncements contained in the majority opinion in the instant case. While holding here that McGlue had no right to receive any amount as compensation for services rendered to the two estates until the Probate Court had acted, we have held in the estate tax proceeding that property rights in and to such compensation, having values of $70,806.14 in the case of the Saul estate and $9,926.75 in the case of the Shea estate, did exist in McGlue at the date of his death. Equally contradictory to the conclusion that there was no right at McGlue’s death to receive any amount as compensation is the statement in the majority opinion that “At the time of decedent’s death the services giving rise to the right to compensation had been performed.” In C. J. Wrightsman, 40 B. T. A. 502; affd., 111 Fed. (2d) 277 (C. C. A., 5th Cir., Apr. 10, 1940), we held that an officer of a corporation acquired the right to receive compensation as the services were rendered, even though the resolution of the directors authorizing payment of the compensation and fixing the amount thereof was not adopted until the end of the year.

McGlue qualified and was appointed coexecutor of the Saul estate on April 1,1931, and of the Shea estate on October 3, 1934, and performed the services required of him up to the date of his death. Under the. contract entered into with Saul during his lifetime, McGlue was entitled to a fee of 1% percent of the appraised value of the Saul estate for serving as coexecutor therefor and, his services as such coexecutor having been concluded at or by his death, not only had his right to compensation become fixed but it may well be argued that it had become fixed for the amount prescribed by the contract. The majority dismisses the contract with the observation that “It is quite obvious that the agreement contemplated that Mc-Glue would serve as coexecutor until the estate should be completely administered”, and concludes that under the District of Columbia Code his right to receive compensation did not become fixed until the Probate Court had acted. As I read the code, however, it is of no assistance in reaching the conclusion of the majority. The right to receive compensation for services rendered as an executor of an estate, like the right to receive compensation generally, rests upon or springs from the actual rendition of services, C. J. Wrightsman, supra, and not on or from any act of the Probate Court. In section 265, chapter 11, Title 29, of the code, .it is provided that commissions “shall” be allowed to executors in an amount “not under one percentum nor exceeding ten percentum of the amount of inventory or inventories, excluding what is lost or perished.” If the existence of the right to receive compensation is dependent upon the affirmative action of the Probate Court, that court undoubtedly could determine that an executor, even though he had performed all of the services required of him under the law — and we must assume that McGlue did just that up to the date of his death — was entitled to no compensation at all. It is apparent, however, from section 265 mentioned above that the existence of the right of an executor to recewe compensation for services actually rendered and the liability therefor does' not rest in the discretion of the Probate Court. When the services have been rendered the right to compensation is fixed, and the only function of the court is to determine within the limitations prescribed by statute the amount of compensation due and owing for such services.

Certainly the Board does not wish to be understood as holding that actual determination or knowledge of the amount to be received or paid is a prerequisite to its accrual. If so, it is, in my opinion, overruling many of its own decisions and disregarding the pronouncements of the courts. J. B. Jemison, 18 B. T. A. 399; Bonnie Bros., Inc., 15 B. T. A. 1231; W. J. Burns, 12 B. T. A. 1209; Fraser Brick Co., 10 B. T. A. 1252; Beacon Coal Co., 9 B. T. A. 280; Max Kurtz, 8 B. T. A. 679; Raleigh Smokeless Fuel Co., 6 B. T. A. 381; Josiah Wedgwood & Sons, Ltd., 3 B. T. A. 355; Producers Fuel Co., 1 B. T. A. 202. While there was a known liability in each of the above cases at the end of the taxable year, the amount either had not been or could not be determined or known until later. In certain of the cases involving damages for breach of contract and one case involving insurance losses, negotiations as to the amounts were still in progress and were not concluded until a later year. In each case the liability was accrued in an estimated amount which upon final settlement in the later year was found to be incorrect. It was held in all of the cases, however, that the accruals occurred in the years the liabilities became fixed and not in the years the amounts were determined. The only adjustments were corrections of amounts. The Supreme Court, in Lucas v. American Code Co., 280 U. S. 445, distinguished those cases from a case where the liability has been contested and “the amount of damages, if any, was wholly unpredictable”, due in that particular case to the fact that liability was substantially dependent upon the course of future events. To illustrate, the claimant was under a duty to mitigate damages. We have no such situation here. Beference to the record in the instant case shows not only that the estates are not contesting their liability to McGlue, but are admitting and claiming liability for certain specified amounts. In Elsie S. Eckstein, 41 B. T. A. 746, taxes on real estate had been accrued in an estimated amount based on the value ascribed to the property in computing the tax for the preceding year. There could be no actual determination of the amount of the taxes until determination of the value of the property for ad valorem tax purposes, and that determination by the “Board of Appeals of Cook County” did not occur until two years later. The propriety of the accrual in the year for which the tax was due was not even questioned. In American Snuff Co., 32 B. T. A. 991; affd., 93 Fed. (2d) 201; certiorari denied, 303 U. S. 662, the question was whether or not certain bonuses to officials and employees accrued in 1928, when they were determined and paid, instead of the years 1912 to 1927, inclusive, when they were earned. It was held that the accruals occurred in the years when the bonuses were earned, even though neither the liabilities nor the amounts thereof were known in those years. The liabilities did in fact exist and could have been known through exercise of proper diligence.

In the majority opinion great significance is attached to the facts that neither estate had been completely administered at McGlue’s death, no final accounting had been filed, no executor’s fees or commissions had been claimed and none had been allowed by the Probate Court. The claiming and allowing of executor’s fees obviously have to do with the formalities of determining the amount of compensation and the payment or collection thereof. The right to compensation being the basis of an allowable claim, the right must necessarily precede the claim and allowance. The right arose from the rendition of services and, as the majority opinion itself states, the services giving rise to the right to compensation had been performed at Mc-Glue’s death. Furthermore, in a case such as we have here, where an executor dies before concluding the administration of an estate, the completion of administration of the said estate and the filing of the final accounting not only are not essential or prerequisite to the fixing of the right to compensation, but are not even prerequisite to its collection. Under section 270, supra, quoted in the majority opinion from the District of Columbia Code, McGlue’s administrator or executor could have required the Probate Court to make an immediate determination of the amounts of compensation owing to McGlue by the Saul and Shea estates and had the further right to retain the amounts so determined out of any assets of the said estates which McGlue might have had on hand at the date of his death. The amount of compensation, though not known or determined at Mc-Glue’s death, was then determinable. There were no further events to take place which would add to or take from the right to such compensation, the only things yet to be done being the determination of the amounts within the limitations prescribed by the statute and the actual payment thereof when determined.

The distinction between the instant case and Lillian O. Fehrman, Executrix, supra, relied upon by the majority, is therefore indicated. In the Fehrman, case the right of the decedent to receive amy amowit as a bonus for the taxable period ending with his death was subject to the hazards of business operations between the date of his death and the close of the calendar year. In the instant case no such operating hazards existed, and, further, McGlue’s administrator or executor could have required immediate determination of the amount of compensation and the payment thereof. Similarly, Jackson v. Smietanka, supra, is not in point. In that case the question involved was the year of accrual of additional compensation for services rendered as receiver, and in fixing the regular compensation at the beginning of the receivership the court had made the conclusion of the receivership a prerequisite to any right to additional compensation.

There is a limited group of cases in which it has been held that the existence of the right to receive certain items of income did not result in the accrual of those items for income tax purposes. Marguerite Hyde Suffolk and Berks, 40 B. T. A. 1121; American Fork & Hoe Co., 33 B. T. A. 1139; Oregon Terminals Co., 29 B. T. A. 1332; Emanuel Solomon Ullmann, 30 B. T. A. 164; Atlantic Coast Line Railroad Co., 31 B. T. A. 730, 749; Great Northern Railway Co., 8 B. T. A. 225, 269. In all of those cases the taxpayers were on the accrual basis and it was held that even though the income was earned in the taxable year the taxpayers were justified in failing to accrue the said items where collection thereof was highly improbable or there was little or no likelihood of collection in the future. There is no showing or claim of any such situation here.

For the reasons set forth, the conclusion that the fees and commissions owing to McGlue for services rendered as coexecutor of the two estates were accrued at his death and taxable under section 42, supra, for the period ending with his death, seems to me inescapable.

I therefore note my dissent.

Hill agrees with this dissent.

       Sections 42 and 43. Income accrued and accrued deductions of decedents: Tile courts have held that income accrued by a decedent on the cash basis prior to his death is not income to the estate, and under the present law, unless such income is taxable to the decedent, it escapes income tax altogether. By the same reasoning, expenses accrued prior to death cannot be deducted by the estate. Section 42 has been drawn to require the inclusion in the income of a decedent of all amounts accrued up to the date of his death regardless of the fact that he may have kept his books on a cash basis. Section 43 has also been changed so that expenses accrued prior to the death of the decedent may be deducted.

       Sections 42 and 43. Period for which deductions and credits taken. The courts have held that income accrued prior to the death of a decedent on the cash basis is not income to his estate, and under the present law, unless such income is taxable to the decedent, it escapes income tax altogether. By the same reasoning, expenses accrued prior to death cannot be deducted by the estate. Sections 42 and 43 of the House bill were so drawn as to require the inclusion in the income-tax return for the decedent of all items of income and deductions accrued up to the date of death regardless of the fact that the decedent may have kept his books on a cash basis. The change made in section 43 is necessary to effectuate the policy adopted in the House bill in section 42. By reason of the proposed change such items as accrued dividends and interest on partially tax-exempt securities are permitted as a credit in computing the normal tax.