Andrews v. Commissioner , 26 B.T.A. 642 ( 1932 )

MRS. FRANK ANDREWS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Andrews v. Commissioner

Docket No. 46734.

United States Board of Tax Appeals

26 B.T.A. 642; 1932 BTA LEXIS 1277;

July 13, 1932, Promulgated

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">*1277 1. Ethel Hopkins McLarry,8 B.T.A. 1257">8 B.T.A. 1257, and Laura Rumsey McMicken,10 B.T.A. 302">10 B.T.A. 302, holding that the "earned income" of the husband in a community property state is not "earned income" of the wife, followed.

2. The dividends here, declared by a national banking corporation which, pursuant to an agreement with its stockholders, of which petitioner was one, were to be paid to trustees appointed by the stockholders, for their account, for the purpose of organizing a subsidiary corporation and acquiring its capital stock, said stock to be held in trust for the stockholders of the bank, are taxable income to the said stockholders though not actually received by them.

Walter E. Barton, Esq., and J. L. Block, C.P.A., for the petitioner.

Philip M. Clark, Esq., for the respondent.

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MORRIS

">*642 This proceeding is for the redetermination of a deficiency in income tax of $569.39 for the taxable year 1926.

The petitioner alleges error on the part of the respondent in (1) finding that her earned net income for 1926 was $3,121.82 instead of $31,145.71, and (2) computing her earned-income credit for that year on">*1278 earned net income of only $5,000 instead of $20,000, and (3) finding that she received a taxable dividend of $1,000 from the Union National Bank during the taxable year 1926.

FINDINGS OF FACT.

The petitioner, an individual citizen of the United States residing at Houston, Texas, is the wife of Frank Andrews, with whom she lived during the taxable year in question.

In 1926 the petitioner and her husband were the owners of 200 shares of stock of the Union National Bank of Houston, Texas (hereafter referred to as the bank), which stock constituted community property under the laws of the State of Texas. The bank was organized under the laws of the United States, with a capitalization ">*643 of $1,000,000, represented by 10,000 shares of a par value of $100 each, all of which stock was outstanding in 1926.

There being certain provisions of the National Banking Act restricting national banks from making real estate loans for periods in excess of five years and in order to provide more complete banking facilities to its patrons, it was decided that a subsidiary corporation should be organized under the state laws to engage in the lending of money on real estate, buying">*1279 and selling first mortgages and vendor lien notes, and in pursuance of that plan a corporation, The Union National Company (hereafter referred to as the company), was organized, according to its charter, "to accumulate and lend money without banking or discounting privileges," and it has since engaged in making long-term loans.

The plans of the bank toward organization of the company were outlined in a communication addressed to all of the stockholders of the bank under date of March 5, 1926, which follows:

MY DEAR STOCKHOLDER: With the unanimous approval of the Directors of The Union National Bank of Houston at its regular monthly meeting to-day and about 80 per cent of the stockholders thereof, the management has in contemplation the organization of a subsidiary company with a capital stock of $100,000.00, to be known as "The Union National Company," or such other name as may be selected, one-half of the capital stock thereof to be paid in now, and the remainder as and when needed.

It is contemplated that the stockholders of the Bank will unanimously authorize the use of a special dividend of $50,000.00 to be declared presently, and another special dividend of a like amount">*1280 to be declared later, both of such dividends instead of being payable to the stockholders of the Bank, to be payable to seven Trustees to be used by them in incorporating such subsidiary company, and when so incorporated, such company to continue as a subsidiary to the Bank throughout the corporate existence of the Bank.

It is also contemplated that the stockholders of the Bank will unanimously appoint the seven Trustees for the purpose of so creating such subsidiary corporation, such Trustees and their successors thereafter to be elected annually by the stockholders of the company who will be identical with those of the Bank, such election to be held at the same time and in the same manner as the Directors of the Bank are elected.

It is contemplated that all of the capital stock of such subsidiary company when so created, shall be issued to the seven Trustees so appointed by the stockholders of the Bank, and will be by them endorsed in blank and deposited with The Union National Bank of Houston, along with a Declaration of Trust made by such Trustees, to the effect that they hold and will continue to hold such stock in trust for the pro rata benefit of the stockholders of The">*1281 Union National Bank in the proportion of their respective holdings of stock in said Bank.

It is likewise contemplated that the special bank dividends mentioned above will in no manner interfere with the payment of the regular quarterly 2 per cent dividend.

In is regarded as desirable to organize such subsidiary company in order to better serve the patrons of the Bank, as has been done in other sections ">*644 by many of the larger national and state banks, as is no doubt known to you, and, therefore, it is not necessary to go at length into this phase of the subject.

It is further contemplated that as earnings accrue on the stock of such subsidiary company, the Directors thereof will declare dividends on the stock of such subsidiary company, which, of course, will be paid by the Trustees to the then owners of The Union National Bank in proportion to their holdings of the stock, either as a separate dividend or included in any bank dividend declared and paid.

If the foregoing meets with unanimous approval, it is contemplated that such endorsement will be made on each certificate of stock of the Bank as will evidence the interest of the owner of such certificate of stock">*1282 in such subsidiary company. Of course, any sale of the Bank stock would carry with it the corresponding interest in the stock of such subsidiary company.

As stated above, about 80 per cent of the stockholders of the Bank are cordially favorable to such plan, and it is deemed both desirable and fair to the other 20 per cent that the matter be submitted to them for their consideration and participation in the manner hereinbefore set forth. Each stockholder is, therefore, respectfully requested to give his or her assent to the proposition on the enclosed form, which is sent in duplicate so that each may retain a copy.

The foregoing plan contemplates the unanimous affirmative response of the stockholders. If any fail or refuse, we can not consummate the desirable thing in mind in the manner herein suggested.

In event of such failure or refusal, the only other method open will be to create a corporation separate and distinct from the Bank. It is essential to adopt one or the other, as in the opinion of the management, some such instrumentality is all but necessary for the proper conduct of the Bank's affairs.

Signatures should be duly witnessed, and your immediate attention">*1283 will be much appreciated.

* * *

On April 7, 1926, the desirability of organizing such a subsidiary was brought to the attention of the board of directors of the bank by its president, Farrar, and by unanimous consent he was instructed to submit the matter to the stockholders in the form suggested by the bank's attorney for their consideration and approval and to resubmit the matter to the board for final action.

The following is a communication signed by all of the stockholders of the bank and addressed to R. M. Farrar, its president:

Referring to your circular letter of March 5, 1926, relative to the proposed organization of a subsidiary company to The Union National Bank Of Houston, to be known as "The Union National Company," or such other name as may be selected, I beg to advise you as follows:

I hereby express my complete approval and consent to the organization of such subsidiary company as outlined in your letter.

I hereby consent to the appointment of Messrs. J. S. Rice, C. G. Pillot, Frank Andrews, B. B. Gilmer, A. L. Carter, George Hamman and R. M. Farrar as

Trustees, for the purpose of creating and organizing such company, and for the further purpose of">*1284 holding all of the capital stock of such company in trust for the benefit of the stockholders of The Union National Bank as outlined in your letter, and I further consent, authorize and direct the Directors of The Union National Bank to declare a special dividend or dividends on ">*645 the stock of The Union National Bank of Houston, amounting in the aggregate to not more than $10.00 on each share of the stock of said Bank, and pay the same to such Trustee above named, to be used by them for the purpose of paying in the capital stock of such subsidiary company; it being understood that special dividends may be declared and so paid on the stock of the Bank at such time or times as by the Directors of said Bank may be deemed wise, provided that in no event shall the total of such special dividends for said purpose be more than $10.00 on each share of stock of said Bank, and I hereby transfer and assign unto such Trustees, for the purpose mentioned, all of my interest in and to such special dividends above mentioned.

I further consent and agree that when such subsidiary company to said The Union National Bank of Houston shall have been duly incorporated, that all of the capital">*1285 stock thereof may be issued to the above named Trustees and be by them endorsed in blank, and together with a Declaration of Trust as outlined in your circular letter of March 5, 1926, deposited with The Union National Bank of Houston, and I authorize and direct the said Trustees for me and in my name, so far as my interest in the stock of such subsidiary company is or may be concerned, to do any and all things necessary to effect the organization of said company, such, as the election of its Board of Directors and otherwise as in their judgment may be necessary and desirable. And I likewise consent that such Trustees above named, or, in any event, a majority thereof, be elected as Directors for the first year of such subsidiary company when so created, and thereafter such Directors to be named by the stockholders of The Union National Bank of Houston.

After the organization of such subsidiary company on request by you, I agree to send in my Union National Bank Stock for appropriate endorsement thereon, such endorsement to show that the owner and holder of such Bank stock is likewise interested in the capital stock of such subsidiary company subject to such trust agreement to be">*1286 made by the above mentioned Trustees.

Under date of April 6, 1926, the trust mentioned in the plan of March 5, 1926, aforesaid, was formally declared, and executed by the trustees, in the following instrument:

THE STATE OF TEXAS

COUNTY OF HARRIS

WHEREAS, in pursuance of a plan submitted under date of March 5, 1926, to its stockholders by The Union National Bank of Houston, a corporation domiciled in the City of Houston, Harris County, Texas, the undersigned were by said stockholders named as trustees, for the purpose of creating a subsidiary corporation to said Bank under the laws of the State of Texas, to be known as The Union National Company, and likewise for the purpose of having said company issue to the undersigned as Trustees all of the capital stock thereof, to be by the undersigned and their successors held in trust throughout the corporate existence of said The Union National Bank of Houston, for the pro-rata benefit of all of the stockholders of said Bank and/or their transferees, as the case may be; and

WHEREAS, said The Union National Company has now been chartered and $50,000.00 of its capital stock paid in pursuant to said plan, and the amount of stock so">*1287 paid in has been issued and delivered to the undersigned as Trustees pursuant to said plan, and it is contemplated that when the remainder of the capital stock of said The Union National Company shall be paid in pursuance to said plan of March 5, 1926, that it likewise shall be issued and delivered to the undersigned or their successors as Trustees, likewise to be held in trust ">*646 in the same manner as the $50,000.00 of such stock hereinbefore mentioned as having been issued and delivered to the undersigned;

NOW, THEREFORE, we, J. S. Rice, C. G. Pillot, Frank Andrews, B. B. Gilmer, A. L. Carter, George Hamman and R. M. Farrar, all of Harris County, Texas, for ourselves, our heirs, executors, administrators, and successors, jointly and severally acknowledge that $50,000 of the capital stock of said The Union National Company has been so issued and delivered to us in trust, and we have endorsed the same in blank, and together with this signed document, delivered the same to The Union National Bank of Houston to be held by it pursuant to such plan; and we further declare that said capital stock is held by us, and shall hereafter be held by our successors throughout the corporate">*1288 existence of said Bank, in trust for the pro-rata benefit of all stockholders of The Union National Bank of Houston and/or their transferees, as the case may be, in the proportion of their respective holdings in said Bank, and we, for ourselves, our successors, heirs, executors and administrators likewise agree as, if and when placed the balance of the capital stock of said The Union National Company shall be paid in pursuant to said plan of March 5, 1926, and issued and delivered to us or our successors, as the case may be, that it shall likewise be held by the undersigned or their successors in trust, upon the same terms, and in the same manner as the $50,000 of stock hereinbefore recited as having been delivered to us; and

WHEREAS, pursuant to such plan of March 5, 1926, so submitted by said Bank to its stockholders, it was agreed by such stockholders that any sale by any stockholder of said The Union National Bank of Houston of any of the stock of said The Union National Bank of Houston owned by him or her, as the case may be, shall carry with it the corresponding interest in the stock of said The Union National Company so held and to be held in trust as aforesaid by us and our">*1289 successors;

NOW, THEREFORE, in pursuance to such agreement of the stockholders of said Bank, it is distinctly understood, stipulated, and agreed, which stipulation and agreement shall be binding on all of said stockholders in said Bank and their respective transferees, that a sale or transfer by any stockholder or said The Union National Bank of Houston of any shares of the capital stock of said Bank shall to that extent be deemed to pass to the transferee of any such shares of stock the beneficial interest of said stockholder in the capital stock of said The Union National Company so held in trust by us, or to be hereafter held in trust by us or our successors, as the case may be, and such beneficial interest may not be tansferred in any other manner than by the transfer of the certificate or certificates of stock so owned by such stockholder of said The Union National Bank of Houston.

It is distinctly understood and agreed that the undersigned Trustees and their successors shall only be deemed to be interested individually in the capital stock so held in trust in so far as they may severally be the owners of capital stock in said The Union National Bank of Houston.

All dividends">*1290 that may hereafter throughout the life of this trust be declared by the Board of Directors of said The Union National Company shall be paid to the stockholders of The Union National Bank of Houston pro-rata in the proportion of their respective holdings of stock in said Bank.

Successor Trustees may be appointed by the stockholders of said The Union National Bank, from time to time, who shall continue to hold the capital stock of said The Union National Company in trust, upon the terms, conditions and stipulations herein contained; but, until such successor trustee shall be so nominated and appointed, said stock shall be held in trust as aforesaid by the ">*647 undersigned. In the event of the appointment of future trustees, it shall not be necessary for the stock so held in trust and deposited herewith or at any time in the future with the Union National Bank of Houston, to be re-issued; but any trustee so appointed shall, upon merely filing an acceptance in writing, be deemed to succeed to all of the rights, powers, privileges and duties so held by his predecessor trustee.

IN TESTIMONY WHEREOF, witness our hands on this 6th day of April, 1926.

[Signed] J. S. RICE

">*1291 C. G. PILLOT A. L. CARTER B. B. GILMER

GEORGE HAMMAN

R. M. FARRAR

The minutes of the meeting of the board of directors of the bank on April 7, 1926, refer to the plan of March 5, 1926, for the creation of the company, to the fact that it had received "practically the unanimous consent of all the stockholders" and to the fact that it had been duly chartered under the laws of the State of Texas, and it was thereat:

RESOLVED by the Board of Directors of The Union National Bank of Houston that a dividend of $5 per share be issued to the stockholders of this Bank as of this date be declared and paid to the Trustees named in said plan so submitted to the stockholders for the purpose of paying to said Trustees fifty per cent of the capital stock of said Company for the benefit of the stockholders of the Bank, and that in further pursuance to such plan that the officers of this Bank receive from the Trustees named the Declaration of Trust executed or to be executed by such Trustees declaring that they hold the stock of said The Union National Company in trust for the pro-rata benefit of the shareholders of The Union National Bank in the proportion of their respective ownership">*1292 of stock in said Bank in conformity with said plan.

The said dividend, amounting in the aggregate to $50,000, was paid to the trustees in accordance with said resolution.

Under date of April 10, 1926, the president of the bank directed a communication to the stockholders, informing them of the organization of the company, stating that $50,000 of its capital had been paid in accordance with instructions of the stockholders and that the trustees had deposited the stock of the said company with the bank, in trust, for the shareholders of the bank, in accordance with the foregoing declaration of trust, and it also instructed them to forward their stock certificates of the bank for appropriate endorsement thereon. Accordingly, at some time during 1926, all of the stockholders of the bank having consented to the agreement, forwarded their certificates of capital stock of the bank in accordance with said instructions and the following was stamped upon the reverse side of each certificate:

By virtue of and subject to a written Declaration of Trust dated the 6th day of April, 1926, made by J. S. Rice and others as Trustees, the owner of the shares of stock represented by this Certificate">*1293 is beneficially interested, in ">*648 common with all other stockholders of The Union National Bank of Houston, in a pro rata amount of the capital stock of The Union National Company, a corporation. Such beneficial interest shall pass with the transfer of this certificate and may not be transferred in any other manner.

By action of the board of directors of the bank on July 6, 1926, an additional $25,000 dividend, or 2 1/2 per cent, was paid to the trustees of the company "for the account of the stockholders of record of the Union National Bank," pursuant to the trust indenture herein, and again on October 13, 1926, a further dividend of $25,000 was declared, and so paid, for the account of said stockholders. The trustees, in turn, paid said dividends into the company.

None of the $100,000 declared as three dividends by the bank, under the said trust agreement, to be used in the organization of the company, was actually paid to the stockholders.

With the exception of qualifying directors' shares, all of the capital stock of the company was issued to the trustees, under the deed of trust, none whatsoever being issued to the stockholders of the bank.

In the determination">*1294 of the deficiency here the respondent found that the petitioner and her husband had received a taxable dividend of $2,000 from the bank in 1926, growing out of the organization of the company under the declaration of trust hereinabove discussed, and he added a dividend of $1,000 to the petitioner's net taxable income for the year.

The respondent found that the gross income, deductions, and net income of the petitioner and her husband for the year 1926 were:

Gross income	$87,449.02
Deductions	13,131.98
Net income	74,317.04

and also that the net income of the petitioner for such year was $37,158.52, and that her husband's net income was the same amount. He found that the partnership income received from andrews, Streetman, Logue and Mobley during 1926 was $62,291.41, one-half of which was taxable to the petitioner and one-half to her husband, and he computed the earned-income credit upon the basis of the minimum earned net income of $5,000 instead of the maximum of $20,000, for the reason that none of her income was derived from personal services rendered by her.

The petitioner's husband gave all of his time to the law firm, of which he was the senior member, ">*1295 and the sum of $62,291.41 represents his earnings from the firm for professional services rendered to clients.

The petitioner kept her books of account and filed her tax return upon the basis of cash receipts and disbursements.

">*649 OPINION.

MORRIS: The first two numbered issues herein really involve but one question, i.e., whether the petitioner is entitled to have her earned-income credit computed upon the maximum amount, $20,000, or the minimum amount, $5,000, of earned income, provided for in section 209 of the Revenue Act of 1926. The solution of this question depends upon whether one-half of her husband's "earned income" to which she became entitled under the community property laws of the State of Texas is "earned income" to her within the meaning of that section of the Act.

With due deference to the United States Circuit Court of Appeals, Fifth Circuit, which in , reversed the decision of the Board in , upon the identical question involved in this proceeding, and after further consideration, we are of the opinion, for the reasons hereinafter">*1296 set forth, some of which may not have been considered by that court, that the Board's decision in the McLarry case and its later decision in , correctly construe the taxing statute.

The Board in its opinion in the McLarry case said, speaking of the interest of a wife in the earnings of her husband in a community property jurisdiction, "Does it arise because the earnings are deemed by the law to be the product of their joint efforts or does it arise because of the marital status?," and it reached the conclusion, after a review and study of the decisions of the state courts of Texas, "that the interest of either spouse in the earnings of the other arises as a matter of law from the marital relationship," and not from "the existence of any joint effort." Although employing such considerations in support of the ultimate conclusion which it reached, the Board indicated that it entertained serious doubt that the question was dependent upon the decisions of the state courts. It said, however, "for the purposes of this opinion we have assumed that counsel for petitioner are correct in their contention that the decisions of the">*1297 state court would be accepted as binding in determining whether or not the amount in question came to the wife as earnings from her services."

It is of interest to note that the circuit court in , did not base its conclusion on the premise that under the Texas law community income arises from joint effort. We deem it advisable, however, to consider what, if any, effect such an interpretation by the Texas courts would have in the determination of the present question, although we have heretofore reached the conclusion, after a consideration of the decisions of the Texas courts, ">*650 that the wife's interest in community income results from the marital relationship. It is the province of the state law to determine and define the property rights of its citizens, , and the Federal courts and this Board are governed thereby and will follow the state court's decisions pertaining thereto. See also . In recognition of this principle the Congress recognized and the courts and this Board have repeatedly upheld the right of">*1298 a wife in a community property jurisdiction, where there is a vested interest in community property as distinguished from a mere expectancy, to, and to be taxed upon, one-half of the income of her husband. , affecting spouses in the state of Washington; , affecting spouses in the State of Arizona; , affecting spouses in the State of Texas; and , affecting spouses in the State of California. But when it comes to the matter of determining how and at what rates that income, so acquired by the wife, shall be taxed by the Federal Government, whether as ordinary income, taxable at ordinary rates, or as earned income, enjoying a lower rate of tax, the laws of the states and the decisions of their courts are not binding. The Congress has defined the term "earned income" and, consequently, to attempt to interpret that definition by reference to the decisions of the state courts would establish a precedent by which each state might define certain classes of income as earned, contrary">*1299 to the intention of Congress, and were we to follow those decisions it would result in a clear nullification of the definition laid down by Congress. Therefore, we are of the opinion that the decisions of the state courts, although they held that the wife's interest arises from joint effort, are not controlling in determining what constitutes "earned income" under the Federal revenue acts. See . Theory must surrender to fact when the determination of the rate of the Federal tax is dependent upon a fact.

Section 209(a)(1) of the Revenue Act of 1926 provides:

The term "earned income" means wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income">*1300 producing factors, a reasonable allowance as compensation for the personal services actually rendered by the taxpayer, not in excess of 20 per centum of his share of the net profits of such trade or business, shall be considered as earned income.

">*651 The Circuit Court, in reversing the McLarry case, used the following language:

* * * Certainly it is not plain, from the language of the statute, that for an amount received as compensation for personal services actually rendered to be included in earned income such services must have been actually rendered by the taxpayer, who was entitled to that amount upon the receipt of it. As the amount returned by the petitioner as earned income was received as compensation for personal services actually rendered, it was within the language of the provision of the statute stating what "earned income" means, though such services were rendered by petitioner's husband and not by herself.

The court concluded by saying that the meaning of the applicable provision "is not free from doubt" and, therefore, it held that the income received by the wife by operation of the community property laws of the State of Texas was "earned income" ">*1301 to her, notwithstanding the income was earned by her husband and not by her.

We are mindful of the well established rule that in construing doubtful taxing statutes doubt must be resolved in favor of the taxpayer and against the Government (), but, when we attach due importance to the literal meaning of the words employed in the statute here, which is most important (), to the context and the purpose of the enactment of the provision, we think the basis for the application of the rule disappears.

We deduce from the circuit court's decision in the McLarry case that, had the Congress added in the first clause of the definition of "earned income" the words "by the taxpayer," thereby indicating a clearer intention to limit the section to the taxpayer who earned the income, its views would have coincided with those of the Board, but, because of the failure of Congress so to specify, it regarded the provision as doubtful, notwithstanding the language which immediately followed that clause expressly referring to the "taxpayer" in a manner clearly evidencing an intention to">*1302 limit the income therein affected to that actually earned by such taxpayer.

Even if the Congress had merely used the words "earned income," without definition, we would have been compelled to reach the same conclusion, in the absence of a clear intention on the part of the Congress to extend the privilege of the section to those receiving income "earned" by others. The dictionary definition of the word "earned" is to have merited or deserved "as by labor or service." To "earn" is "to acquire by labor, service, or performance; to deserve and receive as compensation or wages." Webster's New International Dictionary. "Earn means to gain as a just rate or recompense by service, labor, or exertion." . We know of no authority which classifies income which the wife receives from the husband, either by virtue of his willingness to give, ">*652 or by operation of law, as earnings. A statutory division of the husband's earnings with his wife in a community property jurisdiction can not and does not operate to make them her earnings as that word is defined and as it is commonly understood. The absence of labor or the performance">*1303 of services therefor on the part of the wife deprives such property of all semblance of earnings. If this were not so, then all the wife's share of community income would be "earned" because of her household labors, irrespective of whether the source be stocks and bonds standing in the name of the husband, and acquired with his salary.

The Congress did not so limit its language, however, as just assumed, nor did it content itself with specifying that "personal services "should be "actually rendered" therefor in order to classify the income as "earned" - it added such descriptive words as "wages, salaries, and professional fees," which are generally and commonly understood by all to mean something which one receives for the performance of services. It also added that those wages, salaries, and fees must have been "received as compensation for personal services actually rendered," which, in our opinion, clearly indicates that there was no intention on the part of the Congress to extend the section to others than those who actually performed the services for which the compensation was received. The existence of a property right in the income in one who did not in fact perform the">*1304 services, no matter upon what theory it arises, does not come within that intention. If the wife "received" the income by operation of the state statute, and not "as compensation for personal services actually rendered," the taxing statute has not been complied with.

We are of the opinion that any doubt that might exist as to whether the Congress intended that the income, in order to qualify as "earned," must have been earned by the taxpayer, is immediately dispelled by a study of the legislative history of the section as contained in the committee reports leading up to its enactment. It is clear that the provisions of section 209 were designed to aid the wage earner, as distinguished from what might be termed the capitalistic class whose incomes are derived from investments or from other sources than wages and salaries or compensation in some form. On page twenty of the report of the Committee on Ways and Means respecting the Revenue Bill of 1924, it is stated that the result sought to be attaived by section 209 "is to give the taxpayer a credit of 25 per cent of the amount of the tax attributable to his earned income." The statute, therefore, in our opinion, was intended">*1305 to cover "his earned income," that is, the taxpayer's, and not the income earned by another.

Allegation of error numbered three herein pertains to the respondent's finding that the petitioner received a taxable dividend of $1,000 ">*653 from the Union National Bank in 1926, growing out of the organization of The Union National Company.

The petitioner contends that under the circumstances no part of the dividend became taxable to her in 1926. The respondent adopts a contrary view and he cites as authority for his position ; certiorari denied, , affirming the opinion of the Board at .

In that case the bank, as here, feeling that it should broaden its banking facilities, addressed a circular letter to its stockholders, as in this case, calling attention to the limitations of its powers as a national bank and informing them that the board of directors had formulated a plan for the creation of a new company whose charter would be broad enough to enable the company to supplement its banking facilities, the new company to be owned by the stockholders of the bank in">*1306 proportion to their holdings in the bank itself. The plan there provided for the appointment of trustees and for such trustees holding the stock of the new company for the benefit of the subscribers, the beneficial interest in the stock of the new company to pass with the transfer of the stock in the bank, and, furthermore, that the directors of the bank "will declare a 10 per cent cash dividend, amounting to $1,000,000, and the stockholders will be asked to subscribe for stock in the new company in an amount equal to this dividend and authorize the committee to apply the proceeds in payment of their stock in the new company."

That case is concededly identical with the instant case except that here the plan called for the unanimous consent of the stockholders so to apply the dividend in advance of the dividend declaration, whereas, there, unanimous consent was not required in advance. The resolution of the board of directors stated "that each stockholder so minded may, with said dividend, cause the payment in full of his interest" in the new company. The petitioner there, being one of the assenting stockholders, contended that he was not entitled to cash under the dividend resolution">*1307 and that he received no taxable income.

The petitioner contends that since the stockholders here had no other alternative than to have their dividends apply in the manner described, and since they could not have received any amount of the dividend optionally, as provided in the Lonsdale case, she was not taxable. With this we can not agree. We see no material distinction in principle between the two cases.

In both cases a dividend was declared upon the stock of the bank and in both cases the petitioners consented to the plan whereby their pro rata portion of the dividend should be applied to the purchase of capital stock of a distinctly different corporation. In deciding ">*654 that the dividend was taxable to the stockholder in the Lonsdale case, the court said:

Appellant received a distinct individual gain by the declaring of the dividend in question. The fact that he did not receive the cash in hand, but permitted the cash dividend thus declared to be used in the purchase of stock in another and distinct corporation, did not alter the substantial effect of the transaction; nor is it important that he could not presently sell and dispose of his stock in the">*1308 new company, without at the same time selling his stock in the bank. Whenever such a disposition shall be made, there will be an increment of gain corresponding to the value of the new corporation stock which was purchased with the dividend declared. This dividend was segregated from the capital assets of the bank, and, when declared, was the property of the stockholder, and not of the bank. * * * The fact that appellant reinvested it in the stock of the new corporation, organized to do a distinct business which the bank was not authorized to do, renders that dividend no less an item of income. It is the inherent nature of the dividend itself that controls.

In the course of its discussion the court observed that "Any stockholder might, if so minded, have received his portion of the dividend in money, and have refused acceptance of the plan." In view of the broad principles laid down by the court, we are of the opinion that this language was obiter dictum and that it was not intended as a decisive factor in the conclusion which it reached. We believe that the court would have reached the same conclusion had the plan of payment been the same as here.

We are of the opinion">*1309 that the distribution in question was taxable and that the respondent was correct in so holding.

Reviewed by the Board.

Decision will be entered under Rule 50.

TRAMMELL, ARUNDELL, LOVE

TRAMMELL, dissenting: I dissent, on the authority of McLarry v. Commissioner, 30 Fed.(2d) 789.

ARUNDELL, dissenting: I dissent on the first issue, not because of any conviction of error in the majority opinion, but solely by reason of the decision in , decided by the Circuit Court of Appeals for the Fifth Circuit, to which an appeal lies in this proceeding.

LOVE, dissenting: I dissent from the prevailing opinion in this case on the first issue decided. My reasons for such dissent, stated as briefly as possible, are:

The wife's title to her half of the earned income is exactly the same as her husband's title is to his half. There is no law, rule or reason justifying the allowance of the maximum to the husband and denying the allowance to the wife.

">*655 Congress could have provided for only one such allowance or for a division between the husband and wife, as in the case of the deduction">*1310 for the head of a family, but Congress did not do so, and it is not the province of any court or this Board to supply such legislation.