stock, second issue, from the first party at the times and in the manner above set forth." It will be noted that the collateral security was not placed by the corporation with the stockholders to guarantee the pay-. ment of annual dividends on the second preferred stock, but was placed with the stockholders to guarantee that petitioner would carry out its agreement to repurchase the stock from time to time. This did not convert the preferred stock, second issue, from capital stock of the company into indebtedness of the company. We can see no greater reason for holding the preferred stock, second issue, here in question to be an indebtedness than existed in connection with the 10,000 shares of preferred stock involved in John Wanamaker Philadelphia v. Commissioner, supra.

The respondent's determination is sustained.

Decision will be entered for the respondent.

HOSCH BROTHERS COMPANY, PETITIONER, D. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 2450. Promulgated February 15, 1944.

DEDUCTIONS-LOSSES NOT DEDUCTIBLE-SEC. 24 (b), I. R. C.Each of two brothers, making separate purchases from a corporation in which each is a stockholder, is to be considered as owning the stock of the other and the stock of his father and his other brothers, for the purpose of determining whether he is the owner of more than 50 percent of the seller's outstanding stock.

OPINION.

MURDOCK, Judge: The taxes in controversy are income tax of $3,505.45 and declared value excess profits tax of $535.86 for 1941. The only issue is whether the Commissioner erroneously applied section 24 (b) to disallow deductions for losses realized from sales by petitioner to two of its stockholders. The facts have been stipulated.

The petitioner is a corporation doing business in Gainesville, Georgia. The record does not show where it filed its returns.

It sold, on December 15, 1941, 20 shares of Bellmore Manufacturing Co. stock to H. W. Hosch for $1,000. Its basis for gain or loss on that stock was $2,000.

It sold on the same day 250 shares of Robinson's, Inc., stock to H. C. Hosch for $10,000. Its basis for gain or loss on that stock was $25,000. The petitioner, on its returns for 1941, claimed losses of $1,000 and $15,000 based upon the two sales. The Commissioner denied the deductions on the ground that the purchaser in each case owned, directly or indirectly within the meaning of section 24 (b) of the Internal Revenue Code, more than 50 percent of the stock of the petitioner.

The oustanding stock of the petitioner at the time of these sales was owned as follows:

Section 24 (b) (1) (B) of the Internal Revenue Code disallows a deduction for a loss resulting from a sale by a corporation to an individual who owns, directly or indirectly, more than 50 percent of its stock. Section 24 (b) (2) (B) provides that for the purpose of paragraph (1) "an individual shall be considered as owning the stock owned" by his family. The family includes, inter alia, brothers and father. The family of purchaser H. W. Hosch would include his father and his three brothers. Those five persons owned directly 678 shares of the stock of the petitioner, the seller, and those shares were more than 50 percent of its stock. A similar situation existed in regard to the sale to H. C. Hosch. Thus, each sale was made under circumstances described in section 24 (b) (1) (B) as calling for a disallowance of the deduction to which the seller otherwise would be entitled.

The petitioner makes no contrary contention and by its silence concedes that each sale, viewed separately, was within the statutory prohibition. It states in effect that if both H. W. and H. C. are to be considered as owning constructively the same family shares at the same time, there will be a violation of the Fifth Amendment to the Constitution in that the tax will be taken indirectly from the other corporate owners without due process of law. It also states that the Commissioner's application of the statute is contrary to the provisions of section 24 (b) (2) (E). These contentions are not developed in the brief and are not supported by reason or by citation of authorities.

(2) (E) provides that "stock constructively owned by an individual by reason of the application of subparagraph (B) or (C) shall not be treated as owned by him for the purpose of again applying either of such subparagraphs in order to make another the constructive owner of such stock." This means that in determining the stock owned by any individual purchaser, the statute is applied to him alone and is not first applied to his brother or some other person in his family

group to see how much that person owned indirectly or constructively. Thus, we take the case of H. W. Hosch and determine how much he may be considered to own, and then separately we take the case of H. C. Hosch and determine how much he may be considered to own. If the wife of one had owned some stock it would be included in the stock owned by her husband, but it would not be included in the stock attributed to her brother-in-law. But in the present case there is no such complication. The family group consists only of brothers and their father, and the same family stock can be attributed to both H. W. and H. C. under (2) (B). Consequently, a sale to one does not fail to come within the prohibition of the section merely because there was likewise a sale to the other. If this were not so, the statute could be avoided with ease and its obvious purpose defeated.

The petitioner states that the statute as construed by the Commissioner is unconstitutional. This is a serious charge calling for citation of authority, demonstration, or both. The petitioner fails to provide either.

Decision will be entered for the respondent.

GEORGE S. GAYLORD, PETITIONER, D. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

GERTRUDE H. GAYLORD, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 109138, 109273. Promulgated February 18, 1914.

1. The Civil Code of California, by amendment made in 1931, provides that, unless expressly made irrevocable by the instrument creating it, every voluntary trust (not created prior to the amend ment) shall be revocable by the trustor. In 1935 the petitioners, residents of California, decided to make gifts to their two daughters and to effectuate the gifts by creating an irrevocable trust of which the petitioners would be trustees and the daughters the beneficiaries. Petitioners requested their counsel to prepare an instrument to carry out their purpose. The instrument prepared and executed did not contain any provision respecting revocability or irrevocability. Neither petitioners nor their counsel was then aware of the above provision of the California Civil Code. As soon as he learned of the said provision, counsel drafted an instrument declaring that the trust is and was always intended to be irrevocable. This latter instrument was executed by petitioners on March 27, 1940. Held, that under the law of California the trust was revocable during the taxable years 1936 through 1939 and that the trust income for those years was taxable to the petitioners in the proportion that the amount of corpus contributed by each bore to the total corpus.

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2. Basis determined for computing gain or loss on certain shares of corporate stock sold by petitioners and the trust during the years involved herein.

3. In 1938 the petitioners and the trust purchased a certain improved rental property without any intention of removing the building thereon and erecting a new structure. Thereafter during the year it was found desirable to remove the building and erect a new and larger one in order to obtain tenants, and the petitioners decided to do so. Early in the following year the building was removed and a new one erected. Held, that the amounts deducted by the petitioners and the trust as losses sustained on the removal of the old building are allowable.

4. Amount of loss determined with respect to the destruction of a pear orchard in order to devote the land to other uses.

Thomas A. J. Dockweiler, Esq., and James W. Bontems, O. P. A., for the petitioners.

Byron M. Coon, Esq., for the respondent.

TURNER, Judge: The respondent determined the following deficiencies in income tax against the petitioners for the years indicated:

The questions presented are the correctness of the respondent's action (1) in determining that the income for the years 1936 through 1939 of a trust created by petitioners, and of which they were trustees, was taxable to petitioners for said years; (2) in determining that the basis for computing gain on certain corporate stock sold by petitioners and the trust during 1936 through 1939 was $2.83542 per share; (3) in disallowing deductions of $5,076.11 taken by each of the petitioners and the trust for 1938 as losses sustained on demolition of a building; (4) in disallowing $3,456 of a deduction of $4,320 taken by George S. Gaylord in 1939, as a loss sustained on the removal of a pear orchard from a ranch owned by him; and (5) in disallowing $1,400 of the deductions of $2,650 taken by each of the petitioners as losses sustained on the destruction by storm of ornamental trees on property owned by petitioners and occupied by them as their residence. Issue No. 5 was abandoned by the petitioners at the time of the hearing, leaving the first four issues for determination.

For convenience, the discussion of each issue will follow immediately after the findings of fact relating thereto.

Issue 1.--Taxability to Petitioners of the Income of the Trust.

FINDINGS OF FACT.

The petitioners are husband and wife, residents of Pasadena, California, and filed separate income tax returns for 1936 through 1939 with the collector of internal revenue for the sixth district of California.

As the issue of their marriage the petitioners have two daughters, Margaret and Gertrude. Margaret was born on November 10, 1905, and married Albert Brunker in 1923. Two children were born of that marriage; one on October 14, 1925, and the other on June 4, 1927, and both are still living. Subsequently Margaret divorced Brunker, and in 1931 married Frederick Ruppel. Both Margaret and Ruppel are still living. The petitioners' other daughter, Gertrude, was born on May 31, 1916, and on May 29, 1937, married Eugene L. Bruce. Gertrude and Bruce are still living, and have one child, who was born in April 1938.

Sometime prior to September 1935, the petitioners decided to set up a trust for the benefit of their two daughters, and in case of the death of a daughter, then for the benefit of the children of such daughter. On December 11, 1935, the petitioners signed and acknowledged a declaration of trust, dated November 7, 1935, in which they were designated both grantors and trustees and designated jointly as trustee. A trust, sometimes hereinafter referred to as the Gaylord trust, was declared with respect to 7,000 shares of the common capital stock of Marathon Paper Mills Co., 5,000 shares of which were contributed by Gaylord and 2,000 shares by Mrs. Gaylord.

The trust instrument did not contain any provision relating to its revocability or irrevocability.

When requesting counsel to prepare the trust instrument, Gaylord told him that he and Mrs. Gaylord desired to form an irrevocable trust with respect to the stock. At the time the petitioners signed the trust instrument, they were advised by counsel that the trust was irrevocable. After signing the instrument, they left it in the custody of counsel. On February 4, 1936, the petitioners filed gift tax returns, prepared by Gaylord, for 1935, in which they reported the creation of an irrevocable trust and the transfer thereto of the above mentioned shares of stock in Marathon Paper Mills Co., sometimes hereinafter called Marathon. Mrs. Gaylord reported the 2,000 shares of stock contributed by her as having a value of $50,000, but, by reason of exclusions and the specific exemption taken, she reported no gift tax liability. Gaylord reported total gifts in the amount of $140,278.08, of which $125,000 was reported as the value of the 5,000 shares of Marathon stock contributed by him to the trust. After