text:
    Appeal of FARMERS LOAN & TRUST CO., Administrator, Estate of NATHANIEL WHITMAN.
    Docket No. 1399.
    Submitted March 18, 1925.
    Decided November 20, 1925.
    The taxpayer as administrator made return and paid tax on the transfer of the estate of Nathaniel Whitman in the year 1919 and claims the right to deduct the said tax from its return of income for the estate for the period in which the tax was paid. Held, that the New York State transfer tax was a proper deduction from income of an estate and that said tax is not deductible by the beneficiaries thereof.

      Bussell Bradford, Esq., for the taxpayer.

      E. O. Lake, Esq., for the Commissioner.
    Before James, Littleton, Smith, and Trussell.
    This is an appeal from the determination of a deficiency in income tax for the taxable period beginning January 8, 1919, the date of the death of the decedent, and ended December 31,1919. The amount of the deficiency is $4,498.86.
    The sole question involved in the appeal is whether the New York State transfer tax may be deducted in the determination of the net income of an estate.
    FINDINGS OF FACT.
    Nathaniel Whitman died a resident of the State of New York on January 7, 1919, leaving a will in which he appointed one Arthur L. Lasher as sole executor. The said Lasher acted as executor of the estate until on or about February 18, 1919, when the petitioner in this appeal, the Farmors Loan & Trust Co., was appointed as administrator with the will annexed of the estate.
    Said Lasher, on July 10, 1919, paid a transfer tax upon the estate to the Comptroller of the State of New York in the amount of $121,120.07. Under date of June 10, 1921, the Surrogate’s Court of New York County made final determination of the value' of the estate of Nathaniel Whitman, said value being fixed at $2,500,312.45, upon which a transfer tax was assessed in the amount of $127,494.81, which tax was satisfied by the payment above mentioned because of the 5 per cent discount remitted under New York State law for payment within six months of the date of death.
    Nathaniel Whitman died seized of real estate in New York valued at $518,200, of which $87,000 in amount was specifically devised and the tax upon which amounted to $6,496.03. The decedent further provided in his will for the conversion by the executors of all the rest and residue of his estate into cash.

      Arthur L. Lasher, as executor of the estate of the decedent, made and filed in due course the income-tax return of that estate for the period from the date of the death of the decedent to the end of the taxable year 1919. In making that return he did not claim as adeduction the amount of inheritance or transfer tax paid to the State of New York. The Commissioner made other adjustments not here material or in question and from his refusal to offset against such adjustments the transfer taxes above set forth and his determination of a deficiency consequent thereon, the taxpayer brings this appeal. The return of the estate was on the cash basis, and the books were so kept.
    DECISION.
    The deficiency determined by the Commissioner is disallowed.
   OPINION.

James

: The question involved in this appeal requires the construction of sections 210, 211, 214 (a) (3) and 219 (a) and (b) of the Revenue Act of 1918, and article 10 of the Tax Law of the State of New York, being the article dealing with the subject of taxable transfers.

Sections 210, 211, and 219 of the Revenue Act of 1918 imposed taxes upon individuals, estates and trusts at rates therein named. Section 214 of that Act provides in part as follows :

Sec. 214. (a) That in computing net income there shall be allowed as deductions :
* * * * * * *
(3) Taxes paid or accrued within the taxable year imposed (a) by the authority of the United States, except income, war-profits and excess-profits taxes; or (b) by the authority of any of its possessions, ⅜ * * or (c) by the authority of any State or Territory, * * *

Section 219 of that Act provides in part:

Sec. 219. (a) That the tax imposed by sections 210 and 211 shall apply to the income of estates or of any kind of property held in trust, including—
(1) Income received by estates of deceased persons during the period of administration or settlement of the estate;
* sje ⅜ * sfr ⅛ ⅜
(b) The fiduciary shall be responsible for making the return of income for the estate or trust for which he acts. The net income of the estate or trust, shall be computed in the same manner and on the same basis as provided in section 212, except * * *

It appears from the foregoing that, under the Revenue Act of 1918, a tax is imposed upon the net income of an estate during the period of administration or settlement, in the same manner as upon other taxable persons and with the same definition of gross and net income and the deductions allowable from gross income, in ascer-taming the amount of net taxable income. Inquiry here, therefore, is whether the New York State transfer tax, paid by the estate of the decedent represented in this appeal, may be taken as a deduction in ascertaining the net taxable income of that estate. The question turns upon whether the estate of Nathaniel Whitman was the taxable entity which paid the New York State transfer tax in the year 1919. The solution of this question turns upon the nature of the tax so paid as defined by the statutes of that State as interpreted by the courts of the United States and of the State of New York.

Section 220 of the New York Tax Law provides, so far as is material, as follows:

Taxable tran seers. A tax shall be and is hereby imposed upon the transfer of any tangible property within the state and of intangible property, or of any interest therein or income therefrom, in trust or otherwise, to persons or corporations in the following cases, subject to the exemptions and limitations hereinafter prescribed:
1. When the transfer is by will or by the intestate laws of this state of any intangible property, or of tangible property within the state, from any person dying seized or possessed thereof while a resident of the state.

Section 221 (a) provides the rates of tax which are based upon the amount of the legacies, bequest or inheritance of each individual beneficiary. Section 222, so far as is material to this matter, reads as follows:

Accrual and payment op tax. All taxes imposed by this article shall be due and payable at the time of the transfer, except as herein otherwise provided. Taxes upon the transfer of any estate, property or interest therein limited, conditioned, dependent or determinable upon the happening of any contingency or future event by reason of which the fair market value thereof can not be ascertained at the time of the transfer as herein provided, shall accrue and become due and payable when the persons or corporations beneficially entitled thereto shall come into actual possession or enjoyment thereof. Such tax shall be paid to the state comptroller in a county in which the office of appraiser is salaried, and in other counties, to the county treasurer, and said state comptroller or county treasurer shall give, and every executor, administrator or trustee shall take, duplicate receipts from him of such payment as provided in section two hundred and thirty-six.

Section 224 provides for the method of collection of the tax and the persons responsible for its payment. It reads as follows:

Lien op tax and collection by executors, administrators and trustees. Every such tax shall be and remain a lien upon the property transferred until paid and the person to whom the property is so transferred, and the executors, administrators and trustees of every estate so transferred shall be personally liable for such tax until its payment. Every executor, administrator or, trustee shall have full power to sell so much of the property of the decedent as will enable him to pay such tax in the same manner as he might be entitled by law to do for the payment of the debts of the testator or intestate. Any such executor, administrator or trustee having in charge or in trust any legacy or property for distribution subject to sueb tax shall deduct the tax therefrom and shall pay over the same to the state comptroller or county treasurer, as herein provided. If such legacy or property be not in money, -he shall collect the tax thereon upon the appraised value thereof from the person entitled thereto. He shall not deliver or be compelled to deliver any specific legacy or property subject to tax under this article to any person until he shall have collected the tax thereon. If any such legacy shall be charged upon or payable out of real property, the heir or devisee shall deduct such tax therefrom and pay it to the executor, administrator or trustee, and the tax shall remain a lien or charge on such real property until paid; and the payment thereof shall be enforced by the executor, administrator or trustee in the same manner that payment of the legacy might be enforced, or by the district attorney under section two hundred and thirty-five of this chapter. If any such legacy shall be given in money to any such person for a limited period, the executor, administrator or trustee shall retain the tax upon the whole amount,, but if it be not in money, he shall make application to the court having jurisdiction of an accounting by him, to make an apportionment, if the case require it, of the sum to be paid into his hands by such legatees, and for such further order relative thereto as the case may require.

Section 225 reads in full as follows:

Refund of tax erroneously paid. If any debts shall be proven against the estate of a decedent after the payment of any legacy or distributive share thereof, from which any such tax has been deducted or upon which it has been paid by the person entitled to such a legacy or distributive share, and such person is required by order of the surrogate having jurisdiction, on notice to the state comptroller, to refund the amount of such debts or any part thereof, an equitable proportion of the tax shall be repaid to him by the executor, administrator or trustee, if the tax has not been paid to the state comptrollcr or county treasurer; or if such tax has been paid to such state comptroller or county treasurer, such officer shall refund out of the funds in his hands or custody to the credit of such taxes such equitable proportion of the tax. and credit himself with the same in the account required to be rendered by him under this article. If after the payment of any tax in pursuance of an order fixing such tax, made by the surrogate having jurisdiction, such order be modified or reversed by the surrogate having jurisdiction within two years from and after the date of entry of the order fixing the tax, or be modified, or reversed at any time on an appeal taken therefrom within the time allowed by law on due notice to the state comptroller, the state comptroller shall, if such tax was paid in a county in which the office of appraiser is salaried, refund to the executor, administrator, trustee, person or persons by whom such tax was paid, the amount of any moneys paid or deposited on account of such tax in excess of the amount of the tax fixed by the order modified or reversed, out of the funds in his hands or custody to the credit of such taxes, and to credit himself with the same in the account required to be rendered by him under this article, or if paid in a county in which the office of appraiser is not salaried, he shall by warrant direct and allow the county treasurer of the county to refund such amount in the same manner; but no application for such refund shall be made after one year from such reversal or modification, unless an appeal shall be taken therefrom, in which case no such application shall be made after one year from the final determination on such appeal or of an appeal taken therefrom, and the representatives of the estate. legatees, devisees or distributees entitled to any refund under this section shall not be entitled to any interest upon such refund, and tbe state comptroller shall deduct from the fees allowed by this article to the county treasurer shall deduct from the fees allowed him upon such overpayment. Where it shall be proved to the satisfaction of the surrogate that deductions for debts were allowed upon the appraisal, since proved to have been erroneously allowed, it shall be lawful for such surrogate to enter an order assessing the tax upon the amount wrongfully or erroneously deducted. This section, as amended, shall apply to appeals and proceedings now pending and taxes heretofore paid in relation to which the period of one year from such reversal or modification has not expired when this section, as amended, taires effect.

. Section 236 also contains significant provisions with respect to the duty for the payment of the tax and reads as follows:

Receipts from county treasurer or comptroller. One of the duplicate receipts issued for the payment of any tax under this article, as provided by section two hundred and twenty-two, shall be countersigned by the state treasurer if the same was issued by the state comptroller, and by the state comptroller if issued by any county treasurer. The officer so countersigning the same shall charge the officer receiving the tax with the amount thereof and affix the seal of his office to the same and return to the proper person; but no executor, administrator or trustee shall be entitled to a final accounting of an estate in settlement of which a tax is due under the provisions of this article unless he shall produce a receipt so sealed and countersigned, or a certified copy thereof. Any person shall, upon the payment of fifty cents to the officer issuing such receipt, be entitled to a duplicate thereof, to be signed, sealed and countersigned in the same manner as the original. * ⅜ *

Section 243, entitled “ Definitions,” contains a significant definition of the word “transfer,” in the following language:

⅜ * ⅜ The WOrd “ transfer,” as used in this article, shall be taken to include the passing of property or any interest therein in the possession or enjoyment, present or future, by inheritance, descent, devise, bequest, grant, deed, bargain, sale or gift, in the manner herein prescribed. * * *

At the outset it must be understood that the deductions permitted by section 214 (a) (3) of the Revenue Act of 1918 for taxes imposed by the authority of any State does not purport to permit the deduction of any taxes except those which are paid because they are obligations of the taxpayer. The section provides that “ taxes * * * imposed * * * ” may be deducted. To be deductible from income, therefore, the tax here in question must be imposed upon the estate or its personal representative. It is not enough that the personal representative may be made the conduit through which, or through whom, the tax passes to the State. Since the estate is the Federal income tax taxpayer, it must, if it may lawfully claim this deduction, also be the State transfer tax taxpayer.

The question here at issue has been before the Circuit Court of Appeals of the Second Circuit in the case of Keith v. Johnson, 3 Fed. (2d) 361, and before the Court of Appeals of the State of New York in Home Trust Co. v. Law, 236 N. Y. 607; 142 N. E. 303, affirming a decision of the Appellate Division reported in 204 App. Div. 590; 198 N. Y. S. 710.

In the case of Keith v. Johnson, the issue was identical with that in this appeal. The court at the beginning of the opinion quotes section 224 of the Tax Law as follows:

The tax shall be “ a lien upon the property transferred * * * and the executors ⅜ * * of every estate so transferred shall be personally liable for such tax until its payment.”

Ref erring, to section 224, set out in full above, for the portion quoted, we find that the first sentence of that section reads in full as follows:

Every such tarn shall be and remain a lien upon the property transferred until paid and the person to whom the property is so transferred, and the executors, administrators and trustees of every estate so transferred shall be personally liable for such tax until its payment. (Italics indicate omitted portions, and are ours.)

Reasoning from the section as quoted by it, the court holds that the tax is imposed upon the executor, which is true, but it is also true that in the same sense the tax is imposed both upon the property transferred and the person to whom it is transferred. It would appear that there is nothing in section 224 which is determinative of the question here at issue. Throughout the provisions of sections 221, 224, 225, and 236, dealing with the collection of the tax, there is no intimation as to the particular entity upon which the tax per se is imposed. In fact, section 220 makes it perfectly clear that the tax is imposed upon an event, namely, “the transfer of any tangible property within the state and of any intangible property, or of any interest therein or income therefrom, in trust or otherwise, to persons or corporations in the following cases, * * *

The court; also, in Keith v. Johnson, relies upon the above case of Home Trust Co. v. Law, to which reference in detail will be made later in this opinion.

The Commissioner contended in Keith v. Johnson, and in the instant appeal contends, that the tax is a proper and allowable deduction from the income of the devisee or heirs-at-law when paid, notwithstanding the decision of Prentiss v. Eisner, 267 Fed. 16.

Finally, it is apparent that the court had considerable difficulty in deciding that a New York State transfer tax imposed upon the tranfer of real estate was a tax upon the estate, since, strictly speaking, real property left under a specific devise never comes into the hands of the executors or administrators but passes direct to the heirs, upon whom is placed the direct burden under section 224 of paying the tax upon the real property to the executor, who is charged with the duty of paying the tax in the first instance to the State. So serious did the court apparently consider this question that it concluded the opinion with the words, “We express no opinion as to the result in the cases of realty, where the executor is not the successor, or even in the case of specific legacies.” It must be apparent that if the New York State transfer tax is deductible by any interest, either the estate through the executor or the legatees or heirs, it must be deductible as an entirety and not in parcels depending on the particular manner of the devolution of the property. Any other rule would be so impossible of administration as to indicate clearly that there could have been no congressional intent to provide so complicated a method of deducting it. Consider, for instance, a legatee receiving real estate, a specific bequest, and a share in the residuary estate, which latter comprises both real and personal property. The New York transfer tax, like most inheritance taxes, is graduated both by the degree of relationship of the legatee or heir and by the amount of property received. The tax is computed on the aggregate amount of the transfer. In a case such as that supposed, if the intimation of the court should lead to a separation, the person attempting to compute the proper deduction by the estate and by the legatee would be forced to determine how much of the transfer tax imposed in bulk was imposed (1) upon a specific legacy, (2) upon the real property passing direct, (S) upon the real property and personal property comprising the legatee’s share of the residuary estate, and, to make the matter more complicated, we may assume that a satisfactory division among all the sharers in the residuary estate was arrived at and they took undivided interests in the real property included therein.

The Court of Appeals wrote no opinion in Home Trust Co. v. Law. The Appellate Division of the Supreme Court, however, wrote a carefully considered opinion, in which it held that under die New York State income tax law, imposed under provisions of law almost identical with those of the Federal law, the transfer tax was properly deductible from the income of the estate and not from the income of the individual legatees and devisees or heirs. After discussing a number of New York cases, to which reference is made below, the court said :

The transfer tax payment is made by the executor from the funds of the estate. ⅜ * ⅞ The tax is measurable, not by the funds received by a legatee, but by the funds the executor receives. As the burden of paying the income tax, as well as the burden of paying the transfer tax, is cast upon the executor, and as the taxable income of the estate is under the terms of the Tax Law measurable by gross income received, less taxes paid, it would seem clear that the person paying the income tax, namely, the executor, is entitled to deduct the very transfer tax which he himself pays.

We believe the foregoing states succinctly the sound basis for the determination in this appeal. It is not that the tax is made a burden upon the executor or the estate as- such, or the legatees, devisees, or heirs, as such, but that primarily the State looks to the executor and to the estate for the payment of the tax. Being a tax measured, unlike the Federal estate tax, by the amount transferred to each individual beneficiary, the New York transfer tax has quite properly provided the machinery wherby each individual beneficiary receives his share diminished by the tax upon that share. But this does not necessarily mean that the tax is either paid by the beneficiary or imposed upon him. He receives his legacy diminished by a tax subtracted therefrom before his right attaches, although measured by the legacy itself. In re Swift’s Estate, 137 N. Y. 77; 32 N. E. 1096; In re Penfold's Estate, 216 N. Y. 163; 110 N. E. 497; In re Merriam’s Estate, 141 N. Y. 479 ; 36 N. E. 505, affirmed in the Supreme Court of the United States under the title of United States v. Perkins, 163 U. S. 625.

The last case above mentioned involved a legacy left by Merriam to the United States and included both real and personal property. It is much relied upon by the taxpayer in this appeal, as indicating that the tax is upon the estate, both because of the language in the decision of the New York Court of Appeals and because of the language of the United States Supreme Court and upon what it assumes to be a corollary that to hold that the tax is one imposed upon the devisee would involve a constitutional question by reason of the fact that the property of the United States is exempt from state taxation. Whether this is so as applied to legacies left to the United States may well be doubted, since the United States does not take in its capacity as a Government but in its capacity as a corporation.

In Merriam’s case, the Court of Appeals said:

For the purpose of receiving legacies, and for many other purposes, the United States is to be regarded as a body politic and corporate.

In South Carolina v. United States, 199 U. S. 437, the court said:

Further, it may be noticed that the tax is not imposed on any property belonging to the State, but is a charge on a business before any profits are realized therefrom. In this it is not unlifce the taxes sustained in United States v. Perkins, 163 U. S. 625.

This decision, while not controlling the question before us, indicates that the thought has been that:

The exemption of state agencies and instrumentalities from National taxation is limited to those which are of a strictly governmental character, and does not extend to those which are used by the State in the carrying on of an ordinary private business. (199 U. S. 461.)

In United States v. Perkins the court said:

The so-called inheritance tax of the State of New York is in reality a limitation upon the power of a testator to bequeath his property to whom he pleases; a declaration that, in the exercise of that power, he shall contribute a certain percentage to the public use; in other words, that the right to dispose of his property by will shall remain, but subject to a condition that the State has a right to impose. * ⅜ ⅜ Thus the tax is not upon the property, in the ■ordinary sense of the term, but upon the right to dispose of it, and it is not until it has yielded its contribution to the State that it becomes the property of the legatee. * * ⅜
We think that it follows from this that the act in question is not open to the objection that it is an attempt to tax the property of the United States, since the tax is imposed upon the legacy before it reaches the hands of the ¡government. The legacy becomes the property of the United States only after it has suffered a diminution of the amount of the tax, and it is only upon this ■condition that the legislature assents to a bequest of it.

We come now to consider some of the cases cited by the Commissioner which seem at first glance to indicate a conflict in the New York decisions as to the nature of the New York tax. In re Hoffman’s Estate, 143 N. Y. 327; 38 N. E. 311, involved the method of computing the statutory exemption of $10,000 — that is, whether the said exemption applied to the individual shares or to the estate as a whole. In this case there was a life estate created for the mother ■of the testatrix, a further life estate to her daughter, and the remainder to her issue under certain contingencies. The court held that there was one exemption of $10,000, and used language which seemed to indicate that the tax was upon the recipient, particularly the following language: “ There are some changes of phraseology in the more important sections, but I think it remains true that the tax is one upon the right of succession, levied upon successors in respect to the shares to which they succeed, and not upon the decedent’s estate as such.’’ (Italics ours.) It is manifest that the above italicized portion of the quotation of the decision is dictum wholly unnecessary to the decision in the case and quite without reflection upon the result arrived at. If the court had said in the place of the italicized portion, “measured by the shares passing to the beneficiaries,” the sense would be substantially the same in so far as it is necessary to a decision, and the case would be in agreement with the major line of New York authority.

In re Westurn’s Estate, 152 N. Y. 93; 46 N. E. 315, is a casé involving the method of computing the taxable estate. Since the New York transfer tax is measured by the shares passing; it necessarily follows that the law does not contain, as does the Federal ■estate tax law, provision for the computation of a gross estate from which the debts of the decedent and the costs of administration are deductible. In Westurn’s Estate, an expensive contest over a will resulted in unusually large costs of administration, and the question involved was whether, in computing the value of the shares passing, these expenses of administration were deductible. The real decision in the case is contained in the following language:

The real interest passing is what remains after payment of debts and other charges. It is plainly inferable from section 225 of the act that the debts of the decedent are to be deducted in arriving at the valuation of the property and in fixing the tax. That section authorizes a proportionate amount of a tax to be refunded in case debts against the estate shall be proven after the tax shall have been paid.

But the court also said:

The principle that the tax is a succession tax imposed as a burden on each person claiming succession, measured 6y the value of his interest, and collectible out of his interest only, was reaffirmed in the case of In re Hoffman’s Estate. * * * (Italics ours.)

The language was also quite unnecessary to the decision of the case, and was obviously used by the court in the most general sense.

In re Gihon's Estate, 169 N. Y. 443; 62 N. E. 561, involved the propriety of the deduction of costs of temporary administration. The court held that the deduction was proper before computing the value of the taxable interests transferred, and again the court used language which, taken out of its setting, seems to indicate that the tax is imposed upon the legatee. The case also involved the question whether the Federal inheritance tax of 1898 was deductible in determining the value of the taxable transfer • under the New York law. In holding that this tax could not be deducted, the court said:

In our judgment, the vital error of this argument lies in the assumption that the “ taxes are primarily payable out of the estate.” The federal tax is exactly of the same nature as the state tax, — a tax not on property, but on succession; that is to say, a tax on the legatee for the privilege of succeeding to property. ⅜ » ⅞ The federal tax is necessarily of this character; for a direct tax, unless apportioned according to population, would be repugnant to the constitution of the United States. Under that statute, also, it is the amount of the legacy, not of the estate, that determines the rate of taxation. Therefore, though the administrator or executor is required to pay the tax, he pays it out of the legacy for the legatee, not on account of the estate. (Italics ours.)

But the same result would have been arrived at in the foregoing case had the court contented itself with saying that both taxes were imposed simultaneously and both upon the shares in the estate actually transferred uhdiminished on account of any tax upon the transfer, upon the succession or upon the inheritance, or by whatever name it happened to be described.

In New York Trust Co. v. Eisner, 256 U. S. 345, the same confusion of thought appears where the court says:

If the tax attaches to the estate before distribution — if it. is a tax on the right to transmit, or on the transmission at its beginning, obviously it attaches to the whole estate except so far as the statute sets a limit. “ Charges against the estate ” as pointed out by the Court below, are only charges that affect the estate as a whole, and therefore do not include taxes on the right of individual beneficiaries. This reasoning excludes not only the New York succession tax but those paid to other States, which can stand no better than that paid in New York. What amount New York may take as the basis of taxation and questions of priority between the United States and the State are not open in this case.

Again, the same conclusion would have been arrived at by holding that the taxes attached simultaneously on account of the transfer or succession and were not to be computed with reference to one another.

Knowlton v. Moore, 178 U. S. 41, involving the constitutionality of the Federal inheritance tax of 1898 as imposed by the War Revenue Act of that year, is a most instructive decision as bearing upon the nature of inheritance, succession, transfer, and estate taxes. While the actual decision of the court in that case is not of great importance in this appeal, some of the language is helpful and significant as to the general nature of inheritance, succession, transfer, and estate taxes. Thus the court says (pp. 55, 56) :

Thus, looking over the whole field, and considering death duties in the order in which we have reviewed them, that is, in the Roman and' ancient law, in that of modern France, Germany and other continental countries, in England and those of her colonies where such laws have been enacted, in the legislation of the United States and the several States of the Union, the following appears: Although different modes of assessing such duties prevail, and although they have different accidental names, such as probate duties, stamp duties, taxes on the transaction, or the act of passing of an estate or a succession, legacy taxes, estate taxes or privilege taxes, nevertheless tax laws of this nature in all countries rest in their essence upon the principle that death is the generating source from which the particular taxing power takes its being and that it is the power to transmit, of the transmission from the •dead to the living, on which such taxes are more immediately rested.

And on page 57:

Confusion of thought may arise unless it be always remembered that, ■fundamentally considered, it is the power to transmit or the transmission or receipt of property by death which is the subject levied upon by all death •duties. The qualification of such taxes as privilege taxes, or describing them .as levied on a privilege, may also produce misconception, unless the import of these words be accurately understood. They have been used where the power •of a state government to levy a particular form of inheritance or legacy tax has in some instances been assailed because of a constitutional limitation on the taxing power. Under these circumstances, the question has arisen whether, because of the power of the State to regulate the transmission of property •by death, there did not therefore exist a less trammeled right to tax inherit-anees and legacies than obtained as to other subject-matters of taxation, and, upon the affirmative view, being adopted, a tax upon inheritances or legacies for this reason has been spoken of as privilege taxation, or a tax on privileges. The conception, then, as to the privilege, whilst conceding fully that the occasion of the transmission or receipt of property by death is a usual subject of the taxing power, yet maintains that a wider discretion or privilege is vested in the States, because of the right to regulate. Courts which maintain this-view have therefore treated death duties as disenthralled from limitations which would otherwise apply, if the privilege of regulation did not exist. The authorities which maintain this doctrine have been already referred to-in the citation which we have made from Magoun v. Illinois Trust & Savings Bank, 170 U. S. 283, 288. An illustration is found in United States v. Perkins, 163 U. S. 625, where the right of the State of New York to levy a tax on a legacy bequeathed to the Government of the United States was in part rested on the privilege enjoyed by the State of New York to regulate successions. Some state courts, on the other hand, have held that, despite the power of regulation, no greater privilege of taxation exists as to inheritance and legacy taxes than as to other property. Cope's Appeal, 191 Penn. St. 1; State v. Ferris, 53 Ohio St. 314; State v. Gorman, 40 Minn. 232; Curry v. Spencer, 61 N. H. 624. In State v. Switzler, 143 Missouri, 287, the power of the legislature of Missouri to levy a uniform tax upon the succession of estates was conceded, though such tax was declared not to be a tax upon property in the ordinary sense-. The court nevertheless held that the particular tax in question, which was progressive in rate, was invalid, because it violated a provision of the state constitution; the decision, in effect, being that because the legislature had the power to regulate successions, it was not thereby justified in levying a tax which was not sanctioned by the state constitution.
All courts and all governments, however, as we have already shown, conceive that the transmission of property occasioned by death, although differing from the tax on property as such, is, nevertheless, a usual subject of taxation. Of course, in considering the power of Congress to impose death duties, we eliminate all thought of a greater privilege to do so than exists as to any other form of taxation, as the right to regulate successions is vested in the States and not in Congress.

We conclude, therefore, that the New York State transfer tax at least is a tax which is primarily imposed upon the transfer of an estate, the taxable portion and the rate of tax being measured by the value of the several transfers made, the executor or administrator being primarily the medium for the payment of the tax, and the tax being in the first instance payable out of the taxable shares in. the estate before they are transferred. The tax is, we believe, deductible from income of the estate and not from that of the individual beneficiaries. In arriving at this conclusion, we confess-some difficulty in determining that the tax is imposed upon any entity whatever in a strict sense, since it is imposed really upon the-happening of an event and is a true excise tax rather than a tax strictly either in personam or in rem. But excise taxes, for instance stamp taxes paid upon deeds or other instruments by an executor, would clearly be included in the category of taxes which might be deducted in determining the net income of an estate.

The real confusion, we believe, in the New York cases, and in some of the others to which reference has been made, arises from the difficulty of finding precise language to define the nature of a tax when the exact issue before the court does not require a precise definition. In the decisions themselves we do not find conflict. We find it only in the language used by the courts. Apparently, there is a confusion under the New York law between the imposition of the tax and its incidence, and this confusion is notably . found in the brief filed by the Commissioner in this appeal. Thus the Commissioner says:

These results necessarily follow from the provisions of the New York Inheritance Tax Act. Each legatee is personally liable for the tax on his legacy. The executor deducts the amount of the tax, not from the estate, but from the legatee’s share, and if the legacy or distributive share is not in money the executor is required to collect the tax thereon from the person entitled thereto and he cannot be compelled to deliver the property until the legatee has paid the tax thereon. In the event that there are several succeeding estates in the same property the Court is empowered to apportion the tax amongst the several tenants and to determine the amount to be paid into the executor’s hands by each of them. (Section 224.) Manifestly these provisions are intended to impose the burden of this tax’ upon such legacy. They are entirely inconsistent with any idea that the burden of the tax is to fall upon the “ estate.” It is true that the estate must in the first instance pay the tax, but the incidence of the tax is not determined by its payment where the person paying is entitled to reimbursement. The incidence of the tax is determined by the ultimate liability. Under the New York Act the legatee is ultimately liable for the tax. He must pay it before he can receive his legacy. In the event that the estate proves insufficient to pay debts and the legatee is compelled to refund a part of Ms legacy he is entitled to recover from the tax commission a pro rata part of the tax paid. (Section 226.) Manifestly if the ultimate liability is not upon the legacy the recovery of the overpaid tax would be by the executor as the representative of the estate, and not by the legatee.

But if this reasoning is sound and the incidence of the tax is to be the determining factor as to the entity by which it may be deducted from income, then the Commissioner’s case falls entirely in respect of the entity which may properly deduct the Federal estate tax from an income-tax return. Under the New York law the Federal estate tax has been held to be a charge upon the residuary estate, In re Hamlin, 226 N. Y. 407; 124 N. E. 4; and the residuary legatees receive their shares necessarily diminished on account of the.imposition of the tax. If the incidence of the tax is a measure of its deductibility, then the decision in United States v. Woodward, 256 U. S. 632, was erroneous. The argument proves too much and really has no bearing upon the precise question here under consideration.

These donees do not pay the taxes any more than they pay the funeral expenses, the lawyers, the executors and the testator’s debts. Y. M. C. A. v. Davis, 264 U. S. 47, 51.

We are of the opinion that the taxpayer in this appeal is entitled to a deduction on account of the transfer tax paid to the State of New York in the year 1919, and the deficiency determined by the Commissioner herein must be disallowed.


source: Caselaw Access Project

author: Geaupner

license: Public Domain

text:
    Appeal of M. E. FARR.
    Docket No. 4392.
    Submitted September 17, 1925.
    Decided November 24, 1925.
    Additional compensation for services rendered in 1917 and 1919 but not received by taxpayer until 1918 and 1920, respectively, held taxable as income in the latter years.

      Sanford Robinson, Esq., for the taxpayer.

      George G. Witter, Esq., for the Commissioner.
    Before Graufner and Trammell.
    The taxpayer appeals from the determination of deficiencies in income taxes for the calendar years 1918 and 1920 in the respective amounts of $5,253.99 and $30,760.09, making a total of $36,014.08. At the hearing an agreed statement of facts was filed.
    FINDINGS OF FACT.
    The taxpayer is an individual residing in Detroit, Mich. During the period 1916 to 1920, inclusive, he was president of the American Shipbuilding Co., and received for his* services a salary of $50,000 per year, with extra compensation in accordance with resolutions of the board of directors as hereinafter set forth. During this period the American Shipbuilding Co. was very actively employed in shipbuilding and the taxpayer’s duties' as president were greatly increased, in recognition of which the company paid him additional compensation for the corporate fiscal years ending June 30, 1917, 1918, 1919, and 1920, and for the six months’ period ending December 31, 1920.
    The first additional payment amounted to $50,000 and was paid on September 27, 1917, pursuant to a resolution of the board of directors dated September 26, the material part of which is as follows:
    Whereas said M. E. Farr is willing to accept reelection to the position of President of this Company, and continue in such office, and to devote his time and services to the business of the Company until' January 1, 1919, in con-¡¿deration of receiving in addition to a fixed salary of $50,000.00 a year, further salary as follow:
    For the fiscal year ended June 30, 1917, $50,000 payable forthwith:
    Thereafter, during his continuance in such position, for the current fiscal year and up to January 1, 1919, a sum equal to one per cent of the net earnings of this and subsidiary companies from operations as determined by the Board, after deducting depreciation but before deducting excess or war profits’ taxes, beginning July 1, 1917:
    Such salary, both fixed and additional, to be prorated and paid monthly as nearly as may be.
    Now, therefore, be it resolved, That the additional salary in the preamble hereof set forth, be and the same is hereby voted to said M. E. Farr, all in consideration of his agreement to accept re-elections to his present office and his agreement to remain with this Company as such officer until January 1, 1919.
    Thereafter, the taxpayer filed an amended return for 1916 and included in income reported for that year one-half, or $25,000, of the amount of $50,000 paid him on September 27, 1917.
    In pursuance of the resolution of September 26,1917, and a resolution of October 24, 1917, the taxpayer was paid additional compensation of $29,999.92 for the six months ended December 31, 1917. In further pursuance of the resolution of September 26, 1917, and a resolution of February 27, 1918, additional compensation of $32,-309.36 was credited to the taxpayer on the books of the company on March 30, 1918. The minutes of the meeting of the board of directors of September 18, 1918, contain the following:
    The Comptroller then submitted to the Board a statement as attached to these minutes, showing a balance of $31,836.43 due President Farr as of June 30, 1918, under his arrangement with the Company for compensation. On motion duly seconded, the sum of $31,836.43 was thereupon ordered paid to President Farr to cover the balance of compensation due him for the fiscal period ended June 30, 1918.
    The taxpayer was paid additional compensation of about $30,000 at some time during 1918, the date of payment not appearing in the record.
    For the period subsequent to June 30, 1918, the taxpayer declined additional compensation determined on the basis set forth in the resolution of September 26, 1917. Thereafter, by resolutions of the board of directors dated as shown below, additional compensation was authorized to be paid the taxpayer in the amounts and for the periods as follows:

      All of those resolutions provided that the additional compensation should not be paid out of any earnings under contracts with the United States Shipping Board Emergency Fleet Corporation or any other- Government work, or earnings that would operate to increase the cost of any ships under construction for the Fleet Corporation.
    The salary actually paid the taxpayer, the allocation thereof made by the Commissioner, and the allocation made by the taxpayer are shown in the following schedule:

    DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Geaupner

: The primary questions here are whether, for income-tax purposes, the additional compensation of $32,309.36, actually paid the taxpayer in 1918, should be reported as income for 1917 or 1918, and whether the additional amount of $50,000 paid him in 1920 should be reported as income for 1919 or 1920. The taxpayer contends that, inasmuch as the additional compensation was paid for services rendered in 1917 and in 1919, it may properly be reported as income for those years. These payments were allocated by the Commissioner to the years 1918 and 1920, as shown in the schedule above, on the theory that the payments had neither accrued nor were they paid in the years 1917 and 1919.

Section 213 (a) pf the Revenue Act of 1918 provides in part that gains, profits, and income

⅜ * ⅜ s]}aii he included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under subdivision (b) of section 212, any such amounts are to be properly accounted for as of a different period; * ⅜ * (Italics ours.)

Section 212 (b) provides:

(b) The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income.

The taxpayer kept no boobs. The returns filed show that the taxpayer was on a cash receipts and disbursements basis. The additional compensation may have been accrued on the books of the American Shipbuilding Co., but it was taxable as income to taxpayer only when received by him. Appeal of Edmund J. Karr, 2 B. T. A. 635; Appeal of Louis Titus, 2 B. T. A. 754.


author: Phillips:

text:
    Appeal of HAAS BROS.
    Docket No. 1675.
    Submitted July 6, 1925.
    Decided November 24, 1925.
    At the close of the year taxpayer had outstanding contracts to purchase merchandise, which was undelivered. Upon its books it set up as losses the difference between the contract price and the market price and deducted such alleged losses upon its income-tax returns. Upon the evidence, held, that title to such 'goods had not passed at the close of the year, that such goods could not be included in inventory, and that no deduction could be taken.

      I. I. Brown and Geo. E. Stokes, Esqs., for the taxpayer.

      Ward Loveless, Esq., for the Commissioner
    Before GeaupneR, Trammell, and Phillips.
    This is an appeal from the determination of a deficiency in income and profits taxes for 1919 in the amount of $6,315.88, and for 1920 in the amount of $8,745.11, and involves the right of the taxpayer to include certain undelivered goods in its closing inventories for such years.
    FINDINGS OE PACT.
    The taxpayer is a corporation organized under the laws of the State of California, with its principal office in San Francisco, and during the years involved in this appeal was engaged in business as a wholesale dealer in groceries and like merchandise.
    During the month of November, 1919, taxpayer entered into four contracts for the purchase of Robusta coffee at specified prices. The contracts were upon the printed forms of the broker and the terms and conditions wTere substantially the same in each, except as to the date, the price, the name of the seller, and the amount of coffee to be delivered, and were in form as follows:

      BROKER’S CONTRACT.
    O. E. Bickford & Oo.
    104-106 California Street.
    Sold to Arrive to Messrs. Haas Bros.
    Por Account of Messrs. W. R. Grace & Co.
    Terms: Cash, less 2%, Fifteen days from date of tender of delivery at San Francisco, Calif.
    Contract No. X 943. San Francisco, Oal., Nov. 7, 1919.

    About One thousand (1,000) Bags of Robusta Coffee at twenty and five eighths (20⅝) Cents Gold per lb. San Francisco.
    Coffee to be shipped from source by steamer or steamers to San Francisco, during November/December 1919.
    Should the Government impose a duty, coffee is to be taken by Buyer in bond. Quality to be based on:
    Coffee is described Washed Robusta, guaranteed sweet.
    Sale to be absolute and coffee is to be taken by Buyer if average grading within one half (½⅜5) cent per pound of the sample or description sold by at the graded allowance, and if better than said sample or description, no premium is to be paid.
    If the average quality of coffee tendered for delivery on this Sale exceeds one half (⅛⅜) cent per pound below the type or sample or description sold by, then the Buyer has the option of taking the coffee tendered at the graded difference, or refusing to accept the shipment, but in the latter case the Seller has the option of delivering “ spot ” coffee in accordance with the contract, grade or description in its place.
    Seller may select and/or grade and make any arrivals of coffee uniform by mixing if deemed necessary for proper delivery. Coffee tendered shall be considered accepted unless claims are filed in writing within ten (10) days after tender of delivery.
    If contract price is based on some special feature in description, type or sample, and so described, Buyer can not be compelled to accept delivery of coffee of an entirely different character, even with an allowance, but in this event Seller can no't be compelled to deliver other coffee where good faith on shipper’s part is evidenced by quality of coffee tendered for delivery.
    Should coffee arrive in a damaged condition Buyers are to take the damaged portion at actual graded allowance for the damage.
    Coffee must be actually delivered to within five (5%) per cent more or less of the quantity sold, Seller having the privilege of delivering “ spot ” coffee in accordance with contract, grade or description in place of non-shipments to fulfill contracts, and Buyer the same privilege. This variation in quantity only to be permitted where coffee is sold on a specified plantation brand, but exact quantities specified in the contract must be delivered if sold on description, known standard or type.
    This contract is not contingent upon any other and is to be settled between Buyer and Seller herein mentioned without reference to other contracts covering the same parcel..
    No arrival, no sale, in case of coffees actually shipped but lost in transit. Sold subject to delays caused by wars, revolutions, strikes, pestilences, floods or other unavoidable interruptions, of transportation or cable communication but should any of the above causes be of more than six (6) months duration from the time shipment should be effected, contract void to the same extent.

      Decision of quality and conditions is to be determined by C. E. Bickford & Co., and their decision is binding and final upon both Buyer and Seller.
    Delivery Ex Dock, San Francisco, Cal.
    On Contract No. X 943, 400 bags of coffee were undelivered at the time inventory was taken at the close of 1919.
    Contract No. X 195 was dated November 12, 1919, and provided for the delivery of 1,000 bags of Robusta coffee at 20⅜ cents per pound, f. o. b. San'Francisco. No delivery of such coffee had been made at the time inventory was taken at the close of 1919.
    Contract No. X 928 was dated November 3, 1919, and provided for delivery of 1,000 bags of Robusta coffee at 20 cents per pound, f. o. b. San Francisco. No delivery of such coffee had been made at the time inventory was taken at the close of 1919.
    Contract No. X 950 was dated November 14, 1919, and provided for the delivery of 200 bags of Robusta coffee at 20 cents per pound, f. o. b. San Francisco, “ coffee to be shipped from Orient by steamer or steamers to San Francisco during November/December, 1919.” No delivery of this coffee had been made when the inventory was taken at the close of 1919.
    Each of these contracts was made with a different seller. In trade usage a bag of Robusta coffee is approximately 133 pounds. On December 31, 1919, there remained undelivered 345,800 pounds of said coffee, the contract price of which was $69,991.25, and the market price of which was $60,515. All of such coffee was delivered to the taxpayer in San Francisco during the early part of January, 1920. Only one grade of such coffee entered the Port of San Francisco because of the Pure Food Laws of the United States. The coffee referred to in the contracts complied with such laws.
    On July 1, 1920, taxpayer entered into a contract with the California Packing Corporation for the purchase of canned fruits of various kinds, which contract was as follows, the description of the goods being omitted:
    [Face of contract.]
    CONTRACT OF SALE.
    Canned Goods Department, California Packing Corporation.
    Date, 7/1/20. Confirming Buyers Memo of-
    Sold to Haas Brothers, Buyer-
    Address San Francisco, Calif-
    Destination of Car_
    Routing_
    Broker: Direct-
    Broker’s Address_
    Terms: Regular contract. F. O. B., SF_
    Remarks: 1920 Pack_
    Terms and conditions on reverse side.
    [Description of goods omitted.]

      [Back of contract.]
    CAI IFORNIA CANNED FOODS CONTRACT.
    Effective April 1, 1918.
    Keeommended by Canners’ League of California (as per specifications on reverse side).
    Terms: F. O. B. Pacific Coast rail shipping point cash less one and one-half per cent (1½%), if draft, with documents attached, payable in New York, Chicago or San Francisco exchange, is paid within ten (10) days from date thereof, otherwise net cash in thirty (30) days, unless shipment arrives prior thereto, in which case payment without discount shall be made within three (3) full business days thereafter. Documents against payment.
    Local freight and transfer charges from interior points to point of shipment to be paid by buyer. All local freight, cartage and handling charges for assembling purposes incurred on less than carload lots to be paid by buyer.
    Marine insurance: On shipments via all water route to Atlantic Coast or Gulf Ports, seller to insure for buyer’s account and expense to cover buyer’s cost with ten per cent (10%) added; English form of policy with three per cent (3%) particular average on each package. In seller’s discretion, or at buyer’s request, seller to place war risk insurance for account of buyer.
    Conditions: On account of shipment from different factories, seller reserves the routing of freight. Notwithstanding shipped to seller’s order, goods are at risk of buyer from and after delivery to carrier, and buyer hereby assumes all responsibility for shortage, loss, delay, or damage in transit upon issuance to seller by carrier of clean bill of lading or shipping receipt.
    It is specifically agreed that any route herein specified shall be subject to its being open or available at time of shipment. If after notice by seller, where seller elects to give such notice, buyer does not desire to have shipment made by some route then open or available, or if no route is open or available, at time shipment is ordered, seller may store and insure goods for buyer’s account. If so stored and insured, buyer agrees to pay draft with documents, less one and one-half per cent (1½%) in New York, Chicago or San Francisco exchange within ten (10) days from date of draft. If, upon arrival in San Francisco or other coast common point, pineapple cannot be shipped by any route for any reason or reasons set forth herein, seller shall store and insure goods for buyer’s account and expense, and buyer agrees to pay for said goods, draft with documents, in accordance with the terms herein specified.
    In case of short pack or Government commandeer, requisition or reservation, by reason of which seller is unable to make full delivery of any of the goods specified, delivery shall be prorated.
    If seller shall be unable to perform any or all of its obligations by reason of strike, flood, fire, crop damage, failure of transportation facilities, or for any cause or condition beyond seller’s control, such obligation shall at once terminate and cease.
    Goods to be shipped in seller’s discretion as soon as practicable after packing. If seller elects to ship in cars for several buyers any difference in freight on account of such shipments to be paid by seller. If seller shall elect to withhold shipment at buyer’s request, then the goods unshipped shall be billed and paid for on the following dates, respectively, hereinafter specified:
    Peas — July 1st.
    Asparagus — August 1st.
    Tomatoes or tomato products — November 1st.
    Fruits, fruit products or sundry vegetables — December 31st.
    Hawaiian pineapple — December 31st.
    Conditions on unshipped goods: Buyer agrees to pay for unshipped goods in ten (10) days from date of draft, net cash, with warehouse or storage receipt attached; and seller agrees to store said goods and to insure them in selected insurance companies for buyer’s account against loss, or damage, by fire, for seventy-five per cent (75%) of the invoice value. Buyer shall pay one and one-quarter cents (1½⅜) per ease per month to cover cost of both storage and insurance, fractions of month at full monthly rate, and charges shall accrue from date of warehouse or storage receipt to date of shipment. Seller shall have the right to move and store said goods at buyer’s expense in public warehouse if goods are not ordered out by buyer prior to March 1st following date of billing as above. Local taxes, assessed the first Monday in March of each year, shall be for buyer’s account.
    Seller reserves the right to ship goods unlabeled when delay in receiving buyer’s labels holds back shipment.
    Swells: The goods covered by this, contract are guaranteed by seller against swells until July 1st following the date billed, unless said swells arise from improper handling or storage by carrier or buyer. All claims for swells must be made and bills rendered by buyer on or before said July 1st and swells held subject to seller’s order.
    Claims other than for swells must be presented within ten (10) days from receipt of goods.
    Guarantee: Seller guarantees goods covered by this contract to conform to the requirements of the National Food and Drug Act of June 30, 1906, as amended, except that seller shall be relieved of any liability for misbranding when goods are not shipped under seller’s labels and/or brands.
    This contract shall not be binding upon seller until signed by California Packing Corporation at its principal office in San Francisco. Brokers and salesmen have no authority to waive, change, or add to, any of the terms or conditions specified herein.
    Buyer: Haas Brothers,
    By: A. Meertiisf.
    Seller: California Packing Corporation, By: R. M. Barthold.
    There are four other such contracts, which are identical in terms, except as to the description of the goods and the prices. At the time these contracts were entered into the fruits were not in actual existence, but were to be delivered to the taxpayer or its order during the autumn of 1920. On December 31, 1920, a part of such canned goods remained undelivered. The market price of such undelivered goods on December 31, 1919, was 17,589.53 less than the contract price.
    On December 31, 1920, the California Packing Corporation had on hand a sufficient quantity of the goods covered by such contract to fulfill such contract and all other contracts for such goods outstanding on that date. Such canned fruits were in the warehouses of the California Packing Corporation, arranged in stacks, fruits of the different grades, quantities, and values being kept in separate stacks with no commingling of various quantities or grades in any one stack. The goods called for by taxpayer’s contract, and undelivered on December 31, 1920, had not been separated from other goods of like quantity, grade, and value. The Packing Company charged the taxpayer for storage and insurance on the balance of undelivered goods for the month of December, 1920, which charge was paid by the taxpayer in January, 1921.
    On May 18, 1920, taxpayer entered into contracts with the California Prune & Apricot Growers, Inc., for the purchase of prunes in carload lots. These contracts are nine in number, are on printed forms of the broker, and are identical in terms, except as to the time of shipment of the goods,.which varies from September to November, 1920. The contracts are numbered 12,674 to 12,682, inclusive, and are as follows:
    - [Pace of contract.]
    CALIFORNIA PRUNE AND APRICOT GROWERS, INC.
    California Dried Fruit Contract.
    San Jose, Calif., May 18th, 1920.

    Haas Bros, of San Francisco, Calif., hereinafter called buyer, has this day bought, and California Prune and Apricot Growers, Inc., of San Jose, California, hereinafter called seller, has this day sold the following quantities of California Dried Fruits, as per varieties, style of package, and price named below, and in accordance with the terms and conditions set forth on this contract.
    Destination: San Francisco, Calif.,
    Routing: Delivery routing may be given later.
    Consigned to: Order of Seller.
    Time of Shipment: October-November. S. O.
    1920 Crop.
    One car Load Prunes Sunsweet Brand Assortment as follows:
    110/25 lbs. Boxes 30/40
    440/25 “ “ 40/50
    550/25 “ “ 50/60
    220/25 “ “ 60/70
    330/25 “ “ 70/S0
    330/25 “ “ 80/90
    220/25 “ “ 90/100
    Firm at Seller’s opening prices, said prices guaranteed against Seller’s own decline until January 1st, 1921.
    1920 Boxing Charges.
    Boxing specifications may be changed by buyer provided such changes are received at this office prior to September 1st, 1920.
    Seller reserves the right to substitute a larger percentage of 30/40s to 70/80s for the smaller sizes.
    This contract null and void if not signed and received at this office on or before twenty days from date.
    J. & I. Blum, Inc., Broker.

      [Back of contract.]
    DRIED FRUIT CONTRACT.
    (As per specifications on reverse side.)
    Terms: F. O. B. Pacific Coast Rail Shipping Point. Cash less two percent (2%) if draft is paid within ten (10) days from date thereof, otherwise net cash thirty (30) days after date of draft, unless shipment arrives prior thereto in which ease payment shall be made within three (3) full business days after arrival. Payment to be made against draft with documents attached in New York, Chicago or San Francisco Exchange, or equivalent.
    Examination and approval: Buyer shall have no right of claim nor be entitled to arbitration and contract shall be considered fully complied with on Seller’s part unless claim is made or arbitration demanded within three (3) full business days after arrival of goods or if examination is impossible within that time by reason of goods not being accessible for examination, then within said period after examination becomes possible.
    Routing: Seller shall, where possible, recognize ■ routing named by Buyer, but Seller has option of selecting the initial line. Should Buyer divert goods while in transit without Seller’s consent, Seller shall be relieved of all responsibility for quality and/or condition. Change in routing from rail to water shipment (if requested) is subject to Seller’s confirmation, Buyer assuming freight to and charges at Dock, State Toll, and all unloading and/or loading charges at Port.' On such water shipments and on shipments to be made via Gulf Bines, the provisions of this contract shall be modified and superseded by the terms and conditions contained in the form of contract of the Seller, effective June 2nd, 1919, known as Dried Fruit Association of California Water Shipment Contract; but if at any time within ten (10) days prior to final shipping date it be found impossible by reason of blockade or embargo to ship via Gulf Lines, Seller shall notify Buyer and in the absence of immediate instructions to ship via another route then open or to store goods for Buyer’s account, the Seller shall be privileged to ship by any rail route at current freight rates; should it be found impossible by reason of aforesaid causes to ship all rail, Seller shall then be privileged to store and insure at Buyer’s expense. If goods are shipped all rail the terms and conditions of this contract shall apply; if stored Buyer agrees to pay Seller’s draft at two (2) days’ sight, less two percent (2%) discount, to which shall be attached (in addition to the weight and quality certificates provided by said Water Shipment Contract) Warehouse receipt and Fire Insurance Certificate.
    Responsibility: Notwithstanding shipped to Seller’s order, goods are at risk of Buyer from and after delivery to Carrier, and Buyer hereby assumes responsibility as to shortage, loss, delay or damage in transit upon issuance by Carrier of clean Bill of Lading or shipping receipt. Goods are at Buyer’s risk when delivered at his request to a third party.
    Quality: Good merchantable, unless 'Otherwise specified, and equal to or better than the average of the grade for the section where grown and of the current season at time of shipment. If sold on sample to be equal to or better than sample.
    Separable lots: This contract shall be deemed separable as to all goods sold hereunder and Buyer may not refuse to receive any lot or portion of the goods shipped hereunder for failure of any other lot or portion to comply with the contract, unless the right to so refuse is expressly provided for on the reverse side hereof.

      Weights: No allowance shall be made except for shortage of average weights in excess of one percent (1%) to be ascertained and certified by public weigher upon a weighing for gross of not less than fifty percent (50%) and for tare of not less than two percent (2%) of the shipment. Carton goods — No. 16 to average fifteen (15) ounces net and No. 12, eleven (11) ounces net when packed. All other package goods to conform to established trade custom.
    Specifications: If no assortment is agreed upon at time of sale it is expressly understood that sale is made subject to Seller’s approval of a reasonable assortment specified by Buyer, based on Season’s crop; unless such assortment is reasonable and is specified by Buyer at least thirty (30) days prior to the last day of shipping period, Buyer agrees to accept Seller’s assortment according to Seller’s grading, and unless specifications for packing are furnished prior to said thirty (30) days Seller may ship goods in any standard size packages.
    Liability: If the operations of the Seller shall be prevented or interfered with by exercise of Governmental authority, or by force majeure, embargo, war, civil uprising, fire, strikes, or similar casualty beyond reasonable control of Seller, the Seller shall be excused from performance hereof to the extent that performance of this contract (taking into account all outstanding contracts of the Seller for the delivery of the same class of goods) shall be so prevented or interfered with. Extension of time: Should Seller be obstructed or delayed in the fulfillment of any portion of this contract by any of the aforementioned causes, or the failure of transportation facilities, then the time herein fixed for its fulfillment shall be extended for a period equivalent to the time lost for any or all of the reasons aforesaid, provided notice of such obstruction or delay is given before expiration of period herein fixed for shipment, and provided further that any premium for stipulated shipment be waived by Seller. It is agreed that if by reason of any of the aforementioned causes shipment of any of said goods is not made within sixty (60) days after the time herein specified therefor, this contract shall terminate with respect to any goods not then shipped. Future sales: In the event of destruction of or serious damage to crops after April 15th of the year in which this sale is made and subsequent to the date of this contract, Seller may reduce quantity twenty-five (25%) percent without penalty. If less than seventy-five (75%) percent is tendered, Seller shall pay as damages fifteen (15%) percent of net contract price of shortage below seventy-five (75%) percent unless the California State Commission of Horticulture shall decide the Seller is justified in delivering a smaller percentage because of crop damage. Unless a particular district is specified, the crop of the entire State of the variety of fruit named is to be taken into consideration in determining what is a fair delivery.
    Pool cars: Distribution charges at destination at expense of Buyer. Where goods are sold in less than carload quantities to be included in car for various Buyers to be completed later, and said car is not completed within ten (10) days of expiration of contract time for shipment, Seller may ship goods in cai-to some point nearby to destination and the Buyer shall then pay local freight from such point to final destination.
    Arbitration: Except for the determination to be made by the California State Commission of Horticulture as provided for under sub-heading “ Future Sales,” of liability clause, any dispute arising under this contract shall be immediately submitted to arbitration in either New York, Chicago, San Francisco, Baltimore, Boston, Buffalo, Cincinnati, Cleveland, Denver, Detroit, Indianapolis, Kansas City, Minneapolis, New Orleans, Oklahoma City, Omaha, Peoria, Philadelphia, Pittsburgh, Richmond, St, Louis, Seattle, St. Paul, or Toledo. The particular City in which arbitration is to be held shall, in the absence of agreement by tbe parties, be in tbe city wbieb is nearest to destination of shipment. Arbitrations in New York shall be held before tbe Dried Fruit Association of New York; in Chicago, before tbe Dried and Canned Foods Association; in San Francisco, before the Dried Fruit Association of California; in tbe remaining cities, by tbe joint arbitration boards appointed by tbe National Wholesale Grocers Association and tbe National Canned Goods and Dried Fruit Brokers’ Association. A written statement of facts and anything else that may have proper bearing on the case, together with written argument thereon, may be presented to the Secretary of the Association or the Chairman of the Arbitration Board, as the case may be, and shall by him be submitted in its entirety to the arbitrators, but no oral presentation shall be made unless the parties agree thereto and same is permitted or requested by the arbitrators. If the decision is in favor of Seller, invoice, if unpaid shall become due and payable at once. If decision is against Seller arbitrators shall determine amount of allowance which, if draft has been paid, shall be immediately refunded by Seller and if draft has not been paid, shall be deducted from invoice and the correct amount paid immediately. If arbitrators find bad faith or gross carelessness on the part of Seller they may either allow rejection, award damages therefor or require another tender in compliance with this contract. Arbitration shall be held upon not less than one (1%) percent unbroken and unopened packages. The arbitrators shall assess costs of arbitration and the decision shall be final and binding on both parties who hereby agree to comply therewith. Failure of Seller to ship or Buyer to accept shall be considered a dispute to be settled by arbitration. Bach party hereby agrees that in the event of his failure to comply with the award of the arbitrators within ten (10) days of date of such award, an action in court shall lie against him, based upon such award.
    No unimportant variation in the performance of this contract shall constitute basis for a claim.
    Brokers or salesmen not authorized to sign this contract nor change terms or wording without written authorization by Seller.
    This contract not assignable without written consent of Seller.
    Buyer: Haas Bros.
    By: W. Hutshimek.
    (Seller) : California Prune & Apricot Growers, Ino.
    By: H. G. Goykendall.
    The seller’s opening prices, referred to in the contract, were fixed on August 11, 1920, as follows :
    SUNSWEET BRAND.
    20/30 25⅜ flat per pound bulk (Boxing to be added).
    30/40 170 Bulk basis.
    40/50 15-1/20 Bulk basis.
    50/60 130 Bulk basis.
    60/70 11-1/20 Bulk basis.
    70/80 10-1/20 Bulk basis.
    80/90 9-1/20 Bulk basis.
    90/100 9-1/20 Bulk basis.
    First half September shipment, one-half cent premium.
    Last hálf September shipment, one-quarter cent premium.

      On December 31, 1920, 452,500 pounds of such, prunes remained undelivered. The market price on December 31, 1920, of such undelivered prunes was $23,825.85 less than the contract price.
    The California Prune & Apricot Growers, Inc., is a cooperative association of 11,000 producers of these fruits, organized as a corporation under the laws of California. Under the contracts entered into between the corporation and the growers, the corporation agrees to purchase and the grower agrees to sell all of the crops of prunes to be produced on the grower’s lands during certain years named, the association agrees to use its best efforts to resell said fruits, and the grower shares in the profits obtained from the sale of his prunes and the prunes of' other members of the association. The contract provides for the intermingling of the fruits produced by various growers. At the time the contracts were entered into the prunes had not ripened or been delivered by the growers to the corporation. Such delivery was made to the corporation in September and October, and at all times after October 31, 1920, the California Prune & Apricot Growers, Inc., had on hand sufficient prunes to fill its contract with the taxpayer and all other contracts. On October 27, 1920, the corporation telegraphed taxpayer stating “We must have authority from you to delay shipment on the balance at once or we will have shipped the other three cars to you at San Francisco immediately.” On December 15, 1920, the association telegraphed its San Francisco agents stating that if shipping instructions were not received immediately they would draw on sixty-day trade acceptances with warehouse receipts, this telegram being communicated immediately to the taxpayer. On December 22, 1920, the association wrote taxpayer as follows:
    We are under quite a big expense in carrying all of our prunes, and like everybody else, in need of money to pay our growers. If you can see your way clear to ship, say two cars of your prunes this month, we can carry the balance for another thirty days * * ⅝. We would appreciate an order for at least two cars to be shipped out this month.
    On October 28,1920, taxpayer and the association had entered into an agreement, reading in part as follows:
    In consideration of the Seller agreeing to use its best efforts in deferring shipments until November 30th, 1920, the Buyer hereby agrees that the time of shipment under Contract No. 14976-9-80-12673-4-5-6-7-8-9-80-81 & 82 may be extended to include November, 1920; and'that the Buyer will accept delivery of all fruits so shipped up to and including the month of November, 1920, and will pay for the same in accordance with the terms of said contract at the opening prices of California Prune & Apricot Growers, Inc., and any other prices specified on said contracts.
    On February 25, 1921, 412,500 pounds of such primes remained undelivered and on that date a settlement was reached releasing taxpayer from taking such prunes in consideration of a paym'ent by taxpayer of $22,000.
    In November, 1920, taxpayer entered into two contracts with the California Associated Raisin Co. for the purchase of 7,200 25-pound cases of the 1920 crop of Thompson seedless raisins, the contracts being in form as follows:
    CALIFORNIA DRIED FRUIT CONTRACT. ,
    California Associated Raisin Go., Fresno, Cal.

      November 9, 1920.

    Haas Bros, of San Francisco, hereinafter called, buyer, has bought, and California Associated Raisin Co., of Fresno, California, hereinafter called seller, has this day sold the following quantities of California Dried Fruits, as per varieties, style of package, and price named below, and on terms and conditions stated on reverse side of this contract.
    Destination: San Francisco.
    Notify: Haas Bros.
    Time of Shipment: June — buyer has option of shipping earlier.

      No. Casos Sine Grade and Variety Crop Brand Price

    5000 25-lb. Recleaned Thompsons (Unbleached) 1920 Sun-Maid 21⅞⅝ lb.
    These raisins for shipment to San Francisco Fob common shipping point California.
    ⅝⅞ per lb added over selling price for carrying charges from March to June.
    ⅛0 carrying charge if shipped January, February no charge for November-December shipments.
    (Seller) California Associated Raisin Co.
    By: E. H. Brower.
    (Buyer) Haas Bros.
    This contract covered by Broker’s letter of 11/9.
    Broker: O’Malley Collins Co.
    [The terms and conditions on the reverse side of this contract are identical with the terms and conditions of the Prune Contract above referred to.)
    On December 31, 1920, the entire 180,000 pounds of raisins remained undelivered. The market price on that date of the undelivered raisins was $34,200. The contract price was $37,800.
    In taking its inventories for 1919 taxpayer did not include such undelivered coffee. In taking its inventories for 1920 taxpayer did not include such undelivered canned goods, prunes, and raisins.
    No debit was made to merchandise for any goods undelivered, nor was there a credit to notes, accounts, or bills payable. It did make upon its books entries setting up as losses the difference between the contract price of such undelivered goods and the market price on December 31 of the respective years. It claimed such losses upon its income-tax returns for such years. The amounts so claimed were disallowed by the Commissioner in computing the deficiency involved in this appeal.

      DECISION.
    The determination of the Commissioner is approved.
   OPINION.

Phillips:

During the year 1919 taxpayer entered into contracts-for the purchase of coffee. On December 31, 1919, a portion of each of these contracts remained undelivered. The market price of the coffee at that time was less than the cost and taxpayer set up on its books as a loss, and deducted in its income-tax returns as a loss, the difference between the contract price and the market price on December 31, 1919. In 1920 taxpayer entered into contracts for the purchase of canned goods, prunes, and raisins, a portion of each of which was undelivered on December 31, 1920, and similar entries were made on its books and claimed in its tax return for that year.

Taxpayer claims that title to such goods had passed to it on December 31 of the respective years; that such goods should, therefore, have been included in its closing inventories for such years at the market price, which was lower than cost, and the contract price should have been set up as an account payable. It is taxpayer’s contention that the entries made upon its books accomplished the same results.

Section 203 of the Revenue Act of 1918 provides:

That whenever in the opinion of the Commissioner the -use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

Pursuant to such provision of law the Commissioner adopted regulations providing for the valuation of inventories at (a) cost, or (b) cost or market, whichever is lower. The taxpayer valued its inventories upon the second basis. The Commissioner further provided in his regulations (Regulations 45, art. 1581, as amended March 3, 1922, by T. D. 3296) :

A purchaser should include in inventory merchandise purchased, title to which has passed to him, although such merchandise is in transit or for other reasons has not been reduced to physical possession, but should not include goods ordered for future delivery transfer of title to which had not yet been effected.

Assuming, as we shall, that such regulations are reasonable and within the scope of the authority vested in the Commissioner, the sole question for determination in this appeal is whether title to the property covered by the contracts had passed to the taxpayer on December 31 of the respective years. Each of the contracts was closed in California and is governed by the laws of that State.

Section 1140 of the California Civil Code provides:

Transfer of title under sale: The title to personal property, sold or exchanged, passes to the buyer whenever the parties agree upon a present transfer, and the thing itself is identified, whether it is separated from other things or not.

This section has been the subject of interpretation by the California courts in several cases. In Hamilton v. Klinke, 42 Cal. App. 426, 183 Pac. 675, and in Jones v. California Growers & Shippers, Inc., 182 Cal. 777, 190 Pac. 172, it was held that contracts of sale of crops growing or to be grown upon certain identified property passed title to the purchaser. In Blackwood v. Cutting Packing Co., 76 Cal. 212, 18 Pac. 248, however, a somewhat different situation existed and a different result was reached. In that case the agreement between the parties was witnessed by an instrument signed by the defendant reading:

Sold Cutting Packing Company my crop of apricots, at Haywards, for the seasons of 1882-83-84-85-86, not less than -75 tons, and not exceeding 200 tons, per annum, at 3 cents per pound, f. o. b. Haywards.

The only question before the court was whether or not title had passed prior to delivery of the crop. The court, in the course of its opinion, says:

The portion of the crop to be delivered had not been identified. What was contracted for was to be “ not JSss than 75 tons, and not exceeding 200 tons per annum.” Possibly it might be argued that, if any crop should turn out to be less than 75 tons, the buyer would not be bound to accept any portion of it. It is not necessary to consider that question. It certainly cannot be maintained that the same result would follow if the crop of any year should turn out to be more than 200 tons. At the time of the formation of the contract (to which the inquiry must relate) it could not be known what number of tons would be produced.

After quoting section 1140 of the Civil Code, the court goes on to say:

This section does not dispense with identification. On the contrary, it requires it. It only dispenses with segregation when the property is otherwise identified. Therefore, where the identification consists in the segregation, weighing or measuring, they are still necessary. And the present case was of the latter character. As against these controlling features of the transaction, the plaintiff has only the language of the instrument. The term “ sold,” it is said, indicates a consummated sale. But this word is not conclusive.

The court holds that in the case before it there was only a contract to sell and not a sale.

It is a recognized principle of law that no title passes unless the goods which are the subject of the sale have been identified either as the specific goods sold or as part of a specified mass of like goods. The section of the Civil Code upon which taxpayer relies requires identification of the thing sold, although it does not require separation from other things. The rule is laid down in 35 Cyc. 291, as follows:

The subject-matter of the sale may be goods or articles which, although in existence at the date of the contract, have not been identified as the particular goods sold. In such case the contract is executory and the property in the goods does not pass until the goods have been identified and appropriated to the contract.

And in 35 Cyc. 295, the statement is made:

The contract of sale may relate to goods of a particular description but not part of a specific mass, as when goods are ordered from a dealer. Under such contracts the property in the goods does not pass to the buyer until there has been appropriation of specific goods to the contract.

Substantially the same rule is laid down in 24 B,. C. L. 23. section 285.

In the case of the coffee contracts entered into by the taxpayer in November, 1919, it appears that these contracts were made with four different sellers and provided for the delivery of coffee to be shipped from source by steamer or steamers to San Francisco during November or December, 1919. The only description of the coffee sold was by grade. It is not described as coffee in a particular warehouse or on a particular steamer. When the coffee which was delivered in January, 1920, was shipped, it was not consigned to the taxpayer, but to the respective sellers, and there is nothing in the testimony to show that there was, prior to December 31, 1919, any appropriation of any particular coffee, or of a portion of any particular shipment, to the fulfillment of taxpayer’s contract. It is conceivable, and indeed quite probable, that at least one of the sellers may at that date have had two or more shipments on the high seas bound for San Francisco, from either of which he could have fulfilled his obligations to the taxpayer. Until there was some identification of the coffee covered by such contracts, which would enable taxpayer to claim it as its property, no title could pass.

With respect to the contract for the purchase of prunes, taxpayer claims there was a present sale of growing crops. The California Prune & Apricot Growers, Inc., with which the contract was made, was a cooperative organization having contracts with 11,000 growers for their crops of prunes. Under the doctrine laid down by the California courts in Hamilton v. Klinke and Jones v. California Growers & Shippers, Inc., supra, it would seem to follow that title to such crops had passed to the California Prune & Apricot Growers, Inc., at the time of its contract with taxpayer. Taxpayer’s contract, however, did not call for the prunes to be raised on any designated land or for any portion thereof. The seller was at liberty to fulfill the contract with prunes grown upon any or all of the 11,000 ranches. It seems clear that, at the time the contract was made, at least, no title passed to the taxpayer. Blackwood v. Cutting Packing Co., supra. Nor do we believe that title passed-when the prunes came into the hands of the seller, for there does not appear at any time to have been any identification of taxpayer’s goods, either as a separate mass or as a part of any designated mass. It is true that different qualities and sizes were separated into different bins in the warehouse of the seller and that the seller had on hand on December 31, 1920, sufficient prunes to fill all its contracts. Such prunes, however, were stored in the various warehouses of the seller and delivery might have been made from any of these various warehouses. Assume, for example, that one of the warehouses had been destroyed. Would it have been possible for either the taxpayer or the California Prune & Apricot Growers, Inc., to have successfully contended that the prunes destroyed by fire were the property of the taxpayer or that a certain percentage of them belonged to the taxpayer? In the absence of any sufficient identification, it can not be said that title has passed.

The same situation existed with reference to the canned goods purchased under the contracts with the California Packing Corporation and remaining undelivered on December 31, 1920. It further appears that the seller required taxpayer to pay storage and insurance on the canned goods after December 1, 1920. There is nothing, however, to show that the California Packing Corporation at any time actually set aside the goods to be delivered to the taxpayer or even designated the place at which these goods were stored. The storage and insurance charges appear to be in the nature of damages imposed upon the taxpayer for its failure to take the goods in accordance with its contracts. There is an absence of any proof that the insurance charged to the taxpayer was placed with the insurance companies upon any particular goods, or upon a portion of any particular goods.

So far as the raisin contracts are concerned, it is sufficient to say that the only proof was that the contract was made, that the raisins were not delivered, and that the market price on December 31, 1920, was less than the contract price. It does .not appear that the California Associated Raisin Co. had on hand on December 31, 1920, sufficient raisins to fulfill the contract, but, even though we should assume that such was the case, there is an utter absence of any proof of identification of the properties sold, except by a description of the grade, variety, and crop to be delivered.

The loss claimed by the taxpayer can not be sustained on the ' ground that title passed. This being so, the entry made by the taxpayer was no more than a reserve for anticipated losses, which this Board has decided can not be allowed as a deduction. Appeal of Morrison-Ricker Mfg. Co., 2 B. T. A. 1008.