author: Steenhagen:

text:
    Max Viault, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 84063, 84064, 84065, 84066, 86118, 86119, 86120, 86121.
    Promulgated August 6, 1937.

      Joseph D. Brady, Esq., and N. P. Moerdyke, Esq., for the petitioners.

      Byron M. Coon, Esq., for the respondent.

       Proceedings o£ the following petitioners are consolidated herewith : Clara L. Viault; Arthur Viault; Naomah Viault; Prank Viault; Rheata M. Viault; A. J. Viault; and Gertrude Viault.

   OPINION.

Steenhagen:

The Commissioner determined the following deficiencies in the several petitioners’ income taxes:

The four women petitioners are such only by virtue of their community interest with their husbands, and a determination as to the four husbands will reflect the proper determination as to the wives. There is no dispute as to either the evidentiary or the ultimate facts. They appear in the admitted allegations of the petitions.

The controversy grows out of a contract made on February 12. 1933, between Max and Arthur Viault, on the one hand, called the sellers, and Frank and A. J. Viault, on the other hand, called the buyers. A copy is appended to the petition. It is too long to set forth here verbatim; and, since the present litigation turns largely upon its proper construction, it can not be satisfactorily paraphrased in findings. The four brothers were the shareholders in the California Milling Corporation, Frank and A. J. owning the majority and Max and Arthur the minority. There had been increasing disagreement among them as to the management of the corporation and the conduct of its business, until finally they executed the contract to bring about the acquisition of all the shares by the buyers and the consequent withdrawal "by the sellers from the corporation and the-business. There is no disagreement among them as to the meaning or effect of the contract. They have, so far as this record shows, been in harmony .under it; and, since the contract has now been completely performed, there is no longer any occasion for internal dispute. The Government, however, in determining their several taxable incomes, has made its own construction of the contract, which all the petitioners now contest.

1. In filing their income tax returns, none of the petitioners computed his income upon the installment basis recognized by section 44 of the Revenue Act of 1932. They did not request permission from the Commissioner to use such basis, and in this proceeding they disclaim the privilege of using it and of any election to use it. The Commissioner, however, used the installment basis in computing the tax and the resulting deficiency. He does not now, however, make any defense of this use. The installment basis has always been regarded as a permissive basis available to the taxpayer at bis election if be was qualified under the statute to use it. Indeed, the taxpayer’s election has been regarded as so important that it is only under rare circumstances that tbe election, once exercised, has failed to bind him. Kaplan v. United States, 18 Fed. Supp. 965; Charles J. Derbes, 24 B. T. A. 276; affd., 69 Fed. (2d) 188; certiorari denied, 293 U. S. 580. The Commissioner was clearly in error in imposing upon tbe taxpayers the use of the installment basis as the method for determining the tax.

2. The corporation bad outstanding both common and preferred shares and the contract provided a complicated method whereby over a period of years the sellers should divest themselves of all their holdings in both classes of shares and the buyers should acquire them. The Commissioner treated the contract as a present installment sale, and argues that in this view the transaction was consummated in 1933, when the contract was made. In this construction of the contract the Commissioner was likewise clearly in error. The contract was not a contract of sale whereby title to all of the shares passed at once to the buyers, but was an executory contract which expressly provided that the sale should not be complete as to any of the shares, or title pass until all of the obligations as to all of the shares had been fulfilled. It was expressly provided that the contract was unitary and not divisible, and that none of its provisions setting up different methods and terms of payment for different classes of shares should be construed as a separate sale of less than all the shares.

As a whole, the sellers were, by a complicated method, to receive $607,500 for their 3,375 preferred and 4,500 common shares, all of which had been held by them for over two years. For convenience of computation, but not “as a separate purchase price for such preferred shares”, $337,500 out of the total $607,500 was assigned as applicable to the preferred shares. One hundred and thirty-four thousand dollars was to be paid on June 1, 1933,-and the remainder was to be paid in installments on each June 1 thereafter. The buyers were permitted, at their election, to cause the corporation from time to time to retire some of the preferred shares owned by the sellers, in which event the amount received by the sellers from the corporation in such retirement would serve pro tanto in lieu of payment under the contract. On June 1, 1933, $134,000 was paid by the corporation to the sellers, of which Max received $89,300 and Arthur $44,700, in consideration for which they surrendered to the corporation respectively 893 and 447 preferred shares, which were then retired. On August 31, 1933, the corporation paid a preferred dividend of $1.75 a share, of which the proper proportionate amount went to Max, who then owned 1,357 preferred shares, and Arthur, who owned 678.

The Commissioner, erroneously using the installment basis, treated the amounts received by the sellers in retirement of their preferred shares as if they had been received from the buyers as an installment upon the purchase price, and he treated the August 81 dividend received as if it were “interest” paid by the buyers upon an indebtedness for the. unpaid principal of the purchase price. There is no reason for such treatment. The amounts were in both instances received from the corporation itself by the sellers as shareholders, and the fact that by the contract such distributions by the corporation affected the buyers’ contractual obligation, did not convert the character of such distributions into payments by the buyers. True it is that because of such corporate distributions the buyers were to pay less to the sellers than they otherwise would, but it is better to say that thereby the purchase price was reduced than to distort the distribution by the corporation.

The distribution in retirement of part of the outstanding preferred shares is clearly and adequately covered for tax purposes by the revenue act. It is a distribution in partial liquidation and is therefore to be treated as in payment for the surrendered shares (sec. 115 (c)), the gain therefrom to be computed as the difference between cost and amount received (sec. 111). These amounts are in the record undisputed, from which it appears that upon Max’s 893 shares he had a cost basis of $36,004.51 and received $89,300, thus realizing gain of $53,295.49, and upon Arthur’s 447 shares the basis was $14,058.15 and the amount received $44,700, thus resulting in a gain of $30,641.85. It happens that these figures closely approximate those used by the Commissioner in his calculation upon the installment basis, but the similarity is entirely adventitious.

The dividend of $1.75 a share on preferred, paid by the corporation on August 31, 1933, was treated by the Commissioner as “interest” paid to the sellers by the buyers upon the unpaid principal of the contract purchase price for common shares. This too is an unwarranted distortion of the character and source of the receipt. There is no provision in the contract whereby preferred dividends would be a factor in the computation of the “interest” which the buyers undertook to pay, and therefore the Commissioner’s characterization of the amount as “interest” is not even supported by the contract. But if it were, under the contract, to serve the purpose of reducing interest, it would still, for all other purposes, retain its character as a distribution by the corporation to its shareholders in the form of a dividend; and the fact that by the contract the parties might have adjusted the purchase price by calling an amount “interest,” would not be sufficient to give it that character under the revenue act, Baltimore & Ohio Railroad Co. v. Commissioner, 78 Fed. (2d) 460. Properly the amount thus received by the sellers is included within their income as dividends received from a domestic corporation, and the treatment otherwise by the Commissioner is in error.

Of the total amount of this dividend, the corporation, acting in accordance with section 213 of the National Industrial Recovery Act (Act of June 16, 1933, 48 Stat. 195, ch. 90), deducted and withheld 5 percent of the amount of the dividend, representing the N. I. R. A. excise tax. The Commissioner, treating the entire amount of the dividend as interest received from the buyers, made no allowance for a deduction of the 5 percent excise tax withheld. Since the Commissioner, by his own ruling, T. D. 4372, XXI-2 C. B. 387, 393, recognizes that the 5 percent tax is properly to be allowed as a deduction, consistently with the requirement that the entire dividend shall be included in gross income, it may be assumed that the Commissioner would have allowed such a deduction if he had correctly recognized the dividend in its true character instead of treating it as interest. The withheld tax is a proper deduction and should be so treated in the recomputation.

The contract provided that of the total price of $607,500 the remaining $270,000 was related to the common, although not to be regarded as a separate purchase price for the common. This amount was to be paid, $66,000 on June 1, 1933, and in installments on each June 1 thereafter, according to a prescribed calculation. As fast as the sellers received payments they were to deposit common shares pro rata in escrow, title, however, to remain in them until all the payments were complete, although payments when made became irrevocably theirs. “Interest” was provided to be paid by the buyers upon the outstanding balance. All dividends paid on common to the seller shareholders were to operate as if in discharge of the purchase price and the “interest”, in a prescribed order. .

On June 1, 1933, the buyers made the initial payment of $66,000 to the sellers, and in accordance with the contract the sellers thereupon deposited the pro rata number (1,100) of common shares, as prescribed. The Commissioner, erroneously using the installment basis, treated this, as he had the initial payment with reference to preferred, as including the proportionate gain upon the assumed entire sale. The petitioners assail this, not only for the reasons already considered in respect of the preferred, but also because no present sale occurred. Although the Commissioner was clearly in error in his method of computing the gain, there is, on the other hand, no merit in the petitioners’ demand that the entire amount is without gain and free from tax in 1933. It is not necessary in such a situation that title should pass or that the sale be otherwise complete before the seller may be taxed upon the gain realized within the taxable year. The tax is imposed not upon the sale nor upon the occasion of the transfer by the owner of the property sold. It is a tax upon income and is therefore primarily to be measured with regard to the gain derived by the taxpayer, to the extent that such gain can with reasonable certainty be ascertained within the taxable year. The sellers, in 1933, received $66,000 as part of the total consideration for all their shares, and although title to the shares was withheld by the sellers, there is a reasonable method, consistently with the contract and the revenue act, for determining how much gain is included within the amount received in each taxable year. When payments were received by the sellers, such payments were in no event qualified or returnable. Even in the remote possibility that the buyers should fail to take and pay for all the shares and thus enable the sellers to cancel the contract and retain the shares, they still were permitted to keep the payments which had been made. Under such circumstances it is clearly proper to treat the amount received in each taxable year as including gain. In Birdneck Realty Corporation, 25 B. T. A. 1084, where, as here, the sale was not technically consummated in the year when partial payments of the purchase price were made, the Board said:

* * * the question whether the transactions were sales is not determinative of income under these contracts. During the taxable period petitioner received under its contracts cash sums over which it acquired absolute ownership and control. While its obligation to transfer title in the lot was dependent upon payment of all installments of the purchase price, its right to the cash installments as paid was absolute and unconditional. They were not held in trust nor subject to any obligation to return in case the contractural obligations were not fulfilled. Under the statutory definition of gross income in section 213 (a), they clearly constituted income derived from dealings in property. * * *

See also Commissioner v. Swift, 54 Fed. (2d) 746; Helvering v. Nibley-Mimnaugh Lumber Co., 70 Fed. (2d) 843; Commissioner v. Union Pacific R. R. Co., 86 Fed. (2d) 637; and Union Pacific Railroad Co., 32 B. T. A. 383, 390.

Because of the complicated method of payment to the sellers, it is difficult to compute how much of each annual amount of purchase price received properly represents gain. For each amount received from the buyers, the sellers were to deposit pro rata a number of their common shares in escrow', pending the full performance of the contract. Moreover shares were likewise to be deposited in escrow in the same proportion to amounts received as dividends from the corporation. Title to such shares while in escrow continued to remain with the sellers. See Roscoe H. Aldrich, 3 B. T. A. 911, 919; Charles M. Thorp, Jr., 32 B. T. A. 767; Grand Rapids Trust Co. et al., Executors, 34 B. T. A. 170. After the full purchase price had thus been received by the sellers, the shares in escrow would then belong and be deliverable to the buyers, those alike which had been deposited because of amounts received from the corporation and those which had been deposited when payments had been made by the buyers. If the Commissioner had not used the installment method, but had adopted an approved theory, perhaps a computation under such theory resulting in a reasonable determination of gain would, by virtue of the respect to be given to his determination, have been sustained, but, in the present state of the record, a proper method of computation is at large and must be determined by the Board. In the tax year 1933 the sellers received, in their proper proportions, $66,000 as part purchase price upon all their shares. In this year they deposited in escrow 1,267 shares, 1,100' being deposited when the initial $66,000 was received and 167 when the common dividend of June 10,1933, was received. Of these 1,267 shares, Max deposited 844 shares, the cost basis of which to him was $20,-417.31, and Arthur deposited 423 shares, the cost basis of which to him was $7,982.01. Since the amounts received from the corporation must be treated as dividends, they may not be included in the computation of gain even although common shares were deposited when the dividends were received. The correct method seems to be to regard the $66,000 as including gain upon the entire number (1,267) of common shares which were deposited in escrow in the year 1933. Since Max received $43,980 of this amount and deposited in escrow 844 shares having a basis of $20,417.31, his gain is $23,-562.69. Arthur, by the same method, should properly be regarded, as realizing a gain of $14,037.99 upon his receipt of $20,020 and deposit in escrow of shares having a basis of $7,982.01.

On June 10, 1933, the corporation declared and paid a common dividend of $5 a share, Max thereby receiving $15,000 on his 3,000 shares, and Arthur $7,500 on his 1,500 shares. In accounting under the contract, these dividends served, as between the contracting parties, to reduce both the principal amount of purchase price payable by the buyers and the “interest” which thereafter would have otherwise become due. To the extent that this dividend was accounted for as applicable to the principal purchase price, the sellers deposited a ratable number (167) of common shares in escrow. The Commissioner treated these dividends as if they had in fact-been received from the buyers in part as installments of the total purchase price and in part as “interest”. In this he was likewise in error. The amount received by petitioners was a dividend by the corporation, payable to them only because they were shareholders, and its character as such under the revenue act is immutable and must be recognized by the Government as well as by the shareholders.

3. In 1934 the corporation paid dividends on both, its outstanding-preferred and its outstanding common, and these distributions were made in proper proportions to Max and Arthur, according to the number of shares which they owned. The Commissioner treated these dividends which had been received by Max and Arthur from the corporation as if they had been received by Frank and A. J., the buyers, and used by them in the purchase of shares and the discharge of “interest” obligations. The petitioners, Frank and A. J., of course contest these inclusions in their income as common and preferred dividends, and in this they are correct. The rationale of the discussion in respect of the dividends for 1933 is entirely applicable here, and it results that the respondent’s determination as to the buyers for 1934 was in error and can not be sustained. The amounts distributed by the corporation on shares held by Max and Arthur are properly within their several incomes for 1934 as dividends. They should be excluded from the incomes of Frank and A. J. and, consistently with this, the interest deductions of Frank and A. J. which the Commissioner erroneously allowed should be properly adjusted.

Judgments will be entered wider Rule 50.


source: Caselaw Access Project

author: Mellott:

license: Public Domain

text:
    Davis Regulator Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72667.
    Promulgated August 6, 1937.

      George E. Frazer, Esq., and Hubert Van Hook, Esq., for the petitioner.

      E. L. Corbin, Esq., for the respondent.
   OPINION.

Mellott:

The petitioner contends that no part of the $82,574.55, expended by it in the acquisition of a new building for its manufacturing business out of the $95,000 received in connection with the sale or cancellation of its leasehold, represents recognizable gain to it because of the provisions of section 112 (f) of the Revenue Act of 1928. The section, in so far as pertinent here, is set out in the margin.

The respondent contends that there was merely a sale or release by petitioner of a portion of its personal property and the subsequent purchase by it of real property; that “the conversion of money received for damages to business and vacation of leasehold property into real estate and buildings is not a conversion into property similar or related in service or use as contemplated by section 112 (f)”, supra; and that it was not the intention of Congress, in the enactment of the section, to provide a method to enable taxpayers to escape the taxes on profits derived from the sale of a leasehold through the reinvestment of such profits in real property.

Section 112 (f), supra, and its prototype in other revenue acts, “was designed to prevent an inequitable incidence of taxation”, Washington Market Co., 25 B. T. A. 576, 584, and its provisions “are relief provisions by which a taxpayer may postpone the taxation of so much of the gain derived from an involuntary conversion as it uses in replacement.” International Boiler Works Co., 3 B. T. A. 283, 291. Being relief provisions, they are “to be liberally construed to effectuate their purposes”; Paul Haberland,25 B. T. A. 1370, 1378; August Buckhardt, 32 B. T. A. 1272, 1277.

The section must be read and considered in its entirety; and, while it is true, as respondent points out upon brief, that a taxpayer seeking to avail itself of an exemption from tax must come clearly within the terms of the statute allowing the exemption, we are of the opinion (hat this petitioner has done so. It is sufficient answer to respondent’s argument that there was merely a sale to point out that the section does not, by its terms, preclude a sale. On the contrary, it refers specifically to a conversion of property “into money”—the simplest form of a sale. Whether the leasehold which it gave up was, as contended by respondent, merely personal property or not, is probably unimportant, but it was a “chattel real”, an interest in the land, and “it is treated (by the courts of Illinois) in many respects as real estate.” People v. Shedd, 241 Ill. 155; 89 N. E. 332, 335. If the statute required that the money derived from the sale or conversion be invested in “similar” property and stopped there, there would be more substance to respondent’s argument; but it goes further, and, as pointed out by this Board in Paul Haberland, supra, the word “similar” is “followed immediately by the phrase ‘or related’, which * * * considerably broadens the scope of the statute and gives the taxpayer more latitude in making an investment * * As we view the facts before us, the petitioner had an interest in real estate, capable of and being used by it in connection with its business. This interest was sold and the money received was invested by it in another interest in real estate “similar or related in service or use to the property so converted.” That, we believe, is all that is required to entitle petitioner to the benefits of the section under consideration ; and we do not agree with respondent’s contention that the amount received from a sale of a leasehold must be reinvested in another leasehold. The test, as was stated in Washington Market Co., supra, is “whether there is a replacement in the character of the service or use.” Here there was such replacement. Petitioner used the new building for the identical purpose that the old one was used—carrying on its manufacturing business. Under the circumstances it must be held that it is entitled to the benefit of section 112 (f), though in passing it may be remarked that the “benefit” to petitioner may, in the long run be small; for the property which it acquired, has the same “basis”, under section 113 (a) (10) of the Revenue Act of 1928 as the property converted.

But, says respondent, a possible threat of condemnation is not a threat and. “the fact that the railroad company threatened to bring condemnation proceedings is not proof that it would have been successful.” It is stipulated that the railway company “is a public utility corporation authorized by law to exercise the power of eminent domain in the State of Illinois.” A cursory inspection of the statutes of the state bears out such conclusion. We must assume that the railway company would have been successful if it had instituted appropriate proceedings to condemn petitioner’s property. But there need not be an actual condemnation. If the property were conveyed, as a result of “the threat or imminence” of condemnation the statute is satisfied. The letter from the agent of the railway company, set out in full above, if not sufficient to show that condemnation was imminent, does nevertheless contain a distinct threat that condemnation proceedings would be resorted to, if necessary. Under the circumstances we have no hesitancy in concluding that the sale was made because of “the threat or imminence” of condemnation. Piedmont-Mt. Airy Guano Co., 8 B. T. A. 72, cited by respondent is not in point, nor is the conclusion therein reached contrary to the views herein expressed. In that case a fertilizer company sold its property to a sugar company and invested the proceeds elsewhere. It was not contended that the sugar company had the power of eminent domain, nor was it shown that any official action had been taken or was seriously contemplated by the authorities to condemn the property. The Board merely held that the evidence was insufficient to warrant the conclusion that the petitioner sold its property because of the imminence of condemnation proceedings.

No evidence was presented by petitioner as to the cost (or other basis) of the leasehold to it. We must assume therefore that the entire $95,000 received from the railway company represented gain. We have found that it expended $82,574.55 of the amount received in the acquisition of other property similar or related in service or use to the leasehold formerly owned by it. Under the provisions of section 112 (f), supra, petitioner’s gain is not to be recognized to the extent of this expenditure, but is to be recognized in an amount not in excess of the $12,425.45 which petitioner did not use in the acquisition of the new building. It follows that respondent erred in including the $82,574.55 in petitioner’s income for the taxable year.

As to the negligence penalty, counsel for the respondent admitted at the hearing, and the exhibits show, that a disclosure of the receipt of the income involved was made by the petitioner in its income tax return for the taxable year. It has been held that where full disclosure is made and the taxpayer has “reasonable grounds to differ from the conclusion” of the Commissioner that a tax is due, the negligence penalty should not be imposed. Herman Senner, 22 B. T. A. 655, 658; Frank T. Heffelfinger, 32 B. T. A. 1232; affd., 87 Fed. (2d) 991. A similar holding is made here and no penalty will be imposed.

Judgment will be entered under Rule 50.

       Sec. 112. (f) Involuntary conversions.—IÍ property (as a result of * * * an exercise of the power of * * * condemnation, or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, * * * no gain or loss shall be recognized. If any part of the money is not so expended, the gain, if any, shall be recognized, but in an amount not in excess of the money which is not so expended.


author: Sternhagen:

text:
    Thrash Lease Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82904.
    Promulgated August 10, 1937.

      A. Calder Mackay, Esq., for the petitioner.

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

Sternhagen:

After the filing of fiduciary returns as a trust, the Commissioner determined that the petitioner was an association within, section 1111 (a) (2) of the Revenue Act of 1932, taxable as if it were a corporation. The petition is filed in the name of Thrash Lease Trust, the name to which the deficiency notice is addressed, and alleges that it received the deficiency notice; files the petition “to protect its rights”, but “does not admit that it is a taxable entity”; that Gordon Macmillan acquired the Thrash lease; that “petitioner at no time has had any form of organization”, at no time has been engaged in business as an association. All of these allegations are denied.

It is difficult now to know what the position is as to the identity or nature of the taxpayer under the revenue act. Not only is the existence of petitioner seemingly denied, but also the fiduciary returns are repudiated. Both Herbert R. Macmillan, while a witness, and petitioner’s counsel assert that there was no trust; and from this petitioner’s counsel argues that there is no foundation for recognizing a statutory “association.” Who is to be regarded as the taxpayer in respect of the undisputed income or what his or its character is under the tax law, the petitioner does not say. It is suggested that a tenancy in common existed and its taxable character as a partnership is intimated.

Although, from the evidence, the organization is amorphous indeed, there is little doubt that there was an organization of individuals holding transferable shares in a common business enterprise managed by one or two of their number, who distributed the profits proportionately with interests. This is enough to give prima facie substance to the Commissioner’s treatment of it as an association, Morrissey v. Commissioner, 296 U. S. 344; Helvering v. Combs, 296 U. S. 365; Helvering v. Coleman-Gilbert Associates, 296 U. S. 369; Swanson v. Commissioner, 296 U. S. 362; Bert v. Helvering, 92 Fed. (2d) 491, and to require an affirmative showing by the petitioner of attributes and circumstances indicating a different taxable character under the revenue statute. No such showing is in this record, and the determination must stand.

Judgment will be entered for the respondent.


author: Arundell :

text:
    Austin D. Barney, H. Bissell Carey and E. E. Dimon, Executors of the Estate of D. Newton Barney, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71720.
    Promulgated August 13, 1937.

      E. Barrett Prettyman, Esq., for the petitioner.

      L. H. Rushbrooh, Esq., and F. L. Van Haaften, Esq., for the respondent.
   OPINION.

Arundell :

The principal question here is whether the petitioner was carrying on a business so as to come within section 23 (a) of the Revenue Act of 1928, which allows the deduction of ordinary and necessary expenses paid or incurred in carrying on any trade or business.

The decided cases touching upon what constitutes the carrying on of a business do not announce any comprehensive rule that can be readily applied to the varying facts that are presented in this class of cases. There are decisions both ways, with distinctions drawn that make them difficult to apply. The difficulty is recognized in Bedell v. Commissioner, 30 Fed. (2d) 622, where the taxpayer devoted a part of his time to buying and selling securities and real estate. The court said:

* * * A trader on an exchange, who makes a living in buying and selling securities or commodities, may be said to carry on a “business”; a person who frequents brokers’ offices, and continually dabbles in real estate is conceivably quite different. Most men who have capital change their investments, and may speculate all the time; we should hardly call this a business, though the line is undoubtedly hard to draw.

In Harvey H. Ostenberg et al., Administrators, 17 B. T. A. 738, the taxpayer was a capitalist and an investor of money on a large scale. The facts stated in that case are:

* * * His investments covered a wide range of businesses, such as banks, laundries, farms, livestock, mining, oil, and water-softening devices, and included the stocks and bonds of many corporations. He did not devote ail of his time to any one of the enterprises in which he invested, but divided his time among them in order to look after his interests, and all of his transactions were entered into for profit, and they constituted his business and the source of his income. .

On those facts we concluded that the taxpayer was regularly engaged in carrying on a trade or business within the meaning of the net loss provisions of the taxing statute.

In Foss v. Commissioner, 75 Fed. (2d) 326, the taxpayer deducted as a business expense counsel fees incurred in litigation instituted by stockholders of a corporation in which he owned the majority of stock. The taxpayer’s business activities are described by the court as follows:

During the period in question Doss was a man of many interests and activities. He was president of a manufacturing company, of a water company, and of a real estate company. He was director of many other companies, including banks, railroads, and a stockyard. From 1911 to 1913 he was Governor of Massachusetts. He maintained an office and a personal secretary, and he kept books of account. He was a man of considerable property, which was invested in various enterprises; and, after finishing his terms as Governor, he devoted his time to looking after his investments and to the operations of the various corporations in which he was an officer.

In holding that the activities of Foss amounted to the carrying on of a business the court said:

* * * A person of property, who devotes his time to the active management of it and also to active participation in the management of the companies in which his property is invested, and who maintains an office for that purpose where he spends a substantial part of his time, is carrying on business within the meaning of this statute. If Foss had employed somebody else to look after his affairs, that person would certainly have been engaged in business ; and we think that Foss, in attending to his affairs himself, was equally engaged in business. The line comes between those who take the position of passive investors, doing only what is necessary from an investment point of view, and those who associate themselves actively in the enterprises in which they are financially interested and devote a substantial part of their time to that work as a matter of business. The maintenance of an office for this purpose, though not conclusive, is significant. We are of opinion that Foss was carrying on business within the meaning of the statute.

In the case of L. T. Alverson, 35 B. T. A. 482, the taxpayer was a lawyer engaged in the practice of his profession. That was his principal business. He also bought and sold substantial quantities of securities on the New York Stock Exchange. In the taxable year he paid $600 for special statistical service, advice and information in handling his securities to the best advantage to gain profit and minimize his losses. In that year he had some seventy transactions on the stock exchange, involving more than $150,000 in sales. In allowing a deduction for the $600 as a business expense the Board said:

* * * The word “necessary” as used in the statute means “appropriate” and “helpful.” Blackmer v. Commissioner, 70 Fed. (2d) 255.
Situated as petitioner was with reference to his business affairs and his method of handling them, he deemed it appropriate and helpful to make the expenditure in order to realize maximum returns. Profits made on his investments in his dealings on the stock exchange arc taxable, and losses minimized serve to increase his taxable net income from other sources. It is not material that petitioner had other or larger business interests in which he was engaged. The statute is not so restricted as to confine deductions to a single business or principal business of the taxpayer. A taxpayer may carry on more than one trade or business at the same time. “Any trade or business” is the broad language of the statute.
We, therefore, conclude that taxpayer, in dealing on the stock exchange to the extent he was during the taxable year, was carrying on a trade or business within the meaning of the statute, and that the amount expended for statistical services, information and advice was reasonable, in view of the volume of' business transacted, and was an ordinary and necessary expense in connection with the business and the deduction should be allowed.

Considering the holdings above, particularly the Foss and Aimerson cases, we are of the opinion that the petitioner was carrying on a business within the meaning of section 23 (a). He was not, in the language of the Foss case, a passive investor “doing only what is necessary from an investment point of view.” Some idea of the extent of his activity is conveyed in the fact that he built a fortune estimated at $7,000,000 out of the sum of less than $100,000. In 1930 the value of stocks and bonds was nearly $5,000,000. He owned over 40 different stocks and more than 50 different issues of bonds. He was president and a director of one of the companies in which he owned stock and was a director in 5 others. During the year he purchased over 20 lots of securities and sold or otherwise disposed of over 20 lots. The purchases made were in excess of $640,000; the securities sold had a book value of $297,000. Cf. Alverson case, supra. To carry on these activities the petitioner maintained an office, which, as said in the Foss case, while not controlling, is significant.

While no direct issue is raised as to the reasonableness of the salary paid Dimon, there is evidence to establish that it was a reasonable amount. It was testified that the fees of the bank that had formerly handled petitioner’s securities would have amounted to more than the amount of Dimon’s salary.

We accordingly hold that the petitioner was carrying on a business and that the amount paid to Dimon was reasonable compensation, which under the statute is allowable as an expense deduction.

Our conclusion on the main issue makes necessary a consideration of the alternative question raised by the respondent; that is, whether the petitioner is entitled to the benefits of the capital gain provisions with respect to the amount he reported as capital gain. Section 101 (c) (8) of the Revenue Act of 1928 excludes from the category of capital assets “property of a kind which would be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business.” The first part of the quotation excludes dealers who may use inventories in the determination of their income. It has not been established here, and it can not be gathered from the evidence, that petitioner was a dealer. His “dealings”, that is, his purchases and sales, were only one phase of his business. Nor has it been established that his securities were held “primarily for sale in the course of his trade or business.” At least some of them may have been held to permit his retention of office or directorships in the corporations. His largest stockholding was in the family holding corporation. This stock undoubtedly was not held primarily for sale. His business was primarily that of managing his investments. His purchases and sales, while substantial in number and amount, were incidental to his main business. There is nothing in the record to indicate that he held himself out. as a dealer in securities. Cf. Francis M. Weld, 31 B. T. A. 600. We hold that the respondent has not established that the petitioner incorrectly reported a capital gain.

Decision wild be entered under Rule 50.


author: Arundell:

text:
    M. J. Caldbeck Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82120.
    Promulgated August 19, 1937.

      Ralph J. Belville, G. P. A., for the petitioner.

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

Arundell:

The petitioner in this case realized an admitted gain of $21,409.54 from the proceeds of the insurance carried on its building that was destroyed by fire. This gain it says is a nonrecognized gain under the provisions of section 112 (f) of the Revenue Act of 1932. That section, set out in full in the margin, provides that, where property is involuntarily converted into money which is forthwith in good faith, under the Commissioner’s regulations, expended in the acquisition of other property similar or related in service or use, or in the establishment of a replacement fund, no gain or loss shall be recognized.

We think it beyond serious question that the old and the new buildings were “similar or related in service or use” within the meaning of the statute. Both were business properties; in the old, part of the income was from rents from stores on the ground floor and part from the operation of a motion picture theater; in the new, the income was from rents from ground floor stores. There were differences in the type of construction and the height and depth of the buildings, but the statute does not require exact physical duplication. Cotton Concentration Co., 4 B. T. A. 121.

We do not understand the petitioner to seriously contend that there was an actual expenditure “forthwith” within the meaning of the statute. More than four years elapsed between the receipt of the insurance and the expenditure in the construction of a building to replace the one destroyed. We have heretofore construed the term “forthwith” to mean: “As soon as by reasonable exertion, confined to the object, it may be accomplished.” Chickasha Cotton Oil Co., 18 B. T. A. 1144; Paul Haberland, 25 B. T. A. 1370. In August Buckhardt, 32 B. T. A. 1272, we held a period of two years to be within the statutory term. However, in' that case the taxpayer, during the two-year period, prosecuted diligently his search for property similar to the property condemned. The facts here are different. It was entirely within the petitioner’s power to construct a new building immediately following the destruction of the old. The delay was occasioned by the apprehension that tenants could not be found. This, in our opinion is vastly different from a delay occasioned by inability to locate similar property as in the Buckhardt case. We are aware of the economic conditions existing in 1932 and realize that hesitancy to expend money in new construction was a natural consequence of those conditions. Giving full recognition to those conditions and also to the decisions holding the involuntary conversion section to be a relief provision, we can not persuade ourselves that money held for more than four years before being expended has been expended “forthwith.”

There is left the question of whether the petitioner “forthwith” established “a replacement fund” as permitted by the statute and regulations. The petitioner did two things which it points to as bringing it within the statute. First, it invested some $30,000 of the proceeds of the insurance in Federal and municipal bonds in 1932 and held those bonds, with slight changes to take care of re-demptions, through 1934 and continued to hold $25,000 of bonds through 1935. Second, it set up an account called “reserve for reconstruction” in the amount of the profit realized, $21,409.54, and carried that account, with slight changes of less than $200, through the year 1935.

Article 580 of Regulations 77 provides that where it is not practicable to replace or restore the converted property, the taxpayer may obtain permission from the Commissioner to establish a replacement fund in his accounts. In such case, the taxpayer is required to make application on form 1114 for permission to establish a replacement fund and to furnish a surety bond in an amount not in excess of double the amount of estimated tax that would be payable if no replacement fund w-ere established. Section 112 (f) of the statute makes nonrecognition of gain dependent on compliance with the Commissioner’s regulations.

In Francis V. duPont et al., Coexecutors, 31 B. T. A. 278, we pointed out that it was not the intent of the statute to completely exonerate involuntary gains from tax, “but rather to condition the extent of the relief upon the taxpayer’s own actions after realizing the gain.” Continuing in that case we said:

* * * In other words, while recognizing the inequity of taxing involuntary gains in all cases to the same extent as voluntary gains, once the gain is realized the taxpayer has several avenues open to him, any one of which ho may voluntarily take and thus by his own action place a limit on the amount of tax he will be required to pay. He may elect to pocket his gain and subject it to tax in its entirety. He may, under the respondent’s regulations, replace the converted property at a cost at least equal to the proceeds of the conversion, or if this is not practicable, he may establish a replacement fund and thus escape any tax. Or he may replace in part and become subject to tax on a part of the gain realized.

In allowing a taxpayer these options to fix for himself the amount of his tax and the year of taxation it is not unreasonable that the Government should safeguard its revenues by provisions to insure payment of whatever amount is ultimately due based on the taxpayer’s election. This has become particularly important under the recent taxing acts, which have shortened the period in which the Government may assess and collect. The regulations promulgated by the Commissioner are designed to assure ultimate payment of whatever is due when the taxpayer eventually replaces. They ask nothing more than that and they ask for no advance deposit or payment. Nothing in the regulations is pointed out as being unreasonable or working a hardship on the taxpayer. We think it not unreasonable to require compliance with the simple rules laid down by the regulations as a condition to the postponement of tax on a realized profit.

It is plain that in this case there has been no compliance, nor any gesture towards compliance, with the regulations. The petitioner neither sought nor obtained permission to establish a replacement fund nor did it file a bond covering the tax. In addition to the matter of failure to comply with the regulations, it is at least doubtful whether the investment of part of the insurance proceeds in bonds can be regarded as the establishment of a replacement fund. That investment was not marked on the books as being held for any particular purpose, and for the entire period of four years that the investment was held it was available for any purpose. No resolution of the directors limited its use or required it to be held for any particular purpose. The account designated “Reserve for Reconstruction” can not be regarded as a replacement fund within the statute. It is to be noted that the amount so labeled was only the amount of the profit realized from the insurance proceeds. We do not believe the statute contemplates that profit shall escape taxation by labeling it a reserve. The statute does not speak of a reserve. It provides for a replacement fund. The reserve carried on the books in this case can not be treated as meeting the statutory requirement of a replacement fund.

Decision will be entered for the respondent.

       Sec. 112. (f) Involuntary Conversions.—If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, no gain or loss shall be recognized. If any part of the money is not so expended, the gain, if any, shall be recognized, but in an amount not in excess of the money which is not so expended.


author: Leech :

text:
    Percy C. Madeira, and His Wife, Elise D. Madeira, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82512.
    Promulgated August 19, 1937.

      William R. Spofford, Esq., for the petitioners.

      D. A. Taylor, Esq., for the respondent.
   OPINION.

Leech :

Since the allowance of a deduction from gross income is a matter of legislative grace, a taxpayer seeking such advantage must bring himself squarely within the law authorizing it. New Colonial Ice Co. v. Helvering, 292 U. S. 435. The right to the disputed deduction is claimed under section 23 of the Revenue Act of 1928.

The existence of the loss in question, and thus its deductibility, depend upon whether the transaction detailed in the findings of fact constituted a bona fide sale of stock by petitioner, Percy C. Madeira, to the trust.

Petitioners argue that Percy C. Madeira intended and completed a gift of the $3,100 he passed to the trust as its corpus, which the trust then used in a bona fide purchase of the stock. Respondent disputes that premise and contends that such petitioner did not intend or consummate a gift of the $3,100 to the trust but that he intended to and did retain the right of return of that money in exchange for the 1,500 shares of Madeira, Hill & Co. stock, and that the transfer of the stock and not the money constituted a gift. He takes the additional position, apparently, that, assuming there was a gift of $3,100, there was no bona fide sale of the stock. In this discussion, the latter position is not considered.

The inquiry thus involves only an issue of fact. Respondent’s determination is presumed to be correct, and the petitioners have the burden of proving it incorrect. Botany Worsted Mills v. United States, 218 U. S. 282. We have decided that petitioners have not overcome this presumption and that the transfer in question was a gift and not a sale of the stock.

In describing a gift, the court in Beaver v. Beaver, 117 N. Y. 421, 428; 22 N. E. 940, states what we believe is the law, as follows:

There must be on the part of the donor an intent to give, and a delivery of the thing given, to or for the donee, in pursuance of such intent, and on the part of the donee, acceptance. * * * But delivery by the donor, either actual or constructive, operating to divest the donor of possession of and dominion over the thing, is a constant and essential factor in every transaction which takes effect as a completed gift. Anything short of this strips it of the quality of completeness which distinguishes an intention to give, which alone amounts to nothing, from the consummated act, which changes the title. * ⅜ *

Little, if anything, is left to the imagination by this record.

The petitioner, Percy C. Madeira, and his son, Percy C. Madeira, Jr., one of the trustees, testified openly and rather fully. The picture, thus presented, is clear.

The only purpose for the creation of the trust was its acquisition of 1,500 shares of Madeira, Hill & Co. stock, which Percy C. Madeira wished to transfer, within his family, in the form of a sale in order to support a loss deduction for income tax purposes. Of course, the purpose of tax avoidance does not vitiate the legal consequences of the transaction. Gregory v. Helvering, 293 U. S. 465. But, when such purpose is admittedly present and the transaction is between the immediate members of a family, as here, such transaction is subject to careful scrutiny to determine whether it be, in fact as well as in legal form, what its participants name it. Benjamin T. Burton, 28 B. T. A. 1242; James L. Robertson, 20 B. T. A. 112; Charles S. Hempstead, 18 B. T. A. 204; Albert W. Finlay, 17 B. T. A. 828.

Here, the purpose of the creation of the trust, before its execution and acceptance, was known not only to petitioner, Percy C. Madeira, but to both of his sons, who were named its trustees at the father’s direction. The trust instrument, although providing that its distributions until termination of the trust should be made from income, did not limit the trustees in any manner in the investment of the corpus, and left them free from responsibility in the exercise of their discretion in that investment. Cf. Guaranty Trust Co. of New York et al., Executors, 35 B. T. A. 916.

Then, despite the trust provision that its distribution should be made from income, and without consideration of any other use of the corpus, the trustees, on the day following the execution and acceptance of the trust invested $3,000 of the $3,100 corpus in a common stock that had paid or declared no dividends since 1925. No other property has ever been acquired by the trust. This so-called investment was made with money, all of which was furnished by Percy C. Madeira, petitioner, the alleged seller, not for the convenience of the parties but out of necessity. Cf. Commissioner v. Behan, 90 Fed. (2d) 609, affirming 32 B. T. A. 1088. And the price at which the stock is alleged to have been sold is said to have been fixed by the statement of the secretary of the company that at some indefinite time in the past, under circumstances, none of which were mentioned, a sale of such stock, the amount of which is likewise not stated, occurred at that price.

True, this statement was supplemented by the observation of Percy C. Madeira, Jr., one of the trustees and the son of the petitioners, who was also one of the vice presidents of the company, from his general knowledge of the company’s condition, that that amount reflected the “true value” of the stock. But it should not be forgotten that it is clearly proven that the amount of loss which Percy C. Madeira desired to establish, the number of shares he should sell to support that loss and the amount of the corpus of the trust, which was so significantly similar to the sum used in the alleged stock purchase, were all decided before the execution and acceptance of the trust. From this it is difficult, if not impossible, to believe that the price per share at which the stock should be purportedly sold was not definitely fixed before the creation of the trust and the trustees’ receipt of its corpus. Confirming this conclusion is the testimony of Percy C. Madeira that the amount of the corpus was fixed at $3,100 so that there “should be some unexpended balance in that [the trust’s] bank account.”

The manner in which the so-called selling price of this stock was fixed, is significant, particularly in view of the intimate'relationship of the parties to the transaction, the substantial size of the block of stock involved and the fact that all the funds with which the alleged sale was effected were furnished by the petitioner, Percy C. Madeira, the seller. Cf. Commissioner v. Behan, supra.

And, a circumstance not present in any cited case, and of particular significance, is the testimony of Percy C. Madeira, Jr., one of the trustees and the son of petitioners, and Percy C. Madeira, the petitioner, the only reasonable effect of which is, that the creation of the trust and the contested acquisition of the 1,500 shares of Madeira, Hill & Co. stock from petitioner, Percy C. Madeira, constituted a single, inseparable plan and transaction to which the petitioner, Percy C. Madeira, and the trustees, were parties. That is the premise of respondent’s determination. We think it is not disturbed here. From this, it follows that the implied obligation of the trustees to use the corpus of the trust in its acquisition of the Percy C. Madeira stock, the consideration for which was the creation of the trust, was essentially an inherent part of that one plan and transaction, and became effective upon the acceptance of the trust and its corpus by the trustees. See Hazelton Corporation v. Commissioner, 89 Fed. (2d) 513; Prairie Oil & Gas Co. v. Motter, 66 Fed. (2d) 309; Edwin L. Dana, 36 B. T. A. 231.

Nor do we think, in view of this entire record, this obligation- was nullified or affected by the trust provisions granting the trustees absolute discretion in the investment of the corpus of the trust. This conclusion is strengthened rather than weakened by the oral reiteration of that provision and its purported acceptance by Percy C. Madeira, before the execution and acceptance of the trust and the transfer of its corpus.

Since the obligation of the trustees to use the corpus of the trust in the purchase of the stock of Percy C. Madeira, petitioner, unquestionably reflected a corresponding retained right of that petitioner in the $3,100 transferred to the trust as its corpus, Percy C. Madeira did not thus intend to nor did he divest himself of nor deliver to the trust dominion or control over that money. The transfer was a gift, not of the money but of stock. Guaranty Trust Co. of New York et al., Executors, supra. Cf. F. Coit Johnson, 33 B. T. A. 1003; affd., 86 Fed. (2d) 710. Tbe cases cited by the petitioner are distinguishable on their respective facts. The facts in each of them are measurably stronger for the position of the petitioners here than those revealed in the present record.

As heretofore stated, the controlling question here is one of fact. Thus, after a careful consideration of the stipulation and the evidence, we have concluded that the presumption favoring respondent’s determination has not been overcome, and have therefore found that the transaction giving rise to the present controversy, in which the trust acquired 1,500 shares of Madeira, Hill & Co. stock from the petitioner, Percy C. Madeira, was a gift and not a bona fide sale of that stock.

It follows that no deductible loss was sustained.

Decision will be entered for the respondent.


author: Van Fossan:

text:
    Julius F. Holmes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 71345.
    Promulgated August 24, 1937.

      Neilson Olcott, Esq., Charles B. McInnis, Esq., and Randolph Paul, Esq., for the petitioner.

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

Van Fossan:

This proceeding was brought to redetermine a deficiency in the income tax of the petitioner for the year 1930 in the sum of $51,801.55.

The sole issue is the deductibility of a net loss of $1,198,200 sustained in 1929, of which $565,329.57 is sought to be carried forward as a deduction from the petitioner’s gross income for the taxable year.

In 1924, the petitioner passed his entrance examinations for Princeton University, but chose to go to work in the plant of the American Diamalt Co., a subsidiary of-the Fleischmann Co., which had been founded by his grandfather. In the early part of 1925 he returned to New York to work in the manufacturing department of the Fleischmann Co. He was one of the sons who were to assume the management of that department and eventually he was to become its head. Its manager apparently resented his presence and assigned him no work. He thereupon became dissatisfied and decided to enter some other business.

In the fall of 1925 the petitioner discussed with his father-in-law, who maintained his stock brokerage office with Libaire & Co., the type of business which appealed to the petitioner.. After a time he decided to engage in the business of buying and selling corporate stocks and obligations. Thereupon he began to investigate the stocks of certain companies, the type and character of the management of the companies, their earning record, sales, sales outlook and general business conditions surrounding them, and to obtain information and advice from his father-in-law and friends.

The petitioner used his own money from his income account and also money borrowed by hypothecating securities constituting his principal. All purchases were made with the intention of disposing of the stock at a profit. The petitioner bought both listed and unlisted stocks. Practically all transactions were in lots of 100 and on margin.

The petitioner’s activities in purchasing and selling stock, largely of representative companies listed on the Exchange, may be summarized as follows:

In addition to purchasing and selling the securities comprehended in the above summary the petitioner also engaged in the following transactions:

1925: Purchased unlisted common stock of the Miami Laundry Co. Later he exchanged it for land at Montauk, Long Island.

1926: With three others the petitioner formed the Club Match Corporation for the purpose of building a match-packing machine. The stock was unlisted. The machine was a failure and the venture was abandoned.

1928: The petitioner became interested in the oil hydrogenation process and advanced $10,000 to the inventor, receiving unlisted stock in the Wade Patent Holding Co. He later furnished $22,000 under like conditions. Subsequently he received 16,000 shares of stock of the Standard Hydrogenation Co., which was formed to take over the activities of the Wade Patent Holding Co. and to offer its own stock to the public.

1929: In February the petitioner purchased 5,000 shares of the common stock of the Merlin Products Co., which owned a soap-manufacturing process. In the fall the petitioner purchased for $41,000, 100 shares of the unlisted preferred stock of the Union Solvents Co., receiving 1,000 shares of common stock as a bonus. He also purchased stock of the Super Steam Co., costing $2,000.

At the suggestion of friends and former classmates, the petitioner, on January 3, 1927, purchased 83,834 shares of stock of the Domestic Electric Refrigerator Corporation (hereinafter called the Domestic Co.), a company just formed to take over some patents. He then understood that a public offering of the stock would be made. In April he became dissatisfied with the progress and operation of the company but still believed implicitly in its possibilities. In May 1927 he was the largest single stockholder and was made president of the company. Thereupon, he devoted considerable time in an effort to correct the manufacturing conditions and, ultimately, to straighten out_the organization itself.

The petitioner’s purchases of Domestic Co. stock in 1927 were as follows:

At the petitioner’s request, in July J. M. Eriksen. & Co. made a public offering of 50,000 shares of the Domestic Co.’s stock at $350 per share, but was unsuccessful in disposing of any of the stock. The petitioner then purchased the remainder of the stock held by an associate and obtained complete control of the company. He considered that the only possible way to protect his stock purchases was to buy out the holdings of that associate and his friends. The petitioner advanced funds to the company, guaranteed its accounts and extended his personal credit for its benefit.

After the stock purchase he secured John F. Plummer to build up the organization of the company and to attempt to salvage the petitioner’s stock holdings. Plummer was a man of experience in organization work. He assured the petitioner that the company’s affairs could be adjusted so that he would recoup the expenditures made for the company and a proper stock offering could be presented to the public. Plummer suggested that the name of the company be changed to Holmes Products, Inc., hereinafter called the Holmes Co.

During 1928 the petitioner concluded that the Domestic Co. would not be a profitable venture and decided to discontinue it and take over all its assets. He acquired those assets in exchange for his notes against the company. The Domestic Co. was liquidated during 1928 and its assets transferred to the Holmes Co. in exchange for 3,077 shares of the latter company’s stock issued to the petitioner. During the same year he also purchased 2,245 additional shares for $224,500. The petitioner and his mother were the only stockholders of the Holmes Co.

In the summer of 1928 the petitioner sought to make a public offering of the Holmes Co. stock and to that end conferred with Campbell & Patterson, a firm engaged in marketing stock to the public. No offering was made because the company was not in a condition to justify it.

After the petitioner’s original acquisition of the 3,017 shares of the Holmes Co. stock he advanced further funds to that company as they were required by it and received its stock for such advances. He also guaranteed the company’s accounts and its manufacturing and material supply contracts and extended his personal credit for its benefit. This process continued as long as the company existed. The petitioner took out a life insurance policy for $1,625,000 with the Holmes Co. as beneficiary.

In the summer of 1929 the petitioner determined that the Holmes Co. could not be made successful. He, therefore, wound up its affairs and liquidated it. He sustained a loss of $1,198,200 in 1929 by reason of the worthlessness of his Holmes Co. stock. The excess of such loss over his income for 1930 was $565,329.57.

The petitioner contends that $565,329.57 of a net loss of $1,198,200 sustained by him in 1929 should be deducted from his taxable income for the year 1930, under the provisions of section 117 (b) of the Revenue Act of 1928 and article 651 of Regulations 74. He asserts that the loss was attributable to the operation of a trade or business regularly carried on by him, viz., the business of buying and selling corporate securities.

The respondent concedes that the petitioner sustained a loss of $1,198,200 in 1929 but denies the deductibility of any portion of that loss in determining 1930 net income, holding that the activities of the petitioner did not constitute a trade or business regularly carried on by him and that even if it had been so carried on by the petitioner the loss itself was not attributable to the business.

The. record establishes that petitioner’s “trade or business” was buying and selling stocks and securities. It is a fair conclusion also that his initial purchase of the Domestic Co. stock was in accord with that business. It does not follow, however, that his every subsequent act in relation to that stock is to be construed as an incident to the carrying on of the business. The loss in question did not arise from the purchase of the stock of the Domestic Co. It occurred when the Holmes Co. was wound up. In the period between the original purchase and the final wind-up, much had happened.

The record reveals that the petitioner became interested in the matter of electric refrigeration and in the management of the Domestic Co. He discovered that the affairs of the company were not being conducted properly and that the value of his stock was diminishing. Instead of selling the stock and taking such loss as he would have been compelled to suffer, he purchased more stock, sank more money in the enterprise in order to gain control of the company, and took over its management. He underwrote the Hohnes Co. by taking out an insurance policy on his life for $1,625,000. Such conduct was quite different from his conduct as a trader in securities.

We are of opinion that the statute grants permission to carry forward net losses to those who are engaged in a trade or business as it is ordinarily carried on and understood. The petitioner did not follow his own custom in his treatment of the Domestic Co. stock. His other purchases and sales of stock were made in lots of 100 on margin in the open market. His purchases of Domestic Co. stock were out of proportion to and out of harmony with his transactions in listed stocks and his customary trading on the market. No shares of the Domestic Co. stock were offered for sale, and his attitude toward and interest in the affairs and success of that company were entirely different in character from his conduct toward his market trading transactions. His heavy investment in the stock and his attention to the company affairs were undoubtedly prompted by a business motive, but to say that is not to hold it to be a trade or business regularly carried on.

The petitioner’s occasional purchases of unlisted securities were usually as investments in concerns in which his friends were interested. He did not “deal” in such stocks as he did in the securities which he acquired in the usual manner.

Thus, Ave can not say that the petitioner’s transactions in the Domestic Co. and Holmes Co. stock came within the category of purchases and sales of stock and securities, the business in which he claims to have been engaged and which, , he asserts, entitles him to the benefit of the provisions of section 117 of the statute. Nor was the loss incurred in any trade or business regularly carried on.

The facts in the case before us bear a striking similarity to those in Wade L. Street et al., Executors, 26 B. T. A. 17 (affirmed per curiam, United States Circuit Court of Appeals, Second Circuit, 67 Fed. (2d) 1012); certiorari denied, 292 U. S. 637. In that case we said:

The petitioners next contend that the loss was sustained by the decedent in the course of his business of buying and selling securities for profit, which was a business regularly carried on by him over a period of years. We will assume, since we need not decide, that the decedent’s activities in buying and selling securities for profit were a business regularly carried on by him during the year 1923. The statute requires, in addition, that the net loss result from the operation of the business. It may include losses sustained from the sale of capital assets used in the conduct of such trade or business. The decedent’s ownership of the T. A. Snider Preserve Company stock was quite unlike his ownership of other stocks. He did not acquire or own the Preserve Company stock for the same purposes which he acquired and owned the other stock. Ho was not an ordinary stockholder in the Preserve Company as he was in the other companies. He was the principal, if not the sole owner of the company, its president, treasurer, and general manager. He was the principal person in the company and conducted its business affairs for it. The decedent, in his stock market activities, purchased only securities listed on the New York Stock Exchange; seldom sold securities in blocks larger than 100; was prompted in his purchasing and selling by market considerations; and traded actively. He made no effort to sell the Preserve Company stock in small blocks. It was not listed on the New York Stock Exchange. He did not buy and sell it depending upon market fluctuations. He made no effort to sell less than all of his stock in this company, i. e., either complete ownership of the corporation or at least a majority interest. The Preserve Company stock was not an asset used in the conduct of the business of buying and selling stocks and bonds, but was an asset quite apart from that business and held for an entirely different purpose and under different circumstances. It had no relation whatever to that business. Some of the capital assets used in the conduct of that business were shares of stock similar to the Preserve Company stock, but there the similarity ends. Under such circumstances we hold that the loss did not result from the operation of a business of buying and selling securities regularly carried on by the decedent.

See also Leon C. Coblens, 27 B. T. A. 215; A. P. Hunt, 33 B. T. A. 946. Cf. Ida A. Van Dyke, 23 B. T. A. 946 (affirmed per curiam, 63 Fed. (2d) 1020, and 291 U. S. 642).

The deduction claimed is disallowed.

Decision will be entered for the respondent.

       SEC. 117. NET LOSSES.
      (a) Definition of “net loss.”—As used in this section the term “net loss” means the excess of the deductions allowed by this title over the gross income, with the. following exceptions and limitations:
      (1) Non-business deductions.—Deductions otherwise allowed by law not attributable to the operation of a trade or business regularly carried on by the taxpayer shall be allowed only to the extent of the amount of the gross income not derived from such trade or business;

      (b) Net loss as a deduction.—If, for any taxable year, it appears upon the production of evidence satisfactory to the Commissioner that any taxpayer has sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year (hereinafter in this section called “second year”), and if such net loss is in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year (hereinafter in this section called “third year”) ; the deduction in all cases to be made under regulations prescribed by the Commissioner with the approval of the Secretary.

       Art. 651. Net losses, definition and computation.—The term “net loss” as used in section 117 applies to a net loss during the taxable year in a trade or business regularly carried on by the taxpayer. Included therein are losses from the sale or other disposition of real estate, machinery, and other capital assets used in the conduct of such trade or business. See section 101 and article 503 with reference to the deduction of capital net losses. In order to be entitled to claim an allowance for a “net loss” the taxpayer must have suffered an actual net loss in a trade or business during the taxable year. The amount properly allowed may be neither the loss reflected by the return filed for the purpose of the income tax nor the net loss shown by the taxpayer’s profit and loss account, but is to be computed according to the Act.


author: Mellott :

text:
    Pennsylvania Water & Power Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56720.
    Promulgated August 24, 1937.

      Edwin M. Sturtevant, Esq., and Clyde T. Warren, Esq., for the petitioner.

      William E. Davis, Esq., for the respondent.
   OPINION.

Mellott :

The Commissioner disallowed several hundred thousand dollars, claimed by petitioner as deductions from its gross income in its return for the year 1928, and determined a deficiency in income tax against it for said year in the amount of $86,508.25. He concedes that he erred in disallowing $399,900.10 but contends that a deficiency of $39,675.82 exists by reason of the fact that $337,659.52 of the amount deducted by petitioner was improperly deducted and should be included in its taxable income. All of the facts were stipulated. We set out herein the portion of the stipulation especially pertinent to the issues raised.

1. Prior to 1924, petitioner generated all electricity sold by it exclusively by water power at its hydroelectric plant located on the Susquehanna River at Holtwood, Pennsylvania. The amount of electrical energy generated at Petitioner’s hydroelectric plant varied from time to time due to changing river conditions. When the flow of the water in the Susquehanna River was high a maximum amount of electrical energy could be generated, and when the water was low, or ice had accumulated at the dam, the output of the plant was materially reduced. In order to supply Petitioner’s customers with adequate and continuous service, and utilize the river flow to the best advantage, it became necessary to provide an auxiliary supply of electrical energy generated by steam.
2. Petitioner was advised by its counsel that it had no corporate powers to engage in the business of generating electricity by steam, and that it would be necessary to incorporate a subsidiary to carry on this activity. Accordingly, on August 9, 1924, Holtwood Power Company, hereinafter referred to as the “Holtwood Company,” was incorporated under the laws of the Commonwealth of Pennsylvania, with an authorized capital of $1,500,000 consisting of 15,000 shares of the par value of $100 each. All of these shares were purchased by Petitioner and 50 of the shares were placed in the names of seven directors in order to qualify them as directors, Petitioner, however, remaining the equitable owner of the said 50 shares. With the funds paid by Petitioner to the Holtwood Company for the capital stock, and the proceeds received from the sale of the bonds hereinafter mentioned, Holtwood Company erected the auxiliary steam generating plant on a site immediately adjacent to Petitioner’s hydroelectric plant.
3. By an agreement between Petitioner and the Holtwood Company, dated August 26, 1924, a copy of which is attached hereto as “Exhibit No. 1,” which agreement ran to January 1, 1975, Holtwood Company agreed to deliver to Petitioner, on its order, electric power up to the full capacity of the steam generating plant, and Petitioner agreed to pay, or provide for the payment, monthly of every obligation and expense of the Holtwood Company, and a net return of 8% annually upon the par value of all its securities at any time outstanding. Among the items enumerated in the agreement to be paid by Petitioner were (1) “a sum to provide for amortization of debt, discount and security issue expense,” and (2) “the expenses attending the issue, registration and transfer of the capital stock and bonds ⅜ ⅜ * now or hereafter issued and outstanding, and all interest on its bonded or other indebtedness at any time outstanding or existing, as and when said several interest payments may become due and payable.”
From the date of completion of the Holtwood Company's steam plant on August 16, 1925, to the date of the consummation of the “short form of merger,” hereinafter mentioned, of the Holtwpod Company into Petitioner (December 21, 1927), all the electric energy generated at the steam plant was delivered to Petitioner. Petitioner’s officers were officers of the Holtwood Company, and the Holt-wood Company, during its entire existence, was managed and the steam plant operated by Petitioner’s officers and employees. The officers of the Holtwood Company did not receive any salaries from that Company and the said Company did not have any employees. Petitioner, however, increased the number of its employees in order to operate the steam plant. The steam plant of the Holtwood Company was operated only at such times as conditions of river flow made it necessary for Petitioner to utilize an auxiliary supply'of electric energy. It was operated at all times as a department of Petitioner.
4. For the purpose of providing part of the funds for the construction of the steam power plant, Holtwood Company executed a mortgage and deed of trust to the New York Trust Company, Trustee, dated September 1, 1924, whereby it conveyed all its property to the said trustee for the purpose of securing bonds to be issued under said deed of trust not in excess of $25,000,000 at any one time outstanding. A copy of the said deed of trust is filed herewith, marked “Exhibit No. 2.” The deed of trust (page 15) provided that the bonds might be issued in one or more series; that a series of bonds limited to $2,750,000 in aggregate principal amount should be designated “Series A” (page 16) ; that Series A bonds should be dated September 1, 1924 (page 17), should bear interest at the rate of six per centum (6%) per annum (page 16), should mature September 1, 1954 (page 16), and should be redeemable at the option of the Holtwood Company, as a whole or in any part, on any interest date prior to maturity at the principal amount thereof, together with a premium of seven per centum (7%) of the principal amount thereof in the case of bonds redeemed on or before September 1, 1929 (page 17), which premium was to be reduced one-fourth of one per cent, on March 1, 1930, and on the first day of March in each year thereafter until March 1, 1953, when the redemption price would be 101 percent, (page 17).
5. Subsequent to the execution of the said deed of trust, the Holtwood Company sold to the public $2,750,000 par value of its Series A 6% First Mortgage Sinking Fund Gold Bonds, dated September 1, 1924, maturing September 1, 1954, and received therefor a cash consideration of $2,612,500.
6. The issuance of the Holtwood Bonds comprehended a financing cost of $162,749.87 represented by discount and expenses as follows:
7. This amount of $162,749.87 was set up on the books of the Holtwood Company as “Unamortized Bond Discount and Expense.” Each year from 1924 to 1927, inclusive, the discount and expense was amortized on the books of the Holtwood Company by charging off an aliquot portion of the said discount and expense based on the life of the bonds.
8. The Holtwood Company had no income other than payments made to it by Petitioner pursuant to the agreement dated August 26, 1924, above referred to and filed herewith as “Exhibit No. 1.”
9. Each year from 1924 to 1927, inclusive, a consolidated income tax return was filed for Petitioner and the Holtwood Company. In the said income tax returns the discount and expense, applicable to the Holtwood Bonds, was pro-rated or amortized by taking as deductions in each of said years an aliquot portion of the said discount and expense based on the life of the bonds.
The Petitioner was required by the agreement of August 26, 1924, to make payments to the Holtwood Company on ¿ccount of the amortization of bond discount and expense, which payments were deductible from Petitioner’s gross income as ordinary and necessary business expenses (cost of power), and the Holtwood Company reported these payments as income, which were offset by its deductions on account of amortization of discount and expense. The said agreement ran to January 1, 1975 and the Holtwood Bonds matured September 1, 1954.
10. After the incorporation of the Holtwood Company, Petitioner was advised by its counsel that Petitioner and the Holtwood Company could not consolidate or merge because they were not engaged in similar businesses, since Petitioner had power to supply water to the public, which power the Holtwood Company did not. possess. On June 26, 1926, the Supreme Court of Pennsylvania, in the case of York Haven Water and Power Co. et al. v. Public Service Commission of Pennsylvania et al., 287 Pa. 241, 134 Atl. 419, decided, under similar facts, that such companies might consolidate or merge provided the power to supply water be legally discarded. On October 4, 1927, pursuant to the holding of the Court in that case. Petitioner surrendered its corporate power to store, transport and supply water in accordance with the procedure prescribed by the corporation law of Pennsylvania.
Thereafter a “short form of merger” of the Holtwood Company into Petitioner was effected under Section 23 of the Act of the Commonwealth of Pennsylvania of April 29, 1874, as amended by Section 5 of the Act of April 17, 1876, and the Act of June 2, 1915, a copy of which is filed herewith as “Exhibit No. 3.” Pursuant to and in accordance with the procedure prescribed by the said Act, as amended, Holtwood Company, by deed dated December 21, 1927, transferred all its franchises and property, real, personal and mixed to Petitioner, the sole consideration for the transfer being the delivery to the Holtwood Company of all its capital stock, and Petitioner assuming the indebtedness of the Holtwood Company. Thereupon, pursuant to the provisions of the Act of 1874, as amended, Holtwood Company, by operation of law ceased to exist. All the returns and certificates relating to the said “short form of merger,” required by the said Act to be filed, were duly filed in the Office of the Secretary of the Commonwealth.
11. In determining the income tax liability of Petitioner and the Holtwood Company for the year 1927, during which year the “short form of merger” of the Holtwood Company into Petitioner was consummated, the said companies and the Respondent treated the said merger as a non-taxable transaction giving rise to no gain or loss.
12. On March 1, 1928, Petitioner sold to the public $6,000,000 par value of its Series B 4½% Bonds, dated March 1, 1928, maturing March 1, 1968.
13. The purpose of the issue of $6,000,000 par value of Petitioner’s Series B 4½% Bonds was to apply the proceeds to the retirement of $3,000,000 of Petitioner’s Series A 5½% Bonds and $2,750,000 par value of Holtwood Bonds.
14. On March 1, 1928, pursuant to notice dated January 27, 1928 (given by Petitioner as successor to the Holtwood Company) duly published and mailed to holders of the Holtwood Bonds, Petitioner retired for cash the $2,750,000 of Holtwood Bonds, paying therefor par plus a premium of 7%, or $192,500. None of the Holtwood Bonds were exchanged for Petitioner’s Series B Bonds.
In retiring the Holtwood Bonds, Petitioner exercised the option, originally reserved to the Holtwood Company in the deed of trust under which the bonds wore issued, to which Petitioner succeeded as a result of the “short form of merger.”
15. On January 1, 1928, the year of the retirement of the Holtwood Bonds, the balance of discount and expense applicable to said bonds, which had not been amortized and deducted for income tax purposes, amounted to $145,159.52.
16. In its income tax returns for 1928 Petitioner claimed (among others) the following deductions:

The question, as stated by both parties upon brief, is—“Is petitioner entitled, as the successor of its wholly owned subsidiary, Holt-wood Power Company, to deduct from gross income for the year 1928, (a) the unamortized discount and expense incurred in the issuance, and, (b) premium paid in the retirement of Holtwood Power Company Series A 6% First Mortgage Sinking Fund Gold bonds, dated September 1,1924, and maturing September 1, 1954, which petitioner retired for cash on March 1, 1928 at par plus premium of 7% by the use of part of the proceeds of Petitioner’s Series B. 4½% bonds?” The portion of the question referred to as (a) will be considered first.

Petitioner contends, and it is apparently conceded by respondent, that if the transaction by which the petitioner assumed the bonds of Holtwood Power Company constituted a merger or consolidation, then petitioner is entitled to deduct the unamortized discount and expense of issuing such bonds, which the parties have stipulated to be $144,255.10. This contention is sound and accords with the view frequently expressed by the courts and this Board. Western Maryland Railway Co. v. Commissioner, 33 Fed. (2d) 695; New York Central Railroad Co. v. Commissioner, 79 Fed. (2d) 247; Illinois Power & Light Corporation, 33 B. T. A. 1189; Metropolitan Edison Co., 35 B. T. A. 1110; Coast Counties Gas & Electric Co., 36 B. T. A. 385. But if the transaction is a mere purchase or sale, the purchasing corporation is not entitled to the deduction. Turner-Farber-Love Co. v. Helvering, 68 Fed. (2d) 416; American Gas & Electric Co. v. Commissioner, 85 Fed. (2d) 527, affirming 33 B. T. A. 471; American Gas & Electric Co. v. United States, 17 Fed. Supp. 151; Metropolitan Edison Co., supra. (Issue IV.) It is therefore necessary to determine whether the transaction was a sale, as contended by the respondent, or a merger, as contended by the petitioner.

The instant proceeding is not distinguishable upon its facts from those in Metropolitan Edison Co., supra, bearing upon issue ,V. There, as here, there was so-called “short form merger” under the identical section of the Pennsylvania law now under consideration. The section reads as follows:

Any corporation created under the provisions of this act, * * * may reduce its capital stock * * * by a vote of the stockholders * * *; and it shall be lawful for any corporation in the same manner to sell, assign, dispose of and convey to any corporation created under or accepting the provisions of this act, it franchises, and all its property, real, personal and mixed, and thereafter such corporation shall cease to exist, and the said property and franchises not inconsistent with this act, shall thereafter be vested in the corporation so purchasing as aforesaid * * *.

We said, in passing upon the issue in that case, that the “so-called merger * * * amounted in effect to a sale by the subsidiary of its assets to the parent corporation.” We have reexamined the question in the light of the authorities cited by petitioner in its able brief but are not persuaded that we were wrong in the Metropolitan Edison case or that a different conclusion should be reached under the stipulated facts in this case. However, in view of the fact that our decision in the Metropolitan Edison case was promulgated subsequent to the filing of the briefs in the instant case, it will not be amiss to discuss some of the cases cited by petitioner.

Petitioner contends that the “short form merger” meets all the essential legal requirements of a merger, as defined by the Circuit Court of Appeals for the Second Circuit in Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937, certiorari denied, 288 U. S. 599, including the requirement added in American Gas & Electric Co., supra. It relies especially upon, the portion of the opinion in the Gortland Specialty case in which the court says that “A merger ordinarily is an absorption by one corporation of the properties and franchises of another whose stock it has acquired. The merged corporation ceases to exist and the merging corporations alone survives.” While the definition was never intended to embrace all situations which might arise, the court advisedly using the word “ordinarily” and referring later in its opinion to the fact that the statutes of the states vary “in respect to how far the constitutent companies may be deemed to survive the creation of the new or modified corporate structure”, we are nevertheless constrained to hold that petitioner has not shown itself to be within that definition.

Petitioner contends that the opinion of the Supreme Court of Pennsylvania in Merwine v. Mt. Pocono Light & Improvement Co., 304 Pa. 517; 156 Atl. 150, “is a definite holding that a transfer by a corporation, under the procedure prescribed by the Act of 1876, as amended (shown supra), of its franchises and property to a corporation with which it is affiliated, under circumstances similar to those of the case at bar, is merely a formality and the transaction in reality is a merger of the two companies.” While the court did say—though perhaps it was obiter dictum in view of the fact that it was not required to make any such determination—“that the transaction between the two corporations was in reality a merger,” in the very next sentence it referred to the transferee corporation as “a purchaser cum onere” and instructed the personal injury plaintiff, in the event of judgment against the transferor corporation, “to levy where' defendant’s [transferor corporation] assets liable for the judgment may be found.” It also held specifically that the transferor corporation had not “ceased to exist”—an essential under the definition petitioner is relying upon—saying:

The statute of 1874 and its amendments plainly reveal that the words “shall cease to exist primarily refer to a cessation of carrying on the business for which the selling corporation was created. * * * Defendant corporation [selling corporation] not having been legally dissolved, its present condition is rather that of an inactive corporation and it is not altogether dead. Before a corporation has ceased to exist in the absolute sense here contended for, it must fully and definitely close its affairs, and the fact that a corporation has “ceased to do.business” does not preclude it from exercising its various rights to accomplish this purpose. * * *

The above holding accords with the views of the same court as expressed in Commonwealth v. Lumber City Water Co., 225 Pa. 317; 74 Atl. 238.

Petitioner also relies upon York Haven Water & Power Co. v. Public Service Commission of Pennsylvania, 287 Pa. 241; 134 Atl. 419. That case involved the question of the right of an electric light, heat, and power company to purchase or merge with a hydroelectric or water power company. The court in its opinion said:

There are two forms of consolidation in Pennsylvania, a short and a long form merger. These are accomplished by the act of 1876, as amended, and the act of 1909. The act of April 17, 1876 (P. L. 83 [30]), as amended, provides that such sale may take place if the “franchises are not inconsistent” with this act. And the Merger Act 1909 (P. L. 408; Pa. St. 1920, § 5748 et seq.) permits consolidation between corporations “transacting the same or similar lines of business.”

In a later decision, In re Buist's Estate, 297 Pa. 537; 147 Atl. 606, the court, considering and discussing whether the merger of a number of banking institutions into the Philadelphia National Bank under the act of Congress (November 7, 1918, ch. 209, § 1, 40 Stat. 1043, U. S. C. A., title 12, § 33), empowering national banks to consolidate, constituted a sale, liquidation, or a merger or consolidation of assets, stated as follows:

* * * Care should be taken to distinguish consolidation from proceedings under the Act of April 17, 1876, P. L. 33 [30], § 5, as amended (Pa. St. 1920, § 5694), often referred to as a “short form merger” (See York Haven W. & P. Co. v. P. S. C., 287 Pa. 241, 134 A. 419) ; its operation in reality effects a sale of all the company’s assets.
The new conception was not on the basis of sale, but of a merger or consolidation of assets, which is opposed to sale.

In a number of cases the Pennsylvania courts have referred to transactions under the act in question as being sales. See Koehler v. St. Mary’s Brewing Co., 228 Pa. 628; 77 Atl. 1016; Greensburg Borough v. Westmoreland Water Co., 240 Pa. 481; 87 Atl. 995; Ringler v. Atlas Portland Cement Co., 801 Pa. 176; 151 Atl. 815. Thus in the last case cited, supra, the court refers to the act as regulating “the sale of franchises and assets of one Pennsylvania corporation to another, involving the dissolution of the selling corporation”, while in a very recent case, In re Daily’s Estate, 186 Atl. 754 (1936), the court, citing with approval the Buist Estate case, supra, holds that “a merger is not a sale or liquidation of corporate property but a consolidation of property, powers and facilities.”

It will be noted that the act authorizes a corporation “to sell, assign, dispose of and convey” its property. The stipulation shows that that is what occurred here. Holtwood, by deed, transferred all its franchises and property to petitioner, the sole consideration being the delivery to it of its capital stock and the assumption of its indebtedness. “The transaction certainly bore all the characteristics of a simple sale” (Cortland Specialty Co. v. Commissioner, supra), and we are still of the opinion, which we expressed in Metropolitan Edison Go., supra, that the so-called “short form merger” was, in effect, simply a sale by Holtwood of its assets to this petitioner. It follows that the respondent did not err in disallowing, as a deduction from petitioner’s gross income, the unamortized discount and expense on the Holtwood bonds in the amount of $144,255.10.

Petitioner must prevail in so far as subdivision (b) of the question is concerned, though not upon the grounds urged in its brief. It is now settled that premiums paid by a parent corporation in the retirement of bonds issued by its subsidiary and assumed by it in a transfer of the assets of the subsidiary to it, are deductible from the gross income of the parent corporation, though a contrary view at one time prevailed. The question was recently considered by this Board in Metropolitan Edison Co., supra (issue III). Therein we reviewed the court and Board decisions and concluded that the reasoning under which a conclusion had been reached that such expenditures were not deductible was unsound and should no longer be followed. We pointed out that, while we thought they were deductible as ordinary and necessary expenses of carrying on a trade or business (section 23 (a), Revenue Act of 1928), if they were not properly so classified they were nevertheless deductible as losses (section 23 (e), Revenue Act of 1928). Such, was the holding of the Court of Claims in American Gas & Electric Co. v. United States, 17 Fed. Supp. 151, which we thought and still think to be sound. The portion of our opinion in Coast Counties Gas As Electric Co., 33 B. T. A. 1199, holding that such premiums were not deductible, has now been set aside. (Coast Counties Gas & Electric Co., 36 B. T. A. 385. The facts before us in the instant proceeding clearly require that we reach, and Ave do reach, the same conclusion here.

It is therefore held that the respondent erred in disallowing the deduction from petitioner’s gross income of the premium paid by it in retirement of the Holtwood Power Co. bonds, amounting to $192,500.

Deficiency shall be recomputed in accordance with the views herein expressed.

Judgment will be entered under Rule 50.