author: Smith:

text:
    Nancy K. McFeely, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69492.
    Promulgated February 2, 1934.

      Harry\ B. WasseTl, Esq., for the petitioner.

      W. F. Gibbs, Esq., for the respondent.
   OPINION.

Smith:

The question presented by this proceeding is the amount of taxable profit realized by the petitioner from the sale of 1,000 shares of Radio “A” common stock on March 14, 1929, for the sum of $484,460, and whether the profit realized was a capital net gain or ordinary net income. The petitioner contends that, whatever the amount of the profit, it was a capital net gain within the meaning of the statute, and the respondent contends that it was ordinary net profit and not taxable under the capital net gain provisions of the statute. The contentions of the respondent are set forth in his deficiency notice to the petitioner under date of December 16, 1932, as follows:

3. The profit of $404,085.00 on the sale of 1,000 shares of Radio Corporation of America “A” has been included in schedule 8. Your contention that the profit on the sale of this stock represented capital net gain under the provisions of Section 101 of the Revenue Act of 1928 for the reason that you acquired an absolute right in property of value in 1925 and sold such property in 1929, more than two years later, has been considered.

Section 101 (c) (8) (B) of the Revenue Act of 1928 provides as follows:

“ In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under the provisions of section 113, such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person.”
It appears that the stock in question was acquired under an assignment by your mother of a portion of her interest in the Estate of T. H. Given and the basis for gain or loss purposes in accordance with section 113 (a) (2) of the Revenue Act of 1928 is the same as it would have been in your mother’s hands. Therefore, the period during which your mother held the property should be added to the period it was held by you in order to determine the total period for which the particular property was held.
In this case, the decree of distribution of the stock was not made until November 3, 1927 and that date governs for gain or loss purposes under section 113 (a) (5) of the Revenue Act of 1928. In view of this fact it is inconsistent to hold that the stock was in your mother’s hands prior to November 3, 1927, the date of the decree of distribution. That date which governs for gain or loss purposes, as the law specially so provides, should be used also for capital gain determination. Since the Radio Corporation stock was sold on March 14, 1929, not having been held by you nor by the donor for a period of two years from November 3, 1927, the profit may not be considered capital net gain but is subject to both normal tax and surtax.

Section 101 of the Revenue Act of 1928, so far as is material to our determination, is as follows:

(a) Tax in case of capital net gain. — In the case of any taxpayer, other than a corporation, who for any taxable year derives a capital net gain (as hereinafter defined in this section), there shall, at the election of the taxpayer, be levied, collected, and paid, in lieu of all other taxes imposed by this title, a tax determined as follows: a partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted and the total tax shall be this amount plus 12½ per centum of the capital net gain.
⅜ ⅜ ⅜ ⅜ ⅜ ⅜ *
(c) Definitions. — For the purposes of this title—
⅜ * * * s * * *
(8) “ Capital assets ” means property held by the taxpayer for more than two years (whether or not connected with his trade or business) * * *. For the purposes of this definition—
⅜ ⅜ ⅜ # # ⅜ *
(B) In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under the provisions of section 113, such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person.

Section 113 of the same act provides in material part as follows:

(a) Property acquired after February 28, 1913. — The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that'—
* * » * ⅜ * *
(2) Gift afteb December 31, 1920. — If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift. If the facts necessary to determine such basis are unknown to the donee, the Commissioner shall, if possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof. If the Commissioner finds it impossible to obtain such facts, the basis shall be the fair market value of such property as found by the Commissioner as of the date or approximate date at which, according to the best information that the Commissioner is able to obtain, such property was acquired by such donor or last preceding owner;
*******
(5) Property Transmitted at Death. — If personal property was acquired by specific bequest, or if real property was acquired by general or specific devise or by intestacy, the basis shall be the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent’s estate from the decedent, tlie basis in the hands of the estate shall be the fair market value of the property at the time of the detath of the decedent. In all other cases if the property was acquired either by will or by intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. In the case of property transferred in trust to pay the income for life to or upon the order or direction of the grantor, with the right reserved to the grantor at all times prior to his death to revoke the trust, the basis of such property in the hands of the persons entitled under the terms of the trust instrument to the property after the grantor’s death shall, after such death, be the same as if the trust instrument had been a will executed on the day of the grantor’s death.

It will be noted from our findings that T. H. Given died testate on June 28,1919. In his will he made no provision for his widow. The widow, on July 3, 1919, elected to take, against the will of her deceased husband, one half of his estate in lieu of her dower under the laws of Pennsylvania. By virtue of such election one half of the estate of her deceased husband vested in her immediately and absolutely. Re Greiner’s Appeal, 103 Pa. 89. It was not, however, one half of the specific assets of the estate which became her property by virtue of the election, but only one half of the estate after the debts and other charges of administration should be paid. The basis for determining the gain or loss upon the sale in 1929 of personal property acquired by the widow, Martha A. Given, from the estate of her deceased husband was the value thereof at the date of distribution to her. Section 113 (a) (5), Revenue Act of 1928; Ralph W. Harbison, 26 B.T.A. 896.

The petitioner contends that there was a constructive distribution of the estate of T. H. Given on May 20,1925; that in legal effect the 1,000 shares of Radio “A” common stock were distributed to Martha A. Given on that date and that Martha A. Given was the owner of them until they were given to the petitioner by virtue of the agreement of August 1,1925; that by virtue of section 101 (c) (8) (B) the time during which the securities were in the ownership of Martha A. Given should be added to the time during which the ownership was in the petitioner for the purpose of determining whether the profit realized upon the sale on March 14, 1929, was capital net gain or ordinary net income.

In our opinion the evidence does not support the contentions of the petitioner. While the shares of stock were in the custody of the executors of the estate of T. H. Given they were not in any proper sense “ held ” by the petitioner. If the executors by agreement of the parties or otherwise had sold the shares and realized a profit therefrom the profit would unquestionably have been taxable to the estate and not to the beneficiaries. Anderson v. Wilson, 289 U.S. 20.

It seems clear that if Martha A. Given had not assigned any portion of her estate to the petitioner, but had received the 1,000 shares of Radio stock in question on November 3, 192V, and had sold them on March 14, 1929, the profit would have constituted ordinary net income and would have been taxable accordingly, for she would have held them for a period of less than two years at date of sale. Section 113(a)(5). We can not see that the petitioner stands in any better position than her donor.

Conceivably, if in 1929 the petitioner had sold, not the 1,000 shares of Radio stock in question, but her interest in the estate of T. H. Given, the profit would have constituted capital gain; for she acquired that interest by gift from her mother on August 1, 1925, and would have owned it for a period of more than two years at date of sale. But she did not sell the gift res or a fractional part of it. She sold shares of stock which were distributed to her by the executors of the estate on November 3, 1927. Prior to that date the dominion and control over the shares were in the executors of the estate and not in the petitioner. In view of these facts we think that it can not be said that the petitioner held them for a period of two years at the date of sale. Johnson v. Commissioner (C.C.A., 3d Cir.), 52 Fed. (2d) 726; Schoenberg v. Burnet (C.A.D.C.), 55 Fed. (2d) 543. Contra, New York Trust Co., etc. v. Commissioner (C.C.A., 2d Cir.), 68 Fed. (2d) 19. The respondent’s contention on this point is sustained.

No contention is made by the petitioner as to the value of the 1,000 shares of Radio “A” common stock at the basic date, claimed by the respondent to be November 3, 1927. In the absence of evidence showing error on the part of the respondent in his determination, his valuation is approved.

Reviewed by the Board.

Judgment will be entered for the respondent.


source: Caselaw Access Project

author: TRAmmell :

license: Public Domain

text:
    Vermont Hydro-Electric Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59638.
    Promulgated February 2, 1934.

      Everett H. Maxey, Esq., for the petitioner.

      Harold Allen, Esq., for the respondent.
   OPINION.

TRAmmell :

The petitioner contends that it was affiliated with the National Light, Heat & Power Co. during the period January 1 to March 31, 1926, and was affiliated with the Middle West Utilities Co. during the period April 1 to December 31, 1926. In support of its contention it urges that for the purpose of determining the question of affiliation its cumulative preferred stock is to be considered as nonvoting stock which was limited and preferred as to dividends. The respondent contends that the petitioner was not affiliated with either of the companies as contended by it and urges that the preferred stock of the petitioner is to be considered in determining the question of affiliation.

The Eevenue Act of 1926 provides in part as follows:

Sec. 240. (a) Corporations which are affiliated within the meaning of this section may, for any taxable year, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. * * *
* ⅝: ⅝ ⅜ ⅜ # sfc
(d) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns at least 95 per centum of the stock of the other or others, or (2) if at least 95 per centum of the stock of two or more corporations is owned by the same interests. As used in this subdivision the term “ stock ” does not include nonvoting stock which is limited and preferred as to dividends. This subdivision shall be applicable to the determination of affiliation for the taxable year 1926 * * *.

While the parties have stipulated that all of the petitioner’s outstanding common stock was owned by the National Light, Heat & Power Co. during the year 1926, the record is entirely silent as to the ownership of the petitioner’s preferred stock during that year or as to the ownership of the stock of the National Light, Heat & Power Co. or of the stock of the Middle West Utilities Co. Since the petitioner has failed to establish any basis for a holding that it was affiliated with the Middle West Utilities Co., the respondent’s action in determining that the two corporations were not affiliated during the period April 1 to December 31, 1926, is sustained.

There remains for determination the question of whether the petitioner and the National Light, Heat & Power Co. were affiliated for the three-month period ending March 31, 1926. During this period the National Light, Heat & Power Co. owned all of the 6,500 shares of the petitioner’s outstanding common stock, while the 7,575 shares of preferred stock were owned by some undisclosed party or parties and apparently other than the National Light, Heat & Power Co. If the preferred stock of the petitioner was “ nonvoting stock which is limited and preferred as to dividends ” within the meaning of such designation as used in the act, the petitioner and the National Light, Heat & Power Co. were affiliated corporations. If the preferred stock did not come within such designation as used in the act, then the two corporations were not affiliated, since the National Light, Heat <& Power Co. owned less than 95 percent of the petitioner’s total outstanding stock.

The controversy in Pantlind Hotel Co., 23 B.T.A. 1207, involved the same provisions of the Revenue Act of 1926 as quoted above and presented a question somewhat the converse of that now under consideration. In that case the petitioner contended that it was entitled to file a consolidated return for the period January 1 to June 29, 1926, with another corporation, 99.55 percent of the common stock and 22.82 percent of the preferred stock of which it owned. Considering the two classes of stock together, the petitioner there owned only about 55.56 percent of the outstanding shares. The preferred stock had no voting rights except those provided by law. The statute of the state in which the other corporation was organized granted to the holders of the preferred stock an equal right with the holders of the common stock, share and share alike, to participate in the election of directors and control of the corporation when any dividend due on the preferred stock had remained unpaid for 60 days. Due to the omission of dividends in 1925 and the failure to resume them again, the holders of the preferred possessed and most of them exercised equal voting rights with the common stock during the period for which affiliation was sought. The petitioner there sought to have the amount of the outstanding preferred stock excluded for the purpose of determining affiliation. In denying the petitioner’s contention we said:

We think the provisions of section 240 (d) of the Revenue Act of 1926 are both mandatory and explicit. By its terms “ stock does not include nonvoting stock which is limited and preferred as to dividends.” The definitions of affiliation and of “ stock ” given in this section were designed, we believe, to establish a definite inflexible standard, to remove the uncertainties and obviate the variables constantly impeding efficient administration of prior statutes governing affiliation. In our opinion, this is the only construction compatible with the purpose and the intent of the Congress in enacting the statute in the terms it used and in the light of previous legislation on the subject. We think that for any period under this statute during which a claim for affiliation is not predicated upon ownership of at least 95 percent of the actual outstanding voting stock, the claim must fail.

In the instant case it is agreed that the holders of the preferred stock were not entitled to vote it during 1926. If, as we held in the Pantlind 'Hotel case, preferred stock which during a taxable period actually has voting rights is to be included for the purpose of determining affiliation for that period, then we think that preferred stock which during a taxable period did not have voting rights is not to be included in determining affiliation for such period. Since the preferred stock involved in the instant case did not have voting rights during the period in controversy, January 1 to March 31, 1926, it is not to be included as voting stock in determining affiliation.

The respondent urges that in determining whether the preferred stock was “nonvoting stock which is limited and preferred as to dividends ” we should find that it was not limited as tó dividends, since the preferred stock, after having received dividends of 7 percent in any calendar year and the common stock having received dividends of 10 percent, was entitled to share equally with the common stock in any additional dividends declared during the same calendar year. It is agreed that during 1926 the preferred stock did not participate in the earnings of the petitioner in excess of the ordinary dividend requirements, which were 7 percent. Under these circumstances we think the stock is, for the period in controversy, to be treated as stock limited as to dividends. The mere possibility that the stock in some particular taxable period might be entitled to dividends in excess of 7 percent no more makes it unlimited as to dividends than the possibility that in some particular taxable period it might be entitled to voting rights makes it voting stock. It is the situation actually existing during the period in controversy that is determinative and not a situation that might have existed upon the happening of a certain contingency.

In view of the foregoing we conclude that the petitioner and the National Light, Heat & Power Co. were affiliated during the period January 1 to March 31,1926, and so hold. While the stipulated facts show that the national Light, Heat & Power Co. owned all of the petitioner’s common stock throughout the year 1926 and that certain conditions respecting the petitioner’s preferred stock during the period January 1 to March 31, 1926, likewise existed throughout the remainder of 1926, the petitioner has raised no issue as to whether it and that corporation were affiliated for the period April 1 to December' 31, 1926; consequently, we express no opinion as to whether they were affiliated during such period.

At the hearing the parties agreed that if our decision should be for the respondent there is a deficiency in tax of $11,490.77 and that if it should be for the petitioner there is no deficiency. Since our decision is for the petitioner on one issue and the respondent on the other, a recomputation of the deficiency will be made accordingly.

Judgment will be entered wider Rule 50.


author: Tkammell :

text:
    Samuel Shapiro, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 65158.
    Promulgated February 2, 1934.

      T. Wilkins, Esq., for the petitioner.

      P. S. Grewe, Esq., for the respondent.
   OPINION.

Tkammell :

This proceeding is for the redetermination of a deficiency in income tax of $5,475.83 for 1929. The only matter in controversy is the correctness of the respondent’s action in disallowing as a deduction taken by the petitioner the amount of $14,898.92 representing interest paid by petitioner to his wife on money borrowed from her. The other issue raised by the pleadings has been abandoned by the petitioner.

The proceeding was submitted upon a stipulation of facts, pertinent portions of which are as follows:

In 1925 petitioner, being a resident of Braintree, Massachusetts, began doing business there under the style and name of Braintree Shoe Company, which business was operated and owned by him as a sole proprietor. During the business year capital to a large extent was required for carrying on the activities of the company and petitioner at that time was not able to raise sufficient working capital to carry on the activities of the business and in order to make the necessary additions, improvements and betterments to his plant, such as the continued growth of the business required from time to time at various stated intervals during the year 1926 petitioner obtained from his wife, Ethel, also a resident of Braintree, Massachusetts, at the time, various sums of money as a loan totaling $186,236.44.
The petitioner’s wife advanced the aforesaid sum of $186,236.44 to the petitioner and petitioner received the same as a loan from her and upon the express agreement between the petitioner and his said wife that he would pay her for the use of the money borrowed and repay her the principal amount at Stated intervals. Petitioner’s promise to repay this money was evidenced by a certain promissory note dated January 1, 1927 in the sum of $186,236.44, bearing interest from date at the rate of 8% per annum.
The $14,898.92 referred to in the Specifications of Error contained in the petition as amended, was paid by petitioner to his wife during the year 1929, was paid in pursuance of petitioner’s said agreement to pay his wife interest at the rate of 8% upon the amounts advanced by her to him.
The petitioner in his individual income tax return for the calendar year 1929 claimed as a deduction in computing his taxable net income for that year the said amount of $14,898.92 which he had paid to his wife as aforesaid.
The Respondent in auditing the petitioner’s return for the year 1929 and for the purpose of determining the deficiency set forth in the deficiency notice disallowed the aforesaid amount as a deduction in computing petitioner’s net taxable income for the calendar year 1929.
The petitioner’s wife, Ethel, filed a separate tax return for the calendar year 1929 and included therein in computing the income taxable to her for that year the sum of $14,898.92 received from her husband as interest, which is the amount involved in the instant case.
Petitioner and wife, to whom this interest was paid, were both residents of the State of Massachusetts at the time of all the transactions between them including the date of making the original loan in 1926, and at the time all interest payments were made by petitioner to his wife during the calendar year 1929.

The petitioner contends that, having during the taxable year paid the interest to his wife on money borrowed from her, he is entitled to have the amount thus paid allowed as a deduction in the determination of his net income. The position of the respondent is that although the interest was paid by the petitioner it is not deductible in determining his net income, since the statutes of Massachusetts do not authorize a married woman to make a contract with her husband.

In Anna E. Riley, 29 B.T.A. 160, we had before us the question of whether a married woman, a resident of Massachusetts, was entitled, in determining her taxable net income, to take a deduction for salary paid by her to her husband for his services as general manager of her business. The respondent there contended that under the statutes of Massachusetts a married woman was not authorized to contract with her husband, that she was under no legal obligation to pay him for his services and no deduction could be allowed. After examining the pertinent portions of the statutes of Massachusetts and the decisions of that state, we held that she was entitled to the deduction, saying:

Where contracts of this character have become fully executed and no fraud is apparent, it is the policy of the law not to disturb them. In such cases both this Board and the courts have recognized such contracts and given effect to the rights of the parties which have been fixed thereby. See Hamilton v. Commissioner, 24 Fed. (2d) 668; reversing 7 B.T.A. 362; Pugh v. United States, 48 Fed. (2d) 600; J. W. Brackman, 24 B.T.A. 259; Lewis E. Tifft, 25 B.T.A. 986; Warren MacPherson, 19 B.T.A. 651; Elizabeth M. Coombs, 25 B.T.A. 1320; L. F. Sunlin, 6 B.T.A. 1232.
Being the owner of the business, petitioner was entitled to include the income therefrom in her separate return. Poe v. Seaborn, 282 U.S. 101. Certainly she is entitled to be taxed on her net income, and in computing such net income, she is entitled to the same deductions from gross income as any other taxpayer wbo might be conducting the business.

Here the petitioner, pursuant to a contract with his wife, paid the interest on money borrowed from her in a transaction in which there is no fraud apparent. In so far as the interest in controversy is concerned the contract was fully executed, just as in the Riley case. Under section 23 (b) of the Revenue Act of 1928 a taxpayer is entitled to deduct all interest paid, with an exception which is not here material. If a wife, a resident of Massachusetts, is entitled to deduct a salary paid to her husband pursuant to her contract, we perceive no reason why in the instant case a husband, the petitioner, is not entitled to deduct interest paid to his wife pursuant to a contract for the payment of such interest on money borrowed from her. We think our decision in the Riley case "is applicable here and accordingly sustain the contention of the petitioner.

Judgment will be entered under Rule 50.


author: Van Fossan : McMahon, SteRNhagen, Trammell,

text:
    Henry S. Kerbaugh, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68976.
    Promulgated February 6, 1934.

      Percy 8. Orewe, E,sq., for the respondent.
   OPINION.

Van Fossan :

The Commissioner, under date of October 24, 1932, mailed to the petitioner a notice of deficiency covering the years 1922 to 1927, inclusive. An unpaid tax liability for 1922 and an over-assessment for 1923 were determined to be barred by the statute of limitations. For 1924 there was a determination of a tax liability of $4,377.16, no part of which had been assessed, and a consequent determination of deficiency in the full amount, together with a determination of a penalty of $2,188.58 which was explained as “ 50 per cent penalty provided by section 275 (b), Revenue Act of 1924.” For 1925, 1926, and 1927, there was a determination of net loss, and therefore no deficiencies.

The petition was filed December 23,1932, the form of which was in accordance with Rule 5 of the Rules of Practice. Paragraph 3 of the petition is as follows:

3. The amount oí the deficiency, which represents tax and penalty for the year 1924, is $6,565.74, all of which is in controversy.

Paragraph 4 sets forth as the only assignment of error:

(a) The Commissioner has included in the taxpayer’s gross income for 1924 $74.968.78 as dividends received through the partnership of Henry S. Kerbaugh Business, whereas this amount represented a loan and not dividends.

In paragraph 5 the facts are alleged as follows:

(a) The petitioner was a member of the partnership known as the H. S. Kerbaugh Business, he and John J. McMahon having an equal interest in the profits of such partnership.
(b) During the year 1924 the New Jersey Bergen Square Realty Corporation, a corporation all the stock of which was owned by the said partnership, made a loan to the partners of $148,687.56, which amount was duly entered upon the books of the corporation and of the partnership as a loan. The Commissioner has erroneously construed a part of this loan as a dividend.

The prayer is:

Wherefore, the petitioner prays that this Board may hear the proceeding and determine that the said amount of $74,968.78 represented a loan and not taxable dividends.

The respondent’s answer admits paragraphs 1, 2, 3, and 5 (a), and denies the error of 4 and the facts of 5 (b).

The case came on for trial after due notice, but no one appeared for the petitioner. The respondent moves for judgment in the full amount of both the deficiency and the penalty, contending that the petitioner has failed to prosecute as to the deficiency and that since the petitioner does not attack the penalty there is no issue as to fraud to which the respondent’s statutory burden of proof can attach. He cites Hanby v. Commissioner, 67 Fed. (2d) 125.

There is no question as to the right of the respondent to prevail as to the amount of the deficiency. The burden of proving error as to this determination rested on the taxpayer and in the absence of any evidence to overcome the presumption of correctness attaching thereto judgment for. the respondent will be given. As to the penalty for fraud a different situation obtains and different considerations govern. The burden of proving fraud in civil cases has always been held to be on him who asserts it. It is never presumed. The Circuit Court of Appeals, in Budd v. Commissioner, 43 Fed. (2d) 509, called attention to this rule of law and pointed out that the statutory enactment in the Revenue Act of 1928 (section 601), specifically placing the burden of proving fraud on the Commissioner, was merely declaratory of what, had always been the law in fraud cases. Accordingly it reversed a decision of the Board holding, in effect, that under our rules adopted pursuant to the 1926 Revenue Act, which was in force when the case was heard before the Board, the burden of proof was on the taxpayer. As to this rule the court observed that though the Board had authority to fix rules of procedure it had no such authority as to rules of evidence, and that the burden of proof was a rule of evidence, not a rule of practice or procedure. Though the Budd case was heard prior to the enactment of the 1928 Act, these basic principles were not altered by that act. A charge of fraud has always been regarded as a serious matter in the law. Not only is it never presumed, but the ordinary preponderance of evidence is not sufficient to establish such a charge. It must be proved by clear and convincing evidence. George L. Rickard, 15 B.T.A. 316; M. Rea Gano, 19 B.T.A. 518; Budd v. Commissioner, supra.

Respondent’s argument is that, since petitioner did not allege specifically that the respondent erred in determining fraud and did not appear and contest the determination, no issue of fraud is raised by the pleadings, and judgment should be given for the fraud penalty as well as for the deficiency.

We cannot agree. We have seen that by general rule of law and by statute the burden of proof is placed on the respondent. Since fraud is never presumed and since the burden of proof is on the respondent, there is no presumption of correctness attaching to a charge of fraud. If not admitted it must be proved. Here there is no such admission. Decisions of the Board involving questions of fact fall generally into two classes — those in which petitioner fails to overcome by evidence the prima facie presumption of correctness attaching to the finding of the Commissioner, and those in which, the presumption of correctness being overcome, the case is ruled by the preponderance of the evidence. In fraud cases, there being no presumption of correctness accorded the Commissioner’s finding, they are decided by the weight of the evidence, which, as above stated, must be clear and convincing.

But, respondent argues, since the petitioner does not by his petition specifically allege error in the determination of fraud, accordingly there is no issue of fraud under the statute and, therefore, respondent need submit no evidence to sustain the charge. The obvious answer to this position is that so to do would be either to presume fraud or to put the burden of proof on the taxpayer. A further answer is that the petitioner in paragraph three of his petition specifically says that both tax and penalty are in controversy. Attention may also be called to the fact that a fraud penalty is based on the finding of a deficiency and is proportionate to the same. If no deficiency is due there is no penalty. Petitioner alleged error in determining that a certain sum constituted dividends received and not a loan. Had petitioner proved his contention and been relieved of the deficiency he would automatically have been relieved of the charge of fraud. Nor is it to be overlooked that in this case the respondent has not complied with Rule 14 of the Board’s Rules of Practice, requiring him to include in his answer a statement of the facts on which he relies to prove fraud. In this material respect the case differs from F. O. Statler, 27 B.T.A. 342, where the issue was whether petitioner’s failure to file a reply was to be taken as an admission of fraud.

The case of Hanby v. Commissioner, supra, on which respondent relies, is clearly not authority in support of his position. The preliminary procedural question there considered was whether an issue of fraud was raised. The case arose under the Revenue Act of 1926 and at a time when the Board’s rules did not require the respondent affirmatively to allege the facts on which he relied to prove fraud. The answer, accordingly, contained no such allegations. The court pointed approvingly to the holding of the Board that the question of fraud was inherent in the Commissioner’s determination and held that the issue of fraud was before the Board. If the above decision lends support t'o either party here, it is to the taxpayer. Respondent is contending there is no issue of fraud raised by the pleadings. The Hanby case would seem to be direct authority to the contrary.

The issue of fraud being before the Board, there being no admission thereof and no evidence in support of the charge, we are of the opinion that as to this issue petitioner must prevail. The fraud penalty is not approved.

Reviewed by the Board.

Decision for the respondent for the amount of the deficiency without penalty will be ' entered.

McMahon,

concurring: The provision of section 907 (a), Revenue Act of 1924, as amended by section 601, Revenue Act of 1928, is as follows:

* * * In any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax, where no hearing has been held before the enactment of the Revenue Act of 1928, the burden of proof in respect of such issue shall be upon the Commissioner. * * * [Emphasis ours.]

The word “ involving ” as used here has a broad meaning. It has a broader meaning than the word “ pleaded.” The word “ issue ’! as used here is not qualified by the word “ pleaded ” or by the words “ raised by the pleadings ” or by the words pleaded under the rules of the Board.” There is no justification for reading such qualifications or similar qualifications, into this statute. While the Board has authority to make rules governing its procedure, and has made them, it has no authority to make rules which conflict with the statute. The statute is paramount; and the Board’s rules, in any event, must he construed to harmonize with the statute. “ The issue whether the petitioner has been guilty of fraud with intent to evade tax ” became involved within the meaning of section 907 (a) when respondent determined a deficiency and a penalty, based on fraud and computed on the deficiency of which he gave the petitioner notice. The penalty cannot stand without a basis of fraud to sustain it, in addition to a deficiency as a basis of computation. The burden of proving this fraud, under section 907 (a), is put upon the respondent, who relies upon it. The petitioner is not required to disprove fraud before the Board until he is confronted, at a hearing, with proof of fraud. In other words, he is not required to meet this serious issue until he is properly confronted with it; and the Board cannot approve the fraud penalty as determined by respondent and computed on the deficiency until respondent has discharged his burden of affirmatively proving the fraud upon which the penalty, as computed on the deficiency, is based. See Miller-Pocahontas Coal Co., 21 B.T.A. 1360, Carlton Building Co., 29 B.T.A. 599; and Joseph Buchhalter, 29 B.T.A. 600. Furthermore, such proof is not admissible here in the absence of respondent’s allegation of fraud raising “ the issue ”, as required by Rule 14.

SteRNhagen,

dissenting: I think that the respondent is entitled to a judgment for the full amount of both the deficiency and the penalty. The provision of section 907(a), Revenue Act of 1924, as amended by section 601, Revenue Act of 1928, is:

* * * In any proceeding [before the Board] involving the issue whether the petitioner has been guilty of fraud with intent to evade tax, where no hearing has been held before the enactment of the Revenue Act of 1928, the burden of proof in respect of such issue shall be upon the Commissioner. * * *

Although the statement in paragraph 3 of the petition is that the entire amount representing both tax and penalty is in controversy, it will be noted that there is no assignment of error as to the determination of fraud. The respondent urges, therefore, that the fraud penalty was not put in issue and it was therefore not incumbent upon him either to plead affirmatively or to prove fraud, since the statute places' the burden upon him only when the proceeding involves the issue of fraud. This seems to me to be the correct view. The assignments of error and the allegations of fact are what determine the issues; and not the statement, pursuant to the Eules, of the “ amount in controversy.”

The history of Eule 5 shows that it was not the function of the statement of the amount in controversy to determine the issue. Eule 5 was adopted under the Eevenue Act of 1924. In that statute, section 900 (h) provided:

⅜ * * If the amount of tax in controversy is more than $10,000 the oral testimony taken at the hearing shall be reduced to writing and the report shall contain an opinion in writing in addition to the findings of fact and decision. * * ,⅜

In many cases the Commissioner’s determination of deficiency involves numerous adjustments, sometimes entirely separate and sometimes interdependent. An appeal from the deficiency is not necessarily an appeal from every item in it, nor is it confined to the items determined as set forth in the notice. The amount in controversy may be more or less than the amount set forth in the notice and the issues may include new substantive items not touched by the notice of deficiency. The rule which was first adopted in July 1924 contained no requirement of a statement of the amount in controversy, but the form tentatively suggested in the appendix to the Eules included paragraph 3, as follows:

3. The taxes in controversy are (income) (profits) taxes for the (calendar or fiscal) years (_^_) and are ( more^) than $10,000.00. . \ less /

This was followed by assignments of error and allegations of fact.

The revision of November 1, 1925, changed Eule 5 to include:

(e) A statement of the amount of the deficiency, the nature of the tax, the year for which asserted, and the amount thereof (as nearly as may be determined) in controversy.

And the appended suggested form was modified so that paragraph 3 was suggested in the following form:

3. The taxes in controversy are (income) (profits) (estate) (gift) taxes for the (calendar or fiscal) years (_) and are than $10,-000.00, to wit: _ dollars (state exactly if possible or approximately the amount disputed).

The revised Eules of April 1, 1926, after the enactment in February of the Eevenue Act of 1926, did not change Eule 5, but modified the suggested form by omitting the $10,000 provision, which had likewise been omitted from the new statute. Paragraph 3 then became:

3. The taxes in controversy are (income, profits, estate, or gift) taxes for the (calendar or fiscal) year 19 and for _dollars (state as exactly as possible the amount in dispute).

Thus these provisions of the rule and form have remained ever since. From them, it is clear that paragraph 3 had no' function to frame the issue, but only to inform the Board for administrative purposes of the approximate amount involved.

But even if it had such a significance, it would still have less force to fix the issue than the specific assignments of error and allegations of fact. These were expressly designed to fix the issues and when they are clear, as in this petition they are, and need no illumination, they must dominate. To reverse the emphasis would tend to subvert the entire scheme of the pleading. Instead of shaping the course of the litigation, enabling the parties to prepare for specific issues and no others and avoid doubt as to the nature and extent of the contest, thus expediting the disposition of a voluminous docket, it would promote confusion, bickering, and delay.

The amount of the penalty, being 50 percent of the deficiency, necessarily fluctuates with the deficiency and hence, even when the petitioner admits fraud, the ampunt of penalty, as distinguished from the fact of fraud, is still in controversy to the extent that it exceeds 50 percent of the deficiency ultimately determined. It is entirely logical and consistent, therefore, for a taxpayer to admit the fact of fraud as ground for a penalty and yet state that the amount of penalty is in controversy until the amount of deficiency is settled. In such case, clearly, the fact of fraud would not be in issue, and the Commissioner would have no burden of proving it. We must assume Congress used the term “ issue ” deliberately in its accepted sense of a denied allegation.

There are some taxpayers who commit fraud, and if one chooses by his silence to acquiesce in the determination of fraud and thus, for example, avoid both an admission and the publication of the evidence in an open proceeding, there is no reason why the Commissioner should nevertheless collect and present the evidence. Under the law, the rules and the practice, a taxpayer who is confronted with a fraud penalty may litigate the issue by merely pleading it clearly. If he thus puts it in issue, the statute places the burden of proof on the Commissioner. Miller-Pocahontas Coal Co., 21 B.T.A. 1360. If he does not plead it, but only states that the amount in controversy includes it, there is, in my opinion, no burden on the respondent.

To sustain the Commissioner’s determination of a fraud penalty is not contrary to the statutory presumption implied in section 907 (a), nor does it contravene any doctrine against the presumption of fraud. The Commissioner has made a determination that the taxpayer fraudulently treated as a loan an item which the Commissioner holds to have been a dividend; and this determination the taxpayer has not assailed. If no petition whatever had been filed, the Commissioner would have assessed both the deficiency and the penalty which he had officially determined. There would have been no occasion to consider a presumption because there would have been no issue. So here there is no issue as to fraud, and the Commissioner’s determination has a conclusive sanction. If, after the Commissioner’s determination, the taxpayer had elected the alternative remedy of payment and suit in court to recover, and had omitted to plead facts as to his freedom from fraud, there would have been no question in regard to a presumption, and the Commissioner would have been relieved of any defense of his determination of fraud or his assessment and collection of a penalty. There is no greater burden on the Commissioner before the Board, unless the taxpayer exercises his right to put the fact of fraud in issue in the manner which the Board’s Buies of Practice clearly and authoritatively prescribe. This, in my opinion, he has not done.

Marquette, MoeRis, Murdock, Goodrich, and Leech agree with this dissent.

Trammell,

dissenting: There can be no question but that in any proceeding involving the issue of fraud, the burden of proof is upon the Commissioner. The difference of opinion is when fraud is involved. I believe that a taxpayer charged with fraud in .the notice of deficiency is not obligated to raise the question unless he sees fit to do so, and if he does not, the question is not involved in the proceeding before us. In a criminal case of course the burden of proof is upon the state to prove that the accused is guilty, but the accused has the right to plead guilty if he so desires, and in a proceeding before the Board involving fraud the taxpayer is not required to present the issue. If he does not deny it, or if for any other reason he does not care to have the matter presented to the Board for decision, he does not have to do so.

In my opinion, it is only when the taxpayer denies fraud that the burden of proof to establish it is upon the Commissioner. This issue must be raised in the first instance, in my opinion, by the taxpayer denying guilt of fraud as determined by the Commissioner in the notice of deficiency. We are authorized by statute to establish rules of procedure and unless such rules are contrary to statute they have the force and effect of law.

Section 601 of the Bevenue Act of 1928, quoted in the concurring opinion of Member McMahon, provides that in any proceeding involving the issue whether the petitioner has been guilty of fraud, etc., the burden of proof in respect of such issue shall be upon the Commissioner. The concurring opinion referred to emphasizes the word “ involving.” He states that the word “ issue ” as here used is not qualified by the word “ pleaded ” or by the words “ raised by the pleadings ”, or by the words “ pleaded under the rules of the Board.” In my opinion, however, the emphasis should be laid upon the word “ issue ” and there can be no issue in the absence of pleadings to raise an issue. This being true, I see no objection in the statute to the rule of the Board requiring issues to be joined in pleadings. When the 1928 Act was passed the Board had been operating since 1924 upon the principle of pleadings wherein issues were required to be raised thereby. It would seem, therefore, that when the statute provided that the burden of proof was on the respondent when the issue of fraud is involved, Congress had reference to the methods by which issues were presented before the Board. I therefore think that if the issue is not presented before the Board, the Board has no jurisdiction either to affirm or disaffirm the Commissioner on the question of fraud and, since the taxpayer has not denied fraud, the fraud penalty would stand without any action by the Board. It is a simple matter for a taxpayer to present the issue of fraud in a pleading like any other issue in the case and when he does the Commissioner must prove it. After raising the issue the taxpayer may remain silent. But when the Commissioner determines fraud in a notice of deficiency, in my opinion, it is not an issue until the taxpayer denies it. If he denies it in his petition there is no presumption that the Commissioner’s determination is correct. The presumption then is, of course, that the taxpayer is not guilty. The question, however, as to presumption arises only with respect to issues before us.


text:
    C. E. Wilson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Rex P. Arthur, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 62820, 62821.
    Promulgated February 6, 1934.

      Dayton Denious, Esq., for the petitioners.

      James K. Polls, Jr., Esq., for the respondent.
   OPINION.

Lansdon : The respondent has determined deficiencies for the year 1929 in the respective amounts of $199.25 and $2,813.94. The single issue, common to both proceedings, is whether the petitioners, as a partnership under the trade name of C. E. Wilson, Agent, were dealers in securities in the taxable year and entitled to inventory certain stocks held at the end of the year at cost or market, whichever was lower, under section 22 (c) of the Revenue Act of 1928 and article 105 of Regulations 74. The two proceedings have been consolidated for hearing and report.

The petitioners are individuals residing in Denver, Colorado. Until some time in July 1929 petitioner Rex P. Arthur was an employee of Otis & Co., a partnership operating as stockbrokers in Cleveland, Ohio, with a branch office in Denver, in the capacity of salesman or customer’s man. In July he became, a partner in such partnership and so remained until the end of the year. Throughout the entire year petitioner C. E. Wilson was a partner in Otis & Co.

On February 5,1929, the petitioners entered into a written agreement to form a partnership between themselves under the trade name of C. E. Wilson, Agent, for the purpose of “ trading in stocks at Otis and Co.” The agreement provided that all profits and losses, contributions and withdrawals should be shared equally. Arthur contributed only his knowledge and experience in the business of selling securities and all the necessary cash was furnished by Wilson.

C. E. Wilson, Agent, purchased practically all its stocks from Otis & Co. and sold them to customers secured by Arthur, who was generally known in Denver as a salesman for that concern. The great bulk of the securities so purchased were stocks in which Otis & Co. were specialists and as to which their inventories were very large. In a few instances stocks were purchased from other brokers.

In its operations O. E. Wilson, Agent, would usually arrange for the sale of certain stocks at the market price and thereafter perform its obligations by purchasing such stocks from Otis & Co. and reselling the same to the customers already willing to buy. In some instances, however, large blocks of securities were bought from Otis & Co. and held until they could be disposed of to purchasers. In all purchases from Otis & Co., C. E. Wilson, Agent, was allowed a price between bid and asking prices and, barring a fall in the market, profit was certain.

C. E. Wilson, Agent, conducted its business in the offices of Otis & Co., where Arthur and Wilson each had office rooms assigned them by that concern. It was not listed as an investment banker or broker in the telephone or city directory and did not so advertise itself in the newspapers, but it was licensed as a banker by the city of Denver. It was known throughout the financial district of Denver as a merchant of the securities of Otis & Co. It kept no books other than a file of monthly statements of its accounts with Otis & Co. which were supplied by that concern.

At December 31, 1929, C.- E. Wilson, Agent, had unsold stocks in its account with Otis & Co. for which it had been charged $214,497.98 and which on that date had a market value of $136,625. Petitioners now. claim that C. E. Wilson, Agent, as a dealer in securities, was entitled to inventory such unsold stocks at cost, or cost or market, whichever was lower. The respondent has determined that such partnership was not a dealer in securities and therefore not entitled under the law and regulations to inventory stocks on hand at the end of the taxable year.

The petitioners contend that under the provisions of section 23 (e) (1) of the Revenue Act of 1928, as members of the partnership of C. E. Wilson, Agent, they sustained a deductible loss in the operation of a trade or business. The evidence discloses that neither of the petitioners severed his connection with Otis & Co. at any time during the taxable year. It is fairly clear that practically all the securities handled by the partnership were bought from Otis & Co. It is not clear that any such securities were actually delivered to the partnership. Apparently the whole amount of the alleged cost of stocks on hand at the close of the taxable year was merely a charge against the partnership on the books of Otis & Co. It is entirely consistent with the few facts established in the record that these petitioners were partners in a trading account with the company by which they were employed. This inference is strongly supported by the language of the agreement which expressly states that the partnership was formed for the purpose of trading in stocks. There is a very wide difference between a dealer and a trader in stocks. Of course each may sustain operating losses, but such losses are computed by entirely different methods. A dealer is entitled to use an inventory in the determination of its income for any taxable period, while a trader must compute gain on the basis of receipts and disbursements, and as to any stocks on hand determination of gain or loss must be deferred until sale or other disposition thereof.

In the exercise of discretion conferred on him by the law, the respondent has determined that C. E. Wilson, Agent, was not a dealer in stocks and therefore not entitled to use an inventory in the computation of its income for the taxable years. The petitioners have failed to overcome the presumption that the determination of the respondent is correct.

Decision will be entered for the respondent.

       (e) Inventories. — Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

       Art. 105. Inventories ty dealers in securities. — A dealer in securities, who in his books of account regularly inventories unsold securities on hand either—
      (a) At cost;
      (S) At cost or market, whichever is lower; or
      (c) At market value,
      may, make his return upon the basis upon which his accounts are kept; provided that a description of the method employed shall be included in or attached to the return, that all the securities must be inventoried by the same method, and that such method must be adhered to in subsequent years, unless another be authorized by the Commissioner. For the purpose of this rule a dealer in securities is a merchant of securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be, derived therefrom. If such business is simply a branch of the .activities carried on by such person, the securities inventoried as here provided may include only those held for purposes of resale and not for investment. Taxpayers who buy and sell or hold securities for investment or speculation and not in the course of an established business, and officers of corporations and members of partnerships who in their individual capacities buy and sell securities, are not dealers in securities within the meaning of this rule.


author: Moeris : Black,

text:
    Julius B. B. Stryker, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 56342.
    Promulgated February 6, 1934.

      Ü. J. McGuire, Esq., for the petitioner.

      Maxwell M. Mahany, Esq., for the respondent.
   OPINION.

Moeris :

This proceeding is for the redetermination of a deficiency in income tax of $3,615.51 for the taxable year 1928, growing out of the respondent’s allegedly erroneous inclusion in income of compensation received by the petitioner in the taxable year, which was earned in 1921 while a bona fide nonresident of the United States for more than six months.

The matter in dispute was submitted for consideration upon an agreed stipulation of facts from which we find the following:

The petitioner is an individual, a citizen of the United States, with residence at Lansdale, Pennsylvania.

During the years 1927 and 1928, and for many years prior thereto, the petitioner was an officer and general manager of the Perkins Glue Co., a corporation with principal offices at Lansdale, Pennsylvania, and during all of the period he devoted his entire services to the affairs of this corporation. His stock ownership in the company during the years 1927,1928, and 1929 was approximately 20 percent of the total stock outstanding; as trustee for others he controlled approximately 25 percent additional stock; and jointly with another stockholder he controlled approximately 20 percent additional stock.

The Perkins Glue Co. had a foreign branch in Java (Dutch East Indies). From May 15, 1926, to August 13, 1927, the petitioner was absent from the United States, and, aside from the time required for traveling to and from said country, the petitioner was during that period at all times in Java, devoting all of his time to the business of the Perkins Glue Co. at that branch. During the year 1927 the petitioner was a bona fide nonresident of the United States for1 a period greater than six months, namely, 225 days.

On November 16, 1916, the directors of the Perkins Glue Co. passed the following resolution:

It was moved by I. H. Adams, seconded by J. B. Bradt and motion duly carried, that on and after January 1, 1917, the salary of J. B. B. Stryker, Vice-President, Treasurer and General Manager of the Company, shall be at the rate of Ten Thousand Dollars ($10,000.00) per year ⅜ * * and that in addition thereto they shall each receive on all net profits of the Company (and before the payment of any dividends) over and above the sum of $50,000.00 per annum, a commission as follows:
Four Percent (4%) on net profits between $50, and $60,000
Five Percent (5%) “ $60, and $70,000
Six Percent (6%) “ $70, and $80,000
Seven Percent (7%) “ $80, and $90,000
Eight Percent (8%) “ $90, and $100,000
Ten Percent (10%) exceeding $100,000
Payments of said commission to be made at the end of each fiscal year.

The $10,000 salary provided for in the foregoing resolution was prior to 1926 increased to $24,000 per year, but the commission rate remained unchanged.

During the years 1926, 1927, and 1928 the “ commission ”, exclusive of and in addition to the $24,000 salary payable to the petitioner under the foregoing resolution, was $20,918.55, $20,832.86, and $16,-211.92, respectively. These commission amounts were credited to the petitioner on the books of the Perkins Glue Co. as of December 31 of the year in which accrued, but were not determined nor entered on the books nor paid to the petitioner until after January 1 of each year succeeding the year of accrual. For example, the commission of $20,832.86 for 1927 was credited on the Perkins Glue Co. books during January 1928, the entry being made as of December 31, 1927, by the company, which kept its books on the accrual basis, and the $20,832.86 was actually paid to petitioner on January 19, 1928. Similarly the $16,211.92 commission, was not paid to petitioner until January 1929.

The petitioner rendered his Federal income tax returns on the cash receipts and disbursements basis and on his return for the year 1927 the petitioner returned as income no part of the $20,832.86 commission accruing from that year but not paid until January 19, 1928. On his 1928 return the petitioner included as “ Salaries, Wages, Commissions etc.” the sum of $26,424.44, but now contends that the proper amount returnable is as follows:

Salary for 1928 paid in 1928_$24,000.00
Commissions for 1927 received in 1928, 140/365 of
$20,832.86 _ 7,990.69
$31,990.69

The respondent, in arriving at the deficiency herein for the year 1928, in addition to one adjustment for contributions not appealed from, made the following change:

Salary for 1928 paid in 1928_$24,000.00
Commissions for 1927 received in 1928_ 20,832.86
$44,832. 86

That is, the respondent has determined that the entire 1927 commission of $20,832.86 received by the petitioner in 1928 is taxable income to him in that year, while the petitioner contends that $12,842.17 ($20,832.86 less $7,990.69) is nontaxable as representing the proportional part of the 1927 commission accruing during the period January 1 to August 14, 1927 (225 days) while petitioner was absent from the United States, engaged in the business of the Perkins Glue Co.

It was further stipulated at the hearing that if the books and records of the Perkins Glue Co. were in evidence they would show that as of December 31, 1927, there was cash available for distribution, without financial embarrassment to the company, of $12,842.17, the amount in issue.

Sections 116 (a) and 31 (a) (1) of the Revenue Act of 1928 provide:

Seo. 116. In addition to the items specified in section 22 (b), the following items shall not be included in gross income and shall be exempt from taxation under this title:
(a) Earned, income from sources without United States.- — In the case of an individual citizen of the United States, a bona fide nonresident of the United States for more than six months during the taxable year, amounts received from sources without the United States if such amounts constitute earned income as defined in section 31; ⅜ * *
Seo. 31. (a) (1) “Earned income” means wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by bim to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. * * *

It has been stipulated that the petitioner was a bona fide nonresident of the United States for a period of 225 days in 1927; that he received $20,832.86 in 1928, representing commissions earned in 1927; that he reported no part of said amount as income in his return for 1927 but did, in his return for 1928, report $26,424.44 as “ salaries, wages, commissions, etc.,” the amount in excess of $24,000, presumably, being a portion of said commissions. It is the contention of the petitioner now that 140/365 of the sum of $20,832.86, or $7,990.69, is properly taxable in 1928, but that 225/365 (225 being the number of days the petitioner was in Java in 1927), or $12,842.17, should be exempted under the foregoing sections of the statute. The respondent, of course, still maintains that the entire $20,832.86 is taxable in 1928, the year of receipt, the petitioner being on a cash receipts and disbursements basis of accounting.

The petitioner does not contend that because the income in question was earned in 1927 it should not be taxed in 1928. In fact he concedes its taxability in 1928 by reason of his stipulation that 140/365 thereof should be taxed in that year.

The theory of the petitioner is that the term “ during the taxable year,” found in section 116, supra, means the year in which the services were “ performed ” rather than the year in which the compensation is received, or, to use the language of counsel, “the exempt status attaches during the taxable year when the income is earned and from then on it is excluded from gross income.” The obvious reason for such contention is that since the year 1928 is before us and since the petitioner was not in Java during the requisite time in that period, unless such exemption attached, as he contends when the services were performed and continues, he is clearly without the statute.

We are wholly unable to agree with the petitioner’s reasoning. The term “ taxable year ” is defined by section 48 of the Revenue Act of 1928 to mean “ the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed.” Section 42 of that act provides that “ The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer * * *.” Section 43 of that act provides that “ The deductions and credits provided for in this title shall be taken for the taxable year in which £ paid or accrued ’ or £ paid or incurred ’, dependent upon the method of accounting upon the basis of which the net income is computed * * *.” Thus the foregoing, although not specifically mentioning the subject of “ exemptions ”, very clearly show from the contest that all income, and ail deductions and credits, and exemptions, must be associated with the “ taxable year ” as governed by the method of accounting employed. For instance, if a taxpayer is upon an accrual basis of accounting — in which event performance of the services and the reporting of income concur — then it is true, as the petitioner contends, that the “taxable year” means the year in which the services were performed. But when, as here, the taxpayer is upon a cash receipts and disbursements basis of accounting, hence, by statute, he is permitted to postpone the payment of tax upon income earned until such income is reduced to actual or constructive enjoyment, thus separating, so to speak, the income derived by him from the performance of the services therefor, then the “ taxable year ” becomes, for tax purposes, not the year in which the services were performed but the year in which there is a statutory receipt of income. Ample precedent for this construction can be found, but need not be cited here, in those cases involving the deductibility of business expenses wherein the identical phrase “ during the taxable year ” is used.

We do not concur in the argument of petitioner’s counsel that such a ruling will defeat the purpose of the statute, for, in our opinion, if the taxpayer meets all of the other requirements of sections 116 and 31, supra, during the year in which the income normally becomes taxable under the statute had not the exemption been provided for, the exemption must be granted. In other words, if this petitioner, being a citizen of the United States, had shown that the income in question was earned from “ sources without the United States,” a phase of the question upon which we find it unnecessary to pass, and if he had shown that during 1928 he was a “ bona fide nonresident of the United States for more than six months,” and if the income in question had been brought within the definition in section 31, the exemption would follow.

However, we need not rest our opinion entirely upon the provisions of section 116 alone, but after reading that section — wherein it says “if such amounts constituted earned income as defined in section 31 ” — together with section 31, we still feel that the proof is deficient. In order for the petitioner to comply fully with section 116 he must also comply with section 31 and he must show that the amount upon which he seeks exemption actually represents “ earned income ” as there defined. He must show that the amount or amounts received represented “ a reasonable allowance as compensation for the personal services actually rendered ” in order to satisfy the statutory inhibition that such amounts may not include “ a distribution of earnings or profits.” The petitioner’s counsel assumes that this is shown by the stipulation entered into between the parties, but with this we can not agree. Proof of this character becomes increasingly important where, as here, the petitioner is the owner or has control of substantially all of the stock of the corporation with which he is employed and from which he receives a rather substantial salary aside from his commissions.

Reviewed by the Board.

Judgment will be entered for the respondent.

Black,

dissenting: It is my view that the exempt status provided as to certain income described in section 116 (a) of the Revenue Act of 1928 was intended to apply to the period of employment and to the time of employment, not to the period of actual receipt of the income.

It is my view that the exempt status was to attach at the time the income was earned, assuming that the condition of bona fide non-residence is established, and, once attached, the income remains exempt. As I view it the effect of the majority opinion is to hold that, under such circumstances as we have in the instant case, if a taxpayer keeps his books and makes his income tax returns on an accrual basis, he would get the benefits of section 116 (a), but if he keeps his books and makes his returns on the cash receipts and disbursement basis, he loses it.

Section 42 of the Revenue Act of 1928 reads: “ The amount of all items of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under methods of accounting permitted under section 41, any such amounts are to be properly accounted for as of a different period.”

In compliance with this provision of the law petitioner returned for taxation in 1928, $7,990 69 of the $20,832.86 due him for 1927 commissions but actually received in 1928, and the balance, $12,842.17, attributable to the 225 days in 1927 during which he was a bona fide nonresident of the United States, he excluded from his gross income because it was exempt. In doing this, I think he complied with the law and I dissent from the majority opinion, which holds otherwise.


author: Steenhagen :

text:
    Fifteenth and Chestnut Realty Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 68366, 72611.
    Promulgated February 6, 1934.

      Joseph A. Lamorelle, Esq., for the petitioner.

      Percy 8. Crewe, Esq., and Raymond A. McMillan, Esq., for the respondent.
   OPINION.

Steenhagen :

We are of opinion that the payments made by petitioner to the estate of its deceased officer were not “ salaries or other compensation for personal services actually rendered,” nor were they in any other respect “ ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business,” section 23 (a), Revenue Act 1928. The estate as such could render no “ personal services ” as an officer or director of the corporation ; but, more important, the evidence here shows none. Irwin was performing some service for the corporation and was at the same time an executor of the estate, but we find it impossible to say that the estate was performing the service. See Warren Steam Pump Co., 13 B.T.A. 721; Greene & Greene, 11 B.T.A. 643; Desmond's Inc., 15 B.T.A. 738. The fact that Clement and Saul, the two shareholders, agreed with each other that their estates should draw the stated amount from the corporation after their deaths cannot fix an obligation upon the corporation or determine the character or deductibility under the revenue act of the payment when made. This would be clear if there had been other shareholders;. and the fact that there were no others gives strong support to the view that this was a method of distributing corporate earnings in the guise of salaries. Botany Worsted Mills v. United States, 278 U.S. 282; Gould-Mersereau Co., 21 B.T.A. 1316.

If however, the $22,500 should be regarded as compensation for Irwin’s services, the evidence of the nature and extent of such services still fails to show that such amount was no more than a reasonable allowance therefor. It shows, in our opinion, that it was more than reasonable for what Irwin did for the corporation. Recognizing as we do the right of a corporation to exercise a flexible judgment in such matters, United States v. Philadelphia Knitting Mills, 273 Fed. 657, we must also recognize the Commissioner’s function and duty to confine such deductions within the limits of reasonable compensation for services actually rendered. And this question is always present when the deduction is at issue. Botany Worsted Mills v. United States, supra; Model Dairy, 13 B.T.A. 545; 36 Fed. (2d) 768; Brown & Haley, 21 B.T.A. 752; Gould-Mersereau Co., supra.

If the deductibility of this payment be judged not by the law applicable to salaries, but as a more general expense, it seems to us to be neither ordinary nor necessary as those statutory terms have been considered by the Supreme Court in its most recent opinion on the subject, Welch v. Helvering, 290 U.S. 111.

The payment is one of those nondescripts which are not within the deductions provided by statute, cf. Commissioner v. Marshall Field, 42 Fed. (2d) 820; Brown v. Helvering, 291 U.S. 193.

Judgment will be entered for the respondent.


author: Makquette :

text:
    Grace L. Wright, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46223.
    Promulgated February 7, 1934.

      Raymond H. Berry, Esq., Claude II. Stevens, Esq., and Arthur R. Wood, Esq., for the petitioner.

      F. R. Shearer, Esq., for the respondent.
   OPINION.

Makquette :

The respondent has determined a deficiency in income tax against the petitioner for the year 1927 in the amount of $8,661.59. The only question presented relates to the basis to be used in determining gain or loss under the Revenue Act of 1926 on the sale of certain stock.

H. Bryan Scott, the father of petitioner, died September 11, 1922, leaving a last will and testament which was duly admitted to probate by the Probate Court of Wayne County, Michigan. The Detroit Trust Co. was appointed executor of and trustee under the will and duly qualified as such. On February 21, 1923, the Detroit Trust Co., as executor, transferred to itself, as trustee, certain assets named in the will, among which were 5,250 shares of Newcomb-Endicott Co. stock.

The last will and testament of said H. Bryan Scott provided in part as follows:

Seventh: All of tte rest, residue and remainder of my property, of every kind and nature, both real, personal and mixed, now or hereafter acquired, and wheresoever tte same be situate, I give, devise and bequeath unto the Detroit Trust Company, a Corporation- organized under tte laws of Michigan, its successors and assigns, But in Trust Nevertheless, for the following uses and purposes, and subject to tte powers and provisions herein set forth, viz:
(a) Said Trustee shall divide the same into two equal shares, and hold one share for the benefit of my daughter, Gbace Louise Wbight, and one share for my half sister, Mrs. Louise Griffith and my nephew, Bbuce Griffith.
(b) Said Trustee shall invest and reinvest all moneys, properties and securities held for the benefit of my daughter, Grach Louise Wbight, in such secured notes, bonds, mortgages, and other proper trust securities as, in its judgment, shall seem best, and pay the net income therefrom, in quarterly installments, unto my daughter, until she attains the age of forty (40) years.
On the date my said daughter attains the age of thirty (30) years, said Trustee shall assign, transfer and convey to her one-third (⅛) of all moneys, properties and securities held for her benefit, under the terms of this instrument.
On the date my said daughter attains the age of thirty-five (35) years, said Trustee shall assign, transfer and convey to her one-half (½) of all moneys, property and securities then held by it under the terms of this instrument for the benefit of my daughter.
On the date my said daughter attains the age of forty (40) years, said Trustee shall assign, transfer and convey to her all moneys, properties and securities then held for her benefit under the terms of this instrument, and said trust shall terminate.
If my said daughter shall die before she attains the age of forty (40) years, leaving issue her surviving, then upon her death, I give, devise and bequeath all moneys, properties and securities then held by said Trustee under the terms of this instrument for the benefit of my said daughter, unto her issue, in equal shares.
If my said daughter shall die before she attains the age of forty (40) years, leaving no issue her surviving, then upon her death, said trust shall terminate, and I give, devise and bequeath all money, property and securities then held by said Trustee for the benefit of my daughter under the terms of this instrument, unto her heirs-at-law, in accordance with the laws of the State of Michigan, governing the descent and distribution of property of intestates.
If at any time during the continuance of the trust created by this instrument for the benefit of my daughter, by reason of illness, misfortune or other emergency, the net income to be paid to her from the said trust estate, (together with such other income as she may have from all other sources), is, in the judgment of my said Trustee, insufficient for her proper maintenance and support, then I direct my said Trustee to use such portion of the principal of said trust estate ns, in its judgment, is necessary for her proper maintenance and support, and pay the same unto my said daughter.
⅜: * * ⅜5 * *
(e) Upon the division of my Estate into the two trusts created by this instrument, my said Trustee shall divide the same in kind, as far as possible, but its decision as to any property or securities, real or personal, to be set aside for each trust, shall be final.
⅜ ⅜ * * » # «
Said Trustee, in its discretion, may retain in the trust estates any properties, real or personal, in the form of investment in which such property is received by the Trustee under this Will, even though the same is not a trust investment * * ⅜.

The trustee held the 5,250 shares of Newcomb-Endicott Co. stock under the terms of the will until August 8, 1925, at which time it delivered them to the petitioner, as beneficiary under the said trust.

The fair market value of the 5,250 shares of Newcomb-Endicott Co. stock on the various dates has been stipulated as follows:

September 11, 1922, the date of decedent’s death_$91, 875.00
February 21, 1923, the date of transfer to trustee_ 115,500. 00
August 8, 1925, the date of delivery to petitioner_ 160,125.00

On February 1, 1927, petitioner sold the above described stock for $158,346.50, and in her income tax return for that year claimed a cost basis of $162,732 (since adj usted by the stipulation of the parties to $160,125), being the value of the stock acquired by the trustee from the estate of H. Byron Scott, deceased, at the time it was delivered to her, which resulted in a loss. The respondent determined the basis to be $91,875, the value at which it was included in the estate of H. Byron Scott, deceased, and which is stipulated to have been its fair market value at the time of decedent’s death. The deficiency herein results from this change of basis.

The petitioner relies upon two points to sustain her contention: (1) That for tax purposes she did not “ acquire ” the stock sold until it was distributed to her by the trustee of the H. Byron Scott trust, because the intervening trust prevented petitioner from exercising actual control over the stock until it was distributed to her; and (2) that for tax purposes she did not “ acquire ” the stock sold until it was distributed to her by the trustee because her interest in the stock, until its distribution, was contingent. On the other hand, the respondent asserts that the petitioner’s interest in the stock was vested on September 11, 1922, the date of the testator’s death, and under the applicable law the stock was acquired on that date.

Section 204 (a) (5). of the Revenue Act of 1926, provides:

Sec. 2(M. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property; except that—
. ⅜ * ⅜ ⅜ » >ji *
(5) If the property was acquired by bequest, devise, or inheritance, the basis shall be the fair market value of such property at the time of such acquisition. * * *

We find no merit in the petitioner’s first contention. In all the cases which have come to our attention, either before the Board or in the courts, there was a period of time wherein the beneficiary was prevented from exercising actual control of the subject matter, and it is well settled that an intervening trust will not prevent the vesting of an estate. See Brewster v. Gage, 280 U.S. 327; Chandler v. Field, 63 Fed. (2d) 13; certiorari denied, 289 U.S. 758; Huggett v. Burnet, 64 Fed. (2d) 705; Security Trust Co., 25 B.T.A. 9; Rodman E. Griscom, 22 B.T.A. 979; George Emlen Roosevelt, 28 B.T.A. 194; Robert C. Roebling, 28 B.T.A. 644.

In our opinion the decision of the question herein rests upon the petitioner’s second contention; that is, whether the petitioner’s interest was vested at the death of the testator, and the law of Michigan is controlling as to the character of the interest created by the will. It is admitted by petitioner, on brief, that the general rules relating to the construction of wills prevails in Michigan, and we have been pointed to two rules which petitioner claims show that the interest received under the will was contingent. They say, first, “that if futurity is annexed to the substance of the gift, the vesting is suspended ; but if it appears to relate to the time of payment only, the legacy vests instanier,” and, secondly, “ where there is no gift but by a direction to executors or trustees to pay or divide, and to pay at a future time, the vesting will not take place until that time arrives.” The primary rule, however, is that the intention of the testator must govern, and if this intention can be gathered from the will itself, it must be given effect. We believe that a proper construction of the will fails to disclose an intention either to annex futurity to the substance of the gift or to create a contingent interest. The gift is to the trustee for the benefit of the petitioner, and any futurity is annexed to the time of payment and not to the gift. Nor do we think the rule of “ pay or divide ” is applicable. The will cleariy shows an intent to make a present gift, in trust, with the payment postponed.

The terms of the will in Chandler v. Field, supra, are almost identical with the terms of the instrument herein. There the testatrix, after certain specific bequests and devises, bequeathed and devised the remainder of her property to her husband for life, then to trustees to pay an annuity to her maid for life, and to pay the balance of the income to her son, and, in addition, one third of the principal when he reached 30 years of age, one third when he reached 35, and the remainder when he reached 40. If the son died before the termination of the trust, the principal was to go to his children surviving him and, in default of children, to be divided among a named person and certain charities. The father of the taxpayer having died, the taxpayer received in 1920, ás part of the distribution of the principal when he reached 35, 660 shares of stock of a corporation, and when he reached 40 he received 93 shares of stock in the same corporation. In 1925 he sold the 153 shares, and in computing gain the Commissioner used the value of the shares at the death of the testatrix. The court held that the will, properly construed under New Hampshire law, gave the taxpayer a vested interest in the entire principal of the trust fund at the time of the decedent’s death and that the time of payment only was postponed; that the stock was acquired at the time of his mother’s death; and that the market value at that time was the proper basis for computing gain.

We are unable to discern any difference between that case and this, and we have been pointed to nothing in the law of Michigan which would lead to a different conclusion. We therefore hold that the petitioner herein took a vested interest in the shares of stock at the time of her father’s death, subject to being divested by the gifts over if she died before the named events, and that under the provisions of section 204 (a) (5) of the Revenue Act of 1926 she “ acquired ” the stock at that time. The action of the respondent in using the fair market value of the stock at the date of the father’s death as the basis for computing gain on the sale thereof was proper, and must be approved.

Judgment will be entered for the respondent.


author: MoRRis:

text:
    Katharine B. Bliss, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43412.
    Promulgated February 7, 1934.

      George A. O'Donohue, Esq., for the petitioner.

      J. E. Marshall, Esq., for the respondent.
   OPINION.

MoRRis:

The above entitled proceeding is for the redetermination of a deficiency in income tax of $19,172.09 for the calendar year 1924, and presents for consideration (1) the respondent’s refusal to allow the petitioner to file a joint return for 1924 with her deceased husband, Walter P. Bliss, who died January 10, 1924, and (2) his failure to allow the deduction of an alleged bad debt of $30,000 from the gross income of her husband, representing a note of the Candelaria Mining Co., which is alleged to have been worthless in that year. Allegation (2) becomes purely academic in the event of a ruling upon (1) adversely to the petitioner.

The parties stipulated (1) That the late Walter P. Bliss was the husband of the petitioner Katharine B. Bliss, and that these two individuals were living together as husband and wife on January 10, 1924, the date of Bliss’ death, and (2) that for the period from January 1, 1924, to January 10, 1924, inclusive, the said Walter P. Bliss suffered a net loss of $52,697.37, representing an excess of deductions over gross income, exclusive of any allowance for an alleged bad debt in the amount of $30,000 claimed to represent the face of the note for money loaned to the Candelaria Mining Co.

The petitioner filed an individual income tax return for the calendar year 1924 and in a space thereon for supplying the name of the taxpayer the joint names of “ Mr. and Mrs. Walter P. Bliss ” were given. To Question 3 in that return, “ Is this a joint return of husband and wife? ”, the answer was “ Yes to Question 4, “ Were you married and living with husband or wife on the last day of your taxable year? ”, no reply was given; and to instruction (6), “ If your status in respect to Questions 4 and 5 changed during the year, state date of such change ”, there was likewise no reply. That return showed a total joint income of $167,652.35 and total joint deductions of $189,155.31.

A return was filed by the “ Estate of Walter P. Bliss ” for the period January 11 to September 30, 1924, reporting a total income of $109,369.54 and total deductions of $230,174.25.

Section 223 of the Revenue Act of 1924, governing the first issue, which is the alleged right of the petitioner to file a joint return with her deceased husband for the year 1924, provides:

Sec. 223. (a) The following Individuals shall each make under oath a return stating specifically the items of his gross income and the deductions and credits allowed under this title—
4c * ⅜ « * * *
(b) If a husband and wife living together have an aggregate net income for the taxable year of $2,500 or over, or an aggregate gross income for such year of $5,000 or over—
(1) Each shall make such a return, or
(2) The income of each shall be included in a single joint return, in which ease the tax shall be computed on the aggregate income.
* * * * ⅜ * *

Upon this issue the petitioner cites, as sole authority for her contention, Bankers Trust Co. v. Bowers, 295 Fed. 89, and quotes therefrom the following language of the court:

The fundamental scheme of Title 2 of the Eevenue Act is for a tax on the net income of the taxpayer during an accounting period of twelve successive months. This general accounting period seems to be a predetermined measure to be applied to a taxpayer’s income and is not affected by his death or change of status within the period. The tax is imposed upon the entire net income for such period, and the return of such income constitutes his return for the period of twelve full months, even though he may have lived only a portion thereof.

The argument is advanced that a return of income of a decedent arising between the beginning of the calendar year and the date of his death is in fact a return for the full calendar year in which the death occurred and that although the income arose during only a portion of such year the return is for the full taxable year of twelve months. We are perfectly willing to subscribe to this principle, but we fail to see that it helps to solve the present problem. Nor are we able to see the controlling or even persuasive features of the case relied upon. There the question was essentially one of proper computation of the taxable income and the tax thereon. Here the computation is incidental to the main and only question we have to consider, viz., were Bliss and his wife “ living together ” within the intendment of section 223, supra.

Obviously the petitioner’s husband was not living with her on the last day of the taxable year though they were living together on January 10 of that year. Should we say therefore that the test of whether joint returns might be filed for a given taxable year is whether or not they were married and living together at any time during the year, as the petitioner would have us do, or should the test be whether or not they were living together on the last day of the taxable year ?

Just as divorce separates the marital status and destroys the relationship of “ husband and wife ”, so does the death of a party to the union. Consequently two parties that have been legally divorced cannot thereafter be said to be “ living together ” within the meaning of the act, yet, carrying the petitioner’s contention to its logical and inescapable conclusion, a couple divorced during a taxable year might file a joint return of their income notwithstanding one or indeed both of the parties may have immediately remarried to others, or a surviving spouse might file a joint return with her deceased husband or wife notwithstanding he or she may have remarried within the taxable period. Such incongruity was certainly never intended by the Congress which enacted this section of the act.

The petitioner points to the absence of specific regulation under the Act of 1924 upon this subject and to the fact that it was not until article 401 of Regulations 69, which reads as follows, was promulgated under the Revenue Act of 1926 that the Department took any definite steps toward regulation:

⅜ ⅞ * A joint return of husband and wife may be filed only if they were living together at the close of their taxable year. Where one spouse dies prior to the last day of the taxable year, the surviving spouse should not include the income of the deceased spouse in a joint return for such taxable year. * * *

While there was no specific regulation upon the particular point in question and while the regulation promulgated under the Revenue Act of-1926 in and of itself has no application to cases arising under prior acts, it is noteworthy that the test applied by the respondent has been the status of the parties on the last day of the taxable year, and also that article 401 of Regulations 69 was promulgated to construe a revenue act identical, for all practical purposes, with that section of the act controlling here and was for the purpose, not of making a new regulation respecting such matters, but of putting in writing the respondent’s construction of the act and his settled policy in the administration thereof.

Furthermore the duty of filing a return of the income of the decedent devolves not upon the surviving spouse, but upon the personal representative of such decedent. Section 225 of the Revenue Act of 1924 provides that:

Sec. 225. (a) Every fiduciary * * ⅜ shall make under oath a return for any of the following individuals, estates, or trusts for which he acts, stating specifically the items of gross income thereof and the deductions and credits allowed under this title—
(1) Every individual having a net income for the taxable year of $1,000 or over, if single, or if married and not living with liushand or wife;
(2) Every individual having a net income for the taxable year of $2,500 or over, if married and living with husband or wife;
(3) Every individual having a gross income for the taxable year of $5,000 or over, regardless of the amount of his net income;
(4) Every estate or trust the net income of which for the taxable year is $1,000 or over;
(5) Every estate or trust the gross income of which for the taxable year is $5,000 or over, regardless of the amount of the net income; * ⅝ *

Article 421 of Regulations 65, promulgated under the foregoing section of the act, as amended by T. D. 3660, C.B. IV-1, p. 47, provides in part that:

* * ⅜ if fjje nef income of a decedent from the beginning of the taxable year to the date of liis death was $1,000 or more if unmarried, or $2,500 or more if married, or if his gross income for the same period was $5,000 or over the executor or administrator shall make a return for such decedent. See article 305.

The respondent’s construction of the act and his practice under the various acts with respect to the filing of returns for deceased persons is further clarified in his interpretation of the statute permitting exemptions and credits, as set forth in T. D. 3660, C.B. IV-1, p. 40, wherein it is said:

[Art. 305.] (e) If an individual dies during the taxable year, his executor or administrator in making a return for him is entitled to claim his full exemption according to his status at the time of his death. See also section 219(c) of the statute and articles 341-347. If a husband or wife so dies the joint personal exemption may be used by the executor or administrator in making a return for the decedent, and an undiminished personal exemption, according to the status of the survivor at the end of the taxable year, may be claimed in the survivor’s return.

And further, in the respondent’s interpretation as found in Mim. 3288, IV-1, p. 40, it is said:

In view of the foregoing, a married person living with husband or wife, who by reason of death or separation becomes a single person or a married person not living with husband or wife, changes from the $2,500 status to the $1,000 status. A married person living with husband or wife who by reason of death or separation ceases to be a married person living with husband or wife but is the head of a family does not change his status, inasmuch as both before and after the death or separation he was in the $2,500 status.

We are of the opinion that the statute is clear and that, in order for the petitioner to have the right to file a joint return with her husband, he must have actually lived with her on the last day of the taxable year 1924, and it is not sufficient that he lived with her at some time during that year. Her status at December 31, 1924, was that of a single woman, which precludes her from filing a joint return.

With the first issue so decided, the second is automatically disposed of.

Judgment will be entered for the respondent.