text:
    Percy B. Eckhart, Executor of the Estate of Bernard A. Eckhart, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 76443.
    Promulgated November 12, 1935.

      Williami A. MoSwain, Esq., and Robert F. Spindell, Esq., for the petitioner.

      Ralph E. Smith, Esq., and Arthur L. Murray, Esq., for the respondent.
   OPINION.

Trammell:

The first and principal issue in this case is whether or not certain direct gifts inter vivos and transfers in trust made by-the decedent to and for the benefit of his wife, children, and grandchildren, during the years 1919 to 1930, both inclusive, were made in contemplation of death, within the meaning of the taxing statute.

Section 302 (c) of the Revenue Act of 1926, as amended by Joint Resolution No. 131, 7lst Cong., approved March 3, 1931, applicable here, provides, among other things, that the value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, wherever situated, to the extent of any interest therein of which the decedent has at that time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, including a transfer under which the transferor has retained for his life or any period not ending before his death (1) the possession or enjoyment of, or the income from, the property, or (2) the right to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money’s worth.

No contention is made in this proceeding that any of the transfers in controversy were intended to take effect in possession or enjoyment at or after the decedent’s death, nor that he retained for his life the possession or enjoyment of any of the property or the income therefrom, or the right to designate the persons who should possess or enjoy such property or income. The sole question is whether the transfers were made “ in contemplation of death.”

The meaning of the phrase “ in contemplation of death ” has been the subject of judicial consideration on numerous occasions and a long line of decisions more or less to the same general effect might be cited, but for purposes of the present case, a comprehensive discussion of the term is embodied in the opinion of the Supreme Court in United States v. Wells, 283 U. S. 102, decided April 13, 1931. The statute involved there was section 402 (c) of the Revenue Act of 1918, which, so far as material here, is substantially the same as section 302 (c) of the 1926 Act, supra. From the opinion of the Court, delivered by the Chief Justice, we quote as follows:

Transfers in contemplation of death are included within the same category, for the purpose of taxation, with transfers intended to take effect at or after the death of the transferor. The dominant purpose is to reach substitutes for testamentary dispositions and thus to prevent the evasion of the estate tax. Nichols v. Coolidge, 274 U. S. 631 * * * Milliken v. United States, 283 U. S. 16 * * *. As the transfer may otherwise have all the indicia of a valid gift inter vivos, the differentiating factor must be found in the transferor’s motive. Death must be “ contemplated,” that is, the motive which induced the transfer must be of the sort which leads to' testamentary disposition. As a condition of body and mind that naturally gives rise to a feeling that death is near, that the donor is about to reach, the moment of inevitable surrender of ownership, is most likely to prompt such a disposition to those who are deemed to be the proper objects of his bounty, the evidence of the existence or non-existence of such a condition at the time of the gifts is obviously of great importance in determining whether it is made in contemplation of death. The natural and reasonable interference which may be drawn from the fact that but a short period intervenes between the transfer and death is recognized by the statutory provision, creating a presumption in the case of gifts within two years prior to death. But this presumption, by the statute before us, is expressly stated to be a rebuttable one, and the mere fact that death ensues even shortly after the gift does not determine absolutely that it is in contemplation of death. The question, necessarily, is as to the state of mind of the donor.
$ ‡ * * ‡ # *
It is contemplation of death, not necessarily contemplation of imminent death, to which the statute refers. It is conceivable that the idea of death may possess the mind so as to furnish a controlling motive for the disposition of property, although death is not thought to be close at hand. Old age may give premonitions and prompting independent of mortal disease. Yet age in itself can not be regarded as furnishing the decisive test, for sound health and purposes associated with life, rather than with death, may motivate the transfer. The words “ in contemplation of death ” mean that the thought of death is the impelling cause of the transfer * * *
If it is the thought of death, as a controlling motive prompting the disposition of property, that affords the test, it follows that the statute does not embrace gifts inter vivos which spring from a different motive. » * * The purposes which may he served by gifts are of great variety. It is common hnowledge that a frequent inducement is not only the desire to be relieved of responsibility, but to have children, or others who may be the appropriate objects of the donor’s bounty, independently established with competencies of their own, without being compelled to await the death of the donor and without particular consideration of that event. There may be the desire to recognize special needs or exigencies or to discharge moral obligations. The gratification of such desires may be a more compelling motive than any thought of death.

For further discussion of the principles announced in the Wells case, see Willcuts v. Stoltz, 73 Fed. (2d) 868. See also Real Estate Land Title & Trust Co. v. McCaughn, 79 Fed. (2d) 602.

In the case at bar the evidence clearly establishes that beginning in 1908 the decedent adopted a policy, thereafter consistently followed to and including the year 1930, of making substantial gifts inter vivos to the members of his family and establishing trusts for their benefit. During the period mentioned decedent made 108 separate gifts to and created 10 irrevocable trusts for the benefit of those who were the appropriate objects of his bounty. The fair market value of the gifts exceeded $4,000,000, and of the trusts, $2,000,000. Yet decedent died possessed of an estate valued at more than $5,000,000. The declared purpose of the decedent in making gifts directly to the members of his family and transfers in trust for their benefit was to provide them with independent competencies, so that they might enjoy the use of a part of his property without having to wait for his death.

Another purpose which motivated decedent in this matter was to accustom his children to the handling and management of large amounts of property during his lifetime, while he could teach them habits of thrift and economy, and to live within their incomes. The decedent through the years often discussed with his family and business associates the purposes which prompted his policy of making gifts.

In respect of the trusts created and the gifts inter vivos made by decedent during the period from 1919 to 1926, inclusive, the evidence shows that the decedent had theretofore never been seriously ill in his life, had suffered only minor ailments, and was enjoying unusually sound and robust health. We find nothing in the record to justify the conclusion that his state of mind involved contempla-' tion of death, or that the gifts in any manner constituted testamentary dispositions of property. On the contrary, the evidence convinces us that the gifts made during the period referred to were pursuant to decedent’s long-established policy of making such gifts to his family, and that his purposes were distinctly associated with life rather than with death.

We, therefore, have no difficulty in concluding, and have so found as a fact, that the eight (8) transfers in trust made by decedent in 1919 to 1926, of various securities having a fair market value at his death of $1,022,288.12, and the five (5) gifts of De Soto Securities Co. common stock made by decedent to his wife and children on December 24, 1923, were not made in contemplation of death within the purview of the statute.

In respect of the five gifts aggregating 500 shares of beneficial interest in De Soto Realty Trust made by decedent to his wife and children on March 19, 1930, and the transfer in trust on April 3, 1930, of 9,750 shares of preferred stock of the De Soto Securities Co., a little more than a year prior to his death, a somewhat more difficult problem is presented. Decedent was then more than 81 years of age, and in January of the preceding year had undergone a serious surgical operation for the removal of his prostate gland. He was no longer enjoying the sound and robust health of his earlier years. However, as against these facts it is shown that the decedent believed that he had fully recovered from the prostate operation; his health was reasonably good for a man of his age; he did not know that he was suffering from carcinoma, or cancer, of the prostate; he was actively engaged in the personal direction of his various business interests; during 1929 and 1930 subsequent to his operation decedent assumed the additional burden of directorships in two large corporations, and entered into syndicate agreements involving a combined liability of $1,250,000, which syndicates and agreements continued until after his death; during the same period decedent was planning the erection of a large office building in Chicago, and in August 1930 took part in an attempt to consolidate two of the large Chicago banks, in both of which he was a director.

As pointed out by the Supreme Court in the Wells case, supra, age in itself cannot be regarded as furnishing the decisive test, but the question is as to the state of mind of the donor. His state of mind can be determined only from the contemporaneous statements, acts and conduct of the donor. Considering the facts in the instant case, above referred to, it is our opinion that the decedent’s state of mind indicated thereby does not support the conclusion that the five gifts of March 19, 1930, nor the gift of April 3, 1930, were made in contemplation of death, and we have found that they were not so made.

In Heiner v. Donnan (C. C. A., 3d Cir.), 61 Fed. (2d) 113, the decedent was 78, 81, and 82 years of age when he made the transfers which the court held were not made in contemplation of death. Also, the decedent died within two years of the last transfer, which comprised more than half of his total assets. Notwithstanding the age of the decedent at the time the gifts were made, the court concluded that the transfers were motivated by purposes associated with life rather than with death.

In Brown v. Commissioner (C. C. A., 10th Cir.), 14 Fed. (2d) 281, reversing 29 B. T. A. 1183, the court applied the test defined in the Wells case, and held that a transfer of stock by the decedent to his wife when he was 13 years of age, and only two months and 19 days before his death, was not made in contemplation of death. The court accepted the taxpayer’s contention, held to have been erroneously rejected by the Board, that the transfer was in keeping with the decedent’s long-established custom of making gifts to his wife and children in order to provide them with independent means and incomes of their own.

In respect of the forgiveness by the decedent on March 23, 1931, of an indebtedness owing to him by the De Soto Securities Co. in the amount of $234,788.84, which respondent contends was a gift made in contemplation of death, we think an entirely different picture is presented. Decedent was then in his last illness, from which he died one month and nineteen days later. During the preceding several months his physical condition had become gradually worse, and in the early part of 1931 the change in his appearance was most marked. We think it can not be assumed that a man of decedent’s long experience and mental alertness could have failed to realize that the end of his life was rapidly approaching, that death was imminent. Furthermore, it was about this time that decedent had expressed a desire to have Dr. Bevan operate on his intestines, and upon the refusal of the doctor to operate the decedent showed unmistakable evidence of a realization of the seriousness of his condition. In the light of the facts and circumstances discussed, the respondent’s contention on this point is sustained.

There remains for consideration issue (4), which involves the amount of the deduction to' which petitioner is entitled on account of the liability of decedent’s estate on two promissory notes endorsed by the decedent during his lifetime.

Section 303 of the Kevenue Act of 1926 provides that, for the purpose of the tax, the value of the net estate shall be determined by deducting from the value of the gross estate, among other things, “ claims against the estate ” to the extent that such claims were incurred or contracted bona fide and for a full and adequate consideration in money or money’s worth, and allowed by the laws of the jurisdiction under which the estate is being administered. No question is raised in this case that the claim upon which the deduction is based was not incurred or contracted bona fide and for an adequate money consideration. The issue goes only to the amount of the deduction which is allowable. The petitioner contends that he is entitled to a deduction in the amount of $129,081.44, while respondent asserts that the amount allowable is $82,427.62.

During his lifetime decedent endorsed two promissory notes, which were payable on demand. The unpaid balance due on the notes at decedent’s death was $147,853.44. The notes were secured by collateral having a fair market value of $65,425.82. Subsequent to decedent’s death the holder of the notes made demand upon the makers for payment, and upon their failure to pay the amount due, filed claim therefor against decedent’s estate in the probate court. On May 16, 1932, the probate court allowed the claim for the full amount due, $147,853.44. On June 27, 1932, the collateral security was sold for its then fair market value of $18,772, which amount was applied against the claim allowed by the probate court, reducing the claim to $129,081.44, which the estate immediately paid.

The latter amount is the amount claimed by the petitioner as a deduction. Eespondent contends that since tax liability is determined upon the basis of the value of the estate at the date of decedent’s death, the allowable deduction is the amount of the claim allowed by the probate court, less the value of the collateral security at decedent’s death, or the amount of $82,427.62.

We can not agree with respondent’s view. While it is true that for purposes of the tax property is valued as of the date of decedent’s death, the statute specifically provides for the deduction of funeral expenses, administration expenses, claims against the estate, losses incurred during settlement of the estate, and amounts expended during settlement of the estate for the support of the decedent’s dependents, all of which arise subsequent to the decedent’s death, and the amounts of such deductions are not determined with regard to the date of death.

In respect of the item here in dispute, it must be remembered that there was no matured liability on the part of the estate at the date of the decedent’s death. At that time the liability was wholly contingent, and if the collateral security had had a fair market value equal to or in excess of the unpaid balance due on the notes, there would have been no claim presented against the estate. The estate became liable only when the makers failed to pay upon demand of the holder, both of which events transpired subsequent to decedent’s death. The liability of the estate thereupon became fixed, but the amount of such liability could not be definitely determined until the collateral security had been sold and the proceeds applied against the unpaid balance due upon the notes. When this had been done the amount of the estate’s liability was fixed and determined, and such amount was immediately paid by the estate. Petitioner is entitled to the deduction in the amount claimed.

Reviewed by the Board.

Juclgment will be entered under Buie 50.


source: Caselaw Access Project

author: Trammell :

license: Public Domain

text:
    Ralph W. Crews, Petitioner, v. Commissioner of Internal Revenue, Respondent. Robert E. Crews, Petitioner, v. Commissioner of Internal Revenue, Respondent. Amy Tresner, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mary Willis, Petitioner, v. Commissioner of Internal Revenue, Respondent. Charles Crews, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 66701-66703, 66718, 66766.
    Promulgated November 12, 1935.

      Albert L. McRill, Esq., for the petitioners.

      John H. Pigg, Esq., for the respondent.
   SUPPLEMENTAL OPINION.

Trammell :

These proceedings are for the redetermination of deficiencies in income tax for 1930 and formerly were considered by us at 30 B. T. A. 615 and 31 B. T. A. 187. The petitioners and their brother, Everett J. Crews, were the owner's of an oil and gas property situated in Oklahoma, which they had inherited from their parents, the last of whom died in 1910. .Up to and during the taxable year no actual division had been made of the property and the petitioners and their brother. Everett J. Crews, were each the owners of a one-sixth interest therein and entitled to one sixth of the income therefrom.

Since our former consideration of the instant proceedings we have decided the case of Everett J. Crews, which appears at 33 B. T. A. 36. The issues involved in that proceeding were (1) what amount was to be included in the petitioner’s gross income as his share of the net income arising from certain business operations conducted for the benefit of him and his brothers and sisters, including the operation of the oil and gas property heretofore mentioned, and (2) the amount the petitioner was entitled to deduct for depletion with respect to the said oil and gas property. That proceeding was submitted to us on the same record made in the instant proceedings. Upon further consideration of the record made in the instant proceedings we found it necessary in the case of Everett J. Crews to make certain modifications of our findings of fact and opinion previously made by us in the instant proceedings.

Inasmuch as the facts found and conclusions reached heretofore by us in the instant proceedings are not in conformity with those in Everett J. Crews, supra, they, therefore, are modified to bring them into harmony with the facts found and conclusions reached in that case. Therefore the facts as found in Everett J. Crews, supra, are adopted and made the findings of fact in these proceedings.

Eecomputations of the tax liability of the petitioners will be made in accordance with these findings of fact and opinion in Everett J. Crews, supra.

Decision will be entered under Bule 50.


author: Murdock:

text:
    William F. Humphrey, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68237.
    Promulgated November 12, 1935.

      Walter E. Barton, Esq., Josefh P. Tvmulty, Esq., and B. G. Cushwa, Esq., for the petitioner.

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

Murdock:

The petitioner was on the cash receipts and disbursements basis and could not, under any circumstances, deduct as a loss for 1929 more than he actually paid in that year. A payment of $2,799.84 in cash to the Tunnel Co. was made on July 5, 1929. But that payment was made by the Cattle Co. The petitioner stated that one half of that amount was paid on his behalf. He was not a stockholder of the Tunnel Co. at that time. The petitioner paid $2,768 in cash to the Tunnel Co. on November 30, 1929. The evidence does not disclose the purpose of either of those payments. The petitioner borrowed $93,358.74 from a bank on his promissory note and paid the money thus borrowed to the Tunnel Co. Of that payment $87,500 represented payment at par for one half of the 1,750 shares of Tunnel Co. stock; $4,605 represented a similar payment for 46.05 shares; and $1,253.74 represented a proportionate part of the interest on the Tunnel Co.’s note for $500,000. The petitioner includes in the amount of the deduction which he claims not only all of the above items, but also an item of $29,472. The petitioner and other stockholders of the Tunnel Co. on July 30, 1929, guaranteed a loan which was made to the Tunnel Co. by a bank on a note of the Tunnel Co. The bank demanded on December 2, 1929, that the stockholders make good their guaranty by paying the unpaid balance of the note in the amount of $160,000. The petitioner’s share of this unpaid balance was $29,472. He gave his promissory note to the bank for that amount. That bank then held two of his promissory notes — the one for $93,358.74, above described, and the one just given for $29,472. He combined the amounts of those two notes and gave a new note for the total of $122,830.74 either on the 31st of December 1929 or early in January 1930. Evidence of both dates came from the petitioner’s witnesses. There might be considerable doubt as to whether all of these amounts were paid in 1929 and represented losses by one on the cash receipts and disbursements basis. However, the questions thus suggested need not be decided, for reasons which will later appear.

The petitioner advances three different arguments to support his claim that he is entitled to deduct $126,993.66 from his income for 1929 as a loss under section 23(e) (2) of the Revenue Act of 1928. The first argument which he makes is that he became liable under the original agreement of the parties for a certain share of any loss which might result from the construction of the tube; his share of the loss turned out to be $126,993.66; he paid this amount in 1929; the transaction was entered into for profit and therefore he is entitled to deduct the amount in controversy as a loss under section 23(e) (2). He reasons, in this connection, that the Tunnel Co. was a mere agency created for the sole purpose of constructing the tube; the parties to the original agreement contributed to the Tunnel Co. only what they would have been required to pay if the corporation had never been organized; therefore the corporate entity of the Tunnel Co. should be disregarded.

The petitioner originally entered into the transaction for profit and agreed to share a portion of any loss which might result. In the end he assumed, and probably paid, his share of the loss which resulted from the construction of the tube. But between the original agreement and the ultimate payment of the loss a number of transactions having tax significance intervened. Those intervening transactions can not be ignored. The original parties to the venture formed a corporation. The contract to construct the tube was turned over to that corporation. The corporation actually constructed the tunnel and sustained the loss. Furthermore, it paid for the loss. The- petitioner subscribed for stock of that corporation. Instead of paying cash for the stock at the time of his subscription his associate gave a note in the amount of $115,000 to the corporation. That note represented merely a promise to pay. Later, for reasons' satisfactory to the petitioner and his associate, they ceased to be stockholders of the corporation and allowed the shares which they had previously owned to become the property of the Cattle Co. The Cattle Co. gave its note to the corporation for $175,000. The evidence does not show that the note given by McCarthy was surrendered, but certainly the petitioner can derive no benefit from the lack of proof in regard to what became of that note. The note was never paid. If he remained liable on that note he should have proven the facts to show his liability. If any inference were to be drawn, the natural one would be that McCarthy’s note was surrendered when the note of the Cattle Co. was received by the Tunnel Co. In any event the Cattle Co. became the owner of the stock and1 the petitioner ceased to be the owner of any stock in the Tunnel Co. The Cattle Co. was the owner of the Tunnel Co. stock when that stock became worthless. Thereafter the petitioner reacquired some of the stock of the Tunnel Co. from the Cattle Co. and voluntarily assumed liability thereon for a proportionate part of the loss of the Tunnel Co. There is no sound reason in this case for disregarding the corporate entity of the Tunnel Co., the acts and circumstances surrounding its creation and existence, or the fact that its stockholder, at the time the loss was sustained and its stock became worthless, was the Cattle Co., not the petitioner. The following statement of the Supreme Court in Burnet v. Commonwealth Improvement Co., 287 U. S. 415, is apposite: “ While unusual cases may require disregard of corporate form, we think the record here fails to disclose any circumstances sufficient to support the petitioner’s claim. Certainly the Improvement Company and the estate were separate and distinct entities; the former was avowedly utilized to bring about a change in ownership beneficial to the latter.” Consequently the first argument advanced by the petitioner is rejected as unsound.

The petitioner next argues that he and McCarthy were at all times the owners of 1,750 shares of stock of the Tunnel Co. and were at all times personally responsible for their proportionate part of the 250 shares which were held in trust; the Cattle Co. never owned any of the stock; and, therefore, he is entitled to deduct a loss of $126,993.66, representing his investment in the stock of the Tunnel Co. which became worthless in 1929. This contention is not supported by the facts. The petitioner and McCarthy originally subscribed for 1,750 shares of stock. They did not pay for this stock in cash, but merely gave a note whereby they promised to pay $175,000 in the future. The note was never paid. They never received a certificate for the shares. The Cattle Co. acquired the 1,750 shares in question in 1926. It did not pay cash at that time, but gave its promissory note for $175,000 to the Tunnel Co. It was the actual owner of the 1,750 shares of stock when those shares became worthless. Although the petitioner’s contention finds some support, the evidence as a whole does not justify a finding that the Cattle Co. held the stock merely as nominee, or that it held the stock in any other fiduciary capacity. Two hundred and fifty shares of Tunnel Co. stock were held in trust. The trustee was changed from time to time. When the stock became worthless the stockholders of the Tunnel Co. other than the trustee were liable for the entire loss which the Tunnel Co. had sustained. The Tunnel Co. then called upon its stockholders to pay for their stock. The petitioner had ceased to own any interest in the Tunnel Co. prior to that call for payment of the subscription price and prior to the time that the Tunnel Co. stock became worthless. The record does not show that the Cattle Co. was unable to shoulder its entire responsibility as a stockholder of the Tunnel Co. If it had paid its share of the loss the petitioner would have had no loss to pay. The petitioner is not entitled to deduct the loss which he claims on the theory that at all times he was the owner of one half of a 35/95 interest in the Tunnel Co.

He maintains, as a sort of alternative to this second contention of his, that he is entitled to deduct the amount in question as the cost of the Tunnel Co. stock, even if it be held that he and McCarthy purchased the 1,750 shares from the Cattle Co. in July 1929. The acquisition by the petitioner of the Tunnel Co. stock from the Cattle Co. in July 1929 was not a transaction entered into for profit. He was fully aware before he entered into that transaction that it would not result in a profit, but, on the contrary, would make him liable for a part of the loss sustained by the Tunnel Co. in the construction of the tube. Any loss from that transaction would not be deductible under section 23 (e) (2), since it was not sustained in a transaction entered into for profit. Neither would it be deductible under section 23 (e) (1), since it was not a loss sustained in connection with the petitioner’s trade or business. No effort was made to show what the petitioner’s trade or business was. He has not shown and he does not claim that the loss was sustained in connection with his trade or business. The Cattle Co., as owner of the Tunnel Co. stock in July 1929, was liable for 35/95 of the loss sustained by the Tunnel Co. in the construction of the tube. The petitioner, by voluntarily assuming one-half of the liability of the Cattle Co. on account of the loss of the Tunnel Co. did not become entitled under section 23 (e) to any deduction from his income tax.

The petitioner’s final argument is that he was liable as a stockholder of the Cattle Co. for one half of the indebtedness of the Cattle Co. on its note for $175,000 which it had given to the Tunnel Co.; he assumed and paid one half of the debt and interest, or $88,753.74; his invéstment in the Cattle Co. was a transaction entered into for profit; and he is entitled to deduct $88,753.74 as a loss sustained by him in a transaction entered into for profit. The parties agree that in California a stockholder is liable for his proportionate part of the debts of the corporation in which he owns stock contracted during the period of his stockholding. Nevertheless, the petitioner is not entitled to deduct any amount on this theory. The Cattle Co. was liable for its debt to the Tunnel Co., and if the Cattle Co. was unable to pay that debt, such fact does not appear in this record. If he paid the amount in question because he held one half of the stock in the Cattle Co., that payment was a voluntary one on his part and merely served to increase the basis for gain or loss in his hands of the Cattle Co. stock. Warren E. Burns, 11 B. T. A. 524; affd., 31 Fed. (2d) 399; certiorari denied, 280 U. S. 564; J. S. Maubaules, 20 B. T. A. 359. The cost of the Cattle Co. stock to the petitioner has not been shown. There is no evidence to indicate that the Cattle Co. stock was worthless in 1929. The petitioner still held his stock in the Cattle Co. at the end of 1929. His investment in the stock of the Cattle Co. may have been a transaction entered into for profit, although there is no proof on that point. Since the Cattle Co. stock was not worthless in 1929 and was not disposed of by the petitioner in 1929, no gain or loss for 1929 based upon his investment in the Cattle Co. stock can be computed for that year. The additional amount which he invested in tRe stock of the Cattle Co. by paying the $88,753.74 will be taken into consideration in computing his gain or loss when he disposes of his Cattle Co. stock. The petitioner has not claimed the right to deduct more than $88,753.74 on this theory. However, the Tunnel Co. sustained its entire loss while the Cattle Co. was a stockholder. The Cattle Co. was liable as a stockholder of the Tunnel Co. for the latter’s indebtedness. If the petitioner were to argue that as a stockholder of the Cattle Co. he was liable for a part of this additional indebtedness and for the loss which its payment represented to him, the answer would be that any payment which he made in this connection would likewise represent additional investment in the stock of the Cattle Co. Thus on no theory that has been suggested would the petitioner be entitled to deduct the loss which he claims.

The petitioner originally joined with others in a joint venture. At that time he was in position to become liable for a share of any future losses o.f the venture, as well as to share in its future profits. The form for carrying out the venture was changed when the individuals organized the corporation and transferred to it the contract for the construction of the tube. There was no longer a joint venture with individual liability for future loss and individual rights to future gains. Thereafter it was a corporate venture. The petitioner ceased to be a stockholder in the Tunnel Co. Thereafter he was no longer responsible, on his original agreement, for any future losses sustained in the construction of the tube. The original parties to the venture, prior to the organization of the corporation, also made themselves personally liable to the parties who deposited cash for the protection of the indemnity company, and they also made themselves liable to the parties who gave their personal bonds for the protection of the depositors of the cash. The liability thus created may have persisted until and throughout 1929. However, the depositors of the cash lost nothing, those who gave their personal bonds were not called upon to make good any loss of the depositors, and the petitioner was not called upon to indemnify the ones who had given their bonds. Thus he sustained no loss as a result of those original agreements. The Tunnel Co., in taking over the contract for the construction of the tube, agreed, to indemnify and hold harmless the general contractor. The loss of the Tunnel Co. was paid without recourse to the bonds or deposits made before it was organized. The Cattle Co., as one of the stockholders of the Tunnel Co., was liable for its share of the loss of the Tunnel Co. There is nothing in the record to indicate that it was not at all times able to meet its obligations. It thus stood between the petitioner' and any possible loss on his part. Bnt the petitioner voluntarily assumed a part of the liability of the Cattle Co. to the Tunnel Co. The revenue act, however, does not permit the transfer of a loss of a-corporation to its stockholders under such circumstances.

Deductions are purely statutory and if no specific authorization can be found in the statute no deduction can be taken. The Board is not called upon at this time to decide whether or not the Cattle Co. might be entitled to deduct a loss. The plan whereby the Cattle Co. became a stockholder in the Tunnel Co. was designed to serve useful purposes of the petitioner and McCarthy. If the Tunnel Co. had made a profit on the construction of the tube, the Cattle Co. could have received its share of the profit tax free as dividends. Since the Tunnel Co. sustained a loss, it is to the petitioner’s advantage to disregard his act of substituting the Cattle Co.' for 'himself as a stockholder. Having voluntarily made the Cattle Co. the stockholder for the benefits which that step offered, he must likewise accept its inherent disadvantages. Burnet v. Commonwealth Improvement Co., supra.

Decision will be entered, for the respondent.

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


author: Leech :

text:
    Fletcher American National Bank, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 43712, 43713, 47149, 47150, 47585, 51120-51124, 58966-58969.
    Promulgated November 14, 1935.

      Frank G. Olive, Esq., and G-eorge S. Olive, G. P. A., for the petitioners.

      Elden McFarland, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: R. H. Syfers Realty Company; Fletcher American Company, and Perry E. O’Neal, Receiver; The Henry Severin Realty Corporation, and Frank C. Bopp, Receiver; Warman Avenue Realty Company ; and American Foundry Company.

   OPINION.

Leech :

This controversy apparently presents no original question. Since there was no change in the parent of the affiliated group during the pending tax years, no right of election accrued to petitioners because of the addition, in those years, of other companies to that group. Export Leaf Tobacco Co. v. Commissioner, 78 Fed. (2d) 163, affirming 31 B. T. A. 28; certiorari denied, 296 U. S. 627; Huntington Beach, Inc., 30 B. T. A. 731.

The rule appears to be established beyond question that under the provisions of the Revenue Acts of 1924, 1926 and 1928 the right of election, to file a consolidated return, can only be exercised through the joint action of all of the companies affiliated. If one of the affiliated companies files a separate return, even though the others join in a consolidated return, the tax liability of all must be determined upon a separate basis. Duke Power Co. v. Commissioner, 44 Fed. (2d) 543; certiorari denied, 282 U. S. 903; Dr. Pepper Bottling Co. v. Commissioner, 69 Fed. (2d) 768; Pictorial Review Co. v. Helvering, 68 Fed. (2d) 766; Safety Electric Products Co. v. Helvering, 70 Fed. (2d) 439; Export Leaf Tobacco Co. v. Commissioner, supra.

It is not disputed that petitioners were affiliated during all of the years here involved and that for the years 1924, 1925, and 1926 some of them filed consolidated and others separate returns. It necessarily follows, that for those years, the action of respondent, in computing the tax liabilities of all the companies upon the basis of separate returns, was correct.

For the calendar years 1927 and 1928 the affiliated companies filed consolidated returns and the question, as to those years, is the correctness of respondent’s action in refusing to accept returns on this basis. Section 240 (a) of tlie Revenue Act of 1926 granted affiliated corporations a new right of election as to the basis of the return for that year, but provides, as did the preceding revenue acts, that, if the return was made upon either a consolidated or separate basis, subsequent returns should be upon the same basis unless permission to change the basis be granted by the Commissioner. By article 632 of Regulations 69, the Commissioner has prescribed the rules under which a change of basis may be granted.

In the present case it is shown that for 1927 and 1928 the corporations filed consolidated returns, whereas for 1926 the returns filed had not been upon a proper consolidated basis and, therefore, must be considered to have been upon a separate basis. Export Leaf Tobacco Co. v. Commissioner, supra. It again follows that the return filed for 1927 was upon a different basis from that of the 1926 return and that petitioners were not entitled to file upon the consolidated basis without permission of the Commissioner to make the change.

The record does not disclose permission, but shows refusal on the part of the Commissioner. In fact, it is indicated that permission to make a change was not asked until 1931, three years subsequent to the filing of the consolidated return for 1927. Under these conditions we find no error in the action of the Commissioner in refusing to accept the consolidated return and in computing the tax liabilities of the petitioners upon the basis of separate returns. Such action by him is not an arbitrary, capricious and unreasonable exercise of the discretion, reposed in him by the act, to grant or deny a change of basis for the filing of the returns. Momsen-Dunnegan-Ryan Co. v. Helvering, 68 Fed. (2d) 754.

Not only is this true, but the requests were not made until after the date for the filing of the returns, at which time petitioners’ right to file upon a consolidated or separate basis became fixed by the conditions then existing. If those conditions then lacked the statutory prerequisite for a legal consolidated return, the deficiency could not be supplied by a later request for permission to file such form of return, as the Commissioner was then without authority to change the fixed obligation to file a separate return, by approving the belated request. Export Leaf Tobacco Co. v. Commissioner, supra; George Freese’s Sons, 18 B. T. A. 416; Grant v. Rose, 24 Fed. (2d) 115; Deposit Trust & Savings Bank, Executor, 11 B. T. A. 706. Cf. Alameda Investment Co. v. McLaughlin, 38 Fed. (2d) 120.

Petitioners contend that there was no necessity on their part to request and be granted permission to file a consolidated return for 1921, as they had elected to and did file consolidated returns for 1926, or, at most, had not in that year elected to file upon either a consolidated or separate basis. But, the fact that five of the then affiliated groups filed separate returns for that year, legally characterized the returns of all the group as being upon that basis. (See authorities cited supra.)

It is argued that for that year, petitioners’ intention was to file upon a consolidated basis and the fact that 11 of the affiliated companies were not included in the so-called consolidated return filed for the bank, the American Co. and the Indianapolis Joint Stock Land Bank, was due to mistake or inadvertence.

To this it is answered that petitioners have failed to sustain their burden in establishing any effective mistake of fact or inadvertence. Assuming such was legally possible, the only mistake disclosed here is not of the fact of affiliation, but ignorance of its legal consequences. That ignorance, of course, does not avoid those consequences. Radiant Glass Co. v. Burnet, 54 Fed. (2d) 718, affirming 16 B. T. A. 610; George Freese's Sons, supra.

The fact of affiliation admittedly existed, definitely and unclouded, during 1926, as well as the other years in dispute. Cf. Dexter Sulphite Pulp & Paper Co., 23 B. T. A. 227; Flambeau Public Service Co., 27 B. T. A. 299. Thus the law granted petitioners permission to file their returns on either basis for 1926. It is not the intent of the petitioners in filing their returns for 1926 which controls us here, but what returns were actually filed by them for that year. The record shows that they did not, in fact, file a consolidated return for 1926. As we have heretofore held, their actual returns for that year must all be considered as separate returns. Their right to file a consolidated return for 1927 is determined by the statute which precludes, in such case, the filing of a consolidated return unless permission is granted by the Commissioner. Export Leaf Tobacco Co. v. Commissioner, supra. As this Board said in that case: “It must be remembered we are considering here the question of the existence of a statutory conditional right. Cf. Huntington Beach, Inc., supra, and petitioners, to enjoy its advantages, must bring themselves clearly 'within the specified conditions precedent to its grant. Rock Island, A. & L. R. R. Co. v. United States, 254 U. S. 141.”

The petitioners here, to support their right to file a consolidated return for 1921, must show either the filing of a proper consolidated return for 1926 or permission granted by respondent to make the change to a consolidated basis. Neither one of these conditions is shown. The same reasoning and the same result apply to the return for 1928. We hold that petitioners were not entitled to file a consolidated return for 1927 and in such case section 142 (a) of the Eevenue Act of 1928 requires the return for the latter year to be on the 1927 basis in the absence of permission granted to make the change.

Judgment will Toe entered under Bule 60.

       Sue. 240. (a) Corporations which are affiliated within the meaning of this section may, for any taxable year, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return is made on either of such bases, all returns thereafter made shall be upon the same basis unless permission to change the basis is granted by the Commissioner.

      Amr. 632. Consolidates, returns. — Affiliated corporations as defined in section 240 (d), irrespective of the basis upon which returns were filed prior to 1926 under section 240 (a) of the Revenue Acts of 1924 and 1926, may for 1926 elect to make separate returns or file a consolidated return in which will be reported the consolidated net income of the affiliated group. If return is made upon either of these bases, all subsequent returns must be made upon the same basis except as permission to change may be granted by the Commissioner. In applying for permission to change from one basis to the other there should be submitted a statement in the form of an affidavit executed by a person or persons qualified to sign the returns (see section 239) setting forth completely the reasons for making the request.

       SEO. 142. CONSOLIDATED RETURNS OF CORPORATIONS — TAXABLE TEAR 1928.
      (a) Consolidated returns permitted. — Corporations which are affiliated within the meaning of this section may, for the taxable year 1928, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis of such return. If return for the taxable year 1927 was made upon either of such bases, return for the taxable year 1928 shall be upon the same basis unless permission to change the basis is granted by the Commissioner.


author: Matthews :

text:
    William S. Gordon, as Trustee under a Certain Trust Created in Favor of Florence S. Hyman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Elsie B. Paskus, as Executrix of the Estate of Martin Paskus, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. William S. Gordon, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 63561, 63562, 63568.
    Promulgated November 14, 1935.

      Arthur B. Hyman, Esq., for the petitioners.

      H. B. Linton, Esq., and G. B. SherHff, Esq., for the respondent.
   OPINION.

Matthews :

These three cases, which were consolidated lor hearing, came before us on determinations of deficiencies in income tax for the calendar year 1929 in the following amounts:

William S. Górdon, trustee for benefit of Florence S.
Hyman- $80.81
Elsie B. Paskus, executrix_1,415.21
William S. Gordon_ 282. 07

The question for determination is whether the petitioners realized taxable income and, if so, how much, on the distribution to them in 1929 of certain cash and stock by a syndicate in which they, with others, had been participants. The facts are few and, save for the ultimate fact of the fair market value of the stock distributed, are not in dispute.

On March 1, 1928, the three petitioners together subscribed $25,-000, or $8,333. 33 each, to a syndicate organized by Carl H. Pforz-heimer & Co. as managers, to trade in the stock of the Consolidated Coppermines Corporation. The syndicate agreement provided that:

Tbe Syndicate shall terminate on March 1, 1929, or earlier, in the discretion of the Managers, but it may be extended by the Managers for two additional periods of three months each and may likewise be terminated, in the discretion of the Managers, before the termination date of either of such extended periods. Promptly after such termination the Managers shall make final distribution of the Syndicate assets, whether in cash or in stock and cash, to the participants of the Syndicate. Partial distributions may be made proportionately at any time in the discretion of the Managers.

The managers were to have the “sole direction of the syndicate, with full power to buy or sell stock of said company at such time and at such prices as they may deem best ” and were to receive 10 percent of the net profits as commissions. “All agreements and obligations of the Managers ” were to “ bind and be enforceable against the property and assets of the Syndicate and none thereof shall be binding upon any participant beyond his subscription to the Syndicate.” Each participant was to pay on demand. His subscription could be made in cash, or, to the extent of 50 percent, in stock of the Consolidated Coppermines Corporation at a valuation of $6.50 a share. Each participant was to share in profits or losses in proportion to his participation:

The obligations of each participant hereunder shall be several and not joint; nothing herein shall make any participant a partner with any other participant or with the Managers nor shall make any participant liable to contribute more than the amount of his participation. The death of any participant shall not dissolve the Syndicate or terminate the rights or powers of the Syndicate Managers with respect to any interest of any participant tlien living or dead, nor shall it entitle any participant then surviving or the representative of any participant then deceased to demand any dissolution, distribution or accounting or to withdraw any interest hereunder.

The syndicate managers were authorized to negotiate loans for the syndicate, pledge its assets, employ agents “ and to transact the business of the Syndicate in such manner and form as they shall deem best.” The agreement was to become effective when an aggregate of $750,000 had been subscribed. The syndicate agreement was “ private and confidential ” between managers and participants. Petitioners paid their subscription in cash.

The capital stock of the Consolidated Coppermines Corporation was in 1929 about 1,422,000 shares at a par value of $5. On August 31, 1929, the syndicate terminated by force of the agreement, and the syndicate managers proceeded to distribute to the participants, including the petitioners, the cash and the 77,000 shares which they then held. Each of the three petitioners received from the syndicate managers 856% shares of stock of the Consolidated Coppermines Corporation and $2,711.11 in cash.

The fair market value of the Consolidated Coppermines Corporation stock, which was traded in during 1929 on the New York Curb Exchange, was at the time of the syndicate’s distribution to petitioners $10 a share.

Petitioner Gordon, as trustee for Florence S. Hyman, in his return reported a gain of $2,941.11, computed on a value of $10 a share for the Consolidated Coppermines Corporation stock received. He reached this result by taking the total amount of cash received on the distribution, $2,711.11, adding the 856% shares of stock at the above value, $8,563.33, and deducting the amount of the trust’s cash participation in the syndicate, $8,133.33. Gordon, as an individual, and Paskus, reported the transaction, but no gain or loss.

Respondent contends that when a private syndicate liquidates and distributes to its participants all its assets, stock and cash, the gain or loss to the participant must be determined by talcing the cash received by such participant plus the stock at a value equal to its cost to the syndicate, less the amount of cash contributed by the participant. On this theory, he computed a cost of $15,261 a share and determined a profit to- each of the three petitioners of $7,446.28, with the resulting deficiencies.

Petitioners, on the other hand, contend that this was not a closed transaction resulting in profit or loss on the termination of the syndicate, but was merely the purchase by petitioners of so many shares of stock at a determined cost, the gain or loss on which must await a subsequent sale. Alternatively, petitioners contend that if the distribution by the syndicate to its participants of cash and stock results in the realization of income, measured by the cash so received plus the fair market value of the stock at the time of distribution, less the cash invested, then the fair market value was at that time less than $10 a share. Petitioners seek to maintain their contention as to market value by showing the decline of Consolidated Coppermines Corporation stock after the stock market crash of October 1929, which followed about two months after the syndicate’s distribution, and to infer from that fact a highly inflated market value, not representative of the true value of the stock in August 1929.

The first question is obviously whether the syndicate’s distribution was a closed transaction resulting in the realization of income, and this is determined by the nature of the syndicate formed under the agreement. The petitioners contend that they and the other contributors to the syndicate were joint adventurers who bought certain Consolidated Coppermines Corporation stock through a syndicate, it is true, but who were individual owners of the stock from the moment of the syndicate’s purchase; and consequently, that no income would be realized by the petitioners until they should sell their stock.

0With this construction we can not agree. Two cases decided in the Second Circuit, in which the instant case arises, dispose of this contention. In Wild v. Commissioner, 62 Fed. (2d) 777, the court considered a taxpayer who had made contributions to a syndicate organized under an agreement very similar to that here. There, as here, the syndicate manager was to have complete control of the buying, selling, and managing of the stocks and bonds, and was to end the venture and liquidate the syndicate at its pleasure, when all capital and profits should be distributed, although partial distributions might be made earlier. The precise question there raised was whether the individual contributor to the syndicate was taxable on profits earned but not distributed to him. The answer depended upon whether the syndicate was a partnership, or such a joint venture as interposed no fiduciary to insulate the beneficial owners from taxation. If the latter, whether it was an association or a trust was immaterial. The court decided that such a syndicate, considered in the light of the common law and the law merchant, the New York decisions being taken as evidence of the general law, was not an “ ordinary partnership ” within the meaning of the revenue acts. Copland v. Commissioner, 41 Fed. (2d) 501. The court considered also the possibility that the syndicate, although not a partnership, might have made its members coowners of property managed by a common agent, but rejected it, L. Hand, J., saying:

* * * That can hardly be its full measure. The manager was at least entitled to take title in his own name and was to have absolute control. There was no provision for the substitution of another by the members’ choice; they were to be passive beneficiaries only. * * *

In Glenmore Securities Corporation v. Commissioner, 62 Fed. (2d) 780; certiorari denied, 289 U. S. 754, tlie same court had before it the question whether all or any part of a sum equal to the taxpayer’s original contribution to a syndicate was taxable to the contributor when it was distributed by the syndicate. The taxpayer contended that it was not, but constituted merely a return of its capital under the syndicate agreement by which capital was to be repaid first. The Commissioner treated the total profits of the syndicate as if it had been a partnership and allocated to each member, including the taxpayer, three quarters of his proper proportion of the profits (the last quarter being deducted as manager’s commissions) as income for the year. The court held that the syndicate was not a partnership, but an entity distinct from its members, and sustained the Commissioner on the ground that whether the syndicate was a trust or association, where a distribution had been made to a contributor without impairing the syndicate’s capital, the burden of showing that the distribution was a return of capital and not income fell on the taxpayer, and it had failed to meet it. The Glenmore case is relevant here only in that it treated the transaction between syndicate and contributor as closed, with a resulting profit. The instant case raises no question of the return of the base before the calculation of profits, such as that in Burnet v. Logan, 283 U. S. 404, upon which petitioner relies, or the Glenmore case, for there was here confessedly a distribution of all assets held by the syndicate, which was then dissolved.

The test of whether a distribution of stock by the syndicate managers to the participants shall be treated as a closed transaction and thus the occasion of realization of income by the latter, depends, it is evident, upon whether participants and managers are one, and this determination in turn upon the measure of control which the former have relinquished to the latter. The syndicate agreement is the best evidence of the intent of all parties. Where the managers are no more than mere agents, the participants stand in the relation of partners or joint venturers, at all times able to deal as they please with their own property. A distribution by managers to subscribers in such circumstances passes nothing to the latter, therefore, which they did not have before. J. Henry Dick Estate, 20 B. T. A. 637. But where the measure of control given the managers is unfettered, so that their investment, sale, reinvestment and general disposal of the subscribers’ stock or cash temporarily entrusted to them is beyond the power of the subscribers to forbid or to regulate, the managers in the person of the syndicate assume a corporate will and entity independent of the contributors. As we have said, it is immaterial whether we call such an entity an association or a trust, it has a reality of its own apart from its contributors. It is evident that while the profits are still in the hands of the managers they are still subject to the risk of loss in future dealings and are not beyond jeopardy until they are distributed to the syndicate members. Duffin v. Lucas, 55 Fed. (2d) 786. The members, by transferring to the managers dominion over their contributions, embarked on an enter-' prise the profits of which would ultimately be theirs, but only when distributed to them. The distribution, whether intermediate or final, marks a point of rest in the transaction. Their realization of gain is then actual, but until then it is only contingent. When the distributed gain is cash no one can doubt that it is then taxable to the member. By the same token, profits distributed in the form of stock become then, and then only, taxable to the member. He thereby acquires something which he did not have while the syndicate was still in operation.

When we look at the syndicate agreement here the conclusion is unavoidable that all substantial powers over the cash and stock contributed had passed to the managers. They had sole direction of the syndicate, they might pledge its assets, all their contracts were binding on the participants, and, to put beyond cavil any question of the contributors’ interest in or control over their contributions until the ultimate distribution by the managers on termination of the syndicate, it was expressly provided that “ nothing herein shall make any participant a partner with any other participant or with the managers.” And in order that the ordinary incident of partnership, liability beyond one’s contribution and for the amount of all partnership obligations, might not arise, it was provided that no participant should be liable for more than his contribution, that his liability was several, not joint. In such circumstances we think that the distribution by the syndicate managers to the contributors was a closed transaction and petitioners were taxable on any profit above their original contributions.

We come now to the question of how petitioner’s gain is to be calculated. Respondent contends for the difference between the petitioners’ original contributions and the cash plus the stock distributed, taken at its cost to the syndicate. Petitioners contend that if the transaction was closed the true measure of gain is the difference between their contributions and the cash plus stock distributed, at its then fair market value. Respondent’s contention rests, apparently, on the theory that true market value of the stock can not be lower than the price which the syndicate paid for it. We know of no such presumption, and if we have fairly stated respondent’s argument we can not accept his view, but think that petitioners’ proposed basis of computation is correct.

The only question left is the amount of petitioner’s gain, the measure of it being, as we have said, the difference between their contributions and the cash plus stock, at fair market value, received on the syndicate’s liquidation. We have found that the fair market value of the stock of the Consolidated Coppermines Corporation on August 31, 1929, was $10 a share. It was then freely traded in on the New York Curb Exchange at this price and, for that matter, at “ low ” never fell below 8% for the next month and maintained an average of well over 9y2. Petitioners urge upon us that the syndicate’s operations had inflated the market for this particular stock, that inflation on the eve of the stock market crash in October was general, that 17,000 shares of this stock sold at once would depress the market. These reasons are factitious. The long accepted test of value for tax purposes is what a willing buyer will give a willing seller. It is a practical test. Under all the circumstances of this case, the stock exchange quotations show this amount. We need not go beyond them and indulge in speculation upon the effect of incalculable factors, unforeseeable at the time. Caroline W. Edwards et al., Executors, 31 B. T. A. 879. We think for practical purposes market quotations fairly reflect fair market value.

Reviewed by the Board.

Judgment will be entered wider Bule 50.

Teammell, Arundell, Murdock, and Mellott dissent.


author: Smith:

text:
    Oliver W. Birckhead, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 72389.
    Promulgated November 14, 1935.

      Allen G. Gartner, Esq., for the petitioner.

      O. W. SwecTeer, Esq., for the respondent.
   OPINION.

Smith:

This is a proceeding for the redetermination of a deficiency in income tax for 1930 of $2,422.25. The petition alleges that the respondent erred in his determination of the deficiency in the disallowance of a deduction from gross income of a loss of $15,861.40 on an investment in a pool organized in 1929 for the purpose of dealing in the common shares of the American Seating Co.

During 1926 the petitioner became the president of the Murray Hill Trust Co. of New York, in which capacity he met Frederic L. Yeagel, who was also a director of the trust company and a partner of Sutro & Co., stockbrokers.

Under date of September 30, 1929, Yeagel wrote to the petitioner inviting him to participate in a syndicate stock pool being organized and managed by him for the purpose of trading in the stock of the American Seating Co. Attached to the letter was a syndicate agreement which reads as follows:

I have been requested to form, and am forming, an account of which I am to be the Manager, and in which I may participate as a member, to trade in the Common stock of American Seating Co.
The Syndicate will trade in the shares of said stock and no other security. The commitment of the Syndicate shall not at any one time exceed 50,000 shares, either short or long, of said stock; and all transactions for the account of the Syndicate shall be in accordance with and subject to the rules and regulations of the New York Stock Exchange. Subject only to the limitations aforesaid, the Manager in a trading account, on books duly kept entitled “American Seating Co. Stock Account”, shall have full power and authority hereby granted in his uncontrolled judgment and discretion, during the life and for the account of the Syndicate, to buy and sell and generally trade in the shares of the .Common Stock above mentioned, either long or short, and at either public or private sale, and to deal in puts and calls thereon.
I am reserving for you a participation of 2,000 shares in the Syndicate, subject to delivery to me of your acceptance in the form indicated below, not later than noon on October 5, 1929.
The profits and losses of the Syndicate shall be divided among and borne by the participants in the proportion which their respective participations bear to 50,000. The participants shall be deemed to participate in each transaction in proportion to their several interests in the Syndicate. Any loss resulting from the failure of any participant to carry out his obligations hereunder shall not be charged as a loss to the Syndicate, hut in respect of any such loss incurred or threatened, resulting from such failure, the Manager shall have full power and authority hereby granted to take such action, by sale or otherwise and with or without notice, as in his uncontrolled discretion is necessary, to protect the Manager against loss.
The Syndicate will expire at the close of business on December 1, 1929 unless sooner terminated by the Manager, and may be extended at the discretion of the Manager for two additional periods of three months each, or any part thereof.
The Manager may from time to time and upon two days’ notice, call, and the participants shall thereupon pay in cash, such amounts on account of the Syndicate liability whether for purchase price, margin or otherwise, as the Manager may deem proper, provided the Manager shall not require the participants to maintain a margin in excess of 35% of the entire Syndicate liability.
Interest and commissions shall be paid to the Manager and charged to the Syndicate, as in any trading account, under the rules of the New York Stock Exchange, and the Manager may be interested in the Syndicate as a participant subject to the same liability as any other participant and the same rights of profit or otherwise; and in addition thereto, as additional compensation for services as Manager of the account, shall be entitled to receive 10% of the Syndicate profits, if any, at the termination of the Syndicate. All expenses incidental to the operation of the Syndicate, including legal expenses, advertising, printing, postage, and all clearance charges, floor charges, and commissions, payable by the Manager to other brokers, or for transactions conducted by the house of the Manager, shall be a charge upon and paid by the Syndicate.
The Manager shall have full discretionary power and authority hereby granted to borrow money for the Syndicate, for any of the purposes covered by this agreement, and to pledge as security therefor any of the Syndicate assets in their general loans maintained by the house of the Manager without regard to the Syndicate indebtedness of the participants to the Manager; and also to pledge as security therefor this Agreement and the several obligations of the participants hereunder.
The Manager may in his sole discretion release any participant for any cause, and substitute another satisfactory to the Manager, providing the said substitute assumes the obligations of the released participant. In case of any default on the part of any participant, his interest in the Syndicate, or any shares which he may be required to take up, may be sold at public or private sale, with or without notice, and the Manager or any participant or participants may be the purchaser or purchasers, notwithstanding which every such defaulting participant shall be responsible to the extent of his full liability hereunder. The Manager may in his sole discretion make any such adjustment with any participant as the Manager deems proper. No participant shall in any manner be relieved of his obligations hereunder, by default of any other participant, nor shall his obligations be in any manner increased thereby.
Any participant, with the consent of the Manager, may take up and carry his ratable share of the Syndicate stock, and upon payment therefor shall be relieved of any further liability on the Syndicate account; provided such participant shall agree with the Manager that the stock so taken up shall not be sold during the life of the Syndicate, without consent of the Manager in. writing first obtained and that the same shall be held during the life of the Syndicate, subject to the call of the Manager; and upon such withdrawal, the limit of commitment in the trading account shall be correspondingly reduced and the proportionate interest of the remaining participants shall be ratably increased.
Upon the termination of the Syndicate, the Manager shall account to the participants upon the assets remaining in the Syndicate account, distributing to the participants against payment, their respective proportions of any shares of stock then in the hands of the Manager for account of the Syndicate, together in their respective proportions of any cash on hand; and in the event of a loss, a statement of their respective proportions thereof, which the participants shall forthwith pay to the Manager. Apportionment and distribution by the Manager of profits and losses and expenses shall be conclusive upon the Syndicate and upon the participants, as shall also be the written statements of the Manager of the result of the Syndicate operations. The Manager shall not be liable under any of the provisions of this agreement or for any other matter connected herewith, or for the exercise of his judgment and discretion in the management of the Syndicate except for want of good faith.
Nothing herein contained shall constitute the participants partners with the Manager or with one another, or render them liable for more than their proportionate shares, respectively, of the entire Syndicate liability.
Nothing contained in this agreement shall be construed as creating any trust or obligation in favor of any person or corporation other than the parties hereto, nor any obligations in their favor otherwise than as herein expressly provided.
The agreement shall extend to and bind the successors and personal representatives of the respective parties. This agreement is entered into and is to be performed in the State of New York, and shall be construed in accordance with the laws of said State.
Any notice from the Manager to any participant shall be deemed to have been duly given if mailed or telegraphed to such participant at the address furnished to the Manager by such participant.
Please confirm your acceptance of your participation under the terms) stated above, by signing upon the enclosed duplicate hereof the form of acceptance set forth below, returning the same to the Manager.

The petitioner accepted the invitation and put up $10,000 upon an allotment of 2,000 shares. A month or so later, when the stock declined in value, the petitioner was asked to pay and did pay $6,000 more to the syndicate, making his total cash commitment in the syndicate $16,000.

During the latter part of 1929 and 1930 the market value of the stock continued to decline and the petitioner being, mindful and concerned over his inevitable loss in the investment, requested Yeagel, the syndicate manager, “ to take me out of the position that I could not in any way live up to.”

The syndicate agreement expired by limitation on June 1, 1930, whereupon Yeagel, without petitioner’s knowledge or consent, charged the petitioner, in an account on the books of Sutro & Co. entitled “American Seating Co. stock account No. 2 ”, with 2,000 shares of syndicate stock, comprising the petitioner’s investment in the syndicate. A transcript of such account shows the petitioner charged with $18,000 on account of his participation in the pool, and credited with 2,000 shares American Seating Co. stock. Until about 1934, the petitioner received monthly statements from Sutro & Co. showing that he was still charged with this debt of $48,000, but no demand has ever been made upon him for the payment of the debt.

At the time the syndicate was dissolved, the market price of American Seating Co. common stock was $10 per share. Subsequently the stock sold down to 50 cents per share, and at the time of this hearing in 1934 the market price was approximately $3 per share.

On his income tax return for 1930 petitioner claimed the deduction of a loss of $16,000 representing his contribution to the syndicate. Upon the audit of the return by the respondent the petitioner was allowed the deduction of $138.60 of this amount. The balance of $15,861.40 was disallowed. In his deficiency notice upon which this proceeding is predicated the respondent advised the petitioner:

*' * * ijr^g stock wag purchased by the syndicate at about $32.00 per share, making a total of $64,000.00 for which you were obligated. Having put up $16,000.00 as collateral, there remained a balance due by you of $48,000.00. The pool was not successful and early in 1930 the pool manager called upon the participants to take up their stock and pay the balance due thereon. The 2,000 shares contracted for by you were transferred to your trading account on the books of the broker and are still held on your account as “ long ” 2,000 shares of American Seating Company stock. As the account with the broker was still open in 1930 and you were still the owner of the stock there was no completed transaction in 1930. * * *

Section 23 of the Revenue Act of 1928 provides that in computing net income there shall be allowed as deductions:

(e) Losses iy mddviduals.- — In the ease of an individual losses sustained during the taxable year and not compensated for by insurance or otherwise — ■
(1) if incurred in any transaction entered into for profit though not connected with the trade or business; * * *

As we understand the respondent’s position, it is that the loss claimed by the petitioner is not evidenced by a closed and completed transaction. ISTo contention is made by the respondent that the investment of $16,000 was not incurred in a transaction entered into for profit within the meaning of the statute, and in the light of the evidence we think that no such contention could be made. The respondent cites in support of his contention article 171 of Regulations 74, which provides that “ Losses must usually be evidenced by closed and completed transactions.”

We note that the syndicate agreement evidenced a clear intent on the part of the participants to vest in the syndicate manager independent powers or control of the assets of the syndicate and in the management of the syndicate’s affairs. During the continuance of the syndicate, profits or losses sustained upon purchases and sales of stock by the syndicate were the profits and losses of the syndicate and not of the participants. Cf. J. D. Bigger, 19 B. T. A. 797 5 W. R. Hervey, 25 B. T. A. 1282. The syndicate was dissolved on or about June 1, 1930. Upon dissolution the petitioner was charged with owning 2,000 shares of American Seating Co. stock which had a then market value of $20,000 and with debts of $48,000. If the petitioner had received upon dissolution of the syndicate cash and property of a value in excess of his contribution to the pool he would have been taxable upon the profit. Wild v. Commissioner, 62 Fed. (2d) 777; Glenmore Securities Corporation v. Commissioner, 62 Fed. (2d) 780; certiorari denied, 289 U. S. 754; William S. Gordon, Trustee, 33 B. T. A. 460. If the amount that he received from the dissolution of the pool had a value less than his contribution to the pool he would be entitled to deduct a loss. If the petitioner had been able to respond to the request of the syndicate manager and had paid the additional amount of $48,000 he would have received upon the dissolution of the pool on June 1, 1930, for his investment of $64,000 in the pool, shares of stock having a value of only $20,000. We think it can not be questioned that his loss, in such case would have been the difference between $64,000 and $20,000, or $44,000.-

But the evidence indicates that the petitioner was not able to respond to the request of the syndicate manager for an additional contribution of $48,000. His actual contribution to the pool was $16,000. The year of deductibility of a loss is determinable by a practical test. Lucas v. American Code Co., 280 U. S. 445; Francis S. Appleby, 31 B. T. A. 533. Applying such test to the facts which obtain in the instant proceeding, we have no question but that the petitioner sustained a deductible loss in the year 1930 of $16,000.

Reviewed by the Board.

Judgment will be entered under Rule 50.


author: Muedock : Black,

text:
    American Gas & Electric Company and Subsidiary Companies, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 67368, 67369, 69800.
    Promulgated November 15, 1935.

      J. Marvin Haynes, Esq., for the petitioner.

      Chester A. Gwinn, Esq., for the respondent.
   OPINION.

Muedock :

The Commissioner determined deficiencies in income tax of the petitioner as follows:

The parties have filed an “Agreed Statement of Facts ”, wherein they have settled a number of the issues originally raised and have stated the facts relating to the two questions upon which they ask a decision by the Board.

The one question has been decided against the Commissioner in a number of cases. He concedes that the facts here bring this case within those prior decisions. The question is whether a corporation which retires an outstanding issue of bonds at a callable amount above par in accordance with the trust agreement, is to be denied a deduction for the unexhausted discount and expense on the old bond issue and for the difference between par and the callable price because it borrowed new money to retire those bonds and promptly repaid the amount just borrowed from the proceeds of the sale of a new bond issue. The deduction is proper. East Ninth, Euclid Co., 26 B. T. A. 32; 27 B. T. A. 1289; National Tile Co., 30 B. T. A. 32; San Joaquin Light & Power Corporation v. McLaughlin, 65 Fed. (2d) 677; Commissioner v. Columbia Steel Corporation, 67 Fed. (2d) 989; Helvering v. California-Oregon Power Co., 75 Fed. (2d) 644; Helvering v. Union Public Service Co., 75 Fed. (2d) 723; Helvering v. Central States Electric Corporation, 76 Fed. (2d) 1011. The present case is distinguishable from Commissioner v. Great Western Power Co. of California, 79 Fed. (2d) 94, because here the old bonds were not retired by an exchange for the new bonds.

The other question is whether a corporation which acquires all of the assets and assumes the liabilities of another, including the liability on outstanding bonds, in exchange for its capital stock may amortize over the remaining life of the bonds the un amortized discount and expense incidental to the original issuance of the bonds under the circumstances here present.

The petitioner is the parent of an affiliated group of corporations, which included in 1928, 1929, and 1930 the Appalachian Electric Power Co. The books of the corporations in the group were kept on an accrual basis and the returns were filed on that same basis.

The Virginian Power Co. (hereinafter called Virginian) was organized in 1912 under the laws of Massachusetts. It was engaged, until 1925, in the manufacture and sale of electricity. It was not affiliated with the petitioner, although the latter owned a large part of its stock. It had sold certain bonds at a discount. The discount and expense of issuing the bonds were shown on its books as prepaid interest. Each year a part of this item was charged to expense.

The petitioner organized the Appalachian Securities Corporation (hereinafter called Securities) in 1924 under the laws of New York. Securities issued 82,000 shares of its first preferred stock to Virginian in January 1925 in exchange for all of the assets of the latter and it also assumed all of the liabilities of Virginian. The first preferred stock of Securities had voting rights. The stock issued to Virginian was the only stock outstanding after that transfer. Virginian continued its corporate existence and later exchanged its stock in Securities for stock in the petitioner.

The Appalachian Power & Light Co. (hereinafter called Power & Light) was organized on February 14, 1925, under the laws of Virginia. It then transferred all of its stock to Securities in exchange for the assets and liabilities which Securities had just acquired from Virginian. The American Gas & Electric Co. and Securities were consolidated on February 17, 1925, to form the petitioner.

The Appalachian Electric Power Co. was organized on March 4, 1926, under the laws of Virginia and on April 1, 1926, Power & Light and the Appalachian Power Co. (a Virginia corporation organized in 1911) were merged with it. The petitioner owned 95 percent or more of the stock of each at the date of the merger.

The balances of discount and expense on the Virginian bonds after each transfer were placed upon the books of the transferee as prepaid interest. The interest on the bonds was paid by the Appalachian Electric Power Co. after it assumed the liability on the Virginian bonds. It also amortized the balance of discount and expense in the same way as Virginian had done and claimed deductions therefor. The Commissioner disallowed the deductions.

Virginian was entitled to an annual deduction representing amortization of the original expense of issuing its bonds and of the discount at which its bonds were issued. Helvering v. Union Pacific Railroad Co., 293 U. S. 282. But the question here is whether the right to such annual deductions persisted without interruption in the various other corporate taxpayers which, in turn, assumed payment of the Virginian bonds. The last taxpayer in the chain was the Appalachian Electric Power Co. and it has no right to the deductions unless each of its predecessors in liability on the bonds had a similar right. The Board has held that deductions for un-amortized bond discount and expenses are personal to the corporation issuing the bonds and do not persist in a successor which assumes liability on the bonds. Western Maryland Railway Co., 12 B. T. A. 889, 903, et seq; Missowri Pacific Railroad Co., 22 B. T. A. 267, 287; Southern Railway Co., 27 B. T. A. 673, 688; Michigan Central Railroad Co., 28 B. T. A. 437, 450. The Board has applied this rule in all cases, regardless of whether the liability had been assumed in connection with a sale or whether it had been assumed as a result of a consolidation, merger, or other reorganization from which no gain or loss would be recognized. The application of such a rule here would deny the deductions claimed.

The Board’s decisions in three cases on this subject have been appealed. The Circuit Court of Appeals for the Fourth Circuit reversed the Board in the Western Maryland Railway Co. case, supra. Western Maryland Railway Co. v. Commissioner, 33 Fed. (2d) 695. The Western Maryland Railway Co. issued the bonds in that case. The court there stated that The Western Maryland Railway Co. owned all of the stock of seven subsidiary corporations whose property it operated in all respects as its own. That company and its subsidiaries were consolidated to form the taxpayer in that case, Western Maryland Railway Co. The court recognized that the consolidated corporation was a distinct legal entity from those whose places it had taken, but held that the new corporation was entitled to the same deductions on account of unamortized discount that the old corporation would have been entitled to if the reorganization had not taken place, because, for all practical intents and purposes, the new corporation was a mere continuation of the old. Judge Northcott dissented on the ground that since the two corporations were separate legal entities, the new corporation acquired no right to charge off a proportionate part of the discount at which the bonds were originally sold. The present case is distinguishable from ' the Western Maryland Railway Co. case since here the corporation issuing the bonds was not one of the subsidiaries of a single operating system and never merged or consolidated with the corporation claiming the deduction. Cf. Brandon Corporation v. Commissioner, 71 Fed. (2d) 761. Virginian' did not merge with Securities, but continued as a separate corporation and taxpayer.

The Court of Appeals for the Second Circuit has recently reversed a decision of the Board on the discount question. New York Central Railroad Co. v. Commissioner, 79 Fed. (2d) 247. There the bond-issuing corporation was later consolidated with others to form the taxpayer corporation. That case is likewise distinguishable from the present case on its facts, since here the bond-issuing corporation never consolidated with any other to form the corporation claiming the deduction. The court said in the New York Central case :

In. Western Maryland, Railway Co. v. Commissioner, 33 Fed. (2d) 695 (C. C. A. 4) it was held that a consolidated corporation steps into the place of the constituent corporations and is entitled to deduct amortized discount on bonds issued by them. We think this decision is sound and should be followed in the case at bar. * * * The assets of the consolidated corporation Rave the same co&tbasis as they had when held by the old companies and are subject to the lien of the bond issues. * * * As already stated the subject of amortization is the difference between the cash realized on the bonds and their par value. This difference the consolidated corporation will pay when the bonds mature, and this expenditure it should be allowed to anticipate by yearly amortization during the life of the bonds in order more clearly to reflect its income.

Cases denying deductions for losses sustained by a predecessor in prior years were distinguished in the opinion in the New York Centred case. The court said that the difference between the cash realized on the bonds and their par value is not sustained as a loss by the issuing corporation at the time of the issuance of the bonds. The difference between the issuing price and the amount later paid to retire the bonds, the court said, was a loss sustained at the time of the retirement by the corporation retiring the bonds. It held that a corporation succeeding to another by a consolidation and assuming payment of the other’s bonds, was entitled to deductions for amortization to absorb the loss, which it would have to pay when it retired the bonds, to the extent that this loss had not been recovered previously. It pointed out that the consolidation was a reorganization and that the successor had to take the same bases on its property which the predecessor had had. The reasoning of the court might apply with equal force to all reorganizations where the old bases carried over. However, the facts in that case showed that there had been a true, consolidation. The court did not mention the decision of the Court of Appeals for the District of Columbia in the case of Turner-Farber-Love Co. v. Commissioner, 68 Fed. (2d) 416, affirming an unpublished decision of the Board.

The facts in the present case are in all essentials like the facts in Turner-Farber-Love Co. The taxpayer, in the latter case, exchanged its stock for the assets and liabilities of three companies. One of the three companies had issued its bonds at a discount and the Turner-Farber-Love Co. assumed the payment of those bonds as a part of the liabilities of that company. The appellate court, like the Board, held that the corporation which assumed payment of the bonds was not entitled to deductions representing unamortized discount. Cf. New York C. & St. L. R. R. Co. v. Burnet, 64 Fed. (2d) 152. The court said:

There was obviously no merger or consolidation of the two companies, but an outright sale of the assets of the one to the other. The vendor, until dissolved, continued to be a corporation. The sale of its assets did not destroy its identity, and it might have continued legally thereafter to do any business its corporate charter authorized. It might have filed a tax return and claimed a loss on the sale of its bonds or on the sale of its other assets. Granted it had the right to amortize its bond discount, petitioner, in purchasing its assets, did not succeed to this right any more than it would have succeeded to the right to set up its losses occurring prior to the purchase. Athol Mfg. Co. v. Commissioner, (C. C. A.) 54 Fed. (2d.) 230.
What we have just said is true because the tax laws treat separate corporations as separate taxpayers. Here petitioner is a distinct and separate corporation from the Darnell Company.

The court could find no justification in the statute for allowing the Turner-Farber-Love Co. deductions to which the Darnell Co. would have been entitled.

The Turner-Farber-Love Co. case was cited by the Supreme Court with apparent approval in New Colonial Ice Co. v. Helvering, 292 U. S. 435, whereas the case of the Fourth Circuit, Industrial Cotton Mills v. Commissioner, 61 Fed. (2d) 291 (which, the Circuit Court said, was governed by its decision in the Western Maryland Railway case) was disapproved by the Supreme Court.

The petitioner argues that the prior Board decisions are not in point because they arose under acts which contained no “ reorganization ” and “ non-recognition ” provisions. However, the cases can not be distinguished on that basis, since the acts which were applicable to the exchanges in those cases did contain some such provisions. It is no doubt true, however, that Virginian could not have claimed a loss for 1925 on the unamortized discount on its bonds or on the exchange of its other assets. The gain or loss from the exchange which took place in 1925 would not have been recognized under section 203 (b) of the Revenue Act of 1926. The assets transferred would have the same bases in the hands of Securities as they had had in the hands of Virginian.

The Board has never been reversed in disallowing deductions to a successor corporation on account of expenses of the predecessor in issuing its bonds. The theory of the Second Circuit Court decision would not apply to such expenses since the successor does not pay them. The Appalachian Electric Power Co. is not entitled to deduct amortized expenses and discount on the bonds issued by Virginian. Expenses and discount on other bonds are also involved in this case. The facts relating to those bonds, although somewhat different from those outlined above, are nevertheless similar in all essential details, and the decision of the Board is the same in regard to all such deductions claimed in this case.

Reviewed by the Board.

Decision will be entered under Rude 50.

Black,

dissenting: I dissent on the second point. This point is stated in the majority opinion as follows:

The other question is whether a corporation which acquires all of the assets and assumes the liabilities of another, including the liability on outstanding bonds, in exchange for its capital stock ¡may amortize over the remaining life of the bonds the unamortized discount and expense incidental to the original issuance of the bonds under the circumstances here present.

The majority opinion gives a negative answer to that question and disallows the amortization deduction claimed.

I agree that where one corporation purchases outright the assets of another and as a part of the purchase price assumes and agrees to pay prior issued bonds of the selling corporation, the purchasing corporation is not entitled to set up on its books the remaining unamor-tized discount and expenses incurred in the original issuance of the bonds and take an annual deduction of unamortized discount spread ratably over the remaining life of the bonds. The reason for this is because a transaction whereby assets are sold by one corporation to another is one in which gain or loss is recognized and the selling corporation is then and there entitled to take a deduction of its remaining unamortized discount and expenses connected with the previous issuance of its bonds.

That seems to be the main ground upon which the court based its decision in Turner-Farber-Love Co. v. Commissioner, 68 Fed. (2d) 416, and New York C. & St. L. R. R. Co. v. Burnet, 64 Fed. (2d) 152, both cases cited by the majority opinion in support of the conclusion therein reached. The court emphasized this point in the Turner-Farber-Love case, wherein it said:

There was obviously no merger or consolidation of the two companies, but an outright sale of the assets of the one to the other. The vendor, until dissolved, continued to be a corporation. The sale of its assets did not destroy its identity, and it might have continued legally thereafter to do any business its corporate charter authorized. It might have filed a tax return and claimed a loss on the sale of its bonds or on the sale of its other assets. Granted it had the right to amortize its bond discount, petitioner, in purchasing its assets, did not succeed to this right any more than it would have succeeded to the right to set up its losses occurring prior to the purchase. Athol Mfg. Co. v. Commissioner, (C. C. A.) 54 Fed. (2d) 230.

So, where there has been a sale of the assets of one corporation to another and the purchasing corporation assumes the bonded indebtedness of the debtor corporation as a part of the consideration for the assets purchased, I agree that the purchasing corporation has no right to avail itself as a deduction from its own gross income, of the unamortized discount of the selling corporation. If the facts in the instant case showed an outright sale of assets of one corporation to the other, I would agree to the result reached in the majority opinion. But I think the situation is altogether different where there is a nontaxable exchange under the reorganization provisions of the applicable revenue acts. In that sort of a situation no gain or loss is recognized in the transaction and the corporation to which the assets are transferred takes the same basis of cost for depreciation and gain or loss on the subsequent disposal of the assets as the transferor corporation had.

In a very real sense the transferee corporation steps into the shoes of the transferor corporation. Speaking on this point, the court in New York Central Railroad Co. v. Commissioner (a case involving facts somewhat akin to those we have here), 79 Fed. (2d) 247, said:

In Western Maryland Ry. Co. v. Commissioner, 33 F. (2d) 695, (C. C. A. 4) supra, it was held that a consolidated corporation steps into the place of the constituent corporations and is entitled to deduct amortized discount on bonds issued by them. We think this decision is sound and should be followed in the case at bar. The consolidated corporation does not succeed to the rights and liabilities of the constituent companies as a purchaser but as a successor by operation of law. See Cortland Specialty Co. v. Commissioner, 60 F. (2d) 937, 939 [11 Am. Fed. Tax Rep. 857) (C. C. A. 2); Commissioner v. Oswego Falls Corp., 71 F. (2d) 673, 676 [14 Am. Fed. Tax Rep. 311] (C. C. A. 2). The assets of the consolidated corporation have the same cost basis as they had when held by the old companies and are subject to the lien of the bond issues. Hence the consolidated corporation will suffer a loss when it pays the bonds at par, and the regulations as to spreading this loss over the life of the bonds should apply. They do not in terms confine discount deductions to the issuing corporation, and should not be construed to do so. If the new corporation cannot take the deduction, no one can, for the old companies sustained no loss when the consolidation was effected. As already stated the subject of amortization is the difference between the cash realized on the bonds and their par value. This difference the consolidated corporation will pay when the bonds mature, and this expenditure it should be allowed to anticipate by early amortization during the life of the bonds in order more clearly to reflect its income.

Therefore, under the facts stated in the majority opinion and the law applicable thereto, I think petitioner is entitled to prevail on the second issue as well as the first.

Smith, Trammell, Arundell, and Van Fossan agree with this dissent.

       The court in its opinion in Brandon Corporation made the following statement in regard to its earlier case:
      “ Had there been here a merger in which an existing corporation continued its existence, the other corporation or corporations, being subsidiaries of the main corporation and being merged into it, such as was the case in Western Maryland Railway Co. v. Commissioner, supra, a different question might be presented.”