author: Goodrich:

text:
    The Nace Realty Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 55381.
    Promulgated June 20, 1933.

      Herman R. Tingley, Esq., and B. G. Simpich, Esq., for the petitioner.

      Harold D. Thomas, Esq., for the respondent.
   OPINION.

Goodrich:

We have here a transaction, planned and carried out for the purpose of avoiding a tax liability otherwise resulting to a corporation upon the disposition of certain of its assets. In the absence of fraud, such a device, if effected by legal means, must be recognized and the liability for tax imposed where it thereafter falls, for the proper avoidance or diminution of a foreseen tax liability is not prohibited. United States v. Isham, 84 U.S. 496; Bullen v. Wisconsin, 240 U.S. 625; Weeks v. Sibley, 296 Fed. 155; Wiggins v. Commissioner, 46 Fed. (2d) 743. There is no suggestion of fraud in this record; indeed, it is conceded that no fraudulent intent may be charged either to the corporation’s officers or to the individuals. Consequently, our task is narrowed to the determination of whether the means adopted to shift this tax burden were legally effective; whether the sale was made by, and the profit resulting therefrom taxable to, the petitioner corporation or the individuals, the brothers Nace.

Belying chiefly upon Taylor Oil & Gas Co., 15 B.T.A. 609; affd., 47 Fed. (2d) 108; certiorari denied, 283 U.S. 862; and Fred A. Hellebush et ad., Trustees, 24 B.T.A. 660; respondent has determined that the profit upon the sale was earned by and inured to the corporation. He points out that the corporation, not the individuals, entered into the contract for sale of the lease, and that no other agreement covering the transaction was ever made. He contends that there was no doubt but that the transaction would be carried out in accordance with the contract, and that the last minute subsitution of the individuals as vendors served only to make them the medium through which the property was transferred, leaving the corporation as the real vendor. On the other hand, petitioner contends that the assignment to the individuals was valid and effective because the contract with Kulp was merely executory; that thereafter the individuals were the owners of the leasehold and in disposing of it acted, not for the corporation, but for themselves, even though they made their sale upon the terms previously agreed to by the corporation. They contend that in making the sale they were not the agents of the corporation but, on the contrary, the corporation had always been their agent in- managing the property and in entering into the contract for sale.

We doubt whether the contract with Kulp was merely executory, but we need not decide that question. Even assuming that it was executory so that the corporation continued to possess complete ownership of the leasehold and was able to make a valid assignment of it to the individuals, still, despite the legal form, a reasonable view of the substance of the transaction demands that we regard the individuals as acting on behalf of the corporation in taking title to and disposing of the lease. The contract itself was not assigned; the corporation was still bound by it. We have little doubt but that specific performance of it would have been ordered upon Kulp’s application had the individuals failed to discharge the corporation’s obligations thereunder, nor have we much doubt that the assignment made to the individuals, for a purported consideration of about one eighth of the price at which the corporation had agreed to sell, and less than the default deposit made by the purchaser, would have been set aside upon the complaint of creditors of the company. In other words, this assignment was not a bona fide, arm’s length transaction between the corporation and its individual stockholders, and in such circumstances the individuals could take the lease and dispose of it only for the benefit of the corporation and as its agents. There is nothing in the record before us to indicate that the corporation sought to abandon its contract, whatever the consequences of such an act. On the contrary, since before its assignment to the individuals, Kulp, the purchaser, had negotiated with the heirs of the original lessor for a deed to the property under lease, which the owner of the lease might do under its terms and which the corporation had contracted to do, we infer that all parties to the contract fully expected it to be carried out and stood ready to perform. It will be noted in the case of Fruit Belt Telephone Co., 22 B.T.A. 440, so strongly relied on by petitioner, that, so far as appears, the corporation had made no contract for the sale of its assets prior to their transfer to the individual. That fact alone is sufficient to distinguish the case from that now at bar.

We see nothing in the record sufficient to impel us to regard the corporation as the agent of the individuals. True, there is testimony that the Nace brothers turned over the leasehold to the corporation only for purposes of accounting and management, but that is contradicted by the fact that no restriction of any sort appears in their assignment of the lease, and by the further fact that the items of income and disbursement received and made by the corporation in connection with the leasehold were taken into its accounts as a part of its own business. There is no evidence of any agreement that the corporation should be reimbursed for any loss it incurred because of its ownership of the leasehold, nor is there any evidence that in entering the contract for its sale, the corporation was acting as agent for the individuals or otherwise than as the owner of the leasehold, making sale of its own property. We conclude that in taking title to the leasehold, and subsequently making sale of the same in accordance with the contract by which the corporation was bound, the Nace brothers acted on behalf of the corporation, and that the profit from the sale inured and is taxable to the corporation. The fact that the sales price was paid directly to the individuals rather than to the corporation is immaterial. Since respondent’s computation of the profit is not attacked, it will not be disturbed. Old Colony Trust Co. v. Commissioner, 279 U.S. 716. Cf. S. A. Mac-Queen Co., 26 B.T.A. 1337; James Duggan, 18 B.T.A. 608; Boggs-Burnam & Co., 26 B.T.A. 988; Frank G. Warden, 23 B.T.A. 24; Sylvester W. Labrot, 18 B.T.A. 332.

Judgment will be entered for the resyondent.


source: Caselaw Access Project

author: Goodrich :

license: Public Domain

text:
    Lillian McDonald Brinton, Petitioner, v. Commissioner of Internal Revenue, Respondent. Irene Stromeyer, Petitioner, v. Commissioner of Internal Revenue, Respondent. William A. Stromeyer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 53715, 55341, 55342.
    Promulgated June 20, 1933.

      Pierce Archer, Jr., Esq., for the petitioners.

      Otis J. Tall, Esq., for the respondent.
   OPINION.

Goodrich :

Petitioners contend that the basis for determining the profit on the sale of the stock is the fair market value at the date of its distribution to them in 1928. Respondent has determined and maintains that the basis is the fair market value of the stock on March 1, 1913. In the case of the decedent’s widow, now Lillian McDonald Brinton, he argues that she acquired the stock in question as her share of the community property, and that her election to take under the will was a nullity. We cannot agree with this argument.

Clearly by his will the decedent disposed of his separate estate, consisting of an undivided interest in his father’s estate, and all the community property. By her election to take under the will decedent’s widow relinquished her statutory interest in the community property in exchange for the rights accruing to her under the terms of the will. Thereafter her rights in all the property disposed of by the will, including all the property of the marital community, were limited and determined by the will, Smith v. Butler, 19 S.W. 1083; Prior v. Pendleton, 47 S.W. 706; 49 S.W. 212. She became a beneficiary of the will and could not thereafter claim any interest in the community property as the survivor of the community. Cf. Farmer v. Zinn, 261 S.W. 1073; Heller v. Heller, 233 S.W. 870; Scaggs v. Deskin, 66 SW. 793; Smith v. Butler, supra. Thereafter her survivor’s share of the community property undoubtedly became liable for the debts of the estate, including the personal debts of the decedent. Cf. Shiner v. Shiner, 40 S.W. 439. While it may be suggested that her rights under the will were acquired by purchase, cf. Allen v. Brandeis, 29 Fed. (2d) 363; Irwin v. Gavit, 268 U.S. 161; Mary W. B.,Curtis, 26 B.T.A. 1103, nevertheless this did not change her character as a beneficiary of the will. She was subject to the same administration as other beneficiaries in accordance with the terms of the will. Cf. Butterworth v. Commissioner, 63 Fed. (2d) 944.

The interest which she acquired was not that of a beneficiary of a trust or a life tenant, but a vas a one-half interest in all the net estate disposed of by the will, which, after the payment of debts and the expenses of administration, would be subject to distribution by the executors under the terms of the will. Just what property would be so distributed or whether or not there would be any property to distribute could not be determined before the debts and expenses were paid.

The respondent urges that administration ended when the executors filed an inventory and appraisal of the estate on February 22, 1912, and that distribution was then made to trustees for the beneficiaries. Under the laws of Texas (art. 3436, Vernon’s Ann. Texas Stats.) where, as here, a testator has provided in his will that no other action may be had in the county court than the probating and recording of his will and the filing of an inventory and appraisement and list of claims of his estate, the executors of the will are in legal phraseology termed independent executors, cf. Ellis v. Mabry, 60 S.W. 572. Such independent executors have much broader powers in the management and control of the estate than ordinary executors or administrators. And where power is given them by the will to control, sell, invest and reinvest the property coming into their hands such power may be exercised by them as independent executors and not as trustees. Cf. Beckham v. Beckham, 227 S.W. 940; Yeager v. Bradley, 246 S.W. 688. This management of the estate by the independent executors is an administration under the law. They may manage the estate and pay the debts as though they were their own. Cf. Ewing v. Schultz, 220 S.W. 625; Fernandez v. Holland-Texas Hypoteck Bank of Amsterdam, Holland, 221 S.W. 1004; Todd v. Willis, 66 T. 704; 1 S.W. 803.

It appears that at the time of decedent’s death he was deeply in debt and practically all of his property was mortgaged or hypothe-cated. Shortly thereafter the telephone stock began paying dividends. The executors managed the estate so as to provide a living for the widow and children and to pay off the debts which were largely liquidated by 1917, but not finally paid before ten years later. The real estate was not finally disposed of until 1922 and distribution was not made until the oldest child became of age in 1928. Moreover, the moneys belonging to the estate were deposited in the bank to the credit of the executors ” and disbursements made upon checks signed by the “ executors ” and upon the death of one of the executors the probate court appointed a successor to him in 1925. Under such circumstances we think that the independent executors continued to administer the estate until it was distributed in 1928. But even if respondent’s theory were correct and the independent executors became testamentary trustees at some point in their administration prior to the distribution in 1928, that fact would not be controlling.

In Ralph W. Harbison, 26 B.T.A. 896, the Board considered a question substantially the same as that here raised by respondent— whether distribution to the trustee (when there is a substantial equitable interest in the beneficiary) is distribution to the beneficiary— and held that distribution to the beneficiary does not occur until the termination of the trust. The Commissioner acquiesced in this decision. See G.C.M. 11309, XII-12-6080, p. 5 (modifying G.C.M. 6195, cited by respondent in his brief), holding that the value at the date of distribution to the taxpayer is the basis for determining gain upon the sale of personal property received from a testamentary trust.

The property here in question is personal property, acquired by will but not by specific bequest, and the case falls within section 113 (a) (5), Revenue Act of 1928, which provides that “the basis shall be the fair market value of the property at the time of the distribution to the taxpayer.” Cf. Finance Committee Report No. 960, p. 28, 70th Cong., 1st Sess. Since there was no increase in value of the stock between the date of distribution to petitioners and the date of its sale by them, no profit arose therefrom.

Judgment will be entered for the petitioners.


author: Smith :

text:
    New York and Harlem Railroad Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 20022.
    Promulgated June 20, 1933.

      C. C. Handy, Esq., Charles C. Paulding, Esq., and Leo Manville, Esq., for the petitioner.

      E. C. Algire, Esq., for the respondent.
   OPINION.

Smith :

The petitioner contends that there was a “ complete and absolute assumption of the obligation of the $12,000,000 Consolidated Bond issue ” by the lessee “ and its payment thereof in 1900 created an item of invested capital that the taxpayer should be allowed to set up in its tax returns.”

We have carefully examined the agreements between the lessor and the lessee with respect to these bonds, and fail to find any such assumption of the obligation on the bonds as is here claimed. The facts negative the idea of the lessee assuming the obligation upon the bonds, for, upon the payment of the principal of any of the bonds in question, the petitioner agreed to reissue and refund such bonds as were paid by the lessee. In 1900 this was done. Even assuming that upon the lessee’s payment of the $12,000,000 consolidated bonds, the petitioner realized a “profit,” which increased its surplus; it offset such “ profit ” by the issuance of the $12,000,000 gold bonds which are still outstanding and are carried as a liability upon its books.

We do not agree with the petitioner’s argument that:

* * * The primary responsibility for the obligation of these bonds rests upon the New York Central, binding it not only to the Harlem company but also to the bond-holders of the Harlem, and the latter company is subject only to remote secondary liability with its property pledged as security for the bonds. We submit that the assumption and payment of the obligation by the New York Central constituted a profit to the Harlem which became a proper credit to surplus and should be allowed as invested capital of that company.

Nor do we find any support for that argument in either United States v. Boston & Providence R.R. Corp., 37 Fed. (2d) 670 (relied upon by the petitioner), or Federal Street & Pleasant Valley Passenger Ry. Co., 24 B.T.A. 262. In both cases, there was an unconditional assumption of the liability for the payment of the lessor’s bonds by the lessee.

The transaction in 1900 by which one issue of the petitioner’s bonds was retired and a new issue in an equivalent amount took its place, did not constitute a “ realized profit ” that increased the petitioner’s surplus for invested capital purposes. See La Belle Iron Works v. United States, 256 U.S. 377; Willcuts v. Milton Dairy Co., 275 U.S. 215.

Judgment will be entered under Buie 50.


author: Trammell :

text:
    James I. Van Keuren, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 49507.
    Promulgated June 20, 1933.

      Dean G. Acheson, Esq., and William Merrick Parker, Esq., for the petitioner.

      James H. Yeatman, Esq., for the respondent.
   OPINION.

Trammell :

The petitioner contends that the amount of $31,163.42 expended by the Delaware corporation as vertising, stationery, rent, telegraph, and telephone in the sale of its capital stock in 1919, 1920, and 1921 constituted a deductible loss in determining the corporation’s net income for 1925, the year in which it surrendered its corporate franchise and was dissolved. The respondent contends that, since the amount was expended by the corporation in connection with the procurement of capital through the sale of stock, it constituted a capital expenditure which served to reduce the capital available from the sale of the stock and therefore does not constitute an allowable deduction in determining net income.

In his petition and in his brief the petitioner refers to the expenditures in controversy as “ organization ” expenses. While they were referred to as such by both parties at the hearing, the respondent in his brief denies that they were such. In his brief the petitioner places his argument on the assumption that the expenditures were organization expenses.

If the expenditures were in fact organization expenses they were of the nature and character of capital expenditures which we have held to be deductible under the loss provisions of the statute in the year in which the corporation surrendered its charter and was dissolved. Malta Temple Assn., 16 B.T.A. 409. The expenditures in this case, however, were in connection with a stock sales campaign. None of them can be identified as having been incurred in connection with the acquisition of the corporate franchise. The corporation had been fully organized and the sales of the stock here involved and expenditures in connection therewith could not in any sense be said to be in connection with the acquisition of a capital asset. The only asset acquired was the money received for the stock. The money balances the stock and takes its place in the asset account. There is nothing left to balance the cost of acquiring the money. There is nothing to replace it. Commissions paid for marketing stock simply diminished the net return of the stock issued and essentially they are equivalent to the issuance of stock at a discount. The corporation received that much less from the issuance of the stock. In the case of Simmons Co., 8 B.T.A. 631, we said:

It may be true that tbe amount paid in commissions is essentially a capital expenditure, but not all expenditures are invested capital. If tbis is a capital expenditure it is not balanced by tbe acquisition of a permanent asset of equivalent worth because tbe balancing asset is tbe amount of money received for tbe stock, and it cannot balance anything more than tbe value of the stock issued for it.
*******
By tbe payment of the commission for tbe sale of its own capital stock a corporation acquires nothing the cost or value of which can be included in its invested capital to offset any reduction in its earned surplus or undivided profits as at the beginning of the year.

This decision of the Board was reviewed by the circuit court of appeals (33 Fed. (2d) 75), and in sustaining the Board the court said:

The petitioner’s second contention (illustrated by its claim) that the payment of $150,000.00 as a commission for the sale of the first issue of $2,000,000 of preferred stock is something in the nature of an intangible asset in some way or other associated with the dollars which were expended to secure its stock, seems to us an untenable far fetched notion inconsistent with the plain meaning of the tax statutes.
*******
Commissions paid for marketing stock simply diminish the net return from the stock issue. Financially, they are equivalent to an issue of stock at a discount from par; the par value must be carried as a liability without an offsetting, equal, amount of cash or property.

See also Blumberg Brothers Co., 12 B.T.A. 1021.

■ In the case of Gommg Glass Works, 9 B.T.A. 771, the petitioner had expended $240,000 in the sale of its preferred stock. Of this amount $234,000 was claimed as a deductible loss in 1923, when the preferred stock was retired. In refusing to allow the claimed deduction we said:

We are of the opinion that respondent did not err in refusing to permit petitioner to take the deductions sought. We are further of the opinion that the $240,000 paid Estabrook and Company is not deductible in any event.

In affirming the Board’s decision the Court of Appeals of the District of Columbia (37 Fed. (2d) 798) said:

In title instant case appellant sold to Estabrook and Company preferred stock of tbe par value of $3,000,000 at a discount of $8.00 per share; so that appellant received, not $3,000,000; but $2,760,000; in other words $92 per share. The effect of this was to reduce by the amount of $240,000 the capital available to the appellant. In other words, it represents a capital expenditure and should be charged against the proceeds of the stock and not be recouped out of operating earnings.

In our opinion the loss claimed here does not come within the provisions of section 234 (a) (4) of the Revenue Act of 1926. That subdivision applies only to losses of property or some kind of an asset, but in this case no asset or property was acquired and hence nothing which would form the subject of a loss within the meaning of the statute.

The petitioner relies upon our decision in the case of Malta Temple Assn., 16 B.T.A. 409. That case, however, related to a loss sustained by a corporation upon dissolution and surrender of its charter, not in connection with expenditures incurred in selling stock, but expenditures in connection with incorporation. The petitioner here is not claiming a loss for what it cost to incorporate, but what it cost to acquire capital, a different matter. It may fairly be said that money expended to form a corporation results in the acquisition of an asset, namely, the corporate franchise, which may be considered as a balancing asset, but money paid out to acquire capital does not result in the acquisition of any asset other than the capital itself. There is thus a clear distinction between the Malta Temple case and the case at bar.

In his petition as amended the petitioner alleges that the respondent erred in determining the net income of the Delaware corporation for 1925 by not allowing as a deduction the amount of $63,298.25 as a loss sustained in that year upon the abandonment and liquidation of its business. At the hearing and in his brief the petitioner refers to the amount as $68,520.77, which is computed by him as being the difference between the amount of the $500,000 par value of common stock outstanding at the time of dissolution on February 9, 1925, and the amount of $431,479.23 representing the amount of the corporation’s net assets on that date aside from any value for good will at that time. It is the contention of the petitioner that the $500,000 par value of common stock was issued by the Delaware corporation for property worth at least $500,000, consisting of the business, assets and good will of the Michigan corporation and cash; that at the time of dissolution the Delaware corporation had net assets of a value of only $431,479.23; and that the difference between the two amounts or $68,520.77 was a loss to the corporation, due to the termination of the corporation’s business and the consequent disappearance of its good will.

Conceding for the sake of discussion, but not deciding, that the deficiency in assets of $68,520.77 was due to the disappearance of good will as a result of dissolution of the corporation and the discontinuance of its business as contended by the petitioner, we are unable to find that the amount constituted a loss as determined by the statute.

Section 202 of the Revenue Act of 1926, which is applicable to the year in controversy, provides:

(a) Except as hereinafter provided in tliis section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in subdivisions (a) or (b) of section 204, and the loss shall be the excess of such basis over the amount realized.

Section 204 of the act provides:

(a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
‡ * # * * * ‡
(7) If the property (other than stock or securities in a.corporation a party lo the reorganization) was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.

Section 203 of the act provides:

(h) As used in * * * sections * * * 204—
(1) The term “ reorganization ” means (A) a merger or consolidation (including- the acquisition by one corporation of * * * substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, * * *
(2) The term “ a party to a reorganization ” includes a corporation resulting from a reorganization * * *

Section 202 of the Revenue Act of 1918 provides:

(a) That for the purpose of ascertaining the gain derived or loss sustained from the sale or other disposition of property, real, personal, or mixed, the ;asis shall be—
***** * *
(2) In the case of property acquired on or after that date, [March 1, 1913], the cost thereof; * * *
(b) When property is exchanged for other property, the property received in exchange shali for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of its fair market value, if any; * » *

On November 17, 1919, the Delaware corporation acquired all of the “property, assets, goodwill and trade name” of the Michigan corporation and issued therefor $250,000 par value of its common capital stock, which at that time appears to have been all of its stock outstanding. Immediately following the acquisition of the property and assets of the Michigan corporation by the Delaware corporation the stockholders in the Michigan corporation were the same as those in the Delaware corporation and were in control of the Delaware corporation. In view of this situation there clearly was a reorganization within the purview of the above quoted provisions of the Revenue Act of 1926 and the Delaware corporation, resulting from such reorganization, was a party to the reorganization. The stockholders in the Delaware corporation having been the same as those in the Michigan corporation, they, immediately after the transfer of the property and assets of the Michigan corporation, remained in control of such property and assets. Consequently, under the provisions of section 204 (a) (7) of the Act of 1926 the basis for the determination of the gain or loss from the sale or other disposition of any of the assets acquired by the Delaware corporation from the Michigan corporation is to be upon the same basis as it would be in the hands of the Michigan corporation, increased in the amount of gain or decreased in the amount of loss recognized to the Michigan corporation upon the transfer under the provisions of the Revenue Act of 1918.

The Michigan corporation was organized in May or June 1919, and the assets and property transferred by it to the Delaware corporation must of necessity have been acquired by it subsequent to March 1, 1913. Under the provisions of section 202 (a) (2) of the Revenue Act of 1918, the basis, therefore, for determining the gain or loss resulting to the Michigan corporation from the transfer of its assets to the Delaware corporation was the cost of such assets to the Michigan corporation. Under the above quoted provisions of section 202 (b) of the same act the $250,000 par value of the common capital stock of the Delaware corporation received by the Michigan corporation for its assets and property is to be treated as the equivalent of cash to the amount of its fair market value, if any, in determining the gain or loss to the Michigan corporation from the transaction.

The petitioner has submitted evidence as to what assets other than good will were transferred by the Michigan corporation. He contends in his brief that the assets so transferred, including good will, were worth $250,000 and that the $250,000 par value of the common capital stock of the Delaware corporation had an actual value equal to par at the time of the transfer. He also contends that $150,000 of the amount involved represented the purchase price of the good will of the Michigan corporation. Conceding, but not deciding, that the record sustains all these contentions, an element necessary to a determination of the matter in controversy is lacking. The record does not show what the cost was to the Michigan corporation of the property and assets transferred to the Delaware corporation. The evidence shows the amounts at which such assets, aside from good will, were carried on the books of the Michigan corporation, but it does not indicate whether such amounts represented cost or some other basis for carrying the assets. The item of good will was not carried on the books of the Michigan corporation, nor is there anything in the record to indicate what amount, if any, had been expended by the corporation for it. The evidence shows that the Michigan corporation never paid any income tax as a result of the transfer of its assets, and from the evidence before us we are unable to determine whether it realized a profit or sustained a loss on the transaction. Being, therefore, unable to determine whether upon the transfer the Michigan corporation realized a profit or sustained a loss recognizable under the Act of 1918, we must hold that the basis for determining gain or loss to the Delaware corporation on the disposition of property acquired from the Michigan corporation is the cost of such property to the Michigan corporation, without increase or diminution.

Aside from the item of good will the record does not indicate what assets and property acquired from the Michigan corporation in 1919 were still owned by the Delaware corporation at the time of dissolution in 1925. Considering the nature and character of the assets acquired by the Delaware corporation, aside from good will, it is probable that they had very largely been disposed of prior to 1925, with the possible exception of some furniture and fixtures. The petitioner, however, bases his claim for a deduction on the disappearance of the good will resulting from the dissolution of the Delaware corporation and the discontinuance of its business. As indicated above, any loss sustained on the good will by the Delaware corporation would have to be computed on the basis of the cost to the Michigan corporation of such good will. Since we are unable to find from the record that the Michigan corporation had expended anything for any good will that it transferred to the Delaware corporation, we are unable to find that the Delaware corporation sustained any loss within the meaning of the statute upon the disappearance of good will as a result of dissolution in 1925. We, therefore, perceive no error in the respondent’s failure to allow the deduction contended for by the petitioner.

In view of our decision with respect to the above issues it becomes unnecessary to consider the remaining issue relating to the carrying forward of a net loss from 1925 to 1926.

Judgment will be entered for the respondent.


author: Lansdon:

text:
    Indiana Lamp Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52761.
    Promulgated June 22, 1933.

      Frank S. Bright, Esq., for the petitioner.

      W. R. Lansford, Esq., for the respondent.
   OPINION.

Lansdon:

The petitioner’s claim for deductions in the respective and $5,900 arises out of the liquidation of its bonds as provided for in an accomplished merger agreement under which all its stock was acquired by the Allied Products Corporation. As to the first item claimed the petitioner relies on S. & L. Building Corp., 19 B.T.A. 788, which we have since followed in Metropolitan Properties Corp., 24 B.T.A. 220, and East Ninth Euclid Co., 26 B.T.A. 32. Respondent contends that under the terms of the merger agreement the Allied Products Corporation appears to have assumed the rights and obligations of the petitioner, which therefore is not the party in interest entitled to claim the deductions here in controversy. In our opinion this conclusion is not consistent with the stipulated facts. With cash furnished to it under the terms of the merger agreement, the petitioner redeemed its bonds and ended the life thereof on October 9, 1928. Apparently the respondent’s theory is that the cost of such redemption was borne by the Allied Products Corporation. We think not. Under the agreement the redemption was not effected through direct payments by the Allied Products Corporaton to the bondholders, but with funds that such corporation was required to furnish the petitioner for that purpose. After the redemption of the bonds at October 9, 1928, it was impossible for the petitioner or Allied Products Corporation to continue amortization of the discount, since their life was then terminated. We are of the opinion that the unamortized discount thereon was deductible in its entirety from petitioner’s income in the taxable period in which the bonds were redeemed. In conformity with Chicago, Rock Island & Pacific Ry. Co., 13 B.T.A. 988, the expenses of the bond issue are also amortizable and deductible as above decided. This reasoning and conclusion is also applicable to the petitioner’s claim for the deduction of the unamortized discount and cost of issue of the petitioner’s notes which, at the same date, were retired by issue of the stock of the Allied Products Corporation to the holders thereof. On these two issues the determinations of the respondent are reversed.

Under the terms of the agreement the petitioner was required to pay the redemption premiums and the unpaid interest due on the bonds at date of retirement. Interest, of course, is a deductible expense. The amount of $5,900 paid as redemption premiums is a loss sustained by the petitioner in the purchase and retirement of its own bonds. In Kirby Lumber Co. v. United States, 284 U.S. 1, the Supreme Court held that a corporation may realize profit from a transaction in its own bonds. We think it follows that in such circumstances a loss may be sustained. On this issue the respondent is reversed.

The petitioner’s claim that it is entitled to deduct the net loss sustained by its subsidiary corporation in 1927 from the consolidated net income of the two corporations in 1928, is without merit. On this question the determination of the respondent is affirmed. Wool-ford Realty Co. v. Rose, 286 U.S. 319.

Reviewed by the Board.

Decision will be entered wider Rule 50.

Smith and Murdock dissent.


author: Lansdon :

text:
    Herbert Tutwiler, Edward M. Tutwiler, Temple Tutwiler, and Margaret C. Tutwiler, Trustees, E. M. Tutwiler Trust Estate, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 48688.
    Promulgated June 22, 1933.

      Shuford B. Smyer, Esq., for the petitioners.

      De Witt M. Evans, Esq., for the respondent.
   OPINION.

Lansdon :

Petitioners originally pleaded that tax on the income derived from the sale of securities as set out in the stipulated facts should be computed under the provisions of section 208 of the Revenue Act of 1926. This contention is based on the theory that for income tax purposes a decedent and his estate constitute a single continuing entity. Apparently the petitioners now abandon this contention, as no part of their brief is directed thereto. It is well settled that a decedent and his estate constitute separate taxable entities and that existence of the second dates from the death of the first. Catherwood v. United States, 280 Fed. 241; affd., 291 Fed. 560; Bankers Trust Co. v. Bowers, 23 Fed. (2d) 941; Nichols v. United States, 64 Ct.Cls. 241; Wm. K. Vanderbilt et al., Executors, 11 B.T.A. 291; Walter R. McCarthy, Executor, 9 B.T.A. 525. Since the decedent died on April 19, 1925, and the securities in question were sold by the executors less than one year thereafter, it is plain that the petitioners had not held them as an investment for a period of two years. The transaction is not within the statutory provisions upon which the petitioners rely.

On brief petitioners argue that the profit from the sale in question should be computed on the basis of cost to the decedent. The record discloses that the sale was made on March 3, 1926, and that the computation of profit was made under regulations then in effect and which provided that gain or loss resulting from the sale by executors of property acquired by the death of a decedent should be computed on the basis of value thereof at the date of decedent’s death. This regulation remained in effect until April 6, 1927, when it was revoked by the Commissioner on account of the decision of the Court of Claims in McKinley v. United States, 62 Ct.Cls. 180. This change in the regulations, however, avails these petitioners nothing, since they had already filed their return for. 1926 under regulations then in effect. Nor has their failure to elect a settlement under section 702 (a) of the Revenue Act of 1928 any bearing on the issue here, since that provision applies only to estates that filed returns between April 6, 1927, and July 7, 1928. Cavour Hartley, Executor, 27 B.T.A. 952. In our opinion the gain resulting from the sale of the securities in question should be computed on the basis of the value thereof at date of decedent’s death as set out in the stipulation.

Decision will be entered for the respondent.

       Sec. 208. (a) For the purposes of this title—

        ****** *
      (8) The term “capital assets” means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a land which would properly be included in the inventory of the taxpayer if on hand at the dose of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business. In determining the period for which the taxpayer has held property received on an exchange there shall be included the period for which he held the property exchanged, if under the provisions of section 204 the property received has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged. In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under the provisions of section 204 such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person. In determining the period for which the taxpayer has held stock or securities received upon a distribution where no gain is recognized to the distributee under the provisions of subdivision (c) of section 203 of this Act, or of the Revenue Act of 1924, there shall be included the period for which he held the stock or securities in the distributing corporation prior to the receipt of the stock or securities upon such distribution.


text:
    E. Gordon Perry, Petitioner, v. Commissioner of Internal Revenue, Respondent. Vandelia K. Perry, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 46446, 46447.
    Promulgated June 22. 1933.

      Geo. S. Atkinson, Esq., for the petitioners.

      F. B. Schlosser, Esq., and R. B. Cannon, Esq., for the respondent.
   OPINION.

Lansdon :

The respondent has asserted deficiencies against the petitioners for 1926 in the respective amounts of $833.68 and $860.93. There are two questions presented for determination: (1) Where a corporate dividend is declared on December 31, 1925, and credited on that date to the petitioners’ account on the books of the corporation, does it constitute income for 1925, or should it be included as income in 1926 when it is withdrawn? and (2) Are the petitioners entitled to a deduction in 1926 for amounts paid to a corporation in that year to reimburse it for interest paid in 1924 and 1925 on indebtedness incurred to build a home for them under an agreement that it would be reimbursed for all expenditures in connection with the property ? The material facts are stipulated.

The petitioners, who are husband and wife, reside in Dallas, Texas. All of their income for 1924, 1925, and 1926 was community income. In the taxable year they owned more than 80 percent of the capital stock of the Perry Motor Co., a Texas corporation, of which E. Gordon Perry was president. On December 31, 1925, the directors of the Perry Motor Co. declared a dividend of all profits and surplus and on that date credited the running account of E. Gordon Perry with a dividend amounting to $75,336.15, debiting its surplus account for the total amount of the dividend declared. At the time the credit was entered, Perry’s account had a debit balance of $55,633.05, which was thereby changed to a credit balance of $19,-703.10. On the petitioner’s books the amount of the dividend was credited as income on December 31, 1925, and was reported by them as community income on their separate income tax returns for 1925. The respondent has determined that to the extent of $55,633.05 the dividend constitutes income for 1925, but that the balance of $19,-703.10 is income for 1926, when it was actually withdrawn. The Perry Motor Co. was dissolved on February 25, 1926, and its assets distributed.

Throughout the period from 1923 to 1926 the petitioners owned 95 percent of the capital stock of the Perry Heights Realty Co., hereinafter referred to as the Realty Co., of which E. Gordon Perry was president and manager. Prior to December 31,1923, the Realty Co. was constructing a house on Block D of Perry Heights, an addition to the city of Dallas, in compliance with a contract, the terms of which are stated in the following minutes of the board of directors of the Perry Heights Realty Co.:

Mr. Perry announced that the home which was being constructed on Bloch D, which had been reserved for his home, was nearing completion. He pointed out that it seemed, best that this property be held for the time being so that it would be subject to execution rather than be converted into a homestead and that he wished to confirm in this meeting the agreement to purchase this ground at the schedule cost price of ground and improvements, plus the cost of all buildings placed thereon, and that when it seemed advisable to transfer this property to a homestead he would reimburse the corporation for all interest and taxes they might pay for, and cost of carrying this property in the meantime.
It was moved and seconded that in view of Mr. Perry’s statements and agreement, to thereby recognize the purchase of the property and to obligate himself to reimburse the corporation for any and all interest and taxes paid because of carrying the property in trust as an expediency, that the corporation would hold title to and would carry the property as an asset until such time as Mr. Perry was ready and felt it wise to take the title.

The petitioners took possession of tbe property in 1924 and immediately expended substantial amounts for furniture. On December 81, 1926, legal title was transferred to them and E. Gordon Perry’s running account on the Realty Co.’s books was charged with the amounts expended on the property, which included interest paid in 1924,1925, and 1926 on a loan secured by the residence in the amounts of $3,735, $4,244.97, and $3,999.96, respectively. At that date there was a sufficient credit in Perry’s account on the books of the Realty Co. to cover the total amount of interest paid, which they deducted on their separate individual income tax returns for 1926. Upon audit the respondent disallowed the deduction to the extent of the 1924 and 1925 interest payments, but allowed a deduction of $3,999.96 as interest paid in 1926. For the years 1923 to 1926, inclusive, the petitioners kept their books and rendered their income tax returns on the cash receipts and disbursements basis.

The dividend declared on December 31, 1925, was credited as of that date to the account of E. Gordon Perry on the books of the corporation, which converted a debit balance of $55,633.05 into a credit balance of $19,703.10. The total dividend of $75,336.15 was entered as income on Perry’s books and was returned as income on the petitioners’ separate income tax returns. In such circumstances we think the total amount of the dividend was properly returned as income for 1925. The petitioners considered the credit balance in Perry’s account on the books of the corporation as having been constructively received when credited, and in our opinion the facts show that it was unqualifiedly subject to his demand on December 31,1925. Commissioner v. Bingham, 35 Fed. (2d) 503; Farley Hopkins, 27 B.T.A. 845; Mary Miller Braxton, 22 B.T.A. 128. Cf. William Parris, 20 B.T.A. 320.

The petitioners contend that an amount of $11,979.93 charged to E. Gordon Perry’s account on the books of the Realty Co. in 1926, representing interest paid by it in 1924, 1925, and 1926 on a loan secured by the petitioners’ home, is deductible from their 1926 income as interest paid. The respondent has allowed a deduction for the 1926 interest, but contends that the amount charged in 1926 for interest paid by the Eealty Co. in 1924 and 1926 is either an additional cost of the property to the petitioners or is the repayment of a loan.

The facts are not at all clear as to ownership of the property prior to December 31, 1926, or as to whether the loan was an obligation of the Realty Co. or of the petitioners. Even assuming, however, that the petitioners were the equitable owners of the property during 1924 and 1925 and that they were obligated on the loan, it does not follow that they are entitled to the deduction claimed. When the Realty Co. advanced money to discharge petitioners’ interest obligations, it in effect loaned the petitioner funds with which to make payment and the deduction should be taken in the year of payment. Deductions are not permitted on the repayment of loans. Edwin R. Crawford, 11 B.T.A. 1299, 1302. In the circumstances we must approve the respondent’s determination as to this issue.

Eeviewed by the Board.

Decision will he entered under Rule 60.


author: Smith:

text:
    Mrs. J. B. Atkins, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. J. B. Atkins, Administratrix, Estate of J. B. Atkins, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 38519, 38520.
    Promulgated June 22, 1933.

      W. Scott Wilkinson, Esq., C. Hoffman Lewis, Esq., and Elmo P. Lee, Esq., for the petitioner.

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

Smith:

These proceedings, consolidated for hearing, are for re-determination of the following deficiencies in income tax:

J. B. Atkins died on October 28,1928. J. B. Atkins and Mrs. J. B. Atkins were members of a marital community, resident in Shreveport, Louisiana, from January 1 to October 28, 1923. Separate income tax returns were filed for each- — that for Mrs. J. B. Atkins covering the calendar year, and that for the decedent to the date of his death. In each return was reported one half of the income of the marital community and in the audit of the returns the respondent has found, without objection as to the period involved, the same deficiencies for each petitioner.

The issues involved in these proceedings are common to each petition, except that with respect to the eighth issue, which involves the question whether the respondent erred in disallowing the deduction from the community income of $118.31 representing interest accrued at the date of death of J. B. Atkins on October 28, 1923, which interest was paid by the estate of J. B. Atkins on November 8, 1928.

Some of the issues have been settled by stipulation of the parties, The issues not so settled will be considered in order.

(1) The income tax return of Mrs. J. B. Atkins and that filed by her for her deceased husband for 1923 show that in that year the taxpayers received $150,500 from the sale of shares of stock of the Shreveport-Eldorado Pipe Line Co. acquired in 1921 and 1923 at a cost of $11,500 — net profit $139,000. In the adjustment of the returns the respondent has increased the profit upon the sale of this stock in the amount of $4,900 by reducing the cost from $11,500 to $6,600. On brief the respondent admits that the reduction in the cost should be only $4,500, or, in other words, that the cost should be $7,000 for the shares sold.

The evidence shows that in 1923 the petitioner sold 2,100 shares of stock of the Shreveport-Eldorado Pipe Line Co. to Lilley, Blizzard & Co. of Philadelphia. The ledger of the decedent shows a cost for the shares of stock sold of $11,500; that on March 20,1923, the decedent acquired from his sister-in-law, Mrs. V. B. Terrett, 75 shares of this stock at $60 per share, total $4,500. The respondent contends that the decedent made an ineffectual transfer of these shares to his sister-in-law in a prior year and that the amount of $4,500 represents a portion of the sale price which was eventually paid to Mrs. Terrett by the decedent’s executor. The evidence, however, is clearly to the contrary. The shares of stock stood in the name of Mrs. Ter-rett and she had acquired them from the decedent for a valuable consideration. The contentions of the petitioner upon this point are sustained.

(2) The above mentioned tax returns for 1923 likewise show that in that year the taxpayers sold for a consideration of $61,677.50 shares of stock of the Shreveport Producing & Refining Corporation acquired in 1920 at a cost of $209,604.82. The loss claimed in respect of this sale was $147,927.32, which the respondent has disallowed as a deduction from gross income. It is now contended in the light of the evidence that the cost of the shares was not $209,604.82 but was $170,393.50 and that the loss upon the alleged sale was $108,716.

The evidence upon this point is as follows:

On May 3, 1923, the decedent deposited in the Commercial National Bank of Shreveport a draft upon Lilley, Blizzard & Co. of Philadelphia, brokers, for $32,500 and attached thereto certificates of stock of the Shreveport Producing & Refining Corporation for 26,000 shares ($1.25 per share) ; also, on May 15, 1923, the decedent deposited a draft in the same bank on Lilley, Blizzard & Co. for $29,177.50 to which were attached certificates of Shreveport Producing & Refining Corporation for 23,342 shares; that on May 12, 1923, Atkins loaned to one B. H. Gray on his promissory note payable to the decedent 90 days from date, with interest at 6 per centum per annum, $32,760; that on the same date the decedent issued his check on the Commercial National Bank of Shreveport payable to B. H. Gray or order, in the amount of $32,760. This check bears a typewritten endorsement as follows: “ For Deposit To Credit Account B. H. Gray.” At that time B. H. Gray had an account with the City Savings Bank & Trust Co. ,of Shreveport, which showed a balance to his credit on May 12, 1923, of $113.12. This check was deposited in Gray’s account at this bank on May 12, 1923. On the same date B. H. Gray drew a sight draft on the City Savings Bank & Trust Co. in favor of the Commercial National Bank of Shreveport for $32,760. The draft was paid by the City Savings Bank & Trust Co. on the same day, May 12, 1923. On May 21, 1923, B. H. Gray gave his promissory note payable to J. B. Atkins 90 days after date, with interest at 6 per centum per annum, for $29,410.92. On the same day the decedent gave his check to B. H. Gray for $29,410.92 drawn on the Commercial National Bank of Shreveport, which was endorsed in writing: “For Deposit Acct. B. H. Gray.” B. H. Gray did not personally endorse this check and does not know who did. The check was deposited in the City Savings Bank & Trust Co. on May 21, 1923. On May 23, 1923, Gray drew a check for $34,450.92 on his account in the City Savings Bank & Trust Co. payable to Commercial National Bank, which was paid by the City Savings Bank & Trust Co. on May 23, 1923.

The records of the Shreveport Producing & Refining Corporation show that certificates for 49,352 shares of Shreveport Producing & Refining Corporation stock, claimed to have been sold by the decedent to Lilley, Blizzard & Co. for $61,677.50, were surrendered for cancellation on May 15, 1923, that new certificates for 26,000 shares were issued to B. H. Gray on May 15, 1923, and that certificates for 27,342 shares were issued to him on May 23, 1923.

The above referred to 90-day notes given by Gray to the decedent were secured by the collateral of the 26,000 shares and the 27,342 shares claimed to have been acquired by Gray from Lilley, Blizzard & Co. The difference between the 23,342 shares claimed to have been sold to the brokers by the decedent and the 27,342 shares claimed by Gray to have been purchased from the brokers is accounted for by the fact that J. B. Atkins, Jr., at or about this time parted with 4,000 shares of this stock and these shares were acquired by Gray by the same transaction by which he acquired the 23,342 shares in question.

In 1921 B. H. Gray was an employee of the decedent. In 1923 he was employed by the Shreveport Producing & Refining Corporation at a salary of $6,000 per year. The decedent was president of that corporation. Gray’s income from other sources was not in excess of $1,000 a year. He could not have purchased the stock claimed to have been purchased by him without borrowing money for such purchase-

The notes given by Gray were not paid at maturity, but were canceled by Gray surrendering to the decedent the 53,342 shares given as collateral security for the notes.

The respondent has disallowed the claimed loss upon the alleged sale of the 49,342 shares of stock by the decedent upon the ground (a) that the record does not show the cost to the decedent of the shares of stock in question, and (b) that there was no bona fide sale of the shares from which any deductible loss was sustained or, if there was, the shares were reacquired by the decedent within 30 days from the date of sale.

The respondent admits that the evidence shows that the decedent acquired 16,000 shares of Shreveport Producing & Refining Corporation stock in 1921 at a cost of $41,500. He contends, however, that there is no evidence in the record showing the cost of the balance of the 33,342 shares of stock sold. The evidence does show, however, that the 33,342 shares of stock in question were acquired through the exchange of Caddo Central Oil & Refining Corporation bonds and that the exchange was made upon the basis of $6 par value of bonds for one share of the stock. In John B. Atkins et al., 9 B.T.A. 140, we held that Atkins was liable to income tax upon the receipt of these bonds upon the basis that their fair market value at the time of acquisition by Atkins was $644.30 per $1,000 bond. Upon this basis the cost to Atkins of the 33,342 shares in question was $128,893.50 ($3.8658 per share). It is submitted by the petitioner that upon the basis of our prior report the cost of the shares of stock in question was $110,393.50 ($41,500 for 16,000 shares and $128,893.50 for 33,342 shares). This finding is warranted by the principle laid down by the Supreme Court in Wyoming v. Colorado, 286 U.S. 494, 507, where it was held that findings of fact pertinent to the issues in a suit are not open to dispute in a subsequent suit between the same parties and will be applicable to the issues raised in such subsequent suit. See also Southern Pacific R.R. Co. v. United States, 268 U.S. 1, 48.

The question now for consideration is whether the taxpayers sustained a deductible loss of $108,716 upon the alleged sale of the 49,342 shares in question. The respondent contends that they did not under section 214 (a) of the Revenue Act of 1921, which reads, so far as pertinent, as follows:

That in computing net income there shall be allowed as deductions:
****** *
(5) Losses sustained during the taxable year and not compensated for by insurance or otherwise, if incurred in any transaction entered into for profit, though not connected with the trade or business; * * * No deduction shall bo allowed under this paragraph for any loss claimed to have been sustained in any sale or other disposition of shares of stock or securities made after the passage of this Act where it appears that within thirty days before or after the date of such sale or other disposition the taxpayer has acquired (otherwise than by bequest or inheritance) substantially identical property, and the property so acquired is held by the taxpayer for any period after such sale or other disposition. * * *

The respondent contends that B. H. Gray was in effect the agent of the decedent in the repurchase of these shares.

The bona fides of the transactions by which Atkins is claimed to have sold 49,342 shares of stock of the Shreveport Producing & Refining Corporation at a loss is questioned by the respondent. On thfe books of account of the decedent the transaction was treated as a sale of the stock. The evidence as to Gray’s part in the transaction is decidedly unconvincing that the sale of the shares was made in good faith. On direct examination Gray was asked:

Q. How many shares of stock did you purchase from Lilley, Blizzard & Company and on what .basis were your purchases made, Mr. Gray?
A. I have an invoice of Lilley, Blizzard & Company dated May 3, 1923, for 20,000 shares of Shreveport Producing & Refining Company stock at $1.20 a share, amounting to $32,700. That was attached to a draft — I don’t find a copy of the draft.

On May 2, 1926, an internal revenue agent addressed a letter to “ Lilley, Blizzard & Co., Philadelphia, Pa.”, reading as follows:

May I ask that you furnish me with the following information relative to transactions with .T. B. Atkins, Shreveport, La., during the early part of 1923.
From information furnished me, it appears that Mr. Atkins made certain sales of Shreveport Producing and Refining Corp. stock to you in the latter part of April and the early part of May 1923. Please advise me if you purchased in the latter part of April or about May 1st 26,000 shares of this stock from Mr. Atkins for $32,500 and on about May 15th an additional 23,342 shares from the same person for $29,177.50.
It also appears that this stock was re-purchased in May, 1923 by Mr. B. H. Gray, Shreveport, La., and I therefore ask that you advise me if your records indicate that Mr. Gray purchased 49,342 shares of Shreveport Producing and Refining Gorp. stock from you in May, 1923. If Mr. Gray did make this purchase please give me the date and the consideration.
Assuring you that I shall appreciate a prompt reply, lam * * *.

This letter was answered by Lilley, Blizzard & Co. under date of March 6, 1926, as follows:

In reply to your letter of March 2nd, we beg to advise that in the regular course of our trading business, we did buy from Mr. J. B. Atkins in 1923 the shares of stock of Shreveport Producing and Refining Corporation stated.
It appears that on about May 18, 1923, we sold to Mr. B. H. Gray, 53,342 shares of Shreveport Producing & Refining Stock for a cash consideration of $67,210.92.
Trusting this is the information you desire, we are * * *.

Whether the alleged sale at a price of $1.25 per share was the fair market price of the stock is not shown by the evidence; neither is it shown that the certificates ever left Shreveport. The certificates claimed to have been sold by the decedent on May 15, 1923, to Lilley, Blizzard & Co. were surrendered for cancellation on that day, although it appears from the evidence that they were attached to a draft deposited in the Commercial National Bank of Shreveport for collection on that very day, which draft in the ordinary course of business would not have reached Philadelphia for acceptance and payment on that day. It is not shown that Lilley, Blizzard & Co. had any office in Shreveport. Gray was asked the further questions on direct examination:

Q State the manner in which you acquired your block of stock from Lilley, Blizzard & Company in the year 1923, using such memoranda, invoices, checks or drafts as you may have in your possession to refresh your recollection as to just what occurred at the time. First, did you order this stock from Lilley, Blizzard & Company by letter, telegram, verbally or how?
A I don’t remember how.
Q Have you searched your records for letters and telegrams on the subject?
A Yes, but I don’t keep much of a record of any sort.
Q Could you find any telegrams or letters bearing on the matter?
A I looked through some old files of mine and all I found were some invoices and checks. I didn’t find any record of placing the order.
Q Is it your recollection that you did yourself order the stock or did someone do it for you?
A I don’t recall.

It appears to the Board that if this transaction were a purchase of these shares of stock from Lilley, Blizzard & Co. by B. H. Gray, as contended, B. H. Gray should have a lively recollection of the circumstances under which the purchase was made. At the time he was an employee of the Shreveport Producing & Refining Corporation and received a salary of $6,000 per annum. He stated that his net assets at the time were probably between $25,000 and $30,000. This transaction was a momentous transaction if this was the limit of his resources as he testified.

What arrangement, if any, was made by Atkins with his brokers with reference to this stock is not shown by the record. If as appears to be the fact, Lilley, Blizzard & Co. invoiced to Gray on May 3, 1923, the 26,000 shares of Shreveport Producing & Refining Corporation stock at $1.26 per share, it is apparent that the arrangement by which this was accomplished was made before that date.

Furthermore, it does not appear to the Board that a loan by Atkins to Gray of the full amount of the purchase price of these shares from the brokers, secured by collateral of the shares, was an ordinary business transaction. There is no evidence that upon the maturity of the notes in August 1923, any demand was made upon Gray for the payment of the notes, or that Gray paid any interest upon the notes. Upon the maturity of the notes the certificates securing the notes were surrendered to Atkins. The arrangement by which this was done was made by J. B. Atkins, Jr. Upon the evidence we conclude that Gray was Atkins’ agent in the transaction.

We are of the opinion that the respondent’s contention that the decedent sustained no deductible loss upon this transaction is well founded. If the alleged sale to Lilley, Blizzard & Co. was bona fide, we are of the opinion that the evidence warrants the conclusion that these shares were reacquired by Gray for the decedent within 30 days from the date of the sale thereof. Cf. Esperson v. Gornmis-sioner, 49 Fed. (2d) 259. The issue upon this point is decided in favor of the respondent.

(3) In 1923 the decedent sold 1,600 shares of stock of the Shreveport-Eldorado Pipe Line Co. for $32,000 and credited the same upon his books of account to his two daughters. The respondent has increased the community income for 1923 by the $32,000 in question.

It is the contention of the petitioner upon this point that these shares of stock were the property of her two daughters; that the decedent sold them for tbeir account and treated the transaction accordingly.

It appears that at Christmas time, 1920, the decedent announced that he was going to give to each of his four children 500 shares of Shreveport-Eldorado Pipe Line Co. stock of a par value of $100 as a Christmas present. The stock was not delivered at that time, but at a little later date the certificates for the stock were delivered. The stock was transferred upon the books of the Shreveport-Eldorado Pipe Line Co. and each of the two daughters became stockholders of record. In 1923 the par value of the stock was reduced from $100 to $25 per share and each daughter received 2,000 shares in place of the 500 shares which each had theretofore owned. In 1923 the decedent found a market at $20 per share for 1,000 shares of the stock and advised each daughter to make a sale of 800 shares of the stock belonging to each. Certificates for 800 shares, in safekeeping with the decedent, were endorsed by each daughter and sold by the decedent for the owners and the proceeds invested in bonds,' which were later turned over to the daughters or their husbands.

Upon this point the respondent contends that no valid gift of the shares of stock was made by the decedent, for the reason that at the time of the gift there was no power of attorney executed by the decedent stockholder as required by article 1536 of the Louisiana Civil Code, which reads as follows:

Art. 1536 [1523]. Form of Donation Inter Vivos of Immovables, Incorporeal Things, An act shall be passed before a notary public and two witnesses of every donation inter vivos of immovable property or incorporeal things, such as rents, credits, rights or actions, under the penalty of nullity.

The respondent contends that it was held in Succession of Mc-Gwire, 151 La. 521; 92 S. 40, that a certificate of stock is an incorporeal thing and can not be transferred without the accompanying power of attorney, properly witnessed, which counsel for the petitioner admits was not done in this case.

In Succession of McGuire, supra, the court stated:

On the merits, defendant in rule contends that as the result of the express provisions of Act 180, p. 265, of 1910, entitled “An act to make uniform the law of transfer of shares of stock in corporations,” the title to a share of stock may be validly transferred, without consideration, or, in other words, as a donation, by the execution of a power of attorney to sell, assign, or transfer such as the one hereinabove transcribed executed in his favor by decedent.
That contention appears to us to be well founded. Section 1 of the said act provides that title to certificates of stock and to shares represented thereby can be transferred by the delivery of such a document and of the certificate of stock; and sections 6 and 7, read together, provide that such a transfer is “ effectual ” even though the transferror has received no consideration for same.

The facts indicate that the decedent’s daughters were the owners of record on the books of the Shreveport-Eldorado Pipe Line Co. and we think it cannot be contended 'in the light of the record that the proceeds from the sales of the stock in question inured to the decedent. The evidence is all to the contrary. If he made a gift of money to his daughters and purchased the stock, the gift was valid. Sec. 1539, Civil Code of Louisiana. If, on the other hand, he theretofore owned a certificate of stock which was surrendered for cancellation and reissued to the daughters, the transfer was valid under the decision of the court in Succession of McGuire, supra. The contention of the respondent upon this point is not sustained.

(4) The taxpayers not having reported any taxable income for 1923, did not claim any deduction from gross income of donations to charitable institutions. In the determination of the deficiencies the respondent has allowed donations deductible from the community income of $31.245.52, which is the 15 percent limitation imposed by law. The respondent submits that in the event the appeal of the taxpayers is sustained then this deduction for charitable contributions will have to be reduced to 15 percent of the revised net income.

The evidence shows that dxiring the year 1923 the taxpayers made a donation to Centenary College of $50,000 in bonds of the Shreveport Producing & Refining Corporation. The return indicates that other cash donations were made in the total sum of $5,625. The respondent on brief states that Centenary College is an educational institution within the meaning of section 214 (a) (11) of the [Revenue Act of 1921, and that the deduction for charitable contributions should be allowed in accordance with the provisions of that section. The matter will be adjusted under the Rule 50 settlement.

(5) In the computation of the deficiencies the respondent disallowed the deduction from gross income of $118.31 representing interest accrued at the date of death of J. B. Atkins on October 28, 1923, which was paid by his estate on November 8, 1923. The returns were made upon the basis of cash receipts and disbursements. The payment of the interest in question was a liability of the estate and is a legal deduction from the gross value of the estate under the provisions of the estate tax law. Not having been paid by the community, it is not a legal deduction from community income in returns made on a cash basis. The action of the respondent on this point is sustained.

Reviewed by the Board.

Judgment will he entered under Rule 60.


author: Marquette:

text:
    California Wharf and Warehouse Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Interior Warehouse Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Crown Mills, Petitioner, v. Commissioner of Internal Revenue, Respondent. Northern Wharf and Warehouse Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 41770, 41820-41822, 51797-51800.
    Promulgated June 22, 1933.

      Henry D. Costigan, Esq., for the petitioners.

      Eugene Harpole, Esq., for the respondent.
   OPINION.

Marquette:

The affiliated group of which the petitioners were members sustained consolidated net losses in 1922 and 1923 and again in 1925 and 1926. The group had a consolidated net income in 1924 and also in 1927. The fact of affiliation, and the propriety of filing consolidated returns, is admitted. The only question before us is what portion of the net losses sustained in 1922 and 1923 and in 1925 and 1926 may be deducted in computing taxable net income for 1924 and 1927, respectively.

It is the petitioner’s contention that the consolidated net losses of 1922 and 1923 and of 1925 and 1926 are deductible in computing taxable net income for 1924 and 1927, respectively. This contention is disposed of adversely to the petitioners, upon authority of Wool-ford Realty Co. v. Rose, 286 U.S. 319; Planters Cotton Oil Co. v. Hopkins, 286 U.S. 332; Swift & Co. v. United States, 38 Fed. (2d) 365; Delaware & Hudson Co., 26 B.T.A. 520; and New Castle Leather Co., 26 B.T.A. 282.

Computing the amounts thereof in accordance with the principles laid down in Swift & Co. v. United States, supra, and Delaware & Hudson Co., supra, the following are the unabsorbed net losses for the years 1922 to 1927, inclusive, of those members of the affiliated group which sustained net losses in those years:

It will be noted from the above statement and the statements of net income and net losses set forth in the findings of fact that, of the four companies which had unabsorbed net losses for 1922, three sustained net losses in 1924, while the fourth, the Fife Shipping Co., passed out of the affiliated group at the'close of 1922. Under the cited cases, therefore, the respondent correctly disallowed the deduction of the unabsorbed net losses of 1922 in computing taxable net income for 1924.

It will also be noted that three of the four companies which had unabsorbed net losses for 1923 also sustained net losses in 1924, while the fourth, the California Wharf & Warehouse Co., had a net income in 1924. The respondent, therefore, erred in allowing the deduction of the 1923 unabsorbed losses of the first three mentioned companies in computing taxable net income for 1924, and his prayer for increased deficiencies for that year, based upon the ground that he so erred, is allowed. The total amount deductible in 1924 on account of 1923 losses is $4,867.64.

Of the three companies which had unabsorbed net losses for 1925, two, the Balfour, Guthrie Trust Co. and the Balfour, Guthrie Investment Co., also sustained net losses in 1927. Therefore, the 1925 unabsorbed net losses of those two companies are not-properly deductible in computing 1927 taxable net income. The third company, Crown Mills, had an unabsorbed 1925 net loss which is $95,538.08 in excess of its net income for 1926, and, since its net income for 1927 is greater than that amount, such excess is a proper deduction in computing taxable net income for 1927.

Both of the companies which had unabsorbed net losses for 1926 sustained net losses in 1927. Consequently, the 1926 unabsorbed losses of those companies are not proper deductions in computing taxable net income for 1927.

Judgment will T>e entered under Rule 50.


text:
    Eugenia R. Jemison, Petitioner, v. Commissioner of Internal Revenue, Respondent. Jemison & Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 64996, 64997.
    Promulgated June 22, 1933.

      Lee C. Bradley, Jr., Esq., for the petitioners.

      Thos. F. Callahan, Esq., for the respondent.
   OPINION.

Lansdon :

The petitioner Jemison, Docket No. 64996, contends that no part of the amount received as dividends on the corporate stock referred to in our findings of fact constitutes taxable income in the year collected, arguing that that sum total was but the gross proceeds from the collections of accounts receivable acquired in the stock exchange transaction. In other words, it is this petitioner’s claim that at the time she acquired the preferred stock of the two corporations concerned she also acquired, in addition to the bare property interest represented by each share, the right to the unpaid dividends which had been theretofore declared and which constituted debts owing to Jemison & Co. from the corporation.

The petitioners’ counsel has cited a number of decisions to show, in contemplation of law, who owned the property in the disputed dividends at the time they were separated from the corporation’s undivided surplus by corporate act and appropriated to the stockholders’ accounts. In so far as that question pertains to legal title to the dividends at the time they were declared, the petitioners’ argument is sound and in line with the majority of court decisions. The controlling question here, however, is not one of ownership at a given time, but rather of taxable enjoyment in the taxpaying period as fixed by the statutes. Section 22 (a) of the Revenue Act of 1928 makes corporate dividends reportable as income; and, in applying that provision to cases where stock has been sold between dividend dates, the Secretary of the Treasury has provided in article 51 of Treasury Regulations No. 74 in part as follows:

In the case of stock sold between dividend dates, the entire amount of the dividend is income to the vendee and must he reported in his gross income when the dividend becomes due and payable. The amount advanced by the vendee to the vendor in contemplation of the next dividend payment is an investment of capital and may not be claimed as a deduction from gross income.

The facts herein bring the petitioner Jemison clearly within this provision of the regulation. The whole amount of dividends received by her was taxable income. Under the same regulation it is equally clear that the amount which she advanced to the vendor was a capital outlay and is not deductible from income. Conversely, it follows that the $628.15 was received by the petitioner Jemison & Co., in the sale of capital assets. The parties have stipulated that if it is held that this transaction was of a capital nature the entire amount is in excess of the cost of the property sold and is income to Jemison & Co. The determinations of the respondent conform to the law and regulations and are affirmed.

Reviewed by the Board.

Decision will be entered, for the respondent.

Arundell and Black dissent.


author: Black :

text:
    John J. Rauers and Samuel B. Adams, Trustees under the Will of Jacob Rauers, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 63633.
    Promulgated June 22, 1933.

      Samuel B. Adams, Esq., for the petitioners.

      T. M. Mather, Esq., and R. H. Transue, Esq., for the respondent.
   OPINION.

Black :

This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1929 proposed against petitioners as trustees under the will of Jacob Rauers. Petitioners admit a deficiency of $593.13, but contest the remainder.

Tbe only issue is whether in his will Jacob Eauers created one trust for the benefit of his three daughters, or a separate trust for each.

Section 161 of the Revenue Act of 1928 provides that the taxes imposed upon individuals shall apply to the income of any kind of property held in trust, and that the tax shall be computed upon the net income of the trust, and shall be paid by the fiduciary. Section 143 of the same act provides that the fiduciary shall make under oath a return for any of the trusts for which he acts and shall be subject to all the provisions of law which apply to individuals.

Whether tire decedent in the instant proceeding created one or three trusts depends upon his intention as set forth in the will itself. The material parts of decedent’s will executed on July 17, 1903, are as follows:

(A). — My estate shall not in any event be divided before the death of my wife and should, at the time of her death, any one or more of my children be under the age of thirty (30) years, the estate shall still be kept together until the youngest child shall have attained the age of thirty (30) years. I hereinafter state what shall be done with the share or portion coming to a daughter.
*******
(C). — The balance of the income from my said estate shall be divided equally among my six (6) children. Should a child die leaving surviving him or her issue of such child, the issue shall represent the parent and take such share of the income as the parent would have received if the parent had not died. Should there be no surviving issue, but should a son leave a widow, this widow, if she remain the widow of the son shall enjoy his share of the income until the division. Should there be no surviving issue or widow of a deceased son, the shares of my deceased children in the income shall be enjoyed by my surviving children equally.
(D). — Should any one of my sons, in order to enter business, require a lump sum of money, my Executrix and Executors are empowered to advance it from the corpus of the estate, taking his obligation therefor, and charging such son interest at the rate of three (3) per cent per annum, which interest is to be payable annually. Such advance if retained by him or lost shall be deducted from his share of the estate when the division takes place, and must not exceed fifty (50) per cent of his interest as it is then estimated by my Executrix and Executors.
*******
(E). — Upon the death of my wife, if the youngest child has then attained the age of thirty (30) years, or should she die before the youngest child has attained this age, then upon the attainment by the said youngest child: of his or her thirtieth year, I direct that my estate be divided equally among the children then in life, the issue of a deceased child, if issue there be at that time, to represent the parent and to take the share that the parent would have taken had he or she survived upon this express condition and stipulation, nevertheless, that the share coming to a daughter shall be held by my Executrix and Executors hereinafter named, and the survivor of them, in trust for the said daughter during her lifetime, and from and after her death then for the issue of such daughter her surviving, and with the express condition also that should a daughter die without issue, her share shall go to my surviving children, with the same conditions herein expressed as to a daughter’s share being held in trust as herein stated.
Item Second : I nominate, constitute and appoint my wife, Joanna McD. Rauers, to be the Executrix, and my oldest son, John J. Rauers, and my friend, Samuel B. Adams, all of Savannah, Georgia, to be the Executors of this Will and Trustees hereunder for the purpose of carrying out the trusts herein reposed. * * * I fully authorize the said Executrix and Executors, and the survivors or survivor of them, to make any change of investment at any time before the division hereinbefore provided for at their discretion and without any order of Court, and to this end to make sale at private sale without any order of Court reinvesting the proceeds of such sale upon the same uses and trusts, but to which reinvestment no purchaser or purchasers shall be bound to look.

Tbe widow of tbe testator died about 1914. Tbe youngest child, Harry Rauers, became thirty years of age on November 21, 1915. Early in 1916 be received his share of his father’s estate. By common consent the property was otherwise kept together until in August I960, J. J. Rauers received his share. The daughters’ shares were kept together. One set of books was kept for the three daughters, and all the securities were kept in one safety deposit box. At the end of each year a statement was prepared showing the income of each daughter separately.

A fiduciary return of income on Form 1041 was filed for the calendar year 1929 under the name of “Estate of Jacob Rauers, J. J. Rauers, Executor.” This return was the only fiduciary return filed for the trust in 1929 and showed beneficiaries’ shares of income and credits as follows:

No return was filed on Form 1040, notwithstanding the provision of article 741 of respondent’s Regulations No. 74, providing that “ a return is required on Form 1040 with respect to any taxable net income of the estate or trust computed in accordance with section 162 and a return on Form 1041 with respect to any income deducted under section 162 (b) or (c).” The basis of respondent’s determination is shown in the statement which' accompanied the deficiency notice as follows:

Tbe issue involved is whether under tbe will of tbe late Jacob Rauers one trust ■was created with Mrs. E. R. Thesmar, Mrs. K. R. Cunningham and Mrs. F. R. Oemler as beneficiaries or whether a separate trust was created for each beneficiary.
On the basis of the information of record this office concurs in the examining officer’s contention that only one trust was created.
Accordingly, the report dated October 22, 1931, prepared by Revenue Agent J. R. Maddock, a copy of whicli was transmitted to you under date of November 5, 1931, has been accepted with two exceptions: [These exceptions not needed here.]

It may be remarked at this point that although the shares of income of J. J. Nauers and J. McH. Nauers, the two sons of decedent, are shown on the information return, Form 1041, filed by the fiduciaries for 1929, there is no contention on the part of respondent that their shares are parts of the trust income. It is admitted that their shares were merely kept that way for convenience and they were entitled to their separate shares under the terms of the will.

Petitioners contend that under the will a separate trust was created for each daughter, effective after the death of the wife and upon the youngest son arriving at the age of thirty years, both events having-taken place long prior to the taxable year; that the net taxable income of each trust was the amount of $11,554.13 (% of $34,662.39); that the income tax liability on net income of $11,554.13, part of same being dividends on which only surtax was due, is the amount of $197.11; and that as fiduciaries they are liable for a deficiency of only $593.13.

We think petitioners’ contentions must be denied upon authority of the following cases: Johnson v. United States, 65 Ct. Cls. 285; certiorari denied, 278 U.S. 611; Nancy Carver Lathrop Campbell et al., Trustees, 15 B.T.A. 414; State Savings Loan & Trust Co., Trustee, 25 B.T.A. 228; affd., 63 Fed. (2d) 482; Lynchburg Trust & Savings Bank et al., Trustees, 27 B.T.A. 1182; J. C. Wynne et al., Trustees, 28 B.T.A. 125; Margaret B. Sparrow, 18 B.T.A. 1. The will of Jacob Nauers, of which petitioners are executors and trustees, unquestionably set up only one trust to take charge of his estate at death. This trust was to hold decedent’s property undivided until the death of his wife and the youngest son should attain the age of 30 years. Up until the happening of these two events, no one could contend with any degree of plausibility that the will created more than one trust. No one does so contend. The widow died in 1914 and the youngest son became thirty years of age November 21, 1915. It was at this latter date that the decedent had directed that his estate be divided and the shares coming to his sons be delivered to them, but the shares coming to his daughters were to continue to be held in trust for them. Is there anything to show that the testator intended to direct in his will that three separate trusts be established, one for each daughter, at the time this division of the estate was to take place? We find nothing in the will which justifies us in reaching such a conclusion. Evidently the testator intended that the trust, which had theretofore had the custody of his entire estate, should continue right on as before, except the shares of the estate coining to the sons should be turned over to them. This was the way the trustees treated the matter, for there is nothing to show that they regarded the will as setting up three separate trusts. For the year 1929, the taxable year which is before us, they filed only one fiduciary return of income on Form 1041. We think the facts of the instant case are very similar to those in Johnson v. United States, supra. In that case the trustees originally reported on the basis of there being one trust. Four years later they filed amended returns and claimed that there were three trusts instead of one. The Court of Claims held against such contention and the United States Supreme Court denied a writ of certiorari. In State Savings Loan & Trust Co., Trustee, supra, the contention of the taxpayer was that the declaration of trust established nine trusts instead of one, but we denied such contention and held there was only one trust, and in affirming our decision the circuit court of appeals said: “ It seems to us that the settlors intended to create but one comprehensive trust in which each of the beneficiaries was to have a one-ninth beneficial interest.” We make a similar holding in the instant case when we find there was only one trust instead of three.

Petitioners in support of their contention rely mainly upon our decision in DeVer H. Warner, Trustee, 7 B.T.A. 1292, but we think the facts in the instant case are clearly distinguishable from the facts which were before us in that case. In the Warner case we held that it was clear that the testator intended to create three trusts instead of one, and in giving the reasons for it we said:

It is only necessary to point out two provisions of the will which demonstrate this intention. By the sixth paragraph of the fifth codicil, DeVer H. Warner is given the authority to resign his ofEce of trustee in, any or all of the trusts, to appoint his successor, and “ also to entrust by said appointment, the sepwate trust funds therein created to different trustees, if he shall see fit * * * .” Here the testator speaks of “ the separate trust funds therein created.” He intended to and did create “ separate trust funds.” Under the above provision, DeVer H. Warner was given the authority to appoint a separate trustee for each separate trust fund. It is thus only by circumstance that there was but one trustee for all the trusts in the particular year before us. [Italics supplied.]

We find no comparable provisions in the will which we are now construing. Only one trust was created by the will.

It should be pointed out that in redetermining the net taxable income of the trust for the taxable year in question the Commissioner should allow as a deduction, in accordance with section 162

(b) of the Bevenue Act of 1928, the amount of the income of the trust which was to be distributed currently by the trustees to the beneficiaries, and should also allow as a deduction, in accordance with section 162 (c) of the Bevenue Act of 1928, the amount of any income of the trust which, although not mandatorily distributable to the beneficiaries within the taxable year, was distributable within the discretion of the trustees and was in fact properly paid or credited during the year 1929 to the beneficiaries of the trust.

Beviewed by the Board.

Decision will loe entered under Bule 50.


author: Arundell :

text:
    The Associates, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 62433.
    Promulgated June 23, 1933.

      J. C. Peacock, Esq., for the petitioner.

      Frank A. Surine, Esq., for the respondent.
   OPINION.

Arundell :

Petitioner claims exemption from tax on its income for 1929 under section 103 (9) of the Revenue Act of 1928, which provides for the exemption of:

Clubs organized, and. operated exclusively for pleasure, recreation, and other nonprofitable purposes, no part of the net earnings of which inures to the benefit of any private shareholder.

It is familiar law that a claim for exemption must be clearly made out by the claimant and where there is any doubt the construction must be in favor of the Government. Under other provisions of taxing statutes, similar to the one before us to the extent that they exempted associations “ organized and operated exclusively ” for designated purposes, it has been uniformly held that all of the tests of the statute must be met by the taxpayer. It is not enough that the claimant be organized for the purposes given statutory recognition; it must be so operated and to that end exclusively. Herbert E. Fales, 9 B.T.A. 828; J. Noah H. Slee, 15 B.T.A. 710; affd., 42 Fed. (2d) 184. Under the statute here it is a condition of the exemption that the club be “operated exclusively for * * * nonprofitable purposes.”

The Supreme Court has not denied exemption to a corporation admittedly organized and operated exclusively for religious, benevolent, scientific, and educational purposes because of income from property used as a source of revenue for carrying on its work, or because of incidental profits realized (Trinidad v. Sagrada Orden de Predicadores, 263 U.S. 578), and similarly the Court has not allowed a technical formality, which permitted a charitable organization to enjoy income from a residuary estate before the time limited, to stand in the way of exemption. Lederer v. Stockton, 260 U.S. 3. In the first mentioned case the Court took into consideration the benefit which the public derives from corporate activities of the class named ”, and in the other case “ the beneficent purpose of Congress ” in allowing exemption to charitable organizations, in that case a hospital. The taxpayer before us cannot on any similar grounds lay claim to Congressional favor or any relaxation of the rule of strict construction. The exemption sought here comes under a separate and distinct provision of the statute. Petitioner’s objective is not the bestowal of any benefit upon the public, but rather the advancement of the welfare of its own small group of members. We do not mean to intimate that petitioner is relying upon the cases we have cited from the Supreme Court reports, and we refer to them merely for the purpose of demonstrating that it is only in the case of a public benefactor that it might possibly be said that the rule is ever relaxed.

The respondent does not deny that petitioner was organized for the purposes set out in the statute. His argument is that in 1929 it was operated for profitable purposes, hence its activities went beyond those permitted. We think the position thus taken by the respondent is sound. Perhaps the mere conversion in 1929 of its railroad bonds into cash at a profit would not be enough to characterize its activities as engaged in for profit. But it went beyond that, and bought and sold other securities for substantial sums. Some time between October 24, 1928, and February 6, 1929, petitioner borrowed $21,225, and it is to be presumed that this loan was used to purchase the 1,000 shares of Simms Petroleum stock acquired on November 23,1928. While the evidence does not directly establish that the borrowed funds were so used, it does appear that petitioner did not have sufficient funds of its own to make the purchase. If the borrowed money was not used for that purpose the burden was on the petitioner to show that fact. The Simms Petroleum stock was sold in 1929 at a profit of $8,121. On July 1, 1929, petitioner purchased stock of Consolidated Gas of New York for $64,562.50. The source of the funds for this purchase is not shown, but in the statement of its trustees of June 17, 1929, the only asset listed is cash in the amount of $35,844.54. This block of stock was sold in August of 1929 at a profit to the petitioner of $24,042.50. The record does not disclose the date of purchase of 2,000 shares of American Superpower and a like amount of Transcontinental Oil stock at an aggregate cost of $73,750. The stipulated facts show that petitioner did not own these stocks on October 11, 1929, and did own them on February 24, 1930. In this state of the record we assume the purchase to have been made in 1929.

From this review of petitioner’s activities in 1929 we see that it did a substantial business in dealing in securities from which it reaped a sizable profit. In order to do so it liquidated the investments held at the beginning of the year and in addition borrowed money to carry on the business of buying and selling stocks. The facts in the case preclude any claim that the profits were merely incidental to the ownership of property. We are of the opinion, and so hold, that in 1929 petitioner engaged in buying and selling activities for the deliberate purpose of realizing a profit and thus lost the right to be classified as a club, “ operated exclusively for * * * nonprofitable purposes.”

It was stipulated that petitioner “ engages in social and recreational pursuits, including fishing, golf, tennis and other sports as well as cards and general good fellowship.” Counsel for petitioner claims that this establishes the purposes for which it was operated. However, the stipulation does not say that petitioner’s activities were exclusively those named, and the facts established show otherwise.

There is some argument by both parties as to whether earnings might inure to the benefit of any private shareholder. This might be important if the petitioner had been organized and operated exclusively for the specified purposes, but, holding as we do that it was not so operated, we think it unnecessary to go into this question. If, however, this is material, the evidence is on the respondent’s side, it being shown that at one time petitioner distributed to its members “ some of the accumulated funds of securities.”

Decision will be entered for the respondent.