author: Milliken :

text:
    Leo T. Perls, Petitioner, v. Commissioner of Internal Revenue, Respondent. Adolph Rosenberg, Petitioner, v. Commissioner of Internal Revenue, Respondent. Sara F. Rosenberg, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 9166, 9167, 9936.
    Promulgated June 28, 1927.
    Losses claimed by reason of surrender of stock disallowed due to lack of evidence of the cost of the stock surrendered.

      Joseph R. Little, Esq., for the petitioners.

      Robert A. Littleton, Esq., for the respondent.
    These proceedings result from the determination of deficiencies in income tax for the calendar year 1924, in amounts as follow: for Leo T. Peris, $211.91; for Adolph Rosenberg, $668.22; for Sara F. Rosenberg $88.39. Upon motion made and granted, the appeals were consolidated for hearing and decision. Rut one issue is involved, and is common to all appeals save in the amount of deduction claimed. Error is assigned in that the Commissioner, in determining net income of the petitioners for the year 1924, disallowed deductions of $16,250 by Peris, $26,250 by Adolph Rosenberg, and $26,250 by Sara F. Rosenberg, claimed as losses sustained during the year through the surrender to Adolph Rosenberg & Co. Inc., a corporation, of shares of its own preferred capital stock.
    FINDINGS OF FACT.
    Petitioners are individuals residing at New York City. A. Rosenberg & Co., Inc., was organized in 1919 for the purpose of taking over the assets and continuing the business of A. Rosenberg & Co., a copartnership composed of the petitioners. Upon incorporation, Blanche T. Peris and the petitioners became the sole stockholders. On January 1, 1924, the outstanding capital stock in the corporation was held as follows: Adolph Rosenberg 88214 shares of Class A preferred stock, 11 shares of common stock; Sara F. Rosenberg, 882% shares Class A preferred stock; Leo T. Peris, 1G2% shares Class B preferred stock, 9 shares common stock; Blanche T. Perls, 162% shares Class B preferred stock.
    In December, 1924, the stockholders caused to be filed an application for an extension of the corporation’s charter for a term of one year from January 2, 1925, and by agreement among them, stockholdings were rearranged as follows: capital stock was turned into the corporation by Adolph Rosenberg 252% shares of Class A preferred stock, by Sara F. Rosenberg 252% shares of Class A preferred, by Leo T. Perls 162% shares of class B preferred and 2 shares of common, by Blanche T. Perls 162% shares of Class B preferred, and Leo T. Perls transferred to Adolph Rosenberg one share of common stock. At the end of the calendar year 1924, the stockholdings were as follows: Held in the treasury of Adolph Rosenberg & Co., Inc., 505 shares of Class A preferred stock, 325 shares of Class B preferred, 2 shares of common stock; held by Adolph Rosenberg 630 shares of Class A preferred and 12 shares of common stock; held by Sara F. Rosenberg 680 shares of Class A preferred stock; held by Leo T. Perls 6 shares of common stock. On December 31, 1924,, the following agreement was entered into:
    Agreement made this 31st, day of December, 1924, between Adolph Rosenberg, party of the first part, hereinafter referred to as “Rosenberg”, Leo T. Perls, party of the second part, hereinafter referred to as “Perls”, both of the City and State of New York, Adolph Rosenberg & Co., Inc., a domestic corporation, party of the third part, hereinafter referred to as the “corporation”, Sara E. Rosenberg, wife of the said Adolph Rosenberg, party of the fourth part, and Blanche M. Perls, wife of said Leo T. Perls, party of the fifth part.
    In Consideration of the mutual covenants hereinafter expressed, the parties agree:
    I. The minutes of a certain meeting of stockholders and directors of the Corporation, held on December 29th, 1924, and all resolutions adopted and all things done at said meeting are hereby accepted and approved with the same force and effect as if done pursuant to the provisions of this Agreement. Said minutes are annexed hereto as Exhibit A.
    II. If by May 31, 1925, the net assets of the Corporation are not in excess of $126,000, then the parties hereto will vote their stock in the corporation and do all things necessary and proper to effect the dissolution of the Corporation as of July 1, 1925.
    III. All of the parties to this agreement who hold preferred stock of the Corporation herewith waive all right to dividends accrued or to accrue on such preferred stock to and including the 31st day of December, 192-1.
    IY. All dividends hereafter to be declared and paid on the common stock of the Corporation held by Perls shall be paid to Rosenborg- until the sum of $8,193.18 has been paid to Rosenberg in this manner. The said sum is arrived at by computing- the respective losses for the year 1924, chargeable to Rosenberg and Perls pursuant to agreement between them and by making the adjustments in stockholdings more particularly specified in the minutes of the said meeting- of stockholders and directors held on December 29th, 1924.
    Y. The Board of Directors shall continue to consist of three directors who shall be Adolph Rosenberg, Leo T. Perls and Edward M. Opper.

      If, for any reason, the said Opper shall become incapacitated or be removed as a director, or shall resign or die, then Enrico N. Stein shall be elected a director in his place. The officers of the Corporation shall be: Adolph Rosenberg, President; Leo T. Peris, Secretary and Treasurer, and Edward M. Opper, Assistant Secretary and Assistant Treasurer.
    The parties hereto agree, so far as they may legally do so, to vote and to do and perform all things necessary to effectuate the provisions of this agreement, and to assure the continuance of the persons named as directors and officers of - the Corporation for the period of this agreement.
    VI. Rosenberg shall be employed by the Corporation as Manager, at a salary of fifteen thousand dollars per annum, payable in equal monthly installments, at the termination of each month. Peris shall be employed by the Corporation as Assistant Manager, at a salary of ten thousand dollars per annum, payable in equal monthly installments, at the termination of each month.
    VII. The By-Laws shall have and/or continue to have the following provisions :
    (1) That checks shall be signed by either the president or the treasurer of the Corporation.
    (2) That promissory notes, bills payable, bills of exchange and acceptances must be signed by both the president and treasurer of the Corporation.
    In case of the absence, death or incapacity of Rosenberg checks may be signed by said Opper or his successor, and promissory notes, bills payable, bills of exchange and acceptances shall be signed by both said Opper or his successor, and the said Peris.
    In case of the absence, death or incapacity of said Peris, promissory notes, bills payable, bills of exchange and acceptances shall be signed by both said Opper or his successor and the said Rosenberg.
    (3) Contracts for the purchase of merchandise amounting to more than ten thousand dollars in the aggregate, in one season, must be approved by both the president and treasurer. Each employment contract involving more than three thousand dollars annually must be approved and signed in similar manner, but any employment contract involving less than three thousand dollars in one transaction, or a series of transactions, may be signed by either the president or treasurer.
    VIII. The provisions in pages 5, 6, 7 and the first three lines of page 8 in paragraph “ VI ” of the agreement between these parties, dated October 29th, 1920, relating to inventory, shall, so far as consistent with the provisions of this agreement, be and be deemed part of this agreement with the same force and effect as if herein at length set forth.
    IX. The provisions of paragraph “ VII ” of the said agreement between the parties hereto, dated October 29th, 1920, shall be and be deemed part of this agreement insofar as said provisions are consistent with this agreement; except that the insurance policy upon the life of Leo T. Peris is and shall continue to be in the sum of $35,000, and not in the sum of $60,000, as specified in the said agreement dated October 29th, 1920.
    If upon the death of either Rosenberg or Peris the survivor shall elect to purchase the stock of the decedent — then the $35,000 collected on the insurance policy on the life of the deceased shall be applied to the payment of the first installments due for the stock so purchased. But if the surviving party does not elect to purchase the stock of the deceased, then the said $35,000 shall be paid to the corporation. The remaining provisions of the said agreement dated October 29th, 1920, with respect to the death of the parties to this agreement and the purchase of stock of deceased parties shall remain in full force and effect insofar as they may be consistent with the specific provisions of this agreement.
    X. Each of the individual parties hereto further agrees, during the continuance of the corporate existence, and while he or she is a stockholder of the Corporation, not to make, endorse or accept in his or her individual name, or in the name of the Corporation, any note, acceptance, bill, draft or check as accommodation for any person or persons, firm, association or corporation whatsoever, or enter into any bond as surety or guarantor or otherwise become surety for any person or persons whatsoever, without the written consent of the other of the individual parties hereto, and further, that neither he nor she will not, without such written consent of the other of said individual parties hereto, pledge his or her stock in the Corporation or hypothecate the same in any manner, or enter into any speculative deal or transaction, or be interested, directly or indirectly, in any speculative account.
    XI. Each of the individual parties hereto severally does covenant and agree with the other individual parties hereto, not to sell or offer for sale, pledge, give away or dispose of except as hereinafter indicated, any shares of the stock of Adolph Rosenberg & Co., Inc., preferred or common, now or hereafter owned by him or her, and/or any right or rights to purchase or acquire any of said stock, to any person, firm or corporation until he or she, as the case may be, shall first deliver to the other individual male party to this agreement, a notice in writing that he or she desires to sell all or any portion of the stock-holdings of both the husband and also of the wife of the party or parties so offering said stock, preferred or common, and the other male party hereto shall be entitled to purchase all but not a part of the said so offered stock at its book value as of the inventory date next preceding the offer.
    Nothing in this agreement shall prevent any individual party hereto who now owns or who shall hereafter own any preferred capital stock of Adolph' Rosenberg & Co. Inc., or who shall of record appear as a holder of any of the preferred capital stock of the Corporation, from freely assigning or transferring, or reassigning or retransferring either in whole or in part any such of the preferred capital stock from husband to wife, or from wife to husband or back from wife to husband, or back from husband to wife, and the said assignments, reassignments, transfers and retransfers shall not in any way be limited by the terms or conditions of this agreement except that nothing in this paragraph is intended or shall be construed to give to any of the said holders of the preferred capital stock the right to assign or transfer, reassign or retransfer or otherwise dispose of any part of the said preferred capital stock otherwise than as herein specifically limited, and back to the original assignor and all of the said preferred capital stock shall be otherwise subject to all of the other terms and conditions of this agreement.
    XII. Book value, as used in this agreement in reference to any option to purchase stock, is hereby defined to include salary accrued and payable, and the accumulated dividends on the preferred stock of the party whose stock is so purchased.
    XIII. No officer, agent or employee shall be permitted to make an overdraft, except and unless he shall be authorized so to do by a vote of at least two-thirds of the board of directors at a regular or at a special meeting of the board, called for said purpose.
    XIV. This agreement shall be deemed to supersede the said agreement between the parties hereto, dated October 29th, 1920, except insofar as certain provisions of said agreement are made part hereof by the terms hereof.
    XV. This agreement shall continue in force and effect from the 31st day of December, 1924, to the 31st day of December, 1925.

      In Witness Whereof, tlie parties of tlie first, second, fourth, and fifth parts hereto have hereunto set their hands and seals, and the party of the third part has caused this instrument to be executed by its president, and its corporate seal to be hereunto affixed, the day and year first above written.
    In presence of:
    GJ Adolph Rosenberg [l. s.]
    GJ Leo T. Perls [l. s.]
    GJ Sara F. Rosenberg [l. s.]
    GJ Blanche L. Perls [l. s.]
    Adolph Rosenberg & Co. Ino.,
    GJ By Adolph Rosenberg,

      President, [seal]
    SPECIAL MEETING OF STOCKHOLDERS AND DIRECTORS OE ADOLPH ROSENBERG & CO. INC.
    Minutes of Special joint meeting of the Stockholders and Directors of Adolph Rosenberg & Co. Inc., held at the office of the company, No. 1 Bond Street, Borough of Manhattan, New York City, on Monday, December 29, 1924, at 10 a. m.
    Present :
    Adolph Rosenberg
    Sara F. Rosenberg
    Leo T. Perls
    Blanche L. Perls, and
    E. M. Opper.
    Upon motion duly made and seconded, Adolph Rosenberg was elected Chairman and Leo T. Perls Secretary of the meeting.
    The Secretary presented a written waiver of notice of this meeting signed by all of the directors and stockholders of the corporation, and upon motion duly made and carried, it was
    Ordered that the same be prefixed to the minutes of this meeting.
    The President directed attention to the extension of the Company’s corporate existence for a further term of one year from January 2, 1925, and stated that the certificate of extension was filed with the Secretary of State on October 14, 1924, and with the New York County Clerk on October 15, 1924.
    The Chairman then made a statement concerning the impairment of the company’s capital, and stated that by reason of losses sustained in the business of the company in the year 1924, the company’s capital had been impaired to the extent of $85,000, so that the net worth of the corporation .has been reduced from $211,000 to $120,000. He further stated that in view of an outstanding agreement between Adolph Rosenberg and Leo T. Perls, (the holders of all of the Company’s common stock) which provided for an apportionment of profits and losses, it had been decided to rearrange the stockholdings as follows:
    1. Leo T. Peris to surrender 1 share common stock to Adolph Rosenberg and 2 shares common stock to the Corporation.
    2. Adolph Rosenberg to surrender 252% shares Class A Preferred stock of the aggregate value of $25,250 to the Corporation.
    8. Sara F. Rosenberg to surrender 252% shares Class A Preferred Stock of the aggregate value of $25,250 to the Corporation.
    4. Leo T. Perls to surrender to the corporation 162% shares Class B Preferred stock of the aggregate value of $16,250.
    5. Blanche L. Perls to surrender to the corporation 162% shares Class B Preferred stock of the aggregate value of $16,250.

      Tile chairman further stated that when all these surrenders have been effected, the corporation’s stock will be held, as follows:
    1. Adolph Rosenberg & Oo. Inc. will hold 2 shares common stock, 505 shares Class A Preferred stock, and 825 shares Class B Preferred stock.
    2. Adolph Rosenberg will hold 12 shares of common stock and 630 shares Class A Preferred stock.
    3. Sara F. Rosenberg will hold 630 shares Class A Preferred stock.
    4. Leo T. Peris will hold 6 shares of common stock.
    Upon motion duly made and unanimously carried, it was
    Resolved, that the changes in the stockholdings hereinabove in this meeting outlined by the Chairman, be and the same hereby are ai)proved in all respects insofar as they affect his Corporation, and that any of the officers of the Corporation be and hereby is authorized and directed to do and perform all things necessary or desirable to effectuate the purposes of these resolutions, and to consummate the said changes in stockholdings.
    Upon motion duly made and carried, it was
    Resolved, that this Corporation employ Adolph Rosenberg as general manager for the period of one year from January 1, 1925, at an annual salary of $15,000, payable in equal monthly installments at the end of each month, and that any of the officers of this corporation be and hereby is authorized to sign any agreements and to do all things deemed necessary to effect the purposes of this resolution.
    Upon motion duly made and carried, it was
    Resolved, that the Corporation employ Leo T. Peris as assistant general manager for the period of one year from January 1, 1925, at an annual salary of $10,000 payable in equal monthly installments at the end of each month, and that any of the officers of (his corporation he and hereby is authorized to sign any agreements and to do all things deemed necessary to effect the purposes of this resolution.
    Upon motion duly made and carried, it was
    Resolved, that a certain agreement dated December 31st, 1924, a copy of which is annexed in the minutes of this meeting, be and the same hereby is ratified and confirmed insofar as said agreement affects this corporation, and that any of the officers of this corporation be and the same is hereby authorized and directed to do all things necessary to effectuate the provisions of this agreement.
    Upon motion duly made and carried, it was
    Resolved that no dividends or distributions shall at any time be declared or paid on any stock owued by the corporation and that such stock so owned shall have no voting rights or powers.
    There being no further business before the meeting, upon motion duly made and carried, the meeting adjourned.
    Adolph Rosenberg,

      Chairman.

    Leo T. Perls,

      Secretary.

    On December 31, 1923, the financial statement oí the corporation showed assets of $281,039.93, liabilities of $103,432.72, capital stock of $211,000, and a deficit of $33,392.79. The statement as of December 15, 1924, showed assets of $199,396.07, liabilities of $73,396.07, and capital stock of $126,000, and a loss for 1924 of $50,905.09.
    The corporation was dissolved in 1925.
   OPINION.

Milliken :

The sole issue is whether the three stockholders of A. Rosenberg & Co., Inc., sustained deductible losses in the year 1924 by reason of the surrender Jjy them to the corporation of certain amounts of preferred stock. Even assuming, without admitting, that the petitioners did suffer losses, we are unable to determine the amount thereof for we have no evidence of the cost to the petitioners of the stock surrendered.

Judgment will be entered for the resfondent.


source: Caselaw Access Project

author: Milltken:

license: Public Domain

text:
    Alling & Cory Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6606.
    Promulgated June 28, 1927.
    1. Amount of current advertising expense paid or accrued determined and deduction therefor allowed.
    2. Amounts paid or accrued for an asset having a useful life and value extending beyond the year in controversy not allowed as a current ordinary and necessary expense.

      II. A. Mihills, G. P. A. for the petitioner.

      Thomas P. Dudley, Jr., Esq., for the respondent.
    This proceeding results from the determination of deficiencies for the fiscal years ended June 30, 1917, 1918, 1919, and 1920, aggregating $120,614.53. Errors are assigned as follows: (1) Failure to allow an addition to invested capital for the fiscal year 1920 for a sum of $400,000 paid in to the corporation for preferred stock on December 1, 1919; (2) the Commissioner disallowed a deduction for the fiscal year ended June 30,1920, of $95,211.22, expended for advertising purposes; (3) the Commissioner deducted a tentative tax in determining current earnings available for dividends in the fiscal years 1917 and 1918; (4) in computing the 4 per cent tax for the fiscal year 1917, the failure to reduce the taxable net income for the fiscal period to the proportion applicable to the six-month period ended June 30, 1917, before deducting the excess-profits tax; (5) failure to compute the tax under section 328 of the Revenue Act of 1918 for the fiscal years 1918, 1919, and 1920; (G) failure to recognize the expiration of the period within which the deficiency for the fiscal year 1917 may be determined.
    At the hearing, the respondent admitted error as concerns the first issue and agreed with petitioner to allow in invested capital for the fiscal year 1920, the effective average of $400,000 paid in for capital stock on December 1, 1919.

      The fifth assignment of error was stricken from the petition on motion of respondent to make same more definite and certain, with leave for petitioner to file a petition incorporating an amended paragraph specifically stating the facts. This the petitioner failed to do, and the issue was abandoned. The sixth assignment of error was withdrawn by petitioner.
    FINDINGS OF FACT.
    Petitioner is a New York corporation, with principal office located at Rochester, and is a wholesale dealer in paper. Its stock contains from 4,500 to 5,000 different types and grades of paper. In connection with the sale of paper, it is necessary to supply the trade with samples of the various grades made up in book form. New sample books are prepared and issued to the trade every few years. About February 1, 1919, work was commenced on a set of sample books containing all the types and grades of paper to be distributed, to be housed in permanent wooden cabinets. The cabinet was to be an open box with several compartments and drawers, the compartments to hold the loose-leaf binders in which were placed the samples of various grades of paper. The samples were to be placed in a permanent binder made from heavy binder’s board and covered with library buckram. On each sheet was to be printed the name, grade, weight, color, and finish. A carefully prepared index was to accompany the samples, showing the prices of the product. Petitioner referred to the cabinet and contents as its sample cabinet, and to their customers they termed it “A Silent Salesman.” A descriptive pamphlet was issued prior to the shipping of the cabinet and its contents, which reads as follows:
    Witliin two or three days one of our “ Silent Salesmen ” will he sent to your office for the purpose of helping you select the right paper for every job of printing you may do.
    These “ Silent Salesmen ” are in reality new, complete sets of paper samples arranged in loose-leaf binders, bound in Brown Library Buckram and furnished in a substantial oak cabinet.
    The preparation of these samples has required considerably more than a year,, and we, therefore, desire that every customer may secure full and complete service from his set.
    To this end, we suggest that when your cabinet arrives, you look through each book carefully, read the information given on the index pages, and in general become acquainted with the plan and arrangement of the set. This will make you familiar with the location of the various stocks and enable you to turn to any sample without delay.
    The samples are arranged in loose-leaf-form in order that they may be kept up to date at all times. From time to time, as new lines are added or changes made in other lines, new samples will be sent you for insertion in the books. In this way you can always feel sure that you have accurate samples of our stocks.

      By June 30, 1920, the printing necessary to tbe indexing of the binders, had been practically completed, as well as the cutting, punching, and fitting of the sheets in the binders, and two sets of books had been received by petitioner. The first shipment of cabinets to the trade was made in July, 1920, and approximately 1,600 cabinets and contents had been shipped by December 31, 1920.
    If the customer discontinued handling petitioner’s product, it was the custom to reclaim the cabinet and contents, or if a customer withdrew from business, the cabinets and contents were reclaimed.
    Petitioner kept its books of account on the accrual basis and charged on its books of account as of June 80, 1920, the sum of $115,750.66 as advertising expense, which sum included the cost of the cabinets and contents of $87,905.90, and $27,844.76 was current advertising expense for the fiscal year ended June 30, 1920.
    In computing the 4 per cent tax for fiscal year ended June 30,1917, the respondent deducted from the entire net income, $592,563.83, the profits tax, $65,660.81 (the same being one-half of an amount of profits tax- — $131,321.62—computed for the full year), multipled the remainder by 4 per cent and'added one-half of the product to the tax liability as representing the amount of the 4 per cent tax.
    In computing the current earnings available for dividends, the respondent deducted tentative taxes as follows: for the fiscal year ended June 30,1917, $83,892.61, and for the fiscal year ended June 30,
    1918, $82,902.99. In computing invested capital, the respondent deducted amounts attributable to payment of dividends as follows: for the fiscal year ended June 30, 1917, for the dividend paid June 20,1916, $92,928.90, and for dividend paid August 22,1916, $45,781.94.
   OPINION.

Milltken:

The second issue relates to the deduction claimed by petitioner for the fiscal year ended June 30,1920, of amounts paid or accrued as so-called advertising expense. We have set forth in the findings of fact, the total amount paid or accrued and have accepted the analysis submitted by petitioner, i. e., $87,905.90, related to the cabinets and their contents and $27,844.76 related to current advertising expense. Of the latter sum, the respondent has allowed $20,539.44. The remainder of the sum paid or accrued for current advertising, or $7,305.32, should be allowed as a deduction.

A careful consideration of the evidence convinces us that the cabinets and contents had a useful life and value extending beyond the fiscal year ended June 30, 1920. It was the custom of petitioner to issue its book of samples every few years, and as early as February 1, 1919, it began to make pfians for the issuance of a book of more permanent form in library buckram binding and to house it in a permanent oak cabinet. Practically all the cabinets and contents are, to this day, in the hands of its customers, and one of the witnesses testified as to the value of its “ Silent Salesmen ” as follows:

We considered it of much more value tlian a corps of salesmen because without it we could not really do business.

The cabinet and its contents was more than a mere current advertising display and its value in use attaches to a considerable extent directly to the production of income over the years of its .useful life. We were not advised as to the exact useful life of the cabinets or of the contents that were housed therein. The respondent did not err in his refusal to allow the deduction claimed.

In the third issue, the action of the respondent in reducing current earnings available for dividends, through the accrual of a tentative tax, was in error. Appeal of L. S. Ayers & Co., 1 B. T. A. 1135.

In the fourth issue, the action of the respondent is sustained. Appeal of Yokohama Ki-Ito Kwaisha, Ltd., 5 B. T. A. 1248.

Judgment will Toe entered on 15 days’ notice, wider Rule 50.


author: MillikeN: SterNiiageN,

text:
    National Sugar Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10605.
    Promulgated June 28, 1927.
    Petitioner in year 1917 purchased its own bonds for less than the amount for which they had been issued. Held, that it realized no taxable gain from the transaction.

      R. Dorsey Watkins, Esg., for the petitioner.

      W. Frank Gibbs, Esg., for the respondent.
    This proceeding results from the determination of a deficiency for the year 1917, in the amount of $4,127.28. The parties filed a stipulation concerning the facts and our findings of fact conforms to the stipulation.
    findings of fact.
    Petitioner is a corporation organized and existing under the laws of the State of Colorado, with principal offices at 708-710 Equitable Building, Baltimore, Md. Petitioner, in the year 1917, purchased for retirement, $50,000 face value of its second mortgage (4 per cent income) bonds, for $33,333.33, and reported the difference between the par value and the purchase price ($16,666.67) as income for that year. The respondent has treated the amount of $16,666.67 as taxable income for the year 1917. There was also reported as taxable income in the year 1917 and so treated by respondent, an item of $600, representing the difference between the par value and the purchase price of petitioner’s first mortgage bonds purchased for retirement during the year 1917.
   OPINION.

MillikeN:

The sole issue relates to the inclusion in income for the year 1917, of the purported gain realized from the purchase and retirement by petitioner of its own bonds. Upon the authority of the decisions in the Appeals of Independent Brewing Co., 4 B. T. A. 870, and New Orleans, Texas & Mexico Ry. Co., 6 B. T. A. 436, and Houston Belt & Terminal Ry. Co. v. Commissioner, 6 B. T. A. 1364, the inclusion in income of the amount set forth in the findings of fact was in error.

Judgment will be entered on 15 days’ notice, under Bule 50.

SterNiiageN,

dissenting: In dissenting as I did from the Independent Brewing Co. and other cases cited, I refrained from stating the reasons for my dissent largely because I did not know the extent to which the decisions would be regarded as announcing a principle, and if confined within the scope of their own facts it seemed without sufficient importance to justify discussion. But the succinct statement in the foregoing opinion of the principle which it is said has become established law, leads me to express more fully my views.

It will- be noted that the facts stated are simply that the petitioner in 1917 retired $50,000 of its bonds for $33,333.33 and originally reported the difference of $16,666.67 as income. None of the circumstances of the underlying transaction are revealed, so we may reasonably assume that the $50,000 was actually borrowed. So far as we know, the $50,000 may have been borroAved in cash within the same or the preceding year. I assume this to illustrate what I regard as the error of the decision. Indeed, in the N. O., T. & M. Ry. Co. case, 6 B. T. A. 436, the period was almost as short as this. I take it that the fact that the debt was evidenced by bonds instead of notes or open account is not significant. Hence it follows that one who, not being on the receipts basis, incurs a deductible obligation such as for the purchase of stock in trade, and shortly thereafter in the following year discharges that obligation either to the original obligee or his assignee, for less than its face amount, escapes tax upon the difference because it is said to be not a “ gain.” Surely if one borrows $100 and uses it in business, and shortly thereafter acquits himself of the obligation by paying $50, both “the man on the street ” and the economist will recognize a gain. But under the law no income can be derived at the time of borrowing although it is then that the actual receipt occurs. It is only when the payment is made in discharge that the gain can be realized.

I have given a bald illustration, but it seems to me to be within the principle so broadly laid down by the majority. Of course there will be cases which upon their own facts should properly escape tax because, all things considered, no income can be found. But I see nothing peculiar in this case. It is a pure case, which is decided on a principle.

This principle is said to come from the Supreme Court’s decision in Bowers v. Kerbaugh-Empire Co., 271 U. S. 170; 5 Am. Fed. Tax Rep. 6014, but I see no reason to give that decision such a broad significance. I confess that a refined analysis of that decision gives some authority for the principle stated, but the court was undoubtedly influenced to a substantial extent by the equitable consideration that at the time the tax was sought to be imposed, the result of the whole transaction was a loss,” and “ the fact that the borrowed money was lost, and that the excess of such loss over income was more than the amount borrowed.” The opinion concludes with the statement that “the mere diminution of loss is not gain, profit or income.” This is far from saying that the diminution of liability in a going business is not gain, and I can not believe that the Supreme Court intended to have its decision so understood.

When the statute expressly taxed all gains and income from whatever source, and intended thereby to use the constitutional power to the full extent, it seems to me to have been broad enough to include such a gain as this and tax it at the only time when it is realized.

Smith concurs in the dissent.


author: Milltken :

text:
    W. N. Stevenson Co., Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 8854.
    Promulgated June 28, 1927.
    1. Deductions claimed not allowed due to lack of evidence.
    2. Value of good will purchased not proven.

      Gyrus Williams, O.P. A., for the petitioner.

      Thomas M. Wilkins, Esq., for the respondent.
    This proceeding involves a redetermination of income and profits taxes for the year 1921, in the amount of $2,104.86. The errors assigned are (1) disallowance as a deduction of $150 paid to a salesman in appreciation of his services; (2) disallowance as a deduction of a worthless debt reserve in the amount of $2,809.44; (3) elimination from invested capital of an item of $10,250, representing good will acquired from W. N. Stevenson & Co.; and (4) certain errors in the adjustment of invested capital.

      BINDINGS 01? PACT.
    The petitioner is a New York corporation, with its principal office at 1115 Broadway, New York City. Petitioner was organized in 1913, and in the early part of that year, acquired the business of W. N. Stevenson who for many years had successfully conducted an umbrella manufacturing business under the name of W. N. Stevenson & Co. At the date of its organization, petitioner issued $20,000 par value common stock to represent what it considered the value of the good will thus acquired. The said good will had no value.
    The petitioner, in the year 1921, gave $150 to one of its salesmen.
   OPINION.

Milltken :

This petitioner has failed to prove the facts which it alleged in its petition and has attempted to prove facts which it has not alleged. Thus, petitioner has produced no evidence whatever as to the following alleged errors of which it complains, i. e., the gift of $150 to one of its salesmen; its alleged bad debt reserve, and the alleged errors with respect to adjustment of invested capital. On the other hand, while alleging in its petition that the good will which it seeks to include in its invested capital was acquired when it took over the business of W. N. Stevenson & Co., it attempts to prove that it acquired additional good will when it jnirchased in 1918 the business of Arnold, Schiff & Co. There is no allegation in the petition relative to this purchase.

While, by reason of the answer of respondent, it appears that petitioner issued $20,000 par value of its common stock as the measure of the value of its good will, it nowhere appears to whom this common stock was issued. It does not appear and we have not the right to presume that the good will was paid in for this stock. From all that appears in the record, Stevenson may have sold his business for cash. Neither has petitioner produced proof of the value, if any, of the good will which it seeks to include in its invested capital, or whether such good will was acquired from Stevenson or from Arnold, Schiff & Co. None of the witnesses put a definite value on the good will, nor are there any facts in the record from which the value of the good will may be deduced. The respondent has denied that the good will had value. The burden to prove, not only that the good will had value, but what that value was, rests upon petitioner.

There are many relevant facts stated in the brief filed by the petitioner, but, unfortunately, he has failed to place these facts in the record. We can only determine questions on fact presented by the record. We can not decide cases on statements contained only in briefs.

Judgment will be entered for the respondent.


author: Littleton :

text:
    Laurence D. Miller, Petitioner, v. Commissioner of Internal Revenue, Respondent. Laurence D. Miller, Executor, Estate of Robert G. Miller, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 8773, 8774.
    Promulgated June 28, 1927.
    During the period from 1907 to 1910 petitioners were members of a partnership, which kept its books upon the accrual basis and whieh partnership sustained losses, for which losses petitioners in 1910 gave their promissory notes to the creditors of the partnership. Held, that petitioners were not entitled to deduct the amounts paid on the notes in 1919 and 1920 as losses sustained in those years.

      Franldin O. Parks, Esq., for the petitioners.

      Thomas M. Wilkins, Esq., for the respondent.
    In the case of Laurence D. Miller the Commissioner determined deficiencies of $7,073.99 for 1919 and $368.13 for 1920, and in the case of Laurence D. Miller, executor of the estate of Robert G. Miller, he determined an overassessment of $68.52 for 1919 and a deficiency of $4,224.97 for 1920. Both proceedings involve the same question and were consolidated for hearing and decision. Petitioners claim that they are entitled to a deduction in 1919 and in 1920 of one-third of the operating losses sustained by the partnership of which they were members during the period 1907 to 1910, for which losses partnership notes were given in 1910 and either wholly or. partially paid in the taxable years. These deductions were disallowed by the Commissioner. The facts are found as stipulated.
    findings of fact.
    Laurence D. Miller, Robert G. Miller, Richard G. Miller, and Garland B. Miller were brothers, living in Falfurrias, Tex., and in 1907 entered into a partnership under the name of Miller Brothers Co. and engaged in the business of buying and selling land in connection with a colonization scheme. The partnership became insolvent in 1910 on account of operating losses sustained during the period from 1907 to 1910. In 1910 the partnership was .liquidated and dissolved and the combined assets of the partnership and of the four individual partners were insufficient to discharge the obligations of the partnership. Accordingly, certain notes were given in the name of the partnership which were executed and renewed from time to time by members of the partnership.
    In 1917 a new partnership was formed composed of the same members as the former partnership of Miller Brothers & Co. and the new partnership undertook the same project and business as that theretofore carried on by the former partnership.
    In 1918, Garland B. Miller died and the surviving brothers carried on the business as partners.
    In 1922, Bichard G. Miller died, and in 1924 Bobert G. Miller, whose estate is one of the petitioners herein, died.
    During all of the periods elapsing between 1910 and 1919 the notes given in 1910 were continued in force and effect by renewals from time to time and were legally enforceable against the several successive partnerships and the individual members thereof. During all of this period none of the partners were able to discharge the obligation for which the notes had been given in 1910, but in 1919 the partnership, then consisting of the two petitioners to these proceedings, and Bichard G. Miller, paid $2,874.65 of the principal amount of the aforesaid notes and in 1920 paid $51,000 of the principal amounts of the notes.
    The partnership at all times kept its accounts and made its returns on the accrual basis and the partners kept their accounts and made their returns on the basis of cash receipts and disbursements.
    Each of the petitioners having been a one-third partner in 1919 and 1920, when these payments were made, claimed a deduction of one-third of the amounts of the payments as losses deductible from gross income for 1919 and 1920 respectively.
    The partnership which was dissolved in 1910 sustained a net loss through its operations accumulated for the entire period of its existence of an amount equal to or greater than the aggregate sum of the deductions aforesaid, which were taken on the return of the partnership for the year 1919 and on the return of the partnership for the year 1920, representing the payments in those years of notes given by the partnership in 1910.
   OPINION.

Littleton :

The Board is without jurisdiction to make a determination as to the year 1919 in the proceeding of the estate of Bobert G. Miller, in which the Commissioner has held an overassessment. Cornelius Cotton Mills, 4 B. T. A. 255.

Section 214 (a) (4) of the Revenue Act of 1918 provides that in computing net .income there shall be allowed as deductions losses sustained during the taxable year when not compensated for by insurance or otherwise, if incurred in the trade or business, and the question in these proceedings is whether a deductible loss was sustained in 1919 and 1920 when the partnership, of which these petitioners were members, paid in those years certain notes given by another partnership in 1910 of which they were also members. We think there was not. Gains and losses of a partnership following the accrual method of accounting were gains and losses of partners notwithstanding the partners followed the receipts and disbursements method of accounting. J. A. Bentley, 5 B. T. A. 314; Percival H. Truman, 3 B. T. A. 386; Maxwell E. Bessell, 3 B. T. A. 567; Anton M. Meyer, 3 B. T. A. 1329.

The business of the partnership is the individual business of the several members thereof, they were jointly and severally liable for the obligations of the partnership unless properly limited, which was not true in these cases, and the profits of the partnership belong to the partners as soon as earned. Whatever loss the partnership of which these petitioners were partners sustained prior to the taxable years was the loss of the individual partners, and the fact that notes enforceable against the individual partners were given in 1910 and not paid until 1919 and 1920 did not, in the opinion of the Board, postpone the loss until the later years. These proceedings are to be distinguished from the case of Herschel V. Jones, 1 B. T. A. 1226. The Jones case concerned the agreement of the other partner in 1904 to reimburse another partner for the loss of his investment, which agreement was without consideration and was not enforceable. It was carried out in 1920 by the payment of a specified amount which the Board allowed Jones to deduct in 1920 as a loss. The amount which Jones agreed to pay Hill was in no wise a loss of Jones in 1924 but was a loss of Hill just as we think the loss of the Miller Brothers partnership when it failed in 1910 was the loss of the individual partners thereof.

Judgment will he entered for the respondent in both proceedings.


author: Tkussell:

text:
    Reliance Manufacturing Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6021.
    Promulgated June 28, 1927.
    1. JURISDICTION. — Under the provisions of section 283(f) of the Revenue Act of 1926, the Board has jurisdiction in a case in which a jeopardy assessment was made in February, 1924, and a claim for abatement was made, considered, and finally rejected on July 30, 1925.

      2. Statute of Limitations. — Where tentative return, Form 1031-T, was filed on March 13, 1919, and the return, Form 1120, as required by law, was filed on June 16, 1919, held, that the 5-ycar period of limitation provided by section 250(d) of .the Revenue Act of 1921, began to run at midnight, June 16,1919, under authority of the Appeal of Dallas Brass & Copper Co., 3 B. T. A. 856.
    3. Where an assessment was made in February, 1924, within the 5-year period of limitation provided by section 250(d) of the Act of 1921, and the Revenue Act of June 2, 1924, was enacted prior to the expiration of that 5-year period, and the Commissioner has not as yet begun a suit or other proceeding for the collection of the tax, held, that section 278(d) of the Revenue Act of 1924 is not retroactive and the collection of the tax involved in this proceeding, by suit in court or by distraint proceedings, is barred and there is no deficiency.

      Herbert G.'Mayer, Esq., and Oarl Meyer, Esq., for the petitioner.

      J. W. Fisher, Esq., for tlie respondent.
    This proceeding is from the Commissioner’s determination of a deficiency in income and profits taxes for the calendar year 19Í8, in the amount of $62,542.66.
    The Commissioner has raised the question of the Board’s jurisdiction on the ground that he has not since the enactment of the Eevenue Act of 1924 determined that any assessment should be made against this petitioner for the year 1918.
    The petitioner alleges that the collection of the proposed additional tax is barred by the statute of limitations. Petitioner claims that in the event the tax is not barred, it is entitled to have its profits tax computed under the provisions of section 328 of the Eevenue Act of 1918.
    FINDINGS OF FACT.
    The petitioner is an Indiana corporation with its principal office at Chicago, Ill.
    In a letter dated February 8, 1924, the petitioner was advised by the Commissioner that an additional tax for the year 1918 would be assessed “ without giving the usual thirty-day notice, as provided for in section 250(d) of the Eevenue Act of 1921,” and that a claim in abatement would be entertained. On February 29, 1924 (within ten days of receipt of notice and demand from the Chicago collector of internal revenue), the petitioner filed a claim for abatement of the 1918 additional tax and protest. Further correspondence between the petitioner and the Commissioner followed, an oral hearing or conference was held on July 8, 1925, and by letter dated July 30, 1925, the petitioner was advised by the Commissioner that its claim in abatement was finally rejected. From that final determination ilie petitioner filed on August 6, 1925, its appeal to this Board.
    The petitioner for the calendar year 1918 filed on March 13, 1919, its tentative tax return, Form 1031-T, which did not state any items of gross income or deductions, and filed on June 16, 1919, its corporation income and profits-tax return, Form 1120, setting forth items of gross income, deductions, etc., as required by the lie venue Act of 1918. In February, 1924, within five years from the filing of the return, the Commissioner made an assessment of the additional taxes for the year 1918. No suit or other proceeding or dis-traint proceeding has been begun by the Commissioner against this petitioner for the collection of the additional taxes for the year 1918.
   OPINION.

Tkussell:

The Board has jurisdiction of this proceeding under the provisions of section 283(f) of the Revenue Act of 1926. See Appeal of William A. Slater Mills, Inc., 5 B. T. A. 971, and Appeal of Nice Ball Bearing Co., 5 B. T. A. 484.

The petitioner’s income and excess-profits tax return for the year 1918, Form 1129, filed on June 16, 1919, was the return required*by law and the five-year period of limitation, within which assessment may be made or a suit or proceeding begun for the collection of such taxes, as provided by section 250 (d) of the Revenue Acts of 1918 and 1921, began to run on the day following Juno 16, 1919, under authority of Appeal of Dallas Brass & Copper Co., 3 B. T. A. 856. In February, 1924, within the five-year limitation period, the Commissioner made an assessment of the additional tax for the year 1918. No suit or other proceeding had been begun by the Commissioner against this petitioner for the collection of the said additional tax at the time of the mailing of the deficiency notice. The position of the petitioner is that the collection of the proposed additional tax is barred by section 250(d) of the Revenue Act of 1921. The position of the Commissioner is that where assessment has been made within the five-year limitation period, collection of the tax by distraint subsequently thereto is not barred by section 250(d) of the Revenue Act' of 1921 on the ground that the phrase “ suit or proceeding ” as used in that section refers to judicial proceedings and does not include collection of taxes by warrant for distraint.

The Supreme Court of the United States in Bowers v. New York & Albany Lighterage Co., 273 U. S. 346, held that distraint is a “ proceeding ” as that term is used in section 250(d) of the Revenue Act of 1921, and that collection by distraint of income taxes imposed by the Revenue Acts of 1916 and 1917 is barred by section 250(d) of the Revenue Act of 1921 five years from the time the return was filed, although the taxes were duly assessed within the five-year period provided by section 250 (d) of that Act.

Clearly the proceeding at bar is analogous to the above-mentioned cases decided by the Supreme Court. However, in each of those cases the five-year limitation period expired prior to the enactment of the Revenue Act of 1924, and what effect, if any, that Act may have was not considered by that court.

In the proceeding at bar, the five-year limitation period expired on June 16, 1924, subsequent to the enactment of the Revenue Act of June 2, 1924, and the effect of that Act must be considered.

Section 277 of the Revenue Act of 1924 provides:

(a) Except as provided in section "278 » * *
(2) Tlie amount of income, excess-profits, and war-profits taxes imposed by * * * the Revenue Act of 1918, and by any such Act as amended, shall be assessed within five years after the return was filed, and no proceeding in court for the collection of such taxes shall be begun after the expiration of such period. * * *

Section 278 of the Revenue Act of 1924 provides:

(d) Where the assessment of the tax is made within the period prescribed in section 277 or in this section, such tax may be collected by distraint or by a proceeding in court, begun within six years after the assessment of the tax. * * *
(o) This section shall not (1) authorize the assessment of a tax or the collection thereof by distraint or by a proceeding in court if at the time of the enactment of this Act such assessment, distraint, or proceeding was barred by the period of limitation then in existence, or (2) affect any assessment made, or distraint or proceeding in court begun, before the enactment of this Act.

Section 278(e) states specifically that section 278 of the 1924 Act shall not affect any assessment made prior to the enactment of that Act and accordingly that section is not retroactive.

In the case of United States v. Whyel, 19 Fed. (2d) 260, it was held that section 278(d) of the Revenue Act of 1924 is not retroactive in effect as to assessments made prior to its passage, and under the provisions of section 250(d) of the Revenue Act of 1921, where an assessment was made within the statutory period before the passage of the 1924 Act, but suit ivas not commenced until after five years from the filing of the return, sucli suit was barred by the statute of limitations even though not barred when the 1924 Act was enacted. In that case the return was filed in October, 1919, the additional tax assessed in March, 1924, and the suit was begun in January, 1925, more than five years after the return was filed. In that case the court said:

The question as to whether section 278(e) (1) and (2) was intended to relate to the future only, or was to be given a retroactive effect is conclusively settled by the proceeding before the Committee on Finance of the Senate which had under consideration the Revenue Act of 1924. A. W. Gregg, appearing as Special Assistant to tlie Secretary of the Treasury, referring to the Section which had just been read, said:
“ That is to keep this section from having any retroactive effect or to apply to things happening before its passage.” -
Again, when the section was under consideration, Mr. Gregg said:
“ That is to prevent the giving of any retroactive effect to the provision of this Act. The taxes under prior acts stand on their own footing, and this applies only after the passage of this Act.”
The above quotations are from the Official Government Publication entitled “ Hearings before the Senate on Finance, United States Senate, Sixty-eighth Congress, First Session on II. R. 6715, March 7, April 8, 1924.
This appears conclusive of the purpose which Congress had in mind when the Act of 1924 was passed, and they expressed this meaning in reasonably clear English when they said: “ This Section shall not affect any assessment made, or distraint or proceeding in Court begun before the enactment of this Act.”

In the case of United States v. Cabot (Sup. Ct., D. C., June 15, 1926, 5 Am. Fed. Tax Rep. 6172), it was held that section 278 (d) of the Eevenue Act of 1924 has no retroactive application. See also Henry Wilhelm Co. v. Heiner, 21 Fed. (2d) 463.

The reasoning of the two learned judges in the last above cited cases is persuasive and leads us to the conclusion that we must find that in the case at bar the five-year period of limitation provided by section 250 (d) of the Eevenue .Act of 1921 had expired on June 15,1924, and that at the time the deficiency letter dated July 30,1925, was issued and mailed, the Commissioner had no authority to either assert, assess, or collect any tax or any deficiency in tax for the calendar year 1918 against or from this petitioner.

The Eevenue Act of 1926, section 278, paragraphs (d) and (e) contains the following provisions:

(cl) Where the assessment of any income, excess-profits, or war-profits tax imposed by this title or by prior Act of Congress has been made (whether before or after the enactment of this Act) within the statutory period of limitation properly applicable thereto, such tax may be collected by distraint, or by a proceeding in court (begun before or after the enactment of this Act), but only if begun (1) within six years after the assessment of the tax, or (2) prior to the expiration of any period for collection agreed upon in writing by the Commissioner and the taxjiayer.
(e) This section shall not bar a distraint or proceeding in court begun before the enactment of the Eevenue Act of 1924; nor shall it authorize the assessment of a tax or the collection thereof by distraint or by proceeding in court (1) if at the time of the enactment of this Act such assessment, distraint or proceeding was barred by the statutory period of limitation properly ai>plicabie thereto, unless prior to the enactment of this Act the Commissioner and the taxpayer agreed in writing thereto, or (2) contrary to the provisions of subdivision (a) of section 274 of this Act.

These provisions became effective on February 26, 1926. It is the accepted rule of statutory interpretation that any law shall not be deemed to have any retroactive effect unless clearly provided for. United States v. St. Louis, San Francisco & Texas Ry. Co., 270 U. S. 1. As we read the language of this section Are find no words providing for any retroactive effect. While in paragraph (d) there appear the words “whether before or after the enactment of this Act ” there later appears in paragraph (e) the language “ nor shall it [this section] authorize the assessment of a tax or the collection thereof by distraint or by proceeding in court (1) if at the time of the enactment of this Act such assessment, distraint or proceeding was barred by the statutory period of limitation projierly apjfficable thereto.” These two paragraphs read together appear to provide that if in any case Avhere the statute of limitations had not run on February 26, 1926, an assessment of a tax made prior to that date or when made thereafter within the period of limitations might be collected at any time within those years from the date of assessment. This does not apply to the case at bar Avhere the statute had run on June 16, 1924, and we are therefore of the opinion that there is nothing in either the Revenue Act of 1924 or the Revenue Act of 1926 which can be construed to lift this case out of the class governed by the decision of the Supreme Court in the case of Bowers v. New York & Albany Lighterage Co., supra. See National Refining Co. of Ohio, 1 B. T. A. 236.

Section 1106 of the Revenue Act of 1926 further contains the provision “ the bar of the statute of limitations against the United States in respect to any internal-revenue tax shall not only operate to bar the remedy but shall extinguish the liability.”

FolloAA-ing the decision of the Board in Ocean Accident & Guarantee Co., Ltd., 6 B. T. A. 1045, and uiion the record heroin, Ave find that there is no deficiency for the calendar year 1918.

In view of our conclusion as to the statute of limitations, it is unnecessary, to pass upon the question of assessment of the profits tax under section 328.

Judgment of no deficiency for the calendar year 1918 will ~be entered.

Love dissents.


author: Love:

text:
    Katherine A. Spalding, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 7302.
    Promulgated July 8, 1927.
    The petitioner transferred stock in one corporation, held for Investment, in return for stock in another corporation of a like kind and use. Each lot of stock being held by petitioner as an investment, there Avas an exchange, resulting in no taxable income under section 202 (c) (1), Revenue Act of 1921.

      Burton E. Eames, Esq., for the petitioner.

      J. 8. Halstead, Esq., for the respondent.

      Tliis is a proceeding to redetermine a deficiency in income tax for the year 1922, amounting to $784.80. Tlie question is whether there was a sale of shares of stock from which petitioner derived a profit or whether the transaction was an exchange of property upon which no gain or loss should be recognized.
    FINDINGS OF FACT.
    On January 10, 1921, petitioner purchased 200 shares of preferred stock of the Corning Glass Works for $98 a share, from Estabrook & Co. of Boston, Mass. Estabrook & Co. is a firm of stock and bond investment brokers of which petitioner’s husband is a member.
    In the latter part of 1922, petitioner’s husband advised her to exchange said stock with his firm for shares of preferred stock of the William Whitman Co. At that time Estabrook & Co. owned several thousand shares of such stock. On or about December 1, 1922, cef-tificates for the 200 shares of Corning Glass Works stock, duly indorsed by petitioner, were delivered to Estabrook & Co., and she received for them certificates for 220 shares of preferred stock of the William Whitman Co., from the stock owned by the firm. When Estabrook & Co. received the Corning Glass Works stock it was entered on its books in the firm’s own account.
    On December 1, 1922, the market value of Corning Glass Works preferred stock was $110 a share and the value of the 200 shares was $22,000. On this date William Whitman Co. preferred stock was worth $100 a share and the 220 shares liad a value of $22,000. At that time there was an accrued dividend of $400 on the first mentioned stock and of $250.6(5 on the latter. The petitioner received a check from Estabrook & Co. for the difference of $143.34.
    A statement was mailed to petitioner by Estabrook & Co. reading as follows:
    December 1, 1022.
    Sold to Mrs. Katherine A. Spalding:
    220 Wra. Whitman Company preferred, at 100-$22, 000. 00
    Dividend from Oct. 1st ms. at 7%- 256. 66
    - $22, 256. 66
    Credit proceeds:
    200 shares Corning Glass Works preferred- 22, 400. 00
    Balance due her_ 143.34
    Cheek herewith.
    The Corning Glass Co. stock had been held by petitioner as an investment, and after acquiring the William Whitman Co. stock, she held it for the same purpose. Each of these companies is engaged in manufacturing and is what is termed, in the parlance of the securities market, an “ industrial.”
   OPINION.

Love:

Section 202 (c) (1), Bevenue Act of 1921, provides:

(c) For the purposes of this title, on an exchange of property, real, personal or mixed, for any other such property * * * no gain or loss shall be recognized—
(1) When any such property held for investment * * * is exchanged for property of a like kind or use.

The respondent does not question that each lot of stock was held for investment, or that the William Whitman Co. stock was property of a like kind or use. His position is that there was a sale of the Corning Glass Works stock, and petitioner realized a profit thereon which is taxable. He argues that petitioner has not sustained the burden which is upon her of proving an exchange within the meaning of the statute. In support of his position he relies largely on the statement which was mailed by Estabrook & Co. to petitioner. This statement shows the transaction as though petitioner purchased the William Whitman Co. stock with proceeds from the sale of the Corning Glass Works stock.

However, the uncontroverted evidence of what was actually done shows the essential elements of an exchange. The difference between a sale and an exchange is that in the former property is transferred in consideration of an agreed price expressed in terms of money, while in an exchange property is transferred in return for other property without the intervention of money. 23 C. J., p. 185. Here petitioner owned shares of stock of one corporation; Estabrook & Co. owned shares of another. She transferred her stock to Esta-brook & Co. and the latter transferred to her in return stock which they owned of the other corporation, and each thereafter owned and held the stock thus acquired. There was no intermediary or any intermediate transfer. The fact that there was an adjustment of the accrued dividends in which money passed does not affect the nature of the transaction. Each party could have reserved his accrued dividend without affecting the transfer of ownership of the stock. The written statement upon which respondent relies apparently is on a form which was used generally by Estabrook & Co. It is entitled to weight but it is not conclusive and we think it is overcome by the convincing evidence of what was actually done by the parties.

Judgment will he entered for the petitioner on the issue raised, on 15 days' notice, u/nder Rule 50.


text:
    Pilliod Lumber Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10015.
    Promulgated July 8, 1927.
    A document filed with the collector of internal revenue on May 31, 1919, in the caption of which appeared in typewriting “ The Pilliod Lumber Co., Swanton, Ohio,” but neither signed nor sworn to by anyone, is not such a return as is required by section 239 of the Revenue Act of 1918, and ihe filing of such document did not start from that date the running of the statute of limitation of five years.

      Herbert W. Nauts, Esq., for the petitioner.

      Arthur H. Murray, Esq., for the respondent.
    The Commissioner determined a deficiency of $963.34 in respect of the income and profits tax of the petitioner for the calendar year 1918. Petitioner assigns as error that “the assessment of an additional tax for the year 1918 is barred by the statute of limitation,” and in its statement of facts in its petition states that it had not at any time consented in writing, or otherwise, to the determination and assessment of a tax for the year 1918 after five years from the date on which it claims to have filed a return. Petitioner also assigns as error that the Commissioner had failed to include an item of $25,000 in invested capital for the year 1918, but this error was withdrawn at the hearing. The facts are found as stipulated.
    FINDINGS OP PACT.
    On or about March 14, 1919, the Pilliod Lumber Co. executed and filed with the collector of internal revenue for the tenth district of Ohio a tentative return and estimate of its corporation income and profits taxes for the calendar year ending December 31, 1918.
    Said tentative return signed and sworn to by L. N. Pilliod, president, and T. J. Pilliod, treasurer, on March 14, 1919, was entitled “ Tentative Return and Estimate of Corporation Income and Profits Taxes and Request for Extension of Time for Filing Return ” and contains the following:
    Collector oe Internal Revenue,

      Toledo, Ohio:

    The amount stated below is remitted herewith in payment of not less than one-fourth of the estimated amount of the income, war-profits, and excess-profits taxes for the year ended December 31, 1918, of the corporation whose name and address appear at the head of this form.
    An extension of 45 days in the time allowed for filing a completed return is requested.
    It is not possible to file a completed return on or before March 15, 1919, for the following reasons:

      Unable to execute and file a complete return.
    Estimated amount oí tax, $4,000; amount of remittance herewith, $1,000.
    On May 31,1919, the Pilliod Lumber Co. filed with the collector of internal revenue of the tenth district of Ohio, Form No. 1120.
    The Form 1120 was a document on which was printed “ Corporation Income and Profits Tax Return for Calendar Year 1918 ” and beneath this title there appeared in typewriting the following:
    The Pilliod Lumber Co.,
    Swanton, Ohio.
    This document contained various statements and figures purporting to show gross income, deductions, and credits, and net income and invested capital; it also contained various itemized schedules and a statement purporting to show assets and liabilities as of December 31, 1918. This document was neither signed nor sworn to by any one.
    On December 8, 1921, an investigation of the tax liability of the Pilliod Lumber Co. for the year 1918 was commenced by John T. (lately, an agent of the Internal Revenue Bureau, during the coursé of which the petitioner’s books and records were duly examined by such agent, who completed his investigation on December 13, 1921. The revenue agent made a written report of his investigation to the Commissioner of Internal Revenue, a copy of which report was transmitted to the petitioner. This report is an audit of the books and records of the petitioner by the revenue agent for the years 1917, 1918, and 1919.
    On September 17, 1923, at the request of the Commissioner of Internal Revenue, the president and treasurer of the petitioner executed an affidavit Avhich is as follows:
    We, the undersigned, hereby affirm that our names should have appeared on our Income Tax Refurn for 1918, and which to the host of our knowledge and belief, is correct. We are unable to furnish duplicate signed report, being unable to locate copy, believing same to have been destroyed with other records.
    Sworn to and subscribed before me this 17th day of Sept. 1923.
    O. M. Urasley, Notary Puilio.

    L. N. PirxioD, President.

    T. J. Pilliod, Treasurer.

    On October 23, 1925, the Commissioner mailed to petitioner notice of his determination of a deficiency in respect to the income and excess-profits tax of petitioner for the year 1918, in the amount of $963.34.
   OPINION.

Littleton :

Section 239 of the Revenue Act of 1918 provides :

That every corporation subject to taxalion under this title and every personal service corporation shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title. The return shall be sworn to by the president, vice president, or other principal officer and by the treasurer or assistant treasurer.

The paper filed by the petitioner on March 14, 1919, in the nature of a request for an extension of time for filing a complete return and termed a “ tentative return ” was certainly not such a return as the statute required. Dallas Brass & Copper Co., 3 B. T. A. 856; Boston Hide Leather Co., 5 B. T. A. 617; Matteawan Manufacturing Co., 4 B. T. A. 953.

Was the document designated Form 1120 filed by petitioner on May 31, 1919, the return required by the statute ?

The document in question was neither signed nor sworn to by any one. There is no provision of law authorizing the Commissioner to waive either the oath or the signatures required by the statute. That the Commissioner considered the document filed with the collector on May 31, 1919, at the top of the first page of which was typewritten the name of the petitioner as not being the return required by the statute, is evidenced by the fact that he called the attention of the company to the matter and a request was made for a sworn statement of the officers touching the subject.

The signatures and oath of the proper parties to a corporate return are not mere empty forms. The purpose is to fix responsibility. Bell Lumber Co., 2 B. T. A. 564; Gutterman Strauss Co., 2 B. T. A. 433. Congress evidently intended when requiring that returns be signed and sworn to, that such signatures and oath should have an important bearing upon the determination of the rights of the taxpayer and the Government.

The affidavit made at the request of the Commissioner on September 17, 1923, is a sworn acknowledgment of the return as required by law.

Under the circumstances, as shown by the evidence in this case, the Board is of the opinion that the Form 1120, filed May 31, 1919, now claimed as a proper income-tax return for the year 1918, was not at that time such a return as the Revenue Act of 1918 required should be made and filed. Updike v. United States, 8 Fed. (2d) 913.

The petitioner cites and relies on the case of Emmioh v. United States, 298 Fed. 5, as sustaining the proposition that a return may be such within the meaning of the statute, although not sworn to.

From a careful reading of that case, it will be seen that the defendant was convicted under a count in the indictment charging him with knowingly, willfully and feloniously attempting to defeat and evade the tax imposed by the Revenue Act of 1921 ” by knowingly, willfully and feloniously making a return of income far less than the amount of which he was actually the recipient. The gist of the offense was defendant’s attempt to evade and defeat the tax imposed, to deceive and defraud the Government by making false and deceptive statements in the return or paper he filed as such. Such attempt or purpose on his part might be effective, if the paper was accepted by the collector as true, whether sworn to or not. There was no question but that Emmich signed the return and there was some evidence that it was sworn to.

It is stated in the opinion of the court that “ in the first place there is some testimony in the record which would indicate, if believed, that the return was sworn to, and, as has already been explained, it is the province of the jury to determine what weight should be given to the evidence.”

The Board is of the opinion in this case that the statute of limitation did not begin to run more than five years before October 23, 1925, and hence would not now operate as a bar to the proposed tax assessment.

The Board, therefore, determines that there is a deficiency of $963.34 in respect of the tax of this petitioner for the calendar year 1918.

Judgment will be entered for the respondent.


author: Smith:

text:
    Baker-Vawter Co., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 9325.
    Promulgated July 8, 1927.
    1. The sale by a corporation of all of the capital stock of an affiliated corporation results in neither a taxable gain nor a deductible loss.
    2. On the sale by a corporation of all the capital stock of a subsidiary company whereby the affiliation is terminated separate returns must be filed for each corporation for the remainder of the taxable year.
    3. The evidence fails to show that agreements on the part of certain employees of the petitioner to subscribe for its stock under certain circumstances constituted invested capital.

      Louis B. Montfort, Esq., and A. M. Golegrove, G. P. A., for the petitioner.

      George G. Witter, Esq., for the respondent.
    This appeal is from the determination of a deficiency in income and profits tax for the year 1920 in the amount of $24,890.54. The petitioner alleges the following errors on the part of the respondent:
    (1) The determination of a profit upon the sale of the capital stock of its subsidiary in the amount of the difference between the purchase price and the sale price of the stock.

      (2) The elimination of the surplus of the subsidiary company from petitioner’s invested capital from the date of the sale of the subsidiary’s capital stock.
    (3) The refusal to allow as invested capital the full face value of certain unpaid stock subscription agreements.
    FINDINGS OF FACT.
    The petitioner is a Michigan corporation with its principal place of business at Benton Harbor, Mich. It was originally incorporated under the laws of Maine in 1905. From 1914 to 1916 it operated a branch store at Chicago, Ill. On March 1,1916, pursuant to a general plan of reorganization, the branch store was incorporated under the laws of Illinois under the name of the Commercial Stationery & Loose Leaf Co., and the Baker-Vawter Co., the petitioner herein, was reincorporated under the laws of Michigan. For . convenience the companies will be referred to hereinafter as the parent company and the subsidiary company.
    The net assets of the subsidiary company at the date of incorporation had a book value of $51,549.34. The company was incorporated with capital stock of $45,000 par value. The balance sheet set up showed a surplus of $6,549.34. For these assets the subsidiary company paid over to the parent company all of its $45,000 of capital stock. All of this stock, except for directors’ qualifying shares, was continuously held by the parent company and no additional stock was ever issued. Thereafter, the parent company carried on its books as an asset the $45,000 of capital stock of the subsidiary company.
    For the taxable years January 1, 1917, to February 28, 1920, the petitioner was affiliated with its subsidiary and filed consolidated returns with it. The earnings of the subsidiary company for the taxable years January 1, 1917, to February 28, 1920, reported on the consolidated returns filed by the parent company, on the basis of which income and excess profits taxes were paid, were as follows:
    Calendar Tear 1917 (Loss)_$2,248.46
    1918_^_ 9, 338.31
    1919_ 23, 708. 96
    1920_ 3,012.84
    Total net profit-33, 811.66
    During the entire period the business of the subsidiary company was carried on at the store in Chicago. The earnings of the company were realized from trading with the outside public. They were all reinvested in the business and no dividends were ever declared by the subsidiary company.
    On February 28, 1920, the petitioner sold the capital stock of the subsidiary company for $60,000. In payment therefor the petitioner received $6,000 in cash and the balance in notes receivable. At the date of the sale the surplus on the books of the subsidiary company was $35,003.69, and the book value of the stock of the subsidiary company was $80,003.69.
    The petitioner did not report on its tax return for 1920 any profit from the sale of the capital stock of the subsidiary company. The respondent has determined that there was realized on the transaction a profit of $15,000, the difference between the amount originally paid for the stock and the amount received for it.
    At January 1, 1920, the surplus of the subsidiary amounted to $31,990.45. This amount, less $6,549.34, the surplus at the time of incorporation, the petitioner included in its invested capital for 1920. Respondent has eliminated the surplus of the subsidiary from invested capital from the date of sale, February 28, 1920, resulting in a reduction of invested capital for that period in the amount of $21,270.77.
    On January 31, 1920, the petitioner entered into agreements with certain of its employees, under which the petitioner agreed to sell to said employees 1,109 shares of petitioner’s stock, par value $100, for $130 per share, making a total of $144,170. The stock agreement entered into in respect of each employee reads as follows:
    This Agreement, Made this 31st day oí January, 1920, by and between tlxe Bakeu-Vawter Company, a Corporation, of Benton Harbor, Michigan, party of the first part, and Richard G. Sullivan of Benton Harbor, Michigan, party of the second part.
    Witnesseth : That the said first party agrees to sell to the second party, 50 shares of the Capital Stock of said Corporation of the par value of One Hundred ($100) Dollars per share, upon the following terms and conditions, to wit:
    It is agreed that the purchase price for said stock is One Hundred Thirty ($130) Dollars per share, which shall be paid in the manner following, to wit: One Dollar and Fifty Cents ($1.50) per share per quarter, January 31st, April 30th, July 31st and October 31st. The first installment shall be paid on January 31st, 1920, and a like sum of One Dollar and Fifty Cents ($1.50) per share per quarter shall be payable on the last day of April, July, October, and January thereafter, until the stock is fully paid for.
    It is further agreed that any and all cash dividends which may be declared from time to time shall be applied on said purchase price.
    It is further agreed that the said purchaser shall pay interest on all unpaid balances at the rate of 5% per annum, said interest shall bo accumulative, and shall be added to the purchase price of One Hundred Thirty ($130) Dollars per share.
    It is further agreed that when the first party has received a sufficient amount on said purchase price to fully pay for ten shares of said Capital Stock, upon the terms and conditions aforesaid, that thereupon the first party will issue to the second party a certificate for ten shares of said Capital Stock upon request.
    It is further agreed that in the event that the said purchaser should, at any time, by his own action, or by the action of the first party, or by death, cease to be an employee of first party before said contract matures and said stock has been fully paid for in the manner and upon the terms aforesaid, ilion said contract shall cease and become null and void; and the purchaser, or his estate, shall receive and take from the first party the amount paid in on unissued stock plus cash dividends less 5% per annum on unpaid balances, in shares of the Capital Stock at the price named in this contract. And in addition thereto the said purchaser shall be entitled to take and have any and all stock dividends which may have been declared on the stock which has actually been paid for at the time of the termination of the contract; but in this connection it is understood that all stock dividends which may be declared on said shares of stock shall be held by the first party until this contract has been terminated, or the stock has been fully paid for in accordance with the terms of this contract.
    It is further agreed that until said stock has been fully paid for in accordance with tlie terms of this contract, and certificates therefor have been issued to the second party, that title to said stock shall be and remain in the first party, and the second party shall have no right to vote said shares of stock at any stockholders’ meeting until the same have been fully paid and the certificates representing said stock duly issued to the second party.
    The subscribing employees, ten in number, were selected by the petitioner for their moral and financial responsibility and were at that time solvent and apparently able to carry out their respective agreements for the purchase of the stock. Tlie petitioner declared cash dividends upon the full amount of stock thus subscribed for and these dividends were credited to tlie stock accounts of tlie various subscribers. The petitioner also declared substantial stock dividends upon the full stock subscriptions, amounting, in one instance, to (36% per cent. The shares of stock representing these stock dividends were issued in the names of tlie various subscribers, but the certificates were held by the petitioner as a guarantee for the fulfillment of the subscribers’ obligations.
    The petitioner included in its invested capital for 1920 the total amount of stock subscribed for under the above agreement. Of this amount tlie respondent allowed for invested cajiital purposes only the amounts of cash paid on the subscription agreements during tlie year 1920, totaling $14,528.42, prorated from the date of payment. The respondent also included in taxable income the interest received by the petitioner upon tlie unpaid balances of the stock subscriptions.
   OPINION.

Smith:

Tlie first question to be decided in this appeal is whether tlie petitioner made any profit or sustained any loss in the year 1920 upon tlie sale of the capital stock of its subsidiary company. The facts are not in dispute. The petitioner during the year 1916 incorporated its branch store and took over the entire capital stock at $45,000 par value, in exchange for assets of a book value of $51,549.54. In the year 1920 it sold the capital stock of the subsidiary company, together with all of its assets, including earned surplus of a book value of $35,003.69, for $60,000. Upon this transaction the petitioner claims that it sustained a loss of $13,454.35, while the respondent contends that the petitioner made a profit of $15,000. The petitioner claims its loss, not as a loss upon the sale of the capital stock of the subsidiary company, but as an operating loss, it being contended that the transaction was in fact a sale of assets of the parent company; that, since for income and profits tax purposes the separate companies must be treated as a single economic unit, the corporate entity of the subsidiary company from the day of incorporation may be entirely disregarded.

We have held in Farmers Deposit National Bank, 5 B. T. A. 520, that a sale by one member of an affiliated group of shares of capital stock owned by it in another member of the group is a sale by the affiliated group of its own capital stock and that such sale constitutes a capital transaction which does not result in either a taxable gain or a deductible loss. See also United Drug Co. v. Nichols, 21 Fed. (2d) 160.

We have also held in H. S. Crocker Co., 5 B. T. A. 537, that where a corporation acquires the capital stock of its subsidiary at its book value and subsequently sells it at its book value no profit or loss to the affiliated group results. The present case is not distinguishable from these cases in any material respect. In the appeals referred to, we have relied solely upon the authority of the statute in adhering to the so-called single economic unit theory. The doctrine was not intended to have any broader application than there given. Certainly, there is no authority in the statutes or in these appeals for saying that a corporation which was validly incorporated and which continued to do business in a corporate capacity over a period of years never had any corporate existence. The facts are that the subsidiary company herein did exist as a distinct entity and that the petitioner purchased and sold its capital stock. The transaction was none the less a sale of capital stock because of the fact that all of the capital stock rather than a part was the matter of the purchase and sale, and that the sale terminated the affiliation. The sale did not terminate nor in any way affect the existence of the subsidiary company as an entity. The petitioner might have at any time dissolved the subsidiary company and sold its assets as such if it had chosen to do so. What the petitioner actually owned at the time of the sale and what it sold was not the assets, but the capital stock of its subsidiary and such a sale we have held can not result in either a profit or a loss.

On February 28, 1920, the affiliation ceased and each of the companies existed thereafter for income-tax purposes as a separate and distinct corporation. The invested capital of each company from that date must, therefore, be computed upon the basis of separate returns for the remaining ten months of the year 1920. American La Dentelle, Inc., 1 B. T. A. 575. Since the sale of the capital stock was a capital transaction the proceeds of the sale should be included in the petitioner’s invested capital for the remainder of that year. Farmers Deposit National Bank, supra. The petitioner’s invested capital was, therefore, the invested capital of the affiliated group, less the par value of the capital stock of its subsidiary, less the surplus of the subsidiary, plus the proceeds of the sale of the capital stock of the subsidiary.

The respondent has properly eliminated from the petitioner’s invested capital the unpaid balance of tKe purchase price of stock subscribed for by its employees under the agreement set forth in the findings of fact. We have held in Meadows & Co., 5 B. T. A. 241, that the value of a stock subscription agreement may not be included in invested capital. The petitioner in that appeal, as in the present one, relied upon Hewitt Rubber Co., 1 B. T. A. 424, where the value of a promissory note paid in for stock at par value was allowed as invested capital. The difference between promissory notes and agreements of this nature clearly warrants a distinction. It is not a question of whether the subscribers were bound under the agreements as between themselves and the petitioner, but rather a question of the character and the value of the agreement to the petitioner as a capital asset. No definite value has been shown. An officer of the petitioner’s bank testified that the bank would have made a loan to the petitioner upon these agreements to the- extent of the bank’s authorization for such loans, but only upon the endorsement and credit of the petitioner. We are not satisfied from the evidence that the stock subscription agreements themselves had a cash value or that they constituted property paid in for shares for invested capital purposes. Central Consumers Wine & Liquor Co., 1 B. T. A. 1190.

The interest payments received by the petitioner under the agreements were, we believe, properly included in taxable income. They were not received as payments or credits for shares of capital stock and they were immediately available for general uses along with the petitioner’s income from other sources.

Beviewed by the Board.

Judgment will be entered on W days’ notice, wnder Rule SO.

GeebN dissents.