author: Trammell :

text:
    Guaranty Trust Company, Executor, Estate of Albert G. Jeffress, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 39462.
    Promulgated February 10, 1932.

      E. H. Shelton, Esq., for the petitioner.

      L. S. Pendleton, Esq., for the respondent.
   OPINION.

Trammell :

The first issue is whether the respondent erred in determining that the decedent was a resident of the State of New York and thus a resident of the United States within the meaning of section 301 (a) of the Revenue Act of 1924, as amended by section 322 of the Revenue Act of 1926, effective as of June 2, 1924. That section provides as follows:

In lieu of the tax imposed by Title IV of the Revenue Act of 1921, a tax equal to the sum of the following percentages of the value of the net estate (determined as provided in section 303) is hereby imposed upon tbe transfer of tbe net estate of every decedent dying after tbe enactment of this Act, whether a resident or nonresident of the United States: * * * [Italics supplied.]

Section 302 of the said act provides for computing the value of the decedent’s gross estate by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated * *

Section 303 of said act provides that:

Por tbe purpose of tbe tax tbe value of tbe net estate shall be determined—
(a) In tbe case of a resident, by deducting from tbe value of tbe gross estate—
(1) Sucb amounts for funeral expenses, administration expenses, claims against the estate, unpaid mortgages upon, or any indebtedness in respect to, property (except, in tbe case of a resident decedent, where sucb property is •not situated in the United States), to tbe extent that sucb claims, mortgages, or indebtedness were incurred or contracted bona fide and for a fair consideration in money or money’s worth, losses incurred during tbe settlement of tbe estate arising from fires, storms, shipwreck, or other casualty, or from theft, when sucb losses are not compensated for by insurance or otherwise, and sucb amounts reasonably required and actually expended for the support during the settlement of tbe estate of those dependent upon tbe decedent, as are allowed by tbe laws of the jurisdiction, whether within or without tbe United States, under which the estate is being administered, but not including any income taxes upon income received after tbe death of tbe decedent, or any estate, succession, legacy, or inheritance taxes;
*******
(b) In tbe case of a nonresident, by deducting from tbe value of that part of bis gross estate which at tbe time of bis death is situated in tbe United States—
(1) That proportion of tbe deductions specified in paragraph (1) of subdivision (a) of this section which the value of sucb part bears to the value of bis entire gross estate, wherever situated, but in no case shall the amount so deducted exceed 10 per centum of tbe value of that part of bis gross estate which at tbe time of bis death is situated in tbe United States;
*******
(c) No deduction shall be allowed in tbe case of a nonresident unless tbe executor includes in the return required to be filed under section 304 the value at tbe time of bis death of that part of tbe gross estate of tbe nonresident not situated in the United States. [Italics supplied.]

There is no dispute in this proceeding with respect to the facts. Both parties agree that the domicile of the decedent was in the United States.

The petitioner contends that the decedent, although domiciled in New York at the time of his death, was nevertheless a “ nonresident ” of the United States within the meaning of the Federal taxing statute. The respondent’s contention, briefly stated, is that the word “ residence ” as used in inheritance or estate-tax statutes is synonymous with “ domicile,” and that although the Federal statute uses the word “ resident,” the residence is determined by applying the principles relating to “ domicile.” The respondent urges that decedent was an American citizen who traveled on an American passport; that he was domiciled in the United States; that he was a resident of England only for business purposes and that he never intended to establish his domicile or legal residence in England; and, further, that the only purpose of claiming residence in England is the evasion of taxes upon that portion of the estate situated without the United States. In the determination of the meaning of the word “ resident ” as used by Congress in said section 301 (a), we are not concerned with the possibility that the estate, or a portion thereof, of an American citizen may escape taxation. The only real question is whether the statute levies a tax only upon the estate of a decedent who actually and physically resided in the United States at the date of death, or upon the estate of any decedent who had his domicile, that is, his legal residence, in the United States at the date of death.

The respondent’s regulations have consistently provided that, “A resident (as that term is used in the estate tax provisions and various Revenue Acts) is one who, at the time of his death, had his domicile in the United States ” and, with certain exceptions not applicable in this proceeding, that, “ all persons not residents of the United States as above defined, * * * are non-residents.”

In connection with the term “ resident ” as used in the Federal estate-tax acts, the Circuit Court of Appeals for the Second Circuit, in the case of Bowring v. Bowers, 24 Fed. (2d) 918, said:

But all the limitations applicable, to acquiring a new domicile, particularly when a domicile of national origin is to be abandoned, do not necessarily attach to taking out a new residence, either in this country or England. The United States Income Tax Acts, from the Act of 1913 (38 Stat. 114) on, have been uniform in levying a tax on the entire income of aliens, if resident here, and residence has been construed by the Commissioner in all his rulings as something which may be less than a domicile, which fixes the law of the devolution of property and determines the incidence of estate and succession taxes. It is true that “ residence ” is ordinarily used as the equivalent of domicile in statutes relating to probate, administration, and succession taxes. So, as might be expected, in the Revenue Acts, the word “ resident,” when employed in the portions of these acts dealing with the Estate Tax Law, means “ domiciled,” and has been so construed by the practice and regulations of the department.
It is contended that the same words, when used in the titles of the same acts dealing with the income tax, must have the same meaning. But the estate tax provisions were first introduced in the Revenue Act of 1916 (39 Stat. 756), after the construction of the word “resident” in that act had already become fixed by the ruling of the department at least as early as Treasury Decision 2242 of September 17, 1915, infra. Moreover, the incidence of estate and succession taxes has historically been determined by domicile and situs, and not by the fact of actual residence. Frick v. Pennsyl vania, 268 U. S. 473, 45 S. Ct. 603, 69 L. Ed. 1058, 42 A. L. R. 316. As Justice Holmes said in Bullen v. Wisconsin, 240 U. S. at page 631, 36 S. Ct. 474 (60 L. Ed. 830) :
“ * * * As the states where the property is situated, if governed by the common law, generally recognize the law of the domicile as determining the succession, it may be said that, in a practical sense at least, the law of the domicile is needed to establish the inheritance. Therefore the inheritance may be taxed at the place of domicile, whatever the limitations of power over the specific chattels may be. * * * ”
As was said, also, in the Matter of Martin, 173 App. Div. at page 3, 158 N. Y. S. 916:
“ * * * in many instances there is a difference between the legal intendment of the terms ‘ residence ’ and ‘ domicile ’ * * * but in the matter of succession and transfer taxes the theory of the action of the taxing power renders the term synonymous. In the case of succession the intestate’s personalty is distributed according to the Statute of Distribution of the State of the domicile. Therefore, that State which permits the inheritance is entitled to impose a duty on that privilege. * * * ”
But in personal and income taxes domicile has played no necessary part, and residence at a fixed date has determined the liability for the tax.

In view of the long established Treasury Department’s regulations construing the said term “ resident,” which have not been changed in all the subsequent legislation, we think that, in so far as the estate-tax provisions of the Revenue Acts are concerned, it was the intention of Congress to use the term “ resident ” as meaning a person domiciled in, that is, a legal resident of, the United States. Evidently Congress was satisfied that the consistent administrative construction of the term “ resident ” as used in the various revenue acts was correct, or it would have made an appropriate change in the language used in subsequent acts.

The parties to this proceeding are in agreement that the decedent had his domicile in the United States. England was his place of business and he remained there for business purposes, but maintained his legal residence or domicile in the United States, which he had the legal right to do.

Accordingly, in our opinion, the decedent at the date of his death was a resident of the United States within the meaning of section 301 (a) of the Revenue Act of 1924, as amended by section 322 of the Revenue Act of 1926, and his estate is subject to the tax imposed by the estate-tax provisions applicable to the estates of “ resident ” decedents. As to this issue the action of the respondent is sustained.

The second issue in this proceeding involves the question of whether the respondent erred in not diminishing the value of the foreign-situated property by the foreign death or succession duties paid thereon, for the purpose of including the value of such foreign-situated property in the gross estate. In the case of Lucius N. Littauer et al., Executors, 25 B. T. A. 21, the Board had under consideration this same question, which was decided adversely to the petitioner. Also compare John Aspinwall Hadden, Jr., 10 B. T. A. 741. The action of the respondent is sustained.

Reviewed by the Board.

Judgment will he entered under Bule 50.

GoodRIoh, Matthews, and Murdoch concur in the result.


source: Caselaw Access Project

author: Murdoch :

license: Public Domain

text:
    Trust under the Will of Sarah P. Barber for Remainder Interest after Arthur Barber by United States Trust Company of New York as Trustee, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 26747—26757.
    Promulgated February 10, 1932.

      Harry J. Campaign, Esq., for the petitioners.

      Bruce A. Low, Esq., for the respondent.

       Other parties petitioning -whose cases were consolidated herewith for hearing and opinion are: Trust under the will of Sarah P. Barber for remainder interest after Mabel B. Pershouse by united States Trust Company of New York as Trustee; Trust under the will of Sarah P. Barber for remainder interest after Alice E. Pershouse by united States Trust Company of New York as Trustee; Trust under the will of Sarah P. Barber for remainder interest after Edith B. Bloodgood, by united States Trust Company of New York as Trustee; Trust under the will of Sarah P. Barber for remainder interest after Beatrice B. Cooke, by united States Trust Company of New York as Trustee; Trust under the will of Sarah P. Barber for remainder interest after Constance B. Prosser, by United States Trust Company of Now York as Trustee; Trust under the will of Sarah P. Barber for remainder interest after Elizabeth W. McGrew, by United States Trust Company of New York as Trustee; Trust under the will of Sarah P. Barber for remainder interest after Sarah P. Halladay, by United States Trust Company of New York, as Trustee; Trust under the will of Sarah P. Barber for remainder interest after Philip C. Barber, by United States Trust Company of New York as Trustee; Trust under the will of Sarah P. Barber for remainder interest after Theodora B. Stauffen by united States Trust Company of New York, as. Trustee; and Trust under the will of Sarah P. Barber for remainder interest after St. George Barber, by united States Trust Company of New York as Trustee.

   OPINION.

Murdoch :

The petitioner in each of these cases is a trustee under the will of Sarah P. Barber. It happens that the same corporation is also a trustee under a deed executed by Sarah P. Barber. The second assignment of error raises the question of whether or not the Commissioner erred in bolding that the purchase price received by the petitioners from the disposition of certain shares of stock included $97,084.35. The petitioners point out that this amount was never received by the trusts which are the taxpayers in these cases, but that this amount was allocated to and received by the trusts created by the deed. The probate court allocated this amount to the release of claims made by beneficiaries of the trust created by the deed.

The following quotations are taken from the respondent’s brief:

The respondent admits that the profit attributable to the sale oí the stocks by the trustee under the deed is not taxable to the trustee for remainder interests under the will. However, the respondent does not admit that $11,043.55 is the correct net amount. It is the respondent’s position that the whole amount received on the sale, $1,750,000, is attributable to the sale of the stocks, and that none of the proceeds of the sale is attributable to the release of the claims.
* * * The very gist of the transaction shows that the entire consideration paid was for the stocks, therefore, the $97,084.35 should be prorated between the $73,140.80 attributable to the trustee under the deed of trust and the $1,579,774.85 attributable to the trustee under the will, or $4,295.40 and $93,206.71, respectively. The respondent further admits that the amounts of $11,043.55 plus $4,295.40, or $15,338.95, is not taxable to the petitioners, but maintains that $1,579,744.85 plus $93,206.71, or $1,672,951.56, is the correct gross sales price on which to compute the net profit to the petitioners on the sale.

These admissions dispose of one issue raised by the petitioners, to wit, the action of the Commissioner in including $78,140.80 as part of the consideration for the transfer of stock by the petitioners. Thus, the basis, the consideration, and the profit on the stock transferred by the other trust, that created by deed, drop out of the computation of the profit to the petitioners on the disposition of their stock. But these admissions affect also the issue as to the $97,084.35. They disclose a weakness in the respondent’s contention as to this item, for he thus recognizes the propriety of a part of the allocation made by the probate court and only rejects the portion of the court’s ruling which holds that the $97,084.35 should be allocated to the trust under the deed as attributable to the release of the claims. We find ourselves unable to follow the respondent in making this distinction between the good and the evil in the court’s order. The respondent may be mistaken as to the occasion for the order of the court. It resulted from exceptions taken by the guardian ad litem of the infant grandchildren of Sarah P. Barber to an account filed by the petitioners. These exceptions were that in the account too little had been allocated to consideration for the petitioners’ stock. The court in its order then allocated a larger amount to this item. This case differs from John B. Ford et al., 19 B. T. A. 1143; affd., 51 Fed. (2d) 206, for here the order was not a consent order and the petitioners in this case never received the benefit of any of the money in controversy which was allocated to the other trusts. It is true that the basis of the allocation, book value of the stocks, is not a very satisfactory one. The probate court appreciated this, but adopted it. nevertheless, saying:

The book value may or may not be the best criterion, but under the evidence of this case, exercising as it did the main tangible basis for adjustment of the purchase price, it is the most reasonable figure to .be used in separating the various items in their proper account.

We can not say that there was a better basis available to the court. Obviously, some allocation was necessary, since a lump sum was paid to separate trusts. The respondent not only does not suggest a better method, but he now adopts that made upon book values and suggests arbitrarily adding to the book values of each group of stocks a part of the excess cash in proportion to the book value of each group. It may be, as the respondent contends, that the petitioners’ proof is weak, but in our opinion, it is sufficient to weight the scales in their favor. The probate court stated that the claim of deceit entered vitally into the settlement, and it allocated a part of the consideration to the settlement of such claims. We accept this allocation. The $97,084.85 will be eliminated from the computation of the profit to the petitioners.

The remaining issue depends upon when the 200 shares of stock of Barber & Company, Inc., mentioned in the sixth and seventh clauses of the will, were acquired by. the trustee under the eighth clause of the will. The Commissioner has determined that they were acquired on the date of the death of Sarah P. Barber. The petitioners contend that they acquired the first 100 shares on February 3,1920, the date on which the United States Trust Company of New York transferred these shares from itself as executor to itself as residuary trustee. Edith married prior to the death of her mother, Sarah P. Barber, and the provision of the sixth clause of the will for the bequest of these shares in trust for her never became effective. Thus there was no intervening estate as to these shares before they became a part of the residuary estate. This is the same situation that existed in the case of Security Trust Co. et al., Trustees, 25 B. T. A. 29, where we held, following Brewster v. Gage, 280 U. S 327, that the stock was acquired at the date of the decedent’s death and the value of the stock on that date was the basis for the computation of gain to the testamentary trustee upon the disposition of the stock. Our ruling is the same in this case as to these 100 shares.

The petitioners contend that the 100 shares which were bequeathed first in trust for Elizabeth were acquired by them on September 27, 1921, the date of Elizabeth’s marriage and also the date on which the United States Trust Company of New York transferred this stock from itself as trustee for Elizabeth to itself as residuary trustee. These shares were bequeathed in trust for Elizabeth until her marriage or death, whichever should happen first. The trust was set up, was in existence for about four years after the death of the testatrix, and ceased in 1921 at the marriage of Elizabeth. The 100 shares fell into the residuary estate upon the marriage of Elizabeth. As to these shares the petitioners are remaindermen under the will. In William Huggett, 24 B. T. A. 669, and in Rodman E. Griscom, 22 B. T. A. 979, we held that a testamentary remainderman acquires the property at the death of the testator. The Huggett case overruled the Griscom case on one point in holding that the value of the re« mainderman’s right rather than the value of the property which he ultimately received was the proper basis for gain or loss upon the subsequent disposition of the property itself. But this principle can not be applied in this case, for the Commissioner has computed the gain on the value of the stock at the date of the death of the testatrix, has not asked for an increased deficiency, and has not furnished data upon which to make a determination of any other value than the one he has used. We simply affirm the Commissioner on this point. The gain or loss on the sale of the 200 shares of stock of Barber & Company, Inc., will be computed upon the basis of the stipulated value of the stock on the date of the death of the testatrix. No question is raised as to the valuation of any of the other stock.

Reviewed by the Board.

Judgments will he entered under Rule 50.


author: Seawell:

text:
    Russell Tyson, Arthur T. Aldis, Graham Aldis, Richards M. Bradley, and Arthur Lyman, Trustees of Chicago Real Estate Trust, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 17941, 29276, 40617, 51005.
    Promulgated February 11, 1932.

      Arnold R. Baar, Esq., and Arthur R. Foss, Esq., for the petitioners.

      John E. Marshall, Esq., Arthur Garnduf, Esq., W. S. Delaney, Esq., and C. R. Marshall, Esq., for the respondent.
   OPINION.

Seawell:

The primary question at issue arises on account of the Commissioner’s determination that the petitioner was during the years in question not a trust, taxable- under section 219 of the Revenue Acts of 1924 and 1926 and sections 161 and 162 of the Revenue Act of 1928. but an association within the meaning of that term as used in section 2 (a) (2) of the Revenue Acts of 1924 and 1926 and section 701 (a) (2) of the Revenue Act of 1928, and therefore taxable as a corporation.

In form of organization the trust here involved is almost identical with that considered in Zenith Real Estate Trust, 21 B. T. A. 656; in fact, some of the same trustees and the same agent of the trustee appear in each case and so great is the similarity between the cases that the petitioner submitted as a brief in this proceeding the brief which had theretofore been submitted by it to the Circuit Court of Appeals to which appeal had been taken from the Board in the Zenith case. Since a decision was had on December 9, 1931, from the Circuit Court in the Zenith case (Tyson v. Commissioner, 54 Fed. (2d) 29), in which the action of the Board was reversed, we think it pertinent to discuss the case at bar from the point of view of the court in that case.

The argument of the taxpayer in the Zenith case, as directed to the Circuit Court, was largely that a trust “ should be taxed as a corporation only when ‘in form and effectiveness’ it actually resembled a corporation.” In reaching its conclusion the court said:

Probably the best test is to he found in the activities of the entity. One could readily conceive of a Massachusetts trust being possessed of powers and so exercising them that for taxation purposes it should be called a corporation. An illustration of this is to be found in Trust No. 5833, Security-First Nat. Bank v. Welch, 50 F. (2d) 613. Likewise, it is easy to conceive of a Massachusetts trust so designed and so purposed as to be considered a trust as that term is used in the Revenue Acts. For an illustration of this, see Lansdowne Realty Trust v. Commissioner of Internal Revenue, 50 F. (2d) 56. It necessarily follows then, and numerous decisions sustain this view, that m determining when a trust is an association courts must look to the substance rather than the form of the entity used to carry on the business. Likewise, it must be more imfluenced by the instrument’s activities than the ascertainment of the possible field of its activity. (Gardiner v. United States, 49 F. (2d) 992; Little Four Oil & Gas Co. v. Lewellyn, 35 F. (2d) 149; Lansdowne Realty Trust v. Commissioner, 50 F. (2d) 56). This does not mean that we should not look to the articles of agreement which brought the entity into being. Am examination of this document will aid a court in construing the activities and in weighing the taxpayer’s asserted intention respecting its activities. [Italics supplied.]

That is, if we understand the court correctly, the emphasis is to be placed on the activities of the trust rather than its form, and apparently had it not been for the very limited purpose and activity of the trust a different conclusion would have been reached. In applying the principles outlined above and deciding that the trust in question was not taxable as a corporation, the court emphasized the fact that while the articles of agreement suggest that “the counsel drawing the articles entertained for it somewhat pretentious hopes for its future enlargement,” the witnesses testified that “ it was conceived and brought into existence for the single purpose of acquiring a single piece of real estate; that such real estate had been leased for a long period to a responsible lessee; and that the said lessee kept the property in repair and paid the taxes in addition to the rental.” (Italics supplied.) The court further observed:

* * * In short, the investment was one which provided with reasonable certainty for a sure and fixed income without either care or supervision. They also say this plan was never departed from, save once when $5,000 of the income was invested in bonds. This departure, however, was also for the purpose of making more certain said income. The insertion in the articles of agreement that the trustees might purchase other property may be ascribed to the caution of counsel to take care of the unforeseen and unforeseeable rather than to impeach the witnesses who testified respecting the promoters’ intentions to limit the trust to a single investment, the return from which was to furnish a fixed and' steady income for the beneficiaries.

But in the case we are considering there was no such singleness of purpose and activity; on the contrary, the articles of agreement not only provide for “ pretentious hopes of enlargement,” but those hopes were realized. The trust agreement was executed in 1890 and by 1893 land had been acquired and a building erected thereon at a cost of approximately $1,000,000. The building was then leased under a net rental agreement similar to that involved in the Zenith case, and were this the one transaction before us, that is, if the single purpose of the trust had been to acquire and lease that building in that manner and if we were now concerned with the income only from that building, it might well be said that the decision of the Circuit Court of Appeals would require a holding that the trust is not taxable as a corporation. The record, however, shows that the aforementioned transaction was but one of several of a similar nature carried out by the trust. We find that the trust owned and had under lease three buildings during the years here involved. One of the buildings was that referred to above, a second building was constructed about 1898, and a third in 1924 and 1925 on land acquired shortly prior thereto. Whether other land was acquired and buildings erected thereon we do not know, but it does appear that five other pieces of real estate were acquired and disposed of prior to the years before us. The original funds for the use of the trust were obtained through the sale of interests in the form of “ receipts.” The authorized capitalization was $5,000,000, though the amount issued was only $2,500,000, and that amount had been outstanding at least since 1902. Prior to that time the Monadnock Building had been constructed at a cost of approximately $1,000,000 and since that time the Cable Building and the Hartman Building were constructed at the respective costs of approximately $400,000 and $2,500,000. In addition, five other pieces of real estate were purchased and sold. By June 30, 1929, all buildings had been entirely paid for. All buildings were leased under net rental agreements, though we find for each year substantial expenses incident to the operation of the trust. For example, in the profit and loss statement which we set out in our findings for the fiscal year ended June 30, 1926, the expenses for the operation of the Monadnock Building were $3,638.46; those for the Cable Building, $3,000.08; and those for the Hartman Building, $13,246.64. In addition, “ legal and miscellaneous ” expenses amounted to $2,715.02 and “ interest on mortgage loans,” $41,250. Evidently, therefore, we do not have a simple case of a trust investing funds furnished it by its members in a single business venture, passively collecting the income from such investments under net rental agreements and distributing the proceeds to the beneficiaries, such as was involved in the Zenith case, but rather a trust which, while in form of organization similar to that involved in the Zenith case, was carrying on business through recurring investments in real estate from the profits — at least in a substantial part — derived from the trust operations and the operation of the buildings acquired by it. In fact, it would seem that in every sense of the word the “ pretentious hopes of future enlargement ” referred to by the Circuit Court of Appeals in its decision in the Zenith case were here fully realized. The original funds which were paid in for investment were all paid in more than twenty years prior to the taxable years with which we are concerned, and had been used — in large part at least — in other ventures, but yet we find that in the first year before us, namely, the fiscal year ended June 30, 1925, the trust constructed a building at a cost, including cost of land acquired shortly prior thereto, of approximately the entire original investment of $2,500,000. During the succeeding years from 1925 to 1929 the indebtedness on the building was paid off, partly at least, through the sale of bonds in which its sinking fund had been invested. That the greater part of the trust activities were carried on by the firm of Aldis & Company does not seem to us material. Not only was the firm the agent of the trustees, but also it was closely associated with them, since at least one of the trustees was a member of that firm.

In view of the above considerations and the record as presented, we are of the opinion that the trust here involved satisfies every requirement for an association taxable as a corporation as laid down in Hecht v. Malley, 265 U. S. 144, and the many decisions of the Board on the subject, as well as the test enunciated by the Circuit Court of Appeals of the Seventh Circuit in the Zenith case, supra, to the effect that the “ best test is to be found in the activities of the entity.” Our conclusion that the trust is to be considered an association taxable as a corporation makes a decision unnecessary on the further issue raised by the petitioner, as to the taxability to the trust of the income which was not distributed by it to the beneficiaries.

Judgment will he entered for the respondent.


author: Lansdon:

text:
    Signal Gasoline Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 41532, 47620.
    Promulgated February 16, 1932.

      Melvin D. Wilson, Esq., for the petitioner.

      J. A. Lyon, Esq., and E. L. Updike, Esq., for the respondent.
   OPINION.

Lansdon:

This is a proceeding under section 280 of the Revenue Act of 1926. The respondent has asserted liability against the peti-tionei and transferee of the Signal Gasoline Company for income taxes alleged to be due for the calendar year 1923 and the period from January 1 to September 11, 1924, in the respective amounts of $468.33 and $2,672.53. The petitioner concedes the tax liability, but contends that it is not liable at law or in equity for the deficiencies asserted.

The petitioner is a dissolved California corporation, acting through its statutory trustees. It was organized to acquire the assets of the Signal Gasoline Company, and under contract dated May 1, 1924, it acquired such assets, subject to all outstanding obligations and liabilities not exceeding, in the aggregate, the sum of $51,076.89, in consideration of the issuance to the Signal Gasoline Company of 400,000 shares of petitioner’s common capital stock. The assets so acquired by the petitioner had a net value over and above liabilities assumed in excess of the deficiencies asserted by the respondent in these proceedings. The Signal Gasoline Company was dissolved under the laws of California on September 11, 1924. All of its assets, which consisted solely of the 400,000 shares of petitioner’s common stock, were distributed to its stockholders on October 9, 1924.

Up to the date of this proceeding the petitioner has-paid in excess of the sum of $51,076.89 in liquidation of liabilities of the Signal Gasoline Company assumed by it under the contract of May 1, 1924.

The petitioner paid the last three quarters of the 1923 income tax of the Signal Gasoline Company as shown on its return for that year. It also paid the 1924 income tax of the Signal Gasoline Company in the amount shown on the return for that year.

The petitioner and the Signal Ga'soline Company had the same officers and the same directors as of May 1, 1924, and as of September 11, 1924.

Similar questions of transferee liability have been before us on numerous occasions, and it is now well settled by decisions of the Board that where one corporation transfers its assets to a new corporation in exchange for stock of the latter which is issued directly to the stockholders, leaving the transferor without assets to satisfy its creditors, the new corporation is liable to the creditors of the old to the extent of the value of the property received. Woodley Petroleum Co. et al., 16 B. T. A. 253; Concrete Industries Co., 19 B. T. A. 655; Gideon-Anderson Co., 20 B. T. A. 106; Wayne Body Corporation, 22 B. T. A. 401, and cases cited therein. Many courts have reached the same conclusion where stock of the new corporation was delivered to the old corporation and later distributed to its stockholders, which is the situation in the instant case. Jennings Neff & Co. v. Chrystal Ice Co., 128 Tenn. 231; 159 S. W. 1088; Altoona v. Richardson, 81 Kansas 717; 106 Pac. 1026; 26 L. R. A. (N. S.) 651; Hibernia Insurance Co. v. St. Louis & New Orleans Transportation Co., 13 Fed. 516; American Railway Express Co. v. Commonwealth, 190 Ky. 636; 228 S. W. 433; Grenell v. Detroit Gas Co., 112 Mich. 70; 70 N. W. 413; Chicago I. & S. R. Co. v. Taylor, 183 Ind. 240; 108 N. E. 1. The reason for application of the rule in cases of the latter group where the old corporation is not without assets, having received stock of the new corporation, is stated as follows in Jennings Neff & Co. v. Chrystal Ice Co., supra:

Creclitors of the old corporation cannot be required to look alone to the stock and bonds which were substituted for the real, tangible assets of that corporation. The value of securities so substituted is more or less problematical, and creditors should not be forced to surrender their claim against available, visible assets, and transfer such claim to new securities. The remedy cannot thus be hindered and impaired for the benefit of stockholders. * * *

We think the petitioner is liable as transferee of the Signal Gasoline Company. The contract whereby petitioner acquired the assets provides for a reorganization and should be attended with all the liabilities incident thereto. There was no arm’s-length purchase and sale of assets such as would free the purchaser of any liability to the creditors of the old company.

Our conclusion here in .no way conflicts with our decision in Metropolitan Securities Corporation, 19 B. T. A. 299. We there recognized the above quoted rule, but held it inapplicable on the facts presented. There, the purchasing company had been in business for many years prior to its acquisition of the Union Finance Company and had substantial assets other than those acquired at that time. It paid for the assets in preferred stock, which we found had a real value in excess of the value of the assets acquired. Here the petitioner was organized to acquire the assets of the Signal Gasoline Company in exchange for common stock. We do not think the respondent is bound to look alone to the common stock of petitioner for collection of taxes due from the Signal Gasoline Company. He may follow the assets into petitioner’s hands.

Reviewed by the Board.

Decision will be entered for the respondent.

Murdock concurs in the result.


author: Lansdon :

text:
    Eau Claire Book and Stationery Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 20628.
    Promulgated February 18, 1932.

      JoJm M. Campbell, Esq., and P. M. Beach, Esq., for the petitioner.

      C. II. Curl, Esq., for the respondent.
   OPINION.

Lansdon :

The respondent asserts a deficiency in income and profits taxes for the fiscal year ended January 31, 1922, in the amount of $4,023.46. The principal question at issue is whether the petitioner sustained a deductible loss in the taxable year when it made a purported sale of certain bonds to its stockholders. Petitioner also pleads the statute of limitations as a defense against the tax liability asserted by the respondent.

Petitioner is a Wisconsin corporation, with its principal office at Eau Claire. At September 28, 1920, the Gillette Rubber Company, a corporation, was in debt to petitioner on accounts receivable and notes in the total amount of $14,826.78. At that date the Rubber Company was in financial difficulties and on October 5,1920, its assets were turned over to a creditors’ committee. On October 31,1921, the petitioner accepted notes from the creditors’ committee for the full amount of its claim against the Rubber Company and on November 21,1921, it exchanged such notes for bonds of that corporation at the par value of $14,000.

On or about January 31,1922, petitioner sold the bonds acquired as set out above to its stockholders in exact proportion to their stock-holdings. The stockholders effected this transaction through a trustee. They paid no cash at the time of their purchase, but their trustee gave a note to the petitioner for $1,400, the full amount of the agreed price. Interest received on the bonds of the Rubber Company was credited on this note in the amount of $250. In its income-tax return for the fiscal year ended January 31, 1922, the petitioner deducted $12,600 from its gross income as a loss sustained in the taxable year. Upon audit the respondent disallowed such deduction, made some other minor adjustments, and determined the deficiency here in controversy.

Petitioner has not shown the date on which its return was due or filed and so the Board is without any information as to when the statute of limitations began to run. Petitioner concedes that it signed a waiver, but pleads that its signature was obtained by a revenue agent through misrepresentation. No evidence in support of such allegation was adduced at the hearing. The record contains no evidence sufficient for. a findings of fact that the statute of limitations had run against the petitioner’s tax liability for the year ending January 31, 1922, when the deficiency notice was issued on October 2, 1926.

Petitioner claims a deduction of $12,600 from its gross income for the year ended January 31, 1922, as a loss sustained in such year by the sale of the bonds acquired as set out above. It is elementary that all claims for losses sustained in sales of property must be supported by proof of cost, date of sale and consideration received. Pioneer Fruit Co., 21 B. T. A. 833. The petitioner acquired certain creditors’ notes of the Rubber Company and exchanged such notes in settlement of its receivables against that concern for the bonds in question. There is no evidence in the record upon which we can make findings of fact as to the cost to the petitioner of the creditors’ notes or as to the value of such notes at the date of their exchange for the bonds. It can not be assumed that the petitioner’s receivables against the Rubber Company were worth their face value at the date they were exchanged for the creditors’ notes. Even if such claims were worth $14,000 at that date, it does not follow that basis for a loss is established, since parts of the $14,000 may have represented profit on merchandise sold to the Rubber Company and interest due on the notes taken from that company. Having failed to prove the cost of the proj^erty sold, the petitioner can not be allowed the deduction claimed.

Petitioner’s argument that cost of the property sold is not in issue on account of some statement in the computation attached to the deficiency letter is without basis. In his answer to the petitioner herein thé respondent has denied every material allegation of fact. The evidence adduced by the petitioner is not sufficient to overcome the presumption that the determination of the respondent is correct.

Decision will he entered, for the respondent.


author: Goodrich:

text:
    Camp Manufacturing Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 35955.
    Promulgated February 18, 1932.

      Robert P. Smith, Esq., T. D. Savage, Esq., and A. H. Diebert, Esq., for the petitioner.

      B. U. Steele, Esq., for the respondent.
   OPINION.

Goodrich:

Section 250 (d) of the Eevenue Acts of 1918 and 1921 required that the amount of taxes due under the returns for the taxable periods before us be determined and assessed within five years after they were due or were. made. This statutory period with respect to the 1917 return expired on March 30, 1923; with respect to the 1918 return, on June 12, 1924; with respect to the 1919 return, on May 13, 1925. Prior thereto no determination, assessment or collection of the deficiencies here involved was made by respondent, who contends, however, that these statutory periods were extended by means of consents in writing by both the taxpayer and the Commissioner as by statute provided. He, therefore, on August 2, 1927, issued a notice of deficiency to the Marion County Lumber Company (although he meant Corporation) ; assessed these deficiencies against the Corporation on December 27, 1927; and on December 30, 1927, issued a notice to petitioner of transferee liability. Let us first consider the consent upon which respondent relied in taking these several steps.

The consent was dated October 18, 1926; was executed by P. K. Camp and Burton J. Eay, both former officers and directors of the Marion County Lumber Corporation (which was dissolved on December 31, 1920); and purported to extend until December 31, 1927, the time within which taxes for the years 1917, 1918 and 1919 might be assessed. Section 3810 of the Virginia Statutes provides in part as follows:

All corporations, whether they expire by their own limitations or are otherwise dissolved, shall, nevertheless, be continued for such length of time, not eacceding three years, from such dissolution or expiration, as may be necessary for the purpose of prosecuting and defending suits by or against them, and enabling them gradually to settle and close their business, to dispose of and convey their property, and to divide their capital, but not for the purpose of continuing the business for which said corporation shall have been established. If the affairs of any such corporation shall not be wound up 6y its directors within three years from such dissolution or expiration, they shall be wound up in the manner provided by Section 3813. [Italics supplied.]

Section 3812 of the Virginia Statutes provides:

Upon the dissolution of any corporation under the provisions of this chapter the directors or other governing body, by whatever name it may be known, unless action to the contrary be taken as provided in the following section, shall be trustees thereof, with full power to settle the affairs, collect the outstanding debts, sell and cause to be conveyed property, real and personal and divide the money and other property among the stockholders according to their respective rights, after paying its debts.

Section 3813 provides that on application of any creditor or stockholder of a dissolved corporation, any court having equitable jurisdiction in the principal place of business of the corporation may continue the directors, as trustees, or appoint a receiver or receivers to take charge of the estate, with power to prosecute and defend suits and “ to do all other acts which might be done by such corporations, if in being, that may be necessary for the final settlement of the unfinished business of the corporation,” and that “ The court shall have jurisdiction of such application and of all questions arising in the proceedings thereon, and majr make such orders and decrees and issue such injunctions therein as justice and equity shall require.”

So far as this record discloses (and the burden of proof in this matter was upon respondent), no court of competent jurisdiction ever continued the directors as trustees, or appointed a receiver for the company or in any other way continued the powers of the corporation or its representatives, as provided in section 3813, beyond the period of three years after dissolution as provided in section 3810.

It is apparent therefore that when this consent was given the existence of the corporation had completely terminated. It was without power of anj' kind; its former officers were without authority to act for it, and the period within which its affairs might be wound up had passed. Consequently, the consent of October 18, 1926, was invalid and ineffective. Oklahoma Natural Gas Co. v. Oklahoma, 273 U. S. 257; S. Kirsch Distilling Co., 14 B. T. A. 1073; C. E. McCutchen, 16 B. T. A. 569; Newport Co., 22 B. T. A. 833; Continental Oil Co., 23 B. T. A. 311.

Likewise invalid and ineffective, and for the same reason, were the consents of July 17, 1925, and September 28, 1925, which purported to extend the statutory period for assessment to December 31, 1926. It thus appears that respondent had been barred from all action with respect to these deficiencies prior to the enactment of the Revenue Act of 1926; consequently, the provisions of section 280 of that act afford him no relief; Barron-Anderson Co., 17 B. T. A. 686; Caroline J. Shaw, Executrix, 21 B. T. A. 400; E. N. Ennis, 21 B. T. A. 406; and collection of the deficiencies here asserted against petitioner as transferee is barred by the statute of limitations. It becomes unnecessary to consider the other issues raised by petitioner. Pursuant to section 601 (e) of the 1928 Act, there will be entered,

Judgment of no deficiency.


author: ARUndell :

text:
    Bank of Mount Hope, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43439.
    Promulgated February 19, 1932.

      L. Harold Sothoron, Esq., for the petitioner.

      James K. Folk, Jr., Esq., and Harold F. Noneman, Esq., for the respondent.
   OPINION.

ARUndell :

The sum of $8,329.21 paid to some of petitioner’s stockholders is being claimed as a deduction, on the ground that it falls within the same class as the item of $8,967.29 which was actually paid to the county as taxes. The respondent, following his ruling in I. T. 1300, 1-1 C. B. 11, disallowed the amount, on the theory that it represented a payment of dividends.

Chapter 29 of section 79 of the West Virginia Code, pursuant to which the tax of $3,967.29 was paid, provides that shares in a bank shall be assessed to the several “ holders ” thereof in the county, district and town where the bank is located and that the shareholders “ may have deducted from the value of such stock the amount due another as principal debtor as provided in section sixty-seven of this chapter, by filing with the bank a list of the indebtedness which he desires deducted * * * which list of indebtedness shall be filed by the bank with the assessor along with its return.” The statute then goes on to provide that the taxes so assessed shall be paid by the cashier, secretary or proper accounting officer of the bank, and that any taxes so paid on the stock may be recovered from the owners thereof by the bank or deducted from the dividends accruing on such stock.

Section 234 (a) (3) of the Kevenue Act of 1926 permits a corporate taxpayer to deduct taxes paid on its stock for the owners thereof without reimbursement. Thus if the amount disallowed represents a tax, it, like the $3,967.29 item, is deductible under this provision of the statute.

Taxes have been held to be “ the enforced proportional contribution of persons and property, levied by the authority of the State for the support of the Government, and for all public needs.” Florida Central & Peninsular R. R. v. Reynolds, 183 U. S. 471. See also Amtorg Trading Corporation, 25 B. T. A. 327. Measuring the facts by this definition of the term, clearly the payment to the stockholders is not a tax.

Had advantage not been taken of the indebtedness deduction allowed by the statute, the tax on all of petitioner’s stock would have been $12,296.50. Some of the stockholders, however, filed affidavits of indebtedness with petitioner, and it claimed the deductions, thereby reducing the amount of the tax to $3,967.29. The legality of the deductions so taken is not being questioned.

We are not concerned with what the tax would have been had no deductions been claimed. The tax assessed and paid was $3,967.29. Petitioner’s action, in disbursing to the stockholders whose indebtedness had been used to reduce the tax the amount by which their debts decreased the tax, was undoubtedly done to equalize matters between the stockholders. But such disbursement was not a tax paid to the State of West Virginia.

Decision will be entered for the respondent.


author: Van Fossan:

text:
    Evergreen Cemetery Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 30726.
    Promulgated February 19, 1932.

      J. H. Amich, G. P. A., for the petitioner.

      Eugene Harfole, Esq., for the respondent.
   OPINION.

Van Fossan:

The record in this case is in such an unsatisfactory condition that it has made very difficult the ascertainment of the facts. The proper trial of a case before the Board requires thorough preparation, a clear understanding of the issues, and the marshaling of the evidence in such a way as to indicate clearly the effect of the same and the issue to which it appertains. This is not accomplished by dumping into the hands of the Board a number of books of account and other similar evidence. Such evidence is not self-illuminating. The Board should not be asked to ferret out the correct answer to technical or difficult questions of law and fact from unexplained, uncoordinated evidence. One of the duties of counsel is to assist in ascertaining the true facts. This duty has not been discharged in this case.

The first issue is purely a fact question. It appears from the evidence that the petitioner kept its cemetery accounts on the accrual basis, but in 1923 it entered upon its books as profit for that year an amount of $1,385.28 income from interest which was actually earned and collected in its cemetery business in 1922 and which, therefore, should have been entered and reported in 1922. It follows that the item has been erroneously included in income for 1923 and should be excluded in the recomputation authorized in this opinion.

In the second issue petitioner contends that certain ordinary expenses of collection fees, salaries, taxes and other items have been overlooked and not allowed by respondent. In the third issue petitioner claims that certain deductions allowed by respondent should be increased. The foui’th issue arises from an allegation that income is overstated by respondent. On all of these issues we are met by a failure to prove facts sufficient to overcome respondent’s determination. The lack of identity between the figures as shown on the books and those employed in respondent’s computation, coupled with the scant testimony on the issue, leaves us entirely uninformed. From the record before us it is impossible to say with certainty what has or has not been included. The testimony of petitioner’s witnesses on these points added nothing. Their statements were merely a recital of the items openly appearing on the face of the computation or in the books. There is no direct testimony as to the actual payment of these items. Petitioner has not proven respondent’s computation to be in error.

In the fifth issue the petitioner claims that certain income from interest on the installment contracts should be revised to accord with the fact that such receipts were not all income to the petitioner. The contention is that pursuant to the contract the interest so received was divided equally between the petitioner and Stewart and Fry and therefore only 50 per cent of the same was taxable to the petitioner. The evidence supports this contention and income should be adjusted accordingly. The sixth issue presents a different question. In the case of a few of the sales contracts which called for deferred payments and the withholding of a deed until the purchase price was paid, the petitioner gave a deed and accepted a second mortgage securing minor amounts of remaining unpaid purchase money obligations. Nothing was realized in cash at the time. The whole procedure was a mere matter of convenience resulting in weakening the petitioner’s security and did not alter the essential fact that the deferred payments were to be continued. The income should continue to be reported if and when collected.

In the seventh issue the petitioner claims the right to deductions from income in each of the taxable years of claimed liabilities under section.! of the Act of 1869, State of Michigan (see section 11166 [sec. 7, ch. 212] Michigan Compiled Laws, 1915), which provides as follows:

(11166) Sec. 7. It shall be the duty of such board of directors to preserve good order in the grounds of such cemetery; to provide for the laying out and embellishing of the same, and to see that they are well kept and in good condition. When the payments for lands purchased shall have been fully made, to reserve at least two-thirds of all the receipts of such corporation which shall be derived from the sale of burial rights after the payment of the current expenses fox-interest, improvements, and embellishing, until the aggregate amount thereof shall, in the opinion of said board, be sufficient to constitute a permanent fund which, when invested, shall produce an income large enough to meet the expense of keeping the grounds of such cemeteries perpetually in good condition after the same shall have once been properly laid out, improved, and embellished according to the plan thereof; to invest the receipts to be reserved as aforesaid in the bonds of the United States, or of the state of Michigan, or of municipal corporations of this state, and to use the income thereof only for the purposes aforesaid ; to cause to be issued scrip or certificates to each subscriber to the articles of the association, which certificates shall specify the amount paid into the capital stock by such subscriber. Such scrip shall be personal property and transferable by the holder thereof, under such regulations as the board of directors may adopt; to make a report to the annual meeting of the condition of the association, and its receipts and disbursements for the previous year.

An asset account appears on the books of the petitioner for 1925 in the amount of $16,142.40, called “ Perpetual Fund.” A witness for the petitioner, however, testified that prior to 1929 the petitioner had never made provision for perpetual care. In 1929 the petitioner, in agreement with a trustee, set up a so-called perpetual fund to provide for the care of the cemetery out of the income from the fund; the petitioner retained an interest and control with privilege of making changes and amendments not inconsistent with any then existing law of Michigan applicable to perpetual care and maintenance funds.

The petitioner argues that equity would require substantial compliance with the statute and we are, therefore, expected in view of the inaction of the board of directors, to determine what amount would have been a reasonable fund and the amounts which should have been added thereto during the taxable years. The petitioner’s theory is that these amounts, which we are asked to determine, are properly allowable deductions from income in the taxable years. It would be profitless to consider the legal effect of transfers to the so-called perpetual fund, for it is apparent from the findings that we are not in a position to make the desired determinations. We are unable to say what fund would be necessary, since we do not know the expense of keeping the grounds in good condition; we do not know what two-thirds of the receipts each year from the sale of burial rights over and above interest, improvement and embellishment, covering the long period of years, beginning in 1906, during which the petitioner has operated, amounted to; we are not satisfied that an exercise of sound discretion on -the part of the board of directors would have required certain and definite additions, or additions to the fund in the taxable years. Clearly, the petitioner has failed to substantiate his contention as to this issue.

The question of fact presented by the eighth issue is disposed of by stipulation of the parties. The agreed value as of March 1, 1913, of the cemetery lots and the quantities sold as indicated in the findings of fact will be considered in the recomputation of income.

The ninth issue is, in effect, a claim by the petitioner for the application of the net loss provisions of the statutes if this rede-termination results in statutory net losses. If the recomputations made pursuant to this opinion show net losses the matter will be disposed of under Rule 50.

Decision will be entered under Rule 50.


author: Marquette:

text:
    Peyton-du Pont Securities Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent
    Docket No. 29248.
    Promulgated February 19, 1932.

      Walter J. Bartnett, Esq., for the petitioner.

      J. M. Leinenhugel, Esq., for the respondent.
   OPINION.

Marquette:

Except as incorporated in our findings of fact, the “Additional Statement of Facts ” filed at the hearing has been disregarded as being irrelevant to the issues here presented.

The petitioner filed a consolidated income-tax return for 1923 for itself and five other companies. Affiliation was denied by the respondent and petitioner now concedes that such denial was correct in regard to the Cardiff Marble Company and the Standard Stoker Company, but insists that respondent erred in denying affiliation with the Southern Menhaden Corporation, Charles J. Maxwell & ■ Company, and the Mclntosh-Morello Orchards Company.

The '.Revenue Act of 1921, so. far as it is here pertinent, provides:

Seo. 240. (a) That corporations which are affiliated within the meaning of this section may, for any taxable year beginning on or after January 1, 1922, make separate returns or, under regulations prescribed by tbe Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which ease the taxes thereunder shall be computed and determined upon the basis of such return. If return is made on either of such bases, all returns thereafter made, shall be upon the same basis unless permission to change the basis is granted by the Commissioner.
*******
(c) For the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns directly or controls through closely affiliated interests or by a nominee or nominees substantially all the stock of the other or others, or (2) if substantially all the stock of two or more corporations is owned or controlled by the same interests.

The provisions of subsection (c) have been considered by the Supreme Court in Handy & Harman v. Burnet, 284 U. S. 136. In that case six men owned 93.71 per cent of the stock of the taxpayer and they also owned about 75 per cent of the stock of Hamilton & DeLoss, Inc., a subsidiary. Harold H. Hamilton was president of the subsidiary, and 20 per cent of its stock was issued to him. The taxpayer, through its power over Hamilton’s official position and salary, and its ability to dominate both corporations, was in position effectually to influence Hamilton in respect of the voting, use or disposition of his stock, and thus, as a practical matter, to exert control. Bespect-ing the statute in question, the court said:

The section requires control of substantially all of the stockcontrol of the corporation is not enough. The carrying on of a business unit by two or more corporations does not in itself constitute affiliation. The shares of Hamilton & DeLoss, Inc., owned by the six shareholders did not constitute substantially all of its stock * * *. It would require very plain language to show that Congress intended to permit consolidated returns to depend upon a basis so indefinite and uncertain as control of stock without title, beneficial ownership or legal means to enforce it. Control resting solely on acquiescence, the exigencies of bttsiness or other considerations having no binding force is not sufficient to satisfy the statute.

We think the above decision is controlling here. At the time of the stockholders’ meeting in May, 1923, and for the remainder of that year, petitioner owned 66% per cent of the Maxwell Company’s stock, while 33% per cent was held by a person having no connection with, or financial interest in, the petitioner. Although petitioner held and voted a proxy for that one-third interest, the evidence indicates that the control thus acquired by the petitioner rested upon the exigencies of business and hence was not the legal control of the stock required by the statute.

Bespecting the Orchard Company, petitioner owned 71.48 per cent of the stock in 1923. Through proxies 100 per cent of the Orchard Company’s stock was voted by petitioner. The evidence does not disclose that petitioner had any title or beneficial ownership in the stock for which the proxies were given, and the proof therefore fails to establish the control required by the statute to constitute affiliation.

During the taxable year petitioner owned 75.54 per cent of the Menhaden Company’s capital stock. It is true that four of petitioner’s stockholders and directors together owned 7.94 per cent of Menhaden Company stock, but we can not assume that such individual holdings were controlled by petitioner within the meaning of the statute. In each instance the petitioner owned less than 76 per cent of the stock of the corporation with which it claims affiliation, and no control of the other stock is shown. It has been held repeatedly that such a percentage is insufficient to constitute “ substantially all.” Handy & Hannan v. Burnet, supra; Burnet v. Bank of Italy, 46 Fed. (2d) 629; Denunzio Fruit Co. v. Commissioner, 49 Fed. (2d) 41. We conclude, therefore, that no affiliation existed with either of the three companies in question during 1923.

The petitioner also contends that it is entitled to deductions on account of bad debts with respect to certain promissory notes as follows: $95,090.66 representing the purchase price of the Menhaden Company’s notes bought by petitioner from Frank L. Connable, which amount petitioner charged to profit and loss on December 31, 1923, and $60,500 representing money loaned in 1922 and 1923 by petitioner to the Menhaden Company and evidenced by that company’s promissory notes.

Under section 231 (a) (5) of the Revenue Act of 1921, debts may be deducted when they are ascertained to be worthless and are charged off within the taxable year. Both the ascertainment of worthlessness and the charging off must take place within the taxable year. In' our opinion the evidence offered does not show that the notes, or the debts they represented, were ascertained to be worthless during 1923. The Menhaden Company may have been in poor condition financially, but the evidence does not disclose that any of the promissory notes were past due in 1923, nor that the debtor company was not able to pay the notes when they did fall due. The fact that petitioner has never received any payment on the notes is not proof that they were worthless, or ascertained to be worthless in 1923. At the close of that year there was a fair possibility that the coming fishing season would be profitable for the Menhaden Company and enable it to meet its obligations when due. Clearly, the evidence adduced does not establish that petitioner had ascertained in 1923 that the notes in question were without value. So far as concerns the notes given for loans, not only does the same reasoning apply, but apparently they were not charged off petitioner’s boobs at all. The petitioner thus has failed to sustain the burden of establishing its right to the deductions claimed. Cf. Thomas J. Avery, 5 B. T. A. 872; affd., 22 Fed. (2d) 6; Higginbotham-Bailey-Logan Co., 8 B. T. A. 566.

During 1923 the petitioner entered on its boobs of account charges against four subsidiary companies for interest and financial commissions accrued during that year in the aggregate amount of $34,583.45. The books were kept upon the accrual basis and respondent has included the amounts as taxable income. It is now contended that the items did not constitute income but were merely bookkeeping entries made in the belief that petitioner was entitled to file a consolidated return, in which event the items credited on petitioner’s books would be eliminated by corresponding entries to expenses qn the books of the subsidiaries.

We are not impressed by the argument. Apparently, the items were proper ones to be charged against the companies which incurred them, and, as petitioner was on the accrual basis, the entries were of necessity made at the time of accrual. The making of proper entries to reflect the petitioner’s business transactions was not dependent upon or affected by the petitioner’s right to file a consolidated return. Cf. Clarence Shock, 1 B. T. A. 528; S. W. Harris, 2 B. T. A. 933; Mianus Motor Works, Inc., 5 B. T. A. 435. The interest and commissions, therefore, constituted accrued income to the petitioner in 1923. When, as here, entries must be made to properly reflect business transactions, the validity and force of such entries can not be dispelled because the taxpayer believed he could offset their effect by a method which, in fact, he is not entitled to pursue. We sustain the respondent’s determination upon this point.

The petitioner also charged on its books and against some of its subsidiaries amounts aggregating $5,458.07. Of this total, $4,888.07 represented salaries paid by petitioner to its own employees, while $570 represented rental charges. The subsidiaries and petitioner occupied the same general offices and petitioner’s employees performed the office work necessary for the subsidiaries.

The amounts in question represented expenses paid out by the petitioner. For purposes of its own petitioner chose to carry the items on its books as charges allocated to subsidiary companies rather than as expense to itself. These charges having been made against the subsidiaries upon the books of petitioner, they either represented charges properly made against them or were fictitious entries for tax purposes. The petitioner’s contention that they were mere bookkeeping entries made in the belief that they would be eliminated in a consolidated return is not entitled to much weight in the circumstances, and in our opinion these amounts should be treated as advances to the subsidiaries and, as such, represent neither income nor deductible expense to petitioner.

Decision will be entered under Rule 50.


author: Smith:

text:
    National Land and Construction Company, Petitioner; v. Commissioner of Internal Revenue, Respondent.
    Docket No. 40126.
    Promulgated February 19, 1932.

      M. P. Bosenthaler, G. P. A., for the petitioner.

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

Smith:

The respondent contends that since no excess-profits-tax return (Form 1103) was filed by the petitioner, the excess-profits tax may be assessed at any time (section 278 (a) of the Revenue Acts of 1924 and 1926) and that the 25 per cent penalty should also be assessed for failure to file this return (section 3176 of the Revised Statutes). The statement attached to the deficiency notice shows that the respondent also determined a deficiency in the petitioner’s income tax for 1917, but concedes that the income-tax deficiency is barred by the statute of limitations. The petitioner contends that the proposed excess-profits-tax assessment (deficiency and penalty) is also barred.

Title II, War Excess Profits Tax, of the Revenue Act of October 3, 1917, imposed the tax in controversy and made applicable thereto all provisions of Title I of the Revenue Act of September 8, 1916, relating to returns and payment of the [income] tax therein imposed ” (section 212), and the Commissioner, with the approval of the Secretary of the Treasury, was directed to “ make all necessary regulations for carrying out the provisions of this title ” (section 213). Section 14 of the Revenue Act of 1916 provides for the “Assessment and Administration ” of the tax imposed under Title I of that act, and in subdivision (a) of this section it appears that in cases of refusal or neglect to make such return, and in cases of erroneous, false, or fraudulent returns, * * * the Commissioner * * * shall, upon the discovery thereof, at any time within three years after said return is due, make a return upon information ” and assess the tax. A strict adherence to the provisions of section 14 (a) of the Revenue Act of 1916, applicable to the excess-profits tax imposed by the Act of October 3, 1917, would apparently require the Commissioner to move within three years of the time “ the return was due ” with respect to the contested deficiency. However, subsequent revenue acts provide that the “ tax due under any return shall be determined and assessed * * * within five years after the return was due or was made ” (section 250 (d) of the Revenue Act of 1918), or “the return was filed” (section 250 (d) of the Revenue Act of 1921, section 277 (a) (2) of the Revenue Acts of 1924 and 1926). There is no contention that the income-tax return filed by the petitioner for the taxable year 1917 was false or fraudulent with intent to evade tax. Our question narrows itself down to whether the x-espondent can assess the excess-profits-tax deficiency and penalty for 1917 “ at any time ” or is restricted to the three or five-year period after the return on Form 1103 was due, made, or filed.

The petitioner contends that it filed the only return required by the law and regulations for the taxable year 1917. The petitioner’s income-tax return makes a prima facie showing that it was not required to file an excess-profits-tax retúrn, since its net income was less than $3,000, the amount prescribed by the respondent as being necessary before a domestic corporation was requiied to make an excess-profits-tax return (article 10 of Regulations 41, and see “ General Instructions ” on Form 1031 and Form 1103). Had a return on Form 1103 been required from this taxpayer, the excess-profits tax due was to “be assessed and collected at the same time and in the same manner” as its income tax (article 79, Regulations 41). In Denman v. Motter, 44 Fed. (2d) 648, 649, is the following:

* * * The plaintiffs [taxpayers] made an honest endeavor to comply with the rules and regulations; they made a return that they thought was a full compliance with the law * * *.

As we said in Peerless Iron Pipe Exchange, Inc., 23 B. T. A. 900, 904;

* * * The purpose and function of all income-tax returns, on whatever form, is to furnish such information as will enable the respondent to proceed intelligently in determining the proper amount of tax to be assessed. * * *

This taxpayer substantially complied with the law and regulations and did not file an excess-profits-tax return because of the honest belief that no such return was required. The return filed contained full information regarding petitioner’s invested capital, income and expenses, and the notation that no excess-profits tax was computed and claimed as a credit in the computation of petitioner’s taxable net income certainly put the respondent upon notice regarding the excess-profits tax for 1917. The respondent’s determination of June 12, 1928, more than 10 years after the petitioner filed its return for 1917, is too late. See Abraham Werbelovsky, Executor, 8 B. T. A. 442.

In a recent case involving a corporate taxpayer and the year 1917, United States v. Tillinghast, 55 Fed. (2d) 279, the United States District Court for Bhode Island said:

* * * The return as filed upon Form 1031 discloses income received and items of deduction which had in good faith been claimed * * *. Where a basic return, as here, was required on Form 1031 and a supplemental or accompanying return also provided, with directions for its use and when to be used, it must be the intendment of the law that if the taxpayer’s computation, made in good faith, upon the basic return shows a result which in compliance with the directions and regulations leaves nothing to be carried forward upon the supplemental return, he does not lose his right of protection from delayed suit and examination, provided by the statute of limitations. * * *

The instant proceeding is distinguishable from and not controlled by Beam v. Hamilton, 289 Fed. 9, and Homer P. Morris, 9 B. T. A. 1273, involving individuals and the taxable year 1917. In both of ihose cases the taxpayers filed income-tax returns that were prima facie evidence that they were required to file excess-profits-tax returns; Avhereas, the return filed by the petitioner was prima facie evidence that it was not required to file an excess-profits-tax return and that there was a substantial compliance with the law and regulations. See William F. Stafford, 14 B. T. A. 1199; Valentine Clark Co. v. Commissioner, 52 Fed. (2d) 346; Florsheim Bros. Dry Goods Co. v. United States, 280 U. S. 453. There was no “ substantial delinquency ” to be penalized. Dayton Bronze Bearing Co. v. Gilligan, 281 Fed. 709, 714.

This Board and the courts many times have cited with approval our decision in Mabel Elevator Co., 2 B. T. A. 517, 519, wherein we said:

* * * Tie return filed purported to be made in accordance with the law; it purported to and did include the income ol the taxpayer for the period in question. In the absence of any evidence or claim that such return was false or fraudulent with intent to evade tax, it became the duty of the Commissioner to determine, within the time provided by law, whether or not such return was erroneous in any respect.
There can be no doubt that such limitations are placed on assessments for the purpose of assuring the taxpayer, who has made an honest return, that after such period his tax liability will not be reopened; otherwise the business of the country would always have before it the threat of additional taxes against the income of years long past whenever a new theory for interpreting the tax law or for the application of accounting principles occurred to the taxing authorities. If the limitation can be avoided on the plea that the return filed was not such a return as is required by law, although filed in good faith, there is no such assurance for the taxpayer and the limitation becomes of doubtful value at least. If the statute requires any interpretation great weight must be given to the purpose which it was obviously intended to accomplish.

Judgment of no deficiency will be entered.


text:
    I.G. Zumwalt, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 6883.
    Promulgated February 23, 1932.

      O. R. Folsom-J ones, Esq., and F. E. Yowngman, Esq., for the petitioner.

      H. A. Cox, Esq., for the respondent.
   OPINION.

Van Fossan:

The petitioner contends that the total cost of the irrigation system described in the findings of fact should be allowed as a deduction from income for the year 1919, on the ground that such cost was a usual and necessary expense of business in that year. In the alternate, he contends that he abandoned the main canal and pumping plant in 1919 and that, therefore, he should be allowed to deduct their cost as a loss incurred during the year, and in addition thereto should be permitted to deduct the cost of the distribution ditches and booster plants from his 1919 income as a usual and necessary expense of business.

In our opinion the evidence does not support these contentions. The evidence shows that in the early part of 1919 the petitioner entered upon a large project of rice cultivation. Rice-growing in the part of California in which the petitioner’s land was situated was in an experimental state. It appears from the proof that an adequate supply of water to cover the rice at the various stages of its growth was an essential factor in its successful cultivation and that a lack of a sufficient supply of water was fatal to the crop.

The petitioner had added to his own land a large acreage which had been leased to him for rice-growing purposes. Leases by which he acquired the additional acreage ran for an average period of three years, namely, on the average, for the crop years 1919, 1920 and 1921. The annual rent reserved in the leases amounted to a substantial sum of money. The leases granted to petitioner the right to grow rice and to irrigate the land leased to him. The petitioner had leased to tenants, for rice cultivation, parts of his own land, and for the same purpose had subleased to tenants parts of the land leased to him. These leases and subleases to petitioner’s tenants obligated him to furnish them an adequate supply of water for the cultivation of a rice crop. One of these leases to the petitioner’s tenants ran for a term of two years. The petitioner had cultivated rice on a part of his land prior to 1919 and for such cultivation had used waste water draining through the so-called trough described in the findings of fact. But the evidence discloses that he had no knowledge as to whether or not in 1919 and subsequent years there would be sufficient waste water draining through the trough or sufficient water coming from the mountains to the west of his acreage to furnish an adequate supply either for his own use or for the use of his tenants. He admitted during his cross-examination at the hearing that he could not compel rice growers to the north of his property to allow waste water from their operations to flow through the trough.

From these facts we must conclude that the petitioner constructed his irrigation system, consisting of a main canal, pumping plant, distribution ditches and booster plants, for the purpose of assuring at all necessary times an adequate supply of water for rice cultivation on his own land, on the land leased to him, and on the land leased by him to tenants. Obviously, such expenditures are capital expenditures. It is true that the petitioner testified that when he built the irrigation system he intended to use it only for a year, namely, for the year 1919. But in answer to further interrogation he stated in substance that at the time of construction he did not know how long he should use the irrigation system. And although he stated that the first year of cultivation was the “ big year and the big money,” he admitted that he cultivated his own and his leased lands in 1919, 1920, and 1921, stating in respect thereto as follows:

I had these leases tied up and had paid cash for the land and had to pay-rent anyway and I got something oft it to pay the cash rent * * *.

The facts show clearly that the cost of the construction of the main canal, pumping plant, distribution ditches and booster plants was a capital expense and not an ordinary and necessary expense of business for the year 1919.

Nor are we impressed with the contention that the petitioner abandoned the main canal and pumping plant in 1919 and that the total cost should be allowed as a loss. The testimony indicates, and we have found as a fact, that petitioner did not use them for more than ten days in 1919. That year there was a sufficient flow of waste water through the trough and of water from the mountains to the west to furnish an adequate supply of water both for the petitioner’s own land and also for his leased lands. It appears also that the operation of pumping water from the Sacramento River to the canal was an expensive one and was not justified if sufficient water for the cultivation of the rice crop could be secured otherwise. For these reasons petitioner had little need to use the main canal and pumping plant during the crop year of 1919. But mere nonuser does not constitute abandonment. In Belridge Oil Co., 11 B. T. A. 127, we said: “Whether or not there has been an abandonment * * * depends on the intention of the owner, coupled with the act of abandonment, both to be ascertained and determined from all the surrounding facts and circumstances.” See also Marquart v. Bradford, 43 Cal. 526. Although the petitioner did not use the main canal for more than ten days in 1919, he used it in 1920 when he leased it to the Williams Irrigation District, as stated in the findings of fact. He used it again .in 1923 and 1925 for the irrigation of his land and at all times it was ready for his use in the event of a failure of waste water in the trough. The evidence does not sustain the petitioner’s contention that he abandoned the main canal and pumping station in 1919. It follows that he is not entitled to deduct the total cost as a loss incurred during that year.

It is our opinion also that the evidence fails to support a contention that the useful life of the main canal and pumping station was limited to the life of the several leases made to the petitioner. The main canal, which was constructed on a right-of-way owned by petitioner, ran from the Sacramento River about six miles to a point in the petitioner’s own land. This land consisted of a large acreage suitable for rice-growing purposes. The pumping plant and canal could and did furnish the petitioner with water for rice-growing on his own land for several years after the leases referred to had expired, and we are satisfied from the evidence that they were constructed for the purpose of creating a permanent source of water supply for rice, cultivation on the petitioner’s land at any time when the conditions were suitable for such cultivation. Assuming that the main canal and pumping plant were both subject to depreciation, there is nothing in the record from which we can determine the amount of depreciation of the main canal in 1919 or from which we can say that the rate of 10 per cent a year for depreciation of the pumping plant which was allowed by the respondent is insufficient.

The construction of the distribution ditches and booster plants, however, was made necessary by the terms of the agreements entered into by the petitioner with his lessors and lessees. After the expiration of the leases running to him the petitioner had no right to use this secondary irrigation system, constructed on land leased by him. Under the terms of several of the leases the petitioner had obligated himself to fill in the ditches upon the expiration of the term granted thereby. In every case, upon the expiration of the lease, the ownership of the ditches located on leased land would pass to the owner of that land. Therefore, at the expiration of the leases the useful life of the secondary irrigation system would terminate and the booster plants would be worth only their salvage value. It does appear, however, that a part of the distribution ditches served, or could serve, a relatively small acreage of land owned by the petitioner and usable for rice cultivation, but this portion of the ditches was necessary to connect the main canal with the distribution ditches serving the large acreage leased to the petitioner and was an essential link in the distribution ditches required by the petitioner’s agreements with his lessors and lessees. It is our opinion, therefore, that the useful life of the distribution ditches was commensurate with the life of the leases to the petitioner.

We have held in numerous cases that a lessee who places on leased property improvements which can not be removed after the expiration of the lease is entitled to amortize the cost of such improvements over the life of the lease. National City Bank of Seattle, 1 B. T. A. 139; Rosenfield Dry Goods Co., 4 B. T. A. 373; Terre Haute House Co., 17 B. T. A. 384; Lowe & Campbell Athletic Goods Co., 18 B. T. A. 1134. This principle is applicable to the present proceeding in respect to the cost of the distribution ditches and booster plants. The money expended in their construction was expended for the entire term covered by the leases running to the petitioner and was not a necessary expense of business in the year 1919. The cost of the ditches and booster plants should, therefore, be recovered by the petitioner over the term granted by the leases. While the life of the several leases varied in duration, a fair average life was. three crop years, beginning with the crop year of 1919. In our opinion, therefore, it is reasonable and equitable for the petitioner to amortize the cost of the distribution ditches and booster plants over the years 1919, 1920 and 1921, one-third of such cost being deductible from income in each year. It appears that the cost of the distribution ditches and booster plants was $89,028.46 and that the cost of the booster plants alone was $6,660.59. Of this latter sum one-tenth, or $666, has been allowed by the respondent as a deduction from income for the year 1919. The salvage value of the booster plants was $2,500 and the distribution ditches had no salvage value.

The deficiency for the year 1919 will be redetermined in accordance with this opinion.

Judgment will be entered under Rule 50.


text:
    Washington Market Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 43912.
    Promulgated February 23, 1932.

      Chester A. Bennett, Esq., Hugh H. Obear, Esq., and J. V. Morgan, Esq., for the petitioner.

      Eugene Meaeham, Esq., and O. A. Lowery, Esq., for the respondent.
   OPINION.

Van Fossan:

The petitioner suggests that the Government is estopped to assert the deficiency. It cites no authority and makes little reference to the matter in its brief. We have held repeatedly that the respondent is not estopped to reverse a prior ruling made by him concerning the same tax year at any time prior to the expiration of the statute of limitations, provided no settlement has been made under the provisions of section 3229 of the Revised Statutes. James Couzens, 11 B. T. A. 1040; Chattanooga Coke & Gas Co., 12 B. T. A. 782; Frances P. McIlhenny et al., Executors, 13 B. T. A. 288; affd., 39 Fed. (2d) 365; Oilbelt Motor Co., 16 B. T. A. 831; Stein-Bloch Co., 23 B. T. A. 1161. Moreover, there is no evidence that petitioner has been damaged by reliance on the ruling in question. The respondent was not estopped to assert the claim for additional taxes.

The petitioner claims that the item of $49,131.99 was unwar-rantedly added to its income by respondent and introduced testimony to show that said item was included in the figure of $99,519.21 “ interest received, etc.” reported by it and resulting in a net income of $76,492.91 shown on the face of petitioner’s return.

Petitioner’s problem, however, is to show the error of respondent’s determination. To do this he must meet respondent on his own ground. In computing the deficiency the Commissioner started with the figure of $86,991.50 net income as disclosed by the books. To this he added, among other items, one of $49,181.99 “ interest received.” Both of these figures appear in Schedule L on page 4 of petitioner’s return. The figure $99,619.21 does not appear in respondent’s computation. The question, therefore, was not, as apparently conceived by petitioner’s counsel, whether the figure of $49,131.99 interest received was already included in the figure of $99,619.21 “ interest on bank deposits, etc.” shown under item 5 of petitioner’s return, but whether in respondent’s computation the item of $49,131.99 was included in the basic figure of $86,991.50. A reasonable inference from the return is that it was not so included. In any event petitioner has not shown error in respondent’s computation in this respect.

At the hearing respondent raised as an affirmative issue the correctness of his previous action in allowing petitioner to deduct, in determining the amount of profit, if any, the sum of $104,288.32 from the gross award, as expenses incurred in securing the same. We have held in many cases that commissions and fees paid for effecting a sale of property should be deducted from the sale price in computing the profit earned. Jessie G. Sheen, 6 B. T. A. 114; Frank Cavanaugh, 19 B. T. A. 1251; W. A. Bahr, 10 B. T. A. 637; Bamma Baucum, 17 B. T. A. 1312; Florence G. Baldwin, 23 B. T. A. 512. The engineering expenses, surveys, witness fees and attorneys’ fees incurred in this case in connection with the condemnation proceedings before the commission and in the Court of Appeals bear close resemblance to the necessary costs of a sale. The position of petitioner is sustained.

We may pass without extended discussion the contention raised in petitioner’s brief that all that petitioner was paid for was its equity in the property and that the amount of $310,309.66 withheld by the Government to satisfy mortgage bonds, taxes, and other liens standing against the property was never received by it. The relief from the obligations and liabilities and their payment by the Government constituted a payment to petitioner equally as though the money had been paid to petitioner and petitioner had in turn satisfied the same.

The last and principal question in the case is whether or not petitioner realized a profit of $283,039.77, or profit in some other amount, as a result of the condemnation proceedings under which the property of the petitioner, known as Center Market, in Washington, was taken for public purposes. The respondent computed the profit by deducting from the gross award of $1,522,177.87 the sum of $104,-238.32, expenses of suit, and from the remainder the cost of replacing property, $1,134,919.78, thus arriving at a figure of $283,039.77, which he characterized as profit. It is the contention of petitioner that respondent has totally misapplied the provisions of the revenue act in this determination.

Section 203 (a) and (b) (5) of the Eevenue Act of 1924 is as follows:

Sec. 203. (a) Upon the sale or exchange of property the entire amount of the gain or loss, determined under section 202, shall be recognized, except as hereinafter provided in this section.
* * * * * * *
(b) (5) If property (as a result of its destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation, or the threat or imminence thereof) is compulsorily or involuntarily converted into property similar or related in service or use to the property so converted, or into money which is forthwith in good faith, under regulations prescribed by the Commissioner with the approval of the Secretary, expended in the acquisition of other property similar or related in service or use to the property so converted, or in the acquisition of control of a corporation owning such other property, or in the establishment of a replacement fund, no gain or loss shall be recognized. If any part of the money is not so expended, the gain, if any, shall be recognized, but in an amount not in excess of the money which is not so expended.

At the time the Government condemned and took over the physical assets of the business which the petitioner was conducting on Reservation No. 7 in Washington, D. C., that business consisted of four activities or divisions: (1) Renting stalls for retail markets; (2) manufacturing and selling ice; (3) furnishing cold storage refrigeration ; and (4) leasing space to wholesalers for use in storing goods and displaying them for sale to retailers. After the petitioner was forced to abandon its business on Reservation No. 7 it was unable to secure another location in Washington at which it could carry on its retail business and, hence, was compelled to eliminate that division in its new plant at 4y2 Street and Virginia Avenue, S. W. The facilities constructed at the new plant at a cost of $1,134,919.79 and represented by the stock of the Terminal Refrigerating and Warehousing Company, which the petitioner owned, constituted a complete replacement of the petitioner’s former equipment used in operating the various phases of its business except that of providing stalls for retail market dealers. We are of opinion, and there does not seem to be any dissent by either party from the conclusion, that the erection of the new plant was the “ acquisition of other property similar or related in service or use to the property so converted ” or “ the acquisition of control of a corporation owning such other property ” as provided in section 203 (b) (6). Cf. Henderson Overland Co., 4 B. T. A. 1088. The notice of deficiency recognized that the above quoted section is applicable. Petitioner does not dispute this, but •contends that the tax has been incorrectly computed thereunder. In this contention we concur. It does not follow from the fact that there has been a replacement under this statute that the excess above the replacement cost is all gain. The test to be applied in determining whether there is a replacement is the character of the service or use. It is not a financial test. But whether a gain results requires a consideration of the money involved.

As we view it, section 203 (b) (5) is a special or relief provision designed to prevent an inequitable incidence of taxation, perhaps to prevent the very action that is here proposed. Under the first part of this section, as we interpret the same, it is laid down that where an owner of property is deprived of it by condemnation for public use or other specified cause and by the expenditure of all of the proceeds acquires another property equivalent in usefulness to replace the old, no gain or loss is realized from the mere fact of disposal of the old and the acquisition of the new property. Petitioner did not expend all of the proceeds in acquiring property equivalent in usefulness. Thus the case does not fall under the first provisions of section 203 (b) (5).

The last sentence of this subsection provides however: “ If any part of the money is not so expended, the gain, if any, shall be recognized, but in an amount not in excess of the money which is not so expended.” This contemplates the instant situation. It is in the application of this provision that the respondent erred. It does not provide that all of such excess shall be deemed to be profit. Nor does it hold that any of the excess is profit. This last sentence of subsection (5) of section 203 merely provides a limitation on the gain, if any, to be determined in the event some part of the fund be not expended. The very language recognizes that the amount of gain does not depend on the fact of there being a remainder in hand after replacement. The parenthetical clause “ if any ” is significant. It recognizes that though there be an excess there may. be no gain. It thus refers us back to the fundamental principles normally used in determining gain or loss. Obviously, this section was intended not to penalize but to protect parties whose property may be taken on condemnation.

Approaching the question in the light of these considerations, we find that the gross award was $1,522,197.87, from which should be deducted the sum of $104,238.32 on account of expenses, leaving a net award of $1,417,959.55 applicable to the payment of bonds, taxes and liens and in reimbursement of petitioner for its property. Tire cost of petitioner’s entire plant, as of March 1, 1913, was $1,494,450.29, to which there had been added expenditures aggregating $117,098.20, making a total cost of $1,011,548.49. Against this there had been allowed depreciation amounting to $183,253.43, making a depreciated cost of plant at the time it was taken by the Government of $1,428,-295.08. This sum is greater than the net award after payment of expenses and consequently there was no gain as contemplated by section 204 (b) of the Revenue Act of 1924.

It follows that there is no deficiency for the year 1924.

Decision will be entered for the 'petitioner.