author: Leech:

text:
    Rockford Dairy, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 40349.
    Promulgated June 23, 1932.

      Maxwell Bkmerler, C. P. A., for the petitioner.

      F. K. Blanker, Esq., for the respondent.
   OPINION.

Leech:

Respondent has determined a deficiency of $225 for the calendar year 1924. Petitioner assigns error in this determination in respondent’s action in disallowing a deduction of $1,800 taken by it from gross income upon its return for that year as a loss sustained.

The facts are that petitioner, a New York corporation, in 1922 purchased $3,000 par value joint bonds of William Whitmer & Sons and Parsons Pulp and Lumber Company, paying for them the sum of $3,000. These two companies thereafter became insolvent and went into the hands of receivers. Then certain of the bondholders organized and appointed a committee to represent them, which conceived a plan of acquiring the properties of the insolvent corporations through a corporation to be organized for that purpose. Under this plan there were three alternatives for the holders of the joint bonds — they could deposit them with the committee, pay a certain amount of cash in addition and receive bonds of the new corporation; they could surrender the bonds and make no cash payment, in which event they would receive new bonds and certificates of indebtedness in a lesser amount; or they could retain their bonds, not become parties to the plan and later receive a small amount in liquidation of the same.

This plan, which was in evidence, was carried out in full. The new company, known as the Whitmer-Parsons Pulp and Lumber Company, was incorporated and acquired through the bondholders’ committee the properties of the two insolvent corporations at receivers’ sales, paying for them in cash and deposited bonds and the two old companies went out of existence. Petitioner made no additional cash payment, but surrendered its bonds and received in 1924, in place of the $3,000 in bonds surrendered, $900 par value of bonds and $300 par value certificates of indebtedness of the new corporation. The securities received on the exchange by petitioner were not disposed of, but were owned by it at the date of nearing of this appeal.

On its return for 1924 petitioner took a loss of $1,800 as sustained on this exchange and in determining the deficiency here in question respondent disallowed this deduction as being an exchange coming within section 203 of the Revenue Act of 1924, which provides:

*******
(b) (2) No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
*******
(h) (1) The term “reorganization” means (A) a merger or consolidation (including the acquisition by one corporation of * * * substantially all the properties of another corporation) * * *.
(2) The term “a party to a reorganization” includes a corporation resulting from a reorganization * * *.

Petitioner contends that the organization of the Whitmer-Parsons Pulp and Lumber Company and its acquisition of the properties of the two insolvent corporations under the conditions detailed above did not constitute a “ reorganization ” within the purview of section 203 of the Revenue Act of 1924 and that in any event the exchange by petitioner of securities was one for securities in a lesser amount, the absolute and unavoidable loss to petitioner in a definite amount being thereby determined at that time. He further contends that the bonds surrendered represented a debt of the two bankrupt companies to petitioner which, by reason of their insolvency and receivership, became worthless to the extent of $1,800 in 1924 and it is accordingly entitled to charge off this partial worthlessness in that year under section 234 (a) (5) of the Revenue Act of 1924.

The acquisition of all the properties of the two insolvent corporations by the new corporation, the Whitmer-Parsons Pulp and Lumber Company, under a plan whereby owners of securities of the insolvent corporations exchanged them for securities of the new corporation, constituted a reorganization and both old corporations were parties thereto within the definition of section 203 (b) (2) quoted above. Pinellas Ice & Cold Storage Co. v. Commissioner, 57 Fed. (2d) 188; First National Bank of Champlain, N. Y., 21 B. T. A. 415. The fact that the acquisition occurred at receivers’ sales does not change the consequences in so far as the statutory definition of “ reorganization ” is concerned. DeBlois v. Commissioner, 36 Fed. (2d) 11, involving the meaning of “reorganization” as used in the corresponding section of the Revenue Act of 1918. Nor does it affect this status of the transaction that the properties of both old companies had been foreclosed before the plan became effective or that the stockholders of the two insolvent companies were given no opportunity to share in the exchange. First National Bank of Champlain, N. Y., supra.

The “ new corporation ” clearly resulted from the reorganization and is, therefore, “ a party to the reorganization ” under section 203 (h) (2) set out above. To determine, as is contended, that petitioner is entitled to a deduction under section 234 (a) (5) of the same act for a debt ascertained to be partially worthless, we must hold section 203 (b) (2) to be inoperative in respect to a situation coming squarely within its terms. It is elementary that a specific provision relating to a particular subject must govern in respect to that subject as against general provisions in other parts of the same act, although the latter, standing alone, would be broad enough to include the subject to which the more, specific provision relates. Swiss National Insurance Co. v. Miller, 289 Fed. 571; affirmed in 267 U. S. 42. The specific conditions prescribed in section 203 (b) (2) above quoted are fully met, and we hold that petitioner sustained no deductible loss upon the exchange. The cost basis of the new securities in petitioner’s hands is $3,000 and the deductible loss will be realized upon their payment at maturity or sale prior to that time.

Judgment will Toe entered for the resfondent.


source: Caselaw Access Project

author: Van Fossan:

license: Public Domain

text:
    M. & F. Holding Corporation, Petitioner v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47843.
    Promulgated June 23, 1932.

      Kenneth O. Quencer, Esq., for the petitioner.

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

Van Fossan:

On January 16, 1930, the respondent proposed for assessment against the petitioner deficiencies in income taxes for the fiscal years ending March 31, 1927, and March 31, 1928, amounting, respectively, to the sums of $1,328.47 and $1,245.48. The respondent - also j>roposed to assess the additional amount of $311.37 for the fiscal year ending March 31, 1928, as a penalty for petitioner’s failure to file its income-tax return for that year within the time prescribed by law.

In this proceeding the petitioner requests redetermination, of the above stated deficiencies and also requests that the penalty proposed for assessment be not imposed.

The petitioner alleges as ground of error: “ Failure of the Commissioner to allow the sum of $25,000, paid by petitioner in connection with negotiating and closing a long-term lease, as an expense in the year paid.”

The petitioner claims that it is entitled to charge off this expense in the fiscal year ending March 31, 1926, and to deduct the resulting net loss from income in the two subsequent fiscal years, which are the taxable years in question.

The petitioner is a corporation, organized under the laws of the State of FTew York in February, 1925. The matters connected with its organization were conducted by John J. Quencer, an attorney at law, who was employed by the petitioner to take care of its affairs from its beginning. Immediately upon its incorporation Quencer procured the conveyance to the petitioner of certain premises situated at the southeasterly corner of Seventh Avenue and 56th Street in the City and County of New York and known as Nos. 875, 877 and 879 Seventh Avenue, and Nos. 162 and 164 West 56th Street. These premises were conveyed to the petitioner subject to a mortgage securing payment of the principal sum of $200,000, with interest, and also subject to the lien of certain leases. The property was paid for by mortgage bonds executed by petitioner, and Quencer drafted the bonds and mortgage. Quencer also negotiated the purchase by petitioner of the leases which were liens upon the property at the date of conveyance, and drafted certain bonds excuted and delivered in payment for the leases.

Upon the conveyance of the property to the petitioner, Quencer began negotiations to lease it on a long-term lease. Thereafter a lease dated March 20, 1925, was entered into between petitioner, as lessor, and the 162 West 56th Street Corporation, as lessee, leasing the property for a term of 63 years, beginning May 1,1925, at an annual rental of $30,000, which rental, as provided in the lease, should be increased periodically in the manner set forth in the instrument. Quencer drafted this lease. The lease provided, among other things, for the construction of a new building on the premises leased.

Under date of May 18, 1925, the petitioner, as owner of the fee, and the 162 West 56th Street Corporation, as the borrower, entered into an agreement with S. W. Straus & Company by which S. W. Straus & Company agreed to loan to the 162 West 56th Street Corporation the sum of $960,000, to be used for the purpose of constructing a 15-story apartment house on the premises hereinbefore described. The petitioner and the lessee agreed that they would mortgage the fee and the leasehold as security for the loan. Thereupon the petitioner and the 162 West 56th Street Corporation executed and delivered a trust mortgage conveying the premises, the leasehold and the building to be erected to a trustee as security for an issue of first mortgage serial bonds to be executed by the 162 West 56th Street Corporation in the sum of $960,000, which had been advanced or was to be advanced by S. W. Straus & Company. Quencer represented the interests of petitioner in all matters relating to the loan agreement with S. W. Straus & Company and to the trust mortgage.

Quencer performed other services for the petitioner during the fiscal year ending March 31, 1926, including advice on corporate matters, management of petitioner’s office, preparation of minutes of meetings held by the board of directors, and supervision on petitioner’s behalf of matters relating to the construction of the new building.

On March 25, 1925, Quencer rendered to petitioner a bill for services, stated therein as follows:

To services as per agreement in connection with negotiations toward the entering into of a new lease of the premises on the southeast corner of 56th Street and 7th Avenue, and conclude the execution of the same and other instruments and documents in connection therewith, and to services in connection with the organization of this Company, and the transfer to it of title to said premises, holding of organization meeting, preparing all By-Laws, the holding of the Directors meeting, the drawing of other documents to carry out the above transactions_§25, 000.00
Disbursements
Paid Secretary of State organization tax and filing fee_$80.00
Paid New York County clerk filing_ 6. 00
Telegrams Secretary State and ear fares and postage_ 1.98
Internal Revenue Stamps_ 10. 00
Bill Broun Green Co_ 18. 90
Books_ 2. 50
- 119.38
$25,119.38

In its income-tax return for the fiscal year ending March 31, 1926, petitioner charged the total sum stated in Quencer’s bill to capital, describing the item as “ organization expense.” The petitioner now claims, however, that the item was so charged in the return by the error of an accountant and that, as a matter of fact, the sum designated as “ organization expense ” was paid to Quencer and accepted by him as payment for all services rendered and to be rendered by him from the date of the organization of the petitioner through the fiscal year ended March 31, 1926. Petitioner further contends that whatever part of such sum is deductible as the ordinary and necessary expense of business is deductible in the year in which paid.

There is some testimony in the record tending to prove that petitioner paid to Quencer the amount of his bill as payment for all services rendered and to be rendered by him up to March 31, 1926. In our opinion, however, this testimony does not overcome the weight of the documentary evidence which is a part of the record. The services stated in Quencer’s bill included only matters connected with the organization of petitioner, matters relating to the acquisition of title to the premises hereinbefore described and services consisting of the negotiation and drafting of the 63-year lease. Moreover, in the various communications addressed to the respondent or his representatives, which are part of the record and signed by petitioner’s president, the petitioner in effect restates its claim that the amount charged to capital in the return for the fiscal year ended March 31, 1926, was paid for organization expense.

The petitioner did not offer in evidence its income-tax returns for the fiscal years ended respectively March 31, 1927, and March 31, 1928, which are the taxable years in question. Nor does the evidence satisfactorily disclose in what year the sum in question was actually paid by the petitioner to Quencer. However, in the notice of deficiencies attached to the petition it appears substantially that the respondent disallowed the deduction of $14,000 from income for the year ended March 31, 1927, and disallowed a deduction of $11,119.38 from income for the year ended March 31, 1928. Both of these disallowed sums are referred to in the notice of deficiencies as deductions for “ organization expense.” The respondent allowed organization expense in the sum of $500 to be deducted from income for the fiscal year ended March 31, 1927. These three sums total $25,119.38, the sum charged by petitioner to capital in its return for the fiscal year ended March 31, 1926, and described therein as “ organization expense.” It also appears that the respondent held that $24,500 of the total sum was paid as a fee for negotiating and closing the long-term lease and that respondent prorated that sum over the term of the lease, allowing a deduction of one sixty-third of the amount in each of the taxable years.

In its protest against the proposed deficiencies, which were signed by petitioner’s president and were executed respectively February 13, 1929, and May 22, 1929, the petitioner states in effect that the aggregate of $25,000 was paid by the petitioner “ for legal expenses in connection with the negotiation and culmination of the lease of the corporation’s property.”

It is true that part of the services set forth in Quencer’s bill was described as connected with the transfer to the petitioner of the premises located at the southeasterly corner of Seventh Avenue and 56th Street in the City and County of New York. It is clear, however, that any fee paid for such a service was not an ordinary and necessary expense of business for the reason that the evidence establishes that the property described was acquired by petitioner for the purpose of deriving income therefrom. Therefore, any fee paid for services connected with such acquisition was part of the cost of the property and consequently a capital charge. First National Bank of St. Louis, 3 B. T. A. 807; Stephens Fuel Co., 13 B. T. A. 666; Chestnut Farms Dairy, 19 B. T. A. 192; Charles J. Livingood, Executor, 25 B. T. A. 585. It follows that whatever part, if any, of the fee of $25,000 was paid for services connected with the transfer of the property described would not be deductible from income as an ordinary and necessary expense of business.

It is our opinion that the evidence is wholly insufficient to overcome the presumption of correctness attaching to respondent’s determination. The petitioner concedes in its brief that no more than the sum of $500 is deductible as “ organization expense.” The respondent’s determination, that the balance of the sum of $25,000, namely, $24,500, was payment for services connected with the negotiation and culmination of the long-term lease and should, therefore, be prorated over the term of the lease, is in accordance with Bonwit Teller & Co. v. Commissioner, 53 Fed. (2d) 381 (affirming in part Bonwit Teller & Co., 17 B. T. A. 1019), and with decisions of this Board. James Butler, 19 B. T. A. 718; Evalina M. Howard, 19 B. T. A. 865; Mary C. Young, 20 B. T. A. 692; Spinks Realty Co., 21 B. T. A. 674.

The petitioner also contends that the penalty amounting to $311.37 proposed for addition to the deficiency in tax for the fiscal year ended March 31,1928, should not be imposed.

It appears that the petitioner’s income-tax return for the fiscal year ended March 31, 1928, was not filed until a few days after the time limited for such filing. It also appears that at the time the retuim should have been filed the petitioner’s president was absent from New York, either at Atlantic City or on an automobile trip and could not be reached before the time for filing the return expired. Section 291 of the Revenue Act of 1928 provides that in case of any failure to make and file a return within the time prescribed by law or prescribed by the Commissioner in pursuance of law, 25 per centum of the tax shall be added to the tax, except that when a return is filed after such time and it is shown that the failure to file it was due to reasonable cause and not to wilful neglect, no such addition shall be made.

It is our opinion that no reasonable cause for petitioner’s failure to file its return within the time limited is shown. The statute provides that a corporate return may be executed by the president, vice president or other principal officer of the corporation, and by the treasurer or assistant treasurer. The evidence- does not disclose that there was no officer other than the president who could have executed the return and, in any event, the excuse offered is not, in our judgment, of sufficient merit to justify us in finding that the failure to file the return within the time limited was due to a reasonable cause.

Judgment will he entered for the respondent.


author: TRAMmell :

text:
    Benjamin I. Powell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50380.
    Promulgated June 27, 1932.

      Hugh F. Purvis, G. P. A., for the petitioner.

      James H. Teatman, Fsg., for the respondent.
   OPINION.

TRAMmell :

In his return for 1928 the petitioner took a deduction for taxes of $6,518.90, of which amount $1,311.51 represented taxes paid in that year for 1927 and $5,141.33 represented taxes for 1928 which accrued in that year but which were not paid during the year. Of the deduction of $6,518.90 taken by the petitioner the respondent disallowed $5,347.78, for the reason that the petitioner kept his books on the cash receipts and disbursements basis. At the hearing the parties stipulated that, if we determine that the petitioner’s books were kept on the accrual basis, the deduction allowed by the respondent in 1928 for taxes should be increased by $3,970.21, thus allowing a total deduction of $5,141.33 for taxes for that year, or the amount entered by the petitioner on his books.

The -petitioner contends that his books were kept on the accrual basis, while the respondent contends that they were kept on the cash basis.

With respect to income from rents, the petitioner testified that, since these were always paid in advance, there was nothing to be accrued at the end of the year on account of them. This is the explanation offered as to why only “ Rents Received ” account was carried on his books.

With respect to the account “Accrued Taxes,” only the taxes on part of the petitioner’s property were entered in it. His testimony indicates that probably the taxes on the remainder of his property were paid as they came due and were taken as deductions in his income-tax returns for the year in which they were paid. No explanation is offered by the petitioner as to why, if he kept his books on the accrual basis as he contends, he deducted in his return for 1928 taxes paid in that year for the year 1927 which, if he had been on the accrual basis, would have been deducted in 1927.

The petitioner carried in bis books an account designated “Accrued Interest,” but never made any entry therein from December 31, 1924, until December 31, 1930, notwithstanding the fact that during the years 1926, 1927 and 1928 he took deductions in his returns for interest of a total amount in excess of $5,700. Clearly this account during these years was nothing more than a name since the petitioner made no effective use of it.

The respondent has determined that the petitioner’s books were kept on the cash receipts and disbursements basis, and his determination is presumed to be correct until the petitioner has shown it to be otherwise. From a consideration of the evidence submitted we are not able to hold that the respondent’s determination in this respect is erroneous. The petitioner therefore is entitled to deduct for taxes in 1928 only the amount paid in that year, which was $1,877.57, or $206.45 more than was allowed by the respondent.

The remaining question is whether, in computing net income for 1928, the petitioner is entitled to a deduction of the amount of a net loss sustained in 1927 as a result of his stock in the Powell Furniture Company in the amount of $50,000 having become worthless in that year on account of the bankruptcy of the company. The parties stipulated at the hearing that, if the petitioner is entitled to a deduction for a net loss, the amount thereof is $12,658.09, unless we should hold that the petitioner kept its books on the accrual basis, in which event the amount would be $13,371.65. Since we have sustained the respondent’s determination that the petitioner’s books were kept on the cash receipts and disbursements basis, the amount of the loss involved is, under the stipulation of the parties, $12,658.09. The controversy as to this issue is whether the agreed net loss was incurred in a trade or business regularly carried on by the petitioner.

In his petition the petitioner alleges that the business regularly carried on by him since 1923 was that of investments and that the loss here involved was sustained in that business.

In 1915 the petitioner acquired stock in the Dade County Furniture Company (later Dade Furniture Company), in which he continued to be a stockholder until July or August, 1921. Sometime between 1918 and 1921 he and two others organized and became stockholders in the Avenue D Furniture Company (later Home Furniture Company). This corporation was later merged with the Powell Furniture Company, a corporation organized by the petitioner in 1923 and in which he became the principal stockholder. In both the Dade County Furniture Company and the Powell Furniture Company the petitioner was president and was active in the conduct of the affairs of all the furniture companies, devoting practically all of his time to their activities. About 1918 the petitioner acquired an interest in the Wayne Building, of which he became sole owner in 1921 and which he leased in 1924 for a period of ninety-nine years. Subsequent to 1919 or 1920 he became a stockholder in the Miami Warehouse Company, a corporation organized to acquire, subdivide and operate certain real estate in which he had theretofore acquired an interest. Thus from 1915 until 1927, a period of twelve years, the petitioner acquired stock in three furniture companies and in one warehouse company, or a total of four corporations. The petitioner does not contend in his brief that his businéss was that of investments, but, if he did, we think that in view of the foregoing these occasional stock acquisitions of the petitioner are insufficient to support an allegation that he was regularly carrying on such business. J. J. Harrington, 1 B. T. A. 11.

In his brief the petitioner contends that in 1927 he was engaged in the furniture business, a business in which he had been engaged continuously since 1915, and that the loss on his stock was sustained by him in the operation of that business, which he regularly carried on. The respondent contends that the loss was not sustained by the petitioner in the operation of a business regularly carried on by him, but was sustained in a stock transaction as a result of the petitioner’s investment becoming worthless.

The loss here involved was one resulting from the petitioner’s investment in the Powell Furniture Company having become worthless. It was not a loss resulting from any furniture business carried on by the petitioner. The only connection the petitioner had with any furniture business was that resulting from his being president and stockholder in corporations which carried on the furniture business. The furniture business carried on was the business of the various corporations and not the business of the petitioner. As was said in Glenn M. Averill, 20 B. T. A. 1196:

The loss contemplated by the statute is an operating loss, and the party claiming it must be the operator of the trade or business in which the loss occurs. Therefore, a business regularly carried on by the taxpayer means a business regularly operated by the taxpayer on his own behalf.

There is nothing in the record to indicate that the petitioner ever carried on any furniture business on his own behalf. His activities were in the conduct of the furniture business carried on by the various corporations. Although the petitioner owned five-sixths of the stock of the Powell Furniture Company and devoted practically all of his time to its affairs, the corporation was, nevertheless, a separate and distinct entity and the business transacted in its name was not the business of the petitioner, but of the corporation, and as such was separate and distinct from the affairs of the petitioner. We think the respondent’s action in refusing to allow the deduction of $12,658.09 taken by the petitioner for a net loss was correct. See Louis M. Goldberg, 9 B. T. A. 1355; aff'd., 36 Fed. (2d) 551; Wyatt C. Hedrick, 20 B. T. A. 258; Ida A. Van Dyke et al., 23 B. T. A. 946.

Judgment will be entered under Bule 50.


text:
    Marvel Equipment Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 47841.
    Promulgated June 27, 1932.

      Frank J. Albus, Esq., for the petitioner.

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

Van Fossan:

The issue in this proceeding.is whether the petitioner and three other corporations affiliated with it as stated in the findings of fact were entitled to have their income-tax liability for the taxable year 1927 computed on a consolidated basis.

The applicable statute is section 240 (a) of the Revenue Act of 1926, which reads 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.

During the taxable year 1926 the Guarantee Liquid Measure Company owned all of the capital stock of the petitioner, having acquired it in the year 1925. During 1925 and 1926 the two corporations were affiliated. For each of these years each corporation filed a separate income-tax return. Therefore, they exercised their right to elect between filing a consolidated return and filing separate returns and, pursuant to the provisions of the above-quoted section of the Revenue Act of 1926, could not file a consolidated return for 1927 without the permission of the Commissioner. The petitioner contends, however, that in 1927 a new affiliated group was created, consisting of the Fry Equipment Corporation, the Fry Sales Corporation, the Guarantee Liquid Measure Company and the petitioner, which corporations were affiliated during the taxable year; that on October 1, 1927, the Fry Equipment Corporation became the “ parent ” of this new group by its acquisition of:'all of the capital stock of the Fry Sales Corporation and by the acquisition of all of the capital stock of the Guarantee Liquid Measure Company, which latter company owned all of the capital stock of the petitioner; and that consequently the new parent corporation had the right to elect to file a consolidated return on behalf of the alleged new group for the year 1927.

The courts and the Board have held, in effect, that the addition of one or more corporations to an affiliated group does not create a new tax-computing group and does not give rise to a new right of election. Harbour-Longmire Co., 18 B. T. A. 33; B. Mifflin Hood Brick Co. et al., 19 B. T. A. 785; Imperial Assurance Co., 19 B. T. A. 1068; Swift & Co. v. United States, 38 Fed. (2d) 365.

It is true that in the cited cases the “ parent ” corporation continued to be the same, while the facts in the present proceeding disclose that in October ox the taxable year in question the Fry Equipment Corporation acquired all of the capital stock both of the Fry Sales Corporation and of the Guarantee Liquid Measure Company, which last named corporation owned all of the petitioner’s stock. This distinction is not controlling. Sweets Co. of America v. Commissioner, 40 Fed. (2d) 436. The relations between the Guarantee Liquid Measure Company and the petitioner remained the same at the time of the acquisition of the former corporation’s capital stock by the Fry Equipment Company and, so far as the evidence discloses, this relationship continued throughout the taxable year.

The fundamental question, however, is whether or not there was an affiliated group during the year 1926 which continued throughout the year 1927. Under the cited decisions that question must be decided in the affirmative. The original affiliated group, although enlarged by additions, still continued during the taxable year. Therefore, notwithstanding that late in the taxable year one of the added corporations acquired all of the capital stock of two others of the group, the group was not changed, nor does such acquisition of capital stock modify the legal effect of the action of the two original members of the group in exercising the right of election conferred by the statute by filing separate returns for the taxable year 1926. The corporations composing the original group, which included petitioner, were bound by that election and their right of election under the statute without permission of the Commissioner was extinguished. It follows that under the provisions of section 240 (a) of the Revenue Act of 1926 the four corporations herein-before named were not entitled to have their tax liability for the year 1927 computed on a consolidated basis.

In reaching this conclusion we have not overlooked the decision of the Circuit Court of Appeals for the Third Circuit in Stonega Coal & Coke Co. v. Commissioner, 57 Fed. (2d) 1030. In the present case the facts do not reveal the relative size of the corporations added to the original group, and for that reason it can not be said that the reasoning of the court in the Stonega case would lead to a different result from that announced above. Moreover, we are unable to find in the phraseology of section 240 (a) of the Revenue Act of 1926 an indication that it was the intention of Congress to make the right of a new election dependent upon the “ size ” of the additions to an affiliated group.

Since it appears that the consolidated return for the year 1927 was filed without the permission of the Commissioner, he did not err by rejecting it.

Decision will be entered for the respondent.


author: Lansdon:

text:
    Miles G. Saunders, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 55188.
    Promulgated June 27, 1932.

      Roger Underwood, Esq., and Turner S. Underwood, O. P. A., for the petitioner.

      P. A. Bayer, Esq., for the respondent.
   opinion.

Lansdon:

The respondent asserts a deficiency in income tax for the year 1928 in the amount of $932.64. The petitioner contends that the respondent has improperly disallowed total deductions from his income for the taxable year in the amount of $8,435 representing debts ascertained to be worthless and charged off in that year. The record discloses, however, that this amount has not been disallowed as to such year and that it was claimed and allowed as a deduction in the year 1927. The deficiency determined by the respondent results from the disallowance of an alleged net loss in 1927 in the amount of $6,432.77 as a deduction from petitioner’s taxable income in 1928. It is obvious, therefore, that the respondent has not erred as alleged by the petitioner. This discrepancy, however, is not material, since it is the amount of the deficiency that is in controversy and that must be proved to be erroneous.

The petitioner is an individual with his office in Pueblo, Colorado, where he is engaged in the practice of law. The record shows that prior to June 1,1926, he advanced $4,435 and $4,000 to the Twin Lakes Land and Water Company, hereinafter called the company, and the Twin Lakes Investment Company, respectively, and that on such date the latter ceased operations and that its obligations were assumed by the former, which thereafter was indebted to him in the amount of $8,435. On April 12, 1926, he agreed with the company that he would accept its bonds in the par value of $4,000 in discharge of its obligations to pay him that amount on account of his advances to the Twin Lakes Investment Company. This agreement was never accomplished and in December, 1927, the company defaulted in the bond interest and the trustee for the bondholders began receivership proceedings in the District Court of Pueblo County.

On April 1, 1926, a statement of the company showed assets of the book value of $1,892,073.38 and an asset balance in the amount of $294,133.73. At that date there were substantial liabilities of the company that were not included in the statement. On December 81, 1927, on or about the date of the institution of the receivership proceedings, the trial balance of the company showed assets of the book value of $1,559,134.24, liabilities in the amount of $1,528,545.91, and net worth as per books of $30,588.33. In such trial balance capital stock was not included as a liability.

In his income-tax return for 1927 the petitioner claimed and was allowed a deduction on account of bad debts in the amount of $8,435 representing Ms advances set out above. He now contends that such claim was made in error and that at December 31, 1927, it was impossible to determine that the debts were worthless. He also contends that the deduction of the amount in question from his income in 1927 was not beneficial to him, since he had no taxable income in that year. In our opinion the evidence is not sufficient to prove the petitioner’s allegations. At December 31, 1927, the asset balance of the company, as reflected by its books, was only $30,588.33, with receivership proceedings already in progress. This is a very small margin in a statement of assets of the book value of $1,559,134. Bankruptcy proceedings under a receiver are generally quite expensive. Liabilities are seldom less than shown on the books and the listed value of assets is rarely realized through the processes of liquidation. In all the circumstances we are of the opinion that the debts now claimed to have become uncollectible in 1928 were worthless at December 31, 1927, and that respondent did not err in allowing a deduction of the amount thereof from petitioner’s income in that year. Inasmuch as there is a difference between the deficiency asserted and the amount alleged to be in controversy, final decision will be rendered under Bule 50.

Decision will be entered, wnder Rule 50.


author: SteRNhagen:

text:
    The Delaware & Hudson Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Delaware & Hudson Company and 32 Named Subsidiaries, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 50553, 50629.
    Promulgated June 27, 1932.

      Montgomery B. Angelí, Esq., and Marion N. Fisher, Esq., lor the petitioners.

      F. D. Strader, Esq., and Orris Bennett, Esq., for the respondent.
   OPINION.

SteRNhagen:

The respondent determined a deficiency of $329,-530.62 in the income tax for 1923 of the petitioner, who was a member of an affiliated group filing a consolidated return. Of several issues originally found in the pleadings, all have been satisfactorily disposed of by the parties except one which remains to be decided. In this issue the petitioner assails the respondent’s treatment of the statutory net losses sustained in 1922 by some of the members of the affiliated group in the computation of the consolidated net income and resulting tax for 1923. As will hereafter appear, the petitioner’s contention in respect of this issue requires the consideration of two alternative suggested methods of computation.

The respondent mailed a deficiency notice to the Delaware & Hudson Company alone. That company duly filed its petition with the Board, under docket number 50553. Thereafter a second petition was filed, under docket number 50629, by the same company and thirty-two other corporations which constituted the affiliated group. Upon motion of the respondent, this latter proceeding has been dismissed in respect of all of the petitioners therein except the Delaware & Hudson Company. In respect of that corporation, the two proceedings were ordered to be consolidated, since they are in all respects identical.

The facts upon which the controversy is submitted have been stipulated as follows:

1. The Delaware and Hudson Company is a corporation organized under the laws of the State of New York, with its principal office at No. 32 Nassau Street, New York, N. Y. During the calendar years 1922 and 1923 it was the principal or parent corporation of a group of affiliated corporations hereinafter named, which filed consolidated federal income tax returns for the calendar years 1922 and 1923. The said returns were filed in the office of the Collector of Internal Revenue for the Second Collection District of New York, at the Customs House, New York, N. Y.
2. The corporations that were included in the consolidated return for the year 1922, the places of their principal offices and the states in which they were organized are as follows:
3. All of the aforesaid corporations named in paragraph 2, with the exception of Ticonderoga Railroad Company and Chazy Marble Lime Company, were held by the Commissioner of Internal Revenue to be affiliated for the entire calendar year 1922, and satisfied all the requirements of affiliation under the law. Ticonderoga Railroad Company was organized in 1889 by The Delaware and Hudson Company and citizens of Ticonderoga for the purpose of connecting the village of Ticonderoga with The Delaware and Hudson Company’s line of railroad, and the Ticonderoga Railroad has always been operated by The Delaware and Hudson Company as a part of its railroad system. Prior to April 14, 1922, only a part of the capital stock of the Ticonderoga Railroad Company was owned by The Delaware and Hudson Company. On April 14, 1922, the remaining outstanding capital stock was acquired by The Delaware and Hudson Company, and the Ticonderoga Railroad Company was held by the Commissioner to be affiliated with The Delaware and Hudson Company from April 14, 1922, to the end of that calendar year.
Chazy Marble Lime Company was organized on June 29, 1922, by the Hudson Coal Company to take title to and operate limestone properties primarily for the purpose of furnishing limestone to Chateaugay Ore and Iron Company, a member of the affiliated group. The Hudson Coal Company acquired all of the capital stock of Chazy Marble Lime Company on June 29, 1922, and the Chazy Marble Lime Company has been held by the Commissioner to be a member of the affiliated group from June 29, 1922, to the end of that calendar year.
4. The corporations named in paragraph 2 above were included in the original consolidated federal income tax return filed for the calendar year 1923 and also in an amended consolidated income tax return filed for such year. In addition there was included in the said returns, Hudson River Estates, Inc., a New York corporation with its principal office at New York, N. Y. Hudson River Estates, Inc., was organized on August 20, 1923, for the purpose of taking title to certain real property purchased by The Delaware and Hudson Company at .or about that date. All of the capital stock of Hudson River Estates, Inc., was acquired by The Delaware and Hudson Company on August 20, 1923, and continued to be owned by it throughout the year 1923. All of the corporations named in paragraph 2 were held to be affiliated by the Commissioner for the entire calendar year 1923, and satisfied all the requirements of affiliation under the law, and Hudson River Estates, Inc., was held by him to be affiliated with The Delaware and Hudson Company from August 20, 1923, to the end of that year.
5. In the consolidated return for 1922 no tax liability was reported and the respondent has determined that there is no tax liability upon the petitioner or any of its affiliated companies'for such year.
6. For the year 1922 the Commissioner allowed as a deduction to The Delaware and Hudson Company alone the entire allowance on account of depletion of the coal mines of both The Delaware and Hudson Company and Hudson Coal Company, whereas $197,245.04 of the total allowance for depletion should have been allowed as a deduction of Hudson Coal Company. For the same year the Commissioner erroneously included in the loss of The Delaware and Hudson Company a loss of Tieonderoga Railroad Company in the sum of $246.91. For the same year the Commissioner erroneously found that the Chateaugay & Lake Placid Railway Co. sustained a net loss of $109,390.65, wherea.s such loss was sustained by The Delaware and Hudson Company in that year. It is stipulated and agreed that the statutory deductions of The Delaware and Hudson Company for 1922 are overstated in the sixty-day letter by the aforesaid sums of $197,245.04 and $246.91, and are therein understated by the aforesaid sum of $109,390.65 and the statutory deductions of the Hudson Coal Company are understated in the sixty-day letter by the aforesaid sum of $197,245.04; and it is further stipulated and agreed that the correct net loss separately computed, where a net loss occurred, and the correct net income separately computed, where a net income occurred, of each of the companies in the affiliatéd group for the year 1922, before any deductions for dividends and nontaxable interest, and the correct dividends and nontaxable interest, if any, of such companies are as follows:
The net loss of Ticonderoga Railroad Company, $246.91, set out above, was sustained by it in the period April 14, 1922, to December 31, 1922, inclusive."*
7. In 1923 The Delaware and Hudson Company sustained a deductible loss of $35,205.71 on account of the abandonment by it in 1923 of certain properties belonging to it. In 1923 the Hudson Coal Company sustained a deductible loss of $44,947.63 on account of the abandonment by it in 1923 of certain properties belonging to it. The Commissioner has inadvertently failed to allow the aforesaid deductions in his determination of the net income of the respective corporations and of the consolidated net income of the affiliated group as computed in the aforesaid sixty-day letter. The parties hereto agree that the aforesaid losses in the amounts stated were sustained in 1923 and are proper deductions from gross income in that year.
8. For the year 1923 the Commissioner erroneously allowed as a deduction to The Delaware and Hudson Company alone the entire allowance on account of depletion of the coal mines of both The Delaware and Hudson Company and Hudson Coal Company, whereas $361,409.53 of the total allowance for depletion should have been allowed as a deduction of Hudson Coal Company. For the same year the Commissioner erroneously excluded from income of The Delaware and Hudson Company and included in income of Ticonderoga Railroad Co. the sum of $41,479.02 realized by The Delaware and Hudson Company from operation of Ticonderoga Railroad Co. properties. For the same year the Commissioner erroneously failed to allow as deductions to debtor companies and failed to include in income of creditor companies accrued interest as follows:
For the same year tlie Commissioner erroneously failed to allow as a deduction to Hudson Valley Railway Co. and failed to include in income of The Delaware and Hudson Company the sum of $67,291.56, rent due and payable for the use of property leased by The Delaware and Hudson Company to Hudson Valley Railway Co. For the same year the Commissioner erroneously found that the Chateaugay & Lake Placid Railway Co. sustained a net loss of $96,677.38, whereas such loss was sustained by The Delaware and Hudson Company in that year. For the same year there was not included in the consolidated income tax returns a profit of $35,000 realized by the Hudson Coal Company from the sale by it in that year of a .certain parcel of real estate, and such profit was not included in the gross income as computed in the sixty-day letter.
9.On account of the errors stipulated in paragraphs 7 and 8 above, it is stipulated and agreed that the net income separately computed, where a net income occurred, and the net loss separately computed, where a net loss occurred, of each of the companies in the affiliated group, for the calendar year 1923, before any adjustment for net losses of 1922, are as follows:
10. The following named affiliated corporations included in the consolidated returns had no net incomes and no net losses and received no dividends and no nontaxable interest in the calendar years 1922 and 1923:
The Cooperstown & Susquehanna Valley R. R. Co.
The North River Railway
Warren County Elec. Lt., Heat & Power Co.
Northern Coal & Iron Co.
Albright Coal Company
The Schuylkill Coal & Iron Co.
Shanferoke Coal Company
Silverton Coal Company
The Jackson Coal Co.
Schafer’s Creek Water Co.
The Chateangay & Lake Placid Ry. Co.
11. The Cooperstown and Charlotte Valley Railway Company had no net income and no net loss in 1923.
12. Under date of August 6, 1929, The Delaware and Hudson Company and all the other corporations listed in paragraph 2 above and Hudson River Estates, Inc., duly executed and filed with the Commissioner an agreement in words as follows:
“The undersigned corporations hereby agree that any deficiency of income tax computed on the basis of consolidated returns for the years 1922 and 1923 may be assessed against and/or any overassessment of such tax for the above-named years may be abated, credited or refunded, to The Delaware and Hudson Company.”

At the time that this proceeding was submitted there had been no decision of the Supreme Court in respect of the application of the statutory net loss provisions to affiliated corporations, and the argument of both parties was necessarily directed to the law as reflected in several decisions of the other courts and of the Board. Since that time the Supreme Court has decided Woolford Realty Co. v. Rose, 286 U. S. 319, and Planters Cotton Oil Co. v. Hopkins, 286 U. S. 332, Counsel for both parties have been afforded an opportunity to present to the Board their views of the effect of these recent decisions upon the present controversy, but they have failed to do so.

As appears from the tabulated statement in subdivision 6 of the facts, in 1922 an aggregate loss of $6,279,508.51 was sustained by some of the constituent corporations, while other constituents had an aggregate net income of $40,870.29. Both xoarties throughout the proceeding have treated these figures as if they had no relation to the years preceding 1922; that is to say, it does not appear whether any of the figures stipulated for 1922 are affected by statutory net losses of earlier years, and the stipulation and the arguments have proceeded as if January 1, 1922, were the beginning of the first year in which the group was affected by the statutory net loss provision. Thus the taxable year 1923 is treated as if it were in all respects the “ second ” year, and in no respect the “ third ” year. Since there is no apparent reason to think otherwise, the decision is based upon that assumption.

The Commissioner made his determination in the following way: Applying the aforesaid aggregate net income of some of the members, amounting to $40,870.29, against the aggregate net loss of the other members, he arrived at the consolidated loss for 1922 of over $6,000,000. This consolidated loss was, in effect, apportioned to the constituent members of the group which had sustained net losses, in the ratio of the net loss of each such member to the aggregate loss of all such members. Thus a portion of the loss of each losing member was an offset to the income of the earning members, with the result that there was no tax for 1922 in respect of the affiliated group or any of its members. The remaining portions of the net losses were then used in the computation of the tax for 1923. See Swift & Co. v. United States, 38 Fed. (2d) 365.

In 1923 some of the members of the affiliated group had an aggregate current net income of $8,585,758.47 and the other members an aggregate current net loss of $1,691,329.86. The Commissioner applied the current net losses against the current net incomes and found a composite current net income of almost $7,000,000. This he apportioned among the earning members, allocating to each its proportionate current net income in the ratio which its separate current net income bore to the aggregate current income of all earning members. To this apportioned current net income of each earning member he applied its 1922 apportioned net loss. If such 1922 net loss was in excess of such 1923 net income, this excess was required to be carried into the “ third ” year, 1924.

The petitioner’s primary contention is that such excess of the 1922 net losses over the 1922 net incomes should be applied in 1923 to offset the net incomes of the other earning members. It thus argues in effect that the net loss of an affiliated group for 1922 may be used to reduce the consolidated income of the same affiliated group for 1923. The petitioner further contends that if this treatment is not permitted and it be held that the 1922 net loss of each losing member is available in 1923 to that member alone, the respondent’s method is still erroneous, because it applies the separate 1922 net loss not against the full 1923 net income, but only to a reduced portion thereof.

First. The Woolford and Planters decisions have now settled that the affiliated group is not a taxpayer, but is only the machinery for determining the factors upon which the tax liability of each separate corporation is computed. Each corporation is a taxpayer in its own behalf. It is also clearly established that the term net income as used throughout the tax laws may not be construed to mean a loss or a mathematical minus or red figure. The Supreme Court has, we think, further indicated that the statutory net loss provisions are to be applied separately to each member of an affiliated group, and more particularly that the net loss of a corporation sustained prior to affiliation may not be applied to any extent against the net income of another corporation with which the former becomes affiliated.

It would be inconsistent with these principles to recognize a single consolidated statutory net loss, and its application as a unit in the following year to the affiliated group. The net loss provision is a special provision, and the Supreme Court has made it clear that the affiliation provisions give it no greater liberality than it otherwise provides. There is no support for the use of a statutory net loss of one corporation except to apply it to that corporation alone, and this is as true in respect of affiliated corporations as of independent corporations.

The petitioner’s argument includes the view that, in section 204 (b) of the Revenue Act of 1921, the phrase “ shall be deducted from the net income ” as applied to the use in the second year of the net loss is to be construed as identical in effect with the phrase applied to the third year, that the unabsorbed net loss “ shall be allowed as a deduction in computing the net income.” This difference in language is so plain that it can. not be ignored. It is free from ambiguity and therefore precludes identical construction in any case where the difference is important. Furthermore it has been several times considered and the significance of the difference in language has been recognized, Moore Cotton Mills v. Commissioner, 49 Fed. (2d) 59. The phrases have their several meanings when the problem is to determine consolidated income, as when ascertaining whether the amount of income justifies the statutory credit. Although in some cases the effect on tax liability may be the same as if the two years were governed by the same phrase, as in the later statutes, this accidental result does not justify a disregard of the distinct phraseology or a failure to give to it whatever effect it may have in any case.

Second. Petitioner next urges that, in the event a single consolidated net loss of the affiliated group may not be, recognized and used by the group in the second year, and each corporation’s statutory net loss may be availed of by that corporation alone in the second year, such corporation is entitled to more than the respondent has allowed.

The respondent’s method of computation has been to determine first each corporation’s separate current net income or loss for the second year, without regard to its statutory net loss of the first year. These figures are then consolidated into a group net income. This figure is apportioned among the earning members, thus, by reason of the losses in the group, ^proportionately reducing the current net income of each earning member. To this separate proportionate net income is applied such corporation’s prior net loss of the first year, and if such prior net loss exceeds such proportionate current net income, the excess is carried over into the third year of such separate corporation. The petitioner complains of this method because it is deprived in the second year of so much of the offsetting advantage of the statutory net loss as is measured by the difference between its full net income of the second year and its lower apportioned net income used by the respondent. More simply, the petitioner contends that since each corporation is to be separately considered in applying the net loss provision, it is entitled to have such net loss applied against its full separate net income, unreduced by reason of the loss of its affiliates.

The petitioner disclaims any double advantage from its prior net loss, conceding that the same amount may not be used both to offset the current income of its affiliates, and the succeeding income of itself. In other words, it admits that the separate loss once absorbed may not be used again. In the present case it is admitted that so much of the 1922 loss of any corporation as was used to offset and wipe out the current 1922 income of the earning members has completely performed its function, and, therefore, may not by any means be brought into the determination of 1923. The argument, therefore, relates only to the proper method in 1923 of using the unabsorbed separate 1922 net loss.

In our opinion, the petitioner’s view is correct and is supported by Swift & Co. v. United States, 38 Fed. (2d) 365, and Ginsburg v. Commissioner, 54 Fed. (2d) 238, and is consistent with Woolford Realty Co. v. Rose, sufra. Indeed, we are of opinion that the petitioner’s method most clearly preserves the view which the Woolf ord case has now established, while that of the Commissioner tends to perpetuate confusion.

Each corporation is a taxpayer, and the measure of its tax is its net income, giving due consideration to its statutory net loss. Being a member of an affiliated group does not change this, except as its tax liability may be reduced by reason of the losses of its affiliates (or otherwise affected by a special agreement of the affiliated corporations as recognized in section 240(b)).

In ascertaining the figure of each corporation which determines its tax there is no reason to proceed differently in respect of an affiliated corporation from the method applied to an independent corporation. In both instances, the net income reduced by prior statutory net loss measures the tax — the independent corporation’s figure measuring it directly and the affiliated corporation’s figure measuring the proportion of the consolidated net income properly assignable to it and the resulting apportioned tax. It would be a mathematical fallacy to omit the prior net loss in determining consolidated net income and yet determine the tax itself upon another figure resulting from the use of such loss. Clearly, the net loss must be reflected in determining the member’s proportionate tax, and since such tax is apportioned in accordance with its assignable net income, the assigned net income should reflect all its component factors, of which prior net loss is one. In other words, the result of abandoning the composite method is to determine as to each member separately the figure upon which its separate tax would be measured if it were independent, and then, after setting aside the unabsorbed prior net losses for future use, applying the net earnings of the earners against the current losses of the losers and arriving at the consolidated taxable net income and resulting tax.

Thus, as to this petitioner, its net loss is first used in offsetting the 1922 net income of its affiliates, and the unabsorbed remainder is then used in 1923 to offset its own $1,708,624.66 net income. This leaves it in 1923 with nothing to tax and nothing to contribute to the affiliated group for 1923. Its remaining 1922 net loss is held for 1924.

The respondent defends his method by a bare statement that consolidated net income or loss must be computed before applying prior net losses. He illustrates what he regards as the fallacy of the petitioner’s method by assuming an affiliated corporation with a net loss of $5,000 for 1922 and net income of $5,000 for 1923, while its affiliates for 1923 had a group loss of $1,000 — thus, in his view, indicating a 1923 group net income of $4,000 “ allocated ” to the earner with a remaining $1,000 carried over to 1924. He regards it as “ inequitable and contrary to the theory of consolidated returns ” that by petitioner’s method the corporation should “ have nothing to carry over to 1924.” This begs the question. The corporation has no right to carry into 1924 more than is left after offsetting its income for 1923, and its equity is no greater than the statute gives it. In the illustration given, it must, as the present petitioner claims the right to do, apply its $5,000 net loss of 1922 against its $5,000 net income of 1923, thus wiping it out, and contributing nothing to the group. Its losing affiliates will carry forward their several net losses into 1924, which they would not be permitted to do if, as respondent contends, such amount were carried over by the earner. Respondent does not elucidate his view that this is contrary to the theory of consolidated returns and we are unable to see that it is.

Reviewed by the Board.

Judgment will "be entered under Rule 50.


author: Teammell :

text:
    St. Petersburg Land & Loan Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 34186.
    Promulgated June 29, 1932.

      James H. Haclcney, Esq., for the petitioner.

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

Teammell :

This proceeding is for the redetermination of deficiencies in income tax of $2,273.22 and $2,541.41 for 1923 and 1924, respectively.

The deficiency notice was mailed to the petitioner on December 9, 1927, and on January 23, 1928, the petitioner filed its petition with the Board. On March 23,1928, the respondent filed his answer. On March 26,1928, a copy of the respondent’s answer was served on the petitioner. Thereafter on August 28, 1929, the petitioner filed a motion to dismiss its petition. Hearing having been had on the motion on September 11, 1929, the Board on September 16, 1929, entered its order granting the petitioner’s motion and dismissing the petition and determining deficiencies in the amounts set forth in the deficiency notice. No petition for review of the Board’s order of September 16, 1929, was ever filed by either party.

On August 7, 1930, and almost eleven months after the entry of the Board’s order of September 16, 1929, the petitioner filed a motion asking the Board to reinstate the proceeding and allow petitioner to proceed to trial of the cause on the merits. Thereafter, on August 26, 1930, the Board upon consideration of the petitioner’s motion, entered an order revoking and setting aside its order of September 16, 1929, and restoring the proceeding to the general calendar for hearing in due course.

On September 12, 1930, the Board granted the petitioner’s motion for leave to file an amended petition. On November 12, 1930, the respondent filed an answer to the amended petition.

On November 25, 1930, the Board, upon application of the petitioner, entered an order for the taking of depositions in the proceeding on December 11, 1930. Pursuant to the order depositions were duly taken on that date.

On March 21, 1932, the proceeding was called for hearing on the merits at Tampa, Florida, at which time the parties appeared and placed in evidence the depositions heretofore referred to, together with certain other documentary evidence.

While the respondent has not raised any question as to whether we now have jurisdiction to proceed to a determination of this proceeding on the merits, we think a disposition of that question is necessary before taking such action.

Section 906 of the Revenue Act of 1924, as amended by the Revenue Act of 1926, and as further amended by section 601 of the Revenue Act of 1928, provides:

(e) Ií a petition for a redetermination of a deficiency has been filed by the taxpayer, a decision of the Board dismissing the proceeding shall be considered as its decision that the deficiency is the amount determined by the Commissioner. An order specifying such amount shall be entered in the records of the Board * * *.
(d) A decision of the Board (except a decision dismissing a proceeding for lack of jurisdiction) shall be held to be rendered upon the date that an order specifying the amount of the deficiency is entered in the records of the Board.

Section 1005 of tiie Revenue Act of 1926 provides:

(a) The decision of the Board shall become final—
(1) Upon the expiration of the time allowed for filing a petition for review, if no such petition has been duly filed within such time:

Section 1001 of the same act also provides:

(a) The decision of the Board rendered after the enactment of this Act * * * may be reviewed by a Circuit Court of Appeals, or the Court of Appeals of the District of Columbia, as hereinafter provided, if a petition for such review is filed by either the Commissioner or the taxpayer within six months after the decision is rendered.

Section 274 of the Revenue Act of 1926 also provides:

(b) If the taxpayer files a petition with the Board, the entire amount redetermined as the deficiency by the decision of the Board which has become final shall be assessed and shall be paid upon notice and demand from the collector.

From the foregoing it is clear that when the Board entered its order of September 16, 1929, dismissing the petition, such order was to be considered as the decision of the Board that the correct amounts of the deficiencies were the amounts determined by the respondent. It was mandatory on the Board to specify in its order, as was done, that such amounts were the deficiencies. The date of the entry of the order, September 16, 1929, was, under the law, the date on which the Board’s decision was rendered. Within six months from that date either party had the right to file a petition for review of the Board’s action. But since neither party did so, the Board’s order became final upon the expiration of six months after the date it was entered. The Board’s order thus having become final, it was mandatory on the respondent to assess the amounts of the deficiencies specified therein and it was incumbent on the petitioner to make payment thereof upon notice and demand from the collector.

In view of the specific provisions of the statutes quoted above, the determination of any question relating to the petitioner’s tax liability for the years in controversy under the facts and proceedings presented by this record passed from our hands upon the expiration of a period of six months from September 16, 1929. Our decision then became final, and we no longer had any jurisdiction with respect to it. Congress thus having prescribed the time within which our decisions shall become final, we are without authority in any way to modify or enlarge the time. Any action taken by us with respect to our decision in this proceeding after the expiration of the period fixed by the law is of no force and effect and therefore is not binding on either party. Accordingly our order inadvertently entered August 26, 1930, wherein it was stated that the order of dismissal entered by us on September 16, 1929, was revoked and set aside and the proceeding restored to the general calendar for hearing in due course, was in error and was ineffective for the purpose stated therein. At the time of the entry of the order on August 26, 1930, our decision had been final for more than five months. Clearly, we did not have jurisdiction to take the action purported to be taken by the order, or any other action with respect to the determination of the petitioner’s tax liability. The order of August 26, 1930, and all proceedings thereafter were, therefore, null and void and of no effect. Final order having been entered September 16, 1929, there is no occasion for any further order at this time.


author: Aeundell :

text:
    Grahame and Richard D. Wood, Executors of the Estate of George Wood, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 41211.
    Promulgated June 20, 1932.

      Robert T. McCracken, Esq., and John B. Perry, C. P. A., for the petitioners.

      Frank T. Horner, Esq., for the respondent.
   OPINION.

Aeundell :

Section 303 (a) (1) of the 1924 Act, which is the applicable taxing statute, provides that in determining the value of the net estate there'shall be allowed as a deduction from the value of the gross estate such amounts for “ claims against the estate ” to the extent that they “ were incurred or contracted bona fide and for an adequate and full consideration in money or money’s worth * * * as are allowed by the laws of the jurisdiction * * Our first consideration then is to determine whether the sum of $381,813.77 sought to be deducted constitutes “ claims against the estate.” The items making up the indebtedness consisted of amounts loaned to the decedent by banks and the Millville Manufacturing Company and the Mays Landing Water Power Company, for the. payment of which he was personally liable. On this statement it would appear that the deductions sought were clearly allowable.

The respondent urges, however, that the trust, the pertinent provisions of which are set forth in our findings of fact, had been impressed with the obligation of paying the debts and that the collateral should have been used to satisfy the liabilities. In creating the trust, provision was made for the liquidation of the debts from income earned by the corpus of the trust. The bank loans were to be paid off first and then the debts owed the corporations. Provision was also made for reimbursing decedent’s estate from the same source in case it paid all or any part of the obligations. None of the creditors of the decedent were parties to the trust instrument and there is no evidence of an agreement on the part of any of them to look to the trust for payment. Nothing appears contrary to the fact that the decedent’s primary liability for the debts continued until his death. Had he made provision in the declaration of trust for the payment of the debts by the trust alone, unless the arrangement was agreed to by his creditors, his primary liability for the obligations would nevertheless have continued.

In paying the claims the executors were liquidating liabilities that could have been enforced against the decedent during his life, and they being obligations for which he was primarily liable at the time of his death, the estate was not subrogated to the rights of the banks against the collateral. Grand Council Royal Arcanum v. Cornelius, 198 Pa. St. 46; 47 Atl. 1124; Underwood v. Metropolitan National Bank, 144 U. S. 669; Fox v. Dunning, 124 Okla. 228; 255 Pac. 582. The decedent’s interests in these shares passed with his transfer of them to the trust, and the latter became their owner subject only to such rights as the bank had pending the liquidation of the indebtedness.

So far as the record discloses the agreements entered into with the banks for the loans did not confine their right of recovery to the value of the stock deposited as security. In the absence of such an agreement, a creditor holding security for his claim may, in case of default, proceed against the debtor personally in preference to the security, Western National Bank v. York Silk Mfg. Co., 225 Pa. 442; 74 Atl. 244; Ketcham v. Provost, 141 N. Y. S. 437; State National Bank of Denison v. Syndicate Co., 178 Fed. 359, and after the debtor’s death he may file a claim as a general creditor of the estate. 24 C. J. 276; In re Tubbs' Estate, 161 Pa. St. 252; 28 Atl. 1109; Di Iorio v. Gantore, 49 R. I. 137; 140 Atl. 913. The debts owing the Manufacturing Company and Power Company were unsecured and as to them the creditors had no election of remedies.

The debts were claims against the estate within the meaning of the statute and are deductible from the value of the gross estate.

The case of Estate of Kennedy, 4 B. T. A. 330, is not controlling. There, the contracts under which the loans were made provided that in making settlement under the life insurance policies, any indebtedness to the company respecting them would be deducted from the amounts payable to the beneficiaries. Here, there has been no showing that the banks ever agreed to look to the value of the collateral alone for payment.

The parties are in agreement that the claim of the estate against the trust, created by the payment of the decedent’s indebtedness to the banks and corporations, should be included in the gross estate at some value. The petitioners are asking us to confirm their valuation of $38,181.38, as returned, and the respondent insists that the evidence establishes no value less than the face amount of $381,813.77, the valuation determined by him.

The provisions of the declaration of trust clearly show an intention that the debts, whether paid to the original creditors or the estate, should be paid from income alone, without resorting to the principal. We find no reason to question the limitations thus placed upon the collection of the claim. The decedent was dealing with his own property and could have forgiven the trust of any liability to reimburse his estate, as he did in the case of payments made by him prior to his death. By requiring the trustees to repay his executors out of income from the corpus, he gave his estate the benefit of whatever value such a claim would have at the time of his death.

The uncontradicted testimony of five of petitioners’ witnesses fully supports -their claim. The petitioners, who have been identified with the two corporations for many years as officers, testified that a payment of dividends in and after 1926 would have seriously affected the future of the corporations, due to insufficient current earnings and the necessity of maintaining at all times large reserves of capital to meet market conditions in the industry and obsolescence of machinery resulting from new inventions. They further testified that they have never been interested in acquiring the stock of the trust at the prices at which it was offered to them, and because of the state of the cotton textile industry since the decedent’s death there has been no market for the stock as an entirety at substantial prices. The liquidating value of textile mills, they testified, was very small in 1926 and since has decreased to practically nothing.

Their opinions are confirmed by the testimony of Charles H. Pope, a large cotton broker, with intimate knowledge of the financial affairs of corporations engaged in the textile business before and after 1926? a bank director and president pf the Penn Mutual Life Insur-anee Company, and. the president of the bank with which the corporations had accounts and transacted business. The two latter witnesses placed a valuation on the claim at the basic date of not in excess of 10 per cent of its face amount. The opinions of these witnesses convince us that the claim in question had a value for estate-tax purposes of $38,181.38, and we have so found as a fact.

Under the agreement creating the partnership of George Wood, Sons & Company it is provided that in case any partner shall die before the termination of the firm the deceased partner’s interest and share in the profits shall continue to the end of the partnership term or his executors may elect to withdraw his capital contribution. The petitioners decided to pursue the former course, with the result that they received at the close of 1926 the share of firm profits the deceased would have received had he survived the life of the partnership.

The parties have stipulated the issue to be whether the “ right to share in the profits of the partnership * * * constitutes an asset of the estate subject to the Federal estate tax.” Without objection, the proceedings were submitted by the respondent, with the understanding that if the right to participate in future profits of the partnership is taxable as a part of the gross estate, the figure to be used is the stipulated present worth of $91,876.36. Such appears to have been the purpose of the stipulation and the case will be decided on the, theory that the parties are in agreement as to the value of the right at the time of decedent’s death.

In the case of William P. Blodget et al., 13 B. T. A. 1243, we had the question of whether the taxpayers were liable for income tax on such portions of the earnings of a partnership as were included in the value of the gross estate. The fair market value of the right of the estate of the decedent to profits of the partnership was stipulated to be $49,346.15 as of the date of the decedent’s death. In holding that only the profits received by the estate in excess of this figure were taxable income to the beneficiaries of the estate as gain, we remarked that the right of the estate to future partnership earnings “ was a valuable contractual right or chose in action constituting a part of the assets of William Blodget which passed on his death to the executors of his estate.” The same conclusion was reached in John F. Degener, Jr., 26 B. T. A. 185.

In the case of Ernest M. Bull, Executor, 7 B. T. A. 993, there was no proof of the value of the right to future profits of the partnership and all of the earnings were held to be taxable to the estate as income.

The holding of the court in United States v. Carter, 19 Fed. (2d) 121, is to the same effect. There, the Government sought to impose an income tax on the difference between the estimated amount-at which a right similar to the one here was returned for estate-tax purposes and the amount subsequently received. In deciding that the excess amount did not represent a profit or gain on the right, taxable as income to the estate, the court pointed out that the amount received by the executors from that source “ came to them as part of the corpus of the estate of the deceased,” and that the item “ was an integral part of the corpus of the estate, received and retained by the executors, not a gain or profit issuing and severed from a capital asset.”

We think these cases control the question and accordingly decide the issue in favor of the respondent.

Decision will he entered under Rule 50.


text:
    Himelhoch Brothers and Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 41728, 42769, 45663.
    Promulgated June 29, 1932.

      A. J. Levm, Esq., and II. A. Mihills, O. P. A., for the petitioner.

      John II. Pigg, Esq., for the respondent.
   OPINION.

Aeundell :

The contention being made that, because of its retroactive feature, the provisions of section 204(c) of the Revenue Act of 1924 violate the Fifth Amendment to the Constitution, is without merit. John S. Garvan, 23 B. T. A. 817, and cases therein cited, and Newman, Saunders & Co. v. United States, 36 Fed. (2d) 1009; certiorari denied, 281 U. S. 760.

The parties construe the facts relating to the assignment of the Hudson agreement differently. The petitioner contends that the Hudson agreement was transferred to the Arcade Company on or before March 1, 1923, and that the proper method of entering the transaction on the books of the Arcade Company would be to treat the payments to be received thereunder as a paid-in surplus to the extent of their then value. The respondent, on the other hand, claims that the agreement was assigned to the Arcade Company on March 15, 1923, in exchange for shares of its stock. This difference of opinion requires treatment before consideration is given to other phases of the issue.

For business reasons not necessary to enumerate, the former partnership of Himelhoch Brothers & Company considered it necessary to arrange for other quarters in which to conduct its business, with the result that in 1918 it entered into a 30-year lease on the Washington Arcade building, effective September 1, 1922. Thereafter on March 21, 1922, it disposed of its lease on the premises it then occupied by a sale to the J. L. Hudson Company at a price of $480,000, payable in monthly installments of $4,000, commencing April 1, 1923, when the partnership was to vacate the store. In July, 1922, the petitioner and the Arcade Company were incorporated. The petitioner took over the assets of the partnership, excepting the Hudson agreement and Hecker lease on the Washington Arcade building, in exchange for capital stock, and the Arcade Company accepted an assignment of the Hecker lease for its no par common stock. This left the Hudson agreement still in the hands of the Himelliochs, members of the former partnership.

The Arcade Company was without funds necessary to alter the Washington Arcade building to meet the needs of petitioner’s business. To meet the financial problem arrangements were made with the Union Trust Company of Detroit during the early part of 1923 to purchase the Arcade Company’s notes in the aggregate sum of $480,000, at 98 per cent of their face amount. The loan was completed by the execution on February 20, 1923, as of March 1, 1923, of an instrument in the form of a trust, under the terms of which the Hudson agreement, with other security, was pledged to pay the loan as the notes evidencing it matured. The agreement recites that the six members of the former partnership joined therein for the purpose of assigning and pledging the Hudson agreement. At that time the Himelhochs still owned the asset and the pledging of the contract as part security for the loan did not operate to assign any-interest therein to the Arcade Company.

On March 15, 1923, the former partners met as stockholders of the Arcade Company and adopted a resolution providing for an increase of the corporation’s capital stock from 10,000 to 18,680 shares of no par value stock, each share to have a fixed price of $20, and the surrender of the 9,500 shares of common stock then outstanding, and the reissue of it, together with the issue of the additional 8,680 shares, to the stockholders in proportion to their respective holdings in consideration of the transfer to the corporation of the Hudson agreement. In an instrument executed the same day the former partners assigned the agreement to the Arcade Company in consideration of the issuance of capital stock to them in accordance with the resolution. The agreement recites that it was the desire of the parties to consummate the exchange to carry out an understanding had with the Arcade Company a short time after its organization for the transfer of the agreement in exchange for the corporation’s stock. The asset was taken up on its books and appeared in the corporation’s balance sheet for July, 1923.

For unknown reasons the request on the State officials for authority to increase the Arcade Company’s capital stock, as provided for in the resolution of March 15, 1923, was not filed until April 4, 1924. Thereafter, in April, 1924, the additional authorized no par stock was issued as agreed upon. With the transaction thus completed the stockholders held 18,180 shares of common stock, each of the fixed price of $20, received in exchange for their interest in the Hudson agreement and 500 shares of an equal price for other assets transferred by them.

We think these facts clearly show that capital stock of the Arcade Company was issued in exchange for the Hudson agreement, as contended by the respondent, and that the effective date of the transfer was March 15, 1923.

The provisions of the Revenue Act of 1921 govern for so much of the fiscal year ended January 31, 1924, as falls within the year 1923. Sec. 207 (a), Revenue Act of 1924. The Hudson agreement having been acquired by the Arcade Company subsequent to March 1, 1913, the basis is cost to it. D. O. James Manufacturing Co., 17 B. T. A. 205. Where, as here, property is exchanged for stock, and there is no evidence as to the value of the stock, the value of the property when acquired establishes the cost of the asset to the transferee. Rouse, Hemystone & Co., 7 B. T. A. 1018; John Glackner Realty Corporation, 11 B. T. A. 151; Whiting Lumber Co., 21 B. T. A. 721; Mead Realty Co., 21 B. T. A. 1062; Melrose Trust Co., 22 B. T. A. 538.

The contract was with a large corporation of unquestioned financial standing; the performance of its terms was unconditionally guaranteed by its president, a man of considerable wealth, and the monthly installment payments of $4,000 have been paid as agreed. No difficulty was experienced in obtaining a bank loan of $480,000 largely upon the security of the contract. The original owners, the estate of Wolf Himelhoch, and the directors of the Arcade Company treated it as having a value at near the basic date of $363,600. In addition to these facts bearing upon the value of the asset, we have the testimony of Moses Himelhoch that the asset had a value at February 20,1923, and March 1,1923, of that figure. It does not appear that anything occurred during the first half of March, 1923, affecting the value of the asset.

The basis of the Hudson agreement in the hands of the Arcade Company is $363,600 for so much of 1923 as it was an asset in its hands.

The issue for the remainder of the fiscal year ended January 31, 1924, and other taxable years, is governed by the 1924,1926 and 1928 Acts. These statutes provide that where property is exchanged for stock of a corporation after December 31, 1920, and the trans-ferors receive the stock in substantially the same proportions as their interest in the property transferred and remain in control of the corporation, the basis is the same as it would be in the hands of the transferors, increased by the amount of gain or decreased by the amount of loss recognized to the transferors under the law covering the year of transfer. Sections 203 (b) (4), and 204 (a) (8) and (c) of the 1924 and 1926 Acts, and sections 111 (a), 112 (b) (5), 113 (a) (8), and 114 (a) of the 1928 Act.

The facts here bring the case squarely within the statute, leaving for decision only the determination of the cost basis and whether it should be increased or decreased for profit realized or loss sustained in the exchange transaction. Under the statutes the cost basis of the asset to the Arcade Company is the same as the transferors would be required to use had they retained the property, adjusted for gain or loss in the exchange. Burlington Gazette Co., 21 B. T. A. 156; Wobbers, Inc., 26 B. T. A. 322.

The respondent has determined that the transferors acquired the asset without cost. No evidence was offered to show the expenditure of any sum in connection with the acquisition of the Prentis lease in April, 1913, and in so far as the respondent’s finding applies to the original lessees, it must be followed. Israel Himelhoch acquired one-third of his interest and Sadie H. Himelhoch and Gertrude Himelhoch Ashner acquired their 5 per cent interests, a total of 15 per cent of the whole, by bequest of their father. The basis in the hands of these transferors is the fair market value of the property at the time of decedent’s death. Charles G. Barnes, 8 B. T. A. 360; Elizabeth Guthrie Heywood, 11 B. T. A. 29. This value, which we have found from the evidence to be $52,314.31, represents cost to these transferors. It follows that the basis in the hands of the Arcade Company must be the same, viz., $52,314.31, unless it should be increased by gain realized by the transferors in the exchange.

Whether gain was realized is governed by the 1921 Act. Section 202 (c) (3) of that act provides that no gain or loss shall be recognized in. cases where immediately after an exchange of real, personal or mixed property by two or more persons for stock of a corporation, the transferors are in control of such corporation and the stock received by the transferors is in substantially the same proportion as their interests in the property before the transfer. The transferors of the Hudson agreement received the stock of the Arcade Company in proportion to their interests in the asset assigned and thereafter controlled the assignee. The exchange was not a taxable transaction to the Himelhochs under the 1921 Act and the Arcade Company is not entitled to an increase of the basis of the asset in its hands.

For each- of the taxable years to which the remaining issue applies the respondent proposes to assess the deficiencies against the petitioner on the ground that an agreement exists between it and the Arcade Company as a basis for such action. His determination of the existence of such an understanding will be followed in the absence of proof that it is wrong. Morganite Brush Co., 24 B. T. A. 716; Centred Market Street Co., 25 B. T. A. 499; Washburn Wire Co., 26 B. T. A. 464.

It is not necessary that the agreement be in writing or of any particular form, it being sufficient if, from the record, an agreement or understanding may be inferred from the course of conduct of the interested parties. American Textile Woolen Co., 23 B. T. A. 670.

The regulations promulgated by the respondent for the enforcement of the 1924 and 1926 Acts specifically provide for the filing by affiliated corporations of Form 1122 and that the principal corporation filing a consolidated return shall attach thereto a schedule showing the amount of tax which it is agreed is to be assessed against each affiliated corporation. Art. 632, Begulations 65 and 69. Article 731 of Begulations 74, covering the 1928 Act, provides for the inclusion in the return of any agreement among affiliated corporations as to the amount of the whole tax to be assessed against each.

In tbis case all of the returns, consolidated and information, were signed by M. Himelhoeh, as treasurer. All of the information returns, and the consolidated returns for 1924, 1925 (amended) and 1926 were also signed by Z. Himelhoeh as president and second vice president, respectively. The remaining returns were also signed by H. Himelhoeh as president. The information return executed for 1924 stated that none of the tax should be assessed against the Arcade Company, the returns for 1925 and 1926 left blank space provided for the answer, and the answer to the question contained in the return filed for 1927 was indicated by the figure naught.

The returns for the fiscal years 1924 and 1927 clearly and definitely advised the Commissioner that no part of the tax was to be assessed against the Arcade Company, and we think the returns for the fiscal years 1925 and 1926 show in no less convincing terms that the agreement between the companies was that the tax be assessed against the petitioner. The forms provided by the Commissioner were specifically designed for the return of information as to the manner of apportioning the tax to be assessed and when these forms were executed, as they were, with the space left blank for the amount to be assessed against the Arcade Company, the only reasonable conclusion was that it was intended that the entire tax be assessed against the petitioner.

Although the notices of deficiency advising petitioner of the determination of the respondent to assess the additional amounts found to be due under the consolidated returns against it were mailed during the latter part of 1928, no question was raised of the absence of an agreement until the filing of amended petitions a few days before the hearing. We think petitioner is construing the absence of a signed agreement between the parties as the absence of any agreement. Moses Himelhoeh, who was treasurer of both companies and signed all returns and all petitions, apparently never questioned the matter until the last minute, and his testimony in the trial of the case was simply that he had been unable to find a written agreement.

The stock of the affiliated corporation throughout the taxable years was held by the same persons in the same proportion and it would seem to make no difference to the stockholders whether the deficiencies were assessed against the petitioner or apportioned between petitioner and the Arcade Company in accordance with the income assignable to each.

We think there are sufficient grounds for sustaining the respondent on this issue and, accordingly, hold agreements exist for all years involved to assess the deficiencies against petitioner.

Decisions will be entered under Rule SO.