*1545 Where petitioners' decedent formally assigned to three of his children all his interest in the distribution of funds arising from the property formerly owned by a coal company, said company having been theretofore dissolved and being in a state of liquidation, such assignment transferred a property right and was not a mere assignment of future income.
*291 These proceedings, which were duly consolidated for hearing and report, were brought for the redetermination of deficiencies in income taxes for the years 1924 to 1928, inclusive, in the following amounts:
| 1924 | $955.52 |
| 1925 | 452.28 |
| 1926 | 619.67 |
| 1927 | $791.58 |
| 1928 | 515.76 |
The first proceeding, Docket No. 39291, involving deficiencies for the years 1924, 1925 and 1926, was brought during his lifetime by I. N. Smith, the decedent. After his death the decedent's executors, above named, were substituted as petitioners.
The petitioners allege as errors:
(1) That the respondent erred in including in the decedent's income for the taxable years distributions under a certain*1546 "lease trust" which were not a part of decedent's income for such years.
(2) That the respondent erred in holding that a certain instrument involved in the said "lease trust" constituted a sale on the installment plan and not a lease; that as a result of such holding the respondent erroneously increased the amount of the distributed income of the lease trust for the taxable years by the addition of profits from the sale, and also erroneously increased the shares of the various beneficiaries of the trust, including the decedent, by the amount of their pro rata shares of such additions.
Petitioners alleged a third ground of error respecting a salary item which was included by the respondent in the decedent's income for the year 1924. This assignment of error has been settled by a stipulation between the parties to the effect that the net income of the decedent for the year 1924 as stated in the notice of deficiency should be decreased by the sum of $950.
*292 FINDINGS OF FACT.
Prior to the year 1919 the Rothwell Coal Company, a corporation incorporated under the laws of West Virginia was engaged in the business of mining coal from leasehold properties in Fayette County, *1547 West Virginia. The company was a close corporation and only qualifying shares of stock were issued. Members of the Rothwell family and of the Smith family were the only stockholders of the company. The decedent, I. N. Smith, and his brother, Harrison B. Smith, each owned a one-sixth interest in the company and the decedent was an officer thereof. The directors were the decedent, his brother Harrison B. Smith, and Herbert H. Rothwell, the latter being president of the company.
On October 14, 1919, the Rothwell Coal Company entered into a contract with M. J. Brown and F. A. Taylor of Philadelphia, such contract being described therein as a "deed of lease and agreement." This contract covers all of the corporation's mining properties. In the contract the Rothwell Coal Company was designated as the "lessor" and Brown and Taylor as the "lessees." The agreement recited, among other things, that the lessor was the owner of a leasehold estate in certain lands described in the agreement, under leases dated April 29, 1898, and March 22, 1912, and as such owners had for some years been engaged in operating under said leases and mining coal in accordance with the terms of the leases; that*1548 the lessees desired to acquire an assignment of said leases from the lessor, together with the plant, machinery and equipment owned by the lessor; that it had been agreed between the lessees and lessor that such assignment should be made, provided that the lessees would purchase from the lessor certain described chattels and other readily movable equipment for the sum of $40,000 which chattels the lessees had purchased and had received a bill of sale thereof one payment of the said sum of $40,000.
After such recitals the agreement of October 14, 1919, provided in part as follows:
Now, THEREFORE, THIS LEASE AND ASSIGNMENT OF LEASE is executed, and WITNESSETH:
1. That for and in consideration of the premises, and of the sum of Five ($5.00) Dollars, paid by each of the parties hereto to the other and in consideration of the performance and observance of the several terms, conditions, covenants, agreements and stipulations, all as hereinafter set forth to be performed and observed, the Lessor, reserving as rent the royalty hereinafter mentioned, DOTH HEREBY GRANT, DEMISE AND LET unto the parties of the second part, their personal representatives and assigns, and the survivor of*1549 them, and personal representatives and assigns of said survivor, that certain leasehold estate, created under the leases aforesaid, dated April 29th, 1898, and March 22nd, 1912, and all and every the rights, interests and claims of the Lessor in, *293 under and to said Leases and the coal and all other property described therein and thereby leased or assigned to the Lessors and now held by said Lessors.
There is excepted from the operation of said lease of April 29th, 1898, thirty (30) acres, more or less, which by agreement, were turned over by the Lessee, Rothwell Coal Company to Blume Coal & Coke Company.
Clause seven of the above mentioned lease of April 29th, 1898, is annulled and shall read as follows:
CLAUSE SEVEN MINIMUM ROYALTY
The lessee shall pay to the Lessor as a minimum rental under this lease, whether the quantity of coal mined and coke manufactured for the respective years shall produce that amount of rental or not at least the sum of Four Thousand ($4,000.00) Dollars a year, as long as the leased premises are capable of such production, payment of any amount necessary to complete the minimum rental for any one year shall be made on the 25th day of*1550 January of the next year. It is, however, understood, and agreed that in the event of said Lessee failing to mine an amount of coal equivalent, at the royalties aforesaid, to said minimum rent, during the year for which said minimum rent is paid, the said Lessee shall have the right and privilege of mining the amount of shortage which the minimum, as above provided for, is in excess of the amount of coal actually mined at any time within a period of two (2) years thereafter, thus reimbursing said Lessee for such deficiency in coal or over payment in royalty.
2. The party of the first part, for the consideration aforesaid, DOTH ALSO LEASE AND LET unto the parties of the second part, their personal representatives and assigns, and the survivor of them, or the personal representatives and assigns of such survivor, all equipment, plant, machinery and personal property of the party of the first part on the aforesaid described property or used in connection with the mining operations of the party of the first part, including tipples, store buildings, tenement houses, railways, mine cars, electrical apparatus, and any or all other property constituting the plant and equipment of the*1551 party of the first part, or used in connection with such plant and equipment, and without regard as to whether the same be herein specifically or generally set forth or not, it being the intention to demise hereunder all the property of the Lessor, except bills and accounts receivable, cash assets and property of like character, also except the tangible personal property covered by the aforesaid bill of sale from the party of the first part to the parties of the second part, of even date herewith, conveying title to such tangible and readily movable equipment and supplies.
3. This lease is for a period of ten (10) years from the date hereof, subject, however, to all covenants, stipulations and agreements herein contained as to default in the payment of rents and royalties, forfeitures and other provisions for the protection and preservation of the rights and remedies of the Lessor hereunder.
4. The Lessees shall commence work upon the leased premises immediately upon the execution and delivery hereof, and shall proceed with such operations with all diligence, and shall at all times, during the continuance of this lease, energetically and continuously develop and keep up its*1552 operations hereunder, and shall at all times and in every way keep and perform each and every of the covenants and agreements contained in the said lease of April 29th, 1898, *294 and March 22nd, 1912, as well as each and every of the covenants and agreements herein contained.
5. The Lessees shall pay to the Lessor, its successors, assigns, during the continuance of this lease, the following rents and royalties for the use of said demised premises, and improvements thereon and therein, and for the coal mined therefrom, that is to say;
(a) They shall pay under the said leases of April 29th, 1898 and March 22nd, 1912, all the rents and royalties required thereunder, and fully conform to any and reasonable requirements of said original leases to insure the accurate ascertainment of the weight of all coal taken shipped from or used upon the premises hereby leased.
(b) They shall pay to the Lessor herein, as rental for the said machinery, plant and equipment, the sum of Fifteen Thousand ($15,000.00) Dollars per annum, which sum shall be payable in quarterly installments, the first installment to be paid on the 14th day of January, 1920, and a similar installment to be paid*1553 on the 1st day of each third month thereafter during the continuance of said leases.
(c) The said Lessees, in addition to the payments above specified, agree that they shall and will pay to the Lessor fifteen (15??) cents per ton for each and every ton of Two Thousand, Two Hundred and Forty (2,240) pounds of coal run of mine, mined, dug, carried away from or used upon said premises during the term of this lease, and that said Lessees will pay a minimum coal rental under this lease, the sum of Fifteen Thousand ($15,000.00) Dollars, per annum, during the term hereof, and will pay the same quarterly installments of Three Thousand Seven Hundred and Fifty ($3,750.00) Dollars each, the first payment to be made on the day of 1920, and like payments to be made on the 1st day of every third month thereafter during the term of this lease. Such quarterly installments of royalty shall be the minimum coal royalty payments required to be made hereunder, and the same shall and will be made regardless of the tons of coal mined from said property during any quarter or other period of this lease; provided, further, however, that if in any year a greater tonnage than one hundred thousand (100,000) *1554 tons of coal shall be mined, dug, carried away from or used upon said premises, such excess amount shall be paid for at the rate of fifteen (15??) cents per ton as coal royalty, in addition to the minimum royalty herein reserved such year, such payments to be made within twenty (20) days after the expiration of such year. And the Lessor hereunder reserves for itself the benefit of all reasonable requirements of the Lessor in said original leases of April 29th, 1898 and March 22nd, 1912 to assure the accurate ascertainments of the weights of all coal taken, shipped from or used upon the premises hereby leased, and in addition thereto, such further rights and privileges as may be reasonably demanded by the Lessor for such purpose.
* * *
12. It is agreed by and between the parties hereto that the Lessees, their personal representatives or assigns, shall have the right and option, at any time during the term of this lease, after but not before, the expiration of three (3) years from the date hereof, to extinguish the rent of machinery, plant and equipment, and to extinguish the royalty of coal herein provided to be paid the Lessor herein, and to extinguish this lease by purchasing*1555 all the right, title and interest and claim of the Lessor in and to said machinery, plant and equipment, and the leasehold estate created by the leases of April 29th, 1898, and March 22nd, 1912, by paying to the Lessors, its successors or assigns the sum of Two Hundred and Forty Thousand ($240,000.00) Dollars as the full purchase *295 price for such right, title, interest and claim of Lessor. In the event this option is exercised, the said sum of Two Hundred and Forty Thousand ($240,000.00) Dollars shall bear interest at six (6%) percent per annum from the date of this lease, and all rent of machinery and equipment reserved hereunder, and all royalty on coal paid to the Lessor herein, prior to the exercise of such option, shall be, with six (6%) per cent interest adjusted thereon, credited against such purchase price and its interest.
* * *
The instrument also provided that the lessees would operate the mines in the most modern and workmanlike manner, maintaining the equipment in good condition, would keep the buildings, tipples and equipment fully insured and would pay all taxes on the demised property and also all state and Federal taxes and would not encumber the premises*1556 by mortgage or otherwise. The contract also reserved to the lessor the right to repossess the premises in the event of the default or defaults of the lessees in respect to any of the covenants or agreements made by them.
After the execution of the contract of October 14, 1919, pursuant to a resolution of its stockholders the Rothwell Coal Company was duly dissolved. Prior to such dissolution by agreement of the stockholders and directors of the company, Herbert H. Rothwell, the company's president, was appointed trustee to liquidate the corporation. No minutes were kept of the meeting of stockholders and directors at which his appointment was made.
On July 14, 1921, the decedent executed the following instrument:
CHARLESTON, WEST VIRGINIA,
July 14th, 1921.
In consideration of love and affection, and other good and valuable considerations, I do hereby assign and set over unto my three children, I. Noyes Smith, Catherine D. Smith and E. Dana Smith, all my interest in the distribution of funds arising from the property formerly owned by ROTHWELL COAL COMPANY, and now administered by Herbert H. Rothwell, Trustee, the children's interest to be share and share alike, or*1557 one-third each. Mr. Rothwell, as Trustee, will please hereafter pay my distributive share to my three assignees as above indicated.
WITNESS my signature and seal this 14th day of July, 1921.
I. N. SMITH (SEAL)WITNESS:
DUKE W. HILL
In the summer of 1921, after the execution of the foregoing instrument, the decedent told his entire family that he had recently given his interest in the Rothwell lease trust to his three children, Noyes, Dana and Catherine.
In April, 1922, Herbert H. Rothwell died and thereupon Duke Hill, who was Harrison B. Smith's secretary, was appointed to complete the liquidation of the Rothwell Coal Company, as distributor of the proceeds of the Rothwell lease trust.
*296 During the year 1922 and subsequent years, including the taxable years in question in those proceedings, the trustee and distributor under the Rothwell lease trust issued checks to each of the three children named in the instrument dated July 14, 1921, for one-eighteenth of the amount of distributions made by the trust, one check in 1924 being drawn, apparently in error, to order of the decedent. At the time of the execution of the assignment of July 14, 1921, the three*1558 children named were minors and during a part of the taxable years were in attendance at school or college. Their father, the decedent, managed the financial affairs of each member of his family, with their knowledge and consent. The decedent indorsed the distribution checks and deposited them in his own name. He kept regular family books of account, in which he debited each member of his family with expenditures made in their behalf or for their account and with money advanced to each of them respectively. The items debited in these years embraced not only items covering maintenance of the children at school and at college, but such items as bills for dues at a country club, pleasure trips, bills for jewelry, for insurance premiums, etc. Many of the checks drawn by the decedent covering the items debited to each of the children named in the assignment were drawn to the respective child's order and indorsed by him or her. Such checks so indorsed varied in amount from comparatively small sums to several hundred dollars. The amounts debited to the children were used by them respectively for their own purposes. At the end of each year the decedent credited to the account of each*1559 of the children named one-third of the total amount of the distributions under the Rothwell lease trust received during that year and previously deposited by him to his own credit. After the assignment decedent never received for his own use any distributions from the Rothwell property.
The children each made income-tax reports for the taxable years in question, including in their gross income the total amount credited to them respectively in the debit and credit accounts kept with them by their father, the decedent.
On December 29, 1927, the decedent executed and delivered an instrument as follows:
Charleston, West Virginia,
December 29, 1927.
WHEREAS, on July 14, 1921, I assigned and set over unto three of my children, share and share alike all my interest in the distribution of funds arising from properties formerly owned by the Rothwell Coal Company and now administered by a Trustee and instructed said Trustee to pay my distributive share from said properties to my said assignees; and
WHEREAS, it was my intent and purpose to transfer, assign, convey and set over to my children by said assignment all of my right, title and interest in and to all of the funds and*1560 properties held in said trust, and all of my right to *297 receive any monies therefrom, whether derived from income or from sale of said properties; and
WHEREAS, I made said assignment in good faith and believed, and still believe, the same to be legally valid and sufficient to dispose of all my right, title and interest in and to the funds and properties of said trust and my right to receive a distributive share of the same; and
WHEREAS, said assignment has always been regarded as legally valid and binding, not only by myself but by the Trustee of said trust and by the beneficiaries of said assignment, and all distributions, which would have, without said assignment, accrued to me, have been paid by said Trustee to the said beneficiaries and said assignment has in all respects been strictly carried out and followed; but
WHEREAS, the Income Tax Unit of the Treasury Department has ruled that said assignment was insufficient to transfer the income from said trust from me to the beneficiaries and its representatives have suggested that an enlargement of said assignment should be executed.
Now, THEREFORE, in consideration of the premises, love and affection for my children, *1561 and other good and valuable considerations, I do hereby transfer, assign, convey and set over, as of July 14, 1921, unto three of my children, I. Noyes Smith, Catherine D. Smith and E. Dana Smith, share and share alike, or one-third each, all my right, title and interest in and to the funds and properties formerly owned by the Rothwell Coal Company and now administered by Duke W. Hill, Trustee (as successor to Herbert H. Rothwell, Trustee), and all my right to a distributive share of the monies of said trust, whether derived from income from or sales of said properties, and I hereby instruct the said Trustee to pay to my children, in the proportions aforesaid, all of what was formerly my distributive share in said trust.
This instrument is intended as an enlargement and a part of the assignment previously made by me on July 14, 1921, and it is my express intent and purpose that it be effective as of July 14, 1921. It is made without prejudice to or waiver of my contention that said assignment previously made by me is legally valid and sufficient to transfer, assign, convey and set over unto the beneficiaries thereof all my right, title and interest inand to the funds and properties*1562 formerly owned by the Rothwell Coal Company and now administered by Duke W. Hill, Trustee (as successor to Herbert H. Rothwell, Trustee), and all my right to a distributive share of the monies of said trust, whether derived from income from or sales of said properties.
WITNESS my signature and seal, this 29th day of December, 1927.
[Signed] I. N. SMITH (SEAL)
Witness:
[Signed] DUKE W. HILL
The decedent filed income-tax returns for each of the taxable years, in which he did not include as a part of his gross income the distributions under the Rothwell lease trust credited to his children as hereinbefore set forth. The respondent held that such distributions were income of the decedent and not of the children named in the instrument of July 14, 1921. The respondent also held that the contract entered into between the Rothwell Coal Company and Brown and Taylor constituted a sale on the installment basis and was not a lease. He, therefore, increased the distributable amount *298 reported by the trustee under the lease trust for each of the taxable years by adding thereto certain profits made on the sale, thus increasing by the pro rata part of such profit the*1563 amount shown by the trustee's several reports to have been distributed during each of the taxable years to those having an interest in such distribution. The total amount so determined by the respondent as the decedent's share in the distributions of the Rothwell lease trust for each of the taxable years was included by the respondent in decedent's gross income for the taxable years as stated in the several notices of deficiency.
Brown and Taylor assigned all their right, title and interest under the lease and assignment dated October 14, 1919, to the Maryland New River Coal Company, a corporation. Thereafter and on or about April 13, 1929, the Rothwell Coal Company and all other parties in interest, including the three children named in the assignments of July 14, 1921, and December 29, 1927, conveyed to the Maryland New River Coal Company, in consideration of the sum of $42,192.58 and other good and valuable consideration stated in the instrument, the leasehold and all equipment, plant, machinery and other personal property on the leased premises which were used in connection with mining operations.
This instrument of conveyance recites in substance, among other things, that*1564 I. N. Smith, the decedent herein, had assigned, transferred and set over to I. N. Smith, Junior, Catherine D. Smith, and E. Dana Smith all of his interest in the distribution of the funds arising from the property of the Rothwell Coal Company.
OPINION.
VAN FOSSAN: The first issue is whether or not one-sixth of the distributable income of the so-called Rothwell lease trust for each of the taxable years was the income of I. N. Smith, the decedent, or the income of three of his children. The determination of the question depends on whether the assignment of July 4, 1921, accomplished the transfer of a property right from which income arose or whether it was merely an assignment of future income. ; aff'd., ; ; .
The respondent concedes in his brief that the instrument dated December 29, 1927, which is set forth in full in the findings of fact, is a valid assignment by the decedent to his three children of all the decedent's right, title and interest in and to the funds and properties in question; that such assignment*1565 should be given effect; and that decedent was not liable for tax on any portion of the income for the year 1928. We concur in this view.
*299 Respondent urges, however, that the first assignment, that of July 14, 1921, did not accomplish the same result, and points to variations in language as supporting the distinction he asks us to draw. We are unimpressed by respondent's line of reasoning and can not agree that the earlier document fails of purpose, whereas the latter admittedly succeeds. The phraseology of the latter paper is fuller, but, when read as a whole and related to the present subject matter, no more comprehensive than that employed in the former. We believe both to be valid and effective for accomplishing the declared purpose, the second assignment emphasizing the intention and effect of the first. It will be borne in mind that before the dissolution of the Rothwell Coal Company the decedent, as a stockholder, owned a one-sixth interest in that company, while after the dissolution his only interest was a one-sixth interest in the distribution of assets remaining after payment of debts and liquidating expenses. The company was dissolved in 1919, while the*1566 assignment took place in 1921. Therefore, when decedent assigned and set over to his children "all my interest in the distribution of funds arising from the property formerly owned by the Rothwell Coal Company" he transferred everything he had, namely, his property right in any distributions however arising. Nothing was added when in the second document, that of 1927, he used the words, "all my right, title and interest in and to the funds and properties formerly owned by the Rothwell Coal Company * * * and all my right to a distributive share of the monies of said trust whether derived from income or sales of said properties." The latter phrasing was more detailed, but not more comprehensive.
While the conclusion above reached by study of the language of the two assignments effectively disposes of the principal and determinative issue of these proceedings, it may not be amiss to call attention to other facts revealed by the evidence. The first assignment was formally executed, consistently recognized and enforced and its validity insisted on by decedent in the drawing of the second assignment. The beneficiaries of the assignment were advised of its execution and received and*1567 accepted the benefits. The 1927 assignment was suggested by the attitude of the income tax unit and by its terms declares its purpose to be the effectuation of the original intention.
We are of the opinion that the original assignment was an effective legal transfer of a property right, not a mere assignment of income. By such transfer decedent parted with all right, title and interest in and to any share in the distribution of remaining assets of the coal company, however derived. The beneficiaries thereupon *300 became chargeable with tax on any income so received, which taxes have been paid.
The conclusion above announced makes unnecessary a consideration of the second issue.
Reviewed by the Board.
Decision will be entered under Rule 50.
GOODRICH took no part in the consideration or decision of these proceedings.