by section 151 (b) of the Revenue Act of 1942, and are subject to the treatment provided for in that section. Petitioners' leases which they were using in the operation of their business had been held for more than 6 months. Therefore it is clear that they qualify as "property used in the trade or business" as defined in section 117 (j) of the Code. The $59,211.11 which petitioners received in compromise of their judgment against Skinner & Eddy was of course not received from the sale or exchange of any of their oil or gas in place. If it had been, the resulting gain would have been taxable as capital gain. See Anderson v. Commissioner, 81 F. 2d 457. Petitioners did not sell anything to or exchange anything with Skinner & Eddy. They do not contend that they did, but they do contend that the amount which they received in compromise of their judgment was received as compensation for the destruction in part of oil in place underneath their leases and therefore represented a compulsory or involuntary conversion of property within the meaning of section 117 (j) (2) of the Code. Respondent's main contention is that petitioners' judgment against Skinner & Eddy was for loss of profits and that money received to compensate for loss of profits represents ordinary income and not capital gain. Respondent cites such cases as Glenshaw Glass Co., 18 T. C. 860, affd. 211 F. 2d 928, in support of his contention. Respondent's position would be correct if the record sustained his contention that petitioners' judgment against Skinner & Eddy was for restoration of profits. But in our view the record does not sustain respondent's contention. The issue which was submitted to the jury was the amount of money which would compensate petitioners for the damages which Skinner & Eddy had inflicted upon their property. The portions of the court's charge which we have incorporated in our Findings of Fact would seem to show it was that issue which was submitted to the jury and it was upon that issue that the jury's verdict was based. We therefore conclude that the compromise settlement which was effected by the payment of the money in question was in settlement of the judgment for damages to the oil in place and was not for a restoration of profits. Having reached the conclusions just stated, the question arises: Does the sum of $59,211.11 received by petitioners represent payment for an involuntary conversion of property as a result of the destruction in whole or in part thereof? The Commissioner contends that it does not. He argues that the oil is still in place, not destroyed either in whole or in part; that petitioners still have the lessee's right to enter into the leases and to continue drilling for such oil. That, of course, is true but the jury under the charge of the court has in effect found that certain portions of petitioners' oil have been rendered immobile by the negligent acts of Skinner & Eddy and cannot be extracted. It was for that damage the judgment was awarded. One of the meanings of the word "destroy," according to Funk & Wagnalls New Standard Dictionary, is: "To take away completely the value or usefulness of." Another is: "To render of no avail." In State v. Johnson, 19 S. C. 497, 14 S. E. 2d 24, the court said: Included in appellant's brief is a definition of the word destroy in 18 C. J. 975 from which the following is quoted: "While the term ordinarily implies complete or total destruction, it has on more than one occasion been construed to describe an act which while rendering the thing useless for the purpose for which it was intended, did not literally demolish or annihilate it." We conclude that the $59,211.11 was received by petitioners to compensate them for the destruction in part of their property, to wit, oil in place which was rendered immobile by Skinner & Eddy's negligent acts. The statute itself includes the "compulsory or involuntary conversion (as a result of destruction in whole or in part ***) of property used in the trade or business ***" We conclude that petitioners' case comes within the purview of the statute relied on, section 117 (j). Cf. Guy L. Waggoner, 15 T. C. 496. It is stipulated that the property had been held by petitioners for more than 6 months prior to the receipt of the payment of damages. Therefore the amount received is taxable as capital gain. Because there are some uncontested adjustments, Decisions will be entered under Rule 50 ALICE SPAULDING PAOLOZZI, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Docket No. 46543. Filed October 29, 1954. On June 21, 1938, petitioner created a trust of which she was the Philip B. Buzzell, Esq., for the petitioner. Respondent determined a deficiency in gift tax of petitioner for the calendar year 1938 in the amount of $24,511.97. The only question presented is whether petitioner is taxable on the entire value of property transferred by her in trust, or whether she retained a life interest necessary to support a deduction therefor. FINDINGS OF FACT. The stipulation of facts filed by the parties with exhibits attached is adopted, and, by this reference, made a part hereof. The petitioner is Alice Spaulding Paolozzi, an individual, who, prior to her marriage to Lorenzo Paolozzi, an Italian citizen, in Rome on October 30, 1938, was resident at Beverly, Massachusetts. Petitioner filed a gift tax return for the taxable year 1938, here involved, with the collector of internal revenue for the district of Massachusetts on December 21, 1949. The petitioner was born of American parentage in the United States on May 12, 1917. She lived in this country continuously until the time of her aforementioned marriage. Petitioner's father, William S. Spaulding, died on August 15, 1937. Petitioner spent the winter of 1937-1938 in Europe primarily in Italy, where she became engaged. She returned to the United States early in June 1938 and spent the summer in this country. She departed again for Italy early in August; her engagement was announced on August 17, 1938; and she was married in Rome on October 30, 1938. Thereafter, except for a brief visit to the United States and another in Switzerland, she made her home in Italy until 1943, in which year she moved to Switzerland. By virtue of her marriage, petitioner, under Italian law, became an Italian citizen. At various dates between May 1934 and August 1935, the then Italian Government had subjected foreign securities owned by Italian citizens to various restrictive measures, including registration, deposit with the Bank of Italy, and exchange for 5 per cent Italian Treasury Bonds. In 1938, petitioner was one of the life beneficiaries of a trust created by her father on November 26, 1920 (hereinafter referred to as the 1920 trust). As of January 1, 1938, the assets of petitioner's share of this trust had a market value of $752,826. She was also the life beneficiary of a trust created by her father on August 5, 1935 (hereinafter referred to as the 1935 trust). As of January 1, 1938, the assets of this trust had a market value of $287,562. Petitioner was also a life beneficiary subject to the rights of her mother during the latter's lifetime, of one-third of another trust created under the will of her father (hereinafter referred to as the testamentary trust), which proved to have assets in excess of $1,000,000. The trustees in each of the foregoing trusts could withhold income in their discretion adding it to 2 principal. Petitioner's brother and sister each had a similar beneficial interest in the 1920 and the testamentary trusts. In addition to her interests in the above trusts, petitioner owned outright cash and securities with a value, as of January 1, 1938, of $316,256, which became distributable to her on May 12, 1938, her 21st birthday. Because petitioner was unfamiliar with business affairs, it was suggested that she place her assets in an agency account or trust and, because her mother and her financial and legal advisers believed that she might be required to turn her assets over to the then Italian Government, it was suggested that the trust device would be preferable and that such trust should provide for discretionary payment of income and should contain a spendthrift clause. Thereafter, the trust of June 21, 1938 (hereinafter referred to as the 1938 trust), was created with cash and securities to which petitioner had become entitled on her 21st birthday. The fair market value on June 21, 1938, of the property transferred to the trust was $276,821.66. The 1938 trust provided in material part, as follows: After deducting all necessary charges and expenses including reasonable compensation for the care of the property the Trustees shall pay to said Alice O. Spaulding so much of the net income as they shall in their absolute discretion decide as best for her interest, quarterly or oftener in the discretion of the Trustees for and during her life. Any accumulations of income may be invested from time to time in the discretion of the Trustees and at any time and from time to time during the lifetime of said Alice O. Spaulding may and upon her death shall be added to the principal of the trust fund. After the death of said Alice O. Spaulding the Trustees shall pay so much of the net income as the Trustees shall in their absolute discretion deem advisable in equal shares, quarterly or oftener in the Trustees' discretion, to and among such of her children as are living at the time of each payment, the issue then living of any child of hers then deceased to take by right of representation until the date of termination of the trust. Any accumulations of income may be invested from time to time in the discretion of the Trustees and may be added to the principal of the trust fund at any time. At the date of termination, the Trustees shall pay over and distribute the principal of the trust fund together with all accumulations of income to and among the issue of Alice O. Spaulding then living, such issue to take by right of representation; in default of her issue then the same shall be paid over to such of her sister Katrina S. Kirkbride and brother William S. Spaulding as are then living, the issue of either of them who may be then deceased to take by right of representation; and in case all the issue of said Alice O. Spaulding and her said brother and sister and all their issue shall have died at the date of termination the Trustees shall pay over and distribute the same to and among those persons who would have been entitled to the property of said Alice O. Spaulding under the laws of the Commonwealth of Massachusetts then in force, if she had then died intestate and a resident thereof and in the proportions determined by said laws. No part of the income payable to any beneficiary hereunder shall be paid by way of anticipation or be assignable either voluntarily or by operation of law or attachable or trusteeable by the creditors of the beneficiary or be liable to be come at or reached or applied to the payment of any claim against her or him. At the time of creating the trust, the taxpayer was assured by the trustees that they would give her the income if she wanted it unless they had reason to believe that she was acting under compulsion. At the same time, it was explained to petitioner that under the provisions of the trust she had no absolute right, as a matter of law, to demand and receive the income, and that the trustees must take all beneficiaries into consideration. During the period June 21, 1938, to December 31, 1953, the 1938 trust had total gross income of $364,881.43, of which $60,706.77 has been withheld from income and added to principal, and the balance (after taxes and administrative expenses), has been paid over to or expended for the benefit of petitioner. A large proportion of the accumulation of income took place during the war years when foreign income restrictions prevented larger distributions. During the same period, June 21, 1938, to December 31, 1953, the 1920 trust distributed to petitioner a total of $410,526.51 in varying amounts of not less than $9,000 annually, except for 1948 when the distributions amounted to $5,000, and during the same period withheld from income and added to principal a total of $176,501.04. The 1935 trust has never made any distribution of income to the petitioner, but has withheld from income and added to principal a total of $185,622.81. The testamentary trust has made no distribution to petitioner. Petitioner reported in respect of the transfer to the 1938 trust of property having a value on June 21, 1938, of $276,821.66, total gifts of $71,021.37, which amount was the value on June 21, 1938, of a remainder of $276,821.66 after a life estate of an individual then of petitioner's age. OPINION. VAN FOSSAN, Judge: The question is whether petitioner retained dominion and control over any interest, susceptible of valuation, in the property transferred in trust by her on June 21, 1938. Petitioner established the trust in controversy, of which trust she was, during her lifetime, the sole beneficiary, at a time when she was contemplating marriage to an Italian citizen. By virtue of such marriage she would, under Italian law, become an Italian national. The then Italian Government was, at that time, subjecting foreign securities held by its nationals to stringent restrictions. To avoid such restrictions and thwart possible confiscation of the considerable property which was distributed to her on her 21st birthday, a few weeks before, petitioner, on the advice of her mother and counsel, created the subject trust and effected the transfer in question 330500m-56- -13 |