author: Leech:

text:
    Hattie Wolff, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 37783.
    Promulgated July 1, 1932.

      Jacob H. Gilbert, Esq., for the petitioner.

      William E. Davis, Esq., for the respondent.
   OPINION.

Leech:

Petitioner seeks to deduct from income for the taxable year as “ a debt ascertained to be worthless,” $50,000 advanced “ by way of loan ” to her son and nephew, as copartners in the firm of A. L. Wolff and Company. Section 214 (a) (7), Revenue Act of 1924.

The rebuttable presumption is that this transaction constituted a gift or advance not to be accounted for. Storey v. Storey, 214 Fed. 973.

The evidence here does not rebut, but rather strengthens that presumption. The old partnership, bearing the name of petitioner’s deceased husband, which he created and conducted successfully, was threatened with failure and the resulting stigma on the name. The partners needed $100,000 cash to liquidate and satisfy the creditors. Petitioner furnished $50,000 of the stated amount to “promptly, advantageously and expeditiously ” liquidate the firm and preserve the heritage of financial' integrity her husband left upon his death, epitomized in the name of his firm. Cf. Max Baumann et al., Executors, 8 B. T. A. 107. That the taxpayer treated the transaction more as a gift than as a loan is further indicated strongly by the fact that in the contract providing for the “ advance by way of loan ” to the copartners, her son and nephew, she specifically released both copartners from personal liability, provided the covenants of the contract were kept; that is to say, if the firm were liquidated promptly, expeditiously and advantageously, which meant, under the circumstances, without financial failure and the resulting family financial dishonor she sought to prevent. George W. Griffiths, 25 B.T. A. 1292.

Petitioner was given a note signed by the copartners for the sum advanced, as provided by the written agreement, but this fact does not affect the legal deductibility for tax purposes of the amount involved. In C. B. Hayes, 17 B. T. A. 86, where a taxpayer sought to charge off as worthless an alleged debt of his son-in-law, evidenced by a note, the Board said:

* * * But a gift may not be claimed as a deduction for tax purposes by the device of taking a note for the amount of the gift. And this we deem so, even though the note may be legally enforcible, if there is no intent to enforce the note or reason to believe when taken that it can not be collected.

Also see George W. Griffiths, supra.

However, we are of opinion that the record under no possible reasonable construction establishes a legally deductible debt existing at any time. At most, we find only the obligation to pay upon the happening of one or more contingencies, namely, the liquidation of the partnership with a surplus of assets sufficient to pay all other creditors and petitioner, a successful prosecution of the doubtful British claim with resulting funds sufficient to pay all creditors and petitioner, and/or failure on the part of the copartners to “ promptly, advantageously and expeditiously ” liquidate the partnership. As we held in J. S. Cullinan, 19 B. T. A. 930, “ The debts which the statute permits to be charged oh when ascertained to be worthless are debts where there is an obligation of the debtor to pay and a right of the creditor to receive and enforce payment.” The sine qua non of a debt is the obligation to pay. Preston C. West, 12 B. T. A. 725. And this means not a contingent obligation, but at ail events. In re Philadelphia Co., 18 Pa. Dist. 805, 85 Pa. Co. 442; Guaranty Trust Co. v. Galveston City R. Co., 107 Fed. 311; Poland v. Clark, 143 Cal. 176, 76 Pac. 958; Dwvn v. Neustadt, 129 N. Y. S. 161; Beecher v. Detroit, 110 Mich. 456, 68 N. W. 237; Saleno v. Neosho, 127 Mo. 627, 30 S. W. 190; Bovee v. Boyle, 25 Col. App. 165, 136 Pac. 467; Trask v. Livingston County, 210 Mo. 582, 109 S. W. 656; National Bank of Commerce v. Rockefeller, 174 Fed. 22; Commercial National Bank v. Taylor, 19 N. Y. S. 533.

The legal status of the transaction in controversy and its consequences for tax purposes was fixed by the contract in evidence, the terms of which were fulfilled according to the evidence presented. It was provided therein that no sum of money was payable to the taxpayer at all events, but only upon the happening of one or more contingencies. The contract created not a debt, but a liability, which could become a debt only upon the occurrence of a specified contingency. The evidence as to the failure of all these contingencies established not the worthlessness of a debt, but its nonexistence'., which necessarily precludes the asserted deduction. Luke & Fleming, Inc., 1 B. T. A. 12; Federal Fuel Co. 3 B. T. A. 814; J. S. Gullinan, supra.

Judgment viill he entered for the respondent.


source: Caselaw Access Project

author: Brack:

license: Public Domain

text:
    Ridgewood Cemetery Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43843.
    Promulgated July 5, 1932.

      Rób&t't N. Holt, Esq.) and Herbert R. George, Esq., for the petitioner.

      Arthur Ocvrnduff, Esq., for the respondent.
   OPINION.

Brack:

In this proceeding the petitioner seeks a redeterniination of its income-tax liability for the years 1925 and 1926, for which years the respondent has 'determined deficiencies in the amount of $8,491.36 and $234.97, respectively. The year 1924 was also included in the petition, but at the hearing both parties agreed that, since the deficiency notice and statement thereto attached show that respondent- determined an overassessment for 1924, the Board has no jurisdiction for 1924. Accordingly, the proceeding, in so far as it relates to 1924, is hereby dismissed.

Some of the adjustments made by respondent in petitioner’s income for the taxable years are not contested and so much of the deficiency as is based thereon is not in controversy.

Petitioner’s onty assignment of error is that the Commissioner erred in reducing' the cost of certain property acquired by the petitioner in April, 1920, from a cost price of $150,000 to $50,000. Respondent and petitioner agree as to the basis of cost of one of the tracts of land owned by petitioner, and as to the other tract respondent in the deficiency notice determined a cost of $50,000, but now concedes that the basis of cost of this tract should be $52,500 (cost to transferor). Respondent, in the statement attached to the deficiency notice, states: “ Your contention that the cost of sales should not be decreased each of the years under consideration, is denied. This office holds that the basis for determining the cost of the land -sold, is the same as the cost in the hands of the predecessor owner. See Article 1597, Regulations 69.”

It is true that the lands from which petitioner plotted its cemetery lots were acquired in 1920, when the Revenue- Act of 1918 was in effect, and the profits, if any, involved in this proceeding are from the sale of cemetery lots which took place in 1925 and 1926. Hence the basis of cost of these cemetery lots is determined under the provisions of the Revenue Act of 1926, which governs both taxable years.

Tlie respondent having determined that petitioner acquired the lots in a “ reorganization ” as defined by the Act of 1926, and that the basis of cost of the land to the petitioner is the same as it was in the hands of the transferor, the burden of proof is on petitioner to show that it did not acquire the land in a “ reorganization ” as defined by the 1926 Act, and that, hence, its basis of cost is actual cost to it, without reference to what the transferor originally paid for the land.

The petitioner is a corporation, organized under the laws of the State of Illinois on May 10, 1920, for the purpose of acquiring land and operating a cemetery in the immediate vicinity of Chicago, Cook County, Illinois. Its orginial authorized capital stock was $200,000 or 20,000 shares of a par value of $10 each. Of this amount, $2,000 was subscribed for in cash and $100,000 in property, being the real estate involved in this proceeding.

The petition filed by petitioner contains the following allegation:

The petitioner on April 20, 1920, purchased from the Ohas. F. Heinig Co. 98 acres of land costing them some years previously $52,500. The sale price was $150,000 and the Ohas. F. Heinig Co. accepted as payment two mortgages amounting to $50,000 and 10,000 shares of stock of a par value of $10 each of the Ridgewood Cemetery Company in payment thereof.

This allegation was never qualified, modified or abandoned by petitioner. The facts show that in May, 1920, one L. M. Bangham offered to sell to the petitioner a certain tract of land containing 98 acres subject to two mortgages aggregating $50,000 and on condition that the petitioner would issue to Bangham $100,000 of its capital stock, being 10,000 shares of a par value of $10 each. This offer was accepted. The land was conveyed to the petitioner by one George Brinkman, who appears to have held title to the land, and 10,000 shares of stock of the petitioner were issued to L. M. Bang-ham, May 20, 1920. The petitioner, on the same day that it acquired the land, employed the Chas. F. Heinig Company as fiscal agent to sell the balance of its stock on the basis of a 20 per cent commission, the selling to begin as soon as the petitioner had qualified under the rules of the Securities Department of the State of Illinois.

In a protest filed by the Chas. F. Heinig Company with the Commissioner of Internal Revenue, January 18, 1926, which was offered in evidence by petitioner and referred to by petitioner in its pleadings, the Chas. F. Heinig Company speaks of the above transaction by which petitioner acquired the lands for the cemetery lots, as follows:

The" Company, on April 20, 1920, transferred to the Ridgewood Cemetery Company, property costing $52,500 in return for 10,000 shares of stock valued at $5.00 per share and first and second mortgages amounting to $50,000 and the following entries were made on the books of the company at that time:
Dr.: $52,500.
Gr.:
1st Mortgage_$20, 000
2nd Mortgage- 30,000
Ridgewood Cemetery stock_ 50, 000
Total_ 100, 000

It is the petitioner’s contention that the cost of the 98-acre tract of land here under consideration is to be determined under section 202(b) of the Revenue Act of 1918, which provides in part as follows:

Seo. 202. (b) When property is exchanged for other property, the property received in exchange shall for the purpose of determining gain or loss be treated as the equivalent of cash to the amount of the fair market value, if any * * *.

The petitioner contends that the cost of the land to it was $50,000 in mortgages assumed and 10,000 shares of stock of a par value of $10 per share and having a fair market value same as par, making total cost of the land $150,000. The respondent takes the position that the transaction falls within the provisions of section 204(a) (7) of the Revenue Act of 1926, which provides as follows:

Sec. 204. (a) The basis for determining the gain or loss from the sale or other disposition of property acquired after February 28, 1913, shall be the cost of such property, except that * * *
* * * * * • •
(7) If the property (other than stock or securities in a corporation a party to the reorganization) was acquired after December 31, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 80 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made.

Section 203 (h) of the Revenue Act of 1926 provides:

Sec. 203. (h) As used in this section and section 201 and 204—
(1) The term “reorganization” means * * * (b) a transfer by a corporation of all or part of its assets to another corporation, if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets were transferred * * *
(2) The term “a party to a reorganization” includes a corporation resulting from a reorganization * * *.

The respondent claims that the Chas. F. Heinig Company owned the land in question, although it was held in the name of Brinkman, and that it organized the petitioner and transferred the land to the petitioner for part of its capital stock issued upon incorporation, and was immediately in control of petitioner because of its ownership of much more than 80 per cent of its then issued and outstanding capital stock. We think respondent’s contention on this issue must bo sustained.

The Chas. F. Heinig Company was organized under the laws of the State of Illinois on February 21, 1920, a date preceding the organization of petitioner, to act as financial, commercial or general agent for corporations, firms or individuals. It was not authorized under the terms of its charter to hold or own real estate. As we interpret the evidence in this proceeding, including the protest of the Chas. F. Heinig Company filed with the Commissioner of Internal Revenue in a proceeding involving its own tax liability, which protest was offered in evidence by petitioner without objection from respondent, Chas. F. Heinig acquired the land some time before it was transferred to petitioner (just how long is not shown) for Chas. F. Heinig Company and paid therefor $52,500. The Chas. F. Heinig Company lacked authority to hold real estate; therefore, title to the land was in the name of Brinkman and when Brinkman conveyed the land to petitioner and it issued 10,000 shares of stock therefor to L. M. Bangham, Bangham held the stock as the nominee of the Chas. F. Heinig Company and the stock was owned by that company. If these facts are not true, then the .facts stated in the protest by the Chas. F. Heinig Company offered in evidence by petitioner were not true and the burden was on petitioner to show what the true facts were.

On the facts we hold the petitioner was “ a corporation resulting from a reorganization ” within the meaning of section 203 (h) (2) of the Revenue Act of 1926. The Heinig Company was “ in control of the corporation to which the assets are transferred,” according to the terms of section 203(h) (1) of the Revenue Act of 1926, as it had received over 98 per cent of the outstanding stock.

Accordingly, we are of the opinion that the transaction falls within the provisions of section 204(a) (7) of the Revenue Act of 1926, and that the basis for determining gain or loss from sales i of lots is the same as it would be in the hands of the transferor, that is, $52,500. This basis of cost will neither be increased nor diminished by any profit or loss recognized under the 1918 Act as to the transfer in 1920 by the Chas. F. Heinig Company of the land in question to petitioner. The evidence shows that the Commissioner treated this transaction as one involving neither gain nor loss.

Decision will be entered under Rule 50.


author: Goodeich:

text:
    Gorton Roth, Petitioner, v. Commissioner of Internal Revenue, Respondent. Elijah Stockham, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 22568, 22569.
    Promulgated July 5, 1932.

      A. G. EUioh, Esq., Wayne Johnson, Esq., B. S. Doyle, Esq., and John Enrietto, Esq., for the petitioner.

      M. J. O^Gonnor, Esq., for the respondent.
   OPINION.

Goodeich:

Petitioners plead the bar of the statute of limitations, urging that the returns filed by the company required under the revenue acts in force during that part of the year 1917 in which the company was in existence, and reflecting its business done in that period, were sufficient to start the running of the statute and that, consequently, collection of the liability now asserted became barred on July 25, 1922, under the provisions of section 250 (d) of the Revenue Act of 1921, and the liability itself was extinguished by section 1106 (a) of the Revenue Act of 1926. This contention has been decided heretofore adversely to them in cases which so clearly and so squarely raise this precise issue that discussion is unnecessary. Brady v. Anderson, 240 Fed. 665; United States v. McHatton, 266 Fed. 602; United States v. Boss & Peake, 285 Fed. 410; Beam v. Hamilton, 289 Fed. 9; United States v. Updike, 1 Fed. (2d) 550; aff'd., 8 Fed. (2d) 913; United States v. Updike, 25 Fed. (2d) 746; aff'd., 32 Fed. (2d) 1; aff'd., 281 U. S. 489.

Section 602 of the Revenue Act of 1928 lays upon respondent the full burden of proof with respect to the liability of a petitioner as a transferee of property of a taxpayer. From the facts it is obvious that petitioner Roth is not a transferee of property of the company, for he was not a stockholder therein and received no assets or distributions whatsoever therefrom. Consequently, he is in nowise liable for the deficiency now asserted against the company. It is conceded that petitioner Stockham is a transferee of the company, but respondent has failed to show us the nature and value of the property he received upon its liquidation. The rule that the burden of proof upon respondent includes showing the value of the property received by a transferee and, consequently, the extent of his liability, needs no citation. The only evidence on this matter submitted to us is disclosed by the joint return filed by Stockham and his wife for the year 1917, reporting a loss in the amount of $3,125 sustained from the sale of elevators to Updike Grain Company. The sale price is reported as $15,375, the original cost as $18,500, and an explanation is given as follows:

These elevators purchased of Updike Gr. Co. by E. Stockham Gr. Co. July 1, 1915. After liquidation and dissolution of E. S. Gr. Co. Inc. Sept. 17th E. Stockham having taken these over at list price sold to Updike Gr. Co.

This is not enough to prove the value of property received by Stockham as transferee. He assumed the then existing liabilities of the company. The elevators may have been encumbered with debt; his wife may have been interested in this sale because of her ownership of 100 shares of stock in the company; he may have discharged liabilities of the company in excess of the value of property received — we do not know, for there is no evidence as to these matters sufficient to disclose the value of the assets transferred. Therefore, respondent has failed to show affirmatively the extent of Stockham’s liability in equity as a transferee.

But it is urged that, by assuming the liabilities of the Grain Company, Stockham, upon his contract, is liable at law for the tax asserted against the company, regardless of the value of the property received by him as transferee of the corporation. With that we do not agree. On September -IT, 1917, Stockham by contract assumed all the liabilities of the company “ existing as of this date.” While the income of the company upon which the present tax was levied had then been earned, it was not until October 3, 1917, that the revenue act under which this deficiency is asserted was enacted. Can it be said that the tax liability upon the income earned prior to September 17, 1917, as determined under an act passed subsequent thereto was a liability existing- on that date, and, as such, was assumed by Stockham under his contract? We think not. We must assume that, in making his offer to take over the then existing liabilities of the company, Stockham had in mind certain definite and present liabilities and that in accepting his offer the company accepted it as thus limited. At that time there was no present liability under the Act of October 3, 1917, for that act did not then exist. Neither Stockham nor the company had knowledge that Congress would subsequently pass the act increasing the taxes imposed upon the company’s income already earned, nor were they required to speculate as to what Congress might do in the future. We think it clear that the subsequent act did not have the effect of creating, as a present,'existing liability on September 17,1917, a liability which on that date was, in fact, nonexistent. Cf. Untermeyer v. Anderson, 276 U. S. 440; Blodgett v. Holden, 175 U. S. 142; Metropolitan Securities Corporation, 19 B. T. A. 299. Stockham might have included in his contract the assumption of liabilities arising as a result of future Congressional enactment, but, as is apparent from the plain terms of his offer, he did not do so. Since no liability for the tax here in question was specifically assumed by the contract, it can not be construed as one made for the benefit of the United States as to the assumption of tax liability which did not exist at that time. Cf. Samuel Keller, 21 B. T. A. 84; aff'd., 59 Fed. (2d) 499. Consequently, petitioner is not liable at law for the present claim under his agreement to assume the existing liabilities of the company.

In this view of the case it is unnecessary to consider the remaining issue and there will be entered in each proceeding,

Judgment of no transferee liability.


text:
    Yukon Alaska Trust, by William Loeb, Jr., Charles Earl, Roger W. Straus and William E. Bennett, Trustees, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 34161.
    Promulgated July 8, 1932.

      Hugh Satterlee., Esq., Albert S. Lisenby, Esq., and I. Herman Sher, Esq., for the petitioner.

      Bruce A. Low,- Esq., and F. L. Van Haaften, Esq., for the respondent.
   OPINION.

Goodeich:

In view of the provisions of section 704 (a), Revenue Act of 1928, petitioner is not taxable as an association for the years 1920 and 1921 if it filed its returns for those years as a trust and if, at the time the returns were filed, it was considered to be taxable as a trust under the regulations or under a ruling of the Commissioner or an officer of the Bureau of Internal Revenue, applicable to those years, interpretative of any provision of the revenue acts under which the returns were filed, and then in force.

This petitioner did file its returns for the years before us as a trust on the usual forms furnished for the use of fiduciaries, for we regard as controlling the original returns voluntarily filed, not the amended returns later submitted in response to respondent’s demand. At the time the original returns were filed the effective rulings of the Bureau (the regulations being silent except as to a trust holding real estate, which petitioner did not) laid the rule that the taxability of a trust as an association depends upon the extent of the powers of the holders of the beneficial interests to regulate the management of the affairs of the trust — that, where the beneficiaries had parted with the control of the operation and properties of the trust and the conduct and actions of the trustees, the trust was taxable as such, and not as an association. E. A. Landreth Co., 15 B. T. A. 655; Wilkins & Lange, 15 B. T. A. 1183; Woodrow Lee Trust, 17 B. T. A. 109; Van Cleve Trust, 18 B. T. A. 486; Commercial Trust Co., 18 B. T. A. 1248; Twin Bell Oil Syndicate, 26 B. T. A. 165.

Under the terms of the deed of trust the trustees here were vested with “ the exclusive control and management ” of the trust. The beneficiaries had parted with power to control the trust or the actions of the trustees, their rights being limited to the receipt of distributions, the replacement of trustees in event of the failure of the remaining trustees to fill vacancies, and the power, upon the vote of three-fourths of the interests, to terminate the trust. It is clear, therefore, that under the rulings in force at the time the returns for 1920 and 1921 were filed, petitioner was not taxable as an association and, having filed its returns for those years as a trust, this case falls squarely under the provisions of section 704 (a) of the 1928 Act. Respondent erred in denying petitioner classification as a fiduciary and in classifying it as an association.

But respondent urges that, even though petitioner be held to be a trust, its income, whether distributed or not, is taxable under the provisions of section 219 (a) (4) of the Revenue Act' of 1918, and subdivision (e) of the same section of the Revenue Act of 1921, for the reason that the trust instrument did not require a periodic distribution, this matter being left to the discretion of the trustees, who in the exercise of that discretion made no distribution for several years, including a part of the year 1920 and the entire year 1921.

Because of our desire to bring the case to a conclusion, we will consider this alternative affirmative issue advanced by respondent, passing over certain objections (which are not without merit) made by petitioner respecting the allegations in the amended answer by which respondent seeks to raise this issue.

The provision of the deed of trust relating to distributions by the trustees we have set out in full in our findings of fact, but we repeat here that part which respondent urges serves as a basis for his contention because ambiguous :

* * * the Trustees shall from time to time, and at least once in every year, distribute and pay such portion of the net income or proceeds of the property and securities held by them as such Trustees, as they may deem proper to he so distributed, and paid * * *. [Italics ours.]

The italicized phrase, respondent argues, leaves within the dis cretion of the trustees the question of whether any distribution whatever should be made, and thus nullifies the prior requirement that a distribution shall be made at least once in each year. Petitioner, pointing out that the deed of trust contains no specific instruction concerning the accumulation of income by the trustees, explains that the italicized phrase refers not to distributions of income except so far as the amount thereof is concerned so long as some distribution is made at least once each year, but to distributions of the proceeds of the property and securities, an interpretation which is supported by a contemporaneous construction of the parties as evidenced by the following sentence contained in the circular letter sent to the stockholders of the Guggenheim Exploration Company under date of February 4, 1916:

The Trustees are to make distributions at least annually among the holders of certificates of beneficial interest of the net income realized from the trust fund and, in their discretion, of the whole or any part of the proceeds of any of the property or securities constituting the trust fund which may be sold, collected or received by them, irrespective of the fact that such proceeds may constitute a part of the principal of the trust funds.

However, there is yet a stronger reason for rejecting respondent’s construction of this instruction to the trustees, which would permit, if not direct, them to accumulate the income of the trust. This trust was created for the lives of the two persons named in the instrument and all of its property was personal property. Under the laws of the State of New York the accumulation of income of personal property upon trust for any period of time and for future distribution is unlawful, except for the benefit of a minor, and certain other particular purposes authorized by statute and not here material. Sec. 16, Personal Property Law of the State of New York; Kalich v. Kalich, 166 N. Y. 368; Hascall v. King, 162 N. Y. 134. It follows that, since the income of this trust could not lawfully be permitted to be held for future distribution, either we must hold the trust to be one in which the income was to be distributed periodically or we must hold it to be invalid to the extent that it provided for the accumulation of income. Cf. Margaret B. Sparrow et al., Trustees, 18 B. T. A. 1; Albert J. Appell, 10 B. T. A. 1225; Estate of Henry Mayer, 16 B. T. A. 1164.

We are unwilling to declare the trust invalid, for we recognize that where the provisions of the trust agreement are capable of two constructions, that should be adopted which renders the trust legal and valid. Equitable Trust Co. v. Miller, 197 App. Div. (N. Y.) 391. It is true that the trustees suspended distributions, but from the evidence before us it is apparent that they discontinued not because they were authorized to accumulate the income, but because, on a basis of actual receipts, they had no funds from which distributions could be made. We hold, therefore, that this trust was one in which the income was to be distributed periodically and, under the provisions of section 219(a) (4) of the Revenue Act of 1918 and subdivision (d) of the same section of the Revenue Act of 1921 its income, whether distributed or not, was taxable to its beneficiaries.

Judgment will be entered for petitioner.


author: Morris: TRAmmeil, Love,

text:
    Mrs. Frank Andrews, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46734.
    Promulgated July 13, 1932.

      Walter E. Barton, Esq., and J. L. Block, G. P. A., for the petitioner.

      Philip M. Cldrló, Esq., for the respondent.
   OPINION.

Morris:

The first two numbered issues herein really involve but one question, i. e., whether the petitioner is entitled to have her earned-income credit computed upon the maximum amount, $20,000, or the minimum amount, $5,000, of earned income, provided for in section 209 of the Eevenue Act of 1926. The solution of this question depends upon whether one-half of her husband’s earned income” to which she became entitled under the community property laws of the State of Texas is “ earned income ” to her within the meaning of that section of the Act.

With due deference to the United States Circuit Court of Appeals, Fifth Circuit, which in McLarry v. Commissioner, 30 Fed. (2d) 789, reversed the decision of the Board in Ethel Hopkins McLarry, 8 B. T. A. 1257, upon the identical question involved in this proceeding, and after further consideration, we are of the opinion, for the reasons hereinafter set forth, some of which may not have been considered by that court, that the Board’s decision in the McLarry case and its later decision in Laura Rumsey McMicken, 10 B. T. A. 302, correctly construe the taxing statute.

The Board in its opinion in the McLarry case said, speaking of the interest of a wife in the earnings of her husband in a community property jurisdiction, “ Does it arise because the earnings are deemed by the law to be the product of their joint efforts or does it arise because of the marital status?,” and it reached the conclusion, after a review and study of the decisions of the state courts of Texas, “ that the interest of either spouse in the earnings of the other arises as a matter of law from the marital relationship,” and not from “the existence of any joint effort.” Although employing such considerations in support of the ultimate conclusion which it reached, the Board indicated that it entertained serious doubt that the question was dependent upon the decisions of the state courts. It said, however, “ for the purposes of this opinion we have assumed that counsel for petitioner are correct in their contention that the decisions of the state court would be accepted as binding in determining whether or not the amount in question came to the wife as earnings from her services.”

It is of interest to note that the circuit court in McLarry v. Commissioner, supra, did not base its conclusion on the premise that under the Texas law community income arises from joint effort. We deem it advisable, however, to consider what, if any, effect such an interpretation by the Texas courts would have in the determination of the present question, although we have heretofore reached the conclusion, after a consideration of the decisions of the Texas courts, that the wife’s interest in community income results from the marital relationship. It is the province of the state law to determine and define the property rights of its citizens, DeVaughn v. Hutchinson, 165 U. S. 566, and the Federal courts and this Board are governed thereby and will follow the state court’s decisions pertaining thereto. See also Warburton v. White, 176 U. S. 484. In recognition of this principle the Congress recognized and the courts and this Board have repeatedly upheld the right of a wife in a community property jurisdiction, where there is a vested interest in community property as distinguished from a mere expectancy, to, and to be taxed upon, one-half, of the income of her husband. Poe v. Seaborn, 282 U. S. 101, affecting spouses in the state of Washington; Goodell v. Koch, 282 U. S. 118, affecting spouses in the State of Arizona; Hopkins v. Bacon, 282 U. S. 122, affecting spouses in the State of Texas; and United States v. Robbins, 269 U. S. 315, affecting spouses in the State of California. But when it comes to the matter of determining how and at what rates that income, so acquired by the wife, shall be taxed by the Federal Government, whether as ordinary income, taxable at ordinary rates, or as earned income, enjoying a lower rate of tax, the laws of the states and the decisions of their courts are not binding. The Congress has defined the term “ earned income ” and, consequently, to attempt to interpret that definition by reference to the decisions of the state courts would establish a precedent by which each state might define certain classes of income as earned, contrary to the intention of Congress, and were we to follow those decisions it would result in a clear nullification of the definition laid down by Congress. Therefore, we are of the opinion that the decisions of the state courts, although they held that the wife’s interest arises from joint effort, are not controlling in determining what constitutes “ earned income ” under the Federal revenue acts. See Burk-Waggoner Oil Association v. Hopkins, 269 U. S. 110. Theory must surrender to fact when the determination of the rate of the Federal tax is dependent upon a fact.

Section 209 (a) (1) of the Bevenue Act of 1926 provides:

The term “ earned income ” means wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for personal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. In the case of a taxpayer engaged in a trade or business in which both personal services and capital are material income producing factors, a reasonable allowance as compensation for the personal services actually rendered by the taxpayer, not in excess of 20 per centum' of his share of the net profits of such trade or business, shall be considered as earned income.

The Circuit Court, in reversing the MoLarry case, .used the following language:

* * * Certainly it is not plain, from the language of the statute, that for an amount received as compensation for persona! services actually rendered to be included in earned income such services must have been actually rendered by the taxpayer, who was entitled to that amount upon the receipt of it. As the amount returned by the petitioner as earned income was received as compensation for personal services actually rendered, it was within the language of the provision of the statute stating what “ earned income ” means, though such services were rendered by petitioner’s husband and not by herself.

The court concluded by saying that the meaning of the applicable .provision “ is not free from doubt ” and, therefore, it held that the income received by the wife by operation of the community property laws of the State of Texas was “ earned income ” to her, notwith-s( anding the income was earned by her husband and not by her.

We are mindful of the well established rule that in construing doubtful taxing statutes doubt must be resolved in favor of the taxpayer and against the Government (Gould v. Gould, 245 U. S. 151), but, when we attach due importance to the literal meaning of the words employed in the statute here, which is most important (United States v. Merriam, 263 U. S. 179), to the context and the purpose of the enactment of the provision, we think the basis for the application of the rule disappears.

We deduce from the circuit court’s decision in the MoLarry case that, had the Congress added in the first clause of the definition of “ earned income ” the words by the taxpayer,” thereby indicating a clearer intention to limit the section to the taxpayer who earned the income, its views would have coincided with those of the Board, but, because of the failure of Congress so to specify, it regarded the provision as doubtful, notwithstanding the language which immediately followed that clause expressly referring to the “ taxpayer ” in a manner clearly evidencing an intention to limit the income therein affected to that actually earned by such taxpayer. .

Even if the Congress had merely used the words “ earned income,” without definition, we would have been compelled to reach the same conclusion, in the absence of a clear intention on the part of the Congress to extend the privilege of the section to those receiving income “ earned ” by others. The dictionary definition of the word “ earned ” is to have merited or deserved “ as by labor or service.” To “ earn ” is “ to acquire by labor, service, or performance; to deserve and receive as compensation or wages.” Webster’s New International Dictionary. “ Earn means to gain as a just rate or recompense by service, labor, or exertion.” Dayton v. Ewart, 72 Pac. 420. We know of no authority which classifies income which the wife receives from the husband, either by virtue of his willingness to give, or by operation of law, as earnings. A statutory division of the husband’s earnings with his wife in a community property jurisdiction can not and does not operate to make them her earnings as that word is defined and as it is commonly understood. The absence of labor or the performance of services therefor on the part of the wife deprives such property of all semblance of earnings. If this were not so, then all the wife’s share of community income would be “ earned ” because of her household labors, irrespective of whether the source be stocks and bonds standing in the name of the husband, and acquired with his salary.

The Congress did not so limit its language, however, as just assumed, nor did it content itself with specifying that “personal services ” should be “ actually rendered ” therefor in order to classify the income as “ earned ” — it added such descriptive words as “ wages, salaries, and professional fees,” which are generally and commonly understood by all to mean something which one receives for the performance of services. It also added that those wages, salaries, and fees must have been “ received as compensation for personal services actually rendered,” which, in our opinion, clearly indicates that there was no intention on the part of the Congress to extend the section to others than those who actually performed the services for which the compensation was received. The existence of a property right in the income in one who did not in fact perform the services, no matter upon what theory it arises, does not come within that intention. If the wife “ received ” the income by operation of the state statute, and not “ as compensation for personal services actually rendered,” the taxing statute has not been complied with.

We are of the opinion that any doubt that might exist as to whether the Congress intended that the income, in order to qualify as “ earned,” must have been earned by the taxpayer, is immediately dispelled by a study of the legislative history of the section as contained in the committee reports leading up to its enactment. It is clear that the provisions of section 209 were designed to aid the wage earner, as distinguished from what might be termed the capitalistic class whose incomes are derived from investments or from other sources than wages and salaries or compensation in some form. On page twenty of the report of the Committee on Ways and Means respecting the Revenue Bill of 1924, it is stated that the result sought to be attained by section 209 “is to give the taxpayer a credit of 25 per cent of the amount of the tax attributable to Ms earned income.” The statute, therefore, in our opinion, was intended to cover “his earned income,” that iq, the taxpayer’s, and not the income earned by another.

Allegation of error numbered three herein pertains to the respondent’s finding that the petitioner received a taxable dividend of $1,000 from the Union National Bank in 1926, growing out of the organization of The Union National Company.

The petitioner contends that under the circumstances no part of the dividend became taxable to her in 1926. The respondent adopts a contrary view and he cites as authority for his position Lonsdale v. Commissioner, 32 Fed. (2d) 537; certiorari denied, 280 U. S. 575, affirming the opinion of the Board at 11 B. T. A. 659.

In that case the bank, as here, feeling that it should broaden its banking facilities, addressed a circular letter to its stockholders, as in this case, calling attention to the limitations of its powers as a national bank and informing them that the board of directors had formulated a plan for the creation of a new company whose charter would be broad enough to enable the company to supplement its banking facilities, the new company to be owned by the stockholders of the bank in proportion to their holdings in the bank itself. The plan there provided for the appointment of trustees and for such trustees holding the stock of the new company for the benefit of the subscribers, the beneficial interest in the stock of the new company to pass with the transfer of the stock in the bank, and, furthermore, that the directors of the bank “ will declare a 10 per cent cash dividend, amounting to $1,000,000, and the stockholders will be asked to subscribe for stock in the new company in an amount equal to this dividend and authorize the committee to apply the proceeds in payment of their stock in the new company.”

That case is concededly identical with the instant case except that here the plan called for the unanimous consent of the stockholders so to apply the dividend in advance of the dividend declaration, whereas, there, unanimous consent was not required in advance. The resolution of the board of directors stated “ that each stockholder so minded may, with said dividend, cause the payment in full of his interest ” in the new company. The petitioner there, being one of the assenting stockholders, contended that he was not entitled to cash under the dividend resolution and that he received no taxable income.

The petitioner contends that since the stockholders here had no other alternative than to have their dividends apply in the manner described, and since they could not have received any amount of the dividend optionally, as provided in the Lonsdale case, she was not taxable. With this we can not agree. We see no material distinction in principle between the two cases.

In both cases a dividend was declared upon the stock of the bank and in both cases the petitioners consented to the plan whereby their pro rata portion of the dividend should be applied to the purchase of capital stock of a distinctly different corporation. In deciding that the dividend was taxable to the stockholder in the Lonsdale case, the court said:

Appellant received a distinct individual gain by the declaring of the dividend in question. The fact that be did not receive the cash in hand, but permitted the cash dividend thus declared to be used in the purchase of stock in another and distinct corporation, did not alter the substantial effect of the transaction; nor is it important that he could not presently sell and dispose of his stock in the new company, without at the same time selling his stock in the bank. Whenever such a disposition shall be made, there will be an increment of gain corresponding to the value of the new corporation stock which was purchased with the dividend declared. This dividend was segregated from the capital assets of the bank, and, when declared, was the property of the stockholder, and not of the bank. * * * The fact that appellant reinvested it in the stock of the new corporation, organized to do a distinct business which the bank was not authorized to do, renders that dividend no less an item of income. It is the inherent nature of the dividend itself that controls.

In the course of its discussion the court observed that “Any stockholder might, if so minded, have received his portion of the dividend in money, and have refused acceptance of the plan.” In view of the broad principles laid down by the court, we are of the opinion that this language was obiter dictmn and that it was not intended as a decisive factor in the conclusion which it reached. We believe that the court would have reached the same conclusion had the plan of payment been the same as here.

We are of the opinion that the distribution in question was taxable and that the respondent was correct in so holding.

Reviewed by the Board.

Decision will be entered under Bule 50.

TRAmmeil,

dissenting: I dissent, on the authority of McLarry v. Commissioner, 30 Fed. (2d) 789.

ARTjNdell, dissenting: I dissent on the first issue, not because of any conviction of error in the majority opinion, but solely by reason of the decision in McLarry v. Commissioner, 30 Fed. (2d) 789, decided by the Circuit Court of Appeals for the Fifth Circuit, to which an appeal lies in this proceeding.

Love,

dissenting: I dissent from the prevailing opinion in this case on the first issue decided. My reasons for such dissent, stated as briefly as possible, are :

The wife’s title to her half of the earned income is exactly the same as her husband’s title is to his half. There is no law, rule or reason justifying the allowance of the maximum to the husband and denying the allowance to the wife.

Congress could have provided for only one such allowance or for a division between the husband and wife, as in the case of the deduction for the head of a family, but Congress did not do so, and it is not the province of any court or this Board to supply such legislation.


author: GoodRich :

text:
    Putnam Trust Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 34743.
    Promulgated July 19, 1932.

      George E. Elliott, Esq., and Ralph E. Bnish, Esq., for the petitioner.

      0. G. Holmes, Esq., for the respondent.
   OPINION.

GoodRich :

Petitioner claims the right to deduct from its income for the year 1923, under the provisions of section 234 (a) (4) of the Revenue Act of 1924, the sum of $26,386.73 as a loss sustained upon its investment in stock of the Greenwich National Bank, having paid for the stock $241,003.79, and having received in liquidation thereof only $214,617.06 in cash. It seeks to confine the transaction to a purchase of stock at a price certain and the subsequent liquidation thereof for an amount certain, and the issue to a determination of the deductibility of the resulting loss in cash. Respondent, however, views the transaction as, in substance, a merger of the two banks and regards the so-called loss as an expenditure made in acquiring capital assets — the depositors accounts and good will— or in eliminating a competitor, or in protecting petitioner’s own business. He seeks thus to enlarge the issue, and calls to our attention numerous decisions of this Board and of the courts holding that a deductible loss is not recognized in such transactions and that amounts expended for such purposes are not deductible from income.

It is conceded that a merger, as the term is defined in law, of petitioner and the Greenwich National Bank could not have been effected, since one was a state bank and the other a national bank, and that the two institutions were never 'affiliated. It is conceded also that the impelling motive for petitioner’s participation in this transaction was the desire to stabilize the banking business and the depend-eut financial situation in the community by liquidating, while it could be done without loss to its depositors, a bank which, while yet solvent, was not strong and was under serious threat of a liability which, if enforced, might so cripple the institution as to cause grave apprehension in business circles, resulting in dangerous embarrassment to the other banks in the city, including petitioner. It appears also that when the Greenwich National Bank was dissolved one of petitioner’s competitors had been eliminated, and petitioner had gained a large number of depositor’s accounts, the liability on which was covered by transfeiTed assets, good, if not quick, in an amount-equal to the accounts.

But, as we view it, this is not the usual case where capital assets are purchased from the owner for a consideration in excess of their value and the difference should be denied as a loss, Continental Trust Co., 7 B. T. A. 539; Washington State Bank, 20 B. T. A. 88; Union National Bank, 18 B. T. A. 468; Bank of Terrebonne and Savings Bank, 19 B. T. A. 1286; Dime Bank of Lansford, Pa., 20 B. T. A. 250; Peoples National Bank, 23 B. T. A. 815; nor where an expenditure made in eliminating a competitor should be denied as an operating expense, Newspaper Printing Co., 17 B. T. A. 452; aff'd., 56 Fed. (2d) 125; News Leader Co., 18 B. T. A. 1212; Dime Bank of Lansford, Pa., supra; nor where expenditures made in protecting one’s business or property should be added to capital account, William G. Park, Executor, 22 B. T. A. 1263; aff'd., 58 Fed. (2d) 965; B. Estes Vaughan, 17 B. T. A. 620; Seufert Bros. Co., 14 B. T. A. 1023.

Here, petitioner, first through a syndicate acting for it, Avent out on the open market and purchased capital stock of the Greenwich National Bank, not from the bank itself, but from various individual owners of that stock, thus making an investment. True, after it had gained a controlling stock interest it entered into a .contract with the Greenwich National Bank whereunder it assumed the liability for all the deposit accounts of that bank and took over assets, satisfactory to itself, of an equal amount. The transfer of such assets was expressed in the contract as the consideration for the assumption of the liability of the accounts, and petitioner paid nothing in the purchase of them. It purchased from the bank neither tangible nor intangible assets, nor a going business. Respondent does not allege (hat petitioner made a profit by the acquisition of the accounts, and the evidence before us is that at that time the accounts were of little value, if any, and that because of its condition the Greenwich National Bank had no good will of value. Therefore, in view of the express terms of the contract relative to the consideration for the transfer of the accounts and of the evidence before us respecting then value, we can not agree that petitioner paid anything by way of bonus for their acquisition, or derived taxable profit thereof.

With respect to the remaining grounds urged as a basis for disal-lowance of the claimed loss, it suffices to point out that petitioner passed no consideration to the Greenwich National Bank for its agreement to refrain from engaging in the banking business, and it made no expenditure for the purposes of eliminating a competitor, since that purpose was not the motive and object of its purchase of Ule stock. Nor can it be said that petitioner’s object was so directly to protect its own business or property as to make its investment an expenditure for that purpose. It was threatened with no direct liability or injury. It sought to avoid a possible crisis which might bring difficulty to itself as well as to the other bank, and the business concerns of the community, but such a purpose can not be enlarged to constitute an expenditure for the direct protection of one’s business or property such as should be added to capital investment.

We conclude that petitioner’s purchase of stock of the Greenwich National Bank should be treated as an investment and, since upon liquidation of the stock it received $26,386.73 less than the cost thereof, that amount should be deducted as a loss from its income for the year 1923. Cf. Riggs National Bank, 17 B. T. A. 615, aff'd., 57 Fed. (2d) 980.

Kevieived by the Board.

Judgment will be entered under Rule 50.


author: Matthews:

text:
    Trojan Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 33757.
    Promulgated July 19, 1932.

      John B. Milliken, Esq., Claude I. Parker, Esq., and George H. Koster, Esq., for the petitioner.

      J. L. Backstrom, Esq., for the respondent.
   OPINION.

Matthews:

The petitioner contends that the impounded funds received in 1921 were at no time income to it nor taxable to it as such, but were income to the receiver as fiduciary and should have been returned as such by him in the years of their receipt; that if they were income to petitioner they were accrued on August 18, 1920, when it released to the Government its right, title and interest in the lands and applied for a lease under the Oil Land Leasing Act of February 25, 1920; and that the impounded funds constituted a gift by the Government to petitioner under a remedial statute, and, as such, are nontaxable. If the first point should be decided against it, the petitioner contends that the relinquishment of its claim was a loss which is allowable as a deduction in 1921 and that it is entitled to special assessment for 1921 under sections 327 and 328 of the Revenue Act of 1921, on the ground that its net income for that year is abnormally high, owing to the realization in one year, by the receiver’s payment of the impounded funds, of income earned during a period of years.

• The receiver from whom the impounded funds were received was i n possession of only 60 acres of the 140 acres acquired by petitioner from the Pan-American Oil Company in 1914. The other 80 acres ■were a part of the lands included in the Taft Withdrawal Act of September 27, 1909. There is no evidence as to the disposition of petitioner’s claim to the 80 acres.

Since the hearing in this case, the Supreme Court, in North American Oil Consolidated v. Burnet, 286 U. S. 417, has passed on the first question involved in this proceeding. In that case, as here, the Government brought suit to oust the company from possession of certain oil lands embraced in the Taft Withdrawal Act of September 27,1909, and a receiver was appointed in 1916. Funds derived from the proceeds of oil were impounded by the receiver during that year. The District Court, in 1917, dismissed the suit of the Government and ordered the funds impounded by the receiver to be released to the claimant and they were so released in 1917. The petitioner contended there, as here, that the funds were taxable income to the receiver in the year 1916, when they were earned; that, if not returnable by the receiver, they should have been returned by the company for 1916, because they constituted income of the company accrued in that year; that, if not taxable as income of the company for 1916, they were taxable as income for 1922, since the litigation was not terminated in its favor until 1922. The court held:

First. The income earned in 1916 and impounded by the receiver in that year was not taxable to him, because he was the receiver of only a part of the properties operated by the company. * * *
Second. The net profits were not taxable to the company as income of 1916. For the company was not required in 1916 to report as income an amount which it might never receive. See Burnet v. Logan, 283 U. S. 404, 413. Compare Lucas v. American Code Co., 280 U. S. 445, 452; Burnet v. Sanford & Brooks Co., 282 U. S. 359, 363. There was no constructive receipt of the profits by the company in that year, because at no time during the-year was there a right in the company to demand that the receiver pay over the money. Throughout 1916 it was uncertain who would be declared entitled to the profits. It was not until 1917, when the District Court entered a final decree vacating the receivership and dismissing the bill, that the company became entitled to receive the money. Nor is it material, for the purposes of this case, whether the company’s return was filed on the cash receipts and disbursements basis, or on the accrual basis. In neither event was it taxable in 1916 on account of income which it had not yet received and which it might never receive.
Third. The net profits earned by the property in 1916 were not income of the year 1922 — the year in which the litigation with the Government was finally terminated. They became income of the company in 1917, when it first became entitled to them and when it actually received them. If a taxpayer receives earnings under a claim of right and without restriction as to its disposition, he has received income which he is required to return, even though it may still be claimed that he is hot entitled to retain the money, and even though he may still be adjudged liable to restore its equivalent. See Board v. Commissioner of Internal Revenue, 51 P. (2d) 73, 75, 76. Compare United States v. S. S. White Dental Manufacturing Co., 274 U. S. 398, 403. If in 1922 the Government had prevailed, and the company had been obliged to refund the profits received in 1917, it would have been entitled to a deduction from the profits of 1922, not from those of any earlier year. Compare Lucas v. American Code Co., supra.

Although in the instant case more than one year’s earnings were impounded and the litigation was decided in favor of the Government, we think the decision in the North American Consolidated case governs in this case. Since the receiver in the instant case did not hold all the petitioner’s property, the earnings impounded each year were not taxable to him.

The reasoning of the court as to the second and third points also applies with equal force here. The petitioner in the instant case claimed an interest which was very doubtful and was in litigation. A receiver was appointed by the District Court in 1915. That court made its decree final in 1919, adjudging that the Government’s title was sound and that petitioner’s title was invalid. Thereafter, petitioner appealed, but before judgment was given by the Circuit Court, petitioner entirely relinquished and abandoned all claim to right, title and interest in the land, and applied on August 18, 1920, for a lease under the Leasing Act of Congress of February 26, 1920. This application was finally accepted by the Government and a lease executed on January 6, 1921, effective as of August 18, 1920. A few days later, on January 1Y, 1921, the Circuit Court decreed the release to the petitioner of the impounded funds (less the Government’s royalty reserve under the lease) and the receiver of the District Court, in obedience to its mandate, released this sum and paid it over to the petitioner. It appears clear, therefore, that not until 1921, when the application for the lease was approved by the Government, and the Circuit Court entered its decree, did the petitioner have any right or title of any sort in these impounded proceeds of oil sales. Moreover, its right perfected in 1921 was not that which it had originally asserted against the Government in the pending suit, but was a new and completely independent right arising not to itself as a rival claimant, but from its new position as lessee of the Government. Such a right as petitioner had, therefore, could not have accrued until 1921, when the lease was approved by. the Government and executed. On these facts we can entertain no doubt that the impounded funds were income to petitioner in 1921, when its right under the lease was perfected. It so happened that the impounded funds were paid over to it in the same year, 1921. It will be seen, therefore, that, whether the petitioner was on the cash or the accrual basis, our decision in the circumstances would be unaffected by that fact.

We are not unaware of the decision of the District Court (S. D. Calif.) in Obispo Oil Co. v. Welch, 48 Fed. (2d) 872, in which, under circumstances very closely analogous to those here present, that court decided that such proceeds might be returned as income by the taxpayer for the several years in which the sales were made prior to 1920. Certain facts are present in that case which may afford a ground for distinction, but if it be supposed that the court in that case intended to lay down a general rule upon the retrospective effect of the Act of February 26, 1920, we think it has been overruled by the Supreme Court’s decision in North American Oil Consolidated, supra, applying as it did, the principle of Burnet v. Sanford & Brooks Co., 282 U. S. 359.

The petitioner further contends that the Act of Congress of February 26,19'20, was a remedial statute and that the impounded funds paid over to the petitioner on the granting of the lease were, therefore, not income to the petitioner, within the definition of Eisner v. Macomber, 252 U. S. 189, 207, but constituted a nontaxable gift by the Government to the petitioner. Petitioner cites in support of this reasoning the decision of the Secretary of the Interior in the case of Honolulu Consolidated Oil Co., 48 Lane’s Decisions, 303, in which section 18 of the statute in question is referred to as a “ remedial section’1’; and Barnes v. Poirier, 64 Fed. 14; United States v. Hurst, 2 Fed. (2d) 73; Edwards v. Cuba R. R. Co., 268 U. S. 28, on the supposed analogy of Government grants of homesteads and mining patents on lands or of Government railroad subsidies. We do not find any analogy in these cases. Even'if we should go so far as to concede that the lease was a gift from the Government to the petitioner, the value of that lease is not here in issue, but the income earned under it (in prior years but reached by its retroactive effect). To allow the exemption of income so earned prior to 1920 would logically require the exemption of all subsequent income — a reductio ad absurdwm of the whole proposition.

There remain the two alternative contentions of the petitioner which may be very shortly disposed of. It is argued that the petitioner suffered a loss, admittedly in the year 1920, when the petitioner relinquished and quitclaimed all its right, tile and interest in the 60-acre tract to the United States Government; that the amount of this loss was that, charged off on its books as the cost of the whole property, $572,805.03 ($23,858.85 representing “ additions and better-ments ”); and that the loss, although sustained in 1920, should be allowed in 1921 by way of reduction of the payments made to the petitioner in that year by the receiver, who then released the impounded funds. There are several fatal objections to this argument.

On the evidence, it is impossible to say precisely xvhat the interest acquired in 1914 cost the petitioner. Neither do we know what became of petitioner’s claim to the 80 acres. There is a very grave question whether the petitioner had any legal interest whatsoever in the oil lands themselves in 1914, or at any time, until it acquired such an interest as a lessee in 1921. The United States District Court very plainly held in its decree of December 24, 1919, that the petitioner had no interest in the 60-acre tract, and although this cause was appealed by the petitioner, and was, of course, subject to reversal in the upper courts, petitioner’s subsequent action in applying for a lease from the Government and quitclaiming its rather shadowy interest, indicates rather plainly the petitioner’s own view of the value of that interest.

In the second place, whatever the petitioner paid for its interest in the 60-acre tract must now be regarded as the cost to it of the Government’s lease, which otherwise would have to be regarded as without cost. The petitioner’s interest as lessee was substantial and clear at law, whereas its prior claim was, as we have said, very questionable.

In these circumstances, we can not find that petitioner suffered the loss claimed in 1920. The argument that such a loss, if found, should be allowed against the respondent’s payment of impounded funds in 1921, is answered by the Supreme Court’s decision in Burnet v. Sanford & Brooks, supra.

This brings us to the petitioner’s final contention, that, by reason of the abnormality in its 1921 income resulting from the payment to it in that year of moneys earned in fact in the six previous years, it is entitled to special assessment under sections 327 and 328 of the Revenue Act of 1921.

In Law Opinion 1109, C. B. 1-2, p. 253, at 256, the Commissioner said:

It is my opinion that the following represent the typical and common cases in which there is present an abnormal condition affecting capital or income of a corporation : * * * (4) where the net income for the year is abnormally high, due to the realization in one year of (a) income earned during a period of years, or (b) extraordinary profit derived from the sale of property the principal value of which has been demonstrated by prospecting or exploration and discovery work done by the taxpayer, or (c) gain derived in one year from the sale of property the increase in value of which had accrued over a period of years; and (5) where proper recognition or allowance can not be made for amortization, obsolescence, or exceptional depletion due to the World War.

In this opinion tbe Commissioner was interpreting sections 327 and 328 of tbe Revenue Act of 1918, which were reenacted by Congress without change in the Revenue Act of 1921.

The respondent resists this contention by suggesting that under the rates of the Revenue Acts of 1917 and 1918, if the moneys later received should be considered as accrued in the years 1917, 1918, 1919 and 1920, the tax would greatly exceed the excess-profits tax paid by the petitioner in 1921; and that consequently no abnormality in income existed in 1921. We can not follow the logic of this argument.

We are of the opinion that an abnormality of income existed here which would entitle petitioner to the benefit of the relief provisions. The facts speak for themselves. The logical inconsistency in regarding as “ income earned during a period of years ” the sums paid petitioner under the lease in 1921, although before 1921 the petitioner had no valid legal claims to the proceeds of these oil sales, is offset by the practical consideration that under the leasing act petitioner acquired a new legal right which applied retroactively; so that the petitioner must be regarded, for this purpose only, as having earned in the several prior years the sum to which it became entitled and received in 1921.

The situation in the present case is somewhat similar to that in Red Salmon Canning Co., 15 B. T. A. 790, where we held the taxpayer’s income abnormal in 1919, by reason of the fact that it returned in that year income earned in 1919 from the sale of its salmon pack of that year and also income resulting from the sale in the same year of 80 per cent of its 1918 pack which had been commandeered for food purposes by the United States Government in the prior year and released only after termination of the late war. We said:

Certainly this situation, resulting as it did in practically throwing two years’ income into the year 1919, was not one occurring in the ordinary course of business.

Cf. Pittsburgh Supply Co., 14 B. T. A. 620; Grand Rapids Show Case Co., 12 B. T. A. 1024.

It may be noted that the case of C. Bruno & Sons, Inc., 14 B. T. A. 103, in which the Board reached an opposite decision on facts somewhat similar to those in the Red Salmon Canning Co. case, the sale in a subsequent year of goods impounded by a foreign country through the war period, is clearly distinguishable on the ground of insufficient evidence in the latter case to show any resulting abnormality.

We bold, therefore, that the amount of the funds released by the receiver to the petitioner in 1921 is income to it in that year, but that the petitioner should be allowed the relief afforded by the Revenue Act of 1921 in the matter of special assessment for that year.

Reviewed by the Board.

Further proceedings nnay be had under Mule 6% (e).


text:
    John R. Hanby, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 30009.
    Promulgated July 19, 1932.

      Robert Ruarh, Esq., and E, G. Kilpatrieh, Esq., for the petitioner.

      M. iB. Lenwig, Esq., and Irvmg M. Tullar, Esq., for the respondent.
   OPINION.

Matthews:

This is a proceeding for the redetermination of deficiencies in income and excess-profits taxes and penalties amounting to $43,385.99, which were assessed against the petitioner for the taxable years 1917 to 1921, inclusive, as follows:

The assessment of this total amount was made by the respondent in November, 1924, under the provisions of section 274 (d) of the Revenue Act of 1924, and the petitioner filed a claim for abatement of the full amount of the additional taxes and penalties so assessed. For the year 1917 a penalty of 50 per cent of the excess-profits tax was imposed for failure to file an excess-profits-tax return and there was also imposed, in accordance with the provisions of section 3176 of. the Revised Statutes, a penalty of 100 per cent of the tax on Form 1040 for the willful making of a false and fraudulent return. For each of the other taxable years the penalty imposed represented 50 per cent of the additional tax assessable, as provided in section 250 (b) of the Revenue Acts of 1918 and 1921, for the making of a false and fraudulent return with intent to evade the tax. The computation of these additional taxes and penalties, with the sections of the statutes imposing such penalties, was set out in detail in a 30-day letter addressed to the petitioner by the respondent under date of October 11, 1924. The amounts assessed in November, 1924, for each year correspond exactly in amount to the additional taxes and penalties set forth in the letter of October 11, 1924. Under date of June 3,1927, the petitioner was notified by the Commissioner that his claim for abatement would be rejected in full, “ for the reason that sufficient information has not been submitted to justify this office in abating any part of the tax and penalty assessed for the years in question,” and that a petition might be filed with the Board of Tax Appeals contesting in whole or in part the correctness of “ this determination.” A petition was filed by the petitioner on July 29,1927, contesting the total amount of tax and penalties, paragraph 4 of which reads as follows:

4. The determination of tax and penalties set forth' in the said notice of deficiency is based upon the following errors:
(a) Examination of boohs and records of petitioner in violation of statutes.
(b) Statutes of limitations.
(c) Full and final settlement previously made with respondent as provided by law.
(d) Computation of tax and penalties erroneous, based upon improper data and records, and not in accordance with facts.
(e) Indictment, trial and acquittal of petitioner upon the charge of having wilfully attempted to evade payment of proper taxes for the years 1917, 1918, 1919 and 1921.

In his petition the petitioner alleged the receipt, of the letter of October 11, 1924, setting forth the computation of additional taxes and penalties for the years 1917 to 1921, inclusive, and attached a copy of said letter to the petition. He also alleged that on or about November 29, 1924, respondent made a summary assessment against the petitioner in the amount shown in the respondent’s letter of October 11,1924, Paragraph 7 of the petition reads:

Petitioner is informed and believes and upon such information and belief alleges that the amounts assessed against him by respondent as penalties for the years 1917, 1918, 1919, 1920 and 1921 are and have been assessed against him upon the ground that petitioner unlawfully and wilfully attempted to evade payment of income tax, additional tax and surtax imposed and to be paid by him for said respective years.

In his answer the respondent admitted that the amount in controversy was additional taxes and penalties for the years 1917 to 1921, but denied that he erred as alleged, and also entered a general denial of all material allegations of fact contained in the petition.

When the case came on for hearing and after the opening statements of counsel for both parties, there were introduced in evidence, on behalf of petitioner, income-tax returns filed by the petitioner for the years 1917, 1918 and 1919 on the respective dates of March 15, 1918, March 14, 1919, and March 12, 1920, and amended income-tax returns for the years 1917% 1918 and 1919, all of which amended returns were filed on May 29, 1923. Two canceled checks in the respective amounts of $12,880.55 and $7,263.22 were submitted in evidence by the petitioner. The first of these checks was dated June 15, 1923, and was signed by the petitioner, and the second was a cashier’s check, dated September 10, 1923. Both checks were endorsed by the collector of internal revenue on September 11, 1923. Petitioner also offered in evidence certain correspondence between the petitioner and the respondent, together with a certificate of over-assessment for 1917, dated September 24, 1923, in the amount of $60.21. No oral testimony was offered on behalf of the petitioner, and after the introduction of the above described documentary evidence counsel for the petitioner rested their case.

Thereupon, the respondent assumed the burden of proving fraud. The testimony of a number of witnesses and numerous documents were offered and received in evidence over objection of counsel for petitioner. The evidence admitted conclusively proved that petitioner was guilty of fraud in the preparation and filing of his income-tax returns for the years involved herein. A false, record book Avas kept by the petitioner and his accounts were deliberately manipulated in order that his taxable gain might be understated. False entries were made in order that his records might conform to the false reports of income which he had submitted. The testimony of a number of witnesses and voluminous documentary evidence which was introduced at the hearing leave no room for doubt that the petitioner filed false and fraudulent returns for the purpose of evading taxes.

No evidence was offered by the petitioner to rebut the evidence introduced by the respondent with respect to the issue of fraud. Nor Avas any evidence offered to show that the deficiencies in taxes proper for the years involved, as determined by the respondent, were erroneous. At the hearing petitioner abandoned the issue raised in the petition relative to the unlawful examination of his books.

The points upon which petitioner relies, as set forth in his brief, are as f oIIoavs :

1. No penalties may be asserted or collected by respondent for any of the years involved upon the basis of fraud, because the question of fraud has not been properly put in issue by the respondent.
2. The deficiencies asserted for the years 1917 and 1918 are barred by the statute of limitations.
3. In 1923, petitioner and respondent, pursuant to the provisions of Section 3229 of the Revised Statutes, entered into a binding agreement of settlement and compromise of petitioner’s tax and penalty liability for the years 1917, 1918, and 1919, and no further liability for those years may be asserted by respondent.
4. The assertion or collection of a penalty for the year 1921 is barred, because of petitioner’s former trial and conviction upon the identical charge here urged by respondent as the basis for suelda penalty.

The first point was raised by petitioner at the hearing and it was then ruled that fraud was in issue, and respondent was permitted, over objection of petitioner, to introduce in evidence the testimony of witnesses and documents in proof of fraud.

The jeopardy assessment in this case was made in November, 1924, and the claim in abatement was rejected after the passage of the Revenue Act of 1926. Section 283 (k) (3) provides that “where before the enactment of this Act a jeopardy assessment has been made under subdivision (d) of section 274 of the Revenue Act of 1924 * * * all proceedings after the enactment of this Act shall be the same as under the Revenue Act of 1924 as amended by this Act, except that * * * in the consideration of the case the jurisdiction and powers of the Board shall be the same as provided in this Act in the case of a tax imposed by this title.” The jurisdiction of the Board under the Revenue Act of 1926 covers the determination of deficiencies in taxes and of. penalties. See section 274 (e) of the Revenue Act of 1926. The appeal in this case, authorized under the provisions of section 279 (b) of the Revenue Act of 1924, is an appeal from the determination of the Commissioner rejecting the claim for abatement of the taxes and penalties. The Board’s jurisdiction is to determine whether the petitioner’s claim should be denied in whole or in part.

The effect of the appeal of the petitioner from the rejection of the claim for abatement of taxes and penalties is to put in issue the right of the Commissioner to have assessed the penalties, as well as the additional taxes. As the penalties assessed are the penalties provided by statute in the case of false and fraudulent returns with intent to evade taxes, the question of fraud was inherent in the Commissioner’s determination of October 11, 1924, the jeopardy assessment of November,' 1924, and the rejection of the claim for abatement on June 3, 1927. Therefore, the issue of fraud was drawn between the Commissioner and the petitioner when an appeal was taken to this Board from the determination of the tax and penalties.

The Commissioner in his answer denied that he erred in determining the total tax and penalties. This left the issues as drawn between the Commissioner and the petitioner by the petition. The Revenue Act of 1928, which was enacted after the Commissioner’s answer was filed, provides that “In any proceeding involving the issue whether the petitioner has been guilty of fraud with intent to evade tax, where no hearing has been held before the enactment of the Revenue Act of 1928, the burden of proof in respect of such issue shall be upon the Commissioner.” (Section 601, amending section 907 (a) of the Act of 1924.) At the time the answer was filed the rules of the Board did not require the Commissioner to state in his answer the facts on which he relied to sustain the burden of proof of any issue raised in the petition as to which the burden of proof was by statute placed on the Commissioner. We are of the opinion that the issue of fraud was raised by the pleadings and that evidence with respect to such issue was properly admitted.

The jeopardy assessments of the deficiencies and penalties involved m this proceeding were made in November, 1924, and such assessments for 1919 and subsequent years were timely made without regard to the question of fraud. As no excess-profits-tax return was filed for 1917, and the income-tax returns filed for 1917 and 1918 were false and fraudulent, with intent to evade tax, the assessments for these years could be made at any time. Section 250 (d), Revenue Act of 1921, and similar provisions in subsequent acts.

In support of the petitioner’s claim that he and the respondent entered into an agreement of settlement and compromise of petitioner’s tax and penalty liability for the years 1917, 1918 and 1919, petitioner introduced in evidence two checks for the respective sums of $12,880.55 and $7,263.22, which were applied against petitioner’s account on September 11, 1923, and which balanced the additional assessments for 1918 and 1919 in the total sum of $20,143.77. These assessments were made on August 29, 1923, after petitioner’s representative had been granted conferences with attorneys in the general counsel’s office and with the auditor in the income tax unit who had audited the petitioner’s returns for 1917, 1918 and 1919. Petitioner urges that the amounts represented by the two checks were accepted by the respondent in full payment of all taxes and penalties for the years 1917, 1918 and 1919. In the petition, it is alleged that on or about June 14, 1923, on a form provided by resjiondent, petitioner tendered and made to the collector of internal .revenue of the District of North Carolina an offer in compromise, whereby petitioner tendered and offered to pay to the collector the sum of $12,880.55 in full settlement of all taxes and penalties claimed by respondent to be due by petitioner. In response to a notice to produce the retained carbon copy of the offer in compromise which it was alleged in the petition had been made on a form provided by respondent, petitioner produced at the hearing a Form 656, entitled “ Offer in Compromise,” the entries thereon being carbon copies. The form shows on its face that it was not printed until August, 1924. In a protest filed with the respondent on or about June 22,1923, petitioner stated in one paragraph thereof: “ I am herewith making an offer of compromise in the amount of $12,880.55 (certified check) in full payment of all Federal income and excess profits taxes and penalties for the years 1917, 1918 and 1919.” This check was not accepted in. full payment of all taxes and penalties for the years 1917, 1918 and 1919. It was further proved by the respondent that misrepresentations and fraudulent statements with respect to income were made by petitioner’s representative, F. J. Sullivan, at the above mentioned conferences, which were held prior to August 29, 1923, on which date additional taxes and penalties totaling $20,143.77 were assessed for 1918 and 1919. It has not been shown that there was any compliance with the provisions of section 3229 of the Revised Statutes. The evidence fails to establish that the respondent entered into any agreement of settlement and compromise of petitioner’s tax and penalty liability for any of the taxable years.

After the assessment in November, 1924, petitioner was indicted in the United States District Court for the Eastern District of North Carolina, upon a charge that the amended returns filed in 1923 for the years 1917, 1918 and 1919, and the original' return filed for 1921, were false and fraudulent. The petitioner was tried under this indictment and acquitted of the charges with reference to the amended returns for 1917,1918 and 1919, but convicted of the charge in relation to his original return for 1921. Petitioner claims that the assertion of a penalty for 1921 is barred because of his conviction upon the same charge here urged. The 50 per cent penalty asserted for 1921 under section 250 (b) of the Revenue Act of 1921 was properly assessed and is collectible, notwithstanding the petitioner’s trial and conviction of filing a false and fraudulent return for 1921. Section 250 (b) specifically provides that such penalty is in addition to other penalties provided by law for false or fraudulent returns.”

The respondent having sustained the burden of proving fraud, and the petitioner having failed to show error on the part of the respondent, or that his correct tax liability for the years in question is less than the amounts assessed against him, the determination of the respondent is approved.

Reviewed by the Board.

Judgment vsSU be entered for the respondent.


author: Goodrich :

text:
    The Carey Salt Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Emerson Carey Fibre Products Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 36381, 36382.
    Promulgated July 19, 1932.

      Ea/fl W. Shinn, Esq., for the petitioners.

      Eugene Meacham,, Esq., and Charles Louierg, Esq., for the respondent.
   OPINION.

Goodrich :

In these proceedings, which were consolidated for hearing, we are asked to redetermine deficiencies asserted by respondent against the Emerson Carey Fibre Products Company for the years 1923 and 1925 in the amounts of $13,594.35 and $12,721.22, respectively, and against the Carey Salt Company for the years 1923 and, 1924 in the amounts of $3,685.23 and $76.35, respectively. At the hearing allegations of error relating to depletion and depreciation were waived, leaving, as the sole issue for our determination, whether respondent erred in disallowing as a deduction from income for the year 1923 a loss sustained upon the liquidation of the Gazette Printing Company, a corporation.

Depositions on behalf of petitioners, together with certain exhibits, were lodged with the clerk on September 23, 1929, but, since they were not offered and received in evidence, we will not consider them in determining the issue before us. Attention is directed to Pules 29 and 46 of the Board’s rules of practice. See also Hotel Plaza Co., 25 B. T. A. 95.

The following stipulation of facts was agreed.to upon the record:

At all times herein referred to the above-named petitioners were Kansas corporations, with principal place of business at Hutchinson, Kansas. The entire capital stock of the petitioners was owned by members of the Carey family, and for the year 1917 and years subsequent thereto, including the taxable year herein involved, the said companies were affiliated as a Class B affiliation, and as such filed for each of the years named, a consolidated return. The deficiency proposed by the respondent for the calendar year 1923 was allocated to the respective corporations in accordance with the provision of Section 240 (b) of the Revenue Act of 1921.
In the latter part of the year 1916 the members of the Carey family caused to be organized under and by virtue of the laws of the State of Kansas, the corporation known as the Gazette Printing Company, and assigned to said company in exchange for its entire capital stock, the assets of a job printing company formerly known as the Mid-West Printing Company which had been acquired by the Carey family by assignment in lieu of foreclosure proceedings under the terms of a mortgage held by said family on said assets. The total cost of the stock of the Gazette Printing Company at the time acquired by the Carey family was $18,766.50, and was carried at that figure on the books of the Carey Salt Company.
Por the year 1918 and subsequent years, including the taxable year herein involved, the Gazette Printing Company was affiliated with the petitioners, and for each of said years filed a consolidated return with the petitioners.
During all of tlie years herein referred to the Gazette Printing Company conducted a job printing business in the City of Hutchinson, Kansas. For each year the operations of the company resulted in a net loss as follows:
1917. $5, 917. 38
1918. 4, 969. 81
1919. 8, 089.36
1920. 12, 513.40
1921. 39,138. 86
1922. 50, 767.17
1923. 17, 416. 90
The loss for each year of affiliation was reflected in the consolidated balance sheet of the affiliated group, and taken as a deduction in arriving at the taxable income of the consolidated group for each year.
From time to time during the period of the operation of the Gazette Printing Company, the Carey Salt Company, one of the members of the affiliated group, loaned to said Gazette Printing Company a total sum of $87,192.43 for which promissory notes of the latter company were received by the Carey Salt Company.
During the same period of operation the Carey Salt Company advanced to the Gazette Printing Company the sum of $65,488.02 on open account which was carried on the books of the Carey Salt Company as an ordinary 'account receivable, of and from the Gazette Printing Company.
In the year 1923 the Gazette Printing Company was liquidated, and the assets received by the Carey interests, by reason thereof, were sold in that year to one Ross Burns for $25,000.00, paid as follows: $6,500.00 in cash and a promissory note for $18,500.00.
The cost of the assets as of the date of sale in 1923 was $54,474.67.
On March 26, 1925, tire stock of the Gazette Printing Company was cancelled and its charter forfeited. .
In closing the books of the Carey Salt Company for the year 1923 the sum of $87,192.43, representing loans, and the sum of $65,488.02, representing advances, made by the Carey Salt Company to the Gazette Printing Company were charged off on the books of the Carey Salt Company as a bad debt.

Respondent disallowed as a deduction from income for the year 1923 the amounts totaling $152,680.45, previously advanced by the petitioner, Carey Salt Company, to the Gazette Printing Company upon notes and open account, and charged off as worthless upon the liquidation of the Gazette Company. Since the answer filed by respondent in the case is but a general denial, and his counsel have not favored us with a brief setting forth his theory of the case, the only intimation we have of his reason for his action is contained in a statement in the deficiency notice to the effect that he regards this item as an intercompany transaction in connection with the liquidation of a subsidiary company and therefore not allowable as a deduction.

We think the petitioner, Carey Salt Company, sustained a deductible loss. Upon liquidation of the Gazette Printing Company the affiliation previously existing between it and petitioners was terminated. The Carey Salt Company’s claims were then determined to be worthless, its losses upon these debts were sustained, and, having been charged off, may be deducted; since, resulting from the liquidation, they occurred outside the period of affiliation and were not sustained in an intercompany transaction. Aluminum Goods Manufacturing Co., 22 B. T. A. 1; reversed, 56 Fed. (2d) 568; Remington Rand, Inc., 11 B. T. A. 773; reversed, 33 Fed. (2d) 77; certiorari denied, 280 U. S. 591; United Publishers Corporation v. Anderson, 42 Fed. (2d) 787; American Printing Co. v. United States, 53 Fed. (2d) 98; Riggs National Bank, 17 B. T. A. 615; aff'd., 57 Fed. (2d) 980; Universal Corporation, 18 B. T. A. 319; Obenchain-Boyer Co., 18 B. T. A. 293; Manatee Crate Co., 22 B. T. A. 996; Canal-Commercial Trust & Savings Bank, 22 B. T. A. 541; Roy & Titcomb, Inc., 23 B. T. A. 12.

Upon brief petitioners argue that the claimed loss should be further increased by the amount of $29,474.67, being the difference between $54,474.67, the cost of the assets of Gazette Printing Company, and $25,000, the sales price thereof, and by the amount of $18,766.50, the cost of the stock of the company, thus treating the total loss from the several sources as one sustained upon liquidation. Without passing upon the merits of the first claim, we here deny it for the reason that it is not shown that either of these petitioners made the investment, took over the assets, made sale thereof and sustained the loss claimed to have resulted from the sale. The stipulated facts recite that these assets were assigned to the company by “members of the Carey family ”; that, upon liquidation of the company, the assets were received “ by the Carey interests ”; and that they “ were sold in that year.” Could this difference be held to be a deductible loss, we are not justified in allowing it to either of these petitioners, except upon a clear showing that it was sustained by them, or one of them. Such a showing is not made by this statement of facts, nor by the pleadings. The claim for a loss upon the stock of the Gazette Printing Company must fail for the same reason. The stipulation clearly shows that this- stock was acquired in the first instance by “ members of the Carey family,” and it does not appear that either of these petitioners ever became the owner thereof. Therefore, neither of them is entitled to a loss sustained as a stockholder of the Gazette Printing Company upon its liquidation, the only loss allowable being that sustained by the Carey Salt Company upon debts ascertained to be worthless and charged off as above set out.

However, the assets of the Gazette Printing Company, at the time of liquidation, were charged with its liabilities. It does not appear that there were any creditors other than the petitioner, Carey Salt Company. Therefore, in determining the deductible loss sustained by the Carey Salt Company, there must be credited against the amount of the loans and advances ascertained to be worthless the $25,000 realized from the sale of assets received by the Carey interests upon liquidation of the Gazette Printing Company, since we must assume that the Carey Salt Company, the sole creditor, did not fail to collect for itself or its own credit the receipts from that sale. With this reduction, we determine the loss allowable to be $127,680.45.

Reviewed by the Board.

Judgment will Toe entered wider Rule 50.


author: Van Fossan :

text:
    J. A. L. Van Den Bosch, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47202.
    Promulgated July 20, 1932.

      Edmimd B. Qwiggle, Esq., for the petitioner.

      Byron M. Ooon, Esq., for the respondent.
   OPINION.

Van Fossan :

The translation of articles 280 and 281 of the Dutch Civil Code, as agreed upon.by counsel for the petitioner and the respondent, is as follows:

Article 280.
Should the husband upon whose petition a divorce shall have been pronounced not have sufficient means for his existence, the Court shall be able to allot a payment to him for his maintenance from the estate of the other party.
Article 281.
Such payment shall be assessed according to the position and fortune of the party from whom such shall be due.
In the event of any considerable depreciation of such fortune, such payments shall be subject to reduction and shall cease at such time when the other party shall no longer have need thereof.

These articles apply to alimony awarded to either husband or wife.

A translation, similarly stipulated, of the pertinent provisions of the Netherlands income tax act, is as follows:

Income shall be understood to mean the sum of what-in money or money value is received net as the proceeds of:
1. real property;
2. personal capital;
3. enterprise or labour;
Jf. rights to periodical payments dependent on life.
Article 8.
The right to periodical payments, dependent upon life, embraces the pay granted of officers on leave, or indisponible (sio.), retention money, pensions, annuities, as well as money due for the maintenance of life, the setting up of a household and other matters and generally, allowances and payments made not connected with the occupation of an official post or as an employee and which cease on death of the person entitled thereto or a third party.
Article 19.
To compute the taxable net income, the following, due by the taxpayer, but not connected with any source of his income, are deductible from the incomes specified under arts. 12-18 inch:
a. annuities, pensions and other periodical payments and allowances as referred to in Article 8 ;
b. permanent interests;
c. interest from other debts;
d. premiums for life assurance, life interests or pensions;
all up to the annual amount at the commencement of the fiscal year, or on the coming into effect of the obligation to pay taxes, in the course of that year. * * *

Section 210- (a) of the Revenue Act of 1924, under which the respondent has found the deficiency against the petitioner for the year 1924, is as follows:

Sec. 210. (a) In lieu of the tax imposed by section 210 of the Revenue Act of 1921, there shall be levied, collected, and paid for each taxable year upon the net income of every individual (except as provided in subdivision (b) of this section) a normal tax * * *

Further relevant definitions found in the act are as follows:

Sec. 212. (a) In the case of an individual the term “net income” means the gross income as defined in section 213, less the deductions allowed by sections 214 and 206.
******$
Sec. 213. For the purposes of this title, except as otherwise provided in section 233—
(a) The term “gross income” includes gains, profits, and income derived from salaries, wages, or compensation for personal service (including in the case of the President of the United States, the judges of the Supreme and inferior courts of the United States and all other officers and employees, whether elected or appointed, of the United States, Alaska, Hawaii, or any political subdivision thereof, or the District of Columbia, the compensation received as such), of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. The amount of all such items shall be included in the gross income for the taxable year in which received * * *.

Section 210 (b) of the same act makes special provisions for the taxation of nonresident aliens, but the status of resident aliens, for income tax purposes, is the same as that of any other individual.

Corresponding sections of the Revenue Act of 1926 are essentially the same as those in the Revenue Act of 1924.

The petitioner contends that the issue is controlled by the law of the jurisdiction in which income has its situs. We do not believe the principle to be applicable to the present case. We find nothing in the laws of the Netherlands which holds that the divorced spouse had a vested right in the income of her former husband. Moreover, the various deductions allowable under the income tax laws of the United States exist only by virtue of statutory authorization. Under our revenue acts alimony is not deductible from gross income. See art. 291, Regulations 65 and 69. Payments of alimony may, under the Dutch law, be allowable deductions and still constitute part of the income of the petitioner under the law of the United States.

A study of the Netherlands income tax act and the stipulated facts convinces us that the income out of which the petitioner ordered alimony paid was received by him as the proceeds of real property or personal capital and, therefore, constituted a part of his gross income. The fact that under the Netherlands income tax act he may have been allowed, a deduction for alimony paid for him by his agents to his divorced wife, can not affect his status as a taxpayer in the United States. We are not concerned with the allowances and privileges the Kingdom of the Netherlands may grant him. Cf. Utermeyer v. Commissioner, 59 Fed. (2d) 1004. His gross income is subject to the deductions which our legislation permits. The payment of alimony is not one of them. Therefore we sustain the action of the respondent in adding to the petitioner’s taxable income the amount of alimony payments made by him or for him in the years 1924 and 1925.

Judgment will he entered for the respondent.