text:
    The Penn Mutual Life Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59670.
    Promulgated June 28, 1935.

      Robert Dechert, Esq., for the petitioner.

      John D. Foley, Esq., and James Maddox, Esq., for the respondent.
   OPINION.

McMahon:

This is a proceeding for the redetermination of a deficiency in income tax for the year 1929 in the amount of $75,-641.69. The statement, order, numbering, and grouping of the issues is ours.

Part I

Petitioner alleges that the respondent erred in failing to allow as a deduction:

(1) Interest in the amount of $190,180.40 paid in the year 1929 on proceeds of ordinary life policies which matured by death and which petitioner continued to hold.

^Respondent alleges in part as follows:

in. * * * that in the event that petitioner’s claim set forth in subpara-graph (f) of paragraph 4 and subparagraph (f) of paragraph 5 [our assignment of error (1)] is allowed, then the deduction of $212,132.81, representing 4% of the mean of petitioner’s liability on. matured policies, the proceeds of which are held by it at interest was improperly allowed as a deduction 'from gross income for the calendar year 1929.

Findings of Fact. — The petitioner is a corporation, organized under tbe laws of Pennsylvania, and is engaged in the business of a life insurance company, having its principal office at Philadelphia, it is a purely mutual company, having no stockholders. It operates on the participating plan of insurance.

Petitioner issued a type of policy denominated “ Ordinary Life Policy — Annual Dividends ”, a specimen of which (Exhibit 1) is incorporated herein by reference.

When policies of this type mature there are occasions when the petitioner retains the proceeds under an arrangement with the beneficiary or with the insured pursuant to Option D of the policy. In the year 1929 the petitioner held the proceeds of a number of policies under arrangements with either beneficiaries or those insured. There is considerable variation in the terms under which these sums are left with the petitioner, varying from those in which the beneficiary has the right at any time to make full withdrawal to those under which the beneficiary has no right of withdrawal and the final payment depends upon the happening of some contingency, such as the death of the beneficiary. So far as the petitioner is concerned, the election may be to leave it on demand. The petitioner is not in a position to refuse any reasonable terms demanded by the policyholder or by the beneficiary. The petitioner has not the right to demand that the beneficiary take over the proceeds at any time. It must hold the proceeds until an event occurs which requires that payment be made, or until the beneficiary demands payment. A large portion is left subject to demand withdrawals by beneficiaries.

The total rate at which income or earnings was paid to the beneficiaries who were receiving income under this arrangement in 1929 was 4.85 percent, made up of 3 percent as guaranteed by the contract and an additional 1.85 percent awarded by the board of trustees for that year. During 1929 a guaranteed amount of 3 percent was paid on all proceeds of all types of policies left with the petitioner and an additional 1.85 percent was in all such cases awarded by the trustees. The rate of 4.85 percent paid under ordinary life policies has been constant for approximately the last eight years. The fact that this total rate is being paid under such arrangements is made known to the public by the petitioner through its agents and policyholders, its printed canvassing material and advertising, but petitioner does not thereby directly promise to pay it, and is not bound to pay it. No one has the authority to bind the petitioner in that respect except the board of trustees. If the board of trustees should consider that they would not pay anything in addition to the 3 percent, it would not have to be paid.

The amount thus paid by petitioner in 1929 on proceeds of policies left in the manner above described with the petitioner after the maturity of the policies by the death of the insured, or otherwise, was $190,180.40. The petitioner deducted this amount as “ interest ” paid in its income tax return for the year 1929. The deduction was disallowed by the respondent.

During 1929 the petitioner maintained a reserve to cover the proceeds left with the company as above described.- At the beginning of the year such reserve was in the amount of $4,404,995.95 and at the end of the year the reserve amounted to $6,201,644.33- This reserve was included in the calculation of reserve funds required by law and 4 percent of the mean thereof was taken as a deduction on the petitioner’s return for the year 1929 and was allowed by the respondent.

Opinion. — The petitioner contends that the amount of $190,180.40 paid in the year 1929 to beneficiaries as income upon proceeds of matured ordinary life policies constituted deductible interest within the meaning of section 203 (a) (8) of the Revenue Act of 1928. A similar issue was presented in Penn Mutual Life Insurance Co., 32 B. T. A. 839, wherein, upon similar determinative facts, we held that the 3 percent paid under similar arrangements constitutes deductible interest, but that the additional 1.85 percent is not deductible as interest, under the Revenue Acts of 1926 and 1928, which are similar. Upon the whole record and the authority of our holding-in that proceeding, we hold that the amount calculated at 3 percent in question under this issue in the instant proceeding is deductible as interest, but that none of the amount calculated at 1.85 percent is deductible. Accordingly, upon the redetermination, 3/4.85 of $190,-180.40 will be allowed as a deduction and the remainder thereof will be disallowed.

In view of our holding that a portion of the amount of $190,180.40 is deductible as interest, it becomes necessary to consider the respondent’s affirmative allegation III. It is the contention of the respondent that he committed error in allowing as a deduction in the year 1929 the amount of $212,132.81, being 4 percent of the mean of the reserve to cover proceeds of these matured policies. The applicable provisions of the Kevenue Act of 1928 are contained in section 203 (a) (2).

The case of Helvering v. Inter-Mountain Life Insurance Co., 294 U. S. 686, while not directly in point, is, in our opinion, governing herein in principle. The question there presented was whether assets held by the company against matured and unpaid coupons attached to 20-payment life coupon nonparticipating policies constituted reserve funds required by law within the meaning of section 245 (a) (2) of the Revenue Act of 1921. Such section is similar to the section of the. Kevenue Act of 1928 with which we are concerned. The Supreme Court, in holding that such assets did not constitute reserve funds required by law, stated in part:

* * * We are not here dealing with reserves in relation to solvency of the company. The thing to be ascertained is the meaning that Congress intended by the language “ 4 per centum of the mean of the reserve funds required by law.” The clause to be construed relates exclusively to life insurance companies. It is intended to define a deduction which they are permitted to make in the calculation of the net amount to be taxed. The rule that ambiguities in statutes imposing taxes are to be resolved in favor of taxpayers does not apply. Deductions are allowed only when plainly authorized. Ilfeld Co. v. Hernandez, 292 U. S. 62, 66. New Colonial Co. v. Helvering, 292 U. S. 435, 440.
The word “ reserve ” has many meanings. Accounts creating reserves are set up in almost every line of business and funds evidenced by the book entries are held for many and widely different purposes. As the Act does not permit corporations other than insurance companies to make deductions of the kind here under consideration, “ reserve funds ” may not reasonably be deemed to include values that do not directly pertain to insurance. In life insurance the reserve means the amount, accumulated by the company out of premium payments, which is attributable to and represents the value of the Ufe insurance elements of the policy contracts. The premiums include enough, over and above what is needed to maintain proper insurance reserves, to provide for the discharge of coupon liability according to the terms of the policy. The coupon values are the equivalent of cash and may be used to pay premiums on the face amount of the policy, to procure additional insurance, to lessen the number of annual premiums or otherwise to obtain insurance protection. The amounts so applied cease to exist as coupon liabilities and automatically become a part of the life insurance reserves. These differ essentially from coupon liability. Life insurance matures only upon the death of the insured and the life reserve is based upon that contingency, whereas liability on the matured coupons depends upon no contingency. It follows that the insurance reserves alone constitute the base on which the deduction is to be computed. Reserves against matured coupons are excluded. McCoach v. Insurance Co. of N. Amer., 244 U. S. 585, 589. United States v. Boston Insurance Co.. 269 U. S. 197, 202. New York Ins. Co. v. Edwards, 271 U. S. 109, 119. Duffy v. Mutual Benefit Co., 272 U. S. 613, 618-619. Continental Assur. Co. v. United States, 8 F. Supp. 474. [Emphasis supplied.]

See also North American Reassurance Co., 29 B. T. A. 683; Midland Mutual Life Insurance Co., 19 B. T. A. 765; and Continental Assurance Co. v. United States, 8 Fed. Supp. 474.

It will be seen that the Supreme Court interprets “ reserve funds required by law ” as meaning only the reserve funds held by a life insurance company against the contingency of death of the insured. In the instant proceeding the reserve in question represents proceeds of matured ordinary life insurance policies which were held under an agreement. These funds were not held subject to the contingency of death of the insured, since the insured had already died. Immediately after that event the petitioner had the money representing the face of the policy in each instance, which was subject to the demand of the beneficiary. Any reserve thereafter carried to meet such demand in reality constituted a reserve to meet the contractual liability of the petitioner to the beneficiary, with whom it stood in the relationship of debtor and creditor. We accordingly hold that the reserve in question did not constitute “ reserve funds required by law ” within the meaning of section 203 (a) (2) of the Bevenue Act of 1928; and upon the recomputation the deduction which was allowed by the respondent will be disallowed.

PART II.

Petitioner alleges that respondent erred in failing to allow as deductions :

(2) Interest in the amount of $5,712.52 paid to policyholders, in 1929, on deferred dividends, pursuant to ordinary life accumulated surplus policies;

(3) Interest (3 percent) guaranteed and actually paid by petitioner in 1929 in the amount of $250,443 as a part of guaranteed installments under matured policies, the proceeds of which were payable in installments;

(4) Interest in the amount of $198,487.08, being the interest (1.85 percent) in excess of the guaranteed interest (3 percent) referred to in (3), actually paid by the petitioner in 1929 on policies which had • matured by death, the proceeds of which were paid in installments.

Respondent alleges in part as follows:

I. * * * that in tlie event that the claim of petitioner set forth in sub-paragraph (d) of paragraph (4) and subparagraph (d) of paragraph 5 [our assignment of error (2)] is allowed, then such deduction of $383.90, being 2% of the deferred dividend reserve as at December 31, 1929, was improperly allowed as a deduction from gross income for the calendar year 1929.
II. * * * that in the event that the petitioner’s claims set forth in subparagraphs (e) and (h) of paragraph 4 and subparagraphs (e) and (h) of paragraph 5 [our assignments of error (4) and (3), respectively] are allowed, then such deduction of $335,027.86, being 4% of the mean of petitioner’s liability on matured policies, the proceeds of which are payable in a fixed number of installments, was improperly allowed as a deduction from gross income for the calendar year 1920.

Findings of Fact. — The petitioner issued, prior to 1909, a type of policy denominated “ Ordinary Life Accumulated Surplus Policy ”, a specimen of which (Exhibit 3) is incorporated herein by reference.

The particular respect in which this policy differs from other policies is that it is on the accumulated surplus plan. The payment of surplus was postponed for a period varying from 10 to 20 years from the date of issue, the payment to be then made to those who survived and whose policies remained in force. The “ dividends ” under policies of this type were declared and set apart on the books of the petitioner year by year, even though not actually paid out. Petitioner maintained an individual card record for each policyholder and on each was set up the annual “ dividend ” payment. This was carried forward at so-called “ interest ” and upon lapse of the policy or death during the period the amount accrued up to that time was transferred to a general fund and was carried forward at so-called “ interest ” for distribution among the survivors. The placing of an amount on the card of any accumulated surplus policyholder did not create any direct immediate liability to that individual. The amount of so-called “interest” on the retained “dividends” was set up on the books of the petitioner each year. The so-called “ interest ” on these “ dividends ” which were retained during the accumulated surplus period was compounded annually. The rate of so-called “ interest ” varied from time to time in accordance with the action of the board of trustees, but was never less than 4 percent. The fact that the petitioner not only retained the “ dividends ”, but also so-called “ interest ” added to them on the compound basis, was made known to policyholders and prospective policyholders on forms which the agents distributed. The term “ dividends ”, which is used colloquially in the insurance field, is not accurate, since the amounts referred to are refunds of portions of premiums or returns of overcharges.

The petitioner always knew the names of the entire group from which the ultimate recipients of the accumulated surplus fund would come. There never was any case where the original group in this type of insurance all died. If none had survive^ there could not thereafter' have been any payees in that group.

By the end of 1929 there were very few of this type of policy remaining on the books of the petitioner. The period chosen was usually 20 years or less. The great bulk of them had been paid off by 1929. However, in 1929 there were accumulations of “ dividends ” plus so-called “ compound interest ” on this type of policy which were actually paid out to policyholders.

The amount of so-called “ interest ” paid in 1929 to holders of the accumulated surplus type of policy, in addition to the aggregate of “ dividends ” that had been retained throughout the accumulated surplus period ending in 1929, was $5,712.52. This figure represents the so-called “ compound interest ” paid out under this type of policy during 1929, reduced by the statutory 2 percent of deferred dividends claimed and allowed. The petitioner claimed this amount of $5,712.52 as a deduction on its income tax return for the year 1929. The deduction was disallowed by the respondent.

The reserve for the accumulated surplus policies at the end of the year 1929 was $19,194.79. The petitioner claimed a deduction in its return for the year 1929 of 2 percent of that figure, or $383.90. The deduction was allowed by the respondent.

The petitioner issued a type of policy denominated “ Ordinary Life Trust Certificate or Instalment Policy — Annual Dividends ”, a specimen of which (Exhibit 2) is incorporated herein by reference.

Under this type of policy it is the commuted value which is set up by petitioner as a reserve. In so far as actuarial calculation is concerned, each installment payment consists of a part of the commuted value at the date of death of the insured, plus a guaranteed rate of 3 percent.

While this policy (section 7) purports to apply only in case of the death of the beneficiary, it has been the practice of the petitioner to interpret it as permitting the beneficiary to take installments in accordance with the provisions of the policy for a time and to then draw down the remaining principal on the commuted basis. As to the bulk of the petitioner’s business on this plan the beneficiary has either a limited or complete right of withdrawal, at any time, of the remaining installments-certain, that is, their then worth or commuted value. The insured during his lifetime has the privilege of taking away from the beneficiary the right to draw down the commuted value at any time, but the practice of the petitioner has been not to refuse to pay the commuted value unless the insured has so directed.

The ordinary life policy (section 7) contains an option (Option A) for payment of installments-certain over a fixed period of years if the insured before his death, or the beneficiary afterwards, so elects. If such election is made the ordinary life policy becomes, in general, similar to the ordinary life trust certificate or installment policy so far as payment is concerned. In the instances where such election was made the proceeds of the ordinary life policies as converted were no longer included by the petitioner in the group of policies the proceeds of which were held at so-called “ interest ”, but were treated in the same manner as ordinary life trust certificates or installment policies.

During the year 1929 the petitioner paid $250,448 as guaranteed so-called “ interest ” included .in the face of the installments paid under both the life trust certificates or installment policies and the ordinary life policies converted to that form by the election of the option (Option A).

In addition to the guaranteed so-called “ interest ” paid by the petitioner as part of the face of the installments under both these types of policies, the petitioner paid out with each installment additions awarded by the board of trustees as provided for in both types of policy (section 7). For the year 1929 these additional payments as to each type of policy consisted of 1.85 percent of the remaining commuted value in the hands of the petitioner. The payment of this 1.85 percent, in addition to the 3 percent guaranteed so-called “interest” on these types of policies, has been constant for about the last eight years. This fact is made known by the petitioner to the public generally, through announcements to agents, policyholders and prospective policyholders and by inclusion in advertising, but petitioner does not thereby directly promise to pay it, and is not bound to pay it. No one has the authority to bind the petitioner in that respect except the board of trustees. If the board of trustees should determine that they would not pay anything in addition to the 3 percent, it would not have to be paid.

In 1929 the petitioner paid so-called “ interest ” to beneficiaries on matured installment policies, both of the trust certificate type which were originally payable in installments, and of the ordinary life type which were converted into installment policies by action of the insured or beneficiary, in the amount of $198,487.08, over and above the guaranteed 3 percent. This figure represents the additional 1.85 percent. The petitioner in its return for the year 1929 claimed this amount as a deduction and it was disallowed by the respondent.

The reserve maintained during the year 1929 to cover installment policies of the two types described amounted to $8,181,749 at the beginning of the year and $8,569,644 at the end of the year. This reserve was included in the calculation of the reserve funds required by law. Four percent of the mean of this reserve was claimed as a deduction on the petitioner’s return for the year 1929 and was allowed by the respondent.

Opinion. — Issues similar to these three issues were presented in Penn Mutual Life Insurance Co., supra, wherein, upon similar determinative facts, we held that similar payments are not deductible as interest under the Bevenue Acts of 1926 and 1928, which are similar. Upon the whole record and the authority of our holding in that proceeding, we hold that none of the amounts in question under these issues in the instant proceeding are deductible.

In view of our holding upon these three assignments of error of petitioner, it is unnecessary to further .consider or pass upon respondent’s affirmative allegations I and II, which are in the alternative.

Part III.

Petitioner alleges that respondent erred in failing to allow as deductions:

(5) Neal estate taxes in the amount of $65,884.18 paid in the year 1929 on the petitioner’s home office building;

(6) Expenses in the amount of $133,286.99 paid during the year 1929 for maintaining the petitioner’s home office building;

(7) Depreciation in the amount of $51,317 for the year 1929 on the petitioner’s home office building.

Findings of Fact. — During the year 1929 the petitioner occupied its own 10-story granite building located on the southeast corner of Sixth and Walnut Streets, Philadelphia. It was built in 1915. No tenants other than the petitioner occupied this building during the year 1929. The book value of this building as of December 31,1929, was $1,950,000. The petitioner included no rental value of this building in gross income in its return for the year 1929.

During 1929 the petitioner paid taxes on this building in the amount of $65,284.13, and paid $133,286.99 as expenses for maintaining this home office building. These amounts were claimed as deductions in the petitioner’s return for the year 1929, but were disallowed by the respondent. In its return for 1929 the petitioner also claimed as a deduction as depreciation on its home office building the amount of $51,317. That figure was used as the amount of depreciation by authority of the board of trustees. The respondent disallowed this claimed deduction.

The petitioner had also acquired four buildings adjoining its office building prior to 1929. During 1929 it occupied portions of these buildings while portions were occupied by tenants with hold-over leases. During 1929 petitioner received rental from these buildings in the amount of $18,276.42, which was included as income in its return for that year. The petitioner’s return for 1929 included income from rental in the total amount of $117,730.63. All of this figure over $18,276.42 represents rental from other property acquired under foreclosure proceedings.

Opinion. — Petitioner contends that the respondent erred in disallowing as deductions taxes paid upon its home office building, expenses of maintaining the building and depreciation thereon in the respective amounts of $65,284.13, $133,286.99, and $51,317. There is no controversy as to the figures. The controversy arises due to the fact that the petitioner included no rental value for its building in its gross income for the year 1929. The applicable provisions of the statute are contained in section 203 (a) (6) and (7) and (b) of the 1928 Act.

It is also alleged and contended by petitioner that section 203 (b) is unconstitutional in requiring a rental value of real estate occupied by the petitioner to be included in gross income in order that deductions may be made for taxes, expenses, and depreciation.

The Supreme Court of the United States recently held, in Helvering v. Independent Life Insurance Co., 292 U. S. 371, and Rockford Life Insurance Co. v. Commissioner, 292 U. S. 382, that such section (203 (a) (6) (7) and (b), supra,) and corresponding similar provisions of the Revenue Acts of 1921 and 1924 are constitutional. Upon authority of those cases we so held in Penn Mutual Life Insurance Co., supra. Accordingly, petitioner is not entitled to these claimed deductions unless it is willing to have included in its gross income, in accordance with the provisions of the statute, the rental value of the real estate which it owned and occupied in whole or in part. Peoples Life Insurance Co., 31 B. T. A. 706. It may be well to point out, as was done in Commonwealth Life Insurance Co., 31 B. T. A. 887, that this statute is so worded that an insurance company which occupies all of the space in a building and consequently receives no rents for space occupied by others, will not derive any benefit under the provisions of section 203 (a) (6) and (7) when read in connection with subdivision (b).

The petitioner will be entitled to these claimed deductions only in the event that the conditions prescribed in section 203 (b) are met; and, in that event, a computation similar in principle to the computation approved in Peoples Life Insurance Co., supra, will be necessary.

Part IY.

Petitioner alleges that respondent erred in failing to allow as a deduction:

(8) The sum of $71,347.69 or any other sum on account of depreciation upon furniture and fixtures.

Findings of Fact. — The petitioner took no deduction in its return for the year 1929 on account of depreciation on furniture, fixtures, and equipment belonging to it, and the respondent did not allow any such deduction.

There was received in evidence, without objection on the part of respondent, Exhibit 4, a statement prepared from the books of the petitioner by E. Paul Pluttihger, who, in 1929, was vice president of the petitioner in charge of taxation, purporting to show the purchases of furniture and fixtures in each year from 1914 to 1930 and the depreciation sustained thereon in those years. We incorporate such exhibit herein by reference but set forth only the portion applicable to the year 1929, as follows:

The depreciation shown above as having been sustained in 1929 on equipment purchased in 1919 purports to be the remaining undepre-ciated cost. In all other cases the depreciation shown for 1929 on equipment purchased in any other year was calculated at 10 percent per annum, except that on that purchased in 1929, a rate of 5 percent was used, the theory being that some furniture may have been purchased at the beginning of the year and some at the end of the year.

Opinion. — There is no detailed proof as to the character of the equipment involved or the length of the useful life thereof, which is the basis for determining the correct rate of depreciation. The correct rate of depreciation not being shown, the Board is not in a position to determine, upon all of the essential facts by the exercise of its independent judgment, what amount, if any, of depreciation of this character was sustained by the petitioner in the year in question. Georgia, Florida & Alabama Railroad Co., 31 B. T. A. 1.

Furthermore, it has been held that a life insurance company may not deduct depreciation upon furniture and fixtures which are not used in connection with the company’s investment business, the income of which is taxed, as distinguished from its underwriting business, Rockford Life Insurance Co. v. Commissioner, supra; Commonwealth Life Insurance Co., 31 B. T. A. 887; and Illinois Life Insurance Co., 30 B. T. A. 1160; and there is no evidence in the record upon which we can determine the portion of the furniture, fixtures, and equipment which was used in the investment portion of petitioner’s business.

Hence no adjustment in respect to such depreciation will be made in the recomputation under Rule 50.

Reviewed by the Board.

Decision will be entered under Rule 50.

Matthews dissents.

       (a) General rule. — In the case of a life insurance company the term “ net income ” means the gross income less—
      *»«***«
      (8) Interest. — All interest paid or accrued within the taxable year on its indebtedness * * *.

       (a) General mile. — In the case of a life insurance company the term “net income” means the gross income less—
      *******
      (2) Reserve eunds. — An amount equal to the excess, if any, over the deduction specified in paragraph (1) of this subsection, of 4 per centum of the mean of the reserve funds required by law and held at the beginning and end of the taxable year * * *.

       The law of Pennsylvania, the state in which the petitioner was incorporated, with regard to reserve liabilities is contained in sections 71 and 72 of Title 40 of Purdon’s Pennsylvania Statutes Annotated, Permanent Edition.

       (a) General rule. — In the case of a life insurance company the term “ net income ” means the gross income less—
      • •****•
      (6) Real estate expenses. — Taxes and other expenses paid during the taxable year exclusively upon or with respect to the real estate owned by the company, not including taxes assessed against local benefits of a kind tending to increase the value of the property assessed, and not including any amount paid out for new buildings, or for permanent improvements or betterments made to increase the value of any property. The deduction allowed by this paragraph shall be allowed in the case of taxes imposed upon a shareholder of a company upon his interest as shareholder, which are paid by the company without reimbursement from the shareholder, but in such cases no deduction shall be allowed the shareholder for the amount of such taxes;
      (7) Depreciation. — A reasonable allowance for the exhaustion, wear and tear of property, including a reasonable allowance for obsolescence;
      **»»**»
      (b) Rental value iof real estate. — No deduction shall be made under subsection (a) (6) and (7) of this section on account of any real estate owned and occupied in whole or in part by a life insurance company unless there is included in the return of gross income the rental value of the space so occupied. Such rental value shall be not less than a sum which in addition to any rents received from other tenants shall provide a net income (after deducting taxes, depreciation and all other expenses) at the rate of 4 per centum per annum of the book value at the end of the taxable year of the real estate so owned or occupied.


source: Caselaw Access Project

author: TRAmmell :

license: Public Domain

text:
    S. Rose Lloyd, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75765.
    Promulgated July 3, 1935.

      Percy W. Phillips, Esq., and Eusstis Myres, Esq., for the petitioner.

      R. W. Wilson, Esq., and R. K. Jones, Esq., for the respondent.
   OPINION.

TRAmmell :

The only question for our decision is whether the taxpayer sustained a net loss in 1928 from a trade or business regularly carried on, so that the amount thereof in excess of the income of 1929 is deductible in 1930.

The parties at the hearing stipulated that petitioner sustained a loss in 1928 sufficient to wipe out all income for the years 1928, 1929, and 1930, and that the only question for decision is as above set out, it being further stipulated that if the loss was sustained by petitioner in a trade or business regularly carried on in 1928, there is no deficiency for 1930.

In view of the stipulation of the parties the testimony was limited to the narrow issue presented.

The pertinent sections of the Eevenue Act of 1928 applicable to the question are as follows;

Seo. 117. (a) Definition of “net loss”. — As used in this section the term “ net loss ” means the excess of the deductions allowed by this title over the gross income, with the following exceptions and limitations:
(1) Non-business deductions. — Deductions otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall be allowed only to the extent of the amount of the gross income not derived from such trade or business;
(2) Capital losses. — In the case of a taxpayer other than a corporation, deductions for capital losses otherwise allowed by law shall bo allowed only to the extent of the capital gains.
* * * * * * *
(b) Not loss as a deduction. — I'f, for any taxable year, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year (hereinafter in this section called “ second year ”), and if such net loss is in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year (hereinafter in this section called “third year”); the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary.
* * * * * * *
Sec. 101. (c) (2) “Capital loss” means deductible loss resulting from the sale or exchange of capital assets.
Seo. 101. (c) (8) “ Capital assets ” moaná property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business.

We are convinced that the petitioner’s contention should be sustained. The fact that the petitioner sold a million and a half dollars worth of real estate, or 75 percent of her inheritance, in small parcels during the period from 1914 to 1928 and bought other real estate or invested in real estate notes, coupled with constant activity in connection with such sales and purchases over each of the years, it seems to us, is sufficient to justify the conclusion that she was regularly engaged in the business of buying and selling real estate. Certainly, such activity constituted a material part of the business regularly carried on by her. The fact that she in addition to buying, selling, and trading in real estate, was also engaged in renting real estate and collecting rentals from it and otherwise looking after and occupying her attention in other ways, all connected with and pertaining to real estate, is not sufficient, in our opinion, to warrant us in holding that she was not engaged in the business of a dealer in buying and selling real estate. She had an office in her home, where she constantly engaged in looking after such matters by correspondence, and she was constantly interviewing people with the view of buying, selling, or trading in real estate, as well as attending to matters of rentals, repairs, and improvement of her properties. Her activity was such that it should properly be held to be a trade or business reguarly carried on. It is not necessary that one occupy a full day each day in carrying on one’s activity to be considered to be regularly engaged in business. It is continuity of efforts devoted to the undertaking which constitutes a business regularly carried on. See Harry F. Harper, 20 B. T. A. 143; C. C. Huxford, 20 B. T. A. 39; Charles M. Bryan, 21 B. T. A. 364; Maude Enella Brickell, 17 B. T. A. 711.

Clearly the transaction which resulted in the loss in 1928 was not a mere isolated transaction. We think the loss sustained by the petitioner in 1928 from the sale of the Youree Hotel is attributable to a business regularly carried on. If a loss results from or is incidental to the operation of a trade or business regularly carried on by the taxpayer, it is sufficient to bring it within the net loss provisions of the statute. William M. Lovering, 21 B. T. A. 1260; C. C. Huxford, supra; T. I. Crane, 17 B. T. A. 720; Philip Kobbe Co., 4 B. T. A. 663.

Respondent suggests in his brief that the sale of the Youree Hotel was the disposition of a capital asset and for that reason comes within an exception to the net loss provisions of the statute quoted, but since we conclude that the purchase and sale of real estate was a business regularly carried on by petitioner, and since the evidence establishes that all of petitioner’s property, including the hotel, was held primarily for sale in the course of her trade or business, it does not come within the capital loss exception of the statute, hereinabove referred to.

The parties having agreed that if the petitioner is entitled to carry forward the 1928 loss as a net loss, there is no taxable net income for 1930, it follows that there is no deficiency. Respondent’s determination is disapproved.

Reviewed by the Board.

Judgment will he entered for the petitioner.

TuRNer dissents.


author: Turnee :

text:
    Alfred K. Nippert, Maud Gamble Nippert, and Olivia P. Gamble, Executors and Trustees of the Estate of James N. Gamble, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 55595.
    Promulgated July 9, 1935.

      Lcm-enee Graves, Esq., and Ike Lanier, Esq., for tlie petitioners.

      L. H. Bushbrook, Esq., and Harold Allen, Esq., for the respondent.

       SEC. 23. deductions FROM GROSS INCOME.
      In computing net income there shall he allowed as deductions:
      *******
      (c) Losses by individuals. — In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
      (1) if incurred in trade or business; or
      (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; or
      (3) of property not connected with the trade or business, if the loss arises from fires, storms, shipwreck, or other casualty, or from theft.

   OPINION.

Turnee :

The petitioners take the position that the decedent had a net cash investment, including bonds, stock, judgment, and advances, in the Cincinnati & Westwood Eailroad Co. in the amount of $373,714.59, which he sold in 1928 for $80,000, thereby sustaining a loss of $293,714.59. This loss they claim as an allowable deduction for that year under the provisions of section 23 (e) of the Revenue Act of 1928.

The respondent has determined that the decedent’s stock and all claims against the Company, exclusive of the bonds, were worthless prior to 1928 and that neither the cost of the stock nor any part of the judgment or advances is deductible for that year either as a loss under section 23 (e), supra, or as bad debts under subsection (j) of the same section. He has therefore applied the $80,000 received against the cost of the bonds and found a deductible loss of only $20,000. The petitioners have alleged that the respondent erred in refusing to allow as a deduction all of the amount claimed as a loss in respect to the stock, judgment, and advances.

On the record we agree with the respondent that the stock was worthless prior to the year of the sale. Numerous events in the history of the Company convince us that the stock had been worthless for a number of years. We note particularly in this connection the fact that the Company was heavily indebted to the decedent. We also note that freight service was discontinued in 1924 and that passenger service had previously been discontinued. It is thus apparent that the road, if it had any value, was valuable to the extent that it might be utilized as part of a more comprehensive transportation unit. It is also apparent that the decedent’s hope of recovering the money he had spent was dependent upon his ability to sell, and as early as 1914 he gave Henry an option to purchase his interest for an amount which allowed nothing for the stock, if the priority of debts over stock be considered. On that basis the result would have indicated a total loss of his stock investment had Henry exercised the option. It is true that the stock was still outstanding and was included in the transaction in 1928. It seems reasonable to assume, however, that had the stock been owned by some one other than the decedent, he would have taken steps many years prior to 1928 to have the corporation liquidated and its property brought directly under his control. Any equity that the stockholders had in the corporation’s assets was, in our opinion, entirely extinguished long prior to 1928. Gowen v. Commissioner, 65 Fed. (2d) 923; De Loss v. Commissioner, 28 Fed. (2d) 803; certiorari denied, 279 U. S. 840; Royal Packing Co. v. Commissioner, 22 Fed. (2d) 536. Cf. Homer M. Preston et al., Administrators, 7 B. T. A. 414; William E. Metzger, 21 B. T. A. 1271; Wm. E. Steinback, 30 B. T. A. 1252; Paul Pryibil, 31 B. T. A. 164.

With reference to the judgment and advances, the claim of the petitioners is much more convincing. Throughout the period of his connection with the Company the decedent undoubtedly believed that it had assets with a large potential value. It is perhaps true that there were times when the value of the Company’s railroad contracted sharply, but it is equally true that at other times they promised the recoupment of a substantial part of his advances and investment. For example, during 1920 and 1921 the decedent received $21,000 on an option to buy his interests at a total figure of approximately $265,000. A sale at such a figure would have resulted in the recoupment of decedent’s investment in bonds and approximately $165,000 of his loans and advances.

While Henry would not pay $5,000 to renew his option in 1922, the decedent still had the city of Cincinnati as a prospective purchaser. The potential value of the Company’s property remained until the city abandoned its project on account of the Beeler report. Even then the property had a substantial cash value, since the decedent actually received $80,000 in cash for all of his interests in the Company. This sale completely closed the transaction for the decedent and established the amount of his loss, and prior to this sale we do not believe it could have been said that there was no possibility of recouping at least a part of the advances. Accordingly we find nothing in this record to indicate that decedent was accumulating bad debts to deduct them in a year subsequent to the year of their worthlessness, as was true in Avery v. Commissioner, 22 Fed. (2d) 6. We believe that a deduction for any year prior to 1928 would properly have been denied decedent because of the substantial value of the Company’s property. See Winthrop Ames, 1 B. T. A. 63; G. C. Krack, 1 B. T. A. 1119; Ward Ames, Jr., 27 B. T. A. 624; affd., 71 Fed. (2d) 939. We are of the opinion, therefore, that the advances made by decedent to the Company were not worthless prior to the year of the sale. C. B. Little, 27 B. T. A. 1022; affd., Little v. Helvering, 75 Fed. (2d) 436; Clara B. Parker, Executrix, 30 B. T. A. 1231, petition to review dismissed, Helvering v. Parker, 75 Fed. (2d) 1010.

The respondent has urged that the bar of the statute of limitations was available to the Company, both as to the judgment and as to most of the advances, Pages Annotated Ohio General Code, secs. 11218-22, which fact, he contends, establishes the worthlessness of the judgment and all advances made more than six years prior to 1928.

Under the Ohio code a judgment becomes dormant if execution be not sued out within five years from the date of judgment, or if five years intervenes between the date of last execution issued thereon and that of suing out another execution, sec. 11663, Ohio code. It further appears, sec. 11648 of said code, that an action to revive a judgment can only be brought within 21 years after it becomes dormant. There is nothing in the record to show that the judgment ever became dormant. On the contrary, the record is that the judgment was revived from time to time. Two such revivors would bring this judgment within the 21-year period of the statute of limitations. A court of competent jurisdiction has considered the question and ordered the judgment to stand revived. On the record before us we can not say that the judgment has become outlawed by the statute of limitations.

While the Ohio statute of limitations might have been available to the Company as a defense against decedent’s efforts to collect his advances, such local statutes are not decisive of what deductions may be taken under a Federal tax statute. Weiss v. Wiener, 279 U. S. 333. The Board has considered this question in several cases and has held that the availability of the statute of limitations as a defense is not in itself a sufficient ascertainment of the worthlessness of a debt to justify its charge-off, Leo Stein, 4 B. T. A. 1016; Warner L. Colvert, 6 B. T. A. 623; Ralph H. Cross, 20 B. T. A. 929; affd., 54 Fed. (2d) 781; Clara Burdette, 25 B. T. A. 692; affd., Commissioner v. Burdette, 69 Fed. (2d) 410; W. C. Mitchell Co., 27 B. T. A. 645; G. M. Standifer Construction Corporation, 30 B. T. A. 184. In view of these decisions we hold against respondent on his contention respecting the prior worthlessness of decedent’s judgment and advances.

The remaining issue presents the question as to whether or not a capital net loss should be deducted from gross income in applying the 15 percent limitation in computing the deduction for contributions. We have considered this question in James H. Lockhart, 32 B. T. A. 732, wherein we held that the base for the computation of the 15 percent limitation on such a deduction is gross income less all permissible deductions except contributions themselves. This issue is accordingly determined in favor of the respondent.

Reviewed by the Board.

Decision will be entered under Rule 50.

       Sec. 23 (j) Bad debts. — Debts ascertained to he worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.


author: Seawell :

text:
    Rex Brugh, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71304.
    Promulgated July 9, 1935.

      F. M. Livezey, Esq., and W. 0. Dickey, O. P. A., for the petitioner.

      Stanley B. Pierson, Esq., and P. M. Clark, Esq., for the respondent.
   OPINION.

Seawell :

The controversy here present concerns only profits realized by petitioner in the dissolution of the Beckett-Brugh Furniture Co. The parties are not in disagreement that petitioner received income by that transaction. The dispute arises only as to the year when the income was received. Respondent’s deficiency notice, following petitioner’s income tax return, and agreeing with it as to the year, places the income in the year 1930. Petitioner admits the correctness of the year shown in his return, but claims that in filing the return he was in error as to the time of the corporation’s dissolution; that about November 19, 1929, in carrying out the stockholders’ resolution for dissolution the corporation conveyed to him all the merchandise, accounts, and other property of the corporation at Williamson, West Virginia, and at the same time conveyed to the other stockholder, Denver Beckett, the store and lots at Logan, West Virginia, and the appurtenant personalty; that this constituted all the assets of the corporation and after the transfers it was without assets and ceased to do business and was dissolved.

There are other factors, however, which seem requisite in determining the year in which the income was received. Petitioner was secretary-treasurer of the Furniture Co. at the time when its income tax return for 1929 was filed. That return indicates that in ascertaining gross income of the Furniture Co. for the year an inventory at the beginning of the year and another at the end of the year were used. In addition, attached to the return as a part of it, there was a list of bad debts charged off by the corporation on December 31, 1929. If the corporation was dissolved and its assets distributed to the stockholders in November, as now contended, it would have had no inventory embracing the month of December, and it would have had no bad debts to charge off at December 31,1929.

The law of West Virginia provides for the voluntary dissolution of corporations of that state by section 56 of chapter 53 of its code. The dissolution of the Furniture Co. was undertaken under- that law, which further provides that the holders of a majority of the capital stock may resolve to discontinue business, and, after giving notice of such resolution by advertisement in some newspaper of general circulation published hear the corporation’s principal place of business once a week for four successive weeks, at least, “ before any dividend of the capital shall be made ”, may “ divide the property and assets that may remain after paying all debts and liabilities of the corporation ”; and the “ corporation shall * * * before such dissolution becomes effective, pay into the state treasury the amount it may owe to the State for license tax on its charter, including the penalties * * The resolution of the stockholders (set out in our findings of fact) followed this law by providing for the advertisement required by the statute and certification thereof by the Furniture Co.’s president to the Secretary of State of West Virginia and the payment of all the debts and liabilities of the corporation and the division of the remainder of the assets among the stockholders, particularly providing, in conformity to the statute, “ but no such payment shall be made .to any stockholders until after the publication of the notice hereinafter provided.”

Before complying with the resolution for dissolution and the law applicable by advertising in a newspaper and paying the debts of the corporation, petitioner and the other stockholder of the Furniture Co. had the deed and bills of sale between them executed. The Secretary of State certified to the compliance with the law and the dissolution of the corporation on January 4, 1930. Between November 19, 1929, the date of the instruments, and January 1,1930, the four weeks’ advertisement might have been made, but it is not shown to have been done before January 4, 1930. On the Furniture Co.’s income tax return for 1929 more than $20,000 of notes and bills payable at December 31, 1929, are shown. In the West Virginia Code provision is made for a suit in chancery by any creditor and the appointment of a receiver to take over and admin-' ister the assets of a corporation in voluntary liquidation before satisfying such creditor. Cf. Law v. Rich, 47 W. Va. 634; 35 S. E. 858. From the foregoing it would seem that the deed and bills of sale executed November 19, 1929, were premature, or simply made to take effect according to the law when the prerequisites were complied with. Moreover, petitioner made out his personal income tax return for 1929, and filed it March 11, 1930, when all these matters were presumably fresh in his mind, and no mention was made of income from the dissolution of the corporation, or that there had been a dissolution. Looking at this contemporaneous action of the petitioner, we are drawn to the conclusion that on March 11, 1930, he considered the execution of the deed and bills of sale of November 19, 1929, effective only after the commencement of the year 1930, and filed his return accordingly. His judgment was untrammeled and he then knew whether the prerequisites under the law entitling the stockholders to a distribution of assets had been complied with. No evidence was offered at the hearing to show that his judgment was not correct, although he was a witness in his own behalf. In effect, we are asked to presume that petitioner and the other stockholder acted not within the requirements of the law applicable to the voluntary dissolution of corporations in West Virginia and so to reach the conclusion that the presumption favoring the determination of respondent has been overcome. This would do violence to a well recognized rule of law that all persons are presumed to obey the law. We conclude that petitioner received the income in 1930.

Having reached this conclusion, it is not necessary for us to pass on the plea of estoppel raised in the pleading.

We conclude, therefore, that respondent committed no error in his determination, and his action is affirmed.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Matthews:

text:
    Robert Hoe Estate Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 64886.
    Promulgated July 9, 1935.

      Lester S. Holmes, Esq., for the petitioner.

      George D. Brabson, Esq., for the respondent.
   OPINION.

Matthews:

The question before us is whether the petitioner, a corporation which purchased real property subject to the widow’s right of dower from the executors of the decedent’s will, may deduct from its taxable net income for 1929 the amount paid to the decedent’s widow pursuant to the agreement under which it acquired the widow’s dower interest in the property, the amount thus paid to the widow representing one third of the net rents collected from the property in the taxable year.

It has been stipulated that in the year 1929 the petitioner paid or credited to Olivia P. Hoe, the widow of Robert Hoe, the sum of $27,495.06 and that this sum was reported on her individual income tax return for^that year. It does not follow, however, that such amount is deductible from the gross income of the petitioner.

It is the petitioner’s position that the agreements of January 22 and December 11,1913, which are quoted in part in our findings, and the acts performed by the parties thereunder, constituted in effect an admeasurement of the dower of the widow in the real property of which her husband died seized, whereby there was admeasured to her one third of the net rents collected from the property during her lifetime or until a sale thereof and, in the event of a sale, a gross sum out of the net proceeds of the sale in lieu of her dower. Counsel for' the petitioner earnestly contends that the acts performed by the parties under these agreements did not constitute a purchase by the petitioner of the widow’s dower in the real property of which her husband died seized, as claimed by the respondent. It is further argued that, inasmuch as the petitioner did not in any event have any beneficial interest in that portion of the net rents which it paid to the widow in 1929, it was error for the respondent to refuse to deduct the amount thus paid in determining the petitioner’s net income for 1929.

Section 190 of the Real Property Law of New York provides that a widow shall be endowed of the third part of all the lands whereof her husband was seized of an estate of inheritance, at any time during the marriage. (Book 49, McKinney’s Consolidated Laws of New York, p. 208.)' Upon her husband’s death the inchoate right of the widow becomes dower consummate. The real property descends to the heirs or devisees subject to the dower of the widow. The right of a doweress in lands is in the nature of a charge thereon and the legal owners can not transfer the lands so as to free them in the hands of any subsequent grantees from the claim of the doweress. Mutual Life Insurance Co. v. Shipman, 119 N. Y. 324; 24 N. E. 177.

It never became necessary for the widow to institute any action to obtain her dower and no steps were taken to divide the decedent’s estate until January 22, 1913, when all of the parties interested entered into an agreement to form a corporation to hold legal title to the real estate and to manage the same. It was not important to the widow that the corporation should be organized and she gained nothing by the execution of this agreement. She agreed to and did execute a release of her dower right in the real estate in order that the corporation might hold an unencumbered fee simple title thereto, in consideration of the agreement on the part of the corporation to pay her just what she had been receiving from the executors, being a sum equal to the one-third share to which she was entitled under the law relating to the dower rights of a widow. Although this sum was not a fixed amount* and it could not be determined how much would be paid to her each year until the rents were received by the corporation, and in the case of a sale of any parcel of the land the amount due the widow had to be computed in accordance with her expectancy at the time of the sale, as provided in the agreement, these payments to the widow were made to- her in consideration of the release of her dower right in the property and are capital items which are not deductible in computing net taxable income.

Although the amount which the petitioner agreed to pay to the widow annually was equivalent to the amount which she was entitled to receive on account of her dower right in the property, this does not sustain the petitioner’s contention that what was done was merely an admeasurement of the dower of the widow in the decedent’s real property. The annual payments to the widow were in fulfillment of the contractual obligation assumed by the petitioner and we consider them to be a part of the purchase price which the petitioner paid for the property which it acquired. By releasing and quit-claiming all her interest in the property to petitioner, in consideration of the petitioner’s agreement to make the payments agreed to be made, the widow’s right of dower in the property of the estate was extinguished and thereupon the qualified right of the petitioner became a full right to the property. It follows that the total rents received by the petitioner were income to the petitioner.

It is suggested in the brief filed on behalf of the petitioner that the petitioner received the sums paid to the widow as trustee for her, but this case is clearly distinguishable from Bettendorf v. Commissioner, 49 Fed. (2d) 173, which is relied on by petitioner, and the facts recited above do not support the contention that any trust relation was created between the petitioner and the widow in the instant case. This is not a case where a person receives income wholly as an instrumentality or agency for delivery to another. The petitioner herein was not acting as a mere conduit for the transmission of income.

In view of the foregoing we hold that the respondent did not err in denying the deduction claimed by the petitioner herein. See Corbett Investment Co. v. Helvering, 75 Fed. (2d) 525.

Reviewed by the Board.

Judgment mil be entered for the respondent.


author: Smith : Black,

text:
    Dwight C. Wheeler, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71338.
    Promulgated July 9, 1935.

      J. Gilmer Korner, Jr., Esq., for the petitioner.

      I)e Witt M. Evans, Esq., James K. Polk, Jr., Esq., and John M. Moraw'ski, Esq., for the respondent.
   OPINION.

Smith :

In this proceeding the petitioner claims the deduction of a loss of $99,210.25 on the sale on December 24, 1930, of 3,350 United Founders shares. He concedes that no deduction is allowable in respect of the 1,000 shares sold on December 30, 1930, for the reason that he repurchased a like number of the same shares within the statutory 30-day period.

The respondent contends that the purported sale of the shares in question was not a bona fide sale and did not result in a deductible loss. The pertinent provisions of the statute are sections 112 (a) and 118 of the Revenue Act of 1928, which read as follows:

SEC. 112. RECOGNITION OE GAIN OR LOSS.
(a) General rule. — Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
SEC. 118. LOSS ON SALE OE STOCK OR SECURITIES.
In the ease of any loss claimed to have been sustained in any sale or other disposition of shares of stock or securities where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheritance) or has entered into a contract or option to acquire substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition, no deduction for the loss shall be allowed under section 23 (e) (2) of this title; nor shall such deduction be allowed under section 23 (f) unless the claim is made by a corporation, a dealer in stocks or securities, and with respect to a transaction made in the ordinary course of its business. If such acquisition or the contract or option to acquire is to the extent of part only of substantially identical property, then only a proportionate part of the loss shall be disallowed.

The respondent questions the bona fides of the sale of the 3,350 United Founders shares on December 24, 1930, on the ground that there was no intention on the part of the petitioner to make a final conveyance of the shares and no intention on the part of Bull & Co. to purchase the shares and that the purported sale was a mere subterfuge by which the petitioner sought to establish a loss for income tax purposes. The petitioner admits that the sale was made for the purpose of establishing an income tax loss, but strenuously denies that the sale was not in every way bona fide.

As the facts above set forth show, and as the respondent admits, there was a strict compliance on the part of both the petitioner and Bull & Co. with the requisite formalities of a sale of the 3,350 shares of United Founders stock on December 24, 1930. According to the book entries, the sale was regularly, carried out in the manner and fonm of many other transactions which Bull & Co. handled for the petitioner and other customers. Prima fade, there was a valid sale by the petitioner of the 3,350 United Founders shares on December 24, 1930.

In his brief the respondent states:

* * * The petitioner reacquired the 3,350 shares of United Founders stock on January 26, 1931, without the expenditure of any monies other than brokerage fees and transfer tax. It is the circumstances and collateral facts oceuring between the time of the purported sale and the reacquisition and other collateral facts associated and connected with the transaction that give rise to the inference, conclusions and determination that there was in fact no actual sale.

The respondent further submits:

* * * It is believed that this cumbersome roundabout method of selling and reacquiring the United Founders stock, together with the fictions employed to make the transaction appear regular on its face, are indicative that at the time of the purported sale on December 24, 1930, there was an understanding — tacit or otherwise — that the petitioner. would reacquire the stock without an. outlay of money except the commissions and transfer tax, and no sale took place. * * *

The only transaction with which we are directly concerned in this proceeding is the sale of the 3,350 shares of United Founders stock on December 24, 1930. The petitioner is not claiming any loss on the sale of the I. T. A. shares. Whether the purchase of the I. T. A. shares in 1930 or their sale in 1931 were fictitious transactions is not material in this proceeding except as to the bearing that those transactions may have on the sale of the United Founders shares. The same might be said of the petitioner’s transactions in United Founders shares in 1929, which year is not before us, and the purchase and sale by other individuals of United Founders and I. T. A. shares in 1930.

Under the taxing statute the petitioner is entitled to deduct from his gross income of 1930 the loss sustained upon the sale of 3,350 shares of United Founders stock, provided the sale was actually made and provided (1) he did not acquire within a period of 30 days from the date of sale “ substantially identical property ” or (2) he did not within such 30-day period enter “ into a contract or option to acquire substantially identical property.”

The respondent seems to lay stress upon the fact that the shares of United Founders stock claimed to have been sold by the petitioner were acquired by Bull & Co. and not sold by Bull & Co. to outsiders. The evidence all goes to show that the petitioner believed that when he turned the shares over to Bull & Co., Bull & Co. would sell them to outside parties. Bull & Co. did not sell the shares to the public, but purchased them for their own account. We do not see that this fact is prejudicial to the claim of the petitioner that he sold the shares. He turned them over to Bull & Co. for sale and, so far as the petitioner was concerned, it was immaterial whether Bull & Co. purchased them for its own account or for the account of others. The petitioner sold all of his right, title, and interest in and to the shares when he turned them over to Bull & Co. and received credit on the books of Bull & Co. for the selling price. So far as the record indicates Bull & Co. were not brokers in the transaction. They, as private bankers, had the right to acquire the shares for themselves.

The acquisition by the petitioner of a like number of shares of I. T. A. stock was not the acquisition by the petitioner “ of substantially identical property.” I. T. A. was an investment trust. It was a small concern in comparison with United Founders Corporation. There were transactions in its shares. The fact that the market price of I. T. A. shares generally followed the market price of United Founders shares is immaterial. As a stockholder of I. T. A. the petitioner held substantially different property from that which he held when he owned United Founders Stock. The I. T. A. shares' might have become valueless in the hands of the petitioner without having substantially affected the price of the United Founders shares. Whether or not Bull & Co. was in a position to deliver I. T. A. certificates to the petitioner had he demanded them is beside the question, although the evidence shows that Bull & Co. had an arrangement whereby they could at any time have secured I. T. A. certificates to deliver to the petitioner had he made a demand upon Bull & Co. for their delivery.

The respondent contends’ that there must have been an understanding between Bull & Co. and the petitioner that the petitioner would repurchase the United Founders shares after the expiration of 30 days from the date of sale. Both the petitioner and officers of Bull & Co. testified unequivocally that there was no agreement, or option, or understanding entered into between Bull & Co., or any of the representatives of that concern, whereby the petitioner would be allowed to acquire United Founders shares in- exchange for his I. T. A. shares. The circumstances under which the transactions were made and the fact that other clients of Bull & Co. established income tax losses for 1930 in the same manner in which the petitioner established his loss on the sale of United Founders shares do not persuade us that there was any agreement, option, or understanding between the petitioner and Bull & Co. for the reacquisition of his United, Founders shares. In R. R. Rand, Jr. v. Helvering, 77 Fed. (2d) 450, affirming 29 B. T. A. 467, the court held that this Board was not compelled blindly to accept testimony of the taxpayers that there was no understanding as to repurchase at the time of sales in 1929; that the taxpayers did not sustain the burden resting on them (of establishing that there was no understanding) by mere testimony that there was no understanding, where the facts showed that the officer to whom the sales were made bought the stock for $15, and when he resold for the same amount, it had a value of $6,700. Cf. Shoenberg v. Commissioner, 77 Fed. (2d) 446, affirming 30 B. T. A. 659.

The facts here are not parallel to those which obtained in the above cited cases. Here the petitioner sold his United Founders shares at the market price. The shares were listed on the Boston Stock Exchange and on the New York Curb. When the petitioner sold his I. T. A. shares in 1931 he realized a profit in excess of $2 per share upon that sale and accounted for the profit in his income tax return. When he reacquired 3,350 shares of United Founders stock he paid a price for them in excess of the price at which he had sold them. Clearly, the fact that the petitioner purchased a like number of shares of United Founders stock in 1931 as he had sold in 1930, such purchase having been made more than 30 days after the sale of the shares, is no bar to the petitioner claiming the deduction from his gross income of 1930 of the loss which he sustained upon the sale in 1930.

We reach the conclusion that the petitioner made a bona fide sale of his 3,350 United Founders shares on December 24, 1930, and that the loss represented by the difference between the cost to him of those shares and the selling price is a legal deduction from the petitioner’s gross income of 1930.

Reviewed by the Board.

Judgment will be entered wider Rule SO.

Black,

dissenting: For substantially the same reasons as were given by the Board in Harold F. Seymour, 27 B. T. A. 403, I think the decision in the instant case should be one upholding the determination of the Commissioner that the sales of stock in question were not bona fide and did not result in deductible losses. I therefore dissent from the majority opinion.

Sea well agrees with this dissent.


text:
    P. L. Wheeler, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69028.
    Promulgated July 10, 1935.

      Andrew T. Smith, Esq., Virgil T. Moore, Esq., Robt. H. Lucas, Esq., and N. L. McLaren, G. P. A., for the petitioner.

      Willis R. Lansford, Esq., and Edward M. Woolf, Esq., for the respondent.
   .OPINION.

Seawell :

The instant case and the case of Christian W. Von Gunten, 28 B. T. A. 702; affd., 76 Fed. (2d) 670 (6th Cir.), are so much alike that, in our opinion, the same principles of law are applicable to the issues in each. In the Von Gunten case, pursuant to reorganization, some of the shares of one company were exchanged for all the shares of another company, while in the instant case the shares of two companies were exchanged for shares of another company, the exchange, as agreed by the parties and herein so determined by the respondent, constituting a nontaxable transaction as was the exchange in the Von Gunten case.

In the instant case, as in the Von Gu/nten case, all the shares of stock sold were acquired on the same date, through nontaxable exchanges of stock for stock. In each case the petitioner sold shares of stock of one company for which other stock had been exchanged. In the instant case the petitioner simply sold on different dates a part of the shares acquired on the date when he exchanged stock of two companies for stock of the company he sold.

In the Von Gunten case the court held that, for the purpose of computing gain from the sale of shares sold, the cost of the old shares should be allocated equally to all the new shares and the Commissioner erred in treating the shares sold as taking the basis of the earliest acquired stock which was exchanged or surrendered in the reorganization. The reasoning of the opinion in said case, we held, applied with equal force in Olive Hume Oliver, 30 B. T. A. 1381, and in Alvan T. Fuller, 31 B. T. A. 154. To the same effect, see Helvering v. Stifel, 75 Fed. (2d) 583 (4th Cir.)

In view of the similarity of the facts and issues in the four cases mentioned to those in the instant case, we do not deem it necessary to enter into a discussion of the issues herein which were therein so fully discussed and the reasoning of which, in our opinion, is applicable and controlling in the instant case. •

In the instant case shares of stock of Bancitaly and of Bank of Italy were exchanged for certain trust certificates, which were later exchanged for shares of stock of the Transamerica Corporation, some of which latter stock was sold. There is no dispute as to the number of shares of Transamerica sold and none as to the price paid for them. The only dispute is as to the cost basis to be used in determining the profit. The stipulation of the parties shows that the respondent based his deficiency on the difference between the sale price of $82,284.82 and cost of the earliest acquired stock of Bancitaly Corporation, $25,286.59, and has computed a profit of $56,998.23 taxable as capital net gain.

In our opinion and we so hold, the determination of the respondent as above indicated is not in accord with the principles enunciated and applied in the cases we have cited as controlling in the instant case, and therefore his determination is not approved. The stipulation of the parties contains the data requisite for computing the basis and the deficiency in accordance with the decisions cited and controlling herein.

Decision will he entered under Rule 60.


author: Tuener :

text:
    Mary W. T. Connally, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60434.
    Promulgated July 11, 1935.

      James /. Mason, Esq., for the petitioner.

      Samuel L. Young, Esq., for the respondent.
   OPINION.

Tuener :

The principal point contended for by the petitioner is that in no event can any part of the money paid to her for condemned lands be taxed as profit, because all of it represents “ compensation for losses sustained ”, and, being payment for losses, the proceeds can not be taxed as g’ains.

From the standpoint of taxable profit, there is no magic in the term “ compensation.” When applied to awards in condemnation matters, it relates entirely to the value of property at the date of its appropriation to public use, plus any special damages suffered by the owner. It therefore has nothing to do with the cost of the property taken and may represent profit, or actual loss to the owner, depending entirely upon whether its amount is greater or less than his investment in the property.

The petitioner relies chiefly on the decision of the Supreme Court in United States v. Supplee-Biddle Hardware Co., 265 U. S. 189. Clearly that case is not in point. The question there was whether the proceeds of certain insurance policies payable to a corporation on the life of one of its officers should be included in gross income. The court held that such proceeds did not constitute income under the statute as then worded and specifically avoided the question as to whether or not Congress, if it so desired, might require the inclusion of such payments in corporate, income. Contrasting that situation with the situation here, Congress, in section 112 (f ) of the Kevenue Act of 1928, has specifically provided for the taxation of profits on property condemned for public uses, and, as we have pointed out in the preceding paragraph, the mere fact that under the law a person is entitled to be indemnified for property at its fair market value as of the date condemned is in no way determinative of the fact as to whether or not there is an actual realization of gain.

The petitioner and the respondent agree that the fair market value of the property on March 1, 1913, is not the proper basis for computing the petitioner’s gain from its disposition, but differ as to whether the fair market value on September 10, 1920, when the deed to the property was signed by her sisters and their husbands, or the fair market value on October 20,1917, the date of her mother’s death, is the correct basis for computing the gain. This question is governed by section 113 (a) (5) of the 1928 Act, which fixes the basic date, in such cases, as that of the death of the decedent. Under this provision of the statute the fair market value of the property on October 20, 1917, is the basis for determining the gain realized by the petitioner as a result of the condemnation proceedings.

On the question of land values, a voluminous record made up of depositions and testimony given at the hearing has been produced. Each of the parties called a great number of witnesses. Included among these witnesses were forest rangers familiar with that section of the country, county or city officials, local business men, and other individuals who had some knowledge of the tract of land involved.

Among the witnesses whose depositions were introduced by the petitioner to establish land values were five individuals who served on the condemnation jury in 1927. This jury, having fixed petitioner’s award from the city for the taking of the lands, reassembled at her request on August 24, 1931, to determine by retrospective appraisement the fair market value of the lands in September 1920. At their meeting these former jurymen used as a base for their calculations their 1927 award of $182,709.50, which, by a graduated scale of shrinkage, they reduced to what they believed to be a proper level for the year 1920. By such process they decided that, $146,167.60 “ would be about right ” for the lands in the former year.

Briefly stated, the evidence in the case shows quite clearly that the petitioner’s property was rough cut-over mountain land and the portion suitable for farming was negligible. There was no market or demand for it in 1917 for watershed purposes. In fact, there seems to have been very little demand for such property for any purpose except possibly camp purposes. The possible inclusion of the property as a part of the watershed of the city of Asheville had received no serious consideration, and very likely no consideration at all until the drought of 1925. Since its acquisition by the city of Asheville) its water facilities have not been developed and it does not now appear that they will ever be developed unless and until the population of Asheville materially increases. A great many tracts of cut-over mountain land in the Ashville area had sold at a price ranging from $5 per acre to $12 per acre.

Making due allowance for such agricultural land as the tract contained and such timber, mostly second growth, as remained on the land and its suitability in 1917 for any purposes disclosed by the record, we are convinced that the fair market value of the property on October 20, 1917, was not in excess of $36,531.66. The petitioner has not shown that her gain from the property computed on that amount as the basis was in any way excessive.

Of the $17,388.64 claimed by the petitioner as a deduction, representing fees paid for legal services, the record shows that during the taxable year she did expend a total of $10,000 for legal services in connection with the condemnation proceedings. This item of $10,000 so expended should be applied against the gross amount received by her in computing the gain realized as a result of the condemnation of her property. Cf. E. A. Giffin, 19 B. T. A. 1243.

On the remaining issue, affirmatively pleaded by him, the respondent is sustained. It. is apparent that in computing the deficiency as originally determined the petitioner’s taxable profit was reduced by prorating the amount used in the repurchase of similar lands between the basic cost of the original lands and the tentative profit, computed without regard to the possibility of replacement. This method of computation was proper under section 214 (a) (12) of the Revenue Act of 1921. However, under the provisions of section 112 (f), supra, of the Revenue Act of 1928, which governs this case, the only limitation on the recognition of the gain in full is that it may not exceed the amount of money remaining after replacement purchases are made.

Decision will be entered under Rube 50.

       SEC. 112. RECOGNITION OE GAIN OR LOSS.

        m * * * * - * *
      (f) Involuntary conversions. — If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, no gain or loss shall he recognized. If any part of the money is not so expanded, the gain, if any, shall be recognized, but in an amount not in excess of the money which is not so expended.

       SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.
      (a) Property acquired after February ISIS. — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
      *******
      (5) Property transmitted at death.— * * * if real property was acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. * * *


author: Seawell : Leech:,

text:
    Girard Trust Company, Richard D. Wood, 2d, and Theodore V. Wood, Administrators d. b. n. c. t. a. of the Estate of Stuart Wood, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75624.
    Promulgated July 12, 1935.

      Robert T. McCracken, Esq., and J. Edgar Wilkinson, Esq., for the petitioners.

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

Seawell :

The payment of $80,000 made by the corporation to the estate for 800 shares of its common stock was held by the respondent to be taxable to the estate on the ground that the amount constituted a taxable dividend within the meaning of section 115 (g) of the Revenue Act of 1928, reading in part as follows:

If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at suck time and in suck manner as to make tke distribution and cancellation or redemption in wkole or in part essentially equivalent to tke distribution of a taxable dividend, the amount so distributed in redemption or cancellation of tke stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1918, shall be treated as a taxable dividend. * * *

The petitioners contend that the amount was received in a capital transaction resulting in a deductible loss to the estate of $4,016.

The purpose and principles underlying section 115 (g), supra, and corresponding provisions of prior revenue acts are fully set forth in decided cases. See Pearl B. Brown, Executrix, 26 B. T. A. 901; affd., 69 Fed. (2d) 602; Harry A. Koch, 26 B. T. A. 1025; Annie Watts Hill, 27 B. T. A. 73; affd., 66 Fed. (2d) 45; Henry B. Babson, 27 B. T. A. 859; affd., 70 Fed. (2d) 304; certiorari denied, 293 U. S. 571; James A. Connelly, 30 B. T. A. 331.

Questions of this sort in the final analysis must turn upon their peculiar facts. Here there is ample evidence of record to overcome the finding of the respondent. The circumstances surrounding the transaction are free from artifice and the element of tax avoidance is not present.

The Cotiga Development Co. was created by the trustees for the protection of the property interests of the decedent’s estate and the stock in question was acquired by the estate to enable the corporation to pay for the West Virginia coal and timber lands. The beneficiaries of the net income of the estate insisted that the corporation’s surplus be distributed to them in accordance with the terms of the decedent’s will, and the remaindermen contended with equal force that some part of the corporation’s surplus constituted corpus and was not distributable to the life tenants of the estate. There were ample grounds for the differences of opinion. The executors concluded that the payment of á cash dividend by the corporation and its distribution to the life tenants of the estate would result in the filing of claims by remaindermen and accordingly refused to make any distribution of the surplus until the rights of the contesting parties could be ruled upon by the Orphans’ Court or an agreement with respect to the matter was entered into by the interested parties. In the meantime the advances made to the corporation in the form of stock purchases had served their purpose and part of the surplus funds of the corporation was returned to the estate for stock to earn income which could be distributed to the life tenants without question. Such action was not intended to and did not essentially result in a division of profits of the corporation within the meaning of section 115 (g).

The loss of the $4,016 claimed to have been sustained from the redemption of the stock is computed by using as a basis the sum of $105.02 per share. From the opening statement of counsel for petitioners it appears that such amount represents the average cost of the 13,248 shares of the stock acquired in 1925 and 1926 as shown by the books of the estate. Our only concern here is the proper basis for the 800 shares redeemed in 1931.

In his computation of the deficiency the respondent did not find it necessary to determine the basis for the stock in view of his holding that the entire amount represented a taxable dividend. The burden of showing that the estate sustained a loss and the amount thereof was on the petitioners. Helvering v. Taylor, 293 U. S. 507.

Of the 800 shares of stock redeemed, 400 shares were acquired on January 30, 1926, at par, an amount equal to the redemption price. As to these shares, the estate sustained no loss. As to the remaining shares, the only evidence we have on the proper basis therefor is testimony that the land conveyed in exchange for the stock was appraised by appraisers at a value of $25,000 as of the date of decedent’s death. Such testimony, without more, is insufficient to establish fair market value of the land on the basic date. If it could be used for that purpose, there would be gain to tax rather than loss to use for deduction purposes. On this issue we sustain the respondent.

Eeviewed by the Board.

Decision will be entered under Bule 50.

Leech:,

dissenting: I think the distribution in redemption of stock, upon which that part of the tax deficiency arose involved in the first issue here, occurred at “ such time and in such manner ” as to make it essentially equivalent to the distribution of a taxable dividend ”, and that it was therefore taxable within section 115 (g) of the Revenue Act of 1928.

Black, SteRNhageN, and TukNer agree with this dissent.