author: Hill: Leech,

text:
    Pioneer Automobile Service Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 78866, 79001.
    Promulgated June 24, 1937.

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

      Harold F. Noneman, Esq., and W. S. Alt, Esq., for the respondent.
   OPINION.

Hill:

The principal issue here involves the question, broadly speaking, of how petitioner’s taxable income should be computed in the light of the peculiar facts relating to the income accrued, and the expenses incurred in the earning of such income.

The essential facts, briefly summarized, show that during the taxable years petitioner entered into contracts with automobile owners whereby for a stated consideration, payable in installments, petitioner obligated itself to render certain services during the lives of the respective owners. These contracts are referred to as life memberships.

Petitioner kept its books of account and made its income tax returns on an accrual basis. It accrued and included in gross income for each year the full amount of the consideration paid or to be paid on each contract executed during the year; and in computing the deficiencies respondent likewise included in gross income the full amount of such consideration. Petitioner set up on its books a “reserve for life memberships”, and annually made additions to this reserve on the basis of the number of contracts written each year. The additions made for the taxable years to the “reserve for life memberships” petitioner deducted from gross income. These deductions were disallowed by respondent, giving rise in part to the deficiencies.

Petitioner’s first contention is that the amounts of the additions to the reserve constituted a trust fund set aside and to be administered by it for the benefit of the contract holders, and that such amounts should be excluded from gross income. ¥In the alternative, petitioner says that, if the reserve was not a trust fund, then its taxable income should be recomputed on a strictly cash basis in order to reflect clearly its true income. We can not agree with either of these contentions.

The applicable revenue acts require that net income shall be computed upon the basis of the taxpayer’s annual accounting period in accordance with the method of accounting regularly employed in keeping the books of the taxpayer, unless the method employed does not clearly reflect income, in which event the computation shall be made in accordance with the method that does clearly reflect the income. Sec. 41, Revenue Acts of 1928 and 1932. It does not appear from the record before us that a computation on the basis of cash receipts and disbursements would more clearly reflect petitioner’s income than on an accrual basis. The cash basis, therefore, may not under the statutes be used.

But there are also other serious objections to petitioner’s alternative contention. Respondent’s Regulations 74 and 77, article 322, the validity of which is not questioned here, require taxpayers to make application for permission to change from one method of accounting to another, and to furnish certain information in that connection. This petitioner did not do. Cf. Ribbon Cliff Fruit Co., 12 B. T. A. 13; Brown v. Helvering, 291 U. S. 193, affirming 63 Fed. (2d) 66, affirming 22 B. T. A. 678.

Finally, petitioner has furnished no evidence respecting the items of income and deductions to be reflected in a recomputation of its taxable income on the cash basis. Petitioner’s alternative- contention can not be sustained.

Likewise, we find, little difficulty in rejecting petitioner’s main contention that the reserve constituted a trust fund. An extended discussion of this point is not deemed necessary. It is sufficient to point out that none of the elements of a trust is present. The parties have stipulated, and we have so found, that all the assets listed on petitioner’s balance sheets for the taxable years were under the. domination and control of the corporation, and that nothing was done to establish a trust with respect to those assets except as such trust might arise under the resolutions-of the board of directors. It is true that the directors adopted a motion to provide for some form of a trust arrangement, but nothing further was done about the matter. Petitioner’s assets, including the cash reserve funds, were used for general corporate purposes, and it made no agreement with the contract holders to establish a trust. Each contract merely contained the statement that “The Service Life Memberships are secured by a Reserve Fund which guarantees the servicing of this membership for life.” This did not constitute the reserve a trust fund, nor did petitioner, so far as shown, otherwise declare that it held the reserve fund in trust, or treat it as such a fund. Cf. Mt. Plymouth Corporation, 25 B. T. A. 1201; Acacia Park Cemetery Association, 27 B. T. A. 233; affd., 67 Fed. (2d) 700; Woodlawn Cemetery Association, 28 B. T. A. 882.

The burden of petitioner’s complaint is that if the total consideration paid or to be> paid on each contract written for the taxable years is accrued as gross income, and if the additions to the reserve are not excluded from gross income as a trust fund or the gross income otherwise reduced by deductions for future costs of servicing the contracts, its taxable net income will not be clearly reflected.

The principle is authoritatively recognized that where a taxpayer’s books are kept on an accrual basis, the fact that the exact amount of the liability had not been definitely fixed in the taxable year would not prevent the deduction from gross income for that year of the amount later paid on account of such liability: Lucas v. American Code Co., 280 U. S. 445, 446.

However, here, as in the cited case, there are other obstacles which prevent application of the doctrine referred to. In the case before us the record is wholly insufficient to sustain a conclusion that the additions to the reserve for life memberships represent accruals, ascertained or ascertainable, of amounts of future expense for which a liability was incurred .by petitioner under its contracts. The amount of the reserve represents only an estimate. We are not called upon under the facts here to determine whether a deductible accrual of ordinary business expense can rest upon a mere estimate for the reason that there is no evidence in the record that the amount of the future expense is reasonably estimated. It is not clear from the petitioner’s brief whether the additions to the reserve for the taxable years constituted a fund which petitioner estimated would produce sufficient income to pay the future expense, or whether it was estimated that the entire amount of such additions would be required to cover the cost of future service. In any event, there is no evidence of the reasonableness of an estimate on either basis.

Respondent’s determination of the first issue is approved. „

Under the second issue, petitioner contends that respondent erred in asserting the 25 percent delinquency penalty for failure to file its income tax return for the year 1931 within the time prescribed by" law.

Section 291 of the Revenue Act of 1928 provides that in case of any failure to make and file the required return within the time prescribed by law, or by the Commissioner in pursuance of law, 25 percent of the tax shall be added to the tax, except that when a return is filed after such time and it is shown that the failure to file it was due to reasonable cause and not due to willful neglect, no such addition shall be made to the tax.

Petitioner’s return for 1931 was required by law to be filed not later than March 15, 1932. It was filed three months and nine days later, on June 24,1932. In the early part of 1932, presumably prior to March 15, petitioner’s president inquired about the filing of the 1931 return of an employee who acted in the capacity of auditor and attended to the filing of its income tax returns. The employee stated that he had obtained an extension of time for the filing of the return, when as a matter of fact he had not done so. Later he embezzled some of petitioner’s funds, but at that time was a trusted employee. This same employee prepared the return which was filed on June 24, 1932. Attached to the return was a statement signed by the petitioner’s president to the effect that the return could not be filed within the time prescribed by law because of the fact that business conditions prevented the keeping of sufficient clerical help to compile the necessary information. The matters urged as an excuse, we think, are wholly insufficient.

The duty of preparing and filing a corporate return rests upon the responsible executive officers of the corporation, and Congress plainly expressed an intention that such responsibility is not to be lightly taken. The use of available clerical help in carrying on the activities of a corporation does not, in our opinion, excuse it for failure to file its return on time; nor do we think it a sufficient excuse to say that the president of the corporation, without doing anything further, merely spoke to a trusted employee about the matter, and that such employee misrepresented the facts as to having obtained an extension of time within which to file the return. It was primarily the duty of the officer and not of the employee to see to it that the return was prepared and filed timely.

Furthermore, we think it is clear that the employee in question was guilty of willful neglect, and since the preparation and filing of the return was within the scope of his duties, this neglect is •chargeable to the corporation. Berlin v. Commissioner, 59 Fed. (2d) 996; Axel Holmstrom, 35 B. T. A. 1092.

In Eagle Piece Dye Works, 10 B. T. A. 1360, 1368, the petitioner delegated authority to an accountant to execute and file its return. The Board held that the fact that the accountant did not know that the return for the fiscal year was required to be filed prior to the filing of returns for the calendar year within which the fiscal year ended, did not constitute the accountant any less the agent of the •taxpayer, or become a mitigating circumstance, and upheld the imposition of the delinquency penalty. .

In Gus V. Winston, 22 B. T. A. 1194, 1199, one of the petitioners admitted that his income tax return was not timely filed, but stated that he thought another person had looked after it. The person who was supposed to file the return forget it. The Board held that the delinquency penalty should be collected. The penalty was sustained on similar facts in Rogers Hornsby, 26 B. T. A. 591, 593. And see also Frischkorn Development Go., 30 B. T. A. 8.

It is not a sufficient excuse, for the tardy filing of the return that the corporation’s agent believed that no return was required to be filed until after an audit had been made. Charles E. Pearsall & Son, 29 B. T. A. 747.

On the second issue, respondent’s action is approved.

Reviewed by the Board.

Judgment will be entered for the respondent.

Leech,

dissenting: The deficiencies here result from respondent’s treating the taxpayer’s receipts from life contracts on the accrual basis and its expenditures in carrying out those contracts, on the cash basis. Obviously, that method does not reflect the taxpayer’s income supporting the contested tax. Such receipts and expenditures must be computed on the same basis. Bonded Mortgage Co. of Baltimore v. Commissioner, 70 Fed. (2d) 345.

The taxpayer returned his income for the years in controversy on the accrual basis. It thus included in that income the amounts receivable under the life contracts executed during that year, whether such amounts were actually received during the year or not. Likewise, it deducted its estimated costs of meeting its admitted liability under those contracts for those years. If those estimated, costs were reasonable, I think, the deductions of them were proper. Lucas v. American Code Co., 280 U. S. 445; United States v. Anderson, 269 U. S. 422; General Outdoor Advertising Co. v. Commissioner, 89 Fed. (2d) 862.

Nothing disclosed in the majority opinion appears to establish the unreasonableness of those deducted estimated costs. And, even if it did, since the present record clearly reveals the contested deficiencies to be wrong, they can not stand—at least without a further hearing-Helvering v. Taylor, 293 U. S. 507.


source: Caselaw Access Project

author: MilleR:

license: Public Domain

text:
    Lammot du Pont, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79749.
    Promulgated June 24, 1937.

      Claude M. Houchins, Esq., for tbe petitioner.

      Harold Allen, Esq., and R. H. Transue, Esq., for the respondent-
   OPINION.

MilleR:

The first question for determination is whether the petitioner established deductible losses in 1930 by selling certain stock to a corporation of which he was the sole stockholder. The answer turns on whether the sales were bona fide. The respondent does not charge fraud, but contends that petitioner did not give up control of the securities or effectively part with title thereto.

We find that the sales were bona fide. They were made at the market prices and petitioner was paid therefor. He had no agreement or preconceived plan to reacquire the securities from the corporation. It was customary for petitioner to lend money to the corporation for the purpose of buying securities and the particular stocks involved in this case were purchased by the corporation with money so loaned. This is not sufficient to prevent the sales from being bona fide. See Thomas W. Behan, 32 B. T. A. 1088.

This case is governed by the decisions in Burnet v. Commonwealth Improvement Co., 287 U. S. 415; Edward Securities Corporation, 30 B. T. A. 918; and Commissioner v. Eldridge, 79 Fed. (2d) 629, affirming A. S. Eldridge, 30 B. T. A. 1322. Gregory v. Helvering, 293 U. S. 465, relied upon by respondent, is clearly distinguishable. That case involved the corporate reorganization provisions of the Revenue Act of 1928. There it was held that no real reorganization took place, and that a new corporate structure was set up solely for the purpose of evading taxes. We have no such question here. In the instant proceeding the corporation had been in existence for several years and was created for a valid purpose. There is no reason for disregarding the fact that petitioner and the corporation were separate and distinct entities. In accordance with the facts disclosed in the stipulation, therefore, we hold that the petitioner in 1930 sustained a capital net loss of $71,834.25, and an ordinary loss of $310,893.45 upon the sales of stocks in question.

Moreover, in accordance with the following stipulation:

If the Board sustains the contentions of the petitioner and allows the aforesaid losses for the year 1930 claimed on the alleged sale of securities to The Saint Amour Company, the amount of $504,639.71 constitutes an allowable deduction from the income for the year 1931.

the amount specified therein will be allowed as a deduction for the year 1931.

The next question presented is whether the respondent erred in failing to allow, as a deduction for the year 1930, sums theretofore advanced to Marsh in the amount of $46,392. There are set forth in the margin applicable provisions of the Revenue Act of 1928.

The determination of the respondent is favored with a presumption of correctness and the burden is upon the petitioner to show that it is erroneous. Welch v. Helvering, 290 U. S. 111. Here, upon a consideration of all the evidence, we hold that petitioner has not met his burden.

The facts presented leave us in doubt as to the nature of the loss claimed by petitioner on account of advances made to Marsh for financing and furthering the expedition. Are they to be regarded as loans or as investments in a joint venture? The testimony shows •that Marsh gave petitioner notes representing the $31,392. There is other evidence showing that the advances were to be repaid out of the profits, if any, from-the expedition, and that any excess profit over the amount of the advances was to be divided equally between petitioner and Marsh. The evidence is clear, however, that petitioner had very little hope of profit.

If we assume that the advances are to be considered as loans, then .subdivision (j) of section 23 is applicable, which provides that debts are deductible in the year in which ascertained to be. worthless and charged off. The evidence shows that the petitioner charged off all of the $31,392, except $1 at the end of the year 1926. This evidence, far from supporting petitioner’s contention, tends to sustain the Commissioner’s determination that this debt was ascertained to be worthless and charged off in 1926. This determination is further supported by the fact that thereafter Marsh had no gainful employment or any property, and that this fact was known to the petitioner. The statute does not allow the taxpayer to select the year of deduction of a debt which he has known for some time to be worthless. Louis D. Beaumont, 25 B. T. A. 474, and cases there cited.

If the advances were considered as investments in a joint venture, then any deduction to be allowable as a loss must come under subdivision (e) (2) of section 23. Under that section losses are deductible in the year in which sustained, irrespective of when the taxpayer ascertains his loss. In 1930 the petitioner was informed by Marsh that he had misappropriated some of the money advanced by petitioner. Any loss sustained by petitioner from such embezzlement or misappropriation was sustained in the year it occurred, First National Bank of Sharon v. Heiner, 66 Fed. (2d) 925. Yet we are not informed as to the amount of such misappropriation or as to the time thereof. We are, therefore, not able to determine when the petitioner’s loss by this means occurred. Since we do not know the amount thereof, we can not determine the amount of any remaining loss which might otherwise be deductible in 1930. Moreover, as petitioner has failed to establish the date of such embezzlements—except that they occurred prior to 1930—they certainly can not be urged as an event occurring in 1930 which established a loss for that year.

Disallowance of the claimed deduction of $46,392 is approved.

[Reviewed by the Board.

Decision will be entered under Rule 50.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      *******
      (e) Losses by individuals.—In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
      *******
      (2) If incurred in any transaction entered into for profit, though not connected with
      the trade or business ; or
      * * * * * * *
      (5) Bad debts.—Debts ascertained to be worthless and charged off within the taxable year (or, in the discretion of the Commissioner, a reasonable addition to a reserve for bad debts) ; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.


author: Leech :

text:
    Edwin L. Dana, Petitioner, v. Commissioner of Internal Revenue, Respondent. Fra M. Dana, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 67669, 67670.
    Promulgated June 25, 1937.

      F. S. Jacobsen, Esq., and E. G. Toomey, Esq., for the petitioners.

      Elden McFarland, Esq., and O. B. Marshall, Esq., for the respondent.
   OPINION.

Leech :

The Revenue Act of 1928 is controlling.

The question presented is whether the partnership, which consisted of petitioners, was entitled to any deduction from gross income in the computation of its income for 1929 then distributable and taxable to petitioners (sec. 182 (a)), by reason of the transfer of 2,000 shares of E. L. Dana Livestock Co. common stock to the Ann Arbor Group.

Both petitioners and respondent take the position that this transfer was an isolated transaction and is to be so treated here. The petitioners then argue it constituted a deductible expense, or loss. They cite George M. Wright, 18 B. T. A. 471; Selene Baldwin Burdick, Executrix, 20 B. T. A. 742; City Builders Finance Co., 21 B. T. A. 800; Stephen M. Clement, 30 B. T. A. 757; Commissioner v. Wright, 47 Fed. (2d) 871; Peabody Coal Co. v. United States, 8 Fed. Supp. 845. Respondent answers that the transfer was neither, but was a capital expenditure and therefore not deductible. Our jurisdiction is not limited to the soundness of respondent’s reasons for his action, but necessarily includes the correctness of that action upon any proper theory. Gowran v. Commissioner. 87 Fed. (2d) 125, and cases cited therein.

We do not think this stock transfer was isolated and thus susceptible of such separate and simple treatment.

This stock was transferred to the Ann Arbor Group by petitioners—not by virtue of an independent contract, but in carrying out the specific terms of the very agreement which gave rise to the E. L. Dana Livestock Co. The various steps taken in fulfilling that contract must be viewed as a whole. Hazeltine Corporation v. Commissioner, 89 Fed. (2d) 513, and cases cited therein. And, when so considered, the entire transaction constituted an exchange of certain property of petitioners and the Ann Arbor Group, for stock, bonds and short term notes of that newly organized corporation.

It is true the parties have stipulated that:

The total value of the property thus sold and delivered was $1,642,839.67 and the liens and encumbrances against said property assumed by said corporation were in the sum of $661,191.31, and the net value of the property sold and conveyed to the said corporation, and the cost or basis thereof to said co-partners, was $981,648.36, and which properties of said net value petitioner and his co-partner sold and delivered for 9698 shares of the capital stock of said corporation and which capital stock cost the petitioner and his co-partner $101.22 per share in property and was by said co-partnership parted with as herein set forth.

Likewise, they have stipulated that the partnership offered to sell all the property used in the business of the partnership to the E. L. Dana Livestock Co., for 9,698 shares of the capital stock of that company, and other considerations, as set out in the purported offer in the findings of fact, and that this offer was accepted. But this Board is not bound to accept a stipulation of fact as such where the record demonstrates its error. Seatree v. Commissioner, 72 Fed. (2d) 67, affirming 25 B. T. A. 396.

Thus, it is also stipulated that the single contract providing for the creation of the corporation, the acceptance of corporate bonds and short term notes by the Ann Arbor Group for the amounts due them from petitioners under the earlier trust agreement, and petitioners’ transfer of their property to the corporation for stock, also provided that the partnership should transfer the disputed stock to the Ann Arbor Group. That stock was undoubtedly given to that group as an additional inducement and consideration to them for what was in effect a purchase of obligations of the new company. In addition, it effectuated one of petitioners’ purposes stated in their proposal to the Ann Arbor Group, which, with its acceptance, constituted the contract between that group and petitioners in the execution of the terms of which the corporation was formed. That purpose was that the Ann Arbor Group should continue to share in the “profits” of petitioners’ cattle business.

The substance of all these essentially connected steps in the execution of the petitioners’ contract with the Ann Arbor Group was that petitioners exchanged their equity in the ranch property, together with certain personal property, for 7,698 shares of stock in the newly organized E. L. Dana Livestock Co. Simultaneously, having released their claims against and equity in the partnership property upon their constructive payment, the Ann Arbor Group, in effect, exchanged their money, in the amount of those obligations, for bonds, short term notes and 2,000 shares of stock in that company. See Halliburton v. Commissioner, 78 Fed. (2d) 265; Claude Neon Lights, Inc., 35 B. T. A. 424. Whether this concurrent exchange by petitioners and the Ann Arbor Group with the company was one in which, gain or loss to petitioners was recognizable, is controlled by section 112 (a) and the last provision of (b) (5).

The Ann Arbor Group received all the bonds and notes of the corporation. They constructively exchanged $455,000 cash for those bonds, notes, and stock having a total fair market value of $657,440. It is immaterial that the Ann Arbor Group received their stock in the corporation, not directly therefrom, but through petitioner E. L. Dana, who was so obligated by the contract. Hazeltine Corporation v. Commissioner, supra.

The petitioners’ partnership exchanged property with a fair market value of $981,648.36, for stock then worth $779,191.56. Thus, “the amount of the stock and securities received by each is [not] substantially in proportion to his interest in the property prior to the exchange.” United Carbon v. Commissioner, 90 Fed. (2d) 43.

It follows that the partnership sustained a deductible loss in the amount of the difference between the cost of the property exchanged and that of the stock received therefor. Revenue Act of 1928, secs. Ill (a) and (c) and 113 (a). Since this sum exceeds the contested deficiencies, none such exist. The disputed ad valorem, penalties fall with the deficiencies. Samuel L. Huntington, 35 B. T. A. 835.

Reviewed by the Board.

Decision will be entered for the petitioners.

       SEC. 182. TAX OF PARTNERS.
      (a) General rule.—There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year. If the taxable year of a partner is different from that of the partner, ship, the amount so included shall be based upon the income of the partnership for any taxable year of the partnership ending within his taxable year.

       SEC. 112. RECOGNITION OF GAIN OR LOSS.
      (a) General rule.—upon the sale or exchange of property the entire amount of the gain or loss, determined under section 111, shall be recognized, except as hereinafter provided in this section.
      (b) Exchanges solely in land.—

      (6) TRANSFER TO CORPORATION CONTROLLED BY TRANSFEROR.-—No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.

       SEC. 111. DETERMINATION OF AMOUNT OR GAIN OR LOSS.
      (a) Computation of gain or loss.—Except as hereinafter provided in this section, the gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis provided in section 113, and the loss shall be the excess of such basis over the amount realized.
      (c) Amount realized.—The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received.

       SEC. 113. BASIS FOR DETERMINING GAIN OR LOSS.
      (a) Property acquired- after February 28, 1913.—The basis for determining gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property * * *.


author: Murdock :

text:
    The Commercial National Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent. Walter P. Story, Petitioner, v. Commissioner of Internal Revenue, Respondent. Katherine F. Story, Petitioner, v. Commissioner of Internal Revenue, Respondent. Thomas B. Story, Petitioner, v. Commissioner of Internal Revenue, Respondent. Nelson Story, III, and Charles Vandenhook, as Administrators of the Estate of Nelson Story, Jr., Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 66959, 66960, 66961, 66962, 66963.
    Promulgated June 25, 1937.

      George Y. Patten, Esq., Walter S. Hartman, Esq., and Justin M. •Smith, Esq., for the petitioners.

      Elden McFarland, Esq., for the respondent.
   OPINION.

Murdock :

The first transfer in point of time which the Commissioner has determined was in contemplation of death, was the transfer by the decedent to his son Thomas of certain bonds of the par value of $192,500. That transfer was made in 1917 about nine years before the decedent died, at a time when he was about seventy-nine years of age. The decedent, up to that time, had always been a man of unusual strength and vigor. His health, aside from some minor chronic ailments, had been excellent. He was an active man. His advanced age is the only circumstance which might indicate that this transfer was made in contemplation of death. The Commissioner points also to two letters written about eleven years previously, and argues that they indicate that the decedent was then contemplating death. However, these letters were written so long before the transfer in question and are so ambiguous as to meaning, that they are of little evidentiary value. On the other hand, the real purpose of this gift is quite apparent. The decedent in the past had given substantial amounts to aid his sons in business. His son Thomas was making money in the sheep business. It appeared that through expansion more money could be made. The decedent gave his son the bonds in question so that this expansion might take place. The gift was complete. It was made for a purpose connected with life rather than with death, and the Commissioner erred in including the value of the bonds in the decedent’s gross estate.

Next in point of time were a series of transfers which the petitioner made on December 14, 1923. One of these transfers was to this same son Thomas. Prior to 1923 Thomas had lost not only the bonds which his father had given him in 1911, but all of his own property and some of his wife’s property. His financial condition distressed his father. The father wanted very much to give his son some immediate help so that the son could support his family and again get started in business. For this purpose he made on December 14, 1923, an absolute and complete gift to his son of certain properties. The value of the properties at that time does not appear, but at the time of the decedent’s death these properties had a value of $60,000.88. The Commissioner is able to marshal stronger evidence in support of his conclusion that this transfer was made in contemplation of death than he was able to marshal in the case of the transfer made in 1917. But the evidence which the petitioner relies upon to show that the transfer was made for a purpose connected with life, rather than with death, is just as strong as the similar evidence relating to the transfer made in 1917. The decedent at the time of this transfer was past eighty-five years of age. Although he was still unusually vigorous and active for a man of his years, nevertheless he had slowed up considerably. He had been confined to his home in the care of a nurse for a number of weeks during the fall of 1923 as a result of the removal of a carbuncle. He took some steps about this time to dispose of his home, and there is other evidence which has some tendency to support the Commissioner’s determination. The weight of the evidence, however, is that this transfer was not made in contemplation of death.

The other transfers made on December 14, 1923, were made by the decedent to a bank in trust to pay the income from the trust property to the decedent and his wife for life, and then to pay all of the trust funds of the one trust to Katherine, the wife of Thomas, and all of the funds of the other trust to Nelson Story, Jr. The facts leading up to these transfers have been set out in detail in the findings of fact and need not be repeated. Suffice to say that the decedent, in transferring these funds, was merely carrying out his earlier agreement to hold amounts received from his sons under those earlier agreements in trust, and eventually to return those funds to the sons. Thomas preferred that his share should be paid, to his wife. After the decedent’s death, suits were instituted in the courts of Montana by the administrator of the estate of the decedent and also by Rose Story Hogan. The plaintiffs challenged all of the transfers made by the decedent on December 14, 1923, and sought to recover from the defendants the properties transferred. Some of these proceedings were taken to the court of last resort of the state. The court, in each instance, upheld the transfers and held that the properties transferred in trust subject to a life estate, had at all times been the property of the sons and had not been the property of the decedent. Roecher v. Commercial National Bank, 87 Mont. 570; 289 Pac. 388; Roecher v. Story, 91 Mont. 28; 5 Pac. (2d) 205. It may be that we are bound by those decisions on the question of the ownership of the property which was placed in the trusts on December 14, 1923. Cf. United States v. Robbins, 269 U. S. 315; Burk-Waggoner Oil Association v. Hopkins, 269 U. S. 100; Freuler v. Helvering, 291 U. S. 35; Blair v. Commissioner, 300 U. S. 5, affirming 31 B. T. A. 1192. If, however, we are at liberty to draw our own conclusion from the evidence in this case, it is that the decedent was merely a trustee of the property, who transferred bare legal title to another’ trustee. Cf. Fidelity & Columbia Trust Co. v. Lucas, 7 Fed. (2d) 146. Since the property belonged to the sons and not to the decedent, it could not be the subject of a transfer within the meaning of section 302 of the Revenue Act of 1926.

The decedent on February 23, 1924, transferred to his son Walter and to his daughter all the rest of his property. The Commissioner included in the gross estate the value at the time of death of all of the property transferred on February 23, 1924. The petitioners have raised no issue in their pleadings challenging his action in regard to the properties transferred to the daughter. Nevertheless, they argue in their briefs that the transfers to the daughter were improperly included in the gross estate. Since that issue is not raised by the pleadings, it need not be decided. However, the transfers to the daughter were just like the transfers to the son on that date. The transfers to the son were in contemplation of death, and, if the transfers to the daughter were properly in issue, the holding would have to be that they likewise were in contemplation of death. The record fails to show any purpose which the decedent might have had in making those transfers which would be inconsistent with the making of a transfer in contemplation of death. That is, no purpose for the transfers appears which would have to do with continuing life rather than impending death. On the contrary, there is affirmative evidence in the record indicating that these particular transfers were made in contemplation of death. The transfers were made shortly after the death of the decedent’s wife. He was depressed and nervous following her death and was confined to his home for two months constantly attended by nurses. He revoked his will on the same day that he made these transfers by an instrument in the following terms:

Having previously disposed of my personal property, I am this day disposing of my real estate, therefore leaving no will. Any will, or wills heretofore made by me are hereby revoked, nullified and made void.

The evidence as a whole certainly fails to show that the Commissioner erred in including the transfers of February 23, 1924, in the decedent’s gross estate.

It. is apparent from the foregoing discussion that there is a deficiency in estate tax and, consequently, it is necessary to consider the alternative issues raised by each petitioner. The alternative issues are the same in principle. Each petitioner contends that his liability as a transferee is limited to the tax upon the particular property received by him. There are numerous decisions, however, to the effect that the liability of transferees is joint and several, and that the liability of each transferee is¡ limited only to the value of the transferred property received by that transferee. Phillips v. Commissioner, 283 U. S. 589; Grand Rapids National Bank, 15 B. T. A. 1166; Eleanor Lansburgh, Administratrix, 35 B. T. A. 928.

There is no question about the values. This really disposes of all of the issues raised. However, there is another matter that demands discussion despite the fact that no issue is raised by the petitioners. The point is that the Commercial National Bank, Katherine F. Story, Thomas B. Story, and Nelson Story, Jr., are not liable as transferees because none of them received any property properly included in the decedent’s gross estate. The property which came to three of those petitioners was property placed in trust by the decedent on December 14, 1923. It has already been held that that property was not property of the decedent and was not properly included in his gross estate. The transfers to Thomas were not in contemplation of death. Thus he received no part of the decedent’s gross estate. Walter P. Story received property, properly included in the gross estate, exceeding in value, at the time of the decedent’s death, the amount of the deficiency with interest.

Reviewed by the Board.,

Decision of no transferee liability will be entered in the cases of the four petitioners, and decision will be entered u/nder Rule 50 in the case of Walter P. Story-.


text:
    Edith M. Bensel and Wilbur B. Driver, Executors of the Estate of Frank L. Driver, Sr., Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 70574.
    Promulgated June 25, 1937.

      Theodore B. Benson, Esq., for the petitioners.

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

Murdock :

The Commissioner contends that the stipulated value at the date of death of the 50,830 shares of common stock of Driver-Harris Co. was properly included in the decedent’s gross estate. His first contention is that section 302 (d) of the Revenue Act of 1926 is authority for including these shares. It provides that the value of the gross estate shall include the value at the time of death of all property “to the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke.” He also contends that the property may be included under section 302 (c) as a transfer in contemplation of or intended to take effect in possession or enjoyment at or after death. Both provisions have the following exception: “except in case of a bona fide sale for an adequate and full consideration in money or money’s worth.” The decedent transferred the shares in question to a trustee. Apparently the transfer was irrevocable, but the enjoyment of the interest was subject at the date of his death to change through the exercise of a power by the decedent in conjunction with his son to alter, amend, or modify the agreement. If it should be decided that this was a case of a bona fide sale for an adequate and full consideration in money or money’s worth, neither (c) nor (d) of section 302 will be applicable. For this purpose it may be assumed that the language of (d) is broad enough to cover this transfer (see, however, Helvering v. Helmholz, 296 U. S. 93), and under such circumstances the questions of whether or not the transfer was in contemplation of death or was made to take effect in possession or enjoyment at or after death need not be decided.

Before deciding the question of consideration, it may be proper to state that there is a great deal of evidence in this record relating to the question of contemplation of death. Evidence of the decedent’s state of health shows that he enjoyed good health and was quite active up to January 1925. He suffered at that time a hemi-plegic attack which resulted in partial and temporary paralysis. His recovery was rapid, the paralysis disappeared, and he soon returned to his duties. He intended to procure a divorce and remarry. He made a will on June 8, 1926, which was admitted to probate after his death. He stated in the will that he made no provision therein for his son or for his wife because of other provisions which he had theretofore made for them. The evidence does not disclose that he had made any provisions for them other than those contained in the agreement of May 19, 1924, as amended. The proceeds of the sale of the stock to his son were bequeathed to certain persons in, stated proportions. He also bequeathed specific property and a large part of the proceeds of the sale to the woman he intended to marry, in case she should be his lawful wife at the date of his death. No provision had been made for her in previous wills. He went to Europe in July 1926 for recreation and also for business purposes. He never returned to the United States, but he kept in close touch with the business of the company, and the officers and directors visited him regularly to discuss matters of business. He continued to receive his salary of $33,000 a year. There is also evidence of the earnings and of the assets of the company. This evidence has been carefully considered, but we have deemed unnecessary a statement of it in the findings of fact.

The provisions of sections 302 (c) and (d) were remedial legislation enacted to prevent the evasion of estate taxes. The Supreme Court said in Helvering v. City Bank Farmers Trust Co., 296 U. S. 85:

The purpose of Congress in adding clause (d) to the section as it stood in an earlier act was to prevent the avoidance of the tax by the device of joining with the grantor in the exercise of the power of revocation someone whom he believed would comply with his wishes.

The same Court in United States v. Wells, 283 U. S. 102, referring to transfers in contemplation of death and transfers intended to take effect at or after death, said:

The dominant purpose is to. reach substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax.

They do not apply where a decedent at the time of his death owns property which is subject to an option to purchase by one not the object of his bounty. In that case the decedent’s interest in the property can be included in his gross estate at no more than the option price. Wilson v. Bowers, 57 Fed. (2d) 682; Lomb v. Sugden, 82 Fed. (2d) 166. Cf. Salvage v. Commissioner, 76 Fed. (2d) 112; affd., Helvering v. Salvage, 297 U. S. 106; Omaha National Bank v. Commissioner, 75 Fed. (2d) 434. The respondent contends that the son was the object of his father’s bounty, the price fixed was much less than the value of the stock, and to the extent of the excess value the transfer falls within section 302. If the decedent had entered into the contracts in question -with, an employee in whom he was interested only because of the man’s value as an employee, there would be no justification for including in the decedent’s gross estate the fair market value of the shares when in fact this person could obtain the stock from the estate on payment of $232,500. Yet the decedent would have retained the power to alter or amend in conjunction with this other party. The petitioners contend that Frank L. Driver, Jr., was in no sense the object of his father’s bounty, but was only a valuable employee of the company. They point to the unfriendly relations between this father and son and say that the interests of these two persons were adverse and they dealt at arm’s length in reaching their agreements. There is reason to believe that the terms which the son obtained in these agreements with his father were no more favorable than he might have obtained had he not been related. The two were constantly bargaining over the price. There is no indication that the decedent had the slightest fatherly interest in or affection for his son. The record as a whole indicates that the father’s only reason for desiring to retain the services of the son was that he recognized, as time went on, that the son was the most able man in the employ of the company. The stock was not dealt in extensively prior to 1929, and such sales as there were indicate that the price agreed upon between the father and son was not too low. That is, it was not lower than the price at which persons with adverse interests dealing at arm’s length might have been expected to have agreed. ' The obvious reason for the contracts was that the son was demanding-protection and the father realized that the corporation, in which he was the largest stockholder, would lose the services of a valuable employee unless the agreements were entered into.

The agreement gave the son an option to purchase the stock at a certain price immediately after the father’s death. Although the actual purchase price was much less than the fair market value of the stock at the date of the decedent’s death, when the purchase was. made, an increase in value was a circumstance which was within the reasonable contemplation of the parties at the time they entered into the agreement. The increase in value of the shares was probably due in this case to the increased use of radios, in which the products of the company were used. The possibility of increase in the value of the shares may have induced the son to enter into the contract. The adequacy of the consideration must be measured at the time the contract was entered into rather than at the time, the option was exercised. The consideration in this case was full and adequate in money or money’s worth. The contract originally entered into finally ripened into a bona fide sale for an adequate and full consideration in money or money’s worth. It was not a substitute for testamentary disposition nor a device for avoiding estate tax. Thus the transfer to the trustee was within neither the letter nor the spirit of section 302 (d) or (c). This is so either because there was a bona fide sale for an adequate and full consideration in money or money’s worth or because the circumstances are wholly without the intendment and purpose of the provisions of section 302. This case is like the Wilson and Lomb cases, supra.

The petitioners contend that the Commissioner allowed an insufficient deduction for executors’ commissions and attorneys’ fees. The Commissioner stated that the amounts allowed by him were the amounts allowed by the court. He makes no argument on this point in his brief. Although there is no evidence that the amounts allowed by the court, that is', $4,554.55 as executors’ commissions and $10,000 as attorneys’ fees, have been paid, nevertheless these are proper deductions. Arthur M. Lamport et al., Executors, 28 B. T. A. 862, 867; William Rhinelander Stewart, Jr., et al., Executors, 31 B. T. A. 201, 206. Cf. Commissioner v. Strauss, 77 Fed. (2d) 401.

The final contention made by the petitioners is that they are entitled to deductions of over $85,000 representing claims of Edith M. Bensel against the estate. These claims, they say, consist of $25,000 representing $10,000 due October 1, 1927, and $5,000 due on the first of October 1928, 1929, and 1930, and $60,895.95 claimed to be the commuted value of a $5,000 annuity computed on the life expectancy of this sister at the date of the decedent’s death. The decedent died before October 1, 1930, and during his life his sister collected $3,000. Thus the amount due at the date of the decedent’s death was certainly not $25,000. Furthermore, there is no evidence to show the life expectancy of the sister or the commuted value of the annuity of $5,000 for that period. However, these matters are relatively; unimportant. The statute allows deductions of “such amounts for * * * claims against the estate * * * to the extent that such claims * * * were incurred or contracted bona fide and for an adequate and full consideration in money or money’s worth * ⅜ * as are allowed by the laws of the jurisdiction * * * under which the estate is being administered.” Edith M. Bensel, during the decedent’s life performed valuable services for him. He contracted in consideration of those services to pay her certain sums of money. The contract was bona fide. There is no reason to believe that her claim is not allowed by the laws of New Jersey. The question is to determine the extent to which her claim was contracted for an adequate and full consideration in money or money’s worth. The petitioners must show affirmatively the extent to which the claim was contracted for an adequate and full consideration in money or money’s worth. Pauline L. Sheets et al., Executors, 35 B. T. A. 220. The evidence shows that the sister performed valuable services for her brother, but it gives but a poor measure of the value of those services in money or its equivalent. This woman was a housewife with a family. She had no business experience. Her services were performed intermittently. We are well satisfied that her services were not equivalent in value to $85,000. Although they formed a valuable consideration to support the agreement, that is a different thing from an adequate and full consideration in money or money’s worth. Lillian T. Laity, Executrix, 23 B. T. A. 1250; affd., 62 Fed. (2d) 952. The decedent was heavily in debt, lived extravagantly, and he knew and his sister knew that she could not take $5,000 out of his salary of $33,000 which went through her hands. The amount was beyond his ability to pay. There is evidence that he made other extravagant promises. It seems necessary, under the circumstances, for the Board to determine the extent to which this claim was contracted for an adequate and full consideration in money or money’s worth. Isbell Porter Co. v. Commissioner, 40 Fed. (2d) 432; Sioux City Stock Yards Co. v. Commissioner, 59 Fed. (2d) 944; John Wanamaker, Philadelphia, 22 B. T. A. 487, 504; E. C. O'Rear, 28 B. T. A. 698; affd., 80 Fed. (2d) 473; Julia Dahl et al., Executors, 24 B. T. A. 1167, 1172; Boston Safe Deposit & Trust Co. et al., Executors, 20 B. T. A. 1159, 1164. “The Board should make as close an. approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making.” Cohan v. Commissioner, 39 Fed. (2d) 540, 544. All of the evidence bearing upon this point has been carefully considered and the conclusion has been reached that a proper deduction in this connection is $15,000.

Reviewed by the Board.

Decision will be entered under Rule 50.


author: Arundell:

text:
    George and Maude P. Mackubin, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83671.
    Promulgated June 25, 1937.

      Joshua W. Miles, Esq., and Carlyle Barton, Esq., for the petitioners.

      C. H. Curl, Esq., and Jonas M. Smith, Esq., for the respondent.
   OPINION.

Arundell:

The respondent has asserted the 50 percent penalty prescribed by section 293 (b) of the Revenue Act of 1928 in cases where any part of a deficiency “is due to fraud with intent to evade tax.” The petitioner denies fraud. Consequently, proof of it is necessary in order to permit assessment, as otherwise the statute of limitations under section 275 (a) has run. The burden of proof is placed on the respondent by statute. Sec. 601, Revenue Act of 1928.

To sustain his burden the respondent points to two matters. One is the transaction whereby securities were transferred by the petitioner to his son, which transaction the respondent says was not a bona fide sale effective to establish a loss. The other is the petitioner’s failure to set out this, transaction as a separate item on the return filed.

The. evidence in this case does not convince us that the petitioner is guilty of. fraud. The established rule is that the respondent’s burden of proof where he alleges fraud “is.discharged only by clear and convincing evidence.” Henry S. Kerbaugh, 29 B. T. A. 1014; Harold B. Franklin, 34 B. T. A. 927. The transaction between father and son in December of 1930 was handled in the way that sales are regularly made through established brokerage houses. The petitioner offered to sell and tire son agreed to buy through the brokerage house. Eegular purchase and sale tickets were made out, the usual bookkeeping entries were made, and the stock which was in the broker’s hands was marked out of one account and into the other. In addition the purchaser deposited some $14,000 worth of collateral, which together with the purchase stock was passed upon by the firm’s margin clerk and was found to be sufficient margin for the account. Not only the petitioner but another member of the firm testified that under the firm’s method of operation the stock passed out of the petitioner’s control when it was taken out of his long account and entered up in the account of the son. We see no basis for characterizing as “pure fabrication”, as counsel for the respondent does, the petitioner’s testimony that the transaction was partly prompted by his desire to help his son work out of debt. The petitioner had faith in the stock and thought it was then under-priced in the market. The son had for a time been employed by the Houston Oil Co. and the petitioner was a director of the company. The Eastern Rolling Mills had their plant at Baltimore and the petitioner had some knowledge of the company’s operations. He was thus in a position to judge of the potentialities of the stocks. It seems to us quite the natural thing for the petitioner to do to put his son in a position to work himself out of debt. It can not be said that the transfer of shares was a gift, in view of the son’s hypothe-cating stock of his own worth $14,000 in order to complete the deal. Subsequent events confirm the fact of an actual sale. He sold for his own account all of the Houston Oil stock in June 1931. In 1932, when the Eastern Rolling Mills stock was transferred back to the petitioner, there were also transferred the son’s 1,000 shares of Houston Natural Gas stock. This seems to us to indicate that the petitioner and his son were handling their transactions on a business basis rather than on a gift basis as might be expected between father and son. Still later we find the son reacquiring the Eastern Rolling Mill stock, depositing other collateral to margin his purchase account, then selling the stock and using the profits to reduce his debt to the petitioner.

The evidence against the bona fides of the sale does not outweigh the matters discussed above. Some of the facts in the case, taken alone, might give rise to suspicion. There is the relationship of the parties to the sale, which it has been held in other cases requires a careful scrutiny of the transaction. There is the lack of any cash passing between purchaser and seller at the time of the sale. These and other details brought out at the hearing have been considered and they do not constitute the clear and convincing evidence necessary to sustain the respondent’s burden.

We see no attempted fraud in the method of reporting the result of petitioner’s transactions in securities. True, he did not give the details of the several transactions which resulted in a capital gain, but this without more does not establish fraud. The description given in the schedule was an honest one. The property involved was securities, as reported; the cost, selling price, and profit were accurately reported. The respondent made some adjustments in the figures in addition to those in question here, but no claim for fraud is advanced by reason of such other items. Failure to itemize may be an indication of fraud when the transactions omitted are not bona fide or where they result in an erroneous report of income. Such is not the case here. The petitioner neither gave an erroneous description of the property involved nor made a false statement of the amount of cost or of the selling price. See Victor A. Dorsey, 33 B. T. A. 295; Sol H. Goldberg, 36 B. T. A. 44.

Upon the face of the petitioner’s return for 1930 it appears that within the two-year limitation period a revenue agent made an investigation and filed a report finding an overassessment. That report was not placed in evidence. Whether or not the transaction here involved was disclosed in that investigation does not appear in this record.

In addition to the matters so far discussed, which are based upon the cold type of the transcript of the hearing, there is in the petitioner’s favor the impression that he and his witnesses made on the Division hearing the case. Both the petitioner and his son, another member of the firm, and an employee of the firm, testified concerning the sale in December 1930. All testified fully and frankly and, apparently, honestly. Upon seeing and hearing the witnesses the Division before whom the case was tried was left with the impression that the transaction of December 1930 was not fraudulently conceived and executed for the purpose of evading tax.

Reviewed by the Board.

Decision will be entered for the petitioner.


author: Smith :

text:
    E. R. Squibb & Sons, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 84283.
    Promulgated June 30, 1937.

      M. T. Moore, Esq., Joseph G. White, Esq., and Thomas F. Boyle, Esq., for the petitioner.

      Rudy P. Hertzog, Esq., for the respondent.
   OPINION.

Smith :

This proceeding is for the redetermination of a deficiency in income tax for 1932 in the amount of $10,985.71. The petitioner alleges that the respondent erred in the determination of the deficiency—(1) in including in taxable income $75,763.50 as profit on the sale of its capital stock during the taxable year, and (2) in failing to allow as an additional deduction from gross income the amount of $4,063.10 accrued as additional liability for New York franchise tax for the year beginning November 1, 1932.

The respondent concedes that the petitioner is entitled to the deduction from gross income of $4,063.10 additional liability for New York franchise tax.

The facts bearing upon the profit realized by the petitioner from the sale of its own shares of stock have all been stipulated.

In 1929 the Squibb Plan, Inc. (Delaware corporation hereinafter called the Squibb Plan), was organized for the purpose of promoting and increasing the distribution and sale of the petitioner’s products. Pursuant to the plan, of which the organization of the Squibb Plan was a part, the distributors of the petitioner’s products were enabled to participate in the petitioner’s profits by subscribing at $50 per share for the class of stock of Squibb Plan known as “Distributors’ Preferred Shares.” In furtherance of that participation plan, by an agreement between the petitioner and Squibb Plan entered into August 14, 1929, the petitioner agreed to make certain payments to Squibb Plan based upon the amount of net purchases made from the petitioner by holders of distributors’ preferred shares, and, in addition, to sell to Squibb Plan one share of common stock of the petitioner at a price of $50 per share for each share of distributors’ preferred shares issued to the distributors of petitioner’s products. During the year 1929, in which the agreement between the petitioner and Squibb Plan was entered into, common stock of the petitioner was selling at a range of from $46 to $82 per share.

Petitioner had on hand no shares .of its common stock to sell to Squibb Plan, and to carry out the agreement purchased shares of its own stock in the open market.

During 1932 the petitioner sold shares of stock purchased in the open market as follows:

All but 70 shares of the common stock of the petitioner sold by it in 1982 were purchased in the open market for the purpose of enabling it to fulfill its contractual obligation with Squibb Plan in accordance with the agreement of August 14, 1929. The 70 shares of its common stock sold to several of its employees during 1932 were sold upon the exercise of warrants held by the employees which had theretofore been granted by the petitioner in consideration of the employees’ efforts in promoting the success of Squibb Plan by securing subscriptions for its preferred shares.

In this proceeding the petitioner submits that:

The accretion represented by the excess of consideration received by the Petitioner upon reissue of its shares over the consideration given in acquiring such shares is capital and is not income within the definition of gross income in Section 22 (a) of the Revenue Act of 1932.

The- respondent, on the other hand, contends that the profit of $75,763.50 was taxable profit of the petitioner for 1932.

Gross- income as defined by section 22 of the Revenue Act of 1932 broadly includes:

* * ⅜ gains, profits, and income derived from * * * sales, or dealings in property, * * * the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source'whatever. * * ⅜

In Irwin v. Gavit, 268 U. S. 161, 166, the Supreme Court, in rejecting the contention that certain payments there involved did not constitute income, said:

* * * If these payments properly may be called income by the common understanding of that word and the statute has failed to hit them it has missed so much of the general purpose that it expresses at the start. Congress intended to use its power to the full extent. Eisner v. Macomher, 252 ü. S. 189, 203, * * *

In Helvering v. Stockholms Enskilda Bank, 293 U. S. 84, the Court, referring to a similar section of a previous act, said that the statute reveals in its provisions an intention on the part of Congress to tax “pretty much every sort of income subject to the federal power.” Cf. United States v. Safety Car Heating & Lighting Co., 297 U. S. 88.

In view of the all-inclusive terms of the statute it is evident that the profit of $75,763.50 realized by the petitioner from the sale of its own shares of stock in 1932 is subject to tax unless the transaction can be considered a capital transaction. As stated in Commissioner v. Woods Machine Co. (C. C. A., 1st Cir.), 57 Fed. (2d) 635; certiorari denied, 287 U. S. 613:

Whether the acquisition or sale by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction involved. * * * [Citing Walville Lumber Co. v. Commissioner, 35 Fed. (2d) 445; Spear & Co. v. Heiner, 54 Fed. (2d) 134.]

In the Woods Machine Co. case the taxpayer, in settlement of a patent infringement suit, received shares of its own capital stock which it retired, and the question was whether such acquisition gave rise to taxable gain. The court held that if stock is acquired or parted with in connection with the readjustment of the capital structure, capital gain would not be realized, but further stated:

* * * But where the transaction is not of that character, and a corporation has legally dealt in its own stock as it might in the shares of another corporation, and in so doing has made a gain or suffered a loss, we perceive no sufficient reason why the gain or loss should not be taken into account in computing the taxable income. * * *

Similarly, in Allyne-Zerk Co. v. Commissioner (C. C. A., 6th Cir.), 83 Fed. (2d) 525, the transaction in which the taxpayer received some of its own stock as partial consideration for a sale of its assets was regarded as taxable. To the same effect see Commissioner v. Boca Ceiga Development Co. (C. C. A., 3d Cir.), 66 Fed. (2d) 1004. In the last named case the court stated:

The Board’s decision that a corporation realizes neither a gain nor loss from the purchase of its stock was in keeping with its position at the time when it determined this case (Houston Brothers Company, 21 B. T. A. 804; 8. A. Woods Machine Company, 21 B. T. A. 818; Schiller Piano Company, 23 B. T. A. 376), although its earlier decisions were to the contrary. Behlow Estate Company, 12 B. T. A. 1365; New Jersey Porcelam Company,, 15 B. T. A. 1059. Meanwhile, the courts have held that a corporation acquiring its own stock may recognize a gain or loss provided the purpose of the transaction was not merely a capital readjustment [Johnson v. Commissioner (C. C. A.) 56 F. (2d) 58, certiorari denied 286 U. S. 551, 52 S. Ct. 502, 76 L. Ed. 1287], but a sale of property. Walville Lumber Company v. Commissioner, 35 F. (2d) 445 (C. C. A. 1) ; Spear & Co. v. Heiner, 54 F. (2d) 134 (D. C. W. D. Pa.) ; Commissioner v. S. A. Woods Machine Company, 57 F. (2d) 635, 636 (C. C. A. 1). Since these decisions, the Board has adopted the rule laid down by the courts. Soughton and Dutton Company, 26 B. T. A. 52.

The Board reached a like conclusion in R. J. Reynolds Tobacco Co., 35 B. T. A. 949.

The petitioner contends that the purchase and sale of its own shares of stock was not for the purpose of deriving a profit from the transactions involved, but was necessitated by the agreement which it had entered into with Squibb Plan on August 14,1929. We are of the opinion that it is immaterial that the transactions were necessitated by the agreement which it had with Squibb Plan. The petitioner admittedly realized a profit of $75,763.50 from the sale of its own shares of stock which it previously had purchased in the open market. That profit is clearly taxable.

Judgment will be entered wider Rule 50.


author: Harron :

text:
    Virgil P. Ettinger, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76248.
    Promulgated June 30, 1937.

      Frank J. Albus, Esq., for the petitioner.

      P. A. Bayer, Esq., for the respondent.
   OPINION.

Harron :

The petitioner claims that the securities he received from the Richard Ettinger partnership were gifts to him and he has reported a claimed loss under the provisions of section 113 (a) (2) of the Revenue Act of 1928. If the petitioner received these securities as gifts he is entitled to the loss. The respondent contends that the petitioner received the securities by purchase and not as gifts.

Richard Ettinger has testified as follows:

I told Virgil that I wanted to do something for him because I had done things for other members of the family and I said that I wanted to give- him stock and that I had two objects in giving him that stock; one was to make him á gift that would benefit him and the other was to get a benefit by taking some stock losses that I could not have benefited from myself.

In 1931 the petitioner had one of his most profitable years in business. He received gross receipts of $254,785.46 from his business and a net income after business expenses of $155,088.79. The petitioner’s brother, Richard, was familiar with the petitioner’s income every year, according to the petitioner’s testimony. When the petitioner received the stock he intended to sell it before the end of the taxable year to realize losses.

The petitioner received securities from the partnership account agreeing to pay an amount determined by Richard Ettinger. The parties have referred to this amount as a “lien” on the stock. It is true that the partnership had a margin account with Lamborn, Hutchings & Co. but there is no evidence that these brokers had any lien in any specific amount on the securities transferred to the petitioner. On cross-examination, Richard Ettinger testified as follows, with reluctance, and at questioning of the presiding Member of the Board:

⅜ * * the way I arrived at it (the amount to be paid by the petitioner) was to see what the market value of the stock was and to take some figure, materially less than the market value.

The facts show that the figure fixed by Richard Ettinger was not “materially” less but a few points under the market price on the date of transfer, i. e., on December 14, 1931, 100 shares of Union Pacific were transferred to the petitioner. The stock was selling around $75 per share on that day on the market. Richard fixed the amount to be paid by petitioner at $70 and petitioner paid $7,000 for 100 shares of Union Pacific. On December 17 the petitioner sold this stock on the market at around seventy-two and received $7,278.50. All the transactions are similar.

On the facts we are of the opinion that the amount paid by the petitioner for each block of stock was not payment of the broker’s lien on such stock, if there was one. Furthermore, we are not concerned with the margin account of Richard Ettinger’s partnership for no facts are present as to the nature of his credit with his broker. He had a large account with Lamborn, Hutchings & Co. and we know nothing with respect to whether they were pledges of any stock or had any particular liens in any particular amounts on stock owned by the Richard Ettinger partnership. In any event, there is not as a matter of law any proportional lien against each block of stock in a margin account (Meyer, The Law of Stock Brokers and Stock Exchanges, p. 314), and so long as a broker considers the margin sufficient he will, of course, allow a customer to order out any block of securities he desires. There is no evidence that Richard Ettinger’s margin account was under-margined or that the demand for payments in specific amounts was demanded by the broker.

Having the fact before us that the so-called “lien” was fixed by Richard Ettinger by his own arbitrary method without any consultation with his brokers, we hold that the amounts paid by petitioner constituted a purchase price; that petitioner 'bought the stock; and that there'was no gift to him of the stock.' The brokers acted solely as agents in transferring both the securities and payments involved and the result is the same as if the partnership had transferred directly to the petitioner the $28,487.50 worth of securities and the petitioner had paid the $25,400 directly to the partnership. We are unable to disregard the substantial payments by the petitioner for the stock. A gift is a transfer without consideration but here the petitioner paid almost the full market price for the securities. The Richard Ettinger partnership later purchased most of the same securities again on the market and it is apparent that the total amount paid by the petitioner would easily enable the partnership to reinvest in these good investments.

There have been decisions where this Board and the courts have looked through the labels of “gift” and “sale” and held that where the consideration was greatly less than value there was part gift, a gift being made of the excess of the value over the “bargain price” paid. See May Rogers, 31 B. T. A. 994. Each case must be decided on its own facts and we believe there is no requirement here that it be held that any part of the value of the securities passed to the petitioner as a gift. It is held that the respondent is sustained. It is held further that the basis to the petitioner is the cost to him of the stock and he is taxable on the gain realized from the sale of the securities in the taxable year. Since we hold that the petitioner purchased the stock there is no need for considering his effort to convert what he chose to believe a “capital loss” into an “ordinary loss.” With respect to a few sales and repurchases of stock shown in the findings of fact the petitioner realized a loss of $35. He is entitled to this and his net gain appears to be $2,394.

In determining the market value of the several blocks of stock on the respective dates of transfer to the petitioner we have used the closing quotations on the New York Stock Exchange, following Luther Bonham, 33 B. T. A. 1100, 1105; affd., 89 Fed. (2d) 125, and St. Louis Union Trust Co. et al., Co-trustees, 30 B. T. A. 310, 381.

Decision will be entered under Rule 50.


author: Mellott:

text:
    Paul B. Hunt, Petitioner, v. Commissioner of Internal Revenue, Respondent. George C. Shepard, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 49508, 49509.
    Promulgated June 30, 1937.

      H. A. Mihills, C. P. A., for the petitioners.

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

Mellott:

Many of the facts set out in the above findings were considered by this Board in proceedings brought by 16 stockholders of the City Ice & Supply Co. (the old company) to set aside deficiencies determined against them as transferees of such company. The proceedings were consolidated for hearing, an unpublished memorandum opinion of the Board was filed, and on October 4,1933, decision was duly entered that petitioners were not liable as transferees. (See Fred Messerschmidt et al., Docket No. 47848.) The record in- that hearing is not in evidence in the instant proceedings, though the same documents that were offered and received as exhibits therein, in addition to others, are again in evidence before us.

Petitioners contend that the decision of the Board in the Messerschmidt case, supra, is res judicata of the present controversy; but not so. The question determined therein was whether the stockholders of the old company—not these petitioners—were liable as transferees. These petitioners were neither parties to that proceeding nor in privity with the parties therein. Hence the doctrine relied upon is inapplicable. State of Arkansas v. State of Tennessee, 246 U. S. 158, 176; Western Union Telegraph Co. v. Foster, 247 U. S. 105, 115; Bankers Pocahontas Coal Co. v. Burnet, 287 U. S. 308. Nor is it material that the Commissioner has abandoned the theory relied upon in the Messerschmidt case, and now seeks to hold these petitioners as transferees. There is nothing in the law which would preclude him from determining a deficiency against one group of taxpayers on one theory and against another group on an entirely different theory. Of course, he can not recover the same tax twice; but he is not attempting to do so.

The fact that some of the findings herein are at variance with those made in the Messerschmidt case is not being overlooked. Thus it was there held, under the evidence then before the Board, that the outstanding preferred stock of the old company was redeemed by it out of its own assets, after which the stockholders of the old company sold their common stock to Hunt and Shepard. B'ut evidence in addition to that which was before the Board when such finding was made has now been adduced, which convinces us that the transfer of the assets of the old company to Hunt and Shepard, and to their nominee, the new company, occurred prior to the sale of the stock under the escrow agreement. Moreover, both parties tacitly admit that the assets were transferred prior to the sale of the stock.

It is also apparently admitted by both parties that the basis for determining the gain or loss from the sale or other disposition of the property of the old company was $281,756.79. If the assets were disposed of in a transaction in which gain or loss under the statute was to be recognized, then it must be held that the old company—it keeping its books on the accrual basis—should have accrued upon its books the sum of money plus the fair market value of the property which it was entitled to receive. (Sec. 202 (c), Revenue Act of 1926.) Its gain, therefore, which should have been accrued upon its books is, as' computed by the respondent, the excess of the amount realized— $337,888.54 cash, plus $221,666.67, value of the preferred stock of the new company—over the basis of $281,756.79, or $277,748.42.

But, say petitioners in their pleadings: (a) The assets were acquired by them from the old company as purchasers for value, an adequate consideration being paid therefor; (b) they were not at any time owners of the capital stock of the old company; and (c) the proposal for the purchase of the assets of the old company by them, and under which such purchase was made, while it contained an agreement that they, as purchasers, were to assume all existing liabilities of the old company, did not contemplate that any liabilities other than those appearing upon the books of the company as of the close of business on May -8, 1926, should be assumed or paid by them.

The respondent contends that petitioners, through their agents and attorneys, having suggested a plan thereafter carried out, by which they were to purchase all of the assets and continue the going business of the old company, for a consideration of cash and stock, which cash and stock were to be distributed and were distributed to the stockholders of the vendor corporation, as part of the general plan, have thus made themselves liable, under the trust fund doctrine, for the income taxes of the vendor, it being thus deprived of any means of making payment of such taxes.

In support of this contention respondent relies upon the well settled principle of law that where assets of a corporation are sold for an equivalent consideration, which under an agreement is paid to the stockholders, leaving the corporation without assets to satisfy its creditors, the purchasing corporation is liable to creditors of the selling corporation to the extent of the value of the property received, the sale being in fraud of creditors and the purchaser being a party to such fraud through his knowledge that the result of the transaction must necessarily leave such creditors with no assets from which to satisfy their claims. Woodley Petroleum Co., 16 B. T. A. 253; Gideon-Anderson Co., 20 B. T. A. 106; Wayne Body Corporation, 22 B. T. A. 401; Magnolia Window Glass Co., 23 B. T. A. 1242; Signal Gasoline Corporation, 25 B. T. A. 532; and Fostoria Milling & Grain Co., 11 B. T. A. 1401; and West Texas Refining & Development Co. v. Commissioner, 68 Fed. (2d) 77.

Upon brief petitioners argue, first, that the tax liability here under consideration not only was not known at the time of the conveyance of the assets, but also could not have materialized until after the assets were sold, and hence no liability existed which could have been, or was, assumed by them as purchasers. We agree. The liability for the tax did not arise until the assets were transferred. The assumption by the petitioners of the existing liabilities of the old company did not include the tax here in dispute; Nor did the transfer of the assets ipso facto constitute a fraud upon the United States as a creditor; for it was not a creditor of the old company prior to, or at the time, the assets were transferred.

We also agree with petitioners’ contention that the principle of law and the cases relied upon by the respondent relating to tax liabilities imposed as a result of the operations of a business and to liabilities which accrued and existed prior to the date of the conveyance of the assets are not determinative of the issue before us.

The case at bar, as pointed out by petitioners, is somewhat analogous to Reid Ice Cream Corporation v. Commissioner, 59 Fed. (2d) 189. In that case the corporation purchased assets of another corporation for $337,500 and assumed the selling companies’ liabilities as of a specified date, together with subsequent liabilities incurred in ordinary routine business. The purchaser paid the seller the purchase price of $337,500 and the latter distributed it to its stockholders. Neither the purchaser nor its stockholders participated in the profits of the sale. The tax return of the seller showed a tax liability resulting from the profits of the sale, which the respondent proposed to. assess and collect from the purchaser under section 280 of the Revenue Act of 1926. The Circuit Court of Appeals for the Second Circuit decided that the purchasing corporation did not assume the liability for the tax imposed on the profit; this liability did not arise until the sale was completed and was not therefore an existing liability. The court said:

A tax on the profits of a sale such as is involved here is one of extraordinary liability, and, unless assumed in plain terms, ought not to be imposed upon the .transferee of the property. Where the parties spoke they referred to the liabilities incident to the business. An income tax on the seller’s profits is not a liability of the business; it is a liability which follows the sale, and the business changes hands before the tax liability arises.
A purchaser of property for value has, in his position as a transferee, no liability to pay his vendor’s tax; if he incurs such, he does so by a promise ex contractu. His liability is not the liability of the transferee but the liability of a promisor. The act deals with the peculiar liability of the transferee. Here there was no taxable fund until after the sale, and the petitioner never partook of a taxable fund because no tax liability arose except upon receipt by the seller of the purchase price. That, and not the assets sold, constitutes the taxable fund. There could not be any claim against the transferred assets. Therefore section 280 creates no liability; it is remedial and presupposes a liability for the enforcement of which it is designed to furnish a remedy.

But there are a number of important differences between the facts in the instant proceedings and those in Reid Ice Cream, Corporation, supra. In the Reid case the purchaser paid the seller the purchase price. In the instant proceedings, although petitioners promised that they would cause the purchase price to be paid, delivered, and surrendered to the old company, they did not do so. Ill the Reid case the findings show that the purchaser did not participate in the profits of the sale. In the instant proceedings petitioners appropriated to their private use the entire proceeds of the sale. They used.these proceeds to purchase the stock of the old company under the terms of the escrow and option agreements. When they did this, they were not. acting as the agents of that company. They, and not the old company, were parties to the agreement whereby the escrow agent was to purchase the stock with funds they were to furnish. That they exercised the exclusive option given them is apparent from the receipts given by the stockholders and the receipt which Shepard executed for the stock.

The remaining contentions of the. petitioners may be considered together. True it is that if petitioners had purchased the assets of the old corporation for an adequate consideration, which had been paid to it, they would not be liable for the vendor’s tax upon such transaction, in the absence of an express agreement to pay it. (Reid Ice Cream Corporation v. Commissioner, supra.) But they- did not pay the consideration for the assets of the old company to it. Instead of doing so they appropriated the funds and property, which under their contract they promised would be delivered to it—cash in the amount of $337,838.54 and preferred stock of the new company of the value of $221,666.67—and used it to purchase the stock of the old company from its stockholders in accordance with the terms of the escrow and option agreements. As pointed out, supra, the old company kept its books and filed its income- tax returns on the accrual basis. When it transferred its assets to petitioners and their nominee, it was required to accrue upon its books the consideration which was to be paid (Spring City Foundry Co. v. Commissioner, 292 U. S. 182) and its liability for the tax upon the profit immediately came into being and likewise should have been accrued. The Government had a perfect right to look to the proceeds of the sale for the payment of the tax. Such proceeds constituted the taxable fund to which the tax attached. (Reid Ice Cream Corporation v. Commissioner, supra.) In equity, if not in law--and we need not decide which—such fund should have been used for the payment of the tax. The diversion and appropriation of this fund by these petitioners, leaving the old company without funds to pay the tax upon the profit derived from the disposition of its assets (cf. Phillips v. Commissioner, 283 U. S. 589; Rubel v. Commissioner, 74 Fed. (2d) 27), made them liable for the payment of the tax.

We hold that the respondent did not err in determining that the petitioners are liable under the provision of section ’ 280 of the Revenue Act of 1926, as transferees of the property of the City, Ice &,Supply Co., in respect of the income tax imposed upon said company for the year 1926.

Reviewed by the Board.

Judgment will be entered for the respondent.


author: Miller:

text:
    John E. Zimmermann, Petitioner, v. Commissioner of Internal Revenue, Respondent. Sarah A. F. Zimmermann, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 82491, 82488.
    Promulgated July 13, 1937.

      • Henry 8. Drinher, Jr., Esq., and Frederick E. 8. Morrison, Esq., for the petitioners.

      Hartford Allen, Esq., and Walter W. Kerr, Esq., for the respondent.
   OPINION.

Miller:

These cases present for our consideration a familiar device for tax avoidance, now prohibited by section 24 (a) (6) of the Revenue Act of 1934, namely, the transfer of securities by one spouse to the other, to establish capital losses for deduction from income.

As the transactions involved in each of the two cases occurred prior to the enactment of the 1934 Act, our decision turns upon the question whether these transfers constituted bona-fide sales. That question turns upon the further question whether the seller, in each case, parted, finally with all title and right of every kind in and to the securities transferred or whether he remained in a position of control thereof. Commissioner v. Behan, 90 Fed. (2d) 609.

Although it has been said in a number of cases that transfers between members of the same family should be subjected to searching scrutiny, the object of the scrutiny is to determine whether the actual formalities of a sale have been observed, and this Board and the courts have recognized the validity of husband-and-wife sales made to realize tax losses in numerous cases. Andrew J. Peters, 28 B. T. A. 976; appeal dismissed, 69 Fed. (2d) 999; Benjamin T. Burton, 28 B. T. A. 1242; Joseph E. Uihlein, 30 B. T. A. 399; affd., 82 Fed. (2d) 944; Charles F. Fawsett, 31 B. T. A. 139; Franh M. Arguimbau, 31 B. T. A. 604; Edmund S. Twining, 32 B. T. A. 600; affd., 83 Fed. (2d) 954, certiorari denied, 299 U. S. 578; Thomas W. Behan, 32 B. T. A. 1088; affd., Commissioner v. Behan supra; Du Bois Young, 34 B. T. A. 648.

In the instant cases the petitioners, husband and wife, acted pursuant to the advice of counsel throughout. The record reveals a scrupulous compliance with the law as stated in the decisions of the Board, and of the courts. Cf. Charles E. Mitchell, 32 B. T. A. 1093, at p. 1130.

The sales were made in all cases at the fair market price, through a broker. Commissioner v. Behan, supra; Du Bois Young, supra; Edmund S. Twining, supra. Commissions were charged to the seller and the buyer and the tax was charged to the seller. Commissioner v. Behan, supra; Edmund S. Twining, supra. The petitioners maintained separate brokerage accounts, and upon the execution of each order their separate accounts were charged and the usual broker’s memorandum was sent to each. Charles F. Fawsett, supra. The transactions were treated as sales and purchases in .each case upon the individual books of account of both seller and buyer. Joseph E. Uihlein, supra.

Each petitioner was financially able to buy and pay for all purchases made. Commissioner v. Behan, supra; Du Bois Young, supra; Charles F. Fawsett, supra; Edmund 3. Twining, supra; Andrew J. Peters, supra.

There was no agreement or understanding between the petitioners that the purchaser would hold the transferred securities for the other, or that the purchase price would be returned to the purchaser; or that the purchaser would repurchase or reacquire the securities sold. Du Bois Young, supra; Edmund S. Twining, supra; Joseph E. Uihlein, supra.

There was, in fact, no reacquisition of. any of the securities sold, by either purchaser, but instead such securities were, in each instance, retained as a part of the separate estate of the purchaser or sold to strangers. Du Bois Young, supra; Joseph E. Uihlem, supra; Edmund S. Twining, supra.

Dividends and interest received by the respective petitioners upon securities so purchased and held were returned in their income tax returns for subsequent years. Thomas W. Behan, supra.

The fact that there were simultaneous sales—husband to wife and wife to husband—each selling different securities to the other, but all in the same transaction, arranged by counsel for petitioners and consummated by the joint action of petitioners, petitioners’ secretary, petitioners’ counsel and petitioners’ broker, did not cause the sales to be any the less bona fide. The question is whether “the seller each time followed a usual procedure in making absolute bona fide sales of such property which would serve to fix any losses so that they would be realized , and so deductible from gross income under section 23 of the Revenue Act of 1928, subdivision (e) (1), (2) * * *."Commissioner v. Behan, supra. In both the Behan case and the Fawsett case similar situations existed, and in each case the sales were held to be bona fide.

Respondent contends that the sales were not bona fide because the purchase price of the securities purchased by Sarah Zimmermann was paid, in part at least, by John Zimmermann from fund? realized by him from the sale of the same securities.

This contention is based, apparently, upon the fact that on May 15, 1933, Zimmermann deposited in an individual and joint account of himself and his wife the sum of $16,804.20, following which, on May 17, 1933, he drew against the same account a check in the amount of $17,000, which was credited to Sarah Zimmermann’s brokerage account. These transactions took place nearly five months after the sales of securities under consideration. The evidence shows, that Sarah Zimmermann’s credit with her brokers was good at all times; that her dealings were protected by adequate collateral, and, as a matter of fact, her debit balance with her brokers was wiped out shortly after by sales of securities and a credit balance of approximately $20,000 was paid over to her by them. Moreover, Sarah Zimmermann had actually drawn a check in the amount of $17,000 on the same account and for the same purpose, but for some reason it was not available at her husband’s office when he was ready to send it to the brokers office, so he drew another in the same amount. The amount of $17,000 was, comparatively, only a small part of the total price of the securities purchased by Sarah Zimmermann.

Even if we treat the $17,000 as John Zimmermann’s, throughout the transaction, the result is the same, for the Board has sustained sales in which the wife’s purchase money was the gift of the husband. Cf. Commissioner v. Behan, supra; Arguimbau v. Commissioner, supra. But under all the circumstances of separate accounts here present, we need not go so far. The Board has also upheld as bona fide sales made and purchases effected with funds kept in a joint account of husband and wife. Carl P. Dennett, 30 B. T. A. 49.

The situation in this case comes clearly within the test applied by the court in Commissioner v. Behan, supra, where it said:

What makes weight in favor of the Commissioner’s contention that gifts were the only results of the transactions are such inferences as might be drawn from the fact that the respondents were married and because of that relationship and the fact that each helped the other finance purchases the financial well being of one might inure to the benefit of the other. Yet it was shown that each was financially able to buy and pay for all purchases made leaving their mutual financial assistance but a convenience; not a necessity without which the purchases were impossible. * * *

The Commissioner points out also that Zimmermann carried out the sales on his wife’s behalf as well as his own, but we can find nothing objectionable in such an agency. Sarah Zimmermann was informed of his intentions, and, it appears, generally left such matters to him. The fact that a husband wholly manages and controls his wife’s property as her agent does not alter the ownership of the property itself. Cf. Poe v. Seaborn, 282 U. S. 101. Under the laws of Pennsylvania a wife may hold a separate estate, make contracts, and buy and sell property of the character here involved. Purdon’s Pennsylvania Statutes Annotated, title 48, Marriage §§ 31, 32; Penn. Laws, 1893, p. 344 (Act of June 8,1893, § 1, 2); Dig. Penn. Law (1921) §§ 14569, 14570, 14574. She can also act through an agent and her husband can act as her agent. See Goedecke v. Mock, 174 Atl. 607; Fitzgerald v. Kwaterski, 174 Atl. 596; reversed on another point, 178 Atl. 385. See also Commissioner v. Behan, supra, citing Commissioner v. Hale, 67 Fed. (2d) 561.

In both Charles F. Fawsett, 31 B. T. A. 139, and Edmund S. Twining, 32 B. T. A. 600, the Board upheld, as bona fide, sales made by husband to wife and wife to husband, where the husband acted both for himself and his wife. The important consideration is that the sales in each case were made in such manner as to divest the seller of title and control, according to the tests which have been laid down in the decisions.

We conclude, therefore, that the sales of the various stocks and bonds by Zimmermann and by his wife were bona fide and the resulting losses should, accordingly, be recognized for tax purposes.

At the conclusion of the hearing of this case the presiding Board Member, after a full consideration of all the evidence presented, held that neither petitioner made the sales here in question with an intention to defraud the Government of income tax properly due. After a full review of the evidence, we are of the same opinion.

Respondent abandoned this issue in his brief. In any event, as we have found that the sales were bona fide, the finding necessarily follows that there was no fraud. Du Bois Towng, supra; Thomas W. Behan, supra; and the penalties assessed will be abated.

We have found on uncontradicted testimony of Zimmermann the cost of the Pioche Mines, Consolidated, bonds and their fair market value at date of sale. They were bought at par and sold at market. With the first $5,000 lot bought in 1930 Zimmermann received a stock bonus of 500 shares. These 500 shares had then a fair market value of $1 each; and this value should be considered in determining the cost of this lot of bonds to Zimmermann.

With respect to the second $5,000 lot of bonds of the Pioche Mines, Consolidated, petitioner, John E. Zimmermann, failed to show that he sustained a capital loss. He subscribed for the last $5,000 block of these bonds before December 29, 1930; paid for half of them on December 29, 1930, and for' the other half in January 1931. The statute, section 101 (c) (8), Revenue Act of 1932, defines capital assets as property held by the taxpayer for more than two years. According to the evidence, Zimmermann may have acquired these bonds (by subscription of the whole of the $5,000 lot, and by actual delivery of one-half of this lot) as late as December 28, 1930, and since the sale was made on December 28, 1932, he would not have held any of the last $5,000 lot more than two years. The sale and transfer of title took place on December 28, 1932, although the bonds were not actually delivered until the next day. We held in Harriet M. Hooper, 26 B. T. A. 758, that the day of purchase is to be excluded (which we have assumed to be December 28,1930, since the testimony does not permit us to assume the date to be earlier) and the day of sale to be included (here December 28,1932) in reckoning the period, and unless it covers one day more than two years, the requirement of the statute has not been met. Here, it will be seen, the period December 29, 1930, to December 28, 1932, is precisely two years, and hence, under the rule of that case, the last $5,000 block of Pioche Mine bonds was not a capital asset and any loss on their sale is therefore subject to the limitations of section 23 (r) (1). The capital net loss will be reckoned without them.

Judgment will be entered in each case under Rule 50.

       SEC. 24. ITEMS NOT DEDUCTIBLE.
      (а) General Rule.—In computing net income no deduction shall in any case be allowed in respect of—
      * ***** *
      (б) Loss from sales or exchanges of property, directly or indirectly, (A) between members of a family, or (B) except in the case of distributions in liquidation, between an individual and a corporation in which such individual owns, directly or indirectly, more than 50 per centum in value of the outstanding stock. For the purpose of this paragraph— (C) an individual shall be considered as owning the stock owned, directly or indirectly, by his family; and (D) the family of an individual shall include only his brothers and sisters (whether by the whole or halfblood), spouse, ancestors, and lineal descendants.