author: GoodRich :

text:
    Garden City Feeder Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 24423.
    Promulgated April 10, 1933.

      H. M. Havner, Esq., and A. F. Schaetzle, Esq., for the petitioner.

      Harold Allen, Esq., L. H. RmhbrooJe, Esq., and James M. Adams, Esq., for the respondent.
   OPINION.

GoodRich :

This case has been twice tried. The first hearing was opened on circuit at St. Paul, Minnesota, and, after extending for some days, was continued and transferred to the Washington, D. C., calendar where it was later completed. A voluminous record, including various exhibits and depositions, was made at this hearing. Within a few days after the trial was completed, before the transcript was made up or briefs were filed, the Member who sat as a Division to hear the case was stricken suddenly and died. Thereafter, respondent filed a motion for a rehearing, asking also that, except for certain depositions, all the evidence received at the first hearing be rejected or suppressed. As grounds for his motion respondent recited the death of the presiding Member and claimed that, because of his illness, the Member during trial was laboring under an evident physical and mental disability which markedly interferred with his ability to properly conduct the case, with the result that the record was confused, befogged, erroneous and useless. He alleged also misconduct on the part of counsel for petitioner during trial. This motion was resisted by petitioner which, by counsel, contended that the presiding Member was fully capable of hearing the case and conducted the trial properly; that respondent, because he presented his case, was now estopped from moving to reject the record; that petitioner had incurred heavy expense in appearing at the first hearing, and was unable to again bear that cost, and that the record therein was complete, satisfactory and sufficient to serve as a basis for decision of the issues. Further, petitioner denied misconduct of its counsel during trial but asserted misconduct on the part of respondent’s counsel.

Both parties, by counsel, were heard in. argument upon this motion. Thereafter the full Board considered all phases of the motion and decided that a rehearing should be granted. Accordingly, an order was entered granting respondent’s motion, and the case was set for trial on the circuit calendar at St. Paul at petitioner’s request. Before the date of trial, petitioner filed a motion which, as amended, prayed for an order submitting the case upon the record as made at the first hearing. This motion being resisted by respondent, the parties were heard on argument and permitted to file briefs, after consideration of which the motion was denied and counsel advised that only such parts of the record made at the first trial as might be properly introduced in evidence at the second trial would be considered. Thereafter, by agreement of the parties, and in order to spare them expense and inconvenience, the case was transferred to the trial calendar at Washington, D. C., and set for hearing.

At trial, both parties appeared by counsel. Petitioner, when called upon to introduce evidence in proof of its case, objected to the taking of any additional testimony on the ground that all testimony had theretofore been taken and trial closed, and that the record contained nothing to indicate that further testimony should be taken. This objection raised no issue not previously considered, both upon respondent’s motion for new trial and upon petitioner’s motion to submit the case upon the former record, and was overruled, to which petitioner excepted. Again petitioner was specifically called upon for proof of its case, whereupon its counsel again insisted that the case be submitted upon the record as made, stating:

We offer no proof at this time, except the record itself as it now stands, * * * and ask the Board to consider the record as originally made in this case.

Counsel then added that he was not offering the former record in evidence, but urged that the case be decided upon it. Again counsel moved that all the testimony theretofore offered in the case by petitioner be considered, stating that it would rest on the record as made.

Whether petitioner’s statements, which are conflicting, amount only to a renewal of its previous motions to submit the case upon the former record or effect an offer in toto of the evidence taken at the former trial is not clear. However, the motion was overruled, whereupon counsel excepted, and refused to offer any further evidence, either by witnesses personally appearing, by the testimony of any particular witness formerly taken, or by particular deposition or exhibit. Then respondent, being called upon, proceeded to introduce evidence in support of the affirmative allegations of his amended answer, to all of which petitioner objected generally and was overruled. While petitioner’s continuing general objections to the introduction of respondent’s evidence were overruled, certain of its specific objections made to questions asked the witnesses or documents offered were deemed proper and were sustained. Petitioner participated in the trial as thus indicated and by the exercise of its right to cross-examine respondent’s witnesses.

Since petitioner introduced no evidence, we must sustain respondent’s determinations of deficiencies as set out in the original notice of deficiency and give him judgment thereon because of failure of petitioner’s proof and, consequently, we need not here consider the issues raised in opposition to respondent’s original determinations, nor need we concern ourselves with the facts thereunder. In so holding we are deciding adversely to petitioner’s principal contention, which is that our decision in this case must be based upon the evidence taken at the first trial. Petitioner denies that we have the power to order a new trial in any cause, or that we may disregard, reject or suppress evidence once introduced before us. It further urges that, even conceding our authority to order a new trial, still all the evidence previously taken must be considered as a part of the record because such evidence is a public record which we can not overlook and, secondly, because this Board, being by statute bound by the rules of evidence pertaining to courts of equity in the District of Columbia, may receive and consider upon new trial only such evidence as would be received and considered by such courts in a similar situation. In other words, petitioner regards us as a court of equity, permitted to order a rehearing only under those conditions in which such a court could do so, and then, having done so, subject to the general restrictions obtaining to such a court that no evidence may be gone into which was in the case at the original hearing or capable then of being produced; that no witness orginally examined before the master may be reexamined without special order of the court, and that such an order, if obtained, is limited to facts not testified to by the witness and not then in issue, citing Jenkins v. Eldredge, 3 Story, 299; 13 Fed. Cases 504; Read v. Patterson, 44 N. J. Equity 211; Scales v. Nichols & Scales, 2 Yerger’s Reports 126; 10 Tenn. 126; Buffington v. Harvey, 95 U. S. 99; Whiting v. Bank of United States, 13 Pet. 6; Deitch v. Staub, 115 Fed. 309.

¿The problem raised by petitioner is a serious one. It arises because of the confusion surrounding the status of this Board, its powers, its jurisdiction and its functions, and it is serious because upon its determination depends the correctness of our action upon a considerable number of cases. We are often importuned, both by the Government and by taxpayers, by motions for reopening of cases, both before and after decision has been entered, for the purpose of obtaining new trial, reconsideration, permitting of further argument, and the introduction of further evidence or the correction of inadvertent mistakes. We have been, and are, passing upon such motions as our discretion dictates in an attempt to discharge our duties as we conceive them to be, and on occasion for good cause shown, have granted such motions and taken such further action in proceedings before us as seemed necessary to a just determination of the claims of the parties. Generally, the parties have attributed to us, as a matter of course, the authority necessary to act in such matters, apparently assuming that any tribunal which can hear and determine a controversy has the inherent power to rehear and redetermine it. But, although no issue has been made of it before the courts reviewing our decisions, our power has not been entirely unchallenged nor free from comment. The issue was squarely raised in the case of Continental Oil Co., 23 B. T. A. 311, by petitioner in opposing a motion for rehearing filed by the Government but was not there decided, for the case was disposed of upon other grounds. It was recently suggested by the United States Circuit Court of Appeals for the Fourth Circuit in its decision in Lexington Ice & Coal Co. v. Burnet, 62 Fed. (2d) 906, that we should promulgate rules for such motions. This we had deemed unnecessary, believing those matters to lie entirely within our discretion, but, be that as it may, the fact remains that such requests, many numerically, though few in proportion to the total number of proceedings before us, are submitted to us and we pass upon them. Therefore, it is essential that our power therein be determined, for, certainly, we will not consciously assume and exercise an authority which we do not lawfully possess.

A study of the legislative history surrounding the creation and enlargement of the Board reveals the intention and understanding of the Congress with respect to its jurisdiction and powers. With the various changes made by the Congress to the original plan of organization, with its character as it existed under the Revenue Act of 1924, when proceedings before it were in the nature of a “ preliminary skirmish,” we are not here concerned, for it is apparent that in enacting the provisions of the Revenue Act of 1926 affecting the Board, and particularly that giving the Board jurisdiction to determine the correct amount of a taxpayer’s liability, either as a deficiency or an overpayment, the Congress was content that it had established the Board as a legislative (in contradistinction to constitutional), inferior tribunal, having judicial powers within its limited jurisdiction and capable of handing down, not merely administrative determinations, but judicial decisions. See Edward L. Scheidenhelm Co., 1 B. T. A. 864; Southern California Loan Assn., 4 B. T. A. 223.

This the Congress apparently believed it had power to do, and it seems clear that the name by which it was designated has no effect upon the nature of the powers of the tribunal. In the discussion of the bill by the Ways and Means Committee of the House the following appears relative to provisions affecting appeals of Board decisions :

* * * No other court in the world tries cases which in the aggregate involve such great amounts. * * * Under the new appellate procedure from the board (hereinafter discussed) the jurisdiction of the board in tax matters is similar to that heretofore held by judges of the Federal district courts. * * *
Court Review — Questions of fact anú, law. — -The procedure is made to conform as nearly as may be to the procedure in the case of an original action in a Federhl district court. * * *
In the view of the committee the decisions of the board are judicial and not legislative or administrative determinations. * * * The imposition upon the court of the duty of reviewing judicial decisions, such as those of the board, is not the imposition of a non-judicial duty, * * *. Such review of a judicial, as distinguished from a legislative or administrative determination may be had as to either questions of law or of fact. The proposed procedure, however, for reasons of policy and not of law, limits court review solely to questions of law as heretofore described.

A similar statement is contained in the report of the Senate Committee on Finance.

Again, when considering the Revenue Bill of 1928, the view of the Congress was expressed in the following excerpts from the reports:

A recent decision by the circuit court of appeals for the seventh circuit indicates that there is some disposition to regard the Board of Tax Appeals as an investigative rather than a judicial body, and to require it to reach its decisions not merely on the basis of the evidence presented in the record, but on the basis of such additional evidence outside the record as may be necessary fully to develop the taxpayer’s case. The committee is of the opinion that the hoard's function is purely judicial, and in order to clarify the situation has provided that no decision of the board (whether rendered before or after the bill becomes law) should hereafter be modified or reversed because the board or any of its divisions has failed to consider evidence not adduced before the board or division. At the same time the committee has provided that the rules of practice and procedure of the hoard shall, just as the Federal equity rules, have the farce and effect of law. [Italics supplied.]

On this proposal the Senate Finance Committee expressed itself thus :

In view of certain expressions in a recent court opinion, the House bill in Section 601 provides that no decision of the board shall be modified or reversed because the board has failed to consider evidence not adduced before it. While an appellate court has the right and duty, if an error of law has been made, to remand a case to the board for subsequent proceedings in accordance with law, the emstmg provisions of law clearly contemplate judicial, not administrative, procedure on the part of the board, and the committee can see no need of further legislation on this subject. It is not the duty of the board to make investigations of tax cases but to decide the case on the basis of evidence properly placed before it by the commissioner and the taxpayer. [Italics supplied.]

Whether the Congress, by its enactments, succeeded in endowing this Board with jurisdiction and powers of the nature it intended may be adjudged from the judicial characterization thereof. In Blair v. Oesterlein Machine Co., 275 U. S. 220, the Supreme Court said:

An examination of the sections creating the Board and investing it with power can leave no doubt that they were intended to confer upon it appellate powers which are judicial in character.

Later, in Williamsport Wire Rope Co. v. United States, 277 U. S. 551, the court said that under the Revenue Act of 1924 the power of the Board in reviewing determinations of the Commissioner as to the applicability of the special assessment provisions of the statute was discretionary and executive in character. Still later the court, by Mr. Chief Justice Taft, said, in Old Colony Trust Co. v. Commissioner, 279 U. S. 716:

The Board is not a court. It is an executive or administrative Board, upon the decision of which the parties are given opportunity to base a petition for review to the courts after the administrative inquiry of the Board has been had and decided.

It held further that a decision of the Board may be reviewed by the circuit courts of appeals as a controversy cognizable by those courts under the judicial article of the Constitution.

See also Goldsmith v. U. S. Board of Tax Appeals, 270 U. S. 117; Phillips v. Commissioner, 283 U. S. 589.

The pronouncements of the Supreme Court upon the subject have been the subject of reiteration and interpretation in numerous decisions of the various circuit courts of appeal, of which one of the more recent, rendered after an exhaustive consideration and accompanied by a vigorous dissenting opinion, is Commissioner v. Liberty Bank & Trust Co., 59 Fed. (2d) 320. It was there said:

While the Board is not a court, it exercises appellate powers judicial in character. Its decision presents a case or controversy between the taxpayer and the Government so as to authorize review by the court upon the Commissioner’s petition. * * * The Board exercises functions similar to those exercised by a trial court in a law case without a jury.

The character of the Board and the nature of its powers being thus judicially defined, the inquiry follows: “ What authority has the Board which would permit it to consider and act upon motions of the kind here under discussion? ” It has been urged that, since the Board is a creature of statute, it has neither implied nor inherent powers, and, unlike a court as to which every intendment of law is in favor of the power to do all things necessary toward final judgment in a proceeding, its powers exist, if at all, exclusively in the terms of the statute and, if statutory authority be lacking, it must be inferred that the intention of the Congress was to deny the power. These, and similar arguments, seem conclusively answered by the decision of the Supreme Court in Goldsmith v. Board, supra, holding that the Board, despite the lack of express statutory authority, has the power to make rules as to persons who may practice before it and reading, inter alia:

Our view * * * is that so necessary is the power and so usual is it that the general words by which the Board is vested with the authority to prescribe the procedure in accordance with which its business shall be conducted include as part of the procedure rules of practice for the admission of attorneys.

The primary business of the Board is to hear and decide controversies arising between the Commissioner and the taxpayer — to determine the amount of deficiency owing or overpayment made by the taxpayer. Surely, considering and acting upon motions for new trial, reconsideration, and the like, are as necessary a part of the procedure according to which that business shall be conducted as the prescribing of rules respecting the persons who ghall be permitted to appear to present the controversy. Certainly, the power for the consideration of and action upon such matters is necessary, and is usual to a tribunal having similar duties and, in our opinion, it requires no stretch of implication to imbue us with that authority. In many instances beyond those cases already referred to wherein we have taken cognizance of motions of this nature, we have, without reproach from higher authority, considered and acted upon presented problems, while lacking express statutory authority so to do, in the belief that our duty of determining a petitioner’s tax liability so required. We have considered and determined the constitutionality of a portion of a statute serving as a basis for a determination of deficiency. Henry Cappellini, 14 B. T. A. 1269; Independent Life Ins. Co. of America, 17 B. T. A. 757; American Security & Trust Co., 24 B. T. A 334; Lord Forres, 25 B. T. A. 154; Northern Trust Co., Executor, 9 B. T. A. 96; affd., 41 Fed. (2d) 732; 283 U. S. 782.

We have reviewed the action of the Commissioner in special assessment cases, Oesterlein Machine Co., 1 B. T. A. 159; affd., 275 U. S. 220. We have ordered the substitution of parties petitioner, Wm. I. Paulson, 10 B. T. A. 782; George E. Hall, Administrator, 10 B. T. A. 847; Charles A. Rusk et al., Executors, 20 B. T. A. 138; affd., 53 Fed. (2d) 428. We have refused to be bound by stipulations of law, Ohio Clover Leaf Dairy Co., 8 B. T. A. 1249; affd., 34 Fed. (2d) 1022; certiorari denied, 280 U. S. 588; Walter H. Lewis, 11 B. T. A. 334; affd., 47 Fed. (2d) 32; or by stipulations of fact if manifestly incorrect, William Ernest Seatree, 25 B. T. A. 396; and have disregarded a confession of error by the Commissioner when we found it to be contrary to statute, Lucius H. Littauer, 25 B. T. A. 21. At times, for good cause shown, we have vacated a decision, in some instances over objection of counsel and, again, at times, we have refused to do so. In view of these practices it is perhaps significant that the Bevenue Act of 1926, while expressly prescribing for our use in the admission of evidence the rules obtaining in courts of equity of the District of Columbia, left the rules of practice and procedure governing the conduct of proceedings before us to our discretion and that subsequent acts likewise left this power unimpaired. Moreover, the matter of a new trial of a proceeding before this Board was directly dealt with in Griffith v. Commissioner, 50 Fed. (2d) 782, wherein the court held that a motion therefor stops the running of the time allowed by statute for appeal from our decision, and in Bankers Pocahontas Coal Co. v. Commissioner, 287 U. S. 308, wherein the court held that our denial of a motion for rehearing was not an abuse of our discretion. See also Lexington Ice & Coal Co., supra; United States ex rel Dascomb v. Board, 16 Fed. (2d) 337. We conclude, therefore, that, because it is an essential requirement of the procedure necessary to the fulfillment of our duty, to the conduct of our business, we have the authority to include as a part of the procedure in cases before us, which, by statute is placed within our discretion, such consideration of, and action upon motions as may be necessary to a just determination of the controversy. It was for that reason that, after consideration of the motion by the full Board, a new trial was granted in the case at bar.

But it is further urged that we lack authority to grant a new trial in any proceeding before us wherein we have entered our decision, for the reason that it has then passed beyond our control and we become functus officio and without power to entertain further motions respecting the proceeding. The rule that, after the term has ended, all final judgments pass beyond the control of the rendering court, although under its control during the term, is well established and needs no extended citation. New England Furniture & Carpet Co. v. Willcuts, 55 Fed. (2d) 983. Its purpose is to promote a termination of controversy; to fix a time when the trial court may be done with the case. This Board has no terms, but the time when its decisions become final is fixed by statute. (Sec. 1005, Eevenue Act of 1926) Until such time arrives it seems clear that we retain control of our decisions and may, for good cause, vacate or amend them. Cf. United States ex rel James McCandless v. Board, 26 Fed. (2d) 1003. Whether, for the purpose of preventing an obvious miscarriage of justice occasioned by fraud or mistake, we may vacate a decision after the lapse of the statutory period as if upon a writ of eorarn nohis, we need not here decide.

Considering petitioner’s contention, so strenuously urged, that we must decide this case upon the record made at the first trial, it is apparent that petitioner confuses a matter of procedure with one of evidence. The question of whether a new trial should be granted is one of procedure, and, under the statute, our practice and procedure is to be fixed by the Board itself. The matter thus being within our sound discretion, it would seem that the new trial may be limited in scope, or may be a hearing de novo, as we may direct. Bankers Pocahontas Coal Co. v. Burnet, supra; Great Northern Ry. Co., 10 B. T. A. 1347; Frank C. Hughson, 10 B. T. A. 242; O'Meara v. Commissioner, 34 Fed. (2d) 390; Board, etc. v. United States ex rel Schultz Bread Co., 37 Fed. (2d) 442; and it would seem that our determination of the question, unless arbitrary, would not be subject to review, Fitzgerald v. Dodson, 58 D. C. App. 150; 26 Fed. (2d) 522; cf. Johnson v. Harmon, 94 U. S. 371; Reamer v. Bernheim, 132 U. S. 103; Cochran v. Schriber, 107 Fed. 371; the case then standing as though no previous trial had taken place, Home Life Ins. Co. v. Dunn, 19 Wall. 214; United States v. Ayers, 9 Wall. 609; Stern v. Wabash R. R. Co., 101 N. T. S. 181; Henderson v. Carbondale Coal & Coke Co., 140 U. S. 25.

There can be no doubt but that in the instant case the Board intended a trial de novo. Respondent’s motion, which was granted, requested such a hearing; the subsequent motion of petitioner to submit the case upon the old record made an issue of the point, and the denial of that motion emphasized and clarified, if clarification was necessary, the Board’s intention as to the nature of the further proceedings. The Member, sitting as a Division of the Board at the new trial, so interpreted the order and conducted the proceedings. Any other construction of the order would have nullified it, for the new trial would serve no purpose were petitioner permitted to put in evidence the record made at the former trial, avoiding the production of his witnesses. Nor was the new trial lightly or hastily ordered. We recognized that a new trial would entail hardship to petitioner and to respondent as well, but we found ample justification for ordering it. This case involved a serious issue of good faith and character. Fraud was charged and suspicion raised concerning the honesty of the conduct of petitioner’s officers toward the Government. Moreover, an issue respecting valuation of property was raised, demanding proof, perhaps through testimony of opinion. Such matters can not safely be determined solely from a transcript; personal impressions of the witnesses on the stand are of almost essential assistance in weighing their testimony. Here the Member who saw and heard those witnesses and was to adjudge their testimony was dead. It seemed unwise, if not unfair, to attempt thereafter to determine those issues without the advantages offered by the personal appearance of the witnesses upon whose testimony the decision had to be based. Then, too, it was asserted that, due to the presiding Member’s disability during trial, the record was too confused to serve as a basis for decision. We examined, to some extent, the record made at the former trial and discovered difficulties, beyond mere technical considerations of rulings upon evidence, which indicated that the record might be unreliable, and this was another factor tending to persuade us that a new trial should be granted. Of course, a new trial imposes a hardship on the parties generally and upon one of them especially. That is regrettable but not at all unusual. Frequently it happens in criminal as well as civil cases that a new trial must be had, for instance, where a jury is unable to agree upon a verdict, or is tampered with, or where a juror becomes ill, or dies, or where, for one reason or another, a mistrial is declared. Here there was no jury, but the Member whose duty it was to weigh the imponderable elements of the evidence, as would a jury, was removed by death. Under these circumstances, and in view of the nature of the issues in the case, it seemed necessary to the Board that the hardship be imposed and the new trial ordered.

We have examined carefully the authorities upon which petitioner relies and conclude that they are not here applicable. They refer to the practice and procedure before a master and in a court of equity, and the majority of them refer to a rehearing in equity after a decree. The Board is not a court of equity; no hearing was had here before a master; no decision was rendered in this proceeding before the new trial, and our proceedings are not subject to the rules of practice and procedure obtaining in courts of equity.

The admissibility of evidence in proceedings before us is to be determined by the rules of evidence applicable in courts of equity of the District of Columbia (sec. 907 (a), Revenue Act of 1926). The District of Columbia Code (1926) provides (sec. 1061) that “in equity causes * * * the testimony of witnesses may be taken in the manner provided by the rules of the Supreme Court of the United States for practice in equity and of the Supreme Court of the District of Columbia not inconsistent therewith.”

The rules of practice of the Supreme Court of the United States for courts of equity provide (Rule 46) that “ in all trials in equity the testimony of witnesses shall be taken orally in open court except as otherwise provided by statute or these rules. * * * ” (The exceptions refer to depositions.) Cf. Hawks Dental Assn. v. Tooth Crown Co., 194 U. S. 303; Ex parte Fisk, 113 U. S. 713; Salt Lake City v. Smith, 104 Fed. 457.

The Code of the District of Columbia provides (sec. 1058) in cases where the witness lives beyond the jurisdiction, is likely to leave the United States, is infirmed or aged or sick, or for any reason the party desiring his testimony fears he may not be able to secure same at the time of the trial, his deposition may be taken, but if at the time of the trial the witness can be produced to testify in open court, the deposition shall not be read in evidence, and this is true whether the depositions are taken orally or on interrogatories and cross-interrogatories. The code further provides (sec. 1066), “if a party after having testified at a time when he was competent to do so, shall die, or become insane or otherwise incapable of testifying, his testimony may be given in evidence in any trial or hearing in relation to the same subject matter between the same parties or their legal representatives.”

It appears therefore that the rules obtaining in the courts of equity of the District of Columbia as to the admissibility of secondary evidence are not materially different from the rules of evidence generally prevailing. Upon the new trial of a cause the admissibility of evidence given at a former hearing depends not so much upon the character of the tribunal as upon the judicial character of the proceedings and the purpose for which the evidence is offered. Generally, upon a new trial of a cause, the testimony of a witness who is living, is under no disability and is within the jurisdiction, given at a former hearing, is not admissible, over objection, except for purposes of impeachment. See Wigmore on Evidence, Yol. Ill, sec. 1042; 0. J., sec. 517. Citation of cases establishing and supporting the rule could be endless. Here, petitioner made no attempt to lay the ground for admission of the testimony, or any part thereof, taken at the first trial — made no showing toward bringing such testimony within such rule, but merely offered the previous record in toto. As such, it was rejected, and we think there can be no doubt that, under the rules of evidence obtaining before this Board, the motion to decide this cause upon it, or to admit it in bulk into the record made at the new trial, was properly denied.

In view of the foregoing, it is hardly necessary to discuss petitioner’s contention that the former testimony should be admitted because it is a public record. Public records are admissible to show certain facts, if material, such as the fact that a hearing was had on a date certain, at a certain place, at which certain witnesses were heard, and other facts of like import, but, notwithstanding the fact that records of proceedings before this Board are public records (and are open to public inspection) they are no more admissible as evidence on a retrial of the cause without the laying of a proper foundation therefor than would be any of the other public records with which the files of the various departments of the Government are filled. Petitioner has laid no such foundation; consequently, we can not consider as a part of this record the evidence presented at the former trial.

With respect to the issue of fraud, we have no hesitancy in sustaining the imposition of penalties on that account, for the evidence as to manipulations by petitioner’s officials designed to conceal taxable income is beyond dispute. Petitioner urges that its subsequent, voluntary filing of amended statements and payment of the greater amount of taxes disclosed thereby should serve to mitigate the charge of fraud and excuse it from the statutory penalties. The matter of mitigation of a fraud charge is not in our hands, and we may not pass upon it. Our duty is plain; if respondent alleges fraud and submits evidence sufficient to prove it, we have no alternative but to sustain the penalty which the statute imposes. L. Schepp Co., 25 B. T. A. 419.

However, it is not clear to us that respondent has computed the penalties in accordance with section 250 (b), Revenue Acts of 1918 and 1921. The correct amounts thereof may be determined upon settlement.

Without extended recitation of the detailed evidence introduced by respondent respecting his computation of petitioner’s inventories for each of the several years involved, we have set out in our findings our determinations of the correct inventories. The testimony on this matter was voluminous and the changes to be made as contended by respondent over the amounts disclosed by petitioner’s returns were taken up item by item. The proof shows clearly that petitioner’s inventories as reported were erroneous. We accept the respondent’s proof as to what they should be, for, while cross-examination of respondent’s witnesses indicated the 'possibility of error in some items in his determinations of his proposed inventory adjustments, it did not show the existence of error, and, on the whole record, we are convinced that respondent has maintained the burden of proof of his affirmative allegations.

Reviewed by the Board.

Judgment will be entered under Bule 50.

       “ New Trials and Reheatings in the Board of Tax Appeals.' The Tax Magazine, September, 1932. Arthur B. Hyman, Esq.

        Blair v. Oesterlein Machine Co., 275 U. S. 220; Williamsport Wire Rope Co. v. United States, 277 U. S. 551; Blair v. Curran, 24 Fed. (2d) 390; Brampton Woolen Co. v. Field, 56 Fed. (2d) 23.

       “ The power of Congress to create tribunals for the determination of judicial questions is not confined to the creation of inferior courts under Article III of the Constitution.
      “ The third class of federal tribunals includes those courts and other tribunals created to determine judicially questions arising between the United States as a sovereign government and private individuals, with reference to the exercise of sovereign powers in connection with its own revenues, grants, debts, military forces, duties toward Indian tribes, and the like.
      “ The territorial courts and special tribunals are commonly referred to as ‘ legislative tribunals ’ in contradistinction to the so-called constitutional courts. * * * The term ‘ legislative tribunal ’ applies to all tribunals of the above character whether they have been specifically placed in the Executive Branch of the Government, as in the case of administrative tribunals, or whether they may be considered as a part of the Judicial Branch of the Government as in the ease of the District of Columbia.
      “ Legislative tribunals are often authorized by statute to exercise jurisdiction the same as or similar to that exercised by Federal constitutional courts, and in that sense they are vested with judicial power that is similar to the judicial power of such constitutional courts.” [See brief prepared by H. R. Judiciary Committee, 68 Cong. Rec. 3187, and cases there cited.]

        Goldsmith v. Board, 270 U. S. 117, citing Manning v. French, 149 Mass. 391.

       H. R. #1, 69th Cong., 1st sess.. n. 17.

       Senate Report #52, 69th Cong., 1st sess., p. 37.

      . H R. #2, 70th Cong., p. 30.

       S. R. #960, 70th Cong., p. 38.

        Green v. McLaughlin, 55 Fed. (2d) 423; American Woolen Co. v. White, 56 Fed. (2d) 716; Warren Mfg. Co. v. Tait, 60 Fed. (2d) 982; Peerless Woolen Mills, 13 B. T. A. 1119.

       See Cohan v. Commissioner, 39 Fed. (2d) 540; Schultz Bread Co., 10 B. T. A. 268; United States v. Board, 37 Fed. (2d) 442; certiorari denied, 281 U. S. 731; Underwood v. Commissioner, 56 Fed. (2d) 67.

       See La Floridienne J. Buttgenbach & Co. v. Commissioner, 63 Fed. (2d) 630, wherein it wíis held that a decision of the Board, entered in accordance with a stipulation by the parties, may be vacated at the instance of the parties to the stipulation for good cause shown. That the stipulation of deficiency was entered into through mutual mistake, that the taxpayer did not owe the tax, and that no hearing was had before the Board resulting in a determination of the case upon its merits, was not disputed. The parties joined in a motion requesting the Board to vacate its order of redetermination entered more than four years previously, and to enter an order declaring an overpayment in an agreed amount. This, the Board refused to do.
      The court held that, although the passing of time had foreclosed the right of either party to appeal from the Board’s decision, the Board, in its discretion, might deal further with the proceeding and that extraordinary relief against its decision might be had. It said, by Sibley, J :
      “ We shall not attempt to formulate any rule as to the control the Board of Tax Appeals has over its own judgments. * * * Whether the Board be treated as a court or a departmental agency with quasi-judicial functions, we are of opinion that it may in its discretion, vacate such an order as this is, reinstating the matter for hearing before it on its merits or accepting a new stipulation touching the liability.”


source: Caselaw Access Project

author: TRAmmell :

license: Public Domain

text:
    Volunteer State Life Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54176.
    Promulgated April 10, 1933.

      F. Linton Martin, Esq., for the petitioner.

      George D. Brabson, Esq., for the respondent.
   OPINION.

TRAmmell :

This is a proceeding for the redetermination of a deficiency in income tax for the year 1928 in the amount of $1,541.01. The issues are (1) whether or not there should be included in gross income of the petitioner, a life insurance company, the rental value of space occupied by it in its home office building; (2) what portion of the salaries paid by the petitioner to its president and treasurer may be deducted as investment expense under the provisions of section 203 (a) (5) of the Revenue Act of 1928; (3) whether or not the petitioner is entitled to deduct from gross income for the taxable year the amount of $5,704.22 paid during said year as taxes on real estate; (4) whether or not the petitioner is entitled to deduct from gross income for 1928 the amount of $4,091.42 as taxes imposed upon its shareholders upon their interests as shareholders, which amount was paid in said year by the petitioner without reimbursement from the shareholders; (5) whether or not the petitioner is entitled to deduct the amount of $2,071.91 representing expenses of maintaining real estate rented to tenants, the rental having been reported as income; (6) whether the petitioner is entitled to deduct from gross income the amount of $4,764.80 paid during the taxable year as expenses of maintaining real estate, including the amount of $1,843.60 paid as commissions on the sale of real estate; (7) whether the petitioner is entitled to deduct the amount of $341.19 paid during the taxable year as expenses in connection with the sale of real estate; and (8) whether or not the petitioner is entitled to exclude from its gross income the amount of $1,496 representing gross discount on claims paid in advance.

In respect of issues (3), (4) and (5), involving deductions in the amounts of $5,704.22, $4,091.42 and $2,071.91 claimed by the petitioner and disallowed by the respondent, the latter now concedes error and admits that the petitioner is entitled to the full amounts of the deductions claimed. In respect of issue (8) the respondent also concedes error and admits that the amount of $1,496, representing discount on prepaid claims, was erroneously reported by the petitioner as interest and should be eliminated from gross income. In redetermining the deficiency the items referred to will be treated in accordance with the respondent’s admissions of error. The petitioner concedes issue (7), involving a deduction in the amount of $341.19 claimed by the petitioner and disallowed by the respondent. On this issue, the respondent’s determination is, therefore, approved. The remaining issues will be considered in their numerical order.

Issue (1) raises the question whether or not the petitioner’s gross income should include the rental value of the space occupied by it in its home office building.

The petitioner is a Tennessee corporation, engaged in the business of life insurance, with its home office at Chattanooga. Its life insurance business is conducted on the legal reserve plan. Petitioner keeps its books of account on the basis of cash receipts and disbursements.

During the taxable year 1928 the petitioner owned a twelve-story office building, about one-tenth of which it occupied as its home office, renting the remainder. During the said year the petitioner received rents from other tenants in the total amount of $144,084.19, and the expenses for the year, including depreciation, amounted to $104,507.33. The net rentals in excess of expenses received in said year amounted to $39,576.86. The rental value of the space occupied by the petitioner was $9,873.76. The correct book value of said office building at December 31,1928, was $701,787.19.

This issue, in our opinion, must be decided in favor of the petitioner. We have repeatedly held that gross income of a life insurance company may not be increased by the amount of the rental value of space occupied for its business purposes in a building owned by it, and that deductions for taxes and other expenses pertaining to such building may not be denied or abridged because such rental value is omitted from the gross income. Independent Life Ins. Co., 17 B. T. A. 757; Reserve Loan Life Ins. Co., 18 B. T. A. 359; Two Republics Life Ins. Co., 21 B. T. A. 1355; LaFayette Life Ins. Co., 26 B. T. A. 946.

On authority of the prior decisions above cited, we here hold that the amount of $9,873.76, representing the rental value of the space occupied by the petitioner in its home office building and which amount was erroneously included in its gross income for the taxable year, should be excluded therefrom.

Issue (2) involves the deduction claimed by the petitioner for “investment expenses.” Section 203 (a) (5) of the Revenue Act of 1928 defines “ net income ” in the case of a life insurance company as meaning the gross income less certain specified deductions including “ investment expenses,” provided that if any general expenses are in part assigned to or included in the investment expenses, the total deduction for investment expenses shall not exceed one-fourth of 1 per centum of the book value of the mean of the invested assets at the beginning and end of the taxable year.

The petitioner claimed a deduction from its gross income for 1928 in the amount of $42,742.48 on account of investment expenses. Of this amount $15,999.96 was for officers’ salaries, $9,000 having been paid to the petitioner’s president and $6,999.96 to its treasurer for investment services. The aggregate amount paid to said officers for all services was $22,800.

The respondent makes no objection to any item comprised in the total deduction claimed for investment expenses other than officers’ salaries, but contends that this item represents a general expense which was “ in part assigned to or included in the investment expenses.” Accordingly, the respondent allowed the amount of $33,393.09 as investment expenses, which amount, it is agreed, represents one-fourth of 1 per centum of the mean of the petitioner’s invested assets in the taxable year. Respondent’s action resulted in disallowing the amount of $9,349.89, which is the amount in controversy under this issue.

This issue resolves itself into the ultimate question whether the salaries paid to the officers constituted a general expense which in part was assigned to or included in the investment expenses.

The evidence shows that the petitioner employs a system by which it keeps accurate account of its investment expense. The disbursements for salaries, traveling expenses, supervision and items of that character are kept separate throughout the year, as well as those for telegraphic charges, printing and stationery. The investment expenses are segregated on the petitioner’s books at the time the disbursements are made in all cases, and not at the end of the year. The salaries of $9,000 and $6,999.96 paid to the petitioner’s president and treasurer in the taxable year represented compensation for services in handling its investments. Additional amounts were paid to said officers for services rendered in connection with general supervisory work. The salaries for investment services were paid by separate checks. The checks for investment services did not include any amount for general supervisory work or for any services other than in connection with investments. The payment of specific salaries for investment services was made pursuant to resolutions adopted by the petitioner’s finance committee and approved by the board of directors.

On the foregoing facts we think the respondent’s contention must be denied. It is clearly shown that the petitioner did not pay lump sum salaries to its officers which, at the end of the year or any other time, were allocated in part to investment expenses and in part to general expenses. By resolution of the finance committee, approved by the board of directors, specified amounts were paid by separate checks to each officer for services in connection with investments. There is no evidence tending to indicate, nor has the respondent attempted to show, that the salaries paid for investment services were excessive compensation for the services actually rendered. It follows that the salaries paid to the officers in question did not constitute general expenses which were assigned in part to investment expenses, and the provisions of section 203 (a) (5), supm¡ limiting the amount of the deduction for investment expenses in such situation has no application here. Respondent’s action on this issue is reversed.

Issue (6), the sole issue remaining for decision, concerns a deduction in the aggregate amount of $4,764.80 claimed by the petitioner as representing expenses incurred and paid in the taxable year in connection with its real estate. This deduction consists of the following items: repairs, $1,403.32; fire insurance, $1,494.53; commissions on sales, $1,843.60; and miscellaneous expenses, $23.35; total, $4,764.80.

The record shows that the above expenses were paid by the petitioner during the taxable year 1928 in connection with real estate owned by it, which had been acquired through foreclosures, and did not include any taxes assessed against local benefits tending to increase the value of the property, nor for permanent improvements or betterments. Eespondent now concedes that the three items of repairs, fire insurance and miscellaneous expenses above set .out come within the provisions of section 203 (a) (6) of the Revenue A.ct of 1928, and are allowable deductions from gross income.

However, the respondent contends that the item of $1,843.60 representing commissions on sales of real estate is not an allowable deduction for the reason that the taxing statute does not require life insurance companies to report profit or loss on the sale of real estate for income tax purposes. In our opinion, respondent’s position on this point is well taken.

The petitioner argues that the commissions paid by it “ in its efforts to get back some of the money which it had sunk in these investments ” should be allowed as “ investment expenses.” We are unable to agree with this theory. Plainly, we think, commissions on sales of real estate are primarily and fundamentally a part of the expense of effecting sales and enter directly into the computation of the profit derived or loss sustained upon such sales. They may not, therefore, be fairly classified as “ investment expenses,” and since the petitioner’s income tax liability is not affected by the profit or loss resulting from its sales of real estate in the taxable year, commissions paid in that connection may not be deducted in computing its taxable net income.

Judgment will be entered umder Bule SO.


author: Smith:

text:
    William S. Paley, Petitioner, v. Commissioner of Internal Revenue, Respondent. Jacob Paley, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 56603, 56604.
    Promulgated April 10, 1933.

      Harry LeBoy Jones, Esq., for the petitioners.

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

Smith:

In these proceedings the respondent contends that the payment of $50,000 by the petitioners and their associates to Celia Gore was an outright gift and in no wise affects the computations of net income of the petitioners. The petitioners contend herein that the $50,000. paid to Celia Gore was not a gift and that it was not so treated upon the petitioners’ books of account; that it was an outright business transaction in which an altercation had arisen between the parties and the amount was paid in settlement of the altercation and for the purpose of preventing litigation.

Aside from the treatment of the payment of the $50,000 on the books of account of the petitioners and their associates, there is nothing in the record to show any liability on the part of the Paleys to pay the $50,000. The claim of the Gores that they were entitled to a division of the profits upon the sale by the Paleys of their 7,500 shares of Wesco Corporation stock has no legal justification. Jacob Paley recognized this fact in the letter to his sister dated June 18, 1928. There is every evidence, however, that he had great affection for his sister and did not wish to have any family unpleasantness about the matter. He, his brothers, and his nephew had made a large profit upon their investment in the Wesco Corporation stock and in order to heal any breach in family relations made a gift to Celia Gore of the $50,000. The letter of June 18, 1928, specifically states that the $50,000 is being given to Celia Gore “as a gift from us to you.”

It is furthermore to be noted, as shown by the articles of agreement entered into on October 20, 1927, that the Wesco Corporation stock was owned by Gore Brothers, Inc., and not by the stockholders who apparently had endorsed the note given to the Haystone Securities Corporation of New York. If the $50,000 had been given in settlement of a valid claim there appears to be no reason why the $50,000 should have been paid to Celia Gore rather than to Gore Brothers, Inc. There appears to be no good reason for holding that it was other than a gift to Celia Gore. Cf. Lunsford v. Commissioner, 62 Fed. (2d) 740.

Judgment will Toe entered wnder Rule 50.


author: Trammell:

text:
    Emil Frank, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50224.
    Promulgated April 11, 1933.

      W. C. Magathcm, Esq., and 8. L. McCormich, Esq., for the petitioner.

      Harold F. Noneman, Esq., for the respondent.
   OPINION.

Trammell:

The sole issue in this case is whether or not the net income reported in the returns of the petitioner’s three daughters for the taxable year 1927 belonged to them or to the petitioner. The amount of gross income reported and deductions claimed are not in dispute. The income in controversy was derived from brokerage accounts opened and operated by the petitioner in the names of his daughters, under the circumstances set out in our findings of fact.

The respondent determined that these trading accounts were in effect trading accounts of the petitioner, and that all profits and losses resulting from the transactions should be reflected in his income tax return. The petitioner contends that the action of the respondent in including in his taxable income the income derived from the brokerage accounts carried in the names of his daughters was erroneous. The issue essentially involves the question of the ownership of said accounts.

The uncontroverted evidence shows that in 1925 the petitioner established brokerage accounts in the names of each of his three daughters, who were in that year 16, 14 and 8 years of age, respectively. In the taxable year they were 18, 16 and 10 years of age, respectively. The accounts were opened with stocks which had been theretofore given to their daughters by the petitioner and his wife. Mrs. Frank had a separate estate valued at not less than $200,000, and during the years 1925 to 1927, inclusive, made transfers to the brokerage accounts of the three daughters in excess of $55,000. Transfers were also made to the daughters’ accounts by the petitioner, and both the corpus and income of the accounts were at all times scrupulously treated as the separate property of the daughters.

The petitioner and his wife each had a separate brokerage account, and stocks and cash were transferred from other accounts to the accounts of the daughters, but no transfer was ever at any time made from the accounts of the daughters to any other account. The petitioner managed the brokerage accounts of the daughters, as well as his wife’s and his own, but never at any time used any stocks or proceeds from the daughters’ accounts other than for their direct benefit. Some of the stocks were transferred to the daughters on the books of the corporations and certificates issued in their names, and when the trading accounts were opened in the names of the da.ugh.ters the broker was specifically informed that said "accounts belonged to them. All checks for the proceeds from sales of stock were made in their names. When a daughter became of age, the income was paid over to her for her own use, and when the eldest daughter was married her brokerage account was closed and the stocks and cash therein were turned over to her and her husband.

These facts, in our opinion, reasonably establish that the brokerage accounts in question belonged in fact to the daughters, and that the stocks and cash transferred by the parents to the trading accounts of the daughters prior to the taxable year constituted bona fide completed gifts.

When the brokerage accounts were opened by the petitioner in the names of his minor daughters, the broker was fully informed that the accounts belonged to them, and the petitioner explained to the broker the purpose in view, namely to create separate estates for the daughters. Under the well established rules of law, the broker thereupon became a pledgee for the daughters in respect of the stocks thereafter contained in the said accounts, and occupied a fiduciary relationship to the petitioner’s daughters. His possession was their possession, and they were entitled to receive from him all property in their accounts after deduction of the broker’s lawful charges. See Richardson v. Shaw, 209 U. S. 365; Lamprecht v. State, 84 O. St. 32; 95 N. E. 656; Austin v. Hayden, 171 Mich. 38; 137 N. W. 317.

The respondent’s contention is predicated on the theory that completed gifts were not made in or prior to the taxable year, allegedly because there was no delivery of possession to the daughters who were not permitted to exercise dominion over the subject matter thereof. Eespondent points to the fact that the petitioner was in full and complete control in managing the accounts of the daughters, and in 1929, subsequent to the taxable year, established a trust fund as settlor, including in the corpus of the trust stocks taken from the daughters’ brokerage accounts. The points raised by the respondent we think are not controlling under the circumstances of this case.

When the gifts here in question were being made, the daughters were infants, incompetent both in law and in fact to have uncontrolled possession of large sums of money or to manage valuable property. Even in the taxable year the youngest girl was only 10 years of age and the eldest 18. It is the generally recognized rule that where a gift is made to a child the father as natural guardian may take possession and exercise complete dominion and control over the property for his child. Haynes v. Gwinn, 137 Ark. 387; 209 S. W. 67; Richardson v. Emmett, 70 N. Y. S. 546; Spitler v. Kaeding, 133 Cal. 500; 65 Pac. 1040; Tucker v. Tucker, 138 Ia. 344; 116 N. W. 119; Harry C. Moores, 3 B. T. A. 301.

In Haynes v. Gwinn, supra, the court said:

Where a gift is made to an infant, even by the father himself, and the father takes possession of the property, he holds as natural guardian, and the possession is the infant’s.

The same rule prevails in Ohio. In Rote v. Warner, 17 O. C. C. 360, it was held that a gift to a child of such tender years as to be unfit to have the custody of the gift would not be defeated by the retention of such custody by the donor’s wife. On appeal, the case was affirmed without opinion by the Supreme Court of Ohio. (57 O. St. 633; 50 N. E. 1133.) To the same effect, see other decisions of the Ohio courts cited in Harry G. Moores, supra. The General Code of Ohio, sec. 10928, recognizes the father and mother as the natural guardians of a minor child and provides that they shall have the management of such ward’s estate during minority.

In respect of delivery of the subject matter of the various gifts involved in this case, it seems to us that the petitioner did everything that could reasonably have been expected of him to make valid delivery to his minor daughters, under the existing circumstances.

In Harry C. Moores, supra, we had before us a situation essentially similar on the question of delivery to that presented in the instant case. Moores transferred to his wife and two minor daughters, then 14 and 7 years of age respectively, a total of 160 shares of common stock of the Moores & Boss Milk Company, 100 shares being transferred to his wife and 30 shares to each of the children. The stock was transferred to the children for the purpose of providing a separate estate for them and of interesting them in business affairs, as well as to provide for them against any eventuality that might occur in the future. As in the present case, Moores managed all transactions for his wife and children, and the following extract from our opinion as to the sufficiency of delivery to the minor children is equally applicable here:

It is essential to the validity of a gift that there be a distinct delivery of property so as to show that the donor has relinquished all dominion over it. The donor went as far in this case as he could have gone, unless he had secured the appointment of a guardian or trustee to manage the property of his daughters. Naturally, he deemed such appointment unnecessary. He was their natural guardian, and his success in business might well have led him to believe that no other was necessary or desirable from any point of view. The appointment of a guardian or trustee would, to some extent at least, have deprived the children of the opportunity to learn how to transact business and to conserve the property. It would have been expensive and an unnecessary impoverishment of their property.

The petitioner here was the natural and legal guardian of his minor daughters and his possession and control of the subject matter of the gifts constituted possession and control by the daughters. The gifts will not be defeated because of such fact, if there was a bona fide intention to give. On this point the law presumes that the transfer of property or money to a minor child by the parents is a gift. In Storey v. Storey, 214 Fed. 978, the doctrine is stated as follows:

Transfers of money from a fattier to a minor son can not create a debt. Transfers from a father to an adult son may; but only by an express agreement to that effect. Presumptively such transfers are irrevocable gifts, either never to be accounted for or only as advancements.

In Smith v. Smith (Mich.), 184 N. W. 501, the court said: “ Money paid to a wife or child will be presumed to have been a gift or advancement, but such presumption is rebuttable.” Cf. Jacob Grossman, 9 B. T. A. 643, and Elizabeth N. G. Hetherington, 20 B. T. A. 806.

In the instant case, the evidence not only does not tend to rebut the legal presumption, but strongly supports the conclusion that bona fide gifts were intended to be made.

We are also unable to agree with the respondent that the establishment of the trust in 1929, embracing in part stocks theretofore given to the daughters, is conclusive or even persuasive evidence to defeat the alleged prior gifts. If the gifts were bona fide and complete prior to the taxable year, the income therefrom in the taxable year was not the income of this petitioner, and is not taxable to him. If the gifts were complete prior to the taxable year, what was subsequently done with the property is not material. In Edson v. Lucas, 40 Fed. (2d) 398, 404, proceeds from the sale of property which had been the subject matter of a prior gift were subsequently included in a trust established by the donor, and the court said:

After a gift is once complete and the title has passed to the donee, the fact that the donor subsequently has possession of the property given does not affect the validity of the gift. [Citing authorities.]

See also Lilian K. Blake, 23 B. T. A. 554, where we held that income from shares of stock held in trust by the petitioner for her minor son was not taxable to her.

Respondent’s action in the present case is reversed.

Judgment will be entered for the petitioner.


author: Aeundell:

text:
    Arthur C. Hilmer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 48108, 53559,
    Promulgated April 11, 1933.

      Henry J. Richardson, Esq., for the petitioner.

      G. H. Curl, Esq., for the respondent.
   OPINION.

Aeundell:

These proceedings were consolidated for hearing and report, and involve the redetermination of deficiencies in income taxes for 1926,1927 and 1928, in the respective amounts of $17,746.17, $10,-346.63 and $2,826.20. During the taxable years the partnership of which the petitioner was a member reduced its net profits by amounts equal to 25 per cent of its net income paid to the estate of a deceased member of a former partnership. The respondent restored these payments to the net profits of the partnership distributable to its members, and increased the taxable income of the petitioner in accordance with such action. Whether or not such action was proper is the sole question presented here for decision. The proceedings were submitted on a stipulation of facts which, by reference, is adopted as our findings of fact.

On May 1, 1924, Lorenzo E. Anderson, Arthur C. Hilmer (the petitioner) and Oliver J. Anderson, formed a partnership under the firm name of Lorenzo E. Anderson & Company, for the purpose of conducting a general brokerage business as the successor of a partnership bearing the same name. By the terms of the articles of partnership Lorenzo E. Anderson retained sole ownership of the firm name, its good will, furniture and fixtures used by the predecessor partnership and seats on the New York Stock Exchange, New York Cotton Exchange, Chicago Board of Trade, St. Louis Stock Exchange, and Merchants’ Exchange of St. Louis. The partnership agreement further provided that in case of the death of Lorenzo E. Anderson, the surviving partners could continue the business for 60 days after his death under certain provisions, and in the event Oliver J. Anderson, individually, or with petitioner or others, should within said 60 days elect to continue the business, they would have the right to do so, “ but shall not be required to pay anything on account of the use of said name [Lorenzo E. Anderson & Company] or on account of good will, except as hereinafter stated.” The agreement then provided that if an election was made to continue the business, Oliver J. Anderson or the new firm, if one was formed, would immediately obligate himself or itself, as the case might be, to pay to the estate of Lorenzo E. Anderson, on specified terms, the amount of his interest in the firm, the amount of his furniture and fixtures account, the then market value of his memberships and seats in exchanges and boards of trade, and, in addition thereto, “ annually an amount equal to twenty-five per centum (25%) of the net profits of the business conducted by said Oliver Anderson or the new firm or any firm that shall take over the business, for three years after the date of the death of said Lorenzo Anderson.”

Lorenzo E. Anderson died June 22, 1925. The petitioner and Oliver J. Anderson, the surviving partners, elected to continue the business. In their written notice to the executors of the estate of Lorenzo E. Anderson of such election, they agreed to pay to the executors the amount of the deceased partner’s interest in the firm, the balance in his furniture and fixtures account and the market value of his memberships and seats in exchanges and boards of trade, together with “ an amount equal to twenty-five per cent (25%) of . the net profits of the business of Lorenzo E. Anderson and Company, for three (3) years after the date of death of Lorenzo E. Anderson.”

The surviving partners, with M. C. Jones, and George Witsma, Jr., formed a new partnership as of July 1, 1925, under the name of Lorenzo E. Anderson & Company. The agreement provided that the “name of Lorenzo E. Anderson Company and the present and future good will of this copartnership, or any survivors of future copartnership of the business belong and shall belong equally to said Anderson and said Hilmer exclusively,” on the death of either, the whole to go to the survivor. The net profits and losses of the partnership were to be divided and borne as follows: Anderson and Hilmer, each 42y2 per cent; Jones, 10 per cent; and Witsma, 5 per cent. Provision was also made in the agreement for the payment to the estate of Lorenzo E. Anderson of “ an amount equal to 25% of the net profits of this copartnership for three years from July 1, 1925”; for charging any such payments as an expense of the firm, and that the net profits distributable to the partners would be such amounts as remain after deducting the payments made to the estate.

In an agreement entered into on August 19, 1925, between the members of the partnership, acting in their individual capacity, and the executors of the estate of Lorenzo E. Anderson, it was recited that a portion of the assets transferred to the then partnership carried on under the name of Lorenzo E. Anderson & Company consisted of the interest of Lorenzo E. Anderson in the predecessor partnership of Lorenzo E. Anderson & Company, and that these assets were acquired from the estate of Lorenzo E. Anderson by Oliver J. Anderson and Arthur C. Hilmer. The members of the partnership agreed in the contract to pay to the executors annually for three years an amount equal to 25 per cent of the net profits of the partnership.

The effect of the action of the partnership in reducing its net profits by amounts paid to the estate of Lorenzo E. Anderson, was to decrease the partnership income distributable to the members of the firm. The same result would have been reached by deducting the amounts from the gross income of the partnership. The substance of the petitioner’s claim is that the amounts paid to the estate were a charge against partnership income and, accordingly, ordinary and necessary business expenses of the partnership.

A large portion of the assets employed by the old partnership was owned entirely by Lorenzo E. Anderson. He gave his partners an option to acquire these assets in the event of his death, with the right to obligate any new partnership formed to pay the purchase price thereof. This right of payment was not availed of, although a. new partnership was organized. The assets were purchased by the petitioner and Oliver J. Anderson and they agreed to pay the required consideration. Later the partnership, and all of the members thereof in their individual capacity, agreed to pay the amounts to be based upon partnership profits, without in any way relieving the petitioner and Anderson from their primary obligation.

It does not appear that the partnership acquired any of the property and it never agreed with the estate to pay for the assets. The contract to pay for all the property was between the petitioner and Anderson and the estate, and as to the amounts to be based upon firm profits, the estate had the additional promises of J ones and Witsma. These sums were not payable out of partnership profits, but merely based, on the amount of the earnings. Payments made from any source would have satisfied the contract.

The estate was not a member of the new partnership and was not entitled to share in its earnings. These belonged entirely to the members of the firm in proportion to their several interests. The partnership acquired no property rights from the estate in consideration of the payments. Such benefits as were derived by the payments went to the partners in their individual capacity. The effect of the transactions was to have the partnership pay personal obligations of its members. Such shifting of obligations can not be availed of to reduce partnership profits for tax purposes. Hill v. Commissioner, 88 Fed. (2d) 165; affirming 14 B. T. A. 572.

We find no error in the respondent’s treatment of the amounts in question. Hill v. Commissioner, supra; S. J. Hallahan, 14 B. T. A. 584; affd., 39 Fed. (2d) 420; Benedict v. Price, 38 Fed. (2d) 309.

Decision will be entered for the respondent.


author: Arundell :

text:
    Everett B. Sherman, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60771.
    Promulgated April 11, 1933.

      Charles P. Sawyer, C. P. A., for the petitioner.

      B. M. Coon, Esq., and F. S. Gettle, Esq., for the respondent.
   OPINION.

Arundell :

In computing the petitioner’s income tax liability for 1929 the respondent included in his gross income salary of $3,000 received as superintendent of parks of New Bedford, Massachusetts, and determined a deficiency of $226.39. These proceedings raise the question of whether such income is exempt from taxation.

During 1929 the petitioner received a salary of $3,000 from New Bedford, Massachusetts, the present population of which is about 100,000, for services rendered as superintendent of parks. The compensation was charged to an appropriation authorized by the city council for the maintenance of the parks of the city. The position held by the petitioner is within the civil service classification of the Commonwealth of Massachusetts.

The park system of New Bedford consists of three large tracts, and is operated for the free use of the public. The parks are Improved with baseball diamonds, football fields and tennis courts. They have no bathing facilities. The city of New Bedford has never granted any concessions in the parks, nor collected fees for the use of the tennis courts. No admission charge is made to witness baseball and football games played in the parks. The city derives no income from the operation of the parks.

The parties are agreed that the salary in question was received by the petitioner as an employee of the City of New Bedford, Massachusetts. Our answer to the question presented turns upon whether the income was derived by the petitioner for services performed incident to the exercise of a governmental function of a political subdivision of a state. We think the determination should be in the affirmative.

There was enacted in 1882 by the Legislature of the Commonwealth of Massachusetts a statute which provides that a town may, by a majority vote, elect a board of park commissioners and prescribe their terms of office, with authority to (a) locate public parks within its limits by taking land in fee by eminent domain, or by purchase, gift, devise or otherwise; (b) lay out and improve public parks; (c) make rules for their use and government; (d) appoint certain employees, including a police force to act in such parks, and define their powers and fix their compensation. Land so taken or held as a park shall, by the terms of the statute, be forever kept open and maintained as a public park. Ch. 45, General Laws of Massachusetts.

By a majority vote at a municipal election held in 1890, the voters of New Bedford adopted the provisions of the statute. Since then the City of New Bedford has not adopted any ordinances or "by-laws relating to the administration of its department of parks.

It is our opinion that the maintenance of a park for the sole benefit of the public and not for private profit or benefit to the municipal corporation is a governmental or public function. Such were the parks of New Bedford. While the cases are not uniform, the great weight of authority we believe, supports the view we have taken. Higginson v. Slattery, 212 Mass. 583; 99 N. E. 523; Alder v. Salt Lake City, 231 Pac. (Utah) 1102; Russell v. City of Tacoma, 8 Wash. 156; 35 Pac. 605; Kellar v. City of Los Angeles, 179 Cal. 605; 178 Pac. 505; Harper v. City of Topeka, 92 Kan. 11; 139 Pac. 1018; Heino v. City of Grand Rapids, 202 Mich. 363; 168 N. W. 512; Emmons v. City of Virginia, 152 Minn. 295; 188 N. W. 561; Caughlan v. City of Omaha, 103 Neb. 726; 174 N. W. 220. Contra, Augustine v. Town of Brandt, 249 N. Y. 198; 163 N. E. 732; City of Denver v. Spencer, 34 Col. 270; 82 Pac. 590.

The respondent, relying on Flint v. Stone Tracy Co., 220 U. S. 107, argues that the immunity from taxation is confined to functions “ which the state can only do itself.” We do not understand the rule to be so rigid. Metcalf & Eddy v. Mitchell, 269 U. S. 515; Burnet v. Coronado Oil & Gas Co., 285 U. S. 393.

It follows that the salary of $3,000 received by the petitioner in 1929 from the City of New Bedford, Massachusetts, in his capacity of superintendent of its parks, is not subject to income tax.

Decision will be entered under Rude 50.


author: Van Fossan:

text:
    Gardner Governor Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. Gardner-Denver Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 46549, 57652.
    Promulgated April 14, 1933.

      Robert Ash, Esq., for the petitioners.

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

Van Fossan:

The underlying question in the cases before us is whether or not the issuance of the common and preferred stock of petitioners was pursuant to a sale of stock to employees or was the payment of additional compensation. This question can be answered only by determining whether the stock subscription plan was essentially a contract of purchase and sale or a contract of employment. Anthony Schneider, 3 B. T. A. 920; Albert Russell Erskine, 26 B. T. A. 147. If the former, then the deductions are not allowable in any event. If the latter, then totally different considerations govern.

The offer made by the companies and the acceptances by the employees together constituted the contracts under which the stock subscriptions were made and stock later issued. On its face the contract contains all of the essentials of an agreement of purchase and sale. It speaks specifically in terms usually employed to connote a sale. There was an offer to sell and an agreement to subscribe and pay for. The price was definitely fixed, being approximately the then market price. Payments were to be made by deductions from wages. Cash dividends were to be credited to the subscriber’s account conditionally, the employee losing his claim to such dividends if he failed to complete the purchase or if the subscription was canceled. Sales of the same stock were made to the officers of the company at the same price as employees, but there is no claim that such stock or the dividends thereon were additional compensation to such officers.

Though terminology is not conclusive of the intent of the parties (Alger-Sullivan Lumber Co. v. Commissioner, 57 Fed. (2d) 3), if supported by similar collateral evidences and circumstances it is a fact of weight. The collateral evidences all support the conclusion that the contract was one of purchase and sale. There is no evidence that in 1923 when the plan was started either the employees or the company considered the stock or its earnings as additional compensation. The face of the contract making a prima facie case of purchase and sale, the burden was on the petitioners to show that the situation was otherwise. This they failed to do. For aught the record shows the employees were, previous to 1923, adequately paid and were happy in their employment. There is no evidence that the plan reduced petitioners’ labor overturn. There was not a suggestion at the inception of the plan that it was a veiled policy of paying additional compensation.

Nor is the fundamental legal character of the plan to be controlled by the fact that certain benefits flowed to the employer under its operations. There were obvious mutual benefits to employer and employee alike.

On the corporate books the employee contracts were treated as assets and the interest paid thereon by the employee as income. Likewise, all credits of cash, dividends and interest were listed as liabilities. The common stock held to complete the subscription contracts was also classed as a liability, being placed in the same category as other stock of the corporations.

On the record before us we are of the opinion that the stock subscriptions, under the plans in question, constituted contracts of purchase and sale and not employment contracts.

The above conclusion disposes of the contention that petitioners should be permitted to deduct the difference between the contract price and the market price at the time issued. It likewise disposes of the contention as to dividends and the preferred stock issued on account thereof.

The interest amounting to $5,548.02, paid by the employees on account of the deferred payments on subscription contracts, was income to the petitioners and should be accounted for as such. The item of interest amounting to $2,560.84 credited by petitioner, the Gardner-Denver Company, on dividends credited but not paid was an accrual of interest due for money borrowed and was an allowable deduction. The company kept its accounts and made its return on the accrual basis.

Reviewed by the Board.

Decision will he entered under Rule 50.


text:
    Lynchburg Trust & Savings Bank et al., Trustees, Trust for W. G. and E. F. Younger, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 51163, 54121, 59888.
    Promulgated April 14, 1933.

      0. H. Tufts, G.P. A., for the petitioners.

      Bernard D. Hatheock, Esq., for the respondent.
   OPINION.

Aeundell:

These proceedings are for the redetermination of deficiencies in income taxes in the amounts of $202.48, $843.19, $265.55 and $331.54 for the respective years 1926, 1927, 1928 and 1929. The cases were submitted on a stipulation of facts, which is adopted as our findings of fact.

From the stipulation of facts it appears that the petitioners are the duly qualified executors and trustees under the will of T. W. Gilliam, who died February 3, 1924, a resident of Lynchburg, Virginia.

The decedent left his residuary, property to the petitioners, in trust, with directions that the net income therefrom be divided into two equal parts, one to be paid to his daughter, Elsie West Gilliam, and the remaining half to his two grandchildren, “ subject to the provision hereinafter contained in Item 7,” the latter payments to “ continue till the youngest of my grandchildren or the survivor of them attain the age of thirty years, when the portion of my estate on which my said grandchildren receive the income is to be paid over to them in equal parts.”

Item VII of the will provides, in part, as follows:

I authorize my executors, or the survivors of them, or the one qualifying, to hold bach and invest from the income of my two grandchildren, or either of them, such portion of said income as they may think advantageous, such investments to be made as hereinbefore provided for, or in the improvement of the property of such grandchildren.

The will also provided that all payments of income from the trust estate should be made quarterly.

Since the creation of the trust, the trustees have paid each year one-half of the net income of the trusteed property to Elsie Gilliam, and part of the share of each grandchild to his guardian, and retained the remainder. The amounts retained each year were reinvested by the trustees for the benefit of the grandchildren.

The portion of the net income of the trust accumulated for each grandchild, and retained by the trustees, has been carried in accounts separate and apart from the estate. Some of these funds have been invested in securities for the equal account of the grandchildren and some for their individual account, the records for each being kept separately. These securities were kept separate and apart from other securities and from each other.

For the years 1925 to 1929, inclusive, separate individual income tax returns were filed by the guardian of the grandchildren for the amounts actually paid to the grandchildren or their guardian, and the trustees filed separate fiduciary returns for the portion of the share of each grandchild retained in trust for investment. The respondent combined the fiduciary returns filed each year by the petitioners on the ground that the will created only one trust.

As we understand these cases, petitioners make two claims. One is that the portion of trust income withheld by the trustees and reinvested is taxable to the beneficiaries rather than to the trustees. The other is that the amounts so withheld and reinvested constituted subsidiary trusts taxable separately from the trust created by the will. There is no issue as to either the amounts actually paid to decedent’s daughter, Elsie Gilliam, or as to amounts paid to the grandchildren.

Under the Revenue Acts of 1926 and 1928 trust income is taxable, and the fiduciary is made principally responsible for the payment of the tax. Section 219 (b), Revenue Act of 1926; section 161 (b), Revenue Act of 1928. Among the classes of trust income specifically subjected to tax is the following:

Income which, in the discretion of the fiduciary, may be either distributed to the beneficiaries or accumulated. Section 219 (a) (4), Revenue Act of 1926; 161 (a) (4), Revenue Act of 1928.

It is obvious, we think, from the provisions of the will giving the fiduciaries power to withhold such portion of the grandchildren’s share as “ they may think advantageous ” that the trust income is within the quoted statutory provision. The statutes further provide (section 219 (a) (3), Revenue Act of 1926; section 162 (c), Revenue Act of 1928) that in such cases, that is, where the trust “ income in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated,” the fiduciary in computing the net income of the trust may deduct:

The amount of the income of the estate or trust for its taxable year which is properly paid or credited during such year to any * * * beneficiary.

Under this provision of the statute the fiduciaries here seek to reduce the tax payable on the trust income by way of a deduction from gross income. In order to prevail they must show that they come clearly within the provisions permitting the deduction. Reinecke v. Spalding, 280 U. S. 227. As the amounts here sought to be deducted were not paid to the beneficiaries, they may be deducted only if they were “ credited ” within the meaning of the statutory provisions above quoted.

The case most strongly relied upon by petitioners ,is Ordway v. Willcuts, 12 Fed. (2d) 105; affd., 19 Fed. (2d) 917. That case, in our opinion, is readily distinguishable from those before us. That case arose under the Revenue Act of 1921. The primary question there, as stated by the District Court, was whether the income involved was “(income which is to be distributed to the beneficiary, periodically, whether or not at regular intervals.” That is, whether the income came within the classification of section 219 (a) (4) of the Revenue Act of 1921, from which section the quoted language is taken. If it was such income, then under section 219 (d) the tax was not payable by the fiduciary but the income which was “distributable * * * whether distributed or not ” was required to be included in the income of the beneficiary. There are corresponding provisions in the Revenue Acts of 1926 and 1928. See sections 219 (a) (2) and (b) (2) of the Revenue Act of 1926 and 161 (a) (2) and 162 (b) of the Revenue Act of 1928. But they do not govern these cases, which come under section 219 (a) (4) of the Revenue Act of 1926 and section 161 (a) (4) of the Revenue Act of 1928, which alike provide for the taxation of “ Income which in the discretion of the^fiduciary, may be either distributed to the beneficiaries or accumulated.” In such cases, as above pointed out, the statute allows the fiduciary to deduct the income “which is properly paid or credited * * * to any * * * beneficiary.”

In the Ordway case it was held that the portion of the trust income invested by the trustees in securities purchased for and in the name of the beneficiary, and kept in a separate safe deposit box, had been “ distributed ” within the meaning of the 1918 and 1921 Acts. In that case the courts had no occasion to determine whether the monevs so invested had been “ paid or credited ” within the meaning of the later revenue acts. It is true that the District Court said that in the 1926 Act Congress had made the law conform to the construction given by the court to the earlier acts, but the 1926 Act was not before the court for construction and we do not regard the statement made as controlling.

Section 219 (c) of the Revenue Act of 1921 allowed the fiduciary to deduct income “ paid or credited ” to a beneficiary in cases within paragraphs (1), (2) or (3) of that section, which paragraphs relate, (1) to income of estates during the period of administration; (2) to income accumulated for unborn or unascertained beneficiaries; and (3) to income held for future distribution. In Guitar Trust Estate, 25 B. T. A. 1213, we had before us a trust deed under which during 1922 and 1923 the trustees could at their option declare and pay dividends to the beneficiaries. Beginning with 1924, by supplement to the trust deed, the trustees were required to account annually and the beneficiaries could at any time draw their respective shares of the trust income. The trustees in each year credited the trust income to the invested capital accounts of the beneficiaries. We held that in so far as the case was governed bj the Revenue Act of 1921, that is, for the years 1922 and 1923, when the trustees had the discretion to distribute or not, the crediting to invested capital account was not a payment or credit within the meaning of the statute, saying in part:

As respondent points out, there was not even a crediting to the personal account of each beneficiary, but only a crediting to the “ invested capital ” account of each beneficiary, thus evidencing an intention to keep these profits in the business rather than to distribute them.
Under the circumstances which we have narrated, we think the trust income credited to the invested capital accounts of the beneficiaries in 1922 and 1923 was not a proper paying or crediting within the meaning of the law and is taxable to the fiduciary and not to the beneficiaries.

As to subsequent years we held that the concurrence of the mandatory provisions of the trust supplement and the right of the beneficiaries to draw their shares of income made the income taxable to the beneficiaries rather than to the fiduciary.

Following the reasoning of the Guitar Trust case, we hold that the trust income in this case which was withheld by the trustees in the exercise of their discretion was not paid or credited to the beneficiaries and hence is not a proper deduction from the gross income of the trust. It is clear that there was no actual payment to the beneficiaries of the amounts here involved. In our opinion the income must at least be made available to the beneficiaries before it can be said to have been “ credited ” to them within the meaning of the statute.

Nor do we see any merit in petitioners’ contention that the income withheld and reinvested constituted “ subsidiary trusts ” taxable separately from the principal trust. None of the provisions of the will relating to the trusteed property are ambiguous. Throughout it discloses an intention to have the trusteed property administered under a single trust for the benefit of the testator’s daughter and two grandchildren. Item Y (a) of the will authorizes the trustees to sell certain property, if they deem such action proper, and invest and reinvest the proceeds in property most advantageous to the beneficiaries of “this trust,” and to sell any property purchased for “this trust” and invest the proceeds therefrom for the benefit of “ this trust.” Provision is made in Item V (b) and (c) for the division of the net income derived from “ this fund.” Item YII of the will makes provision for the retention of a portion of the income of the grandchildren, but contains nothing indicating that the testator intended to create separate trusts for the amounts withheld by the trustees. We find nothing in the will to indicate an intention that separate trusts were to be created. Cf. Johnson v. United States, 65 Ct. Cls. 285; State Savings Loan & Trust Co., 25 B. T. A. 228. The creation and maintenance of separate accounts for the beneficiaries was probably a convenient method of showing the amounts to which each beneficiary would be ultimately entitled and would operate for the protection of the trustees upon a final accounting, but in our opinion this does not create trusts taxable separately from the trust created by the decedent’s will.

Decision will be entered for the respondent.