author: Opper:

text:
    Estate of Howard H. McClintic, Deceased, Margaret McC. McClintic, Howard H. McClintic, Jr., Robert H. McClintic, Stewart McClintic, Margaret McC. Love and Fidelity Trust Company, Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent. Charles D. Marshall, Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 101197, 101757.
    Promulgated June 25, 1942.

      Paul G. Bodewald, Esq., for the petitioners.

      Hartford Allen, Esq., and J. Harrison Miller, Esq., for the respondent.

         Commissioner v. Sansome (C. C. A., 2d Cir.), 60 Fed. (2d) 931; certiorari denied, 287 U. S. 667.

   OPINION.

Opper:

We take as our point of departure the principle of the--Bansome case that accumulated earnings and profits of a predecessor-corporation are made available for dividend distribution by a successor where its acquisition of the corporate assets is the result of a tax-free reorganization. Respondent relies upon the figures carried on the-books of the various corporations involved in the series of transfers which led ultimately to the distribution which raises the present questions; and, tracing through the surplus accounts, which in the main-conformed with the tax treatment of the various transactions and culminated in a $12,000,000 book surplus in Pitt Securities, the corporation making the distribution in dispute, concludes that there was ample reserve of earnings and profits to cover the dividend.

If respondent’s treatment is correct that is a short and simple ' formula for disposing of the present proceedings. Petitioners, however, assert that net taxable income and actual earnings and profits-available for dividends are two different concepts, and that “Book, entries are by no means conclusive and must yield to the actual f ácts,. which in this case are not in dispute.” For purposes of discussion we shall adopt this general approach and from that viewpoint examine-the transactions which led to the distributions in controversy. *

This should begin with the corporation to which we are referring-as the Construction Co. and the tax-free reorganization by which McClintic-Marshall acquired that company’s stock and simultaneously received , a distribution of the bulk of its assets. In December 1926,. when this reorganization took place, the Construction Co. had net assets of a value of approximately $65,000,000, though its capital was-slightly less than $7,500,000. According to its books it had earnings-accumulated during its corporate life of $18,500,000, of which, however,, some $1,500,000 had accumulated prior to March 1, 1918, and nearly $4,000,000 represented charges to surplus on the issuance of stock divi- — dends in prior years. The post-1913 accumulations are thus approximately $17,000,000. The impounding of surplus in stock dividends which were apparently nontaxable would not diminish this figure,. August Horrmann, 34 B. T. A. 1178, which is, therefore, what we must I regard as the accumulated earnings of the Construction Co. available- / for the declaration of taxable dividends at that time.

' The cost of the Construction Co. shares to McClintic-Marshall is asserted to be $65,000,000, that being the value of the Construction •Co. assets, and hence of the Construction shares for which the McClintic-Marshall stock was issued. ' But we can not overlook the simultaneous transfer to McClintic-Marshall of most of the Construction Co. assets, which ^stipulated to have been part of the reorganization.

A fundamental principle in the consideration of reorganization problems is that the successive parts of the reorganization should be viewed as a whole. Helvering v. Bashford, 302 U. S. 454; Prairie Oil & Gas Co. v. Motter (C. C. A., 10th Cir.), 66 Fed. (2d) 309; Bassick v. Commissioner (C. C. A., 2d Cir.), 85 Fed. (2d) 8; certiorari denied, 299 U. S. 592; Muskegon Motor Specialties Co., 45 B. T. A. 551, 558. When'" this is done, McClintic-Marshall is seen to have received some $52,000,000 of miscellaneous assets of the Construction Co., including the stock of six subsidiary companies having a value of $15;000,000. That this $52,000,000 is denominated a “distribution” is of no consequence since the assets concerned were acquired as part of the reorganization, as the parties have stipulated, and were part of what McClintic-Marshall, on petitioners’ theory, received for its payment of $65,000,000. As we have already noted, the $65,000,000 is petitioners’ figure for the cost of everything that McClintic-Marshall got because the stock which it issued, having no other indication of market value, should be valued according to the petitioners by viewing the stipulated contemporary worth of the assets received for the stock. We can not escape the conclusion, therefore, that $52,000,000 of the stock was paid out and $52,000,000 of miscellaneous assets were received when the transaction as a whole is considered.

Following the theory presented to its logical conclusion, the cost''of the miscellaneous assets was $52,000,000 out of the total of $65,000,000 which McClintic-Marshall paid. This, of course, leaves $13,000,000 unaccounted for. But when the entire transaction was concluded McClintic-Marshall held, in addition to the miscellaneous assets, the stock of the Construction Co., which in turn still owned property which the parties have stipulated was worth approximately $13,000,000^ By a similar process of reasoning we conclude, therefore, that the remaining $13,000,000 was paid by McClintic-Marshall for the Construction Co. stock. There is thus established a true cost basis for purposes of the computation in which we are now engaged of $13,000,000 and no more for the Construction Co. stock. ,

This brings us to the occurrence which, in petitioner’s view, is the nub of their whole contention. “The most important of the several transactions affecting the earnings of McClintic-Marshall Corporation,” they say in their brief, “and on which the outcome of these cases ultimately turns, is the complete liquidation in 1930 of nine of its wholly-owned subsidiary corporations.” The point made is that these liquidations, including the six subsidiaries and the Construction Co., resulted in a loss to McClintic-Marshall computed by petitioners at a figure sufficient to eliminate the earned surplus which the Construction Co. carried on its books at the time of the transfer to McClintic-Marshail.

The computations upon which petitioners rest that assertion need not be reproduced in detail. Suffice it to say that they include as the predominant item of unrecovered cost an amount of $29,500,000 or thereabouts attributed to the stock of the Construction Co., a figure which is arrived at by assuming that of the $65,000,000 paid for it only about $34,000,000 was recovered by the receipt of Construction Co-assets in 1926. This assumption in turn, proceeds on the theory that the transfer of these assets was a dividend to the full extent of the Construction Co.’s earnings, and that it wiped these out and at the same time reduced McClintic-Marshall’s recovery of its cost by a corresponding figure.

Without this premise the claim of a loss on the liquidation falls. Since, as we have seen, there is no justification for the basic assumption that the cost of the Construction Co. stock was more than the approximate $13,000,000 shown by the net result of the 1926 reorganization, all of its cost and that of the other subsidiaries was recovered by the stipulated value of the assets^received^,in the 1930 liquidation amino loss but in fact a slight profit resulted. It follows ffiatThere is no ground for the contention that McClintic-Marshall’s earned surplus was wiped out or even impaired when its subsidiaries liquidated.

It by no means weakens the force of what we have already concluded to add that the facts demonstrate how unreal and theoretical is any contention that McClintic-Marshall as a result of the transactions described was any worse off than it had been in the first place. Disregarding theories and technical provisions of the tax law, as we must to accord with petitioners’ approach, we see that McClintic-Marshall appears to have acquired all of the stock of the Construction Co., and after becoming the owner of the stock, has effected a complete liquidation of Construction Co. by eventually transferring all of the • assets of Construction Co. to itself. It thus received a total of $65,000,000 worth of net assets. Obviously, it has had no loss. It got exactly what it set out to get and has paid for it in its own stock, which stock, at best, was not worth more than $65,000,000. $65⅜000,00(> paid out and $65,000,000 received back results in neither gain nor loss. Thus, actually, McClintic-Marshall had no loss whatsoever upon the acquisition of the assets of the Construction C'o. nor upon its-liquidation.

(What is perhaps a collateral or supplementary consideration is that basically the situation is not to be distinguished from that adjudicated in various aspects by the Sansome case and those applying a similar principle.,' United States v. Kauffman (C. C. A., 9th Cir.), 62 Fed. (2d) 1045; Helen V. Crocker, 29 B. T. A. 773; Murchison's Estate v. Commissioner (C. C. A., 5th Cir.), 76 Fed. (2d) 641; Fain v. Commissioner (C. C. A., 5th Cir.), 76 Fed. (2d) 1008; certiorari denied, 296 U. S. 588; Baker v. Commissioner (C. C. A., 2d Cir.), 80 Fed. (2d) 813, affirming 28 B. T. A. 704; Corrigan v. Commissioner (C. C. A., 3d Cir.), 103 Fed. (2d) 1010; certiorari denied, 308 U. S. 576; Stanton Corporation, 44 B. T. A. 56, 81; Barnes v. United States (Dist. Ct., E. Dist. Pa.), 22 Fed. Supp. 282. Cf. Coudon v. Tait (C. C. A., 4th Cir.), 61 Fed. (2d) 904; certiorari denied, 289 U. S. 733; Harter v. Helvering (C. C. A., 2d Cir.), 79 Fed. (2d) 12, 13.

* * ‡ These cases hold that, where there has been a reorganization in which the stockholders of an old company have received stock in the new corporation in exchange for their stock in the old, and where under the Revenue Act of 1021 the transaction was tax-free, the earnings of the old corporation continue to be earnings in the hands of the new, the distribution of which constitutes a taxable dividend. * * * [Helen V. Crocker, supra].

And it is unnecessary to attempt to determine whether here the"" successor achieved the predecessor’s earned surplus when the latter’s stock was acquired, on the one hand, or when its assets were completely transferred, on the other. For at least upon ⅛⅞ liquidation of the subsidiaries McClintic-Marshall received a full distribution of all of the assets originally held by the Construction Co. Cf. Harter v. Helvering, supra; Coudon v. Tait, supra.

[ Petitioners, in effect, are seeking to avoid the Sansome result by reliance on a procedure involving the asserted declaration of a dividend to wipe out accumulated gains and profits which in the absence of such a “distribution” would have been available for dividend purposes to the predecessor corporation before the reorganization and to the successor afterward. But there is nothing to show that, when the Construction Co. transferred assets to McClintic-Marshall, this was a dividend. True, the provisions of section 115 of the Revenue Act of 1928, that any distribution is presumed to be out of earnings and profits, would lend the argument weight in other connections. But the trouble with this assertion here is that it is in violation of the fundamental principle advanced by petitioners that provisions of the revenue act are immaterial in the computation of accumulated earnings available for the distribution of dividends. And, in any event, we are not prepared to grant that the underlying principle responsible for the conclusion reached in, Commissioner v. Sansome can be so readily and narrowly restricted. ’

After the liquidation of the subsidiaries, McClintic-Marshall transferred a part of its assets to the corporation we are calling Union and the remainder, after a brief interval, to the Bethlehem Steel Corporation in exchange for some of its stock and other considerations. This was distributed and McClintic-Marshall liquidated. Among the assets which Union thus acquired was stock in a corporation named “The Koppers Company,” subsequently exchanged by Union for a proportionate part of the shares of an association of the same name. A Soon after, Union transferred a part of its assets to Pitt Securities,'i distributing the latter’s stock received in exchange to its stockholders in liquidation. In the following year Pitt Securities made the disputed distribution to these petitioners, which was a dividend if, as respondent contends, there were earnings and profits available to cover it. The part of McClintic-Marshall’s assets transferred to Union was approximately 67 percent of the whole; the Koppers Co. stock represented roughly 82½ percent of all of Union’s assets; and the assets Union transferred to Pitt Securities were approximately 65 percent of its entire property.

""T While accepting the doctrine of the Sansome case when applied to a complete transfer which leaves the predecessor corporation without assets, petitioners resist its application if the transferor retains property which is sufficient to cover the amount of its undistributed \earnings. In this case they say it should be concluded that the old corporation has retained its earnings and profits and that consequently none are available for distribution by the transferee. Thus it is contended that in the transfer to Union that company received no part of McClintic-Marshall’s accumulated earnings and could not pass them on to Pitt Securities, its successor. Without the earnings so inherited the operations of Union and Pitt Securities produced insufficient earned surplus to cover the disputed distributions.

There is, however, a reason for rejecting the argument, which we must consider, if not as such, then as the principle by which the accumulations are to be attributed to the respective corporations. ■ ■ An asset does not ordinarily partake of a character permitting its classification as between capital on the one hand and surplus on the other, and it ⅛ not the practice to maintain books of account or balance sheets in such a way that a division of this nature can be made , by inspection of the asset or of its accounting treatment^) See Canal & Banking Co. v. New Orleans, 99 U. S. 97. Qfor all that will generally appear, and the present proceeding is no exception, the capital assets as a whole will incorporate the combined attributes of stated capital and paid-in or accumulated surplus. In the absence of other means of allocation it is difficult to avoid treating each asset similarly so that it will be considered as including its proportionate share of \ the over-all division between capital and surplus. Thus, if there is

a transfer to two new corporations and it is necessary to ascertain the amount of accumulated earnings available to each, the principle of proportionate allocation is applicable.} Murchison's Estate v. Commissioner, supra, and Fain v. Commissioner, supra, affirming memorandum opinions of this Board. (The same reasoning would justify a similar allocation between capital and surplus when assets are partly retained and partly transferred from one corporation to another in a tax-free reorganization^) Barnes v. United States, supra. fOn the other hand, if a transferor corporation retains anything, the assumption could well be made that it would first assure its capital and that if it is to be presumed that anything is retained as between capital and surplus it would be the former. Petitioners say “The argument made in the Smsome line of cases, that transfer of earnings by reorganization is necessary to prevent escape from taxation, is, as we have shown, not applicable to split-oil reorganizations such as those here involved.” Our doubt as to the correctness of this claim can be briefly illustrated. Suppose a corporation desires to get accumulated earnings into the hands of its stockholders without subjecting them to the tax on dividends. If petitioners are correct all that would be required would be for the old corporation to transfer assets to a new one, equivalent to the amount of the proposed distribution, and distribute to its shareholders the new company’s stock, which would be both tax-free, section 112, and expressly precluded from affecting the subsequent distribution of earnings. If the principle of the Sansome case does not govern, as petitioners urge, because the old corporation has transferred only a part of its assets, then the argument of the taxpayer in the Sansome case, which was rejected there, would now become valid with the result that a distribution by the nerg corporation would be considered a payment from its capital and nence not a taxable dividend. And this process could be repeated as many times as the old corporation desired to organize a new company to acquire its most recently accumulated earnings instead of declaring any dividends itself, at least until the shareholders had thereby recovered the' cost of their shares.

Thus, except for the doctrine of the Sansome case that assets which do not remain in the old corporation will be considered to have endowed the successor with earnings and profits to the extent of those of the predecessor, a tax avoidance identical in kind if not in degree with that condemned in the Sansome case could be made possible by “split-off” reorganizations. This reasoning might require that in the case of such a reorganization the theory of the Sansome case should be employed so far as to consider that all accumulated earnings have been transferred to the successor corporation if the assets transferred are equal in value to the amount of accumulated, earnings, should that be necessary to give effect to the statutory purpose.

But, as we have seen, there is justification for holding merely that, under such circumstances an allocation of accumulated earnings should be made as between assets retained and those transferredj/so that the ^/accumulated earnings acquired by the new corporation will be that, proportion of the total accumulations which the assets acquired are-of the total assets; and for our purposes it will be sufficient if this method of allocation is used in dealing with the transfers through which the assets passed from McClintic-Marshall to Union and from Union to Pitt Securities, the corporation responsible for the distribution to these petitioners which raises the instant questions. We are convinced that the Sansome principle governs at least to that extent. gie further point requires discussion. It is suggested that at least, ame principle of allocation of earnings must be applied to Union ; in its exchange of Koppers Co. stock for that of the Koppers Association and that if this is done the bulk of Union’s earnings were trans- . ferred to the association and did not remain available for subsequent transfer in the reorganization between Union and Pitt Securities. But / we think the Koppers transaction was of a different kind from the-i . other reorganizations being considered, and that none of Union’s earn-Vv ings were thereby transferred^ r

The Sansome decision is predicated on the thought that a tax-free exchange does not operate to “break the continuity of the corporate life,” and that therefore when a reorganization “does not toll the-company’s life as continued venture” the earnings of the “original, or subsidiary, company remain * * * ‘earnings or profits’ of the-successor, or parent.” This is because such reorganizations do not “result in any ‘gain or loss’ to the shareholder participating in them.”

Thus when the shareholders in McClintic-Marshall received stock of Union in lieu of a portion of what their McClintic-Marshall stock had theretofore represented there was a continuity of the corporate life of the McClintic-Marshall-Union corporate enterprise. Union carried on a part of the business theretofore carried on by McClintic-Marshall and with a portion of its assets, and no gain or loss was recognized when the stockholders’ investment in such assets and business, formerly represented by their stock in McClintic-Marshall, was exchanged for Union’s shares. The continuity, however, was between the two corporate businesses, and the transfer of earnings under the Sansome principle affected them. It did not involve the shareholders, and it would be anomalous to say that any of the shareholders’ earnings were taken over and became part of the old enterprise in its new form.

On the other hand, when Union, as a stockholder in the Koppers Co., exchanged that stock for shares of the new Koppers Association, the continuity of corporate life with which an application of the Sansome principle would be concerned was that between the two Koppers companies. The earnings of the old would remain such in the hands of the new. But there was no continuity of corporate life as between Union and the new Koppers Association. The latter, we must assume, carried on the corporate business of the old Kop-pers Co., not that of Union.

Hence, the only result of the Koppers exchange material here is that possibly Union’s earnings, which were in the neighborhood of $15,000,000 before the transfer, were decreased by $2,500,000 because the new Koppers shares were worth 'only $35,000,000, whereas Union’s basis for the shares given up in exchange was $37,500,000. The earnings which, under the Sansome doctrine, would find their way to the new Koppers association, would be those of its predecessor, the old Koppers company, whose corporate life it continued. They were not those of the predecessor’s stockholder, Union, which continued to hold its own earned surplus unimpaired, any more than they would have been had Union been an individual instead of a corporation.

The conclusions we have reached make it unnecessary to consider any other issues. We have taken the view that, mainly by total or proportionate acquisition through nontaxable reorganizations from antecedent companies, Pitt Securities had on hand prior to the distribution to these petitioners earnings and profits of its own or of predecessor corporations which were available to it to cover the entire dividend then paid. This will still be true if all the other matters in controversy are decided in petitioners’ favor. The computation upon which this statement rests appears at the conclusion of our findings of fact and need not be repeated. The result is that respondent’s action in charging these petitioners with the receipt of a dividend to the full extent of the amounts received from Pitt Securities was correct and should be sustained.

Reviewed by the Board.

Decision will be entered for the respondent.

       The figures throughout the opinion are approximate. They appear exactly in the findings.

       An inconsistency, of course, with the tax treatment which provides that the transferee’s basis is that of the transferor. Revenue Act of 1928, see. 113. This is also a result stipulated by the parties.

         The unreeovered cost as of 1930 of the Construction Co. stock must be further reduced, as petitioners concede, by $2,325,700, representing the interim retirement for cash in that amount of a corresponding block of the Construction Co. stock.

       SEC. 112. RECOGNITION Off GAIN OR LOSS [Revenue Act of 1928],
      (h) Same — Effect on future distributions. — The distribution, in pursuance of a plan of reorganization, by or on behalf of a corporation a party to the reorganization, of its stock or securities or stock or securities in a corporation a party to the reorganization, shall not be Considered a .distribution of earnings or profits within the meaning of section 115 (b) for the purpose of determining the taxability of subsequent distributions by the corporation.

       It is evident that on either theory the provisions of 112 (h) (see footnote 5, supra) would be necessary to avoid an argument by the stockholders that the new stock, even-though tax-free under section 112, represented a distribution of the old earnings and profits, however allocated between the corporations, with a corresponding reduction of earned surplus available for future distribution. See Treasury Department statement prepared for use by Senate Finance Committee March 6, 1024, Seidman “Legislative History of Federal Income Tax Laws,” p. 690. The precautionary formula invoked by section 112 (h) would prevent this method of tax avoidance in the case of a split-off reorganization through-distributions of the earnings allocated to either the old or the new corporation. The-section makes no attempt to deal with the division of earnings as between transferor and transferee and this may well be the explanation of the use of the ambiguous “the corporation” as the last two words of the section. See clarifying amendment to the cognate section of the 1936 Act, section 115 (h) ; Senate Report, 74th Cong., 2d sess., No. 2156, p. 19. See Senate Report, 75th Cong., 3d sess., No. 1567, p. 18, which states in part: "Consequently, such earnings or profits remain unimpaired out of which taxable dividends may subsequently be declared * * * by another corporation which * * * takes in. whole or in part the transferor’s basis, so that the earnings or profits of the transferor-corporation become in whole or in part the earnings or profits of such other corporation.”'


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    Leonard Marx, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 106238.
    Promulgated June 26, 1942.

      Emily Marx, Esq., for the petitioner.

      John W. Fisher, Esq., for the respondent.
   OPINION.

Van Fossan:

The question for our determination is whether or ' not petitioner is taxable for the years 1937 and 1938 on one-third of the capital gains received in those years by the trust of which petitioner was the beneficiary of one-third of the income and where the trust provided that petitioner’s share of the principal of the trust should be conveyed to him on reaching thirty years of age. He became thirty years of age on October 4, 1934. It is petitioner’s contention that the trust continued in effect as to him through 1937 and 1938 because, for legitimate reasons, his share of the corpus of the trust had not been distributed to him. Respondent contends that the distribution of petitioner’s share of the corpus has been unreasonably delayed and that during those years petitioner was in substance the owner of the property and taxable on gains derived therefrom under section 22 (a) of the Eevenue Acts of 1986 and 1938.

It is the law of New York State that the life of a trust does not automatically terminate with the death of the person by whose life the duration of the trust is measured. In re Miller's Will, 267 N. Y. 349; 178 N. E. 555; Deering v. Pierce, 149 A. D. 10; 133 N. Y. S. 582. It does not follow, however, that the parties can indefinitely postpone the winding up of a trust. A reasonable time is permitted after the event which terminates the trust for the trustees to pay taxes and administration expenses, to have an accounting, and to perform other duties necessary to complete the administration of the trust. See Willard C. Lipe, Jr., 41 B. T. A. 107; affd., Commissioner v. First Trust & Deposit Co., 118 Fed. (2d) 449.

Thus, in this proceeding if the delay in the payment to petitioner of one-third of the corpus was not unreasonable, the trust remained fully effective so far as petitioner’s control over the trust as beneficiary was concerned. However, if and when the delay became unreasonable petitioner could have compelled the outright transfer to himself of his share of the corpus and different considerations become important.

The query then arises whether the failure of the beneficiary to compel distribution and the delay by the trustees are sufficient to make the beneficiary the owner of the corpus for purposes of taxation under section 22 (a), supra. Pronouncements of the Supreme Court shed light on this question. In Corliss v. Bowers, 281 U. S. 376, the Supreme Court, speaking through Justice Holmes, in holding the grantor of a trust liable for income taxes on trust income paid to his wife, made this statement:

But taxation is not so much concerned with the refinements of title as it is with actual command over the property taxed — the actual benefit for which the tax is paid. * * * The income that is subject to a man’s unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not. * * *

In Helvering v. Clifford, 303 U. S. 331, the Court, in discussing section 22 (a) of the Eevenue Act of 1934, said:

* * * the broad sweep of this language indicates the purpose of Congress to use the full measure of its taxing power within those definable categories. Cf. Helvering v. Midland Mutual Life Insurance Co., 300 U. S. 216, 57 S. Ct. 423, 81 L. Ed. 612, 108 A. L. R. 436. Hence our construction of the statute should be consonant with that purpose. Technical considerations, niceties of the law of trusts or conveyances, or the legal paraphernalia which inventive genius may construct as a refuge from surtaxes should not obscure the basic issue. * * *

The following statement from H. S. Richardson, 42 B. T. A. 830, 889; aff'd., 121 Fed. (2d) 1; certiorari denied, 314 U. S. 684, is also apropos:

* * * Here, the property and the income therefrom is so clearly subject to the petitioner’s unfettered command that they are, in substance, his and, even though he did not see fit to use the property or the income during the taxable year, the latter may be taxed to petitioner as his income under the broad general tax provisions of section 22 (a) * * *.

As tlie above authorities indicate, it is the power which the taxpayer has over property which determines his taxability on income therefrom. Here, the will directed distribution of petitioner’s share of corpus when he reached thirty. There was no provision in the will preventing the distribution to petitioner. Furthermore, there was little or no probability that the trustees would object to the distribution, since the petitioner himself and his sister were the sole trustees. It is true that an accounting might have been necessary, but this should have been had during the lapse of a reasonable time after petitioner became thirty years of age. The fact that petitioner was not the grantor of a trust or the assignor of income is not sufficient reason for distinguishing this proceeding from the above authorities. See H. S. Richardson, supra. Nor is it material that the profits derived by the trust on the sale of part of the corpus were not actually turned over to petitioner. See Whiteley v. Commissioner, 120 Fed. (2d) 782. If the delay in distribution was unreasonable, we are of the opinion that petitioner in substance became the owner of his distributive share of the trust corpus and therefore was taxable on the capital gains derived therefrom.

It can not be gainsaid that there has been delay in distribution of the corpus to petitioner. He became thirty on October 4, 1934. Whether or not the delay was unreasonable is a question of fact, the burden of proof of its reasonableness resting on petitioner. Petitioner has attempted to show that the delay was not unreasonable because a large part of the assets of the trust consisted of stock in real estate corporations which could not be liquidated. He contends that, before applying for an order directing the distribution of the corpus to him, the trustees wanted to make the trust liquid. At the hearing Emily Marx, one of the trustees of the trust here involved and attorney for petitioner, in answer to a question, directed by herself as attorney to herself as witness, testified that “the trustees believe that the nature of the property held by them is still such as to make physical segregation and distribution among the three trustees inadvisable and in many cases impossible,” and that “it would have been very poor business and detrimental to the beneficiaries to divide up that stock.” No showing was made by petitioner why the trustees believed the distribution inadvisable during the taxable years in question or why it would have been “very poor business and detrimental to the beneficiaries” to divide up the stock.

The record discloses that the stock of the real estate companies which it is claimed prevented the distribution to petitioner of his share of the corpus of the trust consisted of three shares in the Joseph E. Marx Co., Incorporated, valued at $105,247.70, and five shares in the Happy Home Realty Co., valued at $28,076.95. All of the stock in the latter company was owned by the trust. The only outstanding stock of the Joseph E. Marx Co., other than that held by the trust, was owned by the Relmar Holding Co. The stock in the latter company was in turn owned by three trusts set up for members of the Marx family. Petitioner and Emily Marx were trustees of one of these trusts for the benefit of petitioner’s mother; Emily Marx and Regina Marx were trustees of another of the trusts for the benefit of petitioner’s wife; and petitioner and Regina Marx were trustees of the third trust for the benefit of the daughter of Emily Marx. Thus, petitioner, Emily Marx, and Regina Marx, as trustees, entirely controlled the Joseph E. Marx Co., and petitioner and Emily Marx as trustees entirely controlled the Happy Home Realty Co.

With such control distribution would apparently have been an easy matter. Nor can we perceive any disadvantage to the beneficiaries if one-third of the stock in the real estate companies had been transferred out of petitioner’s name as trustee and into his name as an individual, in view of the fact that after such a transfer control of the stock by the Marx family would still have remained intact. The task of proving that this would have been detrimental to the interests of the beneficiaries of the trust rested on the petitioner as part of his burden to show that the failure to distribute to petitioner his share of the corpus through 1987 and 1938 was not unreasonable.

We are of the opinion, that petitioner has not sustained his burden of proving that the delay was not unreasonable and that the income was not taxable to him. He must, accordingly, fail.

Decision will be entered under Rule 50.

       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. * * *


author: Black:

text:
    Glenmore Distilleries Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 101983, 105721.
    Promulgated June 26, 1942.

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

      T. F. Oallahan, Esq., and F. M. Cavanaugh, Esq., for the respondent.
   OPINION.

Black:

At the time of the hearing in these proceedings the petitioner waived assignment of error (d) in the petition for the year 1937, pertaining to social security tax, and also waived assignments of error (c) and (d) in the petition for the year 1938, pertaining to a fire loss and involuntary conversion, respectively. In addition to the foregoing assignments of error disposed of by waiver, assignment of error (c) in the petition for the year 1937 is eliminated by virtue of paragraph 44 of the stipulation filed by the parties, wherein it is provided that for the year 1937 the petitioner is entitled to a deduction of $2,318.56, due to additional income taxes paid by the petitioner to the State of Kentucky. This leaves the following questions still in controversy:

1. In the light of the facts in this case, did the respondent have any right to allocate to the two subsidiaries of the petitioner a portion of the so-called executive expenses incurred by tlffe petitioner, and thus deny to the petitioner a deduction for the amount of such expenses allocated to the subsidiaries? This point is involved in each of the years 1937 and 1938.

2. In the light of the facts in this case, did the respondent have any right to allocate to the two subsidiaries of the petitioner a portion of the national magazine advertising expense incurred by the petitioner, and thus deny to the petitioner a deduction for the amount of such expenses allocated to the subsidiaries ? This point is involved in each of the years 1937 and 1938.

3. Is the petitioner entitled to a bad debt deduction for the year 1938 in the amount of $80,810.56, ascertained to be worthless and charged off at the time of the liquidation of the New York subsidiary on October 1,1938?

4. Did the investment of the petitioner in the capital stock of the New York subsidiary in the amount of $1,000 become worthless in the year 1938, so that this amount is a proper deduction from income for that year?

We shall consider together questions (1) and (2).

The respondent has determined, under section 45 of the Eevenue Acts of 1936 and 1938, that a part of petitioner’s executive and advertising expenses should be allocated to its two subsidiaries, the New York and California companies, respectively. Section 45 is identical in both acts and is in the margin. The respondent contends that, since he has exercised the discretionary power vested in him, petitioner has the burden of showing that such determination was purely arbitrary and not made under any of the situations prescribed by the statute as a proper foundation for allocation of the expenses in question, citing in support thereof Finance & Guaranty Co. v. Commissioner, 50 Fed. (2d) 1061; Asiatic Petroleum Co. (Delaware) Ltd., 31 B. T. A. 1152; affd., 79 Fed. (2d) 234; certiorari denied, 296 U. S. 664; and G. U. R. Co. v. Commissioner, 117 Fed. (2d) 187.

We think petitioner has met its burden with the exception hereinafter noted. The evidence introduced by petitioner shows that each company kept accurate records of its own expenses and that all of petitioner’s expenses, with the exception of compensation paid one of the officers and three of the office employees and the accounting expense of auditing the books of the New York company, were for petitioner’s own exclusive benefit. The excepted expenses are as follows:

These expenses are a part of the total executive expenses set out in our findings for 1937 and 1938 of $193,895.48 and $174,846.85, respectively. Duncan testified that he obtained the licenses for the two subsidiaries and advised them on their accounting, invoicing, and credit memoranda; that Margaret Graf kept a perpetual inventory of the New York and California warehouse, which took about two days a month of her time; that Sproul spent about two-thirds of his time keeping the books of the two subsidiary companies; that Wroe now and then printed some stationery forms for them, but spent very little time in doing so; and that a part of the compensation paid Wolf & Co. was for auditing the books of the New York company.

The advertising expenses deducted by petitioner in its returns for 1937 and 1938 of $177,982.56 and $242,890.70, respectively, were for advertisements appearing in national magazines such as Life, Colliers, Time, and the New Yorker. No reference whatever was made in these advertisements to either the New York or California companies. Each subsidiary spent large sums for its own advertising. Petitioner, in addition to its two subsidiaries, had approximately 300 wholesale dealer representatives throughout the United States, none of which were in any way owned by the petitioner and none of which were located in the territory of the two subsidiaries.

Upon the evidence which we have in these proceedings we see no justification in the respondent’s determination that petitioner’s total executive and advertising expenses should be apportioned among the three companies upon the basis which he has used. Each corporation kept its own set of books, in which were recorded the business transactions of each company, and each company filed its own income tax returns. The executive and advertising expenses which the respondent has determined should be apportioned among the three companies in the proportion that the gross sales of each company bear to the total gross sales of all three companies were all the exclusive expenses of the petitioner, with the exception of some overlapping contained in the above amounts of $12,089.99 and $13,938.15 so-called executive expenses for the years 1937 and 1938, respectively. For the year 1937 this overlapping was more than taken care of by the flat charge petitioner made against tbe two subsidiaries of $12,000, which amount petitioner included in its own gross income and it has not been questioned by the respondent. Petitioner made no similar charge for the year 1938. We think that it should have done so by allocating some reasonable amount for that purpose. The respondent has determined that the amount of these executive expenses which should be allocated to the subsidiaries for 1938 is $10,693.64. Inasmuch as the business of both subsidiaries decreased in 1938 and both were dissolved before the end of that year, we think that the amount of executive expenses which the respondent has allocated to the subsidiaries is excessive. We hold that $5,000 of these expenses should be allocated to the subsidiaries, of which $2,500 should be allocated to the California company and $2,500 to the New York company.

To summarize our holding on questions 1 and 2, it is this: None of petitioner’s advertising expenses should bo allocated to the subsidiaries, because this advertising expense was exclusively for petitioner’s brands of liquor and there is no reason why the subsidiaries should bear any part of this expense. They had their own large advertising expenses which properly appeared on their own books. The action of the respondent in making such an allocation was without justification. As to petitioner’s executive expenses, some of these were actually incurred for the benefit of the subsidiaries. We hold that the $12,000 of these expenses which petitioner allocated to the subsidiaries in 193? was ample to take care of the subsidiaries’ share of these expenses and that the allocation by the respondent of a greater amount was without justification. We further hold that $5,000 of these expenses should have been allocated by the petitioner to the subsidiaries for 1938 and that anything above that amount is excessive. Of the amount which the respondent has allocated for 1938, $5,000 is approved and the remainder is not sustained.

We shall now consider together questions (3) and (4). Under these issues petitioner contends that in 1938, when it dissolved the New York company and took over its net assets in part payment of the debt of $131,457.12 owed by the New York company to petitioner, the unpaid portion of the debt in the amount of $80,810.56 and petitioner’s investment of $1,000 in the capital stock of the New York company all became worthless; that, since petitioner ascertained the unpaid portion of the debt to be worthless and had charged it off during the taxable year 1938, it is entitled to a deduction therefor under section 23 (k) of the Revenue Act of 1938; and that it is also entitled to a deduction under section 23 (f) of $1,000 for the worthless stock. We agree with these contentions. Edward Katzinger Co., 44 B. T. A. 533; H. G. Hill Stores, Inc., 44 B. T. A. 1182. Cf. Glenn v. Courier-Journal Job Printing Co., 127 Fed. (2d) 820.

The respondent contends that the claimed deductions are not allowable under section 112 (b) (6) of the Revenue Act of 1938, the material provisions of which are as follows:

(6) Pkoperty received by cobpobation on complete mquidation of another.— No gain or loss shall be recognized upon the receipt by a corporation of property distributed in complete liquidation of another corporation. For the purposes of this paragraph a distribution shall be considered to be in complete liquidation only if—
*******
■(C) the distribution is by such other corporation in complete cancellation or redemption of all its stock * * *.

The respondent refers to the minutes of the special meeting of the petitioner’s board of directors held on August 30, 1938, and contends that petitioner has submitted no proof that it did not surrender its stock in the New York company “for cancellation in exchange for the assets of said New York Company” as provided in those minutes. Those minutes recite, among other things, that petitioner

* * * Glenmore Distilleries Company, the sole stockholder, surrender its stock in the said New York Company to said Company for cancellation in exchange for the assets of said New York Company, and that it assume the liabilities of said New Yoflc Company, * * * [Italics ours.]

The New York company at that time owed the petitioner $131,457.72, which was the balance due on a running account, and owed other outside debts of $4,935.01. The records of petitioner show that the net assets of the New York company were taken over by petitioner and used to pay the debts which the New York company owed to outsiders and the balance was applied in part payment for the debt the New York company owed petitioner. After this was done the New York company owned no assets which it could distribute in liquidation. Petitioner received no property from the New York company as a stockholder, and section 112 (b) (6) was not intended to cover the transfer of assets to a creditor. H. G. Hill Stores, Inc., supra.

The respondent also contends that petitioner’s investment in the capital stock of the New York company should be considered at not less than $41,000 instead of $1,000, on the ground that, since the inventory of the New York company was never less than $40,000, it would be unreasonable to assume that the value of such inventory should be considered as an account receivable due by the New York company to petitioner. We see no merit in this contention. The parties have stipulated that at the time the New York company was organized all of its capital stock “was subscribed for by petitioner by the payment of cash of $1,000.00.” There is no evidence that petitioner ever intended to pay in any more capital than the original $1,000. The running account with the New York company was bona fide and was kept in the same manner as petitioner kept its other accounts receivable, and petitioner fully intended that the account would be paid in full.

We, therefore, upon the authorities cited above, decide questions (3) and (4) for the petitioner.

Decisions will he entered wider Rule 50.

         SEC. 45. ALLOCATION OF INCOME AND DEDUCTIONS.
      In any case of two or more organizations, trades, or businesses (whether or not incorporated, whether or not organized in the united States, and whether or not affiliated) owned or controlled directly or indirectly by the same interests, the Commissioner is authorized to distribute, apportion, or allocate gross income or deductions between or among such organizations, trades, or businesses, if he determines that such distribution, apportionment, or allocation is necessary in order to prevent evasion of taxes or clearly to reflect the income of any of such organizations, trades, or businesses.


author: Sternhagen; Leech,

text:
    Estate of Frank M. Archer, Sr., Frank M. Archer, Administrator, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 108369.
    Promulgated June 26, 1942.

      'Albert L. Hyland, Esq., for the petitioner.

      Davis Haslein, Esq., for the respondent.
   OPINION.

Sternhagen;

The Commissioner determined a deficiency of $10,026.53 in income tax for 1937 and a deficiency of $7,506.30 in income tax and a penalty of $1,876.58 for 1938.

1. For each year a separate notice was sent to the petitioner on June 11, 1941. A timely petition was filed August 9, 1941, assailing the determination for 1937. A separate petition assailing the 1938 determination was filed and docketed at Docket No. 108602 on September 10, 1941, which was more than ninety days after the notice was mailed; and on motion of respondent, this was dismissed for want of jurisdiction. On September 11, 1941, an amended petition was filed in the instant docket, including a new assignment of error which assailed the determination for 1938. The respondent moved to dismiss this petition in so far as it related to the 1938 deficiency. This motion was denied. The respondent insists that since the amended petition was filed more than ninety days after the notice of deficiency was mailed, the Board is without jurisdiction to redetermine the deficiency for 1938. This is obviously so, and the untimely attempt to contest the 1938 deficiency is no more effective when embraced in an amended petition with a timely attack on the 1937 deficiency than when separately filed. The Board has no jurisdiction to decide the merits of the 1938 deficiency; and as to that year, the proceeding is dismissed. I. Frank Sons Co., 22 B. T. A. 40.

2. We consider the merits of the 1937 determination. /The facts are stipulated and need not be specially found. The return was filed in Massachusetts. The petitioner’s decedent died April 8, 1937. In 1910 or 1913 he was “associated” with a corporation and was thinking of resigning. He was promised by the majority shareholder that if he remained, he would receive as much as the shareholder’s brother received, plus an amount equal to the increase in value of the brother’s shares. Nothing was done until early in 1937, when the decedent made claim upon the promisor for $300,000. The claim was denied; and the negotiations had not been “carried to any great extent,” when decedent died. The administrator pressed the claim and, in connection with the settlement of another suit, brought by the corporation against decedent’s promisor, petitioner on April 16, 1938, received $50,000 in settlement of the claim. On his short period return of income of the decedent for the last period of his life, from January 1, 1937, until April 8, 1937, petitioner did not include in income any part of the said $50,000. The Commissioner held that this was income which was accrued at the date of death and should have been returned for the final period, citing section 4*2, Revenue Act of 1936, and Helvering v. Enright, 312 U. S. 636.

At the date of death, decedent had a stale claim for $300,000 upon which demand had been made and refused. Because it was based upon an oral promise which antedated the statutory period of limitations, counsel advised the administrator against suit. Whether, under these circumstances, the claim had any value can not as a matter of fact be determined upon the evidence in the present record, although superficially it would appear to have had none. Nevertheless, the claimee a year later so far acknowledged the validity of the claim as to pay $50,000 in discharge of it. This may be enough to justify the Commissioner in treating the claim as valid and as having had a value of $50,000 at the time of decedent’s death; although we do not say it was. But at best, this validity and value at the date of death are constructive, being based upon nothing known at the time of death, but upon subsequent events. Such a •rationalized validity and value do not support an accrual of the claim as income up to the time of death, especially of one on the cash basis. “Accruals here are to be construed in furtherance of the intent of Congress to cover into income the assets of decedents, earned during their life and unreported as income, which on a cash return would appear in the estate returns”, Helvering v. Enright, supra. This $50,000 was not such as would appear on the estate’s income tax return before its actual receipt in April 1938, nor if decedent had lived would it have been included in his income before he received it. He would not before its receipt have regarded it as accrued income, even if he had kept his accounts on an accrual method. Something more than a disputed assertion of a claim is needed to constitute accrued income; Jamaica Water Supply Co. v. Commissioner, 125 Fed. (2d) 512; certiorari denied, 316 U. S. 698; cf. Lillian O. Fehrman, Executrix, 38 B. T. A. 37; Estate of Mary A. Bedford, 40 B. T. A. 475; Estate of George W. Wickersham, 44 B. T. A. 619; dismissed (C. C. A., 2d Cir., Feb. 9, 1942); Estate of Lewis Cass Ledyard, Jr., 44 B. T. A. 1056. Petitioner makes a provisional claim for a deduction of attorney’s fees for services in respect of the $50,000 collected, in the event that the $50,000 is held to be accrued income. Since we hold that it was not accrued income, the contention needs no decision.

Reviewed by the Board.

Decision wEl be entered- for petitioner as to 19-37 and dismissing the petition as to 1938.

Leech,

dissenting on the second issue: The majority opinion states that “whether * * * the claim [of decedent] had any value [at the time of decedent’s death] can not as a matter of fact be determined upon the evidence in the present record * * Upon that finding, I think respondent’s determination should be affirmed. Helvering v. Enright, 312 U. S. 636; Estate of George W. Wickersham, 44 B. T. A. 619; dismissed (C. C. A., 2d Cir., Feb. 9, 1942).

Mellott agrees with this dissent.


author: Disney:

text:
    Pittsburgh Laundry, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105506.
    Promulgated June 30, 1942.

      John A. McOanrijEsq., for the petitioner.

      William A. Schmitt, Esq., for the respondent.
   OPINION.

Disney:

We have for consideration in this proceeding income and excess profits taxes for the calendar year 1937 in the respective amounts of $2,908.26 and $243.90, in which amounts deficiencies were determined by the Commissioner. The only question involved is whether the petitioner realized taxable gain by reason of transactions in its own stock. A portion of the facts have been stipulated. The stipulation is by reference adopted as our findings of fact, which will be recited herein only in so far as required by examination of the issue at hand. The income and excess profits tax returns of the petitioner for the taxable period were filed with the collector for the twenty-third district of Pennsylvania. From the stipulation and other evidence we find facts as follows:

The petitioner is a Pennsylvania corporation, incorporated in 1925, and since that time engaged in a general laundry and dyeing business. It was formed to take over the assets of a partnership consisting of three men, Edward H. Caswell, Benjamin S. Mann, and Robert S. Sach, each of whom took stock in the corporation, about 35,000 shares each. The petitioner’s authorized capital stock was $250,000, divided as follows:

(a) 1,250 shares, $100 par nonvoting 7% cumulative pfd. subject to call
at $100_$125, 000
(b) 1,245 shares, $100 par, common nonvoting; to participate equally
in dividends with “c” stock “except as to voting”_ 124, 500
(c) 5 shares, $100 par, common, voting — “Said stock, except as to its
voting rights to be equal in all respects with the said class “b” common nonvoting stock”_ 500
Total authorized stock_ 250,000

Edward H. Caswell died on August 10,1933, leaving surviving him his widow, who inherited his stock in the petitioner. She sold her stock because she refused to do anything with the laundry; did not want to do anything with the laundry. Her financial condition was not good. The company arranged to buy her stock, consisting of 360 shares of common and 12 shares of preferred stock, June 30, 1936, in consideration of $350 in cash and $12.50 a week to be paid to her during her widowhood. She died on July 11, 1937. By that time the payments to her aggregated $1,662.50, and the basis, in the hands of the petitioner, of the shares thus acquired from her was $100 per share for preferred stock and $1,285 per share for common stock.

With reference to the purchase of stock in the petitioner corporation, the minute book of the board of directors of the petitioner showed as follows: On August 15, 1933, in connection with certain life insurance policies it was resolved that one-half of the proceeds were:

* * * allocated and reserved for the special purpose of calling in and redeeming in tbe name of and for the benefit of the company, pro rata, the then outstanding preferred stock of the company.

On April 19, 1935:

Mr. Mann also advised the members that he was in a position to buy some of the Corporation Preferred Capital Stock at par or at a discount for the benefit of the Corporation. It was decided to permit Mr. Mann to make these purchases for the benefit of the Company.

On November 22, 1935:

Mr. Mann reported that the following Preferred Capital Stock of the Company had been bought at par for Treasury purposes: Mr. Fleider, 1 share; N. Mann, 1 share; D. Silverman of Brackenridge, Pa., 12 shares; .T. N. Hawkins, 4 shares. Mr. Mann explained that the checks given D. Silverman and J. N. Hawkins were returned to the Company and used to reduce their indebtedness to the Corporation. Mr. Mann also reported that one share had been bought from A. Halleck for $22.00 and that he intended going to New York where he expected to buy for the total price of $125.00 five shares held by L. Fred Klooz. A first payment of $140.00 was made to Max Moses for the stock he held and arrangements made to take monthly payments of $50.00.

On August 28, 1936:

Mr. Mann reported that the Corporation had bought more of its own stock for treasury purposes. Mr. Mann also presented the meeting with the financial position of the Corporation.

On April 16, 1937:

Mr. Zeck expressed a willingness to sell five shares of Preferred Stock he held as he expected to be in need of some money within a week or two. It wa^ agreed for the Corporation to buy these five shares for the price of Five hundred dollars inasmuch as the Company was desirous of retiring the preferred stock and inasmuch as the Company was indebted to Mr. Zeck for accrued salaries.

On December 17, 1937:

After discussion it was agreed to buy the 44 shares of Preferred Capital Stock held by Ida Mann at the price of $100 for each share. Mr. Mann agreed to buy 35 shares of common stock and Mr. Zeck agreed to buy 31 shares of Common stock at the total price of $7920.00.

On December 16, 1938:

Mr. Mann advised the members that all preferred stock with the exception of one share were now held in the treasury. Those purchased during the year were enumerated.

When the corporation took action, it was shown by the minutes of the corporation and the entire transactions with respect to the stock are shown by the above minutes. One of the reasons for buying Mrs. Caswell’s stock was that the company wished to retire the preferred stock.

At the beginning of 1937 petitioner had in its treasury 366 shares of its common stock, of which 360 shares had been acquired from Mrs. Caswell, together with 12 shares of preferred stock. During the year 1937, petitioner sold or exchanged 124 shares of its common capital stock, of which 123 shares were acquired from Mrs. Caswell as above and one share was acquired in 1928 at a cost of $100. Of the 124 shares so sold or exchanged, 105 shares were sold in 1937 for $11,820 in cash and 19 shares were exchanged for 19 shares of the petitioner’s preferred stock which had a then value of $100 per share.

The 105 shares were sold for the purpose of retiring some of the preferred stock and the money received was used for that purpose. Forty-four shares, being $4,400 par value of preferred stock, were purchased; also, small amounts of stock were purchased from time to time. No separate account was set up on the petitioner’s books for gain or loss with regard to sales or purchases of stock. When stock was purchased for less than par, the difference was shown as surplus upon the corporation’s books. The purchase of preferred stock was in pursuance of a plan to do away with the cumulative dividends on the preferred stock. The preferred stock was not actually retired, but was kept in the treasury of the company and is still kept in the treasury of the company. Except in one case, the common stock sold was sold in all instances to former holders of preferred stock. That instance involved 20 shares. The outstanding stock of the petitioner (less stock in the treasury) was as follows: On January 1, 1936, $22,700 preferred and $124,900 common; on January 1, 1937, $14,600 preferred and $88,400 common; on December 31,1937, $2,300 preferred and $100,800 common.

Our question here is whether the petitioner realized gain from the purchase and resale of its own stock. This requires consideration of the object of section 22 (a), Revenue Act of 1936, and article 22 (a)-16, Regulations 94.

The above regulation provides that our answer depends upon “the real nature of the transaction, which is to be ascertained from all its facts and circumstances”, and continues in effect that if the transaction is as if it were in shares of another corporation, gain is considered realized. The circumstances here are that there was a plan, though it appears somewhat indefinite, to call in the preferred stock. On the minutes of the corporation this is expressed variously, such as a “purpose of calling in and redeeming” the preferred stock, to “buy * * * preferred stock * * * for the benefit of the Corporation”; that stock had been “bought at par for Treasury purposes”; or that the company was “desirous of retiring the preferred stock.” The testimony was that the company wanted “to retire” the preferred stock, that plans were made in 1932 or 1933 to “retire” it, that the desire was to “get rid of the obligation”, to do away with accumulated dividends on the preferred stock. As to the particular common stock herein involved, tbe purchase and resale of which caused the determination of realized gain by the Commissioner, “one of the reasons” for the purchase was to retire preferred stock. It was, in fact, resold in the next year, the taxable year, except that 19 shares out of 124 shares were exchanged for preferred stock. The money was used to acquire preferred stock. During the taxable year 123 shares of preferred stock were acquired by{ petitioner. But neither common stock nor preferred was retired when acquired. The preferred stock is still kept in the treasury of the company, and no reason is shown in the evidence for such retention, or why there was no retirement. All preferred has, now been acquired. No separate account of gain or loss on the purchase and sale of the stock was kept on the books of the company. When stock was purchased for less than par, the difference was put into surplus on the books. With one exception, the common stock was sold to owners of preferred stock.

After examination of all these circumstances, we are of the opinion that the “real nature of the transaction” is not such as to show error on the part of the Commissioner in including the gain in the gross income of the petitioner. Though the petitioner’s officers did have some purpose of retiring preferred stock, that was only one of the purposes actuating the purchase of the shares herein in question. The other was that the widow of one of petitioner’s officers, who had inherited his stock, did not want to do anything, and refused to do ary thing, with the laundry, and the stock could be purchased, in part, on partial payments. The stock was purchased and was resold for the profit to be made. That such profit was intended to be used, and was used to retire a different grade of stock, seems to us not to detract from the commercial character of the purchase and sale of the common stock. The profit might well have been made from purchase and sale of stock in some other corporation. There has been, in fact, no retirement of preferred stock. In Budd International Corporation, 45 B. T. A. 737, 749, although the question was not precisely the same as here, but involved a redemption of preferred stock and the sale by the redeeming corporation of some other stock, nevertheless we considered, that the redemption did not color the matter so as to indicate its “real nature” under article 22 (a)-16, Regulations 94, supra, and that there was sale, resulting in gain by the corporation. We think the same is true here. The purpose to which the profit herein involved was intended to be applied did not prevent the realization of taxable gain. Brown Shoe Co., 45 B. T. A. 212. A profit was made on resale of petitioner’s own stock. Allen v. National Manufacture & Stores Corporation, 125 Fed. (2d) 239.

We hold that the purchase and sale of common stock resulted in taxable gain to the petitioner.

Decision will be entered under Rule 50.

       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; * * *

       Abt. 22 (a)-16. Acquisition or disposition ty a corporation of its own capital stock.— Whether the acquisition or disposition by a corporation of shares of its own capital stock gives rise to taxable gain or deductible loss depends upon the real nature of the transaction, which is to be ascertained from all its facts and circumstances. * * *
      But if a corporation deals in its own shares as it might in the shares of another corporation, the resulting gain or loss is to be computed in the same manner as though the corporation were dealing in the shares of another. * * *


author: Leech:

text:
    Phanor J. Eder, Petitioner, v. Commissioner of Internal Revenue, Respondent. Violet L. Eder, Petitioner, v. Commissioner of Internal Revenue, Respondent. James P. Eder, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 106016-106018.
    Promulgated June 30, 1942.

      Richard W. Wilson, Esq., for the petitioners.

      Loren P. O alces, Esq., for the respondent.
   OPINION.

Leech:

The petitioners attack the contested determination only on

the ground that section 337 of the Revenue Act of 1938, under which that determination was made, is not applicable here.

They argue from the legislative history of supplement P of that act, of which section 337 is a part, that the Congressional intent was that the tax be imposed only upon “a comparatively few wealthy individuals” who “voluntarily and willfully” avoided or evaded their income taxes by the use of foreign personal holding companies, and that the tax was therefore wrongfully laid upon them, since they were neither wealthy nor were they voluntarily or willfully using the Colombian Co. to avoid or evade such taxes. We disagree with that construction of the act.

It may be admitted that such use of foreign personal holding companies was the inspiration for this legislation. But neither supplement P, generally, nor the clear and unambiguous language of section 337, supra, specifically indicates in any way that the intention or financial status of the taxpayer should affect the imposition of the tax in the slightest degree. Cf. Olean Times Publishing Co., 42 B. T. A. 1277. In these circumstances, as the Supreme Court said in Caminetti v. United States, 242 U. S. 470, that language “* * * must be taken as the final expression of legislative intent and * * * [is] not to be added to or subtracted from by considerations drawn from titles or designating names or reports accompanying their introduction, or from any extraneous source.” See also Helvering v. City Bank Farmers Trust Co., Trustee, 296 U. S. 85.

Petitioners next contend that the disputed tax is imposed upon the theory of “constructive receipt” of the taxed “assumed distributions” by the taxpayer shareholders and that, since petitioner shareholders in the United States could not have transferred from the Eepublic of Colombia during 1938 any distributions from the Colombian Co. in excess of those that were so transferred and received, because of the exchange restrictions in effect during that year in the Eepublic of Colombia, they did not constructively receive the assumed distributions of undistributed earnings of that company upon which the deficiencies are based. This contention is likewise unsound and for the same fundamental reasons.

Pesos could have been distributed legally to or for the account of the petitioners in Colombia and those pesos could have been invested legally there. The Colombian Co. did distribute to and petitioners actually received in 1938 in United States dollars and paid income taxes on such distributions in excess of the amounts permitted by the exchange laws and regulations then in force in the Eepublic of Colombia. However, we pass those circumstances, as well as consideration of subsections 337 (e) and (f), supra.

Congress believed foreign personal holding companies were being used by United States taxpayers to avoid or evade their incojne taxes and that it could not tax such companies. Eeport of Ways and Means Committee, H. Eept. No. 1546, 75th Cong., 1st sess. By section 337 of supplement P of the Revenue Act of 1938 it therefore proceeded to tax the “assumed distribution” of dividends by those companies in the hands of their United States stockholders1. See Report of Ways and Means Committee, sufra. The power to permit or deny the legal distribution of the funds of those foreign companies was plainly in the hands of the foreign governments under the jurisdiction of which such companies existed. It certainly may not be presumed that Congress did not know of this power and the then existing exchange restrictions upon which petitioners rely. See Introduction to the Report of the U. S. Tariff Commission to the Ways and Means Committee of the House of Representatives, 1934. In enacting section 115 (c) (2) of the same revenue act with which we are here concerned, Congress expressly provided for an exception based upon the laws of a foreign country. But, in enacting section 337, supra, and supplement P, in which that section is included, legal transfer to the United States of its distributed earnings by the foreign personal holding company was not made a condition precedent to the laying of the tax. Nothing there appears remotely suggesting that foreign laws or regulations may affect the imposition of the tax. See Burnet v. Harmel, 287 U. S. 103. Cf. Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46.

It is difficult to believe that such legislation would have been proposed or passed if it had been believed by Congress or those suggesting the legislation that such a tax could be imposed under the well recognized and simple doctrine of “constructive receipt.” In fact, if the existence of foreign laws or regulations restricting the transfer of dividends to the United States by foreign personal holding companies had been made a condition precedent to the laying of taxes under section 337, supra, the admitted purpose of the legislation would have been largely indirectly defeated.

Assumed distribution, even when actual distribution was legally impossible, has been held to properly support other income taxes. So, the distributive share of a partner in the income of a partnership neither distributed nor legally distributable was held to have been properly taxed to a partner under section 218 (a) of the Revenue Act of 1918. Heiner v. Mellon, 304 U. S. 271. See also Mary Clark de Brabant, 34 B. T. A. 951; affd., 90 Fed. (2d) 433.

International Mortgage & Investment Corporation, 36 B. T. A. 187, involving the taxability to a United States taxpayer of his “blocked” German marks in Germany, North American Oil Consolidated v. Burnet, 286 U. S. 417, and other cases upon which petitioners rely, are not in point. They were all decided squarely under the doctrine of “constructive receipt” and are not premised upon any specific legislation, as are the present deficiencies.

Decision will be entered for the respondent*

         SEC. 337. CORPORATION INCOME TAXED TO UNITED STATES SHAREHOLDERS.
      (a) General Rule. — The undistributed Supplement P net income of a foreign personal holding company shall be included in the gross income of the citizens or residents of the united States, domestic corporations, domestic partnerships, and estates or trusts (other than estates or trusts the gross income of which under this title includes only income from sources within the united States), who are shareholders in such foreign personal holding company (hereinafter called “united States shareholders”) in the manner and to the extent set forth in this Supplement.
      (b) Amount Included in Gross Income. — Each United States shareholder, who was a shareholder on the day in the taxable year of the company which was the last day on which a Onited States group (as defined in section 331 (a) (2)) existed with respect to the company, shall include in his gross income, as a dividend, for the taxable year in which or with which the taxable year of the company ends, the amount he would have received as a dividend if on such last day there had been distributed by the company, and received by the shareholders, an amount which bears the same ratio to the undistributed Supplement P net income of the company for the taxable year as the portion of such taxable year up to and including such last day bears to the entire taxable year.
      * * * * * *
      (e) Effect on Capital Account of Eoreisn Personal Holding Companx. — An amount which bears the same ratio to the undistributed Supplement P net income of the foreign personal holding company for its taxable year as the portion of such taxable year up to and including the last day on which a United States group existed with respect to the company bears to the entire taxable year, shall, for the purpose of determining the effect of distributions in subsequent taxable years by the corporation, be considered as paid-in surplus or as a contribution to capital and the accumulated earnings and profits as of the close of the taxable year shall be correspondingly reduced, if such amount or any portion thereof is required to be included as a dividend, directly or indirectly, in the gross income of United States shareholders.
      (f) Basis of Stock in Hands of Shareholders. — The amount required to be included in the gross income of a United States shareholder under subsection (b) shall, for the purpose of adjusting the basis of his stock with respect to which the distribution would have been made (if it had been made), be treated as having been reinvested by the shareholder as a contribution to the.capital of the corporation; but only to the extent to which such amount is included in his gross income in his return, increased or decreased by any adjustment of such amount in the last determination of the shareholder’s tax liability, made before the expiration of seven years after the date prescribed by law for filing the return.


author: Harron:

text:
    John Balestreri, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104025.
    Promulgated June 30, 1942.

      Raymond M. Wansley, G. P. A., for the petitioner.

      Frank T. Horner, Esq., for the respondent.
   OPINION.

Harron:

Petitioner contends that the facts and circumstances re-

lating to his employment in the taxable year bring his earnings within the terms of section 116 (a) of the Revenue Act of 1936, so that such income is exempt from Federal income tax. Petitioner contends that his earnings were received from sources without the United States, because- the. labor was performed on a ship which was outside of the territorial waters of the United States. Petitioner contends, also, that he was a bona fide nonresident of the United States for more than six months during the taxable year, because when he was away from San Diego on fishing trips, he was not a “resident” of San Diego, and because the aggregate time away on fishing trips during the taxable year was more than six months.

The question is whether or not petitioner’s earned income was, in fact, from “sources without the United States” within the intendment of section 116 (a). The question presented is one of first impression under the facts.

Respondent contends, first, that petitioner’s case presents a situation to which Congress did not intend to apply the benefits of section 116 (a). We agree with this contention. The provision excluding from gross income “earned income from sources without the United States” was first enacted in the Revenue Act of 1926. The purpose of Congress in enacting the provision is perfectly clear. The enactment of the provision was a “step toward increasing our foreign trade” by excluding from gross income subject to Federal income tax the income earned by a nonresident citizen of the United States in the conduct of business abroad. See Report of Ways and Means Committee, 69th Cong., 1st sess., H. Rept. 1, p. 7; and Report of the Conference Committee, 69th Cong., 1st sess., II. Rept. 356, p. 33. The late Senator Reed Smoot, later a co-author of the Hawley-Smoot Tariff Act, and always a patron of our foreign trade, was a supporter of the provision in the Senate. He stated, at the time the proposed provision was debated, that it affected “all our commercial agents abroad who go to get business”, and that it applied to an American citizen engaged in business in a foreign country for a period of six months or more. Congressional Record, vol. 67, p. 3781; Seidman’s Legislative History of Federal Income Tax Laws, 1938-1861, pp. 472, 596. It was stated on the floor of the Senate more recently, when the Revenue Act of 1932 was before Congress, that the reason Congress originally enacted the exemption provision and reenacted it in several successive tax bills was because most foreign countries subject Americans who live within the foreign countries more than six months to their income tax, with the result that American citizens conducting business abroad and earning income abroad are subject to the income taxes of both the foreign countries and the United States: Congress, following a liberal policy in the promotion of our foreign trade, intended that American citizens who earned income in a foreign country during a period of residence within such country for six months or more should not be required to include that income, earned outside the United States, in gross income for our income tax, because such income would be taxed by the government of the foreign country. The exclusion provision is a method of relieving some of our taxpayers from the income taxes of two countries, our own and a foreign country, with respect to income earned within a foreign country.

Obviously, petitioner’s earnings in the taxable year were not subject to the income tax of any foreign country, and, although his labor out on the high seas was performed outside of the territorial waters of the United States, it was not performed within any foreign country. Petitioner does not so contend, and it appears that the income in question has not been taxed by the government of any foreign country. In our opinion, petitioner’s case is not one within the area of the express Congressional intent.

Respondent contends, further, that the income in question was not received from sources without the United States because the labor performed in the earning thereof was upon an American registered ship. Respondent relies upon the rule that “a vessel is deemed a part of the territory of the country to which she belongs.” United States v. Rodgers, 150 U. S. 249, 264. Respondent cites many cases where the rule has been applied, among them, The Velox, 21 Fed. 479, where it was held that the right of a seaman as respects a lien on the ship for wages earned is governed by the law of the vessel’s, flag. See also United States Shipping Board Emergency Fleet Corporations. Greenwald, 16 Fed. (2d) 948, 950; Cain v. Alpha S. S. Corporation, 35 Fed. (2d) 717, 718; affd., 281 U. S. 642; The Oriskany, 3 Fed. Supp. 805; Carrington v. Panama Mail S. S. Co., 241 N. Y. S. 347; affd., 251 N. Y. S. 803; City of Norwich, 279 Fed. 687; The Hanna Nielsen, 273 Fed. 171; certiorari denied, Ole Tolo v. Steamship Hannah Neilson, 257 U. S. 653.

We need not decide in this case the law upon the question where petitioner earned his wages under the facts. That question, strictly speaking, is not before us. Rather, the question is whether the income in question was “received from sources without the United States” within the intendment of section 116 (a).

It is held that section 116 (a) is not applicable to the income in question for the following reasons: ¡.fi!

(1) The income was derived from sources within lithe United States, because petitioner’s receipt of compensation was entirely dependent upon the sale of the fish within the United States. None of the fish caught were sold outside of the United States. Petitioner’s testimony is clear that if the fish were not sold, if no fish were caught, or if the caught fish spoiled and became unsuited for sale, he received no compensation for the time and work given. This is because his wages were derived solely from his right to share in the net proceeds from sales made in the United States, if any net proceeds were realized.

(2) Petitioner was not a “bona fide nonresident of the United States” within the intendment of Congress as it used such phrase in section 116 (a). Petitioner called San Diego his “home”, as his testimony shows. The term residence connotes, among other things, the place in which a person makes his home. See Joseph H. Beale, The Conflict of Laws, vol. 1, p. 254; Domes v. Board of Supervisors of Erie County, 243 N. Y. S. 640, 643; Commissioner v. Estate of W. M. L. Fiske, 128 Fed. (2d) 487. The term residence means actual place of abode, whether temporary or permanent. Tenatello v. Pons, 256 N. Y. S. 763, 765. “Kesidence” in law, once obtained, continues without intermission until a new one is gained. Bruechmann v. Frignoca, 152 Atl. 780. Petitioner’s residence was at his mother’s home in San Diego in 1936 and 1937. By absenting himself therefrom temporarily when he went away on fishing trips, petitioner did not give up his established residence.

It is unnecessary, in view of the holding made, to consider petitioner’s contention that his work outside the territorial waters aboard ship was “for more than six months during the taxable year.” Since the income in question was not derived from sources without the United States, within the intendment of'section 116 (a), it is immaterial whether or not petitioner was aboard ship for a continuous six-month period or an aggregate time of six months, intermittently.

Kespondent added a penalty of 25 percent of the tax for delinquency in the filing of the return for 1937 under section 291. That determination was correct unless it can be shown that petitioner’s failure to file his return within the time prescribed by law was due to reasonable cause and not due to willful neglect. See Estate of Frederick C. Kirchner, 46 B. T. A. 578. In this case petitioner has not shown reasonable cause for failure to file the return. Sometime around the date the return for 1937 was due petitioner was told, by a tax consultant that he should file a “no tax” return. Pie failed to act upon this advice for reasons unknown. His returns from fishing trips during 1937 were frequent and he could have filed the return. The notices from the Bureau of Internal Kevenue telling petitioner that he had not filed a return were sent to petitioner’s residence. The delay in his receipt of the notices, personally, is immaterial, as is the fact that the Bureau sent the notices to him. The penalty is imposed for failure of tlie taxpayer to file a return 'within the time prescribed by law. Petitioner, without reasonable cause, failed to file his return on time. Logan Coal & Timber Association v. Helvering, 122 Fed. (2d) 848; O'Sullivan Rubber Co. v. Commissioner, 120 Fed. (2d) 845; Noteman v. Welch, 108 Fed. (2d) 206.

Decision will be entered for the respondent.

       SEC. 116. exclusions PROM GROSS INCOME.
      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 (except amounts paid by the united States or any agency thereof) if such amounts would constitute earned income as defined in section 25 (a) if received from sources within the United States; but such individual shall not be allowed as a deduction from his gross income any deductions properly allocable to or chargeable against amounts excluded from gross income under this subsection.

       Congressional Record, vol. 75, pp. 10410, 10411:
      “Mr. Reed. * * * In order to help our foreign trade and to put all Americans who are working abroad in a position of equality with their competitors, the Congress in several successive tax bills has exempted from our income taxes that part of the earnings of those Americans which was earned abroad, provided they lived abroad more than six months out of the year.

        “The reason for doing that was that most countries — Canada and Great Britain, for example — subject an American to their income tax if that American lives in their country for more than six months. The result of taxing such Americans would be that, first, they paid the British or the Canadian income tax and then the American income tax on top of it."


text:
    Alma S. Hay, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 107481.
    Promulgated June 30, 1942.

      Herman T. Van Mell, Esg., for the petitioner.

      David Altman, Esg., and George E. Gibson, Esg., for the respondent.
   OPINION.

Opper:

There are several grounds upon which respondent’s determination that these gifts were of future interests might be upheld. Paragraph sixth of the trust instrument dealing with the devolution of the shares of the primary beneficiaries upon their death makes it impossible to determine presently who will be the ultimate takers. See United States v. Pelzer, 312 U. S. 399. The trustees’ power to accumulate income and hold the corpus for an indeterminate period renders impractical any appraisal of the present value of the interests acquired by the individual grantees. See Winston Paul, 46 B. T. A. 920; Commissioner v. Brandegee (C. C. A., 1st Cir.), 123 Fed. (2d) 58. But what we think a sufficiently final consideration is that even the existence of a present right to dispose of what is concededly a future interest, the only ground upon which petitioner seeks to distinguish the cases apparently fatal to her contention, can not in our view transform a future estate into a present one for purposes of section 504 (b) of the Revenue Act of 1932.

In the absence of an express permission such as is the effect here, in petitioner’s view, of paragraph seventh of the trust instrument, we know, of no rule .preventing thé assignment of a future estate if the grant is silent on the subject. We can not assume that the affirmative insertion of an authorization which in any event the law would imply can raise the situation to a higher dignity. See Helvering v. Helmholz, 296 U. S. 93. Hence we are presented with the simple question whether a deed of gift conveying a future estate, such as a remainder, deals with a present interest merely bécause there is no prohibition of anticipatory alienation.

It seems evident that, since “future interests” unquestionably include even vested remainders, a form of property which is readily transferable, the mere power to realize some present benefit by an immediate disposition of a beneficiary’s interest will not suffice to convert an enjoyment which the donor has cast into the form of a postponed expectancy into a true present interest. The mere power of present disposition. can not be the test, or at least such estates as vested remainders would be present interests. “The sole statutory distinction between present and future interests lies in the question of whether there is postponement of enjoyment of specific rights, powers or privileges' which would be forthwith existent if the interest were present.” Commissioner v. Glos (C. C. A., 7th Cir.), 123 Fed. (2d) 548.

We may assume that the donee could sell his gift or give it to another. The recipient might then be in the donee’s shoes. But he would be-no more than the present owner of a future right. The interest given would still remain an expectancy with the use, possession, or enjoyment delayed. The gift is what the donor gave. That continues to be a future interest if that was the character fastened upon it by the donor. The exclusions from the gift must have their source in that character. What the donor gave these beneficiaries was consequently nothing but a group of future interests from which the statutory exclusions are accordingly expressly withheld. That being our view, we find it unnecessary to attempt the difficult feat of construction involved in ascertaining the meaning of paragraph seventh in the light of the conflicting provisions of paragraphs sixth and eighth (b8).

Decision will be entered for respondent.

       E.g., Annie B. Smith, 45 B. T. A. 948; Mary R. Nelson, 46 B. T. A. 653; F. J. Sensenbrenner. 46 B. T. A. 713; Lillian Seeligson Winterbotham. 46 B. T. A. 972.

       “Any of the beneficiaries named in Paragraph Fifth hereof may at any time prior to his or her death and during the term or period of the trust, by appropriate instrument in writing directed to the Trustees, order and direct distribution of his or her share of the trust estate to persons other than as provided in Paragraph Sixth hereof; Provided, however, that nothing herein contained shall be considered or construed as a right or power to terminate or direct a termination of the trust or his or her interest therein; 4 * *”

       “As the court said in Welch v. Paine, 120 F. (2d) 141: ‘ * * * it cannot he doubted that a vested and indefeasible legal remainder after a life estate is a “future interest.” ’ ” [Commissioner v. Glos (C. C. A., 7th Cir.), 123 Fed. (2d) 548.]