author: SteRNi-iagen :

text:
    John E. McKelvy and J. Merrill Wright, Executors of Estate of Ella K. McKelvy, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73320.
    Promulgated January 31, 1935.

      J. M. Wright, Esq., and J. 8. Oarson, Esq., for the petitioners.

      J. R. Johnston, Esq., for the respondent.
   OPINION.

SteRNi-iagen :

1. The petitioners assail the inclusion in gross estate of $64,266.62, the commuted value of the amount receivable under three policies of insurance, of which decedent’s three sons were irrevocably the respective beneficiaries. The respondent’s determination rests- upon the view that decedent had until death a power to surrender and cancel the policies and to pledge them as collateral for loans. Chase National Bank v. United States, 278 U. S. 327, clearly supports the inclusion if the assumed powers of the decedent existed. See also Sampson v. United States, 1 Fed. Supp. 95, and Edith Huggard Sharp et al., Executors, 30 B. T. A. 532. In each policy, by a provision called “ Options on Surrender or Lapse ”, it is provided that the owner ” may after three, years’ premiums have been paid surrender the policy for cash or convert it into a different form of insurance, and by a provision called “ Loans ” it is provided that the “ owner ” may borrow an amount not greater than the policy’s cash surrender value upon proper assignment. The present controversy turns upon the meaning of the word “ owner ”, petitioner contending that it means only the beneficiary and respondent that it means the insured.

In support of their position petitioners cite Entwistle v. Travellers' Insurance Co., 202 Pa. 141; 51 Atl. 159; Appeal of Brown, 125 Pa. St. 303; 17 Atl. 419; Smith v. Metropolitan Life Insurance Co., 34 Pa. Sup. Ct. 72; and Jones v. Jones, 23 Pa. Co. Ct. 254, in all of which it was held that the insured was without right to receive or direct the disposition of the proceeds, when payable, of policies under which the insured had no right to change the beneficiary. This was on the ground that the beneficiary had a vested interest in, the proceeds. The recognition, however, of such a vested interest falls short of establishing that the beneficiary is for that reason the “ owner ” of the policy, a proposition essentially different and requiring no consideration in the cases thus cited. The district court in Sampson v. United States, supra, found no inconsistency in the insured’s lack of right to change the beneficiary and the recognition of his right to borrow on the policy. In Schuberth v. Prudential Insurance Co., 86 Pa. Sup. Ct. 80, the court recognized that where the policy expressly provided that the insured could borrow, such a right was not in conflict with a vested interest in the beneficiary. In the policies now before us the provision which denies to the beneficiary “ the right either to assign or to commute income payments unless such right was given to such beneficiary by the insured ” clearly indicates that it is the insured and not the beneficiary who as “ owner ” may surrender and borrow. Had the beneficiary such right prior to the insured’s death he would thus be enabled to defeat the very purpose of his own protection which may be regarded as underlying the existence of the policy.

The right to surrender and to borrow on the policies we hold to be a substantial one, which rested with decedent until her death and is sufficient to bring the commuted value of the amount receivable by the beneficiaries within the decedent’s gross estate as the respondent has determined.

2. Among policies of life insurance payable to beneficiaries other than the executors of the estate aggregating $255,608.42 was one for $30,000 payable to charitable corporations. This amount petitioners deducted in full, regarding it as unaffected by the $40,000 limitation of section 302 (g), Revenue Act of 1926. The respondent first included the amount of this policy within the total to be affected by the $40,000 limitation, thus reducing the amount includible as insurance to $215,608.42. Petitioners claim that notwithstanding this the estate is entitled to the full deduction of $30,000 as a charitable bequest, and this the respondent has denied by reducing such amount to 21560842/25560842 of $30,000. Charitable bequests are deductible by virtue of section 303 (a) (3), which limits such deduction to “ the value of the transferred property required to be included in the gross estate.” It can not be said, in view of the $40,000 insurance exemption, that all this policy, any more than any other policy, was included in the gross estate. The principle by which the respondent’s determination is supported has already been discussed in another but analogous situation, Louise A. Gardner, Co-executor, 22 B. T. A. 1076, wherein the apportionment method has been approved. The determination is sustained.

Judgment will be entered for the respondent.


source: Caselaw Access Project

author: Seawell :

license: Public Domain

text:
    J. T. Hatfield, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72788.
    Promulgated February 7, 1935.

      M. H. McLean, Esq., for the petitioner.

      8. B. Pierson, Esq., for the respondent.
   OPINION.

Seawell :

The question is the narrow one of whether the liquidating dividend paid to the petitioner in stock was received by him in 1930. The petitioner admits that the cash was distributed to him in 1930, but insists that the stock was not received until 1931.

The statutes of Kentucky provide that when dissolution of a corporation organized under its laws results from voluntary action of the stockholders, as here, the corporation “ may thereafter continue for the purpose of closing up its business but for no other purpose; and it shall be the duty of the officers to settle up its affairs and business as speedily as possible.” Sec. 561, Carroll’s Kentucky Statutes.

The adoption of the resolution on December 2,1930, to dissolve did not effect a distribution of the corporation’s assets among its stockholders. Mrs. Grant Smith, 26 B. T. A. 1178; Frank Kell, 31 B. T. A. 212. This rule prevails even though upon dissolution title to corporate assets vests in the stockholders. Wells Fargo Bank & Union Trust Co. v. Blair, 26 Fed. (2d) 532. The same cases are authority for the rule that the mere turning over of assets to liquidating trustees does not constitute receipt of the property by the stockholders for tax purposes. The respondent contends, in effect, that delivery of the assets to McLean for distribution in kind to the stockholders constituted receipt by the stockholders.

The petitioner did not actually receive the stock in 1930 and the delivery of the securities to McLean did not amount to constructive receipt. McLean signed for the stock as agent for the stockholders and the postscript to the letter of December 29, 1930, is that in the distribution of the assets he was acting in behalf of the stockholders. McLean testified that none of the stockholders ever appointed him their agent in the transaction, and it does not appear that any of them ever acquiesced in the purported relationship. It is too well established to require citation of authority that the relationship of principal and agent can not exist without a meeting of the minds of the parties. There was none here between McLean and the stockholders.

The officers of the corporation were charged by statute with the liquidation of the corporation’s affairs as promptly as possible. As a means to that end, they designated McLean to receive the property and distribute it in proper proportions to those entitled thereto. To make the distribution on a pro rata basis as required, it was necessary to divide the certificates according to the interest of each stockholder therein. To accomplish this result McLean, with approval of the corporation, on January 9, 1931, placed the stock in the hands of a broker for reissue in the names of the respective stockholders. The reissued stock was not delivered to McLean until March 1931. That the corporation did not intend delivery of the stock to McLean or the broker as conveyance of title or delivery, actual or constructive, to the stockholders, is shown by the corporate letters of December 29, 1930, and January 12, 1931. The whole record shows an intention to withhold delivery of the assets until the stocks had been reissued to the stockholders in the proper proportions.

The facts in Harry A. Dockum, 11 B. T. A. 39, and Taber v. United States, 59 Fed. (2d) 568; certiorari denied, 287 U. S. 636, involved distinguishable facts and are not controlling here.

The assets in question were not actually or constructively received by the petitioner in 1930. It follows that the action of the respondent in regarding the liquidating dividend paid in stock as a distribution made in the taxable year should be and is reversed. See Mrs. Grant Smith, supra; Wells Fargo Bank & Union Trust Co. v. Blair, supra; Avery v. Commissioner, 292 U. S. 210.

The cost or other basis for the stock of the corporation held by the petitioner is not in controversy, and the parties agree that the sum of $12,502.92 cash was distributed to the petitioner in 1930. The petitioner realized no taxable profit in 1930 by reason of the distribution of liquidating dividends by the corporation except to the extent that the cash received exceeds his basis for the stock he held. This profit, if any, will be reflected in the recomputation of petitioner’s income tax liability for 1930.

Decision will be entered under Rule 50.


author: Seaweed:

text:
    Hazeltine Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 42277, 47011, 51931, 60313.
    Promulgated February 7, 1935.

      Paul Armitage, Esq., and B. O. Klugescheid, Esq., for the petitioner.

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

Seaweed:

Issue 1 (a). — We will first direct our attention to the statutory basis for the exhaustion and obsolescence deductions claimed by petitioner. The proof offered by both parties was on the ground that the basic date of valuation was February 19, 1924, the date petitioner acquired the properties in question from the Hazeltine Research Corporation and Taylor in exchange for 155,250 and 14,750 shares, respectively, of petitioner’s capital stock. Petitioner in its brief argues, as a question of law, that the base for measuring exhaustion and obsolescence of the “ patent situation ” is not the base of the predecessors, but the cost of the properties to petitioner. The respondent, in his brief,, and again in his reply brief, on the question of law thus referred to, simply remarks that while he has not seen fit to argue the case on the basis of the deficiency notice, “ it is not to be presumed therefrom that the issue is waived.” In the statement attached to the deficiency notice in Docket No. 42277 the respondent said:

Tour contention that the depreciation deductions claimed on patents be allowed has been denied.
***#❖♦*
Section 204 (a) (8) of the Revenue Acts of 1924 and 1926 provides that if the property was acquired by a corporation by the issuance of this [sic] capital stock then the basis shall be the same as it would be in the hands of the transferor.
It is noted that the patents acquired for stock were valued on the books in the amount of $3,607,500.00 and depreciation computed on that basis. No evidence has been submitted to disclose the value of the patents in the hands of the trans-feror. In the absence of evidence to establish the basis on which the depreciation allowance may properly be computed under the regulations referred to herein, no allowance may be made.

Substantially similar statements were made in all of the later notices.

The applicable statutes are the Revenue Acts of 1924, 1926, and 1928. Section 204 (c) of the Revenue Acts of 1924 and 1926 and section 114 (a) of the 1928 Act provide that the “ basis ” upon which exhaustion and obsolescence are to be allowed in respect of any property shall be the same as is provided “ for the purpose of determining the gain or loss ” upon the sale or other disposition of such property. Section 204 (a) of the 1924 and 1926 Acts and section 118 (a) of the 1928 Act provide in part as follows:

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—

The only exceptions necessary to consider are paragraphs (7) and (8) of those sections, which are as follows [The following quotations are from the 1924 and 1926 Acts; paragraphs (7) and (8) of section 113 (a) of the 1928 Act are substantially the same] :

(7) If the property (other than stock or securities in a corporation a party to the reorganization) was acquired after December 31, 1917, by a corporation in eonneetion loith a reorganization, and, immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made;
(8) If the property (other than stock or securities in a corporation a party to a reorganization) was acquired after December 31, 1920, by a corporation by the issuance of its stock or securities in connection with a transaction described, in paragraph H) of subdivision (0) of section 203 (including, also, cases where part of the consideration for the transfer of such property to the corporation was property or money in addition to such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. [Italics supplied.]

Section 203 (b) (4) of the 1924 and 1926 Acts, referred to in paragraph (8), supra, and section 112 (b) (5) of the 1928 Act are identical and provide that:

No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange. [Italics supplied.]

The term “ control ” is defined identically the same in all three acts, in section 203 (i) of the 1924 and 1926 Acts and section 112 (j) of the 1928 Act, as follows:

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

Did an interest or control in the assets transferred or ownership of 80 percent or more of petitioner’s stock remain in or vest in the transferors, the Hazeltine Research Corporation and Willis H. Taylor, Jr.? These transferors transferred property to the petitioner in exchange for 170,000 shares or more than 96 percent of its total issue of 175,000 shares. But more than two weeks before the exchange, namely, on February 2, 1924, one of the transferors, the Hazeltine Research Corporation, had agreed to sell 135,000 of such shares to Foster, McConnell & Co. for $650,000 in cash. In the contract providing for the organization of petitioner it was not intended that the old corporation should remain in control of the new corporation or retain ownership of more than approximately 12 percent of its capital stock. The contract further provided that of the remaining 12 percent or 20,250 shares, Foster, McConnell & Co. was to have an option for a period of one year to purchase 10,000 of such shares at a price of $15 per share. In issuing the 155,250 shares to the Hazel-tine Research Corporation, petitioner executed two stock certificates, numbered T 1 and T 3. T 1 was for 135,000 shares and T 3 was for 20,250 shares. T 1 was immediately assigned by the Hazeltine Research Corporation to Foster, McConnell & Co. in exchange for $650,000 in cash. A substantial majority of the original board of directors of petitioner had been nominated and elected by interests adverse to the Hazeltine Research Corporation.

In West Texas Refining & Development Co. v. Commissioner, 68 Fed. (2d) 77, the West Texas Co. owned certain assets consisting of a refinery, pipe lines, etc. On June 2, 1925, it and its stockholders entered into a contract with the Standard Oil Co. whereby “they agreed to transfer to the Standard Co. 50 percent of the capital stock ” of a new corporation to be formed, called the Col-Tex Refining Co., for a cash consideration. In actually carrying out the contract the new corporation was formed and issued 50 percent of its stock to the Standard Co. for the cash consideration, which cash consideration and the remaining 50 percent of the stock was transferred to the West Texas Co. in payment for the assets there in question. The question before the court was whether the gain to the transferor was nonrecognizable to the transferor under section 203 of the Revenue Act of 1926. In holding that the transaction was not within section 203, the Circuit Court of Appeals for the Tenth Circuit said in part:

* * * Tlie whole transaction was the means adopted to carry out the contract between the West Texas Company and the Standard Company. In substance it was but one single transaction. * * *
*******
Here it was contemplated that in substance the West Texas Company should dispose of its assets and receive therefor a cash consideration, and also stock. What was done amounted to a single transaction for income tax purposes, and when it was fully consummated the West Texas Company had received only a 50% stock interest in the Col-Tex Company and $184,771.34 in cash. Therefore the transaction was not within the exceptions defined in Sec. 203, supra, and must be considered as a sale.

It is our opinion that the transactions involved in the instant proceedings must be looked at as a whole and, when so viewed, it can not be said that “ immediately after the transfer an interest or control ” of 80 percent or more of petitioner’s capital stock remained in the transferors of the assets. We therefore hold that, under section 204 (a) of the 1924 and 1926 Acts and section 113 (a) of the 1928 Act, the “ basis ” for determining the claimed deductions for exhaustion and obsolescence is the “ cost ” to petitioner of the assets acquired on February 19, 1924.

Issue 1(b) and (c). — What was the cost to p'etitioner of the assets acquired from the Hazeltine Research Corporation and Taylor on February 19, 1924? As full consideration for s'uch assets petitioner issued 155,250 shares of its capital stock to the Hazeltine Research Corporation and 14,750 shares to Taylor, or a total consideration of 170,000 shares. In Seymour Manufacturing Co., 19 B. T. A. 1280, we said: “ The cost of property acquired for stock is the £ fair market value ’ of the stock.” To the same effect see Ambassador Petroleum Co., 28 B. T. A. 868. We believe and have so found in our findings of fact, that the fair market value of petitioner’s stock on February 19, 1924, was $10 per share. On this basis, the cost of all of the assets to petitioner was $1,700,000. This value is considerably more than the respondent has argued for in his briefs, namely, $4.81 per share, and considerably less than the value contended for by petitioner, namely, $20 per share. In arriving at our value of $10 per share we have carefully weighed all the evidence before us and are of the opinion that the record does not justify a higher value or a lower value on February 19,1924, than $10 per share.

Issue 1 (d). — Having decided that the basic date in question is February 19, 1924, and that the cost to petitioner of all the assets acquired on that date was $1,700,000, we come now to the determination of the exact amount of the deduction to which petitioner is entitled for each of the years before us under section 234 (a) (7) of the Revenue Acts of 1924 and 1926, and section 23 (k) of the 1928 Act, which sections, so far as are material here, are identical, and provide as follows:

In computing tlte net income of a corporation * * * there shall be allowed as deductions:
*******
A reasonable allowance for the exhaustion, wear and tear of property used in the trade or business, including a reasonable allowance for obsolescence.

Under this phase of our determination it is necessary to decide (1) which of the assets acquired by petitioner are subject to the statutory allowance; (2) the portion of the total cost of $1,700,000 that should be allocated to each separate class of assets acquired; (3) the rate of the allowance; and (4) whether the rate first established should be increased in later years due to obsolescence.

Petitioner has briefed these proceedings upon the supposition that all of the assets acquired were subject to the statutory allowance; that it was not necessary to allocate the total cost to any particular asset or group of assets; that the entire cost of all the assets should be spread over either a five or eight-year period (according to the life of the “ patent situation ” as the Board might find from the evidence); and that the entire unexhausted cost remaining on January 1, 1929, should be allowed as a deduction in that year due to obsolescence on account of the commercial appearance at that time of the screen grid invention. On this basis petitioner contends it is entitled to deduct annually, as exhaustion, from 1924 to 1928, inclusive, either one fifth or one eighth of the alleged cost of $3,400,000 (170,000 shares at $20 per share), and for the year 1929, as obsolescence, the remaining unexhausted cost of the patent situation on January 1,1929.

We find ourselves unable to agree with petitioner’s contentions in several particulars. We have already discussed the cost feature and have found such cost to be $1,700,000 instead of the amount contended for by petitioner. This cost represented the cost of all the assets acquired by petitioner, including Patent No. 1,450,080, two patent applications, the inventions described in our findings, three trade-marks, the I. R. M. contract, and the entire business and good will of the Hazeltine Research Corporation. Trade-marks are not susceptible to exhaustion. Norwich Pharmacal Co., 30 B. T. A. 326. Neither is good will. Red Wing Malting Co. v. Willcuts, 15 Fed. (2d) 626; certiorari denied, 273 U. S. 763. It is, therefore, imperative that before any deduction for exhaustion or obsolescence can be determined, the total cost of $1,700,000 must be allocated between the exhaustible and nonexhaustible assets.

Upon the basis of all the evidence before us we are of the opinion and so find that of the total cost to petitioner of all the assets it acquired on February 19, 1924, from the Hazeltine Research Corporation and Taylor, both exhaustible and nonexhaustible, the fair market value of the exhaustible assets was the amount of $1,275,000, and that the fair market value of the nonexhaustible assets on that date was the amount of $425,000.

Issue 1 (e). — Our next question concerns the rate of exhaustion applicable to the cost of the patent, patent applications, inventions, and other exhaustible assets, which we have determined was the amount of $1,275,000. The general rule with regard to the exhaustion of the value or cost of a patent application or invention on a given basic date is that such value or cost is to be written off over a 17-year period dating from the issuance of the patent, unless obsolescence becomes a factor prior to the end of the 17-year period. Hershey Manufacturing Co., 14 B. T. A. 867; affd., 43 Fed. (2d) 298; Tennessee Fibre Co., 15 B. T. A. 133. Where the cost or value relates to an entire group of patents, applications, and inventions, as is the situation here, exhaustion is allowed either over the average life of the patents, as in Prophylactic Brush Co., 25 B. T. A. 676, 686, or upon the life of the principal patent, as in Hyatt Roller Bearing Co. v. United States, 43 Fed. (2d) 1008, 1013; Individuad Towel & Cabinet Service Co., 5 B. T. A. 158, 162; and Hartford-Fairmont Co., 12 B. T. A. 98. In the instant proceedings, we think, in determining the deduction for exhaustion alone, that the cost of $1,275,000 should be spread over a 17-year period, beginning with the date of issuance of the principal patent, which we have found was Patent No. 1,489,228, which was granted on April 1,1924.

Issue 1(f). — We come now to the obsolescence feature. Petitioner has treated the patent, patent applications, and inventions acquired at the time of its organization as a single group. This group contained two general classes of patents, namely, those involving neutralization and those involving unicontrol. In 1929 it became evident that the methods of neutralization would be gradually displaced by the more efficient screen grid tubes, but this displacement had no effect upon the unicontrol patents, which are still in use. Since petitioner has treated both classes of inventions as a single group, we have no basis upon which an allowance for obsolescence can be determined, and we, therefore, hold that petitioner is limited to the deduction for exhaustion in the annual amount of $75,000.

Issue 2. — In the last three docket numbers, covering the years 1927 to 1929, inclusive, petitioner assigns as error the “ Disallowance of expenditures for other and new patent applications and interferences as necessary and proper deductions, cost of litigation, etc.” The respondent in determining the deficiencies for those years disallowed, under the caption of “ patent applications ” and “ patent interferences ”, certain amounts which petitioner had deducted from its gross income as ordinary and necessary expenses. The respondent determined that such items were capital rather than expense items. The evidence on this point is very meager, and insufficient, we think, to overcome the prima facie correctness of the respondent’s determination. The petitioner’s contention on this issue is, therefore, denied.

Issue 3. — Relative to the claimed net loss for the year 1927, the statement attached to the deficiency notice for the two periods in 1927 shows that the respondent determined that petitioner had a net income of $39,711.43 for the period January 1 to April 10, inclusive, and a net income of $105,235.28 for the period April 11 to December 31, inclusive. After making proper adjustments for the proportionate part of the annual allowance for exhaustion, in the amount of $75,000, determined above, it is apparent that no net loss will result. The respondent’s determination on this point is sustained.

Issue I- — The respondent has apparently abandoned his affirmative allegation of error, as he offered no evidence in support thereof and has made no reference to it in his briefs. Respondent, therefore, is not sustained on this issue.

Reviewed by the Board.

Decision will be entered under Bule 50.


author: TueneR :

text:
    Lula Kell, Petitioner, v. Commissioner of Internal Revenue, Respondent. Frank Kell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 21010, 21011, 41622, 41623.
    Promulgated February 12, 1935.

      J ohn B. King, Esq., and Leslie Humphrey, Esq., for the petitioners.

      J. L. Bachstrom, Esq., Shelby Faulkner, Esq., and B. B. Cannon, Esq., for the respondent.
   OPINION.

TueneR :

The disputed deficiencies and the years involved in these proceedings are as follows:

In the original and amended pleadings more than 50 separate issues of fact and law were joined, but the parties, by stipulation, have agreed upon a basis of settlement of all these issues except two. The stipulation is made a part of our findings herein and provides adequate basis for recomputation of the deficiencies under Rule 50 in respect of the issues covered therein.

The first issue left for our determination affects income for the years 1919 and 1922, and presents a question as to whether or not the petitioner, Frank Kell, by gift to his wife and children, divested himself of his interest in a partnership known as the R. O. Harvey Lease Account, so that the income thereafter derived from the partnership is taxable not as community income, but as that of his wife and children. The question presented by the second issue is whether or not the respondent erred in holding that the petitioner, Frank Kell, realized taxable income in 1920 from the sale of his interest in a certain railroad project. Where the words “the petitioner” are used in this respect, without other designation, we refer to Frank Kell.

Issue No. 1.

In 1918 the petitioner, Frank Kell, owned one half of the capital stock of the Wichita Falls Mill & Elevator Co., while the remainder of the stock belonged to the Lasker estate, which was willing to sell its holdings for $600,000. He decided to buy the stock of the Lasker estate for his wife and seven children, three of whom were married daughters. The purchase of the stock was discussed with his family, and an agreement was reached whereby $150,000 would be paid in cash and the remaining $450,000 by notes executed by his wife and children. These notes were dated June 1,1918, and were endorsed by the petitioner, Frank Kell. The cash payment was made with funds advanced by the milling company.

The wife and children of the petitioner, Frank Kell, were without means to pay the notes given for the balance due on the stock. At or about the time of the purchase, a family conference took place at which ways and means for the payment of these notes were discussed. With reference to this conference, Frank Kell testified that, “We discussed the interest that I had in the R. O. Harvey Lease Account, and I agreed with them that I would provide the funds to take up these notes as they matured from the income from the mill, and from the proceeds or income from the R. O. Harvey Lease Account as they were paid, and we would have the reserve of my interest in the R. O. Harvey Lease Account with which to finally meet the obligations and) take up these notes.” Later in his testimony he stated, “ I assured them that this reserve of my interest in the R. O. Harvey Lease Account would be transferred to them and assigned to them, the proceeds of which was to be used to meet these obligations.”

The E. O. Harvey Lease Account was a partnership formed in 1917 by E. O. Harvey, J. J. Perkins, S. H. Cullum, and the petitioner, and was thereafter engaged in the business of buying, developing, and selling oil leases. No written partnership agreement was entered into between these partners and, although contributions of capital and services varied according to their respective abilities and the partnership needs, their interests in the partnership were to be equal. E. O. Harvey had charge of the books and records of the partnership and acted generally as manager of its affairs. S. H. Cullum was the field man, while J. J. Perkins and the petitioner gave assistance and advice whenever called upon.

During the partnership’s first year it acquired oil leases to several thousand acres of land in Callahan, Erath, and Comanche Counties in the State of Texas, the title to all of these leases being taken in the name of E. O. Harvey. These leases were generally known and referred to by the partners as the “ Comanche County Lease.” During the summer of 1918 this block of leases was transferred to the Texas-Penn Oil Co. under a drilling contract. The partnership retained a royalty interest amounting to one sixteenth of the recovery therefrom. Following the transfer, the Texas-Penn Oil Co. began drilling operations and in September 1918 brought in a producing well.

After the family conference in 1918 nothing was done with reference to the E. O. Harvey Lease Account until the spring of 1919, when Frank Kell visited the office of the partnership and advised E. O. Harvey that he wanted his interest in the property transferred to Mrs. Kell and his children so that the “ income or return ” which might accrue therefrom “ would come to them and not ” to him. He testified that according to his recollection he gave the same instructions by letter, but, if so, the letter was not delivered or was mislaid, and under date of August 30, 1919, he wrote a letter which reads as follows:

WroniTA Falls, Texas.
August SO, 1919.
Mr. R. O. Habvey, Office,
Dear Ralph :
Confirming my verbal notice to yon some ninety days since, I beg to advise that tbe interest in the Harvey Oil lease account which you have carried for my personal account is the property of Mrs. Kell, Mrs. O. C. Bullington, Mrs. J. F. O’Donohoe, Miss Willie Mae Kell, Miss Sybil Kell, Mrs. Wiley Blair, Jr., Joseph A. Kell and Miss Mary Joe Kell, share' and share alike.
If the title to this property is carried in my name yon continue it in this way so that the title can be made in the event of a sale, but any dividend arising from the sale of any of the R. O. Harvey Lease Account is payable to the parties above named, share and share alike, and checks should be made payable to Mrs. Frank Kell for herself and the parties above named.
Will you kindly take notice of the disposition of this property and enter same on your books in accordance herewith.
Any liability that may be incurred will be due to be paid by them, but I will hold myself personally responsible for the payment of same.
Tours very truly,
[Signed] Frank Khli,.

This letter was delivered and at some time thereafter a notation was made on the records of the partnership, at the top of the Frank Kell account, under date of August 30, 1919, as follows:

This interest transferred to Mrs. Frank Kell, Mrs. O. C.. Bullington, Mrs. J. F. O’Donohoe, Miss Willie Mae Kell, Miss Sybil Kell, Mrs. Wiley Blair, Jr., Joseph A. Kell and Miss Mary Joe Kell, share and share alike.

This notation was made in ink. Above it, the account shows a pencil notation of the date May 30, 1919.

In July 1919 and prior to the letter'of August 30, 1919, the Texas-Penn Oil Co. negotiated a sale of the Comanche County leases. For its one-sixteenth royalty interest the R. O. Harvey Lease Account received, during 1919, the sum of $700,000. The $175,000 covering the Kell share of the proceeds was paid to Frank Kell personally, as were all subsequent distributions.

R. O. Harvey testified that it was his recollection that he advised both Perkins and Cullum of his conversation with Frank Kell concerning the interest of the latter in the R. O. Harvey Lease Account. Perkins also testified that he had been so advised, and when asked whether or not he raised any objection, testified as follows:

No, I didn’t raise any objection, because Mr. Kell, so Mr. Harvey said, had stated he would stand behind the proposition and would give us every assistance and would cause no complications of any kind to us, and it was quite immaterial to us whether Mr. Kell retained the interest or whether the family retained it, just so there were no complications. The legal title to all the property was in the name of R. O. Harvey.

In 1922, when a large block of leases was sold to the Magnolia Petroleum Co., all of the instruments of conveyance were signed by R. O. Harvey, J. J. Perkins, S. H. Cullum, and Frank Kell and recited that they were legal owners and holders of the leases conveyed. Some of the leases so conveyed were not the property of the R. O. Harvey Lease Account, but were owned jointly by the four individuals named.

According to the record, neither Mrs. Kell nor the children at any time had anything to do with the management of the affairs or operations of the R. O. Harvey Lease Account.

Under instructions from the petitioner Frank Kell, accounts were opened on his personal books for his wife and the seven children. All payments made from the R. O. Harvey Lease Account were first entered in a personal account of Frank Kell, headed “ R. O. Harvey Lease Account.” Thereafter transfers were made to the account of Mrs. Kell and the children. All of the sums received from the R. O. Harvey Lease Account were so transferred except an amount equal to and representing the investment of Frank Kell in the said partnership. This amount was never credited to Mrs. Kell and the children, but remained in the account of Frank Kell personally.

The partnership return of the R. O. Harvey Lease Account for 1919 did not show Frank Kell as a partner, but carried the Kell interest in the income under the name of “ Mrs. F. Kell et al.” The return for 1922 was similar to that of 1919.

In 1922, when the sale of leases by the R. O. Harvey Lease Account was made to the Magnolia Petroleum Co., a check for $287,530, representing a one-fourth interest in the proceeds of the sale, was made to Frank Kell. The partnership affairs were closed out in 1923, and a final distribution of all the proceeds was made. According to the books of the petitioner, Frank Kell, the total amount received from the R. O. Harvey Lease Account was $505,472.35.

The notes given by Mrs. Kell and her children as a part of the purchase price of the capital stock of the Wichita Falls Mill & Elevator Co. were paid as they fell due, except that the last series of notes was extended. By the end of the year 1921, $94,470 had been paid by the petitioner, Frank Kell. The balance on the notes which had matured and interest, approximating $300,000, had been paid by advances from the Wichita Falls Mill & Elevator Co. Thereafter the proceeds from the R. O. Harvey Lease Account were used partly in repaying the Wichita Falls Mill & Elevator Co. and partly in payment of the notes. The account covering the purchase of the stock was liquidated in 1929. There is nothing in the record to show what portion or amount of the sums received from the Wichita Falls Mill & Elevator Co. and used in payment of the notes represented dividends.

On this record we must decide whether or not Frank Kell made a gift to Lula Kell, his wife, and their children of his interest in the R. O. Harvey Lease Account so that the income received thereafter from the partnership was not the income of the marital community but the separate income of his wife and children. If Lula Kell and the seven children did acquire the income producing property itself, the income therefrom was their separate income and the Commissioner’s determination on this point must be reversed. Rose v. Commissioner, 65 Fed. (2d) 616; Commissioners. Olds, 60 Fed. (2d) 252. See also Copland v. Commissioner, 41 Fed. (2d) 501. If, on the other hand, the action on the part of Frank Kell was only an assignment of a bare right to the income thereafter received by him from the R. O. Harvey Lease Account, the action of the respondent must be sustained. Burnet v. Leininger, 285 U. S. 136, and Lucas v. Earl, 281 U. S. 111.

The facts are not at all clear. From some of the incidents it would definitely appear that there was never any intention on the part of Frank Kell to make a gift of anything other than the profits to be derived by him from the partnership. Other facts taken separately tend to show that he made an absolute gift of his entire partnership interest. Under these circumstances, we must consider all of the evidence before us which reflects the intention of the donor and from the complete picture draw our conclusions.

Based on these considerations, it is our opinion that no effective gift was made by Frank Kell of his interest in the R. O. Harvey Lease Account. In the first place, the matter of primary importance to Frank Kell and his family was the purchase of the stock in the Wichita Falls Mill & Elevator Co. and the payment of the notes given therefor. His wife and children had no means with which to pay these notes, and he volunteered the use of “ proceeds or income from the R. O. Harvey Lease Account.” There is nothing in the record which indicates that he had any intention of providing a sum greater than that necessary, when considered in connection with the dividends to be derived from the Mill & Elevator Co., to pay the notes and interest thereon. Kor is there anything in the record to show that the wife and children considered that they had any interest in the R. O. Harvey Lease Account as such. So far as they were concerned, it was merely the reservoir from which Frank Kell was to provide the funds with which to pay their obligations under the notes.

While it is true that Frank Kell gave instructions that his interest in the partnership be transferred to his wife and children, it is also apparent, both from his letter of October 30,1919, and from the testimony of Harvey, and particularly of Perkins, that he would still remain responsible for any obligations pertaining to the account. Taking the record as a whole, we believe that they considered his instructions as nothing more than a designation by him of the recipients of his share in the profits of the partnership and that they still considered him as a partner in the enterprise. We are convinced that this is true, even though Lula Kell and her children were listed as partners on the partnership returns.

One of the most convincing facts tending to show that the petitioner, Frank Kell, did not make or intend to make a gift of his partnership interest is the fact that when the first distribution was made by the partnership and the one-fourth interest in the sale of the Comanche County lease was paid to him, he retained in his own account the full amount of his investment in the partnership and never at any time was any portion of this sum paid over or credited to his wife and children. From this it appears that as a matter of actual fact even on the books of the petitioner, Frank Kell, nothing was ever credited to or used for the benefit of Lula Kell or the children from the R. O. Harvey Lease Account except the profits.

It is also of interest to note that there was no systematic handling of the funds derived from the lease account in payment on the notes. When the notes fell due, they were paid by Frank Kell personally or with the money received from the Wichita Falls Mill & Elevator Co., which, by the end of 1921, had provided some three hundred thousand dollars for that purpose. There is nothing in the record to show what portion of this sum represented dividends payable on the stock purchased in the name of Lula Kell and the children and what portion represented advances which would have to be repaid to the company at a future date. The petitioner, Frank Kell, apparently handled these to suit his own convenience and the account was not balanced and closed until the year 1929, even though the K. O. Harvey Lease Account was liquidated in 1923 and Frank Kell had received one fourth of all the proceeds.

After careful consideration of the evidence presented, we hold that Frank Kell did not make a gift to his wife and children of his interest in the K. O. Harvey Lease Account and, under the rule laid down in Burnet v. Leininger, supra, the respondent is sustained in his determination that the partnership profits are the income of the community and not the separate income of Lula Kell and the seven children.

Issue No. 2.

Early in 1919 the petitioner, Frank Kell, and a number of associates were making plans to build a railroad from Breckenridge to Newcastle, Texas. Newcastle was connected with Wichita Falls by the road of the Wichita Falls & Southern Kailway Co. At about the same time Jake L. Hamon, of Ardmore, Oklahoma, and associates were planning the construction of a similar railroad from Breckenridge south to Dublin, Texas, where it would connect with the St. Louis-San Francisco Kailway Co., more commonly known as the Frisco. On June 3, 1919, they decided to combine their efforts and capital and to construct the two units of railway as a joint enterprise.' A contract covering their agreements in that respect was accordingly drawn up and signed on that date by Frank Kell and Jake L. Hamon.

This contract, after reciting the undertakings contemplated and stating that each party expected to receive donations of money and rights of way to be used in their respective projects, provided that all of the donations so received should be joint and equal; and further stated that “ all of said property, money, rights, and benefits so acquired or obtained by the respective parties * * *, for the use and application to railroad purposes”, should “be devoted to those purposes, and transferred, assigned, and properly conveyed to the proposed railroad corporation, later to be incorporated * * *, and to be so transferred, assigned, and conveyed to said corporation ” when and as the same should become necessary and proper.

The contract also contained the following:

On the final completion of the said line of railway and the putting of the same into operation, that is the line of railway from the point of connection with the Frisco Railroad to Wichita Falls, then either party hereto at his election shall be entitled to an accounting, distribution, and division of all of the said joint property then remaining in hand. The said respective parties hereto obligate and bind themselves to hereafter incorporate and to procure the incorporation of a railroad company for the construction and the operation of the said line of railway between the said junction point with the Frisco and the said city of Wichita Falls, and to proceed thereafter with the construction of such line of railway and the procuring of all necessary and proper power and other equipment for its operation, which power and equipment is to be property of the said proposed railroad corporation.

Each party to this contract was also obligated to subscribe and pay for one half of the bonds and stock of the proposed corporation and also obligated to pay one half of the amount to be expended in the acquisition of town sites and in constructing and putting into operation the line of railway.

Pursuant to the terms of the contract, construction of the railroad beginning in Dublin and working northward was begun under the name of Hamon and Kell. On September 9, 1919, Jake L. Hamon, for himself and associates, entered into a contract with certain citizens of Breckenridge, whereby these citizens agreed to contribute certain money and lands to be used in the construction of the railroad from Breckenridge south to Dublin. At the same time Frank Kell, for himself and his associates, entered into a similar contract with citizens of Breckenridge, relating to the construction of the railroad from Breckenridge north to Newcastle. This contract executed by Hamon with reference to the railroad from Breckenridge south contained a provision to the effect that the contemplated railroad corporation might be availed of, if necessary, for any condemnation proceedings to procure right of way, and that the citizens of Breckenridge, parties of the second part, should hold the said corporation and Hamon harmless from all costs, expenses, disbursements, and damages. The contract also contained a provision which read as follows:

It is contemplated that parties of tbe second part will execute a contract with Frank Kell and J. A. Kemp for- tbe construction of a standard gage railroad from a point of intersection of the Wichita Falls and Southern to the Oity of Breckenridge, Stephens County, Texas, and it is mutually agreed between the parties hereto that the incorporation of one railroad company for the construction of the line herein described and the line described in the contract between Frank Kell and J. A. Kemp and the parties of the second part, will be a compliance with the terms of this contract providing for the incorporation of a railroad company for the construction of a line from the City of Breckenridge in a southerly direction to a point of approximately twenty miles in a southerly direction from the intersection of the proposed railroad with the Texas and Pacific Railroad.
* * ❖ * * Sit #
. It is agreed by all the parties hereto that although this contract is executed by Jake L. Hamon as party of the first part and the provisions hereof run in his name, it is for the benefit not only of himself but any assigns, associates or nominees he may designate and for the like benefit of any railroad corporation that, he may name, the obligations thereof in favor of said Jake L. Hamon being in all respects for the like benefit of any such assigns, associates, nominees or railroad company.

The contract between the petitioner, Frank Kell, and citizens of Breckenridge, with reference to the construction of the railroad north of Breckenridge to Newcastle, contained provisions similar in substance to those referred to in the contract executed by Hamon with reference to the road to be constructed from Breckenridge south.

At the time of hearing it was agreed by the attorneys for the parties to these proceedings that these contracts were representative of all contracts entered into with reference to donations of money and land for use in the construction of the railroad.

By June 1920 the road had been completed from Dublin to Breckenridge. About that time friction arose between Hamon and Kell. The cause of this friction was Hamon’s practice of entering into obligations in the name of Hamon and Kell without consulting Kell or his associates. It also appears that Hamon had made some variations with reference to the course the road was to follow from Breckenridge north and had taken the necessary steps for completion of the road into Jimkurn, Texas. It also developed that Hamon was opposed to the construction of the road beyond Jimkurn by reason of the fact that it would run through some undeveloped territory and would require the expenditure of a very substantial sum in bridging the Brazos River. As a result of these differences a second contract was entered into by and between Jake L. Hamon and Frank Kell, under date of August 80, 1920, wherein it was provided that Frank Kell and his associates would transfer to Hamon and his associates all of their rights and interests in the road constructed and to be constructed from Dublin to Jimkurn. It was also provided that Kell and his associates would transfer all of their rights in Liberty bonds, amounting to $150,000, which they had posted with the Frisco Railroad to secure payment of one half of the amount due the Frisco for steel rails used in the construction which had been completed at that time. In return for this transfer on the part of Kell and his associates, Hamon and his associates paid over to Kell and associates the sum of $1,050,000 and agreed to pay all of the obligations then outstanding against Hamon and Kell on account of the construction work already done. Kell and his associates agreed to take over and carry out all obligations in connection with the construction of the railroad north from Jimkurn to Newcastle.

At the time the contract of August 30, 1920, was entered into, Kell and his associates had paid in to Hamon and Kell for use in construction work the sum of $625,000 in cash. There had also been received for similar purchases cash donations and grants of land amounting to $635,279.69.

Hamon was killed in November 1920, and shortly thereafter demands were being made by creditors of Hamon and Kell for payment of amounts due in connection with the construction of that portion of the railway acquired by Hamon and his associates under the contract of August 30, 1920. In December 1920, after demands by some of these creditors upon Frank Kell and his associates, $50,000 was procured from the Hamon estate to be used in payment on these accounts. Subsequently, in 1921, some of the creditors filed suits against Kell and his associates on the basis of the partnership arrangement which they had had with Hamon. Kell arranged for the payment of some of these obligations by the Wichita & Southern Railway Co. which had been acquired by him and his associates for the purpose of constructing the railroad from Jimkurn, north. The Wichita & Southern Railway Co. was later reimbursed by the National City Bank of New York for all amounts so expended, the National City Bank being interested in the settlement of the Hamon estate, and in the Wichita Falls, Ranger & Fort Worth Railroad Co., which had been organized and had taken over the road constructed by Hamon and Kell.

It is contended on behalf of the petitioner, Frank Kell, first, that the transaction between him and Jake L. Hamon, for themselves and their associates, on August 30, 1920, did not constitute a closed transaction from which gain or loss is determinable; and, second, that if it does represent a closed transaction, the petitioner, Frank Kell, is entitled to include in his basis for determining the gain realized an amount representing one half of the donations of cash and land received in connection with the construction of the railroad from Dublin to Jimkurn.

The petitioner advances two arguments in support of his contention that the agreement of August 30, 1920, does not reflect a closed transaction. One is that Kell and his associates were still liable to the creditors in respect of obligations entered into under the name of Hamon and Kell for the construction of the railroad sold to Hamon and his associates, and, further, under the terms of the agreement, Kell and his associates assumed the obligation to construct the railroad north from Jimkurn into Newcastle, and that these operations constituted merely parts of the whole and neither gain nor loss could be realized until the debts of Hamon and Kell had been paid and the line from Newcastle to Dublin had been finished.

In L. C. Heydrick, 7 B. T. A. 950, an appeal by one of Kell’s associates, we considered the question whether or not the transaction of August 30, 1920, was a closed transaction. In our opinion in that case we stated:

'An entirely changed state of affairs existed after the sale to the Hamon interests. Kell and his associates were engaged in an undertaking of their own, in which they were entirely responsible, i. e., the building of the railroad from Breekenridge to Newcastle. As a partnership, they had sold their right, title and interest in the railroad thus far constructed, and upon receipt by Kell, his associates received income to the extent of their distributable interest therein. It may well be that in the construction of the railroad from Breckenridge to Newcastle, they were called upon for contributions in excess of the sums received from the partnership arising out of the Hamon transaction, but, if so, that was another transaction requiring the investment of capital with which we are not here concerned. Neither should we be concerned with the suits instituted against Kell and his associates, in years subsequent to 1920, by reason of the failure of Hamon to pay all claims which he agreed to pay by the contract of September 1, 1920. In the first place, no losses have in fact been shown to have resulted, by reason of the suits, and in the second place, Kell and his associates believed Hamon to be fully solvent when the sale was made and did not contemplate that any liability would ever result. We are of the opinion that the evidence concerning this issue does not prove the error alleged.

We find no additional facts in the cases now before us sufficient to justify a conclusion different from that reached in the case of L. C. Heydrich, supra, and we accordingly hold that the transaction of August 30, 1920, was a closed transaction giving rise to gain or loss.

The only question now remaining is whether or not one half of the donations in cash and land should be included as a part of the basis for determining the gain or loss realized by Kell and his associates upon the disposition of their interests in the railroad from Jimkurn to Dublin. In that respect the contention of the respondent must also be sustained. In all of the contracts, including those between Hamon and Kell and the contracts between these two individuals and the citizens of Breekenridge, Texas, which according to agreement were declared representative of all other contracts covering donations, it very definitely appears that these donations were made for use in the building of the railroad and in its operations thereafter and were to be for the benefit of a corporation or corporations, to be formed for the purpose of constructing the railroad and operating it after construction.

There is nothing whatever in the contracts with citizens making donations which would give Kell and his associates or Hamon and his associates the right to take out of the project any portion of the money and lands so donated, and, further, we find nothing in these contracts which would form a basis for the inclusion by Kell and his associates of any portion of the donations or contributions as amounts paid by them into the project. Clearly their interest in the railroad company, as of August 30, 1920, had cost them $625,000 in cash and $150,000 in Liberty bonds, or a total of $775,000. This interest they sold to Hamon and his associates for $1,050,000 and the assumption of all partnership liabilities, and the difference between the cost and selling price represents the amount of their taxable gain.

Reviewed by the Board.

Judgment will be entered wnder Ride 50.


author: Trammell :

text:
    C. W. Murchison, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72347.
    Promulgated February 14, 1935.

      L. E. Cahill, Esq., and W. Leo Austin, Esq., for the petitioner.

      W. R. Lansford, Esq., and O.W. Sweeher, Esq., for the respondent.
   OPINION,

Trammell :

This proceeding is for the recletermination of a deficiency in income tax for the year 1929 in the amount of $24,344.93. The petitioner originally assigned 11 errors, upon the basis of which he alleged that the respondent determined the deficiency in controversy. However, at the hearing petitioner waived his assignments of error numbered 2, 4, 6, 7, 8, 10, and 11, and respondent conceded assignment numbered 5, relating to unidentified bank deposits included in gross income in the amount of $3,534.18.

This leaves for consideration here three issues joined by respondent’s denial of assignments one, three, and nine, namely, (1) whether respondent erred in excluding from gross income the sum of $602.76, and in refusing to allow deductions from gross income in the sum of $4,871.43, alleged to represent income and expense deductions arising from the operation of a poultry business; (2) whether respondent erred in including in income for the taxable year alleged dividends received from the Murchison Oil Co., aggregating the sum of $122,248.24; and (3) whether respondent erred in failing to allow as a deduction alleged farm expenses in the sum of $5,954.62.

Issue 1 — Alleged loss from poultry business. — Petitioner included in his return for 1929, as a part of gross income, the amount of $602.76, alleged to have been derived from the operation of a poultry business, and deducted as business expense incurred in that connection the amount of $4,871.43. Respondent eliminated the amount of $602.76 from gross income, and disallowed the deduction of $4,871.43 by including as additional income the net amount of $4,268.67. Petitioner now concedes that the amount of gross income derived from the poultry business during the taxable year was $702.28 instead of $602.76. In support of his action respondent asserts that petitioner has failed to show that the claimed expense was paid or incurred in the operation of a trade or business or in a transaction entered into for profit, and, further, that petitioner has failed to prove that the amount of the expenditures claimed as expense is correct or properly deductible.

The contention of the respondent last stated, we think, is well founded. In his return for the taxable year petitioner deducted from gross income the amount of $5,939.82, and in the attached schedule 18, explaining this item, appears the following: “Loss on poultry business $4,871.43.” At the hearing petitioner offered in evidence as Exhibit 1 an analysis of certain personal accounts, the first of which is entitled “ Statement of Farm Operations” and contains, among others, the item “ Loss on Poultry venture $4,871.43.”

Exhibit 1 was admitted for the sole purpose of establishing the figures, with the statement that oral testimony would be introduced to prove the correctness thereof. However, no such testimony was offered. Although petitioner stated that he had available at the hearing his books and records for 1929, no proof was offered to show the amount or nature of the several expenditures comprising the alleged loss of $4,871.43 other than the statement in petitioner’s testimony that “ The principal part was feed for the poultry.” But this statement was coupled with the admission that he was “ not conversant with just exactly what this loss was for.”

The burden here is upon the petitioner to establish that the amount claimed constitutes an allowable deduction, and this, we think, he has wholly failed to do. For lack of proof to show error, respondent’s action on this issue is affirmed, and it is unnecessary for us to determine whether petitioner was engaged in the poultry venture as a trade or business, or whether it was a transaction entered into for profit.

Issue 2 — Whether withdrawals from corporation constituted informal dividends. — Eespondent determined that during the taxable year petitioner withdrew from the Murchison Oil Co. the net amount of $122,248.24, subject to surtax as dividends. In the deficiency letter respondent stated:

This item is a net withdrawal from the Murchison Oil Company and is treated as a dividend, fifty per cent thereof being income to the taxpayer and fifty per cent being income through the deceased wife to the three children of the taxpayer. Since the children are minors and elected not to file returns, this income is included in the income of this taxpayer, and the credit for dependents is allowed in the sum of $1,200.00.

At the hearing the parties stipulated that the net amount of withdrawals from the corporation during the taxable year was $115,170.37, instead of $122,248.24 as shown in the deficiency letter. The parties also filed the following stipulation of facts relating to issue 2 :

1. That the Petitioner is a citizen of the United States residing at Dallas, Texas.
2. That prior to May 1, 1925, the Petitioner was a member of a partnership known as Murchison & Fain, and on that date owned a fourteen-thirty-seconds interest therein.
3. That Mrs. C. W. Murchison died intestate, leaving three children, on May 19, 1926.
4. That on May 1, 1925, there was organized a joint stock company, or trust estate, by name, Murchison-Fain Oil Company to which was transferred all the property and assets of the partnership of Murchison & Fain, and the partners thereof received in exchange for their interest in said partnership a proportionate number of shares of beneficial interest in the trust estate.
5. That on January 1,1927, there was organized under the laws of the state of Texas a corporation by name, Murchison Oil Company, and a corporation by name, Fain-McGaha Oil Corporation.
6. That the Murchison-Fain Oil Company, the joint stock association or trust estate, transferred to these two corporations all of its property and assets in exchange for all the capital stock of the two newly organized corporations. The Murchison Oil Company received 7/16ths of the assets and property of the trust estate, and the Fain-McGaha Oil Corporation received 9/16ths thereof. Immediately after such transfer the trust estate distributed the capital stock of the Murchison Oil Company and Fain-McGaha Oil Corporation to its holders of beneficial interests in proportion to their respective interest in the trust estate, and in exchange therefor received their shares of beneficial interest in such trust estate.
7. That the transactions enumerated in the next preceding paragraph have been considered by the Murchison-Fain Oil Company, the trust estate, the Murchison Oil Company, the Fain-McGaha Oil Corporation, and the respondent as constituting non-taxable exchanges and reorganizations within the meaning of Section 203 of the Revenue Act of 1926.
8. That the aggregate net earnings of the Murchison-Fain Oil Company for the period from May 1,1925 to December 31, 1925, was in the sum of $788,433.19, and that 7/16ths thereof amounts to $344,939.56.
9. That the aggregate net earnings of the Murchisou-Fain Oil Company for the calendar year 1926 was in the sum of $290,906.09, and that 7/16ths thereof amounts to $127,271.34.
10. That the entire net value of the assets acquired by the Murchison Oil Company from the trust estate of Murchison-Fain Oil Company, including said earnings set forth in paragraphs 8 and 9 above, was entered in the books of the Murchison Oil Company as the cost or value of its capital stock.
11. That the Murchison-Fain Oil Company, the trust estate, filed income tax returns and was taxed as a corporation during the period of its existence.
12. That the cost to Petitioner on May 1, 1925, of his shares of beneficial interest in the trust estate of Murchison-Fain Company was in the amount of $93,928.43.
13. That during the year 1927, the Murchison Oil Company sustained a loss from operations in the sum of $49,232.03.
14. That during the year 1927, the Murchison Oil Company made a distribution to stockholders in the amount of $250,000.00. That in accordance with the agreement and understanding at the time of the distribution above referred to no part of the said $250,000.00 was paid in cash, but this amount was credited to the notes and accounts due by the Petitioner to the corporation.
15. That the Respondent has determined that the Murchison Oil Company realized a net income from operations during the year 1928 in the amount of $62,617.65.
16. That the Respondent has determined that the Murchison Oil Company realized a net income from operations during the year 1929 in the amount of $122,548.21.

Petitioner contends that the net amount of the withdrawals in question represents a loan, which he intends to repay to the corporation. Petitioner’s wife died in 1926 and there has been no legal administration of her estate, except certain savings accounts handled through the courts by petitioner as guardian of his minor children.

Petitioner was the record owner, except as to qualifying shares, of all the capital stock of the Murchison Oil Co. from the date of its incorporation on January 1, 1921". Petitioner’s wife, prior to her death in 1926, had a community interest in the joint stock association or trust estate, which was the predecessor of and transferred its assets to the Murchison Oil Co. in exchange for the shares of the latter’s stock held by petitioner. All the assets of the oil company were acquired by petitioner during coverture.

Petitioner’s withdrawals from the Murchison Oil Co. during 1927, 1928, and 1929 constituted, largely, personal expenses. No notes were given to the corporation representing such withdrawals, and there was no agreement to pay interest thereon. At the close of each of the following years the net debit balance of petitioner’s open account with the Murchison Oil Co. was, 1927, $144,628.90; 1928, $238,165.75; 1929, $353,336.12; 1930, $409,541.84; 1931, $439,-404.64; 1932, $426,103.30; and at August 31, 1933, the debit balance of this account was $442,741.50. Some credits appear on this account by way of checks of petitioner, proceeds of notes due to petitioner, salary credits and cash advanced by petitioner on behalf of the corporation. Likewise, charges appear for numerous items representing cash advances to various persons by the corporation on behalf of petitioner.

Petitioner testified that his account with the Murchison Oil Co. was considered as an asset of the corporation; that the balance of the account represented an obligation due from him, all of which he expected to repay; that he had other sources of income that would produce enough to pay off the account; and that he had actually repaid some of it. Petitioner did not state the amount repaid or when repaid, but it is apparent, from the facts set out above, that whatever amounts may have been repaid and credited to the account were immediately, or within the same year, again withdrawn from the corporation by petitioner, together with additional funds. The debit balance of the account was not reduced, but the net withdrawals steadily increased from year to year.

The reeord clearly indicates, we think, that the Murchison Oil Co. was operated by petitioner as a family corporation, through the instrumentality of which he carried on many of his business ventures. It was wholly under the control and domination of the petitioner.

In 1927 the corporation distributed a dividend of $250,000 out of the earnings of its predecessor, which was credited to petitioner’s account and applied against his indebtedness to the corporation. No other dividend was formally declared by the corporation prior to the taxable year.

Disregarding the withdrawals of the petitioner, the corporation, at the close of 1929, had undistributed earnings of $358,144.73, including earnings of its predecessor. Excluding the earnings of its predecessor, the corporation had on hand at the close of the taxable year net distributable profits of its own in the amount of $135,-933.83.

Petitioner could have caused the corporation to declare a formal • dividend and to distribute these earnings to him, in which event the amount distributed would have been subject to surtax. Instead, the petitioner elected to withdraw the net earnings of the corporation to the extent of $115,170.37 as an alleged loan, without evidencing the obligation by promissory note, or paying interest thereon, and this' amount not only has not been repaid to the corporation, but petitioner has consistently followed the same policy by increasing the amount of his withdrawals, at least down to August 31,1933.

In the circumstances shown here, it is our opinion that the withdrawals by the petitioner must be treated as distributions of net profits of the corporation, taxable as dividends within the meaning of that term as defined in section 115 (a) (b) of the Revenue Act of 1928.

It is immaterial that a dividend was not formally declared by the corporation. Spencer v. Lowe, 198 Fed. 691; Smith v. Moore, 199 Fed. 689; Chattanooga Sav. Bank v. Brewer, 17 Fed. (2d) 79; Hadley v. Commissioner, 36 Fed. (2d) 548; Christopher v. Burnet, 55 Fed. (2d) 527.

In L. J. Christopher, 13 B. T. A. 729; affd., 55 Fed. (2d) 527, where we had before us a situation similar to the present case, we said:

The first question is whether these withdrawals by this petitioner fall within the term “ distribution ” as used in section 201. It is contended that this must be answered in the negative, since it appears that the California Company made no formal declarations of dividends and also because the various withdrawals were entered upon the books of the California Company as charges against this petitioner.
We are dealing with a one-man corporation, which so far as the record discloses, was conducted by L. J. Christopher as though it was an individual business. That portion of his personal account with the California Company which was introduced in evidence discloses that although his salary was in the amount of $1,000 per month, he did not withdraw any part of it. On the other hand, he withdrew money and other items whenever, it appears, he needed them and these withdrawals were credited by his salary and other items including Victory bonds. Another pertinent fact is that the California Company from the date of its organization to and including the year 1921, made no formal declaration of a single dividend. Since during all this time this petitioner was the owner of practically all the capital stock of the California Company and had absolute control, and since the only distribution of earnings made in these seven years was by reason of these withdrawals, we are clearly of the opinion that they were distributions made by the California Company as that term is used in section 201. * * *

Section 201 of the Revenue Act of 1921, which governed the above cited decision, is, in all respects material here, the same as section 115 of the 1928 Act, quoted supra.

Where substantially all of the stock of a corporation is owned or controlled by one stockholder, he cannot escape tax by withdrawing, and thus having the benefit of the use of, the corporation’s net earnings without the formal declaration of dividends, even though the amounts so withdrawn are charged against his account on the books of the corporation. Chattanooga Sav. Bank v. Brewer, supra; Christopher v. Burnet, supra. As we said in E. T. Schuler, 29 B. T. A. 415, 418, “ Clearly tbe purpose of the statute above quoted (sec. 115, Revenue Act of 1928) was to make taxable all corporation profits earned since February 28, 1913, when permanently separated from surplus and delivered to a stockholder ’, whether legally distributed or not.”

Finally, it is argued that the withdrawals in controversy did not constitute a distribution taxable as a dividend for the reason that the entire amount was received by petitioner, whereas he actually owned only one half of the stock and no distribution was made to the other stockholders. In disposing of the same contention in the Schuler case, supra, we expressed the opinion that the question of corporate regularity was of no importance to the petitioner’s taxable status as the actual recipient of the disputed funds, if he did so receive and retain them. And in the case of Christopher v. Burnet, supra, where the taxpayer contended that the distribution was not a dividend because the other stockholders did not participate therein, the court held that since the other stockholders were not complaining, the taxpayer was not in a position to complain.

In our opinion the determination of the Commissioner, as set forth in his notice of deficiency, that all the withdrawals, which we find to be informal dividends, are taxable to the petitioner, is correct. We base our conclusions, however, on other grounds than those assigned by the Commissioner, and we do not put ourselves in the position of approving his reason for taxing it all to the petitioner.

The petitioner withdrew the money. There is no evidence that any of it was withdrawn by or for the children, or that they were advised of it. From all the record discloses, it was for his own personal use. Admittedly a formal dividend was declared in 1927 in the amount of $250,000 in cash, all of which was applied to petitioner’s debts. Petitioner was in absolute control of the corporation, and treated it as if he were the sole stockholder in so far as withdrawals and dividends were concerned. He acted for his children as well as for himself, and we think under the circumstances it is immaterial that no formal declaration of dividends was made or that other stockholders did not participate. Even when a formal dividend was declared the petitioner received it all, as he did in this instance. The petitioner is in no position to complain that this was not a dividend because his children did not share.

On this issue, respondent’s action is approved.

Issue S — Deduction for farm, expenses. — Petitioner claims that he is entitled to deduct from gross income for the taxable year the amount of $5,954.62, as farm expenses. Respondent contends that the evidence does not establish that petitioner in 1929 was operating a farm for profit, nor that he suffered a loss in the amount claimed. This issue is closely related to issue 1, and the status of the proof as to both is the same. The documentary evidence offered by petitioner does not analyze the aggregate deduction, nor disclose the nature of the expenditures comprising the total. The testimony of the petitioner is also vague and wholly inadequate. With respect to this item, petitioner testified:

Q I notice on this exhibit, page 1 of exhibit 1, there is an expense item of some five thousand fifty-nine dollars and forty cents ($5,059.40); what does that include, Mr. Murchison?
A I imagine it covers buildings and labor for buildings and so forth for the operation of the farm.
Q Any labor that would appear in that would be for the construction of chicken buildings and so forth?
A I don’t know as I recall — we did a great deal of that construction work there ourselves. I don’t think that we had a great deal of it let by contract.

Not only has the petitioner failed to establish that the amount claimed represents deductible expense, but his testimony indicates that a substantial portion may have consisted of capital expenditures. For lack of evidence to show error, respondent’s determination on this issue is approved.

Judgment will be entered under Rule 50.

       SBC. 115. distribution BY CORPORATIONS.

        {a.)Definition of dividend. — The term “ dividend ” when used in this title * * * means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnings or profits accumulated after February 28, 1918
      (b) Source of distributions. — For the purpose of this Act, every distribution is made out of earnings or profits to the extent thereof, and from the most recently accumulated earnings or profits. * * »


author: ARunbell : SteeNhageN, MdbdocK,

text:
    Pacific Coast Biscuit Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. American Biscuit Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Capital Candy and Cracker Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Everybody’s Macaroni Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Tacoma Biscuit and Candy Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 71588, 74625-74628.
    Promulgated February 14, 1935.

      Percy W. Phillips, Esq., for the petitioners.

      J. B. Johnston, Esq., for the respondent.
   OPINION.

ARunbell :

The amounts expended in 1926 in connection with the retirement of capital stock and the issuance of new stock, and the expenditures in 1930 in connection with petitioner’s dissolution and liquidation, are claimed by petitioner to be deductible as losses in the year 1930. This claim is based on the holding in Malta, Temple Association, 16 B. T. A. 409.

In the Malta case we found as a fact that in connection with the taxpayer’s incorporation it incurred certain expenses which, under our holdings in cases cited, constituted capital expenditures. The amount of those expenses we allowed as a loss deduction in the year in which the taxpayer dissolved and surrendered its charter. We said in part:

Upon dissolution and surrender of its corporate francMse in the year 1925 the petitioner abandoned or lost a corporate asset which had cost it $1,087.40, no part of which had been returned to it through exhaustion deductions or as ordinary and necessary expense deductions. We think that such a loss clearly falls within the provisions of section 234(a)(4) of the Revenue Act of 1924, and is deductible in computing net income of the year when sustained.

Petitioner’s expenditure of $745 in 1926 for amendment of its articles of incorporation was a capital expenditure similar to that in the Malta case, and under our holding in that case it is an allowable deduction in 1930, the year of dissolution.

The other expenditures in 1926 in connection with the retirement of stock and the issue of new stock were of a different character. One of the expenditures was a banker’s fee in connection with the retirement of old stock and sale of new stock and the other was a capital stock transfer fee paid to the State of New Jersey. They were not organization expenses and did not result in the acquisition of a capital asset. These expenditures are like those in James I. Van Keuren, 28 B. T. A. 480, where a corporation, subsequent to the completion of its organization, incurred expenses in selling its capital stock and sought a deduction therefor in the year of dissolution. We sustained the respondent’s disallowance of the claim, and in the opinion said:

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

In Barbour Coal Co. v. Commissioner, 74 Fed. (2d) 163, the court said that a commission paid for the sale of capital stock does not result in the acquisition of property used in the trade or business, but is an expenditure “ for captial in the forms of cash for use in the business. * * * It is equivalent for income tax purposes to the sale of stock at a discount.” Under the holding of the above cases petitioner acquired no asset by the payment of the banker’s fee and the capital stock transfer fee; consequently, there was no asset value for it to lose when it dissolved in 1930. We sustain the respondent’s disallowance of these items.

The question as to the deduction of the expenditures in 1930 in connection with petitioner’s dissolution and liquidation does not appear to have been passed upon in any of the decided cases. It is argued by petitioner that this deduction is governed by the decision in the Malta case, supra, and it is further claimed that the expenditures are ordinary and necessary expenses. Clearly the cost of dissolution and liquidation did not constitute a deductible loss. Those expenditures did not represent the cost of any asset which was lost upon dissolution and liquidation. If, as held in the Malta case, a loss is sustained upon surrender of the corporate franchise, the measure is the cost of acquisition and not the cost of disposition. The expenses allowable by the statute are those relating to a trade or business that are both ordinary and necessary. It will not be doubted that expenditures in connection with liquidation and dissolution are necessary. When business is conducted in corporate form, the governmental authority that endows the artificial corporate being with life also prescribes how that life may be terminated and requires compliance with certain formalities. Such compliance necessitates expenditures, one of which quite commonly is that of a fee for filing a certificate of dissolution. Services of attorneys and accountants may be required. If the corporation has acquired any property, liquidation is necessary and this may require the expenditure of considerable sums. In Welch v. Helvering, 290 U. S. 111, consideration was given to the meaning of the word “ ordinary ” in the provision of the statute allowing deduction of ordinary and necessary expenses. First, stated negatively, it “ does not mean that the payments made be habitual or normal in the sense that the same taxpayer will have to make them often.” Second, it does include such items as the cost of a lawsuit affecting the safety of a business, “ because we know from experience that payments for such a purpose, whether the amount is large or small, are the common and accepted means of defense against attack. * * * The situation is unique in the life of the individual affected, but not in the life of the group, the community, of which he is a part.” Dissolution and liquidation will of course occur but once in the case of any particular corporation, but it is an everyday happening in the business world, and in this sense it is quite an ordinary affair under the test of the Welch case. Consequently we are of the opinion that costs of dissolution and liquidation are both ordinary and necessary expenses within the meaning of the statute. We are further of the opinion that costs of dissolution and liquidation are so closely connected with a taxpayer’s business as to come within the rule of Kornhauser v. United States, 276 U. S. 145, which allows the expense of defending a suit for an accounting by the taxpayer’s former partner on the ground that such a suit is a matter “ directly connected with, or, as otherwise stated (Appeal of Backer, 1 B. T. A. 214, 216), proximately resulted from ” the taxpayer’s business. Here, while no suit is involved, the liquidation and dissolution are in the nature of a final accounting of the results of the taxpayer’s business rendered to its stockholders and the state. We conclude on this point that the petitioner is entitled to deduct the expenses aggregating $12,856.77 which it is stipulated were incurred in connection with its dissolution and liquidation.”

As to the interest item, petitioner contends that the portion thereof allocable to 1929 on a time basis was an accruable item for 1929 and does not belong in 1930 income. In Household Products, Inc., 24 B. T. A. 594, we held that under the Bevenue Act of 1926 interest on refunds accrued at the time the Commissioner signed the schedule of overassessments pursuant to which the refunds were made. That was by reason of the provisions of the Bevenue Act of 1926, which, in substance, provided for the allowance of interest from the date of payment to the date on which the schedule of overassess-ments was signed. Sec. 1116, Eevenue Act of 1926. By section 614 (c) of the Eevenue Act of 1928, section 1116 of the Eevenue Act of 1926 was specifically repealed. In lieu thereof it was provided in section 614(a) that:

(a) Interest shall be allowed and paid upon any overpayment in respect of any internal-revenue tax, at the rate of 6 per centum per annum as follows:
*******
(2) In the case of a refund, from the date of the overpayment to a date preceding the date of the refund check by not more than 30 days, such date to be determined by the Commissioner.

The effect of this provision, as we read it, was merely to change the termination of the period for which interest was allowable. Under the prior statute the date of signing the schedule of over-assessment marked the end of the interest period; under the 1928 Act the end of the period was not determined by the date of the schedule of overassessment, but ended some time within 30 days prior to the date of the refund check. This change in the statute did not in any way affect the taxpayer’s right to interest on an overpayment. The statute still allowed interest and when the Commissioner certified on his schedule of overassessments that this petitioner was entitled to a refund the right to interest thereon became sufficiently fixed to warrant its accrual.

Eespondent’s objection to allowing the accrual of interest in 1929 is that it was not reported as income for that year. There is no evidence on this point, but even assuming that it was not reported for 1929, that fact standing alone would not work an estoppel against the taxpayer and require the inclusion in 1930 income.

Petitioner concedes that that portion of the interest which accrued in 1930 was income in that year, but contends that it is entitled to a credit of an equal amount against net income under section 26(a) of the Eevenue Act of 1928. That section provides for the allowance of a credit of “ The amount of interest received upon obligations of the United States which is included in gross income under section 22.” The latter section, 22, provides for the inclusion in gross income of “Interest upon * * * the obligations of the United States * * Under the Eevenue Act of 1926, which provided for exemption of interest on obligations of the United States, it has been held that interest on a refund of overpaid taxes is not included within the statutory description of exempt income. American Viscose Corporation, 19 B. T. A. 937; affd., 56 Fed. (2d) 1033. The language of the statute here is the same except that it provides for a credit rather than an exemption, and the same reasoning applies. The argument that the interest became a definite “ obligation ” within the meaning of the credit provision when the refund was scheduled is without merit. The premise of the Viscose case is that the statute intended to free from tax the interest on bonds and securities of the Government only in order to make them more attractive to investors. The view of the Court of Appeals in the Viscose case is sustained by the Supreme Court in Helvering v. Stockholms Enskilda Bank, 293 U. S. 84.

We accordingly hold that the interest allocable to 1929 should not be included in 1930 income, and that petitioner is not entitled to a credit in the amount of the interest for 1930.

Finally, petitioners question the propriety of the respondent’s action in asserting a deficiency against each of them. The deficiency, it appears from the pleadings, arises from adjustments of income of the parent, Pacific Coast Biscuit Co. This action is in accordance with article 15 of Kegulations 75, which provides that the parent and each subsidiary “ shall be severally liable for the tax (including any deficiency in respect thereof) computed upon the consolidated net income of the group.” The subsidiaries each executed and filed a Form 1122 in which they unqualifiedly consented to the regulations. This was a voluntary act on their part and they will not be heard now to complain of the consequences. Furthermore, it is hardly to be presumed that the respondent will attempt to collect the deficiency from each of the petitioners. As they say, there is but one deficiency, and if it is attempted to collect more than that an appropriate remedy is doubtless available to petitioners.

Reviewed by the Board.

Decision will be entered under Bule 50.

SteeNhageN,

dissenting: The opinion holds that $745 expended by the corporation in 1926 for amendment of its articles of incorporation is an allowable deduction in 1930. Without discussion, the decision is merely predicated upon the prior decision in the Malta case, a Division decision not reviewed by the Board. This is the first instance where the Board has reviewed the question whether an organization outlay, or something said to be analogous thereto, is within the statutory provision for the deduction of losses sustained during the taxable year and not compensated for by insurance or otherwise, Revenue Act of 1924, section 234 (a) (4); Revenue Act of 1928, section 23 (f).

I am unable to find that a loss has been sustained. It has been held, beyond the reach of further inquiry, that at the time of the outlay there is no deduction either by way of current business expense or by way of loss, and it has also been held that such an outlay is not such a capital investment as to become the basis for annual exhaustion. These two denials can form no basis for granting the allowance at some other time or under other circumstances, unless such deduction is provided for by the statute. The deduction is not to be granted merely because the taxpayer is compelled by an accounting convention to charge off the item and thus clear it from its books, nor is the deduction to be granted merely because the tax return of the taxpayer has never been permitted by the statute to reflect the outlay. It has been held often enough that deductions depend upon the statute.

Aside from the accounting, I can see no substance in the idea that a corporation suffers a loss of the cost of its corporate existence when it dissolves. Its organization costs are incurred because it desires to exist. It gets what it desires for as long as it wishes and then voluntarily quits. Thereby it loses nothing. To the contrary, it has enjoyed everything which the expenditure contemplated. Just as it has been said that the corporation acquired nothing exhaustible by the expenditure, so it must be said that it loses nothing at the end.

It is a far greater strain of reasoning to call the amount a loss at the time of dissolution, which perchance may be many years after the expenditure has been actually written off and forgotten, than .it would have been to call it either an expense or an exhaustible investment at the beginning of the corporation’s life. It is merely another instance of a nondescript accounting item the substance of which is not within the enumerated statutory factors of net income.

McMahoN agrees with this dissent.

MdbdocK,

dissenting: The prevailing opinion holds that a fee paid in connection with the amendment of a corporate charter may be deducted as a “ loss ” upon dissolution of the corporation; amounts expended in connection with the dissolution and liquidation of the corporation are deductible in the year of dissolution as “ordinary and necessary expenses ”; but that fees paid in connection with the retirement of capital stock and the issue and sale of new stock can not be deducted as a “ loss ” upon dissolution. I am unable to distinguish between the two kinds of fees so as to hold that one is deductible and the other not. I do not agree that the amounts expended in connection with the dissolution and liquidation of the corporation are deductible under section 23 (a). I am unable to find any statutory authority allowing a deduction for any of these expenditures.

SterNhageN and McMahoN agree with this dissent.