The opinion
Jones, Chief Judge,
dissenting:
I cannot agree to the conclusions reached by the majority. We are here concerned with a claim for refund of an alleged overpayment of income taxes. For reasons set out below, I regard;the $36,346.64 remaining in the drawing account as income to the decedent, Frederick W. Buchholz, during the period January 1 to November 22, 1944, and nondeductible for income tax purposes.
After the death of Gustav Buchholz, Christina and her son Frederick entered into an agreement, the terms of which are set out in finding 5. Under this agreement Frederick conducted the business as a sole proprietorship until his death on November 22, 1944. The net profits of the business belonged to Frederick, and were credited on the books of the business to a personal drawing account set up in his name. From this account he withdrew the sums so credited whenever and in whatever amount he desired. It is not asserted that Frederick failed to report or pay tax on the net earnings of the business for any year prior to 1944, and the only taxable year here involved is January 1 to November 22, 1944.
On January 1, 1944, Frederick’s drawing account showed a balance of $35,525.14 carried forward from previous years. Thereafter as a result of adjustments of reserves for taxes for prior years there was transferred to the drawing account an additional $33,330.42. Thus there were in the drawing account during 1944 amounts totaling $68,855.56 representing profits from prior years, exclusive of net earnings for 1944.
The earnings of the business from January 1 to November 22, 1944, were $81,459.28. This amount was included as part of Frederick’s gross income for such period in the return filed by his executors on March 15, 1945. Of the $81,459.28 earnings, $31,255.80 was credited to Frederick’s drawing account between January 1 and November 22,1944. Also, there was an additional $1,409.51 credited to the draw *48 ing account alter his death, as a result of bookkeeping adjustments, which represented 1944 earnings for the period prior to his death. 1 The result was a total of $101,520.87 in his drawing account during 1944, derived from profits both for 1944 and prior years, before any deduction of withdrawals during that period. During the period here in question Frederick made withdrawals totaling $65,174.23, which reduced the drawing account balance to $36,346.64 as of the date of his death.
Upon his death Frederick was survived by his mother, Christina. Acting pursuant to the 1925 agreement Christina took over the assets and all of Frederick’s interest in the business, including cash on hand and in the bank. Under this agreement his rights to assets of the business, cash on hand or otherwise, were extinguished by his death. Included in this category was the drawing account balance of $36,346.64, representing unwithdrawn profits at the time of his death. This right was twice asserted by his executors in judicial proceedings in the District of Columbia, and both times they were unable to recover the $36,346.64 remaining in his drawing account at the time of his death. National Metropolitan Bank of Washington v. Doherty, 160 F. 2d 580 , was a civil action against the estate of Christina, who died shortly after Frederick, and In re Estate of Christina Buchholz, Admin. No. 64690, D. C., was a probate proceeding for the administration of Christina’s estate. It should be noted that the holdings in these cases are merely to the effect, that Frederick’s estate is not entitled to the $36,346.64. I am unconvinced that these holdings are tantamount to a determination that the funds in question are not taxable as income to the decedent during the period January 1 to November 22, 1944.
As noted above the entire earnings of the business during the period here involved, in the amount of $81,459.28, were reported by Frederick’s executors on his Federal income tax return for that period and the tax paid thereon. Thereafter a *49 claim was filed with the Collector of Internal Revenue for refund of an alleged overpayment, asserting in part that the $81,459.28 earnings of the business from January 1 to November 22, 1944, was income not to Frederick but to Christina. It was also claimed that Frederick was entitled to a deduction of $36,346.64 from gross income for that period, as a cost of the 1925 contract. Both of these claims were rejected by the Government. The petition was then filed in this court.
As before the Collector, plaintiffs’ petition states a claim for recovery of the entire amount of taxes paid for the January 1 to November 22, 1944, period, again relying in part on the assertion that no part of the $81,459.28 was in-cludible as income to Frederick. The argument is also made that in any event Frederick is entitled to claim a deductible loss under section 23 (e) of the Internal Revenue Code for this taxable period in the amount of $36,346.64 remaining in his drawing account at the time of his death. The argument with reference to the $81,459.28 has apparently been abandoned. Such a claim is untenable and should be denied.
With respect to the $36,346.64, plaintiffs claim first that it was not income to Frederick but merely unwithdrawn profits which never came into his possession but passed instead to Christina. It is urged alternatively that if such amount was properly includible as income under section 22, Internal Revenue Code, as gross income for the period in question, then upon his death and as a result of the contract of 1925, he suffered a loss in that amount deductible under section 23 (e) (1) or (2).
Let us turn first to the question of whether the drawing account balance is income. As I understand the 1925 agreement and operation thereunder, whether or not given profits were transferred to the drawing account has no bearing on the question of tax liability therefor. When the business showed a net profit for any taxable period, Frederick was taxable thereon regardless of whether any of those profits were taken out of the business, and regardless of whether such profits were formally transferred to the drawing account. Thus as to any taxable period it was the realization of profits that was significant in computing gross income *50 and not the subsequent transfer to a drawing account. A fortiori the mere failure to withdraw such profits from the drawing account was unimportant, since the character of income under section 22 2 had attached independently of transfer to such an account. They were no less income from the fact that Frederick had not taken them from the account when he died. Nor did the further fact that, pursuant to the 1925 contract, Christina took over Frederick’s interest in the business upon his death, deprive them of their character as income to the decedent during his life under section 22.
Furthermore, plaintiffs’ argument that the $36,346.64 should be excluded from computation of J anuary 1-Novem-ber 22,1944, income, assumes that such amount was actually included in the tax return filed for that period. Such assumption is misleading and indeed only partially correct. The evidence shows that at most no more than $32,665.31 of the total 1944 profits ($81,459.28) for the period prior to Frederick’s death was ever transferred to the drawing account. Thus well over three thousand dollars remaining in the account at the time of Frederick’s death was derived from profits for prior years. It seems abundantly clear that the $36,346.64 figure can have no significance in determining Frederick’s income under section 22.
The more serious question is whether plaintiffs are entitled to a deduction of $36,346.64 under either section 23 (e) (1), (loss sustained if incurred in trade or business) or section 23 (e) (2) (loss sustained if incurred in any transaction entered into for profit though not connected with the trade or business) for the period J anuary 1 to November 22,1944.
Defendant contends, and I think correctly, that even if such amount were otherwise deductible under section 23 (e) (1) or (2), the allowance of such a deduction is prohibited by section 24 (b) of the Internal Revenue Code which provides:
Sec. 24 (b) Losses feom sales oe exchaNges of PBOPEBTY.
(1) Losses ms allowed. — In computing net income no deduction shall in any case be allowed in respect of losses from sales or exchange of property, directly or indirectly—
*51 (A) Between members of a family, as defined in paragraph (2) (D); (2) * * *
(D) The family of an individual shall include * * * ancestors, and lineal descendants;
It should be noted at the outset that this section states an absolute prohibition, not merely a presumption, against the allowance of losses on any sales or exchanges of property between members of a family. McWilliams v. Commissioner, 331 U. S. 694 .
Plaintiffs’ sole answer to the contention that section 24 (b) is a bar to their claim is that the alleged loss in question did not arise from a “sale or exchange of property”. Plaintiffs urge that such alleged loss resulted from a forfeiture, rather than a “sale or exchange”, citing in support Gaius G. Cannon, 16 T. C. 1134 , and Palmer Hutcheson, 17 T. C. 14 . These cases concerned losses incurred by withdrawing partners of a large law firm in Texas. The partnership articles provided that upon the death of any partner or upon his withdrawal from the partnership and from the practice of law, such partner would be entitled to receive his agreed share of the partnership assets; but in the event that any partner voluntarily withdrew from the partnership and continued in active practice of the law, no compensation would be paid to such a partner for his interest in the firm. The taxpayers in each case were partners who voluntarily withdrew and continued in the active practice of law. The Tax court held that under the partnership articles the withdrawing partners had forfeited their respective interests in the assets of the firm and had thereby suffered a loss deductible under section 23 (e).
The Tax Court rejected respondent’s contention in the Gannon case that the loss was occasioned by a “sale or exchange” of a capital asset within the meaning of sections 23 (g) and 117, giving as reasons therefor (1) that the taxpayer “lost this asset without receiving any consideration”, and (2) there “was not a sale or exchange as those words are ordinarily used.” In the Hutcheson case the Tax Court followed Gannon without further discussion of this question.
Even if we were bound by the holdings in the Gannon and Hutcheson■ cases and the construction there given to the “sale or exchange of a capital asset” under sections 23 (g) *52 and 117, we do not believe they are available here to support plaintiffs’ construction of “sale or exchanges of property, directly or indirectly * * * between members of a family * * *” under section 24 (b). The Tax Court apparently acted on the assumption that under sections 23 (g) and 117 the terms “forfeiture” and “sale or exchange” were mutually exclusive. But cf. Commissioner v. Paulson, 123 F. 2d 255 (C. C. A. 8th, 1941) in which a “forfeiture” of realty under a contract of sale by the vendee in default was held to be a “sale or exchange” within the meaning of sections 23 (g) and 117. Without further considering the validity of such a distinction and assuming its applicability under section 24, we are nevertheless unable to find such a forfeiture in the instant case.
Forfeiture carries with it the connotation of offense or delinquency, penalty, default or negligence; at the very least it would seem to arise from failure to perform some duty owed, conti’actual or otherwise. Ballentine, Law Dic tionary, 2d ed.; Bouvier's Law Dictionary, Third Revision; Webster’s New International Dictionary, 2d ed. There is an inherent presupposition of some degree of control in the one against whom the forfeiture operates over the operative acts, omissions, or events giving rise to the forfeiture. Thus in the Gannon case, supra, the purpose of the articles of partnership was obviously to establish and maintain the practice of law in partnership. Withdrawal of individual partners was contrary to this purpose. Therefore, drastic consequences were agreed to as a deterrent to the happening of such a contingency. Incurrence of these consequences, however, was completely within the control of any individual partner. Therefore the characterization of the loss suffered by a withdrawing partner as a “forfeiture” was justified.
No such justification exists in the instant case. The contingency from which the loss in question arose was that Frederick predeceased his mother. There was no element of penalty involved, and most certainly no control in either party to the agreement over the occurrence of the contingency. The provision providing for the passage of Frederick’s assets to Christina upon occurrence of the uncontrollable contingency that he predecease her was hardly by way *53 of recompense to one party for some dereliction of a duty owed by the other. On the contrary, it would seem clear that such a possibility was contemplated by the parties as being beyond their control and was therefore a factor in determining the amount of consideration given for the property interest at the time of transfer. We have no hesitation, therefore, in concluding that the holding in the Gannon and Hutcheson cases has no applicability here.
The assets of the business were transferred from Christina to Frederick under the contract of 1925. As a part of the consideration therefor Frederick agreed that all assets of the business and all his interest therein should become the property of Christina if he predeceased her. This contingent obligation by Frederick was assumed by him as part of the consideration required for the acquisition of interest in the hotel and restaurant business. At the time of his death, Christina surviving, Frederick’s interest in the business included $36,346.64 derived from profits mostly from 1944 and partly from prior years. The interest passed to Christina and became her property. That there was a transmutation of property (i. e., “any interest or aggregate of interests which are of a kind that normally have an economic value * * Restatement of the Law of Property, Intro. Note) is beyond question; that consideration was given of some price or recompense in value for such property is the basis of plaintiffs’ claim. We are unable to say that the loss of that interest did not result from a “sale or exchange, directly or indirectly,” within the meaning of section 24 (b), between Frederick and his mother. We must conclude, therefore, that section 24 (b) (1) (A) prohibits the recognition of any loss otherwise deductible under section 23.
In addition, I feel that the evidence fully justifies findings of fact to support the conclusion reached above. Especially I would strike the last clause of finding 12, “if withdrawn prior to his death.” This finding is not justified by the record. Clearly during the life of the contract all funds were within the complete control of Frederick Buchholz.
With regard to plaintiffs’ claim for a deduction of $12,010.97, it seems to me that if Frederick Buchholz, as is claimed, invested this amount of his own money at the *54 beginning of the contract with his mother, that sum should be deducted as a loss when at his death the entire properties and funds reverted to his mother.
The record is not clear as to whether the items of Gustav’s estate obligations were paid out of Frederick’s personal funds or were merely checked out of the funds of the estate or withdrawn from profits of the hotel and restaurant business.
I would refer this issue to the commissioner to take further testimony limited to this question. If it develops that the estate obligations aggregating $12,010.97 were advanced by Frederick and not later recouped, I would allow the deduction of this sum as a loss. If they were merely checked out of the business operating funds, or if advanced by Frederick and later recouped from the operation of the hotel and restaurant, I would dismiss the entire petition.
FINDINGS OF FACT
The court makes findings of fact, based upon the evidence, the report of Commissioner George H. Foster, and the briefs and argument of counsel, as follows:
1. Frederick W. Buchholz died a resident of the District of Columbia on November 22, 1944. The plaintiffs are the duly appointed, qualified and acting executors of his will.
2. On March 15, 1945, the plaintiffs filed the decedent’s final income tax return for the period January l.to November 22, 1944 with the Collector of Internal Bevenue at Baltimore, Maryland. The said return showed a tax liability of $54,588.66 and disclosed previous payments of estimated taxes of $56,068.88, resulting in a claimed overpayment of $1,480.22. Included in such return as part of gross income was $81,459.28, the unwithdrawn earnings and profits from the operation of the Occidental Hotel and Kestau-rant to November 22, 1944. An audit of decedent’s return disclosed that he had paid a tax of only $48,044.53 for the final period, leaving a balance due under the return of $6,544.13, which was duly assessed, and with interest thereon of $255.22 which was paid on November 18, 1945. Subsequently a deficiency of $2,610 was assessed and was paid with interest in the amount of $350 as follows:
*55 June 11, 1947___$2,645.02
August 8, 1947_ 815.43
Total_ 2,960.45
3. On March 15, 1948 plaintiffs filed a claim for refund with the Collector of Internal Revenue in the amount of $57,549.11, alleging many grounds therefor including those now in issue. This claim was rejected by the Commissioner of Internal Revenue on January 26,1950.
4. Frederick W. Buchholz was the son of Gustav and Christina Buchholz. During his lifetime Gustav Buchholz owned and conducted a hotel and restaurant business known as the Hotel Occidental at Nos. 1411 and 1413 Pennsylvania Avenue NW., Washington, D. C. The premises at No. 1413 were owned by Gustav and the premises at No. 1411 were leased by him. Gustav Buchholz died in June 1925 and by his will he left, among other bequests, $30,000 to his son, Frederick W. Buchholz. He also left the property known as 1413 Pennsylvania Avenue NW., in trust with the rental proceeds therefrom to his wife, Christina, for her life. At her death the corpus of the trust was to pass to his surviving heirs at law. The hotel business, which was included in the residue of his estate, was bequeathed to his wife.
5. On August 13,1925, Christina Buchholz entered into a written agreement with her son, Frederick, containing the following provisions:
Made this 13th day of August 1925, by and between Christina Buchholz, party of the first part, and Frederick W. Buchholz, her son, party of the second part:
Witnesseth That, in consideration of the sum of One Dollar ($1.) to her in hand paid and the covenants hereinafter contained and to be performed by the party of the second part, the party of the first part hereby sets over, transfers, assigns and pays over to the party of the second part all and singular the following assets connected with the business known as the Occidental Hotel, and conducted in and upon premises Nos. 1411 & 1413 Pennsylvania Avenue, Northwest, Washington, D. C., namely: The lease on said premises No. 1411 Pennsylvania Avenue, Northwest, all furniture, fixtures, china, silver, glassware, cooking utensils and the like in use in connection with said business, cash on hand and in bank in connection with said business, and the good will *56 thereof, but on the following express terms and conditions, which are hereby fully agreed to by the party of the second part, namely:
The party of the second part hereby agrees to devote his best efforts to the conduct of said business, to assume full responsibility for and discharge all of the obligations under the aforesaid lease, to pay all debts and taxes incident to said business and the conduct thereof, to maintain suitable insurance, and make suitable repairs, to the satisfaction of the party of the first part, to pay promptly to the executors of the estate of Gustav Buchholz, deceased, all sums which may be needed or required by them to pay and discharge in full all debts and obligations of the estate of said decedent, all taxes whatever thereon, all legacies provided by his will, and all expenses incident to the administration of the estate, and further, at any time, upon sixty (60) days’ previous notice and demand in writing from the party of the first part, to transfer, assign, pay over and deliver to the party of the first part all and singular the assets aforesaid, excepting such changes as may then exist in the amount of cash on hand or in bank and in the furniture and fixtures on hand in said business.
The party of the second part further agrees not to make any sale, assignment or transfer, of any character whatever, of the aforesaid business, or of any interest therein, or of any assets thereto pertaining, except as to cash on hand or in bank or such portions of the equipment aforesaid as may require renewal, without the written consent thereto of the party of the first part first had and obtained, and the party of the second part further agrees that the party of the first part, so' long as she may live and so desire, and the party of the second part continue to conduct the aforesaid business, shall have the right to use and occupy, free of any charge for rent, Apartment “7-F”, in the aforesaid premises No. 1411 Pennsylvania Avenue, Northwest and also to employ the party of the first part as housekeeper in said business, and to pay her, as compensation for acting as such housekeeper, the sum of Two Hundred Dollars ($200.) per month.
It is further agreed by the parties hereto that if during the lifetime of the party of the first part, the party of the second part shall die, or for any other reason cease to carry on the aforesaid business, except upon the written consent of the party of the first part, the said business, and all rights and interests whatsoever therein of the party of the second part, and all and singular the *57 assets, of whatsoever character, connected therewith, shall forthwith revert to and become the property of the party of the first part, and all right, title and interest whatsoever of the party of the second part therein shall absolutely cease and determine; but if the party of the first part shall die during the lifetime of tlie party of the second part, and while the party of the second part shall be conducting the aforesaid business and shall have fulfilled all of the obligations herein made binding upon him up to that time, then, upon the death of the party of the first part, the aforesaid business, and all rights and interests therein, and in the aforesaid assets, shall be and remain the absolute property of the party of the second part, free from any further- obligations whatsoever under this agreement, and all rights hereunder of the party of the first part and of her estate shall absolutely cease and determine.
6. Also on August 13, 1925, Christina Buchholz and Frederick W. Buchholz, as parties of the first part, and Stanton C. Peelle, co-executor of Gustav’s will, as party of the second part, entered into an agreement reading as follows:
Made this 13th day of August, 1925, by and between Christina Buchholz and Frederick W. Buchholz, parties of the first part, and Stanton C. Peelle, party of the second part:
Whereas, by the terms of the last will and testament of Gustav Buchholz, deceased, bearing date the 12th day of January, 1923, the residue of his estate, after the fulfillment of certain prior provisions, is devised and bequeathed to the said Christina Buchholz; and,
Whereas one of the principal assets of the estate of said decedent consists of a going hotel and restaurant business, conducted at Nos. 1411 & 1413 Pennsylvania Avenue, Northwest, Washington, D. C., together with the lease of said premises No. 1411 Pennsylvania Avenue, the equipment, stores on hand, good will, and a balance in the Merchants Bank and Trust Company, of Washington, D. C., amounting at the date of said decedent’s death to the sum of $24,330.48; and,
Whereas the said Christina Buchholz desires to have transferred, assigned and delivered to her, as of the date of the death of said decedent, all and singular the aforesaid business and assets, so that she may transfer and assign the same, upon certain terms and conditions, to the said Frederick W. Buchholz; and,
Whereas the said Stanton C. Peelle, being co-executor under said last will and testament with the said Chris *58 tina Buchholz and Frederick W. Buchholz, before consenting to such transfer and delivery, of the said business and assets, requires indemnification from them, as hereinafter provided, and which indemnification they are ready and willing to give:
Now, therefore, this agreement witnesseth, That, in consideration of the premises, and of the joining of said Stanton C. Peelle as co-executor, as aforesaid, with the other executors, in turning over said business and assets, as aforesaid, and also in consideration of the sum of One Dollar ($1.) by the said Stanton O. Peelle in hand paid to the parties of the first part, receipt of which is hereby acknowledged, the said parties of the first part do hereby undertake, covenant and agree, jointly and severally, to furnish and provide promptly all such funds as may be needed or required for the full payment and discharge of all debts and obligation of the estate of said decedent, all taxes of whatever character thereon, all legacies provided in said will, and all expenses incident to the administration of the estate, and further to indemnify and save harmless the said Stanton C. Peelle from and against any loss, cost, damage, claim or expense whatsoever which he may incur or to which he may be put, for or by reason of the turning over of the said business and assets to the said Christina Buch-holz, or for or by reason of the conduct of said business by her or by the said Frederick W. Buchholz, or any matter or thing whatsoever arising therefrom or connected therewith.
7. From the time of the agreement of August 13,1925 with his mother until his death, Frederick W. Buchholz conducted the business of the Occidental Hotel as a sole proprietorship and the net profits of the business belonged to him and were credited on the books to his personal drawing account. He withdrew the sums so credited whenever and in whatever amounts he desired.
8. Frederick W. Buchholz predeceased his mother, Christina, and in acordance with the agreement of August 13, 1925, the business of the Occidental Hotel, including all of the assets connected therewith, became the property of Christina at the time of his death.
9. On January 1, 1944 the drawing account of Frederick W. Buchholz showed a balance carried forward from previous years of $35,525.14. There were additional credits *59 of $33,330.42 to this drawing account in 1944 which resulted from adjustment of reserves for taxes of prior years. Net earnings from the hotel business from J anuary 1 to November 22,1944, in the amount of $31,255.80 were credited to the drawing account. During 1944 Frederick W. Buchholz withdrew cash in the total of $63,563.30 and other charges were debited, making total debits of $65,174.23, leaving a balance in the drawing account as of the date of his death of $36,346.64. The total withdrawn from the drawing account in 1944 was greater than the profits from the hotel business credited during 1944.
10. The premises known as 1411 Pennsylvania Avenue N. W. were leased from the Willard estate. In 1932, when the lease to that property expired, Frederick W. Buchholz renewed the lease and pledged his entire estate as security. During the period Frederick operated the hotel business he paid the rental for those premises and also paid rental for the premises at 1413 Pennsylvania Avenue N. W., to the trust for the benefit of his mother. Also, when the business was in need of funds, Frederick borrowed money from the bank and personally signed the notes for the loans.
11. In his will dated June 7,1944, Frederick W. Buchholz provided that if at the time of his death he should be the owner of the Occidental Hotel, that business should become a part of the residue of his estate, which was placed in trust with the income therefrom to be distributed to designated beneficiaries. However, as he predeceased his mother, the business reverted to her at the time of his death under the provisions of the contract set out in Finding 5.
12. From the time of the agreement with his mother, dated August 13, 1925, until his death Frederick W. Buchholz operated the business of the Occidental Hotel and all of the profit therefrom belonged solely to him, if withdrawn prior to his death.
13. During the years 1926 and 1927, Frederick W. Buchholz, pursuant to the agreements of August 13, 1925, paid and discharged all debts and obligations of the estate of Gustav, all taxes thereon, all legacies provided in the will, and all expenses incident to the administration of the estate. The amount paid in 1926 amounted to $7,108.06. In 1927 *60 he paid Federal estate taxes with interest thereon of $4,260.66. He also paid, during 1927, a net sum of $642.25 for District of Columbia inheritance taxes. The total paid was $12,010.97.
CONCLUSION OF LAW
Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes that as a matter of law the plaintiffs are entitled to recover.
The entry of judgment is suspended until the incoming of a stipulation by the parties, or, in the absence of a stipulation, until the incoming of a report by a Commissioner of the court showing the amount due plaintiffs computed in accordance with the court’s opinion and the foregoing findings.
All or substantially all of the 1944 profits for tbe period prior to Frederick’s death which were not actually transferred to the drawing account were used to set up a reserve for Federal income taxes and were apparently paid to the Government as advance payments on Frederick’s 1944 tax liability. These constitute the major portion of the actual moneys plaintiffs are here seeking to recover.
This section defines gross income.