text:
    Alabama Mineral Land Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 56960, 69007.
    Promulgated June 29, 1933.

      Geo. E. H. Goodner, Esq., for the petitioner.

      Hartford Allen, Esq., for the respondent.
   OPINION.

Lansdon:

Petitioner’s first contention is that it is entitled to reduce its tax liability for the years 1928 and 1929 by carrying forward a net loss of $16,430.52 or more sustained in 1927. The facts disclose that the computation of the petitioner’s tax liability settled under the provisions of section 606 of the Revenue Act of 1928 included the allowance of an operating loss in the amount of $16,430.52. In his computation of petitioner’s tax liability for 1928, the respondent reviewed the operations that resulted in such alleged loss in 1927 and determined that, in fact, the petitioner realized a profit from sales in that year and so has denied any net loss deductions for 1928 and 1929 resulting therefrom. On this issue the petitioner contends first that its tax liability for 1927 has been closed by a 606 agreement ” and the respondent cannot reopen that year for any purpose and, second, that if we hold to the contrary, it is entitled now to adduce evidence that it did sustain the loss in question or one greater in amount in 1927. The first point pleaded by petitioner has been decided adversely to its contention in W. C. Mitchell & Co., 27 B.T.A. 645. This same report, however, sustains the petitioner in his claim that it may now introduce evidence to show that a net loss was sustained in 1927. Such evidence is in the record and will be considered along with the facts relating to the deficiencies asserted for 1928 and 1929.

The principal question relates to the fair market value at March 1, 1913, of the standing timber and cut-over lands which were sold in 1927, 1928, and 1929. The petitioner reported gain or loss from such sales on the basis of a fair market value of the lands of $5 per acre and of $5 per 1,000 feet for the standing timber on the basic date. The respondent has computed the deficiencies in the taxable years and redetermined the results of the sale in 1927 on a basis much lower than the 1913 values claimed by the petitioner. The evidence adduced by the petitioner in support of its reported values consisted of the testimony of a number of witnesses. All are well acquainted with the land and timber here involved and are familiar with values and sale prices of comparable properties in the same locality in 1913. Without exception such witnesses testified to the value contended for by the petitioner. The respondent offered no rebuttal evidence and failed to weaken the testimony of petitioner’s witnesses by cross-examination or otherwise. In our opinion the petitioner has proved that the lands and standing timber in question had a fair market value at March 1, 1913, of $5 per acre and $5 per 1,000 feet, respectively. Recomputation under Rule 50 on the basis of such values will redetermine the amount of the net loss sustained in 1927, which may be carried forward in the determination of petitioner’s tax liability for each of the two succeeding years. The deficiencies asserted for 1928 and 1929 will be recomputed under Rule 50 in accordance with our conclusion above.

The evidence supports the petitioner’s contention that it should be allowed to deduct from its income in the years 1928 and 1929 the amounts of $10,196 and $10,000, respectively, as losses sustained by embezzlement in such years. The embezzler left no property subject to the claims of the petitioner. The peculations were not discovered and claimed within the period specified in the first-insurance policy. The second policy expressly provided that the underwriter would not be liable for any defalcation that occurred before the date of its execution, which was some time in 1931. The petitioner is entitled to deduct the losses from embezzlement as claimed in its amended petition. Article 342, Regulations 74; Peterson Linotyping Co., 10 B.T.A. 542.

As a trader in timber and timber lands, the petitioner kept a number of woodsmen and timber cruisers on its pay rolls at all times. The wages of such employees constitute an ordinary and necessary expense of its business. The amount of $2,320.68 paid to woodsmen and cruisers in the year 1927 is deductible from income in that year. The fact that a part of the expense was incurred in cruising timber that was afterwards sold in no wise affects the nature of the expenditure.

On brief the petitioner abandons its last allegation of error and tiie determination of the respondent with respect thereto is affirmed.

Decision will be entered wnder Pule 50.


source: Caselaw Access Project

author:
Sternhagen : VaN FossaN,
      Black,

license: Public Domain

text:
    Minnesota Tea Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. E. C. Peterson, Petitioner, v. Commissioner of Internal Revenue, Respondent. A. F. Peterson, Petitioner, v. Commissioner of Internal Revenue, Respondent. L. T. Peterson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 54227, 60837-60839.
    Promulgated June 30, 1933.

      C. J. McGuire, Esq., for the petitioners.

      Prew Savoy, Esq., and George D. Brabson, Esq., for the respondent.
   OPINION.

Sternhagen :

The respondent determined deficiencies in the income taxes of the petitioners as follows: Minnesota Tea Co., $11,587.64 for the period January 1 to August 24, 1928; E. C. Peterson, $15,982.31 for 1928; A. F. Peterson, $646.66 for 1928; and L. T. Peterson, $15,974.76 for 1928. There is no explanation for the use of a short tax period for the Minnesota Tea Co., although it is stated in the notice of deficiency of January 26, 1931, that “ it is still a going concern.” The facts are stipulated, and findings are unnecessary.

The Minnesota Tea Co., engaged in the retail grocery business, negotiated in 1928 for the transfer of its business to the Grand Union Co. Its shares were all owned by the three Petersons, and, so far as appears, still are. Before malting the transfer to the Grand Union Co., it transferred its real estate and some miscellaneous property to the Peterson Investment Co., newly created for the purpose, in exchange for the Peterson Co.’s shares, which it immediately distributed proportionately among its three shareholders. Thus reduced, the entire assets of the Minnesota Co., the statutory cost of which was $254,646.62, were transferred to the Grand Union Co. for $426,842.52 cash and 18,000 shares (voting trust certificates) of Grand Union no-par common, which it agreed not to sell for a year. The 18,000 shares were neither distributed nor sold. The $426,842.52 was distributed among the three shareholders, who assumed, and paid, the Minnesota Co.’s liabilities amounting to $106,-411.13. At the time of the receipt by the Minnesota Co. of the cash and shares, its undistributed earnings and profits were $109,442.83. The outstanding shares of the Grand Union Co. were at this time 239,726, and they were being sold on the New York Stock Exchange for around 30.

Several questions are raised as to the gain resulting to each of the petitioners from these transactions and as to the recognition thereof as a statutory matter; but such questions are predicated upon the idea that there was a statutory reorganization, as that term is defined by section 112 (i) (l), Revenue Act of 1928. Whether there was such a reorganization must, therefore, be first decided. If there was no such reorganization, there is no foundation for the petitioners’ attack on the deficiencies, and the respondent’s determinations must be sustained; while if a statutory reorganization occurred, the measure of the resulting tax must be determined with regard to other statutory provisions.

At the time when the deficiencies were determined, there was a disposition to read the statutory definition with a superficial regard for its language, and thus to say that the acquisition by one corporation of substantially all the properties of another corporation was per se a reorganization. The extent of this literalism is indicated by Sarther Grocery Co. v. Commissioner, 63 Fed. (2d) 68, in which the view was urged by the taxpayer that a sale for cash of all its properties by one corporation to another was a reorganization. See Tulsa Oxygen Co., 18 B.T.A. 1283; National Pipe & Foundry Co., 19 B.T.A. 242; First Nat. Bank of Champlain, N.Y., 21 B.T.A. 415; Robert D. Green, 24 B.T.A. 719. In Cortland Specialty Co., 2B.T.A. 808, the Board gave a broader consideration to the definition and, although there was “ no question whatsoever but that substantially all of the [one] company’s properties were acquired by the [other],” held that there was no reorganization.

In the development of the law by the courts, the literal view has never gained a foothold. The Fifth Circuit Court of Appeals, in Pinellas lee & Cold Storage Co. v. Commissioner, 57 Fed. (2d) 188, the first court decision on the subject, took quite the opposite view, saying:

It must be assumed that in adopting paragrapli (b) (of section 203, Revenue Act of 1926, to which the section now under consideration is similar) Congress intended to use the words, “merger” and “consolidation” in their ordinary and accepted meanings. Giving the matter in parenthesis the most liberal construction, it is only when there is an acquisition of substantially all the property of another corporation in connection with a merger or consolidation • that a reorganization takes place. Clause (B) of the paragraph removes any doubt as to' the intention of Congress on this point.

A few months later the Second Circuit Court of Appeals, in Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937, held that the acquisition by one corporation of all the properties of another was not to be treated-by itself as a statutory reorganization; that such acquisition, to be within the statute, must be related to what would in general legal parlance be referred to as a reorganization, but that the concept of such reorganization was not as restricted as the Fifth Circuit Court of Appeals had held, as being confined to technical mergers or consolidations, but could include other arrangements whereby there was substantially a continuance of the same interests in the business and properties affected, the change being only a modification in corporate form or structure.

The Supreme Court in Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462, held that the absolute view of the Fifth Circuit Court of Appeals was too narrow an interpretation of the statute. The Supreme Court cited with approval the opinion of the Second Circuit Court of Appeals in Cortland Specialty Co. v. Commissioner, supra. It said that the parenthetical expression, the acquisition of substantially all the properties of another corporation,” has the effect of “ expand [ing] the meaning of ‘ merger or consolidation so as to include some things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words — so as to embrace circumstances difficult to delimit but which in strictness can not be designated as either merger or consolidation.” It held that the situation before it “ has no real semblance to a merger or consolidation.”

In the light of these decisions, it is now the law that the parenthetical expressions may not be considered separately, but only as parts of the entire section of the statute, and hence that the acquisition by one corporation of substantially all of another’s properties is not, of itself, enough to constitute a statutory reorganization, but must be part of a strict merger or consolidation or of something which partakes of the nature of a merger or consolidation and has a real semblance to a merger or consolidation anc^involves a con-, tinuance of essentially the same interests through albiodified corporate structure.^>

This construction of part (A) of the definition must be shaped to fit into the definition as a whole. There is a plain intendment to correlate part (A) and part (B), for both deal with the change of ownership among corporations of their properties. Whether there be any substantial significance in the fact that (A) treats of the acquisition, thus apparently emphasizing the receiving side of the transaction, while (B) treats of the transfer, the opposite facet, is perhaps unimportant here; for, however that may be, they must both be construed to effect. (A) may not be read so broadly in respect of the acquisitlon of Property for stock as to stultify (b), dealing with the transfer of nro-pertv.for stock. Such a transter, to be a reorganization under (B), must comply with the prescribed condition, — “ if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred,” and it would not do to treat as a reorganization a transfer for Less than control through the device of calling it a merger and thus bringing.it within (A). While, therefore, there is. latitude in the term merger, there is at the same time the necessity of keeping it within the bounds of (A) and not invading (B).

There is substantial difficulty in this. Some overlapping seems inevitable. It is therefore better not to attempt to formulate a rule of construction, which by its very language may serve to constrict the operation of the statute more narrowly than was intended. It is only important to fulfill the purpose indicated by the language of the statute. The underlying purpose of this section is to permit a change in the form of ownership which in essence does not affect continuance of the same actual ownership of substantially the same properties without fear of tax at the time of the formal change. In the case of a true merger or consolidation, the immunity from tax is extended beyond this purpose, since to the shareholder the result is to give him new shares representing properties in some of which he theretofore had no interest. While through modified forms he has a continuing interest in the same assets, although in a lessened proportion, he also acquires an interest in entirely new assets.

Is this, then, an arrangement which for the purpose of the statute so far partakes of the nature of a merger or consolidation or resembles it as to bring about the same tax result, notwithstanding it is not the transfer of properties for controlling shares of the transferee? Three persons owning all the shares of a corporation conducting a local business cause the corporation’s assets to be transferred to another existing corporation with nation-wide activities, for cash, $426,842.52, which is distributed to them, and approximately 1 y2 percent of the shares of the large corporation, worth approximately $540,000. The local corporation continues its existence, holding as its assets the acquired shares, and the individuals continue to be the owners of their original shares. We think it is not within the scope of the statute.

The nature of the transaction is the same as that treated in (B) except for the condition. Omitting consideration of the cash received, since its effect is found rather in subdivision (d) than in the definition o,f subdivision (i), there was a transfer by one corporation of all its properties to another for stock in the transferee, but instead of being in control, which by subdivision (j) means the ownership of at least 80 percent of the transferee’s shares, there is ownership by the transferor of only 7% percent of such shares. Thus the transaction appears to be far from a continuing interest in the same property through a mere change in forms of ownership but rather an almost complete change in the essential assets owned; and this still disregards the large proportion of cash received.

This wide departure from the percentage of stock upon which (B) is conditioned, in a transaction which is otherwise within that part of the definition, should make us slow to find (A) nevertheless applicable. The parties to the transaction deliberately for their own purposes refrained from a merger. Furthermore they chose an arrangement which avoided the result of a merger. Instead of the shareholders of the Minnesota Co. owning shares of the Grand Union Co., as they would have if there had been a merger, they continued to own Minnesota shares; and instead of the Minnesota Co.’s disappearance as in a merger, its existence and powers continued, and as the owner ,of the Grand Union shares it brought about a freedom from immediate tax upon the dividends upon such Grand Union shares, since by section 83 (p) such dividends are deductible by a corporation simultaneously with their receipt as gross income, while to an individual shareholder dividends are subject to surtax.

This decision does not restrict (A) to technical mergers. It still leaves room for a more expansive application of the statute. Tt. might fíp snggegt.Ptd , •for.^qmp1p.1 that by having the assets of the Minnesota Co. transferred to the Grand Union in exchange for shares and then having the Minnesota Co. promptly distribute such shares among its own shareholders in liquidation and dissolve, so that in all substantial respects the outcome would have been the same as if a true merger had occurred, the petitioners might properly have invoked part (A) of the definition. How much further from a true merger they might have gone and yet achieved what the statute calls a reorganization, we do not attempt to say. It is enough now to hold that the facts before us go further than the statute implies, and that there was no reorganization.

In this view, the Minnesota Co. realized a gain measured by the difference between the $254,646.62, cost of its property, and $966,-842.52, being the sum of $426,842.52 cash and $540,000, the value of the 18,000 shares of Grand Union Co. Section 111. This gain of $112,195.90 may not escape recognition. Section 112 (a).

The question is suggested whether the 18,000 shares of Grand Union stock were without fair market value since there was a covenant against its sale within a year after its receipt. The petitioners say they do not press the point before the Board, but “ preserve it for the purpose of the record.” The restriction was a contractual obligation and therefore voluntary, and does hot, in our opinion, leave the shares without fair market value, as that term is meant to be used in the statute. See Newman v. Commissioner, 40 Fed. (2d) 225. This fair market value we find to be $30 a share.

As to the Petersons, it follows from the foregoing that the distribution to them, as shareholders, of the cash surplus was, after being-reduced by the amount of the liabilities assumed, $106,411.73, an ordinary dividend subject to surtax.

^Reviewed by the Board.

Judgment will be entered under Rule SO.

MaRQuette concurs in the result.

VaN FossaN,

dissenting: It seems clear to me that the prevailing opinion goes much further than is warranted either by the language of the revenue acts or by the authoritative decisions of the courts. It reads into the statute a concept and a limitation neither written in nor intended by Congress.

Black,

dissenting: The effect of the majority opinion as I construe it is to interpret paragraph (1) (A) of section 112 (i) of the Revenue Act of 1928, which now reads: “(1) The term ‘ reorganization ’ means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation) ” as if the last clause quoted above were made to read: “ or substantially all the properties of another corporation if immediate1/y after the transfer the transferor or its stoclcholders or both are in control of the corf oration to which the properties are transferred.” I find no warrant for reading into the statute this language which is not there.

In support of the conclusion which it reaches, the majority opinion cites Cortland Specialty Co., 22 B.T.A. 808; affd., 60 Fed. (2d) 937, and Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462. I do not think these two cases are authority for what the Board holds in the instant case.

In the Cortland Specialty Co. case, one corporation transferred its assets to another in consideration of cash and promissory notes. The Board held that the transaction was not a reorganization, but simply a sale by one corporation of its assets to another. This view was upheld by the Circuit Court of Appeals for the Second Circuit, the court holding that the transaction did not come within section 203 (e), Revenue Act of 1926, because the property received for the assets sold did not include “ stock or securities ”, the notes received not being so classifiable. There was no continuity of interest on the part of the transferor corporation or its stockholders in the ' property sold because neither the selling corporation nor its stockholders received stock in the purchasing corporation. The situation in Pinellas Ice & Cold Storage Co. was pretty much the same. There two corporations owned by the same stockholders sold their assets to a third corporation for cash and promissory notes. No stock or other securities of the purchasing corporation were received. The Supreme Court held that the transaction was a mere sale of assets and did not partake of any of the features of either a merger or a consolidation. The court was, however, careful to point out that the words within the parenthesis of (A) might not be disregarded. On that point the court said:

* * * The words within the parenthesis may not be disregarded. They expand the meaning of “ merger ” or “ consolidation ” so as to include some things which partake of the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words — so as to embrace circumstances difficult to delimit but which in strictness cannot be designated as either merger or consolidation. But the mere purchase for money of the assets of one company by another is beyond the evident purpose of the provision, and has no real semblance to a merger or consolidation. Certainly, we think that to be within the exemption the seller must acquire an interest in the affairs of the purchasing company more definite than that incident to ownership of its short term purchase money notes.

In the instant case the seller acquired an interest in the affairs of the purchasing company to the extent of 18,000 shares (voting trust certificates) of its no-p'ar common stock. This, in my opinion, gave the transferring corporation that continuing interest in the new above quoted. As to the cash received in the transaction, it is taxable to the corporation to the extent of the gain realized, unless distributed to the stockholders in pursuance of the plan of reorganization. This is so by reason of section 112 (d) of the Revenue Act of 1928, which reads:

If an exchange would be within the provisions of subsection (b) (4) o'f this section if it were not for the fact that the property received in exchange consists not only of stock or securities permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then—
(1) If the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, but
(2) If the corporation receiving such other property or money does not distribute it in pursuance of the plan of reorganization, the gain, if any, to the corporation shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property so received, which is not so distributed.

( It is my understanding that it is under the foregoing provision that the Commissioner has determined that there is a taxable gain to the corporation in this proceeding to the extent of $106,411.18. On the date that petitioner, the Minnesota Tea Co., transferred all of its assets to the Grand Union Co. for .18,000 shares of its common stock plus $426,842.52 in cash, pursuant to resolutions authorizing the transfer, it immediately .distributed the cash pro rata to its shareholders, the petitioners, E. C., A. F., and L. T. Peterson, who assumed and thereafter duly discharged all of its Habilites. The petitioners Peterson received cash in the amount of $426,842.52 and assumed and paid liabilities of $106,471.13, each thereby receiving his pro rata portion of the net distribution of $320,370.79. Respondent has held this taxable to each of the petitioners Peterson as dividends received from the corporation and has helcTtim $706,471.73 taxable to the corporation as profit from the transfer of assets, received in cash and not distributed to the stockholders in pursuance to a plan of reorganization. The Commissioner contends that this $106,471.73 was impressed with a trust, that the stockholders should use it to pay the debts of the corporation and that this is not a distribution to stockholders within the meaning of the statute above quoted, but is equivalent to the corporation itself using the money to pay its debts. With this view I agree. The majority opinion, however, does not affirm the deficiency against the corporation on that ground, but on the ground that there was no reorganization and the whole transaction was taxable. With this view, for reasons I have already stated, I disagree. I do not discuss the question as to whether the $320,370.79 admittedly distributed to the petitioners Peterson is all taxable to them as dividends as determined by respondent, or only a part as contended by petitioners. The majority opinion having affirmed the deficiencies on the ground that there was no reorganization, I am content to record my dissent to that holding.

       SEC. 112. RECOGNITION OF GAIN OR LOSS.
      *******
      (i) Definition of reorganization. — As used in this section and sections 113 and 115—
      (1) The term “ reorganization ” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.

       An examination oil the history of these provisions seems to indicate that there was no deliberate design to differentiate between the phraseology of (A) and (B), but only to bring together, within the definition of reorganization, language which had already been used in separate parts of the statutory scheme.


author: Matthews :

text:
    C. H. Mead Coal Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42718, 42719, 54660.
    Promulgated June 30, 1933.

      Frederick L. Thomas, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Matthews :

1. The issue with respect to depreciation falls under two heads — (a) the basis to be used, and (b) the rate to be used in determining the depreciation allowable on steel rails.

(a) The petitioner recognizes that cost is the basis to be used in determining depreciation and contends that $335,000 was the cost to it of the depreciable property acquired upon its organization in 1920. Eespondent contends, on the other hand, that the petitioner paid only $235,000 for the property and has calculated depreciation on this basis.

The facts, simply stated, are these:

C. H. and C. S. Mead obtained an oral option from the East Gulf Coal Co. to sublease 2,500 acres of coal lands, which carried with it the right to purchase the plant and mining equipment placed on the leased lands by the East Gulf Coal Co., and the right to the proceeds of a contract with the Virginian Railway Co. and to certain rents, the Meads to assume the royalty obligations under the original lease, to pay the East Gulf Coal Co. $50,000 rent a year for 12 years and to pay $235,000 for the physical equipment on the property. They offered to sell the option to the petitioner in return for 1,000 shares of petitioner’s stock having a par value of $100. This offer was accepted by petitioners, the 1,000 shares were issued by the Meads for their option and the purchase price of $235,000 for the physical assets paid over by the petitioner to the East Gulf Coal Co.
Petitioner added $100,000 to the cost of the physical assets and contends that this was proper because the property when received from the East Gulf Coal Co. was in fact worth at least $335,000, and the 1,000 shares of stock issued to the petitioner were worth par.
Although the evidence shows that the stock was worth par at the time it was issued to the Meads, and the physical property was worth at least $335,000, the $100,000 paid for the option does not represent an additional cost to petitioner of physical property alone. It represents cost to petitioner of all the properties acquired from the East Gulf Coal Co. No evidence was introduced to show how the $100,000 should be apportioned between the physical properties, the sublease and the rights under the contract with the Virginian Railway Co., and to certain rents. The fact that the physical properties were worth at least $335,000 at the time they were acquired by the petitioner does not furnish any basis for allocating the total amount paid for the option to such properties. The lands which were leased were very valuable coal lands and the acquisition of a lease on such lands might well have been worth $100,000 to petitioner without the acquisition of the mining equipment already on the lands. There is absolutely no evidence from which we could find what, if any, portion of the $100,000 should be allocated to the physical property. In the absence of such evidence, the determination of the respondent as to the basis for depreciation must be sustained.

(b) As to the second point raised on the depreciation issue, whether steel rails in a mine depreciate at the rate of 10 percent a year, as contended by respondent, or at 12y2 percent, as the petitioner urges; we are of the opinion that the more rapid depreciation in petitioner’s mines is sustained by the evidence, and have so found. Petitioner’s witness, Nowlin, its secretary-treasurer, calculated the average life of a steel rail in petitioner’s mines — with their curves, grades, slate falls, etc. — was six years. The petitioner had some $25,000 of tracking and its replacement was about $4,000 a year. It would appear, therefore, that depreciation on steel rails in petitioner’s mines was about 16 percent, certainly as much as the 12y2 percent claimed. We do not think the rate of 12y2 percent unreasonable for the years before us.

2. We come now to the question of whether petitioner sustained a loss of $82,438.26 in 1925 on the exchange of stock resulting from the reorganization of the Interstate Coal & Dock Co., a Maine corporation, in which petitioner was a stockholder to the extent of 2,083 shares. If this transaction was a “ reorganization ” within the meaning of the 1926 Revenue Act, of course, no loss on such an exchange will be recognized to the petitioner. See section 203 (b) (2), set out in the margin. If such an exchange does result in a taxable gain or loss, the petitioner’s valuation of the stock received in exchange is sustained by our finding that it was worth at that time not more than $40 a share. The facts of the transaction may be summarized as follows: Petitioner was a stockholder of the Maine corporation. The Maine corporation owned 9,600 of the total 13,516 shares of the Low Volatile Consolidated Coal Co., a West Virginia corporation, or something over two thirds of its capital stock. The assets of the Maine Co. were mortgaged to a bank on October 10, 1922. On May 9, 1925, the president of the Maine Co. and of its subsidiary, the West Virginia corporation (C. H. Mead being vice president of this company) sent out jointly a circular letter to all stockholders of both companies, pointing- out that the mortgagee bank was in need of money and would shortly commence foreclosure proceedings ; that the indebtedness of the two companies consisted mostly of the unpaid purchase price on certain West Virginia mines and that the burden could no longer be carried without “additional financing”; and suggesting, the majority of the stockholders and certificate holders of both companies having so “ unanimously voted after full discussion,” that “ the only practical method of refinancing these companies is through reorganization.” The letter also outlined the plan. The mortgagee bank thereupon foreclosed on the Maine Co’s, mortgage on June 30, 1925, and at the foreclosure sale the new company, the proposed financial structure of which had been put. before the stockholders of the old companies fully in the ab<rve mentioned circular letter, purchased the assets for $491,000 pursuant to the plan. The new company was the Low Volatile Coal Co. of Ohio, an Ohio company. The Ohio Co. issued 10,000 shares of preferred stock, to be sold at par; 10,000 more shares of common (no pax-value) to go as a bonus, share for share, with each share of preferred sold; and 10,000 shares more of common to be distributed to preferred stockholders of the old Maine Co. and to the minority stockholders of its subsidiary, the old West Virginia Co. Petitioner as a stockholder in the old Maine Co. thereby got 94Y shares of the new Ohio Co’s, no-par common stock (worth in 1925 about $40 a share) and seeks to show a loss in 1925 measured by the difference in value then of this stock and the cost of the stock held in the old Maine Co.

We are asked to say that this transaction was not “ a reorganization ” within the meaning of the 1926 Act, the relevant sections of which are set out in the margin. The petitioner points out that only about 68 percent of the new company’s stock was owned after the transaction by stockholders of the two old companies, and that of the total shareholders of the old companies only about 80 percent owned stock in the new company. And it argues from this, under the statute’s definition of “ control ” as 80 percent, that this was not a reorganization under section 203 (h) (1) (B). Conceding this without deciding it, the question remains whether this was not a reorganization under subsection (A) of the same provision. The petitioner contends that it does not fall within the definition of merger or consolidation ”, but we think otherwise. Only recently, the Supreme Court had occasion to construe this section of the act, and said by way of definition, in Pinellas Ice & Cold Storage Co. v. Commissioner, 287 U.S. 462:

The paragraph in question directs — “The term ‘reorganization’ means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of sto'ck of another corporation, or substantially all the properties of another corporation).” The words within the parenthesis may not be disregarded. They expand the meaning of “ merger ” or “ consolidation” so as lo include some things which partake o'f the nature of a merger or consolidation but are beyond the ordinary and commonly accepted meaning of those words — so as to embrace circumstances difficult to delimit but which in strictness cannot be designated as either merger o'r consolidation. * * *

In that case there was the form of a sale by the old corporation to the new, ami what is here important, a distribution of the cash proceeds of the sale (when realized through maturity of notes from the old corporation) to the stockholders of the old corporation. No such thing took place here. Here the new company paid $491,000 for all the assets of the old at the sale, but the only distribution made to the stockholders of the old company and its subsidiary was in stock of the new company. Moreover, such a distribution in the new company’s stock was prearranged from the beginning, as the proposal to all stockholders of the two merged corporations made by the majority of such stockholders plainly shows there was a definite plan of reorganization which was carefully carried out.

It seems to us immaterial that there was a foreclosure sale of the old corporation’s assets. Foreclosure sales are the common concomitant of reorganizations, and no peculiar significance, as petitioner contends, attaches to this circumstance; in fact, the judicial sale is the usual incident of reorganizations. Cf. De Blois v. Commissioner, 36 Fed. (2d) 11; Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937; certiorari denied, 288 U.S. 599; Morawetz on Private Corporations, § 812. What is essential, however, to constitute a reorganization is continuity of interest from the old corporation into the new, and it is this element which distinguishes a reorganization from a mere sale by the old corporation of its assets for cash and notes to be distributed to its stockholders in liquidation. Cortland Specialty Co. v. Commissioner, supra; Pinellas Ice & Cold Storage Co. v. Commissioner, supra. Here the petitioner was a stockholder in the old corporation and became, through a definite and prearranged plan, a stockholder in the new corporation, so that its continuity of interest remained unbroken. Cullen F. Thomas, 14 B.T.A. 1341, cited by petitioner, is distinguishable on its facts; and the peculiar facts of Burnet v. Houston, 283 U.S. 223, also relied on by petitioner, so far as we can see, have no application to the question at issue here. There a stockholder became a guarantor of the value of certain collateral held by his corporation and was allowed to take as a loss the difference between the amount so guaranteed and the stocks received on distribution of the collateral, the stocks received by the taxpayer having incidentally been substituted for that originally pledged to the corporation by its debtor through a reorganization. To state these facts is to show how remote that case is from the issue here.

In general legal parlance there was a reorganization, and we hold that there was also a reorganization within the meaning of the statute. Consequently, petitioner sustained no recognizable loss through its receipt in 1925 of the new Ohio Co.’s stock in exchange for the stock originally held by it in the old Maine Co. Cf. Minnesota Tea Co., 28 B.T.A. 591.

3. One assignment of error remains which need not detain us long: The respondent’s allocation of the cost equally between common and preferred shares of the stock bought by petitioner in 1927 in the new Low Volatile Coal Co. The petitioner bought in that year 739 shares of preferred stock of that company, paying approximately $103.66 a share. With each share of preferred, it received free as a bonus one share of common stock. The petitioner sold 54 shares of the Low Volatile Coal Co. preferred in 1928 at $5,346, or $99 a share.

The petitioner offered evidence of sales of the common stock in January 1926, at $22, and in December 1929, at $34 a share. It was certainly not worth more in 1927 than $40 a share, its probable value in 1925, and we have so found. It follows, therefore, that the preferred stock was then worth the difference between the amount paid for common and preferred, or about $63.66 a share. This basis of allocation of cost of the 739 shares of common and of preferred stock to petitioner in 1927, should, therefore, be followed, in the calculation of the gain on the 1928 sale.

Reviewed by the Board.

Judgment will he entered under Rule 50.

GoodRICH took no part in the consideration of or decision in this report.

       Sue. 203. (b) (2) No gain, or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

       Sec. 203. (h) As used ill tins section and sections 201 and 204—
      (1) The term “ reorganization ” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number ol' shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in contol of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
      (2) The term “ a party to a reorganization ” includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one cor-poraton of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.
      (i) As used in this section the term “ control ” means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.


author: Lansdon : StekNhageN, Leech,

text:
    Mrs. R. L. Wheelock, Petitioner, v. Commissioner of Internal Revenue, Respondent. R. L. Wheelock, Petitioner, v. Commissioner of Internal Revenue Respondent.
    Docket Nos. 37805, 37806.
    Promulgated July 6, 1933.

      Harry C. Weeks, Esq., for the petitioners.

      F. B. S dúos ser, Esq., and E. B. Gannon, Esq., for the respondent.
   OPINION.

Lansdon :

Petitioners allege tbat they are entitled to deduct the amount of $600 from the income of the marital community of which they are members, as a bad debt ascertained to be worthless and charged off in the taxable year. Wheelock testified that as surety on a note which the money lender failed to collect by a suit in 1923 he paid more than $600 in that year. The evidence shows that in the taxable year he paid not less than $600 as surety on the note of one Banks, who was then entirely without assets. In such circumstances the deduction claimed is allowable. Otto P. Heyn. 4 B.T.A. 1256.

As to the loss claimed as sustained in 1923, Wheelock testified that he advanced about $1,900 to a blacksmith with which to begin business; that the business was operated for two or three weeks and then turned over to him; and that he sold the material for about $500. The only basis for respondent’s disallowance of the loss here claimed is that the exact figures are not proved. We are satisfied that petitioner advanced not less than $1,900 and recovered not more than $500. The determination of the respondent is reversed.

The third question relates to the amount of allowable depletion to which petitioners are entitled in the taxable year as a deduction from income which they realized from sales of oil produced on the Wheelock-Smith lease. In their income tax returns for 1923, petitioners claimed and were allowed, depletion in the amount of $122,702.87, based on a discovery capital value of $308,028.28, an oil reserve of 552,037.71 barrels, and a production of 219,905.50 barrels. They now claim that the actual production from such lease in 1923 was 237,766.57 barrels. In amended answers to the petitions the respondent avers that the discovery value was incorrectly computed and that depletion should not be allowed in excess of $83,710.47 and moves for an increased deficiency.

In support of his affirmative allegation the respondent contends that the basis for depletion, which in this case is the fair market value within 30 days of the discovery of oil and gas, was incorrectly computed. In his computation, which was made by the so-called analytical method, respondent used a price of oil of $1.30 per barrel at the date of discovery. The wells here involved were in the Powell field, in which at the discovery date there was flush production in excess of existing pipe line facilities. This resulted temporarily in a local market price that was substantially lower than at other points in the Mid-continent field in Oklahoma and northern Texas. In their Form O report the petitioners stated that the price of oil at date, of discovery of the wells in question in what is known as the Mid-continent field, of which the Powell field is geographically a part, was $1.30 per barrel. Respondent argues that he was misled by that statement and that his computation of value therefor was greatly in excess of the fair market value of the property within 30 days of discovery, which he contends was $184,819.40.

Discovery value is the fair market value of an oil producing property within 30 days after a producing well is developed. The discovery well on the lease in question produced 9,000 barrels of oil daily when it was brought in and a second, drilled in before the expiration of the 30-day period, was an 18,000 barrel gusher. Seven other wells of varying productivity were completed and produced oil in the taxable year. In the period from October 12 to December 31, 1923, there was a gross production from petitioners’ interest in the lease in the volume of 231,766.57 barrels. Witness testified that similar adjacent property was sold at about the time of the discovery on the Wheelock-Smith lease at prices considerably in excess of the discovery value of the property in question as determined 'by the Commissioner, acreage, production and marketability considered. One witness, well qualified by education, training and experience as an expert in such matters, was of the opinion that petitioners’ interest in the discovery value of the lease in question was not less than $400,000 and another equally well qualified, testified to a value of from $250,-000 to $425,000. The property was sold in March 1924 for $500,000, of which petitioner received $250,000 in addition to approximately $300,0000 which he had realized from the sale of oil prior thereto. In our opinion the fair market value of the petitioners’ interest in the Wheelock-Smith lease was at least $308,028.28, the amount originally determined by the respondent. On this issue the contention of the respondent for a lower value is overruled. At the hearing the respondent admitted that the actual production from the petitioners’ interest in the Wheelock-Smith lease in 1923 was 237,766.56 instead of 219,905.50 barrels of oil. This admission must be considered in a recomputation of the deficiency under Bule 50.

The parties have stipulated that depreciable equipment which cost $167,244.22 was purchased for and installed on the Wheelock-Smith lease and used in the production of oil therefrom in 1923. One half the cost of such equipment or $83,622.11 was charged to the petitioners, but no deduction on account of depreciation thereof was claimed on their income tax returns for 1923 or allowed to them on any subsequent audit of such returns. Petitioners sold their interest in the lease about March 18,1924 for $250,000. In their computation of gain from such sale the basic cost was not decreased by any amount representing depreciation allowed or allowable before the date of the sale. The tax liability of the petitioners for 1924 was finally settled by an agreement executed under the terms of section 606 of the Revenue Act of 1928.

Petitioners now claim deduction from their income in 1923 of an amount representing depreciation on physical property used by them in that year in their business of producing oil. Failure to claim depreciation on a return does not preclude assertion of claim therefor in proceedings before the Board. In Union Metal Mfg. Co., 1 B.T.A. 395, we said:

The mere failure of a taxpayer to take the proper deduction in each year does not permit him to take advantage of his mistake through an incorrect return in a later year, nor does it permit the Commissioner to compel an incorrect return. The law does not contemplate the adjustment in any part of an incorrectly computed tax by the incorrect computation of another tax-Unless barred by the statute of limitations, a taxpayer is not precluded from demanding a correct computation of his tax for a past year on the facts as they exist, whether originally reported or not.

The rule therein established in that proceeding has been followed by the Board in many subsequent cases by the cojirts and by the Commissioner. S. Marsh Young, 2 B.T.A. 457; Mereen-Johnson Machine Co., 5 B.T.A. 400; Burke Electric Co., 5 B.T.A. 553; Gould Coupler Co., 5 B.T.A. 499; Deltox Grass Rug Co., 7 B.T.A. 811. In Felt & Tarrant Mfg. Co. v. United States, 37 Fed. (2d) 977, the Court of Claims followed the same rule on the question. The Felt & Tarrant Mfg. Co. case was taken to the Supreme Court on certio-rari and that tribunal, in an opinion reversing the court below, recognized at least by implication that the rule of the Union Metal Mfg. Co., supra, 283 U.S. 260, is sound.

The respondent does not deny that the general rule is as above set forth, but he contends that the practically contemporaneous settlement of the tax liability of the petitioners for 1924, under the provisions of section 606 of the Revenue Act of 1928, which had the effect of dropping the bar of the statute of limitations against all questions relating to income for that year, effected estoppel as to the claim for depreciation in 1923. It is true, of course, that petitioners’ failure to claim depreciation in 1923 increased their taxable income in that year. It is equally true that their failure to reduce the basis for computing gain on the sale of the property in 1924 reduced their taxable income in that year in the same amount. By reason of the closing agreement as to tax liability for 1924 the Government is not now able to redetermine petitioners’ taxable income for that year. It follows, therefore, that if the present contention is allowed the petitioners will have been allowed to reduce their taxable income in each of two successive years by the deduction of the same item.

Petitioners do not come here offering to correct their return for 1924 on the basis of the true income for that year and, even if they were willing so to do, such action is now barred by the statute of limitations as well as the closing agreement. It is apparent, therefore, that in the present proceeding they are not asking us to redetermine their true tax liability for each of the years 1923 and 1924, but for the second time to allow them an offset against their taxes which they have already enjoyed. Unless the law inescapably permits such an inequitable result, they should not prevail.

In many recent cases the sort of estoppel here argued by the respondent has been applied by this Board and the courts. It may be outside the general rule, but it is based on acquiescence or acceptance of benefits. In Ralston Purina Co. v. United States, 58 Fed. (2d) 1065, the Court of Claims said: “ Under the doctrine of equitable estoppel, a person is held to a representation made on a proposition assumed where otherwise inequitable consequences would result to another, who having the right to do so under all the circumstances of the case, has in good faith relied thereon.”

In Inland Products Co. v. Blair, 31 Fed. (2d) 867, in affirming a decision of this Board, the Circuit Court of Appeals for the Fourth Circuit said:

It is true that these moneys, having been paid voluntarily by the taxpayer under mistake of law, could not have been recovered back (Fox v. Edwards (C.C.A. 2d) 287 F. 669); but nevertheless there was a moral obligation upon the government upon discovering the mistake to correct it, and it has made the correction and the taxpayer has accepted the refund. It is elementary that one who seeks to have a mistake corrected must surrender what he has received by reason thereof, and likewise one who accepts the correction of a mistake is estopped to claim benefit to which he would be entitled if it were not corrected. In this case, the taxpayer, as the result of the payment under mistake, received the deduction from its gross income of the amount so paid. When the mistake was rectified, and it accepted the return of the amount paid, with interest, it ought not to be heard to claim the benefit of the deduction on account of the payment.

In Louis Werner Saw Mill Co., 26 B.T.A. 141, the Board said:

* * * Tbe respondent correctly determined that the amounts received constituted income and gave petitioner the benefit of taxing one-half in each of two years instead of accruing all as taxable income in 1921. Petitioner accepted that determination with respect to 1921 and paid the deficiency asserted upon that basis. There is no difference in principle between the transaction concerning the oil and gas lease and that concerning the Panola Block timber tract. In each the petitioner has elected to accept the benefits flowing from respondent’s determination of a method of taxation. Having so elected, petitioner cannot now renounce that method and insist upon another under which taxes cannot be collected because the statute of limitations has run.

In W. R. Ramsey, 26 B.T.A. 277, we said:

* * * The petitioner took advantage of the liberal provisions of article 225, supra, and with the approval and consent of the respondent reduced his income-tax payments for each of the years 1922, 1923, 1924 and 1925 by classifying these expenditures currently as business expenses. Having profited by such prior classification, at the expense of the Government, he now seeks again to profit by them in reduction of his taxes for 1926, without offering to do equity by paying the taxes he escaped in the prior years. Inasmuch as the respondent acquiesced and acted upon the petitioner’s classification in such prior years, and as the statute of limitations now prevents collection of such taxes, it is obvious that the petitioner has voluntarily waived his right to change his position, to the detriment and loss of respondent, and is therefore estopped from denying the correctness of his former assumed statute. Swain v. Seamans, 9 Wall. 254; Shutte v. Thompson, 15 Wall. 151. Parties must take the consequences of the position they assume. Casey v. Galli, 94 U.S. 673. * * *

In the light of the decisions cited above we are of the opinion that the petitioners should not prevail here. They are not seeking to recover something of which they have been wrongfully deprived. Their loss in 1923, if any, resulted from their own acts and was fully compensated to them in the following year when the amount of deduction now claimed was applied to reduce their tax liability for that year. On this issue the determination of the respondent is affirmed.

On December 31, 1923, the E. L. Smith Oil Co. charged the running account of the petitioners upon its books for one half the cost of development of the lease or $50,492.27. Upon its own books the E. L. Smith Oil Co. capitalized the entire amount of development costs and on December 31 charged out of capital one half thereof to the petitioners, who deducted the same from their income for the taxable year as expense, in conformity with Begulations 62, article 223. As filed, the petitions herein alleged that such amount should have been capitalized by the petitioners and depreciation claimed. This contention has been abandoned. At the hearing the respondent duly amended his answer and alleged that such amount was erroneously allowed as an expense, that it should be capitalized and that the income of each petitioner for the taxable year should be ratably increased to that extent. It is obvious, of course, that the petitioners’ abandonment of an alleged error does not preclude the respondent from making an affirmative allegation of his own in reference to the same matter. It is necessary, therefore, to consider the merits of the allegation as set up in the respondent’s amended answer.

No facts on the issue above set out are in controversy. The petitioners claimed and were allowed the amount of the development costs as an expense incurred and paid in the taxable year. Respondent argues that, as the whole amount of development costs was capitalized on the books of the Smith Co., it follows that one half of such amount was thereby capitalized for the petitioner, since in the circumstances such books were also the books of the petitioner. We are unable to agree with this reasoning. It is true that the capital account of the Smith Co. was increased by the full amount of the development costs, but immediately thereafter it was reduced one half of such amount by a charge to the running account of the petitioners upon the same books. It is not disputed that petitioners then set up this amount on their own books as an expense. This they were entitled to do under the express provisions of Regulations 62 at article 223. Had the relationship between the petitioners and the Smith Co. been that of partners there would be some ground for this contention, but on this question the burden of proof is on •the respondent and he has failed to prove and does not argue that any partnership existed. The entire venture was a joint ownership and each owner was entitled to keep books and file Federal tax returns on any system that truly reflected income. On this issue the contention of the respondent is overruled. Under the conclusion we have reached it is not necessary to determine whether such expenditures, if capitalized, are recoverable by depreciation or depletion allowances.

Issue (5), relating to the disallowance of amounts alleged to represent business expenses incurred and paid in the taxable year, has been abandoned by the petitioner.

Reviewed by the Board.

Decision will be entered under Rule 50.

StekNhageN,

dissenting: A closing agreement under section 606 may involve a composition of numerous detailed controversies between the taxpayer and the Government as to the items determining tax liability for the year. The liability agreed upon may reflect such a give and take that no one of these items can be said to have been determined. Neither the original return nor the audit indicates the measure of the liability agreed upon. It is fair to assume that both were adjusted in reaching the final agreement. Without knowing more than that a return had been filed, that the unreduced cost basis of gain shown therein had been at first approved on an audit, and that a settlement had been embodied in a closing agreement under section 606, I could not say that the taxpayer is estopped to claim for the prior year the deduction to which he is otherwise lawfully entitled. Union Metal Mfg. Co., 1 B.T.A. 395.

While the taxpayer should not have both the 1923 deduction and the unreduced cost basis for 1924, and I should deny him the one if he had availed himself of the other, the double advantage ought to be established and not assumed, to support the denial.

Trammell, McMahon, Black, and Leech agree with the above dissent.

Leech,

dissenting: The majority opinion sustains the respondent’s disallowance of petitioners’ admittedly correct depreciation deduction for 1923, solely on the ground of an estoppel said to be raised by respondent’s establishing a bare agreement, without any of the considerations involved therein, executed under section 606 of the Revenue Act of 1928, closing petitioners’ tax liability for 1924.

This Board has held that such an agreement “ bars only the reopening of tax liability for the year covered thereby and in no way estops the petitioner from pleading and proving any fact overlooked in such year but related to the tax of a subsequent year. To hold otherwise would permit the perpetuation of an error to affect tax liability for subsequent years, a result quite as likely to be prejudicial to the revenue as beneficial to taxpayers and one which, in our opinion, was not within the intention of Congress when section 606 of the Revenue Act of 1928 was enacted.” W. C. Mitchell Co., 27 B.T.A. 645. Cf. Hering v. Tait, 65 Fed. (2d) 703.

A fortiori, such an estoppel cannot be created as to a tax liability for a prior year; certainly not unless a legal basis of fact is established therefor by the respondent, who here asserts it. In my opinion, the present record discloses no such basis. I therefore dissent on this point.

SteeNhageN, Trammell, McMahoh, and Black agree with this dissent.

       [Sec. 234 (a) (9), Act of 1921.] That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
      *******
      (9) * * * Provided, further, That in the case of mines, oil and gas wells, discovered by the taxpayer, on or after March 1, 1913, and not acquired as the result of purchase of a proven tract or lease, where the fair market value of the property is materially disproportionate to the cost, the depletion allowance shall be based upon the fair market value of the property at the date of the discovery, or within thirty days thereafter: * * * such reasonable allowance in all the above cases to be made under rules and regulations to be prescribed by the Commissioner with the approval of the Secretary. * * *


author: Aktjndell:

text:
    AutoStrop Safety Razor Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 57374.
    Promulgated July 6, 1933.

      Lawrence A. Taazer, Esq., and James C. Peacock, Esq., for the petitioner.

      J. A. Lyons, Esq., for the respondent.
   OPINION.

Aktjndell:

In the deficiency notice the amount involved was added to income by respondent, with the simple explanation “Returned royalties.” The petitioner contends that the transaction amounted to a contribution of capital, or a gift, to a corporation by its sole stockholder, and the amount involved, therefore, is not taxable income.

The transaction in question was one between the Autan Transfer Corporation and the AutoStrop Safety Razor Co., this petitioner’s predecessor, and it took place about six months prior to the organization of this petitioner. We are unable to determine from the evidence whether the petitioner and its predecessor are one or different taxable entities. The respondent treated them as one, and, though statements were made at the hearing by counsel for petitioner indicating the possibility that they hold a different view, no evidence was presented on the matter and the point is entirely forsaken in petitioner’s brief. The point is not important, however, for we are of the opinion that no taxable income was involved in the transaction.

The Autan Transfer Corporation was the sole owner of all of the outstanding capital stock of the AutoStrop Safety Razor Co., and the purpose of the former’s cancellation of the latter’s indebtedness is clearly stated in the instrument by which the cancellation was effected to be to assist the latter in its operation and in its business generally, and to improve its financial condition. The transaction, it seems to us, falls squarely within the provisions of article 49 of Regulations 69, which was first adopted in substantially the same form under the Revenue Act of 1918 and has been adopted under all subsequent revenue acts, and which reads as follows:

Art. 49. Forgiveness of Indebtedness. — Tlie cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the circumstances. If, for example, an individual performs services for a creditor, who in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his services. If, however, a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter’s gross income. If a shareholder in a corporation which is indebted to him gratuitously forgives the debt, the transaction amounts to a contribution to the capital of the corporation.

That the action of the Autan Transfer Corporation was entirely gratuitous on its part is evident from the absence, in the agreement, of any consideration moving to it from the benefited corporation. It sought by canceling the indebtedness to remove any hindrance to operations and marketing of products by the debtor corporation. The accomplishment of that purpose would naturally redound to the Autan Transfer Corporation’s benefit, since it was the sole owner of the debtor corporation; and the benefit so to be derived was evidently consideration enough for its action. No compensation for services, nor income from a transaction entered into for profit, nor gain derived from capital, or from labor, or from both, was involved in the transaction, and, therefore, the amount involved is not within the definition of income as defined in Eisner v. Macomber, 252 U.S. 189. The transaction constituted a contribution by the Autan Transfer Corporation to the capital of the AutoStrop Safety Razor Co. Cf. United States v. Oregon-Washington R.R. & Nav. Co., 251 Fed. 211; A. M. Lawrence, 13 B.T.A. 463; and Smith Insurance Service, Inc., 9 B.T.A. 284. The respondent erred in adding the amount of the canceled indebtedness to income.

Decision will be entered under Bule 50.


author: Maequette:

text:
    Rebecca J. Murray, Petitioner, v. Commissioner of Internal Revenue, Respondent. Edward J. Murray, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 40174, 40176, 58857, 58858.
    Promulgated July 6, 1933.

      W. S. Wiley, Esq., and G. Q. WAlbini, G.P.A., for the petitioners.

      Alva G. Baird, Esq., for the respondent.
   OPINION.

Maequette:

The controversy here is whether the profit derived from the sale of the capital stock of the Herald Publishing Co. should be reported on the installment basis, or should be reported entirely in the year 1926 upon the theory that the sale was a closed and completed transaction in that year.

Section 212 (d) of the Eevenue Act of 1926 authorizes taxpayers to report income on the installment basis in certain circumstances, viz.:

* * * In the case (1) of a casual sale or other casual disposition of personal property for a price exceeding $1,000, or (2) * * *, if in either case the initial payments do not exceed one-fourth of the purchase price, the income may, under regulations prescribed by the Commissioner with the approval of the Secretary, be returned on the basis and in the manner above described in this subdivision. As used in this subdivision the term “ initial payments” means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made.

Respondent contends that the sale of the stock was completed in 1926, and that the funds placed in escrow, together with the promissory note, were constructively, if not actually, received by the petitioners. The petitioners contend the transaction was a casual sale of personal property; that less than 25 percent of the purchase price was received in 1926, and that they reported income on a cash receipts and disbursements basis; that the contract was executory in that it had five years to run from October 1, 1926, and that they did not have unrestricted benefit of management or unqualified use, control or disposition of the unpaid balance. They further contend the trust company was not in theory of law the agent of the petitioners, and that income derived from securities was paid to them in lieu of interest on the promissory note; that they had the responsibility of any loss resulting from the investment of the escrow funds; and that under the terms of the agreement there was a possibility that Dennis would derive some profit from the management of the trust.

Regardless of the terminology that the parties have used in designating the character of this sale, that is, whether it be called a closed transaction ”, a completed sale ”, or a “ casual sale ”, we are convinced that this is the type of transaction that the Congress had in mind when it provided an election for reporting income from the sale of personal property when less than 25 percent of the purchase price was paid as an initial payment or payments. The facts are undisputed that during the year 1926 the petitioners received $80,900 in cash as the initial payment on stock which they sold for $130,900. The balance of the purchase price was placed in escrow, the receipt of which by the petitioners was conditioned upon their remaining out of the newspaper and publishing business for a stated period of time.

Respondent lays great stress upon the fact that there was nothing for the petitioners to do under the contract except to await the passage of a period of time, but the value that the purchaser placed upon this portion of the contract is measurable by the amount of security that he required-to be held in escrow in order to protect his interest. It is clearly stated in the agreement that Dennis was paying a large sum of money and that the good will which he was acquiring would be wholly destroyed or impaired if he could not prevent the petitioners from reentering the field in a competing business. We believe that this condition was a vital part of the contract; definite, real, and not dependent in any way upon the whim or caprice of the petitioners, such as existed in the case of William Holden, 6 B.T.A. 605. The condition is virtually the same as that found in Otto Braunwarth, 22 B.T.A. 1008, where Liberty bonds were placed in escrow, payable so much per year for five years, providing the petitioner had not entered into a competing business. In that case we held that the amounts received in each year were income to the extent that they exceeded the capital investment in the business sold.

In Ganson Depew, 21 B.T.A. 515, the petitioner in 1925 deposited certain certificates of stock in escrow, duly endorsed, receiving the purchase price in 1926. The purchaser had deposited the purchase price in escrow in 1925, and the question arose as to whether the loss sustained by the petitioner was realized in 1925, when the deposits were made under the escrow agreement, or whether the loss was realized in 1926, when the purchase price was paid. The Board held that the loss was sustained in 1926 because the petitioner had neither actually nor constructively received the purchase price as a result of delivery to the escrow agent. To the same effect is our decision in K. E. Merren, 18 B.T.A. 156, affirmed on another point in Merren v. Commissioner, 51 Fed. (2d) 44.

In Mrs. H. C. Walker, Jr., 23 B.T.A. 1, certain interests in oil properties were sold for a consideration of $200,000, to be paid out of the proceeds from oil produced from the land. The oil proceeds were to be placed in escrow at a designated bank and the bank was to pay the vendors $50,000 per year beginning in 1921. The land proved to be very productive and the proceeds in 1921 amounted to practically the full purchase price. The petitioners reported the income from the transaction on the installment basis and each claimed a deduction for depletion. The respondent disallowed the deduction and the petitioners appealed, contending that the income was taxable to them in the years in which the proceeds were deposited with the escrow agent. The Board held that the proceeds constituted income to the petitioners for the years in which received and that, having made their election to report income on the installment basis, they could not change and report on a different basis, when so doing would result in throwing a large part of income back in a prior year for which assessment and collection would be barred by the statute of limitations. To the same effect is Commissioner v. Moore, 48 Fed. (2d) 526 (certiorari denied, 284 U. S. 620), reversing the Board in L. C. Moore, 11 B.T.A. 979; and Commissioner v. Garber, 50 Fed. (2d) 588, reversing the Board in M. C. Garber, 11 B.T.A. 979.

In these proceedings the petitioners have elected to report income from the sale of the stock and their newspaper business upon the installment basis, as provided for in the above quoted section of the Bevenue Act of 1926. It must be admitted that they realized no more income in 1926 than the amount which they reported, unless it can be said that the receipt of the money and note by the escrow agent constituted receipt by the petitioners themselves. We find no justification in the agreement for holding that the trust company acted as agent for either party to the exclusion of the other; rather we believe that the trust company acted in its proper capacity as a disinterested party obligated to see that the terms of the agreement were performed, and upon performance by the parties pay over to either or each of them the property specified in the agreement. Until there was performance by the party of the agreed conditions, there could be no transfer by the escrow agent; upon performance the escrow agent was required to turn over the property specified to the party entitled thereto, and, therefore, as each annual payment was made by the escrow agent to the petitioners, they realized a profit upon the sale made in 1926.

In view of the foregoing discussion and cited cases, it is our opinion that the petitioners have properly reported income from this sale on the installment basis, and that they should be taxed accordingly.

In determining the petitioners’ tax liability for 1927 due regard should be given to the stipulation relating to the amount of profit received by each petitioner in 1927 and to the error conceded by respondent with respect to the disallowance of a deduction for rental commissions.

Decision will be entered wider Bule 50.


author: Seawell:

text:
    Laura M. Curtis, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56314.
    Promulgated July 6, 1933.

      Watson Washburn, Esq., for the petitioner.

      Nathan Gammon, Esq., for the respondent.
   OPINION.

Seawell:

Petitioner’s deficiency in income tax as determined by the Commissioner for the year 1928, amounting to $863.60, results from the disallowance by the Commissioner of a deduction of $6,908.78 from gross income claimed by petitioner as an expense of the operation of a racing stable conducted as a business by her during that year.

The petitioner is an individual, residing in Washington, D.C. In 1928 she was engaged in running two shops, one in Washington and one in New York, and she had profitable investments in securities. She was interested in horses and discussed with others the idea of going into the business of horse racing and the breeding of race horses, and was advised “ she would have a great deal of pleasure out of it and would probably make it pay if she would supervise and work with it carefully.” She had no farm or stable and never acquired either for her purposes. She acquired five fillies, yearlings in 1926, and put them in the hands of a trainer and stalled them in public stables and with keepers of public farms or pastures. She kept no books of account with reference to the cost of keeping the horses and did not require the trainer or keeper to do so, but depended upon her paid checks for showing the expense. Some or all the horses were raced in 1928 and won four or five purses, amounting to two thousand dollars. Petitioner spent more time looking after the horses and attending races in which they were entered than with both her shops. Petitioner had had no previous experience in breeding or racing horses, but had owned horses for pleasure for many years. When questioned as to her reason for acquiring and keeping the horses, petitioner stated: “ I had them because I liked them and hoped to make it a success, make it a successful racing stable.” * * * “Well, it was a question of pride with me, more than anything else. I really had invested that money in the stable as an investment, and I wanted to make it pay. My income was such that I could not have gone for any length of time, if it had not paid, but I was going to go on for a year or so.” There were no foals from the mares in 1928, but some in 1929. In the latter year, finding the business unprofitable, she gave it up and gave away the colts.

During 1928, the taxable year, the petitioner had expenses with her horses for feeding, insurance, transportation, training, etc., amounting to $7,908.78, according to her petition, which is borne out by her evidence and the identified paid checks which she produced at the hearing. From this expense she deducted in her income tax return for that year one thousand dollars, being receipts from “ stakes won ” or purses obtained from races. This one thousand dollars is the amount alleged to have been deducted from expense in the petition, but in her testimony on the hearing, while she denied that the winnings were more, she admitted they were as much as two thousand dollars. This results in an overstatement of deductions of $1,000 on the return.

Breeding and racing stables, “ though a financially hazardous undertaking, may be classified as a business under revenue laws,” as was said in the case of Margaret E. Amory, 22 B.T.A. 1398. The Amory case is much like the case at bar. The petitioners are both women; neither owned a farm or stables; neither had previous experience in breeding and racing horses; both were fond of horses and thought they could make the business, as well as the horses, go; both purchased yearlings as a nucleus in building up their stables; both employed trainers and managers; both suffered losses from the beginning. One outstanding difference appears, Mrs. Amory continued for several years to increase her investments and to suffer increasing losses, while petitioner learned her lesson in two or three years and quit. While petitioner was induced to enter this undertaking not only for the hope of making money, but for the pleasure she expected with the horses, it appears that her activity was, under the circumstances, nevertheless a business. Wilson v. Eisner, 282 Fed. 38; George D. Widener, 8 B.T.A. 651; affd., 33 Fed. (2d) 833.

By reason of the fact that petitioner in her tax return for 1928 overstated the deductions in the sum of one thousand dollars as pointed out above, it follows that there is a corresponding understatement of income for the year 1928, in the amount of one thousand dollars, and we so find and adjudge.

Judgment will be entered under Bule 50.


author: Goodrich :

text:
    Frank J. Kier and Franklin G. McIntosh, Executors of the Estate of Mary Dennison Myler, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47905.
    Promulgated July 7, 1933.

      J. Boy Dickie, Esq., for the petitioners.

      B. F. Staubly, Esq., for the respondent.
   opinion.

Goodrich :

Petitioners, wbo are the duly qualified executors under the will of Mary Dennison Myler, who died on May 4, 1927, a resident of Pittsburgh, Pennsylvania, in this proceeding attack respondent’s determination of a deficiency in estate tax of $35,243. The entire controversy relates to the value at which stock of the Standard Sanitary Manufacturing Co. owned by decedent at the time of her death should be included in her estate for purposes of the tax. A stipulation of counsel, which need not be here recited in full, sets forth facts respecting decedent’s holdings, the business and condition of the company in which she owned stock, a record of market sales of the stock, and other matters necessary or helpful to a determination of value. Several annual reports of the president of the company to its stockholders, containing financial statements and other data, were put in evidence by agreement, and one witness, a member of a brokerage firm, was called to give expert testimony respecting the effect on the market of an attempt to dispose of a large block of stock.

At her death, decedent owned 36,610 shares of common stock, having a par value of $25 a share, of the Standard Co., which was then the largest manufacturer in this country of bath room fixtures. It had outstanding 1,078,162 shares of common and 47,614 shares of preferred stock, the latter of a par value of $100 a share. The common stock was listed on the Pittsburgh Stock Exchange and 30,274 shares were sold there during 1925 at prices ranging between $136 and $100 a share. In 1926, 36,914 shares were sold, the prices ranging from $118% to $88; and in 1927, 78,151 shares were sold at prices between $114 and $78.50. During 1927 the sales of stock averaged about 5,200 shares monthly, except in October, when 21,088 shares changed hands, at prices ranging from $106 to $94.75. In May 1927, the month in which Mrs. Myler died, there were sales of 3,583 shares at prices between $85% and $83, and on the day of her death there were sales of 17 shares at $83.50 and 50 shares at $84%. During 1926, through its earnings, the company increased its surplus by more than two million dollars, and in 1927 the increase was nearly one million. In 1927 the company’s earnings on its common stock were $6.92 a share, and dividends paid totaled $5 a share. For a five-year period including 1927, the average earnings were $6.49 and the average dividends paid, $5.65 a share. The book value of the stock was $40.72 as of December 31, 1926. It was valued by respondent at $53.81 a share as of June 30, 1926, for purposes of the capital stock tax. The taxing authorities of Pennsylvania, for the purposes of the state inheritance tax, valued the stock at $76.50 a share as of the date of decedent’s death. In their return for Federal estate tax petitioners included the stock at the price fixed by the Pennsylvania authorities, $76.50 a share, and here contend that figure is the fair market value of the stock as of May 4, 1927. Despondent however has determined that the price to be used is $83{-f a share, that being the mean of the sales on the day of decedent’s death, and has so included it in the estate. From this action arises the deficiency herein.

On petitioners lies the burden of proving that respondent’s determination is erroneous and of proving the correct value of the stock. Their sole argument before us is that the prices at which small amounts of the stock were sold on the day of decedent’s death are not indicative of the fair market value of the large block of the stock owned by the estate, for the reason that an attempt to dispose of such large holdings would greatly depress the market, assuming that buyers could be found. We realize that in many cases that argument bears weight, although it has been rejected before, Bingham, v. Commonwealth, 196 Ky. 318, and that respondent, in his later edition of the regulations then in force has made a change of rule to permit of a departure from that standard “ where such selling prices do not reflect the fair market value.” Art. 13, par. 3, Regulations 70 (1929 Ed.). But this theory cuts both ways. It frequently happens that the ownership of a large block of stock controls the management and policies of the corporation and that fact effects a great enhancement of value of the total holdings over that of smaller units. Consequently, the disclosure of the fact that respondent’s valuation is based upon sales prices of but a few shares is not sufficient to prove it erroneous. Cf. Francis E. Smith, 1 B.T.A. 868.

Petitioners’ witness was of the opinion, in view of the figures supplied him as to sales, that the market was a narrow one, indicating neither “ that the stock is greatly wanted nor that it is desired to be sold” and that to throw this large block on that market would materially affect it, with the result that a price ranging from $74 to $77 a share would be the best that could be obtained. His testimony was confined entirely to expert expectations as to market performance in connection with an attempt to dispose of this stock; he had no knowledge of the financial condition or business prospects of the Standard Co., nor as to the attitude of its stockholders toward disposing of their holdings.

We cannot believe that the stock of a corporation which had attained outstanding leadership in its field, which, during the five-year period of which we have knowledge from the record before us, had annually earned and distributed as dividends amounts in excess of 20 per centum of the par value of its stock, and which had accumulated a huge surplus, a part of which it planned, at the time here basic, to expend in widespread expansion, was an unwanted stock. To the contrary, we conclude that its owners did not desire to sell it and that likely it would have found a ready and acceptable market had it been offered, even in very substantial amounts. In support of this view we need only point to the fact that during October 1927, a few months after decedent’s death, 21,088 shares— nearly two thirds of the amount held by decedent’s estate — were sold on the Pittsburgh Exchange at prices considerably in excess of the value used by respondent of which petitioners complain. Certainly, that record indicates that it was possible to market the stock of which decedent died possessed within a reasonable time thereafter, at a price at least equivalent to the valuation fixed by respondent. We conclude that his determination of the fair market value of the stock was not in error.

Judgment will be entered for the respondent.


author: Lansdon :

text:
    Callie E. Robertson, Petitioner, v. Commissioner of Internal Revenue, Respondent. R. R. Robertson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42496, 42497.
    Promulgated July 11, 1933.

      W. L. Austin, Esq., L. E. Oahill, Esq., and Olaude Oollard, Esq., for the petitioners.

      8. S. Fwulhner, Esq., and B. B. Cannon, Esq., for the respondent.
   OPINION.

Lansdon :

The petitioners claim their right to deduct from theif incomes in 1923 and 1924, respectively, ratable parts of the so-called “intangible” drilling expenses referred to in our findings of fact. The respondent contends that the petitioners, having elected under article 223 of Eegulations 02 and article 225 of Eegulations 65 to charge such expenditures against capital, are now precluded from claiming them as development expenses. The portion of the regulation invoked by respondent as relating to drilling expenses reads as follows:

Such incidental expenses as are paid for wages, fuel, repairs, hauling, etc., in connection with the exploration of the property, drilling of wells, building of pipe lines, and development of the property may at the option of the taxpayer be deducted as a development expense or charged to the capital account returnable through depletion. * * *

It will be noted that the regulation gives the taxpayer the option to deduct expenditures of the kind here considered as development expenses or to charge them to capital, but does not restrict him as to time or manner by which he is bound to indicate his election. Obviously a reasonable time, according to the circumstances in each case, and some definite commitment, are implied.

In the case considered nothing was done by the partnership or these petitioners to classify the items here considered in the initial year of their operations. At that time, according to the record, these petitioners were under the impression that the relationship between petitioner E. E. Eobertson and the other members of the partnership was that of coadventurers in the two oil projects, and that no accounting was to be made until the leases were developed or sold. A choice was made, however, in 1925, when the partnership filed regular and delinquent returns for 1924 and 1923, respectively. In each of these returns the partnership deducted the amount of such items as expense. In harmony with this classification of expenditures the petitioners thereafter filed their amended returns for 1923 and current returns for 1924, in which they claimed ratable deductions of the items from their gross income as expenses. These acts, we hold, were the only commitments made by the petitioners respecting their choice in the premises considered after adequate knowledge was had upon which they could exercise judgment in respect thereto, and, under the circumstances, must be considered as their election. We, therefore, sustain the contentions of the petitioners respecting this issue. Cf. Sterling Oil & Gas Co. v. Lucas, 51 Fed. (2d) 413; affd., 62 Fed. (2d) 951.

The next issue relates to expenditures amounting to $12,266.35 which the partnership of Muse & Eobertson made during the fiscal year ended August 31, 1925, in carrying out conditions assumed in the acquisition of lease interests. There is nothing in the record to show the character of these expenditures, except the stipulation that they were made “ in connection with the drilling of oil and gas wells on the leases named.” These leases, however, call for drilling and exploration expenditures which, in their nature, must be regarded as capital expenditures and, the partnership having assumed such obligations, we assume that the amounts in dispute relate thereto. In the absence of proof to show that the respondent committed error in denying these deductions, his determination in regard thereto must be affirmed.

The petitioners paid $8,000 as their one-fifth interest in the $40,000 paid to the Texhoma Oil & Gas Co. to secure the release of a production purchase contract. The respondent holds that this expenditure must be attributed to the cost of selling the oil released by that contract. The record shows that, in so far as the petitioners’ one-fifth interest in the oil was concerned, the sale contract in no way encumbered it and that the petitioners refused to recognize it. The contract, however, did constitute a cloud upon the lease, in that it affected four fifths of the entire production and while outstanding was an obstacle to a sale for which they were negotiating with the Prairie Oil & Gas Co. Petitioner E. E. Eobertson testified that the purchasing company refused to buy the lease so long as the contract was outstanding, and that they were compelled to purchase it from the Texhoma Oil & Gas Co. in order to clear their title and consummate the sale. This testimony is not contradicted and we must accept it as true. We, therefore, hold this $8,000 item to have been a capital expenditure and not an expense deductible from 1925 income as determined by the respondent.

In computing tbe gain resulting from the sale of oil leases by the petitioners in 1924, the respondent has disallowed the amount of $7,833 as a part of the cost of the property sold because petitioners were unable to produce the canceled check in evidence. At the hearing petitioner It. It. Eobertson testified that he made the payment by cashier’s chock in the amount claimed and entered the same in the investment account on his books. The canceled cashier’s check was not produced. If it is now in existence it is in the files of the bank which issued it and, therefore, not available for production by petitioner. We think the testimony of Eobertson that he paid this amount and duly entered it on his books is sufficient to overcome the presumption of correctness that attaches to the determination of the respondent. Accordingly, we hold that petitioners’ income for the year 1924 should be reduced in the amount of $7,833.

Eesulting from his analysis of petitioners’ capital account for 1924, the respondent determined additional income from unidentified sources in the amount of $8,533.24. Since we have found above that the respondent erroneously excluded $7,833 from petitioners’ investment or capital account in 1924, it follows that the income from undisclosed sources in that year must be reduced to that extent.

Decision will J>e entered- mder Rule 50.


author: Seawell :

text:
    Edward V. Schiesser, Executor, Estate of Cecelia E. Taheny, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51523.
    Promulgated July 11, 1933.

      J. Robert /Shen-od, Esq., for the petitioner.

      George D. Brdbson, Esq., for the petitioner.
   OriNION.

Seawell :

With reference to the alternate allegation of error to the effect that the parcel of real estate purchased in 1899 had a fair market value on March 1, 1913, of more than $22,000 as determined by the Commissioner, to wit, a value of $50,000, counsel apparently waives the issue and admits in his brief that the fair market value is as determined and that said sum is in excess of cost.

The other issues raised persist, but appear to us to be fully decided in the case of Fannie E. Lang, 23 B.T.A. 854. Petitioner, however, says :

In the present case, we raised a point which was not decided in the Lang ease, which is that whatever value passes and is taxed for Federal estate tax purposes becomes capital and what is capital cannot be income within the meaning of the Sixteenth Amendment to the Constitution of the United States.

This contention of petitioner appears to us to be based upon an erroneous understanding as to what the Supreme Court decided in the case of Tyler v. United States, 281 U.S. 497. The brief for petitioner says:

* * * Either the United States Supreme Court was in error in its decision in Tyler vs. V.8., supra, or the entire value of property held as tenants by the entirety must have passed at death in order to have been subjected to the Federal estate tax. There must have been a transfer from the decedent to the surviving tenant, because the tax is upon the transfer, and not upon the property itself.

The decision of the Board in the Fannie E. Lang case, supra, was affirmed by the Circuit Court of Appeals for the Fourth Circuit, 61 Fed. (2d) 280, and this decision of the circuit court of appeals was itself affirmed upon review by the Supreme Court of the United States, 289 U.S. 109. Mr. Justice Sutherland, who delivered the opinion of the Supreme Court, having under review the question (on facts comparable to the facts in the instant case) whether cost of property at 'the date purchased and acquired by the tenants by entireties or its fair market value at the time of the death of one of the tenants by entireties is the proper basis for determining the gain from the sale made by the surviving spouse, said:

An estate by the entirety is held by the husband and wife in single ownership, by a single title. They do not take by moieties, but both and each take the whole estate, that is to say, the entirety. The tenancy results from the common law principle of marital unity; and is said to be sui generis. Upon the death of one of the tenants “the survivor does not take as a new acquisition, but under the original limitation, his estate being simply freed from participation by the other; * * 1 Washburn, Real Property, 6th Ed., § 912. In the present ease, therefore, when the husband died, the wife, in respect of this estate, did not succeed to anything. She simply continued, in virtue of the nature of the tenancy, to possess and own what she already had. Giving the words of the statute their natural and ordinary meaning, as must be done, it is obvious that nothing passed to her by bequest, devise, or inheritance.

The court further said:

If the legislation here under review results in imposing an unfair burden upon the taxpayer, the remedy is with Congress and not with the courts. Unless there is a violation of the Constitution, Congress may select the subjects of taxation and tax them differently as it sees fit; and if it does so in plain words, as it has done here, the courts are not at liberty to modify the act by construction in order to avoid special hardship. Croolcs v. Harrelson, 282 U.S. 55, 61.

We feel that the various decisions in the Lang case are fully controlling here, and accordingly we affirm the Commissioner.

Judgment will be entered for the respondent.