author: Aeundell:

text:
    American Refrigerator Transit Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 64782, 67602, 72861.
    Promulgated October 31, 1934.

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

      James L. BacksProm, Esq., for the respondent.
   OPINION.

Aeundell:

For 16 years prior to the tax years in controversy the petitioner computed its annual depreciation charges to operating expenses on the basis of 5 percent of the diminishing value of its cars, that is, 5 percent of 100 percent of cost in the first year, 5 percent of 95 percent of cost in the second year, 5 percent of 90 percent of cost in the third year, and so on, until the aggregate depreciation deductions with respect to any particular car amounted to 60 percent of cost or book value, when depreciation deductions with respect to that car were discontinued. By this method, 60 percent of the cost or book value of petitioner’s cars was written off in 18 years. The remaining 40 percent of cost or book value was carried on the books undiminished as representing the salvage value at the end of useful life. It must be assumed that these annual depreciation charges were reasonable allowances for exhaustion, wear and tear, including obsolescence, of petitioner’s cars, in the light of conditions then existing, for, notwithstanding that they were computed by a method which, from an income tax standpoint, is highly unsatisfactory, Albia Box & Paper Co.,, 4 B. T. A. 1184, they were allowed by respondent as deductions in computing taxable net income. Thus, the importance of the method by which petitioner computed the depreciation deductions claimed in earlier returns becomes obscure, as it inevitably must, for after all the question is not one of methods, but rather the reasonableness of the deductions claimed. American South African Line, Inc., 30 B. T. A. 753.

In the tax years in controversy petitioner claimed depreciation deductions which were computed by the same method as was used in computing the deductions of the prior 16 years, except that depreciation on new cars was computed on the straight line basis, that is, at 5 percent of cost. The respondent rejected these deductions and, having determined that 30 years is the average useful life o,f petitioner’s cars, allowed deductions equivalent to 3% percent of the average book values as of the beginning and close of each year.

Unless there be present unusual circumstances which justify a departure from the rule, a proportional part, based upon estimated useful life, of cost less salvage value will reflect a reasonable allowance for depreciation of wasting assets. This is what the parties are contending for here. They disagree, however, as to what are the useful life of petitioner’s cars and the base or cost less salvage value.

We have found as a fact that the average useful life of petitioner’s cars is 20 years. To support that finding, we have the uncontro-verted testimony of three expert witnesses, who, by training and years of practical experience, are peculiarly fitted to express opinions on the subject. They knew the state of condition of petitioner’s cars, as to wear and tear, obsolescence, availability and usefulness, for, in their respective positions of auditor, superintendent of transportation, and mechanical superintendent in petitioner’s employ, they were required to keep themselves informed on the subject. They testified that obsolescence, brought on by advances made and being made in the art of refrigerating cars for the transportation of perishable shipments and improvements in the construction of refrigerator cars, has substantially lessened the usefulness of petitioner’s cars to a period much shorter than their physical life, and that it is the largest single factor to be reckoned with in estimating useful life; and to that factor they have assigned the greatest weight in their estimates of useful life. There is extrinsic evidence to support their judgment in that respect. In 1919 the United States Railroad Administration introduced a new United States standard refrigerator car that, in every important feature of construction, method of refrigeration, and efficiency in protecting perishable shipments, was a radical departure from the cars then in use. The introduction of that new standard type of car sounded the death knell of the older types of cars, or so circumscribed their sphere of usefulness that their employment as transportation facilities has been reduced to only occasional use and is a matter of much difficulty. In 1922, when petitioner first commenced the replacement of its older type of cars with the newer type, the older cars constituted 100 percent of its entire car equipment, while six years later, in 1928, they represented but 46 percent of all the cars owned. Thus, within the short period of six years, more than one half of petitioner’s older cars were supplanted with the newer type; and though the older cars represented 46 percent of all the cars owned, their mileage earnings represented less than 8 percent of petitioner’s total mileage revenues. Furthermore, the petitioner is now confronted with a further advance in the art of refrigerating cars, that of producing refrigeration with mechanical devices, and the testimony is that the ice bunkers of petitioner’s cars must give way, before the end of physical life, to the new mechanical means of refrigeration.

Further confirming the opinions of these witnesses are the facts pertaining to the age of cars owned in the taxable years. Less than 15 percent of the cars, on the average, were more than 20 years old. Of course, this situation largely reflects the replacements of older cars with newer cars since 1922; but, confronted now with a further revolutionary change in methods of refrigeration, it is not at all likely that any great error would result in basing the estimate of useful life upon the petitioner’s actual experience. True, a large number of this 15 percent are substantially older than 20 years; but the fact that they are still being carried in petitioner’s capital accounts is best explained by the auditor’s testimony as to the reluctance of the board of directors to charge them off in years of low earnings, which is confirmed by the mechanical superintendent’s statement that his repeated requests or recommendations to retire these older cars have been ignored by the board of directors.

The determination that 20 years is the useful life of petitioner’s cars necessarily precludes from consideration, in determining the annual depreciation deductions, all cars in excess of that age, and the base should be reduced accordingly. The evidence shows that the average cost of the older cars is $1,200. The elimination of all cars over 20 years old will, therefore, reduce the cost basis, as of the close of 1928, 1929, 1930, and 1931, by the amounts of $1,903,200, $1,888,800, $1,863,600, and $2,714,400, respectively.

A further factor to be considered in fixing the depreciation base is the estimated salvage value of cars at the end of useful life. Consistently since 1912, the petitioner has carried 40 percent of cost on the books as representing estimated salvage value. However, the facts set forth in the findings indisputably show that while 40 percent of cost was a fair estimate of salvage value in 1912, when petitioner first adopted a depreciation policy, it is much too high under the circumstances existing in the taxable years in controversy. Interchangeability of parts and high scrap prices gave high values to salvaged materials in the years immediately following 1912. In the taxable years in controversy that interchangeability of parts had been largely lost, while scrap prices had materially declined from the high levels of earlier years. Comparing the salvage actually realized within the cost of cars retired in the taxable years, we conclude that 12 percent of cost is the maximum salvage value that may be ascribed to petitioner’s cars. The cost basis of cars under 20 years old, as of the close of 1928, 1929, 1930, and 1931, should be reduced, therefore, by the amounts of $2,521,290.55, $2,862,491.02, $3,249,299.73, and $3,138,935.04, respectively, representing salvage values.

After giving effect to the above adjustments for elimination of cars over 20 years old and salvage values, the bases, as of the close of 1928, 1929, 1930, and 1931, are $18,489,464.03, $20,991,699.78, $23,828,198.06, and $23,018,857.00; and the average bases are $19,740,532.40 for 1929, $22,409,899.42 for 1930, and $23,423,527.52 for 1931. Applying a rate of 5 percent, based on a useful life of 20 years, to these average bases, we conclude that reasonable allowances for depreciation of petitioner’s cars are $987,026.62 for 1929, $1,120,494.97 for 1930, and $1,171,176.38 for 1931.

Decision will be entered wider Rule 50.


source: Caselaw Access Project

author: Seaweul :

license: Public Domain

text:
    United States Trust Company of New York as Trustee of the Estate of Henry de Coppet for Remainder Interest after Gertrude de Coppet, Petitioner, v. Commissioner of Internal Revenue, Respondent. United States Trust Company of New York as Trustee of the Estate of Henry de Coppet for Remainder Interest after Beatrice de Coppet, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 60389, 60390.
    Promulgated October 31, 1934.

      E. Sheldon Stewart, Esq., and George L. Shearer, Esq., for the petitioners.

      Ralph E. Smith, Esq., and John T. Koehler, Esq., for the respondent.
   OPINION.

Seaweul :

It is not disputed that the basis for determining the gain or loss from the sale involved in the instant proceedings is governed by section 113 (a) (5) of the Bevenue Act of 1928, which in part provides:

(5) Pkopebty transmitted at death. — If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent’s estate from the decedent, the basis in the hands of the estate shall be the fair market value of the property at the time of the death of the decedent. In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. * * *

In behalf of the petitioner it is insisted the trusts for the lives of Gertrude and Beatrice de Coppet were contingent trusts and did not vest until the death of their mother. The respondent contends the trusts vested upon the death of their father, the testator.

The real estate involved and sold was situated in New York and the law of that state with respect to interests therein, whether vested or contingent, is controlling. United States v. Crosby, 7 Cranch 115; De Vaughn v. Hutchinson, 165 U. S. 566, 570; Poe v. Seaborn, 282 U. S. 101, 110.

The distinguishing characteristics of vested and contingent remainders under the common law and the New York law are, with citation of authorities sustaining same, in 23 R. G. L., sections 36, 37, pp. 504-506, in part thus stated:

36. * * * A provision in the New York statutes, which, has been incorporated in the statutes of other states, introduced the rule that an estate is vested “ whore there is a person in being who would have an immediate right to the possession of the lands upon the ceasing of the intermediate or precedent estate.” This statute was deemed by Chancellor Kent (Com. 202) to express fully and accurately the common law definition of a vested remainder. And this remark seems to have misled the courts of other jurisdictions into accepting the decisions of the New York Courts under the statute of that state as expository of the common law. But the assumption that this statutory definition is simply a brief statement of the common law rule has now been definitely abandoned everywhere, and it has been recognized even in New York that there is a marked distinction between this statutory definition and that of the common law.
37. * * * But according to the common law distinction between vested and contingent remainders, a remainder does not vest merely because there is a person in being who would have a right to the possession should the particular estate immediately determine; the person in being must be one whose right ultimately to enjoy the remainder is fixed and certain during the pendency of the particular estate. To the contrary, under the New York rule, which declares a remainder to be vested “ when there is a person in being who would have an immediate right to the possession of the land upon the ceasing of the intermediate or precedent estate,” all members of a class who are in life at any time during the particular estate will take vested remainders, even though the instrument creating the estates nominates those only of such class as shall be in esse when the particular estate falls in to take in remainder at all; for they clearly come within the words of the rule as persons in being who would have an immediate right to the possession of the lands upon the ceasing of the intermediate or precedent estate.

In Trowbridge v. Cross, 110 N. Y. S. 1108; 126 App. Div. 679; affd, 195 N. Y. 596, the court, in part, said:

* * * Under the statute future estates are either vested or contingent. They are vested when there is a person in being who would have an immediate right to the possession upon the ceasing of the intermediate or precedent estate. They are contingent while the person to whom, or the event upon which, they are limited to take effect remains uncertain. Real Property Law, Laws 1896, Sec. 30, O. 547, p. 564.

The petitioner cites and relies on In re Crane, 164 N. Y. 71; 58 N. E. 47, quoting the general rule of construction therein enunciated that “where the only words of gift are found in the direction to divide or pay at a future time, the gift is future, not immediate; contingent and not vested ”, and insists that the trusts in the instant cases herein (consolidated for hearing) fall squarely within that rule.

In that case, however, the court said there are exceptions to the rule and stated, as where there are words importing a gift in addition to the direction to executors or trustees to pay over, divide or distribute. In such a case, the general rule of construction does not govern, because the language employed, outside of the direction to divide or distribute, imports a gift, and therefore the situation is precisely as if the will contained words of gift.” In that case the court decided: “ That, aside from the direction to the executors or trustees to divide and distribute the estate, there are no words importing a gift, and hence it becomes our duty to give force and effect to the rule that, where the only gift is found in a direction to divide or pay at a future time, the gift is future, not immediate; contingent, and not vested.”

A careful reading of the provisions of the will construed in that case, as set forth in the court’s opinion, will disclose that they are quite different from those of the will in the instant proceedings. After making provision for debts, funeral expenses, gifts to his wife and certain relatives, the testator then devised and bequeathed all the rest of his estate to his executors in trust, commanding them to dispose of his real estate and convert personalty into cash and invest in bonds secured by real estate mortgages; and to pay certain annuities to his wife and certain relatives. Upon death of the wife, the trust terminated. The will further provided: Upon the decease of my said wife, I order and direct that my estate be divided as follows, viz: equally between my brothers and sisters and my niece. * * * ” The testator’s seven brothers and sisters and niece survived him, but all died before the widow, some leaving issue and some none. The court below construed the will as vesting the remainders given to the brothers and sisters and niece immediately upon the death of the testator and this holding the Court of Appeals of Yew York reversed, as heretofore indicated. The remainder interests to be divided as above indicated had not been devised to aforesaid parties nor in trust for them, as was the case of remainder-men in the will in the instant proceedings.

The trust in the Crane case, supra, had relation only to the disposition and conversion of certain property into cash and its investment in bonds and the payment of certain annuities, which trust terminated upon the wife’s death. In the instant proceedings the remaindermen’s interests were held in trust for them from date of testator’s death and we think they had vested interests prior to death of the widow, though enjoyment was postponed until after her death.

In Lane v. Corwin, 63 Fed. (2d) 767; certiorari denied, 290 U. S. 644, the court, discussing vested and contingent remainders under New York laws, stated in part as follows:

* * * Whether a given remainder is vested or contingent turns on testamentary intent, and, where the intention is that the distribution of the estate shall be postponed until a future time to persons then to be ascertained, it is contingent as distinguished from the instance in and where the ultimate takers are capable of identity at the date of death. Matter of Baer, 147 N. Y. 348, 41 N. E. 702; Matter of Eickelberg’s Estate, 135 Misc. 581, 240 N. Y. S. 699. * * *
The former Revenue Acts were either silent or provided that the value at the time of the acquisition of the property should be the basis. The Revenue Act of 1928 changed the law. Brewster v. Gage, 280 U. S. 327, 50 S. Ct. 115, 74 L. Ed. 457. By it Congress substituted the date of decedent’s death, and, to take care of situations to which the date of death seemed inapplicable, it added the date of distribution.

In tke case of Warner v. Commissioner, 72 Fed. (2d) 225, affirming 28 B. T. A. 1178, the court, citing and discussing numerous cases (which makes it unnecessary to otherwise refer to them herein), said in part :

* * * Moreover, the fact that the gift was to named persons rather than to a class the members of which might not be determined until the time when the future interest should vest in possession has generally been regarded as indicative of a vesting at the date of the testators death, especially when the income is payable during the pendency of the trust to the person prospectively entitled to receive the remainder. Fulton Trust Co. v. Phillips, 218 N. Y. 573, 582; Vanderpoel v. Loew, 112 N. Y. 167. The rule that a direction in a will to divide and pay in future, without words of present gift, renders a bequest presumptively contingent is, at best, but a rule of construction and should not apply to a case where the objects of the testator’s bounty are specifically named and there is no question of ascertaining who are the members of a class entitled to take at the time the trust terminates. Vesting at the testator’s death is generally favored. (McArthur v. Scott, 113 U. S. 340) and the “ divide and pay over ” rule is only applicable in determining whether the right of persons to whom a testator has bequeathed his estate in remainder is transmissible in case of failure to survive the life tenant. It only helps in some cases to determine whether a remainder becomes indefeasibly vested at the date of the testator’s death or at the termination of a trust or life estate. It has nothing to do with remainders that are vested subject to be divested by the happening of a condition subsequent.

See also Isabel Richardson Molter, 27 B. T. A. 442. Cf. Elizabeth B. Wallace, Executrix, 27 B. T. A. 902; Daniel Tracy Beers, 31 B. T. A. 117.

In the light of the authorities quoted and others cited, we will endeavor to make proper application of the principles enunciated in them and correctly determine the question in issue in the instant proceedings.

With respect to the residue ” of his estate, which included the real estate here involved, the testator devised none of it directly to his wife, his children or to their issue or to others, but all of it was devised to his executor in trust, the petitioner herein, for the use and benefit of certain named living persons or designated classes or individuals indicated or ascertainable from provisions of the will. Much of what has been said in petitioner’s behalf has been based on cases involving outright remainders, while in the instant proceedings we are dealing with remainders in trust.

The trustee, petitioner herein, upon the death of the testator and due qualification, by virtue of the will, held the “ residue ” of the testator’s estate in trust for the use and benefit of the widow, daughters, and remaindermen as set out in the various provisions of the will. The rule is well established that contingent remainders are not favored, and unless from the language of the instrument it is manifest that a contrary result was intended, the estate will be regarded as vested, and not contingent. 23 B. C. L., secs. 61, 62, pp. 621-523. Upon the death of the testator, the rights or interests of the daughters, Gertrude and Beatrice de Coppet, in the “ residue ” of the testator’s estate were, in our opinion, definitely fixed and there was nothing which might occur during the period of the intermediate life of their mother that could operate to divest them of such interests, except their own deaths, which, of course, would not render an estate, previously vested, contingent. The death of the mother or widow did not terminate the trust created by the testator. Her life, we think, merely postponed the enjoyment of the vested rights of the daughters.

In our opinion there was “ no distribution to the taxpayer ” nor to any of the beneficiaries of the trust in the sense of the statute, when the trustee (taxpayer and petitioner here) simply received and held, subject to the terms of the trusts, the proceeds from the sale of a piece of property which had been held in trust since its1 receipt upon the death of the testator. What was said by the court in Willcuts v. Ordway, 19 Fed. (2d) 917, construing other and early statutes, nevertheless, may be appropriately repeated and here applied, to wit:

* * * In eacli of these acts, tlie intent is that annual income to a particular beneficiary from a trust estate shall be taxed to him as a separate unit of taxation where that income is “distributed” to him. “Distribution,” as there used, does not necessarily mean passing into the uncontrolled possession and disposition oí the beneficiary. It means separation and segregation from the trust estate so that it no longer forms any part or parcel thereof. The test set up by the statute is whether the income passes from the trust estate which produced it and ceases to be subject to the terms and control of that trust. * * *

The increase in value of the property from $130,000 to $250,000 for which it was sold and the profit, $120,000, arising from its sale all occurred during the existence and execution of the trusts still in force and effect, the sale and receipt of proceeds by the trustee being in execution and continuance of the trusts. In our opinion, and we so hold, the trustee, under the circumstances herein shown, is a “taxable person” (see Merchants' Loan, & Trust Co. v. Smietanka, 255 U. S. 509), and, in view of the principles enunciated in authorities heretofore cited, we are further of the opinion and hold that the proper basis for determining the profit or loss upon the sale of the Park Avenue plot is its fair market value, $130,000, on October 6, 1920, the date of the death of the testator and the vesting of remainder interests, and that in each of the cases herein the determination of the deficiency in income tax for 1929 in the amount of $6,612.49 (stipulated to be correct on said basis) is properly taxable to petitioners.

Judgment in each ease will accordingly he entered for respondent.


author: Goodeigh :

text:
    Nathaniel W. Smith and Rhode Island Hospital Trust Company, Executors of the Will of Lucian Sharpe, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 70747.
    Promulgated October 31, 1934.

      Nathaniel W. Smith, Esq., for the petitioners.

      L. S. Pendleton, Esq., for the respondent.
   OPINION.

Goodeigh :

Respondent determined a deficiency in estate tax of $26,408.15. Petitioners, who are the duly qualified executors of the wiil of Lucian Sharpe, admit liability for $256.30 of the deficiency but contest the remainder. The facts are not in dispute, being established by allegations of the petition admitted by the answer. For the purposes of this report, they may be summarized as follows:

Lucian Sharpe died on January 26,1931, a resident of Providence, Rhode Island. He left a will, executed under date of October 17, 1922, which provided no charitable bequests. Pending probate, controversy arose respecting the will, and a compromise was entered into by the contestants modifying its terms to include, among other things, the appointment of petitioners! as executors, and gifts totaling $235,000 to five Rhode Island corporations, all admitted to be within the classes described in section 303 (a) (3) of the Revenue Act of 1926. Thereafter, the will, as modified by the compromise agreement, was probated and the charitable bequests paid. In computing the estate tax liability respondent refused to deduct from the gross estate these bequests of $235,000, and from that action arises the disputed deficiency. Whether those amounts should be deducted from the value of the gross estate, as petitioners contend, is the issue.

Petitioners point out that the statutes of Rhode Island permit the modification of a will by compromise agreement, and provide for the probate of the will as modified. Moreover, the courts of that state hold that the effect of these statutory provisions is to “ embody the compromise in the will and give effect to it as if originally a part of the will.” Upon probate, the will, thus modified, speaks as from the date of the testator’s death. Barber v. Westcott, 43 Atl. 844; cf. Young v. Geoffroy, 152 Atl. 793; Codman v. Commissioner, 50 Fed. (2d) 763.

Petitioners contend, consequently, that the gifts provided-by the modified will were legacies as truly as though originally bequeathed by Sharpe himself, and that, such being the effect of the law of the testator’s domicile under which the devolution of his property is determined, we are bound to follow it, and to allow the $235,000 so disposed of as a deduction from the value of the gross estate.

With that, we cannot agree. While the rules respecting devolution of property, arising from the laws both of the situs of the assets of a decedent’s estate and the testator’s domicile, are frequently followed in some matters pertaining to the determination of the Federal estate tax liability, they are not controlling when in conflict with the in-tendment of the Federal statute. See Tyler v. United States, 281 U. S. 497 (503); Wear v. Commissioner, 65 Fed. (2d) 665; Fidelity-Philadelphia Trust Co. v. McCaughn, 34 Fed. (2d) 600; Weiss v. Wiener, 279 U. S. 333; Burnet v. Harmel, 287 U. S. 103.

There is such a conflict here, evidenced by the result for which petitioners contend, and the interpretation put by prior decisions upon the statutory provisions under which this deduction is claimed. It is well settled that only those bequests may be deducted from the value of the gross estate, under the provisions of section 303 (a) (3), for which the testator himself provided and which may be ascertained at the moment of his death. Mississippi Valley Trust Co. et al., Executors, 28 B. T. A. 387; affd., 72 Fed. (2d) 197, and cases there cited, particularly Y. M. C. A. v. Davis, 264 U. S. 47. See also George W. Davison, Executor, 31 B. T. A. 101.

Here, the fact is that Sharpe made no bequests to charity in his will. At his death, his will, as it then existed, contained no provision for the legacies now sought as deductions. Thereafter, the contestants by their agreement wrote a new will for him, which, under the local law, was accepted by the court and made effective as the act of the testator, and which governed the disposition of his estate. And that fact is not altered by the legal fiction which, under the laws of Rhode Island, made the compromise agreement effective as an original act of the testator. Judged by the standards of deductibility set for bequests under the provisions of the Federal statute respecting the determination of the Federal estate tax liability, the will, at the time of the testator’s death, contained no deductible bequests. The agreement of the contestants, by which these gifts were made, could no more make them deductible bequests of the testator than could agreements of like effect made by beneficiaries or heirs at law in an effort to carry out the supposed desires of a testator. Estate of Valentine Janson, 3 B. T. A. 296; Lancaster Trust Co., Executor, 3 B. T. A. 298; Augusta C. Burger et al., Executors, 12 B. T. A. 1391; Mississippi Valley Trust Co., supra.

Reviewed by the Board.

Judgment toill be entered for the respondent.

       Sec. 303, Revenue Act of 1926, as amended by Revenue Act of 1928 :
      Eor the purpose of the tax, the value of the net estate shall be determined — •
      (a) In the case of a resident, by deducting from the value of the gross estate—
      *******
      (3) The amount of all bequests, legacies, devises, or transfers to * * * any corporation organized and operated exclusively for religious, charitable, scientific, literary or educational purposes * * * no part oí the net earnings of which inures to the benefit of any private stockholder or individual * * ■*.

       Sections 18 to 23, ch. 363. General Laws of Rhode Island <Revision 1923).


author: GoodRigh : Murdock,

text:
    Gillette Rubber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 43052, 50073.
    Promulgated October 31, 1934.

      Lee I. Parle, Esq., for the petitioner.

      J. A. Lyons, Esq., for the respondent.
   OPINION.

GoodRigh :

The parties agree, and upon examination we accept their conclusion, that petitioner’s acquisition of the assets of the old company and the distribution of its securities did not constitute a statutory reorganization. Consequently, the cost basis of the assets in the hands of the old company does not carry over and it becomes necessary to determine the basis of the assets in the hands of petitioner. It is clear that the fair market value of the securities issued in payment for the assets is the cost basis for the assets in petitioner’s hands. Likewise, it appears that if the fair market value of the securities so issued cannot be determined from the record of sales thereof, or other evidence pertaining to the securities, then the value to be assigned to them, and to be taken as the cost basis of the assets in petitioner’s hands, is the fair market value of the assets for which they were exchanged.

Respondent, in computing the deficiencies here .in controversy, determined the fair market value of the securities issued by petitioner to be $1,269,805.43; took that amount as the cost basis of the assets acquired and allocated it amongst them. Upon brief he revises his determination, arriving at a basis of $1,487,564.36, which he obtains by valuing the bonds at 75 percent of par, the preferred stock at 50 percent of par, and adding the cash paid to the preferred creditors and the liabilities of the old company assumed by petitioner. From this computation of value he excludes petitioner’s common stock, for reasons to which we will later refer.

But we agree with petitioner in its contention that the fair market value of these securities at the basic date cannot be determined by the evidence pertaining strictly to the securities; that there was no market for them; that there were no transactions in them which would reflect their fair market value, as that phrase has been so often judicially defined. True enough, as respondent points out, and as we have found as a fact, there were sales of considerable amounts of these securities, but all these transactions were consummated under peculiar conditions and limitations. The securities were not freely bought and sold; the sales were made to a restricted class of purchasers, and under peculiar compulsion. Efforts to arrange a public offering were unavailing.

The common stock, for instance (or rather a part of it — the balance having been issued and deposited to secure company management) , was sold to the former stockholders of the old company under an agreement entered into more than a year before the stock was issued, at a price known to be a low one, purposely made so to secure the good will of those stockholders and give them a chance to recoup. None of it was publicly offered; only six outsiders were permitted to buy it, and they for particular reasons and in small amounts. The preferred stock and bonds were not sold to the public, but were issued pro rata to the creditors of the old company. Hermann, the underwriter, and controller of the new company, offered to buy in the preferred stock within a specified time at one-half its face value. The creditors faced a dilemma — whether to turn in their stock and thus save a part of their claims, or hold it in hope of one day making a larger collection. WI. ether they were advised of the facts pointing to prosperity for the new company does not appear; it seems doubtful. No purchaser could be found except Hermann and, later, the company. So with the bonds; there was no place to sell them except to the company itself, and its-officers, who proceeded to pick up offerings at their own prices.

Sales made under such conditions do not establish a fair market value, nor can later sales, made at increased prices because, as time passed, it was realized the company’s operations were to be successful, relate back to the basic date to do so. And the fact that well known underwriting firms refused to put these issues on the public market is another consideration leading to our conclusion that, viewing only the securities issued by petitioner on August 1, 1925, we cannot determine their fair market value at that time.

It becomes necessary, then, to determine the fair market value of the assets exchanged for1 the securities which is to be taken as the equivalent of the value of the securities and as the cost basis for the assets in petitioner’s hands. As to that, the evidence satisfies us that the fair market values of the fixed assets, of the inventories, and of the contracts (which are the only ones upon the valuation of which the parties differ) were the amounts at which these were set up on petitioner’s books. Therefore, we have found as a fact that, at August 1, 1925, these assets were of the values set out in the schedule contained in our findings. They should be used as the equivalent of the fair market value of the securities for which exchanged, and as the cost basis for determining depreciation and gain or loss upon subsequent sale.

In determining the deficiencies here in controversy, respondent considered that petitioner issued all its securities in payment for the assets taken over from the old company. He now says he erred in so doing; that all the common stock and $50,000 par value of the preferred were sold to Hermann for cash and should be eliminated from the consideration given by petitioner in exchange. Some months after trial of the case, having meantime requested and been granted additional time within which to file his brief, respondent moved to file amended answers to the petitions (which he said conformed Ms pleadings to the proof) affirmatively pleading this error and making claim to increased deficiencies. Petitioner opposed the filing of the amended answers, chiefly upon the grounds that the proof did not bear out respondent’s affirmative allegations, and because the motion to file this further pleading was not timely, and that to grant it would be an abuse of discretion, since the case had been tried upon the issues as originally framed and the hearing had been concluded.

Whether respondent’s motion was timely, we need not decide. We deny it, and refuse the amended answer, for the reason that the allegations thereof are not supported by the proof of record.

Reviewed by the Board.

Judgment will be entered wider Rule 50.

Murdock,

dissenting: Stock and bonds of the purchaser formed the consideration paid for the assets. No assets were acquired by the issuance of the common stock, instead it was issued to Hermann for other purposes. The total par value of the bonds and preferred stock issued for assets amounted to $1,459,610.87. The assets certainly did not cost the petitioner approximately $2,000,000 more than the par value of these securities. If one were to assume that the common stock was issued for assets, still a value of about $20 per share would have to be attributed to it in order to absorb the difference between the par value of the bonds and. preferred stock and the cost of the assets as determined in the prevailing opinion. The cost of the assets as determined by the Commissioner should be approved.

      Sec. 204 (a), (c), Revenue Act, 1926; see. Ill (a), sec. 113„ sec. 114, sec. 23, Revenue Act, 1928, as to basis for determining gain or loss and allowances for depreciation.

       For statements and discussion of this rule see: William Ziegler, Jr., 1 B. T. A. 186; Wallis Tractor Co., 3 B. T. A. 981; George A. Richer, 10 B. T. A. 11; John Glackner Realty Corporation, 11 B. T. A. 151; Kanawha City Co., 13 B. T. A. 912; Jefferson Livingston, 18 B. T. A. 1184; Reliance Investment Co., 22 B. T. A. 1287; Biscayne Bay Islands Co., 28 B. T. A. 731; Stollwerck Chocolate Co., 4 B. T. A. 467.

       In addition to decision cited in footnote 2 above, see: Premier Packing Co., 12 B. T. A. 637, and Cases there cited; Helvering v. Kendrick Coal & Dock Co., 72 Fed. (2d) 330; Essew Motors, 22 B. T. A. 804; Walter v. Duffy, 287 Fed. 41; Phillips v. United States, 24 Fed. (2d) 195 ; Hemer v. Crosby, 24 Fed. (2) 191.


author:
MoRRis:
      Black,

text:
    Hugh M. Matheson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71353.
    Promulgated October 31, 1934.

      Douglas D. Felix, Esg., for the petitioner.

      G. G. Rol/mes, Esg., for the respondent.
   OPINION.

MoRRis:

The respondent having determined a deficiency in income tax of $7,524.82 for the calendar year 1930, the petitioner brings this proceeding for the redetermination thereof, alleging error in such determination by reason of the use of an aggregate of $111,200 as the “ cost ” basis for the computation of gain or loss upon sale thereof; his ruling that the purchase and sale of said stocks did not constitute a transaction entered into for profit; that certain items were not deductible as bad debts; and his failure to permit the deduction of the sum of $8,000 representing the cost of 68 shares of capital stock of the City National Bank, Miami, Florida, in the computation of net taxable income.

The petitioner, an individual, is a resident of Miami, Florida.

William J. Matheson died on May 15,1930, leaving an estate which was inventoried as of that date at approximately $24,000,000, and which estate included, among other assets, the shares of corporate stock hereinafter mentioned.

As of May 15, 1930, Hugh M. Matheson, petitioner herein, was given a credit on the books of said estate of $500,000, the same being the sum bequeathed to Mm by the third bequest in the will of his father, the said William J. Matheson, in the following language: “ ThiRD : I give and bequeath to my son, Hugh: M. MathesoN, the sum of Five Hundred thousand Dollars.”

On August 27, 1930, certain stocks were transferred by the executors of the estate to Hugh M. Matheson, at an agreed price of $497,-400, and the sum of $497,400 was then charged on that date against the credit mentioned in the above paragraph and this credit was also charged with $2,600, which was paid to Hugh M. Matheson in cash, which transaction was recorded on the books of the estate.

Among the stocks transferred to petitioner as aforesaid were:

200 shares, Allied Chemical & Dye at $310 per share_$62, 000
200 shares, New Jersey Zinc at $78 per share_ 15, 600
300 shares, Westinghouse Electric at $117 per share_ 53,100
Total_ 130, 700

The market value of the 700 shares of stock above listed was $130,700 on May 15, 1930, and $111,200 on August 27, 1930.

The estate was solvent and therefore financially able on August 27, 1930, to have paid Hugh M. Matheson the $500,000 bequest and the legality of said bequest has never been questioned by the respondent.

On December 26, 1930, the said Hugh M. Matheson sold the—

200 shares Allied Chemical & Dye stock for_$36, 842
200 shares New Jersey Zinc stock for_ 9,168
300 shares Westinghouse Electric stock for_ 27, 309
Total- 73, 319

In his income tax return for the calendar year 1930, petitioner deducted the difference between the above mentioned sums of $130,700 and $73,319, or the sum of $57,381, as a loss in the year 1930 from the sale of said stock. The respondent disallowed $19,500 of the loss so deducted, and a portion of the deficiency, which is the subject of this proceeding, resulted from the disallowance.

The estate of William J. Matheson, deceased, had a net income for its taxable year, which included August 27, 1930, of $618,773.93, and said estate did not report any profit received or loss sustained from the transfer of said stock from it on August 27, 1930, to Hugh M. Matheson.

The petitioner is entitled to deduct as a bad debt for the calendar year 1930 the sum of $1,840 on account of the indebtedness of A. E. Ozanne, otherwise known as Bert Ozanne, but the petitioner is not entitled to deduct for said year the balance claimed as bad debts, to wit: The sum of $8,802.33, which is alleged in the petition in the above entitled, appeal to be owing petitioner by Sidney Wilbur, William Little, and William Kocli.

The petitioner is entitled to deduct as a loss sustained in the calendar year 1930 the sum of $8,000, same being the cost of stock owned by him in the City Natonal Bank in Miami, which stock became worthless during said calendar year.

The petitioner’s counsel argues at some length in his brief that the 700 shares of stock in question were not acquired by “ distribution ” (see section 113 (a) (5) of the Eevenue Act of 1928), under the will of the decedent, but were acquired by purchase ”, and that, therefore, actual “cost” to him under section 113 (a) of said act and not the fair market value at the time of such alleged distribution should be the basis for determining gain or loss upon the sale here involved.

Notwithstanding the stipulation entered into between the parties merely refers to the respondent’s disallowance of $19,500 of the $57,381 loss originally claimed by the petitioner and contended for in this proceeding, it would appear that the entire amount was in fact disallowed by him.

The respondent tacitly admits, by his argument, the deductibility of all but $19,500 of the amount claimed by the petitioner and apparently abandons all contentions that he might have originally advanced that the transaction was not one entered into for profit and that consequently no deductible loss was sustained by reason of the purchase and sale of these stocks. He now concedes that such shares were not acquired by “ distribution ” but were, as the petitioner contends, acquired by “ purchase ”, but he argues that instead of the use of the actual cost to the petitioner, to wit, $130,700, the fair market value on August 27, 1930, the date of purchase, to wit, $111,200, should be used. His argument seems not to be predicated upon the fact that there was a statutory “ distribution ” on August 27, 1930, but rather that he paid $130,700 for stocks — said figure being the fair market value thereof at the date of the death of the decedent — which had a fair market value of only $111,200 when purchased, or $19,500 less than the actual purchase price.

The simple issue seems to be, therefore, whether the actual purchase price to the petitioner — he having agreed to purchase the stocks from the estate at a fair market value of $19,500 greater than the actual fair market value on the date of acquisition — or the actual fair market value on such date, should be used as the “ cost ” basis for the determination of gain or loss.

Section 113 (a) of the Eevenue Act of 1928 provides that:

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

The facts show that the petitioner was bequeathed the cash sum of $500,000 in the decedent’s will; that he received a credit upon the books of the estate for the amount of his legacy on May 15, 1930; and that the estate, being entirely solvent, he, as the respondent appears to concede, received a constructive distribution of his cash legacy at or about that time. On August 27, 1930, the stocks in question having shrunk in value from $130,700 on May 15, 1930, to' $111,200, the petitioner agreed to purchase and, as the respondent concedes, “ purchased ” such stocks from the estate and actually paid the sum of $130,700 therefor.

The facts here are quite different from those in Donald, McDonald., Jr., Administrator, 28 B. T. A. 64, where the taxpayer acquired stock from his daughter-in-law, paying more therefor than the stock was worth at the time of purchase in order to aid her in her financial difficulties and, we believe, justify a different ruling. While we do not know what the petitioner’s motives were for paying $130,700 for securities having a fair market value of only $111,200, when acquired, there is nothing in the record to indicate other than that the entire consideration represented the actual purchase price of the stock alone and that no part thereof represented a gift or special favor as in Donald McDonald, supra. It is reasonably inferable, though this is pure conjecture, that these securities may have been set aside at or about the time of the decedent’s death in anticipation of the purchase thereof by the petitioner, when the fair market value thereof was $130,700, and that, therefore, because of his fiduciary relationship he felt constrained to pay such amount therefor, notwithstanding a shrinkage had taken place between that time and the date of physical acquisition on August 27, 1930. However, it being conceded that the actual cost was $130,700, and there being not the slightest trace of mala fides or other circumstances which would tend to defeat the purpose of the taxing statutes, his motives for the payment of a' sum greater than the fair market value become unimportant.

The statute provides for the basis of “ cost.” The securities here cost $130,700. We find no justification for a different basis and we therefore disapprove the respondent’s determination.

Proper effect shall be given in the redetermination hereunder to the stipulated adjustments settling the only other issues raised by the pleadings.

Reviewed by the Board.

Decision will be entered under Rule 50.

McMahoN dissents.

Black,

dissenting: I am not convinced that there is sufficient distinction in the facts in the instant case to justify a different result from that reached in Donald McDonald, Jr., Administrator, 28 B. T. A. 64, distinguished in the majority opinion.

In the McDonald case the Board, after discussing Congressional intent with reference to the provisions of law allowing deductions for losses, said:

* * * However that may be, we think that they did not intend to allow a deduction for that part of the loss which resulted in this case from paying more than a fair price for tire stock. The excess cost was paid for personal reasons, which would not have been paid otherwise, and cannot be the basis of a loss.

Petitioner, at the hearing in the instant case, did not advance any reason as to why he paid $130,700 for stocks which were transferred to him on August 27,1930, and which on that date admittedly had a fair market value of only $111,200. The latter part of the majority opinion states that petitioner made no explanation of the reasons which prompted him to pay more for the stock than it was worth. The majority opinion states we must be left to inference as to why this was.

If we are to be left to inferences, are we not justified in reaching the same conclusion as in the McDonald case, where it is said, The excess cash was paid for personal reasons which would not have been paid otherwise and cannot be. the basis of a loss ”. It seems to me that it was the business of the petitioner to explain why he paid $19,500 more for these stocks than their fair market value on the day they were transferred to him.

There is another angle from which I think this transaction may be properly viewed and which furnishes a logical explanation, and that is this: The $500,000 in cash bequeathed to petitioner in his father’s will, not being required to be paid out of any particular fund, was a general bequest and not a specific bequest. Cf. Harry G. Haskell, 30 B. T. A. 855. The executor determined to pay this general bequest in stocks rather than in cash, except as to the $2,600 paid in cash.

If my construction of the transaction in this respect is correct, then unquestionably the basis for loss as provided in section 113 (a) (5), Kevenue Act of 1928, is the fair market value of the stocks at the date of distribution, to wit, $111,200. I cannot agree that the basis for gain or loss on these stocks is $130,700, their fair market value at the date of the death of decedent. This would be true if the stocks had been bequeathed to petitioner by specific bequest, but is not true where they come to him under a general bequest. See section 113 (a) (5), (Revenue Act of 1928.

Murdock agrees with this dissent.


author: Seawell: Muedocxc,

text:
    Illinois Addressograph Manufacturing Company, Formerly Addressograph Company (Illinois), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49204.
    Promulgated October 31, 1934.

      Leo H. Hoffman, Esq., for the petitioner.

      John D. Kiley, Esq., for the respondent.
   OPINION.

Seawell:

In filing the stipulation of facts, the parties thereto reserved the right to object to the relevancy or materiality of any facts set forth therein either upon trial or on argument. On brief counsel for the petitioner contends that only so much of the stipulation of facts as relates to the time and place of incorporation of the petitioner and the Delaware corporation; the acquisition of assets and assumption of liabilities of the petitioner by the Delaware corporation ; the dates on which the returns of the petitioner were filed; the date on which the deficiency notice was sent; the officers of the Delaware corporation in 1929 and 1930; the making of jeopardy assessments in 1930 for the taxable years; and the amount paid on the assessments, are material and relevant, and moves that the remaining facts having to do with audits, conferences, waivers, including the circumstances under which they were filed, etc., all of which have some bearing on the estoppel question, be stricken from the record as immaterial and irrelevant. The motion is denied.

The statutory period of limitation for assessment of the deficiencies for the respective taxable years expired March 16, 1929, and May 15, 1929, dates prior to the mailing of the deficiency notice. Sec. 277 (a) (1) and (2), Revenue Act of 1926. Whether the deficiency notice was timely depends upon the sufficiency of the several waivers to extend the time for assessment. The contention of the petitioner is, in substance, that the instruments relied upon by the respondent are not its waivers, but waivers of the Delaware corporation, a taxpayer separate and distinct from it. The respondent relies upon equitable estoppel.

In Dickerson v. Colgrove, 100 U. S. 578, the Court said:

The estoppel here relied upon is known as an equitable estoppel, or estoppel in pais. The law upon the subject is well settled. The vital principle is that he who by his language or conduct leads another to do what he would not otherwise have done, shall not subject such person to loss or injury by disappointing the expectations upon which he acted. Such a change of position is sternly forbidden. It involves fraud and falsehood, and the law abhors both. This remedy is always so applied as to promote the ends of justice. It is available only for protection, and cannot be used as a weapon of assault. It accomplishes that which ought to be done between man and man, and is not permitted to go beyond this limit. It is akin to the principle involved in the limitation of actions, and does its work of justice and repose where the statute cannot be invoked. * * *

In a later case, Stone v. Bank of Commerce, 174 U. S. 412, the same Court remarked:

An equitable estoppel which is to prevent the State from receiving the benefit of an exercise of its power to alter the rule or rate of taxation for all the time of the existence of a business corporation, should be based upon the clearest equity. It is fitly denominated an equitable estoppel, because it rests upon the doctrine that it would be against the principles of equity and good conscience to permit the party against whom the estoppel is sought to avail himself of what might otherwise be his undisputed rights. * * *

The Court of Claims, in Naumkeag Steam Cotton Co. v. United States, 2 Fed. Supp. 126; certiorari denied, 289 U. S. 749, after reviewing the authorities on the question of estoppel, said:

The doctrine of equitable estoppel is predicated upon the fact “ that it would be unconscionable to permit a person to maintain a position inconsistent with one in which he has acquiesced or of which he has accepted any benefit.” If a person is induced by another’s acts and conduct to do what he would not otherwise have done, or, as is said, if he abstained from doing what he would have done, the person inducing such conduct may not suddenly change his attitude to the injury of the other.

In Lucas v. Hunt, 45 Fed. (2d) 781, Hunt, formerly president of a corporation and one of its liquidators in dissolution proceedings, signed a waiver extending the period for assessment of taxes against the corporation after the expiration of the statutory period of three years within which the officers could legally act for the corporation. In its decision estopping Hunt from denying the validity of the waiver, the court remarked:

* * * We are of opinion that Hunt by signing the waiver estopped himself to question its validity, with the result that he was bound to respond to the assessment to the extent of funds in his hands which belonged to the dissolved corporation taxpayer. The circumstances all show that the commissioner relied on the waiver and is therefore entitled to claim the equitable estoppel asserted by counsel in his behalf.

In other cases the courts have estopped taxpayers from denying the validity of waivers on which the Commissioner relied. Loewer Realty Co. v. Anderson, 31 Fed. (2d) 268; Liberty Baking Co. v. Heiner, 37 Fed. (2d) 103; Trustees for Ohio & Big Sandy Coal Co. v. Commissioner, 43 Fed. (2d) 182; Commissioner v. New York Trust Co., 54 Fed. (2d) 463; Wonder Bakeries Co. v. United States, 6 Fed. Supp. 228; Warner Collieries Co. v. United States, 63 Fed. (2d) 34.

• The returns of the petitioner for 1924 and 1925 were filed and audited under the name of “Addressograph Company.” Notwithstanding the change of its name in 1921 to “ Illinois Addressograph Manufacturing Co.” and the organization at that time of the “Ad-dressograph Company ” under the laws of Delaware, the petitioner, directly or through its attorney in fact and counsel in these proceedings, held numerous conferences with representatives of the respondent respecting the correct tax liability of the petitioner; received letters from the respondent with reference thereto; and filed refund claims and letters of protest on proposed deficiencies with the respondent, all under its original name. True it is that the return of the petitioner for the period January 1 to June 12, 1921, showed a change of its name, yet thereafter the petitioner, in numerous ways, indicated willingness to have its tax liability for 1926 and prior years determined under its original name. Such notice of a change of corporate name is not controlling. Warner Collieries Co. v. United States, supra.

The Delaware corporation was not organized until 1927, and had no tax liability to adjust or pay for 1924 and 1925, the years involved here. Harvey, who signed the petitioner’s return for 1925 as assistant treasurer and who occupied the same position with the Delaware corporation, is charged with knowledge of this fact. If it were Harvey’s intention to furnish the respondent 1924 and 1925 waivers of the Delaware corporation, instead of the petitioner, it would, indeed, be difficult to conclude that the transaction was free from fraud. Clearly, the use of the seal of the Delaware corporation was a mistake. In any event, the statute requires only “ consent ”, Liberty Baking Co. v. Heiner, supra; Loewer Realty Co. v. Anderson, supra; and corporate waivers without seals have been held to be valid. Pictorial Printing Co., 12 B. T. A. 1407; reversed on other grounds, 38 Fed. (2d) 563; Panther Rubber Manufacturing Co., 17 B. T. A. 310. Cf. Panther Rubber Manufacturing Co. v. Commissioner, 45 Fed. (2d) 314.

The waivers were furnished by the petitioner for the purpose of obtaining extensions of the periods of limitation; they were relied upon by the respondent for that purpose; and the petitioner received and accepted the benefits of the waivers. Under the circumstances, we think it would be unreasonable to allow the petitioner to repudiate the instruments. See Fidelity Storage Corporation, 18 B. T. A. 517, and Charles S. Rauh, 22 B. T. A. 662.

Beviewed by the Board.

Decision will be entered for the respondent.

Muedocxc,

concurring: Although I agree that the consents-extended the statutory period for assessment, I do not agree that the effectiveness of the consents depends upon equitable estoppel. The question of whether or not an equitable estoppel has been established is not to be decided by considering only such general principles as are quoted in the prevailing opinion. Cf. Tide Water Oil Co., 29 B. T. A. 1208. There are certain essentials of an equitable estoppel, all of which must be present in order to estop a party to a proceeding. The following brief statement of these essentials will suffice for present purposes: (1) a misrepresentation or concealment of a material fact; (2) this fact must be known to the party estopped; (3) the person claiming the benefit of the estoppel must have been in ignorance of the truth of this fact at the time of the misrepresentation or concealment, at the time that he acted upon the fact, and until it was too late to change his action; (4) the misrepresentation or concealment must have been done with the intention or expectation that it would be acted upon by the other party or, under such circumstances, that it was natural or probable that it would be acted upon; (5) the fact must have been relied upon and acted upon by the other party; (6) his action must have changed his position for the worse. Bigelow on Estoppel, p. 437; Pomeroy’s Equity Jurisprudence, 4th ed. vol. 2, par. 805; Bouvier’s Law Dictionary and Words and Phrases, tit. “ Estoppel Howard Sheep Co., 1 B. T. A. 966; Ergenbright v. Henderson, 72 Kan. 29; 82 Pac. 524. It has been held, in connection with requirement (3)., that the deceived party must not only not know the fact, but must have had no convenient or ready means of acquiring knowledge of the fact. Brant v. Virginia Coal & Iron Co., 93 U. S. 326. Furthermore, the deceived party must have exercised reasonable diligence under the circumstances to learn the truth. Bailey v. Lisle Mfg. Co., 238 Fed. 257. The prevailing opinion does not indicate that due consideration has been given to the question of whether or not all of the essentials of an estoppel are present in this case. It fails to point out precisely what the fact was which was misrepresented or concealed and upon which the Commissioner relied to his disadvantage.

The Commissioner apparently seeks to estop the petitioner to deny that the consents which the Commissioner relied upon were in fact the consents of this petitioner. The rationale of this contention would seem to be that the petitioner, in order to deceive the Commissioner, had the Delaware corporation execute the consents, and the Commissioner, not knowing that there were two corporations having similar names and believing that the consents filed had been executed by the petitioner, relied upon those consents until after the statutory period for assessment had expired. There could be no estoppel based upon such a contention if, under the circumstances, a reasonably prudent person, acting with such care as he might be expected to exercise in an important matter, would not have been misled. Bailey v. Lisle Mfg. Co., supra; Frankfort Land Co. v. Hughett, 137 Tenn. 32; 191 S.W. 530; Fourth N.B. v. Nashville, C. & St. L. Ry. Co., 128 Tenn. 530; 161 S.W. 1144; Southwestern Investment Co., 19 B. T. A. 30. The petitioner, in its return filed for 1928, specifically called the attention of the Commissioner to the change in its name, and the Commissioner’s letter of February 11, 1930, clearly indicates that he then knew of the existence of two corporations having similar names. But perhaps the Commissioner in his consideration of prior tax liability ought not to be charged with knowledge of the change in name furnished in a return for a later year, even though that information came to him more than a year before the expiration of the assessment period for the earlier taxes, and, of course, on February 11, 1930, it was too late to assess unless the consents were valid. Aside from these circumstances, however, there was another circumstance which a reasonably prudent man would not have overlooked and which precludes the Commissioner from successfully raising the defense of estoppel in connection with these consents. The Commissioner knew all along that the taxpayer was an Illinois corporation, yet each of the consents upon which he relies was clearly impressed with a seal which plainly showed that it was the seal of a Delaware corporation. The seals were placed in accordance with the instructions on the forms supplied by the Commissioner. ^Reasonable diligence upon his part in the examination of these documents would have disclosed the fact that the seal was not that of the taxpayer and he must.be charged with knowledge of that fact. He knew that he wanted consents from an Illinois corporation and that he did not want consents from a Delaware corporation. Estoppel can not be raised as a defense to avoid the consequences of one’s own negligence. Bailey v. Lisle Mfg. Co., supra Frankfort Land Co. v. Hughett, supra Fourth N.B. v. Nashville, C. & St. L. Ry. Co., supra. The Commissioner has failed to establish his right to estop the petitioner to deny that the consents were its consents or to deny any material fact in the case.

However, it does not follow that the consents were invalid or ineffective to extend the statutory period for assessment of the deficiencies for 1924 and 1925. The Delaware corporation was not organized until 1927 and, of course, had no tax liability or income tax questions for the years 1924 and 1925. The Illinois corporation was the taxpayer, and its duly authorized representative had a number of conferences and communications with the Commissioner in which both parties fully understood that they were dealing with the tax liability of the Illinois corporation for the years 1924 and 1925. The parties apparently disregarded the change in name in these conferences and communications. It seems reasonably clear to me, from a consideration of all of the evidence, that both the taxpayer and the Commissioner intended the consents to be valid consents on the part of the taxpayer to the later assessment of its taxes for the years 1924 and 1925. The name used on these consents was the name which both parties had used at all times theretofore in their negotiations and discussions. The officer who signed these consents on the part of the taxpayer was in fact the assistant treasurer of the taxpayer. The use of the seal of the Delaware corporation on the consents seems to have been an error rather than an attempt on the part of the taxpayer to invalidate the consents which it obviously intended to give. Fraud on the part of the corporation should not be imputed. The statute does not require that there be any seal on a consent, and for present purposes, the seal can be regarded as mere surplusage. Cf. Pictorial Printing Co., 12 B. T. A. 1407; reversed, 38 Fed. (2d) 563. The consents were valid consents in writing and served to extend the period for assessing the deficiencies for 1924 and 1925.

SteriihageN, Goodrich, and Leech concur in the above.


author: Murdock:

text:
    The Travelers Indemnity Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Travelers Fire Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Travelers Bank and Trust Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Rio Grande Land and Canal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Rio Grande Reservoir and Ditch Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 57916, 62832-62834, 71347-71351.
    Promulgated November 1, 1934.

      Nelson T. Hartson, Esq., and James €. Rogers, Esq., for the petitioners.

      Chester A. Gwinn, Esq., and Charles E. Lowery, Esq., for the respondent.
   OPINION.

Murdock:

The deficiencies determined by the Commissioner and the corresponding docket numbers are as follows:

Several of the original assignments of error have been abandoned or settled and need not be mentioned here. The questions presented for decision are:

1. Whether or not the tax liability of the Travelers Insurance Co., the Travelers Indemnity Co., and the Travelers Fire Insurance Co. should be computed upon the basis of consolidated returns for the years 1927,1928, 1929, and 1930;

2. Whether or not the tax liability of the Travelers Bank & Trust Co., Colorado Valley Land Co., Monte Vista Canal Co., Bio Grande Beservoir & Ditch Co., Bio Grande Land & Canal Co., and Nebraska Securities Corporation should be computed upon the basis of consolidated returns for the years 1929 and 1930.

The facts were stipulated and may be summarized as follows:

The Travelers Insurance Co. was a life insurance company, and the Travelers Indemnity Co. and Travelers Fire Insurance Co. were insurance companies other than life or mutual. The Travelers Bank & Trust Co., Colorado Valley Land Co., Monte Vista Canal Co., Bio Grande Beservoir & Ditch Co., Bio Grande Land & Canal Co., and Nebraska Securities Corporation were companies other than insurance companies. All of the seven companies were domestic corporations. At all times involved in these proceedings, the Travelers Insurance Co. owned directly at least 95 per centum of the stock of the Travelers Indemnity Co. and the Travelers Indemnity Co. owned directly at least 95 per centum of the stock of the Travelers Fire Insurance Co. At all times involved in these proceedings the Travelers Insurance Co. owned directly at least 95 per centum of the stock of the Colorado Valley Land Co., of the Bio Grande Land & Canal Co., and of the Nebraska Securities Corporation, and the Colorado Valley Land Co. owned directly at least 95 percentum of the stock of the Monte Vista Canal Co. and of the Bio' Grande Beservoir & Ditch Co. At all times during the calendar years 1929 and 1930, the Travelers Insurance Co. owned directly at least 95 per centum of the stock of the Travelers' Bank & Trust Co. As used in this paragraph the term “ stock ” does not include any nonvoting stock which was limited and preferred as to dividends. For each of the calendar years 1927 and 1928 one consolidated return was filed, and it included both the insurance companies and the noninsurance companies, excepting the Travelers Bank & Trust Co., which did not have an affiliated status during those years. For each of the calendar years 1929 and 1930 one consolidated return was filed for the insurance companies, and another consolidated return was filed for the noninsurance companies.

The question of whether a life insurance company and two insurance companies other than life or mutual have a right to file a consolidated return for the years 1927 to 1930, inclusive, depends for its answer upon a proper interpretation of the applicable provisions of the Bevenue Acts of 1926 and 1928. The Commissioner contends that the law did not authorize the filing of a consolidated return for such a group. He does not otherwise find fault with the form or effectiveness of the returns actually filed.

Section 240 of the Revenue Act of 1926 is headed “ Consolidated Returns of Corporations ” and permits corporations which are affiliated to make a consolidated return of net income. It provides that two or more domestic corporations shall be deemed to be affiliated ” if their stock is held in one of two ways described in 240(d). This test of stock ownership is the only one prescribed by the statute. The stipulated facts show that the three corporations in question would be “ deemed to be affiliated ” under this test of stock ownership. There is no special mention of insurance companies in section 240 and no language is used which would indicate that Congress intended to treat insurance companies differently from other corporations in the matter of affiliation and consolidated returns. Nor is there any indication in 240 of an intention to distinguish a life insurance company from a fire insurance company. The section by its terms applies generally to all domestic corporations, with two exceptions, corporations organized under the China Trade Act, 1922, and corporations entitled to the benefits of section 262. Thus, not only does the Commissioner find no basis for his action in the language of section 240, but under the rule of expressio unius est exclusio alterius it would seem that insurance companies were meant to be in the general class to which the statute applies.

Section 142 of the Revenue Act of 1928 is, for present purposes, identical with section 240 of the Revenue Act of 1926. The language of section 141 of the Revenue Act of 192-8 is different from that of the two sections above mentioned. However, it does not deny to insurance companies the right to file a consolidated return or exclude them from an affiliated group. The only special reference to insurance companies in section 141 is in (e) which provides that “ an insurance company subject to the tax imposed by section 201 or 204 shall not be included in the same consolidated return with a corporation subject to the tax imposed by section 13.” This provision merely furnishes another argument for the petitioners, since the clear implication is that insurance companies subject to the tax imposed by section 201 or 204 may form part of an affiliated group and may file consolidated returns, as long as insurance and noninsurance companies do not join in the same return.

The Board and the courts have held that insurance companies and noninsurance companies could not join in a consolidated return under the Revenue Act of 1926 because of the different rates of tax applicable to each. Fire Companies Building Corporation, 23 B. T. A. 550; affd., 54 Fed. (2d) 488; certiorari denied, 286 U. S. 546; Cincinnati Underwriters Agency Co. v. Commissioner, 63 Fed. (2d) 309; certiorari denied, 289 U. S. 754. In those cases mention was made of the difference in the method of computing the net incomes of the two types of corporations, but this difference was not the real basis for the decisions. See, however, National Insurance Co. v. United States, 4 Fed. Supp. 1000; American Exchange Securities Corporation, 29 B. T. A. 41. The Revenue Acts of 1926 and 1928 contain special provisions relating to insurance companies which differ in many material respects from the provisions applicable to corporations generally. Furthermore, the special provisions relating to life insurance companies (sec. 244, Revenue Act of 1926; secs. 201, 202, 203, Revenue Act of 1928) differ from those relating to insurance companies other than life or mutual (sec. 246, Revenue Act of 1926; sec. 204, Revenue Act of 1928). The Commissioner argues that because of these differences “ it is impractical to permit the affiliation of the Travelers Insurance Company with the Travelers Indemnity Company and the Travelers Fire Insurance Company.” However, he has failed to point out any particular practical difficulty which might arise and, as a matter of fact, has computed the tax liability of the three companies for each of the four years in question based upon consolidated returns and has stipulated that on that basis there are no deficiencies. Thus, certainly no practical difficulty arises in these cases from the use of consolidated returns. Furthermore it would seem simple and practical to compute the consolidated net income in any similar case under the Commissioner’s regulations, which provide that the consolidated taxable net income shall be, for 1927 and 1928, the combined net incomes of the several affiliated corporations computed separately, and that the consolidated net income for 1929 and 1930 shall be the aggregate of the gross income of each member of the affiliated group less the aggregate of the deductions allowable to each. Regulations 69, art. 635; Regulations 74, art. 734; Regulations 7-5, art. 31. If there is any real obstacle to the filing of consolidated returns by life and nonlife insurance companies the Commissioner should be able to point to it. The rates of tax applicable to the two types of insurance companies are exactly the same and consequently the basis for the decisions in the Fire Companies Building Corporation case and the Cincinnati Underwriters Agency Co. case is not present here. These are the cases upon which the Commissioner relies. It may be that practical difficulties would develop in case an attempt were made to consolidate in one return the report of an insurance company with that of a noninsurance company, as stated, but not demonstrated, in some of the cases cited. But we have a different case before us and, until it appears that there really is some practical difficulty in making a consolidated return for life and nonlife insurance companies, and computing the tax on that basis, the plain words of the consolidated returns sections permitting the use of such returns should not be changed by judicial interpretation.

This result does not pervert the purpose of the statute in permitting consolidated returns. Fire Companies Building Corporation, supra. One of the original purposes of consolidated returns was to prevent tax evasion during the profits tax period of varying rates. But the primary purpose was, and the only purpose in continuing the use of consolidated returns is, to tax “ as a business unit what in reality is a business unit ”, because to do so “ is sound and equitable and convenient both to the taxpayer and to the government ”, i. e., “ to secure substantial equality between shareholders who ultimately bear the burden.” 65th Cong., 3d sess., S. Eept. No. 61T, p. 9; 70th Cong., 1st sess., S. Eept. No. 960, p. 14; Handy & Harman v. Burnet, 284 U. S. 136. The Commissioner has not contended that these three companies were not in reality a single business unit. A consolidated return for a life insurance company and an insurance company other than life might fulfill the purpose of the consolidated returns provisions as well as any other consolidated return. It was not until the enactment of the Eevenue Act of 1932 that Congress said such returns could not be filed. Sec. 141 (e), Eevenue Act of 1932. Thereafter the Commissioner changed his regulations to provide for the first time that such returns could not be filed under the new act. Cf. art. 711, appendix to Eegulations 75, and art. 713, Eegulations 77. The new provision of the act was not retroactive and no sound reason for holding that it was merely declaratory of existing law has been advanced.

The second question relates to the filing of consolidated returns for the noninsurance groups for 1929 and 1930. It has nothing- in common with the first question except that it is dependent upon a proper interpretation of section 141 of the Eevenue Act of 1928. The Commissioner has not questioned the form or method used in filing the consolidated returns for the noninsurance corporations for 1929 and 1930. The argument of the respondent on this point is that a life insurance company can not be recognized as “ a common parent corporation”, within the meaning of section 141(d), of non-insurance corporations owned by it and, consequently, a consolidated return may not be filed for the latter companies even though no insurance company is included in that return. The Commissioner made a somewhat similar argument in the recent case of Manus-Muller & Co., 30 B. T. A. 1015. The difference is that in the Manus-Muller case he contended that a foreign corporation could not be the “ common parent corporation ”, within the meaning of section 141(d), of domestic corporations owned by it and, consequently, a consolidated return for the domestic corporations was not authorized by the act. He relied very strongly in his argument upon the provisions of section 238 of the Revenue Act of 1928. The Board held, however, that the foreign parent and the two domestic subsidiaries constituted an “ affiliated group ” within the definition of that term given in section 141(d) and a consolidated return for the two domestic corporations was proper. There is no substantial difference in the language of section 141 relating to a foreign corporation as a possible parent, from that relating to an insurance company as a possible parent. Furthermore one of the Commissioner’s arguments in the Manus-Muller case is not available to him in this case, since section 238 relating to foreign corporations has no counterpart relating to insurance companies. Thus, even if the Board misinterpreted section 238 in the Manus-MuTler case, nevertheless a decision for the petitioners in this case might be proper. “Affiliated group” is defined in section 141(d). The language of the definition is general and contains no reference to insurance companies. Consequently there is no reason to infer that Congress meant to exclude insurance companies of any kind from an “ affiliated group.” Subsection (e) contains a special provision relating to insurance companies. This fact and the wording of the special provision are further indications that Congress did not intend to exclude insurance companies from an affiliated group.” If they were excluded from the affiliated group the special provision would not have been necessary. The special provision that they “ shall not be included in the same return ” with other corporations in the group implies that they are in the “ affiliated group.” Furthermore there is no reason why Congress would want to exclude them from the group and every reason for including any corporation would apply with equal force to include insurance companies. In 1929 and in 1930 there was an “ affiliated group ” within the precise terms and meaning of the definition contained in 141(d). Since the statute permitted the use of such a return, the Commissioner had no right to compute deficiencies on the basis of separate returns. A consolidated return was proper for the noninsurance companies within the affiliated group for each of the years 1929 and 1930.

Reviewed by the Board.

Decision will ~be entered in accordance with the stipulation of the parties.

Smiti-i dissents oh the second point.


author: Mttkdock :

text:
    Mary M. Shea, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61544.
    Promulgated November 1, 1934.

      Donald V. Hunter, Esq., for the petitioner.

      H-. D. Thomas, Esq., for the respondent.
   OPINION.

Mttkdock :

The Commissioner sent a notice of deficiency addressed to “ Mrs. Mary M. Shea, Trustee, Isabell Shea, et al ”, advising that he had determined a deficiency of $6,436.40 for 1929 and a penalty of $1,609.10 for delinquency in failing to file a return. A piece of property in Louisville, Kentucky, had been taken by the Federal Government by condemnation. The owners had been awarded $75,000 for the'property taken. The Commissioner used $16,000 as the fair market value of the property on March 1, 1913. He deducted $2,560 on account of depreciation, added $2,000 as expenses of the owners, and computed a profit of $59,560. He held that this gain was taxable to a trust for remaindermen of which Mary M. Shea was trustee. A stipulation of facts has been filed.

The property condemned formerly belonged to Michael Shea, who died in 1897. He devised the real estate in question to Mary M. Shea for life, with remainders in fee to his four daughters. Mary M. Shea, the decedent’s widow, and the four daughters survived the decedent. These five persons were of age at all times material hereto. The property was rented and Mary M. Shea, the life tenant, received the income until October 1929, when it was taken by the Federal Government after condemnation proceedings in which Mary M. Shea and her daughters Isabella, Amelda, Elizabeth, and Catherine were defendants. Seventy-five thousand dollars was awarded to these defendants, the owners of the property, as full compensation for the land. A check for $75,000 was delivered by the clerk of the court to the attorney for the defendants, as attorney. He deposited this check in his personal account and then drew checks on December 9, 1929, for $75,000 payable to Mary M. Shea. She deposited the checks in her personal account and in the early part of 1930 purchased bonds and a certificate of deposit with the net amount after deducting $2,061.45 for expenses of the condemnation proceedings. The bonds were marked “Proceeds of the sale of property located at 6th Street and Broadway, North East cor., Mary M. Shea ” and placed in the safe-deposit box of Mary M. Shea. The certificate of deposit ivas issued in the name of Mary M. Shea. Mary, M. Shea has collected and used the income from the securities for her own benefit. She received no income from them during 1929.

Mary M. Shea, in her individual capacity, filed a petition with the Board, based upon the notice of deficiency sent to her as a trustee, in which she alleged that she was not a trustee. The Commissioner, before answering, moved to dismiss this proceeding for lack of jurisdiction because the notice was to a fiduciary, whereas an individual had filed the petition. This motion was denied and the proceeding came on for hearing, at which time the jurisdictional question again arose. Mary M. Shea contends that she is not a trustee or fiduciary and is not subject to tax or penalty as such, no taxable income resulted from the condemnation and award, and, if section 161 of the Revenue Act of 1928 imposes the tax, it is unconstitutional. The Commissioner contends that he did not err in computing the profit, in determining the deficiency against the trust, or in holding that the penalty is due. We are convinced, after fully considering the facts, that the Board has no jurisdiction in this proceeding.

The law, including the Revenue Act of 1928, recognizes as separate entities a fiduciary of a trust and the same person acting in his individual capacity. Income and gains of the two are separately taxed. See section 143 and Supplement E. Mary M. Shea, the individual, was a life tenant of her husband’s real estate. She was entitled to the use of that property or its equivalent during her life. This case does not involve any question of income to her as a life tenant of that property. It involves only a gain from the disposition of that property. The life tenant was not entitled to that gain and the Commissioner is not attempting to tax that gain to her as an individual. The theory of his determination is that a different person, a legalistic person, a fiduciary, is liable for a tax because a trust which that person represented realized a gain from the disposition of some real estate for $75,000 in cash. Therefore, he sent a notice to this allegedly existent fiduciary. But no such person has petitioned or appeared before the Board. Instead, Mary M. Shea, in her individual capacity, has filed a petition. Not only did she not file it as a fiduciary, but she insists that she is not a fiduciary and has no authority to represent any trust for the benefit of “Isabell Shea, et al.” Cf. Corinne Porter Scruggs, Administratrix, 29 B. T. A. 1102. Furthermore it appears that the property disposed of was not held in trust and was disposed of, not by a trust, but by the individual owners thereof, so that there is no trust liable for any tax. The taxability of a gain from the disposition of property for money does not depend in the slightest upon what is done with the money after its receipt.

The Commissioner may not conjure up a taxpayer for the purpose of computing a profit and collecting a tax, and if there is no such fiduciary as was named in the notice of deficiency, his determination will not aid him in collecting. If there was such a taxpayer, that taxpayer has not come before the Board. The person before the Board is an individual who did not receive a notice of deficiency and has no right to file a petition. Sec. 212. The Commissioner seeks no tax fr6m her or her property. The remainder-men have made no move and the Commissioner has not moved against them. Mary M. Shea has not come before the Board as a fiduciary and we can not compel her to do so.

(Reviewed by the Board.

The proceeding will he dismissed for lack of jurisdiction.

Adams concurs in the result.

Arundell and McMahon dissent.


author: Adams :

text:
    Emma S. Cone, Executrix of the Estate of Irving H. Cone, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68034.
    Promulgated November 1, 1934.

      Claude I. Parker, Esq., and Ralph W. Smith, Esq., for the petitioner.

      Eugene G. Smith, Esq., for the respondent.
   OPINION.

Adams :

The petitioner seeks a redetermination of a proposed deficiency in estate tax of $571.15 against the estate of Irving H. Cone, deceased, under the Revenue Act of 1926.

The facts were presented by stipulation by the parties and are set forth in substance.

The petitioner, Emma S. Cone, is now, and ever since the 15th day of October 1930 has been, the duly appointed, qualified, and acting executrix of the estate of Irving H. Cone, deceased.

Evaline M. Kimball died on June 13, 1921, domiciled in Chicago, Illinois. Her will was probated in the State of Illinois, and it provided, among other things, as follows:

I give and bequeath unto The Northern Trust Company, a corporation organized under the laws of the State of Illinois, located at Chicago, as Trustee * * *
# * # * ❖ # *
(b) The sum of $200,000.00, to be held in trust by said The Northern Trust Company during the life of my brother, Irving H. Cone, now residing at Corona, California, paying to him the entire net income from said trust fund during his life, and upon his death distributing the principal thereof in accordance with the provisions of his Last Will and Testament, or, in case he fails to provide for such distribution by his Last Will and Testament, then to his descendants who may survive him, per stirpes and not per capita; and in case he leaves no descendant surviving, then to such persons as would inherit his personal property under the present laws of descent of the State of Illinois.

Irving H. Cone, the brother named in the will of Evaline M. Kim-ball, died September 14,1930, domiciled in Los Angeles County, State of California, leaving a will as set forth in paragraph 5 of the stipulation of facts. The only distributing clause of the will is the second paragraph thereof, which reads as follows:

Secondly: All of the rest and residue of my estate, personal, real and mixed, wherever situated, I give, devise and bequeath to my beloved wife, Emma S. Cone.

Subsequent to the death of Irving H. Cone, the Northern Trust Co., trustee under the aforesaid portion of the will of Evaline M. Kimball, delivered to Emma S. Cone all the property referred to in the aforesaid portion of the will of Evaline M. Kimball which it then held pursuant to the trust created in her will. The trust property referred to in Evaline M. Kimball’s will had, at all times subsequent to the decease of Evaline M. Kimball and prior to its delivery to Emma S. Cone, remained in the State of Illinois. The Northern Trust Co. was and is a corporation, organized under the laws of the State of Illinois, and located and domiciled in Chicago, Illinois. At no time was the trust property physically present in the State of California until it was distributed by the Northern Trust Co. to Emma S. Cone; nor was the trust property, which was subject to the power of appointment as provided in the Kimball will, included in nor did it become a part of Irving H. Cone’s estate, as probated in the State of California.

Emma S. Cone is the widow of Irving H. Cone and is the same person mentioned in the will of Irving H. Cone, deceased.

In the amended petition filed with the Board on March 3, 1933, it is alleged, among other things, that' the decedent was granted a power of appointment over the corpus of the said trust, and that the decedent, Irving H. Cone, did not at any time during his life, or by his last will, exercise this power of appointment. That, by reason of his failure to exercise the power, the trust fund, upon his death, passed to his widow, she being his sole heir at law under the laws of the State of Illinois.

The second question relates to a claimed deduction for miscellaneous administration expenses in the-amount of $15,034.32. Of this amount, the sum of $134.32 was allowed as a deduction in determining the deficiency tax. The balance of $14,900 was disallowed for the reason that the expense had been neither incurred nor paid.

In the amended petition, it is alleged that incident to the termination of said trust, and the vesting of the corpus thereof in Emma S. Cone, beneficiary and widow, the inheritance tax department of the State of Illinois authorized as a deduction for expenses incident to the trust the sum of $15,000, which sum had been audited and allowed by the inheritance tax department of the State of Illinois, and this sum it is alleged is a fair deduction in the premises.

This allegation is denied in the respondent’s answer. No evidence with respect to this item has been produced by the petitioner.

The principal question in this case is whether or not the value of certain property over which the decedent held a power of appointment should be included as part of decedent’s gross estate.

The applicable sections of the Bevenue Act of 1926 provide as follows:

Seo. 802. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated'—
*******
(f) To the extent of any property passing under a general power of appointment exercised by the decedent (1) by will, * * *
Sec. 303. For the purpose of the tax the value of the net estate shall be determined—
(a) In the case of a resident, by deducting from the value of the gross estate—
(1) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebtedness in respect to property * * * as are allowed by the laws of the jurisdiction * * * under which the estate is being administered * * *.

The parties agree that the power given the decedent under the will of Evaline M. Kimball was a general power of appointment, and that the question here must be determined under the law of the State of Illinois. Thus, the issue as to whether respondent erred in including the trust fund in decedent’s estate is narrowed to the question as to whether the decedent exercised the power of appointment given him by Evaline M. Kimball over the property bequeathed to the Northern Trust Co. in trust under the law of the State of Illinois.

An examination of the law of the State of Illinois leads us to the conclusion that it is the settled doctrine in that state that there must be within the instrument claimed to be the exercise of the power of appointment a manifest intent to exercise such power. This intent-may appear either from a direct reference to the power of appointment or from a direct reference to the property embraced in the power of appointment, or it may appear from the fact the instrument would be inoperative without the exercise of the power.

In Funk v. Eggleston, 92 Ill. 515, it was held the power of appointment is exercised when the intention to exercise it is made clear and manifest. In arriving at that conclusion, the court reviewed many English and American cases, among the number being Blagge v. Miles, 1 Story, 427, from which opinion the following language was quoted:

Mr. Justice Story» * * * speaking in regard to the execution of powers by last wills and testaments, says: “ The main point is, to arrive at the intention and object of the donee of the power in the instrument of execution; and, that being once ascertained, effect is given to it accordingly. * * * if the donee of the power intends to execute, and the mode be, in other respects, unexceptionable, that intention, however manifested, whether directly or indirectly, positively or just by implication, will make the execution valid and operative. I agree, that the intention to¡ execute the power must he apparent and clear, so that the transaction is not fairly susceptible of any other interpretation. If it he doubtful, under all the circumstances, then that doubt will prevent it from being deemed am execution of the power * * [Italics supplied.]

The court said further:

We prefer, then, to follow the broad and liberal rule announced by Lord Coke in Scope’s case and by Mr. Justice Story in the Blagge v. Miles case, and that is based upon principal, and thus carry into effect the intention of the testatrix rather than to defeat such intention by following the narrow and technical rule predicated upon the cases.

From that holding, it appears there must be an intention to exercise the power so apparent and clear that the transaction is not fairly susceptible of any other interpretation and if there be well founded doubt that the decedent intended to exercise the power, that doubt should be resolved in favor of a nonexecution of the power.

Our attention is called to Harvard College v. Balch,, 171 Ill. 275. In that case Joseph M. Moriarty devised property to a trustee to pay the income to his uncle, Charles Lowell Hancock, and at his decease to such person as he should direct. Charles Lowell Hancock died leaving a will, which did not mention the power granted him under the will of Joseph M. Moriarty, nor did he mention the property; but bis will had the usual residuary clause.' The Illinois court held that the residuary clause was not a good exercise of the power because no intent to exercise the power and no mention of the power or of the property appears in it. The court cited Fu/nk v. Eggleston, supra, among other authorities.

We think that, “ In the absence of a statute the general rule is that a power of appointment is not executed by a residuary clause in the will of the donee unless an intent to exercise the power clearly appears from the will.”

Under these authorities, we conclude that the residuary clause in the will of Irving H. Cone, deceased, was not such an exercise of the general power of appointment granted him in the will of Evaline M. Kimball as to make the trust estate a part of the gross estate of the deceased Irving H. Cone.

Petitioner undertakes in his brief to distinguish recent holdings of the Board of Tax Appeals from this case. We have examined those cases — among the number being Old Colony Trust Co., Executor of Minot, 29 B. T. A. 677; J. Gilmore Fletcher, Executor, 29 B. T. A. 503, and other cases. Each of them is distinguishable from this case, as is conceded by the respondent on brief.

As to the deduction item claimed by the petitioner, no proof has been offered as to it, and, the determination of the respondent being presumed to be correct as to this item, the respondent’s determination is affirmed.

Reviewed by the Board.

Decision will he entered under Bule 50.