Court recognized "his disability to make a gift of the corpus to others during the term of the trust." It has been held in the present case that the profits in question were taxable to the grantor under 22 (a), but the Clifford case is not authority for the proposition that, by allowing the profits to remain the property of the trusts, the grantor thereby made a gift of those profits to the trusts. When we examine this transaction from the standpoint of gift taxes as opposed to income taxes, we find there is no statute such as 22 (a) which has a broad sweep and which requires us to look behind the legal situation to some other in order to impose a gift tax. Also, it must be remembered that this is not a revocable trust in which the grantor, seeing a potential gain which he could capture for himself by revoking, may be said to have made a gift when he fails to revoke. Nor is it a trust where the grantor has retained the power to determine directly or indirectly which of two or more beneficiaries may receive the income, and finally allowing it to go one way, might be said to have made a gift at that time. We must hold in this case that legal title to the amounts in question was never in the petitioner and was never transferred by him to the trusts, either in the taxable years or in any other years. Those profits were impressed with a trust when they first came into existence and the trust did not merely attach after they had come into existence. It is our understanding that the deficiencies result entirely from the action of the Commissioner in including in taxable gifts the gains and profits from trading on margin discussed above, and that if these amounts are not taxable gifts there is no deficiency for any year and, consequently, there can be no addition for failure to file returns. Reviewed by the Court. Decision will be entered for the petitioner. BLACK, J., dissenting: It seems clear enough that the gift tax is imposed in the year when the gift becomes complete. Burnet v. Guggenheim, 288 U. S. 280. In the instant case the petitioner and his wife in 1922 created the Copley trust, which was irrevocable, for the benefit of their three children. The trust was to consist of a trading account, to be operated under the direction of petitioner. No property was transferred to the trust in 1922. No gift tax law was in effect in 1922, but if there had been one in effect at that time no gift tax could have been imposed upon petitioner and his wife upon the creation of these trading accounts because any gifts thus made, from the point of view of substance, were inchoate and imperfect. It was only in later years when petitioner actually operated these trading accounts and they ripened into actual fruit represented by large profits that the inchoate and imperfect gifts made back in 1922 became complete. It seems to me that the court in Hogle v. Commissioner, 132 Fed. (2d) 66, correctly characterized the fruits which arose from the operation of these margin accounts in the following language: * The income thus created and the profits thus realized were not merely income accruing from the corpus of the Trust or from capital gains realized from disposition of corpus, but were profits earned through trading on margins involving the exercise of personal skill and judgment of Hogle, and were in substance personal earnings of Hogle. The amount of trading on margins which Hogle was to carry on for the Trust was wholly in his discretion. He could trade little or much or not at all for the benefit of the Trust as he saw fit. Thus, he exercised practical control over what portion of income from his personal efforts in trading on margins should accrue to the Trust. Hogle allocated to the Trust in each of the taxable years in question such portion of his personal efforts in trading on margins as he saw fit. In substance, he gave to the Trust in each of those years the profits derived from a designated portion of his individual efforts. It amounted in each of those years to a voluntary assignment of a portion of his personal earnings. * * It is true, of course, that the foregoing language of the court was used with reference to the imposition of the income tax under section 22 (a) and would not necessarily control the incidence of the gift tax. However, I think it correctly characterizes what was done for the purpose of the imposition of the gift tax as well as that of the income tax. The majority opinion in the instant case lays much stress on the fact that, once the profits were earned from the operation of the margin accounts by petitioner, they belonged to the trusts and could not be recalled nor deflected in any manner by petitioner. That is undoubtedly true, but it is, in my opinion, no answer to the issue that the gifts of the earnings in these margin accounts were not complete until the respective years when such profits were earned. The court in Hogle v. Commissioner, supra, took note of the fact that it was not until the years that earnings from the margin accounts were realized that they fell into corpus. On that point the court said: On the other hand, after the earnings which arose from trading on margins passed to the trust they became part of the corpus of the trust and were no longer within Hogle's control. Once they fell into corpus, the rights of the beneficiaries thereto and to the income therefrom were irrevocable. * In considering the issue which we have here for decision, it should be borne in mind that the Commissioner is making no contention that the earnings of the trust corpus, as such, such as interest and dividends, were the subject of gifts in any of the years which we have before us. All that the Commissioner seeks to tax as being the subjects of gifts in each of the taxable years are the earnings from these margin accounts, and in this, I think, he is correct for reasons I have already endeavored to explain. What I have said with reference to the Copley trust, created in 1922, seems to be equally applicable to the Three trust, created in 1932, and there is no necessity for repetition. For the reasons above stated, I respectfully dissent from the majority opinion. LEECH, HILL, KERN, and OPPER, JJ., agree with this dissent. BELLA HOMMEL, PETITIONER, v. COMMISSIONER OF INTERNAL Docket No. 7501. Promulgated October 17, 1946. Separate agreements under which each of her four children agreed A. Leo Weil, Jr., Esq., for the petitioner. Respondent determined a deficiency in income tax in the amount of $2,261.55 against petitioner for the taxable year 1941. On December 9 of that year the petitioner transferred certain securities to each of her four children in exchange for their separate written promises to pay the petitioner an annuity for her lifetime. Respondent treated this transaction as taxable under section 111 (a) and (b) of the Internal Revenue Code, by ascribing a "fair market value" of one-fourth of the aggregate fair market value of all of the securities at the time of the transfer, to the promises of each of the four children. In addition, in computing the deficiency, respondent broke down each of the four contracts and treated the transfer of each security therein as being a separate transaction and, in so doing, determined that losses were sustained on some of such separate transfers and thus to be disregarded under section 24 (b) of the code, while on others a gain was realized and so taxable under section 111 (b), supra. Petitioner contests the propriety of both of these actions, thus raising the only two issues for decision. FINDINGS OF FACT. The petitioner filed her return for the taxable year 1941 with the collector of internal revenue for the twenty-third district of Pennsylvania, at Pittsburgh, Pennsylvania. On December 9, 1941, the petitioner transferred to each of her four children certain securities, in consideration of each of the four children agreeing to pay to the petitioner during her life the annual sum of $2,132, commencing with the year 1942. A separate annuity agreement was thereupon entered into between petitioner and each of her four children, and the securities transferred to each of the children were set forth on exhibits attached to each of the annuity agreements. The amount of the annuity payable by each of the children, as provided in their respective annuity agreements, was determined on the basis of the annuity payment offered by companies engaged in the business of writing annuity contracts. At the time of the execution of all of these agreements, each of the four children of petitioner who were parties thereto was the possessor of property of his own and had an independent income. Under the terms of the annuity agreements, the agreement was to remain in full force and effect during the lifetime of the petitioner and, during her lifetime, was binding on the heirs, executors, administrators, and assigns of the petitioner's four children. No payments were due or paid to petitioner in 1941, pursuant to the terms of the annuity agreements, the first payment under each agreement being due and payable in 1942. Pursuant to the terms of the agreements, petitioner received the sum of $2,132 from each of her four children in 1942, or total receipts of $8,528 in that year. The cost or other basis to petitioner of the securities exchanged for the respective annuity contracts was $102,223.78, and these securities had a total fair market value of $96,768.52 as of December 9, 1941. The fair market value of the securities transferred to each child under each annuity agreement was approximately $24,192.13. Respondent treated the transaction as a sale by petitioner of the several specified securities to each of her four children. In so doing he disallowed all losses, under section 24 (b) of the code, but recognized short term capital gains in the amount of $172 and long term capital gains in the amount of $5,076.98. OPINION. LEECH, Judge: Since both parties have obviously assumed the fact, we also assume from the record, as an entirety, that petitioner was on the cash basis. Thus, if the transaction is to be treated as being a sale of securities, as both parties have done, since petitioner received no cash therefrom in the taxable year, her gain must be limited to the amount by which the fair market value of the annuity contracts when received exceeded her basis for the securities sold. Sec. 111 (a) and (b), I. R. C. That basis to petitioner was $102, 223.78. The obligors on the annuity contracts were all individuals. They were not "a sound insurance company." But the terms of the annuity agreements were computed on the same basis as similar contracts of companies in the business of writing annuity contracts. The then fair market value of the securities transferred for the annuities was less than the basis of the securities to petitioner, by about $6,000. Petitioner argues, in effect, that when she received the annuity contracts in the taxable year, they were without fair market value as a matter of law. Whether this is so, we do not decide. In any event under the present circumstances, we think, such fair market value, as a matter of fact, did not exceed her basis for the securities she exchanged for the annuities. See J. Darsie Lloyd, 33 B. T. A. 903; Frank C. Deering, 40 B. T. A. 984; Burnet v. Logan, 283 U. S. 404; Bedell v. Commissioner, 30 Fed. (2d) 622; Evans v. Rothensies, 114 Fed. (2d) 958; Cassatt v. Commissioner, 137 Fed. (2d) 745. And no taxable gain resulted. On the other hand, if, despite the treatment accorded these agreements by both parties, the transaction be considered a purchase of an annuity by petitioner, the same conclusion must follow, since petitioner received nothing from the contracts in the taxable year. Sec. 22 (b) (2), I. R. C.; Frank C. Deering, supra. Respondent is reversed. Decision will be entered for the petitioner. LOUISIANA DELTA HARDWOOD LUMBER COMPANY, INC., PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Docket No. 8006. Promulgated October 21, 1946. 1. Petitioner had a net operating loss in 1940. For 1941 petitioner took a deduction for percentage depletion. Since there was no allowable cost depletion, the percentage depletion so taken was in its entirety in excess of any allowable cost depletion. Held, in converting the net operating loss carry-over from 1940 into a net operating loss deduction for 1941, under section 122 (c) of the Internal Revenue Code, the carry-over from 1940 must be reduced by an amount equivalent to the deduction taken by petitioner in 1941 for percentage depletion. 2. Held, under the facts, that petitioner can deduct for the calendar year 1941 only the capital stock tax which accrued July 1, 1941, and can not for deduction purposes treat the capital stock tax on a monthly accrual basis. |