Section 201 of the "Second Revenue Act of 1940" added a new subchapter to the Internal Revenue Code providing for an excess profits tax on certain corporations. Section 727 (e) of the Internal Revenue Code, as thus amended, exempts personal holding companies from excess profits tax. We have determined under the first issue herein that petitioner was a personal holding company in the year involved. The fifth issue, involving the determination of an excess profits tax on petitioner, consequently presents a moot question and has become immaterial.

Issue 6.

Since we have held that petitioner is a personal holding company, we shall now consider, for the purpose of ascertaining the amount of its net income subject to personal holding company surtax for the fiscal year ended August 31, 1941, the sixth issue, which involves the computation of petitioner's "dividends paid credit."

Under section 27 (a) of the Internal Revenue Code, as operative during the taxable years, one of the components of the "dividends paid credit" is a corporation's "basic surtax credit" which as defined in section 27 (b) (1) includes "The dividends paid during the taxable year." Section 27 (f) provides that in computing the basic surtax credit the dividends paid include stock dividends which are a "taxable dividend in the hands of shareholders under section 115 (f).”♦

Petitioner contends that all of the $3,400 dividend declared on March 1, 1941, and paid during the fiscal year ended August 31, 1941, should be included in its "dividends paid credit" instead of only the amount of $400 thereof, as allowed by respondent, and it further contends that the entire dividend of $20,400 declared and paid August 25, 1941, no part of which was allowed by respondent as a "dividends paid credit,"

SEC. 727. EXEMPT CORPORATIONS.

The following corporations shall be exempt from the tax imposed by this subchapter:

(1) GENERAL RULE.-A distribution made by a corporation to its shareholders in its stock or in rights to acquire its stock shall not be treated as a dividend to the extent that it does not constitute income to the shareholder within the meaning of the Sixteenth Amendment to the Constitution.

(2) ELECTION OF SHAREHOLDERS AS TO MEDIUM OF PAYMENT.-Whenever a distribution by a corporation is, at the election of any of the shareholders (whether exercised before or after the declaration thereof), payable either (A) in its stock or in rights to acquire its stock, of a class which if distributed without election would be exempt from tax under paragraph (1), or (B) in money or any other property (including its stock or in rights to acquire its stock, of a class which if distributed without election would not be exempt from tax under paragraph (1)), then the distribution shall constitute a taxable dividend in the hands of all shareholders, regardless of the medium in which paid.

should be so allowed. Was the $3,000 paid in stock on the dividend declared March 1, 1941, a taxable dividend in the hands of the stockholders? The answer to the question depends on whether or not the shareholders had an election under section 115 (f) (2), supra, as to the medium in which the dividends were to be paid, i. e., whether in its stock or in money.

*

This dividend was paid pursuant to a resolution which provided in part "that the same be payable in cash or stock of the corporation. the same to be paid from the surplus of the corporation or in capital stock of the corporation." One shareholder requested, and was paid, his dividend in cash, amounting to $400. Respondent allowed this as a deduction. The remaining shareholders requested, and were paid, their dividends in stock in the amount of $3,000, which amount respondent has not allowed as a deduction. It is obvious from the mere statement of these facts that the shareholders had and exercised their election "after" the "declaration" of the "distribution," in strict conformity with the terms of section 115 (f) (2), supra. This being true, the $3,000 paid in stock on the first dividend was a taxable dividend in the hands of the shareholders and should be included as dividends paid in computing the basic surtax credit for the purpose of determining petitioner's dividends paid credit. Cf. Capital Estates, Inc., 46 B. T. A. 986.

As to the dividend declared August 25, 1941, the resolution specifically provided that "the same be payable in stock of the corporation." No provision was made for payment in cash or for an election to receive cash. The entire dividend of $20,400 was declared and on the same day paid as a stock dividend. At all times petitioner had only one class of stock outstanding and that was common stock. That stock dividend consequently was not taxable to the shareholders receiving it, section 115 (f) (1), supra, and Eisner v. Macomber, 252 U. S. 189; Helvering v. Griffiths, 318 U. S. 371; Helvering v. Sprouse, 318 U. S. 604, and is therefore not to be included as dividends paid in computing the basic surtax credit for the purpose of determining petitioner's dividends paid credit. Sec. 27 (i), I. R. C. The action of the respondent with respect thereto is sustained.

Reviewed by the Court.

Decision will be entered under Rule 50.

SEC. 27. CORPORATION DIVIDENDS PAID CREDIT.

(1) NONTAXABLE DISTRIBUTIONS.-If any part of a distribution (including stock dividends and stock rights) is not a taxable dividend in the hands of such of the shareholders as are subject to taxation under this chapter for the period in which the distribution is made, such part shall not be included in computing the basic surtax credit.

ESTATE OF LUCY LATHAM BOYLES, DECEASED, HOUSTON LAND & TRUST COMPANY, ET AL., EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 4750. Promulgated April 3, 1945.

The decedent bequeathed $50,000 to trustees, directing that the fund be used for civic purposes in the city of Houston. Pursuant to this provision of the will, the trustees paid the $50,000 to the Christ Episcopal Church of Houston for the construction of a parish house and administration building as an adjunct to the church. Held, that the amount of the bequest is a legal deduction from the gross estate under section 812 (d) of the Internal Revenue Code.

John H. Crooker, Esq., for the petitioners.

D. Louis Bergeron, Esq., and L. R. Van Burgh, Esq., for the respondent.

The respondent determined a deficiency in estate tax in the amount of $3,104.24. Not all of the adjustments are in dispute. The only issue is whether a bequest of $50,000 made by decedent to trustees, to be used for civic purposes in the city of Houston, is deductible from the gross estate under section 812 (d) of the Internal Revenue Code. Some of the facts have been stipulated.

FINDINGS OF FACT.

Lucy Latham Boyles, hereinafter referred to as the decedent, was a citizen of the United States, residing in Houston, Texas. She died on June 30, 1941, leaving a last will and testament which was admitted to probate by the County Court of Harris County, Texas. The Houston Land & Trust Co., A. S. Cleveland, and W. D. Cleveland, Jr., are the duly qualified and acting independent executors and trustees under decedent's will.

At the time of her death, and for many years prior thereto, decedent owned an undivided one-half interest in lot No. 11, block 80, on the south side of Buffalo Bayou, in the business section of the city of Houston. The other undivided one-half interest was owned by decedent's sister, Lennie Groesbeck Latham.

On June 9, 1931, decedent and her sister made separate contemporaneous wills which were substantially similar to each other. In her will the decedent devised her one-half interest in lot No. 11 to Houston Land & Trust Co., A. S. Cleveland, and W. D. Cleveland, Jr., as trustees, for the following purposes:

Within a reasonable time after my death the above described property is to be sold by my Trustees for such price and upon such terms and conditions as they may see fit and out of the net consideration received for my interest in said property, there shall be set aside the sum of Fifty Thousand and No/100

($50,000.00) Dollars, and the balance of said consideration shall be paid to my sister, Lennie G. Latham to be hers absolutely. Should my interest in said property sell for less than Fifty Thousand Dollars ($50,000.00) then the net amount realized for my interest shall be set aside by my Trustees. The Fifty Thousand Dollars so realized from the sale of said property shall constitute a trust fund and shall be designated as the "Captain Lodowick Justin Latham Memorial," in memory of my father, who was born April 16, 1814 at Mystic, Connecticut, and died in Houston, Texas, March 20th, 1886. The said fund or the income therefrom or both shall be used by my Trustees for civic purposes in the City of Houston, the exact use to be made of said fund to be made known by me to my Trustees during my life time, but should I fail to determine the exact purposes for which said fund is to be used and not make it known to my Trustees, then the said fund shall be used by my Trustees for such civic purposes as they may determine. The only restriction I place upon them is that whatever use may be made of the fund, the fund or the things purchased or set up with the fund or the act done with the fund shall be designated and known as the "Captain Lodowick Justin Latham Memorial".

Decedent's sister, Lennie Groesbeck Latham, died on September 14, 1942, and her will, which was admitted to probate, also provided that $50,000 from the sale of her undivided one-half interest in lot No. 11 should be used for civic purposes in the city of Houston as a memorial to her father.

The decedent during her lifetime did not make known to the trustees the exact use or civic purpose for which she desired the trust fund to be used.

After decedent's death, the trustees, pursuant to the terms of the will, considered various civic purposes for which the fund might be used and, in the exercise of the discretion given to them under the will, determined that the $50,000 devised under decedent's will, together with the similar sum of $50,000 devised under the will of Lennie Groesbeck Latham, should be used for the construction of a parish house and administration building as an adjunct to Christ Episcopal Church, which was located in the city of Houston.

Thereafter, the executors under the wills filed suit in the District Court of Harris County, Texas, against the Attorney General of Texas, the District Attorney of Harris County, the city of Houston, and various residuary legatees in order to have the wills construed, to determine, among other things, whether the two bequests of $50,000 each constituted a valid public charitable bequest and whether the proposed use and dedication of such trust funds were within the civic purposes directed and authorized by such wills. The district court in which the suit was filed and subsequently tried had jurisdiction over the subject matter of the suit and the parties thereto. Answers were filed by various defendants, at least one of whom was a minor. The answer filed in behalf of the minor alleged that the trust "for civic purposes in the city of Houston" was too vague and uncertain to be valid and enforceable and that the proposed construction of the

parish house and administration building for Christ Episcopal Church was not such a charitable or civic purpose as to be valid and enforceable as a charitable trust.

Thereafter, a hearing was had which lasted two days, at which the public interests were represented by the District Attorney of Harris County, Texas, and the city attorney of Houston, and the minor was represented by a guardian ad litem who was an attorney.

On August 20, 1943, a decree was entered by the district court which, in so far as it affects this proceeding, provided as follows:

FIRST: That said $100,000.00 public charitable trust fund created and provided for by said wills as referred to in findings set forth above in paragraphs 4, 5, and 6 of this decree ($50,000.00 thereof being under said will of Lucy Latham Boyles, deceased, and the other $50,000.00 thereof being under said will of Lennie Groesbeck Latham, deceased) arises solely from said two bequests of such $100,000.00 trust fund, each and both of which bequests constitutes a valid, enforceable and irrevocable charitable trust for the use and benefit of said City of Houston (which city is a political subdivision of the United States) for exclusively public purposes and the same also constitutes a valid, enforceable and irrevocable charitable trust to said trustees (in their fiduciary capacity as such trustees) to be used by them exclusively for the public and charitable use so determined by them; that said use so determined by such trustees is exclusively for public, civic, educational and charitable purposes, for the use of said City of Houston (which city is a political subdivision of the United States); and that no part of the activities of said trust or the trustees thereof or of said use or purpose is or can be the carrying on of propaganda or otherwise attempting to influence legislation, and no part of said trust fund or the earnings thereof inures or can inure or is payable to or for the benefit of any private stockholder or individual or any party hereto, individually or personally, in any way or to any extent whatsoever-all as more fully embodied in said findings set forth hereinabove in paragraphs 4, 5 and 6 of this decree.

Since no appeal was taken by any of the parties, the decree of the district court became final 30 days after its entry. Thereafter, the executors sold the lot and set up the $100,000 trust, $50,000 of it from the estate of decedent. The $100,000 fund was conveyed to Christ Episcopal Church of Houston, Texas, for the purpose of constructing the adjunct to the church and deposited in escrow pending the release of war restrictions upon construction.

The value of decedent's undivided one-half interest in lot No. 11, block 80, south side of Buffalo Bayou in the city of Houston, was $75,000 on June 30, 1941, the date of decedent's death.

OPINION.

HARRON, Judge: Section 812 (d) of the Internal Revenue Code provides that the value of the net estate in the case of a citizen or resident of the United States shall be determined by deducting from the value of the gross estate "the amount of all bequests use of

to or for the

any State, Territory, and political subdivision