of the principal of the Trust Estate as in the sole judgment of the Trustees shall seem advisable, but only for the sole use and benefit of said wife, such child, or children, or such grandchild or grandchildren. The provisions of this clause are intended primarily as a precaution against serious illness, misfortune, or other emergency or other unusual condition affecting said wife or said children or said grandchildren, and for the children of MATTHEW LAHTI during the period of their education or at the time or [sic] their marriage, but the foregoing enumeration is to serve only as a guide to the Trustees and the decision of the Trustees as to the desirability of any such payments shall be binding and conclusive upon all persons interested in the trusts hereby created. No part of the principal of the trust was ever withdrawn until July 7, 1942. The petitioner, in 1934, made a gift of $40,000 to his wife and also transferred $35,250 to the trust mentioned in the preceding paragraph. Dorothy, in that same year, transferred $50,412.50 to the same trust. They both filed gift tax returns reporting those transfers. The petitioner and Dorothy separated and were divorced in 1942. They and others at their instance entered into several agreements on or about July 1, 1942. Those agreements provided, inter alia, that Dorothy should have general custody of the minor son, Abbott, and should also provide most of his support. A trust was created on July 1, 1942, of which the petitioner and the Cambridge Trust Co. were trustees. Dorothy was to have the income of that trust for life and after her death Abbott was to be the beneficiary. Dorothy could demand $1,000 annually of the principal and the trustees were authorized to pay her an additional amount of principal, not exceeding $1,500 in any one year, if they deemed it necessary for her welfare. Any remaining corpus of the trust was to be returned to the petitioner and his heirs if Abbott died intestate and did not leave issue or a widow surviving him. The petitioner and Dorothy agreed that the arrangements made on July 1, 1942, would be in lieu of all obligations for support and would be in full, complete, and final settlement of all claims of each in the property of the other growing out of their marriage. Their residence was to be sold and $10,000 of the proceeds was to be paid into the trust. The residence was sold and $7,000 of the proceeds was paid into the trust in 1942 and the remaining $3,000 was paid to the trust in 1943. The trustees of the trust created on June 1, 1934, transferred $40,000 of the principal of that trust on July 7, 1942, to the trustees of the July 1, 1942, trust. Dorothy was granted a divorce on July 8, 1942, by a court of the Commonwealth of Massachusetts. The court decreed that the custody and support of Abbott were to be in accordance with a stipulation of the parties filed with the court. The stipulation was in accordance with the agreement which Dorothy and the petitioner entered into on July 1, 1942. All of the trusts, transfers, and agreements of July 1942 were made in connection with the divorce. and were conditioned upon an entry of an absolute decree of divorce. The petitioner contends that the $40,000 which the trustees of the 1934 trust transferred to the trustees of the 1942 trust did not subject him to any gift tax. Gift taxes were paid in connection with the transfers of property to that trust in 1934 and no contention is made by the respondent that completed gifts were not made at that time. As a matter of fact, Dorothy transferred more property to that trust than did the petitioner. The 1934 trust instrument gave the trustees authority to apply principal of that trust to the use of Dorothy to the extent that it seemed advisable to them. The petitioner contends that the transfer of the $40,000 was made under that authority. That contention seems to be sound. No other authority for the transfer appears. That transfer merely carried out one of the provisions of the 1934 trust and did not subject the petitioner to gift tax in 1942. One of the agreements entered into by the petitioner and Dorothy on July 1, 1942, was that she would join in a deed for the sale of their residence provided that $10,000 of the proceeds would be placed in the trust of which she was a life beneficiary and in which her minor child had a remainder interest. Seven thousand dollars of the proceeds of the sale of the residence was placed in the trust in 1942. The transactions between Dorothy and the petitioner in July 1942 were obviously arranged at arm's length between two contracting parties with adverse interests. The placing of the $7,000 of the proceeds of the sale of the residence in the trust for Dorothy was not done with any donative intent upon the part of the petitioner and did not subject him to gift tax. Herbert Jones, 1 T. C. 1207; Edmund C. Converse, 5 T. C. 1014. Reviewed by the Court. TYSON, J., dissents. Decision will be entered under Rule 50. ARNOLD J., dissenting: The doctrine announced in Herbert Jones, 1 T. C. 1207, and followed here, has been repudiated by the Supreme Court in Commissioner v. Wemyss, 324 U. S. 303, and Merrill v. Fahs, 324 U. S. 308, and by the First Circuit in Commissioner v. Bristol, 121 Fed. (2d) 129, reversing 42 B. T. A. 263. For this and other reasons, more fully set forth in my dissenting opinion in Edmund C. Converse, 5 T. C. 1014, I respectfully note my dissent to the conclusion reached by the majority. TURNER, J., agrees with this dissent. 71761647- -2 VICTOR B. GILBERT, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. JOSEPH E. GILBERT, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Docket Nos. 3746, 5866. Promulgated January 9, 1946. Held, on the facts, that the notes involved were not "in regis- Daniel Katz, Esq., for the petitioners. OPINION. DISNEY, Judge: These cases, duly consolidated, involve income taxes. Deficiencies were determined by the Commissioner in Docket No. 5866, Joseph E. Gilbert, petitioner, in the amounts of $6,552.90, $6,097.93, and $13,921.06, for the calendar years 1938, 1939, and 1940, respectively. An amended answer filed by the Commissioner asks that such deficiencies be increased by $33,415.89, $32,254.33, and $43,916.63, respectively, for the years involved. In Docket No. 3746, Victor B. Gilbert, petitioner, involving the calendar year 1940, deficiency was determined in the amount of $439.25. No increase of deficiency is asked in that case. The principal question involved in both cases is whether certain amounts received are taxable in their entirety as ordinary income, or only in part, as capital gain. A stipulation of facts was filed, and certain income tax returns and a report thereon were introduced. We find the facts as stipulated. So far as material, they may be summarized as follows: The petitioners are individuals and filed their income tax returns for the taxable years with the collector for the third district of New York In 1927 Joseph E. Gilbert owned certain property in the city of New York in which he had a cost basis of $4,100,000, and in that year he sold the property for a price of $4,750,000. The purchase price, however, was represented by $2,100,000 first mortgage to which the purchaser took subject, $1,000,000 in cash, and two bonds and two mortgages totaling $1,650,000, but at that date having a fair market value of $1,000,000. Joseph E. Gilbert therefore received for his property exactly the amount of his base, $4,100,000. He held, however, the two notes and mortgages with a total face value of $1,650,000. Later in 1930 and 1932 he assigned to petitioner Victor B. Gilbert a $202,500 face value interest in the two notes and mortgages and assigned to other persons participating interests therein to the extent of $337,500 face value, leaving in himself an interest of the face value of $1,110,000. That interest, however, had a cost basis of $672,800; and petitioner Victor B. Gilbert's cost basis in the $202,500 interest conveyed to him was $122,700. The obligor on the two notes and mortgages made the following payments to Joseph E. Gilbert: $800,000 in 1933, $100,000 in 1938, $100,000 in 1939, and $110,000 in 1940, the last payment being in full satisfaction of Joseph E. Gilbert's participating interest. The obligor also paid petitioner Victor B. Gilbert $9,375 in partial satisfaction of his participating interest. The two bonds and mortgages upon which the above payments were made were at all times pertinent entered, noted, and carried in the books, records, and accounts of the obligor corporation, and both mortgages were, on September 29, 1927, recorded in the office of the Register of the County of New York, State of New York. Petitioner Joseph E. Gilbert, for the year 1933 and for the taxable years here involved, treated a pro rata portion of the amounts received by him as recovery of cost and reported the remainder of the amounts received as long term capital gain. For the year 1940 petitioner Victor B. Gilbert did the same. Petitioner Joseph E. Gilbert, in his income tax returns for the year 1933 and for the taxable years, reported income taxable as long term capital gain as follows: In 1933, $315,151.52; in 1938, $39,370.58; in 1939, $39,370.44; and in 1940, $43,307.46. For the year 1940 petitioner Victor B. Gilbert reported as long term capital gain $3,694.50. In addition to the stipulated facts above epitomized, we further find that petitioner Joseph E. Gilbert's treatment in his income tax return of the amounts received by him in 1933 was not questioned by the Commissioner. The petitioners, as indicated by their returns, contend that the amounts above indicated were properly returned by them as long term capital gain. They base their contention upon section 117 (f) of the Internal Revenue Code, taking the view that within the text of that section the amounts reported by them were received upon the retirement of notes "with interest coupons or in regis 1 SEC. 117. CAPITAL GAINS AND LOSSES. (f) RETIREMENT OF BONDS, ETC.-For the purposes of this chapter, amounts received by the holder upon the retirement of bonds, debentures, notes, or certificates or other evidences of indebtedness issued by any corporation (including those issued by a government or political subdivision thereof), with interest coupons or in registered form, shall be considered as amounts received in exchange therefor. tered form," and that therefore the amounts "shall be considered as amounts received in exchange" for such notes, so that the amounts received constituted capital gain. There is no argument as to the length of time the notes were held. In our opinion the petitioners' views may not be sustained, for there is no contention that the notes carried interest coupons and nothing in the record indicates that they were in registered form, within the meaning of the statutory expression. On this question the respondent relies primarily upon Gerard v. Helvering, 120 Fed. (2d) 235, while the petitioner relies equally firmly upon Stoddard v. Commissioner, 141 Fed. (2d) 76, from the same Circuit Court of Appeals, the Second Circuit. In the Gerard case, the court construed the statutory expression "in registered form," and in our opinion very pertinently and correctly defined it as follows: Since the bond had no coupons she cannot succeed unless it was “in registered form,” a phrase whose meaning in this context is entirely plain. It refers to the common practice in the issuance of corporate bonds which allows the holder of one or more coupon bonds of a series the option to surrender them and have one bond "registered" upon the books of the obligor or of a transfer agent; or the holder may subscribe for such a bond in the first place. The purpose is to protect the holder by making invalid unregistered transfers, and the bond always so provides upon its face. The mere fact that the debtor keeps books of account upon which the debt appears is altogether immaterial; to construe the statute as the taxpayer asks would in effect make the payment of any corporate debt-"evidence of indebtedness”—a "retirement" of "capital assets," for almost all corporations keep books. It is scarcely necessary to labor the answer to so plain a misinterpretation. It will be noted that under the above language petitioners' reliance upon the fact that the obligations here in question were at all times entered, noted, and carried in the books, records, and accounts of the obligor corporation can not stand; nor is record in the county register compliance with the statute. Petitioners, however, strongly urge that the Gerard case may not be reconciled with the Stoddard case, and that the latter in effect overrules the former. With this view we can not agree. Careful examination of the Stoddard case discloses that the court did not consider any question as to the meaning of the expression "in registered form." Though it is true that the court did state that "the amount received in retirement of a note is to be considered as received in exchange therefor," that this language was used only with reference to the statutory expression "retirement" is clear from the fact that immediately after the above language it is stated, "And this note was retired within the meaning of above subdivision (f)." Not only so, but the court immediately |