author: Lansdon:

text:
    Hattie W. Mackay, Executrix, Estate of Walter S. Mackay, Petitioner, v. Commissioner of Internal Revenue, Respondent. Shirlaw W. Mackay, Petitioner, v. Commissioner of Internal Revenue, Respondent. Hattie W. Mackay, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 56914-56916.
    Promulgated February 13, 1934.

      William M. Maxwell, Esq., for the petitioners.

      Dean P. Kimball, Esq., for the respondent.
   OPINION.

Lansdon:

The real issue here is whether the California Bag & Paper Co. sold both groups-of assets in question. If there was such a sale prior to September 14,1928, the profit realized was that of the corporation, and, added to book surplus as of that date, it was almost sufficient to distribute a dividend out of earnings accumulated after March 1, 1913, as determined by the respondent. The petitioners contend that the corporation declared and distributed a dividend in kind to them, consisting of the group of assets that had a book value of $84,105.31, and that they sold such assets on the next day to St. Helens for $150,000.

Comparison of the diverse contentions of the parties discloses that each is asking us to look through the form of the corporate and other acts by which the assets involved were finally passed to the purchaser for a price agreed to before any procedure to minimize Federal income taxes and to base our conclusions on the substance of what was actually done. The respondent ignores the terms of the resolution of distribution and argues that prior to its adoption by the directors the group of assets in question had already been sold by the corporation and so were not available for distribution in kind on September 14, 1928.. Upon this theory he asks us to determine that dividends in the amount of $150,000 were received by the petitioners and that their ratable parts thereof are taxable at surtax rates provided in the Revenue Act of 1928. To affirm his determination we must hold that the corporation realized a profit from the sale in the amount of the difference between the book value of the assets and $150,000 and that such profit, plus surplus at date of sale, was available for distribution as dividends on September 14, 1928.

It is somewhat difficult to determine the real contentions of the petitioners. They plead (1) that the Commissioner erroneously failed to recognize the distribution of assets of the book value of $84,105.31 as a tax-free distribution of capital under the provisions of section 115 (d) of the Revenue Act of 1928, (2) that he erroneously held that all of such distribution was taxable as dividends, and (3) that he erroneously failed to recognize and adopt the findings of an internal revenue agent allowing an overassessment to each of the petitioners in certain specified amounts. It is perfectly clear that these allegations are inconsistent with the facts relied on by the petitioners. Only one dividend was declared on .September 14 and that in terms was the book value of the assets in question in the amount of $84,705.31. On that date the corporation had surplus available for dividends in the amount of $81,697.47 and therefore capital could not have been included in the distribution in excess of $3,007.84. To bring this contention within the provisions upon which they rely the petitioners include appreciation or depreciation reserves in the amount of $65,294.69 and thereby in their view of the facts increase the distribution to $150,000. The resolution, however, provides for the distribution of only $84,705.31, practically all of which could be paid out of surplus. It is clear, therefore, that petitioners are asking us to look through the form of the resolution and determine its real substance as something quite different.

If the terms of the corporate and other acts under review are literally applied, the petitioners received a body of assets as a dividend in kind valued by the resolution at $84,705.31 and on the next day sold the same property for $150,000 and realized a gain, after one day of ownership, in the amount of $65,294.69. It thus appears that petitioners are foreclosed from any attempt to have us hold that the nature of all the transactions of September 14 and 15 is clearly shown by the form thereof, unless they are willing to pay both normal and surtaxes on the profit clearly indicated by the procedure adopted.

The record discloses that negotiations for the sale in question were begun some two months before the corporate and other acts of September 14, 1928. Such negotiations resulted in a complete meeting of the minds of the seller and purchaser. There was an agreement as to price and it was understood that as a matter of form the purchaser would pay $182,125.31 directly to the seller and the remaining $150,000 to the stockholders thereof. On the morning of September 14 it remained only to embody the terms arrived at by negotiation into corporate and other acts necessary to effect the transfer of the assets to the buyer.

The assets sold to St. Helens did not include all the property of the corporation. It retained some valuable real estate and all its accounts receivable. The combined value of the retained property and the selling price of the assets purchased by St. Helens exceeded the cost of all the corporation property by an amount which counsel for petitioners admit was between $60,000 and $70,000. Since there is no evidence on this point, it may have been much more. It was obvious, therefore, that a direct sale would result in a substantial tax liability against the corporation. Admittedly, upon the advice of counsel, the procedure on September 14 and 15 was for the purpose of reducing such liability to a minimum. In McQueen Co. v. Commissioner, 67 Fed. (2d) 857, the court, in reference to a similar contention but involving the taxability of the profits realized from a sale, said: Such anticipatory arrangements and contracts, intended to circumvent the taxing statutes, are not looked upon with favor ”, and cited Lucas v. Earl, 281 U.S. 111; and Phelps v. Commissioner, 54 Fed. (2d) 289; certiorari denied, 285 U.S. 558. It is plain, therefore, that such arrangements must be carefully scrutinized and approved only when their facts show beyond any doubt that the purposes thereof have been legally accomplished. .

In our opinion the plans adopted failed to accomplish their purpose for the reason that all the assets in question had been sold before the alleged distribution. It follows, therefore, that the amount of $150,000 was not in fact received by the stockholders from St. Helens, but from the corporation. On September 14 the corporation had already sold such assets to St. Helens for $150,000 and the distribution in fact was in that amount instead of in the book value of $84,705.31 and included profit from the sale properly chargeable to surplus in the amount of $65,294.69, which, in addition to the book value of $84,705.31, was at once available for distribution as earnings or surplus accumulated after March 1, 1913. On very similar facts in Taylor Oil & Gas Co., 15 B.T.A. 609, we decided that assets alleged to have been distributed to the stockholders of a corporation in liquidation were in fact sold by the corporation to which the profits of the sale therefrom accrued. This result was affirmed by the United States Circuit Court of Appeals for the Fifth Circuit in Taylor Oil & Gas Co. v. Commissioner, 47 Fed. (2d) 108; certiorari denied, 283 U.S. 862. See also Liberty Service Corp., 28 B.T.A. 1067; Fred A. Hellebrush, 24 B.T.A. 660; affd., 65 Fed. (2d) 902; Northwest Utilities Securities Corp., 27 B.T.A. 524; affd., 67 Fed. (2d) 619; McQueen Co. v. Commissioner, supra.

On brief petitioners argue that the cases cited and relied on by the respondent are not in point, since they relate to profits realized by a corporation and taxable to it as such and have no bearing here, where the Commissioner seeks to tax after distribution to the stockholders. This argument is not convincing. In each of the cited cases the question was whether the profit was realized by the corporation or by someone to whom the assets had been transferred in some fashion by the corporation after sale had actually been accomplished. In each instance if the property was actually sold by the corporation the realized profit was an addition to the surplus and available for distribution of dividends. In such a situation it is obvious that the profit realized by the corporation is taxable to it and that distributions of such profit from surplus are taxable to the stockholders at surtax rates as ordinary dividends. On their face the facts here indicate that the distribution of $150,000 was made from surplus and capital in the respective amounts of $146,992.16 and $3,007.84, but, even if section 115 (d) of the Revenue Act of 1928 is applicable to the lesser amount, there is no evidence of the basic cost of the shares of stock which may be reduced to that extent, or that the remaining assets of the corporation were not, in fact, equal to the par value of all its outstanding capital stock.

In addition to their contention as to the nature of the transaction involved, the petitioners also plead that the failure of the Commissioner to approve and adopt the findings of a revenue agent allowing each of them an overpayment of taxes in 1928 was erroneous. This allegation of error is not argued in their brief, but the record does not show that it has been abandoned. It is without merit. James Couzens, 11 B.T.A. 1040. The determinations of the respondent are affirmed.

Reviewed by the Board.

Decision will be entered for the respondent.

       Sec. 115. (cl) Other, distributions from capital. — If any distribution (not in partial or complete liquidation) made by a corporation to its shareholders is not out of increase in value of property accrued before March 1, 1913, and is not out of earnings or profits, then the amount of such distribution shall be applied against and reduce the basis of the stock provided in section 113, and if in excess of such basis, such excess shall be taxable in the same manner as a gain from the sale or exchange of property. The provisions of this subsection shall also apply to distributions from depletion reserves based on the discovery value of mines.


source: Caselaw Access Project

license: Public Domain

text:
    William John McCabe, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 69777-69784, 69803.
    Promulgated February 13, 1934.

      George McClintoch, Esq., and J. B. Templeton, Esq., for the petitioners.

      Arthwr H. Fast, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: William John Mc-Cabe, Jr.; William John McCabe, as Executor of the Last Will and Testament of George II. McCabe, Deceased; Ken C. McCabe; James McCabe; .James Iloscoe McCabe; Milton Mathew McCabe ; Cecil Charles Blair ; and I-Iarry K. Chidlaw.

   OPINION".

Lansdon:

The respondent has determined that the transaction here involved was effected by the new corporation purchasing for cash the stock of the old companies. The petitioners contend that such merger was a tax-free reorganization under the provisions of section 112' of the Revenue Act of 1928. The undisputed testimony shows that the plan of reorganization contemplated no cash payments by the new corporation to the stockholders of the old com-pañíes, and that on the completion of the merger none of such stockholders had received any cash or any consideration for their stock other than the stocks and bonds of the new corporation. Unless the use of checks in the process of transferring the old stock to the new corporation, as set out in our findings of fact, can be regarded as the payment of cash by such new corporation to the stockholders of the old concerns, it is obvious that under the facts and the law the petitioners have overcome the presumption of correctness that attaches to the determination of the respondent.

A careful study of the various steps through which the new corporation acquired the stock of the old companies by the issue of its securities convinces us that no cash was paid for such stock. The checks used were in the nature of tokens or counters. The only check received by any stockholder of any old company was unsigned and the only check that any such stockholder gave in the process of converting his old stock into the securities of the new corporation was drawn on a bank in which he had no account. The unsigned check could not have been cashed and the stockholder’s own check on the Royal Bank of Canada, in which he had no account,- was worthless except as a counter or token to be used only in connection with the conversion of the old stock into new securities. In our opinion the use of the checks in question did not evidence any cash payments and was merely one of the parts of a single transaction contemplated by the reorganization plans.

In support of his determination the respondent cites J. Hampton Hoult, 24 B.T.A. 79; B. F. Saul, 4 B.T.A. 639; Minnie C. Brackett, Administratrix, 19 B.T.A. 1154; Minnesota Tea Co., 28 B.T.A. 591; Georgetown Water, Gas & Electric Co., 28 B.T.A. 321; Prairie Oil & Gas Co. v. Motter, 66 Fed. (2d) 309; Tucker v. Alexander, 25 Fed. (2d) 425; Charles T. Kountze, 24 B.T.A. 405; affd., Burnet v. Kountze, 66 Fed. (2d) 141. In the Hoult case, supra, the Board held that the stockholders of the old company actually sold their stock therein for cash and with the proceeds purchased preferred and common stock of the new company, but there is nowhere any showing that the stockholders of the old company acquired all the securities of the new concern and the facts disclose that other parties not interested in the old corporation held a controlling.interest in the voting stock of the new concern. It is obvious, therefore, that upon the facts in that proceeding it has no bearing on the situation here.

In B. F. Saul, supra, also cited by the respondent, the merger agreement provided for the purchase of all the assets of the Home Savings Bank by the American Security & Trust Co. for $400,000 in cash, and that, upon the surrender of the stock owned by the stockholders of the vendor concern, each was to receive four shares of the stock of the vendee for every share so surrendered. The stockholders of the vendor did not acquire all the securities of the vendee. That transaction, which was based upon the sale of assets for cash and the subsequent use of such cash to acquire a minority of the stock of the purchasing company, is so essentially different in fact from the reorganization here under consideration that it is plain that no rule established in our decision therein has any bearing on the controversy. In Minnie C. Brackett, Administratrix, supra, the old company sold for cash to a new concern and with such cash purchased shares of stock in the vendee, but there is no showing that after the transaction was completed the stockholders of the old concern ratably owned all the securities of the new company and there was an actual use of cash deposited in a bank for the purposes of the transactions.

In Georgetown Water, Gas & Electric Co., supra, the owners of all the stock of the petitioner, pursuant to a contract, sold all of its tangible and intangible assets for a recited consideration in cash, but for a part of the amount thereof agreed to take bonds of a third concern, with the provision that the purchasing company should have the right to take over such bonds at stated intervals and pay the petitioners cash in the amount of the par value thereof. This was plainly a sale of assets in which the stockholders of the old company acquired no securities of the purchasing concern. It has no bearing on the issue here. Careful consideration of the facts in the other cases cited by the respondent discloses that all are easily distinguishable from the instant proceeding.

The facts here do not indicate even the form of a transaction in which cash was received by the petitioners. There never was a time in the course of the negotiations for merger in which it was contemplated that any stockholder of an old company should receive cash for his interest therein. The plan of reorganization provided for no cash payments. In the process of transferring the stock of the old companies for the securities of the new concern, it was very carefully provided that none of the old stockholders could receive any cash. Petitioners who testified all swore that they never expected any cash and received none and that all they did receive was their ratable proportion of the securities of the new corporation. We are convinced that the petitioners have shown that the merger in question falls squarely within the statutory provisions upon which they rely.

Our conclusion above renders it unnecessary to decide the alternative plea of the petitioners relating to the basic cost of their shares in the old companies. All other issues have been abandoned.

Reviewed by the Board.

Decision will be entered under Rule SO.

       SEC. 112. RECOGNITION OP GAIN OR LOSS.
      (a) G-eneral rule. — Upon the sale or exchange of property the entire amount of the gain or loss * * * shall be recognizes, except as hereinafter provided in this section.
      (b) Exchanges solely in hind. — •
      »****»»
      (3) Stock iron stock on keoeganization. — No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization', exchanged solely ior stock or securities in such corporation or in another corporation a party to the reorganization.
      * ⅝ * ⅜ * * *
      (i) Definition of reorganization. — As used in this section * * *
      (1) The terra “ reorganization ” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the yoting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or 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 and includes both corporations in the case of an acquisition by one corporation of at least a majority of the yoting stock and at least a majority of the total number pf shares of all other classes of stock of another corporation.


author: Matthews :

text:
    Corinne Porter Scruggs, Administratrix of the Estate of J. D. Scruggs, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69796.
    Promulgated February 14, 1934.

      J. O. Ristine, Esq., for the petitioner.

      G. O. Holmes, Esq., for the respondent.
   OPINION.

Matthews :

On March 16, 1931, J. D. Scruggs of Madison, Florida, filed his income tax return for the year 1930 with the collector of internal revenue for the District of Florida. On October 24, 1931, J. D. Scruggs died intestate. His widow, Corinne Porter Scruggs, was appointed administratrix of his estate and letters of administration were duly granted to her under date of November 2, 1931, by the County Judge of Madison County, Florida.

On May 30,1932, Corinne Porter Scruggs, as administratrix of the estate of J, D, Scruggs, deceased, executed a power of attorney authorizing J. M. Jordan to represent her as administratrix in connection with all tax returns filed with the United States Government by J. D. Scruggs, deceased, which power of attorney was received by the Public Relations Division! of the Bureau of Internal Revenue on August 30, 1932. Under date of December 6, 1932,. the County Judge of Madison County, Florida, certified that the estate of J. D. Scruggs, deceased, had not been completely administered and that the same was still in the process of administration by Mrs. Corinne Porter Scruggs, administratrix, which certificate was received by the Public Relations Division of the Bureau of Internal Revenue on December 10, 1932.

A protest had previously been filed with the internal revenue agent at Jacksonville, Florida, under date of July 6, 1932, in the name of J. D. Scruggs, deceased, by J. M. Jordan, agent, in which reference was made to a letter dated May 23, 1932, relative to the assessment of a proposed deficiency of $5,058.40, and in which protest R. C. Horne was referred to as administrator ,of the estate of J. D. Scruggs.

R. C. Horne has not been at any time the administrator of the estate of J. D. Scruggs, deceased.

On December 30, 1932, the Commissioner forwarded a notice of deficiency by registered mail to “ Mr. R. C. Horne, Administrator, Estate o.f J. D. Scruggs, Madison, Florida ”, which states in part as follows: “ You are advised that the determination of your tax liability for the year 1930 discloses a deficiency of $5,058.40, as shown in the statement attached.”

On February 9, 1933, a petition was filed with the Board under the caption, “ J. D. Scruggs, Deceased, Mrs. Corinne Porter Scruggs, Administratrix ”, which petition was signed by J. M. Jordan, counsel for the petitioner. The petition reads in part as follows:

(1) The petitioner is a fiduciary whose address is Madison, Florida.
(2) The notice of deficiency, a copy of which is attached, was dated and presumably mailed to the petitioner on December 30, 1932.
(3) The taxes in controversy are income taxes for the calendar year 1930 of $5,058.40.

The following language is used in the verification of the petition: “ Corinne Porter Scruggs, being duly sworn according to law says that she is the administratrix of the estate of J. D. Scruggs, deceased, the petitioner mentioned in the foregoing petition and as such is duly authorized to verify the same, * * * ” and the verification is signed by Corinne Porter Scruggs as administratrix, estate of J. D. Scruggs, deceased.

The petitioner is contending that the notice of deficiency dated December 30, 1932, was not sent to the proper person and that a valid petition has not been filed with this Board. The petitioner has filed a motion asking that the Board determine whether the proceeding should be dismissed on the ground that the respondent mailed the notice of deficiency to a person .other than the petitioner.

We are of the opinion that, under the circumstances outlined above, the misnomer in the deficiency notice is not such a defect as to furnish a basis for refusing jurisdiction of the instant case. The record discloses that the notice of deficiency was addressed to one B. C. Horne, administrator of the estate of J. D. Scruggs, deceased, and that Horne was never the administrator of the decedent’s estate. The instant petition was filed, not by Horne, who was erroneously named in the deficiency notice, but by Corinne Porter Scruggs, who was the duly appointed administratrix and who filed the petition in her representative capacity. The notice clearly shows that the proposed deficiency was that of the deceased taxpayer for the year 1930. As the fiduciary legally entitled to institute a proceeding on behalf of the deceased taxpayer, the petitioner took a timely appeal from what she knew to be a notice of deficiency in tax asserted to be due from the estate of which she was administra-trix. Petitioner was not misled by the error made by the respondent in the deficiency notice in describing Home as administrator. There is no allegation that she did not receive the notice of deficiency or that there was any delay in its delivery. We cannot see that her rights have been jeopardized in any way. Beading the petition as a whole, it is clear that it is the taxpayer’s representative who has petitioned, and by thus accepting the deficiency notice and appealing therefrom the petitioner has cured any error of which she might previously have complained.

Although some of the following cases are distinguishable from the instant case upon the facts, they show that the Board has taken jurisdiction of proceedings instituted by persons other than those whose names appear in the notices of deficiency, where the person filing the petition has actual authority to represent the taxpayer against whom the deficiency has been determined and no one has been misled as to the liability asserted: Kay Mfg. Co., 18 B.T.A. 753; affd., 53 Fed. (2d) 1083; Bankers Realty Syndicate, 20 B.T.A. 612; Charles M. Howell, Administrator, 21 B.T.A. 757, 780; Bankers Trust Co., Trustee, 24 B.T.A. 10; Waldemar R. Helmholz, Executor, 28 B.T.A. 165; Edwin W. Eisendrath et al., Executors, 28 B.T.A. 744; Burnet v. San Joaquin Fruit & Investment Co., 52 Fed. (2d) 123, reversing, in part, 16 B.T.A. 1290.

In the case of Commissioner v. New York Trust Co., 54 Fed. (2d) 463; certiorari denied, 285 U.S. 556, the court reversed the Board’s decision reported at 20 B.T.A. 162, saying: “ The ‘ taxpayer ’ as referred to in the taxing statutes has not a narrow or restricted meaning.” The Board had dismissed the proceeding for lack of jurisdiction, holding that where a trustee filed a return but the deficiency notice was addressed to the beneficiary and referred throughout to the deficiency as that of the beneficiary, the Board has no jurisdiction over a proceeding brought by the trustee. In reversing this holding the court pointed out that though the tax return was made out by the trust company as trustee and the deficiency notice was addressed to the beneficiary in care of the trustee, such notice wa,s received by the trustee and was fully understood as referring to the liability of the trust company as trustee for the beneficiary. The court found that the trustee was not misled by the method of addressing and held that the trustee, by appearing before the Board and invoking the Board’s jurisdiction to obtain redetermination of the tax, waived any defect in the notice.

We are not unmindful of the Board’s decision denying jurisdiction in the case of Antoinette J. Mitchell, Administratrix, 22 B.T.A. 1365, relied upon by the petitioner herein. Under facts very similar to those of the instant case it was stated that neither the estate of the decedent nor its administratrix had been notified of the proposed deficiency in the manner required by the statute and it was held that it was unimportant that the petitioner had obtained actual knowledge of the deficiency within time to file a petition with the Board. Since this decision the Board, in the cases hereinabove cited, has taken a less technical view in determining whether the petitioner is properly before the Board, and the Mitchell case will not be followed herein.

We hold that the Board has jurisdiction, and an order will be entered denying the petitioner’s motion to dismiss.

Reviewed by the Board.

Teammell, Mtordook, and GoodRich dissent.


author: Aeundell:

text:
    Suburban Transportation System, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 62384, 68633, 72387.
    Promulgated February 14, 1934.

      Paul B. Strout, O.P.A., for the petitioner.

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

Aeundell:

Petitioner’s thesis is that the operation of the public schools is an essential governmental function and that the transportation of the pupils to and from school is a necessary incident thereto, citing Burnet v. Coronado Oil & Gas Co., 285 U.S. 393; State v. Randall, 79 Mo. 226, 229; and Jones v. Cody, 132 Mich. 13. Thus it is urged that petitioner is engaged in carrying on an essential governmental function by reason of its agreements with Sno-homish and Eng Counties, Washington, to transport children to and from school, and the income derived from this source it is claimed is immune from Federal taxation under the principles of law underlying our dual system of government, which prohibits the interference, by taxation or otherwise, of one government with the means, instrumentalities, and agencies of the other in the performance of its essential governmental functions.

The fundamental considerations underlying this subject have been so exhaustively considered by the Supreme Court of the United States, as well as by the other courts of the land and this Board, that it is believed little purpose would be served to again go over the ground in detail. The principle is well understood, but it is in determining the extent of its limits that there is difficulty.

As suggested in Metcalf & Eddy v. Mitchell, 269 U.S. 514, there is hardly a step that either the Federal Government or the states take that may not in some indirect way interfere with the activities of the other. For example, the Federal Government may so occupy a field of taxation that in a highly practical way the states are excluded, but that may not be regarded as such a direct interference as will make unconstitutional the levy.

The facts in the instant case, as recited in our findings, so nearly fit the facts as they appear in Metcalf & Eddy v. Mitchell, supra, that we have no doubt that our decision must be controlled by that case. We quote briefly from the Court:

* * * any taxation by one government of the salary of an officer of the other, or the public securities of the other, or an agency created and controlled by the other, exclusively to enable it to perform a governmental function (Gillespie v. Oklahoma, supra), is prohibited. But here the tax is imposed on the income of one who is neither an officer nor an employee of government and whose only relation to it is that of contract, under which there is an obligation to furnish service, for practical purposes not unlike a contract to sell and deliver a commodity. In such a situation it cannot be said that the tax is imposed upon an agency of government in any technical sense, and the tax itself cannot be deemed to be an interference with government, or an impairment of the efficiency of its agencies in any substantial way. * * *
* ⅜ * * * * *
But we do decide that one who is not an officer or employee of a state, does not establish exemption from federal income tax merely by showing that his income was received as compensation for services rendered und'er a contract with the state; and when we take the next step necessary to a complete disposition of the question, and inquire into the effect of the particular tax, on the functioning of the state government, we do not find that it impairs in any substantial manner the ability of plaintiffs in error to discharge their obligations to the state or the ability of a state or its subdivision to procure the services of private individuals to aid them in their undertakings.

The services rendered by petitioner are those of a private contractor; it is neither an ofiicer nor an employee of the State of Washington or any of its political subdivisions; it has neither attempted to show nor does it claim that to tax it would in any manner interfere with or impair its ability to discharge its obligation to the school districts or the ability of the school districts to procure the services of private individuals to transport the children back and forth between the schools and their homes.

We regard as of no significance in deciding the issue before us the fact that in the year 1981 certain of the petitioner’s busses were leased by the school districts to avoid payment of a state automobile license. The busses were still owned and operated by petitioner.

As the income received by the petitioner from the school districts of Snohomish and King Counties, Washington, is properly subject to income tax, it follows petitioner is entitled to deductions for ordinary and necessary expenses and depreciation of its busses. The parties are in agreement upon the amount of permissible deductions, except depreciation. No evidence was offered on the question of depreciation; consequently, the respondent’s determination, allowing only part of the amount claimed, must be sustained.

Decision will he entered under Bule 50,


author: Matthews:

text:
    Finley Peter Dunne, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54444.
    Promulgated February 14, 1934.

      Wayne Johnson, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

Matthews:

This proceeding is for the redetermination of a deficiency in income tax asserted against the petitioner for the year 1927 in the amount of $12,110.48. It is alleged in the petition that the respondent erred in refusing to allow as a deduction from income a loss of $392,152.59, alleged to represent the petitioner’s share of a loss sustained upon the sale of stocks and securities sold through several brokerage accounts during the taxable year, and in refusing to allow, as a deduction, interest charged upon the debit balances in such accounts. In the alternative it is alleged that the respondent erred in including in petitioner’s taxable income one third of the dividends credited on the brokerage accounts.

The case was submitted upon the following stipulation of facts:

1. The petitioner is an individual residing in the Borough of Manhattan, New York City.
2. During the year 1927 petitioner and Eugene Hale, Jr., and Samuel Clark each had an equal one-third interest in four stock-trading accounts carried with three New York stock brokerage firms. Said accounts were opened in the year 1919 upon the suggestion of the late Payne AVhitney, who was a man of great wealth, and who guaranteed the brokers against any loss arising from transactions in said accounts. At the time the accounts were opened Payne Whitney told the petitioner and two other friends, Eugene Hale, Jr. and Samuel A. Clark, that he desired to assist them to make a substantial amount in the stock market and for this purpose would lend them his credit, guaranteeing their accounts. All of the parties agreed to this and as a result three separate joint accounts were opened with the stock exchange houses of Charles D. Barney and Company, W. H. Goadby and Company and.Wrenn Brothers and Company, it being understood that the accounts were the property of the three individuals but guaranteed by Mr. Whitney.
The account at Wrenn Brothers and Company was subsequently transferred to Harriman and Company.
3. The account at Charles D. Barney and Company was carried on the broker’s books as #378 special ” account (Mr. Whitney’s personal account was #378). At W. H. Goadby and Company there were two accounts, one as “ Payne Whitney Special D ” and the other as “ Payne Whitney Special I.” The account at Wrenn Brothers and Company was “ Payne Whitney Special ” and the account at Harriman and Company was carried as the “ C. D. & H.” account (Clark, Dunne and Hale). These accounts were opened without any money being deposited and the total amounts expended in the purchase of securities appeared as debit balances in the accounts. The debit balances were adjusted from time to time on account of interest and commissions charged, dividends credited, etc. The effect of no money being deposited to the accounts was that the securities were bought entirely upon credit. The brokerage houses were willing to make this arrangement because the accounts were guaranteed by Mr. Whitney.
4. During 1919 there were profits on a few transactions in the account with Barney & Company and in that year petitioner withdrew from said account as his individual property the sum of $20,000. Each of the other two participants likewise withdrew from said account the sum of $20,000 as their individual property. Thereafter said account at all times reflected losses, either actual losses on sales or paper losses due to decline in the value of the securities carried.
5. No withdrawals were ever made by the petitioner or the other participants from the other accounts at Goadby & Company or Harriman & Company.
6. During the year 1927 securities carried in the aforesaid accounts were sold, the costs, selling prices and gain or loss being as follows:
7. In his income tax return for the year 1927 petitioner claimed as a deductible loss incurred in the sale of securities one-third of the above loss, or the sum of $392,152.59. The Commissioner of Internal Revenue disallowed said deduction.
8. During 1927 interest due on debit balances or allowable on credit balance in the aforesaid accounts was debited or credited to said accounts in the amounts set forth below:
9.In his income tax return for 1927 petitioner claimed as a deduction for interest paid on indebtedness one-third of the net amount of interest charged as above, or the sum of $18,789.06. The Commissioner of Internal Keyenue disallowed said deduction.
10.During 1927 cash dividends on stocks carried in the aforesaid accounts were received by the brokers and credited to said accounts as follows:
11. In his income tax return for 1927 petitioner included in gross income from corporate dividends, one-third of the above sum of $61,575.00. The Commissioner of Internal Revenue made no change in this item of the return.
12. At the time the aforesaid accounts were opened no money was deposited specifically to the credit of said accounts but Payne Whitney guaranteed the brokers against any loss arising from transactions therein. The total amounts expended in the purchase of securities appeared as debit balances and such balances were adjusted from time to time as necessary on account of interest charges, dividends on securities carried, etc.
13. The account at Charles D. Barney & Co. was closed in the early part of 1927 and Payne Whitney paid the broker in the amount necessary to make good the net debit balance, a total sum of $1,616,031.32.
14. The accounts at W. H. Goadby & Company were closed shortly after the death of Mr. Whitney in May, 1927. Mr. Whitney had on March 31, 1926, made a cash deposit of $992,250 in said accounts and upon completion of sales of securities in said accounts there was a credit balance of $1,028,128.64. Eugene Hale, Jr., acting for himself, the petitioner and Samuel A. Clark directed that the said sum of $1,028,128.64 be paid over by the brokers to the executors of the Estate of Payne Whitney, which was done.
15. The account at Harriman & Company had been closed prior to Mr. Whitney’s death in the sense that all the securities had been sold and there appeared in the account only a debit balance owing to the brokers of $1,136,-961.91. Mr. Whitney had an account at the same brokers in which there was a credit balance of exactly the same amount, and after his death the brokers cancelled this credit balance against the debit balance in the Dunne, Clark and Hale account, thus disposing of the latter account.

It is contended by the petitioner that the several margin trading accounts, which were opened and guaranteed by Whitney under the circumstances outlined above, belonged to the petitioner, Clark, and Hale and that, inasmuch as they were entitled to receive the profits therefrom, the losses resulting from these accounts were likewise the losses of the petitioner, Clark, and Hale. Petitioner relies upon the memorandum opinion of this Board in the case of William Seward Webb, Jr., affirmed by the Circuit Court of Appeals for the Second Circuit, 67 Fed. (2d) 859. In that case Payne Whitney had opened an account with brokers in the name of Mrs. Webb, Whitney guaranteeing the account. There was a net credit balance in the account at the close of 1925. The amount was not paid to her at the close of 1925, but when the account was closed out in 1926. It was held by the Board that Whitney made a gift to Mrs. Webb when he established a trading-account in her name and ordered stocks purchased for her account and that the profit arising out of the sales of the stock for her benefit in 1925 represented taxable income to her for that year. The decision of the Board was affirmed, the court pointing out that although Whitney supplied the margin or credit which caused the brokers to buy the stock for Mrs. Webb, once she ratified the transaction, as she did, she became the brokers’ principal and entitled to the profits from the subsequent sale of the shares. The court also pointed out that even if Whitney reserved the power to close the account at any time and thereby terminate his liability to the brokers, there was nothing to indicate that he reserved any control over proceeds of sale in excess of his indebtedness. We find nothing in the language used by the Board or the court in the Webb case to indicate that had there been a debit balance in 1925 Mrs. Webb would have been entitled to a loss.

In the instant case, although the account's were not opened in the names of petitioner, Clark, and Hale, it was understood by the brokers and Whitney that any profits which were shown in the accounts were to be the property of the three friends for whose benefit the accounts were opened, Whitney guaranteeing the brokers against any losses. The effect of this guarantee was that petitioner, Clark, and Hale were also guaranteed against any losses. When the accounts were closed out in 1927 there were net debit balances in the Barney and Harriman accounts and a credit balance in the Goadby account. Such credit balance, however, was in large part due to the fact that Whitney had made a cash deposit in such account in 1926. The net result of the trading in securities in the three accounts was a loss of $1,176,457.75. When the accounts were closed out in 1927, Whitney or his estate paid this loss; consequently, petitioner sustained no loss in 1927.

In determining whether there is a net debit balance or a net credit balance in a margin trading account, commissions and interest debited and interest and dividends credited to the account are taken into consideration. In the instant case the interest and dividends credited to the accounts were not received and could not have been withdrawn by petitioner and the other participants. Neither were they liable for nor did they pay any part of the interest debited to the accounts. Therefore, petitioner is not entitled to deduct one third of the interest debited to the accounts and he is not taxable on one third of the dividends credited to the accounts.

Reviewed by the Board.

Judgment will be entered under Bule 50.


author: Van Fossan:

text:
    Thomas Fitzgerald, Petitioner, v. Commissioner of Internal Revenue, Respondent. Peter G. Ten Eyck, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 62075, 68197.
    Promulgated February 16, 1934.

      John O. Watson, Esq., and Lcmrence Graves, Esq., for the petitioners.

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

Van Fossan:

These proceedings were brought to redetermine deficiencies of $311.85 for 1929 as to Fitzgerald and of $471.89 for 1930 as to Ten Eyck.

The sole issue is whether or not the salaries of the petitioners, as members of the Albany Port District Commission, are exempt from Federal income tax by reason of its having been received for services in connection with the exercise of an essential governmental function.

On March 25, 1925, the Legislature o,f the State of New York created a public corporation having perpetual existence, known as the Albany Port District (hereinafter called the District). The act establishing the District provided that the District:

* * * shall embrace the city of Albany and the lands belonging to the city of Albany, within the town of Bethlehem; the city of Rensselaer; and all lands and water, in the Hudson River contiguous thereto, subject to the right, title and interest of the state in and to the lands under the waters of the Hudson River.

The said act also established the Albany Port District Commission (hereinafter called the Commission) to administer the affairs of the District. The Commission is a body corporate and consists of five members, four residents of Albany and one a resident of Rensselaer. The members are appointed by the Governor of New Tort upon nomination of the mayor of the city in which the proposed member resides. The governor may reject the nomination made by the mayor. Vacancies in office are filled in the same manner. The term of office is three years and the annual salary is $5,000. Members are required to take the constitutional oath of office. They may be removed by the governor for inefficiency, neglect of duty or misconduct in office.

The Commission is granted the “power and authority over the survey, development, control and operations of Port facilities ” in the District and “ the co-ordination of the same with existing or future agencies of transportation, with a view to the increase and efficiency of all such facilities and the furtherance of commerce and industries in the district * * The Commission was required to make an annual report of its proceedings and deliver a copy thereof to the state superintendent of public works, the state engineer and surveyor, the mayor and common council of each city in the District, the resident United States Army engineer, the Chief of Engineers of the United States Army and the Secretary of Commerce of the United States. An appropriation of $5,000 was made to cover the expenses in connection with the appointment and functioning of the Commission.

The powers and duties of the Commission constituted by the said act, as amended April 5, 1929, are in part as follows:

See. 5. Such port commission also shall (1) Have power to confer with the governing bodies of each of the municipalities within the port district and dock, port, harbor, channel and improvement commission and any other body or official having to do with port and harbor facilities within and without the district and h'old public hearings as to such facilities.
(2) Have power to confer with the railroad, steamship, warehouse and other officials in the district with reference to the development of transportation facilities in such district and the coordination of the same.
• (3) Confer with the proper state officials as to means and measures for stimulating the use of the barge canal.
(4) Formulate and adopt a financial, building and operation program, which shall be submitted to the mayor of each city, in the district, who shall be entitled to be heard thereon before formal adoption, notice of such hearing to be given in writing at least twenty days before the day of such hearing.
(5) Have power to adopt a comprehensive plan, and to change or revise the same, for the development of port facilities in such district, which plan may provide separately for the work of initial development, and shall include an estimate of the total cost of all the work and/or of the work included in such initial development, and to apportion the cost thereof, as provided in section eight, and not oftener than once in three years to revise such apportionment to accord with any changes theretofore made in the comprehensive plan, as required by said section eight; and as part of such comprehensive plan, or pursuant thereto, to determine upon the location, type, size and construction of requisite port facilities, subject, however, to the approval of the secretary of war and chief of engineers, United States army, where federal statute or regulation requires it.
(6) Have power to acquire, lease, erect, construct, make, equip and maintain port facilities within or outside the district, either on land owned by the district or upon land set aside for its uses and control, as provided in section thirteen, and for any such purpose to acquire and improve real property, including easements therein, lands under water and riparian rights, by agreement or by condemnation, and to sell, rent, exchange or dispose of any property, real or personal, as may seem advisable.
(7) Have power to contract with any municipality in the district for the construction by the municipality of one or more docks, wharves, terminals or warehouses, to belong to the municipality and be maintained by it, whereby a part of the cost of construction shall be borne by the district, in cases where the commission, after a public hearing, determines that such work is of common benefit to the municipalities, inhabitants and property in the district.
(8) Have power to execute contracts within the provisions and limitations of this act and to issue and sell bonds or other obligations of the port district to the amount authorized pursuant to section ten and in such additional amount, not exceeding fifteen per’ centum of the amount so authorized, as may be required for work included in any revision or amendment of the comprehensive plan, pending a re-apportionment of the total cost as above provided.
(9) Have power to fix rates, charges and wharfage for the use of all port facilities, or to rent the same or grant the use thereof for limited periods, and collect rates, rents, charges and wharfage for such facilities owned or controlled by the district.
(10) Operate and maintain all port facilities owned or controlled by it, including a general terminal railroad connecting with any railroad within said district, use the revenues therefrom for the upkeep thereof and the expenses of the commission and the residue, if any, on hand at the end of any fiscal year, for further construction and port development, or in reduction of taxation.
(11) Have power to regulate and supervise the construction and operation of all port facilities, by whomsoever constructed, installed or owned.
(12) Expend moneys, if any, appropriated by the state for the purposes of this act on account of benefits accruing thereunder to the state or its property.
(13) Have power to create and maintain a trafile bureau.
(14) Have power to employ such clerical, engineering, legal or other professional assistants as it may deem necessary for the purposes of this act, fix their compensation and at pleasure discharge any of them.
(15) Have power to do all things necessary to make the deeper Hudson project useful and productive.
The term “ facilities,” “ port facilities,” “ terminals,” and “ terminal work ” as used in this act, shall include, among other things, wharves, docks, piers, terminals, railroad tracks on terminals, cold storage and refrigerating plants, warehouses, elevators, and such property real or personal as may be acquired or used in connection therewith, personal service, freight handling machinery and such equipment as is used in the handling of freight and the establishment and operation of a port,, and the appurtenances thereto and work of deepening parts of the Hudson river adjacent to the terminal, exclusive of the channel, within the port district.
Sec. 6. The commission may make, and cause to be served upon any municipal or other corporation, or individual, within the district, any reasonable order which it may determine to be necessary for the proper development, maintenance and use of the port, relating to the construction, equipment, repair, maintenance, use and rental of any dock, wharf, slip, terminal or warehouse owned or leased by such corporation or individual within the district. With a copy of the order shall be served a notice specifying a day, not less than ten days after such service, when such corporation may appear before the commission, present written objections to the making of the order and be heard on such objections. If no such objections be filed within the time stated, or if the order be sustained as the result of such hearing, either in its original or a modified form, such order shall be final, subject only to review by a court of competent jurisdiction; but no order staying or suspending an order of the commission shall be made by any court otherwise than upon notice and after a hearing; and if the order of the commission is suspended, the order suspending the same shall contain a specific finding based upon evidence submitted to the court and identified by reference thereto that great and irreparable damage would otherwise result to the petitioner and specifying the nature of the damage. When an order of the commission shall become final, including the termination of any court proceeding sustaining the order, or of the time for beginning such a proceeding if none be brought, if the corporation or individual shall fail to obey it, or if any municipal or other corporation or individual shall violate a lawful rule of the commission, the commission may commence and maintain an action or proceeding in the name of the Albany port district, in an appropriate court having jurisdiction, for the purpose of having such disobedience to an order or violation of a rule prevented or obedience enforced, either by mandamus or injunction. Such an action or proceeding may be brought in the supreme court, which shall have jurisdiction to grant mandamus or injunction or any other relief appropriate to the case. The commission also, by rule, may prescribe a civil penalty of not more than fifty dollars for disobedience to an order or violation of a rule for any distinct act of such disobedience or violation, or, in the case of a continuing disobedience or violation, a penalty of not more than fifty dollars for each day that it continues. Any such penalty may be sued for and recovered by the commission in any court of competent jurisdiction, and the moneys recovered shall be used in carrying out the provisions of this act. Two or more such penalties incurred by the same corporation or person may be sued for in one action.
Sec. 7. The commission, and any member thereof when directed by the commission, may make any investigation which the commission may deem necessary to enable it effectually to carry out the provisions of this act, and for that purpose the commission, or such member, may take and hear proofs and testimony and compel the attendance of witnesses and the production of books, papers, records and documents, including public records. The commission and its authorized agents may enter upon any lands as in its judgment may be necessary for the purpose of making surveys and examinations to accomplish any purpose authorized by this act, the district being liable for actual damage done.

The petitioners were appointed members of the Commission previous to the taxable years and still hold those offices. They took the oath of office and each received the salary of $5,000 per year. Ten Eyck is chairman of the Commission and devotes practically all his time to the performance of his duties as such member and chairman. Fitzgerald was secretary of the Commission and devoted less time to his duties. The Commission has performed its duties in accordance with the statutes creating it and has complied with the conditions therein imposed.

Albany is the junction point of the Hudson Eiver, the New York Barge Canal, the Oswego Canal, the Cayuga Canal and the Champlain Canal. It is 143 miles inland from New York Harbor. Within a 250-mile radius of the city the population is equal to one third of the population of the United States. The western terminus of the New York Barge Canal is at Buffalo. The Barge Canal and the Great Lakes afford a continuous waterway of 1,500 miles, serving more people than any other inland waterway in the world.

The Sixty-eighth Congress of the United States appropriated $11,200,000 for the construction of a channel in the Hudson Eiver from New York City to Albany, having a width of 300 feet and a depth of 27 feet at mean low water. Between $8,000,000 and $9,000,000 of that sum was used for the purpose. The State of New York expended approximately $175,000,000 in the construction and improvement of the Barge Canal, formerly the Erie Canal.

Prior to the appropriation by Congress the Chief of Engineers, under date of June 2,1924, recommended that local interests provide dumping ground for dredged material, “ organize an agency to design, construct and operate suitable terminals and to promote the actual transfer of freight between ship and rail at such terminals ” and “before any Federal funds are expended on channel improvement, make provision satisfactory to the Chief of Engineers and the Secretary of War for the construction of terminals * * * supporting warehouses * * * a grain elevator * * * and a publicly controlled belt-line railroad * * He also stated that credit should be given to the State of New York for its great expenditure in construction of the Barge Canal and for that reason that the locality be relieved from contributing to the cost of the improvement.

During 1930 and prior thereto the Commission was engaged in the construction of the Port of Albany. The following provision contained in chapter 523 of the Law of 1927, amending the original act creating the District, governs the payment of the Commission’s expenses :

Annually, in the mona of June, the commission shall file with the clerk and with the treasurer of each city in the district, a statement of the amount to be raised upon the territory within such city and paid to the commission, for the estimated expenditures of the commission under this act during such fiscal year, including construction cost, expenses other than for construction, and installments of the district debt, if any, and interest, to fall due in such year. The statement shall specify when the amount should be paid to the commission which shall, so for as practicable, be after the collection of taxes next to be levied in or for such municipality. The clerk of each city shall cause such statement to be presented to the legislative governing body, and board of estimate, if any, of the city at its next meeting, and such board or body shall cause the amount chargeable to the several parcels of real estate in the city to be levied upon such real estate in the city by the first annual municipal tax levy next occurring, in proportion to the valuation of the taxable real property for city taxes. The amounts chargeable under this section, when collected, shall be paid to the treasurer of the commission. In anticipation of the levy and collection of taxes under this section, the commission may issue and sell certificates of indebtedness of the district, payable for moneys so to be collected by tax in such cities. In determining the total amount to he raised for any fiscal year under this section the commission shall deduct’ from its estimate of total expenditures the probable amount of net revenues, if any, from its port facilities, and the amount of any appropriations by the legislature to be available in such year.

Each year the Commission submits to the cities of Albany and Rensselaer its estimate of the deficit anticipated in the operation of the port. The salaries of the commissioners are included therein, The amount of the estimate is apportioned between the cities and each includes its respective share in its budget, issues a check therefor to the Commission in a lump sum and levies a general tax assessment against its property owners to cover the amount. The Commission maintains its offices at Albany and has an information office in New York City. Its employees are compelled to contribute to the retirement fund of the State of New York. The commissioners may do so. The Commission makes such contribution in a lump sum for the benefit of its employees.

The Commission has paid for the construction of its port facilities by issuing bonds and certificates of indebtedness. Its bonded indebtedness is $6,036,000 and its outstanding certificates of indebtedness amount approximately to $900,000.

Generally speaking, the Commission’s duties are administrative, financial, operative, engineering, and negotiating. The Commission holds hearings on the apportionment of the annual deficit between the cities of Albany and Rensselaer. It arranges for bond issues to provide funds for its constructive work. It formulates plans for the building and expansion of the port. It negotiates with shippers using the port facilities, with municipal, state and Federal officials and with the officers of railroad and steamship lines.

The District is the connecting link between the deeper Hudson project and the Barge Canal. It is the transfer point for export cargoes carried on the Barge Canal from inland shipping points and for import cargoes received by water from the Pacific coast, West Indies, Europe and other points.

The Commission owns the land comprising the port. It consists of 201 acres on the west, or Albany, side of the Hudson River and 110 acres on the east, or Rensselaer, side thereof. Some of the acreage was contributed by the two cities and some was purchased by the Commission. The facilities and equipment of the port consist of docks aggregating 4,400 feet in length, a belt-line railroad, two transit sheds containing 156,000 feet of floor space, a warehouse 600 feet long, and 180 feet wide, a grain elevator with a capacity of over 13,000,000 bushels of grain — the largest single unit grain elevator in the world — a feed mill, a lumber terminal, and other necessary port and dock equipment such as conveyors, loading devices, turning basin, car-float ferry, stevedoring and fire protection equipment, and water supply. It leases its feed mill to cooperative farm organizations. It also leases land to three stevedoring companies and to the Molasses Products Corporation. These concerns have erected buildings and installed extensive equipment on the properties.

The Commission has adopted certain rules and regulations governing its operations and makes certain fixed charges for the use of its various facilities and equipment. Each year since its creation the Commission has incurred a large deficit. In 1930 the deficit was placed in the budget estimate at $50,000; in 1931, at $65,000; and in 1932, at $228,442.50.

Much has been said and written concerning the exemption from Federal taxation of officers and employees of states and political subdivisions thereof. In the cases before us the status of the petitioners as officers or employees of the state is not challenged. Therefore, we may disregard that phase of the question and confine our discussion to the character of the powers, duties, and activities of the District.

The fundamental rule governing the determination of the Federal taxation is set forth in Flint v. Stone Tracy Co., 220 U.S. 107, in the following language:

The cases unite in exemption from Federal taxation the means and instru-mentalities employed in carrying on the governmental operations of the State. The exercise of such rights as the establishment of a judiciary, the employment of officers to administer and execute the laws and similar governmental functions can not be taxed by the Federal Government. The Collector v. Day, 11 Wall. 113; United States v. Railroad Co., 17 Wall. 322; Ambrosini v. United States, 187 U.S. 1.
The true distinction is between the attempted taxation of those operations ' of the States essential to the execution of its governmental functions, and which the State can only do itself, and those activities which are of a private character. The former, the United States may not interfere with by taxing the agencies of the States in carrying out its purposes; the latter, although regulated by the State, and exercising delegated authority, such as the right of eminent domain, are not removed from the field of legitimate Federal taxation.

We must, therefore, scrutinize carefully the underlying purpose of the creation of the District as reflected by the statutes authorizing it and also examine tlie historical background antedating the state and national legislation. For many years the Erie Canal, running roughly east and west across the State of New York, had been in use as a public waterway. Prior to 1925 the State of New York had expended over $175,000,000 in deepening, strengthening, improving and reequipping the canal and had changed its name to “ Barge Canal.” The state authorities opened negotiations with the Federal authorities for deepening and widening the channel of the Hudson Biver from Albany to New York City to accommodate sea-going vessels, to the end that a continuous waterway might be established from New York Harbor to the Great Lakes. Three other canals had their terminals at Albany, thus materially enlarging the territory to be served from the Hudson Biver. The negotiations resulted ultimately in an appropriation of $11,200,000 by Congress for the construction of a channel in the Hudson Biver 300 feet wide and 27 feet deep at mean low water, but before the appropriation was granted the Chief of Engineers of the United States Army recommended that the state authorities should provide terminals, warehouses, a grain elevator, a belt-line railway, etc., satisfactory to himself and the Secretary of War. He also made the following statement:

* * * The capital district, from the point of view of transportation economies, is a unit whose needs and potentialities transcend those of any individual community contained in it. The Nation’s interest lies not in extending deep water to any community as such, but rather in providing a port within the district adequate to serve its hinterland. A suitable site is available at Albany, below the Albany-G-reenbush Bridge.

We have noted that on March 25, 1925, the Legislature of the State of New York established the District and designated the Commission to administer its affairs. By the language of the act the commissioners were constituted state officers. The Commission was granted general power and authority over the survey, development, control and operation of the port facilities. The adoption and alteration of its plan of procedure, however, were subject to the approval of the Secretary of War and of the Chief of Engineers of the United State» Army. The legislature appropriated from state funds sums deemed necessary to defray the initial expenses. The Commission was also given power to enforce its orders, to make investigations and to proceed in the courts. The annual reports of the Commission were required to be filed with state and national officials. The power was given to and duty imposed upon the Commission to confer with municipal, state and Federal authorities in all matters relating to the development and operation of the port and to its utilization as a thoroughfare for intrastate, interstate, national and international commerce.

As we view the facts, the establishment of the Port of Albany was inspired and impelled by national need. The purpose and use of the port went far beyond the limits of local or sectional requirements. In its inception the project of connecting the Great Lakes with New York Harbor by water was national in its scope. The intent of those advocating it was to build a great system of communication and transportation to aid in the growth of the nation and its economic problem of distribution.

It is equally obvious that the District was not created primarily for the purpose of revenue. The successful launching of such a national undertaking compelled the support of the local cities. There was no thought of profit to them. In fact, there appears to be an increasing yearly deficit arising from the operation of the port. The service charges are fixed at a rate low enough to induce shipments by water. If and when the port shall become self-supporting and shall have reimbursed the cities of Albany and Eensselaer for monies advanced by them, it is reasonable to assume that the rent, wharfage and other charges will be adjusted to maintain that self-supporting basis, but not to produce gain. The primary purpose o'f the port is to serve the public and not to make money.

Looking more closely to the principal functions of the Commission, we find that they conform to those operations which the Supreme Court, in Flint v. Stone Tracy Co., supra, classifies as essentially governmental in that the state alone can perform them. The appropriation of $11,200,000 by the Federal Government for the construction of the Hudson Eiver channel was conditioned solely upon the creation of the District and the Commission by the legislative action of the State of New York. The agency so created was an instrumentality of the state. It was a corporate body with perpetual existence. Its members were appointed and conducted themselves as other state officers. It was empowered and directed to confer, treat and cooperate with the Federal Government in order to enable the port to render a maximum service to the public. No private corporation or agency could thus have represented the State of New York.

We are convinced from the facts that the main object of the District and hence, the primary function of the Commission is to provide for the use and benefit of the general public an inland waterway extending from New York Harbor to the Great Lakes; that this vast project has been completed successfully through the joint efforts of the State of New York and the Federal Government; that the Port of Albany is an integral part of that system; that the service charges made by the Commission are necessary but only incidental to the operation of the port; and that, therefore, the compensation paid to the petitioners as commissioners is exempt from Federal taxation.

The case of Leon S. Moisseiff, 21 B.T.A. 515, in which the status of the Delaware Eiver Bridge Joint Commission (of Pennsylvania and New Jersey) and the Port of New York Authority (of New York) was under consideration is basically in point. In that case we stated that “ the power of the states to establish public agencies for harbor improvements, for drainage and reclamation purposes, to aid navigation and to provide facilities for commerce is not open to question,” our holding being that the agencies named were exercising governmental functions. The Delaware Eiver Bridge Joint Commission was established in Pennsylvania and New Jersey for the purpose of constructing a highway bridge across the Delaware Eiver between Philadelphia, Pennsylvania, and Camden, New Jersey. The Port of New York Authority was created by a compact between the States of New York and New Jersey, consented to by the Congress of the United States. That compact recited that “ It is confidently believed that a better co-ordination of the terminal, transportation, and other facilities of commerce in, about and through the Port of New York, will result in great economies, benefiting the nation, as well as the States of New York and New Jersey ⅛ ⅜ ⅜,” and pledged the two States to “ * * * faithful cooperation in the future planning and development of the Port of New York, holding in high trust for the benefit of the nation the special blessings and natural advantages thereof.” The Port Authority constructed the Arthur Kill Bridges, the Pludson Eiver Bridge and the Kill van Kull Bridge.

In Leland Powers, 26 B.T.A. 1381, although we reached a contrary result, in which it is to be noted we have now been reversed by the Circuit Court of Appeals, First Circuit (C.C.H. 1934, No. 9048), we made the following comment respecting the Moisseiff case:

* * ⅜ In that case, the instrumentalities employed by the States concerned were engaged in providing bridge facilities in furtherance of commerce, and making harbor improvements in aid of navigation, and in so doing did not merely take over and operate a private corporation, as in the instant proceedings. In the case of the States of New York and New Jersey, the legislatures thereof expressly provided that the Port Authority be regarded as performing a governmental function (see page 526) ; the same inference is drawn from the legislation creating the Delaware River Bridge Joint Commission.

In reversing the Board in the Powers case the Circuit Court of Appeals stressed the fact that the. trustees had power to fix rates and to declare deficits which upon their decision were collected by taxation. Functions and powers comparable to those possessed in both the Moisseiff and Powers cases were possessed and exercised by the petitioners.

The facts in the cases at bar show that the primary purpose of the District was the establishment and maintenance of a major link in the oeean-to-lake waterway, a development of national importance; that only the state could do the things required to effect such a result; and that, therefore, the Commission was performing essential governmental functions.

The deductions for contributions should be adjusted in accordance with this opinion.

Decision will be entered, under Rule 50.


author: McMahon:

text:
    Joseph E. Swanson, James Otis, Edward M. Willoughby, John H. Hardin, and Thurston B. Swanson, as Trustees of the Fullerton Parkway Land Trust, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 32571, 41308.
    Promulgated February 16, 1934.

      Arnold R. Baar, Esq., for the petitioners.

      E. A. fonjes, Esq., for the respondent.
   ■ OPINION.

McMahon:

The first question to be determined is whether the Fullerton Parkway Land Trust is a trust or an association taxable as a corporation within the meaning of section 2 (a) (2) of the Revenue Act of 1926, which is as follows:

Sec. 2. (a) When used in this Act—
* * * * * * *
(2) The term “corporation” includes associations, joint stock companies, and insurance companies.

In Trust No. 5833, Security-First Natl. Bank v. Welch, 50 Fed. (2d) 613; affd., 54 Fed. (2d) 323; certiorari denied, 286 U.S. 544, it appears that a real estate operator in association with other persons undertook to acquire a tract of some 90 acres of land to improve the same by laying out streets, etc., and to subdivide the tract into city lots and sell them to the public at a substantial profit. The District Court, in its opinion, after setting forth certain provisions of the declaration of trust under which the project was launched, states:

* ⅜ * It is true that the trust in many respects was self-executing, and to some extent was an escrow and security device. It was, however, also a functioning, operating business carried on for profit by the joint action of the trustee, beneficiaries, and sales agents.
* * ⅜ ⅜ * * *
* * ⅜ It seems to me that to classify this trust as a mere liquidating trust such as those encountered in the administration of estates of deceased persons or in financially embarrassed businesses or projects would be an unreasonable classification. * * *

To the same effect see Commissioner v. Atherton, 50 Fed. (2d) 740, affirming C. H. Atherton et al., Trustees, 19 B.T.A. 1172. See also discussion and cases cited in Monrovia Oil Co., 28 B.T.A. 335, and in Ittleson v. Anderson, 2 Fed. Supp. 716; affd., 67 Fed. (2d) 323.

To the effect that the nature of the activities of the entity probably constitutes the best test, see Tyson v. Commissioner, 54 Fed. (2d) 29 (C.C.A., 7th Cir.); Fisk v. United States, 60 Fed. (2d) 665; Sloan v. Commissioner, 63 Fed. (2d) 666 (both (C.C.A., 9th Cir.); Dunbar v. Commissioner, 65 Fed. (2d) 447 (C.C.A., 1st Cir.), and cases cited in them.

The petitioners contend that all the characteristic forms and modes of procedure of a corporation are lacking in the instant proceeding; but, in this respect, the trust agreement provides that the trustees shall have exclusive management and control of the real estate described therein and of any buildings or improvements thereon; that the trustees shall have certain enumerated powers, including the right to hire suitable offices for the transaction of the business of the trust and to employ agents, servants, and attorneys at law, either from among their own number or otherwise; that neither trustees nor any beneficiary shall be personally liable and all persons dealing with the trustees shall look only to the property of the trust; that the interest of the beneficiaries shall be evidenced by receipts issued by the trustees, which receipts shall be construed to be personal property and shall not be held to be an interest in or evidence of an interest in real estate; that the beneficial interests shall be represented by 3,000 shares of the par value of $100 each, aggregating $300,000; that such shares may be transferred in the manner provided in the trust agreement; that upon resignation of a trustee or trustees such vacancies shall be filled by the remaining trustees or trustee, if there be only one; that the trustees may delegate their powers for a period not exceeding one year at any one time to any other trustee or to other trustees; that the trust agreement may be amended by an agreement in writing by the beneficiaries holding three fourths or more in value of the receipts, which amendment or amendments shall be binding upon the beneficiaries and trustees; that the trust shall be terminated at the expiration of 20 years after the death of the last survivor of named children of Ralph C. Otis, Joseph E. Swanson, and Thurston B. Swanson or by the trustees in their discretion at any time before the expiration of the 20 years by selling all the property held by them as such and distributing the net proceeds of such sale.

In the instant proceeding the organization had succession and the death of a beneficiary or a trustee did not interfere with or terminate the existence of the association; while it had no corporate name, the trust so-called could be sued and could sue in the name of the trustees; it could acquire and hold property and do other acts in the name of the trustees; it had no common seal, but this is not an indispensable requirement; it did not have bylaws, but bylaws are not an essential requisite to corporate existence. They are rules for internal government and if the agreement or charter is deemed sufficient for that purpose, bylaws are superfluous. Fletcher Cyclopedia Corporations, vol. 2, sec. 10, p. 14, and sec. 5, p. 5, and cases cited.

In Sears, Roebuck & Co., etc., Fund v. Commissioner, 45 Fed. (2d) 506, the court held that a practical semblance to corporate forms and methods was sufficient. To the effect that a quasi-corporate form or organization is not a controlling factor or indispensable element of an “association”, see Twin Bell Oil Syndicate, 26 B.T.A. 172; Investment Trust of Mutual Investment Co., 27 B.T.A. 1322. See discussion in the latter case at page 1330.

The petitioners argue that the trustees were not subject to the control of the beneficiaries. Control by the beneficiaries is not a determinative factor. Ittleson v. Anderson, infra. Furthermore, this lack of control in the instant proceeding is largely theoretical, as the beneficiaries and the trustees were the same until 1920, in which year Joseph E. Swanson transferred his shares to his wife, and Ralph E. Otis transferred his shares to the Central Trust Co. as trustee for himself. In 1919 or 1920 Hibbard died and thereafter the partner of Swanson became trustee. Ralph E. Otis was later succeeded by his son as trustee. The association enjoyed benefits similar to those of corporate existence. The beneficiaries in the trust agreement provided that the trustees could delegate their powers to a trustee. It seems that at the very outset the group relied and has continued to rely upon the business acumen and ability of Joseph E. Swanson; that under the agreement they could and did permit him or his firm under his direction to manage and operate the enterprise. The agreement gave the beneficiaries the sole right to amend the agreement and had they desired to do so they could have curtailed the powers of the trustees by amending the agreement.

The petitioners further argue that the trust was not engaged in business and that it was not formed for the purpose of carrying on any business. It certainly was not organized for the purpose merely of preserving or of settling, liquidating, and winding up the affairs of an estate or business. It was doing more than acting as a passive holder of property or a conduit to carry over profits to persons entitled to them. Ittleson v. Anderson, supra. Cf. Commissioner v. Morriss Realty Co. Trust No. 2, 68 Fed. (2d) 648, affirming Morriss Realty Co. Trust No. 2, 23 B.T.A. 1076.

In J. W. Pritchett et al., Trustees, 17 B.T.A. 1056, 1064, 1071, the Board held that the owning and renting of one apartment home or an apartment hotel constitutes the carrying on of a business for profit. There is but one property involved in the instant proceedings.

Tyson v. Commissioner, supra, cited by the petitioners, is distinguishable. The court held that, for income tax purposes for the years in question, the Zenith Real Estate Trust was a trust and not an association, based primarily upon testimony of witnesses, from which the court concluded that “the investment was one which provided with reasonable certainty for a sure and fixed income without either care or supervision.”

The facts as disclosed by that testimony are similar to the facts in Lansdowne Realty Trust v. Commissioner, 50 Fed. (2d) 156, cited by the petitioners.

The doctrine enunciated by the court in Tyson v. Commissioner, 54 Fed. (2d) 29, supra, was applied by the same court in Tyson v. Commissioner, 68 Fed. (2d) 584.

The difference in activity required to take care of a property covered by a long term lease and that required to take care of a property with 16 apartments, which apartments were originally leased for a term of from three to five years and thereafter renewed for a term of one year, is considerable. Joseph E. Swanson testified that after the erection of the modern buildings the better tenants moved. In fact it is argued on brief in support of the second issue involved herein that the testimony was very definite to the effect that during the taxable years, and prior thereto, it was becoming increasingly difficult to rent the apartments. However, it appears that the total rental during 1920 and 1921 amounted to $65,000 and increased gradually until from 1926 to 1929 the total rentals were about $82,000 to $84,000, and that there were no vacancies during 1924, 1925, and 1926. Despite the alleged difficulty in renting the apartments, the total rentals increased substantially. It may be said in reference to the situation present here, as stated by the court in Sears, Roebuck & Co., etc., Fund v. Commissioner, supra, that a “ study of all the purposes of the plan discloses that its objects have been and can only be gained through the use of much skill, ability, and sound business judgment.”

Numerous cases decided by the courts and the Board bearing on the first issue presented in these proceedings are cited and discussed on briefs by the parties. While prior decisions enunciate general principles and illustrate the application thereof to the facts presented in each case, it is apparent that each case must be determined upon its own peculiar facts. Therefore, we do not believe that a discussion of all these cases would serve a useful purpose.

Upon the authority of the foregoing cases which we have discussed or cited, we conclude that the Fullerton Parkway Land Trust is an association within the meaning of section 2 (a) (2) of the Revenue Act of 1926.

The petitioners further contend that, if the Fullerton Parkway Land Trust is subject to tax as an “ association ”, the deduction allowed by the respondent for depreciation, including obsolescence, should be increased to from 6 to 8 percent of the stipulated basic sum of $271,668.93. It is claimed that due to building activities in the section in which the property involved is located the value of the realty, which was purchased in 1916 for about $62,000, increased to more than $400,000 in 1925; that the increased land value resulted in increased taxes; and that the return from the building became wholly disproportionate to the capital value of the property.

Joseph E. Swanson testified that the building of the modern 16 to 20-story apartment buildings and hotel buildings changed the Fullerton Parkway Land Trust Building into a second-class building; that people coming to the neighborhood in search of an apartment preferred the newer and more modern buildings; that they naturally had to reduce the rents to meet the competition of the more pretentious buildings; that in 1925 and prior thereto the better tenants left to go to these more modern buildings. However, he also testified that there were no vacancies in the buildings during 1924, 1925, and 1926; that the total yearly rentals increased from $65,000 in 1920 and 1921 to about $82,000 to $84,000 in 1926, and continued at about $84,000 until after 1929, when rentals fell off considerably, which condition, however, prevailed generally with respect to all buildings. It appears, therefore, that while the building activities resulted in increased land values and increased taxes, and while greater difficulty in obtaining tenants may have been encountered, such building activities also resulted in increased rentals to the petitioners. Anna J. Cotton, 25 B.T.A. 1158, affd., 68 Fed. (2d) 436, on another issue, by the Circuit Court of 'Appeals of the District of Columbia, wherein no question was raised as to the Board’s holding as to obsolescence.

In U.S. Cartridge Co. v. United States, 284 U.S. 511, 516, the United States Supreme Court defines “ obsolescence ” as follows:

* * * Obsolescence may arise from changes in the art, shifting of business centers, loss of trade, inadequacy, supersession, prohibitory laws and other things which, apart from physical deterioration, operate to cause plant elements or the plant as a whole to suffer diminution in value. Burnet v. Niagara Brewing Co., 282 U.S. 648, 654; Gambrinus Brewery Co. v. Anderson, 282 U.S. 638. [Emphasis supplied.]

There is no evidence showing that the building decreased in value. The character of the section wherein this property was located did not change. It remained residential in character. In fact, the erection of the modern apartment buildings and hotels increased its desirability for residential purposes. In the instant proceeding, as in the Cotton case, supra, the rentals increased after the erection of the modern buildings, and in the instant proceeding the rentals continued to increase until after 1929, when rentals decreased in general.

Swanson testified as follows:

Q. Well, the question of whether the building could he profitably operated for any length of time, that is purely your opinion, isn’t it?
A. The building could not be profitably operated for any length of time, knowing the expenses of this building, it can not be operated on such a valuation with the taxes there, because now it is running at a loss.

He also testified in substance that the rate of return, based on cost, without taking into consideration any enhancement of land values, was better in 1926 than in 1920; and that, based on the increased land values, without taking into consideration the cost, the rate of return on the property was not as good in 1926 as in 1920. However, a decrease in the rate of return does not in itself establish obsolescence.

The action of the respondent with respect to computation of the allowance for depreciation including obsolescence is therefore approved.

Reviewed by the Board.

Decision will he entered for the respondent.