author: McMahon:

text:
    California Coast Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 25018.
    Promulgated March 15, 1932.

      John B. Millilcen, Esq., for the petitioner.

      M. B. Leming, Esq., for the respondent.
   OPINION.

McMahon:

The first question to be determined is whether the respondent erred, in determining the tax liability of the petitioner for the years 1918, 1919, 1920 and 1921, in disallowing as operating expenses the amounts of $25,452.78, $24,309.70, $47,101.96 and $9,608.61, respectively, which petitioner paid out in those years for wages, fuel, repairs, hauling, etc., in connection with drilling wells, building of pipe lines, and the development of property under lease by petitioner, and which, for convenience, we term “ incidental development costs.” The deficiency letter upon which this proceeding is based does not assert deficiencies against the petitioner for the years 1918 and 1919, and we therefore do not have jurisdiction to redetermine the tax liability of the petitioner for or decide questions relating to those years, except as it becomes necessary in computing the tax liability of petitioner for the years 1920 and 1921. It is the contention of the petitioner that the determination of this issue as to 1918 and 1919 will have a bearing upon the petitioner’s tax liability for the years 1920 and 1921, by affecting invested capital for 1920 and 1921, and that the determination of the issue with regard to the year 1919 will result in the finding of a net loss in that year which may be carried forward and deducted from the net income of the petitioner for the year 1920.

It has been stipulated by the parties that the items constituting the amounts set forth above are of the character described in article 223 of Regulations 45 and 62 of the Treasury Department, Internal Revenue Bureau.

Article 223 of Regulations 45, which relates to taxes under the Revenue Act of 1918, provides in part as follows:

Charges to capital and to expense in the case of oil and gas wells. — Such incidental expenses as are paid for wages, fuel, repairs, hauling, etc., in connection with the exploration of the property, drilling of wells, building of pipe lines, and development of the property may at the option of the taxpayer be deducted as an operating expense or charged to the capital account returnable through depletion. If in exercising this option the taxpayer charges these incidental expenses to capital account, in so far as such expense is represented by physical property it may be taken into account in determining a reasonable allowance for depreciation. The cost of drilling nonproductive wells may at the option of the operator be deducted from gross income as an operating expense or charged to capital account returnable through depletion and depreciation as in the case of productive wells. An election once made under this option will control the taxpayer’s returns for all subsequent years.

Article 223 of Regulations 62, wbicb relates to taxes under tbe Revenue Act of 1921, is identical w,itb the above quoted portion of article 223 of Regulations 45, except that for the words “ operating expense ” it uses the words “ development expense.”

The only question presented in this regard by the parties is whether the petitioner exercised an option under the above article of the regulations and, if so, what type of an option.

The respondent contends that the petitioner exercised the option of charging such expenditures to capital in computing its tax liability for the year 1918 and that for that year and years following petitioner is bound by .its election. Petitioner, on the other hand, contends that it elected to deduct such items as an operating expense for the year 1918 and that for that year and the following years, it should be allowed deductions of the amounts expended.

An edition of Kegulations 45, embracing article 223, was promulgated February 25,1919, and another edition of such regulations was approved on April 17,1919. Petitioner filed its original income and profits-tax return for the year 1918 on June 16, 1919. Therein the petitioner did not deduct its incidental development costs as an expense. Nor did it deduct such costs as expense in its amended return for the year 1918 which is dated June 2, 1921. As a matter of fact, these incidental development costs were charged to capital account on the petitioner’s boobs in the years 1916, 1917 and 1918. There is evidence to show that in 1919 the Union Oil Company, which controlled the policies of the petitioner in respect to its cost accounts and records, issued instructions to charge incidental development costs for 1918 to expense, and that petitioner’s bookkeeper, William J. Hanna, did not act in accordance with instructions when, in making a certain reforming journal entry on December 31,1919, he failed to charge the amount of incidental development costs to expense for that year. However, in our opinion, these instructions issued by the Union Oil Company in 1919 are not decisive of the question, since petitioner may have made an election prior to that time.

George H. Forster, who is now comptroller of the Union Oil Company and who was chief accountant of that company in 1918 and 1919, testified that in 1918 the Union Oil Company, in its control of the petitioner and its other subsidiary companies, determined that those companies should charge expenditures of the nature here in question to expense, and indicated that since the books of the petitioner in the year 1918 showed these expenditures as charged to capital, Hanna, who kept petitioner’s books in that year, had made a mistake. However, the testimony of Forster, taken in connection with the whole record, we believe, indicates that the error to which he refers was the error made by Hanna in making the journal entry on December 31, 1919. Hanna himself testified that he later learned that he had made an error in making the entry on December 31,1919, but his testimony does not establish that the entries on the books made in the year 1918 were at variance with the policy or instructions in existence at that time. Furthermore, the evidence discloses that during 1918 the Union Oil Company itself charged items of this nature to capital and that it was not until some time in 1919 that it determined to treat its own expenditures of this nature to expense. For these reasons we do not feel justified in accepting the above referred to testimony of Forster as proof that during 1918 there had been established by the Union Oil Company a policy of having the petitioner charge items of this nature to expense.

Even if the Union Oil Company had determined upon such a policy for petitioner, we do not believe that this necessarily would be governing. The petitioner is a separate entity from the Union Oil Company and the regulations refer to an election by “ the taxpayer.” Nowhere in the record in this proceeding is there any evidence as to any action taken by “ the taxpayer,” either through its directors or officers, in regard to the exercise of this option.

The respondent has held that the petitioner elected to capitalize this type of expenditure, and the burden is upon the petitioner to introduce sufficient facts to overcome the presumption in favor of the correctness of the respondent’s determination. From a consideration of the entire record we are constrained to hold that the petitioner has not shown that it did not elect to charge these items to capital in computing its tax liability for the year 1918. We approve the respondent’s action in treating these items as capital expenditures in each of the years 1918, 1919, 1920 and 1921.

We do not consider this holding in conflict with Sterling Oil & Gas Co. v. Lucas, decided by the District Court for .the Western District of Kentucky on July 21, 1981, which is relied upon by the petitioner. In that case it clearly appeared that the taxpayer had not finally disposed of the oil well development costs on its books until after the filing of its return for the year 1919, that the board of directors of the taxpayer did then deliberately elect to treat them as expenses, and that in an amended return the taxpayer treated them as expenses.

In view of the above holding as to the proper method of handling incidental development costs, the petitioner’s contention that it sustained in 1919 a net loss which may be allowed as a deduction in computing its net income for 1920 fails. The respondent held that there was a deficiency in tax due for the year 1919 and there is no showing that he erred.

There is no evidence to show that the respondent erred in computing depletion deductions for 1920 and 1921 as alleged by petitioner. The respondent’s determination in each of the above respects is approved.

Petitioner also contends that during 1920 and 1921 there were abnormal conditions affecting its capital and income within the meaning of section 327 of the Revenue Acts of 1918 and 1921, and that it is entitled to have its profits taxes for those years computed in the manner specified in section 328 of those revenue acts. The Revenue Act of 1918 provides in part as follows:

Sec. 327. That in the following cases the tax shall be determined as provided in section 328:
* * * 4> * * *
(d) "Where upon application by the corporation the Commissioner finds and so declares of record that the tax if determined without benefit of this section would, owing to abnormal conditions affecting the capital or income of the corporation, work upon the corporation an exceptional hardship evidenced by gross disproportion between the tax computed without benefit of this section and the tax computed by reference to the representative corporations specified in section 328. This subdivision shall not apply to any case (1) in which the tax (computed without benefit of this section) is high merely because the corporation earned within the taxable year a high rate of profit upon a normal invested capital, nor (2) in which 50 per centum or more of the gross income of the corporation for the taxable year (computed under section 233 of Title II) consists of gains, profits, commissions, or other income, derived on a cost-plus basis from a Government contract or contracts made between April 6, 1917, and November 11, 1918, both dates inclusive.
Seo. 328. (a) In the cases specified in section 327 the tax shall be the amount which bears the same ratio to the net income of the taxpayer (in excess of the specific exemption of $3,000) for the taxable year, as the average tax of representative corporations engaged in a like or similar trade or business, bears to their average net income (in excess of the specific exemption of $3,000) for such year. * * *

Sections 327 and 328 of the Kevenue Act-of 1921 contain the same provisions.

Petitioner did not pay out any salaries to its officers and directors during those years. These officers and directors were also officers and directors of the Union Oil Company of California and were capable men. They were largely responsible for the income of the petitioner in the years in question. There was testimony that the reasonable value of their services would be between $25,000 and $50,000 for each of the years in question, and we have found as a fact that their services were reasonably worth at least $25,000. There was also competent testimony adduced at the hearing which shows that it was abnormal in 1920 and 1921 in the oil industry for a corporation having the volume of business and the amount of income which petitioner had in those years not to be required to pay salaries to its officers.

During 1920 and 1921 petitioner did not pay office rent, office space being furnished it free of charge by the Union Oil Company, and the bookkeeping for petitioner was done by the Union Oil Company at cost. The petitioner’s general office expenses for 1920 and 1921 were in the relatively small amounts of $2,040.67 and $2,154.72, respectively. The evidence shows that in 1920 and 1921 it was abnormal in the oil industry for a company having the volume of sales and income which petitioner had in those years to have such a small amount of office expense as petitioner had.

The petitioner did not incur any expense with respect to the marketing of its product. Its directors and officers negotiated contracts for the purchase of its commodity.

It is our opinion that the above described conditions constituted such abnormal conditions affecting petitioner’s income of the years in question that the petitioner is entitled to have its profits taxes for the years 1920 and 1921 computed in the manner specified in section 328, supra. See G. Angelo Co. et al., 12 B. T. A. 460, where the fact that no ofiicers’ salaries were paid was held to create an abnormality entitling taxpayer to special assessment; Sol Frankel, Inc., 3 B. T. A. 494, where inadequacy of officers’ salaries was held to create an abnormality entitling taxpayer to special assessment; San Francisco Hotel Co., 22 B. T. A. 740, where it was held that facts that officers received no salaries and that the taxpayer was required to pay a low rental created an abnormal condition entitling taxpayer to special assessment; and Hirsch & Spitz Mfg. Co., 21 B. T. A. 1186, wherein it was held that abnormal conditions obtained entitling taxpayer to special assessment where there was a disparity in the ratio of expenses to earnings, the taxpayer obtained its manufacturing building from the owners at less than normal cost, the taxpayer had the use of a large sales force without cost, and its officers’ salaries were below normal.

Since we have held that petitioner is entitled to special assessment for the years 1920 and 1921, it becomes unnecessary to further consider the other contentions raised by petitioner with regard to invested capital for those years.

Further proceedings may be had under Buie 62 (c).


source: Caselaw Access Project

author: Seawell :

license: Public Domain

text:
    Kay Finance Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43267.
    Promulgated March 17, 1932.

      J. Sydney Sallcey, Esg., for the petitioner.

      Harold F. Noneman, Esg., and James E. Polk, Jr., Esg., for the respondent.
   OPINION.

Seawell :

There appears no contention but that the facts of this case, as stipulated, bring it within the provisions of sections 204 (a) (8) and 203 (b) (4) and 203 (i) of the Revenue Act of 1926.

It is, in effect, admitted that the petitioner corporation acquired after December 31, 1920, certain property (corporate stock) from an individual who had paid therefor $7,757.50 and in payment therefor to the individual the petitioner issued its own stock to an amount more than 80 per cent of its entire stock and immediately thereafter the individual was in control of the petitioner corporation; and that in 1926 the petitioner sold the property so acquired for the sum of $33,359.72.

The petitioner, however, insists that at the time of the transaction between it and the individual the petitioner “ valued ” the property received at $57,904, and that accordingly instead of a profit or gain on the transaction of $25,602.22 ($33,359.72 minus $7,757.50), as claimed by the Commissioner, it had a loss of $24,544.28 ($57,904 minus $33,359.72).

There was no evidence offered at the hearing, and no stipulation of fact, tending to show that the property received by the petitioner had a value at the time of its receipt of $57,904 or of anything more than $7,757.50, the cost thereof to petitioner’s transferor. There was likewise no evidence or stipulation as to the value of petitioner’s stock issued in payment for the property received. But under these circumstances the petitioner cpntends that using the cost to the trans-feror as the basis for determining the profit or gain to the petitioner, the transferee, is equivalent to taxing not gain, but the capital of the petitioner, and that section 204 (a) (8) of the Revenue Act of 1926 is accordingly without the warrant of the Constitution.

Even if the proof or stipulated facts brought the petitioner’s contentions within the circumference of its argument, nevertheless, we would be constrained to deny its conclusions and to follow the uniform rulings of the Board and the published decisions of the courts to the effect that the revenue act challenged is not violative of the Constitution. Haas Building Co., 22 B. T. A. 528; T. W. Phillips, Jr., Inc., 23 B. T. A. 1271; Newman, Saunders & Co. v. United States (Ct. Cls.), 36 Fed. (2d) 1009 (certiorari denied, 281 U. S. 760); Osburn California Corporation v. Welch, 39 Fed. (2d) 41.

Judgment will be entered for the respondent.


author: Mukdock:

text:
    The Roessler & Hasslacher Chemical Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 34263.
    Promulgated March 17, 1932.

      Lawrence A. Baker, Esq., Henry H. Elliott, Esq., and Henry Ravenel, Esq., for the petitioner.

      J. B. Johnston, Esq., for the respondent.
   OPINION.

Mukdock:

The R. & H. Company filed consolidated returns for 1921 and 1922 on behalf of itself, Niagara, and four other companies. The Commissioner has removed Niagara from the alleged affiliation and has computed its tax liability separately. There is no controversy about the figures which he has used in making this determination. The petitioner contends that certain expenditures of the R. & H. Company for each year should be distributed or apportioned so that a part thereof may be used to offset Niagara’s income, another part used to offset the income of Perth Amboy, and the remainder left to the R. & H. Company. It contends that authority for making this distribution or apportionment is found in section 240 (d) of the Revenue Act of 1921. A similar contention has been considered by the Board in only one reported case, that of Broadway Strand Theatre Co., 12 B. T. A. 1052. Although later acts have contained a somewhat similar provision, in only one other reported case has the Board considered any of these later provisions. That was a case involving section 240 (d) of the Revenue Act of 1924 and section 240 (f) of the Revenue Act of 1926. Nowland, Realty Co., 18 B. T. A. 405; affid., Nowland Realty Co. v. Commissioner, 47 Fed. (2d) 1018. In neither of these cases did the facts disclose any justification or basis for disturbing the Commissioner’s determination.

Section 240 of the Revenue Act of 1921 is entitled Consolidated Returns of Corporations.” In Paragraph (a) it makes provision for returns for any taxable year beginning on or after January 1, 1922. In paragraph (b) it provides for the computation and assessment of a tax based on a consolidated return and for a credit. Paragraph (c) states the circumstances under which two or more domestic corporations shall be deemed to be affiliated. Paragraph (d) is as follows:

For the purposes of this section- a corporation entitled to the benefits of section 262 shall be treated as a foreign corporation: Provided,, That in any case of two or more related trades or businesses (whether unincorporated or incorporated and whether organized in the United States or not) owned or controlled directly or indirectly by the same interests, the Commissioner may consolidate the accounts of such related trades and businesses, in any proper case, for the purpose of making an accurate distribution or apportionment of gains, profits, income deductions, or capital between or among such related trades or businesses.

Paragraph (e) provides that consolidated returns for any taxable year beginning prior to January 1, 1922, shall be made in the same manner and subject to the same conditions as provided by the Revenue Act of 1918. Paragraph (d) appeared for the first time in the Revenue Act of 1921.

The following questions, among others, arise: Does the provision for the consolidation of accounts in paragraph (d) apply only to corporations entitled to the benefits of section 262 and perhaps to foreign corporations? Does it apply to a taxable year beginning prior to January 1, 1922? Were the businesses of Niagara and the R. & H. Company related, and were they owned or controlled directly or indirectly by the same interests within the meaning of the act? If the Commissioner has failed to consolidate accounts, may the Board require the consolidation of accounts, and if so, to what extent and under what circumstances? Cf. Broadway Strand Theatre Co., supra; Nowland Realty Co., supra; Nowland Realty Co. v. Commissioner, supra. None of these questions has been decided by this Board or by the courts. The petitioner contends, tha,t the consolidation of accounts may be made in any case, particularly in the present case; the two businesses were related and were owned or controlled directly or indirectly by the same interests; the Board has jurisdiction; and it is immaterial that there is no question of abuse of discretion by the Commissioner. Although we are not inclined to wholly disagree with the petitioner, we nevertheless find it unnecessary and therefore unwise to decide any of the questions suggested above, since in any event our judgment must be for the respondent.

The petitioner has given us a list of various amounts expended and deducted entirely by the R. & H. Company. The claim is that these amounts were expended partly for the benefit of Niagara and Perth Amboy and therefore should be distributed or apportioned among the three companies. The act says the Commissioner may consolidate the accounts for the purpose of making an accurate distribution or apportionment of gains, profits, income, deductions, or capital among related businesses. Accurate must mean at least as accurate as reasonably may be under the circumstances. The Commissioner has not attempted to consolidate the accounts of these companies. He was not requested to do so prior to the hearing. We do not know what would be his method in a proper case. However, if this is an appropriate case for any distribution or apportionment, it was incumbent upon the petitioner to prove facts from which the Board could make a proper distribution or apportionment.

The petitioner argues that it has met this burden of proof by showing three satisfactory methods for making the apportionment — an apportionment which a witness gave as his opinion of a proper one, and apportionments on the basis of gross sales, or capital. The witness confessed his inability to apportion the expenditures for research, experimentáis, patents and trade-marks, and library, but he stated that in his opinion 15 per cent of each of the other items in the list should be apportioned to Niagara and 15 per cent to Perth Amboy. His estimate is based only upon his general knowledge of the volume of work, orders, billings, invoices, bills, checks, and money transactions of these companies. He had supervision of some books of the other companies, but not of the general books of Niagara. We do not think that the record shows his estimate to be even reasonably accurate. Furthermore, we see no reason to believe that the total rent could not have been distributed fairly accurately, perhaps by determining what part of the space was used by each company and showing the rent for such space. The salaries and wages might have been apportioned on the basis of the time spent by each employee on the work of the separate companies. Patents, trade-marks, communications, printing and stationery, like the other items, have no necessary relation to capital, gross sales, or volume of business, but could be accurately apportioned by determining to which company each item making up each total related. There was no effort made to segregate accurately any of the expenses to determine the amount applicable to each company. It does not appear that such an attempt would have been futile or that it was necessary to rely upon an approximation.

The methods suggested by the petitioner are short cuts. They are less onerous as to proof. But there were obviously better and more accurate methods which anyone wanting to make a reasonably accurate distribution would adopt in preference. Where some allocation is proper under section 240 (d), it is incumbent upon a petitioner before this Board to prove a more accurate method of distribution or allocation than those suggested by this petitioner, or at least to show sufficient justification for failure to do so. Even if every other question in this case were decided in the petitioner’s favor, nevertheless, we could not make any allocation. We need decide nothing more.

Judgment will he entered for the respondent.


author: Matthews :

text:
    Towers and Sullivan Manufacturing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 40508.
    Promulgated March 21, 1932.

      D. J. Gantt, Esq., for the petitioner.

      T. M. Mather, Esq., and L. W. Greason, Esq., for the respondent.
   OPINION.

Matthews :

This Board has held in a number of cases, beginning with that of Meyer Jewelry Co., 3 B. T. A. 1319, that the cancellation of an indebtedness does not constitute income to the debtor. See John F. Campbell Co., 15 B. T. A. 458; affd., Burnet v. Campbell Co., 50 Fed. (2d) 487; Eastside Manufacturing Co., 18 B. T. A. 461; Progress Paper Co., 20 B. T. A. 234; E. B. Higley & Co., 25 B. T. A. 127; and Commissioner v. Simmons Gin Co., 43 Fed. (2d) 327.

In the case of John F. Campbell Co., supra, a corporation engaged in the sugar and rice brokerage business was indebted to its creditors in a large amount. In 1921 these creditors agreed to accept 75 per cent of their claims in cash and accounts receivable, and to forgive the remaining 25 per cent. We held that the amount forgiven did not constitute income and the Court of Appeals of the District of Columbia, in affirming our holding, said:

We agree with the Board’s decision. It is plain that early in 1921 the taxpayer was in financial distress, and was probably insolvent, and that its creditors canceled part of their claims against it in order to secure payment of the balance of their claims. This relief enabled the taxpayer to continue business and to realize a profit in the years 1922 and 1923. It is public history that the time in question witnessed great disturbance in such business as the taxpayer was then engaged in.
This forbearance did not produce taxable income to the taxpayer. “ Income ’’ within the purview of the revenue acts has been defined! to be “ gain derived from capital, from labor, or from both combined,” and includes “profit gained through a sale or conversion of capital assets.” Stratton’s Independence v. Howbert, 231 U. S. 399, 415; Doyle v. Mitchell Bros. Co., 247 U. S. 179, 185; Eisner v. Macomber, 252 U. S. 189, 206, 207. “ In determining the definition of the word ‘ income ’ thus arrived at, this court has consistently refused to enter into the refinements of lexicographers or economists and has approved, in the definition quoted, what it believed to be of the commonly understood meaning of the term which must have been in the minds of the people when they adopted the Sixteenth Amendment to the Constitution.” Merchants’ L. & T. Co. v. Smietanka, 255 U. S. 519. We do not believe that the term “income ” as commonly understood applies to the partial cancellation by a creditor of a debt due to him from a disabled debtor, in order that such debtor may thereby be enabled to pay the balance of the debt. “ The fact that after the transaction the plaintiff’s balance sheet had improved was not sufficient to constitute ‘ a gain derived from capital.’ If anything it was a gain accruing to capital, and, as such, under the Eisner and Phellis cases, was not taxable income.” Kerbaugh-Empire Co. v. Bowers, 300 Fed. 938; Aff’d 271 U. S. 170.

In the instant proceeding the petitioner’s balance sheet for the fiscal year 1922 shows a deficit of $221,922.98, and the balance sheet for the fiscal year 1923 shows a surplus of $56,872.13. The goods and merchandise for which the ’ indebtedness herein was incurred had declined in value, as shown by the write-off of inventory, and the petitioner was unable to pay its debts. In such a situation the creditors entered into a composition agreement to take 75 per cent in cash and stock and to forgive the remainder. We think that these facts bring the case within the holding in John F. Campbell Co., supra. The petitioner did not realize any taxable income in the fiscal year 1923. Even excluding the amount forgiven from gross income, the petitioner had a net loss for this year of $27,247.77. In such a situation we do not see how the amount forgiven can constitute income, but there is “ a mere diminution of a loss.” See Simmons Gin Co., supra, and Bowers v. Kerbaugh-Empire Co., 271 U. S. 170. As a result of this action on the part of its creditors, the petitioner was enabled to continue in business and to make a profit during the next few years, but, as the court said in the Campbell Co. case, this was not sufficient to constitute “gain derived from capital.”

We are, therefore, of the opinion that the amount of $79,304.72, which was 25 per cent of the entire amount of the indebtedness, does not constitute income to the petitioner and should not be included in its gross income for the fiscal year 1923.

The amount of $24,348.94, accrued interest, consisted of $20,904.96 which had accrued and was deducted in the fiscal year 1923, and the amount of $3,443.98 which had accrued in a prior year. Inasmuch as the composition with the creditors was made during the fiscal year 1923, this had the effect of canceling the petitioner’s liability for interest due and therefore it should not have deducted any accrued interest for that year. It therefore follows that the respondent did not err in including the amount of $20,904.96 in gross income for the fiscal year 1923. The amount of $3,443.98, which had accrued in a prior year, is in the same category with the principal amount of $79,304.72, and does not constitute income to the petitioner in the fiscal year 1923 and should not be included in its gross income for that year.

Judgment will be entered wider Rule 50.


author: Smith:

text:
    Norfolk Southern Railroad Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 40024.
    Promulgated March 21, 1932.

      Hugh G. Bickford, Esg., R. Kemf Slaughter, Esg., and W. B. Rodman, Esg., for the petitioner.

      J. T. Haslam. Esg., for the respondent.
   OPINION.

Smith:

The respondent determined a deficiency in the tax upon the consolidated net income of the petitioner and certain affiliated corporations for the taxable year 1924 and asserts $43,095.89 of the deficiency against the petitioner. The petitioner alleges that:

(a) The. Commissioner has erroneously held that $60,430.75 accruing to the petitioner on account of the payment and retirement during the calendar year 1924 of certain bonds of petitioner, being the difference between the face or par value of said bonds and the amount at which, during the calendar year 1924, the said bonds were paid and discharged, represents a profit and taxable income.

The case was submitted upon the following stipulation:

The petitioner is a corporation organized under and by virtue of the laws of the State of Virginia, with its principal office at Norfolk, Virginia. It is engaged in the business of a common carrier, its system of accounting is the accrual basis and is that prescribed by the Interstate Commerce Commission, and it is subject to the Act of Congress known as the “Act to Regulate Commerce ” and the acts amendatory thereof and supplementary thereto.
Alleged Profit on Acquisition cmd Retirement of Bonds
That as of February 1, 1911, Norfolk Southern Railroad Company created its First and Refunding Mortgage to secure an issue of 50-year 5% Gold Bonds with a par value of $1,000.00 each; that on January 1, 1924, there was outstanding in the hands of the public a large number of said bonds; that during the year 1924 the trustee in said mortgage having in hand funds arising from the redemption of John L. Roper Lumber Company bonds pledged under the trust and/or from the sale and release by the trustee of the property subject to the trust, constituting that part of the sinking fund required to be used in redeeming bonds, purchased from the public 189 of the said 50-year 5% Gold Bonds having an aggregate par value of $189,000, paying therefor the sum of $128,-569.25; that the trustee cancelled said $189,000 bonds and, upon written demand, delivered them to the petitioner in 1924; that the petitioner made entries in its books of accounts in 1924 to record said purchase and cancellation and to place in its profits and loss account a credit of $60,430.75, being the difference between $189,000 the par value of said bonds, and $128,569.25, the cost thereof; that the petitioner returned as taxable income in the year 1924 the said $60,430.75, which has been included by the respondent in the taxable income of the petitioner for the year 1924.
A copy of the said First and Refunding Mortgage dated February 1, 1911, is attached hereto, is made a part hereof, and is marked Exhibit A.
The 189 said bonds were originally issued and sold by the petitioner on the dates, in the amounts, and for the cash consideration as follows:
Of the $13,990.00 discount, the petitioner has amortized $3,568.32 during the period the said 189 bonds were outstanding, and in determining taxable net income has deducted from gross income of each of the respective years, that portion of the discount applicable thereto. The amortized portion of the discount deducted from gross income of the year 1924 was $177.63.
All of said claimed deductions from gross income of the amortized discount have been allowed by the Commissioner of Internal Revenue. The data with respect to the purchase of the said $189,000 par value of bonds are as follows:
It is agreed that if it is ultimately determined that the petitioner erroneously included the amount of $60,437.25 (the difference between $189,000 and $128,569.25), or $50,009.07 (the difference between $178,578.32 (the sum of $175,010.00, cash received at sale, and $3,568.32 discount amortized) and $128,569.25), or any part thereof, in its taxable income for the year 1924, then, in that event, the consolidated taxable net income for the year 1924, as determined by the Commissioner of Internal Revenue, and stated in the deficiency letter of July 5, 1928, in the amount of $350,124.00, should be reduced by the amount determined by the Board to have been erroneously included therein.

On brief, the petitioner attempts to distinguish the instant proceeding from United States v. Kirby Lumber Co., 284 U. S. 1, in which the Supreme Court held that the taxpayer realized income upon the purchase of some of its bonds at a price less than the amount received upon the issuance of such bonds. The only distinction that we see in the two cases is that here the bonds were issued several years prior to the taxable year in which they were purchased, whereas in the Kirby Lumber Co. case the bonds were issued and purchased in the same taxable year. In Consolidated Gas Co. of Pittsburgh,, 24 B. T. A. 901, 905, we considered this distinction and said:

* * * But it does not appear that this fact made any difference in the opinion of the Supreme Court for the regulations, which were approved as the correct statement of the law, do not make any distinction in this connection. Nor did the court find any difficulty in the fact that the taxpayer received no money or property in the year. In the Kirby Lumber Co. case the court remarked that there was no shrinkage of assets. * * *

In the Consolidated Gas Co. case certain “ refunding bonds,” issued in 1898, were repurchased in the taxable years at less than the price at which they were issued, and it did not appear that the result of the whole transaction was a loss. In the instant case, certain “ refunding bonds ” were issued in 1911,1912, 1913, and 1914 and repurchased in the taxable year at less than the price at which they were issued. There appears to have been no shrinkage in petitioner’s assets, heretofore offset by this bond obligation, and it does not appear that the result of the whole transaction was a loss. Thus, the two cases are distinguishable from Bowers v. Kerbaugh-Empire Co., 271 U. S. 170, and the petitioner’s contention that the instant proceeding is controlled by that decision is untenable. The amount of income realized by petitioner in 1924 is $50,009.07, the difference between the amount received upon issuance of the bonds, plus the amortized discount allowed as a deduction from its gross income, and the amount paid for these bonds in the taxable year. United States v. Kirby Lumber Co., supra; Consolidated Gas Co. of Pittsburgh, supra; Woodward Iron Co., 24 B. T. A. 1050.

Judgment will be entered under Rule SO.


text:
    William M. Armstrong, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 40419.
    Promulgated March 21, 1932.

      Geo. E. H. Goodner, Esq., and Frederick O. Rohwerder, O. P. A., for the petitioner.

      Chester A. Gwinn, Esq., and John R. Gaskins, Esq., for the respondent.
   OPINION.

Smith:

The respondent contends that petitioner, who kept his accounts and filed his income-tax returns upon the basis of cash receipts and disbursements, realized income in the amount of the gross receipts from the sale of oil and gas credited to him upon the books of the Ohio Oil Company during the taxable years before us. Pursuant to the two agreements, the Ohio Oil Company developed and operated the oil leases, charged petitioner with his proportionate part of the expenses therefor, and, upon the sale of the oil and gas produced, credited him with his proportionate part of the receipts therefrom. In support of his contention, respondent argues, first, that petitioner and the Ohio Oil Company were joint adventurers and that the gross receipts in the hands of the latter constituted income to petitioner; and, second, that petitioner constructively received the amounts in question, since they were set apart and dedicated to his use ” and that “ he became enriched by the gradual reduction of his liability and that enrichment represents income ” to him. The first argument is predicated upon the assumption that in a joint adventure the adventurers individually account for their respective shares of the gross income from and the gross expenses of the enterprise. The cases cited by the respondent on this point correctly hold that members of syndicates are taxable upon their distributive shares of the net earnings of the syndicate, even though a portion of such earnings is retained for future contingencies. See Ferry Market, Inc., 5 B. T. A. 167; Walter S. Dickey, 14 B. T. A. 1295; Glenmore Securities Corporation, 24 B. T. A. 697. The second argument is based upon cited decisions holding that (a) money paid for the benefit of the taxpayer constitutes income to him (Blalock v. Georgia Ry. & Electric Co., 246 Fed. 387; Old Colony Trust Co. v. Commissioner, 279 U. S. 716; United States v. Boston & M. R. R., 279 U. S. 732); (b) the incidence of tax upon income can not be escaped by anticipatory arrangements (Corliss v. Bowers, 281 U. S. 376; Lucas v. Earl, 281 U. S. 111; McCaulay v. Commissioner, 44 Fed. (2d) 919); and (c).a taxpayer’s share of partnership earnings is income to him although the amount is applied to,the payment of his note given for his interest in the partnership (William B. Grise, 6 B. T. A. 743). Such arguments are iñapplicable to the facts of record, which show that petitioner incurred no liability to the corporation and that he received, and was entitled to receive, only his proportionate share of the net earnings from the enterprise.

Petitioner contends that “ the gross receipts entered on the Ohio Oil Company’s books were not subject to the demand of petitioner and could not be reduced to possession by him until such time as all of the costs and expenses of the Ohio Oil Company had been paid.” This contention is consistent with the agreements of the parties and their conduct in carrying out their agreements. Petitioner was entitled to a monthly remittance of his percentage of the proceeds from the sale of the oil and gas produced under the leases “ over and above the amount necessary to reimburse ” the Ohio Oil Company “ for the expenditures made by it on account of ” the petitioner’s interest. In other words, the petitioner had no right to receive anything from these operations until there were net earnings. The facts show that there were no net earnings upon petitioner’s interest from the operations under the Blanket Agreement during the taxable years, but that the operations under the Section 34 Agreement produced net earnings of $49,928.17 (after absorbing the loss of $415.65 for 1919) in 1920 and $53,250.79 in 1921 upon his interest. The difference between these amounts and the amount of cash received by petitioner in the respective years is not explained, and neither does it appear that any portion of the net earnings upon his interest in the operations under the Section 34 Agreement were applied against the charges incident to the operations under the Blanket Agreement. It does not appear of record, and petitioner apparently does not contend, that he was not entitled to receive upon demand payment of the net earnings under the Section 34 Agreement during the taxable years 1920 and 1921. In the circumstances, we hold that these amounts, representing his distributive share of net earnings under that agreement, constituted taxable income to him in those years. Ferry Market, Inc., supra; Walter S. Dickey, supra; Glenmore Securities Corporation, supra; Frank G. Wild, 24 B. T. A. 691. See also McMurray v. Reynolds, 38 Fed. (2d) 480. In thus determining the amount of income that petitioner realized under the agreements with the Ohio Oil Company, it is not necessary to discuss further either the respondent’s or the petitioner’s arguments regarding the constructive receipt of income, except to state that the instant decision is in accord with the Board’s decisions on that question. Cf. Geo. P. and Bessie P. Douglas, 1 B. T. A. 372; Clarence Schock, 1 B. T. A. 528; John A. Brander, 3 B. T. A. 231; Albert J. Sullivan, 16 B. T. A. 1347; Mary Miller Braxton, 22 B. T. A. 128.

Judgment will be entered under Rule 50.


author: Smith :

text:
    Carter Hotel Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41186.
    Promulgated March 21, 1932.

      C. R. McAtee, Esq., for the petitioner.

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

Smith :

Petitioner argues that it sustained a loss in the year 1926 of $10,233.33 by reason of its inability to repurchase from its preferred stockholders, for $30,TOO preferred stock of a par value of $40,933.33 isssued in 1924. The respondent disallowed the deduction of the loss claimed in the determination of the deficiency, under article 543 of Regulations 69, which provides in part:

* * * The proceeds from the original sale by a corporation of its shares of capital stock, whether such proceeds are in excess of or less than the par value of the stock issued, constitute the capital of the company. If the stock is sold at a premium, the premium is not income. Likewise, if the stock is sold at a discount, the amount of the discount is not a loss deductible from gross income. * * *

This Board has many times held that a corporation sustains no deductible loss when it sells it shares of capital stock at less than par value. In Emerson Electric Manufacturing Co., 3 B. T. A. 932, we said:

We think it is perfectly clear that the amount received by a corporation in excess of the par value of its stock is not income to the corporation, but is in fact a paid-in surplus, and that the converse is equally true, that when stock is sold for less than its par value the corporation has not suffered a loss. * * *

Cf. Simmons & Hammond Manufacturing Co., 1 B. T. A. 803; Cooperative Furniture Co., 2 B. T. A. 165; Liberty Agency Co., 5 B. T. A. 718; Corning Glass Works v. Lucas, 37 Fed. (2d) 798; certiorari denied, 281 U. S. 742; Simmons Co. v. Commissioner of Internal Revenue, 33 Fed. (2d) 75; Houston Brothers Co., 21 B. T. A. 804; S. A. Woods Machine Co., 21 B. T. A. 818.

The petitioner does not contend, however, that it sustained any loss in 1924 upon the sale of its preferred stock, but that it sustained a loss in 1926 by reason of its inability to redeem the stock at the issued price. We fail to see, however, how the petitioner sustained any loss in 1926. The corporation was not indebted to its stockholders for the shares of stock held by them. The stockholders simply invested a certain amount of money in the corporation. Upon the liquidation of a corporation for any reason whatever the stockholders are entitled to receive distributions of the assets after the debts are paid. The mere fact that the common stock holders might upon such liquidation receive less than they would have received if the preferred stock had not been issued is no ground for a claim that the corporation sustained a loss by failure to redeem the preferred stock at the issue' price. The contention of the petitioner upon this point is not sustained.

Judgment will be entered for the respondent.


text:
    Cavanaugh Brothers Garage, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41392.
    Promulgated March 21, 1932.

      John R. McLane, Esq., for the petitioner.

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

Smith:

With exceptions not material to our determination, Title II — Income Tax, of the Revenue Act of 1926 took effect as of January 1, 1925 (sections 286 and 1200). Consolidated returns of corporations are provided for in section 240, under Title II of that act. Subdivision (a) of section 240 is as follows:

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

The term “ taxable year ” is defined in section 200 (a) as follows:

The term “ taxable year ” means the calendar year, or the fiscal year ending during such calendar year, upon the basis of which the net income is computed under section 212 or 232. The term “ fiscal year ” means an accounting period of twelve months ending on the last day of any month other than December. The term “ taxable year ” includes, in the case of a return made for a fractional part of a year under the provisions of this title or under regulations prescribed by the Commissioner with the approval of the Secretary, the period for which such return is made. The first taxable year, to be called the taxable year 1925, shall be the calendar year 1925 or any fiscal year ending during the calendar year 1925.

There is no dispute as to the petitioner’s change from a fiscal year to a calendar year basis, resulting in the filing of a return for the nine-month period ended December 31, 1926. The respondent contends that petitioner, having filed a separate return for the fiscal year ended March 31,1926, thereby made its election and was thereafter required to file separate returns until permission was granted to file consolidated returns. See article 63, Regulations 69.

The petitioner’s “ first taxable year ” within the purview of the statute was its fiscal year ended March 31, 1925, for which it filed a separate return. It thereby made an election which it followed in filing a separate return for the fiscal year ended March 31, 1926. Thus, for two taxable years after the effective date of the pertinent provisions of the Revenue Act of'1926,-separate returns were filed even though petitioner was affiliated with another corporation during these years. The petitioner having made its election to file separate returns, and no permission having been procured to change the basis for filing, the return for the period in controversy, a “ taxable year,” should have been “ upon the same basis.” The respondent’s determination upon the basis of separate returns is sustained. A. S. Siracusa Sons, Inc., 23 B. T. A. 53; Hennepin Holding Co., 23 B. T. A. 119; Lucas v. St. Louis National Baseball Club, 42 Fed. (2d) 984; certiorari denied, 282 U. S. 883.

. Judgment will be entered for the respondent.


text:
    Flushing Nurseries Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 42464.
    Promulgated March 21, 1932.

      G. A. O'Donohue, Esq., and Lawrence Graves, Esq., for the petitioner.

      F. B. Schlosser, Esq., for the respondent.
   OriNION.

Smith :

Petitioner contends that it realized no gain upon the sale of certain real estate acquired in the manner set forth in our findings from the Land Company, since the fair market value of the real estate on the date of acquisition (January 5, 1926) was the amount of the consideration received on the date of the sale (January 6, 1926). The respondent contends that petitioner acquired the property in connection with a reorganization and that the basis to be used for computing the gain upon the sale is the cost of the property to the Land Company, such cost being stipulated as $96,802.

Section 204 (a) (Y) of the Revenue Act of 1926 is as follows:

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

The term “ reorganization,” as used in section 204, is defined in section 203 (h) of this act as follows:

(1) The term “ reorganization ” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (O) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.
(2) The term “ a party to a reorganization ” includes a corporation resulting from a reorganization and includes both corporations in the case of an acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation.

In Mente & Co., 24 B. T. A. 401, we applied the above provisions of the same Revenue Act to transactions similar to those now under consideration. The question there presented was the basis for depreciation, whereas here it is the basis for gain; the basis for either is determined in accordance with section 204. We there said:

It seems to us that the above provisions exactly fit the present case. The assets of the Burlap Company were acquired by petitioner in connection with a reorganization as defined in section 203 (h) and immediately after the transfer control remained in the same persons. In such cases the statute — section 204 (a) (7) — provides that the basis shall be the same as it would be in the hands of the transferor, with adjustment for gain or loss recognized on the transfer. No adjustment is to be made in this ease, as no gain or loss has been recognized to the Burlap Company. Cf. David B. Gann, 23 B. T. A. 999.

The only difference between the transactions in the instant proceeding and the transactions in the Mente & Co. case is that here three corporations are involved instead of two as in that case. This difference is not fatal, since the result is the same in both cases. After the several transactions were completed the same persons who had owned the stock of the Land Company and Flushing Nurseries, Inc., owned all the stock of petitioner. Furthermore, petitioner acquired “ all the properties of another corporation [the Land Company].” In like manner it acquired the properties of the Flushing Nurseries, Inc. These transactions bring the case within the definition of a reorganization contained in section 203 (h). We accordingly hold that petitioner acquired the real estate of the Land Company “ in connection with a reorganization ” and that upon the sale of such real estate the basis for computing the realized gain is the cost of the property to the transferor.

The respondent concedes the overstatement of the fair market value of the second mortgage received as a part of the consideration upon the sale in question, and proper adjustment will be made upon final settlement.

Judgment will be entered u/nder Bule 50.


text:
    Boca Ceiga Development Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 40446.
    Promulgated March 22, 1932.

      Edward J. McGrath, O. P. A., for the petitioner.

      James K. Polk, Esq., and Harold Nonemam,, Esq., for the respondent.
   OPINION.

Smith:

The petitioner contends that its “books were kept substantially on the accrual basis, as evidenced by the fact that there are entries there for bills receivable, mortgages receivable, accounts payable and notes receivable.” The books were submitted in evidence, and these have been carefully examined in the light of the returns filed. While there appear to be accounts designated as “ receivable ” and “ payable,” such accounts appear merely as memorandum records of such items as mortgages and notes and there do not appear therein accrued items of income and expenses, as the case may be, as such for either of the years before us. Much of the testimony in support of petitioner’s contention that its books were on the accrual basis related to transactions of years not before us, but even then the items referred to were not shown to have been accrued as income or expense of the particular years. In other words, petitioner’s books do not clearly reflect its income earned during the taxable period and expenses incurred in and properly attributable to the process of earning that income. To illustrate, petitioner’s estimated gross profit from real estate sales in the year ended February 28, 1927, was $2,258.33, upon which there would have accrued certain commissions, assuming petitioner’s contention respecting commissions to be correct, but no amount was accrued therefor, and the books show under this account a payment of $2,500 to S. C. Abernethy on October 5, 1926, which amount was carried to profit and loss at the close of the fiscal year.. This item is deductible on the basis of receipts and disbursements, but not on the accrual basis, assuming that petitioner correctly states that this sum represents commissions based upon profits from sales, since the amount of the commission is greater than the amount of the estimated profit on the sales for the year. An accountant, who had audited petitioner’s books and assisted in the preparation of the returns for the years under consideration, stated that these returns were made upon the same basis as shown by the books. The 1926 return bears the notation that it was made upon the cash receipts and disbursements basis except for small accruals for taxes on properties unsold, but there is no deduction on this return for taxes. After locating as far as possible the items appearing on the returns upon the books of account, we are satisfied that petitioner correctly stated in the returns that the returns were made on the basis of actual receipts and disbursements. The respondent’s determination is upon that basis and is sustained.

Having found that petitioner was on a cash receipts and disbursements basis, the second issue requires no discussion, since petitioner does not contend that any portion of the alleged commissions was paid. However, it is to be noted that the minutes allegedly authorizing such commissions as compensation fail to show what action, if any, was taken upon the motion relating to such commissions. The respondent’s disallowance of the claimed deduction is sustained.

The remaining issue is whether the respondent has correctly computed the profit realized in the fiscal year ended February 28, 1926, upon the sale of the Lake Maggiore land. The initial payment upon this sale consisted of 480 shares of the petitioner’s capital stock, which the respondent has treated as cash to the extent of its “par value (also fair market value)” of $48,000. Petitioner contends that this was a capital transaction by which it acquired its own stock (which was then canceled), and that the value of this stock should not be considered in computing the profit upon the sale. We have heretofore held that a corporate taxpayer realizes neither gain nor loss upon the acquisition of its own stock. Houston Brothers Co., 21 B. T. A. 804; S. A. Woods Machine Co., 21 B. T. A. 818; Schiller Piano Co., 23 B. T. A. 376. Since in the taxable year before us the petitioner received only shares of its stock it realized no gain, and upon the authority of those decisions its contention is sustained.

Judgment will he entered under Bule 50.


author: Arundell:

text:
    Cascade Milling & Elevator Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60262.
    Promulgated March 22, 1932.

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

      John D. Kiley, Esq., for the respondent.
   opinion.

Arundell:

The respondent’s answer to the petition filed in this proceeding concludes with the following prayer:

Wherefore, it is prayed that the Board redetermine the amount of the deficiency involved in this proceeding to be equal to the amount determined by the Commissioner, plus any additional amount which may arise from the correction of any error or errors that may have been committed by the Commissioner. Claim is hereby asserted for the increased deficiency, if any, resulting from such redetermination.

Petitioner has moved that the prayer of respondent’s answer be stricken as meaningless and not supported by the averment of affirmative facts upon which it could be granted. As grounds for the motion to strike, petitioner sets forth that the respondent’s determination of a deficiency is prima facie correct and may not be changed by the Board without an affirmative showing to the contrary ; that the respondent’s claim “ for the increased deficiency, if any ” resulting from the Board’s redetermination is too general, and inconsistent with the presumptive correctness of the determination; that in the interest of good pleading the respondent should not be permitted by such a general prayer to leave open to doubt the accuracy of his computation, and by a “ catch-all ” phrase convert the Board into a bureau of. auditors to search out and correct his errors, if any.

Section 274(e) of the Revenue Act of 1926 provides that the Board shall have jurisdiction to redetermine the correct amount of the deficiency “ even though the amount so redetermined is greater than the amount of the deficiency ” determined by the respondent, and “ to determine whether any penalty, additional amount or addition to the tax should be assessed, if claim therefor is asserted by the Commissioner at or before the hearing or a rehearing.”

Section 907(a) of the Revenue Act of 1926 provides in part that:

The proceedings of the Board and its divisions shall be conducted in accordance with such rules of practice and procedure (other than rules of evidence) as the Board may prescribe * * *.

Rule 14 of the Board’s rules of practice promulgated under the authority granted by section 907(a) relates to the answer to be filed by the Commissioner and provides in part:

The answer shall be so drawn as fully and completely to advise the petitioner and the Board of the nature of the defense. It shall contain a specific admission or denial of each material allegation of fact contained in the petition and a statement of any facts upon which the Oommissioner relies for defense or for affirmative relief or to sustain any issue raised in the petition in respect of which issue the burden of proof is, by statute, placed upon the Oommissioner.

The Revenue Act of 1924 contained no provision like section 274(e) of the 1926 Act, but under the prior act the Board held that it had the right and duty to redetermine the correct deficiency, even though the amount was greater than that determined by the Commissioner. Hotel De France, 1 B. T. A. 28. The wording of the 1926 Act left no doubt as to our right in that respect, but by the same section of the act our right to determine whether the increase shall be assessed is limited to those instances where a claim for the increase is asserted by the respondent. The effect of the present practice of the respondent, if allowed, will defeat the purpose of the 1926 Act, for the “ catch-all ” provision of the answer will assert a claim for an increased deficiency in every case, and our procedure will revert back to that followed under the 1924 Act.

We do not mean to say that in no case is a prayer for an additional deficiency proper. In Moise v. Burnet, 52 Fed. (2d) 1071, it is quite distinctly held that'a prayer for an increase in the deficiency is necessary if the respondent is to obtain the benefit of any increase claimed in his answer. In that case the respondent answered the petition and alleged that he had improperly allowed certain deductions, and that income should be increased accordingly, but made no specific claim for the resulting increase either by prayer or otherwise. The Board held that the allegations of the answer constituted a sufficient claim within the meaning of the statute, and allowed the increased deficiency, upon a showing that the deductions referred to in the answer had been improperly allowed (13 B. T. A. 525). The Circuit Court of Appeals reversed our holding, saying in part:

Tbe Oommissioner did not properly “ assert ” “ claims ” for additional deficiencies, in the amended answers filed by him before the Board. The rule that tax statutes should be liberally construed in favor of the taxpayer clearly requires that a claim should be actually and definitely made, and not left to conjecture, inference, or interpretation. No words of claim, request, or demand were used by the Oommissioner. He must be bound by his pleadings, and cannot be assumed to have intended, to present a claim that he did not actually assert.

The court further pointed out that the relief demanded is gauged by the prayer.” While, as indicated by the Moise decision, it is necessary for the respondent’s pleadings to include an appropriately framed prayer for relief if an additional deficiency is sought, it is our understanding of the intent of the revenue act that the prayer must have the support of specific claims in each case ba.sed on specific grounds.

The undoubted purpose of section 274(e) was to put the taxpayer on notice of any demand that the Commissioner proposed to make for an increase in the deficiency determined. The respondent’s determination when it comes before us is presumptively correct. He can not consistently rely on that presumption and at the same time urge that the determination is wrong by asking for an increase. If the determination is wrong in any particular, the respondent should be required to allege particularly wherein it is in error and state the facts relied on, as required by our Hule 14.

The prayer of respondent’s answer in this case not only fails to meet the intent of the statute, but is in violation of the fundamental purpose of pleadings. In Hill v. Mendenhall, 21 Wall. 453, it is said:

The office of pleading is to inform the court and the parties of the facts in issue; the court that it may declare the law, and the parties that they may know what to meet by their proof.

The case of Pugmire v. Oregon S. L. R. Co., 92 Pac. 962; 13 L. R. A. (N. S.) 565, quotes from Pomeroy on Code Remedies as follows:

The very object and design of all pleading by the plaintiff, and of all pleading of new matter by the defendant, is that the adverse party may be informed of the real cause of action or defense relied upon by the pleader, and may thus have an opportunity of meeting and defeating it if possible at the trial. Unless the petition or complaint on the one hand, and the answer on the other, fully and fairly accomplishes this purpose, the pleading would be a useless ceremony, productive only of delay, and the parties might better be permitted to state their demands orally before the court at the time of the trial. The requirement therefore that the cause of action or the affirmative defense must be stated as it actually is, and that the proofs must establish it as stated, is involved in the very theory of pleading.

In McKinney v. Carson, 35 Utah 180; 99 Pac. 660, 664, it is said:

In every pleading the opposite party is entitled to notice of what the proof will be directed to, and this notice must appear from the pleading.

Under these rules of pleading we are of the opinion that that part of the respondent’s answer attacked by petitioner is, as asserted, meaningless, and should be stricken:

An order will be entered striking the prayer of the answer and granting the respondent time to amend.

Reviewed by the Board.


text:
    A. V. Stegeman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. Fannie L. Stegeman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Eugene S. Daley, Executor of the Estate of Clara P. Robson, Petitioner, v. Commissioner of Internal Revenue, Respondent. H. R. Stegeman, Petitioner, v. Commissioner of Internal Revenue, Respondent. H. M. Stegeman, Petitioner, v. Commissioner of Internal Revenue, Respondent. William L. Stegeman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Mrs. Mabel K. Stegeman, Petitioner, v. Commissioner of Internal Revenue, Respondent. Albert V. Stegeman, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent. W. C. Sanders, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 26643-26651.
    Promulgated March 22, 1932.

      Lawrence A. Balcer, Esq., and Henry Ravenel, Esq., for the petitioners.

      H. B. Hunt, Esq., for the respondent.
   OPINION.

Smith :

The original petitions set forth several allegations of error that were either abandoned or waived at the hearing. The only issue remaining for our determination is whether or not the petitioners’ liability is barred by the applicable statute of limitations.

The respondent contends:

* * * that the matter is adjudicated and petitioners cannot now' raise this issue because (1) the 1917 tax liability of the Old ’76 Distilling Co. was decided by the Board under Docket #1262 on the merits after full hearing; (2) If, as now claimed, the tax was barred from collection in February 1924, prior to the time the appeal in Docket #1262 was filed, the company had a right to defend against the imposition of the deficiency on that ground; (3) The failure to raise the issue of limitations on behalf of the company was a waiver of this defense; (4) Such action -by the company in waiving the defense is binding upon petitioners, its former stockholders, and who were in fact the interested parties prosecuting the petition in Docket #1262; and (5) The interjection of the statute of limitations in the instant proceedings is a collateral attack upon a prior determination of the Board.

The proceedings instituted by the transferor in Docket No. 1262 were the result of the Commissioner’s final determination of the transferor’s claim in abatement filed after the assessment of March 21, 1923. The assessment list for March, 1923, on which this assessment appears bears a notation to the effect that there was a noncompliance with section 250 (d) of the Revenue Act of 1921. Since no attack has been made upon the assessment, “ we assume that this act of the Commissioner was regular and valid.” American Locker Co., 21 B. T. A. 408. Thereafter, the transferor taxpayer filed a claim in abatement which was under consideration at the time of the enactment of the Revenue Act of 1924. Such claims were then referred to the Solicitor of Internal Revenue, upon whose recommendation the Commissioner’s final determination was based. Subsequent to the expiration of the five-year period of limitations, as extended by waiver, for the assessment and collection of the tax due under the 1917 return, and subsequent to the enactment of the Revenue Act of 1924, the Commissioner notified the transferor taxpayer of his final determination, and the taxpayer appealed to this Board from that determination. Prior to the hearing and decision on the merits, a hearing was held upon the respondent’s motion to dismiss the appeal for lack of jurisdiction, since the appeal was based upon the letter notifying the taxpayer of the respondent’s final determination regarding the taxpayer’s claim in abatement. The Board denied the respondent’s motion and accepted jurisdiction of the appeal. (See Brown & Sons Lumber Co. v. Commissioner, 282 U. S. 283.) The case was then heard upon its merits, without any plea as to the bar of the statute of limitations, and the final order of the Board, affirming the respondent’s determination of the 1917 deficiency, was entered on April 22, 1926.

In so far as material hereto, section 280 of the Revenue Act of 1926 is as follows:

(a) .The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in a tax imposed by this title (including the provisions in case of delinquency in payment after notice and demand, the. provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds) :
(1) The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this title or by any prior income, excess-profits, or war-profits tax Act.
* * * * ^ * * *
(b) The period of limitation for assessment of any such liability of a transferee or fiduciary shall be as follows:
(1) Within one year after the expiration of the period of limitation for assessment against the taxpayer; or
(2) If the period of limitation for assessment against the taxpayer expired before the enactment of this Act but assessment against the taxpayer was made within such period, — then within six years after the making of such assessment against the taxpayer, but in no case later than one year after the enactment of this Act.
*******

Section 280 of the Revenue Act of 1926 is constitutional. Phillips v. Commissioner, 283 U. S. 589.

The respondent argues that by reason of the fact that this Board in Docket No. 1262 determined a deficiency to be due from the Old ’76 Distilling Company and of the further fact that notices of tax liability were sent to the petitioners within one year from the date of the entry of decision in Docket No. 1262, the petitioners may not raise any question as to the bar of the statute of limitations as affecting the transferor.

A primary question for our consideration, however, is whether the petitioners had any liability “ at law or in equity ” for the payment of the deficiency determined by the respondent and by this Board to be due from the Old ’76 Distilling Company; for, if the petitioners had no such liability, it is not necessary to discuss the question of the bar of the statute of limitations.

There can be no question from the facts of record in these proceedings that the Old ’76 Distilling Company, in the proceeding in Docket No. 1262, had a valid defense of the bar of the statute of limitations had it availed itself of such defense. The bar of the statute for the collection of the tax fell on February 17, 1924. The claim in abatement filed after the assessment in March, 1923, did not extend the period within which collection of the deficiency might be made. Guardian Trust Co., Executor, 15 B. T. A. 1256; Uncasville Manufacturing Co. v. Commissioner, 55 Fed. (2d) 893. If the tax had been collected after the statute of limitations had tolled, the amount paid could have been recovered through proper proceedings. Bowers v. New York & Albany Lighterage Co., 273 U. S. 346; Russell v. United States, 278 U. S. 181.

The statute of limitations having tolled in favor of the transferor on February 17, 1924, it follows that if the deficiency may be collected from the petitioners, the transferees of the assets of the Old ’76 Distilling Company, it must be by virtue of the decision of this Board in Docket No. 1262, entered April 22, 1926. The respondent relies solely upon that decision. We think that his reliance is misplaced, for two reasons — first, because the decision of the Board in Docket No. 1262 was not conclusive of the transferor’s rights, and, secondly, because Congress in section 280(b) of the Revenue Act of 1926 has provided a statute of limitations applicable to the transferee.

It will be noted from our findings that the hearing in Docket No. 1262 was had on May 13, 1925, that briefs were filed on or prior to May 25, 1925, and that the Board promulgated its opinion on April 20, 1926, and entered its decision therein on April 22, 1926. The proceeding was therefore one of the class of cases arising under section 283 (j) of the Revenue Act of 1926, which, so far as material, provides:

In cases within the scope of subdivision (b) or (f) of this section where any hearing before the Board has been held before the enactment of this Act and the decision is rendered after the enactment of this Act, such decision shall, for the purposes of this title, be considered to have become final upon the date when it is rendered and neither party shall have any right to petition for a review of the decision. * * *

Clearly the transferor, the Old ’76 Distilling Company, had the right, if it had paid the deficiency determined by the Board, to bring a suit for the refund of the tax paid, and in such proceeding it might have raised the question of the bar of the statute of limitations which it had failed to raise before the Board. As stated by the court in Blair v. Curran, 24 Fed. (2d) 390, “ The hearing before the Board [under the provisions of the Revenue Act of 1924] was at that time little more than a preliminary skirmish, a run for luck.” There has never been a conclusive determination of the transferor’s liability.

It is furthermore to be noted that it was not the intention of Congress in the enactment of section 280 of the Revenue Act of 1926 to impose liabilities upon transferees which did not rest upon them at law or in equity. A. H. Graves et al., 12 B. T. A. 124. Its purpose was simply to provide a new remedy for the enforcement of the liability. Phillips v. Commissioner, supra. Cf. Marion Parsons Spencer, 11 B. T. A. 437; Guardian Trust Co., Executor, supra; Charles E. Hammersley, 16 B. T. A. 68; Annie P. Kountze, 17 B. T. A. 928; Alfred J. Diescher, 18 B. T. A. 353; dismissed, 44 Fed. (2d) 1013; William H. Schroll, 20 B. T. A. 1027; Caroline J. Shaw, Executrix, 21 B. T. A. 400; Frank L. Roche, 21 B. T. A. 1139; Newport Co., 22 B. T. A. 833.

What we have said above applies only to the liability asserted for the year 1917. The liabilities of the petitioners for the unpaid taxes of the Old ’76 Distilling Company for the years 1919 and 1920 are not barred by the statute of limitations. The return for 1919 was filed on March 15, 1920, and the assessment was made in December, 1924, after the enactment of the Revenue Act of 1924, and within the five-year period of limitations which expired on March 15, 1925 (sections 280, 277 (a) (2) and 278 (d) of the Revenue Act of 1924). The respondent’s notice to the petitioners, dated February 17, 1927, was within six years of the assessment and not more than one year after the enactment of the Revenue Act of 1926 and is timely within the period of limitations (now extended by these proceedings — see sections 280 (d) and 274 (a) of the 1926 Act) provided for in section 280 (b) (2). The 1920 return was not filed until March 28, 1923, and the respondent had.five years from that date within which to assess and collect the tax due on that return for the transferor, and, under section 280 (b) (1), an additional year in which to proceed against the transferees. Since the period of limitations for assessment against the transferor did not expire until after the enactment of the Revenue Act of 1926, it is not essential that we discuss the effect., if any, of the assessments in September, 1923, and December, 1924. The period of limitations for assessment against the transferor not having expired on February 17, 1927, when the respondent notified the petitioners of his proposal to assess the tax against them, it follows that the notice was timely,- the period of limitations for assessment against the transferees (now extended by these proceedings — see sections 280 (d) and 274 (a) of the 1926 Act) has not expired, and the petitioners’ liability is not barred. A. Cellars, 16 B. T. A. 411; Louis Costanzo, 16 B. T. A. 1924; Phil Gleichman, 17 B. T. A. 147; Moritz Hilder, 17 B. T. A. 1189; Caroline J. Shaw, Executrix, supra; E. N. & O. M. Ennis, 21 B. T. A. 406; Edward H. Garcin, 22 B. T. A. 1027; Samuel Henigson, 23 B. T. A. 1294.

Reviewed by the Board.

Judgments will be entered under Bule 50.

Lansdon, Maequette, and Aeundeel dissent.


author: Van Foss an :

text:
    Thomas A. O’Donnell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 35341.
    Promulgated March 23, 1932.

      Thomas B. Dempsey, Esq., and A. Colder Maehay, Esq., for the petitioner.

      Alva C. Baird, Esq., for the respondent.
   OPINION.

Van Foss an :

Respondent admitted error in his original determination of a deficiency, but by second amended answer raised an issue as to the taxability to petitioner of payments made to the trustee of the two trusts created by him. Both trusts were expressly subject to revocation by the settlor and petitioner apparently does not seriously contend that the income, if any was earned in 1923, was not income to him, but maintains that the respondent has failed to prove the payments constituted income.

Respondent’s allegation is that the fair market value of the rights acquired by the petitioner by virtue of the contract of January 9, 1918, with Midway, i. e., the right to receive one-third of the future profits of Midway from the property in question, did not exceed $75,000 on the date of acquisition and that he or his nominees had received the sum of $413,672.14 under such contract prior to 1923.

The transaction of January 9, 1918, by the terms of which the petitioner transferred to Midway his one-third stock interest in San Gabriel and options on the remaining two-thirds of such stock in consideration of receiving one-tliird of the future profits of Midway was not a closed transaction on which gain arose on the contract date. It was a sale of property which might or might not give rise to income, dependent on the inscrutable factor of future oil production. If and when petitioner had received back his capital cost or basis, income would begin to accrue. If such cost were never recovered no income would ever arise. Doyle v. Mitchell Bros. Co., 247 U. S. 179. Petitioner reported his income on a cash basis and is required to return income for taxation only when the profit is realized. The promise to pay one-third of future profits was not equivalent to cash nor did it have, on January 9, 1918, an ascertainable fair market value. Burnet v. Logan, 283 U. S. 404.

Nor do we deem it proper to find a fair market value as of January 9, 1918, by employing ao a basis the subsequent profits. Such profits might serve as corroborative of the reasonableness of a figure of value if such were ascertainable as of the basic date. But no value of the right being ascertainable on that date, the subsequent returns will not be looked to to determine the same.

This is not, however, an end of the matter. Though respondent may have been mistaken in assuming that a fair market value could be determined as of January 9, 1918, we have the further problem of determining whether petitioner had recovered the cost or value of the stock and options prior to the close of the taxable year. It is stipulated that petitioner, or the trustee of the revocable trusts created by him, received from the Midway Company between January 9,1918, and December 31,1922, the sum of $413,672.14 on account of the contract of January 9, 1918, and that in 1923 the further sum of $114,908.31 was so received. As we have indicated, if he had recovered the cost or basis of the property sold, the payments received in 1923 constituted income. To solve this further problem it is necessary to look back of the transaction of January 9, 1918, to the date of acquisition of the stock and options and, if possible, determine their cost or value, whichever is the appropriate base.

Under date of June 28, 1917, petitioner acquired one-thircl of the stock of San Gabriel Company by transferring to that company his undivided one-third interest in certain oil leases. At the same time the two McCrays received one-third each of the stock for their interests in the leases. These leases had been acquired for a nominal consideration.

Under the revenue act then in force the transaction of June 28, 1917, was a taxable transaction and thereafter the basis for determining gain on disposition of the stock was the fair market value of the same when received. Since all of the stock was exchanged for the leases, and there being no evidence of any other assets, we believe it reasonably inferable that the stock had no greater value than the leases. These leases had been acquired during March of the same year. The facts do not indicate that any development had been undertaken or production achieved prior to June 28, 1917, when the leases were transferred to San Gabriel Company-

Sis months later, on January 7, 1918, the two McCrays sold their stock for a net price of $75,000 to each, the Midway Company assuming all obligations of San Gabriel Company and undertaking to save the sellers harmless therefrom. In the option given petitioner on M. L. McCray’s stock mention is made of a note due the Farmers & Merchants National Bank, while in the option from L. A. McCray specific mention of a note for $45,000 due “ the bank ” is made. That these references are to the same note seems clear to us. There is no other evidence from which we are led to believe that the liabilities assumed by Midway were in a large amount and in any event it seems apparent that all of these liabilities, including the note for $45,000, were incurred by the San Gabriel Company subsequent to June 28, 1917, the date when petitioner acquired his stock. If, however, they were in existence at the last mentioned date they would not serve to increase the value of the stock then acquired by petitioner.

In addition to his one-third stock interest petitioner sold on January 9, 1918, the two options on the remaining two-thirds of such stock held by the McCrays. One of these options recites no consideration while the other states one dollar as consideration. The first of these options was acquired on December 24, 1917, and the other on December 31, 1917. They were sold and transferred a few days later — on January 9, 1918. Since the options were so acquired, their cost is the basis for determining gain on disposition. Having been acquired at nominal cost, they add nothing to the aggregate amount to be used as a base on their subsequent sale with the stock. We are thus thrown back on the fair market value of the stock on June 28, 1917, as the ultimate base for determining profit.

The record in this case is incomplete in many respects. The facts were stipulated, and we have no opinion evidence such as is usually presented in valuation cases. On such facts as we have before us, and making such reasonable inferences of fact therefrom as seem justified, does it appear that by the end of 1922, when petitioner or his nominees had received $418,672.14, he had recovered the fair market value of the stock and cost of the options sold January 9, 1918? Though it is impossible on the record to determine exactly the fair market value of petitioner’s stock on June 28, 1917, we are satisfied that it, together with the cost of the options, was less than $413,672.14, the amount paid on account thereof by Midway Company prior to January 1, 1923, and we do so find. It follows that previous to the taxable year petitioner had received the fair market value or cost of the property sold by him on January 9, 1918, and that all sums received in 1923 constituted taxable income.

Decision will be entered under Rule 50.


author: Love :

text:
    The Stock Yards Bank of Cincinnati, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41085.
    Promulgated March 23, 1932.

      William J. Reilly, Esq., for the petitioner.

      Prew Savoy, Esq., for the respondent.
   OPINION.

Love :

The principal issue in this proceeding is whether any gain or loss was recognizable to petitioner in the transfer of its assets, property and good will to the Trust Company.

The respondent relies upon the contract of sale between petitioner and the Trust Company, which was approved by both the stockholders and directors of each contracting party.

Petitioner contends that the manner in which the stock was purchased from its old stockholders and the subsequent transfer of its assets, property and good will to the Trust Company amounted to a “ reorganization ” as that term is defined in section 203 (h) of the Revenue Act of 1926, and being a reorganization, section 203 (b) (2), (3) and (4) of the same act, as interpreted by article 1574 of Regulations 69, specifically prohibited the recognition to petitioner of either gain or loss on the said transfer of its assets, property and good will.

We agree with the result contended for by petitioner, namely, that no gain or loss should be recognized on the transfer in question, but for entirely different reasons from those given by petitioner.

As we analyze the record, the respondent has laid too much emphasis on section 710-140 of the General Code of Ohio, which provides in part that “ lío purchase or investment shall be made in the stock ” of any other bank doing business in Ohio. For instance, in the statement attached to the deficiency notice the respondent says:

Your contention that no profit was realized by you upon the sale of your assets is denied. It is held that a profit was realized by you since under the laws of the State of Ohio, it was necessary for the purchasing corporation to purchase your assets, which it did through trustees.

And in his brief, after quoting from section 710-140, supra, the respondent continues as follows:

Petitioner seeks to limit this specific language to investments only and contends that the Bank could have purchased all of the stock of the Bank. No authority for such an interpretation of the statute has been cited and this interpretation seems clearly contrary to the specific language of the statute.

Williams’ testimony to the effect that Shinkle was named as the nominee of the Trust Company to purchase the stock of petitioner for the Trust Company was in part as follows:

A Well, the matter was brought up as to how to handle it. We realized the bank could not own shares in the bank, so Mr. Shinkle was named as the nominee, and we agreed to lend Mr. Shinkle money to pay for those shares, without interest.
By The Member:
Q Whom do you mean by “we”?
A The Fourth and Central Trust Company, the loan committee, agreed to lend him the money to purchase these shares, and not charge him any interest. So we proceeded to buy them.
* * # # # * #
Q Did you tell the Court the nature of the loan made by The Fourth and Central Trust Company to Mr. Shinkle covered by these two notes and his open account, totalling $400,000?
A We made him our nominee, and lent him the money without interest.
Q Now, tell the Court how the thing was closed as a matter of your own recollection and knowledge?
A Under the agreement Mr. Shinkle said, “ here is your stock; I want my notes”, and the notes were given him for the stock and for nothing else.

We think the evidence clearly establishes the fact that the Trust Company, through its agent or nominee, Shinkle, purchased all of the stock of petitioner. This may or may not have been an ultra vires act, but in any event all of the acts referred to in our findings were approved by the Superintendent of Banks of the State of Ohio on February 8, 1926.

What was the effect of the contract entered into between petitioner and its sole stockholder, the Trust Company 1 True, in form it was clearly a contract of purchase and sale of assets, property and good will for a stated consideration of $400,000. Plainer language could not have been used to draw up a contract with such an end in view. But in substance the transaction was nothing more than a distribution in complete liquidation of petitioner to its sole stockholder. No consideration of any kind was actually paid to petitioner by the Trust Company for the assets, property and good will so transferred. The latter already owned petitioner’s stock and merely took over all of petitioner’s assets, etc., with a view of surrendering petitioner’s charter, which occurred later in the year. In Weiss v. Stearn, 265 U. S. 242, the Supreme Court voiced its opinion as to whether form or substance should control, in the following language:

Questions of taxation must be determined by viewing what was actually done, rather than the declared purpose of the participants, and when applying the provisions of the Sixteenth Amendment and Income laws enacted thereunder we must regard matters of substance and not mere form.

Section 201 (c) of the Revenue Act of 1926 provides in part that “Amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock ” and that “ The gain or loss to the distributee resulting from such exchange shall be determined under section 202 * * We are not concerned here with the gain or loss, if any, to the distributee resulting fróm such complete liquidation, or with the gain or loss realized to the old stockholders of petitioner upon the sale of their stock to the nominee of the Trust Company. We are only concerned now with the question whether petitioner realized a gain or loss when it distributed its assets, etc., to its sole stockholder in complete liquidation of its affairs. We believe that .the respondent has correctly answered this question in article 548 of his Regulations 69, from which we quote:

No gain or loss is realized by a corporation from the mere distribution of its assets in kind upon dissolution, however they may have appreciated or depreciated in value since their acquisition.

Cf. Virginia Beach Golf Course Annex Corporation, 23 B. T. A. 1169, Ezra Gould et al., 21 B. T. A. 824.

In view of what we have said above, we do not deem it necessary to discuss further the arguments made by petitioner as to the applicability of section 203 (b) (2), (3), (4) and (h) of the 1926 Act, or the second issue pertaining to the value of the good will and its proper place in the respondent’s determination of profit.

Reviewed by the Board.

Judgment of no deficiency will be entered.