Opinion
Docket No. 111400.
1943-07-5
OLETA A. EWALD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
H. A. Mihills, C.P.A., and Henry S. Slyfield, Esq., for the petitioner. Paul A. Sebastian, Esq., for the respondent.
1. Prior to the taxable years involved petitioner irrevocably transferred certain property to her husband as trustee and directed him to pay her during her lifetime such portions of the income therefrom as he deemed proper. Provisions were made for successor trustees and for the distribution of both income and principal upon the happening of certain events, one being the death of the grantor. The husband was not a beneficiary under the trust but was named as the residuary legatee under petitioner's will. Held, upon consideration of the entire trust instrument, the intention of the grantor was not that the trust would terminate and revert to her estate should she predecease her husband, but rather that it was to continue for the benefit of her surviving children, and the children of any deceased child; held, further, petitioner's husband did not have a substantial adverse interest in the disposition of any part of the trust income, but could have distributed the entire income to petitioner; held, further, the entire income of the trust for each of the taxable years involved is taxable to petitioner under section 167(a)(2) of the Revenue Act of 1936 and the Internal Revenue Code.
2. For the years 1936 and 1937 petitioner omitted from her gross income amounts properly includible therein which were in excess of 25 per centum of the amounts of gross income stated in the returns for those years. The deficiency notice was mailed within five years after the returns were filed. In 1936 a ruling was made by the Deputy Commissioner of Internal Revenue which held that for the taxable year 1935 Oleta A. Ewald was properly taxable only on that portion of the trust income actually distributed to her. Held, section 275(c) of the Revenue Act of 1936 is applicable and the deficiencies determined for 1936 and 1937 are not barred by the statute of limitations. H. A. Mihills, C.P.A., and Henry S. Slyfield, Esq., for the petitioner. Paul A. Sebastian, Esq., for the respondent.
This proceeding involves deficiencies in income tax for the calendar years 1936, 1937, 1939, and 1940 in the amounts of $49,337.17, $15,638.47, $8,876.41, and $26,585.54, respectively.
The respondent made only one adjustment to the net income reported by petitioner for each of the taxable years involved. That adjustment was an addition to the net income so reported of all the remaining undistributed annual net income for each of the years involved of a trust created by petitioner in 1929. In explaining the adjustment for each of the years 1936 and 1937 in the statement attached to the deficiency notice the respondent said, ‘It is held that the total income‘ of the 1929 trust ‘is taxable to you under the provisions of section 167(a)(2) of the Revenue Act of 1936.‘ A similar explanation was given for each of the years 1939 and 1940, except that the applicable statute there was section 167(a)(2) of the Internal Revenue Code.
Petitioner by an appropriate assignment of error (a) contests the above adjustment for each of the years involved, and, in addition thereto, assigns the following error:
(b) The Commissioner erroneously determined deficiencies for the calendar years 1936 and 1937 although the period of limitation for assessment of such deficiencies pursuant to Section 275 of the Revenue Act of 1936 had expired prior to the date of the Commissioner's notice of deficiency. The petitioner alleges that Section 275(a) of the Revenue Act of 1936 is controlling and that Section 275(c) is not applicable to this case.
FINDINGS OF FACT.
Petitioner is an individual, residing in Detroit, Michigan. She filed her income tax returns for the years involved with the collector for the Michigan district.
On June 6, 1925, petitioner acquired by gift from her husband, Henry T. Ewald, 4,000 shares of class A common capital stock of Campbell-Ewald Co.
On June 27, 1929, petitioner executed a trust instrument under the terms of which she transferred and assigned unto her husband, as trustee, the above mentioned 4,000 shares of stock for the purposes therein set forth. Henry T. Ewald accepted his appointment as trustee thereunder and has ever since continued to act in such capacity. Among other things the trust instrument provided as follows:
WHEREAS, the donor desires to create an irrevocable trust in favor of the beneficiaries hereinafter designated, and in accordance with the provisions and terms hereof;
NOW THEREFORE * * * the donor * * * by these presents does grant, bargain, sell, assign, transfer, set over and deliver unto said party of the second part (Henry T. Ewald) and to his successor and successors, as Trustee * * * (the above mentioned 4,000 shares of stock) TO TAKE, HAVE, HOLD and DISPOSE OF under and in pursuance hereof, IN TRUST, nevertheless, in the manner and for the uses and purposes herein stated, as follows:
1. To take possession of the trust estate and property receive and collect the moneys, dividends, interests, profits and income arising therefrom.
2. To manage and control said trust estate and property the same as in the judgment and discretion of the trustee may seem most advantageous to such trust estate. * * *
3. To pay to said donor, quarter annually, during her lifetime, such portions of the net income from said trust estate as said Henry T. Ewald, said trustee, may deem proper.
4. Upon the death of said donor, said Henry T. Ewald, said trustee, shall distribute to the surviving children of said donor, and to the children of any deceased child or hers, quarter annually, such portions of the net income from said trust estate as he may deem proper.
14. In case of the death of said Henry T. Ewald, his resignation or inability to serve as trustee hereunder prior to the termination of the trust hereby created, said donor hereby appoints UNION TRUST COMPANY, of Detroit, Michigan, HENRY THEODORE EWALD, JR., if and when he attains the age of twenty-one (21) years, and HENRY S. SLYFIELD, of Detroit, Michigan, as joint trustees in the place and stead of said Henry T. Ewald. * * *
15. Any trustee or trustees who shall serve in the place and stead of said Henry T. Ewald, shall have all the powers and rights herein given to and bestowed upon said Henry T. Ewald, except that such trustees taking the place of said Henry T. Ewald shall be bound by the following provisions:
(a) Such trustees shall distribute quarter annually to said donor during her lifetime the entire net income from said trust estate, after payment of the proper and necessary charges and expenses of managing and controlling said trust estate, which charges and expenses shall include reasonable fees for said trustees.
(b) Such trustees shall invest the trust funds in said trust estate only in securities or other property which shall be of the class of investments authorized by law for trustees.
(c) On the death of said donor subsequent to the death of said Henry T. Ewald, said trust estate shall be divided into equal shares or separate trusts for donor's children, SHIRLEY O. EWALD and HENRY THEODORE EWALD, JR., and such other children of donor, if any are hereafter born, or such of them as are then living or deceased with surviving issue, one share or separate trust for the surviving issue of said deceased child.
The share or trust for the issue of any deceased child shall be assigned, transferred and conveyed to such issue per stirpes, as soon as practical after said division.
Such portion of the income on the share or trust for each of donor's living children shall be used by the trustees to support, educate, maintain and care for such child as in the discretion of said trustees may be deemed most advisable until such child reaches the age of twenty-one (21); thereafter, each child shall receive, in quarter annual installments, all of the net income on his or her share or trust, during the continuance of the trust herein created.
(d) The share or trust for each of donor's children, Shirley O. Ewald and Henry Theodore Ewald, Jr., and such other children of donor, if any are hereafter born, shall be administered and distributed as follows: Each shall receive the income thereon as above, and if he or she be then twenty-five (25) years of age, or upon his or her arriving at age twenty-five (25), he or she shall receive one-fourth (1/4) of the principal of his or her share or trust. If he or she be then thirty (30) years of age, or upon his or her arriving at age thirty (30), he or she shall receive a second one-fourth (1/4) of the principal of his or her share or trust. If he or she be then thirty-five (35) years of age, or upon his or her arriving at age thirty-five (35), he or she shall receive a third one-fourth (1/4) of the principal of his or her share or trust. The residue of his or her share or trust shall be held during his or her lifetime, he or she to receive the income thereon as above, and the undistributed portion at his or her death shall be distributed in the manner hereinafter provided.
If any of donor's said children should die leaving surviving issue, prior to receiving all of his or her share or trust, any undistributed portion of his or her share or trust shall be distributed to his or her surviving issue by right of representation.
If any of donor's said children should die without leaving surviving issue, prior to receiving all of his or her share or trust, any undistributed portion of his or her share or trust shall be distributed, share and share alike, to the other surviving children of donor, the issue of any deceased child to receive the parent's share by right of representation.
If any of donor's said children should die without leaving surviving issue, prior to the final distribution of their shares of this trust estate, then any undistributed portion of their shares of this trust estate shall be distributed to donor's heirs-at-law, as provided by the statutes of the State of Michigan, in relation to estates of intestates.
Campbell-Ewald Co. is a corporation organized under the laws of the State of Delaware and is engaged in business as a national advertising agency. During all of the period from the beginning of the year 1936 to the present time, Henry T. Ewald has been president of the Campbell-Ewald Co. and the owner of 4,845 shares of its capital stock, which, together with the 4,000 shares so held in trust, has been all of the capital stock of any class outstanding. The stock has not, at any time during this period, been listed or traded on any exchange. During all of the taxable years in controversy the above mentioned 4,000 shares of stock have been the principal asset of the Oleta A. Ewald trust.
The book value of the above mentioned 4,000 shares of Campbell-Ewald Co. stock so held in trust at the beginning of the year 1936 was $595,040, and such value has thereafter increased from year to year to a value at December 31, 1940, of $739,760. During this same period, the indebtedness of petitioner was at no time in excess of $100,000, and her ‘net worth (excess of assets over liabilities)‘ ranged from $174,643.21 on December 31, 1936, to $484,279.07 on December 31, 1940.
On October 8, 1934, petitioner executed her last will and testament, the third and fourth articles of which provided in part as follows:
THIRD ARTICLE: I hereby give, devise and bequeath unto my daughter, SHIRLEY EWALD LOUD, if living, all and singular, my personal wearing apparel, jewelry and personal ornaments, including the oil portrait of myself, but excluding my three diamond ring; said ring I hereby give, devise and bequeath unto my son, HENRY THEODORE EWALD, JR., if living.
(a) I hereby give, devise and bequeath unto my husband, HENRY T. EWALD, if living, all the residue of my estate, both real, personal and mixed, of whatsoever kind, nature or description, wheresoever situated.
FOURTH ARTICLE: If my said husband, HENRY T. EWALD, should predecease me, then all the residue of my estate, both real, personal and mixed, of whatsoever kind, nature or description, wheresoever situated, I give, devise and bequeath unto * * * as Joint Trustees, and to their successors in office, IN TRUST, NEVERTHELESS, for the benefit of my children, SHIRLEY EWALD LOUD and HENRY THEODORE EWALD, JR., and such other children of mine, if any are hereafter born, and such other beneficiaries named herein, to be used for their use and benefit in the manner hereinafter designated.
On November 9, 1935, petitioner executed a codicil to her will but the codicil did not amend or change any part of the above quoted portions of the third and fourth articles of the will.
Henry T. Ewald had knowledge during each of the taxable years in controversy of the existence of petitioner's will and of the provision making him the residuary legatee thereunder.
Petitioner was born June 7, 1887; and her husband, Henry T. Ewald, was born April 20, 1885. Petitioner and Henry T. Ewald have been married over 31 years and have two children, namely: Shirley Ewald Loud, who is now 30 years of age, and Henry T. Ewald, Jr., now 18 years of age. Shirley Ewald Loud is married to Brewster Loud, Jr. (who is still living), and they have two children, namely, Theodore E. Loud, now 6 years of age, and Brewster M. Loud, who is 3 years of age.
During each of the years from 1929 to 1933, inclusive, the entire net income of the Oleta A. Ewald trust was distributed to petitioner.
For each of the calendar years from 1934 to 1940, inclusive, the net income of the trust (before deduction for amounts distributed to the beneficiary), the amounts distributed to petitioner as the beneficiary, the accumulated balance as of the end of each calendar year, and the Federal income tax paid by the trustee with respect to the undistributed net income of the trust, were as follows:
+----------------------------------------------------------+ ¦Year¦Net income ¦Distributed to¦Accumulated¦Federal income¦ +----+-----------+--------------+-----------+--------------¦ ¦ ¦ ¦beneficiary ¦balance ¦tax paid by ¦ +----+-----------+--------------+-----------+--------------¦ ¦ ¦ ¦ ¦ ¦trustee ¦ +----+-----------+--------------+-----------+--------------¦ ¦1933¦ ¦ ¦None ¦ ¦ +----+-----------+--------------+-----------+--------------¦ ¦1934¦$104,033.33¦$20,000.00 ¦$84,033.33 ¦$19,865.00 ¦ +----+-----------+--------------+-----------+--------------¦ ¦1935¦100,142.08 ¦36,200.00 ¦147,975.41 ¦11,819.15 ¦ +----+-----------+--------------+-----------+--------------¦ ¦1936¦150,254.93 ¦70,000.00 ¦228,230.34 ¦22,220.02 ¦ +----+-----------+--------------+-----------+--------------¦ ¦1937¦92,396.95 ¦65,000.00 ¦255,627.29 ¦3,601.30 ¦ +----+-----------+--------------+-----------+--------------¦ ¦1938¦40,187.97 ¦232,092.50 ¦63,722.76 ¦0 ¦ +----+-----------+--------------+-----------+--------------¦ ¦1939¦60,045.19 ¦40,000.00 ¦83,767.95 ¦2,050.68 ¦ +----+-----------+--------------+-----------+--------------¦ ¦1940¦100,036.27 ¦60,000.00 ¦123,804.22 ¦10,466.14 ¦ +----------------------------------------------------------+
In the year 1938 there was distributed tax free to the beneficiary $191,904.53 in excess of the net income of the trust for that year, such excess having been previously taxed to the trust.
The above mentioned net income of the trust for the taxable years involved was reported by petitioner and by the Oleta A. Ewald trust, respectively, as follows:
+----------------------------+ ¦Year¦Reported by¦Reported by¦ +----+-----------+-----------¦ ¦ ¦petitioner ¦trust ¦ +----+-----------+-----------¦ ¦1936¦$70,000 ¦$80,254.93 ¦ +----+-----------+-----------¦ ¦1937¦65,000 ¦27,396.95 ¦ +----+-----------+-----------¦ ¦1939¦40,000 ¦20,045.19 ¦ +----+-----------+-----------¦ ¦1940¦60,000 ¦40,036.67 ¦ +----------------------------+
The respondent determined that under section 167(a)(2) of the Revenue Act of 1936 there should be added to the net income reported by petitioner for the taxable years 1936 and 1937, and under section 167(a)(2) of the Internal Revenue Code there should be added to the net income reported by petitioner for the taxable years 1939 and 1940, as additional income from the Oleta A. Ewald trust, amounts as follows:
+----------------+ ¦1936¦$80,255.33 ¦ +----+-----------¦ ¦1937¦27,000.00 ¦ +----+-----------¦ ¦1939¦20,045.19 ¦ +----+-----------¦ ¦1940¦40,036.67 ¦ +----------------+
Petitioner's returns for 1936 and 1937 were filed on March 14, 1937, and March 15, 1938, respectively. The gross income stated in these returns was $84,318.43 and $79,142.04, respectively. The deficiency notice was mailed on March 13, 1942.
In omitting $80,255.33 of the income of the trust for 1936 and $27,000 of the income of the trust for 1937 from the gross income stated in her income tax returns, petitioner thereby omitted from her gross income amounts properly includible therein which were in excess of 25 percent of the amounts of gross income stated in the respective returns and the five-year period of limitations prescribed by section 275(c) of the Revenue Act of 1936 is applicable.
As bearing upon petitioner's assignment of error (b) to the effect that section 275(a) of the Revenue Act of 1936 is controlling as to the running of the statute of limitations and that section 275(c) is not applicable, the parties have stipulated the following facts:
On June 25, 1935, the Internal Revenue Agent in Charge, at Detroit, Michigan, notified Oleta A. Ewald that additional tax would be recommended with respect to her income for the calendar year 1934 on the ground that the entire income of the above described trust was properly taxable to her under Section 167 of the Revenue Act of 1934. A protest was filed by Oleta A. Ewald who contended that Henry T. Ewald, as Trustee, was a person having a substantial adverse interest in the disposition of the trust income, and that, accordingly, only that part of the trust income actually distributed to her in 1934 was properly taxable to her, the undistributed portion being taxable to the Trustee. A conference was held in the office of the Conference Section in Washington, D.C., on April 8, 1936 and on June 2, 1936, a ruling was issued by Deputy Commissioner Charles T. Russell, which held that Oleta A. Ewald was properly taxable only on that portion of the trust income actually distributed to her.
Any part of the stipulation of facts and the supplemental stipulation of facts, including the exhibits thereto, not specifically set forth herein are incorporated herein by reference and made a part of these findings of fact.
OPINION.
BLACK, Judge:
The first issue is whether the entire net income of the Oleta A. Ewald trust for the taxable years 1936, 1937, 1939, and 1940 should be included in computing petitioner's net income under the provisions of section 167(a)(2) of the Revenue Act of 1936 (for years 1936 and 1937) and of the Internal Revenue Code (for years 1939 and 1940). These provisions of the 1936 Act and the Code are identical and are set forth in the margin.
Admittedly, under paragraph 3 of the trust instrument Henry T. Ewald, the trustee of the trust, had the sole discretion with respect to the disposition of the income of the trust. The determination of this issue is, therefore, dependent upon whether Henry T. Ewald had a ‘substantial adverse interest‘ in the disposition of the undistributed income-of the trust, which is the ‘part of the income‘ here in question. If we determine that he did have such an interest, then the decision on this issue should be for the petitioner. On the other hand, if we determine that Henry T. Ewald did not have a ‘substantial adverse interest‘ in the disposition of the undistributed income of the trust, then the decision on this issue should be for the respondent.
SEC. 167. INCOME FOR BENEFIT OF GRANTOR.(a) Where any part of the income of a trust—(2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; * * *then such part of the income of the trust shall be included in computing the net income of the grantor.
In her brief petitioner contends that Henry T. Ewald, trustee, did have a substantial adverse interest in the disposition of the undistributed trust income in question for two reasons, stated in the brief as follows:
(a) His interest as beneficiary of the estate of the Petitioner if said Petitioner predeceased him.
(b) His interest in preserving the ownership of Campbell-Ewald Company within the Ewald family.
Under the first reason petitioner has requested a finding to the effect that there is no provision in the trust instrument for the disposition of the trust corpus or of the accumulated income in the event petitioner predeceased her husband. In this connection she points out that under paragraphs 3 and 4 of the trust instrument Henry T. Ewald, trustee, is given authority to pay such portion of the trust income as he may deem proper to petitioner during her lifetime and to her children following her death; and that the only provisions of the trust instrument relative to the disposition of the corpus are contained in subparagraphs (c) and (d) of paragraph 15. Petitioner argues that subparagraphs (c) and (d) apply only ‘On the death of said donor subsequent to the death of said Henry T. Ewald‘ and that, if petitioner should die prior to the death of her husband, the trust purposes would end with respect to the corpus and any income which might then be accumulated. In her brief petitioner says, ‘It is a general principle of trust law that the interest of a trustee in trust property is only as large as the trust purposes require, and every interest and estate not embraced in the trust remains in and reverts to the Settlor,‘ citing 65 C.J.p. 565; 26 R.C.L. 1258, sec. 107; Bogert on Trusts and Trustees, vol. 4, sec. 997 (to which might have been added section 12984 of Compiled Laws of Michigan, 1929, which provides as follows:
When an express trust is created, every estate and interest not embraced in the trust, and not otherwise disposed of, shall remain in, or revert to the person creating the trust, or his heirs as a legal estate.)
Petitioner then concludes from this that if she should die before her husband, the trust would terminate, with the corpus and all accumulated income first reverting to her estate and then being distributed to her husband as the residuary legatee under her will. In this way petitioner says it would be to the interest of her husband as trustee to distribute as little of the trust income as possible so that in case he survived his wife he, as the residuary legatee under her will, would receive the undistributed portion for himself, and that this interest must be regarded as a substantial adverse interest. Petitioner goes farther and says that, even if she revoked her will and predeceased her husband, the latter would ‘upon the death of Oleta A. Ewald, receive a substantial share (at least one-third) of the personal property constituting Mrs. Ewald's estate under the provisions of the Michigan Statutes of Descent and Distribution,‘ citing Act 314 of Michigan Public Acts of 1915, ch. LVII, sec. 7. This section as amended (Michigan Statutes Annotated, vol. 23, sec. 27.3178(163), sec. 93, part. 5) provides in part as follows:
In case any married woman shall die possessed of any personal estate, her sole property, or any right or interest therein not lawfully disposed of by her last will and testament, the same shall, after the debts of the deceased, funeral charges and expenses of administration are paid, be distributed as follows: One-third to the husband, and the remaining two-thirds to her children * * * .
We do not agree with petitioner that the trust would terminate if petitioner should die prior to the death of her husband. In construing trust instruments it is a paramount rule that the intention of the grantor, as expressed in the deed, shall prevail. Green v. Green, 23 Wall. 486; Colton v. Colton, 127 U.S. 300. ‘American courts are unwilling to permit the termination of the trust if this would defeat the purpose of the settlor in creating the trust. ‘ Scott on Trusts, vol. 3, sec. 329A. Looking at the trust instrument in question, we see that the donor desired to create an ‘irrevocable‘ trust in favor of the ‘beneficiaries‘ thereinafter designated. During her lifetime she was to have such portions of the net income of the trust as her husband as trustee should deem proper to pay her, but if her husband died, or resigned, or became unable to serve as trustee, the successor trustees appointed by her were to pay the entire net income of the trust to petitioner during her lifetime. Paragraph 4 provided that ‘Upon the death of said donor, said Henry T. Ewald, said trustee, shall distribute to the surviving children * * * quarter annually, such portions of the net income from said trust estate as he may deem proper.‘ We think this paragraph clearly shows that the grantor never intended the trust to terminate upon her death, if that death took place prior to the death of Henry T. Ewald, as petitioner contends. It is true that Henry T. Ewald as trustee was not given any authority to terminate the trust or to distribute any of the corpus. But by paragraph 14 the grantor appointed three joint trustees to serve in the place and stead of Henry T. Ewald in case of his death, resignation, or inability to serve. Then by paragraph 15 the donor provided that the new trustee or trustees shall be bound by four independent provisions, (a) to (d), inclusive. The fourth provision (d) provided in considerable detail for the disposition thereafter of both income and corpus. It may be that the trust instrument might have been more clearly drawn, but, after considering the entire instrument, we are unable to find any intention on the part of the grantor to have the trust terminated upon her death if she should predecease her husband.
Petitioner's whole case falls if it be determined that the trust does not terminate upon her death prior to the death of her husband. It would only be under a finding that the trust did terminate that the trust corpus and accumulated income would become a part of petitioner's estate and become the property of her husband under the residuary clause of her will. It is clear that the trustee, Henry T. Ewald, took no interest in either the corpus or income of the trust under the terms of the trust indenture itself. If, therefore, it be held that under the terms of the trust indenture none of the corpus or accumulated income of the trust would be subject to disposal by petitioner's will upon her predeceasing her husband, it is clear that Henry T. Ewald would take none of the trust property by reason of being the residuary legatee under petitioner's will and therefore could not have a substantial adverse interest to petitioner in the distribution of the income of the trust. Cf. Jennie Sapirstein, 47 B.T.A. 903. We hold, therefore, that Henry T. Ewald did not have a substantial adverse interest in the disposition of the undistributed trust income for the first reason argued by petitioner.
Under the second reason, stated above as (b), petitioner argues that if Henry T. Ewald exercised his discretion by accumulating a part of the trust income each year he would be building up a fund to pay estate and inheritance taxes of petitioner, and if a sufficient fund was thus built up, it would not become necessary to sell any of the 4,000 shares of Campbell-Ewald Company stock in order to pay such taxes, and that the building up of such a fund would be to the interest of Henry T. Ewald. This argument is likewise based upon the major premise that the trust would terminate if petitioner predeceased her husband and must, therefore, fall for the reasons above stated.
In Georgia B. Lonsdale, 42 B.T.A. 847, we said, ‘The phrase 'a substantial adverse interest’, as used in section 167, contemplates a direct interest in the trust income.‘ A person having such an interest would in ordinary parlance be regarded as a beneficiary of the trust. But in Reinecke v. Smith, 289 U.S. 172, the Supreme Court has held that ‘A trustee is not subsumed under the designation 'beneficiary’.‘ Cf. H. Cecil Sharp, 42 B.T.A. 336, 340; Loeb v. Commissioner, 113 Fed.(2d) 664, affirming 40 B.T.A. 517; certiorari denied, 311 U.S. 710; and Mary A. Cushing, 38 B.T.A. 948.
In the instant proceeding we hold that Henry T. Ewald, as trustee, did not have a substantial adverse interest in the disposition of the undistributed income of the Oleta A. Ewald trust, and that he could have distributed the entire income of the trust for the taxable years here involved to petitioner. The respondent's determination on this issue is approved.
The second issue is whether the deficiencies for the years 1936 and 1937 are barred by the statute of limitations. The applicable statute is section 275(a) and (c) of the Revenue Act of 1936.
It is conceded that the statute has run if only subsection (a) is applicable, but the respondent contends that subsection (c) is also applicable and the under subsection (c) the statute has not run. The respondent has shown that the gross income stated in petitioner's return for the years 1936 and 1937 was $84,318.43 and $79,142.04 respectively; that 25 percent of these amounts is $21,079.61 and $19,785.51, respectively; that petitioner omitted from her gross income the amounts of $80,254.93 and $27,396.95, respectively; and that the deficiency notice was mailed within five years after the respective returns were filed. The omitted amounts are in excess of 25 percent of the amounts of gross income stated in the respective returns, and under the first issue we have held that the omitted amounts were properly includible in petitioner's gross income under section 167(a)(2) of the Revenue Act of 1936.
SEC. 275. PERIOD OF LIMITATION UPON ASSESSMENT AND COLLECTION.Except as provided in section 276—(a) GENERAL RULE.— The amount of income taxes imposed by this title shall be assessed within three years after the return was filed, and no proceeding in court without assessment for the collection of such taxes shall be begun after the expiration of such period.(c) OMISSION FROM GROSS INCOME.— If the taxpayer omits from gross income an amount properly includible therein which is in excess of 25 per centum of the amount of gross income stated in the return, the tax may be assessed, or a proceeding in court for the collection of such tax may be begun without assessment, at any time within 5 years after the return was filed.
Petitioner contends that it was the intent of Congress to apply subsection (c) only if the omission from gross income of amounts properly includible therein was due to negligence on the part of the taxpayer; that the supplemental stipulation of facts (which we have incorporated in our findings of fact) clearly shows that the omission was not due to negligence, but to an honest belief that the omitted amounts were not income; and that to ‘omit‘ from gross income clearly means an act arising from neglect to perform what the law requires.
We considered this identical statute in Estate of C. P. Hale, 1 T.C. 121, where in the course of our opinion we said, ‘The words 'If the taxpayer omits from gross income’ are so clear and unambiguous that no construction of them is required.‘ In accordance with our decision in that case we hold that the deficiencies for the years 1936 and 1937 are not barred. Cf. Foster v. Commissioner, 131 Fed.(2d) 405; American Liberty Oil Co., 1 T.C. 386; Katharine C. Ketcham, 2 T.C. 159.
Reviewed by the Court.
Decision will be entered for the respondent.