author: Moeris:

text:
    Leopold Adler, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 49913, 49914, 49922-49926, 52629, 52630.
    Promulgated June 12, 1934.

      J. G. Peacock, Esq., for the petitioners.

      John H. Pigg, Esq., for the respondent.

       Tbe proceedings of tbe following petitioners are consolidated berewitb: Hannah G. Adler; E. S. Epstein; Henry C. Grouse, E. S. Epstein, and Jacob Gazan, Executors, Estate of Louis E. Grouse, Deceased; Hugo I. Prank; Melvin L. Adler ; and Samuel G. Adler.

   opinion.

Moeris:

These consolidated proceedings are for the redetermination of the following deficiencies in income tax:

The allegation of error common to all of these proceedings pertains to the inclusion in the taxable income of each of the respective petitioners, as a dividend, of the full amount received upon the retirement of certain capital stock in I. Epstein & Brother Co.

Another allegation of error, set forth in the proceeding of Leopold Adler, Docket No. 52629, was expressly abandoned by counsel at the hearing.

The petitioners, Leopold and Hannah G. Adler, Docket Nos. 49913 and 49914, have amended their petitions to allege that, if the respondent correctly held that the amounts received by them, $50,000 and $47,500, respectively, from the redemption of preferred stock should be treated as taxable dividends, then they could have been included as such only in their respective incomes for 1926, the year in which they were authorized by the corporation and made available to them, and, therefore, the respondent erred in including any part of said amounts in their respective incomes for 1927.

The proceedings were submitted upon a stipulation of facts entered into between the parties, together with the oral testimony of two witnesses for the petitioners and one for the respondent, from which we find the following:

The petitioners in Docket No. 49923 are the duly appointed and acting executors of the estate of Louis E. Grouse, deceased, and the other petitioners are all individual residents of Savannah, Georgia.

On March 1, 1913', Leopold Adler was the owner of 1,805 shares of the common capital stock of I. Epstein & Brother Co., a Georgia corporation, whose principal office and place of business was at all times material herein at Savannah, Georgia. On that date said stock had a fair market value of $175 per share, which amount was greater than the cost thereof to him. On June 29, 1915, he acquired 245 additional shares at a total cost of $50,474.56, and on April 1, 1919, he acquired 100 additional shares at a total cost of $25,000.

On October 15, 1918, Leopold Adler gave to his wife, Hannah G. Adler, 1,000 shares of the common capital stock of I. Epstein & Brother Co., of which 760 shares were out of the 1,805 shares owned by him on March 1, 1913, and the remaining 240 shares were out of the 245 shares acquired by him on June 29, 1915.

On October 15,1918, Leopold Adler gave one share of the common capital stock of I. Epstein & Brother Co. to each of his two sons, Melvin L. Adler and Samuel G. Adler. These two shares were out of the shares acquired by him on June 29,1915.

On October 15, 1918, the fair market value of the common capital stock of I. Epstein & Brother Co. was $250 per share.

On March 1, 1913, Louis E. Grouse was the owner of 600 shares and E. S. Epstein was the owner of 250 shares of the common capital stock of I. Epstein & Brother Co., the fair market value of which at that time was as set forth above, xvhich value is greater than the cost thereof to the said Grouse and Epstein.

Except as shown above, there were no changes in ownership ox-transfers of the common capital stock of I. Epstein & Brother Co. at any time material to these proceedings. On' April 9, 1924, and continuously thereafter until subsequent to April 9, 1928, the entire outstanding common capital stock of that company, consisting of 3,000 shares of a par value of $100 per share, was owned and held as follows:

Shares
Leopold Adler (husband-father)_ 1, 148
Hannah G. Adler (wife-mother)_ 1, 000
Samuel G. Adler (son)_ 1
Melvin L. Adler (son)_ 1
Louis E: Grouse_ 600
E. S. Epstein_ 250
Total_3, 000

I. Epstein & Brother Co. was organized under the laws of the State of Georgia in May 1906, with a capital stock of $300,000, all common, consisting of 3,000 shares of the par value of $100 each. At all times material herein, the company was engaged in the wholesale dry goods business at Savannah, Georgia. On April 9, 1924, in conformity with the action of its stockholders and board of directors, at meetings held on April 9, 1924, the company declared and paid a 100 percent dividend upon the common stock, payable in 7 percent cumulative preferred stock, redeemable at the option of the*company after two years from April 9, 1924, and containing various provisions with respect to the payment thereof in full in the event of a distribution of the assets of the company, before the common stock should be entitled to participate in any such distribution. At the same time its authorized capital stock was increased to $600,000, the increase of $300,000 being preferred stock consisting of 3,000 shares of the par value of $100 per share. The action of the stockholders at their meeting, held on the date indicated above, was reflected on the company’s minutes as follows:

*******
The President stated tliat in his opinion a stock dividend of three hundred thousand dollars ($300,000.00) should be declared out of the Undivided Profits. In order to do this, however, he stated that it would be necessary for the stockholders to adopt a resolution increasing the Capital Stock from the present amount of $300,000.00 to sis hundred thousand dollars ($600,000.00), and, if this should be done, then to adopt a resolution authorizing the issuance of the stock dividend.
After full discussion, the following resolution offered by L. E. Grouse was unanimously adopted:
Whereas, it is the desire of the stockholders to issue a stock dividend of three hundred thousand dollars ($300,000.00), but, in order to do which, it is necessary first to increase the Capital Stock to six hundred thousand dollars ($600,000.00), therefore be it resolved:
1. That, in conformity with the power granted this Corporation by its charter, the Capital Stock of this Corporation be and hereby is increased to six hundred thousand dollars ($600,000.00).
2. That the additional issue of three hundred thousand dollars ($300,000.00) shall be Preferred Stock entitled to dividends at the rate of seven (7) per centum per annum, and no more, payable out of net profits, and cumulative. That each year’s dividend and all accumulated unpaid dividends shall be first paid in full before there shall be any dividend declared, or paid on the common stock of this company, and also that in the distribution of assets of this Corporation, under any circumstance, the Preferred Stock shall be paid in full, together with any accumulated dividends, before the Common Stock shall participate in such distribution of assets. Also that said Preferred Stock shall be subject to be called in and retired, at par, plus accumulated unpaid dividends, at the option of this Corporation at any time after two years from the date of this resolution.
3. That the issue of Preferred Stock herein provided for shall be paid for by the Corporation with three hundred thousand dollars ($300,000.00) of its undivided profits, this issue of Preferred Stock being a stock dividend which is hereby declared, and that there shall be delivered to each stockholder of record of the date of this meeting, one share of Preferred Stock, fully paid up, for each one share of Common Stock, now held by said Stockholders respectively.
4. Resolved further that the Secretary of this Company be, and he hereby is, authorized to have prepared and printed the necessary and proper certificates for the issuance of this Preferred Stock, and that the same shall be issued and signed by the Officers of this Corporation as provided in the By-Laws.
There not being any further business, the meeting adjourned.
[Signed] C. M. Ohakdle®, Jr.,
Secretary.

The action- of the board of directors at their meeting, held on the date indicated above, is reflected on the company’s minutes as follows:

****** V.
The President stated the meeting was called to consider the matter of declaring a stock dividend in the sum of Three Hundred Thousand Dollars ($300,000.00) of preferred stock, seven (7) per cent, cumulative, as authorized by a resolution adopted this day at a special stockholders meeting.
On motion of L. E. Grouse, duly seconded, the resolution adopted by the stockholders authorizing and declaring the stock dividend having been read to the meeting, the said resolution was in all respects adopted as the action of the Board of Directors, and that, by reference thereto, the said resolution is hereby incorporated in the minutes of this meeting.
There not being any further business, the meeting adjourned.
[Signed] C. M. Chandleb, Jr.,
Secretary.

At the close of its fiscal year ended March 31, 1924, I. Epstein & Brother Co. had an earned surplus and/or undivided profits of $830,853.94; and on March 31, 1925 (after the issuance of the stock dividend), $557,099.29. On March 31, 1926, the company’s surplus and/or undivided profits amounted to $605,439.20; on March 31, 1927, $553,116.98; and on March 31,1928, $575,620.67.

On June 10, 1924, Leopold Adler made gifts of preferred stock of I. Epstein & Brother Co. in the aggregate amount of 548 shares. The following schedule shows the number of shares of the preferred stock held by the respective stockholders immediately upon the issuance thereof as a stock dividend, and after the gifts of 548 shares were made.

The preferred stock continued to be held as above set forth until its redemption and/or cancellation as hereinafter set forth. Rena H. Frank is the wife of Hugo I. Frank, and her income for the year 1928 was reported in their joint income tax return for that year.

The board of directors of I. Epstein & Brother Co., at a meeting held on April 7, 1926, adopted a resolution in words and figures as .follows:

*******
Upon motion, duly seconded, a cash dividend of 7% on Preferred Stock $300,000.00 was declared, payable at once.
Upon motion, duly seconded, it was decided to retire $150,000.00 of the Preferred Stock effective during the current month.
No further business, meeting adjourned subject to call of the Chair.
[Signed] C. M. Chakdlek, Jr.,
Secretary.

Pursuant to the foregoing resolution, 1,500 shares of preferred stock were canceled and/or redeemed on the dates, from the stockholders, and in the amounts as follows:

After the cancellation and/or redemption of the foregoing 1,500 shares of the preferred stock, the remaining 1,500 .shares were held as follows:

The board of directors of I. Epstein & Brother Co., at a meeting held on April 9, 1928, adopted a resolution in words and figures as follows:

*******
Upon motion, duly seconded, a cash dividend of 7% on preferred stock outstanding was declared, payable at once. Upon motion duly seconded, it was resolve to retire $150,000.00 preferred stock, payable during the current month.
Upon motion, duly seconded, the meeting adjourned, subject to call of the Chair.
[Signed] C. M. Chandler, Jr.,
Secretary.

Pursuant to the foregoing resolution, the remaining 1,500 shares of preferred stock were canceled and/or redeemed on the dates, from the stockholders, and in the amounts as follows:

Annual dividends of 7 percent were declared and paid on the preferred stock while it was outstanding.

The total amount distributed by I. Epstein & Brother Co. in redemption and/or cancellation of its preferred stock ($300,000) represented earnings or profits accumulated subsequent to February 28, 1913.

The liquid assets and current liabilities of I. Epstein & Brother Co. on the dates indicated below were as follows:

In their income tax returns for the years involved in these proceedings, the petitioners reported gains or losses on account of the sums received by them by reason of the cancellation and/or redemption of the preferred stock of I. Epstein & Brother Co., computed on the basis of a certain allocated cost of the common stocks to the preferred stock. In arriving at the deficiencies involved, the respondent determined that I. Epstein & Brother Co. canceled and/or redeemed its preferred stock at such times and in such manner as to make the distribution and cancellation or redemption essentially equivalent to the distribution of a taxable dividend, within the meaning of section 201 (g) of the Revenue Act of 1926 and section 115 (g) of the Revenue Act of 1928. If the respondent’s determination as to the applicability of sections 201 (g) of the Revenue Act of 1926 and 115 (g) of the Revenue Act of 1928 be sustained by the Board of Tax Appeals, the petitioners concede that the deficiencies involved are correct. Should the respondent’s determination be denied, the gain or loss resulting to the petitioners by reason of the amounts received by them in connection with the cancellation and/or redemption of the preferred stock in controversy should be computed upon the basis of allocating to the preferred stock, at the time of the issuance thereof, 28.5714 percent of the cost or other basis of the common stock.

Section 201 (g) of the Revenue Act of 1926, and section 115 (g) of the Revenue Act of 1928, which are identical, provide in part as follows:

If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. * * *

The respondent having asserted deficiencies upon the theory that the amounts received by the several petitioners herein in the redemption of their stock were received “ at such time and in such manner ” as to constitute them “ essentially equivalent to the distribution of a taxable dividend ” under the foregoing provisions of the statutes, we are called upon to consider the correctness of this determination. The petitioners offered two witnesses, E. S. Epstein, himself a petitioner and an officer and director in I. Epstein & Brother Co., having been connected with that firm since 1892 when it was operated as a copartnership, and Leopold Adler, also a petitioner herein and the president of that company since its inception in 1906.

Epstein testified that the business of the company from 1906 to 1911 was successful from a financial point of view, but that in or about the latter year, or in the year following, the trend toward direct selling had manifested itself through the advent of automobile travel, good roads, chain stores, and competition with mail order houses, which compelled the jobber to accept lower grades of credit risks than theretofore. He said that during the period of the war, 1914 until 1919, it was an easy matter to make money and the prevailing conditions prior thereto were temporarily checked, but that after the war they remanifested themselves in an even greater degree than theretofore. The business with small towns, crossroad towns, from which jobbers largely drew their trade, was gradually drying up and in many instances wiped out. This matter was of great concern prior to 1924 and at least once a month the officers of his company held conferences to consider the matter in an attempt to overcome the difficulty. He said that at that time the company was overcapitalized, and that a recommendation had come from an outside source, a banking interest, to one of the company’s officers that a helpful solution ” would be to create a preferred stock issue of $300,000, with the idea of liquidating it as soon as convenient. He did not say, however, how this was to help in the solution of the problem complained of.

Adler, the other witness to testify, it appears, was the officer of the company to whom the recommendation just referred to was made. He testified that he put the question of how the capital of his company might be reduced to his New York bankers and that he was referred to one Osgood, the bankers’ employee, who attended to nothing but “ tax matters,” who advised him to issue a 100 percent stock dividend. Upon cross-examination counsel for the respondent, speaking of the recommendation made by Osgood, asked the witness if “ He advised you * * * that you could pay or declare a stock dividend of one hundred per cent and redeem it after two years from the declaration, in which event the gain would only be taxable at twelve and a half per cent? ” To this question the witness replied in the affirmative. He said that the “ substance ” of his conversation with Osgood was how to accomplish a distribution and incur the least tax.

The respondent produced the testimony of a revenue agent who made the investigation respecting the subject matter here under discussion. He said he explained to Adler that he was going to treat the entire amount received in 1927 from the redemption of the preferred stock by the company as a dividend. His statement of the conference had with Adler is as follows:

•i= * * That some time before the stock dividend was declared and issued by the I. Epstein & Brother Company, he [speaking of Adler] was in a broker’s office in New York, and he stated to a man in that office, who was well versed in income tax laws, — and Mr. Adler emphasized the fact that he was not a small person but was a man of authority. Mr. Adler stated that he explained to this anonymous person in the broker’s office that he had a company in Savannah whose surplus was all out of proportion to his capital stock and above the needs of the company. That he wanted to distribute a substantial portion of that surplus to the stockholders. That he himself, and Mrs. Adler, were the principal stockholders in the company. Bach one has or did have along then a considerable income each year, and he wanted to know what if any method could be used to distribute that without incurring a large income tax liability, and that this anonymous person outlined to him the plan of declaring and issuing the preferred stock dividend, which could be redeemed after the expiration of two years, and the maximum of twelve and a half per cent tax be paid on the gain which was recognized on the transaction.

In considering this identical question the Board had the following to say in Annie Watts Hill, 27 B.T.A. 73, affirmed at 66 Fed. (2d) 45:

Section 201 (g) of the Revenue Act of 1926 and corresponding sections of prior revenue acts were enacted by the Congress in an attempt to prevent the avoidance of tax upon distributions of corporate earnings, ordinarily to be distributed as dividends and so taxable, by means of redemption and cancellation of stock. It leaves to the Commissioner, in the first instance, and to this Board and the courts to determine what circumstances surrounding the cancellation or redemption of stock shall constitute “ such time ” and “ such manner ” as to make those acts and the distribution “ essentially equivalent to a distribution of a taxable dividend.” Here the parties argue at length upon brief as to the intention with which the stock was issued as a dividend in the first instance; as to whether there was a continuing relation between the issuance and redemption of the stock; and whether those acts were designed and carried out as part of a unified plan to distribute surplus.
These matters are of importance, for, should it appear that it was intended when the stock was issued that the later redemption should be the means of distributing earnings which otherwise would be paid to the stockholders in the form of dividends, and that this plan continued over the interval during which the stock was outstanding so that the issuance and redemption are related to each other as a part of that plan, it would seem that the redemption was “ at such time ” and in “ such manner ” as to make it, and the resultant distribution, equivalent to a taxable dividend. In other words, such circumstances would indicate that a cancellation or redemption of outstanding stock had been employed as an artifice by which to avoid the ordinary tax upon a corporate distribution. Cf. Pearl B. Brown, Executrix, 26 B.T.A. 901; Harry A. Koch, 26 B.T.A. 1025; Alfred A. Lawn, 26 B.T.A. 764; Robert R. Meyer. 27 B.T.A. 44.

There is no mention whatsover of liquidation in the various resolutions concerning the distribution in 1924 of preferred stock, nor in the resolutions concerning the later redemptions thereof. Epstein, a minority stockholder, apparently knew nothing about the real plan or purpose back of the distribution or redemptions except what appears to have been inferred by him from the general condition of the jobbing business to which he testified, that is, he knew nothing about the purpose which Adler, himself, has evidenced here. Adler and his wife were the principal stockholders of the corporation. He sought advice respecting the distribution of the corporation’s earnings “ without incurring a large income tax liability ” and he was the moving party who caused the distribution and the ultimate re-demptions of the stock based upon the advice which he had received.

While ultimate liquidation because of unfavorable conditions affecting the jobbing business may have been in the minds of the parties even as far back as 1912, when the outlook seemed more or less questionable, there is nothing in the record to associate or to identify such liquidation as the motive for either the distribution or the later redemption.

The respondent has found that the amounts in question should be taxed as ordinary dividends, and we are of the opinion that there is insufficient evidence to overcome that finding. Indeed, from the evidence of record it is reasonably clear that there was a “unified plan ” to distribute the surplus of the corporation “ and that this plan continued over the interval during which the stock was outstanding so that the issuance and redemption are related to each other as a part of that plan.” Annie Watts Hill, supra. Nor does the fact that the distributions here occurred in 1924 and the re-demptions were not until 1926, 1927, and 1928 alter the conclusion reached where the evidence tends to show that the time element was designedly a part of the plan of redemption and where the actual time of the redemption bears an identifiable relationship with the originally conceived plan. For instance the original plan, it appears, was to make a distribution in 1924 and it was intended not to make a redemption prior to two years from such distribution — the distribution was made April 9,1924, and 1,500 shares of such stock were redeemed, beginning with April 9,1926. The time element, therefore, if it has any bearing upon the question, under the circumstances' here, would seem to strengthen the position of the respondent. Upon this point compare the facts in Annie Watts Hill, supra.

The petitioners advance the argument that these redemptions were not equivalent to an ordinary dividend because they were not pro rata among all of the stockholders and also because the company did not have funds “ available or in sight ” with which to pay the $300,000 in April 1924, when the distribution was made.

Even assuming that an equal distribution is an essential part of an ordinary dividend, we are of the opinion that the statute spares us the burden of finding that all of the elements of such a dividend are present. All that we need find under the statute is that there has been a cancellation or a redemption and that the “ distribution and cancellation or redemption ” were “ at such time and in such manner ” as to make them “ equivalent ” to a taxable dividend. The word “ equivalent ” is defined in Webster’s New International Dictionary (1921) to mean “Equal in worth or value, force, power, effect, import, and the like; alike in significance and value; of the same import or meaning.”

Respecting the argument that there were insufficient funds with which to meet the payment of the $300,000 distribution in 1924, we find that just nine days prior to the distribution, to wit, on March 31, 1924, the surplus of the company was $830,853.94. We can not agree with counsel that there were no funds “ in sight ” at that time with which to make payment. The most cogent answer to that phase of the argument, however, is the fact that ultimate payment was in fact contemplated, as we have already found, and that payment was actually made.

Nor are we impressed by the argument that, because the petitioner in Docket No. 49924 owned no stock after the redemption took place, and the petitioners in Docket Nos. 49925 and 49926 owned only one share of common before and after such redemptions, the statute could not apply. Counsel cites article 629 of Regulations 74, promulgated under the Revenue Act of 1928, which provides in part as follows:

* * * On the other hand, a cancellation or redemption by a corporation of all of the stock of a particular shareholder, so that the shareholder ceases to be interested in the affairs of the corporation, does not effect a distribution of a taxable dividend. * * *

That language simply means that where the corporation purchases and cancels the stock of a “ particular ” stockholder and where that was the purpose of the redemption it does not fall within the act because it is not essentially equivalent to the declaration of a taxable dividend. As we said in Shelby H. Curlee, Trustee, 28 B.T.A. 773, where the same argument was made:

* * * The taxable status of these distributions under the act, therefore, is fixed by the executed purpose of the corporation, in the determination of which the identity of the stockholders is in no way material. Under petitioner’s theory, a corporation with deliberate intent to distribute surplus, could issue a stock dividend, cause the holder of one share of common stock to sell it, then liquidate the stock dividend and be held outside the provisions of section 201 (g), a result in distinct opposition to the purpose of the questioned section. * * *

Respecting the alternative allegation of error urged by the petitioner’s counsel that, if we should sustain the respondent’s determination that the amounts received by Leopold and Hannah G. Adler, Docket Nos. 49913 and 49914, were taxable dividends, then such amounts should have been included in their respective incomes for the year in which declared, 1926, and not the year in which received, 1927, we are unable h> agree.

The petitioners base their contentions upon the following articles of Regulations 69, promulgated under the Revenue Act of 1926:

Art. 52. Examples of constructive receipt. — * * * Dividends on corporate stock are subject to tax when unqualifiedly made subject to the demand of the shareholder. * * *
Art. 1541. Dividends. — * * * A taxable distribution made by a corporation to its shareholders shall be included in the gross income of the distributees when the cash or other property is unqualifiedly made subject to their demands.

It is argued that the funds for “ payment in full were probably available from the peak collections in the fall of 1926, but if not could have been borrowed at any time,” and from this it is concluded that the amounts were “ unqualifiedly made subject to their demands ” in 1926. The fault with this argument lies in the very fact that even though the funds may have been available from collections in the fall of 1926, there is no showing that they were, and even though funds might have been borrowed with which to make payment then they were not in fact borrowed. Therefore, under the circumstances, we fail to see how the amounts, although declared, were unqualifiedly made subject to their demands ” in 1926. At any rate it appears that the petitioners treated the transaction as taxable in 1927, as did the respondent, and, in the absence of more concrete proof of the availability of funds with which to make these declarations unqualifiedly subject to their demands, we can not apply the doctrine of constructive receipt. Hal E. Roach,, 20 B.T.A. 919. Cf. Avery v. Commissioner, 292 U.S. 210.

Decision mil he entered for the respondent.


source: Caselaw Access Project

author: Akundeld:

license: Public Domain

text:
    Charles F. Fawsett, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72057.
    Promulgated June 14, 1934.

      O liarles F. Fawsett, pro se.

      G. A. Ray, Esq., for the respondent.
   OPINION.

Akundeld:

In disallowing a portion of the deduction claimed by petitioner as taxes paid to the State of Wisconsin, the respondent relies upon the proposition that amounts paid as taxes under unconstitutional statutes are not taxes at all, in view of the established doctrine that an unconstitutional act is wholly void and “ in legal contemplation, as inoperative as though it had never been enacted.” Norton v. Shelby County, 118 U.S. 425. There have been several cases somewhat close to this on the facts. In Philip C. Brown, 10 B.T.A. 1122, and Inland Products Co., 10 B.T.A. 235; aff'd., 31 Fed. (2d) 867, the amounts illegally exacted were refunded to the taxpayers, and it was held that, having been made whole, they were not in a position to claim deductions. Similarly, in Lehigh Valley Coal Sales Co., 15 B.T.A. 1401, it was held that invested capital should not be reduced on account of excessive taxes later refunded. In E. L. Bruce Co., 19 B.T.A. 777, the taxpayer made a payment in compromise of an amount demanded as a tax under a state statute which was later held invalid, and there, as here, the taxpayer was unable to obtain a refund. We held that, although the amount paid was not deductible as a tax, it was deductible as a loss or as a business expense. From this brief recital of the salient facts in the cited cases it is apparent that the facts here are sufficiently different so that those cases are of doubtful authority upon the question here presented.

Here the amount in controversy was demanded and paid as a tax, and the same statute which imposed the levy prevents a recovery by reason of the limitation period it prescribes. Under the circumstances present here we believe that section 23 (c) of the Revenue Act of 1928, permitting deductions for “ taxes paid,” should be construed to allow the deduction claimed. Particularly so, where the amount was demanded by and paid over to the sovereign under a statute which had been tested in the courts and had been held valid, State v. Frear, 148 Wis. 456; 134 N.W. 73, and the time has gone by in which the taxpayer can secure a refund, Whitbeck v. Wisconsin Tax Commission, 239 N.W. 655; 240 N.W. 804. However, we need not rest our decision entirely on this view of the Federal statute. Petitioner argues, and we think correctly, that the Hoeper decision does not automatically establish that he has made an overpayment to the State of Wisconsin. The Hoeper decision did not declare invalid the entire statute under which petitioner made his payment to the state; it went only to the one feature, namely the taxing to the husband of his wife’s income. And so, while that decision is apparently applicable to petitioner’s case, it would affect only the one item in petitioner’s return, that is, the income of the wife reported by petitioner. The other items making up petitioner’s own income remain unaffected and in order for him to secure a refund — assuming a timely application — the amount paid on account of the income of his wife might well be offset by other items in his own income or deductions. We know from experience in deciding tax cases that a tax proposed by the Government on an erroneous theory may be sustained on another ground. So here, although petitioner might be entitled to a refund on the phase of his case involved in the Supreme Court decision, the state government might well be able to retain the entire payment on matters pertaining to his own income. In this view of the case it appears that the mere citation of the Hoeper case, conceding the facts here to be the same, does not establish that any portion of the amount paid by petitioner to the state was not a tax. We accordingly hold that petitioner is entitled to the deduction claimed.

[Reviewed by the Board.

Decision will be entered for the petitioner.


author: Arundedl : Adams,

text:
    Poly Holding Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74254.
    Promulgated June 14, 1934.

      W. H. Wallace, Esq., for the petitioner.

      O. W. Sweeker, Esq., and Claude Kitchin, Esq., for the respondent.

       Prepared during Mr. Lansdon’s term of office.

   OPINION.

Arundedl :

The only question here is the amount of the deduction to be allowed to petitioner for depreciation of the building erected at its expense on leased premises. Section 23 (k) of the Revenue Act of 1928 provides for a reasonable allowance for exhaustion, wear and tear of property used in a trade or business, including a reasonable allowance for obsolescence. On petitioner’s leasehold it has erected a building at a cost of $235,000 and it maintains the right to exhaust its cost over the original term of the lease, a period of 21 years, without regard to the life of the building, or the privilege of renewal. Petitioner relies on Bonwit Teller & Co. v. Commissioner, 53 Fed. (2d) 381, decided by the Court of Appeals for the Second Circuit, and also cites 719 Fifth Avenue Co. v. United States, recently decided by the Court of Claims, 5 Fed. Supp. 909.

The respondent has found that the useful life of the building erected by petitioner is 40 years, and based on such a finding has allowed deductions for depreciation at the' rate of 214 percent per annum on the basis of cost. Petitioner does not dispute the respondent’s finding as to the useful life of the building and offers no evidence of earlier obsolescence nor any facts that would in any way suggest that the allowance made by the respondent is not reasonable. It stands squarely on the ground that, whatever its cost and whatever the circumstances surrounding the outlay, it is entitled to recover its capital sum over the original term of the lease. With this view we cannot agree, nor do we believe that Bonwit Teller (& Co., supra, stands for such a broad principle.

It is our view that each case must be decided on its own facts, however desirable administratively it may be to have a rule of thumb. Taxpayers doing business in the manner of petitioner must ordinarily recover their capital from the income of the leasehold. To say that this must be done under all circumstances over the original term of the lease .is as unreasonable as to require that in all cases the cost must be spread over the original term plus all renewal periods. It may be assumed that business men will not ordinarily place valuable improvements having a long and useful life on land that they can use but a brief period, and we see no reason why the presumption should be indulged in that such is the case. Cf. Gladding Dry Goods Co., 2 B.T.A. 336. An illustration will serve better to bring out the point we are considering. A is the lessee of property the original term of which expires in two years. He erects on the property a building at a cost of $1,000,000, the annual rental of which would be $50,000. He has the right, however, to renew the lease for an added period of 30 years. To insist, under such circumstances, that A must recover his entire outlay over the two-year period would not be reasonable, for against the income not more than one tenth of the cost would be recovered. A fair statement of the case would make it clear that the large expenditure was made in the light of the renewal privilege and the reasonable allowance contemplated by the statute could be had only by spreading the cost over the renewal period, unless the useful life of the structure was less.

The Bonwit Teller case did not involve the facts we have here. In that case the improvements on the leased premises were made by the lessor at its expense, the lessee paying only interest on the cost of construction. Thus the lessee had no capital investment in the building to exhaust. The question before the court, in so far as the lessee was concerned, was whether the March 1, 1913, value of the lease should be exhausted over the original term of the lease or such term plus the possible reneivals. When a case arose in the same court involving similar facts and the same question as we have here the court did not base its decision on the Bonwit Teller case, but examined the evidence to determine what constituted a reasonable allowance for exhaustion of the portion of the building cost borne by the lessee. 379 Madison Avenue, Inc. v. Commissioner, 60 Fed. (2d) 68. That the court did not overlook its earlier Bormit Teller decision is shown by the citation of the case on another question decided, and this is persuasive that it did not intend in the Bonwit Teller case to lay down an arbitrary rule to be applied to all cases of exhaustion on leased property. In the 379 Madison Avenue case the evidence indicated that by reason of changed conditions in the neighborhood to which the building on the leased premises could not be conformed the building would be valueless by the end of the original term. On these facts the court concluded it was “ highly improbable that either party to the lease will insist upon a renewal at a time when the building upon the property will be unable to earn a return on the value of the ground ”, and allowed exhaustion on the lessee’s share of the cost over the original term. Similarly in the case in the Court of Claims, 719 Fifth Avenue, supra, it was found as a fact that the renewal privilege was of no value to the lessee. When the 719 Fifth Avenue case was before this Board the evidence did not satisfactorily establish the value, or lack of value, of the renewal privilege. We said in part that “ The. word ‘ reasonable ’ in the statute implies an appraisal of the probabilities. An examination of the lease in its entirety indicates that the parties contemplated that the lessee would continue to occupy the premises and that provision should be made for an alteration from time to time of the rental.” (5 B.T.A. 565, 569.) In the instant case, as above pointed out, petitioner offered no evidence that the building erected by it would be of so little value at the end of the original term as to make renewal unlikely, and in this respect the facts differ from those in the 379 Madison Avenue case, and the 719 Fifth Avenue case in the Court of Claims.

The facts and the question here are the same as in 353 Lexington Avenue Corp., 27 B.T.A. 762. In that case we pointed out that there is no requirement in the statute that the cost of a leasehold and the cost of improvements made by the lessee should be exhaustible over the same period. In that case as here the rental under any renewal was to be based on the value of the land without reference to the improvements, and we said that the land and improvements should be regarded as separate pieces of property, and deductions for exhaustion allowed accordingly. That case is controlling here. As said above, the language of the statute is that a reasonable allowance for exhaustion shall be made. Where the respondent has made a determination of what constitutes a reasonable allowance, that deter-initiation on the presumption of correctness must prevail in the absence of sufficient evidence to establish error. In this case we have no evidence that the building will not earn sufficient income to meet rentals or of any other facts indicating the improbability of renewal. Consequently, we cannot say that its useful life to petitioner will be any shorter than that determined by the respondent, nor can we find what is more directly in point that the useful life of the building will be limited to the original term of the lease.

Reviewed by the Board.

Decision will be entered, for the respondent.

Tkaiumell and Van Fossan dissent.

Adams,

dissenting: I am unable to agree to the prevailing opinion in this proceeding. I think that this case is controlled by the doctrine laid down by the Circuit Court of Appeals for the Second Circuit in the case of Bonwit Teller & Co. v. Commissioner, 53 Fed. (2d) 381, which was followed by the Court of Claims in 719 Fifth Avenue Co. v. United States, 5 Fed. Supp. 909. In Bonwit Teller & Co. supra, the court said:

It was also error to extend beyond the term of the lease the period over which exhaustion of the leasehold is to be spread. The renewal privilege had not been exercised and may never be. There was no evidence as to the value of this privilege as a separate element in the valuation of the leasehold. * * * The problem is to compute the amount of exhaustion during the taxable year of “property used in the business”. The property here in question was a leasehold having nineteen years to run, and containing an option (o renew for twenty-one years at a rental to be determined by an appraisal of the property to be made at the time of renewal. Despite the uncertainty of the rental to be paid during the extension, the option may give additional value to the lease, just as many other types of provisions might give the lease value. But it is still true that the property being used in the business (the leasehold) will be exhausted in nineteen years. If the option should be exercised at the end of the existing term, there will be created a new term (new property) to be thereafter used in the business. The new term, when created, may or may not have value; if it has, allowance for the exhaustion of such new term will be in order. Let it be supposed that the option contained in the lease in question were to purchase the property at the end of the term. Such an option might readily enhance the value of the lease, but it could hardly be supposed to change the period during which the lease will become exhausted. Similarly in the case at bar we see no basis for extending the period of exhaustion beyond the end of the term which was valued. See Appeal of Lenox Land Co., 5 B.T.A. 1206, 1210; Hinkel Dry Goods Co. v. Commissioner, 10 B.T.A. 228.

There is no testimony in the record which indicates what value, if any, the option to renew the lease had. The stipulation states specifically that petitioner has not decided as yet to renew the lease at the expiration of the first term of 21 years; nor has it given any indication of its action in that regard.

Where one makes improvements, which are fixtures in their nature, upon the property of another, the title to such improvements is in the owner of the land; and if such improvements are made by the lessee, in the absence of a specific contract, when the lease expires such fixtures, having become a part of the realty, belong to the lessor. Where the lessee of vacant property makes valuable improvements in the nature of fixtures on such property, the expenditures made by the lessee for this purpose become to him a part of the cost of his lease. I am unable to see how in arriving at the cost of the lease we may separate and treat in a different manner that which the lessee pays in money directly to the lessor and that which he expends in the improvements of the lessor’s property, and I am of the opinion that such expenditures constitute a part of the cost of the leasehold to the lessee, and that for the purposes of taxation such expenditures should be treated in no different manner from that where the entire consideration for the lease is paid in cash.

The whole scheme of income taxation is built on an annual accounting period, and to postpone until the end of the term a substantial portion of the cost of the lease, on the assumption that if the lease is not renewed the lessee will be entitled to a loss for the portion of his expense not ratably deducted on his annual returns during the period of the lease, results in a distortion of income inconsistent with the theory of annual accounting periods. Moreover, the lessee may not realize income on the last year of his term from which he can deduct, as a loss, the balance of his expenditure.

In Hewitt Realty Co., 29 B.T.A. 1205, we had before us the lessor of real property on which the lessee had erected a valuable building which became the property of the lessor, subject to the lease. In that case the original lease was for the term of 21 years, with three possible renewals for like terms. The useful life of the building so erected was 40 years. In that case the Commissioner determined that the estimated depreciated value of the building at the date of expiration of the original term of the lease represented income to the lessor and added an aliquot part of income for the taxable year. This determination of the Commissioner we sustained. There the petitioner, lessor, contended that it realized no income from the erection of the building by the lessee. It argued that the lessor had only the title without enjoyment or beneficial use of the building. In that case we said:

In Cryan v. Wardell, 263 Fed. 248, where the Government attempted to tax to the lessor the entire value of a building erected by a lessee, at the termination of the lease, the court said: “ It results that whatever accession of value resulted to plaintiff's property from the erection of the building in question accrued and became vested in her in 1910 (the date of its completion) and not upon the termination of the lease.” To the same effect is Miller v. Gearrin, 258 Fed. 225. In United States v. Boston & Providence R.R. Corp., 37 Fed. (2d) 670, the court said:
“A building erected on leased land under a covenant in the lease that it shall become and remain a part of the realty and the property of the lessor is treated by the Revenue Department, and properly so, as income of the lessor, presumably upon the ground that, on becoming a part of the realty, it has enhanced the value of the lessor’s property to the amount it has added to its fair market value; and, while its cost as to the lessee may be treated as so much rental and be spread over the entire term of the lease in computing his income tax, the fair market value it has added to the lessor’s property is taxable to the lessor in the year in which the building was constructed. Miller v. Gearin, supra; Cryan v. Wardell, supra.

I am persuaded that an equitable application of the rule therein laid down requires the reversal of the Commissioner’s determination in this proceeding.

I think that under the facts in this case the petitioner should be permitted to take as an allowance for depreciation an aliquot part of the cost of the improvements over the unexpired term of the original lease.

The prevailing opinion cites as authority for its holding 379 Madison Avenue, Inc. v. Commissioner, 60 Fed. (2d) 68, for the purpose of showing that the Circuit Court of Appeals in that case based its decision on the fact that the lease would in all probability not be renewed. This I think to be too narrow a construction of that opinion. I believe that that case was decided under the doctrine laid down in Bonwit Teller & Co., supra.

The prevailing opinion cites 353 Lexington Avenue Corp., 27 B.T.A. 762, as authority for the holding here. I agree that that case is controlling, but, in my opinion, the holding there was erroneous and should be overruled.

In substance, the holding of the majority in this case would permit the Commissioner to speculate as to what contract the parties would or might enter into in future and would permit this Board to make findings upon what it presumed would be done by parties in relation to their business affairs and property hereafter. I think that, in the absence of some testimony, we would not be justified, in indulging in such speculation.

Entertaining these views, I believe the determination of respondent should be reversed.

Lansdon and Seawell agree with this dissent.


author: McMahon : Adams,

text:
    Edward Securities Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71208.
    Promulgated June 14, 1934.

      Harry N. Wyatt

      , Esq., for the petitioner.

      Bruce A. Low, Esq., for the respondent.

       Prepared during Mr. Lansdon’s term of office,

   OPINION.

McMahon :

The only issue to be considered in this proceeding is whether the respondent erred in disallowing a deduction in the sum of $15,100 representing a loss resulting from the sale in 1930 by the petitioner of 50 shares of the stock of the Sheridan Trust & Savings Bank.

The position of the respondent is, first, that the sale was not a bona fide sale, and secondly, if it were a bona fide sale, the stock was sold to an individual who was not only in control of the corporation, but owned all except two qualifying directorship shares out of a total of 9,982 outstanding shares, and, therefore, it would be contrary to the intent of Congress and public policy to allow such a deduction.

The respondent not only concedes that the sale was made, but the parties stipulated that the petitioner on December 26, 1930, “ sold ” the 50 shares of bank stock to E. N. DAncona at the then market value of such shares, or $750. Both contentions of the respondent are based primarily upon the fact that the petitioner sold the stock to its stockholder, who owned practically all of its stock, the respondent conceding that if the petitioner had sold the stock “ to some stranger, it would be different.” This fact by itself is not sufficient to sustain the contentions of the respondent. As stated in Commissioner v. Van Vorst, 59 Fed. (2d) 667; affirming George W. Van Vorst, Executor, 22 B.T.A. 632:

In the absence of other showing,, the mere fact that the purchaser is a stockholder of the vending corporation does not change the character of the transaction. Appeal of McMichael, 4 B.T.A. 266, 269; Fruit Belt Co. v. Commissioner, 22 B.T.A. 440; Taplin v. Commissioner, (C.C.A.) 41 F. (2d) 454; Trust Co. v. Rose (C.C.A.) 28 F. (2d) 767.

In that case a stockholder who held 46,397 of the 50,000 outstanding shares of stock of a corporation purchased certain real estate from the corporation for the sum of $54,559.60, which real estate had a fair market value at the time of $143,559.60. The Board in its opinion in that case stated:

* * * In our opinion the stipulated facts, including the stipulation that the decedent “ purchased ” the property, made a prima facie case for the petitioner and it was then incumbent upon the respondent to show that although this was in form a sale, nevertheless it occurred under circumstances which indicate that in fact it was a distribution of earnings or profits accumulated since February 28, 1913. In this connection we see no reason to infer that the stockholders ever agreed to an unequal distribution. This majority stockholder undoubtedly purchased at a bargain price and there were stockholders who did not share in the bargain. Rut bargain purchases do not ipso faoto require an explanation by the purchaser to avoid tax. Proof of a prima facie case does not require the elimination of all unfavorable possibilities. The purpose of the rule of evidence is to avoid just such difficulties.

While the above case involves an increase or addition to the taxable income of the purchaser and the instant proceeding involves a deduction from the income of the seller, both involve dealings between corporation and stockholder. The principle in the above case, in our view, is therefore applicable here.

In Fruit Belt Telephone Co., 22 B.T.A. 440, the Commissioner contended that the corporation really sold its assets to the Southern Bell Telephone Co., or in any event did not in good faith sell them to Evans and James, who owned all but one share of petitioner’s stock. The Board stated:

On this question, we think the evidence is perfectly clear that the assets were sold to Evans and James and that they sold them to the Southern Bell Telephone Company. So long as neither creditor nor stockholder has any objection to the sale of assets by a corporation, clearly, a corporation is not prohibited by law from selling to its stockholders even at a price less than the value of the assets and there is nothing to prevent a corporation from distributing its assets to its stockholders in liquidation if it desires to do so regardless of the value of the assets distributed. A corporation may clearly do what it has a legal right to do, even for the sole purpose of reducing its tax liability. It is not required to pursue a course which gives rise to a greater tax liability if another course is open to it which will give rise to a less tax liability.

See also David Stewart, 17 B.T.A. 604; Corrado & Galiardi, Inc., 22 B.T.A. 841; and Budd v. Commissioner, 43 Fed. (2d) 509. In the first case just cited, we said:

Ordinarily, where an individual sells securities to a corporation at less than the cost of the securities, the sale establishes the amount of the individual’s loss for income-tax purposes. It has been shown in this case that the petitioner sold his securities to a corporation for less than those securities cost him. Why then should he not have a deduction for a loss? * * * The petitioner admitted that he did what he did in order to take a loss on his income-tax return, but of course it is not reprehensible to take lawful steps which will entitle one to a loss on one’s income-tax return. It! may well be that the petitioner was in a position, due to his control of the corporation, to commit a fraud on the Government in order to take an unsustained loss on securities, but there is no evidence to indicate that any of his acts lack genuineness. * * *

As heretofore set forth, the sale involved in the instant proceeding was at the market price.

So far as the record discloses, the position of the respondent that the sale was not bona fide was first stated at the hearing. In Corrado & Galiardi, Inc., supra, the Board said: “The respondent’s brief states that the sole question is whether or not there was a bona fide sale. Bona fide means, with good-faith; without fraud or deceit: Fraud is not to be presumed.” That case also involved a sale of stock, without clear proof of its market value, by a corporate taxpayer to two of its stockholders, who, with their families, owned all the stock of the taxpayer.

In Budd v. Commissioner, supra, the court stated:

* * * It is a general principle tliat fraud is never to be presumed, and lie who avers it, takes upon himself the burden of proving it. * * * The determination of the Commissioner being presumptively correct, in appealing from the additional assessment, Mr. Budd was required to prove a sale; transfer of title, a valuable consideration, and the other positive elements upon which he relied. This he did, and this must stand unless the sale was a pretense and a fraud.’ * * * The Commissioner made no attempt to prove fraud, but relied upon Mr. Budd to negative the charge of fraud. But fraud cannot be inferred by the court or jury from acts, legal to themselves and consistent with an honest purpose. * * *
The burden was, therefore, on the Commissioner to bear the burden of proving his charge of fraud that the sale was not bona; fide.

Nor can. the separate identity of the petitioner and its stockholder purchaser, under the circumstances of this proceeding, be disregarded. Under the general rule for tax purposes a corporation is an entity distinct from its stockholders. Dalton v. Bowers, 287 U.S. 404.

This principle is stated by the United States Supreme Court in Burnet v. Clark, 287 U.S. 410, as follows:

A corporation and its stockholders are generally to be treated as separate entities. Only under exceptional circumstances — not present here — can the difference be disregarded.

The mere fact that the stock of the petitioner was owned by the purchaser is not such an unusual circumstance as to require disregard of its corporate form in the transaction involved herein. In Burnet v. Commonwealth Improvement Co., 287 U.S. 415, the taxpayer had deducted a loss on its 1920 income tax return resulting from the transfer of certain shares to the Widener Estate, its sole stockholder. The Commissioner changed the basis thereof, thereby establishing a profit and á deficiency in tax. It was thereupon contended by the taxpayer that the transaction resulted in no gain or loss, since, practically considered, the taxpayer and the Widener Estate were the same entity. The Court, in disposing of that contention, stated:

While unusual cases may require disregard of corporate form, we think the record here fails to disclose any circumstances sufficient to support the petitioner’s [taxpayer’s] claim. Certainly, the Improvement Company and the Estate were separate and distinct entities; the former avowedly utilized to bring about a change in ownership beneficial to the latter. For years they were recognized and treated as different things and taxed accordingly upon separate returns. The situation is not materially different from the not infrequent one where a corporation is controlled by a single stockholder. See Eisner v. Macomber, 252 U.S. 189, 208, 209; Lynch v. Hornby, 247 U.S. 339, 341; United States v. Phellis, 257 U.S. 156, 172, 173.

The result reached in the instant proceeding is adequately supported by Jones v. Commissioner, 71 Fed. (2d) 214. See that case for the discussion and authorities cited, which are persuasive. See also New Colonial Ice Co. v. Helvering, 292 U.S. 435, and Joseph Cavedon, 30 B.T.A. 364.

In support of his contention that the corporate form of the petitioner should be disregarded, the respondent cities as leading authorities Southern Pacific Co. v. Lowe, 247 U.S. 330, and Gulf Oil Corp. v. Lewellyn, 248 U.S. 71. The United States Supreme Court, in Burnet v. Commonwealth Improvement Co., supra, with respect to these two cases, stated as follows:

Southern Pacific Co. v. Lowe, supra, and Gulf Oil Corp. v. Lewellyn, supra (the latter covered in principal by the first), cannot be regarded as laying down any general rule authorizing disregard of corporate entity in respect of taxation. These cases presented peculiar situations and were determined upon consideration of them. In the former this court said: “ The case turns upon its very peculiar facts, and is distinguishable from others in which the question of the identity of a controlling stockholder with his corporation has been raised. Pullman Car Co. v. Missouri Pacific Ry. Co., 115 U.S. 587; Peterson v. Chicago, Rock, Island & Pacific Ry. Co., 205 U.S. 364, 391. * * • *” [Emphasis supplied.]

We have not overlooked Helvering v. Gregory, 69 Fed. (2d) 809, which reverses Evelyn F. Gregory, 27 B.T.A. 223, on another ground, or Sydney M. Shoenberg, 30 B.T.A. 659. There is nothing in any of the reports of these cases which suggests a departure from the applicable doctrine of the decisions of the Supreme Court of the United States upon which we rely here; and if there were we could not agree with its application to the facts presented in the instant proceeding. The principal issue decided by the court in Helvering v. Gregory, supra, was whether under the facts in that case there was a “ reorganization ” within section 112 (i) (1) (B) of the Revenue Act of 1928, bringing the taxpayer within section 112 (g) of the same act so that her gain could not be “ recognized ” because certain corporate shares were “ distributed in pursuance of a plan of reorganization.” No such issue is presented in the instant proceeding. Furthermore, while the court reversed the Board upon this issue, it approved the Board’s holding that the separate entity of the corporation should not be disregarded, and in doing so stated:

* * * we cannot treat as inoperative the transfer of the' Monitor shares by the United Mortgage Corporation, the issue by the Averill Corporation of its own shares to the taxpayer, and her acquisition of the Monitor shares by winding up that company. The Averill Corporation had a juristic •personality, whatever the purpose of its organization; the transfer passed title to the Monitor shares and the taxpayer became a shareholder in the transferee. All these steps were real, and their only defect was that they were not what the statute means by a “ reorganization ”, * * * [Emphasis supplied.]

In Sydney M. Shoenberg, supra, the Board held that “ the forms and ceremonies which taxpayer employed lacked the spark of vitality essential to a bona fide sale; that there was a persisting intention to hold title; and that in the mind of the taxpayer he never really parted with dominion over the stock.” The Board further held that, if the steps taken were sufficient to constitute a bona fide sale, the taxpayer, during all the time he was out of possession, held an option to buy back from the corporation, which was exercised immediately on the expiration of 30 days after the sale, thus bringing the transaction within the “ wash sales ” provisions of section 118 of the Revenue Act of 1928. That case is distinguishable from the instant proceeding on both grounds.

This proceeding is controlled and governed by the Revenue Act of 1928. That act deals with (1) individuals and (2) corporations, which are in many respects dealt with separately. Sections 11 and 12 fix the rates of normal tax and surtax on the taxable income of individuals; section 13 fixes the rate of tax on corporations. In section 23, dealing with Deductions from Gross Income ”, subsection (e) enumerates losses deductible by individuals and subsection (f) those deductible by corporations. Section 25 deals with “ Credits of Individual Against Net Income ” and section 26 deals with “ Credits of Corporation Against Net Income.” Section 51 deals with “ Individual Returns ” and section 52 with “ Corporation Returns.” The act throughout evidences a plan and purpose on the part of Congress to recognize corporate entity. This is not only true of the 1928 act, but it is also true of previous revenue acts. In Eisner v. Macomber, 252 U.S. 189, the United States Supreme Court, in a case which arose under the Revenue Act of 1916, recognized the purpose and plan of that revenue act in the following language:

* * * But, looking through the form, we cannot disregard the essential truth disclosed, ignore the substantial difference between corporation and stockholder, treat the entire organization as unreal, look upon stockholders as partners, when they are not such, treat them as having in equity a right to a partition of the corporate assets, when they have none, and indulge the fiction that they have received and realized a share of the profits of the company which in truth they have neither received nor realized. We must treat the corporation as a substantial entity separate from the stockholder, not only because such is the practical fact but because it is only by recognizing such separateness that any dividend- — even one paid in money or property — can be regarded as income of the stockholder. Did we regard corporation and stockholders as altogether identical, there would be no income except as the corporation acquired it; and while this would be taxable against the corporation as income under appropriate provisions of law, the individual stockholders could not be separately and additionally taxed with respect to their several shares even when divided, since if there were entire identity between them and the company they could not be regarded as receiving anything from it, any more than if one’s money were to be removed from one pocket to another. [Emphasis supplied.]

Hence, to ignore or disregard the corporate entity is in effect to ignore and disregard the purpose and plan of Congress clearly expressed in valid legislation enacted pursuant to the Sixteenth Amendment to the Federal Constitution.

There is no express provision in the act prohibiting any corporation from dealing with its own stockholders, nor does it in any way restrict the actions of any corporation in dealing with its own stockholders. Section 23 (f) of the 1928 Act provides that a corporation may deduct from gross income “ losses sustained during the taxable year and not compensated for by insurance or otherwise.” If Congress had intended not to allow the deduction by a corporation of losses arising from transactions between it and its stockholders it could readily have so stated. Until it does this, we are bound by the statutes that it has enacted, as pointed out in Jones v. Commissioner, supra.

In the construction and application of the Federal tax statutes with which we are here concerned it is not necessary to resort to other statutes, Federal or state, or to the precedents in which they have been construed or applied, for the reason that these Federal tax statutes and the precedents under them upon which we rely in this proceeding are sufficiently comprehensive and plain for our purposes. Furthermore, other statutes, Federal and state, and the precedents under them, are so different in their scope and language that it is doubtful if resort to them would be helpful. No such other statutes or precedents which are helpful have been brought to our attention.

An exception to section 23 (f), supra, is contained in section 118 of the same act, generally referred to as the “ wash sales ” provision. This section is applicable to all sales of shares of stock or securities made under the conditions stated in that section. Had Congress intended also to exclude all losses arising from the sale of stock by a corporation to its stockholder from the losses deductible under section 23 (f), it could as readily have so provided as it did provide in section 118 for the disallowance of so-called “ wash sales ” losses. Furthermore, there are no facts presented in this proceeding which bring it within the exception which is contained in section 118. The parties have stipulated that the securities in question were “ sold ” by the corporation to the petitioner, that delivery thereof was made and the purchase price, based on the market, was paid. As heretofore indicated, section 118 is not applicable to the facts of this proceeding.

In our opinion, therefore, the respondent erred in disallowing the deduction in the sum of $15,100.

The parties stipulated that the amounts of $40,052 and $5,000, respectively, also deducted by the petitioner in its income tax return for the year 1980 and disallowed by respondent, shall be disallowed as losses of the petitioner for the calendar year 1930. Effect will be given to this stipulation in the recomputation.

Eeviewed by the Board.

Decision will be entered imder Bule 50.

Adams,

dissenting: I am unable to agree with the opinion of the majority in this proceeding.

The question here is, Can one in control of all the stock of a corporation so deal with the corporation by buying from it or selling to it as to establish gains or losses at his pleasure which must be recognized for purposes of taxation?

The petitioner here is a creature of the laws of Illinois. The statutes of that state provide that a corporation may be organized by three or more persons, and further that the business of the corporation shall be controlled by a board of directors. At the time of this transaction, D’Ancona was the owner of all the stock of petitioner except two qualifying shares which were controlled by him.

We have before us the corporation, and in order to determine its tax liability it becomes necessary to examine its transaction with its sole owner. The respondent asks us to disregard the corporate entity and to look through the form of the transaction to its substance and to determine the tax status of petitioner from this viewpoint. He contends that for the purposes of this proceeding the corporation and its sole owner are one and the same. Petitioner, on the other hand, contends that its taxable status must be determined as would that of any other corporation, and that its transactions with its sole owner must be judged as though they were ordinary and normal business transactions; as though they were strangers and dealt at arm’s length.

Petitioner bases its contention and the majority report is grounded on the holding in the case of Burnet v. Commonwealth Improvement Co., 287 U.S. 415. That case is readily distinguishable from the situation here. It will be noted that in that case we had before us the corporation which was seeking to deny its own existence for its own purposes. Here, we have the corporation asserting that it and its sole owner are separate entities for the purposes of this case. Here the corporation petitioner asserts that the reasoning in that case denies to the Commissioner the right to disregard its corporate entity. Although a corporation cannot deny its own existence, it does not follow, that its corporate entity may not he disregarded upon the application of other interested parties, such as the Commissioner in this case.

Corporations are legal fictions authorized for the benefit and convenience of the individual citizen, and are, under our economic conditions, necessary in order that commercial enterprises requiring large capital may be promoted and at the same time the liability of the individuals associated therein may be limited.

It is recognized that a corporation is an entity distinct from its stockholders and ordinarily, when used for the legitimate business purposes for which it was created, it must be so dealt with, but the law has never lost sight of the fact that the juridical personality of the corporation is but a collective expression of the real personality of the true owners, and it has always been competent, in a proper case, to disregard the corporate fiction and determine the true owners, who, acting through their representative directors, manage and control the affairs of the corporation. United States v. Phellis, 257 U.S. 156; Labrot v. Burnet, 57 Fed. (2d) 413; Reed v. United States, 51 Fed. (2d) 931; 112 West 59th St. Corp. v. Helvering, 68 Fed. (2d) 397; Southern Pacific Co. v. Lowe, 247 U.S. 330; Gulf Oil Corp. v. Lewellyn, 248 U.S. 71; Superior Oil Co. v. Mississippi, 280 U.S. 390; Shotwell v. Moore, 129 U.S. 590; Hamilton Ridge Lumber Sales Corp. v. Wilson, 25 Fed. (2d) 592. Fundamentally a corporation must, after all, be considered as a collection of human beings, and where, as here, it is owned and controlled by one person, we must recognize that it is in point of fact the alter ego of the individual when it is so used as to make it merely an instrumentality or conduit of the individual for the accomplishment of ends which he would not be permitted to accomplish without it. Cf. Interstate Telephone Co. v. Baltimore & Ohio Telephone Co., 51 Fed. 49; aff'd., 54 Fed. 50; United States v. Milwaukee Refrigerator Transit Co., 142 Fed. 247; Linn & Lane Timber Co. v. United States, 236 U.S. 574. There is a limitation to the doctrine of separate existence and “ it is propei’ly disregarded in cases of fraud, circumvention of contract or statute, public wrong, monopoly and like instances.” Fletcher, Private Corporations, sec. 42. Although corporate entity is more commonly disregarded in cases where the transaction is tainted with fraud, it is by no means limited to such transactions. In Hamilton Ridge Lumber Sales Corp. v. Wilson, supra, the court said:

This principle has not been more clearly stated, perhaps, than by the Supreme Court of Ohio, in State v. Standard Oil Co., 49 Ohio St. 137, 30 N.E. 279, 15 L.R.A. 145, 34 Am. St. Rep. 541, where it is said Í
“ On a question of this kind, the fact must constantly be kept in view, that the metaphysical entity has no thought or will of its own; that every act ascribed to it emanates from and is the act of the individuals personated by it; and that it can no more do an act, or refrain from doing it, contrary to the will of these natural persons, than a house can be said to act independently of the will of its owner; and where an act is ascribed to it, it must be understood to be the act of the persons associated as a corporation, and whether done in their capacity as corporators or as individuals, must be determined by the nature and tendency of the act.”
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Nor, can I agree with the contention of counsel for the bank that this doctrine is applicable only in cases where the corporate entity has been resorted to for purely fraudulent and criminal purposes. I do not find that the rule is subject to any such limitations, but, on the contrary, that it is applicable wherever reason and justice require its application, though the acts of the parties amount to constructive fraud only. 14 Corpus Juris, 59; Clark on Corporations (3d Ed.), p. 10; Marshall on Corporations, p. 16, supra.

Whenever the corporate form is used in an endeavor to evade a statute or to modify its intent, courts will disregard the corporate fiction and look at the substance of the transaction. United States v. Lehigh Valley R.R. Co., 220 U.S. 263; Miller & Lux v. East Side Canal & Irrigation Co., 211 U.S. 293. The former case is in point here. The Lehigh Valley Railroad Co. owned all the stock of the Lehigh Valley Coal Co. The commodities clause of the Hepburn Act made it unlawful for a railroad company to transport in interstate commerce any article or commodity manufactured, mined, or produced by it, or in which it might have any interest, with certain exceptions. In a proceeding brought by the United States against the railroad company, United States v. Delaware & Hudson Co., 213 U.S. 366, the Government alleged that it owned stock in the coal company whose coal it was carrying. The court held that stock ownership by a railroad company in a bona fide corporation, irrespective of the extent of such ownership, was not a violation of the statute. In an amended bill the Government then alleged facts to show that the railroad company had absolute control over the coal company through stock ownership, and was using the coal company as a device in order to evade the provisions of the statute. The Supreme Court thereupon held that while the right of the railroad company as a stockholder to use its stock ownership for the purpose of a bona fide separate administration of the affairs of a corporation in which it has a stock interest may not be denied, the use of such stock ownership so as to commingle its affairs with the affairs of the railroad company brought it within the prohibitions of the statute. Mr. Chief Justice White, in the opinion, said:

In other words, that by operation and effect of the Commodities Clause there is a duty cast upon a railroad company proposing to carry in interstate commerce the product of a producing, etc. corporation, in which it has a stock interest not to abuse such power so as virtually to do by indirection that which the Commodities Clause prohibits.

Here we have an analogous situation. The revenue laws provide that no deduction shall be allowed for any loss claimed from the sale or other disposition of stock where it appears that within 30 days before or after such sale or other disposition the taxpayer has acquired or entered into a contract or option to acquire substantially identical property. The intention of Congress to deny any deduction on account of wash sales of stock is clear, and it applies to all persons. Deductions are in the nature of exemptions and should be strictly construed. Cf. Cornell v. Coyne, 192 U.S. 418; Samuel S. Bloch, 16 B.T.A. 426; aff'd., 42 Fed. (2d) 1013. They are subjects of specific legislation and before a taxpayer can take a deduction he must show facts which clearly entitle him to it under the statute. The burden is on him and this burden is not sustained by the facts in the record before us. To permit a person who owns or creates a corporation which he controls to circumvent the statute by dealing with the corporation is to put him in a preferred class not intended by the statute and not justified by any theory of corporate fiction. I think that the doctrine enunciated by Mr. Chief Justice White in United States v. Lehigh Valley R.R. Co., supra, is applicable here. By the operation and effect of the revenue law there is a duty cast upon a person who controls a corporation through stock ownership not to abuse such power by his personal dealings with the corporation so as to accomplish by indirection that which the statute prohibits. In such a case courts should disregard the corporate fiction and recognize that the individual is in reality dealing with himself. I do not think it was the intention of Congress that a corporation and its sole owner could so deal with each other as to avoid the payment of taxes which either of them would otherwise owe.

Nor do I believe, in viewing transactions between a corporation and its sole owner to determine the rights of other interested parties, such as the Government in this case, that the two should necessarily be regarded as separate entities and the rights of such parties fixed by what the corporation and its sole owner do between themselves.

It is not material that the transaction is bona fide between the corporation and its sole owner, in the sense that title passes from one to the other, and that the nominal consideration was the fair market value, the net result being a mere transfer of assets by the sole owner from one pocket to the other, these assets remaining always under his domination and control.

In the case of Helvering v. Gregory, supra, in an opinion by L. Hand, Circuit Judge, the court says, among other things:

We agree with the Board and the taxpayer that a transaction, otherwise within an exception of the tax law, does not lose its immunity, because it is actuated by a desire to avoid, or, if one choose, to evade taxation. Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes. U.S. v. Isham, 17 Wall. 496, 606, 21 L.Ed. 728 (2 Am. Fed. Tax Rep. 2304), Bullen v. Wisconsin, 240 U.S. 626, 630, 36 Sup. Ct. 473, 60 L.Ed. 830 (3 Am. Fed. Tax Rep. 2944). Therefore, if what was done here, was what was intended by sec. 112(i) (1) (B), it is of no consequence that it was all an elaborate scheme to get rid of income taxes, as it certainly was. Nevertheless, it does not follow that Congress meant to cover such a transaction, not even though the facts answer the dictionary definitions of each term used in the statutory definition. It is quite true, as the Board has very well said, that as the articulation of a statute increases, the room for interpretation must contract; but the meaning of a sentence may be more than that of the separate words, as a melody is more than the notes, and no degree of particularity can ever obviate recourse to the setting in which all appear, and which all collectively create. The purpose of the section is plain enough; men engaged in enterprises — industrial, commercial, financial, or any other — might wish to consolidate, or divide, to add to, or subtract from, their holdings. Such transactions were not to be considered as “ realizing ” any profit, because the collective interests still remained in solution. But the underlying presupposition is plain that the readjustment shall be undertaken for reasons germane to the conduct of the venture in hand, not as an ephemeral incident, egregious to its prosecution. To dodge the shareholders’ taxes is not one of the transactions contemplated as corporate “ reorganizations.”

I think it is entirely immaterial as to whether a corporation was organized for the specific purpose of transferring to it assets and thereby establishing profit or loss, or whether a corporation already in existence was used for that purpose.

The case of Jones v. Helvering, 71 Fed. (2d) 214, seems to be in point and to sustain the prevailing opinion herein. With all due respect to that high authority, I am unable to agree with the conclusion reached in the Jones case.

Under the authorities above cited, and entertaining these views, I believe that the determination of the Commissioner in this case should be sustained.

Lansdon agrees with this dissent.