author: Van Fossan :

text:
    Wilson Shipbuilding Company, a Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 34337.
    Promulgated January 14, 1932.

      Charles E. McCulloch, Esq., and Ivan F. Phipps, Esq., for the petitioner.

      A. H. Fast, Esq., for the respondent.
   OPINION.

Van Fossan :

We will consider the issues in the order named. The respondent added to the petitioner’s income for the fiscal year ending June 30, 1918, the sum of $72,122.84 as “depreciation charged off.” During that year the petitioner received no income from (government contracts. Its principal revenue was derived from repairs to small fishing boats and river craft. Its net income was reported at $5,620.08. It charged off no sum on account of depreciation in arriving at this figure of net income. Respondent was in error in adding the sum of $72,122.84 to petitioner’s income.

Exclusion of the item of $72,122.84 and the adoption of the remaining computation as made by the respondent results in a net income of $5,058.90. We find this amount to be the correct net income of the petitioner for the fiscal year ending June 30, 1918.

We have found as a fact that the petitioner’s amortization period extended from January 1,1918, to January 31,1920, inclusive. That period may be taken as the basis for applying the allowance for amortization, which should be spread in proportion to the net income in the respective taxable years within the amortization period. G. M. Standifer Construction Corporation, 4 B. T. A. 525; Williams Harvey Corporation. 16 B. T. A. 752, Crowninshield Shipbuilding Co., 24 B. T. A. 925.

The residual value of the petitioner’s building, machinery and equipment, exclusive of land, constituting its war plant on January 31, 1920, was $45,000. That amount may be taken as a factor in computing the amortization allowance.

Section 234 (a) (8) of the Revenue Act of 1918 provides as follows:

(a) That in computing the net income of a corporation subject to the tax imposed by section 230 there shall be allowed as deductions:
i!s :;:*##* *
(S) In the case of buildings, machinery, equipment, or other facilities, constructed, erected, installed, or acquired, on or after April 6, 1917, for the production of articles contributing to the prosecution of the present war, and in the ease of vessels constructed or acquired on or after such date for the transportation of articles or men contributing to the prosecution of the present war, there shall be allowed a reasonable deduction for the amortization of such part of the cost of such facilities or vessels as has been borne by the taxpayer, but not again including any amount otherwise allowed under this title or previous acts of Congress as a deduction in computing net income. * * *

Article 181 of Regulations 62 defines the respondent’s construction of the foregoing provision as follows:

All allowances made to a taxpayer by a contracting department of the Government, or by any other contractor, for amortization specifically as such, shall be treated as a reduction of the cost of the taxpayer’s plant investment. Further amortization is allowable only in respect of such reduced cost. Where no such allowance has been made the amount of amortization to be allowed as a deduction from gross income, for the purpose of the tax, shall be computed in accordance with the provisions of articles 181 to 189, pursuant to which the deduction must be made, and not upon the basis of any amount contractually or otherwise determined.

The settlement contract between petitioner and the Shipping Board provided for a cash payment of $250,000 in full satisfaction of all claims. There was no itemization of allowances and the contract indicated no allowance for amortization specifically as such. The testimony is that this was a lump-sum settlement. There is no contrary evidence and the fair inference supports the conclusion that no amortization was contained in the allowance of $250,000. We are of the opinion that petitioner is entitled to amortization. G. M. Standifer Construction Corporation, supra; Peninsula Shipbuilding Co., 9 B. T. A. 1189.

The petitioner concedes deficiencies for the fiscal years ending June 80, 1918, and June 30, 1923, in the amounts of $151.77 and $1,262.10, respectively. Adjustments in conformity with this opinion will be made in the income and excess-profits taxes due for those years.

Judgment will be entered under Bule 50.


source: Caselaw Access Project

author: Goodrich :

license: Public Domain

text:
    Enameled Metals Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 19011.
    Promulgated January 14, 1932.

      8. Leo Ruslander, Esg., for the petitioner.

      P. S. Crewe, Esg., for the respondent.'
   OPINION.

Goodrich :

Respondent concedes, and rightly so, that the collection of the tax here claimed is barred by the expiration of the statute of limitations, unless the statutory period has been extended by the waivers filed by petitioner.

Under section 250 (d) of the Revenue Act of 1921, respondent had five years irom the date of filing of the 1918 return, or until June 16, 1924, within which to determine, assess and collect this tax. He failed to make collection, or to institute suit or other proceeding for such collection, within that time, and, therefore, the collection was thereafter barred. The statutory period was continued by section 277 (a) (2), as enlarged by section 278 of the 1924 Act which, however, did not extend to cases where, as here, the assessment had been made prior to the effective date of the act—June 2, 1924. Russell v. United States, 278 U. S. 181; William H. Schroll, 20 B. T. A. 1027; E. J. Lorie, 21 B. T. A. 612. See also section 1009 (d), Revenue Act of 1924. Nor do the Revenue Acts of 1926 and 1928 extend the time within which collection may be made where the assessment was made prior to the effective date of the 1924 Act. No suit or other proceeding for collection had been instituted, and collection was barred prior to the effective date of the 1926 Act.

It is clear, therefore, that collection of the tax was barred on June 16, 1924, when the five-year statutory period expired; on June 2, 1926, when respondent issued his deficiency notice; on July 30,1926, when petitioner filed its appeal therefrom to this Board; and on September 12,1927, when the first waiver was filed.

■ But respondent contends that this waiver, and those subsequently given, revived the period for collection. With this we do not agree. The waivers must be read with their riders, filed with and as a part of them. Therein the taxpayer expressly reserved his rights with respect to the bar of the statute of limitations, and gave to the collector protection only against loss of his rights resulting from his forbearance to distrain for the taxes during the effective period of the waivers. During such periods, the collector had no legal right to distrain, because collection was outlawed long since. As we read them, these waivers effected no revival of the statutory period.

Respondent argues, further, that he should be permitted to make collection now for the reason that, had he made collection previously, whether by distraint or otherwise, whether legally or illegally, petitioner could not recover because of the provisions of section 611 of the Revenue Act of 1928, relating to payments made after the expiration of the statute of limitations. We see no reason for entering the realm of conjecture or resorting to an hypothesis to reach a decision in this case. The fact remains that the tax has not been paid. It further appears that the period within which the tax may be collected lawfully has expired. Therefore, there will be entered a

Judgment of no deficiency.


author: AeuNdell :

text:
    Business Real Estate Trust of Boston, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 33469, 42684, 50305.
    Promulgated January 15, 1932.

      John P. 'Wright, Esq., and Schuyler Billon, C. P. A., for the petitioner.

      James L. Baclcstrom, Esq., for the respondent.
   OPINION.

AeuNdell :

In 1910 petitioner was the owner of certain improved property located in the business section of Boston. Wm. Filene’s Sons Company was the operator of a large department store in the neighborhood and it was in the market for larger quarters. Negotiations were entered into between petitioner and Filene’s and a tentative accord arrived at to the effect that, if petitioner should be able to acquire sufficient property adjoining that then owned by it and would on such property erect a suitable building, Filene’s would enter into a long term lease for such property at a substantial rental. To that end petitioner acquired in fee certain adjoining property and on other property it acquired 99-year leases. But the property so acquired by it, as well as the property already owned in fee, was improved and occupied by tenants. Time was of the essence of the agreement with Filene’s, and if the deal was to be consummated it was necessary that immediate possession be obtained in order that the old buildings might be demolished and a new structure completed by a definite date. To secure the surrender of the leases by the tenants occupying the properties large sums were paid them to move.

The problem for solution is ,the proper treatment to be accorded the sums paid the vaiáous tenants in order to secure immediate possession of the premises so that a new building might be' erected and leased to Filene’s. Whether or not expenditures of this character should be treated as losses, ordinary and necessary business expenses or capital expenditures to be added, to the cost of the land or recovered over a period has been determined very largely from the purpose which prompted the expenditure. In Higginbotham-Bailey-Logan Co., 8 B. T. A. 566, we treated an amount paid by the fee owner to its tenant for the surrender of the lease as an ordinary and necessary business expense where the purpose of the owner was to itself enter into the use of the surrendered property for business purposes. In H. B. Miller, 10 B. T. A. 383, where the owner paid for the cancellation of a lease in order to rent the same property to another at a higher rental, the amount so expended was permitted to be recovered over the term that the canceled lease had left to run. In the case of Columbia Theatre Co., 3 B. T. A. 622, where the owner of a 99-year lease paid a sum to the sublessee to surrender his sublease in order that it might erect on the property another building in compliance with a provision of the long-term lease, we said such an amount should be spread over the 99-year lease on the theory that the benefit would run for so long a time. Other cases where a somewhat similar problem was treated by the Board are Charles B. Bretzfelder et al., Executors, 21 B. T. A. 789, and Rome Trust Co., 21 B. T. A. 1255. See also Douglas Properties, 21 B. T. A. 347.

A question closely analogous has arisen as to the proper treatment of demolished buildings. Article 142 of Regulations 45 and similar provisions of all later regulations of the Commissioner provide that a loss may be taken upon a voluntary demolition of an old building. It is provided, however, in a case where property has been acquired with a building on it which the purchaser intended to raze and put the property to some other use, that no loss may be taken on the demolition of the building, but that the entire cost should be treated as having been paid for the land. A view similar to that expressed in article 142 will be found in Liberty Baking Co. v. Heiner, 34 Fed. (2d) 513, and 37 Fed. (2d) 703; and Parma Co., 18 B. T. A. 429.

The respondent, in reliance on H. B. Miller, supra, would have the expenditures here involved spread over the remaining life of the canceled leases and as the expiration dates of these leases have long since passed, no allowance would be permitted during the taxable years before us. Petitioner, on the other hand, asks that the expenditures be spread over the term of the lease to Filene’s and, if this can not be done, then over the life of the new building.

There is no dispute between the parties that the expenditures in controversy were made solely in order to prepare the way for the new building to be leased to Filene’s. It is equally clear that time was of the essence and that unless immediate possession of the entire property was had the deal could not be put through. That such possession could only be had by the expenditures in question is clear. We do not believe that these expenditures made under the circumstances here present should be added to the cost of the land, title to some of which had been owned in fee long before this transaction arose. Nor were the benefits of the expenditures to inure permanently, or in the cases of the 99-year leases over their term. The payments were made to the tenants to obtain immediate possession so that the new building might be erected for lease to Filene’s, and for no other purpose. It is the building that is to produce the income and it seems to us both just and reasonable that these expenditures should be added to the building cost and recovered over its life of 40 years.

The petitioners contend that the expenditures made by them were in the amount of $486,495.91. This amount is arrived at, however, by including certain expenditures which in the present state of the record may not, in our judgment, be included. The sum of $18,500 was expended as a bonus to obtain the 99-year lease on 22-24 Summer Street, and should be treated as a cost of that leasehold estate, recoverable ratably over its term. In one case rents for four months, amounting to $1,266.68, were waived in consideration of the lessee’s agreement to cancel the remaining term of his lease. In another instance the lessee was permitted to occupy the leased premises for four months free and there was refunded to him the sum of $1,583.38 for rent paid for April, 1911. This sum, together with a like amount, a total of $3,166.66, is alleged to be the cost of procuring the cancellation of the lease. We have not been informed whether or not petitioner treated the rents accruable under the leases as income and we may not regard the sums as the cost of acquiring the unexpired terms of the leases. In four cases petitioner’s own capital stock of a total par value of $50,000 was given in addition to cash for the cancellation of leases. No attempt was made to establish the fair market value.of the stock so paid, nor was any evidence offered as to the extent of the stock outstanding or the value of the net assets behind the stock. Accordingly, we must exclude this item as a part of the cost of the building. After making allowance for these items, there remains for recovery ratably over the life of the new building the sum of $413,562.51.

Decision will he entered wnder Rule 50.


author: Arundell :

text:
    New England Power Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Connecticut River Power Company of New Hampshire, Petitioner, v. Commissioner of Internal Revenue, Respondent. Bellows Falls Power Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 18591-18593, 29104-29106.
    Promulgated January 15, 1932.

      Bartlett Harwood, Esq., and Arthur H. Weed, Esq., for the petitioners.

      Elden McFarland, Esq., and Arthur Olarh, Esq., for the respondent.
   OPINION.

Arundell :

At the outset we must consider the suggestion of lack of jurisdiction in the Connecticut River Power Company case, Docket No. 18591, in so far as the year 1918 is concerned. The original return, a consolidated return, showed no tax due from this company separately. On March 15, 1924, the respondent, after refusing to' allow affiliation, assessed against this petitioner $175,183.43. Abatement claim was filed, which was allowed for $144,299.28 and rejected to the extent of $30,884.15. This latter amount was satisfied to the extent of $20,834.51, partly by credit and partly by payment, and against the balance of $10,049.64 petitioner filed a claim in abatement. Correct tax liability was finally determined by respondent to be $29,736.04, and, by reason of the unabated portion of the March, 1924, assessment in the amount of $30,884.15, respondent found an apparent overassessment of $1,148.11. The net result of this is that the respondent is asserting a claim for taxes for the year 1918 in the amount of $8,901.53. In other words, he is asserting a deficiency and not finding an overassessment as alleged. The determination was made in the letter of May 22, 1926, and we have jurisdiction. Section 283 (e), Revenue Act of 1926.

Statute of Limitations.

This issue is raised with respect to the year 1918 in Docket No. 18591, and as to 1919 in Docket Nos. 18591,18592 and 18593.

The 1918 return was filed by the parent company on June 16, 1919. As that return showed for the several companies separately the data necessary for the computation of the tax of each, it was sufficient to put the statute of limitations in operation. Continental Oil Co., 23 B. T. A. 311, and cases therein cited. The statutory period for assessment and collection, as extended by the waiver filed, expired June 16, 1925. Consequently the assessment of March 15, 1924, was timely, but under Russell v. Cnited States, 278 U. S. 181, collection was barred when the deficiency notice of May 22, 1926, was sent, unless, as contended by respondent, the period was extended by reason of the filing of claim in abatement and bond. We have repeatedly held that the filing of an abatement claim or a bond does not extend the statutory period. Wirt Franklin, 8 B. T. A. 977; Gulf States Steel Co., 12 B. T. A. 1244; J. B. Dortch, 19 B. T. A. 159. Respondent’s contention is that collection is not barred, because section 279(a) of the Revenue Act of 1924 provides that upon the filing of an abatement “ claim and bond the collection * * * shall be stayed pending the final disposition of the claim.” That provision, however, relates only to assessments made under section 274(d) of the same act; that is, assessments made after the enactment of the statute, which was on June 2, 1924. Assessments made prior to that date fall within the rule of the Russell case, supra, which in this case requires us to hold that collection was barred at the time the deficiency notice was mailed. Whether collection can be enforced by suit on the bond (see United States v. Barth Co., 279 U. S. 370) need not be decided in this proceeding.

The 1919 consolidated return, setting forth separately the items of gross income, deductions, and invested capital for each of the petitioners, was filed on March 12, 1920. No waivers are shown to have been filed, and the statute of limitations therefore barred assessment and collection on March 12, 1925. As the assessments herein were not made until September 15, 1925, they were too late, and as the notices of deficiency were not sent until in May, 1926, they were likewise outside the statutory period.

Counsel for respondent concedes that if the consolidated return filed meets the requirements set out in F. A. Hall Co., 3 B. T. A. 1172, the contention of petitioners herein would appear to be correct. We hold that the return filed meets the statutory requirements and that assessment and collection are barred.

Affiliation Issue.

(a) New England Power Company.—Reference to the table set out in the findings of fact shows that the parent owned all the outstanding common stock of this petitioner and only a small amount of its preferred stock. Some of the preferred stock of petitioner was owned by the parent’s stockholders, some by one of its subsidiaries, and some by the stockholders of another subsidiary. It is argued that if the preferred stock is to be taken into consideration in determining the extent of ownership or control, these holdings should be added to the parent’s direct ownership. Granting for the moment that such addition is proper, the sum total of these holdings would range from a low of 50.09 per cent to a high of 67.04 per cent of the total outstanding stock. Obviously these percentages standing alone are not sufficient to sustain the claim for affiliation.

But petitioner’s principal argument is that the preferred stock should be disregarded in affiliation cases and it cites a number of cases, some of which at first glance would seem to give support to the contention made. Temtor Corn & Fruit Products Co., 299 Fed. 326 (afld. sub nom. Schlafly v. United States, 4 Fed. (2d) 195), is a case in which one company owned all the common stock of another, and the latter’s preferred stock was held by some 3,000 stock holders. The preferred stock was entitled to vote only in the event that dividends were passed for a stated period. The courts disregarded the preferred stock and held the two corporations affiliated. In view of the restricted voting power of the preferred stock in that case, we think the decisions are of little weight in the matter before us. In Shillito Realty Co., 8 B. T. A. 665; affd., 89 Fed. (2d) 830, the parent owned all the common and 50 per cent of the preferred stock of the subsidiary. The preferred had full voting rights. The holders of 67.16 per cent of the parent’s stock, who for the most par,t were officers, directors, or employees of the parent, or their relatives, owned 15.516 per cent of the preferred stock of the subsidiary. On these facts we allowed affiliation, saying that “ Only an inconsiderable amount [of the preferred stock] was in the hands of persons who properly may be regarded as outside interests.” It thus appears that the preferred stock with voting rights was taken into consideration in determining the extent of ownership or control. In Atlantic City Electric Co., 15 B. T. A. 1081, the parent owned all the common stock of the subsidiaries. The subsidiaries had outstanding voting preferred stock which in the case of one was less than 23 per cent, and as to the other less than 30 per cent of the total outstanding stock. In. holding the companies affiliated we said, “ The holder of the preferred stock resembled a creditor of the corporation more than he resembled a common stock holder.” We did not, however, disregard the preferred stock in reaching our conclusion. Had we done so, our holding would have been based purely on the 100 per cent common stock ownership by the parent, which, of course, in the absence of preferred stock would have been sufficient to allow affiliation. That we gave consideration to the preferred stock is shown in the opinion (p. 1089), where we listed as factors taken in consideration, “ stock ownership, limitations surrounding the ownership of preferred stock, and the complete business dominance of petitioners by the parent company.” In J. A. Folger & Co. et al., 23 B. T. A. 210, interests outside a closely related group owned voting preferred stock amounting to not in excess of 30 per cent of the total common and preferred. We held that by reason of the domination exercised over the minority stock, there was “ control ” over it within the meaning of the statute. The latest decision on the question is Commissioner v. Howes Bros. Hide Co., 284 U. S. 583, which reversed the Circuit Court of Appeals for the First Circuit (49 Fed. (2d) 878), which had reversed the Board in the same case, 17 B. T. A. 129. In that case five brothers owned all the common stock of one company which sought affiliation with another in which the brothers likewise owned all the common stock and all of the second preferred stock, but in which there was a large outside holding of first preferred stock. All of the preferred stock had voting rights. The holders of the first preferred stock almost without exception were absent from stockholders’ meetings and such stock of this class as was represented was voted by proxies given to two of the Howes brothers. In denying affiliation we held that:

It is true that at all times the five Howes brothers owned and controlled 50 per cent of the voting stock, but the evidence fails to show that they ever had a beneficial interest in any substantial amount of first preferred stock. It must be admitted that the Howes brothers dominated the company, directed its policies, and managed its business, but the test of the statute makes no mention of these factors in laying down the rule governing affiliation. The statute provides that substantially all the stock must be owned or controlled by the same interests, and “ substantially all ” can not be construed to mean a bare majority.
Counsel would have us hold that, since the common stock holders had it within their power to call the first preferred for redemption at any time, they effectually controlled this class of stock within the meaning of section 240(b) of the 1918 Act. It is undoubtedly true that the first preferred stockholders held their stock subject to call after proper notice, but it is just as true that this power was never exercised, and that the first preferred stockholders exercised their voting rights at every stockholders’ meeting. The power or ability to control is not the control required by the statute, and it can not be said from the evidence before us that the first preferred stockholders were lacking in any of the elements of ownership of their stock.”

The Howes Bros. case we think goes far towards dispelling any doubt that may have existed previous to the Supreme Court’s decision as to whether preferred stock having voting rights should be included in the total stock outstanding for the purpose of determining whether there is ownership or control of “ substantially all of the stock.” In our opinion such stock must be included.

Applying this conclusion to the. present situation, it is plain that the parent did not own or control sufficient stock of the New England Power Company — 50.09 to 67.04 per cent — to constitute substantially all, and it must be held that the two were not affiliated.

(b) Connecticut River Power Company. — The parent company owned all the common stock and some of the preferred. Counting in both the common and preferred, as we held above must be done, the parent’s ownership varied from 67.75 per cent to 83.77 per cent. Petitioner contends these percentages should be augmented by the holdings of the stockholders of the parent and the stockholders of the New England Power Company. In our opinion this may not be done. No control by the parent over such stock is shown. The fact that the parent dominated the business policies and operations of the subsidiaries is not sufficient to establish control over the stock held by others. Under the decision in Handy & Harman v. Burnet, 284 U. S. 136, the control required by the statute is legally enforceable control, and that exercised through economic domination is insufficient.

In the present case the question is thus narrowed to whether the percentages set out above, representing the parent company’s direct ownership, constitute “ substantially all ” the stock of the Connecticut River Power Company. In the light of the decided cases we are of the opinion that they do not, and that affiliation must be denied. Handy & Harman v. Burnet, supra (in which the owners of 93.71 per cent of the parent owned or controlled 81.27 per cent of the subsidiary); United States v. Cleveland P. & E. R. Co., 42 Fed. (2d) 413 (77 to 84 per cent ownership); Denunzio Fruit Co., 16 B. T. A. 1326; affd., 49 Fed. (2d) 41 (80% per cent ownership and control of additional 3 per cent).

(c) Bellows Falls Power Company. — In this company the parent owned 85 per cent of the common and from 75 to 95 per cent of the preferred stock. The voting rights of the preferred were limited to matters relating to increasing bonded indebtedness and preferred stock. The parties appear to be agreed that in view of the limited voting rights of the preferred stock it should not be included in determining the parent’s ownership or control. No such control as contemplated by the statute is shown to have existed over the 15 per cent owned by the so-called “ Phipps interests.” This leaves the affiliation claim resting on the parent’s ownership of 85 per cent, which in our opinion is insufficient. United States v. Cleveland P. & E. R. Co., supra; S. N. & C. Russell Mfg. Co., 16 B. T. A. 501.

We are accordingly of the opinion that none of the petitioners were affiliated, within the meaning of the statute, with the New England Company, and the respondent’s denial of affiliation is sustained.

Claimed Interest Deductions.

For the years 1919 and 1920 the New England Power Company and the Connecticut Fiver Power Company entered on their books as capital items certain amounts which they now seek to deduct as interest, claiming that such amounts are interest on funds used for construction of new plant facilities.

Interest as such is properly deductible in the year of accrual or payment, as the case may be (sec. 234 (a) (2), Revenue Act of 1918), and it is not a proper capital item. Westerfield v. Rafferty, 4 Fed. (2d) 590; Spring Valley Water Co., 5 B. T. A. 660. See also Arthur C. Fraser, 6 B. T. A. 346; affd., 25 Fed. (2d) 653. But in this case it does not appear that petitioners ever became liable for or paid any interest. The only evidence on this point is contained in the testimony of the individual who is treasurer of the parent company, and who during the taxable years was either auditor or general auditor of the parent and all the subsidiaries. He testified that construction jobs for the operating companies were financed by the loan of funds by the parent to the Power Construction Company, which funds were used by the Construction Company to pay wages and purchase materials and supplies in connection with the construction work. The construction company made charges to the work representing the interest, and such charges became a part of the cost of the work, which was billed by the construction company to the operating company for which the work was performed. It does not appear that the operating companies, petitioners here, ever borrowed any funds from the parent for construction purposes. The loans were made to the construction company and it put itself in position to pay the interest by increasing the cost of the work in an amount sufficient to cover the interest it was required to pay. We see no difference between the situation here and the ordinary case where a contractor borrows funds to prosecute a construction job and figures in the interest he will be required to pay in the sale price he fixes for the completed job. In such a case, while the purchaser reimburses the contractor for the interest, he does not pay interest as such.

Guaranty of Dividends.

Under written contracts the parent company assumed the liability to pay semiannually an amount which, added to the available income of the Bellows Falls Power Company, would be sufficient to pay an annual dividend of $5 on the preferred stock of the latter. While the parent agreed to make the payment to a designated trust company, in practice a shortcut was taken and payment was made directly to the Bellows Falls Power Company, so that it could pay its dividends in full in one payment. The amounts so paid were included by respondent in income of the Falls Company, and his action in so doing is alleged to be erroneous.

Petitioner contends that this case is not within the rule of Rensselear & S. R. Co. v. Irwin, 249 Fed. 726; Old Colony Trust Co. v. Commissioner, 279 U. S. 716, and similar cases, because it was not a party to the guaranty agreements, and, further, there was no lease of property or any consideration whatever on the part of the Falls Company. In our opinion the sums received by the Falls Company from the parent do not fit within the definition of income as “ gain derived from capital, from labor, or from both combined,” Eisner v. Macomber, 252 U. S. 189. The payments received did not represent a return on any capital investment on its part, nor were they received for any labor or service rendered. The Falls Company was merely a conduit through which the payments passed to those entitled to them.

Respondent has long held that payments by a holding company in fulfillment to a guaranty of dividends of a subsidiary may not be deducted by the holding company in computing net income, but may be added to the cost oí its stock in the subsidiary. See art. 582, Reg. 45, 62, and 65; art. 282, Reg. 74. If this view of the respondent be correct, it would seem to follow necessarily that the payments when received by the subsidiary would not constitute income. Without passing on the validity of these regulations, we are of the opinion that the payments by the New England Company to the Bellows Falls Power Company were not income to the latter.

Decision will he entered, under Rule 50.


author: Lansdon :

text:
    Adelaide Park Land, Charles D. Francis and Frederick W. Armitage, Trustees, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 39980.
    Promulgated January 15, 1932.

      Joseph E. Peeler, Esq., for the petitioners.

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

Lansdon :

The petitioners’ first contention here is that it was. strictly a trust in the taxable years; that all the income realized from the sale of lots was distributable to the beneficiaries in proportion to their interests; and that such distributions having been made as contemplated by the trust instrument, it was not taxable in any of the years in question. The facts herein are similar to those found in G. F. Sloan et al., 24 B. T. A. 61, and, in our opinion, our decision there must control in this proceeding. Here, as there, a voluntary association was formed and financed to acquire, hold, improve and sell a parcel of valuable real estate. The operations extended over a few years and, while they involved only one purchase, they included many sales. There is sufficient resemblance to corporation organization and procedure to bring the petitioner within the provisions of the law for taxing an association as a corporation. The purpose of this organization was to make money by dealing in real estate. Its operations were carried on for profit. In our opinion, the determination of the respondent must be approved. Hecht v. Malley, 265 U. S. 144; Durfee Mineral Co., 7 B. T. A. 231.

Subsequent to the promulgation of G. F. Sloan et al., supra, the Board adopted and promulgated its report in the proceeding of Frank G. Wild, 24 B. T. A. 691. The facts in that proceeding distinguish it from the instant case. There, there was no organization of the participants in a joint venture. Each individual contributed capital, which was to be used by a manager who was in unrestricted control over the operations from which profit might be derived and empowered to close out the venture and distribute the proceeds at any time. The participants entered into no association with each other and there was no resemblance to corporate organization and operation. In the instant proceeding the beneficiaries of the trust associated themselves in an organized capacity and retained complete authority over the trustees and their operations. This brings the petitioner within the provisions of section 2 of the Revenue Acts of 1921 and 1924, as interpreted by the Commissioner in article 1312 of Regulations 74. See Realty Associates, 17 B. T. A. 1173.

The distinction between a trust instituted solely for the purpose of conserving and liquidating properties already owned by the beneficiaries and one that is based on an organized association of individuals engaged in business for profit is now well established. In Realty Associates, supra, and Frank G. Wild, supra, there was no voluntary association of individuals, but merely contributions to a fund to be used by a promoter in complete control of all transactions. This is also true in F. E. McGlone et al., 22 B. T. A. 358, where the trust was instituted for the sole purpose of disposing of certificates of beneficial interest in one-half of the property, but was terminated before operation was begun. In Lansdowne Realty Trust v. Commissioner, 50 Fed. (2d) 56, the trustees merely received property already owned by the beneficiaries and under lease for five years and collected and distributed the income therefrom and did nothing more than trustees ordinarily would be called upon to perform in the management of trust property.” In Lucas v. Extension Oil Co., 47 Fed. (2d) 65, which affirms Extension Oil Co., 16 B. T. A. 1028, the trust was declared for the purpose of proving and selling an oil lease and never continuously operated the property as a business.

On the other hand, a long line of cases decided by the courts and this Board hold that if there is a voluntary association functioning similiarly to a corporation that transacts business for profit, tax liability as a corporation results. At the head of these cases is Hecht v. Malley, supra, in which the Supreme Court said:

We conclude, therefore, that when the nature of the three trusts here Involved is considered, as the petitioners are not merely trustees for collecting funds and paying them over, but are associated together in much the same manner as the directors in a corporation for the purpose of carrying on business enterprises, the trusts are to be deemed associations within the meaning of the Act of 1918; * * *

In the Burk-Waggoner Oil Association v. Hopkins, 269 U. S. 110, the court disposed of all contentions as to the constitutional power of Congress to tax unincorporated associations as corporations. In E. A. Landreth Co., 11 B. T. A. 1, this Board exhaustively discussed all the phases of the question here involved and reached the conclusion that the petitioner therein was an association. Cf. J. W. Pritchett et al., 17 B. T. A. 1056; Russell Tyson et al., Trustees, 20 B. T. A. 597; Tulsa Mortgage Investment Co., 21 B. T. A. 735; Lloyd M. Willis et al., Trustees, 22 B. T. A. 564.

In the light of all the pertinent decisions cited and others too numerous for citation, we conclude that whether a trust is taxable as an association must be determined (1) by the form of the organization and (2) by the purposes, nature and results of its operations. The application of these tests requires the taxation of the petitioner as an association.

There is no evidence that the failure to file returns in the taxable year was willful. As soon as the trustees realized that reports of some sort must be made to the Commissioner, they made out and filed what they regarded as the returns required by law. Section 3176 of the He vised Statutes (U. S. Code Title 26, 98) as amended, provides in part as follows:

* * * In case of any failure to make and file a return within the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law, the Commissioner shall add to the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable ewuse and not to willful neglect, no sueh addition shall be made to the tax. * * '*■ [Italics supplied.]

In this proceeding a return was filed after the due date. The evidence is clear that the failure to file a timely return was due to reasonable cause and not to willful neglect. We are of the opinion that in the circumstances herein and in the light of the explanation made at the hearing, the penalty was not authorized and should not be collected. Adelaide McColgan, Administratrix, 10 B. T. A. 958; Fajardo Sugar Co. of Porto Rico, 20 B. T. A. 980; Dayton Bronze Beating Co. v. Gilligan, 281 Fed. 709.

Decision will be entered under Rule 50.


author: Marquette :

text:
    Black Diamond Coal Company and Cora Coal Company, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 32458.
    Promulgated January 18, 1932.

      A. M. Fitzgerald, Esq., for the petitioners.

      John H. Bigg, Esq., for the respondent.
   OPINION.

Marquette :

One of the questions presented in this proceeding is whether the respondent erred in his determination of the amount of profit derived from the sale of certain coal properties in 1925. That determination was based upon an erroneous estimate of the amount of recoverable coal remaining in the land sold. The respondent now admits his error and that the amount of recoverable coal so remaining was 3,243,481 tons of the value of 2^ cents per ton. The tax liability of the petitioners for 1925 should, therefore, be recomputed upon the basis of the larger amount of recoverable coal tonnage.

The other question before us is whether the petitioners were affiliated with the Panther Creek Mines, Inc., during the year 1923.

The Revenue Act of 1921 in section 240 (c) defines affiliated corporations as follows:

(c) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others; or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.

No claim is here made, nor does the record disclose, either that petitioners owned or controlled in any way any of the capital stock of the Panther Creek Mines, or that the latter company owned or in any way controlled any of the capital stock of either petitioner. If affiliation existed, it must have been because substantially all of the stock of the petitioners and of the Panther Creek Mines was owned or controlled by the same interest^.

It is shown by the evidence that four men, George, Henry, Robert and Edward Solomon, owned outright 80 per cent of the capital stock of both petitioners, and 95 per cent of the capital stock of Panther Creek Mines, Inc. The remaining 20 per cent of the capital stock of both petitioners was owned by P. H. Solomon, but he owned or controlled no stock in Panther Creek Mines; and Fish, who owned 5 per cent of the Panther Creek Company’s stock, did not own or control any of the capital stock of either petitioner. The evidence also establishes the fact that each of the above stockholders was entirely free to sell any or all of the stock he owned, whenever and to whomsoever he pleased. Each stockholder had absolute dominion over his stocks and was not subject to any control, from any source, respecting them.

The situation here disclosed resembles that in the case of Handy & Harman v. Burnet, 284 U. S. 136. In that case it was held that control of the business policies and management of Wo corporations was not the control contemplated by the statute and, where there is a substantial minority, unless there is a control of the stock of such minority, there is no affiliation of the corporation. See also lee Service Co. v. Commissioner, 30 Fed. (2d) 230; Commissioner v. Adolph Hirsch & Co., 30 Fed. (2d) 645; and Conley Tin Foil Corporation, 11 B. T. A. 65.

In Adolph Hirsch & Co., supra, the court said:

The management of the business of the corporation is not the control required by the statute. It refers to stock control. The fact that the minority is acquiescent and permits the majority to manage the business does not prove actual control over the minority interest. Nor does a control based upon friendship or professional relations satisfy the statute. The control of the stock owned by the same interest refers to beneficial interest. This meaning is consistent with the purpose of the statute to extend to those subject to the hazard of the enterprise, when they are substantially one and the same, the benefit of the consolidated reports.

In the light of the decisions above cited, it is clear that the interests which owned substantially all of the capital stock of Panther Creek Mines, Inc., did not own or control more than 80 per cent of the capital stock of each of these petitioners, within the meaning of the statute. That amount is not “substantially all ” as contemplated by the law. Handy & Harman v. Burnet, supra. Therefore, the petitioners were not affiliated with Panther Creek Mines, Inc., during 1923 and the action of the respondent in that regard is sustained.

Decision will be entered wader Bule 50.


author: Arundell:

text:
    San Martinez Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 37447, 43121.
    Promulgated January 18, 1932.

      D. Webster Egan, Esq., for the petitioner.

      Philip M. Ciarle? Esq., for the respondent.
   OPINION.

Arundell:

The oil leases involved in this proceeding were obtained in the latter part of 1920 and the early part of 1921, in the name of the Yernon Oil Refining Company, but they were so obtained for and on behalf of the petitioner. That procedure was necessary for business reasons and the Yernon Oil Refining Company never claimed any interest in the leases except to hold them in trust for petitioner until assigned to the latter. The petitioner paid the cost of obtaining the leases and carried on all drilling operations which resulted in the discovery of oil on November 20, 1921, on the Booth Lease. It was at all times then material the equitable owner of the property, and the delay in conveying the bare legal title until after the discovery is not important. Cf. Carrie E. Molter, 19 B. T. A. 911.

The only remaining issue is whether the petitioner is entitled to a depletion allowance based upon the fair market value of the property at the date of discovery of oil on November 20, 1921, as provided by section 234(a) (9) of the Revenue Act of 1921 and sections 234(a) (8) and 204(c) of the Revenue Act of 1924. The facts of record clearly establish that the petitioner, by its own drilling operations, discovered oil on its Booth Lease on November 20, 1921, and that the well was not acquired as the result of the purchase of a proven tract or lease. When the leases in question were obtained from the owners of the land, oil had not been discovered within 10 miles thereof.

We have already pointed out in our findings that the failure of the well to continue to flow after the third day was due solely to the presence of certain mechanical defects in the equipment and that with the coming in of the well a valuable discovery had been made. Our real problem is to determine its value in dollars.

The record contains the uncontradicted testimony of several experts who have been engaged in the oil business for years, and, in particular, the testimony of a mining engineer and geologist who had been employed by the Federal Government as a valuation engineer, examining and appraising mineral and oil lands in California for a period of 10 years, and who has been continuously engaged in private practice in his profession since 1921. This witness was not only the best qualified of the several who testified, but he also exercised greater care and gave more attention to recognized valuation factors in reaching his valuation than did the others. The discovery value he arrived at, namely, $859,474.30, impresses us, after consideration of all the evidence, as being the most nearly correct figure. We have accordingly found as a fact that that sum represents discovery value. The value so found is clearly disproportionate to cost and depletion should be based on it.

The parties agreed and stipulated that all of the statements and data contained in “ Form 0 ” filed with petitioner’s return for 1923 are true and correct except as to the dates of acquisition of the leases, the amount of the fair market value of the property on November 20, 1921, and the estimated recoverable oil reserves. Petitioner has proved those three items to be true and correct as set forth in the said “ Form 0 ” and therefore the amount of depletion as computed by petitioner and deducted on its return for 1923 in the sum of $166,459.09 is the amount to which it is entitled as a deduction.

The “ Form 0 ” filed with petitioner’s return for 1924 refers to. Form 0 ” filed with the 1923 return and is based thereon. The deduction for depletion in the amount of $193,394.34, taken by petitioner on its 1924 return is the amount to which it is entitled as a deduction.

Judgment will be entered for the petitioner.


author: TRAmmell:

text:
    Peavy-Byrnes Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Peavy-Wilson Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Peavy-Moore Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 15822-15824, 16354-16356, 25984-25986.
    Promulgated January 18, 1932.

      3. L. Herold, Esq., and John B. Files, Esq., for the petitioners.

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

TRAmmell:

Further proceedings were had in these cases pursuant to judgment and mandate of the United States Circuit Court of Appeals for the Fifth Circuit. (51 Fed. (2d) 163.) The issues joined at the original hearing included, among others, questions of invested capital and depletion. See 14 B. T. A. 625, where we said, at page 648:

The Peavy--Byrnes Lumber Co. claims that either it is entitled to deduct each year, as cost of timber under the Krause & Managan Lumber Co. contract, one-half of the net profits of the Peavy-Byrnes Co., or that the 2,500 shares of capital stock issued to the Krause & Managan Lumber Co., Ltd, in 1913 were worth $562,000, and represented payment for the timber contract; and that this amount should be included in invested capital and be subject to exhaustion or depletion based upon the quantity of timber included in the contract.

Upon the evidence adduced, we reached the conclusion that the Peavy-Byrnes Lumber Co. acquired the timber rights under the contract in question from the Krause & Managan Lumber Co. in 1909, for which stock was issued in July, 1913. (14 B. T. A. 631, 648, 650.) Accordingly, we held that the cash value of the timber rights in 1909 when paid in for stock should be included in invested capital, and that the basis for computing deductions for depletion was the value of the timber rights at March 1, 1913.

The United States Circuit Court of Appeals, in its opinion above cited, held that the contract referred to “ did not effect an immediate sale of the timber that “ the Board erred in failing to accept July 28, 1913, as the date for ascertaining the value of the timber received by the Peavy-Byrnes Company in exchange for its capital stock ”; and remanded the cases for further proceedings not inconsistent with its opinion.

Agreeably with the mandate of the court another hearing was held, at which the parties were afforded an opportunity to present such additional evidence as they desired respecting the value of the timber at July 28, 1913, and the evidence so presented will be referred to herein.

The assets paid in for stock, with which we are here concerned, constituted tangible property, and, under the Revenue Acts of 1918 and 1921, may be included in invested capital at their actual cash value at the time when so paid in, i. e., July 28, 1913. Also, since the timber was acquired by the Peavy-Byrnes Company on July 28, 1913, which was subsequent to March 1, 1913, cost is the basis for computing depletion allowances. There is no controversy respecting the correctness of these propositions of law. It follows that the problem now presented is to find from the evidence before us the actual cash value of the timber in question as of July 28, 1913, for purposes of invested capital, and the cost thereof to the Peavy-Byrnes Company for purposes of depletion, if cost was not the same as the actual cash value.

The parties to the contract involved were dealing at arm’s length, and hence evidence respecting the actual cash value of the assets exchanged for the stock may be considered in arriving at the value of the stock. Conversely, evidence tending to establish the value of the stock may be considered in determining the value of the assets exchanged therefor. William Ziegler, Jr., 1 B. T. A. 186; Napoleon B. Burge et al., 4 B. T. A. 732; Rose C. Pickering et al., 5 B. T. A. 670, and decisions cited. At the original hearing, these cases were presented on the theory that the value of the stock represented the value of the assets for which exchanged.

Based on the record of the first hearing, the petitioners contended that the fair market value of the 2,500 shares of stock of the Peavy-Byrnes Company which were issued to the Krause & Managan Company on July 28, 1913, was $245.50 per share, or a total market value of $613,750 as of July 28, 1913; and that the fair market value of the timber as of the same date, when the stock was issued therefor, was $613,750, which amount should be included in invested capital.

The petitioners now contend that the property exchanged for stock had a value at the basic date of $1,250,000, which amount should be included in invested capital, and that the same amount, in addition to the annual stumpage payments at the stipulated rates, also represents the cost to the Peavy-Byrnes Company of the timber acquired on July 28, 1913, which amount likewise should be the basis for computing depletion allowances.

These latter contentions are predicated upon the testimony adduced at the supplemental proceedings hereinabove referred to. At that hearing A. J. Peavy, president of the petitioning corporations, testified that in his opinion the aggregate value of the assets of the Peavy-Byrnes Company at July 28, 1913, was about $3,000,000 and that the timber at that date was worth $10 per thousand feet. Rudolph Krause, president of the Krause & Managan Company, testified that in his opinion the assets of the Peavy-Byrnes Company a,t July 28, 1913, were worth $2,500,000 to $3,000,000, and that the timber at said date was worth between $10 and $12 per thousand feet.

On the basis of this testimony, the petitioners argue that the stock of the corporation had a fair value of $500 per share at July 28,1913, or a total value of $1,250,000 for the 2,500 shares exchanged on said date, as the petitioners claim, for a one-half interest in the aggregate assets, including the timber and half of the future profits, of the Peavy-Byrnes Company.

The Circuit Court of Appeals declined to accept the theory of the petitioners in respect of the assets exchanged for the stock, saying:

Prior to July 28, 1913, the Peavy-Byrnes company had only the right to cut the timber, * * * The Peavy-Byrnes company did not become the owner of the timber until July 28, 1913 when it paid for it in stock. The Krause & Managan company upon the exercise of its option to take the stock surrendered its interest in the contract, and thereafter became only a stockholder. It therefore cannot be held, as argued on behalf of the Peavy-Byrnes company and the other two petitioning corporations, that the stock was issued to the Krause & Managan company only for the purpose of evidencing its right to continue to receive half of the future net profits.

The present contention of the petitioners, and the testimony offered in support thereof, that the stock of the Peavy-Byrnes Company had a value of $500 per share at July 28,1913, a value in excess of twice the amount originally claimed, is in sharp conflict with the other evidence of record bearing on the question of value of the stock and of the assets.

Peavy testified at the original hearing that he purchased 45 shares of this stock from his brother-in-law, Byrnes, on November 21, 1913, at $225 per share; that the purchase was a business transaction, and that he then considered the stock was worth what he paid for it.

The petitioners’ witness Johnson, at the same hearing, testified that in 1913, at about the basic date, or shortly prior thereto, he sold stock in the Peavy-Byrnes Company for approximately $230 per share. He further testified that, considering the factors then known affecting the value of the stock, it had in his opinion a fair value at July 28, 1913, of $266 per share. This witness was a banker of many years experience, the president of two banks, which were the principal depositories of all the Peavy companies, and one of which banks assisted in their original financing. He was also a stockholder of the Peavy-Byrnes Company and about July, 1913, was familiar with its financial condition.

Taking the value of $266 per share as the fair value of the stock at July 28, 1913, which is the maximum value as of that date established by the testimony of the witness Johnson, we find the total value of the 2,500 shares of stock exchanged on that date for the Krause & Managan property to be $665,000. This entire amount of stock, however, was not issued for the timber standing uncut on that date. A portion only of the stock issued at that time was in payment of the uncut timber. A portion of the stock so issued must be allocated to the timber which was cut between 1909 and July 28, 1913, since we find no provision in the contract to justify the conclusion that the Krause & Managan Company intended to donate to the Peavy-Byrnes Company, one-half of the profits accumulated during the said period. Nor can the stumpage provisions of the contract ($4 per thousand feet and the conditional bonuses) be considered as the full compensation intended to be paid by the Peavy-Byrnes Company to the Krause & Managan Company for the timber cut prior to 1913. The contract did not provide one rate of compensation to be paid by the Peavy-Byrnes Company for the right to cut the timber prior to 1913 or the date when the profits had returned to that company the cost of its plant, and a different consideration for the sale of the remaining timber on that date to said company. On the contrary, only one basis of compensation was provided in the contract, and it applied alike to the timber paid in for stock in July, 1913, and the rig-ht to cut the timber prior thereto.

When the cut began in 1909 the timber reserve was 206,140,227 feet and up to July 28, 1913, there had been cut 52,124,702 feet, leaving 154,015,525 feet uncut on said date. Allocating the 2,500 shares of stock issued in 1913 in part to the timber that remained uncut on July 28, 1913, and in part to the right to cut the timber prior thereto, basing such allocation on the proportion of timber cut prior to the basic date and that remaining uncut on said date, and valuing the stock at $266 per share, we find that the value of the stock issued in payment of the timber standing at July 28, 1913, was $497,135.92. On the basis indicated, said amount represents the fair value of the stock issued for the timber on the date stated.

Bearing in mind the valuation of the stock arrived at above, we will next consider the evidence relating to the value of the property exchanged therefor. At the original hearing, the petitioners offered no direct evidence as to the value of the timber at July 28, 1913, when exchanged for stock, but the following stipulation relating thereto was made by the parties:

It is hereby stipulated by and between the petitioners and the respondent by their respective Attorneys of record, that the following facts are true and that the Board may incorporate the same into its findings of fact, subject to the right of either party to introduce evidence as the basis of further findings of fact, except as to paragraph 9 hereof:
* % * * * * * *
9. That if the witnesses for the Government were present they would qualify as experts as to the fair market value of timber and testify that the fair market value of the timber covered by the agreements between Peavy Byrnes Lumber Company and Krause & Managan Lumber Company, introduced before the Board, had a fair market value of $4 per M ft. log scale as of Nov. 20, 1909; that the said timber remaining uncut on March 1, 1913 had a fair market value of $5 per M ft. log scale, and that the timber remaining uncut on July 28, 1913 had a fair market value of $6 per M feet log scale.

While paragraph 9 of the foregoing stipulation recites in substance what, it was agreed, the Government’s witnesses would have testified to, if present, the fact that the parties reserved the right to introduce further evidence except as to the subject matter of paragraph 9, would seem to be tantamount to stipulating that the values fixed by the Government’s witnesses were correct, and that no further evidence would be offered thereon by either party. In any event, whatever may be the precise effect of the stipulation in that regard, we are unable, in the light of the circumstances disclosed, to accept the later conflicting testimony of the witnesses Peavy and Krause as establishing- a valuation of the timber in excess of the stipulation.

At the stipulated value of $6 per thousand feet, the 154,015,525 feet of timber standing at the basic date had a total unencumbered value of $924,093.15, from which we must deduct the then present value of the $4 per thousand feet stumpage which was to be paid as the timber was cut. Using for this purpose the same factors.set out in detail in our prior opinion, we find the then present value of the $4 payments to be $377,277.61. This amount subtracted from the unencumbered value of $924,093.15 leaves $546,815.54 as the value of the timber paid in for stock on July 28, 1913. That amount exceeds the value of the stock, as above computed, to the extent of $49,679.62, but in computing the value of the timber, we have not taken into consideration the conditional stumpage bonuses of 25 cents and 25 per cent. Giving effect to those elements of the consideration paid for the timber, it is at once apparent that substantially the same result is reached on the basis of a stock valuation of $266 per share as on the basis of a timber valuation of $6 per thousand feet.

Considering all the evidence in the record before us, it is our opinion that the property paid in for stock on July 28, 1913, had an actual cash value of $497,135.92 for purposes of computing invested capital, and since the stock issued therefor had substantially the same value, this amount represents the cost of the property to the Peavy-Byrnes Lumber Company, and is the proper basis for computing the depletion deductions. The amounts paid in 1919, 1920 and 1921 to the Krause & Managan Lumber Company as stumpage bonuses under paragraph 13 of the contract will be treated as additional cost of the timber for the respective years in which paid. The deficiencies will be recomputed accordingly.

Judgments will be entered under Bule 50.


author: Smith:

text:
    State Savings Loan & Trust Company, Trustee, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 47958, 49293.
    Promulgated January 19, 1932.

      Robert Ash, Esq., for the petitioner.

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

Smith:

In these proceedings the petitioner contends that the indenture of trust of February 7, 1925, created nine separate trusts instead of a single trust. It contends that this is apparent from the following language excerpted from paragraph 5 of the agreement:

* * * and as each of said grandchildren arrive at the age of thirty years, said trustee shall pay to him or her one-third of the trust estate in which said grandchild has a beneficial interest * * *.

It is argued that if only one trust existed for the nine grandchildren and each had an equal beneficial interest, then each would have a total one-ninth interest; that the above quoted words from the fifth paragraph of the instrument would be meaningless unless the instrument as a whole be construed to create nine trusts, since “ each child would at no time be entitled to as much as a one-third interest.” The argument is not sound.

The indenture of trust is not ambiguous. The settlors simply desired to create a trust fund in which each of their nine grandchildren should have an equal beneficial interest. They went to the petitioner and the petitioner’s officers drew the indenture of trust, which was executed by the settlors and the petitioner. The petitioner was apparently of the opinion that the matter could be handled as one trust in one account and accordingly the instrument throughout speaks of the “trust estate” or the “trust fund” which was created by the instrument. The petitioner kept its books of account showing the creation of a single trust fund so far as the years under review are involved, and for the years 1925, 1926, and 1921 filed a single return for the trust fund. No moneys were paid to the beneficiaries or for the education, comfort, and support of the beneficiaries during the taxable years. It was much simpler for the petitioner to keep its accounts in this manner. It was merely a mathematical computation to determine the beneficial interest of each beneficiary in the trust fund. Each was entitled to one-ninth of the whole. So long as this situation existed there was no occasion for the separation of the trust fund.

The petitioner insists that the decree of the Circuit Court of Adams County, Illinois, entered on April 30, 1931, conclusively proves that nine separate trust funds were created by the indenture of trust. We are of the opinion, however, that such a decision of the Circuit Court of Adams County is not binding upon this Board. As shown by our findings of fact, the decree of the county court was the decree desired by the beneficiaries. The defendants defaulted and judgment was rendered in accordance with the complainants’ averments set forth in their bill of complaint. In Fidelity & Colum bia Trust Co. v. Lucas, 52 Fed. (2d) 298, it was held that the Government in administering the Federal tax laws was not concluded by an “ agreed judgment ” entered in the Circuit Court of Jefferson County, Kentucky, involving the construction of a will. The court there said:

* * * Furthermore, it is well settled that a decision of a State Court, establishing a local rule of property or, construing a state statute or a contract made after the rights of a litigant in a federal court suit had accrued, and in a case to which he was not a party, is not binding upon the federal court. I know of no reason why this rule should not apply to the construction of wills. See Kuhn v. Fairmont Coal Co., 215 U. S. 349, 30 S. Ct. 140, 54 L. Ed. 228, and authorities there cited.

The second contention of the petitioner is that'the trust created by the indenture of trust was a discretionary trust and that the income of the trust estate which might have been distributed to the beneficiaries in the years 1926, 1927, and 1928 is deductible from gross income under subdivision (2) of section 219 (b) of the Revenue Act of 1926 and the corresponding section of the Revenue Act of 1928 (sec. 162 (b)).

The respondent, on the other hand, contends that section 219 (b) (3) of the Revenue Act of 1926 and the corresponding section of the Revenue Act of 1928 (sec. 162 (c)), barred the deduction of the amounts claimed. Section 219 (b) of the Revenue Act of 1926 reads in part as follows:

(2) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount oí the income oí the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under paragraph (3) in the same or any succeeding taxable year;
(3) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is properly paid or credited during such year to any legatee, heir or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.

In support of its contention the petitioner relies upon Blair v. Barton, 26 Fed. (2d) 765; and Willcuts v. Ordway, 19 Fed. (2d) 917. An examination of these cases shows, however, that they involved entirely different facts. In Blair v. Barton, supra, the question was whether a trustee was liable to income tax in respect of amounts distributed to beneficiaries under a discretionary trust, the total income of the trust fund having been paid to such beneficiaries. The court held that the trustee was not liable under such circumstances, the statutes involved being the Eevenue Acts of 1918 and 1921. In Willouts v. Ordway, supra, the acts involved were the Eevenue Acts of 1916, 1918, and 1921. The facts were that a will bequeathed to each of the children of the testator an equal share in the income of the trust fund. Pursuant to its terms the shares of the adult children were paid to them each year while the shares of the minor children, after certain expenses for maintenance, etc., were invested to accumulate until they severally reached the age of 21 years. The trustees each year purchased securities with the share of income distributable to each minor in his or her name, which they kept in a special safe-deposit box apart from any papers of the trust and such investments were not carried on the books nor treated as any part of the trust estate. It was held that such segregation of the shares of the minors was a distribution and that neither they nor their accumulations were subject to tax as income of the trust, but as separate units to the several beneficiaries.

In the present proceedings the books and records of the trustee show that no money was paid or credited to any beneficiary in either of the years in question. The income of the trust fund was to be either distributed to the beneficiary or accumulated within the discretion of the fiduciary. The facts bring these proceedings squarely within the provisions of section 219 (b) (8) of the Eevenue Act of 1926, and the corresponding section of the Eevenue Act of 1928. Since there were no distributions to the beneficiaries during the taxable year, and since there were no credits to the accounts of the beneficiaries, it must be held that the income of the trust fund is taxable to the petitioner, the trustee.

Judgments will be entered for the respondent.


author: LaNsdoN :

text:
    Imperial Elevator Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 35688.
    Promulgated January 19, 1932.

      G. G. Goodson, Esq., and E. F. Hoesehen, Esq., for the petitioner.

      J. M. Leinenhugel, Esq., for the respondent.
   OPINION.

LaNsdoN :

The respondent concedes that petitioner sustained a loss by reason of its ownership of stock in the P. L. Howe Lumber Mills, but contends that such loss occurred in the fiscal year ended June 30, 1922. The petitioner contends that the stock became worthless in the fiscal year ended June 30, 1923, and that it is entitled to carry forward the resulting net loss for the two succeeding taxable years. There is no controversy over the cost of the stock to petitioner or over the fact of its worthlessness.

The facts disclose that on May 1, 1922, the petitioner entered into an agreement with certain creditors of the P. L. Howe Lumber Mills providing for a future liquidation of that company. Liquidation, pursuant to the contract, was completed on December 1, 1922, when all the assets and business were sold to the Brooks-Scanlon Lumber Company for an amount insufficient to satisfy the claims of creditors. On May 1, 1922, it was certain that petitioner would sustain a loss on its investment in the stock of the P. L. Howe Lumber Mills, but we do not think it was certain that it would lose its entire investment. At that time the company was still a going concern, with a large plant and equipment, timber holdings and an inventory of finished goods. The respondent points to the agreement of May 1, 1922, where it is stated, “ it has become manifest and is now conceded by all the parties hereto that the capital stock of the Lumber Company has no present or prospective value whatsoever except as a convenient means of holding its assets and liquidating its affairs ”; and says that the petitioner, itself, recognized that the stock was worthless. It should be noted, however, that in paragraph 8 the agreement provides that the balance, if any, remaining from the liquidation should be paid to the petitioner. We do not think the petitioner was obligated to write off the loss from its investment when it was first determined to liquidate the company. We think petitioner is entitled to take its loss after the liquidation was completed, when all the assets had been sold and nothing remained for the stockholders. It was then certain, for the first time that nothing would be realized from its investment. Cf. H. Liebes & Co., 23 B. T. A. 787.

The respondent contends that the agreement of May 1, 1922, resulted in the transfer of the business and assets of the P. L. Howe Lumber Mills, which terminated the affiliation existing between petitioner and that corporation. He contends that the petitioner was required to file a consolidated return for the period up to May 1, 1922, and a separate return for the period May 1, 1922, to June 30, 1922. We do not agree with such a construction of the instrument. The petitioner continued to own its stock in the P. L. Howe Lumber Mills and any transfer was to give the creditors’ committee power to liquidate the business. On December 1, 1922, all of the assets and business were sold and operations of the P. L. Howe Lumber Mills ceased. The affiliation between petitioner and its subsidiary was not terminated prior to that date.

The facts of this proceeding, with reference to whether a “net loss ” may result from stock in a subsidiary corporation becoming worthless, are very similar to those in H. Liebes & Co., supra, where we allowed the petitioner to carry forward the amount of such a loss to the two succeeding taxable years. In accordance with our opinion in that case, we conclude that petitioner is entitled to carry forward the “ net loss,” if any, for the fiscal year ended June 30, 1923, to the two succeeding taxable years.

Decision will be entered wader Rule 50.


author: Black :

text:
    Spencer K. Mulford, Sr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 33490.
    Promulgated January 19, 1932.

      Robert A. Littleton, Esq., for the petitioner.

      O. H. Gurl, Esq., for the respondent.
   OPINION.

Black :

In support of his allegation that collection of the deficiency is barred by the statute of limitations, petitioner assigns the following reasons:

1. Because the document of February 5, 1923, does not specify the year for which it was given, it is void as a waiver for the year 1917.
2. The statement by an official of the Bureau on December 10, 1923, to the taxpayer’s legal representative, that there was a waiver on file for the year 1917 that would shortly expire, was the misrepresentation of an existing fact, made for the purpose of inducing the taxpayer to execute the waiver of December 10, 1923, as the renewal of a prior waiver.
3. The waiver of December 10, 1923, was induced by the misrepresentation of an existing fact; obtained under duress,- and is void.
4. The waiver of December 8, 1924, is the renewal of prior void waivers, and is also void.
5. The deficiency assessed and proposed to be collected is barred by the statute of limitations, and there is no deficiency in tax due from the taxpayer for the year 1917.

The reasons relied upon by petitioner in support of his contention that the deficiency is barred by the statute of limitations are so closely related that they may be discussed together, without treating them separately. If the waiver executed by petitioner on February 5, 1923, is valid to arrest the running of the statute of limitations against collection of the tax due under petitioner’s return for the calendar year 1917, admittedly petitioner’s appeal fails. His whole contention that the collection of the deficiency is barred by the statute of limitations is based upon the proposition that the waiver filed February 5, 1923, is void for uncertainty.

The blank space contained in the waiver for the insertion of the year or years to which it was applicable was not filled in and petitioner contends that such space should have been filled in with the figures “ 1917 ” and that because this was not done, the waiver is void for uncertainty. We do not agree to this contention. The evidence shows that the only contested tax case which the petitioner had pending with the Bureau of Internal Revenue at the time this waiver of February 5, 1923, was signed by the petitioner and the Commissioner, related to the year 1917.

It seems perfectly plain from the facts introduced in evidence, that the waiver was intended to cover the year 1917; the Commissioner accepted it for that purpose, acted upon it, and granted petitioner the delay necessary for the further and more deliberate consideration of his claim that the additional tax liability which the Commissioner was asserting for 1917 was wrong.

The consent in writing waived the statute of limitations as to the determination, assessment and collection of the amount of taxes due under “ any return made by or on behalf of the said (-) for the years (-) under the Eevenue Act of 1921, or under prior income, excess-profits or war-profits tax or under Section 38 of the Act entitled ‘ An Act to provide revenue, equalize duties and encourage the industries of the United States and for other purposes’, approved August 5,1909, irrespective of any period of limitations. This waiver expires one year from date.” The language would seem broad enough to waive the statute of limitations for the period of one year as to any tax return which petitioner had filed under the Revenue Act of 1921 or prior revenue acts. However, we are only called upon to decide its validity as to the year 1917 and we hold it a valid waiver for that year. In Constitution Publishing Co., 22 B. T. A. 426, the taxpayer had.filed a waiver purporting to waive the statute of limitations as to any taxes “ due under any return made by or on behalf of said taxpayer for the year 1922, seven months ended July SI [italics supplied] under existing revenue acts or under prior revenue acts.” Notwithstanding the ambiguity in the waiver, we held it valid for the calendar year 1922.

Where the taxpayer, by the execution of the waiver, has obtained delay in the collection of additional taxes and a more deliberate and thorough consideration of his claim in abatement, and where the waiver is regular in form, except in the respect which we have enumerated, and is in the possession of the proper governmental bureau, every presumption should be taken in favor of its validity and binding effect. Cf. Trustees for Ohio & Big Sandy Coal Co. v. Commissioner, 43 Fed. (2d) 782; Stern Bros. & Co. v. Commissioner, 51 Fed. (2d) 1042.

On the authority of the above cited cases we hold the waiver of February 5, 1923, a valid waiver. The waiver of February 5, 1923, being a valid waiver, there was no duress exerted by the Commissioner in securing petitioner’s signature to the renewal waiver of December 10, 1923. The Commissioner’s representative, Phillips, merely stated to petitioner’s legal representative that unless the waiver then on file was renewed, an immediate assessment of the tax claimed would be made against petitioner. It is not duress on the part of the Commissioner to give the taxpayer notice that he is going to use the lawful means provided by the statute to assess and collect the tax. Burnet v. Chicago Railway Equipment Co., 282 U. S. 295.

The assessment made by the Commissioner against petitioner December 23, 1925, was not barred by the statute of limitations when made. The assessment having been made after the effective date of the Revenue Act of 1924, the Commissioner had six years from the date of the assessment in which to collect the tax, and the collection was not barred at the time the Commissioner rejected petitioner’s claim in abatement — November 4, 1927, nor at the time petitioner filed his petition in this proceeding. Section 278(d), Revenue Acts 1924 and 1926. Northwestern Barb Wire Co. v. United States, 42 Fed. (2d) 579; Aiken v. Burnet, 282 U. S. 277.

Decision wild be entered for the respondent.


author: S3?awell :

text:
    Rita M. Kohler White, Petitioner, v. Commissioner of Internal Revenue, Respondent. Vera M. Kohler Alker (Substituted for Vera M. Kohler Erbe), Petitioner, v. Commissioner of Internal Revenue, Respondent. Olga K. Miglietta, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 36112, 36113, 36379.
    Promulgated January 19, 1932.

      R. Kemp Slaughter, Esq., and Hugh C. Bickford, Esq., for the petitioners.

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

S3?awell :

The issue with which we are concerned arises on account of the trusts referred to in our findings as A, B, C and D, which were created under the terms of the will of Charles Kohler. The decedent died on June 4, 1913, leaving a large estate, and by the terms of his will provided that a portion thereof should be set aside which would be sufficient to produce income for each of the petitioners during the life of each of them in the amount of $25,000. A similar provision was made for his widow, who is not a petitioner in this proceeding. The trusts were not created until after extended court proceedings which terminated in 1921 with a decision by the Court of Appeals of the State of New York. The trusts were then created and the trustees received property on account of each trust of some $680,000. Included in the property so received were two leaseholds of the respective values of $100,000 and $185,000, and one-fourth of the value of each leasehold was included in the trust for each daughter and one-fourth for the widow. One lease expired in 1927 and the other in 1930. The remaindermen with respect to each of the trusts for the petitioners were the issue of the respective daughters. While we are not shown in detail the amount produced by each trust and the exact disposition thereof, our understanding is that substantial amounts were produced by each trust (computed by taking as a deduction the amount retained for amortization of the leaseholds) in excess of that required to pay the annual amount of $25,000 to each of the daughters (petitioners herein) and that pursuant to the decision of the Court of Appeals of New York (here-inbefore referred to) such excesses were paid to the respective daughters. And we understand further that similar excesses were produced by the trust for the widow and that these excesses were likewise paid to the daughters. In the fiduciary returns as filed by the trustees, the amount retained as amortization of the leaseholds was claimed as a deduction and the petitioners as beneficiaries reported in their returns the amounts so shown by the trustees, which were likewise the amounts distributed to them.

Our question is whether the action of the trustees in claiming a deduction for amortization of leaseholds was correct in arriving at the amount distributable to the petitioners and therefore taxable to them. The fact that the petitioners have reported in their returns the amounts distributed to them by the trustees is not conclusive as to the amounts upon which they are to be taxed, since the controlling sections of the statutes (section 219 (a) (4) and (d) of the Revenue Act of 1921 and corresponding provisions of the Revenue Act of 1924) provide that the amount to be returned is that which, “ pursuant to the instrument or order governing the distribution, is distributable to such beneficiary, whether distributed or not.” Since the decision in Baltzell v. Mitchell, 3 Fed. (2d) 428 (certiorari denied, 268 U. S. 690), many cases have arisen before the Board with respect to the income upon which a life beneficiary is to be taxed, and we have held that where the trusteees create an unauthorized reserve out of income to replace depreciable assets of the corpus of a trust estate, the amount so withheld is distributable and taxable to the life beneficiaries. Estate of Virginia I. Stern et al., 7 B. T. A. 853, and F. C. Hubbell et al., 14 B. T. A. 1040; affd., Hubbell v. Commissioner, 46 Fed. (2d) 446, and certiorari denied, 283 U. S. 840. But where the will is not clear as to whether an amount should be withheld by the trustees from the income of a given trust in order to conserve the corpus of the trust, consideration will be given to the interpretation placed thereon by the parties themselves (E. L. E. Brenneman et al., 10 B. T. A. 544) and to the rule of law with respect to the conservation of such assets which exists in the State where the particular trust is being administered as well as to any State decrees which may have been entered with respect to such estate. Marguerite T. Whitcomb et al., 22 B. T. A. 118.

While the will here involved does not clearly show whether an amount should be retained by the trustees on account of the exhaustion of the leaseholds included in certain trusts created pursuant to the will, an examination of the other considerations named above makes necessary the conclusion that the amount deducted and retained by the trustees may not now be considered as taxable income to the beneficiaries. In the first place, the fact can not be overlooked that the estate, of which the trusts in question formed a part, was the subject of protracted litigation, particularly with respect to the creation of these trusts, and that in the final decree entered by the Court of Appeals of New York, which held that definite amounts should be set up in these trusts, it was stated that it could not be said that the amounts so set up were intended by the testator to “ remain uncertain, varying or shifting amounts,” and that “ The principal of such trust funds when set aside will, subject to the trusts, become vested in those to whom the residue thereof is given under the will,” that is, the issue of the petitioners in these proceedings. Pursuant to that decree, the trusts in question were set up out of assets then included in the testator’s estate and included among the assets so used were certain exhaustible or wasting assets, that is, leaseholds. The general rule in New York as expressed by a court of that State in a case involving leaseholds (In re Golding’s Estate, 216 N. Y. S. 593) follows:

* * * The general rule is that, whel-e trustees or executors find a portion of the estate invested in what are termed “wasting” securities, they should pay to the life beneficiary only so much of the income as represents a fair return upon the capital value, accumulating and retaining the residue for the benefit of the remaindermen, unless a contrary intention is evidenced from the will itself, read in the light of the surrounding circumstances. Frankel v. Farmers Loan & Trust Co., 152 App. Div. 58, 135 N. Y. S. 703; Matter of James, 146 N. Y. 78, 40 N. E. 876, 48 Am. St. Rep. 774.

Not only do we fail to find anything of a positive nature indicating that provision should not be made for the exhaustion of the leaseholds, but also when the case (referred to above as involving the testator’s estate) was returned by the Court of Appeals to the surrogate’s court for the entry of final judgment, such final judgment was entered on the basis of an accounting which made provision for the exhaustion of the leaseholds in question. That is, the amount which it is now proposed to be added to the taxable income of the several petitioners in these proceedings was shown in the schedule submitted to, and approved by, the surrogate’s court as representing the amount to be retained by the trustees on account of the exhaustion of the leaseholds in question.

In the next place, we find that the trustees, with the apparent acquiescence of the beneficiaries, interpreted the directions of the decedent, as indicated by the several decrees heretofore referred to, to mean that amounts should be retained each year from the income of the trusts to conserve the corpus in so far as the wasting assets (leaseholds) were concerned. The amounts so retained by the trustees were considered by them as corpus and were not distributed to the beneficiaries (petitioners in these proceedings), to whom they are now proposed to be taxed. In this respect, the cases at bar are even more favorable to the petitioners than that of Marguerite T. Whitcomb et al., supra, in that the beneficiaries involved therein had actually received the amounts sought to be deducted by the trustees in their fiduciary returns. We held, however, that since a court of competent jurisdiction later decided that an amount should have been retained by the trustees on account of exhaustion, wear and tear of trust property, such an amount was a proper deduction in the fiduciary returns and therefore was not taxable income to the beneficiaries even though it had been received by them. In the cases which we are considering the amounts in question had not been paid to the beneficiaries, but were retained by the trustees with approval of the court having jurisdiction thereof and that in a State where the rule of law applicable to the situation here existing is in accord with the action taken by the trustees. Under such circumstances, we are unwilling to say that the course pursued by the trustees constituted an unauthorized withholding of income from the beneficiaries. The report previously promulgated in these proceedings (23 B. T. A. 391), which held that the amounts withheld by the trustees on account of the exhaustion of the leaseholds were taxable to the beneficiaries, is accordingly reversed and the contention of the petitioners that the amounts so withheld should not be considered taxable to them is sustained.

Reviewed by the Board.

Judgment will be entered under Bule 50.