author: Harron:

text:
    Paris & Mt. Pleasant Railroad Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 103578.
    Promulgated June 23, 1942.

      T. D. Gresham, Esq., for the petitioner.

      Donald P. Moyers, Esq., for the respondent.

       Vacated; Order of July 20, 1942; Revised Report, p. 439.

   OPINION.

Harron:

The respondent determined a deficiency in income tax for the year 1937 in the amount of $13,540.88. The deficiency results from the respondent’s determination that petitioner is liable for surtax on undistributed profits in the'amount of $14,038.97, which is computed by applying the provisions of section 14 (b) of the Revenue Act of 1936 to undistributed adjusted net income in the amount of $68,482.78. Petitioner agrees on the amounts of its taxable net income and its adjusted net income.

Petitioner contends, first, that it is not a corporation which comes within the terms of section 14 (b), because under the provisions of the Interstate Commerce Act, as amended by the Transportation Act of 1920, it was prohibited from paying any dividends in the taxable year because it had a capital deficit. During the taxable year petitioner’s deficit amounted to in excess of $400,000. Petitioner argues, in effect, that before it could pay dividends out of current earnings, it was required to accumulate earnings until the capital deficit was extinguished. Petitioner has not cited us to any other provisions of the Interstate Commerce Act which prescribe what funds are “properly includable in the capital account.” Assuming, arguendo and without deciding the point, that provisions of the Interstate Commerce Act prevented the petitioner from paying any dividends out of earnings in the taxable year, there is nothing in this case to take it out of the rule of Crane Johnson Co., 38 B. T. A. 1355; affd., 311 U. S. 54; and Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46. In both cases the corporations had existing deficits and they were prohibited by state statutes from paying dividends except out of surplus. Section 26 (c) (1) allows a credit, if dividends can not be distributed without violating the terms of a written contract executed prior to May 1, 1936, which expressly deals with the payment of dividends. “The language used in section 26 (c) (1) does not authorize a credit for statutorily prohibited dividends.” (Italics added.) Northwest Steel Rolling Mills, Inc., supra. It provides no distinction here that the statute which, presumably, prohibited petitioner from paying dividends, was a Federal statute. The provisions of the Interstate Commerce Act are not a “contract” within the meaning of section 26 (c) (1). The Crane Johnson Co., and Northwest Steel Rolling Mills, Inc., cases, supra, are controlling. Furthermore, petitioner is not a corporation within the classes of corporation specifically exempted from the surtax on undistributed profits by section 14 (d). Section 14 (b) makes the surtax applicable to “every corporation”, which means, upon reading section 14 in its entirety, every corporation except those specifically exempted.

For the above reasons, it is held that petitioner is not entitled to a credit in the amount of its adjusted net income, or $68,482.78.

In the alternative, petitioner contends that it is entitled to a credit under section 26 (c) (2) in the amount of $14,000, which represents the amount set aside out of its current earnings of the taxable year to pay $8,000 of bonds principal amount, plus $6,000 of accrued interest. The facts show, and the respondent agrees, that in 1937 petitioner “irrevocably set aside” by paying to the Farmers & Merchants National Bank of Abilene an amount which, included the $14,000 in question.

Petitioner is not entitled to a credit under section 26 (c) (2) for the $6,000 paid on accrued interest, because this payment does not come within the terms of the above section. The trust deed did not require that any part of petitioner’s earnings in each year should be paid or set aside within the taxable year to pay interest. It is true that the above amount was paid out of current earnings in the taxable year, but petitioner was not bound by contract to apply current earnings to interest on its bonds. The sinking fund provision in the trust deed did not deal with a sinking fund for the payment of interest. The petitioner was free, under the terms of the trust deed, to pay interest out of accumulated earnings, current earnings, borrowings, or any other type of funds, in its own discretion. It has been pointed out that this provision has not been loosely applied. Belle-Vue Manufacturing Co., 43 B. T. A. 12, 17; Hub Clothing House, Ltd., 39 B. T. A. 900; Eastern Building Corporation, 45 B. T. A. 188, 192; Oregon City Manufacturing Co., 43 B, T. A. 212; Lafayette Hotel Co., 43 B. T. A. 426.

The above leaves for consideration whether or not petitioner is entitled to a credit under section 26 (c) (2) in the amount of $8,000, which was irrevocably set aside for payment into the sinking fund in the taxable year. The only question is whether or not the $8,000 was; paid in accordance with the requirements of a written contract executed prior to May 1,1936, which expressly dealt with the disposition of earnings and profits of' the taxable year. The deed of trust executed July 1, 1912, was continued in effect in all of its terms on February 7, 1935. Under the facts it must be concluded that the deed of trust in all its terms was in effect in 1937. When the holders of 8 bonds held back their consent to the appointment of a successor trustee, for which paragraph seventeenth of the trust deed provided, until it was agreed that petitioner would redeem their bonds, there was no modification of any of the terms of the trust deed, or of paragraph thirteenth, relating to the payment of 5 percent of the gross earnings of each year into a sinking fund. The arrangement made with them, to which Jones consented, did not constitute the making of a new agreement in 1937. Jones’ consent simply constituted a waiver of his right, under the default, to have all of the moneys in the sinking fund applied pro rata for the benefit of each bondholder.

Under the terms of the sinking fund provision petitioner is required to make sinking fund payments until all of its bonds are paid. It was required to deposit $22,657.14 in the sinking fund in 1937, or 5 percent of its gross earnings. Petitioner set aside $8,000. The entire amount was used to redeem 8 bonds in the principal amount of $8,000. Paragraph thirteenth of the trust deed provided, among other things, that the trustee could use money in the sinking fund to purchase or call bonds at not more than $105 and accrued interest. Respondent does not contend that the $8,000 was not a payment into the sinking fund. It is concluded that the payment to the bank of $8,000 for transfer to the new trustee was a sinking fund payment, and that it was made pursuant to the requirements of a written contract executed prior to May 1, 1936. The payment comes within the provisions of section 26 (c) (2), and petitioner is entitled to a credit in the amount of $8,000. Cf. Brockway Glass Co., 43 B. T. A. 267, 270, 271, where the taxpayer deposited in a sinking fund more than it was required to set aside out of earnings in the taxable year, as contrasted with petitioner’s setting aside less than was required. See also Michigan Silica Co., 41 B. T. A. 511; affd., Commissioner v. Michigan Silica Co., 124 Fed. (2d) 397; Strong Manufacturing Co., 41 B. T. A. 1273; affd., Commissioner v. Strong Manufacturing Co., 124 Fed. (2d) 360; certiorari granted, 317 U. S. 102; Saginaw & Manistee Lumber Co., 45 B. T. A. 780.

Decision will be entered u/nder Rule 50.

       Tlie Interstate Commerce Act, as amended by the Transportation Act of 1920, U. S. C. A., Title 49, sec. 20 (a) (12), pp. 292 — 293, provides in substance that it shall be unlawful for the director of any carrier to participate in the paying of any dividends from any funds properly includable in the capital account.

       Petitioner paid to the bank $14,507.60, which included $127.60 for “Federal income tax”, leaving $14,380 for principal and interest on the bonds. Petitioner deducted in its return an amount for interest paid in the taxable year which included $380, so that the amount involved in the issue is $14,000, of which $6,000 was a payment for accrued inlerest.


source: Caselaw Access Project

author: Leech:

license: Public Domain

text:
    H. N. Henry, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 108258.
    Promulgated June 23, 1942.

      Robert G. Lane, Esq., for the petitioner.

      F. L. Van Eaaften, Esg., for the respondent.
   OPINION.

Leech:

The question here is original, so far as we know. We think it is clearly answered by the provisions of the statutes hereinafter cited.

That the payments, received by petitioner from the Dominion of Canada constituted gross income to him under the definition of sections 22 (a) of the Revenue Acts of 1936 and 1938 is manifest and needs no argument. It is likewise clear that they do not fall within the class of any of the statutory deductions from gross income. It thus remains to be determined whether they fall within the exclusions from gross income. The only sections of these acts, possibly pertinent, are sections 22 (b) (5) and (7) reading as follows:

SEC. 22. GROSS INCOME.
*******
(b) Exclusions from Gkoss Income. — The following items shall not be included in gross income and shall be exempt from taxation under this title: *******
(5) Compensation foe injuries ob sickness. — Amounts received, through accident or health insurance or under workmen’s compensation acts, as compensation for personal injuries or sickness, plus the amount of any damages received whether by suit or agreement on account of such injuries or sickness; *******
(7) Income exempt undee treaty. — Income of any kind, to the extent required by any treaty obligation of the United States.

The payments in question were not “received, through accident or health insurance or under workmen’s compensation acts” nor were they damages for accident or received as compensation or damages for personal injuries or sickness, There is no treaty obligation of this country for their exemption from tax.

Petitioner argues that payments similar in character made by this country under its laws to former members of its armed forces are not subject to tax and that he is now a citizen of this country and should be accorded the same exemption. The exemption to which he points is provided by the Act of August 12, 1935, 49 Stat. 607, exempting from all’ taxes amounts paid as pensions or disability compensation under certain specified statutes of the United States. The payments in controversy were not made under those acts and petitioner is accordingly not entitled to the statutory exemption there provided. .

Decision will be entered, for the respondent.


author: Black:

text:
    Clinchfield Coal Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102862.
    Promulgated June 23, 1942.

      A. K. Morison, Esq,, for the petitioner.

      ‘William V. Orosswhite, Esq., and George II. Mitchell, Esq., for the respondent.
   OPINION.

Black:

As has already been stated, part of the deficiencies in petitioner’s unjust enrichment tax for the years 1936 and 1937 were determined under the provisions of section 501 (a) (2) and part were determined under section 501 (a) (3), Revenue Act of 1936.

That part of the deficiencies determined under section 501 (a) (2) has been conceded by petitioner and is no longer in issue. All of the deficiency determined by the Commissioner under section 501 (a) (3) is in controversy.

Section 501 (a) (3) is printed in the margin.

The statute in question provides that the Commissioner in his determination of the deficiency may determine to what extent, if any, the vendor shifted the burden of the tax to the vendee, by the use of margin computations. Section 501 (e) provides for the use of this method and is printed in the margin.

The Commissioner in his determination of the deficiencies in the instant case has used the margin method. His computation of the margins is set out in full detail in the deficiency notice and is a part of the record in this proceeding, and has been carefully examined and studied, but is not incorporated herein on account of its length. The petitioner attacks the correctness of this margin computation on the ground that in its compilation the Commissioner used only two factors, namely, royalties and depletion, as factors of cost of petitioner’s product. It is petitioner’s contention that these two factors which respondent has used in his compilation are only a small part of petitioner’s cost; that there are other factors of cost quite as important, such for example as selling costs, and that the Commissioner has not taken these other factors into consideration in his computation of the margins for the base period and for the tax period; Petitioner contends that if he had done so quite a different result would have been reached.

Petitioner embodies its views as to a correct computation of the margins in its Exhibit 3, which was introduced in evidence. This computation has likewise been carefully examined and studied, but is not incorporated in our findings on account of its length.

Petitioner devotes considerable space in its brief to an argument, that the Commissioner has erred in his computation of the margins and, therefore, there is no statutory presumption in his favor. For reasons ivhieh we shall presently state, we think it would be unprofitable for us to discuss the computation of the margins which the Commissioner has made or the computation which petitioner has. made in its Exhibit 3.

For the purposes of this case we shall assume that respondent’s, computation of the margins, which are contained in his deficiency notice, were made in accordance with the statute and Treasury regulations and that the presumption provided by section 501 (e) exists in his favor. This presumption, however, is a rebuttable one.

Section 501 (i) provides:

(i) Either the taxpayer or the Commissioner may rebnt the presumption established by subsection (e) by proof of the actual extent to which the taxpayer shifted to others the burden of the Federal excise cax. Such proof may include, but shall not be limited to:
[Here the statute sets out in detail certain methods of proof which may be used in rebuttal of the presumption which arises under subsection (e).]

We think the petitioner has succeeded in rebutting the statutory presumption raised in the Commissioner’s favor by subsection (e).. In the first place, petitioner has proved clearly that it did not add' the amount of the tax to its invoices of coal sold. The only exceptions-to this were a few invoices for coal sold to agencies of the Federal Government. These agencies refused to pay the tax and it was never collected from them by petitioner.

Petitioner’s comptroller testified:

Shortly after the first of November, 1935, I called our president’s attention-to the fact that this Act was effective and that up to that point we had not added' the tax to any invoices and asked him if he had given consideration to the-application of the tax. He replied that he had and that it ought to be added but the chaotic condition of the market was such that we would not do it. For-that reason it was never added to any other invoices other than the ones I have pointed out.

In answer to the foregoing testimony, respondent contends that the fact that petitioner did not add the amount of the tax paid directly to each invoice of coal shipped would by no means be conclusive that petitioner did not shift the burden of the tax to its vendees. That, of course, is true.

The tax could be passed on to petitioner’s vendees by an increase in the price of coal which would equal or exceed the tax, just as effectively as by adding the tax to the invoice. The evidence in the instant case shows that in October 1935, after the Guffey Act had been enacted by Congress but prior to November 1, 1935, when the tax became effective, petitioner increased the price of its coal 16 cents per ton, later adjusted to 15 cents per ton. The evidence conclusively shows that this increase in price was made by petitioner because of increased labor costs which were occasioned by wage increases that were put into effect a short time prior thereto. This increase in price of 15 cents per ton did not stay in effect very long.

On November 25, 1935, petitioner reduced its prices on all contract coal 20 cents per ton. Also, shortly after that it made similar reductions in price on its spot sales of domestic sizes of coal. This decrease in price of 20 cents a ton for coal remained in effect until June 1, 1936, which was after the Guffey Act had been declared unconstitutional. The only exceptions to this were some fluctuations upward of spot sales of domestic sizes of coal which were influenced by seasonal demand. Thei'efore, it seems clear that petitioner did not shift the burden of the tax to its customers by increasing the price of its coal to them. Aside from adding the tax directly to the invoice or collecting it by an increase in the price of coal, there would doubtless be still another method by which petitioner could have passed on the tax to its customers, assuming that certain factors were in existence. For example, if after November 25, 1935, when petitioner put into effect a general decrease of 20 cents per ton in the price of its coal, there had been a substantial decline in petitioner’s operating expenses and selling expenses which was not passed on to its customers, that would doubtless be a factor which would tend to sustain the presumptive correctness of the margin computation which the Commissioner has made.

The evidence shows that no such lowering of operating expenses and selling expenses took place, but that on the contrary during the remainder of the period when the tax was in effect petitioner’s operating deficit per ton of coal was greater than it was prior to November 25, 1935. Therefore, we think that, taking the evidence as a whole, it shows that petitioner did not shift, either directly or indirectly, any part of the Guffey coal tax to its customers.

We think that the facts of the instant case bring it within the ambit of our decision in Norwood-White Coal Co., 45 B. T. A. 638. See also Epstein v. Helvering, 120 Fed. (2d) 427 (Fourth Circuit), in which the court reversed a decision of the Processing Tax Board of Review and in its opinion, among other things,-said:

We do' not think that this decision should be sustained in view of the Board’s findings. It gave too great wéight to the marginal method required by section 907 (a), (b) and (c), and too little weight to proof of the actual facts permitted by section 907 (e) of the Act. Having found that the comparison of margins resulted unfavorably to the taxpayer, the Board accepted the statutory prima facie presumption, and held that the greater part of the burden of the tax was shifted, notwithstanding the express finding that no part of the tax was added to the sales price of the goods or collected from the customers. Moreover, this weight was given to the marginal method in the face of the further finding that during the post-tax period, a substantial change prevailed in the taxpayer’s business in that the selling price of the cigars was reduced while the grade of tobacco used w¿s maintained at the previous level, so that the margin between the cost of the raw material and the selling price of the manufactured goods was necessarily diminished.

On tbe strength of the foregoing authorities we sustain the petitioner on the only issue involved in this proceeding.

Decision will he entered wider Rule 50.

       SEC. 501. TAX ON NET INCOME FROM CERTAIN SOURCES.
      (a) The following taxes shall be levied, collected, and paid for each taxable year (in addition to any other tax on net income), upon the net income of every person which arises from the sources specified below :
      *******
      (3) A tax equal to 80 pereentum of the net income from refunds or credits to such person from the United States of Federal excise taxes erroneously or illegally collected with respect to any articles, to the extent that such net income does not exceed the amount of the burden of such Federal excise taxes with respect to such articles which such person shifted to others.

       (e) For the purposes, of subsection (a) (1), (2), and (3), the extent to which the taxpayer shifted to others the burden of a Federal excise' tax shall be presumed to be an amount computed as follows :
      (1) From the selling price of the articles there shall be deducted the sum of (A) the cost of such articles plus (B) the average margin with respect to the quantity involved; or


text:
    Joe B. Fortson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Lyda Fortson, Petitioner, v. Commissioner of Internal Revenue, Respondent. Estate of John T. Fortson, Deceased, H. C. Bartlett, T. D. Queen, and R. F. Bartlett, Independent Executors, Petitioner, v. Commissioner of Internal Revenue, Respondent. Viola Fortson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 104269, 104270, 104271, 104272.
    Promulgated June 23, 1942.

      George 8. Athinson, Esq., for the petitioner.

      D. D. Smith, Esq., for the respondent.
   OPINION.

Harron:

The definition of capital assets set forth in section 111 (b) of the Revenue Act of 1936 excludes “property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.” Respondent contends that the bonds in question do not come within the above exclusion, so that they properly were determined to be capital assets, and that, consequently, the allowance for the loss was limited, properly, to $2,000. Petitioner contends that the bonds were property which fell within the above exclusion.

Petitioner relies upon Julius Goodman, 40 B. T. A. 22, and Hercules Motors Corporation, 40 B. T. A. 999. In our opinion those cases are controlling. See also Gilbert v. Commissioner, 56 Fed. (2d) 361.

The facts show clearly that it was the custom in the business of doing construction work for levee districts for the districts to make payment for the work in its bonds. In fact that was the only way the contractor could be paid. The Construction Co., the'partnership in which the four petitioners were members, did construction work for many levee and improvement districts in Texas from 1920 to 1929 and, in each instance, received bonds in payment for services. Excepting in one instance, not material, the Construction Co. sold the bonds as soon as possible. The intent always was to sell such bonds. That was the only way the Construction Co. could keep itself with funds on hand to carry on business. The company’s receipt of the bonds in question in payment for work done, therefore, was not an isolated instance of receiving bonds. The adversity experienced in disposing of the bonds was unusual in the company’s experience. The situation is amply explained by the facts, all of which show that the company was caught in the nation-wide depression in 1929, and following, which was visited upon the levee districts of northern Texas. The general depression made it impossible for the company to sell the bonds, but the original intent to sell them remained. The business adversity did not convert the original purpose to sell the bonds into a purpose of investment.

The facts leave no doubt on the point that the bonds came into the company’s possession as a necessary incident to the conduct of its business — to the sale of its services — and they were not received or intended to be held as a capital asset. Disposition of the bonds through sale was likewise essential to the carrying on of its business.

Under all of the facts it is held that the loss sustained was a loss upon property held primarily for sale to customers in the ordinary course of business. The loss is deductible as an ordinary loss. Respondent is reversed on authority of the cases above cited.

Decision will be entered wider Rule 50.


author: Murdock: Turner,

text:
    Myrtle S. Carson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104474.
    Promulgated June 23, 1942.

      E. R. Garrieron, G. P. A., for the petitioner.

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

Murdock:

The Commissioner determined a deficiency in income tax for 1938 in the amount of $336. The issues are whether petitioner is entitled to a personal exemption of $2,500 as head of a family and a credit of $100 for one dependent for a period of three months.

The case was submitted upon the following stipulation of facts:

(1) That the petitioner is, and that she was throughout the calendar year 1938, a citizen of the United States and a resident of the City and County of Honolulu, Territory of Hawaii.
(2) That the petitioner had been legally married to Merwin B. Carson, a citizen of the United States, and that there had been born unto the petitioner and the said Merwin B. Carson two children, namely, Knight S. Carson, a son, whose birthday was March 23,1918, and Lorna Carson, a daughter, whose birthday was April 5,1920.
(3) That the petitioner was divorced from the said Merwin B. Carson on December 12, 1933, and that throughout the calendar year 1938 she was unmarried.
(4) That the petitioner was awarded by the court the custody of the two children, aforesaid; and that no change had been made in the said court order on or before December 31, 1938.
(5) That neither of the said children had been married on or before December 31,1938.
(6) That the petitioner, for several years prior to 1938 and throughout the calendar year 1938, owned a residential property on Judd Hillside, City and County of Honolulu, aforesaid, and that the petitioner still owns and occupies said residential property as her home.
(7) That the petitioner occupied said residential property as her home continuously during the period begun January 1, 1938, and ended August 26, 1938, when she embarked for Boston, Massachusetts, in company with her daughter, Lorna, who matriculated at Vassar College during the Pall of 1938.
(S) That the said daughter, Lorna, lived with the petitioner in the petitioner's home at Judd Hillside, aforesaid, prior to 1938 and during the period begun January 1,1938, and ended August 26,1938, when she embarked with her mother for the purpose aforesaid.
(9) That the petitioner possessed a substantial estate, which she had inherited from her father or had accumulated, and that she realized a gross income of $26,361.26 from the said estate during the calendar year 1938.
(10) That the petitioner maintained her home at Judd Hillside, aforesaid, befitting her social status; that, except as hereinafter stated, the petitioner paid all the household bills and other expenses incurred in the maintenance of the said home at Judd Hillside during the period begun January 1, 1938, and ended August 26, 1938, and that the petitioner did not charge to, nor receive from her daughter, Lorna, nor from her son, Knight, reimbursement of any portion of the said household and maintenance expenses.
(11) That the petitioner, during the school year begun in September, 1938, and ended in May, 1939, rented an apartment on Beacon Street, Brookline, Massachusetts; that the petitioner’s son, Knight S. Carson, who attended a university in Cambridge, Massachusetts, throughout the school year aforesaid, lived with the petitioner at said Beacon Street Apartment throughout the school year of 1938-1939; and that the petitioner’s daughter, Lorna, stayed with the petitioner at said Beacon Street apartment during the Christmas, 1938, holidays.
(12) That, except as hereinafter stated, the petitioner paid all of the household bills and other maintenance expenses in respect of the Beacon Street apartment at Brookline, Massachusetts, throughout the school year 1938-1939, and that the petitioner did not charge to nor receive from either Knight S. Carson or Lorna Carson reimbursements of any part of said household and other maintenance expenses of the Beacon Street apartment during the period aforesaid.
(13) That the petitioner incurred and paid during the calendar year 1938 household and other maintenance expenses in respect of her Judd Hillside home and of her Beacon Street apartment, both aforesaid, approximately $12,500.00. [Sic.]
(14) That Knight S. Carson and Lorna Carson, son and daughter of the petitioner, each acquired from their grandfather prior to 1938, by gift and by inheritance, a separate estate; that the gross income of Knight S. Carson from his said separate estate for the calendar year 1938 was $7,228.75; that the gross income of Lorna Carson from her said separate estate for the calendar year 1938 was $7,310.00; and that a Federal income-tax return for the calendar year 1938 was duly filed in behalf of each of Knight S. Carson and Lorna Carson in which was reported the income that was received by each of them, respectively.
(15) That Knight S. Carson paid out of his separate estate during the calendar year 1938 the costs of tuition and maintenance at a university during the calendar year 1938, excepting his board and lodging during the school year 1938-1939, when he lived with the petitioner at her Beacon Street apartment, aforesaid.
(16) That Lorna Carson, during the period of 1938 that she lived with her mother at the Judd Hillside home and during the period begun August 26, 1938, and ended December 31, 1938, spent approximately $4,000.00 of the income of her separate estate for the following purposes: For the purchase of an automobile for her personal use, for driving lessons, and for the maintenance of said automobile; for clothing additional to clothing furnished by the petitioner; for dancing and other lessons; for private parties to friends; for traveling expenses to college; for college tuition; for furnishing her room at Yassar College; for cosmetics and hair dressing; et cetera, but not in reimbursement of any of the expenses incurred and paid by the petitioner, aforesaid.
(17) That the petitioner duly filed with the Collector of Internal Revenue at Honolulu, an income tax return for the calendar year 1988 in which she reported her gross income and deductions, and in which she claimed the personal exemption as head of a family, $2,500, and a fractional credit (three months) for one dependent, her daughter, Dorna. A copy of the said return is hereto attached, and may be received in evidence.

The Commissioner disallowed both the credits claimed and allowed •one of $1,000.

The petitioner claims that she was the head of a family as that term is used in section 25 (b) (1) of the Revenue Act of 1938 and is, therefore, entitled to the $2,500 credit. She claims further that for the first three months of 1938 her daughter, Lorna, was a dependent within the meaning of section 25 (b) (2) and that she is entitled to a credit of :$100 under that provision of the statute.

The petitioner is entitled to the credit of $100 claimed under section .25 (b) (2), in respect of her daughter. A credit of $400 is allowed “for each person (other than husband or wife) dependent upon and receiving his chief support from the taxpayer if such dependent per-son is under eighteen years of age.” The daughter was under eighteen years of age during the first three months of the taxable year, the •petitioner was legally obligated to maintain and support her, and did .in fact so maintain and support her. The claim for the credit of $100 for the daughter as a dependent under section 25 (b) (2), supra, for the first three months of the taxable year is accordingly allowed. Cf. Warren S. Booth, 43 B. T. A. 846.

The statute does not define or otherwise explain the meaning of the ■term “head of a family” used in section 25 (b) (1). The Commissioner in Regulations 101, article 25-4, has interpreted the term as ■follows:

A head of a family is an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by ■blood relationship, relationship by marriage, or by adoption, and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. In the absence of continuous actual resi•dence together, whether or not a person with dependent relatives is a head of a family within the meaning of the act must depend upon the character of the •separation. If a father is absent on business, or a child or other dependent is ¡away at school or on a visit, the common home being still maintained, the ^additional exemption applies. * * *

The petitioner is an individual who actually supported and maintained her daughter in one household. The daughter is an individual who is closely connected with the petitioner by blood relationship. The petitioner’s right to exercise family control and provide for this individual is based upon a moral or legal obligation. We have already held that the daughter was dependent upon and receiving her chief support from the taxpayer while they were in Hawaii. Their actual residence together was not continuous during the entire taxable year. The child was awray at school for a part of this year. The mother still maintained a common home. In fact, she maintained two common homes thereafter — one in Honolulu and one in Brookline, Massachusetts. The home which the mother had provided in Hawaii was apparently too far away for the daughter to get any benefit from it and to satisfy the mother. Therefore, the latter provided and maintained a second common home in Brook-line. It is clear that this was a common home with respect to this mother and daughter because they both lived there at the expense of the mother during the daughter’s Christmas vacation, and also another member of the family lived there continuously with his mother from September to the end of the year at his mother’s expense. The result, according to the regulation, would have been' the same even if the mother had not come to Brookline but had merely continued to maintain the common home in Hawaii ready for the return of the daughter.

The petitioner thus fulfills all of the requirements of the Commissioner’s own regulation to qualify as head of a family. The regulation does not deny the status as head of a family merely because a child may have some funds of her own or be in part supported and maintained by funds from some outside source. Eleanor L. Mack, 37 B. T. A. 1101; O. D. 422, 2 C. B. 159. Where the parent contributes substantially to the support of the dependent and maintains a common home at all times during the year, it is immaterial that the child may be temporarily away from home at school or on a visit, and while away from home for this temporary period may be actually supported and maintained in part or even entirely by funds other than those of the parent. It is common knowledge that children frequently go away from home on a visit and those whom they are visiting furnish board, lodging, and sometimes even a few new clothes. It is also common knowledge that funds for the education of children are frequently provided by trusts, scholarships, and other outside sources. But the regulation wisely provides that the parent does not lose his or her status as head of a family by reason of such temporary absences. The petitioner was head of a family during the entire year and is entitled to the credit of $2,500. Consideration of the additional circumstance that the petitioner’s son. was an occupant of tbe common home of his mother in Brook-line, Massachusetts, at all times that the petitioner lived in that common home, is unnecessary in this proceeding.

Reviewed by the Board.

Decision mill be entered for the petitioner.

Turner,

dissenting: I am unable to agree that petitioner is entitled for the last four months of the taxable year to credit as head of a family. The statute does not define or explain the term, but the interpretation contained in the respondent’s regulation has long been recognized as fair and reasonable and has become firmly imbedded in the law. So much of the regulation as is here pertinent reads as follows:

A head of a family is an individual who actually supports and maintains in one household one or more individuals who are closely connected with him by blood relationship * ⅜ * and whose right to exercise family control and provide for these dependent individuals is based upon some moral or legal obligation. In the absence of continuous actual residence together, whether or not a person with dependent relatives is the head of a family within the meaning of the Act must depend upon the character of the separation. If * * * a child or other dependent is away at school * ⅜ * the common home being still maintained, the additional exemption applies. * * *

During the months of September through December petitioner maintained an apartment in Brookline, Massachusetts, in which she lived with her adult son, Revised Laws of Hawaii, 1985, sections 4510, 4513, and where, according to the stipulation, her “daughter, Lorna, stayed * * ' * during the Christmas, 1938, holidays”,, petitioner ostensibly furnishing board and lodging during such period. Except for such holidays, she did not during the period in-question “actually support and maintain” her daughter in her own, household or in any other household, but, to the contrary, the daughter maintained and supported herself from her own independent, means. Regardless of that fact, however, it is here held that maintenance of the apartment plus the holiday “stay” is sufficient to-establish petitioner as the head of a family. This ruling is based, on that sentence of the regulation reading: “If * * * a child or-other dependent is away at school * * * the common home being-still maintained, the additional exemption applies.” Even a casual reading of that sentence and the sentence preceding discloses that they-are concerned solely with the relaxation, under the circumstances therein set forth, of the requirement in the first sentence of the regulation that the dependent individual be supported and maintained in the same household as the person claiming the credit. There is not, in' my opinion, a single word or the semblance of a thought in either sentence which relaxes or removes the plain and basic requirement that the person claiming credit as head of a family must actually support and maintain the individual upon whom the claim is based. Furthermore, the person “actually supported” must be a “dependent individual.” In the first sentence of the regulation the persons furnishing the basis for the claim are referred to as “these dependent individuals”; in the second sentence, as “dependent relatives”; in the third sentence, as “a child or other dependent.” Here the daughter, being over eighteen years of age, was not a dependent within the meaning of section 25 (b) (2), supra. She was not a dependent in fact. Not only did she have independent means of her own more than sufficient to furnish ample maintenance, but during the period in question, except possibly to some extent “during the Christmas, 1988, holidays,” she in fact did support and maintain herself from her own means. It is true that she was still a minor under Hawaiian law and would not become of age until she reached the age of twenty years, and presumably had there been any occasion or necessity therefor the petitioner could have been required under the laws of Hawaii to- support her until she did become of age. The fact nevertheless remains that there was no such occasion or necessity for the petitioner to support her daughter, and the petitioner did not “actually support and maintain” her, as the regulation requires. I am accordingly unable to agree that petitioner is entitled during the last four months of the taxable year to credit as head of a family.

Hill and Kern agree with this dissent.


author: Van Fossan:

text:
    George Caldwell, Petitioner, v. Commissioner of Internal Revenue, Respondent. Zella B. Caldwell, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 102546, 102547.
    Promulgated June 23, 1942.

      Boland O. Kizer, Esq., for the petitioners.

      Donald P. Moyers, Esq., and Homer J. Fisher, Esq., for the Respondent.
   OPINION.

Van Fossan:

In the notices of deficiencies respondent increased the petitioners’ income from two principal sources: (1) The arrangement between petitioner George Caldwell and James Monroe Smith, president of Louisiana State University, by reason of which Caldwell was paid 1 (later 2) percent of the cost of all buildings constructed under his supervision; and (2) rebates or “kickbacks” from con-' tractors and materialmen.

Although the respondent charges fraud and has the burden of proof on that issue, petitioners have the burden of proof as to the contested items of income. Henry S. Kerbaugh, 29 B. T. A. 1014; Snell Isle, Inc. v. Commissioner, 90 Fed. (2d) 481; certiorari denied, 304 U. S. 734.

Petitioners’ evidence is almost exclusively directed to the first of these items, i. e., percentage payments by the university. They concede that the “kickback” payments were made, but argue on brief that these payments were reported as gambling gains. They offer no proof whatever to substantiate this claim and it is clearly not self-evident. Except for the percentage payments, the record affords no basis in fact for an argument against the correctness of respondent’s determination of the deficiencies.

Respondent held that petitioner George Caldwell was an employee of the state as to his salary from the, university. The only question is as to the percentage payments.

We can not shut our eyes to facts established by the record and ignore the background of the percentage arrangement. Thus we know of the scandalous and criminal conduct of James Monroe Smith, the president of the university. We know too of Caldwell’s admittedly criminal conduct in regard to his tax accounting, and of his solicitation of rebates and bribe money in connection with the very work here involved. We know that the board of supervisors of the university never authorized the payment of the percentage to petitioner and that the minutes of the board, prepared and kept by James Monroe Smith, president of the university and secretary of the board of supervisors, purporting to authorize the percentage arrangement, were false. The conclusion is obvious. We are convinced that petitioner and Smith entered into a privately conceived arrangement, separate in legal standing and effect from petitioner’s employment as superintendent of building, the consequence of which was the payment of the percentages of cost. We are of the further opinion that by this illegal and unauthorized arrangement petitioner And Smith connived at the defrauding of the university. The payments received by petitioner pursuant to the arrangement are not those of an employee of the state. They were not part of the salary -paid petitioner as an employee of the state. We, therefore, sustain respondent in full as to all of the deficiencies.

We likewise sustain the respondent in his finding of fraud. Manasse Karger, 38 B. T. A. 209, dismissed without opinion, C. C. A., 5th Cir., May 19, 1939. The proof shows that petitioner George Caldwell was indicted in the United States District Court for the Eastern District of Louisiana on charges of fraudulent evasion of income taxes, the same being the identical taxes and for the same amounts and years as appear in the notice of deficiencies. The record also shows that petitioner pleaded guilty to all four counts of the Indictment a’nd was sentenced to a fine and imprisonment and is now incarcerated in a Federal prison. As held by the Board in Thomas J. McLaughlin, 29 B. T. A. 247, this plea of guilty was an admission against interest subject to the taxpayer’s right to explain the same or otherwise lessen its. weight. Here no explanation was attempted and there is no other evidence to lessen the weight normally to be given such a fact. It is sufficient to sustain the charge of fraud. Moreover, the record contains other clear and convincing evidence supporting the conclusion that petitioner was guilty of fraud. The fraud penalties determined against petitioner George Caldwell are approved.

Decisions will be entered for the respondent.


author: Arundell:

text:
    Estate of Flora W. Lasker, Deceased, Mary L. Foreman and Frances Lasker, Successor Executors, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101290.
    Promulgated June 23, 1942.

      A, L. Hopkins, Esq., Jay O. Halls, Esq., and Harry D. Orr, Jr., Esq., for the petitioners.

      Franklin F. Korell, Esq., and David Altman, Esq., for the respondent.
   OPINION.

Arundell:

The issues raised by the petition and answer have been settled by stipulation of the parties or will be determined upon re-computation under Rule 50.

The only question remaining for our decision was affirmatively raised by respondent in his amended answer and is whether or not the decedent’s gifts in trust are includible in her gross estate under section 302 (a), as amended, 302 (c), as amended, or 302 (d), as amended, of the Revenue Act of 1926. Respondent claims that the gifts in trust were conditional because decedent reserved the right to modify, that decedent did not intend to make present gifts at the time of the creation of the trusts, and that, in any event, the intent of decedent was that the possession or enjoyment of the gifts should take effect only at or after her death, thus complying with the literal words of section 302 (c), as amended.

We must first determine whether the trusts which were in effect at decedent’s death were the original trusts as created by her in 1931, or were the trusts as modified by the several amendments, including the amendments of June 26, 1935. If these amendments were valid and effectual modifications of the original instruments, it is clear that decedent retained no interests of any kind in the trusts at the date of her death. As we understand it, respondent questions only the modifications of June 26, 1935.

By the amendments of June 26,1935, made prior to decedent’s death, the possibility of further modification of the trusts in any manner was removed. Under the original trust instruments modification or termination of the trusts was possible during the lifetime of decedent by reason of paragraph VIII of each trust. By written instruments signed by two trustees other than decedent and in accordance with the provisions of paragraph VIII, the trustees eliminated paragraph VIII from each trust. Power to modify or terminate a trust may be vested in the trustee. Bogert, Trusts and Trustees, sec. 1000; Scott, The Law of Trusts, secs. 331, 334.1; Schrever v. Schrever, 101 App. Div. 456; affd., 182 N. Y. 555; Lillard v. Lillard, 63 Ohio App. 403, 26 N. E. (2d) 933. Moreover, the fact that decedent gave the power to modify or terminate to the trustees regardless of the consent of the beneficiaries is strong evidence that the trustees owed no duty to the beneficiaries of the trusts to refrain from exercising that power. See Reinecke v. Smith, 289 U. S. 172, 176. Thus, the trusts were amended so as to make them completely irrevocable and unamendable. Consequently, at decedent’s death she had no power to alter, amend, revoke, or terminate the trusts and, furthermore, had no interests therein. It is these trusts as so amended, rather than the original trusts, which were in effect at decedent’s death.

The conclusion reached on this point disposes of respondent’s contentions that the value of the trusts was includible in decedent’s estate either under section 302 (a), as amended, or section 302 (d), as amended. Decedent retained no interest in the trusts which would be subject to tax under section 302 (a), as amended. Moreover, at the date of her death decedent possessed no right to alter, amend, or revoke the trusts nor, as the parties have stipulated that the question of contemplation of death is not here involved, did she relinquish such a right in contemplation of death. Consequently, section 302 (d) is not applicable. Since we have determined that the amended trusts were the determinative ones, we need not consider the question of whether the original trusts would have been includible in decedent’s estate under section 302 (d), as amended. See Helvering v. City Bank Farmers’ Trust Co., 296 U. S. 85, 89; Virginia L. Houghteling, Executrix, 40 B. T. A. 508.

The principal contention of respondent is that the gifts in trust were intended to take effect in possession or enjoyment at or after decedent’s death within the meaning of section 302 (c) of the Revenue Act of 1926, as amended. He claims that the gifts were originally intended to take effect at or after her death and that nothing which the trustees did or could do subsequent to the creation of the trusts could change the nature of those gifts. With this contention we do not agree. We think it immaterial, whether the trusts as originally constituted might have been modified by decedent, since, as we have shown, the trusts with which we are concerned were the amended trusts. Whatever rights decedent might have had in the trusts were eliminated by the action of the trustees in making the several modifications, including the amendment of June 26,1935.

The decision of the Supreme Court in Reinecke v. Northern Trust Co., 278 U. S. 339, completely answers respondent’s argument that the gifts in trust were intended to take effect at or after death. In that case the Supreme Court had before it the question of the inclusion in a decedent’s gross estate of the value of the corpora of certain trusts which decedent had created. In those trusts decedent had created life tenancies in certain individuals but with remainder over five years after the death of the decedent. The Court, in holding that the gifts in trust were not intended to take effect in possession or enjoyment at or after the decedent’s death, stated:

But the question much pressed upon us remains whether, the donor having parted both with the possession and his entire beneficial interest in the property when the trust was created, the mere passing of possession or enjoyment of the trust fund from the life tenants to the remaindermen after the testator’s death, as directed, and after the enactment of the statute, is included within its taxing provisions. * * *
• •****•
* * * In the light of the general purpose of the statute and the language of section 401 explicitly imposing the tax on net estates of decedents, we think it at least doubtful whether the trusts or interests in a trust intended to be reached by the phrase in section 402 (c) “to take effect in possession or enjoyment at or after his death,” include any others than those passing from the possession, enjoyment, or control of the donor at his death and so taxable as transfers at death under section 401. That doubt must be resolved in favor of the taxpayer. * * *

The Northern Trust Co. case is solid authority for a negative answer to respondent’s contention that section 302 (c), as amended, should be applied without regard to whether ownership or control is retained in the settlor-decedent. See Commissioner v. Kellogg, 119 Fed. (2d) 54. The Northern Trust Co. case makes it clear that, in order that a gift may be included in the donor’s estate as intended to take effect in possession or enjoyment at or after death, it is necessary that something pass from decedent at death. Here it is obvious that nothing passed. We do not think that the cases of Helvering v. Hallock, 309 U. S. 106; Klein v. United States, 283 U. S. 231, and Estate of Mary H. Hughes, 44 B. T. A. 1196, require a contrary result. In those cases, incidents of ownership, however slight, were retained by the decedent, and expired, were relinquished, or were eliminated by the death of the decedent. Here we have no life interest such as was retained in the Hughes case, nor do we have a possibility of reverter or other attribute of title in decedent such as was present in the Hallock case. However the Halloeh and similar cases may tend to indicate a philosophy of taxation, we are not prepared to attempt to impeach the validity of Reinecke v. Northern Trust Co., supra, which is clearly applicable to the facts here. Accordingly, the issue must be decided for petitioner.

We can not agree with the inference respondent sought to draw from the facts stipulated by the parties. The matter in issue was raised by respondent and the burden of proof consequently rests on him. Inferences are not to be resolved in favor of the party having that burden.

Decision ruill he entered under Rule 50.

       Sec. 302. The value of the gross estate of the decedent shall he determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated, except real property situated outside the united States. [As amended by sec. 404, Revenue Act of 1034.]
      (a) To the extent of the interest therein of the decedent at the time of his death.

       (e) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the .property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in ease of a bone fide sale for an adequate and full consideration in money or money’s worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title. [As amended by sec. 803 (a), Revenue Act of 1932.]

       (d) (1) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in ease of a bona fide sale for an adequate and full consideration in money or money’s worth. [As amended by sec. 401, Revenue Act of 1934.]


author: Disney:

text:
    Pittsburgh Steel Foundry Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 105752.
    Promulgated June 25, 1942.

      ~W. W. Stoner, Esq., for the petitioner.

      ■Orris Bennett, Esq., for the respondent.
   opinion.

Disney:

The subject of this proceeding is income tax for the calendar years 1936 and 1937. Deficiencies were determined in the respective amounts of $39,188.61 and $42,393.51. The question for solution is whether the petitioner is entitled to credit because of contracts restricting payment of dividends within the intendment of section 26 (c) (1) of the Revenue Act of 1936. All facts have been stipulated and we find them as so stipulated. We shall hereinafter state only such facts as are necessary to consideration of the issue at hand. The income tax returns for the taxable years were filed by the petitioner in. the twenty-third collection district of Pennsylvania.

The Commissioner determined in the deficiency notice that no credit •could be allowed in computing surtax on undistributed profits by reason of alleged contracts dealing Avith the payment of dividends. JEt is the burden of the petitioner to show error in such determination. The petitioner seeks to do so by citing the decision in Lehigh Structural Steel Co. v. Commissioner, 127 Fed. (2d) 67, to the effect that a stock certificate may constitute a contract restricting payment of dividends within the intent of section 26 (c) (1) of the Revenue Act of 1936, and by attempting to show wherein the stock certificates issued by the petitioner constituted suck contracts; also by reliance upon the provisions of a mortgage given to the Union Trust Co. We assume herein, without so deciding, that under the decision in thé Lehigh Structural Steel Co. case, supra, a stock certificate may constitute a contract under section 26 (c) (1); for we have concluded, upon examination of the stock certificates here involved, that they do not contain such restrictive provisions as are within the purview of the section; and that the mortgage provision likewise does not come within the ambit of the act.

First, as to the provision of the mortgage: It reads as follows;

Section 11. The Corporation shall not pass any vote nor do any act tending", directly or indirectly, to lessen or impair the value of the property hereby mortgaged or intended so to be, or the security of these presents; and it will prevent its officers, employees, and agents from passing any such vote, and from doing any such act, in so far as it may have power so to do.

We consider it so clear that such provision does not satisfy section-26 (c) (1) that we do not give it lengthy discussion; for that sectiom requires a provision which “expressly deals with the payment o£: dividends.” There is nothing whatever express as to dividends in the language quoted above from the mortgage. Patently Congress by the phrase “expressly deals” particularly intended to eliminate-contractual provisions so completely general as the above; therefore we eliminate it at once, as not satisfying the statute, and pass to' consideration of the provisions of the stock certificates, relied upon as complying with section 26 (c) (1).

The provisions in question were contained in certificates evidencing-both preferred and common stock, and in pertinent part provide that-holders of preferred stock shall receive “from the surplus or net-profits of the Corporation” dividends at the rate of 5 percent, to-accrue from April 1, 1925, such dividends to be cumulative, and to be paid (or money set apart for payment thereof) before any dividend on any of the stock shall be paid (or money set apart for payment thereof); also that

Tbe holders of the Preferred Stock shall not be entitled to receive any dividend or share of profits beyond five per centum (5'%) per annum, payable only in cash whether or not dividends on other stock be payable in cash, stock, or property, nor shall said holders have any preemptive right} to subscribe for or purchase any new issue of stock of any class now or hereafter authorized or issued.

Briefly stated, petitioner’s position is, first, as to preferred stock, this: that under the pertinent language in the preferred stock certificates dividends upon preferred stock could not be paid except in cash, that under the law of Pennsylvania dividends could be paid only from surplus, that there was no surplus, for certain reasons set forth, and that therefore no dividends on preferred stock could be paid, the statute was satisfied, and-the credit was due the petitioner.

The error in petitioner’s argument, in our opinion, is that it does not rely on the stock certificate provisions alone to restrict the payment of dividends, but, perforce, relies on them together with the slate statute. That this is clearly the position of the petitioner is emphasized by its brief, where stating its view on this point, it says:

⅜ ⅜ * our principal contention is as follows:
(a) That under the provisions of the preferred and common stock certificates, the Act of Assembly of the Commonwealth of Pennsylvania approved Slay 5, 1933, * ⅜ * and Section 26 (c) (1) of the Revenue Act of 1936 * * * the petitioner was entitled to credit ⅜ * *.

Again, it is stated what the position is, and the first item discussed thereunder is the state statute, which is quoted at length, to the effect that dividends may be paid only out of surplus, and including in liabilities the amount of stated capital after deducting from the aggregate of assets the amount by which such aggregate was increased by unrealized appreciation in value or revaluation of fixed assets; and the petitioner contends, in that connection, that in fact there was such upward revision of the value of assets, at the time petitioner took them over from its predecessor, and that such amount, $592,923.55, is shown in petitioner’s capital surplus in both taxable years, so that if the state statute had been followed and such unrealized appreciation deducted there would have been impairment of capital and no surplus. But if we assume all such facts, it still remains obvious that under the petitioner’s argument the only effect of the preferred stock certificate fromsions was to prohibit dividends other than in cash, for, had it not been for the state statute requiring dividends to be from surplus, taking into consideration the particular statutory provision as to deduction of unrealized appreciation, they might have been paid in cash from surplus existing if such statute had not existed. Plainly, then, the preferred stock certificates did not contravene section 26 (c) (1), for dividends on preferred stock could have been paid “without violating a provision” thereof. The state statute is not the contract contemplated. Helvering v. Northwest Steel Rolling Mills, Inc., 311 U. S. 46; Crane-Johnson Co. v. Helvering, 311 U. S. 54; Belle-Vue Manufacturing Co., 43 B. T. A. 12. We hold that in the above respect the petitioner’s view is in error, and that credit under section 26 (c) (1) was properly denied to the extent necessary to pay dividends upon preferred stock.

As an alternate contention, however, the petitioner urges that even if payment of dividends on preferred stock was possible under the statute, yet after deduction from undistributed net income of an amount sufficient to pay the preferred stock dividends, the remainder comes within the ambit of section 26 (c) (1). Petitioner relies upon the following language appearing on certificates for both preferred and common stock:

Whenever all cumulative dividends on the Preferred Stock previously payable shall have been paid and moneys for the dividend on the Preferred Stock next becoming payable shall have been set apart for the payment thereof and all the aforesaid quarter-yearly sums of $12,500 have been set apart at the appointed times, the Board of Directors may declare dividends on the Corporation’s Common Stock without nominal or par value (hereinafter referred to as the “Common Stock”), payable then or thereafter, out of the remaining surplus or net profits; provided, however, that no dividends shall be declared or paid upon the Common Stock (1) except out of current earnings of the Corporation or its predecessor accumulated subsequent to January 1, 1925, or, (2) unless the current assets of the Corporation amount to at least four times its current liabilities, or, (3) when such dividend would have the effect of reducing the current assets of the Corporation to an amount less than four times its current liabilities; the term “current assets” to be understood to mean cash, good accounts receivable, and inventory at cost or market price, whichever is lower, and the term “current liabilities” to be understood to mean taxes, accounts, notes, and bills payable (but not the Corporation’s First Mortgage Six Per Cent. Sinking Fund Gold Bonds, dated April 1, 1925).

The petitioner construes the above language to mean that under the contract contained in the stock certificates dividends upon common stock are expressly prohibited for “any one and all” of the following reasons:

(a) Unless and until all cumulative dividends on the preferred stock previously payable shall have been paid and moneys for the dividends on the preferred stock next becoming payable shall have been set apart for the payment thereof.
(b) Except out of the remaining surplus or net profits of the corporation after payment of dividends on the preferred stock and the setting apart of money for the then next payment as set forth in (a) above.
(c) Except out of current earnings of the corporation or its predecessor accumulated subsequent to January 1, 1925.
(d) Unless the current assets of the corporation amount to at least four times its current liabilities.
(e) When the payment of such dividend would have the effect of reducing the current assets of the corporation to an amount less than four times its current liabilities.

The petitioner points out that such conditions did not all exist.

The respondent, on the contrary, argues that each of the above provisions as set forth on the stock certificate is in the disjunctive, separated from the others by “or” and that the petitioner seeks to change “or” into “and”, making this provision conjunctive, contrary to the express language of the certificates. In other words, respondent in effect says that the statute in substance provides merely that no dividends on common stock shall be declared or paid unless (1) there are sufficient earnings accumulated since January 1, 1925, or (2) current assets and liabilities were at all times maintained at a ratio of four to one, and that if either, condition obtained dividends could have been paid. Petitioner upon reply brief says: “Our contention is that subdivisions (1), (2), and (3) above [referring to the statute last above quoted] all modify the phrase that ‘no dividend shall be declared or paid upon the common stock’ and make the whole mean that none can be paid unless they can be paid without the violation of any one of the three conditions.” (Italics supplied.)

After study of the statutory expression, we come to the conclusion that “or” is used in the usual, disjunctive, sense, and that the intent expressed on the stock certificates was that dividends might be paid either if there were current earnings of the petitioner or its predecessor, accumulated subsequent to January 1, 1925, or in case the ratio of four to one existed between current assets and liabilities. Had the intent been otherwise it could have been simply and plainly expressed as requiring all conditions to be met before dividends could issue. Rules of statutory interpretation as to common understanding of the term “or” require the above conclusion, hi our opinion. It has not been shown that neither condition obtained here. We conclude that the petitioner was not entitled to credit under section 26 (c) (1) of the Revenue Act of 1936.

Decision will be entered wnder Rule 50.

         SEC. 26. CREDITS OF CORPORATIONS.
      In the case of a corporation the following credits shall be allowed to the extent provided in the various sections imposing tax—
      *******
      (c) Contracts Restricting Payment or Dividends.—
      (1) Prohibition on payment or dividends. — An amount equal to the excess of the-adjusted net income over the aggregate of the amounts which can be distributed within the taxable year as dividends without violating a provision of a written contract executed ■ by the corporation prior to May 1, 1936, which provision expressly deals with the payment of dividends. If a corporation would be entitled to a credit under this paragraph because ■ of a contract provision and also to one or more credits because of other contract provisions, only the largest of such credits shall he allowed, and for such purpose if two or more • credits are equal in amount only one shall be taken into account.


text:
    Estate of Alexander Marton, Deceased, by Baroness Elizabeth Hatvany-Marton, as Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 104285.
    Promulgated June 25, 1942.

      John J. Sweedler, Esq., for tbe petitioner.

      J. B. Biggies, Esq., for tbe respondent.
   OPINION.

Leech:

Briefly, the facts are that the petitioner is the executrix of the estate of Alexander Marton who, in his lifetime, was a citizen and resident of Budapest, Hungary, where he was engaged in the publishing business. At no time had he an office or place of business in the United States.

On or before June 4, 1936, petitioner’s decedent and one Eugene Heltai, also a nonresident alien, jointly sold and conveyed to the Metro-Goldwyn-Mayer Corporation, a United States corporation, the motion picture rights to a novel or play written by Heltai and published by petitioner’s decedent, entitled “Silent Knight.”

The agreement of sale of these motion picture rights was negotiated in New York City but was executed by petitioner’s decedent and Heltai in Budapest, Hungary. Payment of the consideration was made in New York City to the agent of the owners of these rights. The contract of sale specified that the world-wide rights for the production of the work in motion pictures was conveyed.

Of the consideration paid, petitioner’s decedent’s share was $13,000. A withholding tax of 4 percent was retained by the agent and paid to the collector of internal revenue. The balance, $12,480, was forwarded to petitioner’s decedent.

The deficiency arises through the action of respondent in computing tax at the rate of 10 percent under section 143 of the Revenue Act of 1936. Against the amount so computed he has given credit for the tax at the rate of 4 percent withheld and paid by decedent’s agent.

Petitioner contends first that the tax is not to be computed upon the total consideration received by her decedent because the rights conveyed were the world rights and that the only portion of the consideration constituting income from sources within the United States is the portion paid for the United States rights, covered by copyright taken out in this country, which was specifically assigned at the time of the transfer. It is not contested that the parties to the agreement made no segregation of the amounts paid for the United States rights as distinguished from the rights in other parts of the world. However it is argued that a reasonable segregation may be made, based on the percentage of the total income of the Metro-Goldwyn-Mayer Corporation from its activities, derived from sources within the United States and sources without the United States, for the four years following the acquisition of such rights by that corporation. It is admitted that the corporation has never yet made use of the rights it thus acquired.

We think that a segregation of the purchase price upon the basis of income derived by the corporation from its production and exhibition of other pictures in this and foreign countries would be wholly unjustified. It would have been a simple matter for the parties to have segregated the purchase of the domestic from the foreign rights. This they did not do and we can not supply that omission by surmise. For all we know, the foreign rights to this picture were considered of little or no value. In fact, just what these foreign rights included, we do not know. Although petitioner’s counsel on brief states that under the laws of Hungary and the other nations of the world outside of the United States, as signatories of the Berne Convention, the publishing of the work gave the author and publisher a world-wide copyright in countries other than the United States, no proof was made either of the Hungarian law, the Berne Convention, or the signatories thereto. Under such conditions, we can not determine what the rights of the decedent were outside of those possessed under the copyright of the work in the United States, which has been stipulated.

Not only is no segregation of the purchase price possible, but in any event the total consideration paid to the decedent is, we think, subject to income tax as income from sources within the United States. The question is similar to that presented in Sabatini v. Commissioner, 98 Fed. (2d) 53, where it was held that the amount paid for the exclusive world-wide rights to produce motion pictures based upon the works of that author must be deemed to be from sources within the United States, since it was paid for the use of those rights in the United States and the contested royalty emanated from that source. See also Ingram v. Bowers, 47 Fed. (2d) 925; affd., 57 Fed. (2d) 65. The sale was not of the work but merely the license to use it for a limited purpose. E. Phillips Oppenheim, 31 B. T. A. 563; Irving Berlin, 42 B. T. A. 668. We think that the source of this payment, which is in its nature admittedly a royalty, was within the United States.

Petitioner contends further, however, that respondent is in error in computing the tax at 10 percent instead of at the rate of 4 percent which was that used by the withholding agent. It is insisted that the Eevenue Act of 1936 was not approved until June 22 of that year, whereas the transfer in question occurred on the preceding June 4. It is then argued that the provision of the Eevenue Act of 1936 imposing a tax at the rate of 10 percent, even though that act applies to all income received subsequent to December 31,1935, should be read in connection with section 143 (g) of that act, which approves the withholding rate of 4 percent in those cases where the agent had actually withheld and paid at that rate as required by the Eevenue Act of 1934, prior to a date 10 days subsequent to the enactment of the Eevenue Act of 1936.

Undoubtedly the withholding provisions of the Eevenue Acts of 1934 and 1936 are to facilitate administratively the collection of the tax. But these provisions do not impose the tax. Section 211 of the 1934 Act imposes a rate of 4 percent and the same section of the 1936 Act fixes a rate of 10 percent. The mere fact that, under the provisions of the Eevenue Act of 1934, the forwarding agent had properly retained and paid over the tax at the rate of 4 percent upon this contested income, and thus was relieved of the withholding obligation, does not alter the fact that the Eevenue Act of 1936 imposed upon that same income a tax at the rate of 10 percent. The respondent properly computed the deficiency at the latter rate. Cf. Winterbottom Book Cloth Co., Ltd., 43 B. T. A. 572.

We do not agree with petitioner’s contention that the United States had no jurisdiction in rem to impose a tax subsequent to the transmission to the decedent of the balance of the fund collected by the withholding agent. This was income from sources within the United States and subject to its laws in the hands of the recipient. Frank W. Ross, 44 B. T. A. 1 (on appeal, C. C. A., 4th Cir.); Lord Forres, 25 B. T. A. 154.

Decision will be entered for the respondent.