author: Kern:

text:
    Whitney Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81993.
    Promulgated July 29, 1938.

      Frank W. Wilson, O. P. A., and O. S. Wilson, Esq., for the petitioner.

      E. O. Algire, Esq., for the respondent.
   OPINION.

Kern:

The respondent has determined a deficiency of $28,493.86 in the income tax of petitioner and its affiliated companies for the calendar year 1930, pursuant to article 16 (a) of Regulations 75, set out in the margin, on the theory that the exchange of the assets of petitioner and the Whitney Brothers Co. (Brothers) for the stock of the Merritt-Chapman & Whitney Corporation (New) and the later exchange of this New stock with the Merritt-Chapman & Scott Corporation (Scott) were, in effect, a sale, and, not being within the nonrecognition provisions of section 112 of the Revenue Act of 1928, the resulting gain is taxable.

The petitioner contends that Brothers, although a subsidiary of petitioner, may be a party to a reorganization independent of its parent, and was a party to a reorganization within the meaning of sections 112 (b) (3) and/or 112 (b) (4) and 112 (i) (1) (A) of the Revenue Act of 1928, set out in the margin, and consequently that no gain or loss was recognizable on receipt by Brothers of the capital stock of either New or Scott in exchange for substantially all of Brothers’ assets. In the alternative it is urged that if gain or loss is recognizable on the exchange of Brothers’ assets for the capital stock of either New or Scott, the amount of such gain or loss can not be determined in the year 1930, because it was not known in that year what would be the precise number of shares of Scott which Brothers would receive in consideration for its assets.

1. We shall deal first with the question whether the nonrecognition reorganization provisions apply. The more salient facts may be presumed to afford a clear picture of the transaction. The petitioner, in 1930, was a holding company which owned all the capital stock of its two subsidiaries, Brothers and Materials, which were engaged in the marine contracting business. Gwin A. Whitney was president of all three corporations and a major shareholder of petitioner, with substantially all the rest of its stock being held by his family connections. Scott was an entirely distinct corporation, resulting from several old constituent companies, and was anxious to acquire a marine contracting business in the Great Lakes region. After some discussion a plan was drawn up by Whitney and Scott by which Brothers was to dispose of its gravel business to Materials, and petitioner was to do the same; and Brothers was then to transfer all its remaining property relating to the marine contracting business and its good will to a new company to be organized, the Merritt-Chapman & Whitney Corporation, in exchange for 4,800 shares of the new company’s common stock, the remaining 2,700 shares of the total of New’s 7,500 shares to go to petitioner. The next step was for Brothers to exchange its 4,800 shares of New for 10,000 shares of common and 2,500 shares of preferred of Scott’s stock and then to dissolve, petitioner at the same time exchanging its 2,700 shares of New stock with Scott for cash. This plan was set out in an agreement of October 17, 1930, between Gwin A. Whitney and Scott, and its supplements of December 1 and 19, 1930. Certain intercompany transfers between Brothers and petitioner took place before the exchange with New and with Scott. In these transfers Scott had no interest. The plan, as outlined, was carried out in substance, including the transfer of certain assets by petitioner to New not specifically mentioned in the plan. Part of these assets had been received by petitioner from Brothers in the intercompany transfers. Brothers did not transfer all its assets to New but retained cash in excess of liabilities .in the amount of $25,300, and about the same amount of accounts receivable and debts. It had transferred directly to New $126,000 of assets, and including those transferred through petitioner, $211,000. Petitioner, after its transfer to New, still held about 40 percent of its original total assets, not including its shares of stock of Brothers. Brothers, after the transfer, continued to exist, but did no business beyond holding the Scott stock and its other assets.

Respondent, in his deficiency notice, treated the several transactions as severable, holding that gain from the transfers of assets by petitioner and its wholly owned subsidiary Brothers to New in exchange for all the issued stock of that company was nonrecognizable under section 112 (b) (5), but that the second transfer by petitioner and Brothers of New’s stock so received to Scott for the latter’s stock resulted in recognizable gain, since New was not dissolved and petitioner and its subsidiary, Brothers, were not, after the second transfer, in control of Scott.

Respondent now contends that the transaction was a sale of assets by petitioner and Brothers for cash, notes, and stock, and the gain is therefore recognizable under section 112 of the Revenue Act of 1928; that the plan, as adopted and carried out, does not fall within the statute; and that, even if it should be held within the statute, the corporate entities of petitioner and Brothers should be ignored and a taxable profit found.

We may assume that the transfers of assets by petitioner and its subsidiary Brothers to New in exchange for New’s stock would be a reorganization within the meaning of the statute. However, the “plan of reorganization” contemplated more. Pursuant to its terms, petitioner exchanged its stock in New with Scott for cash and notes, and Brothers exchanged its stock in New with Scott for Scott’s stock in an amount which represented only a small percentage of the total stock of Scott then outstanding. This occurred December 30, 1930, on the same day petitioner and Brothers had acquired the stock of New. It is obvious that these were all steps in one transaction. As a result of the entire transaction, petitioner had transferred certain of its assets to New and held, on December 30, 1930, cash and notes of Scott, and Brothers had transferred certain of its assets to New and held stock in Scott, which, in turn, held all of the outstanding stock of New.

There is no question but that the cash and the notes held by petitioner are taxable to the extent of the gain realized, the latter at their fair market value, as found by us in the findings of fact. This part of the transaction would fall within the general taxing provision of section 112 (a) of the Revenue Act of 1928 as a sale; and even if the cash had been combined with property permitted to be exchanged without tax recognition, the cash would still be taxable under section 112 (c) (1), set out in the margin. As to whether the stock of Scott acquired by Brothers is taxable, we think this question has been decided by the Supreme Court of the United States in the case of Groman v. Commissioner, 302 U. S. 82, the opinion in which was handed down subsequent to the submission of this case. Under the authority of that decision and the decision in Helvering v. Bashford, 302 U. S. 454, it is our opinion that Scott was not a party to any reorganization and that the receipt of its stock by Brothers was the occasion for computation of taxable gain within the meaning of section 112 (a) of the Revenue Act of 1928, set out in the margin. As those cases demonstrate, the proper test of whether a corporation is a “party to a reorganization” is to be found in the continuity of interest which the shareholders of one corporation have after the exchange in the second corporation. The transfer of assets by petitioner and Brothers to New in exchange for New’s stock, and the immediate transfer by petitioner and Brothers of New’s stock so received to Scott in exchange, respectively, for cash and notes, and for Scott’s stock, resulted in no continuity of interest in Scott. Brothers parted with its assets, and as the result of the reorganization plan received Scott’s stock, but the latter did not represent in any way the old assets which remained in Scott’s subsidiary, New. The continuity of interest must be material and permanent. Helvering v. Bashford, supra. Cf. Gilbert D. Heddin, 37 B. T. A. 1082; Note 51 Harv. L. Rev. 893. The same result would follow as to Scott’s stock in Brothers’ hands, even if Brothers had retained a portion of New’s stock received on the first stage of the transaction, for the situation would then be precisely that considered in the Groman and Bashford cases, Scott’s stock being “other property” within the meaning of section 112 (c) (1), and, as such, recognizable for tax purposes.

On this point we must hold for respondent.

2. The only remaining question is whether the transaction was closed in 1930 so as to render any gain realized by petitioner or Brothers determinable in that year. Petitioner contends that the provisions of the agreement with Scott, by which 1,667 shares of the former’s preferred stock were placed in escrow at the time of the exchange in 1930 as security for Gwin A. Whitney’s guaranty of the minimum earnings of the New company for the period ended December 31,1931, make the gain completely uncertain in that year and not determinable until 1932. The fair market value of Scott preferred stock has been stipulated and is covered by our findings. It is true that 520 shares of this stock had to be returned ultimately by Brothers for failure to meet the guaranty in full, but this does not affect the gain realized in 1930. At most, it would result in a loss in the later year. The stock was issued to Brothers, and in its name, and any dividends payable by reason of its ownership would have gone to Brothers. We think that Commissioner v. Darnell, Inc., 60 Fed. (2d) 82, relied on by petitioner, is distinguishable on its facts, and that the situation is ruled in respondent’s favor by our decisions in Federal Development Co., 18 B. T. A. 971, and Luther Bonham, 33 B. T. A. 1100; affd., 89 Fed. (2d) 725. Cf. North American Oil Consolidated v. Burnet, 286 U. S. 417.

Judgment will he entered under Rule 50.

       Am. 16. — Parent Agent foe Subsidiaries.

        (a) Scope of Agency of Parent.

      Except as provided in paragraphs (S) and (c) of this article (relating to the effect of the withdrawal of a.subsidiary or the dissolution of the parent)—
      The parent corporation shall be for all purposes, in respect of the tax for the taxable year for which a consolidated return is made or is required, the agent of each corporation which during any part of such year was a member of the affiliated group, duly authorised in the name of the parent to act for and represent each such corporation in all matters relating to such tax; the parent corporation shall be the sole agent for such corporations in such matters; and such corporations shall not have authority to act for or represent themselves in any such matter. For example, ail correspondence will be carried on directly with the parent; deficiency letters will be mailed only to the parent, and the mailing to the parent shall be considered asa mailing to each such corporation; the parent will file petitions and conduct proceedings before the Board of Tax Appeals, and any such petition shall be considered as having also been filed by each such corporation; the parent will file claims for refund or credit; refunds will be made directly to and in the name of the parent and will discharge any liability of the Government in respect thereof to any such corporation; and the parent in its name will give waivers, give bonds, and execute closing agreements, offers in compromise, and all other documents, and any waiver or bond so given, or agreement, offer in compromise, or any other document so executed, shall be considered as having also been given or executed by each such corporation. Notwithstanding the provisions of this paragraph, however, any deficiency letter, in respect of the tax for a consolidated return period, will name each corporation which was a member of the affiliated group during any part of such period, any assessment (whether of the original tax or of a deficiency) will be made in the name of each such corporation (but a failure to include the name of any such corporation will not affect the validity of the deficiency letter or the assessment as to the other corporations) : and any notice or demand for payment, any distraint (or warrant in respect thereof), any levy (or notice in respect thereof), any notice of a lien, or any other proceeding to collect the amount of any assessment, after the assessment has been made, will name the corporation from which such collection is to be made. The provisions of this paragraph shall apply whether or not a consolidated return is made for any subsequent year, and whether or not one or more subsidiaries have become or have ceased to be members of the group at any time (but see paragraph (¾), of this article).

       SEC. 112. RECOGNITION OF GAIN OR LOSS.
      *******
      (b) Exchanges solely in hind.—
      *******
      (3) Stock foe stock on reorganization. — No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
      (4) Same — Gain of corporation.' — No gain or loss shall be recognized if a corporation a party to a reorganization exchanges property, in pursuance of the plan of reorganization, solely for stock or securities in another corporation a party to the reorganization.
      *******
      (i) Definition of reorganization. — As used in this section and sections 113 and 115—
      (1) the term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), * * *

       SBC. 112. RECOGNITION OE GAIN OR LOSS.
      * * ⅜ * * * *
      (e) Gain from exchanges not solely in leinS,.—
      (1) If an exchange would be within the provisions of subsection (b) (1), (2), (3), or (5) of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.

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


source: Caselaw Access Project

author: Offer:

license: Public Domain

text:
    Waters F. Burrows, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 87787.
    Promulgated August 3, 1938.

      Richard J. Mackey, Esq., for the petitioner.

      J. G. Maddox, Esq., for the respondent.
   OPINION,

Offer:

This proceeding involves a deficiency of $1,846.21 in income tas for the year 1983. The petitioner stipulated at the hearing that no issue was being raised regarding the statute of limitations, which is proper in view of the waiver signed by him which is in evidence. Only three issues remain:

1. The petitioner claims that profits from stock sales made in a marginal account in the taxable year do not constitute income, since the profits were not withdrawn and in the following year the petitioner’s account was closed out by the brokers, with a debit balance due from him. This contention is without merit, since under the revenue act income is computed on an annual basis. There is no authority in the statute for suspending the profits realized in one year to determine whether they will be lost in a subsequent year. Burnet v. Sanford & Brooks Co., 282 U. S. 359. And the fact that petitioner did not withdraw profits to which he had an absolute right does not diminish their attribute as income received. Margaret Wilson Baker, 30 B. T. A. 188; affd., 81 Fed. (2d) 741.

2. The petitioner claims the deduction as a bad debt of $6,000 paid for a second mortgage on real estate in Bronxville, New York. Respondent requests us to find that in 1933 the first mortgage was foreclosed and that the mortgagor was adjudicated a bankrupt and we do so find. This left nothing for the second mortgage holder. The petitioner had assigned the record title to this mortgage' to his wife before 1933 and they made separate returns in 1933, neither claiming a deduction for this bad debt. He testified that he was the beneficial owner of the mortgage in 1933. In a letter written by him on March 10, 1936, to the internal revenue agent in charge at Jacksonville, Florida, he stated that the mortgage had been conveyed to his wife in payment of certain debts which he owed to her, but he also stated that the note or bond which the mortgage secured “was never transferred to my wife.” If this was the fact, and there is no contrary evidence, the debt itself remained the property of pet-tioner. It is doubtful whether in fact under such circumstances the attempt to transfer the mortgage was effective. Bloomingdale v. Bowman, 4 N. Y. S. 60. See also Harold S. Denniston, 37 B. T. A. 834. But in any event it is the indebtedness represented by the note or bond and not the mortgage securing it which petitioner is claiming as a deductible loss on the ground that it is a bad debt. Under these circumstances we conclude that petitioner has sustained his burden of proof that the debt was owed to him. Nor can there be any substantial doubt that the identifiable events resulting in worthlessness took place in the year 1983. Not only did the foreclosure of the first mortgage destroy any value to petitioner which the security might have had, but the debtor went into bankruptcy and was discharged in the tax year. The debt having been ascertained to be worthless, it was not necessary that petitioner charge it off, since he kept no books. “Since the petitioners kept no books of account the requirement that the bad debts be charged off before they can be claimed as a deduction does not apply to them.” H. E. Newton, 7 B. T. A. 1153. Frank A. Spencer, 21 B. T. A. 859; Stephenson v. Commissioner, 43 Fed. (2d) 348. And in this case failure of petitioner to take the deduction on his tax return is not significant as it was in Rufus H. Syfers, 22 B. T. A. 736. There, there was room for serious doubt whether in fact the debt was worthless and failure to charge off on petitioner’s books or at least to claim the deduction on his tax return was regarded as evidentiary of petitioner’s own failure to regard the debt as worthless. Here we think there is no substantial doubt that the debt in fact became worthless in 1933 and was so regarded by petitioner, and that therefore petitioner’s failure to claim the amount in his return is not material. See Peters v. United States, 10 Fed. Supp. 145; Mitchell v. Page, (Not reported.) (U. S. Dist. Ct., Ga., Apr. 25, 1938). We may add that petitioner’s wife also failed to claim the deduction in her return, although her income subject to surtax was in excess of the face amount of the debt. We conclude that petitioner is entitled to deduct the amount of the bond or note from his gross income.

3. The petitioner claims the deduction as a business expense of $221.43 incurred in his practice of medicine in former years which was paid in the taxable year after the petitioner had retired from practice. The petitioner is on a cash basis, so that the year when these expenses were paid rather than when they were incurred is controlling. The fact that during the taxable year the petitioner was not continuing his practice does not prohibit the deduction, since the statute does not require continuation of a business in which expenses are incurred. Sec. 23 (a), Revenue Act of 1932. See Burnet v. Marston, 57 Fed. (2d) 611, applying the similar language of the net loss section. Neither do the regulations make any such requirement. Regulations 77, arts. 121,125. This deduction is allowed.

Decision will be entered under Rule 50.


author: Turner:

text:
    Louise D. Morrell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83941.
    Promulgated August 3, 1938.

      Emanuel Friedman, Esq., and Wm. Gutter Thompson, Esq., for the petitioner.

      E. M. Woolf, Esq., for the respondent.
   OPINION.

Turner:

The sole question presented for our determination is whether the payment of $12,533.33 made by the petitioner to the St. Francis Industrial School should be allowed as a credit for dependents under section 25 (d) of the Eevenue Act of 1932. The record shows that the petitioner regularly and for a number of years prior to the taxable year had been contributing monthly amounts sufficient to cover the difference between the income from the school’s endowment fund and its operating costs. The school used those funds, together with the income from the endowment fund, for the purpose of carrying on its activities, which included housing, feeding, educating, and otherwise maintaining approximately 250 boys who were selected and transferred to it by the Catholic Children’s Bureau or St. John’s Orphan Asylum. It is conceded by the respondent that the payments so made by the petitioner were deductible as contributions to a charitable organization under section 23 (n) of the act, subject only to the limitations provided therein. The petitioner now claims that, by reason of the execution of the instrument of May 10, 1933, and the inclusion therein of the names of the boys who entered the school during that year, the amount so paid to the St. Francis Industrial School during 1933 constituted, to the extent of $12,533.33, payments made for the chief or sole support of 64 boys within the meaning of section 25 (d).

We have examined the facts carefully and are unable to subscribe to the application of the statute contended for. In the first £>lace, the mere fact that an agreement to make a contribution is reduced to writing does not convert it into something different, and in the second place, the facts definitely show that the petitioner continued to do what she had done before, that is, to contribute to the St. Francis Industrial School an amount sufficient to make up the excess of its operating expenses over the income from its endowment fund, and from the funds derived from its endowment and the contributions so made by the petitioner the St. Francis Industrial School supported and maintained the boys in question. The listing of inmates or anticipated inmates of a charitable institution in an agreement to contribute to such an institution does not convert the individuals named into dependents within the meaning of section 25 (d), supra, and in determining taxable income the allowance for such contributions is to be made under section 23 (n), supra, and not as credits for dependents.

Decision will be entered for the respondent.

       SEC. 25. CREDITS OF INDIVIDUAL AGAINST NET INCOME.
      There shall be allowed for the purpose of the normal tax, but not for the surtax, the following credits against the net Income:
      * * * * * * *
      (d) Credit por Dependents. — $400 for each person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer if such dependent person is under eighteen years of age or is incapable of self-support because mentally or physically defective.

       SEC. 23. deductions FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions :
      * * * * * * *
      (n) Charitable and Other Contribotions. — In the case of an individual, contributions or gifts made within the taxable year to or for the use of :
      * ⅜ * * * * *
      (2) a corporation, or trust, or community chest, fund or foundation, organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual;
      * ******
      to an amount which in all the above cases combined does not exceed 15 per centum of the taxpayer’s net income as computed without the benefit of this subsection. * * *


author: Opper:

text:
    Charles S. Hatfield, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89343.
    Promulgated August 3, 1938.

      Everett Sanders, Esq., and L. A. Qrmelle, Esq., for the petitioner.

      Ohwies E. Lowery, Esq., for the respondent.
   OPINION.

Opper:

This proceeding involves deficiencies in income tax of $475.30 for the year 1934 and $605.45 for the year 1935. The only issue is the taxability of the petitioner’s salary as a judge of the United States Court of Customs and Patent Appeals.

The following are the facts as stipulated by the parties:

1. That on the 4th day of March, 1923, petitioner, Charles S. Hatfield was appointed an Associate Judge of the United States Court of Customs Appeals now United States Court of Customs and Patent Appeals, by President Harding with the advice and consent of the Senate. That after said appointment, to wit on March 8, 1923, petitioner took his oath of office and qualified as such Judge. That on said day he entered upon the duties of said office as such Judge and has served continuously since.
2. The income tax returns for the period here involved were filed by petitioner with the Collector of Internal Revenue at Toledo, Ohio for the tenth District of Ohio.

We are not now required to determine whether the United States Court of Customs and Patent Appeals is a “constitutional” court, thereby conferring upon petitioner constitutional immunity from tax on his salary. Petitioner’s counsel states: “Petitioner for the purpose of this proceeding concedes that the United States Court of Customs and Patent Appeals is not an ‘inferior court’ as that term is used in Section 1 of Article 3 of the Constitution.” See Ex parte Bakelite Corporation (1929), 279 U. S. 438, 459; Williams v. United States (1933), 289 U. S. 553, 571. While therefore not relying upon the provision of the Constitution that compensation of judges shall not be diminished during their term of office, petitioner nevertheless contends that by construction of the Revenue Act of 1984 his salary is not subject to inclusion in gross income.

It will at once be apparent that the definition of gross income contained in the first sentence of this provision would be broad enough to include petitioner’s salary. It is his contention however that the succeeding sentence, by application of the rule of expressio u/nius est exclusio olierius, excludes from the otherwise general definition salaries of all judges of courts of the United States whether “constitutional” or “legislative” whose appointments became effective before June 6, 1982.

It may be assumed for present purposes at least that the Court of Customs and Patent Appeals of which petitioner is one of the judges is a court of the United States. Ex parte Bakelite Corporation, supra. But we think it does not follow from this proposition that the indicated language of the revenue act has the effect of exempting petitioner’s salary from taxation. As we have said, the general definition of gross income would clearly be broad enough to include the salaries of judges of the courts of the United States, at least as to those not protected by any constitutional immunity. The sentence upon which petitioner relies is not in terms a provision of exemption or exclusion, but of extension or inclusion. It applies only to judges “talcing office after June 6, 1932” and therefore has by definition no direct application to petitioner, whose appointment became effective March 8, 1923. Since, without this provision, petitioner’s salary would clearly be subject to tax, that sentence on its face, being inapplicable to petitioner, leaves his salary where it would otherwise be, within the scope of gross income. And petitioner himself contends : “Section 22 of the act in controversy is clear and unambiguous and requires no construction. * * * Where the language of a statute is not ambiguous it must be construed in its natural and obvious sense. * * *”

In spite of this, petitioner urges, and there therefore remains for consideration, the application of an extrinsic rule of construction, that of expressio unius. To resolve the question thus presented an examination of the true meaning and extent of that rule is required. “The general rule that the expression of one thing is the exclusion of others is subject to exceptions. Like other canons of statutory construction, it is only an aid in the ascertainment of the meaning of the law, and must yield whenever a contrary intention on the part of the lawmaker is apparent. Where a statute contains a grant of power enumerating certain things which may be done and also a general grant of power which, standing alone, would include these things and more, the general grant may be given full effect if the context shows that the enumeration was not intended to be exclusive.” Springer v. Philippine Islands, 277 U. S. 189, 206. “This maxim properly applies only when in the natural association of ideas in the mind of the reader that which is expressed is so set over by way of strong contrast to that which is omitted that the contrast enforces the affirmative inference that that which is omitted must be intended to have opposite and contrary treatment.” Ford v. United States, 273 U. S. 593, 611. In City of Lexington v. Commercial Bank, 130 Mo. App. 687; 108 S. W. 1095, 1096, a case cited by the Supreme Court in the Springer case, supra, the opinion contains the following language: “It has been said, if there is some special reason for mentioning one and none for mentioning the other, the absence of any mention of the latter will not operate as an exclusion * * *.” See also State ex rel. Whitlock v. State Board of Equalization (Mont.), 45 Pac. (2d) 684, 687; Parks v. Commissioners of Soldiers' and Sailors' Home, 22 Colo. 86; 43 Pac. 542, 545.

Applying these principles to the language before us, we think that both the purpose of the section and the legislative and judicial history of the subject lead to the conclusion that the rule is inapplicable. Congress had already expressed the view that the general language of the first sentence of section 22 (a) was sufficiently broad to include all such salaries taxable under the Constitution. And it is generally recognized that in the definition of gross income Congress endeavored “to use its power to the full extent.” Douglas v. Willcuts, 296 U. S. 1, 9. We must thus look elsewhere to discover the purpose of adding the second sentence of section 22 (a). We find this in the Committee Reports covering the Revenue Act of 1932, where it is expressed as follows: “This amendment requires Presidents of the United States and judges of the courts of the United States, talcing office after the date of the enactment of this act, to include their compensation in gross income, and amends all acts ■fixmg the compensation of such officers so as to malee it clear that the provision is intended as a reduction of such compensation; and the House recedes.” (Emphasis added.) Conference Report, Statement of the Managers on the Part of the House, 72d Cong., 1st sess.; House Report JSTo. 1492, p. 11. In so far as judges of “legislative courts” are concerned, this provision was unnecessary. The same Congress which passed the Revenue Act of 1932 was aware of its power to diminish the compensation of such judges during their term of office. And this power was subsequently confirmed by the Supreme Court. Williams v. United States (1933), supra. Cf. O'Donoghue v. United States (1933), 289 U. S. 516. The legislation was necessary, however, particularly as to that aspect which specifically treats the tax as a reduction in compensation, if “constitutional” judges appointed subsequent to the enactment of the Act were to be subjected to taxation. Miles v. Graham (1925), 268 U. S. 501. If this were the purpose of the section its exclusion of judges appointed prior to June 6, 1932, would be limited to judges of the constitutional courts, the taxation of whose salaries was in any event beyond the power of Congress, according to the doctrine of Evans v. Gore and Miles v. Graham. And the express Congressional belief that the broad opening language was sufficient to reach all judicial salaries subject to tax furnishes that “special reason for mentioning one” and for not “mentioning the other” referred to in the Lexington case, supra. This situation provides ample basis for the inclusive language of the second sentence of section 22 (a) and makes it unnecessary to assume that the legislative purpose in including the salaries of judges taking office after June 6, 1932, was inferentially to exclude the salaries of judges of “legislative” courts already in office.

Petitioner suggests that the failure of Congress to adopt more restrictive language should be taken as an indication of its purpose to include only “legislative” and “constitutional” judges taking office subsequent to the specified date. He suggests that the use of some such language as “in the case of Presidents of the United States and judges of inferior courts of the United States taking office after the date of enactment of this Act” would have placed the matter beyond question. In this we think he overlooks the fact that the sentence we are discussing is a taxing provision and not one of exemption. It was therefore reasonable and appropriate for Congress to indicate the breadth of its purpose by using language as general and unrestricted as possible. For example, had the words suggested by petitioner been used, application of the very rule for which he contends would have made it possible to argue that, since Congress specified as taxable only the salaries of “constitutional” judges, the salaries of “legislative” judges would consequently have been exempt, not only as to those taking office prior to 1932 but as to the entire class.

Nor are we able to agree with petitioner that “It is inconceivable that the Congress should legislate in such a way as to operate against the Judges of the Court of Customs Appeals and the Court of Claims on the one hand and in favor of the Judges of the District Courts and Circuit Courts of Appeal on the other in excluding from the income tax levy the salaries of Judges already appointed.” A comparable “discrimination” is precisely what was accomplished by the appropriation act passed by the same Congress which first enacted the sentence we are here considering. O'Donoghue v. United States, supra; Williams v. United States, supra.

We are therefore unable to conclude that anything in the language or circumstances surrounding the enactment of section 22 (a) of the Revenue Act of 1934 has the effect of exempting from inclusion in gross income the salary of a judge of the Court of Customs and Patent Appeals, whether appointed prior or subsequent to June 6, 1932.

Reviewed by the Board.

Decision will be entered for the respondent.

       See Evans v. Gore, 253 U. S. 245.

       SEC. 22. GROSS INCOME.
      (a) General Definition. — “Gross income” includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. In the case of Presidents of the united States and judges of courts of the united States taking office after June 6, 1932, the compensation received as such shall be included in gross income; and all Acts fixing ⅛⅜ compensation of such Presidents and judges are hereby amended accordingly.

       “Section 22 — Gross Income.
      “No changes are made in the general definition of gross income in section 22 (a) except to omit as surplusage the following clause which appears in section 213 (a) of the 1926 Act:
      ‘(including in the case of the President of the United States, the judges of the Supreme and inferior courts of the United States, and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivisión thereof, or the District of Columbia, the compensation received as such)’
      “In so far as such compensation may be taxed under the Constitution, it is already included within the general definition in the bill.” [Report of Ways and Means Committee, 70th Cong., 1st sess.; House Report No. 2, p. 13 (128).]

       See Unitect States v. Fisher (1883), 109 U. S. 143.

      Section 107. (a) .During the fiscal year ending June 30, 1933—
      *******
      (5) the salaries and retired pay of all judges (except judges whose compensation may not, under the Constitution, he diminished during their continuance in office), if such salaries or retired pay are at a rate exceeding $10,000 per annum, shall be at the rate of $10,000 per annum.” [Legislative Appropriation Act of June 30, 1932 (47 Stat. 382, 402).]

       See footnote D, supra.


author: Black :

text:
    Peavy-Byrnes Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 15824.
    Promulgated August 4, 1938.

      S. L. Her old, Esq., and John B. Files, Esq., for the petitioner.

      John E. Marshall, Esq., and Olaude B. Marshall, Esq., for the respondent.
   OPINION.

Black :

Whether petitioner is entitled to have its excess profits tax for the years 1920 and 1921 determined as provided in section 328 of the Bevenue Acts of 1918 and 1921, depends first upon whether it meets the required tests specified in section 827 of those acts. The material provisions of the latter section are the same in both acts and are as follows:

Sec. 327. That in the following cases the tax shall be determined as provided in section 328:
*******
(d) Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision shall not apply to any ease (1) in which the' tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a nominal invested capital * * *

Petitioner does not contend that it falls within any of the grounds specified in subdivisions (a), (b), or (c) of section 327, but relies solely upon subdivision (d). Cf. Stokes Milling Co., 12 B. T. A. 912; Heiner v. Diamond Alkali Co., 288 U. S. 502.

The parties are agreed that the sole question for consideration at this time is whether the record discloses abnormal conditions affecting the capital or income of petitioner. If so, petitioner has made a prima facie case under section 327 (d), supra, notwithstanding that it can not be determined, in the absence of comparative data, whether there is gross disproportion between the tax of this petitioner and comparable taxpayers, or whether petitioner, in the light of such comparison, would be subject to exceptional hardship. These are matters for later determination, if that be necessary, under the provisions of Buie 62 (c) of the Board’s rules of practice. Cf. Pierce Oil Corporation, 32 B. T. A. 403, 416; Garden City Feeder Co., 35 B. T. A. 770. Petitioner contends that both its capital and income were affected by abnormal conditions.

The principal abnormal condition allegedly affecting both capital and income which petitioner contends existed during the taxable years involved had its origin in the 1909 Krause & Managan contract. Petitioner contends that if Krause & Managan, in 1913, had elected under paragraph 14 of the contract to take one-half of all the net profits and a one-half interest in all of petitioner’s property instead of one-half of petitioner’s capital stock, which it did elect to take, petitioner would have been entitled to take one-half of its net profits as a deduction for additional cost of timber, and that the absence of such a deduction from gross income produced an abnormality in petitioner’s net income. Among the errors assigned in the original and first amended petitions were that the respondent had erred in failing to deduct from petitioner’s gross income for 1920 and 1921, one-half of the net profits for those years, and, in the alternative, that the respondent had erred in failing to find that the value of the 2,500 shares of stock issued to Krause & Managan on July 28,1913, was $562,500, which value should be allowed both for invested capital and depletion purposes, instead of the value of $125,000 allowed by the respondent. On March 10, 1928, petitioner further amended its petition to strike out $562,500 and insert in lieu thereof $613,750; and on December 5, 1931, it amended the second amended petition to strike out $613,750 and insert in lieu thereof $1,250,000. The Board and the Fifth Circuit have denied petitioner’s contention for a deduction of one-half of its net profits, and it has been found from the evidence and finally decided that the value of the 2,500 shares of stock issued to Krause & Managan, or its nominees, on July 28,1913, was $665,000, which value has been the basis for allowances in invested capital and for depletion deductions in the stipulated deficiencies set forth in our findings of fact. The alleged abnormality of capital is apparently based upon the fact that the Board did not find from the evidence that the value of the stock issued to Krause & Managan Avas $1,250,000, as alleged by petitioner in its third amended petition. It is true that the Board did not find that the capital stock issued to Krause & Managan had a value of $1,250,000, but that was because the evidence did not warrant it. We held that the evidence showed that the stock had a value of $665,000 on July 28, 1913, the basic date. We held, however, that these 2,500 shares were issued for the entire 206,140,227 feet in the tract on November 20,1909; and that, since 52,124,702 feet had been cut between November 20, 1909, and July 28, 1913, leaving on the latter date 154,015,525 feet uncut, the value of the stock issued in payment of the timber standing on July 28, 1913, was 154015525/206140227 of $665,000, or $497,135.92.

In this reduction the court held that we were in error and reversed us on that point. See Peavy-Byrnes Lumber Co. v. Commissioner, 69 Fed. (2d) 712. The court in the concluding part of its opinion said:

We agree with the Board’s conclusion that the cost of the timber and the value of the stock ought to be and are the same. We agree too with its conclusion that a value of $665,000 as of that date is reasonable and supported by tbe evidence. We do not agree with its conclusion that any less than this amount fairly represents the then value of the stock, the then cost of the timber exchanged for it.
The order of the Board is therefore reversed and the cause is remanded with directions to redetermine petitioner’s tax liability in accordance with its finding of $665,000 as the fair market value of the stock, the cost of the timber, as of July 28, 1913, when the exchange was made.

It is true that the court’s opinion above referred to involved Docket No. 16354', which involved prior taxable years, but it is equally applicable here. In the stipulation filed by the parties, which has been embodied in our findings of fact, petitioner’s income for the years 1920 and 1921 was recomputed on the basis of the court’s opinion above referred to.

As illustrating the effect on petitioner’s invested capital resulting from applying the prior Board and court decisions, we give the following example: Petitioner’s invested capital, as determined in the Commissioner’s deficiency notice, for the year 1920 was $483,-668.10. Now it is $698,679.36, by giving effect to the adjustments which have been made. For 1921 petitioner’s invested capital as determined in the deficiency notice was $427,718.34. Now it is $745,-885.62, by giving effect to the adjustments which have been made. Petitioner, in support of its contentions that it is entitled to special assessment, cites as authority Clarence Whitman & Sons, Inc., 11 B. T. A. 1192; Concrete Engineering Co., 19 B. T. A. 212; Hirsch & Spitz Manufacturing Co., 21 B. T. A. 1186; San Francisco Hotel Co., 22 B. T. A. 740; Delaware, Lackawanna & Western Coal Co., 26 B. T. A. 1330; and Pierce Oil Corporation, 32 B. T. A. 403. The facts in this case are entirely different from the facts involved in the cases cited by petitioner and we do not regard any of them in point. Contrary to what took place in the cases above cited, all of petitioner’s income producing assets, so far as we can see, have now been included in petitioner’s invested capital in the manner provided by statute.

Petitioner also contends that by reason of this contract with Krause & Managan it was able to purchase timber at a total cost very much below the actual cash value of the timber and that therefore the contract possessed a certain intangible value over and above its cost of $665,000, which, although income producing, could not be included in petitioner’s statutory invested capital. The facts, however, do not support petitioner in this contention. The contention would doubtless be a valid one if petitioner had paid only $4 per thousand feet as provided in paragraph 2 of the contract, but by I’eason of paragraph 13 of the contract, petitioner paid Krause & Managan in 1920 and 1921 much more than $4 per thousand feet for the timber. This was in addition to the $665,000 which had already been paid under paragraph 14 of the contract. During the taxable years 1920 and 1921 petitioner cut 11,144,730 and 3,744,991 feet, respectively, from the Krause & Managan tract. The parties have stipulated that petitioner paid Krause & Managan for this timber $119,004.28 in 1920 and $21,513.39 in 1921, under paragraphs 2 and 13 of the contract. The total average cost per thousand feet of this timber to petitioner in cash in 1920 and 1921 was $10.68 and $5.74, respectively.

During the same years petitioner cut 14,318,727 and 15,008,659 feet, respectively, from sources other than the Krause & Managan tract at a total cost of $88,517.31 and $69,803.86, respectively, which is at an average cost per thousand feet of $6.18 for 1920 and $4.65 for 1921, which was considerably less than the average cost per thousand feet of the timber cut from the Krause & Managan tract. We think these facts clearly show the lack of any so-called intangible value of the Krause & Managan contract not included in invested capital, as contended for by petitioner. Cf. Sonora Phonograph Co., 16 B. T. A. 1172, 1180; Coca-Cola Bottling Works of Pittsburgh, 19 B. T. A. 267; Peytona Lumber Co., 21 B. T. A. 354; affd., 55 Fed. (2d) 27; certiorari denied, 287 U. S. 612.

We have carefully considered every phase of this case and are unable to find any abnormal conditions affecting petitioner’s capital or income. On the contrary, we think this is a case where petitioner’s excess profits tax, computed without the benefit of the special assessment provisions of the statute, is high merely because petitioner earned within the taxable years a high rate of profit upon a normal invested capital. It follows that petitioner is not entitled to have its excess profits tax for 1920 and 1921 determined as provided in section 328 of the Revenue Acts of 1918 and 1921. Cf. H. D. & J. K. Croswell, Inc., 6 B. T. A. 1315; Albert's, Inc., 10 B. T. A. 1132; Park Amusement Co., 16 B. T. A. 587.

Reviewed by the Board.

In accordance with the stipulation, decision will be entered that there is a deficiency of $10,-090.80 for the year 19W, and that there is a deficiency of $15,08044 for the year 19®1.


author: TurneR:

text:
    Delbert B. Geeseman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81736.
    Promulgated August 4, 1938.

      J. Garfield Houston, Esq., and H. V. Blaster, Esq., for the petitioner.

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

TurneR:

The respondent contends that the option granted the petitioner “by its terms was strictly an employment of service contract” and that the difference between the price paid for the shares of stock and their fair market value on the date of purchase was additional compensation received by him as an employee of Continental Can Co. The petitioner contends that his purchase of stock was a “bargain” purchase and that such acquisition does not result in the realization of gain until the shares are sold or otherwise disposed of at a profit. In the alternative, he contends that if the transaction did constitute the payment of compensation, such compensation was received either when the option was originally granted or on the respective dates when the right to acquire the various allotments of stock matured.

Numerous cases which resemble the instant case in many respects have been decided and the results in many of them can not be reconciled as to conclusions of fact or conclusions of law. The disposition of such cases has become increasingly difficult because of the effort to spell out some set rule or formula whereby transactions of the type here involved may be automatically classified either as “bargain” purchases having no dependency on a contract of employment and which in the absence of sale or other disposition of the shares are said not to result in the present realization of gain, or classified as the payment of compensation which, to the extent that, the fair market value of the shares on the date of acquisition exceeds the purchase price, must be returned by the employee as income in the year of the purchase. To hold that a transaction of the character here involved is a “bargain” purchase having nothing to do with the employer-employee relationship, or, to the contrary, that it is not a purchase but constitutes the receipt of compensation having nothing to do with the purchase of property, to the extent that the fair market value exceeds the purchase price, is to ignore obvious facts and to assume a case substantially different from the one before us. In the first place, it may not be said that the acquisition of the stock of Continental Can Co. was not a purchase merely because the price paid was substantially lower than the price at which the same stock was then selling on the market, and, in the second place, obvious facts are ignored if it be said that the stock transaction was separate and apart from, or was not based upon, the employer-employee relationship, or that it had no relation to services rendered or to be rendered. In practically all such cases both elements are present and decision is impossible if the absence of one or the other is essential thereto.

Normally the purchase of property does not result in the realization of taxable gain, but rather in the acquisition of an asset with a view to the later realization of gain or profit through its use or subsequent sale, and upon sale the general rule is that no taxable gain is realized until the seller has recovered his cost or capital. Burnet v. Logan, 283 U. S. 404. Certainly the above principle is applicable in the instant case in so far as the stock acquired by the petitioner under the option granted to him by his employer was acquired at a cost to him of $30 per share in cash. It is also equally obvious that the petitioner did not at the time of or in the year of purchase recover any part of such cost. Our question then is whether on the facts presented it must be said that some undivided part of the 640 shares of Continental Can acquired by the petitioner was acquired by purchase and in respect of that part no taxable gain is realized until the stock is sold or otherwise disposed of and the petitioner has recovered his cost, while saying that the remaining undivided part of the said shares was received as the payment of compensation and must be reported as income in the year received to the extent of the fair market value of such undivided part. If so, it must be because of the fact that the price paid was lower than the price at which the same stock was selling on the market either at the time of purchase or at the time the offer was extended or became effective; otherwise, there would be no basis for holding that any portion of the stock was acquired other than by purchase, even though the sale to petitioner was based on an employer-employee relationship. Gardner-Denver Co. v. Commissioner, 75 Fed. (2d) 38. Furthermore it is not at all unusual that the purchaser of property may through his ability and shrewdness as a buyer, or by reason of other influences or forces, be able to purchase property at a price substantially lower than the price at which it may be immediately sold, but it does not follow that gain is presently realized through such a purchase. Manomet Cranberry Co., 1 B. T. A. 706; Morgan J. McMichael, 4 B. T. A. 266; George W. Van Vorst, Executor, 22 B. T. A. 632; affd., 59 Fed. (2d) 667; James William Everhart, 26 B. T. A. 318; W. L. Dunn, 14 B. T. A. 13; and Rose v. Trust Co. of Georgia,, 28 Fed. (2d) 767. Accordingly it is our opinion that as a prerequisite to the conclusion sought by the respondent it should definitely and clearly appear that a transaction, which in form is nothing more than a purchase and to an obvious and substantial extent is unquestionably a purchase, is in fact to some extent the payment of compensation for services rendered or to be rendered.

If the agreement between an employer and employee shows that the amount of money which is to be paid by the employee in connection with the acquisition of stock in the employer is fixed or controlled by services rendered or to be rendered and further shows that the employee agrees to receive payment of his compensation in the form of stock, the parties should not be heard to say that the excess of the fair market value of the stock over the cash paid by the employee should not be treated for income tax purposes as compensation paid. Albert Russel Erskine, 26 B. T. A. 147. Cf. W. M. Ritter Lumber Co., 30 B. T. A. 231. It is also possible that even in the absence of such a definite understanding or expressed declaration in the agreement between the employer and employee, the circumstances surrounding the agreement may be such as to render unreasonable and absurd any conclusion that the acquisition of the stock at the price named did not constitute the payment of compensation to the extent of the difference between the amount paid and the fair market value of the stock. Such, however, is not the case before us. It is true that the prospective purchasers were selected solely because they were valued employees of Continental Can Co., and there is no doubt that the added interest of these employees and the proprietary attitude toward the company which would result from their ownership of the stock constituted one of the motives for the granting of the option. It is equally obvious, however, that the continued employment of the petitioner was not dependent upon the receipt by him of the right to purchase the stock at less than the market price. The terms and conditions of his employment and the compensation he was receiving were in no way changed by the receipt of the privilege of purchasing the stock. Accordingly the rule stated in the Ershine and Ritter Lumber Co. cases is not applicable here. Furthermore the price to be paid by petitioner for the stock was substantial and, if consideration be given to the language of the offer, the margin of difference between the option price and the current market price at the time the option price was fixed, and to the fluctuation of prices on the stock market during the period in which the offer was made, we do not believe that it can be said that the margin of difference between the offering price and the fair market value of the stock was so great as to require the conclusion that the transaction here constituted the payment of compensation. Cf. Omaha National Bank v. Commissioner, 75 Fed. (2d) 434; Gardner-Dewoer Co., supra; and Rossheim v. Commissioner, 92 Fed. (2d) 247. Accordingly we are unable to find in the instant case the elements which would indicate that the transaction was not what its form indicates, that is, a purchase of stock by the petitioner with a view to the subsequent realization of profit through dividends or sale or other disposition of the, property.

The conclusion stated makes it unnecessary to consider the petitioner’s alternative contentions.

Decision will be entered for the petitioner.


author: Keen :

text:
    Sol H. Morris, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 85277.
    Promulgated August 5, 1938.

      Daniel D. Oontarsy, G. P. A., for the petitioner.

      Carroll Walker, Esq., for the respondent.
   OPINION.

Keen :

This proceeding involves a deficiency in income tax liability of petitioner for the calendar year 1933, determined by respondent in the sum of $689.19. That part of the deficiency is in question here which arises by reason of respondent’s adding to petitioner’s income the profit on the sale of stocks amounting to $6,368.95. The deficiency notice stated that this amount “represents an increase of income from the joint venture, which was increased by the amount of $24,787, representing a loss estimated by the venture in connection with the sales of capital of the General American Tank & Transportation Co. This loss is held to represent a wash sale and is, therefore, not deductible. (Article 661, Regulations 77).”

Petitioner’s principal business was that of a stockbroker and trader. He resided and did business in the city of Chicago, Illinois. In 1933 petitioner and two other individuals were engaged in the purchase and sale of stock of the General American Tank & Transportation Co. in a joint account. In this joint venture petitioner had a 25 percent, interest in its losses or profits and executed all of the transactions consummated by the joint venture.

During the period from June 21 to December 31, 1933, petitioner spent the greater part of his time in carrying on the trading activities of the joint venture. The market hours were from 9 a. m. to 2 p. m. and petitioner spent at least four of these hours each day either watching the market or consummating transactions on behalf of the joint venture. During this period the joint venture completed approximately six hundred transactions on one hundred different days, and the amount involved therein was approximately $5,000,000. During the year 1933 petitioner received an income of $2,400 from his business as broker, and the sum of $8,854.92 as profits from the transactions of the joint venture. This latter figure represented one-fourth of the profits of the joint venture, determined by deducting the total losses from its transactions from the total profits therefrom.

Losses by individual taxpayers are deductible from gross income pursuant to section 23 (e) (1), (2) of the Revenue Act of 1932, set out in the margin.

The loss which petitioner claims as a deduction and is involved in this proceeding was disallowed by respondent on the ground that it is the type of loss which is not to be allowed as a deduction by reason of section 118 (a) of the Revenue Act of 1932, commonly known as the “wash sales” provision of the act, which section, together with article 661 (a) of Regulations 77, is set out in the margin.

It is to be noted that the prohibition of the allowance of losses arising out of “wash sales” of stock or securities so far as individual taxpayers are concerned, is contained in the language, “no deduction for the loss shall be allowed under section 23 (e) (2).” There is no prohibition against the allowance of a deduction for such a loss under section 23 (e) (1). It, therefore, follows that if a loss is sustained by the taxpayer, such as is described in section 118 (a) of the act, and is incurred in taxpayer’s trade or business, it is an allowable deduction, since it is not subject to the application of section 118 (a), which by its terms applies only to losses “incurred in any transaction entered into for profit, though not connected with the trade or business.” This construction of the statute is recognized by article 661 of Regulations 77, which states that the “prohibition [contained in section 118 (a)] does not apply (1) in the case of a taxpayer, not a corporation, if the sale or other disposition of stock or securities is made in connection with the taxpayer’s trade or business.”

Were the sales of stock and securities involved in this proceeding made in connection with petitioner’s trade or business? We think that the answer must be in the affirmative. Petitioner devoted the largest part of his business time to carrying on the activities of the joint venture in buying and selling securities. During the last six ■months of 1933 the joint venture completed over 600 transactions connected with the purchase and sale of securities and involving an amount of money in excess of $5,000,000. A greater proportion of petitioner’s income was derived from the business of the joint venture than from any other business in which petitioner was engaged. Petitioner’s activities during the taxable year in connection with the stock trading of the joint venture were not isolated transactions but were “such that they may, of themselves, be regarded as a regular occupation for the purpose of livelihood or profit.” Oscar E. Rehm, 21 B. T. A. 243; Richard D. Wyckoff, 19 B. T. A. 263; George P. Sachs, 25 B. T. A. 415. These authorities are also quite clearly to the effect that a person can be engaged in more than one trade or business. Ignaz Schwinn, 9 B. T. A. 1304; Marry F. Harper, 20 B. T. A. 143,153.

Respondent's argument is, apparently, that the only exception contained in the “wash sales” provision of the revenue act (section 118) ⅛ granted to a corporation which is “a dealer in stocks or securities”, and, therefore, since a joint venture is considered as a partnership by virtue of section 1111 (a) (3) of the Revenue Act, the “wash sales” provision is applicable to the transactions here in question. However, as we have pointed out, no specific exception is required as to losses of this type which are deductible under section 23 (e) (1) of the revenue act, since section 118 (a) of the act, by its terms, applies only to losses claimed by individual taxpayers which would otherwise be allowed under section 23 (e) (2), and not as to those deductible under section 23 (e) (1).

Respondent relies on the case of Richard Coulter, 32 B. T. A. 617. That case, however, merely held that “it is not sufficient that a taxpayer can show a series of individual transactions, whether speculative or for investment”, and that the evidence therein was “not enough to establish a trade or business not subject to the restrictions of the wash sale provision.” As we read the opinion in that case, it is not inconsistent with any of the views which we have expressed.

Decision will he entered under Rule 50.

       SEC. 23. DEDUCTIONS FROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      *******
      (e) Losses by Individuals. — Subject to the limitations provided in subsection (r) of this section, in the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
      (1) if incurred in trade or business ; or
      (2) if incurred in any transaction entered into for profit, though not connected with the trade or business; * * *

       SEC. 118. LOSS FROM WASH SALES OF STOCK OR SECURITIES.
      (a) In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire substantially identical stock or securities, then no deduction for the loss shall be allowed under section 23 (e) (2) ; nor shall such deduction be allowed under section 23 (f) unless the claim is made by a corporation, a dealer in stocks or securities, and with respect to a transaction made in the ordinary course of its business.
      Akt. 661. Losses from tvash sales of stock or securities.— (a) A taxpayer can not deduct any loss claimed to have been sustained from the sale or other disposition of stock or securities, if, within a period beginning 30 days before the date of such sale or disposition and ending 30 days after such date (referred to in this article as the 61-day period), he has acquired (by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities. However, this prohibition does not apply (1) in the case of a taxpayer, not a corporation, if the sale or other disposition of stock or securities is made in connection with the taxpayer’s trade or business, or (2) in the case of a corporation, a dealer in stock or securities, if the sale or other disposition of stock or securities is made in the ordinary course of its business as such dealer. See article 58 as to stock or securities sold from lots purchased at different dates or at different prices where the identity of the lots can not be determined; article 501 as to the treatment, for the purpose of capital net gain, of stock or securities acquired in connection with wash sales ; and article 602 for the basis for determining gain or loss from the subsequent sale or other disposition of such stock or securities.


author: Disney:

text:
    Stantex Petroleum Company, as Alleged Trustee for Lillie Morse Syndicate No. 2, Petitioner, v. Commissioner of Internal Revenue, Respondent. Stantex Petroleum Company, as Alleged Trustee for Lillie Morse Syndicate No. 1, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 89531, 89532.
    Promulgated August 5, 1938.

      Dwight Williams, Esq., and Tom F. Oarey, O. P. A., for the petitioners.

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

Disney:

These proceedings were consolidated for hearing and report and involve redetermination of the following deficiencies:

The question presented for decision is whether the petitioners are associations taxable as corporations. The facts are embodied in stipulations of fact which are adopted by reference as our findings of fact.

Immediately after its organization in 1931 under the laws of Oklahoma the Stantex Petroleum Co. acquired by assignment;, in exchange for 130 shares of its capital stock, an oil and gas lease covering a tract of land in Texas. Thereafter in 1931 the Stantex Petroleum Co. sold to 30 individuals undivided interests aggregating 260/640 of its 7/8 working interest in the lease covering the north half of the tract, and, to 19 persons, undivided interests totaling 87/640 of its 7/8 working interest in the lease covering the south half of the land. Each purchaser acquired his undivided interest under the provisions of a written assignment reading, in part, as follows:

To Have and to Hold said interest tinto said assignee, his or her executors, administrators and assigns, subject, however, to the agreements and powers hereinafter recited, which are agreed to by said assignee by acceptance of this assignment.
And for the same consideration, the assignor covenants for itself, its successors and assigns, to and with said assignee, his or her executors, administrators and assigns, that the assignor is the lawful owner of the interest herein assigned and has good right to assign the same.
Assignor further covenants that it will drill, at its own expense, a well on the above described premises to a depth of thirty-seven hundred (3,700) feet, unless oil or gas is found in paying quantities at a lesser depth and if production is obtained in paying quantities, the assignor agrees to furnish the necessary tankage at its own expense.
In the event of discovery of oil and/or gas on the leased premises in paying quantities, the assignee herein authorizes the assignor to collect the proceeds due under this lease from all oil and/or gas sold to any pipe line, refinery or other purchaser of said products, giving said assignor authority to collect and receipt for the same and to pay out, first the expense of operating, producing, saving and marketing said oil and/or gas as certified by the Stantex Petroleum Company, the operators of said lease and to pay the net proceeds to the leaseholders as their interests appear. Said assignee further agrees that the Stan-tex Petroleum Company for rendering this service of collecting and distributing the funds as above outlined shall receive one (1%) percent of said funds or a minimum of One Hundred Fifty ($150.00) Dollars per month, as a compensation therefor. Said assignee further agrees in accepting this assignment that when the holders of 51% or more of the interests in said lease, desire to sell and have a purchaser in good faith ready, willing and able to buy the entire property, that he or she agrees to join in said sale or to buy the other interests out at the price that they have agreed to sell for. Said assignee agrees either to join in said sale or purchase under the above agreement within fifteen days after he receives notice that 51% of the interest holders desire to sell and if he fails to either buy or join in said sale within fifteen days, the said assignee hereby appoints and makes said assignor his or her attorney in fact to execute and assign his or her interest in said lease as fully as though he or she had executed it, and assignee hereby ratifies such sale and all acts of such attorney in fact in carrying out said agreement.
It is further agreed that Stantex Petroleum Company, its successors and assigns shall have the development and operation of said premises so leased as long as said development and operations are conducted in an efficient manner.
It is further agreed that Stantex Petroleum Company, its successors and assigns shall have the right to contract for the sale of all the oil and/or gas produced to the interest herein assigned from the property above described and shall have the right to execute in behalf of and as the agent for the assignee named herein division orders and such other instruments and/or contract as may become necessary for the sale and marketing of said oil and/or gas.
This assignment becomes valid and effective only upon signing and acknowledging of the same by both assignor and assignee.

All of the assignments were properly recorded in Rush County, Texas.

No other agreements were ever entered into between the assignor and the assignees regarding the respective undivided interests in the lease, and aside from the assignments, no certificate or acknowledgment of interest was ever issued to the assignees. During the taxable periods in question the Stantex Petroleum Co. did not hold legal title to the undivided interests covered by the assignments.

The alleged association had no name, no office, no stationery, no books of record, no bylaws, no trust agreement, no officers, no board of directors, and it did not issue certificates of beneficial interest.

Pursuant to the terms of the assignments and during 1931, the Stantex Petroleum Co. drilled, completed, and equipped a producing oil and gas well on each half of the tract, the well on the north half being known as “Lillie Morse Well No. 1” and the one on the south half as “Lillie Morse Well No. 2.”

The Stantex Petroleum Co. complied with the terms of said assignments (Exhibit A), in that it signed division orders as agent for the owners of said 260/640 undivided interests, sold the oil and gas produced from said interests and collected the proceeds therefrom, and applied said proceeds first to the payment of the proportionate part of operating expenses applicable to said interests and distributed the remainder to the owners of said interests each month. The Stantex Petroleum Co. acted in a like manner for the owners of the 87/640 undivided interests in the lease on the south half of the tract.

The owners of the respective 260/640 and 87/640 undivided interests transacted no business jointly except the operation of said leasehold estate. No other property was acquired by them, nor were the proceeds from the sale of oil and gas invested in any manner for the owners of said undivided interests.

In Morrissey v. Commissioner, 296 U. S. 344, and the companion cases the Court discussed the circumstances under which an enterprise may be classified as an association taxable as a corporation. The Court did not establish an absolute test. It said that “The inclusion of associations with corporations implies resemblance; but it is resemblance and not identity.”

There is little here disclosing resemblance of corporate form. The holders of undivided interests in the lease, as tenants in common, F. E. McGlone, 22 B. T. A. 358; affd., Burnet v. Burns, 63 Fed. (2d) 313; Commissioner v. Duckwitz, 68 Fed. (2d) 629; and Commissioner v. Brouillard, 70 Fed. (2d) 154; and C. H. Clovis, 32 B. T. A. 646, were in a limited and general way associated in a business enterprise for profit with provision for continuity of the venture and limitation of liability. Thus the terms of assignments of undivided interests in the lease by the Stantex Petroleum Co., the lessee of the entire tract of land, provided for drilling two wells, one on each half of the tract, at the assignor’s expense; authorized the operation of the wells by the assignor, its successors and assigns, so long as it did so in an efficient manner, in case oil or gas was discovered in paying quantities; and permitted assignment of undivided interests. Aside from these elements, the agreements contain no features analogous to corporations. A paying well was drilled in each section, the production was sold, and the net proceeds were distributed monthly to the coowners of the property in accordance with provisions of the assignment. Title to the lease and the producing wells was at all times important in the original lessee and its assignees of interests therein as tenants in common. Exclusive of the amount collected for itself, such income as was derived from the wells was collected by the Stantex Petroleum Co. as agent or trustee for its cotenants. See Commissioner v. Whitcomb Coca-Cola Syndicate, 95 Fed. (2d) 596; Mark L. Gerstle, 33 B. T. A. 830; affd., 95 Fed. (2d) 857. While the coowners sought to limit their liability to the operation of wells containing oil and gas in paying quantities, they were severally liable for expenses of producing, saving, and marketing the output of the wells to the extent that the Stantex Petroleum Co. acted within its authority. Under the circumstances there was no limitation of liability similar to the stockholder of a corporation.

The respondent cites Thrash Lease Trust, 36 B. T. A. 444. Questions of the sort involved here must turn upon their peculiar facts. There we did not think the facts were sufficient to overcome the showing made in favor of the correctness of the Commissioner’s finding. The facts here do not, in our opinion, warrant a finding that the petitioners were during the taxable periods associations taxable as corporations, and we so hold.

Decision will he entered for the petitioners.

        Swanson v. Commissioner, 296 U. S. 362; Helvering v. Combs, 296 U. S. 365 ; Helvering v. Coleman-Gilbert Associates, 296 U. S. 369.