author: Opper:

text:
    Monarch Life Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88811.
    Promulgated October 11, 1938.

      Frederick A. Ballard, Esq., and Abbott P. Mills, Esq., for the petitioner.

      L. W. Greason, Esq., for the respondent.
   OPINION.

Opper:

Not a little of the difficulty inhering in the disposition of this proceeding is due to the anomalous factual circumstances giving rise to petitioner’s claim. It is stipulated that “less than 50% of petitioner’s total reserve funds held during the taxable year were held for the fulfillment of life insurance contracts.” Petitioner is, therefore, not a “life insurance company” as that term is used in the Bevenue Act of 1928 and, being a privately owned stock company, must bo treated as an insurance company “other than life or mutual.” Nevertheless all of the items of dividends for which petitioner claims credit either as an exclusion from gross income or as a deduction arise out of its life insurance contracts. It should be noted at the outset and borne in mind throughout the consideration of the question raised in this proceeding that, since Congress has seen fit to place petitioner in the category of insurance companies other than life, its position must be treated without regard to the nature of the insurance contracts involved and specifically without giving effect to any special attributes that may inhere in life insurance contracts.

Petitioner bases its contention that it is entitled to deduct dividends credited or paid on its participating life policies on the alternative grounds that such payments or credits constitute “return premiums” within the meaning of section 204 (b) (5), or “ordinary and necessary expenses” within section 204 (c) (1), Revenue Act of 1932. If the petitioner is entitled to exclude these dividends from gross income as “return premiums”, then, obviously it is not necessary to discuss whether they could constitute ordinary and necessary expenses. On the other hand, since they are items having a unique existence in the insurance business, allowance thereof would be expected among the technical provisions covering the peculiar types of income and deductions of an insurance company, section 204 (b), especially subdivisions (3) — (7), rather than in the provisions referring to the deductions allowed to corporations generally, section 204 (c); and, in fact, in referring to mutual companies, that is the method adopted by Congress. Therefore if Congress in the provisions deeding specifically with insurance companies did not intend to permit the exclusion of policy dividends in computing net income it can not, in the absence of specific language, be assumed that it was intended to allow them under the general provision for deduction of such ordinary and necessary expenses as are common to all corporations. “It is an old and familiar rule that, ‘where there is, in the same statute, a particular enactment, and also a general one, which, in its most comprehensive sense, would include what is embraced in the former, the particular enactment must be operative, and the general enactment must be taken to affect only such cases within its general language as are not within the provisions of the particular enactment.’ ” United, States v. Chase, 135 U. S. 255, 260; also Ginsberg & Sons v. Popkin, 285 U. S. 204. In our view, then, the petitioner’s case must stand or fall on whether the term “return premiums” was intended to embrace “dividends” to policyholders. For this reason, and because of the different character of the petitioner’s commitments from those in Retailers Fire Insurance Co., 3 B. T. A. 1186, we do not regard that case as of any controlling effect. Moreover, the respondent did not question there that the refunds were deductible expenses, and perhaps for that reason there was no consideration of the bearing which Penn Mutual Co. v. Lederer, 252 U. S. 523, might have had upon the issue if raised.

Respondent contends that the term “return premiums” means unearned premiums, arising from cancellations, terminations, or rescis-sions, which are returned because the risk did not attach to the extent originally contemplated. In such cases there is a “return” of premiums as such. Provisions for return or refund of premiums are common in fire insurance policies. However, in life policies, including those here in question, there are comparable provisions, e. g., in the case of military or naval service in violation of the terms of the policy. But it is not vital to the sense of the statute that the term “return premiums” has any application at all to life policies since as pointed out above the section in question in terms applies to all stock insurance companies other than life, as defined in the statute.

The petitioner claims that the term “return premiums” is applicable to its policy dividends, no matter how they are paid or applied, although it admits that they are not returned as an earmarked “excess premium” but rather out of the general surplus of the company in which the policyholders are permitted to participate. There has not been cited nor have we been able to find any authoritative or accepted definition of the term as used generally or in the insurance business. Apparently, the most that can be said is that its meaning depends upon the context in which it is used. It is evidently sometimes used with the meaning attributed to it by the respondent, as in Retailers Fire Insurance Co. supra, where corporate bylaws provided separately for payment of “return premiums” and policy dividends. And the term is sometimes used where it might be susceptible of the interpretation given it by petitioner, as in the Massachusetts General Laws (ch. 175, sec. 1), which refer to “return premiums, other than, premiums returned to policyholders as dividends.”

It seems to us that the context of the provisions of the Revenue Act of 1932 covering insurance companies indicates an intention to use the term “return premiums” restrictively. In the first place, where Congress intended to allow the deduction of any repayments to policyholders (in addition to policy losses) as for example in the case of mutual insurance companies other than life, it used much fuller language which made its meaning clear. Its failure to use any such language here is significant. Penn Mutual Co. v. Lederer, supra. In the second place, the term “return premiums” appears in the section defining and designed to arrive at “premiums earned.” The item is permitted as a deduction from gross premiums received. It may therefore he assumed to he limited to premiums considered “unearned.” This is home out by the allowance as a deduction of premiums paid for reinsurance, in which case the risk is merely transferred and the original insurer earns nothing. But we are dealing here with dividends paid out of an obviously earned surplus, resulting in part from investment profits and in part from prior premium payments, both of which are treated as earnings at the time of receipt.

Had Congress intended to exclude from “earned premiums” the amount of dividends on participating policies it could have used language similar to that of the Massachusetts statute cited supra, which provides that a participating company “shall not be required to include * * * in its earned premiums” a loading charged “solely for dividends.” Finally, there is the rule that the provision in question, even though it appears in a section for computing gross income, is an exemption from tax which is to be construed strictly against the taxpayer. Heiner v. Colonial Trust Co., 275 U. S. 232.

Two factors in the legislative history of the measure bear out this construction of “return premiums.” In addition to the provisions regarding mutual companies quoted supra, footnote 5, the early acts in the case of life insurance companies (which were not restricted by definition as in the later acts) contained specific provision for the noninclusion in income of “such portion of any actual premium received from any individual policyholder as is paid back or credited to, or treated as an abatement of premium of such individual policyholder, within the year.” This provision made it clear that dividends applied in abatement of premiums were to be excluded in computing net income. Penn Mutual Co. v. Lederer, supra (1920). But this language was stricken from the 1921 Revenue Bill by the Senate.' And significantly no such language was embodied in section 246 (counterpart of section 204, Revenue Act of 1932) when that section was added by the Senate.

In the second place, the Senate proposed to limit the new provisions inserted by the House in the 1921 Bill to life companies, as defined, and it was originally proposed in the Senate to treat both mutual and stock companies, “other than life”, in the same section (246) . As so written, the subdivision of section 246 dealing with the computation of “earned premiums” allowed the deduction of return premiums in the following language:

* * * deduct return premiums (or, in the case of mutual companies, dividends or unabsorbed premiums returned or credited to the assured) and premiums paid for reinsurance.

It seems to us inescapable that as there used and applied only to nonmutual companies, “return premiums” did not include dividends or other payments the effect of which would be to reduce premiums already paid — otherwise the parenthetical clause would have been pure surplusage. Since effect must, if possible, be given to “every clause and part” of a statute (Ginsberg & Sons v. Popkin, supra), if the quoted language were before us there could be no question that “return premiums” was intended to exclude dividends. While still in the Senate the section was altered so that the application was restricted to nonmutual companies, its language relating to “return premiums” assumed its present form, and the sections covering mutual companies in the existing law were left substantially unchanged. The few changes from the section as originally proposed (including the striking of the parenthetical clause quoted above) were characterized by Senator Smoot of the Finance Committee in charge of presenting the section on the floor, as intended only to make the section inapplicable to mutual companies. Thus no change of intent in the use of the term “return premiums” is apparent. The section as thus amended was adopted by the Senate and thereafter by the Conference Committee and by the House. The statement by Senator Smoot is entitled to respect as being in the nature of a supplemental committee report (see United States v. St. Paul, M. & M. Ry. Co., 247 U. S. 310, 318), since section 246 was proposed by the Committee after its original report had been made. And the intent of the Senate must be attributed to the House, which acted later with presumable knowledge of the Senate proceedings. This assumption is implicit in decisions giving effect to the intent manifested by the initiating House. See G. M. Standifer Construction Corporation, 4 B. T. A. 525, 557.

Petitioner contends that it is inconceivable that Congress could have preferred mutual companies over stock companies. This assumption Ave think unwarranted. Not only has the desire of Congress to favor mutual enterprises been recognized (see Penn Mutual Co. v. Lederer, supra) but express statements during consideration of this measure indicate that to be precisely what was intended. What thus seems inconceivable is that Congress intended to prefer stock companies over mutual companies. Yet that is the position which petitioner’s contention ivill reach. It claims, either as an exclusion from income or as a deduction for expense, all of the policy dividends paid or credited without regard to the actual disposition of such dividends. This is a preferential treatment to which not even a mutual company would be entitled. The Supreme Court in Penn Mutual Go. v. Lederer, supra, summarized provisions of the 1913 Act as follows:

* * * Congress treated the so-called repayments or dividends in this way (p. 173):
(a) Mutual fire companies “shall not return as income any portion of the premium deposits returned to their policyholders.”
(b) Mutual marine companies “shall be entitled to include in deductions from gross income amounts repaid to policyholders on account of premiums previously paid by them and interest paid upon such amounts between the ascertainment thereof and the payment thereof.”
(e) Life insurance companies (that is both stock and strictly mutual) “shall not include as income in any year such portion of any actual premium received from any individual policyholder as shall have been paid back or credited to such individual policyholder, or treated as an abatement of premium of such individual policyholder, within such year.”
(d) For all insurance companies, whatever their field of operation, and whether stock or mutual, the act provides that there be deducted from gross income “the net addition, if any, required by law to be made within the year to reserve funds and the sums other than dividends paid within the year on policy and annuity contracts.”

Of these provisions, which are in pari materia with the provisions of the 1932 Act governing mutual companies, the Court said:

If the terms of the non-inclusion clause, (c) above, standing alone, permitted of a doubt as to its proper construction, the doubt would disappear when it is read in connection with the deduction clause, (d) above. The deduction there prescribed is of “the sums other than dividends paid within the year on policy and annuity contracts.” This is tantamount to a direction that dividends shall not be deducted. It was argued that the dividends there referred to are “commercial” dividends like those upon capital stock; and that those here involved are dividends of a different character. But the dividends which the deduction clause says, in effect, shall not be deducted, are the very dividends here in question, that is dividends “on policy and annuity contracts.” None such may be deducted by any insurance company except as expressly provided for in the act, in clauses quoted above, (a) (b) and (c). That is, clauses (a) (b) and (e) are, in effect, exceptions to the general exclusion of dividends from the permissible deductions as prescribed in clause (d) above.

As so interpreted by the Supreme Court, the revenue acts were not intended to provide that dividends as such should be deductible in the case of mutual companies — except in the cases specifically mentioned. We can not believe that Congress intended that they could nevertheless be deducted by stock companies. It is doubtful whether the only exception permitted to mutual companies generally would be broad enough to grant a deduction even to a mutual company operating as did the petitioner. But, in any event Congress has failed to include the exceptions granted in favor of mutual companies in the provisions relating to companies other than life and mutual, and we think that failure must be regarded as intentional. We accordingly conclude that petitioner is not entitled to allowance for any of the dividends in question.

Eeviewed by the Board.

Decision will be entered for the respondent.

Akundell, Van Fossan, Leech, Mellott, and Aenold dissent.

       SBC. 201. TAX ON LIFE INSURANCE COMPANIES.
      (a) Definition. — When used in this title the term “Jife insurance company” means an insurance company engaged in the business ol issuing life insurance and annuity contracts (including contracts of combined life, health, and accident insurance), the reserve funds of which held for the fulfillment of such contracts comprise more than 50 per centum of its total reserve funds.

       SEC. 204. INSURANCE COMPANIES OTHER TETAN LIFE OR MUTUAL.
      (a) Imposition of Tax. — In lieu of the tax imposed by section 13 of this title, there shall be levied, collected, and paid for each taxable year upon the net income of every insurance company (other than a life or mutual insurance company) a tax as follows :
      (1) In the case of such a domestic insurance company, 13¾ per centum of its net income;
      (2) In the case of such a foreign insurance company, 13 ¾ per centum of its net income from sources Within the United States.
      (b) Definition of Income, Etc. — In the case of an insurance company subject to the tax imposed by this section—
      (1) Gross Income. — “Gross income” means the sum of (A) the combined gross amount earned during the taxable year, from investment income and from underwriting income as provided in this subsection, computed on the basis of the underwriting and investment exhibit of the annual statement approved by the National Convention of Insurance Commissioners, and (B) gain during- tbe taxable year from the sale or other disposition of property; and (C) all other items constituting- gross income under section 22;
      (2) Net income. — “Net income” means the gross income as defined in paragraph (1) of this subsection less the deductions allowed by subsection (c) of this section;
      (3) Investment income. — “Investment income” means the gross amount of income earned during the taxable year from interest, dividends, and rents, computed as follows:
      To all interest, dividends and rents received during the taxable year, add interest, dividends and rents due and accrued at the end of the taxable year, and deduct all interest, dividends and rents due and accrued at the end of the preceding taxable year.
      (4) Underwriting income. — “Underwriting income” means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred;
      (5) Premiums earned. — '“Premiums earned on insurance contracts during the taxable year” means an amount computed as follows:
      From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance. To the result so obtained add unearned premiums on outstanding business at the end of the preceding taxable year and deduct unearned premiums on outstanding business at the end o£ the taxable year;
      (6) Losses incueued. — “Losses incurred” means losses incurred during the taxable year on insurance contracts, computed as follo-ws:
      To losses paid during tho taxable year, add salvage and reinsurance recoverable outstanding at the end of the preceding taxable year, and deduct salvage and reinsurance recoverable outstanding at the end of the taxable year. To the result so obtained add all unpaid losses outstanding at the end of the taxable year and deduct unpaid losses outstanding at the end of the preceding taxable year;
      (7) Expenses ixcueeed. — “Expenses incurred” moans all expenses shown on the annual statement approved by tho National Convention of Insurance Commissioners, and shall be computed as follows:
      To all expenses paid during tho taxable year add expenses unpaid at the end of the taxable year and deduct expenses unpaid at the end of the preceding taxable year. For the purpose of computing the net income subject to the tax imposed by this section there shall he deducted from expenses incurred as defined in this paragraph all expenses incurred which are not allowed as deductions by subsection (c) of this section.
      (c) Deductions Allowed. — In computing the not income of an insurance company subject to the tax imposed by this section there shall be allowed as deductions:
      (1) All ordinary and necessary expenses incurred, as provided in section 23 (a) ;
      (2) All interest as provided in section 23 (b) ;
      (3) Taxes as provided in section 23 (e) ;
      (4) Losses incurred as defined in subsection (b) (C) of this section;
      (5) Losses sustained during the taxable year from the sale or other disposition of property ;
      (6) Bad debts in the nature of agency balances and bills receivable ascertained to be worthless and charged off within the taxable year;
      (7) The amount received as dividends from corporations as provided in section 23 (p) ;
      (8) The amount of interest earned during the taxable year which under section 22 (b) (4) is exempt from the taxes imposed by this title, and the amount of interest allowed as a credit under section 26 ;
      (9) A reasonable allowance for the exhaustion, wear and tear of property, as provided in section 23 (k) ;
      (d) Deductions oe Fobeign Coepokations.- — In the case of a foreign corporation the deductions allowed in this section shall be allowed to the extent provided in Supplement I.
      (e) Double Deductions. — Nothing- in this section shall be construed to permit the same item to be twice deducted.

       See footnote 5, infra.

       SEC. 208. MUTUAL INSURANCE COMPANIES OTHER THAN LIFE.
      (a) Application op Title. — Mutual insurance companies, other than life insurance companies, shall be taxable in the same manner as other corporations, except as hereinafter provided in this section.
      (b) Gross Income. — Mutual marine-insurance companies shall include in gross income the gross premiums collected and received by them less amounts paid for reinsurance.
      (c) Deductions. — In addition to the deductions allowed to corporations by section 23 the following deductions to insurance companies shall also be allowed, unless otherwise allowed—
      (1) Mutual insurance companies othbk than life insukance. — In the case of mutual insurance companies other than life insurance companies—
      (A) the net addition required by law to be made within the taxable year to reserve funds (including in the case of assessment insurance companies the actual deposit of sums with State or Territorial officers pursuant to law as additions to guarantee or reserve funds) ; and
      (B) the sums other than dividends paid within the taxable year on policy and annuity contracts.
      (2) Mutual makine insurance companies. — In the case of mutual marine insurance companies, in addition to the deductions allowed in paragraph (1) of this subsection, unless otherwise allowed, amounts repaid to policyholders on account of premiums previously paid by them, and interest paid upon such amounts between the ascertainment and the payment thereof;
      (3) Mutual insurance companies othbk than life and marine. — In the case of mutual insurance companies (including interinsurers and reciprocal underwriters, but not including mutual life or mutual marine insurance companies) requiring their members to make premium deposits to provide for losses and expenses, the amount of premium deposits returned to their policyholders, and the amount of premium deposits retained for the payment of losses, expenses, and reinsurance reserves.

       Petitioner’s policies provide: “Surplus. — After premiums for two full years have been paid hereon, upon each succeeding anniversary of the date hereof, this policy shall be entitled to participate in any distribution of surplus made by the company * *

       Income Statements for 1931 and 1932 list investment profits from interest, dividends and rents; they also list total gross premiums less amounts paid for re-insurance, but with no deduction for “return premiums.”

       Tariff Act of 1913. II. G (b) ; Revenue Act ol 1916, sec. (12) (a) (2d) ; Semble, Revenue Act of 1918, sec. 233 (a) (1).

       H. R. 8245, Calendar No. 286, 67th Cong., 1st sess., Senate Report No. 272, pp. 40, 156, and Senate Report No. 275, p. 83, line 5. Also, H. R. 8245, “As Agreed to in Conference”, p. 89, line 20.

       1-I. R. 8245, “As Agreed to in Conference”, p. 118, line 17 ; see also, Conference Report, II. R. 8245, House Report No. 486, 07th Cong., 1st sess., pp. 40 — 41.

         I-I. R. 8245, Senate Report No. 272 (footnote 9, supra) p. 171; Senate Report 275, p. 102; “As Agreed to in Conference”, p. 113.

       Congressional Record, vol. 01, part 7, p. 6981, 67th Cong., 1st sess.

       Footnote 12, supra.

       Congressional Record, vol. 61, part 7, p. 7159, 67th Cong., 1st sess.

       Congressional Record, yol. 61, part 7, p. 7159, 67th Cong., 1st sess.: “Mr. Smoot: * * * These amendments are simply to perfect the original amendment so as to exclude mutual companies from the tax imposed under this amendment and allow the mutual companies to pay under existing law. * * See also footnote 17, infra.

       Footnote 12, supra; see also Senate Report No. 275, 67th Cong., 1st sess., p. 20 ; H. R. 8245, Senate Report No. 272, p. 175, and Senate Report No. 275, p. 107; and see footnote 14, supra.

         Congressional Record, vol. 61, part 7, p. 7159, 67th Cong., 1st sess.:
      “Mr. Smoot. I will tell the Senator what the changes are. The only changes are that we have amended the amendment by making a separate provision for mutual companies. In the past the mutual companies have paid scarcely any tax whatever. In some cases it is so small that it would hardly be denominated a tax. If they are included in this amendment, the tax in some eases would represent an increase of over 400 per cent. The purpose of it is to allow the mutual companies to pay taxes under existing law.
      “Mr. Simmons. You exempt them from this new scheme?
      “Mr. Smoot. We exempt them from this new scheme.
      “Mr. Simmons. So as not to overtax them. I agree with the Senator about it.
      “Mr. Smoot. That is all there is to it.”

       The comparable parts of the 1932 Act are section 208 (c) (l)-(3), footnote 5, supra. The provision designated (c) in the quoted excerpt ivas omitted in the 1921 Act. See footnote 9, supra.

       Tie exception is for the amount of “premium deposits” returned to policy holders or retained for specified purposes. It seems that a premium deposit is a deposit against the payment of a premium the amount of which is to he determined at a later time, and not the payment of a fixed premium with a possible subseguent right to share in profits by means of a dividend. See Solicitor’s Opinion 156, III-l, C. B. 284.


source: Caselaw Access Project

author: Disney: SteRnhagen,

license: Public Domain

text:
    Marie Hanlin and the Union Trust Company of Pittsburgh, Executors of the Estate of Belle C. Hershman Martinek. Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79112.
    Promulgated October 11, 1938,

      Joseph G. Robinson, Eisq., for the petitioners.

      Harold D. Thomas, Esq., for the respondent.
   OPINION.

Disney:

The Commissioner determined a deficiency of $7,983.19 in income tax of the estate of Belle C. Hershman Martinek, deceased, for 1932. He disallowed the deduction of an ordinary loss from the sale of bonds of the city of Philadelphia and of a capital loss from the sale of Federal Land Bank bonds, with the following explanation :

These disallowances are based upon section 118 (a) of the Revenue Act of 1932, .which provides that no loss shall be allowed from the sale of securities where, within a period of thirty days, substantially the same kind and character of securities were repurchased by the taxpayer.

The facts are in general not in dispute. The decedent died on March 13, 1933. On February 7, 1931, she created a revocable trust. On November 27, 1931, she transferred to the trustee $125,000 par value city of Philadelphia 4½ percent bonds which had, by distribution dated October 30, 1931, been received by her from the residuary estate of Oliver C. Hershman, who died July 9, 1930. All of these bonds were issued in 1918, pursuant to a city ordinance of June 29, 1916; $60,000 were to mature on May 1, 1948, and the remaining $65,000 on November 1, 1948. On December 8, 1932, the trustee sold $50,000 par value of these bonds at a unit price of 89; on December 14, he sold $25,000 par value at 88; and on December 28, he sold $50,000 par value at 86½. The net sales proceeds aggregated $109,-437.50, and the trust thereby sustained a loss of $10,723.50. On the same dates and at the same unit prices, the trustee purchased bonds of the city of Philadelphia of the same respective par values, authorized by the same city ordinance, bearing the same rate of interest, and to mature on March 1, 1949.

On November 27, 1931, the decedent transferred to the trustee bonds of the Federal Land Bank of Omaha, purchased by her on July 18, 1923, of a par value of $100,000, which bore 4½ percent interest, were to mature on July 1, 1953, and were redeemable on or after July 1, 1933. On December 14, 1932, the trustee sold them at a unit price of 87½, the net proceeds being $87,500 and the loss $12,750. On the same date and at the same unit price, he purchased $100,000 liar value 4½ percent bonds of the Federal Land Bank of Omaha, maturing on January 1, 1956.

On November 27, 1931, the decedent transferred to the trustee bonds of the Federal Land Bank of Louisville, which bonds had been purchased by her on November 26, 1923. The Louisville bonds had a par value of $50,000, bore 4% percent interest, were to mature on July 1, 1953, but were redeemable on or after July 1, 1933. On December 14, 1932, the trustee sold them at a unit price of 89¾, the net proceeds being $44,875 and the loss $5,000. On the same date and at the same unit price he purchased $50,000 par value 4% percent Federal Land Bank bonds, maturing on January 1, 1954, $19,000 par value thereof having been issued by the Federal Land Bank of St. Louis and $31,000 par value thereof having been issued by the Federal Land Bank of Wichita. Of the St. Louis bonds $10,000 par value were redeemable at any time after January 1, 1934. All of the St. Louis and Wichita bonds had been issued not later than July 1, 1932 (as shown by computation of interest from that date).

The language of section 118 (a) of the Revenue Act of 1932, is set forth in the margin.

The losses upon the sales in December 1932 were capital losses, some of the bonds having been purchased in 1923, and the remainder having been “held”, under section 101 (c) (8) of the Revenue Act of 1932, since July 9, 1930, the date of death of Oliver G. Hershman, and not merely from October 30, 1931, the date of distribution by his estate. McFeely v. Commissioner, 296 U. S. 102.

The Philadelphia Bonds.

The only dispute as to the facts as to the Philadelphia bonds is as to difference in interest dates and as to dates of issuance of the bonds purchased. The petitioner argues that the bonds sold and those purchased differed as to interest dates, likewise as to dates of issue, in that the bonds purchased were issued in 1919, whereas it is agreed that the bonds sold were issued in 1918. The record fails to show either that there was difference in interest dates or that the bonds purchased were issued in 1919, and since there was no agreement in regard to these points, we are confined to a consideration of a difference only in maturity, respondent’s determination of substantial identity being presumed correctly to negative any other differences.

The question to be decided is whether the sale of Philadelphia 4½ percent bonds issued in 1918 under a certain ordinance of June 29, 1916, and maturing in 1948, and the purchase within 30 days thereafter of Philadelphia 4½ percent bonds issued under the same ordinance, maturing four or ten months later in 1949, but otherwise identical, was a statutory wash sale which prevents the deduction of a loss — and this depends on whether, for the purpose of the statute, the bonds purchased and the bonds sold were substantially identical. They were not identical; but were they substantially identical? The statutory expression, and not that used by respondent in the notice of deficiency, is of course to be construed.

The statute is not as such ambiguous.. The difficulty lies in its application to particular facts due to the indefiniteness of the expression “substantially identical.” Interpretation calls therefore for an application of the rule that the legislature must be presumed to use words in their known and ordinary signification. Levy's Lessee v. McCartee, 6 Pet. 102, 110; Old Colony Railroad Co. v. Commissioner, 284 U. S. 552.

If the wash sale provision had contained the word identical without qualification, it could have been literally applied without much difficulty; because its meaning is clear in common usage, in law generally, and in revenue law. This was the form in which the wash sale provision first appeared in the draft of the 1921 House bill. As to it, the House Committee on Ways and Means said in its report:

Section 214 would limit the deductions for losses by providing that no deduction shall be allowed for losses sustained in the sale of securities where the taxpayer at or about the time of such sale purchases identical securities. This change will, if adopted, prevent evasion of the tax through the medium of wash sales. [H. R. Rept. No. 350, 67th Cong., 1st sess., p. 11.]

The Senate bill incorporated the word substantially, although the Finance Committee report says nothing about it. The Conference Committee adopted the change without comment. The Eevenue Act of 1921, as enacted, used the words substantially identical, and succeeding statutes have made no change. There is no aid to construction available in the legislative reports. The word “substantially” must be construed in the light of the intendment of the whole provision. The term “substantially identical” is looser than “identical”, and was unquestionably so intended; but the retention of the word “identical” and the testimony before the Senate Finance Committee clearly indicates that approximation to identity, and not mere similarity, was the controlling thought. The word substantially was added to prevent an emasculation of the provision. Thus a sale of common shares and the purchase of certificates immediately convertible into such common shares might have escaped the wash sale restriction if tested by identity, but not if tested by substantial identity. See Margaret E. Kidder, 30 B. T. A. 59; I. T. 2292, C. B. V-1, p. 12 (1926). On the other hand, there would have been no identity of shares of one corporation with the shares of another corporation holding them, Seymour E. Knox, 33 B. T. A. 972.

The petitioner refers to I. T. 1365, C. B. 1-1, p. 151, as to Liberty bonds of the second and fourth issues. Therein appeared difference in market value and date of issuance, in addition to difference in maturity. What differences, if any, cause the difference in market value, does not appear. I. T. 2585, C. B. X-2, p. 182, also cited, involved the generally recognized difference between voting stock and nonvoting stock in the same corporation. I. T. 2672, C. B. XII-1, p. 72, likewise relied upon, involved different interest dates, different values, and different dates of issuance, in addition to different dates of maturity. I. T. 2778, C. B. XIII-1, p. 79, cited as involving an example of bonds clearly identical, shows differences in date of issue and in amount redeemable annually, though date of maturity and rate and dates of payment of interest were the same; also, the bonds received in exchange were issued under a supplement to the indenture under which those exchanged were issued. It thus appears that none of the above situations is parallel with the instant matter, wherein difference only in date of maturity must be relied upon as negating substantial identity. The present question has not heretofore been clearly met. The regulations promulgated by the Commissioner do not assist. Difference in maturity date of bonds is clearly an element in the construction of the term “substantial identity.”

It does not, however, constitute per se a negation of substantial identity; that would be to allow any difference whatever in maturity, e. g., one day, to be effective and patently to vitiate the statute and defeat its essential purpose. Nor can a rule consonant with the remedy sought by the statute be established upon a concept that substantial identity does not exist unless the difference in maturity is negligibly slight. To do so would be to disregard the rationale of our opinions in various cases involving consideration of the expression “substantially all” applied to the amount of stock necessary for control of corporations, and to the amount of property involved in reogan-izations, wherein we have construed “substantially all” not to be negatived by a merely negligible quantity as to stock or property. Among other cases, in Brownsville Ice & Storage Co., 18 B. T. A. 439, we considered “substantially all” not avoided by 8 percent of stock necessary for control of a corporation under section 240 (c), Revenue Act of 1921, and in Western Industries Co. v. Helvering, 82 Fed. (2d) 461, it was held that absence of what the Board had found was not less than 15 percent of property did not prevent application of “substantially all” under section 203 (h) (1) (A) of the Revenue Act of 1926. In Arctic Ice Machine Co., 23 B. T. A. 1223, 1228, we relied upon the analogy between the expressions in the two statutes. There is the same analogy here. Two things which are identical are 100 percent the same. “Substantially identical” plainly means identical in “substantially all” respects, i. e., substantially 100 percent the same. “All” is no more an absolute than is “identical.” “Identical is the strictest term for entire and absolute agreement or negation of difference.”— Webster’s New International Dictionary. Yet above we see that we have plainly considered that a substantial approximation to the absolute “all” was satisfied when there was considerably more than a mere negligibility in difference. What amount of difference prevents substantial identity? An elastic term has been used by Congress as to stock control, as to property in reorganization, and here as to identity of securities, and “the very use of elastic terms indicates an intent to have them construed flexibly in the light of the peculiar circumstances in each particular case.” Rishell Phonograph Co., 2 B. T. A. 229. In Great Lakes Hotel Co. v. Commissioner, 30 Fed. (2d) 1, it is said:

“Substantially all tlie stock” is a lax, indefinite expression, wbieii, under the rulings of the board, is equivalent to “a large majority.” Its limitations cannot be defined with exactness or certainty. * * ⅜

In United States v. Whyel, 19 Fed. (2d) 260, it is held:

The term “substantially all the stock” clearly indicates, not a definitely fixed amount of percentage, but is a somewhat elastic term, which must be construed according to the facts of the particular ease. * * *

To the same effect are Brownsville Ice & Storage Co., supra, and Commissioner v. Hirsch & Co., 30 Fed. (2d) 645.

“Substantially” has perhaps no better definition than “in the main”, as given by the New Century Dictionary and Encyclopedia. In Gibson v. Glos, 111 N. E. 123, there was considered the question of a statutory expression, “substantially the same chain of title.” Just as here the statute has been amended by the addition of “substantially” to “identical”, there it had been amended by addition of “substantially” to “the same chain of title.” Under the previous statute it had been held in Culver v. Waters, 93 N. E. 741, that “same” meant “identical.” Holding that it was “evident that by the amendment the Legislature intended to relax the strict requirement of the former statute” the court also defines substantially as “in the main.” Ap-

plying such definition generally, it is plain that the Philadelphia bonds herein involved were in the main identical, being so identical in par value, unit selling price, interest rate, date of issuance and authorizing ordinance, and lacking identity in only one characteristic out of several. Under such circumstances and within the above definition, difference in maturity standing alone, might, regardless of amount of difference, be considered so relatively unimportant as to be disregarded in considering substantial identity. But assuming that the nonidentical characteristic, maturity date, could of itself be regarded, as a generality, of such comparative importance as to prevent application of the above general definition “in the main”, and therefore further examining that element of difference here, we are still constrained to examine it as to whether the amount of difference in maturity here involved effects a difference substantially or in the main in the bonds. The distinction between the bonds is patently not substantial as a matter of mathematical comparison of duration of life of bonds and amount of difference in maturities, for the percentage or proportion of difference in duration between the bonds is much less than the difference in percentage in amounts of stock or property allowed as a deviation from 100 percent involved in the statutes and cases referred to above. Upon the authority of those cases, we conclude that there was no substantial abstract mathematical difference in mere life duration of the bonds, i. e., in their maturity.

If, however, we consider the matter other than quantitatively, it seems plain that examination must be from the standpoint of normal investor and normal obligor. We are unable to discern any interest on the part of any other, but if such interest could be conceived, it would be so inconsequential as not to affect our consideration here, and we shall confine our thought to obligor and obligee of the bond as the norm to be regarded. In what do the bonds here being considered differ substantially for either obligor or obligee as to maturity (other than mere amount of difference above discussed) ? The maturities are remote, that is one bond has a life or permanence differing from the other bond only in a longer duration, but both still running for a long period of time. We think that consideration of a difference in remote maturities does not substantially affect the normal investor in bonds, otherwise identical. Plainly, such remote maturity is much less important to him than rate of interest or return on his investment, certainty of payment, value, and the other characteristics identical in the bonds herein considered. All other things being equal, the only consideration reasonably important or practical to the normal investor seems the permanence of his investment, and there is, we think, no substantial difference in permanence of investments of approximately sixteen years life, to be found only in a difference of four or ten months in length of life of bonds. Indeed the particular investor here was obviously not materially or substantially affected by the difference in maturity, since he paid the same unit price for bonds as received by him for bonds of a different maturity, and otherwise identical. As to the obligor, it is apparent that the difference in maturities is of importance analogous to that to the investor, and that such difference in remote maturities is not substantially important in comparison with the other characteristics such as interest rate and amount to be paid — the identical features in the bonds here; yet it is easily conceivable that circumstances might, from obligor’s standpoint, make material difference between bonds differing not greatly in their duration. For example, the maturity of other onerous bonds between the two dates of maturity being considered might render obligor less able to meet the bonds last maturing. Such events or circumstances, however, and not the mere difference in maturity dates, would effect the difference in the bonds, and the certainty or imminence of such concrete events has not been shown by the petitioner herein. We are therefore as to position of both obligor and obligee, in the absence of other proof, left to consider only the abstraction as to difference in maturity dates, a mathematical and quantitative element as above seen, and one which in amount, by parity of reasoning in the cases above noted, has been found insufficient to overcome a determination of substantial identity. Such slight and remote disparity in maturity as here appears can not be said alone to negative the fact that in the main the bonds possess identity. We conclude under the facts herein that petitioner has not shown that the Philadelphia bonds in question vrere not substantially identical and in that respect respondent’s determination is approved.

The Omaha Land Bank Bonds.

Here again we consider sale and purchase of bonds issued by the same obligor. Those sold matured July 1, 1953, with privilege of redemption on or after July 1, 1933; those purchased matured January 1, 1956. The record does not indicate as to whether they contained the same provision as to redemption after July 1, 1933, nor does it contain the dates of issuance of either the bonds sold or those purchased. Therefore, respondent’s determination of substantial identity being presumed correct, we assume the bonds to be identical in all particulars except date of maturity, petitioner not having shown to the contrary, and having in fact suggested no other difference in the bonds other than difference in maturity date. The bonds sold had approximately twenty and one-half years yet to run; those purchased had approximately twenty-three years yet to run, a difference in maturity dates of two and one-half years; but both, we must assume, were subject to redemption at any time on or after July 1, 1933, at the option of the issuing Land Bank. They were issued pursuant to the same statutory authority, which provides for redeemability after not more than ten years from issuance (Sec. 861, ch. 7, Title 12, U. S. Code Annotated), and the officials issuing the bonds are presumed to have obeyed the statute. Were the bonds purchased “substantially identical” with those sold on December 14, 1932? If there was an unconditional positive difference of two and one-half years in the maturity or redeemability of the bonds a more difficult question as to the substantiality of the difference might arise, but here, on December 14, 1932, there were sold and purchased, for the same unit price, bonds all of which were subject to redemption after July 1, 1933, and in all respects identical except that if not redeemed at any time after July 1, 1933, those sold would be payable July 1, 1953, those purchased payable January 1, 1956. Was there, applying the definition above approved, because of a difference of two and one-half years in ultimate maturity of the bonds, a difference “in the main” or substantially? In our opinion the element of re-deemability after July 1,1933 — only six months, approximately, from date of sale and purchase — was much more important to the ordinary purchaser of these bonds and to the obligor than the date of ultimate maturity. So far as life or duration of the bonds was concerned, to the ordinary investor and obligor, we believe the main characteristic was the possibility of redemption, at any time after a few months after the sale and purchase here concerned. Payment is obviously the prime and most important element of a bond. An obligation which may be paid at any time within the option of the obligor is treated and valued accordingly, and when such option is exercisable at any time within almost the entire period of twenty and one-half or twenty-three years the bonds have yet to run, the bonds are plainly in their most important aspect, in the same category — they are, in the main, or substantially, identical. We conclude, therefore, that the Omaha Land Bank bonds sold and those purchased were substantially identical, within the purview of section 118 (c) of the Eevenue Act of 1932.

Louisville Federal Land Bank Bonds Sold/ St. Louis a/nd Wichita Federal Lam/1 Bank Bonds Purchased.

Here a third situation is to be considered. The bonds of one Federal Land Bank were sold and on the same day purchase was made of the same par value amount of Federal Land Bank bonds, at the same unit price and bearing the same rate of interest as the bonds sold, but issued by two other Federal Land Banks.

We think that fact establishes essential and substantial difference. Respondent argues that all Federal Land Banks are alike liable upon the bonds of each. If such liability were essentially or substantially the same as to each Land Bank, regardless as to which issued the bonds in question, such contention would no doubt be sound. But under the statutes providing for such bonds such liability does not appear. Indeed the very fact that the twelve Land Banks may issue consolidated bonds (sec. 875-819, ch. 7, Title 12, U. S. Code Annotated) which shall be the “joint and several obligation of the twelve Federal Land Banks” indicates that the liability of other banks than the issuing bank, as to other than consolidated bonds, is not substantially identical. These are not consolidated bonds. Other statutes show that as to the bonds here involved the liability of other banks is not joint and several, but is contingent only and not essentially the same as that of the issuing bank. Section 872 provides that the issuing bank is primarily liable, and that the other Federal Land Banks are liable only for interest payable by the issuing bank only in case of its default, and for the portion of the principal unpaid after application of the assets of the issuing bank; such liability of the other banks, however, to be only in proportion to the amount of farm loan bonds which each may have outstanding at the time of assessment of liability against it by the Farm Credit Administration, because of the liability above described through the default of the issuing bank. It is plain that such liability of other banks is not by any means the primary liability borne by the issuing bank, but that it is essentially and substantially different. We therefore conclude and hold that the bonds of the St. Louis and Wichita Federal Land Banks were not substantially identical with those of the Louisville Federal Land Bank, and therefore that deductible capital loss was suffered by petitioner as to the sale of the Louisville Federal Land Bank bonds; but that the losses incurred in sale of the Philadelphia and Omaha Federal Land Bank bonds are not deductible, under the provisions of section 118 (a) of the Revenue Act of 1932.

Reviewed by the Board.

Decision will be entered wider Rule 50.

SteRnhagen,

dissenting: While it can not be seriously denied that the bonds sold and the bonds purchased were in several respects similar, it seems to me that this does not bring them within the statutory denial of deduction. The dominant word underlying the denial is the -word “identical”, and I think this may not be overridden by emphasizing the qualifying word “substantially.” Wien words of such plain meaning are used in legislation in order to restrict deductions which are otherwise allowable, I think they should not be interpreted so as to give them a meaning which they do not have. Throughout the revenue acts Congress has chosen to use the words “similar”, “like”, and “equivalent” frequently enough to indicate that the use of the word “identical” in this instance was not inadvertent. In the statement of the Treasury’s representative, Adams, before the Senate Finance Committee, preceding the enactment of the Revenue Act of 1921, in which the provision first appears, he said that if a taxpayer “changes from one form of Liberty bonds to another form of Liberty bonds, or sells United States Steel and buys New York Central, he can take his loss under this provision.” (Hearings before Committee on Finance on H. R. 8245, 67th Cong., 1st sess., p. 52). The rulings of the Bureau from that time on seem to me to indicate a consistent administration of the statute which treats a difference in maturity date of bonds as disproving that they were “substantially identical.” To hold otherwise, as the present decision does, is to adopt such an elusive, impressionistic rule as to be practically impossible of the undiscriminatory uniformity with which a tax law should be administered. The present opinion seems to provide a caveat if the disparity between maturity dates of otherwise similar bonds is wide enough, but it supplies no satisfactory standard which will enable either taxpayers or administrators to say with any assurance whether the loss in any case is deductible or not.

Black and Leech agree with this dissent.

       SEC. 118. LOSS EROM WASH SALES OE STOCK OR SECURITIES.
      (a) In the case of any loss claimed to have been sustained from any sale or other disposition of shares of stock or securities where it appears that, within a period beginning SO days before the date of such sale or disposition and ending 30 days after such date, the taxpayer has acquired (by purchase or by an exchange upon which the entire amount of gain or loss was recognized by law), or has entered into a contract or option so to acquire, substantially identical stock or securities, then no deduction for the loss shall be allowed under section 23 (e) (2) ; nor shall such deduction be allowed under section 23 (f) unless the claim is made by a corporation, a dealer in stocks or securities, and with respect to a transaction made in the ordinary course of its business.

       Sec. 214. Paragraphs (5), (6), and (7) of subdivision (a) of section 214 of the Revenue Act of 1918 are amended to read as follows :
      “(5) * * * No deduction shall be allowed under paragraphs (4) and (5) for any loss claimed to have been sustained in any sale or other disposition of shares of stock or securities made after the passage of the Revenue Act of 1921 where it appears that at or about the date of such sale or other disposition the taxpayer has acquired identical property in the same or substantially the same amount as the property sold or disposed of. If such new acquisition is to the extent of part only of identical property, then the amount of loss deductible shall be in proportion as the total amount of the property sold or disposed of bears to the property acquired;” [H. R. 8245, 67th Cong., 1st sess. (Aug. 15, 1921), p. 17.]

       Section 214 allows substantially the same deductions in computing net income as are authorized under existing law, but adds the following provision: * * * (3) to prevent evasion through the medium of wash sales, it is provided that no deduction shall be allowed for losses sustained in the sale of securities where it appears that within 30 days after such sale the taxpayer purchases identical securities; * * *

       Revenue Act of 1913, seo. E; Revenue Act of 1916, sec. 13 (e) ; Revenue Act of 1917, sec. 1208; Revenue Act of 1921, secs. 202 (c), 214 (a) (12) ; Revenue Act of 1932, secs. 112 (b) (1), (5), 115 (g) g 143, 212 (b), 231 (b).


author: Disney:

text:
    Mark Kleeden, Commerce Exchange Building, Oklahoma City, Oklahoma, Petitioner, v. Commissioner of Internal Revenue, Respondent. R. A. McArthur, 3918 Brandt Street, Houston, Texas, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 88730, 88731.
    Promulgated October 11, 1938.

      A. E. Hill, Esq., and. J. Forrest McCutcheon, Esq., for the petitioners.

      8. B. Anderson, Esq., for the respondent.
   OPINION.

Disney:

The question here is simply as to whether there was a liquidation of three corporations, resulting in gain to petitioners as stockholders, measured by the difference between the value of assets distributed to stockholders and original cost of the stock, as determined by respondent, or whether there was no gain or loss by reason of the facts constituting a nontaxable reorganization.

The respondent on brief contends that there were two separate and distinct transactions: First, the transfer by the old corporations of all their assets to McArthur, for himself, and Kleeden, in exchange for their stock, and, second, the transfer by McArthur of the assets to the new corporation in exchange for its capital stock; and that the first transaction was a distribution in liquidation taxable under section 115 (c) of the Revenue Act of 1932, while the second was a nontaxable transaction under section 112 (b) (5) of the same act.

The letters written to the interest holders owning a portion of the properties and the minutes of the stockholders’ meetings of the three old corporations (stating that the transaction is to be “an even exchange and for the purpose of merging and consolidating the properties and assets of the company with other corporations * * * into the said new corporation to be known as Black Gold Petroleum Company * * *”) plainly show a plan for a consolidation and merger of the old entities, business and properties into a new corporation. That such was the plan in general can not, we think, be gainsaid, and under section 112 (i) (1) (A), Revenue Act of 1932, this was a plan of reorganization. Any difficulty arises from examination of what was done.

The corporate minutes of the old corporations show that their stock was to be assigned back to the corporations as treasury stock as a consideration of the transfer of assets of the corporations, and respondent contends that the consideration was transfer of the assets to R. A. McArthur for himself and Kleeden, the other stockholder, and therefore that a distribution in liquidation resulted, despite the fact that McArthur, on the same day he received the assets, transferred them to the new corporation in consideration of issuance of its stock to the stockholders of the old corporations.

Are the transactions herein involved to be considered separately or together? Does what was actually done overcome the intent to consolidate or merge the old organizations into a new one? Did Mc-Arthur, in temporarily holding the assets of the old corporations, hold them for himself and Kleeden, the stockholders, or as agent to transfer them on to the Black Gold Petroleum Co. pursuant to a plan of reorganization?

Respondent is in essential error, we think, in his contention and assumption that the assignment of stock back to the old corporations, and cancellation of such stock, was in consideration of transfer of assets to MoArthur. The record convinces us not only that the cancellation of the stock of the old corporation was in consideration of the transfer of their assets to the new corporation, but that R. A. McArthur in receiving the assets and holding them temporarily, did so not as a stockholder, but as an agent for transfer to the new corporation. The language of the minutes which contain the resolution relied upon for respondent’s view adds to and explains the resolution, and we think respondent has not sufficiently considered all of the language explaining the situation. The minutes of each company (identical as to each corporation), immediately prior to the resolution, provide in part that McArthur, president of the company, presented to the meeting “the matter of transferring the assets of the company * * * to a new corporation * * * with the proposition that all of the capital stock * * * be assigned and transferred back to the company as treasury stock as a consideration of such transfer of said assets and properties * * (Italics supplied.) Indubitably, in the above language nothing appears as to transfer to R. A. McArthur or the stockholders of the old corporation; but the transfer of assets is to be to the new corporation, and the consideration for assignment to the treasury of stock is not transfer of assets to R. A. McArthur or stockholders, but transfer of assets to the nev) corporation. With this preface we next examine the resolution immediately following the above minutes. There we find provided not a plain transfer of corporate assets to McArthur in consideration of assignment of the corporate stock to the treasury, as contended by respondent; carefully examined, the language is seen to provide an assignment of the corporate assets “to R. A. Mc-Arthur, who, in turn, should transfer the same to the new corporation * * * and that all of the stock now owned by the stockholders of the company be assigned and transferred to the treasury of the company in consideration thereof * * (Italics supplied.) “Thereof”, we think, plainly refers not to assignment of assets to McArthur, but to assignment to the new corporation through him. To conclude otherwise would be to refuse to read the language with the context of the minutes, just preceding, which say nothing of transfer to R. A. McArthur or to stockholders. It is important that there is no statement that the transfer of corporate assets was to the stockholders as such. It was to one only, with an immediate provision tliat lie should retransfer to the new corporation. He did so on the same day he received the assets.

Petitioners explain that the reason for transfer, not directly to Black Gold but to McArthur, who should transfer to Black Gold, was because of certain Oklahoma statutes as to corporations holding property of competitors. Regardless as to whether such reason was sound, it tends to explain what was actually done, but it is not, we think, so explanatory as the corporate minutes, which, as above seen, clearly show that the purpose of the whole matter was a merger or consolidation and shows the consideration for cancellation of the old stock to be transfer of assets to the new corporation and not merely to the old stockholders. We should not, we think, divide this transaction as desired by respondent, but look at it as a whole. Respondent argues that there was no showing of assumption of liabilities by the new corporation, though the resolution of the stockholders’ meeting provided for such assumption. Though not definitely stated, we think such an assumption of debts is apparent from the catalogue or schedule of properties, to which is appended a list of liabilities assumed. By the written acceptance of the offer by Black Gold, such liabilities were assumed. The fair inference from this instrument is that the liabilities were intended as those against all the properties, including those of the old corporations. Such assumption of liabilities is consonant with the merger or reorganization planned. Nothing indicates that McArthur or Kleeden assumed the liabilities of the old corporations. Though Milton H. Biohley, 1 B. T. A. 544, involved stockholders receiving corporate assets, who executed a definite acknowledgment of their trusteeship for the corporation, and plainly is stronger in that sense than the present proceeding, yet it does indicate that reorganization does not require transfer of assets directly from old corporation to new, but that it can be through stockholders as trustees. Herein McArthur could not successfully have denied his trusteeship, in the face of the language in the minutes showing the agreed purpose of the transfer, the ban against any personal profit or earnings, and the provision for “even exchange” for the purpose of merger. He was as much a trustee as in the cited case.

The certificate of validation by the former interest holders of the exchange shows on its face that the interest holders, at least, took stock in Black Gold in lieu of their former holdings. The fact that R. A. McArthur acted at the same time as agent for the interest holders and for the assets which had belonged to the three old corporations tends to place the interest holders and old corporations in the same class, and to indicate that in fact, through McArthur, all received stock in the new corporation for their old interests, of whatever nature. The new corporation accepted the proposition made to it, thereby becoming a party to the contract, and a party to a reorganization. The old corporations were a party thereto and transferred, through R. A. McArthur, their assets, in pursuance of a plan of reorganization, solely for stock in the new corporation, a party to such reorganization, under section 112 (b) (4) and section 112 (i) (1) of the Revenue Act of 1932.

We conclude that McArthur received the corporate assets not as stockholder, but as agent for transfer thereof in turn to the new corporation, and that the consideration for assignment of the stock to the treasury was the transfer of assets not to McArthur, but to the new corporation. In Commissioner v. Newberry Lumber Chemical Co., 94 Fed. (2d) 447, the court holds that there was reorganization with a new company though a certain bondholders’ committee purchased the property and caused its transfer to the new corporation, saying:

* * * It makes no difference tliat tlie transaction was effected by the bondholders’ committee, for that committee acted for and represented the bondholders in the old corporation, who became bondholders and stockholders in the reorganized corporation. * * *

There is no essential difference, we think, from the situation here at hand and that considered in the cited case. Mere agency intervening between old corporation and new does not prevent reorganization. See also Wilbur F. Burns, 30 B. T. A. 163; affd., 85 Fed. (2d) 8: certiorari denied, 299 U. S. 592.

We therefore hold that the transfers herein involved were in connection with a reorganization and did not constitute a taxable distribution in liquidation, and that the respondent was in error in his determination of deficiency as to both petitioners.

Decision of no deficiency will be entered in both proceedings.


author: SteRnhagen:

text:
    Old Colony Trust Company and Jesse W. Morton, Executors of the Will of Jennie K. Baldwin, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81071.
    Promulgated October 12, 1938.

      Francis V. Barstow, Esq., for the petitioners.

      Paul E. Waring, Esq., for the respondent.
   OPINION.

SteRnhagen:

Tlie Commissioner determined a deficiency of $6,251.49 in the income tax of the decedent’s estate for 1934. The facts are contained in a written stipulation and need not be set forth in detail.

The decedent died in 1933, leaving a will containing numerous pecuniary legacies. The executors were unable to pay these legacies in full; in 1933 and 1934 they sold securities at a profit, and in 1934 they distributed $44,854.25 profit and some other income among the pecuniary legatees pro rata. In their 1934 income tax return they took a deduction of this amount, which they called “distribution — beneficiaries’ share of income and credits.” The Commissioner disallowed the deduction and stated as his reason: “The amounts claimed are legacies under the will and not income distributions.” The executors assail this disallowance and claim that the deduction is allowable under Bevenue Act of 1934, section 162 (b) or (c).

Although the amount in question was “income of the estate for its taxable year” and “income received by the estate of a deceased person during the period of administration or settlement of the estate”, and was in fact distributed in the taxable year “by the fiduciary to the beneficiaries” and “properly paid or credited during such year to a legatee, heir or beneficiary” and thus is literally described in the statute, it is nevertheless, by virtue of prior decisions, not deductible by the fiduciaries. These sections of the statute are to be read in the light of the general precept of Helvering v. Butterworth, 290 U. S. 365; Helvering v. Pardee, 290 U. S. 365; Bush v. Commissioner, 89 Fed. (2d) 596; Anna M. Chambers et al., Trustees, 33 B. T. A. 1125; William B. Weigel et al., Trustees, 34 B. T. A. 237, that the income of an estate is to be taxed to either the fiduciary or the beneficiary distributee, and that it may not be permitted to escape tax by falling in some way between the two. The pecuniary legatees were apparently entitled to the distributions which the fiduciaries made, notwithstanding that the fund consisted of what the revenue act calls income to the fiduciary and there is nothing in the will which expressly gives the pecuniary legatees any claim upon income 'of the estate as such. Certainly the propriety of such distribution is not to be questioned in this proceeding, and appears to be supported by decisions of Massachusetts. Tomlinson v. Bury, 145 Mass. 346; 14 N. E. 137; Porter v. Howe, 173 Mass. 521; 54 N. E. 255; Chase v. Union National Bank, 275 Mass. 503; 176 N. E. 508; Smith v. Livermore (Mass.), 10 N. E. (2d) 117. However anomalous the statement may appear to be, it is nevertheless correct to say that what the legatees received by these distributions as the principal of their legacies under the will were shares of estate income; i. e., what was income to the executors became upon distribution a realization of principal to the legatees. Weigel v. Commissioner, 96 Fed. (2d) 387, affirming 34 B. T. A. 237, and Anna M. Chambers et al., Trustees, sufra, held that such a distribution of what the fiduciary calls income and the distributee calls corpus is not within the intendment of the statutory deduction allowed to the fiduciary, since the complementary provision of the statute which would require the receiving beneficiary to include the amount within his taxable income, is plainly inapplicable.

The Commissioner’s disallowance of the deductions to the executors is sustained.

Judgment will be entered for the respondent.

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