author: Seawell :

text:
    U S L Battery Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 73074, 73075.
    Promulgated June 21, 1935.

      Paul P. Cohen, Esq., for the petitioner.

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

Seawell :

There is involved in these proceedings, consolidated for hearing and report, the transferee liability of the petitioner for unpaid income tax of the U. S. Light & Heat Corporation in the amount of $10,220.61 for the period January 1 to April 30, 1927, and like taxes of the TJ S L Battery Corporation, whose name the petitioner, formerly the Motor Battery Corporation, acquired on June 1, 1928, for the periods May 1 to December 81, 1927, and January 1 to May 31, 1928, in the respective amounts of $23,022.16 and $5,495.05. The cases were submitted for decision on the basis of a stipulation of facts, in which the parties agree upon the correct tax liability of the transferors for the respective periods except the period May 1 to December 31, 1927, for which it is agreed there is no deficiency. As to the two periods still in controversy, the petitioner claims that its liability as a transferee is barred by the statute of limitations. The parties are also in agreement that if the period for assessment and collection has not run against the petitioner, it is liable as a transferee for the amount of the agreed deficiencies, plus interest as provided by law.

The income tax return of the U. S. Light & Heat Corporation for the period January 1 to April 30, 1927, was filed on March 13, 1928, and the return of the U S L Battery Corporation (transferor) for the period January 1 to May 31, 1928, was filed on March 14, 1929. On February 2, 1931, the transferors executed and filed with the respondent waivers for the assessment of the taxes in question at any time on or before December 31, 1931, “ except that, if a notice of a deficiency in tax is sent to said taxpayer by registered mail on or before said date, then the time for making any assessment as aforesaid shall be extended beyond the said date by the number of days during which the Commissioner is prohibited from making an assessment and for sixty days thereafter.”

On November 10,1931, deficiency notices were mailed to the trans-ferors for the taxable periods in question and on January 9, 1932, the petitioner, as the transferee of the assets of the transferors, filed petitions with this Board on the basis of such deficiency notices. On April 19, 1932, this Board entered orders of dismissal in the proceedings for lack of jurisdiction, the motions therefor having been made by the respondent. No appeal was taken by the petitioner from the orders. On March 26, 1932, after making the motions, the respondent, in accordance with section 274 (c) of the Kevenue Act of 1926, assessed the deficiencies proposed against the transferors, and on March 29,1932, and April 19, 1932, mailed to the transferors the first and second notices, respectively, of such assessments, none of which have been paid.

On May 24, 1933, the respondent mailed to the petitioner notices of its liability as a transferee for the taxes in question, plus interest as provided by law.

The petitioner questions the validity of the consents to extend the period of limitation against the transferors beyond March 13, 1931, and March 14, 1931, as fixed by section 277 (a) (1) of the 1926 Act and section 275 (a) of the 1928 Act, on the ground that they were executed nearly three years after the taxpayers had transferred their assets to it. Consents given at such time are valid and bind the transferee. McPherson v. Commissioner, 54 Fed. (2d) 751, affirming 22 B. T. A. 390; Helvering v. South Penn Oil Co., 68 Fed. (2d) 420; W. O. Menger, 17 B. T. A. 998; Continental Oil Co., 23 B. T. A. 311.

The petitioner contends that the period of limitation is controlled by the terms of the consents, which extend the time after the mailing of a deficiency notice by the period during which the Commissioner is prohibited from making an assessment, plus 60 days. It is admitted that such a prohibition existed for the period between the mailing of the deficiency notices to the taxpayers on November 10, 1931, and for 60 days after January 9, 1932, the date appeals were' taken from the notices. To determine the time during which the Commissioner was prohibited from making assessment, the petitioner says we must look to the provisions of section 274 (a) of the 1926 Act and section 272 (a) of the 1928 Act. The petitioner claims that those provisions confine the prohibition against assessment to cases where a petition is filed by the taxpayer and if such person does not take an appeal, then the Commissioner may make an assessment as provided in sections 274 (c) and 272 (c) of the 1926 and 1928 Acts, respectively. Section 274 (a) of the 1926 Act authorizes the sending of deficiency notices and the filing of petitions with the Board within 60 days thereafter. As to assessment, it provides:

* * * Except as otherwise provided in subdivision (d) or (f) of this section or in section 279, 282, or 1003, no assessment of a deficiency in respect of the tax imposed by this title and no distraint or proceeding in court for its collection shall be made, begun, or prosecuted until such notice has been mailed to the taxpayer, nor until the expiration of such 60-day period, nor, if a petition has been filed with the Board, until the decision of the Board has become final. * * *

Section 272 (a) of the 1928 Act contains a like prohibition. Sections 274 (c) of the 1926 Act and 272 (c) of the 1928 Act provide that “ If the taxpayer does not file a petition with the Board * * * the deficiency * * * shall be assessed, and shall be paid upon notice and demand from the collector.”

The clear intent of these sections of the acts is that if a petition is filed with the Board upon the basis of a deficiency notice the Commissioner shall not make an assessment of the deficiency until the decision of the Board becomes final. The prohibition goes into effect when a deficiency notice is mailed and “ if a petition ” is filed with the Board it continues until the decision of the Board in the proceeding becomes final. To continue the force of the prohibition it is not essential that the petitioner be the taxpayer to whom the deficiency notice was sent. It is sufficient if a petition is filed on the basis of the notice of deficiency. In other words, the moving party in the petition filed from the notice must, for the purposes of the statute, be treated as the taxpayer until the decision of the Board has become final. Such is the effect of the decision in American Equitable Assurance Co. v. Helvering, 68 Fed. (2d) 46, affirming 27 B. T. A. 247, followed in Emily King Parker et al., Trustees, 30 B. T. A. 342.

The decisions of the Board in the proceedings instituted in 1932 did not become final until October 19, 1932. Secs. 1001 (a) and 1005 (a) of the 1926 Act and sec. 272 (h) of the 1928 Act. Until then the Commissioner was prohibited from making assessment against the taxpayers. The consents extended the time for assessment against the transferors an additional 60 days and section 280 (b) (1) of the 1926 Act and section 311 (b) (1) of the 1928 Act provide for an additional year within which to make assessment against a transferee. The transferee notices sent to the petitioner on May 24, 1933, were well within the time allowed by the statutes as extended by the consents.

The fact that the Commissioner did make an assessment against the taxpayers during the pendency of the proceedings does not call for a different conclusion. American Equitable Assurance Co. v. Helvering, supra.

In accordance with the stipulation, orders will be entered deciding that the petitioner is liable as a transferee for unpaid income tax of the U. S. Light & Heat Corporation for the period January 1 to April 30, 1927, in the amount of $6,159.71, and for like tax of the U S L Battery Corporation for the period January 1 to May 31, 1928, in the amount of $4,168.64, plus, in each case, interest as provided by law, and that it is not liable as a transferee for income tax of the U S L Battery Corporation for the period May 1 to December 31, 1927.


source: Caselaw Access Project

author: Arundell : Murdock, McMahon,

license: Public Domain

text:
    Ned Wayburn, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74348.
    Promulgated June 26, 1935.

      Gobnan Gray, Esq., for the petitioner.

      Richard W. Wilson, Esq., for the respondent.
   OPINION.

Arundell :

The respondent determined a deficiency in petitioner’s income tax for 1930 in the amount of $2,526.94 and asserted a 50 percent fraud penalty in the amount of $1,263.47. In arriving at the deficiency the respondent made several additions to income, reduced a claimed deduction for taxes paid, and increased the deduction allowed for interest paid. Petitioner alleges error as to only two matters: (1) The addition to income of $22,080.91 described in the deficiency notice as unexplained bank deposits in the name of Mrs. Wayburn, and (2) the assertion of the fraud penalty.

The major addition to income is an amount of $22,080.91 which petitioner drew from the Ned Wayburn Studios of Dancing, a corporation, and which he did not return as income. Petitioner contends that this amount was not income to him, but was drawn for the purpose of entertaining people from whom the corporation drew its business and was expended for that purpose.

Petitioner is a theatrical producer and stage dancing instructor. He has been a theatrical producer for over thirty years. In 1920 he opened a dancing studio, which was incorporated in 1922 or 1923 under the name of Ned Wayburn Studio of Stage Dancing, hereinafter called the corporation. The capital stock of the corporation consisted of five shares, of which petitioner owned two, and his wife three, shares. Petitioner was president and managing director of the corporation.

The business of the corporation was obtained partly through advertising in magazines, newspapers, and theater programs, an,d partly through personal contacts of petitioner and his wife with various organizations and with many individuals, particularly well known people of the stage, screen, and radio. These personal contacts were made largely through entertainment provided by petitioner and his wife, consisting of theater parties, meals at public places, and social gatherings at their home in Long Island. Petitioner and his wife attended the opening performances of shows and clubs and various places of entertainment. For these openings petitioner purchased tickets for himself and his guests. He also staged many benefit affairs at his own expense. These expenditures were considered necessary to keep the corporation’s name before the public.

Petitioner’s home at Bayside, Long Island, is equipped with special entertainment facilities, including a recreation room capable of accommodating from eighty-five to a hundred people. This room contains a bar, card nooks, a table for roulette wheels, billiard table, and player piano. On the grounds of the home are a tennis court and equipment for various out-door games for children and adults. During 1930 petitioner and his wife had guests at their Long Island home almost daily,- they had guests for breakfasts, luncheons, teas, dinners; they gave dinner parties for groups of twelve to fifteen guests; they staged entertainments for .larger groups, numbering as many as eighty-five people; they had week-end guests. Some of their parties were catered affairs; for some they employed extra servants. They employed professional entertainers. Among the people entertained at petitioner’s home were newspaper and theatrical men, and prominent people of the stage, screen, and radio. The children of some of petitioner’s guests were pupils at his dancing studio. In addition to his Long Island home petitioner had a summer home in New Hampshire, with about seven acres of ground and fronting on a lake. He and his wife entertained extensively there.

The entertainments at petitioner’s home were managed by his wife. To defray the entertainment expenses petitioner withdrew from the corporation weekly sums of around $400, with some variations, which he turned over to his wife. The sums so received by Mrs. Waybum, aggregating $22,080.91 for the year 1930, were deposited in her bank accounts. Household expenses were paid from petitioner’s salary which he received from the corporation. Neither petitioner nor his wife kept any books or records of personal expenditures or of entertainment expenses.

The amounts paid by the corporation to petitioner for entertainment were charged to salary accounts on the corporate books. The corporation claimed a deduction therefor, as salaries, in its 1980 return. The entry of these items under salaries rather than under the heading of entertainment expenses was for the purpose of avoiding explanations to creditors.

Both the petitioner and his wife appeared as witnesses and described at some length the various kinds of entertainment they provided both in and outside their home, testified as to the numbers of people entertained at different functions, the occupations or professions of some, and gave the names of some of the people entertained. They also testified as to the necessity of entertaining people who were able to and did bring pupils to the corporation. This latter evidence we do not regard as material except to show the purpose for which the $22,080.91 was received by the petitioner. We make no findings as to whether or not this sum was an ordinary and necessary expense of the corporation. There is, however, evidence that the sum of $22,080.91 was approximately 10 percent of the gross income of the New York studio of the corporation. We do find as a fact that this sum was furnished to petitioner by the corporation for the purpose of entertaining, and that petitioner entertained extensively for the purpose of benefiting the corporation. We are not convinced, however, that the whole sum was devoted to entertainment in behalf of the corporation. The evidence is that much of the entertaining was done at petitioner’s home. No segregation was made between expenditures for maintaining the home for the use of petitioner and his family and those made for the purpose of entertaining for the benefit of the corporation. Doubtless, too, petitioner and his wife entertained personal guests as distinguished from those that they invited for the purpose of furthering the business of the corporation. It is apparent that in entertaining in the home there is inevitably an overlapping of the costs pertaining to the maintenance and operation of the home as such and those of providing entertainment. Perhaps in some cases a fair apportionment of costs might be made, but that was not attempted here. In fact, petitioner testified that he had no way of making any segregation of expenditures. Some of the entertainments in this case were catered affairs, and in some cases professional entertainers were brought in. In such cases the costs could no doubt have been determined by the petitioner. We have critically examined the testimony and it is our conclusion that a substantial sum was expended by petitioner and his wife out of the funds received from the corporation directly for entertainment in behalf of the corporate business. But we are unable to determine exactly the amount expended solely for that purpose. Petitioner relies oh Blackmer v. Commissioner, 70 Fed. (2d) 255, in which the taxpayer was allowed a deduction for the entire amount claimed to have been expended as entertainment and publicity expenses. The facts of that case are somewhat different from those before us. In the Blachmer case it appears that the claimed business expenses did not include expenses of a personal character such as the entertainment of the taxpayer’s family and close friends. Moreover, in that case, while the taxpayer did not keep an account book showing his expenditures, he had some records, “ checks, statements of account, and vouchers.” The court there pointed out that although such records were not introduced in evidence, “ it does not appear that any question was raised as to his failure to produce them at the hearing.” In the present case neither petitioner nor his wife, according to their testimony, kept any records. Petitioner did not know whether any canceled checks had been preserved. In view of the difference in the facts the Blach-mer case is not authority for the finding in this case of a business expense of the entire sum claimed. This phase of the case seems to us to fall within the holding in Cohan v. Commissioner, 39 Fed. (2d) 540, where, upon proof of business expenses having been incurred, but the amount was not established, the court said: “ The Board should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making.” Applying this rule, and making the best approximation that we can, we find as a fact that the petitioner’s expenditure for entertainment in behalf of the corporation amounted to $12,000 in the year 1930. To the extent that the petitioner expended that amount for the corporation he was an agent of the corporation entrusted with the handling of that sum for the benefit of the corporation, and not for his personal use, and as it was expended for the purpose for which it was received, it was not income and the respondent erred in treating it as such. The evidence not being sufficient to establish that the balance of the $22,080.91 was expended for the corporation, that amount should be included in the petitioner’s income.

Other items added to income by the respondent are not in issue, but there was evidence at the hearing as to some of them because of the respondent’s charge of fraudulent understatement of income.

One item is an amount of $6,400 received by petitioner in 1930 for rehearsing a show being produced by Florenz Ziegfeld in which three Wayburn pupils were starred. This sum was received in installments which petitioner handed over to the corporation’s accountant without explanation as to the disposition to be made of them. The accountant credited them to petitioner’s loan account on the corporate books. The $6,400 was not returned by petitioner as income, but is now conceded by him to be income for 1930.

Another item is an amount of $3,762.50 said by respondent to be dividends received by Mrs. Wayburn from four corporations. Neither petitioner nor Mrs. Wayburn were able to give any information as to this item. Mrs. Wayburn testified that she had some stock which was held by a bank as collateral, and there was a possibility that the bank had received some dividends on such stock. The respondent offered no proof on this, but petitioner concedes taxability solely because he was unable to produce evidence.

No evidence was offered by either side concerning an amount of $82.74 added to income by respondent as interest received. The respondent increased a claimed deduction for interest paid by $2,615.19. There was no evidence on this.

Petitioner received a salary from the New York office of the corporation of $250 per week and he also received certain sums from the Chicago office. He did not return as 1930 income his salary for the last week in that year and the amount thereof, $250, was added to 1930 income by the respondent. Evidence was offered designed to show that he did not receive his last weekly salary check for 1930 until 1931. The evidence leaves some doubt as to the time of receipt by petitioner, but as the pleadings frame no issue concerning this matter we do not pass upon it. Coosa Land Co., 29 B. T. A. 389.

The joint return of petitioner and his wife for 1930 was prepared by an accountant on the basis of such data as he could find in the records of the corporation. When he had prepared it he presented it to petitioner during a rehearsal of the Ziegfeld show mentioned above. Petitioner was extremely busy and was physically ill and did not take time to analyze the return. He asked the accountant whether it was all right, and upon the accountant’s assurance that it was right as far as he knew, petitioner signed the return.

Counsel for the respondent points to petitioner’s omission of the above amounts of $6,400, $3,762.50, and $22,080.91 as sustaining the charge of fraud. We have disposed of the item of $22,080.91. We are not at all sure that the amount of $3,762.50 was actually received by petitioner’s wife. It remains in income only because the respondent’s finding thereon is presumptively correct. On the state of the record we can not say that there was an omission of this item with fraudulent intent.

The receipt of the $6,400 in 1930 was proved and is admitted by the petitioner. Omission of it from' the return is sought to be explained on the ground that petitioner was extremely busy at the time the return was prepared and presented to him for signature. While this omission does not appear to have been a deliberate act designed to defraud, the explanation offered does not excuse petitioner’s failure to satisfy himself that the return contained a full and complete disclosure of the facts. The rendering of a proper return should be regarded by every citizen as a vital part of his life equally with that of attention to his business. Failure to give the necessary time and attention to make an honest effort to render a full and complete return can not be treated as less than extreme negligence. Petitioner says he was ill at the time. We do not doubt his word on this, but if he was not too ill to attend daily rehearsals at the theater he was not too ill to give some slight attention to his income tax return. While the negligence of the petitioner seems inexcusable on any ground developed in the evidence, his acts, which were those of omission, do not impress us as fraudulently conceived with intent to evade tax. The respondent has the burden of establishing fraud; he has not established it affirmatively; and, upon consideration of all the evidence, we do not find there was “ fraud with intent to evade tax.” Sec. 293 (b), Eevenue Act of 1928. We accordingly hold that petitioner is not subject to the 50 percent penalty. The respondent has not asked for the imposition of any other penalty.

Reviewed by the Board.

Decision will he entered wider Rule 50.

Murdock,

dissenting: The Commissioner has determined that $22,080.91 which the petitioner received in cash from a corporation in which he and his wife owned all of the stock was income to the petitioner. It was, therefore, incumbent upon the petitioner to prove that this amount was not income to him. He admits that he received thiq money and that he and his wife spent it, but he contends that it was not income to- him because it was drawn and used for the purpose of entertaining people from whom the corporation drew its business. In view of the fact that the corporation was a family affair, susceptible of easy control by the petitioner, and of the further fact that the alleged expenditures might easily be confused with personal expenditures of the petitioner and his wife, the evidence should be closely scrutinized to determine with reasonable certainty the exact purpose for which the expenditures were made. The amount involved is a substantial one. The petitioner kept no records of the expenditures. There was no way in which the Commissioner could make any reasonable independent investigation either of the amount expended or of the exact purpose for which any particular amount was expended. Thus he could not form any independent opinion as to whether or not the petitioner was using all or any part of the amount for his own purposes. Purpose is a conclusion to be drawn from facts. A taxpayer has no right to expect that his judgment alone of the purpose for which such a large sum was expended will be determinative for Federal income tax purposes. His failure to produce evidence of the various expenditures in sufficient detail to enable the Board to determine to what extent the expenditures were for the benefit of the corporation and to what extent, if any, they were personal to the petitioner is, in my opinion, reason to sustain the determination of the deficiency made by the Commissioner.

Black, Seawell, and Matthews agree with this dissent.

McMahon,

dissenting: Upon the authority of the principles of R. P. Shea, 24 B. T. A. 798, and Helvering v. Taylor, 293 U. S. 507, none of the $22,080.91 should be included in petitioner’s income. The instant proceeding is distinguishable from Joseph F. Logel, 24 B. T. A. 798, heard and reported with the Shea case. The undisputed, unimpeached, corroborated testimony of petitioner Way-burn and Mrs. Wayburn, taken together, to the effect that the whole amount was expended to promote the business of the corporation, is sufficient as a basis for the exclusion of the whole amount from his income as required by the principle of Cohan v. Commissioner, 39 Fed. (2d) 540, relied upon in the majority opinion. There is no basis for including all, or a part, of it. The inclusion of any part of it must be founded upon a mere guess, at best. The evidence fails to disclose any other figure. No finding should be made unless a basis for it can be pointed to somewhere in the record. There is nothing in the (Johan case which requires us to thus guess, under facts and circumstances such as we have presented here. Either all of the amount in question or none of it should be included in petitioner’s income and, as here pointed out, the evidence requires the exclusion of all of it.


author: Leech : McMahon,

text:
    H. C. Gowran, Petitioner, v. Commissioner of Internal Revenue, Respondent. Edith Rose Suddard, as Executrix of the Estate of Thomas Suddard, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. George S. Hamilton, Petitioner, v. Commissioner of Internal Revenue, Respondent. Edward P. Hamilton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 60890-60893.
    Promulgated June 27, 1935.

      A. L. Nash, Esq., for the petitioners.

      Isadore Graff, Esq., and Harold D. Thomas, Esq., for the respondent.
   OPINION.

Leech :

These consolidated proceedings are under reconsideration pursuant to the Board’s order dated November 20, 1934. By order dated November 24, 1934, the proceedings were set for hearing evidence limited to the fair market value on July 1,1929, of the Hamilton Manufacturing Co. preferred stock. At such rehearing on February 13, 1935, petitioners filed a motion that the Board vacate its order directing reconsideration, that the Board deny respondent’s motion for reconsideration of the memorandum opinion heretofore entered, and that the Board enter judgment for petitioners. The principal ground for such motion was that the memorandum opinion had become final and that the Board was without authority, on November 20,1934, to direct a reconsideration. In these proceedings the Board has never entered its final order, pursuant to section 906 (d) of the Revenue Act of 1924 as amended by section 601 of the Revenue Act of 1928. Thus, the Board, not having entered its decision in these proceedings, has the power to reopen the cases and revise its prior findings of fact and opinion. Washburn Wire Co. v. Commissioner, 67 Fed. (2d) 658. Accordingly, petitioners’ motion filed on February 13,1935, is denied.

The respondent has determined income tax deficiencies for the year 1929, in the following amounts:

Docket No. 60890_j_$5, 831.67
Docket No. 60891_ 3,570.84
Docket No. 60892_ 3,771.04
Docket No. 60893_ 1,158. 44

He determined that preferred shares issued as a dividend on the common shares of the Hamilton Manufacturing Co., on July 1, 1929, were redeemed by the company in such a manner as to make the distribution essentially equivalent to the distribution of a taxable dividend under section 115 (g) of the Bevenue Act of 1928.

The petitioners assigned error in such determination.

The Board, in its memorandum opinion heretofore entered, considered the proceedings only upon the basis of such assigned error and determined, upon the facts, that the preferred stock was not redeemed in 1929 in such a manner as to make the distribution essentially equivalent to the distribution of a taxable dividend. The parties did not specifically raise, nor did the Board consider, the question of whether the dividend was tax-free or taxable to petitioners when the shares were issued on July 1, 1929. This latter question has now been specifically raised by the granting of the respondent’s motion for reconsideration on the ground that the memorandum opinion, heretofore entered, is in conflict with the decision in Tillotson Manufacturing Co. v. Commissioner, 76 Fed. (2d) 189, affirming 27 B. T. A. 913.

In deciding now whether the present dividend was tax-free or taxable, we are not considering a new issue raised for the first time by respondent’s motion. The deficiency in controversy is asserted upon the basis of the respondent’s determination that the dividend was taxable. The correctness of that deficiency is the general issue, in the consideration of which the Board is not limited to the theory advocated by either the respondent or the taxpayer. Charles L. Coughlin, 15 B. T. A. 515, 519; James P. Gossett, 22 B. T. A. 1279; affd., 59 Fed. (2d) 365; John I. Chipley, 25 B. T. A. 1103. The question before the Board now, as originally, inherently involves the taxable character of the dividend revealed by the evidence of record. If it be determined that the dividend was not a tax-free stock dividend when made on July 1, 1929, and therefore properly includable in income, that conclusion would be decisive here without passing upon the question of whether there was a redemption within the meaning of section 115 (g) of the 1928 Act.

There follow only those facts necessary to a determination of the one question now under consideration.

The petitioners, H. C. Gowran, George S. Hamilton, and Edward P. Hamilton, are individuals residing at Two Fivers, Wisconsin. The petitioner, Edith Bose Suddard, is the duly qualified executrix of the estate of Thomas W. Suddard, deceased, who died testate September 11, 1931. She "also resides at Two Rivers, Wisconsin.

Hamilton Manufacturing Co., hereinafter referred to as the company, was incorporated on February 23, 1926, under the laws of Wisconsin. Article III of its “Articles of Organization ” as amended on April 5, 1926, and on December 27, 1928, provides that the company’s capital stock shall be divided into 10,000 shares of preferred stock of the par value of $100 each, entitled to a preferential cumulative dividend at the rate of 7 percent per annum, payable out of net profits; and 30,000 shares of common stock without nominal or par value. Article III further provides that the holders of common stock shall have certain rights and powers, including voting rights, and, that the company shall have the right to purchase and redeem any part or all of the preferred stock on the first of January or July in any year, by paying $105 for each share together with accrued dividends, and that the preferred stock when so redeemed and canceled, may be reissued.

On July 1, 1929, the company’s common capital stock, issued and outstanding, amounted to 18,680.8 shares held by 30 individuals in amounts ranging from 1 share to 6,189 shares.

Prior to July 1, 1929, the company’s preferred stock, issued and outstanding, amounted to 7,155 shares held by approximately 300 individual stockholders. The petitioners held no shares of the company’s preferred capital stock prior to July 1, 1929.

On July 1, 1929, the company’s earned surplus available for distribution was not less than $444,147.05.

The company’s board of directors, at a special meeting on Juné 29, 1929, adopted a resolution which, after setting forth that the company’s surplus was in excess of $261,531.20, the total of a $14 per share dividend on 18,680.8 common shares outstanding, and that there remained unissued $261,600 par value preferred stock available for issue by way of stock dividend,- provided in part as follows:

Resolved, by the Board of Directors of Hamilton Mfg. Company, that there he and there hereby is declared a dividend on all of the outstanding common capital stock of the company, to the holders thereof of record on July 1, 1929, amounting to $14.00' per share, and that the officers of the company be and they hereby are directed to pay and distribute said dividend forthwith to said stockholders of record, pro rata to each in proportion to his present holdings of common stock, in the form of certificates of the company’s preferred stock, each share of said preferred stock so distributed to be taken at its par value, viz: $100.

The petitioners’ holdings of common shares on July 1,1929, and the number of preferred shares each was entitled to and did receive pursuant to the above mentioned resolution, were as follows:

The preferred stock so received by petitioners on July 1, 1929, had a fair market value of $100 per share on that date. Subsequent to September 1929 petitioners agreed to sell to the company at par, all the preferred stock issued to them as a dividend, and on or about October 1, 1929, the company purchased at par all such preferred stock, for resale to its employees.

Petitioners argue that the present dividend on common stock declared and paid in preferred stock of the declarant company, is a stock dividend within the meaning of section 115 (f) of the Revenue Act of 1928, and is, therefore, not taxable.

The authorities upon which they rely are: Alfred A. Laun, 26 B. T. A. 764; Pearl B. Brown, Executrix, 26 B. T. A. 901; affd., 69 Fed. (2d) 602; certiorari denied, 293 U. S. 570; and Frances Elliott Clark, 28 B. T. A. 1225; affd., 77 Fed. (2d) 89.

In all those cases, no preferred stock was outstanding when the preferred in question was distributed as a dividend on or in partial exchange for common stock. Thus, since (1) there was no severance of assets from the declarant corporations, and (2) there was no alteration of the preexisting proportionate interest of the stockholders, but “ only a proliferation of preexisting interests ”, (Pearl B. Brown, Executrix, supra) the disputed dividend was held nontaxable. (Tillotson Manufacturing Co. v. Commissioner, supra.)

In that case, which petitioners attempt to distinguish from the pending situation, there was a substantial amount of common stock outstanding when the dividend on the preferred stock, payable in common, was declared and paid. That fact sustains the Board’s conclusion that the second prerequisite, above, to the exemption of that dividend from tax, was not there established. The position of the stockholder in receiving such common stock in that distribution was materially changed. He acquired substantially different and, as the court there held, “ additional property rights which might well afford him a different and greater market with an increased money return.”

So, here, as in the Tillotson case, though the first of the two recognized tests {supra) for distinguishing a taxable from a nontaxable dividend, may have been met, the second has not. The preexisting proportionate interest of the stockholder was substantially changed. It is true that the present record discloses the converse situation as to the class of stock in which the dividend was declared and paid, but in the. recent case of James H. Torrens, 81 B. T. A. 787, in applying the rule announced in the Tillotson case to similar facts, this Board said:

If there be any difference in the degree of change effected in the stockholders’ existing rights by the converse factual situation here, we do not think it sufficient to except this case from the application of that rule.

Our immediately pertinent inquiry is the taxable status of this new preferred stock, not from the standpoint of the corporation, but from that of the common stockholders. What did the petitioners, as common stockholders, receive ? Here, not only was there a substantial amount of preferred stock of the declarant company outstanding when the present dividend on common was declared and paid in preferred stock, but none of that preferred was then owned by petitioners. The rights and attributes of these preferred and common stocks were, materially different. Despite the mechanics of the corporate bookkeeping, which certainly do not control the taxable character of the disputed dividend in the hands of the petitioners (Doyle v. Mitchell Bros. Co., 247 U. S. 179), they, as common stockholders, by the receipt of the present preferred stock, as a dividend, received rights in the assets of the corporation, as to future dividends, and upon liquidation, which were, before receipt of that preferred stock, limited to the then outstanding preferred stock. By the distribution of the preferred stock here, the then existing rights of petitioners, common stockholders, were increased, and those of the then preferred stockholders were decreased, to that extent. Nor is the effect of that fact in evaluating the difference between petitioner’s rights before and after the receipt of the questioned preferred stock, avoided here by the financial condition of the corporation at the time of that receipt. Petitioner’s rights, though constant in extent during each of those respective periods, were subject to fluctuation in value with that financial condition during each of such periods. It is that continuing potentiality of the common stockholders’ new and proportionately altered interests, inherent in the preferred stock in dispute, not the mere liquidating value of that stock at any particular time, which gave petitioners additional property rights which might well afford them a different and greater market with an increased money return.” Tillotson Manufacturing Co. v. Commissioner, supra.

The disputed dividend, on common stock, declared and paid in preferred stock of the declarant company, of a fair market value of $100 per share, when issued on July 1, 1929, was not a tax-free stock dividend.

The memorandum opinion heretofore entered in these proceedings is modified accordingly.

Reviewed by the Board.

Decision will be entered pursuant to Rule 50.

Black dissents.

McMahon,

dissenting: The result reached by the majority in these proceedings is contrary to applicable and corresponding provisions of the revenue acts, rulings and regulations of the Secretary of the Treasury promulgated thereunder, rulings of the Bureau of Internal Revenue, provisions of the Federal Constitution, decisions of the courts, and this Board, and long continued, persistent, uniform practice of the officers charged with the administration of such revenue acts, all of which are controlling here.

The conclusion is unavoidable that Congress has clearly expressed its intention to exempt all stock dividends from income tax. Beginning with the 1921 Act Congress, in section 201 (d), provided that a “ stock dividend shall not be subject to tax.” The term stock dividend ” is a broad term. The language used is plain, simple, and direct. It is here used in its ordinary sense and must be so applied. Congress did not limit or restrict it to any particular type of stock or stock of any particular class or to stock where stock of the same class is not outstanding. Obviously, if Congress had intended such limitation it would have so provided.

Congress in section 115 (a) of the applicable 1928 Act defined a taxable dividend as “ any distribution made by a corporation to its shareholders whether in money or in other property, out of its earnings of profits accumulated after February 28,1913.” This definition contains two classes of dividends, i. e., (1) dividends “ in money ” and (2) dividends “ in other property ”, but both must be “ distributions * * * out of its earnings or profits accumulated after February 28, 1913.” (Emphasis supplied.) This section does not include any other classification of dividends, as did the 1916 and 1918 Acts, the latter including a third classification of dividends “ in stock of the corporation.” The provision taxing dividends “ in stock of the corporation ” is the one that was declared unconstitutional in Eisner v. Macomber, supra; and it was therefore omitted in the 1921 Act and subsequent corresponding acts.

In section 115 (f) and (g), of the 1928 Act, and corresponding sections of previous acts back as far as the 1921 Act, Congress dealt only with two kinds of stock dividends, i. e., (1) a “ true stock dividend made lawfully and in good faith ”, Eisner v. Macomber, supra, and (2) a stock dividend not made lawfully or in good faith, or one made to circumvent taxation. However, Congress did not even provide that a stock dividend not made lawfully and in good faith should be subject to tax. It provided that if after the issuance of a stock dividend the corporation proceeds to cancel or redeem its stock at such time and in such manner as to make the issuance of such stock and the cancellation or redemption thereof essentially equivalent to the payment of a taxable dividend, the amount received in redemption or cancellation of the stock shall be treated as a taxable dividend to the extent of the earnings or profits accumulated after February 28, 1913. It is the amount subsequently paid by the corporation in cancellation or redemption of such stock dividend not made in good faith that is taxable to the stockholder when received. Hence, when Congress provided that a “ stock dividend shall not be subject to tax ”, it meant every stock dividend of whatever type or class.

Since it was held in Eisner v. Macomber, supra, that Congress had no power under the Constitution to tax a dividend in common stock issued to holders of common stock, it was not necessary for Congress to legislate to exempt such common stock dividend from tax. Such legislation would have been futile. Congress had a reason for enacting the provision that a “ stock dividend shall not be subject to tax.” Cf. National Bank of the Republic of Chicago, 31 B. T. A. 680. This provision accomplishes the purpose of removing any question about the taxability of stock dividends other than common stock on common stock. This is not contrary to Eisner v. Macomber, supra. It is in keeping with it.

As disclosed by T. D. 3059, supra, and subsequent regulations, officers charged with the administration of the revenue acts have repeatedly ruled that a stock dividend in whole or in fart of a character cmd preference materially different from the stock upon which the stock dividend is paid ” (emphasis supplied) is not tamable income to the stockholder receiving the same.

The substantial reenactment in later acts of provisions theretofore construed by administrative officers is persuasive evidence of legislative approval of the administrative interpretation.

If it were the intention of Congress that the provision of the Eevenue Act of 1921 and subsequent acts that a “ stock dividend shall not be subject to tax ” should apply only to stock dividends issued in common shares upon common shares and the meaning of the term “ stock dividend ” should be so limited, then such provision, viewed from the standpoint of the facts of the instant proceedings, would be unconstitutional because contrary to Article I, section 2, clause 3, and Article I, section 9, clause 4, of the Federal Constitution, requiring that direct taxes shall be apportioned according to population, and also because contrary to the Sixteenth Amendment, since the stock dividend issued in preferred stock to holders of common stock out of surplus, when other preferred stock is outstanding, represents a portion of the capital interest of the holders of common stock or a portion of the “ enrichment through increase in value of capital investment ”, which “ is not income in any proper meaning of the term ” as hereinafter more fully pointed out. (Emphasis supplied.) Eisner v. Macomber, supra. To the same effect are Towne v. Eisner, supra, and Gibbons v. Mahon, supra. It is elementary that if it can be done legislation must be construed so as to bring it within the Constitution rather than in conflict with the Constitution. The construction put upon the applicable section of the act by the majority is contrary to the applicable provisions of the Constitution.

If we assume for the purpose of discussion that Congress has power under the Constitution to tax a stock dividend such as we have here there is nothing in the Constitution to make it mandatory upon Congress to do so; Congress has not done so; on the contrary, Congress has expressly exempted such dividend from income tax.

In truth and logic, looking to substance and not to form, and disregarding mere bookkeeping entries, or lack of them or their mechanics, as is done in this dissent, all of the reasoning of the Supreme Court in Eisner v. Macomber, supra, in holding that a common stock dividend on common stock is not income or otherwise taxable, applies with equal force to the preferred stock dividend on common stock with other preferred stock outstanding, in question in these proceedings, and requires a similar result, and is in part set forth in the margin.

The Hamilton Manufacturing Co. on June 29,1929, declared a stock dividend on common stock to the extent of $14 per share payable in its unissued preferred stock of the par value of $100 per share; and it paid the same by issuing such stock on July 1, 1929. This required no distribution of corporate money or other property, but only bookkeeping entries showing the transfer of $261,581.20 (18,680.8 X $14) from surplus to preferred stock liability, both on the liability side of the balance sheet, so that the preferred stock liability would be $977,-031.20 with 9,770.312 shares outstanding instead of $715,500 with 7,155 shares outstanding, and the surplus of $444,147.05, after deducting also the July 1,1929, quarterly preferred stock cash dividend and common stock cash dividend, together totaling $59,221.25, would be reduced to $123,394.60.

It is elementary that the capital interest of holders of common stock embraces not only the amount invested, but also the surplus, after all other liabilities, including preferred stock dividends, are provided for. If the dividends payable to holders of preferred stock are paid in cash as they accrue out of surplus available for dividends, as was done in the instant proceedings, then all of the remaining surplus profits constitute capital interest of holders of common stock only. Hence, when petitioners received the preferred stock as dividends, the outstanding preferred stock having received the dividend to which it was entitled, they merely received the evidence, in the form of preferred stock certificates, of their proportionate share in the surplus to the extent of such dividend. They received nothing in addition to what they theretofore had except such paper.

No money or other property out of corporate earnings or profits accumulated after February 28, 1913, was distributed by the corporation and it merely capitalized a part of its surplus profits on its books of account. Nothing was taken from the holders of preferred stock. Their capital interest to the extent of the par value of their shares was represented by assets of the corporation and they had no other interest, either capital or income, in the surplus, since they also received their quarterly dividend to which they were entitled on July 1,1929, when the preferred stock was issued as a dividend on common stock.

These proceedings are distinguishable from Tillotson Manufacturing Co., 27 B. T. A. 913, affirmed in Tillotson Manufacturing Co. v. Commissioner, 76 Fed. (2d) 189, relied upon by the majority.

There is no adequate support in the record in James H. Torrens, 31 B. T. A. 787, also relied upon in the majority opinion, or in these proceedings, for the view that in the Tillotson case a dividend was declared “ under substantially similar circumstances.” The majority opinion there and here states, in effect, that a converse situation is presented as compared to that in the Tillotson case. This is tantamount to saying that the factual situation in the Tillotson case, as compared with the factual situation there and here, is different. No true stock dividend such as we have here is involved in the Tillot-son case. Since the factual situations are thus different, it follows that the Tillotson case is distinguishable from the instant proceedings and the Torrens case upon the facts and in principle.

Furthermore, in the Tillotson case the court stated that “ Two tests were thus established for distinguishing a taxable from a non-taxable dividend in stock: (1) Severance of assets from the corporation, and (2) alteration of the preexisting proportionate interest of the stockholders ”, and that there the first test, but not the second, was met. As appears from the discussion herein, in the instant proceedings both tests are met.

What is said in the Tillotson case, by the Circuit Court of Appeals and the Board, should be read in the light of its peculiar facts and should not be applied, to a factual situation such as we have in the instant proceedings, which is so different, and the doctrine of the Tillotson case should not be carried beyond the requirements of the peculiar facts of that case.

The issuance of the preferred stock dividend in question here had no effect upon the rights of the preferred stock outstanding. It is elementary that ordinarily the capital interest of holders of preferred stock is limited to its par value, and that they have no capital interest in the surplus profits; that their interest in the surplus profits is limited to the fixed rate of dividend; that such interest is an income interest as distinguished from a capital interest; and that even a premium paid to holders of preferred stock upon redemption of such is not a capital interest, but constitutes income and is taxable as such. Had the corporation, out of surplus, paid money or other property instead of stock, the assets of the corporation to that extent would have been depleted, but the holders of the preferred stock outstanding coud not have rightfully complained. Here the surplus was not distributed in money or other property, out of corporate earnings or profits accumulated after February 28, 1913, but was retained by the corporation. The asset side of the balance sheet was not affected. In fact, the corporation could have distributed the entire surplus to common stockholders in money or other property and the preferred stockholders would have had no right to complain. Even in that event the corporation would still have had assets equivalent to the par value of their stock, and, in addition, assets equal to the value of the amount invested by holders of common stock, which upon dissolution or liquidation is ordinarily subject to the rights of creditors and the preference of preferred stock. The owners of preferred stock previously outstanding were chargeable with knowledge that there was authorized unissued preferred stock which could be sold or issued as a dividend on common stock, as was done here. This must all be viewed in the light of the conditions that existed, in this respect, at the time of the declaration and payment of the stock dividend in question, and not in the light of any imaginary anticipated future changed condition. This question here can not be rightfully tested by different, assumed conditions as of some other time.

None of the Board cases which involve preferred stock dividends, except the Torrens case, are decided upon the absence or existence of previous outstanding preferred stock. As appears from the discussions herein, both are immaterial. There is nothing in the Constitution, revenue acts, regulations, rulings, or previous court or Board decisions which intimates that if there is preferred stock outstanding at the time of the issuance of a preferred stock dividend such dividend is not a tax-free stock dividend; and all these require a result contrary to that reached by the majority here and in the Torrens case. The Torrens case should be overruled.

It is elementary that fluctuations in value do not give rise to taxable income or deductible losses or constitute additional property rights by virtue of an increase in value; the measure of the value as reflected by the market may change, but the rights to all of the property remain the same whatever its value may be intrinsically or otherwise. The majority opinion does not mention a single thing in esse, in being, or of any actual value which the petitioners received from or which was distributed to them by the corporation on July 1, 1929, except the paper upon which the certificates were written. In some respects the majority opinion, in effect, holds taxable a thing in posse, that which is not but may be, something dependent upon conditions which can not be foreseen and wholly beyond the control of the corporation or its stockholders. The possibility that the petitioners may or may not receive a greater profit on the preferred stock than they would had they not received it is treated by the majority as “ additional property rights which might well afford them a different and greater market with an increased money return.” In Eisner v. Macomber, supra, however, the Court stated that “ we regard the market price of the securities as an unsafe criterion and in an inquiry such as the present, when the question must be, not what will the thing sell for, but what is it in truth and, in essence.” (Emphasis supplied.) By the receipt of the preferred stock dividend, the petitioners did not receive in praesenti anything in money or in other property, “ out of its [corporation’s] earnings or profits accumulated after February 28, 1913 ”, as required by section 115 (a) of the 1928 Act, or any “ of the company’s assets for his [their] separate use and benefit ”, Eisner v. Macomber, supra, or any “ assets of exchangeable and actual value severed from their capital interest ” in the company, United States v. Phellis, 257 U. S. 156, or “ a thing really different from what he [they] theretofore had ”, Weiss v. Stearn, 265 U. S. 242; and by a parity of reasoning the petitioners did not even receive any present “ rights to the assets ” of the company. Their right to future dividends is subject to declaration by the directors and their right to preference as to assets to the extent of the par value of their stock and unpaid dividends, if any, can arise only at the time of liquidation.

The preferred stock received by the petitioners in the instant proceedings is a tax-free true stock dividend.

II.

Hence the value of that stock on July 1,1929, is immaterial.

Furthermore, in reconsidering the memorandum opinion entered herein on June 29, 1933, the Board is considering a new issue raised for the first time by respondent’s motions filed July 18,1933. The only issue raised by the pleadings in these proceedings is whether the preferred stock dividend distributed to the petitioners on July 1, 1929, was later redeemed or canceled by the corporation on October 1, 1929, in such a manner as to make the redemption or cancellation thereof equivalent to the distribution of a taxable dividend within the purview of section 115 (g) of the Revenue Act of 1928. Counsel for respondent so stated at the first hearing. The facts were there stipulated in part and such stipulation treats the dividend of July 1, 1929, as a “ stock dividend.” Hence the issue there presented did not comprehend the nature and character of the dividend distributed on July 1,1929, but it involved only the nature and character of the payment made on October 29, 1929, by the company to the petitioners upon return to the company of the stock dividend distributed on July 1,1929. This is admitted by counsel for respondent in his argument in support of his motions filed July 18, 1933, wherein he states:

A stipulation filed with the Board refers to the dividend as a “ stock dividend,” and it was on this theory that the deficiencies were determined and the cases presented to the Board.

Hence no question was raised by the parties as to the taxability of the stock dividend of July 1, 1929, until the respondent raised the question in the above motions. It was never raised except by motion and after the proceedings had been disposed of by the decision of June 29, 1933.

The respondent has not indicated that the memorandum opinion filed June 29, 1933, is incorrect in its statement of the issue raised by the pleadings and facts presented. On the contrary, in his brief in support of his motion for consideration and judgment filed July 18, 1933, he stated that “ the respondent was not complaining of the Division’s decision on the theory on which it was presented and decided but was asking for reconsideration on a new theory ” and that the “ respondent is content with the findings of fact made by the Board in its previous memorandum Opinion * * * ” filed June 29, 1933, except that under his new theory of the proceedings he, for the first time, with his motions, requested a finding as to the value of the preferred stock as of July 1,1929, without any proof in the record to base such finding upon.

The question whether the stock dividend issued on July 1, 1929, was a tax-free stock dividend constitutes not a “ theory ”, but an issue not raised by the pleadings; and such issue is a wholly different issue, governed by a wholly different statutory provision, section 115 (f) of the 1928 Act and not by section 115 (g) of the 1928 Act. These statutory provisions deal with wholly different causes. As this new issue and cause was not raised in the petition, the duty rested upon the respondent to plead it in his original answer or by amendment thereof under Bule 14 of the Board, which provides that the “ answer shall be so drawn as fully and completely to advise the petitioner and the Board of the nature of the defense ” and “ shall contain * * * a statement of any facts upon which the Commissioner relies for defense or affirmative relief.” While the question of the correctness of the deficiency is inherent in every proceeding before the Board, the Board, in determining the correctness of the deficiency, will consider only issues raised and causes pleaded. James P. Gossett, 22 B. T. A. 1279; John I. Chipley, 25 B. T. A. 1103; and Claude D. Cass, 32 B. T. A. 713. No amendment to the pleadings was filed and the Board erred in ordering further hearing upon an issue and cause not raised by the pleadings. Coosa Land Co., 29 B. T. A. 389, 394; and North American Coal Corporation, 28 B. T. A. 807, 831. These cases, relied upon by majority, do not hold that the Board, in determining the correctness of the deficiency, may consider issues or causes other than those raised by the pleadings. Furthermore, as heretofore indicated, all the facts necessary to sustain the respondent’s new issue and cause in the instant proceedings were not adduced in evidence at the original hearing and it was necessary to hold a further hearing, after the proceeding had been heard and determined and its memorandum opinion entered, to ascertain the fair market value of the preferred stock as of July 1, 1929.

The rule of the Board requiring the respondent, in his answer, to fully and completely advise the petitioner and the Board of the nature of his defense should not be permitted to be set at naught by designating an issue or a cause as a theory.

Assuming, for the purpose of discussion, that the issue and cause, under section 115 (f) of the 1928 Act, suggested for the first time by respondent’s motions, constitutes a mere theory and not an issue or cause, neither the Board nor any Division could rightfully reconsider the memorandum opinion of June 29, 1933, or order the taking of further testimony without a showing on the part of respondent of newly discovered evidence or some other good cause therefor, which is lacking here. Fifth Avenue Bank of New York, Executor, 32 B. T. A. 208; Pierce Oil Corporation, 30 B. T. A. 470; and Fifth Street Building v. Commissioner, 11 Fed. (2d) 605, affirming 24 B. T. A. 816.

No motion to amend the pleadings or reopen the proceedings to permit the taking of further proof was ever made by the respondent. See Pierce Oil Co., supra.

In the instant proceedings, the hearing was concluded, briefs were filed, and an opinion completely disposing of the proceedings was rendered. All of respondent’s motions as made should have been denied.

III.

In view of the conclusions heretofore set forth, it is unnecessary to further discuss, directly or indirectly, whether (upon the whole record, under the provisions of the revenue acts, construed in the light of the reports of the committees of Congress), (1) after the memorandum opinion had been entered on June 29, 1933, and after respondent’s motion, filed July 18, 1933, for review by the Board upon the ground only that such memorandum opinion is contrary to Tillotson Manufacturing Co., 21 B. T. A. 913, was denied by order entered July 24, 1933, and after respondent’s motions filed July 18, 1933, for reconsideration of such memorandum opinion and judgment for the respondent, upon the same ground, were denied after hearing thereon by the order entered January 15, 1934, with an accompanying “ Memorandum ”, not a “ memorandum opinion ”, the order of January 31, 1934, should have been entered directing review by the Board of the “ Order with the accompanying memorandum ”, dated January 15, 1934, upon another motion of respondent, based upon the same ground only, filed January 26,1934, (a) that the Chairman of the Board direct that the “ Memorandum Opinion entered by a Division of the Board on January 14, 1934 ” be reviewed by the Board, and (b) that if the decision of the Division had become the decision of the Board that the Board review its own decision; (2) whether the Board, upon such motion of respondent or upon its own initiative, should have reconsidered the memorandum opinion entered June 29, 1933; (3) whether the Board should have directed another Division of the Board to enter the order dated November 20,1934, vacating the order entered January 15, 1934, and granting respondent’s motion filed January 26, 1934, for reconsideration of the memorandum opinion entered June 29, 1933; (4) whether such other Division should have entered the order dated November 24,1934, placing these proceedings on the Chicago calendar for hearing evidence upon the subject of the fair market value of the preferred stock of the Hamilton Manufacturing Co., as of July 1,1929; (5) whether another different Division should have heard such further evidence thereon February 13, 1935; (6) whether the memorandum opinion entered June 29, 1933, has become final so that the time for appeal by respondent has expired; or (7) any other phases of the proceedings.

Conclusion.

In any event, the order of the Chairman dated January 31, 1934, and the orders of November 20 and November 24, 1934, should be vacated and set aside; both motions of respondent filed January 26, 1934, should be denied; the memorandum opinion entered herein on June 29, 1933, as well as the order of the Chairman dated July 24, 1933, and the order dated January 15, 1934, together with its accompanying memorandum, should be permitted to stand; and a decision should be entered in accordance with the memorandum opinion entered herein on June 29,1933.

Since I presided at the first hearing in these proceedings and at the hearing on two of the three motions of respondent as filed July 18,1933, and denied the same by the order of January 15,1934; and, since I made the decision embodied in the memorandum opinion entered June 29, 1933, and dissented from the order entered November 20, 1934, and now dissent from the order of November 24, 1934, as well as from this opinion of the majority, I am constrained to respectfully set forth my views.

       Sec. 1X5 (i). Stock dividends. — A stock dividend shall not he subject to tax.

       Sec. 115 (a), <f), (g), 1928 Act; sec. 201 (a), (f), (g). 1926 Act; sec. 201 (a), (f), 1924 Act; and sec. 201 (a), (d), 1921 Act.

       Arts. 628 and 600, Regulations 74; arts. 1548 and 1599, Regulations 69; arts. 1548 and 1599, Regulations 65 ; art. 1548, Regulations 62; T. D. 3052 and T. D. 3059, 3 C. B. 38 (July-Dee. 1920).

       1. T. 2538, IX-1 C. B. 144 (1030) ; G. C. M. 6709, VIII-2 C. B. 132 (1929) ; and O. D. 801, 4 C. B. 24 (Jan.-June 1921).

       The Sixteenth Amendment and Art. I, sec. 2, cl. 3; Art. I, sec. 9, cl. 4.

        Eisner v. Macomber, 252 U. S. 189; Gibbons v. Mahon, 136 U. S. 156; Towne v. Eisner, 245 U. S. 418; United States v. Phellis, 257 U. S. 156; and Weiss v. Stearn, 265 U. S. 242.

        Alfred A. Laun, 26 B. T. A. 764; Pearl B. Brown, Executrix, 26 B. T. A. 901; affd., Commissioner v. Brown, 69 Fed. (2d) 602; certiorari denied, 293 U. S. 570; Robert R. Meyer, 27 B. T. A. 44; Louis Rorimer, 27 B. T. A. 871; T. Pierre Champion, 27 B. T. A. 1312; Shelby H. Curlee, Trustee, 28 B. T. A. 773; and Frances Elliott Clark, 28 B. T. A. 1225.

       For a fuller discussion of the foregoing citations, with the exception of the Phellis and Weiss cases, see the dissenting opinion in James E. Torrens, 31 B. T. A. 787, 803.

       Sec. 2 (a), 1916 Act; sec. 201 (a) (c), 1918 Act

         Zellerbach Paper Co. v. Helvering, 293 U. S. 172; Helvering v. Bliss, 293 U. S. 144; Brewster v. Gage, 280 U. S. 327; National Lead Co. v. United States, 252 U. S. 140.

       * * * x'his ["declaring a ‘stock dividend’”], however, is no more than a book adjustment, in essence not a dividend hut rather the opposite; no part of the assets of the company is separated from the common fund, nothing distributed except paper certificates that evidence an antecedent increase in the value of the stockholder’s capital interest resulting from an accumulation of profits by the company, but profits so far absorbed in the business as to render it impracticable to separate them for withdrawal and distribution. In order to make the adjustment, a charge is made against surplus account with corresponding credit to capital stock account, equal to the proposed “ dividend ”; the new stock is issued against this and the certificate delivered to the existing stockholders in proportion to their previous holdings. This, however, is merely bookkeeping that does not affect the aggregate assets of the corporation or its outstanding liabilities; it affects only the form, not the essence, of the “ liability ” acknowledged by the corporation to its own shareholders, and this through a readjustment of accounts on one side of the balance sheet only, increasing “ capital stock ” at the expense of “ surplus ” ; it does not alter the preexisting proportionate interest of any stockholder or increase the intrinsic value of his holding or of the aggregate holdings of the other stockholders as they stood before. The new certifiaates simply increase the number of shares, with consequent dilution of the value of each share.
      A “ stock dividend ” shows that the company’s accumulated profits have been capitalized, instead of distributed to the stockholders or retained as surplus available for distribution in money or in kind should opportunity offer. Far from being a realization of profits of the stockholder, it tends rather to postpone such realization, in that the fund represented by the new stock has been transferred from surplus to capilal, and no longer is available for actual distribution.
      The essential and controlling fact is that the stockholder has received nothing out of the company’s assets for his separate use and benefit; on the contrary, every dollar of his original investment, together with whatever accretions and accumulations have resulted from employment of his money and that of the other stockholders in the business of the company, still remains the property of the company, and subject to business risks which may result in wiping out the entire investment. Having regard to the very truth of the matter, to substance and not to form, he has received nothing that answers the definition of income within the meaning of the Sixteenth Amendment.
      We are clear that not only does a stock dividend really take nothing from the property of the corporation and add nothing to that of the shareholder, but that the antecedent accumulation of profits evidenced thereby, while indicating that the shareholder is the richer because of an increase of his capital at the same time shows he has not realized or received any income in the transaction.

       These figures are taken from the record. See illustrative balance sheet and discussion thereof in dissenting opinion in James H. Torrens, 31 B. T. A. 787, 799, 801.

       The facts of the Tillotson case and the numerous grounds of distinction likewise applicable here are pointed out fully in the dissenting opinion in James H. Torrens, 31 B. T. A. 787, 799.

       See p. S2o.

       See dissenting opinion in James H. Torrens, 31 B. T. A. 787.

       The Board there stated:
      “ While Rule 17 does not define the ' conclusion of the hearing it can not he said to attend ’beyond, the time when the trial has been concluded and the briefs filed. This we believe is a reasonable rule and fairness and orderly procedure require that it be adhered to in a case such as this. To disregard the rule under such circumstances would be an invitation to litigants to try their cases piecemeal and unreasonably extend the proceedings. Moreover, the petitioners here do not bring themselves within the rulé, for the motion before us does not propose to ‘ amend the pleadings to conform to the proof ’, but seeks to reopen the case to amend the pleadings, and to offer proof in support of such amendment. * * *
      . “ While the Board has not adopted a rule governing rehearing, its policy in respect thereto is that a rehearing is extraordinary, and will only be granted on good ctmse shown. * * *” [Emphasis supplied.]

       Sec. 900, 1924 Act; secs. 1000 and 1005, 1926 Act; secs. 601 and 272 (e), (h), 1928 Act.

       Kept. No. 2, Committee on Ways and Means, 70th Cong., 1st sess.; Kept. No. 960, Committee on Finance, 70th Cong., 1st sess.

       This “Memorandum” distinguishes the Tillotson case (27 B. T. A. 913) with less elaboration.


author: Murdock :

text:
    Addison H. Gibson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 75500.
    Promulgated June 28, 1935.

      Earl F. Reed, Esq., for tlie petitioner.

      G. A. Ray, Esq., and G. W. Brooks, Esq., for the respondent.
   OPINION.

Murdock :

It will not make any difference in the determination of the deficiency in this particular case whether the item in controversy is taxable to the petitioner as ordinary income or whether it is taxable to him as a dividend. The reason for this is that in no event will any of the petitioner’s income be subject to normal tax. The real issue in the case is, therefore, whether or not all, or any part, of the $21,204.75 is income to the petitioner for the year 1931. If the amount is income to the petitioner either on the theory suggested by the Commissioner or on any other theory, the determination of the Commissioner must be approved. James P. Gossett, 22 B. T. A. 1279; affd., 59 Fed. (2d) 365; Beaumont v. Helvering, 73 Fed. (2d) 110. There is little, if any, dispute between the parties as to the facts.

The Commissioner does not contend that the forgiveness of the indebtedness was compensation for services rendered by the petitioner to Zahniser, nor does he contend that it represents a dividend distributed by Zahniser to the petitioner as one of the stockholders of Zahniser. The fact is that the petitioner was not a stockholder of Zahniser and Zahniser, being insolvent, was in no position to declare an ordinary dividend. Neither was the forgiveness a gift from Zahniser to the petitioner. Cf. Fitch v. Commissioner, 70 Fed. (2d) 583. If the directors of a corporation attempt to give away its assets, their action is ultra vires. Noel v. Parrott, 15 Fed. (2d) 669; certiorari denied, 273 U. S. 754. The explanation given by James for the resolution which he prepared was:

Well, Mr. Dickson was hopelessly insolvent, and I saw no use in carrying an insolvent account on the books of a liquidating concern, and I said, as we were going to write-off Dickson’s indebtedness, I thought at the same time we should write off Mr. Gibson’s.

The real reason why Zahniser forgave the indebtedness due it from the petitioner is found in the petitioner’s relation to Galvez and the relation of Galvez to Zahnizer. The petitioner owned all of the stock of Galvez, and the amount which Zahnizer owed Galvez was far more than the value of all of the assets of Zahnizer. Galvez alone suffered in exact proportion to the benefit which the petitioner received from the forgiveness. Galvez was the only creditor or stockholder which had any reason to complain of the action of the board of directors of Zahniser in forgiving the indebtedness which the petitioner was fully able to pay. The sum of $21,204.75 had been received by the petitioner and used for his own purposes. The receipt of that sum by him was never reflected in any of his income tax returns. The money represented a loan to him until December 30, 1931, but when his indebtedness was forgiven on December 30, 1931, he was enriched at that time in the amount of $21,204.75. tie was solvent. The amount became income to him at that time. Cf. B. F. Avery & Sons, Inc., 26 B. T. A. 1393; petition to review dismissed, 67 Fed. (2d) 985. Then, for the first time, had he reason to report it as income. It seems clear that on one theory or another he became liable for tax on that amount as part of his income for 1931. If this were not so, the circumstances disclose a fairly easy method of avoiding or, at least, of substantially reducing tax liability.

There may be room for differences of opinion as to the precise theory npon which this item is income to the petitioner. The Commissioner’s theory is that the amount represents a dividend to the petitioner from Galvez. The parties are agreed that Galvez had sufficient surplus with which to pay a dividend of $21,204.75. The Commissioner was probably incorrect in stating that the forgiveness had the effect of a liquidating dividend or return of capital from Zahniser to Galvez, since it probably should be treated as a partial payment of the debt due from Zahniser to Galvez. Under such circumstances Galvez, as creditor, would come before Galvez, as a stockholder. However, it is not important to decide whether the forgiveness had the effect of a liquidating dividend or whether it had the effect of a partial payment of the debt due from Zahniser to Galvez, since either theory would support the Commissioner’s contention that the petitioner in effect received an ordinary dividend from Galvez. It is true that in fact Galvez never declared any dividend to the petitioner in the amount in controversy and took no active part in the matter whatever. However, its silence is important. Its failure to object to the forgiveness of the petitioner’s debt by Zahniser is an indication that it consented to have the petitioner benefit in its place. The petitioner argues that since the statute of limitations had run against the major portion of the debt, the forgiveness of that portion did not represent income to him. He cited no authority for his statement that the statute of limitations had run against a portion of the debt. This was an entire active open account. The statute of limitations had not run as to a part of it, as the petitioner contends. Furthermore, even if it had run, it did not extinguish the liability. Cf. Moses Cohen, 28 B. T. A. 190. We are unable to say that the Commissioner erred in taxing the $21,204.75 to the petitioner as a dividend to him from his wholly owned corporation, Galvez.

Decision will be entered for the respondent.