author: McMahon :

text:
    Helen G. Carpenter, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54463.
    Promulgated December 10, 1932.

      Thomas L. Marshall, Esq., for the petitioner.

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

McMahon :

We are here called upon to determine the taxable income derived in the year 1928 by the petitioner upon the sale in 1927 of certain real property located in Chicago, Illinois, which she and her husband had acquired and owned as joint tenants. Petitioner’s husband died about six months before the date of sale.

The sale was upon the installment basis and was so treated by the petitioner in her income tax return for the year 1928. No question is raised as to the propriety of this manner of returning the income. The sole issue relates to the proper basis to be used. For the year 1928 the petitioner returned and paid income tax upon an aliquot part of one-half of the difference between the total cost of the entire property and the selling price. This was upon the theory that she acquired one-half of the property at the date of the original transfer to her and her husband. It is her contention that the remaining half of the property was acquired by her upon the death of her husband; that the basis for the determination of gain or loss upon her sale of that portion is its value as of the date of the death of her husband; and that, since at that date it had a value equal to the price at which it was later sold, no gain was derived upon the sale. The respondent, on the other hand, contends that the proper basis to be used in the determination of gain or loss to the petitioner upon the sale of the entire property is the original cost of such property, namely, $77,136.07, and that the gain derived by petitioner is the difference between that figure and the selling price of the entire property, $125,000, less the broker’s commission of $3,750 paid by petitioner. Neither petitioner nor respondent, in their calculations, deducted this commission, but respondent in his brief concedes that it should be deducted in computing the profit. This amount will be deducted upon the recomputation under Eule 50.

Under section 113 of the Revenue Act of 1928, set forth in part in the margin, the basis for the determination of gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property, with certain exceptions. This property was acquired by petitioner after February 28, 1913, and unless one of the exceptions is applicable the basis to be used is the cost of the property. The only exceptions which are possibly applicable are contained in subdivision (a) (5).

In applying the quoted portion of the statute, we are governed by certain well established rules of statutory construction to the effect that exceptions to the general provisions of a statute should be strictly construed; that the burden of proof is upon the one claiming the benefit of such exceptions to bring himself within them; that the general provision is broader than the exception and all doubts and implications should be resolved in favor of the rule rather than the exception; that a legislature is presumed toi have stated all the exceptions to a general provision which it intended to state; and that other exceptions than those designated by statute can not be read into the statute. Bend v. Hoyt, 13 Pet. 263; United States v. Scharton, 285 U. S. 518; Kendall v. United States, 107 U. S. 123; Hopkins v. United States, 235 Fed. 95; Basham Co. v. Lucas, 21 Fed. (2d) 550; Eddington v. Northwestern Bell Telephone Co., 201 La. 67; 202 N. W. 374; Mobile Liners v. McConnell, 220 Ala. 562; 126 So. 626; Holmes v. Coalson, 154 S. W. 661 (Tex.); In re Cadwells Estate, 26 Wyo. 412; 186 Pac. 499; and Rothschild v. Superior Court, 293 Pac. 106 (Cal.). In Bend v. Hoyt, supra, the Supreme Court stated that “ an exception in a statute amounts to an affirmation of the application of its provisions toi all other cases not excepted,” and “ is conclusive to show that none other was intended.” In United States v. Scharton, supra, it was held that the clause of section 1110(a) of the Revenue Act of 1926 fixing the limitation period for offenses involving fraud at six years is an exception clause, and is to be narrowly construed.

It is also well settled that the title of a statute can not enlarge or confer powers, or control the words of the act unless they are doubtful or ambiguous, and that the ambiguity must be in the context and not in the title to render the latter of any avail. Cornell v. Coyne, 192 U. S. 418; Patterson v. The Eudora, 190 U. S. 169, and United States v. McCrory, 119 Fed, 861. The same rule applies to headings of subdivisions of statutes. Chesapeake & Ohio Ry. Co. v. Pew, 109 Va. 288; 64 S. E. 35; State v. Bridges, 19 Wash. 431; 53 Pac. 545; 36 Cyc. 1134, 1135. There is no ambiguity in the context of the portion of the statute which is here under consideration.

We are here called upon, in the light of those rules of statutory construction, to determine whether petitioner received one.-half of the joint tenancy property “by intestacy,” within the meaning of section 113 (a) (5) of the Revenue Act of 1928.

It is the contention of the petitioner that in the case of joint tenants in Illinois, the death of one tenant gives to the other tenant, as a matter of succession, the half interest of the deceased tenant, and the surviving tenant who theretofore had owned merely an undivided' half interest then receives the other half for the first time. This raises the question as to whether she took a one-half interest in the property from her husband “ by intestacy ” and whether this proceeding comes within the provisions of subdivision (a) (5) of section 113 of the Revenue Act of 1928. No claim is made that petitioner received this interest in real estate by general or specific devise.

In regard to the incidents of joint tenancy we are bound by the rules of property established in Illinois, the state in which the real property in question is located. Tyler v. United States, 281 U. S. 497.

It is well settled by the courts of Illinois that a joint tenancy may be created having all the attributes of a common law joint tenancy. In Gaunt v. Stevens, 241 Ill. 542; 89 N. E. 812, the Supreme Court of Illinois stated in part:

A “ joint tenancy ” is where two or more persons have any subject of property, jointly, in which there is unity of interest, unity of title, unity of time, and unity of possession. 2 Blackstone’s Com. 180, * * *.
* * * on January 31, 1827, the General Assembly passed an act “ concerning conveyances of real property ”, section 5 of which is as follows: “ No estate in joint tenancy, in any lands, tenements, or hereditaments, shall be held or claimed under any grant, devise or conveyance whatever, heretofore or hereafter made, other than to executors and' trustees, unless the premises therein mentioned shall expressly be thereby declared to pass not in tenancy in common, but in joint tenancy; and every such estate, other than to executors or trustees (unless otherwise expressly declared as aforesaid) shall be deemed to be a tenancy in common.” This section of the act of 1827 has been re-enacted in all of the revisions of our statutes, and is now found, without substantial change, as section 5 of our present act concerning conveyances. Hurd’s Rev. St. 1908, c. 30.
This court decided in Mette v. Feltgen, supra, that section 5 of the act of 1827 so far repealed, by implication, section 2 of the act of 1821 as to authorize the creation of joint estates possessing the qualities and incidents which the common law attaches to thein, where the language of section 5 of the conveyance act, or other equivalent words, are used clearly indicating an intention to create a joint tenancy. In other words, the effect of section S of the act of 1827 was to reverse the common-law rule, so that a conveyance to two or more persons creates the relation of tenants in common unless the intention to vest a joint estate in clearly manifested as provided by section 5 of the act of 1827. The holding in the Feltgen Case is now the established doctrine in this state. Slater v. Gruger, 165 Ill. 329, 46 N. E. 235; Cover v. James, 217 Ill. 309, 75 N. E. 490.

See also Mette v. Feltgen, 148 Ill. 357; 36 N. E. 81, referred to in Gaunt, v. Stevens, supra, which latter case was cited with approval in Liese v. Hentze, 326 Ill. 633; 158 N. E. 428, decided in 1927 by the Supreme Court of Illinois. See also Deslauriers v. Senesac, 331 Ill. 437.

In the instant proceeding the property was conveyed to petitioner and her husband by deed “ not as tenants in common but as joint tenants.” There can be no question therefore that the property was held in joint tenancy.

It is likewise well settled by the courts of Illinois that, when one of two joint tenants dies, the surviving joint tenant takes nothing as heir from the other tenant.

In Erwin v. Felter, 283 Ill. 36; 119 N. E. 926, the Supreme Court of Illinois, in determining that title to certain certificates of deposit was vested in the surviving joint tenant, stated in part:

* * * The mother and daughter were equally entitled to withdraw the entire deposit. Each held during their joint lives subject to their right in the other, and upon the death of either the other held by the same title under the instrument creating the joint tenancy. The right of each party to receive from the bank payment of the money was the same and vested at the time the bank issued the certificates. No greater right accrued by the death of either party, but the right already existing in the survivor continued while that which had existed in the deceased ceased. There toas therefore nothing in the nature of a testamentary disposition of property; no gift to talce effect at the donor’s death. [Italics supplied.]

See also Mette v. Feltgen, supra.

The case of Erwin v. Felter, supra, is in accord with the law as generally recognized.

In Thompson on Real Property, vol. 2, sec. 1712, it is stated:

The distinguishing incident of title by joint tenancy is the doctrine of surviv-orship, by force of which, upon the death of one joint tenant, the joint estate remains unimpaired with the survivors, and ultimately with the last survivor, instead of passing to the heirs of the deceased tenant. Neither can a joint tenant devise his interest in the joint estate; for upon his death, another joint tenant surviving, there is no estate or interest in the joint estate left for his will to take effect upon,

In Hernandez v. Becker, 54 Fed. (2d) 542. it is stated that:

The chief incident of such an estate [joint tenancy] is the right of survivor-ship by virtue of which, upon the death of one joint tenant, Ms interest does not pass to his heirs or representatives, hut the entire tenancy remains to the surviving cotenants, and the last surviving tenant takes the whole. 2 Bl. Com. 183, 184; City of Louisville v. Coleburne, 108 Ky. 420, 56 S. W. 681, 682; Farr v. Trustees of Grand Lodge, A. O. U. W., 83 Wis. 446, 53 N. W. 738, 18 L. R. A. 249, 35 Am. St. Rep. 73. The survivor does not take the moiety of the other tenant from him or as Ms successor, hut takes it under and hy virtue of the conveyance or instrument hy which the joint tenancy was created. Carter v. English, (C. C. A. 9) 15 P. (2d) 6; Smith v. Douglas County (C. C. A. 8) 254 F. 244; In re Gurnsey’s Estate, 177 Cal. 211, 170 P. 402; Fleming v. Fleming, supra; 33 C. J. p. 904. [Italics supplied.]

In Smith v. Douglas County, Neb., 254 Fed. 244, the United States Circuit Court of Appeals for the Eighth Circuit held that a surviving joint tenant did not, upon the death of the other joint tenant, receive “ by gift, legacy, or inheritance ” anything which was taxable under the Nebraska inheritance tax statute. The court there stated in part:

* * * If a joint tenancy, while the property would pass to the survivor upon the death of the other it would not so pass because of death, but because of the contract for joint tenancy or because of the actual joint tenancy title. * * *
* * * * * * *
* * * Plaintiff in error secured nothing by gift, legacy, or inheritance. The property did not come within the terms of the Nebraska inheritance tax statute.

We hold that upon the death of her husband petitioner did not acquire any interest in the joint tenancy property “ by intestacy,” and thus subdivision (a) (5) of section 113 affords no exception in the instant case to the general rule that the basis for determination of gain or loss shall be the cost of the property.

Petitioner relies upon United States v. Robertson, 183 Fed. 711, in which the United States Circuit Court of Appeals for the Seventh Circuit was concerned with property located in Illinois and in which the court entered into a discussion of joint tenancy. However, that decision is not in conflict with the holding herein. The court did not there hold that a surviving joint tenant takes the deceased tenant’s moiety “ by intestacy ” or by “ inheritance.” It held that the survivor took merely by “ survivorship.” Furthermore, the statute there involved is quite different from the statute applicable here.

The petitioner also relies upon the case of Commissioner v. Fletcher Savings & Trust Co., 59 Fed. (2d) 508, in which it was held that, where husband and wife own property as tenants by the entirety, when one dies the other takes the interest of the deceased tenant by “ inheritance,” within the meaning of section 303 (a) (2) of the Revenue Act of 1924, which is a part of the estate tax provisions. The court there pointed out that the word “ inheritance ” is not necessarily restricted in its meaning to the acquisition of property by one person as heir to another. We do not consider that case as governing in the instant proceeding. In the first place it involves the estate tax provisions of the Revenue Act of 1924 and we believe that there the court reached the result logically intended by the statute. In the instant proceeding we are concerned with the income tax provisions of the Revenue Act of 1928 and are called upon to determine whether a surviving joint tenant takes, upon the death of the other, any interest in the property from the deceased tenant “ by intestacy.” Cf. Lang v. Commissioner, 61 Fed. (2d) 280. Clearly the petitioner did not take “ by intestacy.'1'1 Whether or not the petitioner’s husband died testate or intestate is immaterial, because, as pointed out above, a surviving joint tenant does not, under the law of Illinois, take any interest from the deceased tenant as heir of such deceased tenant.

We are not here concerned with subdivisions (2) and (4) of section 113 (a) of the Revenue Act of 1928, since they deal with gifts. Petitioner did not receive a gift.

We hold that under section 113 of the Revenue Act of 1928 the basis for determination of gain or loss upon the sale of the property in question is its cost. The respondent’s determination will not be disturbed except for the reduction of the selling price of the property by the amount of the broker’s commission.

Petitioner also contends that, since, for estate tax purposes, there was included in the gross estate of her husband an amount of $62,500 representing the value of a one-half interest in the property in question (there is set forth in the margin the applicable provisions of the Revenue Act of 1926 requiring the inclusion of the half interest of Benjamin Carpenter in his estate for estate tax purposes), and since the estate tax was paid thereon, the use of the original cost of that half of the property to determine the gain derived by petitioner upon the sale thereof for income tax purposes constitutes double taxation. A similar contention was denied by the Board in Fannie E. Lang, 23 B. T. A. 854, affirmed in Lang v. Commissioner, supra. That case involved tenancy by the entireties, whereas we are here concerned only with joint tenancy. However, the general principle there enunciated is applicable here and we see no need to enter into a further discussion of this question. We hold that it does not constitute improper taxation. Cf. Perthur Holding Corp. v. Commissioner, 61 Fed. (2d) 785.

The holding in Kathryn M. Wood, 26 B. T. A.T028, being in conflict with the holding herein, will not be followed hereafter.

Reviewed by the Board.

Judgment will he entered under Bule 50.

Smith and Van Fossan dissent.

       (a) Property acquired after February 28, ISIS. — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
      *******
      (5) Property transmitted at death. — If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent’s estate from the decedent, the basis in the hands of the estate shall be the fair market value of the property at the time of the death of the decedent. In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. * * *

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      *******
      (e) To the extent of the interest therein held as joint tenants by the decedent and any other person, or as tenants by the entirety by the decedent and spouse, * * * except such part thereof as may be shown to have originally belonged to such oilier person and never to have been received or acquired by the latter from the decedent for less than an adequate and full consideration in money or money’s worth: * * *


source: Caselaw Access Project

author: Smith:

license: Public Domain

text:
    Lake View Trust and Savings Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent.

      Docket Nos. 58988, 63050.
    Promulgated December 13, 1932.

      Allen H. Gardner, Esq., for the petitioner.

      T. G. Histon, Esq., for the respondent.
   OPINION.

Smith:

The petitioner contends that the collections made in the taxable years before us, on the debts ascertained to be worthless, charged off on its books, and claimed and allowed as deductions from gross income of the earlier years, do not constitute taxable income. The argument is advanced that since the petitioner had net losses in the earlier years, it has received no benefit from the claimed deductions and that there was no detriment toi the Government’s revenue thereby. In other words, the assertion is made that such debts, though ascertained to be worthless and actually charged off on the taxpayer’s books in a particular year, should not be reflected in the computation of tax liability unless the deduction of the debt actually reduces the taxpayer’s taxable income. With this we can not agree. The deduction for bad debts is provided by statute and is predicated upon (a) the ascertainment of worthlessness, and (b) the actual charge-off, and not upon the ultimate resulting benefit to a taxpayer. A taxpayer may not defer the deduction of bad debts ascertained to be worthless and charged off on its books from the year of the ascertainment and charge-off to a later year when the deduction therefor will be of more benefit and effect a greater reduction of its tax liability.

In Putnam Nat. Bank v. Commissioner, 50 Fed. (2d) 158, the Circuit Court of Appeals for the Fifth Circuit, in affirming the Board’s decision (20 B. T. A. 45), said:

It seems to be taken for granted, as indeed it must be, that, if the 1921 deduction was properly claimed and allowed; that is, if in law and in fact the bonds were in that year ascertained to be to that extent worthless, any later collection of such debt must be returned as income. Carr v. Com’r (C. C. A.) 28 P. (2d) 551; Davidson v. Lucas, 59 App. D. C. 176, 37 F. (2d) 806; Sanford & Brooks Co. v. Com’r (C. C. A.) 35 P. (2d) 312, 314; Burnet v. Sanford Brooks Co., 282 U. S. 359, 51 S. Ct. 150, 75 L. Ed.-; T. D. R. 62, art. 151; T. D. R. 60, art. 50; Brewster v. Gage, 280 U, S. 327, 50 S. Ct. 115, 74 L. Ed. 457; Fawcus Machine Co. v. U. S., 282 U. S. 375, 51 S. Ct. 144, 75 L. Ed.-.

The petitioner now contends that the debts due from the Hartray Shoe Company and Rosenbaum Brothers & Company were not ascertained to be worthless to the extent of the charge-offs in the earlier tax years, and that it was not until the tax years before us that the uncollected balances on these debts were ascertained to be worthless and should be allowed as deductions. Similar attacks by a taxpayer upon its earlier action in determining the worthlessness of debts charged off on its books, claimed and allowed as deductions on its returns, were without success, and the taxpayer held to be estopped to deny the correctness of its earlier action, in Commissioner v. Liberty Bank & Trust Co., 59 Fed. (2d) 320, 325. From the record made by this petitioner, we are satisfied that the debts in question were ascertained to be worthless to the extent charged off on its books and claimed as deductions by the petitioner in the earlier years, and that collections on these debts in the later years (1928 and 1929) now before us, constitute income to this taxpayer as determined by the respondent. Iberville Wholesale Grocery Co., Ltd., 17 B. T. A. 235; First Nat. Bank of Key West, 26 B. T. A. 370; Askin & Marine Co., 26 B. T. A. 409; Putnam Nat. Bank v. Commissioner, supra; Commissioner v. Liberty Bank & Trust Co., supra. Cf. Burnet v. Sanford Brooks Co., 282 U. S. 359.

Judgment will be entered for the respondent.


author: Sea well :

text:
    Evangeline C. Harper, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45428.
    Promulgated December 13, 1932.

      H. B. Jones, Esq., and Bobt. E. Bronson, Esq., for the petitioner.

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

Sea well :

The record shows that the petitioner, during the year 1924 and for a considerable time prior thereto, and continuously thereafter up to and throughout the year 1927, was the owner of a certain lot in the City of Seattle, Washington, which property was improved with a three-story and basement brick building. It is further shown that the building was erected prior to 1913 and on March 1,1913, had a fair market value of $34,500 and on that date had a reasonable expectancy of usefulness of twenty years. This building was demolished during 1927 and no salvage value was realized therefrom.

The petitioner charged and was allowed as a deduction, in determining her taxable income, depreciation sustained up to October 1, 1924, at the rate of 5 per cent per annum, amounting to a total of $18,837.50, leaving a residual value for the building on October 1, 1924, of $15,662.50.

The issue for our determination is whether the petitioner in computing her 1927 taxable income is entitled to deduct the residual value of the building, or, if not, if she is entitled to deduct the 5 per cent depreciation for that year. We will consider first petitioner’s claim for deduction of the residual cost or value of the building.

The record shows that the petitioner, under date of October 6, 1924, leased the lot in question to a corporation (Third Avenue Investment and Building Company) for a period of 99 years from October 1, 1924, the terms of the lease requiring that the lessee not later than January 1, 1928, should commence the construction of a fireproof four-story building, with a full basement thereunder; that said building should be completed and ready for occupancy as speedily as possible thereafter within reason, and should cost and have a fair value when completed of not less than $100,000 and be entirely free from mechanics’, labor or other statutory liens. Numerous provisions — as appear from our findings of fact — were embodied in the lease, indicating advantages that were to accrue and be protected and preserved to the petitioner. The terms of the lease in full are not disclosed. It is stated in paragraph 8 of the lease that nothing therein shall be construed to modify paragraph 37 thereof, which paragraph is not embodied in the stipulation of facts, nor disclosed by the record. The record shows, however, that the $100,000 building provided for in the lease must be in substantial accordance with the plans and specifications approved by the petitioner and must be entirely on the petitioner’s lot, and that before demolishing or to any degree removing or wrecking tire then existing building on the premises, the lessee would have to execute and deliver to the petitioner a surety bond, with numerous provisions, satisfactory to the petitioner and fully protecting her rights and interests.

Paragraph 10 of the lease provided: “Any and all building or improvements erected upon said demised premises, with their appurtenances, shall at once become a part of the freehold, free of all claims thereon or rights or interests therein on the part of the lessee, except as in this lease provided.” Counsel for respondent, in support of his contention that the petitioner in computing her 1927 taxable income may not deduct the unextinguished or residual value of the building, cites and relies on the principle upon which our decision in Anahma Realty Corp., 16 B. T. A. 749 (affirmed in 42 Fed. (2d) 128; certiorari denied, 282 U. S. 854), was based. For the petitioner it is insisted that our decision in the Anahma Realty Corp. case supra, was predicated simply on our previous decision in Charles N. Manning, 7 B. T. A. 286, in which case the petitioner herein asserts there were several features not established by the record in the instant case. In our opinion, however, the differences between the Manning case, supra, and the instant case are not of such a character as to make inapplicable to the instant case the principle applied in our decisions in the other two cases cited.

In the concluding portion of the opinion in Anahma Realty Corp., supra, (42 Fed. (2d) 128), the court said:

* * * There was necessarily contained in the lease permission on the part of the appellant to permit the lessee to destroy the old buildings. The acquisition of something from which income will be derived in the future has a value in money’s worth in the same sense as something which will produce income in praesenti; there was a compensating value for the loss of the buildings which must be recognized as having money’s worth. There was a substitution of assets rather than a loss sustained in the destruction of the buildings.

In the instant case, the terms of the 99-year lease as set forth indicate that the then existing building on the premises leased would be demolished, provisions of the lease requiring that before demolishing the building a surety bond, satisfactory to the petitioner, for the construction and completion of the specified new building, would have to be executed and delivered. The record fails to show at what time in 1927 the building on petitioner’s lot was demolished.

We are of the opinion, and so hold, that the respondent committed no error in refusing to allow, as a deduction in computing petitioner’s 1927 taxable income, the depreciated or unextinguished value of the building as of October 1, 1924, in the amount of $15,662.50. Such determination is in accord with our decisions in Anahma Realty Corp., supra; and Mary C. Young, 20 B. T. A. 692 (affd., 59 Fed. (2d) 691), and is controlled thereby. It is insisted in behalf of the petitioner that if she is not entitled to a deduction of the entire amount of the unextinguished or residual value of the building as of October 1, 1924, nor the residual value depreciated to January 1, 1927, she is in any event entitled to deduct annual depreciation at the rate of 5 per cent in the amount of $1,725.

The record shows no depreciation was claimed by the petitioner from October 1, 1924, to December 31, 1926, and that the respondent allowed her for the year 1927 one ninety-ninth of the unextin-guished value ($15,662.50) as of October 1, 1924, in the amount of $158.21. Under Weiss v. Wiener, 279 U. S. 338, such unextinguished or residual cost or value may not be taken as a deduction by the lessee, such lessee not being the owner of the property leased. Under such circumstances, it is argued in behalf of petitioner that it is only logical and just that depreciation should be.allowed the lessor, the petitioner, in the instant case. That some deduction should be allowed petitioner herein does seem to us right and proper, namely, the one ninety-ninth of the unextinguished value of the building as of the effective date of the lease, which the respondent did allow.

The record does not disclose at what date the building on the lot was demolished. The stipulation shows, however, that the lessee entered into possession of the premises under date of October 1, 1924, and that it or its assigns at all times since remained in possession thereof and that the demolition of the building “ occurred and was completed in the year 1927, and that no salvage value whatsoever was realized by petitioner therefrom.” What rental, if any, may have been paid the lessor, petitioner, by the lessee prior to the actual demolition of the building by the latter is not disclosed by the record.

In the circumstances, there being no evidence adduced which is, in our opinion, sufficient to overcome the presumption of the correctness of the respondent’s determination as indicated in his notice of deficiency, we must and do approve the same. We are also of the opinion that without additional evidence there is no proper basis for allowing an increase in the deficiency as heretofore determined by the respondent and any increase in deficiency is denied.

Judgment will be entered for the respondent.


text:
    Flambeau Public Service Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Flambeau Paper Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 36716, 36717.
    Promulgated December 14, 1932.

      Frederic Sammond, Esq., for the petitioners.

      W. Franh Gibbs, Esq., for the respondent.

       Sec 240. (a) That corporations which are affiliated within the meaning of this section may, for any taxable year beginning on or after January 1, 1922, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return is made on either of such bases, all returns thereafter made shall he upon the same basis unless permission to change the basis is granted by the Commissioner.

   OPINION.

McMahon :

In both petitions herein it is alleged that substantially all of the common stock of the Paper Company, Eealty Company and Power Company is now and was during all of 1923 owned or controlled by the same interests and that the Paper Company owns directly all of the stock of the Public Service Company. The respondent admitted such allegations in both answers.

Petitioners on brief state that, because the facts necessary to constitute affiliation under the Revenue Act of 1921 are pleaded and are admitted by the respondent, it is, “ therefore, undisputed that Wisconsin Realty Company and Flambeau Power Company, and both petitioners were affiliated during 1923.” The respondent in. his brief states that the:

* * * statement of facts shows conclusively that the four companies involved in these proceedings meet the statutory requirements for affiliation within the meaning of Section 240 of the Revenue Act of 1921, since the petition alleges and the answer admits that “ substantially all of the common stock of. the Flambeau Paper Company, the Wisconsin Realty Company and the Flambeau Power Company is now and was during all of 1923 owned or controlled by the same interests and the Flambeau Paper Company owns directly ail of the stock of the Flambeau Public Service Company.”

In view of the position taken by the parties and of our disposition of the issues raised, we deem it unnecessary to determine whether or not the four companies were affiliated.

However, the respondent, although admitting the affiliation of the four corporations, contends that the petitioners elected to file separate returns for the year 1922 and, therefore, having made an election to file separate returns for such year, under section 240 (a) of the Revenue Act of 1921, returns must be made upon the same basis for the year 1923 unless permission to change the basis is granted by the Commissioner.

. It appears that the question of the affiliation of the two petitioners and the Realty Company during the years 1917, 1918, 1919, 1920 and 1921, was before the Commissioner for consideration prior to 1922, and that the respondent by letter dated November 19, 1921, advised the Paper Company that it and the Public Service Company were affiliated for the years 1918, 1919 and 1920, but that the Realty Company was not so affiliated. While the affiliation issue of prior years was still pending, and before the income tax returns for 1922 were filed, E. P. Sherry, president of the four companies involved, by letter under date of February 20, 1923, in behalf of the Paper Company, requested a ruling from the Bureau of Internal Revenue as to the “ necessity or possibility of filing a consolidated income tax return ” for the four companies. In reply to this letter, under date of March 8, 1923, the Paper. Company was advised by the respondent that, during the year 1922, it and the Public Service Company were affiliated within the purview of section 240 of the Revenue Act of 1921 and could elect to file a consolidated income tax return for that year, but that during such year the Realty Company and the Power Company were not affiliated with any of the companies named or with each other, and such companies should file a separate return. Within a few days thereafter all four companies filed separate returns for the year 1922. In March, 1924, the petitioners and the Realty Company filed an amended consolidated return for the year 1922 and also a consolidated return for the year 1923, with the letters under date of March 12, 1924, which are set forth in our findings.

The petitioners contend that the ruling of the respondent with respect to 1922 “ effectively and legally deprived the petitioners of all choice, option or election ”; that in filing separate returns for 1922 they did not make an election under. the law, but filed such returns pursuant to respondent’s ruling; and that they were justified in accepting the respondent’s specific instructions.

The petitioners rely mainly on the case of Dexter Sulphite Pulp & Paper Co., 23 B. T. A. 227, in which the Board held that the filing of a separate return by one company under the peculiar facts in that proceeding was not an exercise of the option provided by section 240 (a), 1921 Act. However, that case is not controlling here and is distinguishable for the reason that it was impossible for taxpayer in that case to determine the fact of affiliation, because of litigation arising from the repudiation of a contract involving the properties of the Dexter Company and ownership of stock of subsidiaries, which litigation was instituted in 1921 and continued through 1922 and 1923. Such is not the situation here. As far as appears from the record, there was nothing which prevented the petitioners from determinining the status of the companies and from exercising their option either to make separate returns or a consolidated return, except the respondent’s letter of March 8, 1923. In our opinion, the respondent’s ruling did not deprive the petitioners of their right of election under section 240 (a). Pictorial Review Co., 26 B. T. A. 472; Radiant Glass Co., 16 B. T. A. 610. In Radiant Glass Go., supra, the petitioner based the deprivation of its right of election in 1922 on the Commissioner’s ruling of nonaffiliation for 1921. An appeal was taken to the Court of Appeals of the District of Columbia, and the court, in Radiant Glass Co. v. Burnet, 54 Fed. (2d) 718, 719, affirmed the decision of the Board and in its opinion stated the following:

When appellant came to make out and file its return ior the year 1922, it was ■ entitled, if affiliated with the Times-Rec'ord Company, to file either a separate or consolidated return. The ruling of the Commissioner upon the questionnaire in the prior years did not prevent or impair the free exercise of that right. Such a ruling Hoes not have the force of law; nor are the courts hound, l>y it. United States v. Hurst, D. C. 2 F. (2d) 73. The status of affiliated, to file a consolidated return if it so elected, and to appeal to the courts, and not By the Commissioner. Fidelity Nat. Bank v. Commissioner (C. C. A.) 39 F. (2d) 58, 61. Accordingly it was the right of appellant, if affiliated, to file a consolidated return if it so elected, and to appeal to the Board of Tats Appeals and to the courts for a judicial determination of its rights. * * * [Italics supplied.]

Although the Commissioner’s ruling in this proceeding applied to the taxable year in question, nevertheless, in our opinion, such ruling did not deprive the petitioners of their right of election.

There is no evidence that the petitioners, or E. P. Sherry, president of all the companies, were so influenced by the rulings of the Commissioner relative to 1922 or previous years as to deprive them of their right of election. On the contrary it appears that the ruling of the Commissioner was not considered binding upon them, as separate returns for the year 1922 were first filed in behalf of the Paper Company and the Public Service Company instead of a consolidated return as permitted under such ruling. Furthermore, E. P. Sherry testified that he could not recall the circumstances relative to the filing of separate returns for 1922 for the Paper Company and the Public Service Company instead of filing a consolidated return for such companies, and testified further that, “ In 1924, when we were considering the matter again ” the amended consolidated return for the year 1922 was filed.

Even if we were of the opinion that under the facts herein the petitioners were deprived of their right of election under section 240 (a) of the 1921 Act, and that the filing of the amended consolidated return for 1922 by the petitioners and the Realty Company and the consolidated return for 1923 by the same companies in March 1924, constituted an election, nevertheless, it would be necessary for the petitioners to file separate returns for such years, as the Power Company filed a separate return for both 1922 and 1923. Where one corporation which is a member of an affiliated group files a separate return, the remaining corporations may not file a consolidated return of their income, but must also file separate returns. Fontana Union Water Co., 24 B. T. A. 1045; Southern Power Co., 17 B. T. A. 962; affd., Duke Power Co., 44 Fed. (2d) 543; Apartment Corp., 17 B. T. A. 876.

The amended consolidated return for 1922 was filed by the petitioners and the Realty Company. The Power Company was organized in May, 1922, and filed a separate return for 1922. Again, for the year 1923 the petitioners and the Realty Company filed a consolidated return and the Power Company filed a separate return. A consolidated return must include the income of all members of an affiliated group and one member of the group may not file a separate return and the others a consolidated return. The fact that the power Company was organized in May, 1922, and therefore could have been affiliated for only a part of a year, is immaterial. Lucas v. St. Louis Notional Base Ball Club, 42 Fed. (2d) 984; certiorari denied, 282 U. S. 888; A. S. Siracusa Sons, Inc., 28 B. T. A. 53.

The petitioners, having elected in 1923 to make separate returns for the year 1922, can not thereafter change the basis by filing an amended return for the same year and can not change the basis for subsequent years by filing a consolidated return, without permission of the Commissioner. Pictorial Review Co., supra; Pine Ridge Coal Co., 23 B. T. A. 489, 491, 492, and cases cited therein.

The petitioners contend in the alternative that the accounts of the petitioners, the Realty Company and the Power Company should be consolidated, under section 240 (d) of the Revenue Act of 1921.

Section 240 (d) provides that accounts may be consolidated for the purpose therein stated “ in any case of two or more related trades or businesses * * * owned or controlled directly or indirectly by the same interests.” That the four companies were owned or controlled directly or indirectly by the same interests may be assumed for the purposes of this discussion.

On brief the petitioners stated that upon hearing there was no showing by petitioners of intercompany relations ” between the Public Service Company and the other three companies as the Public Service Company “ was operating- along an unrelated line of business ” and was involved only because of stock ownership and that consolidation of the accounts of such company with the accounts of the other three companies was a matter of indifference to the petitioners.

Petitioners argue that the books of account do not reflect true income because the Realty Company and the Power Company were created and existed for the benefit of and to serve the Paper Company to the detriment of the Realty Company and the Power Company and that the “intercompany relations” and particularly the “ intercompany leases ” resulted in distortion of income.

Petitioners apparently interpret “ related business ” to mean “ in-tercompany transactions ” or that businesses become “ related ” by transactions with each other. The term “ related business ” was discussed in Nowland Realty Co. v. Commissioner, 41 Fed. (2d) 1018; affirming Nowland Realty Co., 18 B. T. A. 405. In that case the Nowland Realty Company was created for the purposes of one Schmidt, who conveyed certain real estate and other property to the corporation for stock and the corporation in turn leased certain of the realty to Schmidt. The court in its opinion states that Schmidt’s individual activities were not interrelated with or interdependent upon the activities of the corporation and that:

The statute requires that the businesses be both related and owned by the same interests. Owned by the same interests they were, but it cannot be said that the two businesses were related. “ Related ” means “ standing in relation; connected; allied; akin.

E. P. Sherry testified that the Realty Company acquired power sites “ with the idea that they would be a benefit to the Flambeau Paper Company ultimately”; that the Realty Company’s investments in timber land, in lots and houses in Park Falls, most of which were rented to employees of the Paper Company, in the railroad from Park Falls to Pixley Water Power, used by the Paper Company under rental, in preferred stock of the Paper Company, in preferred stock of the Power Company, and in the collateral note of Waldo, were “ the principal investments ” of the Realty Company “ held for the benefit of ” the Paper Company. He testified that the Realty Company is more or less a holding company ” in the sense that it merely holds title to the investments referred to for the benefit of the Paper Company. That such investments were made and held “ for the benefit of ” the Paper Company is a conclusion of the witness.

The evidence does not support such a conclusion. The books of account of the Realty Company do not bear out this assertion. Each company kept separate books of account. There is no evidence showing that such books were inaccurate or that they did not correctly show the assets, income and expenses of each company. The books of account of the Realty Company did not show that any of its investments were made or held for the benefit of the Paper Company. The Paper Company was not a gratuitous recipient of property or money from the Realty Company or Power Company, but paid for what it received. It paid rent for the use of the railroad and for power furnished to it pursuant to agreements. It issued preferred stock for money advanced to it, upon which it paid during 1923 to the Realty Company a very substantial amount in dividends. The corporations were organized for business purposes and obviously because of certain advantages to be gained thereby. We can not disregard the separate entities of these corporations because transactions between the corporations dealing with each other as separate entities were more advantageous to one than the other. As stated in Broadway Strand Theatre Co., 12 B. T. A. 1052, where a corporate form is resorted to for its business benefits, the burdens, if- any, must also be assumed. See also Evelyn F. Gregory, 27 B. T. A. 223, and 112 West 59th Street Corp., 23 B. T. A. 767.

The Public Service Company is engaged in the business of distributing electric power for light, heat and other purposes; the business activities of the Power Company consist of owning, developing and leasing water power; the Realty Company is engaged in buying and selling real estate and investments; and the Paper Company is engaged in the business of making paper. The businesses carried on by these four companies in our opinion are not related trades or businesses. Cf. Crossett Western Co., 27 B. T. A. 258; Starr Piano Co., 26 B. T. A. 835; Herald News Co., 26 B. T. A. 688; Western Hide & Fur Co., 26 B. T. A. 354; Roessler & Hasslacher Chemical Co., 25 B. T. A. 915; Nowland Realty Co., 18 B. T. A. 405.

Furthermore, even if the four corporations here ■ involved were engaged in “ related trades or businesses ” and entitled to the benefit of section 240 (d), it is incumbent upon them to prove facts from which the Board can make an accurate distribution or apportionment. Starr Piano Co., supra; Herald News Co., supra; Western Hide & Fur Co., supra, Roessler & Hasslacher Chemical Co., supra; Broadway Strand Theater Co., supra.

We turn then to a consideration of the evidence in this proceeding.

The consolidated return of the Paper Company, the Public Service Company and the Realty Company (respondent’s Ex. F) and the separate return of the Power Company (respondent’s Ex. E), both for the year 1923, are before us. The petitioners introduced in evidence the balance sheet and the profit and loss statement of the Realty Company (petitioners’ Exs. 7 and 9) and the balance sheet of the Power Company (petitioners’ Ex. 8). These statements were prepared by E. P. Sherry from the books of the respective companies. In such statements he allocated certain of the assets, liabilities, income and disbursements of the Realty Company and the Power Company, respectively, as “ for the benefit ” of the Paper Company. Although the totals on such statements agree with thé books of account of the respective companies, such allocation does not appear in the books of account of such respective companies, but represents the opinion and judgment of E. P. Sherry, nor do the books of account of the Realty Company indicate or contain an account showing that the assets as allocated were held for the benefit of the Paper Company. On the profit and loss statement of the Realty Company it appears that 84 per cent of the “ Milwaukee office expense,” “ General expenses ” and “ Interest paid ” were allocated to the Paper Company. He arrived at this percentage by determining the assets of the Realty Company which in his judgment were “ held for the benefit ” of the Paper Company, the book value of which assets on January 1, 1923, was 84 per cent of the total assets of the Realty Company. He testified that this ratio prevailed throughout 1923, approximately, so that, at the end of 1923, 81.6 per cent of the assets of the Realty Company “ were held for the benefit ” of the Paper Company and 18.4 per cent were not so held. These percentages were used in allocating such expenses. On such statement all of the railroad earnings during 1923 of $1,387.50, and a loss of $21,747.75 resulting from the abandonment of such railroad, were allocated to the Paper Company. Out of a total of $17,765, representing dividends on investments received by the Realty Company during 1923, the amount of $17,477 was allocated to the Paper Company. Nearly all of that amount represents dividends paid by the Paper Company on its preferred stock held by the Realty Company and a very small part thereof represents dividends paid by the Power Company on its preferred stock owned by the Realty Company.

On the balance sheet of the Power Company (petitioners’ Ex. 8) Sherry allocated $288,555.37 out of the total assets of such company of $293,243.73 as of January .1, .1923, and $445,193.40 out of total assets of such company of $454,983.68 as of January 1, 1924, as held for the benefit of the Paper Company. The greater part of such amounts so allocated as held for the benefit of the Paper Company represents the cost of hydroelectric developments and the transmission line which were under lease to the Paper Company.

To the balance sheet of the Power Company (petitioners’ Ex. 8) there is attached a statement showing that the Power Company on July 1, 1922, leased to the Paper Company for 25 years the so-called Lower Power ” and “ Pixley Power ” and the transmission line for an annual rental of $22,000, $24,400, and $1,200, respectively, the lessee to pay all real estate taxes and repairs. There is no evidence from which we can determine -whether or not such rentals were fair or were not comparable to rentals paid for similar property by others. The only testimony in this regard is that such leases were very advantageous to the Paper Company. This is also true relative to the rent paid for the railroad.

Petitioners suggest on brief that a proper consolidation of the accounts would be to assign a percentage of the net income and net loss of the Realty Company and the Power Company to the Paper Company, but that they consider that the choice of actual methods may more properly be worked out under Rule 50.

In Roessler & Hasslacher Chemical Co., supra, the Board stated:

* * Where some allocation is proper under section 240 (cl) it is incumbent upon a petitioner before this Board to prove a more accurate method of distribution or allocation than those suggested by this petitioner or at least to show sufficient justification for failure to do so. Even if every other question in this case were decided in the petitioner’s favor, nevertheless, we could not make any allocation. We need decide nothing more.

In our opinion the petitioners have failed to prove a reasonably accurate method of distribution or allocation, nor have they proved sufficient facts to enable the Board to make a proper or reasonably accurate distribution or allocation. As, in our opinion, the petitioners, the Realty Company and the Power Company are not entitled to consolidation of accounts under section 240 (d), supra, it is unnecessary to decide the questions raised by the respondent that section 240 (d) applies only to corporations entitled to the benefits of section 262 of the Revenue Act of 1921, and that permitting the consolidation of accounts under section 240 (d) is within the sole discretion of the respondent. Roessler & Hasslacher Chemical Co., supra.

The determination of the Commissioner is approved in all respects except as to disallowance of a deduction in the amount of $16,509.80, representing the excess of net loss sustained by the Flam-beau Paper Company in the year 1921 over the amount of such net loss applied to the taxable year 1922, as to which the Commissioner confessed error.

Reviewed by the Board.

As to petitioner Flambeau Public Service Company judgment will be entered for the respondent. As to petitioner Flambeau Paper Company judgment will be entered wider Buie 50.

       See. 240. (d) Por the purposes of this section a corporation entitled to the benefits of section 262 shall be treated as a foreign corporation: Provided, That in any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the united States or not) owned or controlled directly or Indirectly by the same interests, the Commissioner may consolidate the accounts of such related trades and businesses, in any proper case, for the purpose of making an accurate distribution or apportionment of gains, profits, income, deductions, or capital between or among such related trades or businesses.


author: MaRQuette :

text:
    Julius Glaser and Aaron Waldheim, Executors of the Estate of David Sommers, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 38381.
    Promulgated December 14, 1932.

      Stanley S. Waite, Esq., for the petitioners.

      G. H. Curl, Esq., for the respondent.
   OPINION-.

MaRQuette :

There is little doubt that it was the wish and intention of David Sommers in 1925 to make a new will and to bequeath at least $250,000 to The Dorothy Drey Sommers Shelter Home. He died before doing so, but did leave a memorandum indicating his wishes in the matter, and those wishes were carried out by the executors and heirs at law.

Under the Revised Statutes of Missouri, every will must be in writing, signed by the testator, or at his direction, and attested to by two or more witnesses subscribing their names in the testator’s presence ; and a written will may be revoked only by a subsequent will in writing, or by burning, canceling, tearing or obliterating by the testator, or in his presence and by his consent and direction. It is further provided that a nuncupative will, if the estate bequeathed exceeds $200 in value, is not valid. It is clear, therefore, that the full amount of $250,000 can not be considered a valid bequest or transfer legally chargeable as such against the estate of David Som-mers. Only the sum of $35,000 was bequeathed to the home by decedent’s will and only that amount is deductible under the provisions of section 303 (a) (3) of the Revenue Act of 1924. Respondent has already allowed that deduction.

As an alternative, petitioners contend that the full amount of $250,000 is deductible as an enforceable claim against the estate of David Sommers. The Revenue Act of 1924, in paragraph (1) of section 303 (a), allows as deductions:

(1) Such amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebtedness in respect to, property * * * to the extent that such claims, mortgages, or indebtedness were incurred or contracted Iona fide and for a fair consideration in money or money’s worth * * *.

In order to sustain their contention, petitioners must prove (1) that the claim arose from a bona fide contract made by David Sommers, and (2) a fair consideration in money or money’s worth as a basis for the contract.

Upon the record the beneficiary, The Dorothy Drey Sommers Shelter Home, was not a party to any contract with the decedent, nor was there any direct pledge to the home by David Sommers that he would support it or provide by will for its support after his death. It does appear, that in 1923, at a mass meeting to raise funds for the Jewish charities in St. Louis, decedent stated that in lieu of his annual subscription of $5,000 he would pay the running expenses of the home.

Thereupon his proposition was accepted by the Federation of Jewish Charities, and his subscription was recorded not as a fixed amount, but as whatever would be sufficient to take care of the home. About a year later decedent stated to various friends that he would provide for the home after his death.

Even if we assume that these facts disclose a binding agreement with the Federation during Sommers’ life, they do not disclose any contractual obligation to be fulfilled after his death. His statements about providing for the Shelter Home in his will were made long after his agreement with the Federation of Jewish Charities, and formed no part of the consideration, if any, for that agreement. There was no legal consideration given by reason of which Sommers’ statements concerning provision for the home after his death could ripen into a contract binding upon him or his estate. Clearly, therefore, the Federation of Jewish Charities had no enforceable claim against the Sommers estate.

The decedent in 1923 made another agreement affecting the home. In that agreement he promised one Ida Waldman that, if she would give up her then position and serve as matron of the home, he would provide for all the running expenses of the institution both during his life and after his death. Relying upon that promise, Mrs. Waldman became matron of the home. Assuming the binding force of Sommers’ promise to her, Mrs. Waldman thereby acquired a right to recover any damages which she might suffer if Sommers broke the agreement. Having thus an adequate remedy at law for any loss sustained, Mrs. Waldman was precluded from an action for specific performance of Sommers’ agreement. The extent of any enforceable claim which might have accrued to Mrs. Waldman and against the Sommers estate would have been measured solely by the amount necessary to compensate her loss caused by a breach of contract.

Petitioners claim, however, that David Sommers’ agreements respecting the maintenance of The Dorothy Drey Sommers Shelter Home constituted contracts for the benefit of the home which it could enforce in its own behalf. Granting the legal principle, the facts do not sustain the contention. The record discloses only two agreements by David Sommers concerning maintenance of the home which could be considered contracts giving rise to enforceable claims against his estate. As already pointed out above, the agreement with the Federation of Jewish Charities did not extend to, nor include provision for maintaining the home after Sommers’ death. Respecting the agreement with Mrs. Waldman, it is very apparent from the evidence that Sommers’ promise to provide for the home after his death was not made for the benefit of charity. It is quite evident that Mrs. Waldman was not at that time particularly interested in the Shelter Home. She was interested in knowing whether, if she became matron of the home, her position would be permanent, her salary paid regularly, and the home enabled to con-time. The promises by David Sommers were made solely to induce her to accept the position of matron. In so assuring her there was apparently no thought in David Sommers’ mind of benefit to the home, except possibly the incidental benefit to be derived from Mrs. Waldman’s services as matron. The fact that a person may derive large benefits from performance of a contract to which he was not a party, and which was made for the benefit of the principals, does not give such third party any right of enforcement of the contract. City of St. Louis v. Wright Contracting Co., 202 Mo. 451; 101 S. W. 6. In that case the city contracted with the company for the improvement of certain streets. The company having breached its contract, suit was brought by the city upon the company’s bond. The city could recover only on the theory that the contract was made for the benefit of abutting property owners. It was held that the contract was not so made, although such owner would be benefited by the improvements, the court saying:

There is a broad distinction between the principle involved where a contract is entered into between two parties for their own use and benefit, and where they make a similar contract for the benefit of a third party. A breach of the first would create no cause of action in favor of a third party even though he was thereby deprived of large benefits which would have flown to him had the contract been performed.

The above decision is directly applicable to the present proceeding. In our opinion the sum of $215,000 is not deductible from the gross estate of David Sommers as a claim against the estate within the meaning of the statute.

The next question is whether there may be deducted from the gross estate the amounts of $2,210.80 and $22,320.59, which were asserted as deficiencies for the years 1924 and 1925, respectively. The parties have agreed that there should be a deduction in the amount of $21,014.49 in respect of those deficiencies. That amount, therefore, is to be deducted in the recomputation of the tax.

Reviewed by the Board.

Decision will be entered under Bule 50.


author: Maeqdette:

text:
    St. Louis Union Trust Company, Executor of the Will of William Northrup McMillan, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 45966.
    Promulgated December 14, 1932.

      Philip Nichols, Esq., for the petitioner.

      Frank T. Horner, Esq., for the respondent.
   OPINION.

Maeqdette:

The first question is whether William Northrup McMillan Avas a resident and a citizen of the United States at the time of his death in 1925. In our ojfinion he Avas not. Title 8, section 17, United States Code of laws, provides that “Any American citizen shall be deemed to have expatriated himself when * * * he has taken an oath of allegiance to any foreign State.” It is undisputed that the decedent took an oath of allegiance to the British Crown in 1920, perhaps even earlier than that, and he never thereafter repatriated himself as a citizen of this country. A statement in his will, made prior to his oath of allegiance to Great Britain, that he was “of St. Louis, Missouri,” and like statements concerning him made by others after his death, do not constitute repatriation. It is clear from the facts before us that he was not a citizen of the United States at the time of his death.

We think it equally clear from the facts that he was not a resident of this country at the time of his death, nor for many years prior thereto. A resident is one who resides in a place and to reside is to live; to make an abode for a considerable time; to dwell as in a home. (Standard Dictionary.) Under no aspect of that definition can it be said that decedent ever resided in the United States after 1899. He made his home elsewhere, acquired extensive property and business interests outside this country, and looked after those interests in person. During the last ten years of his life he was in this country but once, for a brief visit. Respondent cites, as authorities to the contrary, Adolph Rosenberg, Executor, 2 B. T. A. 720; Union Trust Co. of Cleveland, Executor, 5 B. T. A. 1272; Noah C. Rogers, Executor, 17 B. T. A. 571; Bank of New York & Trust Co., Executor, 21 B. T. A. 197; Guaranty Trust Co., Executor, 25 B. T. A. 507. But in each of those cases there was no expatriation, as here, and there were definite evidences of intention to retain domicile in the United States. In the instant proceeding the evidence not only fails to support the theory that decedent retained or intended to retain his domicile in this country, but it shows that he had no such idea or intention.

The second question relates to the inclusion in decedent’s estate of various items of property received from his father’s estate, of certain intangibles kept in this country, and of money deposited in banks in the United States. The property received from the estate of decedent’s father consisted of United States bonds and Treasury notes, county road improvement bonds, corporate stocks and securities, a debt owing from decedent to his fathers’ estate, cash in bank, accrued interest on bonds, and real estate valued at $82,527.15.

The pertinent provisions of the Revenue Act of 1924, here applicable, are:

Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
(a) To the extent of the interest therein of the decedent at the time of his death which after his death is subject to the payment of the charges against his estate and the expenses of its administration and is subject to distribution as part of his estate * * *.
Sec. 303. For the purpose of the tax the value of the net estate shall be determined—
*******
(d) For the purpose of Part I of this title, stock in a domestic corporation owned and held by a nonresident decedent shall be deemed property within the United States, * * *
(e) * * * and any moneys deposited with any person carrying on the banking business, by or for a nonresident decedent who was not engaged in business in the United States at the time of his death, shall not, for the purpose of Part I of this title, be deemed property within the United States.

In Ernest Brooks, et al., Executors, 22 B. T. A. 71, we considered the statute above cited respecting its application to intangible property of a nonresident alien. The property consisted of stock in a foreign corporation, bank deposits, bonds of foreign corporations, foreign governments, domestic corporations, and a domestic municipality. All that property was kept in New York, where the income was collected and deposited to the credit of the alien decedent. We there held that the situs of such securities was at the domicile of the owner, and hence they should not be included in his taxable estate in this country. That decision was affirmed by the Circuit Court of Appeals for the Second Circuit on July 29, 1932, 60 Fed. (2d) 890. In both decisions a distinction, due to statutory provision, was drawn between the securities mentioned and stock in a domestic corporation.

In the above case court decisions are reviewed, and it is apparently settled in the Federal jurisdiction that stocks, bonds and similar securities, mortgages and other evidences of indebtedness, money on deposit, and other intangibles, if not part of a localized business elsewhere have an exclusive situs for tax purposes at the domicile of the owner. Cf. Baldwin v. Missouri, 281 U. S. 586. That principle is modified by section 303 (d) of the Revenue Act of 1924, which provides that, for Federal estate tax purposes, “ stock in a domestic corporation owned and held by a nonresident decedent shall be deemed property within the Unted States.”

None of the personal property in this country which was owned and held by petitioner’s decedent at his death was employed by him in business here. In our opinion none of that property was subject to Federal estate tax except the 40 shares of stock in the Annuity Realty Company, a domestic corporation, received in the distribution of the William McMillan estate, and the stock in domestic corporations included in the return filed with respect to decedent’s estate.

Under the laws of Missouri, in-1925 real property was not subject to the expenses of administration of a decedent’s estate. Hence it could form no part of such estate for Federal estate tax purposes, under section 302 (a) of the Revenue Act of 1924. Crooks v. Harrelson, 282 U. S. 55; Oreon E. Scott et al., Executors, 25 B. T. A. 131. Therefore, whatever interest in real property in Missouri was held by petitioner’s decedent at his death can not be subjected to estate tax by the respondent.

Respecting personal property of the decedent in Great Britain and Africa, respondent concedes that such property is not taxable here if we decide, as we have, that decedent was not a resident or citizen of the United States. The value of that property, $265,798.17, therefore should not be included in the gross estate upon a recomputation of the tax.

The decedent and his mother made an agreement respecting a portion of the income from the William McMillian trust estate. During the mother’s last illness the agreement was canceled, but in order to carry out certain provisions of her will the decedent voluntarily paid to her executors amounts aggregating $399,635.53. The payments began in 1915 and continued until some time in 1921. The respondent contends that the amount so paid constituted a valid claim by decedent’s estate against the estate of his mother, and hence should be included in his gross estate. The evidence indicates that decedent made the payments with full knowledge of all pertinent facts. If he was under any misapprehension at all, and it is by no means certain that he was, it was only concerning the legal effect of the agreement with his mother. We think the respondent’s contention is not well founded. It is a general principle of law that payments voluntarily made with full knowledge of all the facts, although under mistake or ignorance of the law, are not recoverable in the absence of fraud or improper conduct of the payee. Little v. Bowen, 134 U. S. 547. Here, no fraud, or improper conduct by his mother’s executors, induced the payments in question.

Respondent has admitted error in disallowing deductions on account of funeral and administration expenses and the like under the Revenue Act of 1924, and of a payment of $50,000 in compromise of a claim against decedent’s estate. In the case of a nonresident decedent such deductions are allowable in the proportion which the value of his gross estate located in this country bears to his entire estate, but in no case to exceed 10 per cent of the value of his gross estate situated in the United States. Section 303 of the statute deals only with such property of a decedent as may become subject to Federal estate tax. It is not concerned with any property not subject to such tax. Obviously, the language used and the deductions allowed can only refer and apply to such taxable property. Oreon E. Scott et al., Executors, supra. The only property of the decedent subject to Federal estate tax was his stock in domestic corporations, having an aggregate value of $37,856.50. Not more than 10 per cent of that amount should be allowed as a deduction in recomputing the tax.

Reviewed by the Board.

Decision will be entered, under Rule BO.


author: Seaweed:

text:
    Poncin Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 53097, 61619.
    Promulgated December 15, 1932.

      Maurice R. McMicken, Esq., for the petitioner.

      Nathan Gammon, Esq., and Vernon F. TVeeTcley, Esq., for the respondent.
   OPINION.

Seaweed:

We will consider first the issue raised in Docket No. 53097; viz., what deduction, if any, is the petitioner entitled to take in 1928 on account of a loss sustained by reason of the sale in that year of its lots Nos. 3, 4, 7 and 8 to satisfy the tax liens against them, or loss sustained because of their abandonment by petitioner in that year.

The record shows that the petitioner in 1927 acquired from Birdie L. Poncin, Claude M. Poncin and Birdie V. Cline, in exchange for its capital stock, certain property of the estate of Gamma Poncin. At the same time and in the same deed, Claude M. Poncin conveyed his undivided one-half interest in lot No. 2 which was willed him by his mother, Eliza Poncin, deceased. The record further shows' that, at the time the petitioner acquired the four lots of the aforesaid devisees, the improvement and general tax liens on them exceeded their value as appraised for Federal tax purposes upon the death of Gamma Poncin, and the evidence fails to show that their fair market value was other than the same as said appraised value of $2,800, when acquired by the petitioner, neither the appraised nor the fair market value (the same) taking into consideration the aforesaid tax liens against the lots. Both parties have dealt with the lots on the idea that $2,800 was both their appraised value and their fair market value.

The Statutes of the State of Washington (Eem. Comp. Stat., 1922, sec. 11272, and 1927 Supp., sec. 11097-101) provide: “The taxes assessed upon real property shall be a lien thereon from and including the first day of March in the year in which they are levied until the same are paid * * And the same is true of local improvement assessments. (Sec. 9376, Eem. Comp. Stat., 1922.) There is no period of redemption from a tax sale after the issuance of a tax deed, with the exception of a three-year period for minors or insane persons. (Sec. 11097-119, Eem. Comp. Stat., 1927 Supp.) The petitioner, under the law of the State of Washington, was not personally liable for the payment of real estate taxes or local improvement assessments against the lots sold as stated, the recourse of the taxing authorities being against the property.

In behalf of the petitioner it is insisted that the fact that there were delinquent taxes or assessments against the four lots has no bearing on the amount of the loss the petitioner is entitled to deduct, citing and relying on sections 23 (f) and (g), 112 (b) (5), 113 (a) (5), and 113 (a) (8), of the Eevenue Act of 1928.

In petitioner’s brief, argument is made that, when petitioner corporation was formed and its stock issued in exchange for the property turned over to it by the three devisees under the will of Gamma Poncin, said devisees immediately thereafter were in control of the corporation “ in the same proportion as their interests in the property under the will” of Gamma Poncin; that under section 112 (b) (5), supra, no gain or loss was recognized by the devisees; and that section 113 (a) (8), supra, was applicable in determining the basis for gain or loss to the petitioner upon the sale of the lots aforesaid, which gain or loss would be the same as in the hands of the trans-ferors and by the provision of section 113 (a) (5), supra, the basis would be the fair market value of the property at the time of the death of Gamma Poncin, which was its appraised value of $2,800. When the lots were sold in 1928 for or on account of delinquent taxes and were abandoned by the petitioner, it is insisted it sustained a loss of $2,800.

In reply to the foregoing argument, it may be stated that the record shows that, when the three devisees transferred the lots and other property to petitioner in 1927 and received stock in exchange therefor, each of them did not in our opinion (based on the record) receive stock of petitioner “substantially in proportion to his interest in the property prior to the exchange,” which would be necessary in order that section 112 (b) (5), supra, might be applicable. The preferred stock of petitioner appears from the record to have been received 'by the transferors of the Gamma Poncin estate to petitioner in proportion to their respective interests, but such is not shown to be true as to the common stock, which was the only stock that had voting power. No common stock being shown to have been received by Birdie V. Cline, one of the three transferors of the property to the petitioner, section 112 (b) (5) of the Revenue Act of 1928, which is the same as section 203 (b) (4) of the 1926 Revenue Act, is not applicable.

The evidence shows that at the time the four lots were conveyed to petitioner the tax and assessment liens thereon exceeded the aforesaid appraised value of $2,800, which appears to have been their fair market value at the time of acquisition by petitioner, the accrued taxes thereon not being considered. Such liens were not a personal liability of the petitioner, but attached only to the lots. It is evident, therefore, that at the time these lots, with other property, were conveyed to the petitioner, the equity or interest of petitioner in the lots was practically valueless and, in abandoning them and permitting their sale to satisfy said liens, petitioner, in our opinion, sustained no loss, and the respondent did not commit error in disallowing any deduction upon the sale of the lots. His action is accordingly approved.

In Docket No. 61619 the issue is on what basis gain or loss should be computed on the sale made in 1929 by the petitioner of the undivided one-half interest in lot No. 2 which was owned solely by Claude M. Poncin and acquired from him by petitioner in 1927.

It appears from the briefs filed that the parties are agreed that the basis for computing gain or loss to petitioner on the sale of the undivided one-half interest in lot No. 2 which was received by the three residuary devisees under the will of Gamma Poncin and exchanged for stock of the petitioner may be considered to be its value as appraised for estate tax purposes ($112,000), subject to adjustment for capital expenditures or capital deductions, and such basis as adjusted ($110,469.74) was used by the respondent in determining the deficiency, as indicated in our findings of fact. As to such one-half interest petitioner assigns no error, although the evidence indicates that at the time it was acquired by the petitioner the other one-half interest in the same lot was of the value of at least $103,000.

In petitioner’s brief it is stated that in computing the loss on the undivided one-half interest in lot No. 2 acquired from Claude M. Poncin and sold as stated in our findings of fact, petitioner used in its 1929 income tax return the amount of $145,970 as set up on its books as the cost basis, being the March 1, 1913, value, at that time believing such to be the correct method of ascertaining its deductible loss. The petitioner’s brief correctly states that the respondent in his deficiency notice computes the cost basis to petitioner of his one-half interest in the lot received from Claude M. Poncin at $20,000, being the amount of petitioner’s note issued to Claude M. Poncin in payment therefor. It is, however, now insisted in petitioner’s behalf that both above methods are wrong and that the correct basis for computing petitioner’s gain or loss on the sale of the undivided one-half interest in the lot received from Claude M. Poncin is its fair market value at the time it was acquired by the petitioner in 1927, such undivided one-half interest being worth just the same as the other one-half, which had an appraised value of $112,000, considered and accepted by respondent as correct.

The transfer by Claude M. Poncin of his undivided one-half interest in lot No. 2 to the petitioner, though made in the same instrument with other transfers, was a separate transaction from the transfer to petitioner by the three residuary devisees of their interests in the estate of Gamma Poncin, deceased, including their one-half interest in lot No. 2, and was so treated by both parties. The consideration paid or given was different in character, although all the transfers were included in the same instrument. Neither Birdie L. Poncin nor Birdie V. Cline had any interest whatever in the undivided one-half interest in lot No. 2 willed to Claude M. Poncin by his mother, Eliza Poncin, deceased. For the transfer of such one-half interest Claude M. Poncin agreed to and did accept the note of petitioner for $20,000, bearing 6 per cent interest and due in three years.

Inasmuch as the petitioner did not issue any of its stock in payment for Claude M. Poncin’s undivided one-half interest in lot No. 2, but acquired it by direct purchase with its $20,000 promissory note, the transaction, in our opinion, does not come within any of the exemptions provided by sections 112 or 113 of the Revenue Act of 1928, as insisted for the petitioner, but the basis for computing gain or loss on this undivided one-half interest when sold by the petitioner is the amount actually paid therefor;.viz., $20,000. It is well settled that taxing statutes allowing exemptions are to be construed strictly in favor of the Government and the taxpayer has the burden of proving that he comes within the exemption provision. Reinecke v. Spalding, 280 U. S. 227; Botany Worsted Mills v. United States, 278 U. S. 282; Franciscus Realty Co. v. Commissioner, 39 Fed (2d) 583; Insurance & Title Guarantee Co. v. Commissioner, 36 Fed. (2d) 842; Ogilvie v. Commissioner, 36 Fed. (2d) 473.

In behalf of the petitioner, it is insisted that when Claude M. Poncin transferred his undivided one-half interest in lot No. 2 to petitioner he did not make an outright sale of the property to a stranger for $20,000, but was transferring the same to a corporation in which he was a stockholder and all the corporation’s stockholders were residuary devisees under his father’s will. Although Olaude M. Poncin may have conveyed his one-half interest in lot No. 2 to petitioner for less than its fair market value, the record indicates it was, nevertheless, a sale. In considering such, it should be borne in mind that the petitioner was an entirely different entity from Claude M. Poncin and the other stockholders therein and the evidence does not show that any of the parties at the time considered the transfer other than as a sale by Claude M. Poncin and a purchase by the petitioner, and it was so set up on its books.

It is further insisted for the petitioner that the transfer to it of Claude M. Poncin’s undivided one-half interest in lot No. 2 increased the assets of the petitioner to the extent of the difference between the fair market value of said interest at the time of the transfer and the price ($20,000) paid therefor, and the same should be treated as the equivalent of a donated or paid-in surplus. In support of such insistence, Rosenbloom Finance Corp., 24 B. T. A. 768, is cited and apparently chiefly relied on. The facts in that case and the instant case are different. In the Rosenbloom Finance Corp. case, supra, no stock, money, or other property was given for what was transferred to the petitioner by its majority stockholder and a condition of the transfer was that it should constitute paid-in surplus of the corporation, and the corporation in accepting said transfer declared the same to be paid-in surplus. Under such circumstances, it was held that the transfer was not a gift and that the proper basis for computing the gain or loss on the sale of the thing transferred was the fair market value of such property at the time it was acquired by the petitioner. In the instant case, there was a substantial consideration for the transfer. There was no condition or stipulation that the fair market value, or any part thereof, of the undivided one-half interest in lot No. 2 which was conveyed to petitioner by Claude M. Poncin should be treated as either a gift or paid-in surplus.

In the circumstances of the instant case, as disclosed by the record, it is our opinion that the transfer of the undivided one-half interest of Claude M. Poncin in lot No. 2 to petitioner for $20,000 was a sale to petitioner, though for much less than its value, and as such was properly so treated by the respondent in computing petitioner’s deficiency in tax for 1929, and his determination of income tax deficiency for 1929 is approved.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Black:

text:
    Schmieg, Hungate & Kotzian, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54683.
    Promulgated December 15, 1932.

      Henry Brack, O. P. A., for the petitioner.

      F. B. ScMosser, Esq., for the respondent.
   OPINION.

Black:

In a recomputation of the deficiency, effect should be given to the stipulation of the parties that petitioner is entitled to an additional depreciation deduction of $174.82 for 1928, and a deduction for amortization of improvements to leased premises in the amount of $828.96.

The remaining question involved in this proceeding may be stated thus — Where a partnership composed of two members transfers all of its assets to a corporation for all of its capital stock, both common and preferred, under the circumstances detailed in our findings of fact, is the basis for determination of the depreciation of the assets received by the corporation limited to the cost to the partnership ?

It is the contention of the respondent that the transactions outlined in our findings of fact, by which the petitioner acquired the assets of the partnership, constitute a nontaxable exchange within the meaning of section 112 (b) (5) of the Eevenue Act of 1928. If this contention is true, then, under the express provisions of sections 114 (a) and 113 (a) (8) of the Eevenue Act of 1928, the basis for the determination of the depreciation allowance is the cost to the partnership. Barron Bros., Inc., 26 B. T. A. 304.

The petitioner, because of the oral agreement made between Hun-gate and the two partners of Schmieg and Company, in 1923, prior to the organization of the corporation, maintains that the transaction is not a nontaxable exchange, since the element of control, as defined by section 112 (j) is not present. The question, therefore, resolves itself into whether or not the transaction was a nontaxable exchange, and that depends upon a construction of the meaning of section 112 (j). It reads:

(j) Definition of control. — As used in this section the term “control” means the ownership of at least 80 per centum of the voting stock and at least SO per centum of the total number of shares of all other classes of stock of the corporation.

Now it is admitted by petitioner that Schmieg and Kotzian owned all the preferred stock and two-thirds of the common stock of petitioner, but petitioner contends that Hungate was the owner of the other one-third of the common stock, although it was not held in his name. If petitioner has met the burden of proof and shown that Hungate, immediately after the transfer of partnership assets from the partnership of Schmieg and Company to the corporation, Schmieg, Hungate and Kotzian, Inc., was the owner of one-third of petitioner’s common stock within the meaning of the above quoted language of the statute, then there was not the control in Schmieg and Kotzian prescribed by the statute. It would follow that the transaction was a taxable one and petitioner would get a new base for the determination of gain or loss and depreciation. Has petitioner met the burden of proof on this point to overcome respondent’s determination? We think not. Certain facts connected with the transaction are undisputed. Among these are the written offer submitted by the partners to the corporation to convey to it the partnership assets, which recited that the consideration for such conveyance should be the issuance of the entire capital stock of the newly organized corporation to Schmieg and Kotzian, the partners, and the assumption by the corporation of all the partnership liabilities; the resolution of acceptance by the corporation of this offer recites that the corporation shall issue to said partners all of its capital stock in payment for the assets; all the stock was in fact issued to the partners, Schmieg and Kotzian, except three qualifying shares, one of which was issued to Hungate. No other shares were issued in Hungate’s name until in April, 1929.

Therefore, under these undisputed facts, we hold that, notwithstanding the verbal agreement which Hungate had with Schmieg and Kotzian in 1923 (described in our findings of fact), the actual transaction which was put through in January, 1924, was a sale of the assets of the partnership to the newly organized corporation in consideration for the issuance of all the stock to Schmieg and Kotzian. They became the owners of the stock and were in control of the corporation, within the meaning of section 112 (j) of the Revenue Act of 1928. The formal acts of the parties are to be given substantive effect in the determination of tax' liabilities. Minnie C. Brackett, Administratrix, 19 B. T. A. 1154, affirmed from the bench without opinion by the United States Circuit Court of Appeals for the Seventh Circuit, April 21, 1931; Ralph J. Chandler Shipbuilding Co., 22 B. T. A. 5.

The fact that Schmieg and Kotzian ultimately transferred one-third of the stock to Hungate does not affect the situation. When, after the sale of assets by the partnership to the corporation, the partners, Schmieg and Kotzian, who had received all the stock, transferred some of it to Hungate, they were merely exercising a right of ownership. The situation does not require that the original owners shall remain indefinitely in control after the exchange. It is only necessary that the owners of the property transferred shall be immediately in control of the corporation to which the transfer of property is made. Federal Grain Corp., 18 B. T. A. 242.

Therefore, on this issue we hold for respondent, and in so doing we do not think we are in conflict with our decision in Dome Co., 26 B. T. A. 967, a case strongly urged by petitioner in behalf of its contention herein. We think the facts in that case are distinguishable from those of the instant case. The parties are in agreement as to how the depreciation shall be computed and at what rate, once the basis has been determined. Our decision disposes of that only remaining question.

Reviewed by the Board.

Decision will be entered under Rule 50.