ceeding virtually indistinguishable from David Small, supra. Income attributable to the period subsequent to the amendments and not actually expended for support of the beneficiaries we accordingly view as improperly charged to petitioner.

Respondent denies the effectiveness of the amendments, suggesting that the beneficiaries would approve any prospective dealing with the trust. But here more than their bare consent is required. The decision is committed to a competent court, which we can not suppose, particularly in the case of minors, would surrender its independent judgment to an acquiescence given improvidently or as the result of parental influence.

Nor does the plea of res judicata reach this aspect of the controversy. The amendments constituted such a subsequent change in the operative facts as to render ineffectual any prior adjudication. We are now considering the effect of differently constituted trusts. The "right, question or fact" to be decided, as well as the claim or demand, is no longer the same and the previous decision can not foreclose an independent consideration of the new record. Blair v. Commissioner, 300 U. S. 5.

Petitioner concedes that income which was in fact devoted to the permitted purpose of payment for expenses of the beneficiaries was properly included in decedent's income by virtue of the provisions of section 134. It further justifiably recognizes "that Section 134 of the Revenue Act of 1943 is retroactively effective for years prior to 1943 only if certain requirements of paragraph (2) of Subsection (b) thereof are complied with. It is assumed that this Court will allow a reasonable time for petitioners to comply with these requirements, as was done in W. C. Cartinhour, 3 T. C. 482 (493) and David Small, 3 T. C. 1142." Regulations in this respect, not available for use in the Cartinhour and Small cases nor when the present proceeding was heard, have now been promulgated (T. D. 5392, C. B., Aug. 11, 1944, p. 18), and presumably they eliminate the occasion for any further delay in completing these preliminaries. We assume that they can now be made the subject of prompt accord between the parties. Reviewed by the Court.

Decision will be entered under Rule 50.

FLORENCE PEARLMAN, TRANSFEREE, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 112500. Promulgated September 27, 1944.

1. A resident of Pennsylvania, after becoming hopelessly insolvent, designated his wife as first beneficiary in several policies of insurance on his life, in substitution for his executors, administrators, or assigns. At the time of his death the insured was insolvent. Proceedings were then pending involving deficiencies in his income

tax for several years. The proceedings were dismissed and the de-
ficiencies were upheld. After the death of the insured the insurance
companies issued claim settlement certificates in the aggregate
amount of more than $200,000, under which decedent's widow is
receiving substantial monthly payments and under which she has
various options having substantial value. By the law of Pennsyl-
vania, as construed by its courts, a change of beneficiary under such
circumstances is fraudulent and void as to creditors. Fidelity Trust
Co. v. Union National Bank of Pittsburgh, 313 Pa. 467. Held, the
widow, petitioner herein, is liable in equity as a transferee for
the income tax of her deceased husband.

2. Petitioner's husband, during his lifetime, kept no personal
books of account. For several years prior to the taxable years he
had carried on business under a trade name, during which period
he had borrowed $135,000 from two banks. The business was wholly
inactive during most of the taxable years, but its books of account,
on accrual basis, reflected the amounts owing to the banks, and in-
terest on the loans was accrued annually. No interest was paid by
the debtor or his "business" on the bank loans during the taxable
years and no interest was paid by the debtor on other amounts owing
by him, although he had substantial income. Held, the Commis-
sioner properly disallowed the deduction of amounts claimed by the
debtor as interest accrued upon indebtedness. Berryman D. Fincan-
non, 2 T. C. 216, distinguished.

Nathan Silberstein, Esq., and M. Wolf, Esq., for the petitioner.
Myron S. Winer, Esq., for the respondent.

The Commissioner determined that petitioner is liable, as transferee of assets of Martin M. Pearlman, deceased, "for deficiencies of income taxes due from the Estate of Martin M. Pearlman, Deceased," as follows:

In the answer it is alleged the Commissioner "erroneously and inadvertently failed to assert liability" for the additional amount of $1,755.15, this being the unpaid balance of the tax shown to be due by Pearlman's return for 1940. The aggregate amount in issue is therefore $25,713.57.

The principal question is whether petitioner, as the primary beneficiary of proceeds of insurance on the life of her deceased husband, Martin M. Pearlman, the annual premiums of which were paid by him during his lifetime, is liable in equity as transferee for his unpaid income tax for the calendar years 1934 to 1937, inclusive, and 1940, together with statutory interest thereon. A subsidiary question, in the event petitioner is liable as a transferee, is whether the liability of the deceased was less than the amount determined by the respondent

The facts are found to be as stipulated. Others shown in our findings are based upon admissions in the pleadings, documents received in evidence at the hearing, or concessions made by the parties.

FINDINGS OF FACT.

Petitioner is the widow of Martin M. Pearlman (hereinafter referred to as Pearlman), who died in Philadelphia, Pennsylvania, on March 11, 1941, insolvent and without any estate. Petitioner was born April 10, 1882.

In Pearlman's income tax returns for the calendar years shown below he deducted, as interest, the following amounts:

All of the deductions were disallowed except approximately $1,700 for the year 1940. The correctness of the disallowance of the amounts shown under the heading "Other interest" is not in issue.1

The amounts shown in the column "Interest on business indebtedness" represented accruals of interest entered on books of account of M. M. Pearlman and Co. on notes to Tradesmen's National Bank & Trust Co. ($75,000) and to Philadelphia National Bank ($60,000), aggregating $135,000.

Pearlman did not maintain any books of account (other than a check book) at any time except those in the name of M. M. Pearlman and Co. M. M. Pearlman and Co. was a mere trade name. It "was conducted as a partnership until December 31, 1926." Thereafter it "was the trade name under which Martin M. Pearlman individually conducted an active business in the purchase and sale of metals * * until 1931."

*

During the period from 1917 to 1931 the books of M. M. Pearlman and Co. were kept on a basis according to which all bills received for money owed by it were entered when the bills were received and deducted as expenses in such years, although a great many of these bills, both for materials and for expense items, were not paid until the following years. Similarly, merchandise sold was entered as an account receivable when the sales were made and reported in income for such years, although in many cases payment was not received

1 The petition alleges that all amounts shown in the last column constituted proper de ductions from Pearlman's gross income. The evidence adduced at the hearing, however, was directed solely to the deductibility of the interest on business indebtedness. We construe this to be a concession by petitioner that the first four amounts shown under the heading "Other interest" and $16,952.17 of the last amount shown under the same heading were properly disallowed by the Commissioner,

until the following year. In all cases the purchases, sales, and accounts payable and receivable were entered on that basis. In 1931 the company was inactive and so remained until 1937. From 1937 until Pearlman's death the activity of the company was on a much

reduced scale.

On the books of account of M. M. Pearlman and Co. for the years 1934 to 1940, inclusive, there was accrued each year interest payable in the amount of $8,212.50 representing interest on the loans to the above named banks in the aggregate amount of $135,000. By December 31, 1929, Pearlman had withdrawn funds from M. M. Pearlman and Co. in excess of $135,000, which funds were charged to his drawing account on the books of M. M. Pearlman and Co.

During the period from 1931 to 1940, inclusive, each year there were accruals of interest entered on the books of M. M. Pearlman and Co. in the annual amounts of $8,212.50. These items appeared in an account designated "Interest and Discount" and a liability account designated "Accounts Payable." By December 31, 1932, the latter account was made up only of accrued interest on the two loans, and it so continued until December 31, 1937. On that date the credit balance in that account was split and credited to liability accounts in the name of each bank ($20,390 and $25,487.50). From then until December 31, 1940, the accrued interest was recorded each year in the new liability

accounts.

"Prior to Dec. 31, 1926, interest on notes representing loans from the Philadelphia National Bank and the Tradesmen's National Bank and Trust Co. was charged to, paid by, and shown on the books of M. M. Pearlman and Co., a partnership. During the period from Dec. 31, 1926 to October 1, 1930, interest on notes representing loans from said banks was charged to, paid by, and shown on the books of M. M. Pearlman and Co. solely owned by Martin M. Pearlman during that period of time.

"Prior to the year 1927 the ledger of M. M. Pearlman and Co., a partnership, shows the repeated use of inventory accounts in the determination of the periodical profit or loss resulting from operations in the 'Zinc skimmings,' 'Salamoniac skimmings,' and 'Dross' accounts. Dealing in these commodities and in lead constituted the bulk of the business of M. M. Pearlman and Co. At no time did M. M. Pearlman and Co. have a warehouse for the storage of merchandise, and consequently contracted for its sales and purchases simultaneously, in all cases shipping the merchandise directly from its seller to its buyer. During the years 1927 to 1941, inclusive, M. M. Pearlman and Co. had no unsold merchandise on hand at the end of any year, and accordingly recorded no inventories on its books at the end of such years. except in the year 1940, when an inventory of $478.02 was recorded. It was subsequently found that the merchandise so inventoried had

actually been sold prior to December 31, 1940, so that the entry was erroneous, and the inventory was eliminated by the Revenue Agent who examined the books for that year."

During the years M. M. Pearlman and Co. was active-i. e., prior to 1931-its books and records showed substantial amounts in accounts receivable and payable. No accounts receivable existed after December 31, 1930. Accounts payable reflected only interest on the loans of Philadelphia National Bank and Tradesmen's National Bank & Trust Co. No part of such interest was ever paid by Pearlman or anyone else.

In Pearlman's returns for the years 1934, 1935, and 1936, line 9"State whether your books are kept on cash or accrual basis"—is left blank. In his returns for 1937 and 1940 it is indicated they were "prepared on an accrual basis." Notwithstanding the fact that in some of the returns commissions earned rather than commissions received were reported in gross income, it can not be found that Pearlman's returns were made on other than a cash basis.

By notice dated February 27, 1940, the Commissioner determined deficiencies in Pearlman's Federal income taxes for the calendar years 1934, 1935, 1936, and 1937 in the respective amounts of $3,022.49, $2,633.84, $2,813.66, and $5,665.46. On May 18, 1940, Pearlman filed. a petition with this tribunal requesting redetermination of the deficiencies. Motion to dismiss for lack of prosecution was granted on May 31, 1941, and deficiencies in the amounts shown above were determined. After Pearlman's death, but before the order of May 31, 1941, was entered, jeopardy assessments were made; but no portion of the taxes has ever been collected.

Pearlman's income tax return for the year 1940 was acknowledged by him on the date of his death (March 11, 1941) and filed in the office of the collector of internal revenue at Philadelphia on March 13, 1941. The tax shown to be due thereon was $2,340.20. The first payment shown on the face of the return and transmitted to the collector was $585.05. The difference between the amount shown to be due and the amount received, or $1,755.15, is the amount sought in the respondent's answer in addition to that set out in the notice of liability herein. The net income shown to be due by Pearlman's return for 1940 was increased by the amount of interest shown above ($25,164.67). This resulted in a deficiency of $9,822.97 for that year. The total liability in controversy is therefore: