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98 C. Cls.

ber 6, 1926, was $476 per share. The lower court therefore ordered the entry of judgment for plaintiff in the amount of $22,600 ($47,600 less $25,000 paid) with interest thereon at the rate of 6% per annum, from June 29, 1934, the date of the verdict, to December 29, 1934, the date of entry of judgment, amounting to $678. The lower court denied plaintiff's motion for interest upon the sum of $22,600 from November 6, 1926, to June 29, 1934.

10. Sensenbrenner appealed from the judgment of the lower court, and plaintiff gave notice of review on the appeal, alleging, among other things, that the trial court erred in denying interest from the date of the sale of her stock, namely, November 6, 1926. The Supreme Court of Wisconsin concluded that the plaintiff was entitled to interest on the judgment of $22,600 at 6% per annum from November 6, 1926, to the date of the verdict, and on February 4, 1936, it affirmed the judgment as so modified. (Nichol v. Sensenbrenner, 220 Wis. 165, 182, 184; 263 N. W. 650.) Interest computed on that basis amounted to $13,779.72 as reported, subject to pro rata deduction by plaintiff in her income tax return for 1936. The total of the judgment and the interest thereon was $36,379.72.

The court decided that the plaintiff was not entitled to

recover.

JONES, Judge, delivered the opinion of the court:

This is a suit to recover a portion of the income tax paid by plaintiff in 1936.

Upon the death of her father in 1920 the plaintiff inherited certain shares of stock in the Kimberly Clark Company.

F. J. Sensenbrenner, the vice president and manager of the company, had long been associated with her father in business. Plaintiff and her family had complete confidence in his friendship and integrity.

On November 6, 1926, upon the recommendation of Sensenbrenner, plaintiff sold to a brokerage firm 100 shares of the stock of the Kimberly Clark Company for $250 per share. On November 16, 1926, the stock was transferred

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to a third party and on December 2, 1926, it was transferred to Sensenbrenner. It developed that the stock was worth considerably more than the $250 per share.

On December 28, 1931, the plaintiff filed suit against Sensenbrenner in the Circuit Court for Winnebago County, Wisconsin, for the profits reaped and retained by him; that is, the difference between the actual value of plaintiff's stock at the time of its acquisition by Sensenbrenner and the price which had been paid the plaintiff by his agents, alleging that fraud and deception had been practiced on her.

The jury returned a verdict for plaintiff in the sum of $22,600. The trial court entered judgment for that sum, together with interest at the rate of 6% per annum from June 29, 1934, the date of the verdict. On appeal the Supreme Court of Wisconsin reformed the judgment allowing plaintiff interest at the rate of six per cent per annum from November 6, 1926. Interest computed on that basis amounted to $13,779.72, which, less the deduction of expense of collection, was reported in her income tax return for 1936. The tax was paid on that basis.

Plaintiff filed a timely claim for refund in the sum of $1,615.09 on the basis of two contentions; first, none of the proceeds of the judgment received in the year 1936 and reported was taxable income, regardless of the element of interest included therein; and, second, that if such proceeds were taxable at all, they should be taxed in their entirety as capital gain, because while a portion of the total amount recovered was designated as interest, the entire amount was in reality a judgment for damages.

We think the taxes were properly levied and collected by the Commissioner of Internal Revenue.

Clearly the gain realized in 1926 was taxable. In essence her suit was brought to recover additional unrealized gains to which she claimed she was entitled as of November 1926. These additional gains, when she finally recovered them in 1936, had the same status as income as that portion of the 1926 payment which represented gain. Whether they be called damages or gains they represented gains.

We also think that the interest collected should be treated as income. A recent decision by the United States Supreme

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98 C. Cls.

Court, Kieselbach v. Commissioner of Internal Revenue, decided January 4, 1943 (317 U. S. 319), is controlling in this case. The facts are similar and the principle is the same.

In that case the Board of Estimate of the City of New York, pursuant to a charter provision, passed a resolution directing that upon January 3, 1933, the title in fee to a tract of realty should vest in the city. Condemnation proceedings, of which the resolution was a part, were instituted. The city took possession on the date named in the resolution and received all rents thereafter accruing. The Supreme Court of New York entered its final decree on March 31, 1937, allowing payment in the sum of $73,246.57 as compensation to the owners. The amount of said payment was computed by adding to the principal amount of $58,000, interest thereon at the rate of six per cent per annum from January 3, 1933 to May 12, 1937, in the sum of $15,246.57. The primary question was whether the interest should be treated for tax purposes as a portion of the capital gain, or as ordinary income.

In passing on this question the court, after quoting Section 22 of the Revenue Act of 1936, c. 690, 49 Stat. 1648, 1657, makes the following comment:

The sum paid these taxpayers above the award of $58,000 was paid because of the failure to put the award in the taxpayers' hands on the day, January 3, 1933, when the property was taken. This additional payment was necessary to give the owner the full equivalent of the value of the property at the time it was taken. Whether one calls it interest on the value or payments to meet the constitutional requirement of just compensation is immaterial. It is income under Sec. 22, paid to the taxpayers in lieu of what they might have earned on the sum found to be the value of the property on the day the property was taken. It is not a capital gain upon an asset sold under Sec. 117. The sale price was the $58,000.

The property was turned over in January 1933, by the resolution. This was the sale. Title then passed. The subsequent earnings of the property went to the city. The transaction was as though a purchase money lien at legal interest was retained upon the property. Such interest when paid would, of course, be ordinary

income.

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The plaintiff is not entitled to recover, and the petition is dismissed. It is so ordered.

MADDEN, Judge; WHITAKER, Judge; LITTLETON, Judge; and WHALEY, Chief Justice, concur.

FLORENCE P. BLACKMAN v. THE UNITED STATES No. 45477

BERNARD M. PALMER v. THE UNITED STATES No. 45478

[Decided February 1, 1943]

On the Proofs

Estate tax; termination of trust established in 1924 and creation in 1928 of a new trust with similar rights of decedent as to income and distribution of corpus.-Where decedent in 1924 transferred to certain trustees, of which decedent was one, substantially all of his property under a trust instrument prohibiting sale of certain stock held unless all of such stock was sold; and where in 1928 said trust was terminated and new trust instrument was executed by settlor and beneficiaries with substantially the same conditions but without restrictive provisions as to sale of said stock, and with changes as to the termination of the trust; both in form and substance the 1928 trust was something different from the 1924 trust, and for estate tax purposes the property rights of decedent in the trust property must be adjudged on the basis of the 1928 trust instrument.

Same; inclusion of decedent's interest in gross estate subject to estate tax. Where under the 1928 trust agreement, of which settlor was a trustee and beneficiary, settlor together with other beneficiaries, had the right to revoke the trust and upon revocation, settlor would have been entitled to receive one-half of the corpus, and where settlor's rights ended at his death and such half passed to members of his family; the value of settlor's one-half interest was properly included in decedent's gross estate for estate tax purposes under the provisions of section 302 (d) of the Revenue Act of 1926 (44 Stat. 9, 71). Same; "settlor."-Where upon termination of trust settlor waived his right to receive one-half of the corpus and joined in the direction that the trust property be divided among beneficiaries equally, relying upon a prior agreement that said property would

Reporter's Statement of the Case

98 C. Cls.

be conveyed to a new trust in which settlor would be entitled to share; settlor was also "settlor" of the new trust, and the share to which he would have been entitled in event of termination of new trust should be included in determining settlor's estate tax.

Same; transfer of property to trust not made by decedent but at his instigation.-While decedent did not directly make a transfer of property to the 1928 trust he caused others to make the transfer in such a manner that he retained a valuable interest therein, and it is well established that the person who furnishes the consideration for the creation of a trust is the "settlor" even though in form the trust is created by another. Lehman v. Commissioner, 109 Fed. (2d) 99; certiorari denied 310 U. S. 637 ; Buhl v. Kavanagh, 118 Fed. (2d) 315, cited.

The Reporter's statement of the case:

Mr. Hiram M. Nowlan for the plaintiff. Mr. Otto A. Oestreich was on the briefs.

Mrs. Elizabeth B. Davis, with whom was Mr. Assistant Attorney General Samuel O. Clark, Jr., for the defendant. Messrs. Robert N. Anderson and Fred K. Dyar were on the brief.

The court made special findings of fact as follows:

1. Plaintiffs, Florence P. Blackman and Bernard M. Palmer, individuals, are residents of California and Wisconsin, respectively, and are the daughter and son, respectively, of William F. Palmer, deceased.

2. William F. Palmer (hereinafter sometimes referred to as the "decedent") died in California February 1, 1933. Florence P. Blackman, as administratrix of the decedent, filed an estate tax return January 24, 1934, showing a gross estate of $171,577.79 and deductions of $151,695.09 which, with the specific exemption allowed, resulted in no net estate and no tax due. Under a schedule in that return dealing with the transfers involved in these proceedings, the following explanation was given of the date, amount or value, and motive which actuated the decedent in making the transfer:

Jan. 14, 1924, $250,000, Love and affection-Transfer made by Trust in which decedent retained portion of income not taxable under Act [Art.] 18, Reg. 70 because made prior to March 3, 1931; Copies of Trust Agreement submitted herewith.