author: Lansdon:

text:
    Erle P. Halliburton, Petitioner, v. Commissioner of Internal Revenue, Respondent. Vida C. Halliburton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 36413, 36414.
    Promulgated March 30, 1932.

      Ben F. Saye, Esq., and O. F. Miller, Esq., for the petitioners.

      Frank B. Schlosser, Esq., for the respondent.
   OPINION.

Lansdon:

The respondent has determined the deficiencies here involved on the theory that the effective date of the organization of the corporation was July 23, 1924, and that the petitioners at no time thereafter owned as much as 80 per cent of the outstanding capital stock thereof. If the determination is sound, the petitioners, as equal owners of the partnership assets, realized profits by the sale thereof to the extent of the difference between the cost of such property adjusted as provided in section 202(b) and the value of the stock received therefor, which was $178,000. The petitioners contend that incorporation was completed at July 1, 1924, and that immediately thereafter they were the owners of more than 80 per cent of the outstanding capital stock and so remained until July 23, 1924, when the parties of the second part paid in $130,000 in cash and became stockholders to the extent of their obligations under the promotion agreement.

The record is clear that the corporation began business as of July 1, 1924. On that date the parties of the first part delivered the assets of the partnership which, from that date, were used in the operation of the corporation. It is equally beyond dispute that all the acts incident to the transfer of title of such assets to the corporation were not done until July 23, when the signatures on the deed to the real estate and the assignments of the patents and patent licenses were attested.

The petitioners contend that the transaction falls within the exception included in (4) of section 203 (a) of the Revenue Act of 1924, which is as follows:

(a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.
*******
(4) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons, this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
*******
(i) As used in this section the term “ control ” means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.

In our opinion the record fails to support the contention of the petitioners. On June 19, 1924, the Halliburtons and the parties of the second part entered into an agreement to organize the corporation, which was set up as of July 1,1924, at which date all the parties to such agreement became subscribers for the stock of the corporation and the capital structure thereof as authorized by the charter was complete to the extent of their obligations thereunder. It is true that the parties of the second part did not pay in their subscription for stock until July 23, 1924, but their liability had theretofore become fixed and was enforceable by the corporation and/or its creditors. It is also true that the parties of the first part did not do all the acts incident to the transfer of their assets until July 23. Upon the record it is perfectly clear that representatives of both parties participated in corporate activities from the date of incorporation and we think it may be fairly presumed that the parties of the second part signed the application for a charter, but that paper is not in evidence, possibly for that very reason. There is no merit in the contention that the petitioners were the sole stockholders immediately after incorporation, which we think was actually completed when all the terms of the promoter’s agreement were accomplished and the parties of the first and second parts thereto became entitled to the benefits and charged with the obligations therein credited.

As an alternative issue the petitioners plead and argue that even if the exchange involved was a taxable transaction, the greater part of the profit derived therefrom resulted from the sale of capital assets held more than two years and should be taxed under the provisions of section 208 of the Revenue Act of 1924. In respect of this claim the respondent contends (1) that the provision for taxing capital gain does not apply to a sale of the operating assets of a going business, and (2) that, even if applicable, the evidence establishes no foundation for findings of fact upon which to base a rede-termination of the asserted deficiency. In support of his first point he relies on Henry L. Berg, 6 B. T. A. 1287. The conclusions in that proceeding are not controlling here, since the issue there was governed by the Revenue Act of 1921, which provides at section 206 (a) (6) that, “ The term ‘ capital assets ’ as used in this section means property acquired and held by the taxpayer for profit or investment for more than two years (whether or not connected with his trade or business) but does not include property held for personal use or consumption, or stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year.” In the Revenue Act of 1924, at section 208 (a) (8), which controls here, the definition of “ capital assets ” omits the words “ acquired and held by the taxpayer for profit or- investment.” In our opinion the omission broadens the definition sufficiently to cover the facts herein and to render our conclusions in Henry L. Berg, supra, inapplicable here.

In relation to the second point argued by the respondent, the record discloses that the depreciated cost of all the listed assets transferred on July 1, 1924, was $62,709.64 at that date. It is stipulated that included therein was property, of the depreciated cost of $16,216.51, which had been owned by the partnership for more than two years. The petitioners contend that Letters Patent No. 1,369,891, with a stipulated depreciated cost of $12,216.51, was a part of such property and that if this amount is subtracted from the total depreciated cost of all the assets involved, the remainder must represent only the tangible properties which were specifically included in the transfer at cost. If this theory is sound, it follows that the purchase price of $178,000, less the depreciated cost of tangible property, $50,493.13, or $127,506.87, represents the sales price of the intangibles and includes all the profit derived from the transaction. If this is true and the depreciated cost of the intangibles is known, the resulting profit is readily ascertainable and is taxable as capital gains if the property in question all consisted of capital assets which had been owned by the seller for more than two years.

The record discloses that the intangibles paid into the corporation consisted of Patents Nos. 1,369,781 and 1,486,883, a license to use Patent No. 1,101,484, owned by a competing concern, and the good will of the partnership. At July 1, 1924, the partnership had been so profitably engaged in the business of cementing oil wells for a number of years that the stock of the corporation formed to continue and expand its operations was readily salable at or above par. This indicates that the good will transferred to the corporation must have had a very substantial value. The petitioners have adduced no evidence to establish such value. The license to use Patent No. 1,101,484 and Patent No. 1,486,883 must also have had some value, since they are made the subject matter of several paragraphs of the promoter’s agreement and are specifically assigned to the corporation. The petitioners argue, however, that on the record the entire value of the stock received for intangibles should be allocated to Patent No. 1,369,891, which appears to have covered the general process used by the partnership in cementing oil wells. An engineer of experience and standing testified that in his opinion such patent was worth at least $100,000 on July 1, 1924, and the oral evidence of Erie P. Halliburton is to the same effect.

Apparently the petitioners would have us find a value of $100,000 or more for Patent No. 1,369,891 and allocate the remaining receipts of stock for intangibles to other patents and the good will of the partnership. There is, however, no evidence that either of the patents or the license to use the third were ever owned by the partnership. The patents were issued to Halliburton and the license was in his name and there is no evidence of any assignment to the partnership. This may not be important in determining whether such intangibles were capital assets, but it is a fact that must be established before the separate tax liabilities of the two petitioners here can be redetermined.

Since the stipulation merely specified “ patent ” without any descriptive number, we can not determine that the agreed depreciated cost of $12,216.61 was that of Patent No. 1,369,891 alone, or that it included the other patent and the license to use a third. In our opinion the whole argument of the petitioners in support of their alternative contention is a fabric of mere presumptions of fact and law entirely to frail to support findings of fact adverse to the determination of the respondent.

Decision will be entered for th& respondent.


source: Caselaw Access Project

author: Lansdon :

license: Public Domain

text:
    A. R. McLennan, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 26730.
    Promulgated March 30, 1932.

      W. G. Stevens, Esq., and E. E. Zumwalt, G. P. A., for the petitioner.

      E. A. Tonjes, Esq., for the respondent.
   OPINION.

Lansdon :

Upon the record it is clear that the petitioner received assets of the taxpayer in liquidation of his stock in the amount of $7,100. He is liable to the extent of such receipts for any unpaid Federal income and profits taxes of the taxpayer for the year 1921. Grand Rapids National Bank, 15 B. T. A. 1166; Annie G. Phillips et al., Executors, 15 B. T. A. 1218; affd., Phillips v. Commissioner, 42 Fed. (2d) 177; 283 U. S. 589. Robert N. Parrett, 15 B. T. A. 1313; Woodley Petroleum Co., 16 B. T. A. 253.

The taxpayer’s return was filed on March 14, 1922, and four years thereafter, or on March 13, 1926, the statute ran against any tax liability thereon unless extended by waiver or operation of law. The respondent has produced no waiver extending the time. The petitioner contends that as there is no enforceable liability against the taxpayer for its unpaid taxes for 1921 there can be none against him as a transferee. This might be true, except for section 280(b) of the Revenue Act of 1926, which as to time of assessment thereunder provides as follows: “ * * * Within one year after the expiration of the period of limitation for assessment against the taxpayer.” The four-year period established in the Revenue Act of 1921 and applicable here expired on March 13, 1926, and the one year after ended on March 12, 1927. The liability assessment was made on February 26,1927, well within the “ one year after ” and was timely. Louis Costanzo et al., 16 B. T. A. 1294; Angier Corporation, 17 B. T. A. 1376; National Bank of Commerce, 19 B. T. A. 1080. Petitioner’s counsel on brief relies on section 280(b) (2), which is not in point, since, by its express terms, it applies only when the limitation period ended before the passage of the act. The Revenue Act of 1926 was passed on February 26, 1926, and the taxpayer’s limitation period here ended on March 13,1926, after that date.

The only error pleaded as to the deficiency asserted against the taxpayer for 1921 in the amount of $18,117.19 is that the profit derived from the sale of the oil and gas lease in question was erroneously computed by the Commissioner. Such profit was determined upon the theory that the property was acquired by the Thirty-One Oil Company on March 7, 1916, in exchange for its stock issued at that date. The petitioner contends that, regardless of the date of the issue of stock, the taxpayer did not acquire title to the property until May 2,1916, when the second producing well was drilled and the taxpayer’s obligations under the contract were fully discharged. Whether the transaction was completed at the first or second date is not material, since the consideration in either event was the stock of the taxpayer. All the evidence adduced by the petitioner on this issue relates to the value of the leasehold after the wells were drilled in and is immaterial, since the profit arising from the sale of capital assets must be determined by using the cost of the asset sold as the basis for the computation. The record establishes no cost of the property when acquired or at anjr other date as a basis for determining gain or loss other than that used by the Commissioner in his determination of the deficiency asserted against the taxpayer. On this issue the respondent is affirmed.

Decision will he entered under Bule 50.


author: McMahon:

text:
    William R. Tracy, Petitioner, v. Commissioner of Internal Revenue, Respondent. Helen Gregory Tracy, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 45513, 45514.
    Promulgated April 5, 1932.

      Edward S. Reid, Jr., Esq., for the petitioners.

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

McMahon:

In their brief the petitioners abandoned the assignment of error regarding the loss on the sale of a temporary residence at Pontiac, Michigan, and the respondent’s determination in that regard will not be disturbed.

The remaining issues, in so far as they relate to petitioner Helen Gregory Tracy, apply only to the year 1926, but petitioner William E. Tracy Raises issues as to both the years 1925 and 1926.

The first question to be determined is whether the respondent erred in taxing to petitioner William E. Tracy the full amount of the gains and dividends from the stocks in the marginal stock-trading account with Otis & Company, and in holding that all the interest paid to Otis & Company for carrying the account should be deducted by him, instead of holding that such income and deductions should be divided equally between the two petitioners. No question is raised by the petitioners as to the correctness of the amounts determined by the respondent as representing such gains, dividends and interest. The respondent has held that the account was owned by petitioner William E. Tracy. Petitioner contends that the account was owned by the two petitioners as joint tenants and that •each is entitled to return one-half of the gain and dividends and to deduct one-half of the interest in computing their net income. It is the position of the petitioners that Tracy in 1924 made a gift to his wife of a one-half interest in the account in question.

In Lee v. Lee, 5 Fed. (2d) 767, the court quotes with approval the following from Allen-West Commission Co. v. Grumbles, 129 Fed. 287:

Among the indispensable conditions of a valid gift are the intention of the donor to absolutely and irrevocably divest himself of the title, dominion, and control of the subject of the gift in praesenti at the very time he undertakes to make the gift; * * * the irrevocable transfer of the present title, dominion, and control of the thing given to the donee, so that the donor can exercise no further act of dominion or control over it; * * *

In Bowen v. Kutzner, 167 Fed. 281, 296, it is stated:

Gifts inter vivos of personal property, to be effective, must be accompanied by the delivery of the possession, the donor parting with all present and future dominion over it; * * *

In Hoyt v. Gillen, 181 Mich. 509, 148 N. W. 163, it is stated:

The rule as laid down in Cyc. is as follows: “To constitute a valid gift inter vivos the purpose of the donor to make the gift must be clearly and satisfactorily established, and the gift must be completed by actual, constructive, or symbolic delivery without power of revocation.”

To the same effect is Shepard v. Shepard, 164 Mich. 183; 129 N. W. 201.

The Board has heretofore held in Edward H. Mount, 16 B. T. A. 847, that “ a gift, if it is one in fact, is an unqualified giving up of dominion over the property itself and everything appertaining thereto.”

Have the petitioners shown that William R. Tracy intended to divest himself of ownership and control over any portion of the account in question and make a gift to Helen Gregory Tracy? We believe not. In his letter of January 1, 1925, to Otis & Company, Tracy stated: “ Please make a joint account of my transactions,” and “ Orders for transactions in this account will be given to you for the writer.”

It does not appear that he told his wife what was in the letter, except that he told her he had directed the broker to make the account joint, or that she understood that she could draw on the account. There was no explanation offered of the delay in the change in the broker’s books.

It does not expressly appear that Mrs. Tracy assumed any liability for losses or otherwise; that she could trade in or draw upon the account or do anything else with the account; or that the directions contained in the letter to the broker could not be revoked by Tracy at any time.

The letter calls for a mere change in name and is limited to his transactions. It does not appear that the reservation contained in the last paragraph of the letter was brought to her attention. We construe this paragraph to mean that she could not on her own account give orders to buy or sell.

It does not appear that Tracy or his wife or the broker had a clear understanding of what took place or was intended to take place. If a gift was intended, there should have been no equivocation about it. The intention to make a gift should have been shown clearly. The limitations of the letter negative the theory of a gift. See Garner v. Bemis, 81 Fla. 60; 87 So. 426, where the Supreme Court of Florida stated:

[3] In the case of an alleged gift from husband to wife, there must be clear and convincing evidence of a delivery of the property by the husband with the intention of divesting himself of all dominion and control of it and of vesting it in the wife, and the evidence of the circumstances of a gift of an unindorsed chose in action should be full, clear, and convincing. * * *

We hold that the petitioners have not met the burden of showing that the respondent erred in holding that this account in the years in question belonged to William E. Tracy alone, that the income therefrom is taxable to him in its entirety, and that the interest paid to Otis & .Company for carrying the account is deductible by him alone. The respondent’s determination in these regards is approved.

The testimony of the witness Savage deals with joint trading accounts created by express written agreements, formally entered into, in Detroit, subsequent to 1925-1926, the period in question, and as these are quite different from the one before us in this proceeding, his testimony is of no assistance.

Each of the petitioners alleges that the respondent erred in holding that property taxes on real estate in Michigan owned by them as tenants by the entireties are deductible by William E. Tracy alone. The evidence discloses that the respondent increased the deduction claimed in 1925 by William E. Tracy, on account of taxes paid, by the amount of $284.09, representing one-half of the taxes paid on real estate located in Michigan which the two petitioners owned jointly. The evidence discloses that for the year 1926 the respondent disallowed a deduction of an amount of $612.33 claimed by Helen Gregory Tracy and allowed it as an additional deduction in computing the tax liability for William E. Tracy for the year 1926. These taxes, according to the deficiency letter, represent “ taxes on local property, South Haven property, and property in Cleveland.”

Petitioners contend that under the revenue acts the owners of property are the proper parties to deduct taxes, that each of the petitioners owned an equal interest in the property, and that the taxes should be deductible by each in equal proportions.

There is no evidence that Helen Gregory Tracy paid any part of them, or that William E, Tracy did not pay the full amount thereof. In this situation there is no basis in fact for disturbing the respondent’s determination as to the deductibility of these taxes. On the contrary there is a preemption here that his determination is correct. Upon the record we must hold that the respondent did not err in this respect.

It is alleged by the petitioner William E. Tracy that the respondent erred in holding that rents from real estate in Florida owned by him and Helen Gregory Tracy as tenants by the entirety were income of William R. Tracy alone, rather than income to each of them equally. The evidence discloses that the respondent increased William R. Tracy’s reported net income for the year 1925 by the amount of $323.65, representing one-half of the rent from real property located in Florida. However, the respondent has not held, and the evidence does not show, that this property was owned by the two petitioners as tenants by the entirety. It simply shows that such property was owned by them “ jointly.” In this situation there is a presumption that each petitioner owned a one-half interest therein, since there is no evidence to the contrary. Loring v. Palmer, 118 U. S. 321; Nippel v. Hammond, 4 Colo. 211; Shiels v. Stark, 14 Ga. 429; Greenwood v. Bennett, 208 Ala. 680; 95 So. 159; In re Sutter’s Estate, 245 N. Y. S. 636, and cases cited; Kissam v. McElligott, 280 Fed. 212; Thompson on Real Property, section 1768, 1771; 33 C. J. 837, 909.

The determination of the question of who is properly taxable upon the income from the property depends upon the rights of each to the ownership and possession of such income. As to such rights we are bound by law of Florida. Warburton v. White, 176 U. S. 484; Bucher v. Cheshire R. Co., 125 U. S. 555; and Kuhn v. Fairmont Coal Co., 215 U. S. 249; E. K. Wood Lumber Co., 25 B. T. A. 1013.

Respondent cites section 5867 of the Compiled General Laws of Florida, 1927, which is to the same effect as section 3948 of the Revised General Statutes of Florida, 1920, which applied in the years in question in this proceeding. That statute provides as follows:

Tlie property of the wife shall remain in care and management of the husband, but he shall not charge for his care and management, nor shall the wife be entitled to sue her husband for the rent, hire, issues, proceeds, or profits of her said property.

However, in Florida Citrus Exchange v. Grisham, 65 Fla. 46; 61 So. 123, the Supreme Court of Florida had the following to say with regard to a similar provision of the General Statutes of Florida of a prior year:

[1] Under the act of March 6, 1845, brought forward in the General Statutes as section 2589, “ the property of the wife shall remain in care and management of the husband, but he shall not charge for his care and management, nor shall the wife be entitled to sue her husband, for the rent, hire, issues, proceeds or profits of her said property.” The contention of the plaintiff in error might be sound, were it not for the provision of the Constitution of 1885, art. 11, § 1, declaring that “ all property, real and personal, of a wife owned by her before marriage, or lawfully acquired afterwards by gift, devise, bequest, descent, or purchase, shall be her separate property, and the same shall not be liable for the debts of her husband without her consent given by some instrument in writing, executed according to the law respecting conveyances by married women.”
The Constitution has thus vested her with the property in her separate estate, instead of the mere title thereto, which only she enjoyed prior to the Constitution of 1868, of which our present Constitution is an amendment. May the Legislature, against the will of the wife, say to her that the husband shall have absolute dominion over her “ property ”? To so hold, it seems to us, would cut down the larger word “ property ” to the narrow word “title,” and say to the makers of the Constitution: “You were ignorant of the meanings of the two words; the change you made was a thoughtless one, and we shall again enthrall the wife, however skillful and competent she may be in matters financial, under the yoke of the husband, however incompetent in such matters, or controlled by his appetite for strong drink or gambling, or other dissipations.”
[3] The limit the Legislature can go in this direction is to make the husband the agent of the wife as to her separate property, confirmed in her by the organic law, only so long as it may be mutually agreeable, the husband serving without compensation; but the Legislature may not interfere with her dominion over that property, created and fixed in her by the higher law, to the extent of placing it irrevocably in the control of her husband.
* * * * * sh *
It is, however, asserted that the question is no longer open in this State. Assuming that the court may estop itself from obeying the mandate of the Constitution we shall proceed to examine our previous holdings. In Marye v. Root, 27 Fla. 453, 8 South. 636, the precise point decided was that the income from the wife’s property would not be subjected or sequestrated for the husband’s debts, under the Constitution of 1868. Following up this decision, we held, in Shomaker v. Waters, 59 Fla. 414, 52 South. 586, that the husband alone could not mortgage the crops grown upon her separate property. In Fritz v. Fernandez, 45 Fla. 318, 34 South. 315, and Graham v. Tucker, 56 Fla. 307, 47 South. 563, 19 L. R. A. (N. S.) 531, 131 Am. St. Rep. 124, we recognized some life in the statute to the extent only of holding that, the wife consenting actively or silently, the husband might be her responsible agent in the management and control of her property. There may be expressions in some of these opinions looking to a larger scope to the statute; but such expressions are not necessary to the decisions, and are not binding.
It would be too severe a load upon an absolute separate property in an estate to compel the owner to go into the courts in order to be relieved of a statutory burden placed thereon; but we do not see that it is necessarily beyond the power of the Legislature, in recognition of the traditional headship of the family, to declare that the husband shall remain in the care and management of the wife’s separate estate, without compensation, so long as that arrangement is agreeable, to both parties.
* # * * # * *

See also Shomaker v. Waters, 59 Fla. 414; 52 So. 586, wherein it is said: “ It seems, therefore, to be settled that the rents and profits of a wife’s separate statutory property are her property.”

We hold that each petitioner herein was entitled to one-half of the rent from the Florida real estate in question and that the petitioner William E. Tracy is taxable upon only one-half of the rent received from such property in the year 1925. See F. J. Carman, 25 B. T. A. 162. From the above cited Florida decisions we are of the opinion that if William R. Tracy collected the one-half of the rents from the property in question to which his wife was entitled, he did so merely as her agent. Receipt of rent by an agent is receipt by the principal. George L. Craig et al., 7 B. T. A. 504.

It is also alleged that the respondent erre.d in holding that petitioner William R. Tracy realized income in 1926 in the amount of $889.68 from the Mair Trust.

In the petition it is alleged:

The so-called Mair Trust was organized In 1926, and was a trust to buy and • sell lands in Oakland County, Michigan, wherein petitioner and other persons were beneficiaries. This trust was determined by the Department of Internal Revenue, to be an association, taxable as a corporation, and petitioner, the trustee, and the other beneficiaries acquiesced in such determination. The Mail-Trust made no distribution of income in 1926. The income of the Mair Trust has been assessed to the Mair Trust as an association.

In his answer the respondent admitted all the above allegations in the petition, except that he denied that the Mair Trust made no distribution of income in 1926.

At the hearing petitioner William R. Tracy unqualifiedly testified, and such testimony was not controverted, that he received no distribution whatsoever from the Mair Trust in either of the years 1925 or 1926.

The respondent contends that since the petitioner William R. Tracy did not produce any books to prove that the amount in question was not paid to him, there is a presumption that if the available documents and records had been produced they would have been injurious to the petitioner. However, we are not advised that there were any documents or books which woiild bear upon this question, and, even if there were, it is our opinion that they would not be better evidence of amounts received by petitioner than petitioner’s own testimony under oath. Such evidence, if produced, • might have been cumulative merely. See Fulsom-Morris Coal & Mining Co. v. Mitchell, 37 Okl. 575; 132 Pac. 1103, cited in respondent’s brief.

The case of Missouri K & T Ry. Co. v. Elliott, 102 Fed. 96, also cited by respondent is not in point. There, the defendant, having certain records in its possession and refusing to produce them after due notice, it was held that the plaintiffs had a right to introduce secondary evidence of their contents, and that in such situation there is a presumption that the secondary evidence is correct, and that the primary evidence if offered by the party refusing to offer it although in a position to do so, would be prejudicial to such party.

We hold that the respondent erred in including the amount of $889.68 in William E. Tracy’s income for the year 1926.

Eeviewed by the Board.

Judgment will be entered under Rule 50.

Lansdon and Matthews concur in the result.

Murdock and Leech dissent.


author: Aeundell:

text:
    Edward G. Swartz, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 36650.
    Promulgated April 6, 1932.

      A. S. Lisenby, Esq., and W. D. Zirhle, G. P. A., for the petitioner.

      Brooks Fullerton, Esq., for the respondent.
   OPINION.

Aeundell:

Prior to the year 1919 Edward G. Swartz, individually, owned certain lands, together with the timber thereon, situated in the State of Louisiana, and also owned the timber only on other tracts of land in the same state. Some of this timber was acquired by Swartz prior to March 1, 1913, and some was purchased by him subsequent to that date and prior to 1919.

On August 25, 1919, Swartz entered into a written contract (set out at length in our findings of fact) with the St. Bernard Cypress Company, Ltd., for the cutting of the timber owned by him. Shortly after the contract was executed the St. Bernard Company took possession of the timber, and within a week or ten days from the date of the contract began the construction of camps and log roads. It began the cutting of the timber at its mill in January, 1920.

The cutting was completed in December, 1926, within the estimated period of seven years, and Swartz and/or his assignee received total payments under the contract of $2,037,321.77, the last payment being made in 1929.

The petitioner corporation was organized under the laws of Louisiana, on March 11, 1922, with an authorized capital stock of 3,750 shares of the par value of $100 per share. On the same date Swartz assigned and transferred to the corporation the said contract of August 25, 1919, together with certain securities, in exchange for all the capital stock of the corporation, except two qualifying shares. Thereafter, all amounts due under the terms of the contract were paid through Swartz to the corporation, and were included in the gross income reported in its respective returns.

The issue raised by the pleadings is whether or not any portion of the payments received by the petitioner in the taxable year 1926 under the contract assigned to it by Swartz constituted gain, profits, or income and, if so, to what extent.

The respondent has amended his answer to allege, that the petitioner is not entitled to any allowance for depletion or for exhaustion of the contract, and that the amount allowed as such deduction in computing the deficiency should be added to income and the deficiency increased accordingly.

Since Swartz owned all but qualifying shares of the petitioner, under sections 203(b) (4) and 204(a) (8) of the Revenue Act of 1926 the basis for exhaustion of the contract in petitioner’s hands is the same as in the hands of Swartz. On this point the parties are in agreement, but they' do not agree as to what the proper basis is in the hands of Swartz. Respondent contends that the contract between Swartz and the St. Bernard Cypress Company was merely a working agreement between them, and, as Swartz retained title to the timber, the contract cost him nothing. Petitioner contends that under the contract title to the timber passed to the St. Bernard Cypress Company; that it evidenced a completed transaction which, under the Revenue Act of 1918, gave rise to gain or loss and likewise gave Swartz a new basis for exhaustion, namely, the value of the contract at the time of acquisition.

In our opinion the transaction whereby Swartz obtained the contract with the St. Bernard Cypress Company is not such as to give rise to gain or loss, or to provide a new basis either for purposes of exhaustion or the computation of gain or loss on subsequent disposition. The amount Swartz was to receive under the contract in any year was contingent upon the amount of timber cut. While the contract provided for a minimum annual cut, this was subject to conditions under which the amount to be paid Swartz was rendered problematical. The amount to be received by him above the specified sums for the cypress as cut depended entirely on whether the St. Bernard Cypress Company made a profit. Swartz’s share was to be determined and paid to him annually. If the company made no money, Swartz would receive only the specified sum of $9 per thousand feet of merchantable cypress and $5 per thousand feet of pecky cypress lumber. ■ Swartz apparently was not of the opinion that the receipt of the contract in 1919 constituted a closed transaction. At any rate he did not so report it for tax purposes. In fact, none of the parties concerned with the contract have ever regarded it as evidencing a completed sale in 1919, as is now claimed by petitioner. In the years 1922 and 1924, inclusive, petitioner claimed deductions for exhaustion of the timber under the heading of “ cost of goods sold,” and in 1925 and 1926 it claimed and was allowed deductions for depletion. In forest industries schedules (Form T), filed by the St. Bernard Cypress Company for the years 1920, 1921, and 1922, that company represented that it owned no timber “ but buys its timber as cut, currently paying therefor $9 per thousand feet for merchantable cypress and $5 per thousand feet for pecky cypress. There is therefore no depletion.” Thus we find all parties interested in the contract, and also the respondent, pursuing a consistent course under which the holder of the contract was considered as the person entitled to an allowance in the nature of depletion. We find nothing in the record before us to convince us that that course was wrong.

Under somewhat similar facts, in Burnet v. Logan, 283 U. S. 404, the Supreme Court held that the transaction whereby the taxpayer received a promise, subject to contingencies as in this case, should not be regarded as a completed one giving rise to gain in the year the promise to pay was received. In the same case in the Circuit Court of Appeals (42 Fed. (2d) 193), the court held that “where the right to receive moneys is contingent as provided by a contract until the property right secured by the contract has been relieved of its element of risk and turned into cash, the income taxing act does not reach it, and the contingent right is not income.”

The record in the present case contains testimony directed to showing the value of the contract when acquired by Swartz and also ' when he assigned it to the petitioner. We have no doubt that the contract did have some value. But, as pointed out above, it was not received by Swartz in payment for his timber and so there is no occasion for valuing it. Cases of this kind are distinguishable from those in which property is exchanged for securities such as stock or bonds, which pass readily from hand to hand and for which there is an established market. In such cases the property received is regarded as being accepted in payment. See John B. Atkins, 9 B. T. A. 140; affd., 36 Fed. (2d) 611; Atkins v. Bender, 26 Fed. (2d) 690; affd., 36 Fed. (2d) 1018.

The parties argue at length the question of whether title to the timber was conveyed to the St. Bernard Company by the contract of August 25, 1919. The solution of this question does not appear to be decisive of the question before us. Even if title passed, as contended by petitioner, the amounts to be received in the future would not necessarily be income in 1919 to Swartz, who was on the cash basis. Title to the stock involved in Burnet v. Logan, supra, undoubtedly passed in 1916, but the promise of the purchaser was not regarded as realized income. On the other hand, a taxpayer actually realizing income on the sale of property may not escape or postpone the tax by withholding delivery of evidence of title.

In our opinion the respondent is in error in the position taken in the present proceeding, namely, that the contract cost Swartz nothing and consequently there is no basis for exhaustion. Whether or not the contract served to convey title, it did divest Swartz of his theretofore absolute rights in the timber. By entering into the contract he parted with his outright ownership of the timber; he was no longer free to dispose of it as he saw fit, but was obligated to let the St. Bernard Company cut it on the terms specified. It is agreed by the parties that the March 1, 1913, value of the timber owned by Swartz on that date was $365,973.48. Thereafter, and prior to August 25, 1919, he acquired additional timber at a cost of $233,540.10. The sum of these amounts, $599,513.58, is the proper basis in Swartz’s hands for the computation of gain or loss and depletion. He was entitled to recover that sum upon the sale or other disposition of the timber. We see no sound reason why, under the circumstances here, he should be deprived of that basis. Since the transaction by which the contract was assigned to the petitioner in exchange for its entire issue of stock was one which did not result in either gain or loss to Swartz, and under the statute the basis for exhaustion of the property received by the petitioner would be the same as that in the hands of its transferor, namely, Swartz, and since the transaction by which Swartz acquired the contract was not one in which gain or loss could then be computed, but rather one in which profit to Swartz would be computed as the timber was cut on the basis of the difference between the March 1, 1913, value plus subsequent cost of the timber and the amounts paid to Swartz, we are of the opinion that the proper basis for exhaustion of the contract to the petitioner is the March 1, 1913, value of the timber plus subsequent cost, namely, $599,513.58, and that this amount should be spread over the period of cutting the timber and a pro rata part allowed as a deduction in each year. It appears from the deficiency notice that that is the basis used by respondent in computing deduction for 1926, but if we are wrong in this it may be settled under Rule 50.

We see no merit in petitioner’s contention that this case comes within that group in which taxpayers have unsuccessfully attempted to escape tax by assigning income to others, such as Ormsby McKnight Mitchel, 1 B. T. A. 143; 15 Fed. (2d) 287. Rensselear & S. R. Co. v. Irwin, 239 Fed. 739; Lucas v. Earl, 281 U. S. 111, and similar cases. In this case Swartz did not merely assign income; he assigned the property which gave rise to the income, as in Wallace Huntington, 15 B. T. A. 851, and M. A. Milan, 16 B. T. A. 1112, in which the taxpayers conveyed to others notes covering deferred payments on installment sales. See also J. V. Leydig, 15 B. T. A. 124; affd., 43 Fed. (2d) 494; Copland v. Commissioner, 41 Fed. (2d) 501.

Reviewed by the Board.

Decision will be entered under Rule 50.

Trammell, Love., and Murdoch: dissent.


author: Lansdon: Goodrich,

text:
    Frank G. Williams and Carrie W. Hunter, Executors, Estate of G. W. Hunter, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 33564.
    Promulgated April 6, 1932.

      C. G. Heimerdinger, Esq., for the petitioners.

      John D. Kiley, Esq., for the respondent.
   OPINION.

Lansdon:

Petitioners contend that the unrecorded deeds of 1906 passed a present title to the property therein specified to the wife and daughters of the decedent, and that decedent thereafter must be regarded not as the owner thereof, but as the agent of the grantees. The respondent contends that the decedent’s continued possession, control and use of the property and the income therefrom to the date of his death indicate that he did not intend to divest himself of title when he delivered the deeds.

The deficiéncy notice with statement attached does not clearly set forth any specific statutory basis for including the amount here in controversy in the gross estate of the decedent. On brief, however, counsel for the respondent argues that even if there were a completed gift as claimed the circumstances indicate that it was “intended to take effect in possession or enjoyment at or after * * * death.” The only basis for the argument of the respondent is that the decedent continued to use and enjoy the property for the remainder of his life as if it were his own. It is perfectly clear from the record, however, that by his own acts the donor made such enjoyment and use wholly dependent upon his wife. At any time after the date of the transfer Mrs. Hunter could have recorded the deeds and deprived her husband of the possession and management of the property. Even if there was an understanding between husband and wife that the donor was to remain in control of the property until his death, there was, at the utmost, no more than an implied reservation of a life interest in property completely alienated by deed.

The transfer of March 1, 1906, was not made in contemplation of death within the legal significance of such words. It was not a testamentary disposition of property. Unless the statutory provision relied on by the respondent is controlling, it can not be included in the gross estate of the decedent. In Reinecke v. Northern Trust Co., 278 U. S. 339, the Supreme Court said:

One may freely give his property to another by absolute gift without subjecting himself or his estate to a tax, but we are asked to say that this statute means that he may not make a gift inter vivos, equally absolute and complete, without subjecting it to a tax if the gift takes the form of a life estate in one with remainder over to another at or after the donor’s death. It would require plain and compelling language to justify so incongruous a result and we think it is wanting in the present statute.

At bar the situation is much more adverse to the argument of the respondent than in the decision above cited. There, a life interest was expressly reserved. Here, there was no such reservation and the continued use and enjoyment of the property by the donor was wholly at the sufferance of the donees. In our opinion there is no basis for the contention of the respondent. See also May v. Heiner, 281 U. S. 238.

California is a community property state, but under section 164 of the civil code thereof it is provided that when property is conveyed to a married woman by an instrument in writing there is a presumption that it becomes a part of her separate estate. Even if the property so conveyed was purchased with community funds, the presumption still holds. Lyon v. Lyon, 233 Pac. 988. There is, therefore, no basis for any contention that any part of the assets conveyed by gift was community property after March 1, 1906. No part of the rents, proceeds or issues of separate property such as made up a part of the assets here in question at the date of the death of the decedent was accumulated community income or a part of any community estate that may have been vested in Hunter and his wife at such date. George v. Ransom, 15 Cal. 322; 76 Am. Dec. 490.

A completed gift passes title to the property involved and can always be shown by proving intention to give, delivery and acceptance. If the property given is real estate, delivery is by deed properly executed. The property here in question consisted of personalty and real estate. The record clearly establishes intention to give. The deeds were handed to the wife of the donor, who accepted and held them until the donor’s death. So far, as the wife is concerned, the gift was completed when she accepted the deeds. Moore v. Trott, 162 Cal. 268: 124 Pac. 462; Bias v. Reed, 169 Cal. 33; 145 Pac. 516.

The conclusion above disposes of the respondent’s contention as to the property conveyed to the decedent’s wife by the first deed and her one-half interest in that conveyed by the second deed. It is still necessary to determine whether the delivery of the second deed to the wife and her acceptance thereof can be regarded as delivery to the daughters of the interests conveyed to them by the second deed as tenants in common with their mother. It is now well settled that delivery to one tenant in common is delivery to all. In Thompson on Real Property, vol. 4, at page 964, this rule is stated as follows:

A delivery to one of two or more grantees who take the title as tenants in common is, in the absence of evidence to the contrary, a delivery to both or all.

This principle is supported in Eshelman v. Henrietta Vineyard Co., 102 Cal. 199; 36 Pac. 579; Smith v. Lombard, 201 Cal. 518; 258 Pac. 55. Where a deed is obviously given for the benefit of the grantee and imposes no burdens, delivery and acceptance are presumed even if the grantee is without knowledge thereof until after the death of the grantor and this presumption is even stronger where the grantee is an infant, as was one of the daughters of the decedent herein. Neeley v. Buster, 50 Cal. App. 695; 195 Pac. 736. DeLevillian v. Evans, 39 Cal. 120.

Title having passed to the donees at the delivery of the deeds to the mother, what happened to the property after that time is not material. Even an immediate redelivery of it to the donor would not change the character of the transaction. Beaumont v. Beaumont, 152 Fed. 55; Hynes v. White, supra. In Bury v. Young, 98 Cal. 446; 33 Pac. 338, a situation was considered where a father on his sick bed deeded all his real estate to two daughters. The deed was delivered by him to an attorney, with instructions not to record it, but to deliver it to the grantees upon his death. Later, the father, having recovered his health, attempted without success to recall the deed from the attorney. Failing in this, he repudiated the transaction and made a will devising the real estate to one of the daughters. This daughter, claiming under the will, brought suit to nullify the deed, but the court sustained it, holding that the delivery of it to the attorney vested title to the land in the grantees, after which it was beyond recall by the grantor, and that evidence of his subsequent acts, offered to show a contrary intent, was inadmissible. Another California case, with facts strikingly similar, is Ruiz v. Dow, 113 Cal. 490; 45 Pac. 867. There a husband, in consideration of love and affection, executed a deed conveying his entire estate, consisting of lands, notes, mortgages, money and other personal property to his wife. The deed was delivered to his attorney with instructions that it be placed in an envelope and deposited for safe-keeping in n bank, to be filed for record by the bank officials after his death. The donor in that case kept physical possession of all of the property conveyed by the deed, including a promissory note upon which he collected $4,000 which he deposited in his personal bank account. The issue submitted to the court was whether or not the deed vested title to this note in the donee and the moneys paid to the donor during his lifetime. The court sustained the claim of the donee to this fund and held that the title to the note vested in her as and from the date of the delivery of the deed to the bank, citing with approval Bury v. Young, supra.

We think that the record here shows a completed gift and that title to the property affected passed to the petitioner, Carrie W. Hunter, and her four daughters at the delivery to and acceptance by her of the deeds on March 1, 1906. Coward v. De Gray, 38 Cal. 210; 176 Pac. 56; Ruiz v. Dow, supra; Spitter v. Kolding, 133 Cal. 500; 65 Pac. 1040; Hulet v. Northern Pac., 14 N. D. 209; 103 N. W. 628. The parties agree that at the date of the decendent’s death the proceeds of the property deeded to the wife and daughters of the decedent in 1906 had a value of $337,221.82. This amount formed no part of the decedent’s estate at his death in 1925.

Reviewed by the Board.

Decision will Toe entered for the petitioners.

Goodrich,

dissenting: Section 302 of the Revenue Act of 1924 provides in part as follows:

The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated — •
*******
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for a fair consideration in money or money’s worth. * * *

Even assuming that the acts done by decedent in 1906 effected a completed gift of the properties, which I doubt, still I think the value of these properties should be included in decedent’s estate, for it is clear that the donor’s intention, as evidenced by his conduct over a period of years, was that the transfers should take effect in possession or enjoyment at or after his death. I see no justification for recognizing here an implied reservation of a life interest in the property to the donor or to create by implication a trust such as was considered in the case of Reinecke v. Northern Trust Co., supra.

Here, there was nothing more than an attempt to transfer property and yet retain until death the full control, possession and enjoyment thereof. Section 302 (c) was designed to cover precisely this sort of a transaction and, in my opinion, the tax should be imposed in this case.

Morris, VaN FossaN, and Murdock agree with this dissent.


author: Steknhagen :

text:
    Birdneck Realty Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46079.
    Promulgated April 6, 1932.

      Dwight E. Borer, Esq., for the petitioner.

      L. W. Creason, Esq., for the respondent.
   OPINION.

Steknhagen :

1. The single error assigned in the petition is respondent’s failure to compute petitioner’s taxable gain from contracts for the sale of lots in accordance with Solicitor’s Law Opinion 988, C. B. II, page 84, which is as follows:

No realization of gain or loss arises from a mere contract to sell real estate in the future. The sale is held to occur at the time a deed passes or at the time possession and the burdens and benefits of ownership are from a practical standpoint transferred to the buyer whichever occurs first. Payments made prior to the sale are to be applied in reduction of cost so far as they do not exceed cost; being treated as income to the extent, if any, to which cost is exceeded.

Petitioner contends that its contract for deed did not constitute a sale, but an executory agreement for sale, and denies the realization of any taxable gain from transactions based on its contracts signed during the taxable period. It relies primarily on Feuchtenberger v. Williams, 137 Va. 578; 120 S. E. 257, as establishing that the contracts passed no property right in the lots under Virginia law.'

Even if the petitioner’s taxable income depended upon the passing of title (but see Charles J. Derbes, 24 B. T. A. 276, 283), the cited case is inapplicable. The contract in that case provided that default in payment of any installment would render it void; default had occurred, not even the full initial payment having been made, and the court held that the prospective purchaser was without property rights in the premises to support a mechanic’s lien. But here petitioner’s contracts are not voided or voidable by the vendee upon default. Clearly, a definition of a contractee’s right under a voided contract is not determinative of the petitioner’s rights under the present instruments.

But we are of opinion that the question whether the transactions were sales is not determinative of income under these contracts. During the taxable period petitioner received under its contracts cash sums over which it acquired absolute ownership and control. While its obligation to transfer title in the lot was dependent upon payment of all installments of the purchase price, its right to the cash installments as paid was absolute and unconditional. They were not held in trust nor subject to any obligation to return in case the contractual obligations were not fulfilled. Under the statutory definition of gross income in section 213(a), they clearly constituted income derived from dealings in property. Cf. Charles J. Derbes, 24 B. T. A. 276; Lucas v. North Texas Lumber Co., 281 U. S. 11.

This proceeding is readily distinguishable from Biscayne Bay Islands Co., 23 B. T. A. 731, wherein petitioner contended that the obligations received by it were of little or no value. After so finding as a fact, the Board noted that in any event the transactions there considered were not present sales and that no part of the future payments could be said to have accrued in the first year. Petitioner insists that the same reasoning is applicable here. The agreements construed in the cited case .provided that any default in subsequent installments rendered the contract void; after such event, which rested in the prospective purchaser’s control, no liability for the unpaid portion of the purchase price remained. In this proceeding, however, a default gave petitioner the option to declare the unpaid remainder due and payable. The liability for the full price, therefore, became absolute at the signing of the instrument.

The view that petitioner’s cash received constitutes income is strengthened by an examination of the consequences of the contrary view. In respect of the installment sales as defined in the statute (section 212(d)), petitioner is taxed only on that proportion of the installment payment which the total anticipated profit bears to the purchase price. Since practically the entire payment would constitute gain if the contract were not carried out, it is taxed, therefore, only on the minimum possible profit realized.

But in respect of those transactions not taxable on the installment basis, it may happen that the total anticipated profit, on which petitioner is here taxed, exceeds the amount of the cash payment received. In such a situation it can not be said, as above, that petitioner is taxed only on cash paid, which upon receipt became its absolute property. But together with the cash, petitioner likewise received the unconditional obligation of the vendee to pay the remaining amount of the purchase price. In absence of evidence to the contrary, the respondent’s determination that such obligations were worth no less than par at the time of receipt is sustained.

2. At the hearing petitioner amended its petition to allege that respondent should add to the cost of the subdivided tract from which its lots were sold $96,000, expended in addition to a $75,000 reserve therefor. This addition results in a total cost of $171,000 for development and improvement of the tract. Respondent contests the propriety of allowing this addition in cost, and further pleads affirmatively that the $75,000 cost, already allowed, should be reduced by $57,179.17, representing that part of the original reserve unexpended during the taxable period.

Petitioner’s witnesses testified that the expenditures made were for roads, water mains and other improvements of a capital nature, and its contract with the Atlantic Coast Realty Corporation indicates that the cost of its surveys, accounting, taxes and other non-capital items were likewise to be drawn from this reserve. Respondent bases his plea for reduction of the cost determination on the ground that $57,179.17 was not actually spent until after the taxable period.

The inclusion in cost of an estimated future expenditure on the development of tracts of land from which lots are sold has been recognized by the Board as proper. Kentucky Land, Gas & Oil Co., 2 B. T. A. 838; Osgood Land & Livestock Co., 22 B. T. A. 387; cf. O. D. 226 (1919), C. B. I, page 26; O. D. 567 (1920), C. B. II-2, page 108. The amount of $171,000 should be treated as cost of the land and development.

3. In his amended answer respondent pleads that he erroneously allowed the deduction in 1926 of the amount of $2,992.57 claimed as a net loss sustained in 1925. During 1925 petitioner expended this amount for stationary, taxes, legal services, etc., in perfecting its organization and securing title to its land. No lots were sold and no .normal business was conducted in 1925. The alleged loss, therefore, did not result from the operation of a trade or business and is not a net loss within section 206 (a) (b) of the 1926 Act. Harrisburg Hospital, Inc., 15 B. T. A. 1014; 379 Madison Avenue, Inc., 23 B. T. A. 29, 44.

4. The respondent also pleads affirmatively that in the event it be held, as petitioner contends, that the transactions were not present sales, and, therefore, involved no gain, there can be no room for the allowance of any commissions whatever in respect of such transactions, Since, however, it has been held above that income was realized upon the transactions of the taxable period, the commissions of $30,971.67 paid in respect of such income transactions were properly determined by respondent to be deductible. The petitioner is entitled to the deduction of no more.

Judgment will be entered under Rule 50.


author: Artjndell :

text:
    England Walton & Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42115.
    Promulgated April 7, 1932.

      Robert A. Littleton, Esg., for the petitioner.

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

Artjndell :

Petitioner’s position is that the last two waivers served only to extend the period for assessment of the 1917 tax, and not its collection. This view, however, we think is precluded by Stange v. United States, 282 U. S. 270. There the same argument was made, but, as the court pointed out, something more than a futile act was intended by the agreement between the parties and the intention of the parties was to extend not only the period for assessment, but the period for collection. At the time the waivers in the instant case were given, the tax had long been assessed and the claim in abatement was filed, and it was during the pendency of the abatement proceedings that the waivers were given. To construe the instruments as meaning that the parties had in mind simply .the assessment of some additional amount other than that already assessed and that the Commissioner was not concerned with the collection of the amount he had already determined and assessed seems to us an altogether unreasonable interpretation of the agreement entered into by the parties. The waivers were sufficient to extend the period for collection. Stange v. United States, supra; Burnet v. Chicago Ry. Equipment Co., 282 U. S. 295; United States v. Southern Lumber Co., 51 Fed. (2d) 956.

Nor are we impressed with petitioner’s argument that section 278(d) of the 1924 and 1926 Acts, in providing different'periods of limitation for assessment and collection, necessarily requires separate waivers for assessment and collection, and that Stange v. United States, supra, is not controlling. The intention of the parties was to extend the period for collection and we see nothing in section 278(d) to prevent giving effect to that understanding.

The waivers extended the time for collection to December 31, 1927. Within less than a year thereafter liability for taxes due from the taxpayer was asserted against the petitioner as transferee. The notice was timely. Louis Costanzo, 16 B. T. A. 1294; Newport Co., 24 B. T. A. 1246.

, For the years 1916 and 1917 decision will be entered for the respondent. For the years 1918 and 1919 decision will be entered for the petitioner.


text:
    Thomas J. Dixon, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43453.
    Promulgated April 8, 1932.

      Charles L. Brown, Esq., for the petitioner.

      R. N. McMillan, Esq., for the respondent.
   OPINION.

Lansdon :

The respondent has asserted deficiencies in income tax for the years 1924,1925 and 1926 in the respective amounts of $215.75, $180.61 and $133.38. The principal issue is whether the respondent erred in each of the taxable years in increasing the income of the petitioner by adding thereto certain amounts retained by a trust, of which he is a beneficiary,' representing depreciation on property owned by the trust.

The petitioner is a resident of Oak Park, Illinois, and is a son of Arthur Dixon, who died testate on October 26, 1917, leaving a will in which a trust was established with income therefrom distributable to the petitioner and several other beneficiaries. The corpus of the trust so created consisted largely of improved real estate. The trustees and beneficiaries under the will have construed its provisions as authorizing them to set up a depreciation reserve out of income from real estate before determining the net income distributable to the beneficiaries. Since 1917 the beneciaries have included in their sev-ral income-tax returns only the amounts actually distributed to them by the trustees, which included no part of the trust income set aside as depreciation reserve. For each of the taxable years the respondent has added to petitioner’s income from the trust a ratable part of the amounts charged to depreciation reserve for each of such years and has determined the deficiencies here in controversy.

The pertinent part of the will of Arthur Dixon creating the testamentary trust now under consideration is as follows:

Twelfth: * * * I invest my said trustees with full power and authority to manage the real estate aforesaid during the last five years of the trust period created by this clause of my will, in such manner as they shall in ilie exercise of their discretion deem for the best interest of such trust estate, and those beneficially interested therein, and with full power to do every act and thing in relation thereto and every part thereof, as I could do if living, save only the selling or conveying of the fee title to any part thereof. During the continuance of the last five year trust aforesaid, my said trustees shall pay the net income from said trust real estate, (except lots five (5) and six (6) in Glasscock’s Subdivision aforesaid, during the time of the accumulation of the income thereof as hereinbefore directed), annually or oftener, as occasion may in their judgment require, unto my children or unto the descendants of such of them as shall be dead leaving descendants him, her, or them surviving in equal parts, share and share alike * * *.

The Board has several times considered the issue involved in this appeal and has uniformly held that the trust instrument determines whether beneficiaries are entitled ratably to deduct depreciation sustained by the depreciable assets of the trusts. At bar the will does not authorize a depreciation reserve and does direct that the net income of the estate shall be distributed to the beneficiaries. Under the will the trustees were not required to withhold from distribution any amounts representing depreciation. In our opinion the amounts so withheld were income to the beneficiaries and taxable to them under the provisions of section 219 (b) of the Revenue Acts of 1924 and 1926. Baltzell v. Mitchell, 3 Fed. (2d) 428; Frederick M. Hubbell et al., 14 B. T. A. 1040; affd., Hubbell v. Commissioner, 46 Fed. (2d) 446.

The petitioner also alleges that his income should be decreased by a ratable deduction therefrom of a part of certain taxes paid in the taxable years on the surplus of the trust. No evidence was adduced as to the nature or amount of such taxes and accordingly the determination of the respondent thereto is approved.

Decision will be entered for the respondent.


text:
    Southern Abstract & Loan Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 10225.
    Promulgated April 8, 1932.
    ■ Homer K. Jones, C. P. A., for the petitioner.

      DéWitt Mf Evans, Esq., for the respondent.
   OPINION.

Lansdon :

The petitioner’s first contention is that its tax liability for the fiscal years ended June 30, 1919 and 1920, should be settled on the basis of the amended returns. In our opinion this issue is governed by section 212(b) of the Revenue Act of 1918, which provides as follows:

The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made upon such basis and in such manner as in the opinion of the Commissioner does clearly reflect the income. * * *

Throughout its entire period of active operations the petitioner accounted on its own books for all cash received from commissions as income when received and made its income-tax returns on the same basis. It has always kept its books on the cash receipts and disbursements basis and all its original income-tax returns, including those for the taxable years, were made on the same basis. It now pleads and argues that the commission notes were earned before they were received and realized to the extent of their fair market value when taken into its accounts. The proof is, however, that such notes, sometimes as many as 10 in number, were all taken by the petitioner at the dates loans for the principal were made. They were collectible, however, only as petitioner collected the interest on the loans and were not fully earned until such collections were made, anywhere from one to 10 years after their receipt. Even if it be conceded that such notes were earned before they were received, it does not follow that they were realized as income on date of receipt, unless they were accrued on the books. They represented the compensation due the petitioner for services rendered or to be rendered and were mere evidence of amounts to be realized at future dates.

Counsel for petitioner recognizes his own difficulties on this point by his contention that the notes in question were income when received, either at their fair market value or their present worth as of that date. He further argues, in the face of a record to the contrary, that the petitioner actually kept its books on the accrual basis. The only evidence that can be used in support of this contention is that the face value of the notes when received was taken into the “ unearned interest account,” wliich he thinks should be regarded as an accrual. If this is true, they were in fact taken into the books at their face value and there is no basis for the claim that only market value or present worth when received should be included in income. Only by accrual could they become elements of income when received. Either of the two methods of accounting for and reporting income is in conformity with sound accounting methods and the question here is not which is the better, but whether one having been adopted and used for 10 years, it can now be abandoned and the other adopted without distortion of income incapable of proper adjustment. It appears that the respondent was and is yet satisfied that the petitioner’s accounting system and that its returns based thereon clearly reflected its income on an annual basis. For 10 years he accepted returns so made and settled the tax liabilities as indicated thereon. It is obvious that under the petitioner’s accounting method comparatively small parts of its alleged earnings were reported for taxation in the earlier years of the income tax and increasingly larger amounts in the years here under review, when it was retiring from business and collecting cash on commission notes received in earlier years. It is equally clear that it subjects the total receipts from the commission notes to taxation instead of the present worth or fair market value of such notes as and when received. If the petitioner prevails here it will escape all taxation on the amounts of $49,708.97 and $55,824.58 collected in the respective taxable years and not theretofore reported or now reportable as income, except such part thereof as may have resulted from the collection of commission notes received in 1917, the single year in which any adjustment is possible under the theory of the petitioner. This result is repugnant to the law, which clearly imposes a tax on all income on an annual basis.

In Leslie H. Fawkes, 25 B. T. A. 366, where the petitioner sought to change a basis of reporting income that he had followed to his own advantage for 10 years, we said: Taxpayers should not be barred from correcting any mistakes in their returns upon sound proof of the basis of their claims, but the administration of the taxing statutes requires a prompt adjudication of such matters. In the instant proceeding, however, more than 10 years elapsed before the alleged mistake was discovered and during all that time the petitioner profited from its decision that the two automobile agencies were separate concerns. * * * To allow such a claim in the circumstances herein would make a farce of the statute of Congress and render the collection of the public revenue unreasonably costly and difficult.” We think this reasoning applies to the facts and contentions here. It is not disputed that the petitioner’s original returns for the 10 years from 1913 to 1923, inclusive, were made in accordance with its regular accounting methods. Our conclusion that the change in accounting for and reporting income now claimed by the petitioner can not be allowed is not based on the doctrine of estoppel, but upon the fact that adjustments can not be made that will result in the taxation on an annual basis of the petitioner’s income as reflected by its books.

If the bookkeeping methods of a taxpayer result in distortions of income that do violence to the principle that taxes should be assessed on an annual basis, the Commissioner has ample authority to reject the returns based thereon, or the taxpayer, on his own motion, with the consent of the Commissioner, may change its methods of accounting for and reporting income, but whichever party moves must base its action on the fact that income on an annual basis is not clearly reflected by the accounting methods theretofore used- In our opinion that is not the situation here. The petitioner from its inception kept its books and made its income-tax returns on the cash receipts and disbursements basis. Over a period of 10 years it paid taxes on its annual cash receipts and no more. No part of its income has either escaped taxation or been subjected to a double burden. Certainly there could be no such result if the method of reporting income now proposed by the petitioner should be approved.

The petitioner has already had the benefits which resulted from reporting its relatively small cash receipts in 1913, 1914, 1915 and 1916. It now seeks to increase its income for all the years in which its tax liability has been barred by the statute of limitations and t® correspondingly decrease the same in the years in which adjustments are yet possible. It would also still further reduce the asserted deficiencies and increase its claim for refund and/or abatement by taking commission notes into income at about 60 per cent of their face value at date of receipt. Although probably not pertinent to the issue here, the record discloses that subsequent to the years under review the petitioner sold all its remaining commission notes for cash, all of which was income either when received or when the notes were taken. Obviously a decision in the case at bar favorable to the petitioner would lift all tax liability from any part of that amount which was derived from commission notes received in years as to which such liability is now barred by the statute of limitations. In our opinion the change in reporting income now asked by the petitioner would result in distortions which could not be adjusted except to the detriment of the revenue, and, therefore, must be denied upon the authority of section 212(b) of the Revenue Act of 1918 and corresponding sections of subsequent acts applicable here.

There are numerous decisions of the courts and of the Board which support the conclusion reached above, without resort to the doctrine of estoppel, and all are based on the requirement that a taxpayer’s accounts must truly reflect its income.

In Coley v. Pickering, 21 Fed. (2d) 247, the court held that, when a taxpayer’s accounts did not clearly reflect its net income, it was required by law to make a return on the cash receipts and disbursements basis. In Hyams Coal Co. v. United States, 26 Fed. (2d) 805, it was held that, Courts, in the absence of positive law to the contrary, will construe a revenue act as intended to reach actual income.”

In Morris-Poston Coal Co. v. Commissioner, 42 Fed. (2d) 620, the court said:

The law plainly reeognizes that the selection of the system or method of keeping his books is primarily for the taxpayer. It further reeognizes that the cash receipts and disbursements during the period furnish the normal or prima facie correct test for computing income. The Revenue Act of 1921, §212(b), 42 Stat. 237, provides that the computation shall be "in accordance with the method of accounting regularly employed in keeping the books of such taxpayer ”; but “ if the method employed does not clearly reflect the income,” the Commissioner ma^ adopt and require some other method, which in his opinion does clearly reflect the income. Section 213 (a), 42 Stat. 238, says that items of income should be included in the report for the taxable year in which they were received by the taxpayer, unless, under section 212(b), they were to be properly accounted for in a different period. Hence the right of the Commissioner to reject the taxpayer’s theory of income in this kind of a ease stands upon the Commissioner’s preliminary finding that the method employed by the taxpayer did not clearly reflect the income. * * *

In the instant proceeding the petitioner selected its own system of accounting and for 10 years based its returns thereon. Even now it has not changed the system first adopted, but contends that in respect of the commission notes it should be allowed to vary.from the cash receipts and disbursements basis. When the petitioner filed its income-tax returns for each of the several years here involved the Commissioner, in his discretion, determined that the income therein reported was truly reflected in its books. Without a finding to the contrary he could not reject the returns, and we think it follows that tax liability must be computed on the basis of such accepted returns.

In Maine Dairy Co., 4 B. T. A. 375, the Board approved the exercise of the discretionary power of the Commissioner to reject returns and compute liability by whatever method of accounting clearly reflects income. In the case at bar the Commissioner has exercised his discretionary authority by accepting the returns of the petitioner and computing the taxes indicated therein. In Henry Reubel, Executor, 1 B. T. A. 676, the sole question involved was whether an accrued item of expense may be deducted by a taxpayer on the cash receipts and disbursements basis although not paid during the year for which a return of income was made. In our opinion in that decision we said:

In this appeal the taxpayer followed one of the two alternative bases provided by statute for keeping accounts and making returns of income. He claimed a deduction which can only be justified under the other alternative basis. In our opinion, to allow such a deduction would result in a distortion of the result of the income of the taxpayer for the year in question and would lead tp the inevitable conclusion that Congress, instead of providing for two alternative bases for reporting income, each complete in itself, provided for alternative bases with respect to the reporting of items of income and the taking of items of deductions. Such a holding would be inconsistent with the specific language of Congress in sections 200 and 212 and wholly at variance with the obvious intent of Congress that income should be reported in such a manner upon an annual accounting basis as to reflect the truth. * * *

To the same effect on a similar issue in Consolidated Asphalt Co., 1 B. T. A. 79, we said:

It would be an obvious distortion to return only the gross income actually received and deduct therefrom both the amounts paid out and the payments anticipated.

Each of the last two cases above cited deals with deductions from income, while the instant proceeding relates to additions thereto. The petitioner now seeks to take into its income in each of the taxable years its cash receipts from rents and dividends, omitting the amounts derived from the collection of commission notes, and also the value of commission notes taken in such years which can become cash income only as and when collected and that are income items in the year in which they are received only on the accrual basis. We think the same treatment must be applied to the accrual items of expense and of income, and, therefore, consider that the Consolidated Asphalt Co. and Reubel cases, supra, support the conclusion that we have reached herein.

In our opinion the petitioner has failed to prove that its method of accounting and reporting its receipts from commission notes did not “clearly reflect” its income. Its claim is denied. Theodore H. Beckman, 8 B. T. A. 830; Cf. John Hoskins, 7 B. T. A. 299; Olinger Corporation, 9 B. T. A. 170; First Trust & Savings Bank, 11 B. T. A. 1034.

Petitioner took commission notes into its accounts as unearned interest, which it treated as income only as and when collected. At March 14, 1915, the unearned interest account amounted to $167,-767.36, none of which was included in profit and loss or surplus account. On April 15, 1917, a stock dividend of $164,200 was distributed and the amount thereof was charged to “ unearned interest account.” In each of the taxable years the petitioner included the amount of such stock dividend in the computation of its invested capital for profits-tax purposes. Upon audit of its returns for each of such years the respondent disallowed such amount as invested capital, but later allowed special assessment and determined petitioner’s tax liability in conformity with section 328 of the Revenue Act of 1918. Under the accounting system of the petitioner the “ unearned interest account ” was not earned surplus and, therefore, is not an element in the computation of invested capital. The commission notes on hand, however, were of substantial value and were used by the petitioner as collateral for loans. It was ordered prior to the hearing that evidence should first be taken only on issues not related to special assessment. The proceeding will be restored to the calendar for further hearing under Rule 62(d).


author: MURDOCH:

text:
    John I. Chipley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 39528.
    Promulgated April 12, 1932.

      Wilton H. Wallace, Esq., B. B. Pettus, Esq. and B. C. Wallace, C. P. A., for the petitioner.

      Lloyd W. Greason, Esq., for the respondent.
   OriNION.

MURDOCH:

The petitioner’s counsel contend that a very narrow issue has been drawn in connection with the $12,000 item representing salary from Chipley’s Universal Motor Company, Inc. They argue that the issue is as to whether or not the petitioner received this amount of salary in the form of capital stock; the proof shows that he received no capital stock during the year; and, therefore, he should have judgment, for the Board, under such circumstances, may not decide nor even consider whether or not the $12,000 representing salary might have been properly included in the petitioner’s income for any other reason than the one given by the Commissioner. At the beginning of the hearing in this case we thought that the issue was narrowed as the petitioner now contends. The deficiency notice, the pleadings, and the statements of counsel for both sides so indicated. But as the hearing progressed, it became apparent, chiefly from evidence offered on behalf of the petitioner, that, for other reasons than those assigned by the. Commissioner, his action in adding $12,000 to the petitioner’s income on account of salary from Chipley’s Universal Motor Company, Inc., was proper. The attention of counsel for the petitioner was called to the fact that the issue, in the light of the testimony, could no longer be considered so narrow as originally suggested, and that his contention could not be sustained on this point if on a consideration of all the evidence it appeared that the Commissioner’s action was proper. The petitioner, his witnesses, and his books were still present. An adjournment was taken until the following day to give counsel additional time to think over the situation and decide upon their course of action. On the following day they stated that the petitioner did not desire to introduce any further evidence.

If we were required to close our eyes to the rest of the evidence in the case and decide only the question of whether or not $12,000 should be included in the petitioner’s income for the year 1923 because of the receipt of salary from this corporation in the form of its capital stock, our judgment on this point would be for the petitioner. But our duty, under the circumstances, is to consider all of the evidence and in the light thereof to decide whether or not the Commissioner erred in including $12,000 in the petitioner’s income representing salary from this corporation. Cf. Charles L. Coughlin, 15 B. T. A. 515; Edgar M. Carnrick, 21 B. T. A. 12; Altshul Tobacco Co. v. Commissioner, 42 Fed. (2d) 609; Bornwit Teller & Co. v. Commissioner, 53 Fed. (2d) 381; certiorari denied, Feb. 15, 1932. Thus we see that the date of the receipt of the stock is not a determining factor.

Usually the parties may narrow the issues as much as they care to and the Board will confine itself to a decision of the issues as so narrowed, but, unless restricted by statute, we will not knowingly decide a case incorrectly upon a full disclosure of the facts. If the proof showed that a petitioner had received no stock but had received payment of his salary during the year in cash, should the Board reverse the Commissioner and exclude the salary from income merely because the salary had not been paid in stock as the Commissioner had thought ?

This petitioner owned all of the stock of Chipley’s Universal Motor Company, Inc., during all of the year 1923. His control of the actions of that corporation during the year could not have been challenged. The corporation each month accrued on its books a liability of $1,000 representing one-twelfth of the yearly salary due its president, the petitioner. The latter knew and' must have approved of this. On the income-tax returns of the corporation deductions were claimed for the full amount of this salary. The petitioner signed and swore to these returns. The corporation was allowed the benefit of these deductions by the Commissioner. The corporation credited the salary to the account of the petitioner on its books. During the year the petitioner withdrew a small part of his salary. He could have withdrawn it all if he had so desired. For his own purposes he chose not to withdraw all of it. Under such circumstances it is obvious that he had received the salary of $12,000, constructively or otherwise, for income-tax purposes. John A. Brander, 3 B. T. A. 231; Corliss v. Bowers, 281 U. S. 376. If the proper method of reporting his income is the cash receipts and disbursements method, this amount should be included in his income for 1923. The Commissioner would argue further that the petitioner is estopped to deny his liability for tax on this item of income. Cf. Casey v. Galli, 94 U. S. 673. We do not know why the Commissioner was so long misled as to the true considerations upon which his action should have been based. Perhaps it was because of certain misleading entries on the books of the corporation dated December 31,1923, and described in our findings of fact.

The petitioner regularly kept books of account in 1923. We have found as a fact that these books were kept on an accrual basis rather than on the basis of cash received and disbursed. A few insignificant items may have been recorded in the books on the latter basis, but the accrual method overwhelmingly predominated. Cf. Maine Dairy Co., 4 B. T. A. 375. Therefore, the books should have been consistently kept on the accrual basis, i. e., all items of accrued income, including the salary in question, should have been accrued on the books and the return of income should have been made in accordance with his chosen method of bookkeeping thus properly conformed. Cf. Niles Bement Pond Co. v. United States, 281 U. S. 357; United States v. American Can Co., 280 U. S. 412. Unless conformed to one method, the books do not clearly reflect income in accordance with the statute. Cf. United States v. Anderson, 269 U. S. 422.

Counsel for the petitioner contend that the accrual method of keeping the petitioner’s books applied only to his individual business as a Ford dealer, and it was permissible for him to enter on the same set of books, on the basis of actual receipts, items of income which he received separate and apart from his Ford business. He cites three decisions of the Board in this connection: John F. Cook et al., 4 B. T. A. 916; W. J. Burns et al., 12 B. T. A. 1209; and Joseph Stern et al., 14 B. T. A. 838. In none of those cases was there any inconsistency in the taxpayer’s method of accounting other than that he kept his individual books on one basis and was a member of a partnership which kept books upon another. Partnership income is computed on the basis of the partnership books. A partner’s distributive share is determined on the basis of this computation, and there is no difficulty whatever about including it with his other income computed in accordance with any different method upon which his personal books may be kept. The important thing is that each method be consistent within its own sphere. A better case -for the petitioner is Marlin Grocery Co., 15 B. T. A. 1080, but in the present case it does not even appear that the petitioner’s salary from Chip-ley’s Universal Motor Company, Inc., was the kind of income that he was accustomed to record in his books on the cash basis. The books were not offered in evidence, and we do not know how this salary was entered on his books. We do not even know that it was entered on his books, four judgment on this point is for the respondent no matter what method of accounting for this item was proper, j

Our judgment on the next issue, which relates to the action of the Commissioner in including interest in the amount of $7,833.80 in the petitioner’s income for 1923, is for the petitioner. This item was not a proper accrual for 1923 and it was not paid in any way during 1923. Therefore, on neither theory could it properly be included in income for that year.

The record on the issue relating to a deduction for bad debts is very confusing. This much is clear — the petitioner claimed a deduction of $7,636.66 on his return; the Commissioner disallowed the deduction to the extent of $7,147.57; and the petitioner now concedes that this latter amount is the amount in controversy. The Commissioner, therefore, must have allowed a deduction of $489.09. The Commissioner, in his explanation accompanying the deficiency notice, treats the amount in controversy as if it had been claimed as an addition to a reserve for bad debts. The petitioner has failed to show what it was. We could not allow the amount as an addition to a reserve for bad debts, for the petitioner has not shown that it was a reasonable addition to such reserve, and, furthermore, he has not shown that he is entitled to use the reserve method. Cf. Kay Manufacturing Co., 18 B. T. A. 753; affd., 53 Fed. (2d) 1083; W. H. Langley & Co., 23 B. T. A. 1296. One of the witnesses for the petitioner testified that for the year 1923 there was an addition of something over $7,000 to a reserve for bad debts on the petitioner’s ledger, thus giving some support to the Commissioner’s treatment of the item in controversy as an addition to a reserve. This same witness, a certified public accountant, who prepared the petitioner’s income-tax return for the year in question, testified that in going over the petitioner’s books he picked out anywhere from 70 to 200 accounts due the petitioner which he thought were of sufficient age to have their collectability questioned; he knew a number of the debtors; be consulted the petitioner and his bookkeeper in regard to these accounts; and, together, they decided which of these accounts they would consider worthless. He said that this list has now been lost. He gave no amount and no details as to any particular account. These accounts may be the ones which the Commissioner has allowed to be deducted as bad debts. Counsel for the petitioner stated that they had the petitioner’s books covering the year 1922 in the room at the time of the hearing, but they made no effort to show what accounts were on the books at the end of the year 1923 or to prove facts which would tend to show that there were worthless accounts on the petitioner’s books at the end of 1923 in excess of the amount allowed by the Commissioner, which accounts had been ascertained to be worthless at that time and charged off. The petitioner has not proven that any greater amount should be allowed as a deduction for bad debts than the Commissioner has already allowed.

Judgment will be entered under Rule 50.