author: ARNOLD:

text:
    T. T. Word Supply Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. T. T. Word, Petitioner, v. Commissioner of Internal Revenue, Respondent. Anna Word, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 90997, 93542, 93543, 93544.
    Promulgated April 26, 1940.

      J. L. Lockett, Esq., and Homer E. Mabry, Esq., for tbe petitioners.

      J. L. Baekstrom, Esq., for tbe respondent.
   OPINION.

ARNOLD:

The Supply Co. filed a consolidated return for the year 1931, in which it deducted net losses of the Specialty Co. and the Texas corporation of $34,927.61. The respondent denied the right to make a consolidated return on the ground that the three corporations were not an “affiliated group”, as defined in section 141 of the Eeve-nue Act of 1928. In determining the tax liability of T. T. Word and Anna Word for the year 1934, the respondent held that T. T. Word acquired all of the assets of the Texas corporation in exchange for the surrender of all of its stock and the cancellation of certain of its obligations, and realized a gain of $177,738.47, which was taxable to him and Anna Word on the community property basis. He found that the Supply Co. did not own the stock of the Texas corporation and the Specialty Co. in 1931, and that T. T. Word and not the Supply Co. owned the stock and obligations of the Texas corporation in 1934. In order to protect the interests of the Government, the respondent also notified the Supply Co. of his determination of a deficiency against it for the year 1934, which resulted from inclusion of the gain of $177,738.47 in its income. However, he here insists upon liability of the Supply Co. for the tax on such gain only in the event that we should hold that T. T. Word was not the owner of the stock and obligations of the Texas corporation in 1934.

A question for determination, common to these proceedings, is whether T. T. Word or the Supply Co. owned the stock of the Texas corporation. The issue in the proceeding of the Supply Co. involving the year 1931 turns upon ownership of the stock in that year and the issues in the proceedings of the Supply Co. and T. T. Word and Anna Word involving the year 1934 turn upon ownership in that year. In Word Specialty Manufacturing Corporation, Docket No. 68856, and T. T. Word Supply Co., Docket No. 68857 (34 B. T. A. 974) we found as a fact that during the years 1929 and 1930 T. T. Word owned directly in excess of 95 percent of the stock of the Texas corporation, and that such stock issued to him had not been transferred by him since its acquisition. The evidence in the present proceeding shows that no change in ownership of the stock of the Texas corporation occurred from the time of its acquisition from the Tennessee corporation in 1926 to the time of its surrender in 1934. The respondent has pleaded and here argues that the question of ownership of the stock of the Texas corporation has been adjudicated in the former proceedings and that our decision therein is res judicata. At the hearing the respondent introduced in evidence the pleadings, decision, and orders of the Board in the former proceedings, and the petitioners were permitted to introduce evidence bearing on the ownership of the stock, over an objection that it was incompetent to the extent that it should be found to be inconsistent with our former decision. The petitioners rely upon such evidence to establish that the stock was owned by the Supply Co. in 1931 and 1934 and that it was not owned by T. T. Word.

The evidence shows, and the petitioners do not deny, that legal title to the stock was taken in the name of T. T. Word upon its acquisition in 1926 from the Tennessee corporation. T. T. Word testified that he acquired the stock for and on behalf of the Supply Co., that he held it as trustee for its benefit, and that the only reason for taking title in his own name was that his counsel, who advised him throughout the negotiations, directed that this be done so as not to offend the antitrust law of Texas. His counsel is now deceased, but another witness has corroborated his statement that such advice was given. We considered testimony to the same effect in the former proceedings, but were not convinced by it for the reason that other evidence indicated that T. T. Word owned the stock in his individual capacity, and for the further reason that no authority prohibiting a Texas corporation from owning stock of another corporation had been brought to our attention. In their brief the petitioners refer to provisions of the Texas statutes, civil and penal, relating to monopolies and combinations in restraint of trade. Vernon’s Ann. Civil Stats., art 7427; Vernon’s Ann. Penal Stats., art. 1633. Both articles define a monopoly as a combination or consolidation of two or more corporations, when effected by the following method, among others:

Where any corporation acquires the shares or certificates of stock * * * or the physical properties or any part thereof, of any other corporation * * * for the purpose of preventing or lessening, or where the effect of such acquisition tends to affect or lessen competition, whether such acquisition is accomplished directly or through the instrumentality of trustees or otherwise.

The statute is aimed at situations where there is an intent to lessen, or an acquisition has a tendency to effect a lessening of, competition. The evidence here is not directed to proof of intent or the effect of the transaction. However, it is sufficient to show that a direct acquisition of the stock by the Supply Co. could not have been intended, and would not have tended, to lessen competition between the Supply Co. and the Texas corporation. The two corporations were engaged in the same business — the sale of oil and gas well supplies. The Supply Co. was a selling company organized in 1926, and at that time or soon thereafter, the manufacturing branch of the Texas corporation’s business was taken over by the Tennessee corporation. In January 1926 the Texas corporation consigned all manufactured products, supplies, materials, and implements then owned by it to the Supply Co. for sale by the latter on a commission basis. The contract of consignment states that the Texas corporation is discontinuing its business generally. Thus, the acquisition of the stock by the Supply Co. would not fall within the statute. If a transfer of the stock to the Supply Co. would be under the ban of the antimonopoly statute of Texas, transfer in the name of T. T. Word in trust for the Supply Co. would likewise be. The statute applies whether the acquisition of the stock is accomplished directly or through the instrumentality of a trustee. The reasons assigned for taking title in T. T. Word’s name are therefore unconvincing. There is no evidence that any express trust was created, nor is there any evidence that a trust resulted by reason of the payment by the Supply Co. of any part of the consideration for the stock.

There is, so far as the evidence shows, no written contract covering the purchase of the stock. The contract of March 10, 1926, does not purport to sell the stock. The evidence merely shows that in the negotiations with the receivers T. T. Word also sought to acquire the stock and that several days before the contract of March 10,1926, was executed the stock was delivered to him, and at the same time assets of the Texas corporation of the value of $38,000 were delivered to the Tennessee corporation. We regard the holding of the stock by T. T. Word and bis subsequent acts as more persuasive of his ownership than his mere assertion of trusteeship. Consolidated income tax returns for the years 1926,1927, and 1928 were filed on behalf of the Supply Co. and the Texas corporation. They were signed by Word as president of the Supply Co. and in them he definitely set forth that he owned the stock and certified that there were no equitable owners. Such allegations of ownership, as stated in our former decision:

* * * represent * * * a conclusion reached within a short time after completion of the transactions by one chiefly concerned with the result, and adhered to without change of position for a long period of time. It would require strong evidence to overcome the facts so consistently represented by the person primarily concerned with the outcome of these proceedings.

The above returns were filed under the Revenue Act of 1926, which permitted affiliation if 95 percent of the stock of two or more corporations was owned by the same interests. Sec. 240 (d). Beginning with the. taxable year 1929, affiliation was limited to chains of corporations connected through stock ownership with a common parent, if at least 95 percent of the stock of each corporation, except the common parent, was owned directly by one or more of the other corporations, or if the common parent owned directly at least 95 percent of the stock of at least one of the other corporations. Revenue Act of 1928, sec. 141 (d). T. T. Word promptly accommodated his interests to this change, in so far as his dealings with the Government were concerned, by filing consolidated returns for 1929 and subsequent years in which he represented that the Supply Co. was the owner of the stock of the Texas corporation. This shift of position took place four years after the transaction of purchase, and was intended to secure the benefits of affiliation under the new statute, but in his dealings with , his wholly-owned corporation he did not change his status with respect to the stock. He made no sale or donation of the stock to the Supply Co. His conduct is strong evidence that he intended to and did retain ownership of the stock in himself.

In his dealings with the Government with respect to his individual tax liability, T. T. Word made further representations which are inconsistent with the position now taken by him. As hereinafter shown, all of the consideration paid for the stock and obligations, was derived from the assets of the Texas corporation. The consideration included $130,000 in cash which was borrowed from the Union National Bank on a note which T. T. Word was required to endorse. Consistently, in each of the years 1926 to 1932, T. T. Word deducted substantial amounts of interest on his income tax returns, which the record shows was the interest paid to the Union National Bank on the note. This was a representation that the indebtedness was his own, and, therefore, if any of the consideration paid for the obligations was in fact consideration in part for the stock, it was paid with money borrowed by T. T. Word for the purpose.

This evidence and the uncontradicted testimony that no change in the ownership of the Texas stock took place from the time it was originally acquired from the Tennessee corporation in 1926 until the surrender of the stock in 1934, together with all the other facts and circumstances shown by this record, warrants the conclusion that the stock was owned by T. T. Word at all times between March 1926 and May 8, 1934, and we so hold. Our conclusion is in accord with that reached in the former proceedings on substantially the.same evidence, and our former conclusion is quite persuasive, since the petitioners have here proven no other facts or circumstances tending to show that T. T. Word did not own the stock.

Since the conclusion thus reached is adverse to the contentions of the petitioners, it is unnecessary to pass upon the question whether, under the doctrine of res judicata, our former adjudication of ownership of the stock is conclusive upon either the Supply Co. or T. T. Word and Anna Word. It may be noted, in conclusion, that the petitioner has produced no evidence whatever respecting the ownership of the stock of the Specialty Co. during the year 1931. For this reason, even if we should hold that the Supply Co. owned all of the Texas stock in that year, we would not be justified in disturbing the respondent’s action in rejecting the consolidated return on which the aggregate net loss of both subsidiaries was deducted.

The ownership of the obligations, consisting of $141,086.14 of mortgage notes and $759,274.02 of unsecured claims, had its origin in the contract with the receivers of March 10, 1926. That contract expressly recites that the mortgage notes have been delivered to the Supply Co. and in terms sells, transfers, and assigns the unsecured claims to the Supply Co. In addition other assets, apparently of doubtful value, are transferred to other parties. Thus the legal title to the notes and claims clearly was placed in the Supply Co. All of the documents thereafter executed recognize the Supply Co. as the owner of these obligations. Such evidence would be quite convincing were it not for the fact that in the field of taxation we “are concerned with substance and realities, and formal written documents are not rigidly binding.” Helvering v. Lazarus & Co., 308 U. S. 252, and Higgins v. Smith, 308 U. S. 473. All of the stock of the Texas corporation was acquired by T. T. Word, and he also was the owner of all of the stock of the Supply Co. The evidence of the entire dealings between T. T. Word and these corporations must be closely scrutinized, and we proceed to examine it for the purpose of determining whether T. T. Word was the beneficial owner of tbe obligations. The entries on the books of the two corporations and T. T. Word are no more than evidential and, in case of conflict, must give way before the true facts. Doyle v. Mitchell Brothers Co., 247 U. S. 179; Watson-Moore Co., 30 B. T. A. 1197.

In March 1926 the Supply Co. was a newly organized corporation with a paid-in capital of $10,000. It had some earnings over a period of two months. The Texas corporation had assets which were represented to the Union National Bank as having an appraised net value of almost $500,000. That value did not take into account the $900,000 which it owed the New York corporation on the mortgage notes and unsecured claims. The contract with the receivers provided for a payment of $160,000 in cash. The Supply Co. neither had the cash with which to make the purchase nor financial standing by which it could borrow the money. The $160,000 was raised by withdrawing $30,000 from the cash funds of the Texas corporation and borrowing $130,000 from the Union National Bank on Word’s endorsement. It was placed in the Supply Co.’s bank account, and paid by check to the receivers. The remainder of the consideration consisted of promissory notes of the Supply Co. for $30,000, which were executed and endorsed by T. T. Word as required by the contract. The bank took a promissory note of the Supply Co. for the $130,000. It not only required the endorsement of the note by T. T. Word, but it also insisted that the note of $759,274.02 payable to the Supply Co. and secured by some $220,000 of bills receivable of the Texas corporation be pledged as security for the note for $130,000. T. T. Word testified that all of the assets of the Texas corporation were pledged to the bank. Payments made from time to time on the notes to the bank and to the receivers were made from assets of the Texas corporation, except about $60,000. The latter amount was paid by the Supply Co. While the evidence does not show any reimbursement of the Supply Co. through direct cash payments, it does show that the Supply Co. credited the Texas corporation with 80 percent of the proceeds collected on all sales made on its behalf, and charged against such credits the payments made by it on the notes. When the Texas corporation was dissolved in 1934, the Supply Co. was indebted to it on that account to the extent of $109,420.99. Thus all of the consideration paid, both for the stock and the obligations, in the amount $228,000, was as a matter of fact paid through withdrawal of funds or assets of the Texas corporation. The Supply Co. did not use any of its own funds or its own credit.

The book entries relating to the'transaction are set forth in detail in our findings of fact. The petitioners oppose their consideration on the ground that they are not proof of the actual facts, and, with respect to the entries on the personal books of T. T. Word, the latter in his testimony disclaims responsibility for such hooks and says that he did not know of their existence until they were shown to him for the first time in 1933 by a revenue agent. We think the personal books are what they purport to be and are competent to corroborate facts otherwise established. At the time the stock and obligations were acquired in 1926, T. T. Word employed an accountant for the purpose of guiding his bookkeeper in setting up accounts reflecting the entire transaction. The accountant had a personal conference with T. T. Word, in which the details of the transaction were discussed, and thereafter he gave written bookkeeping instructions based on the facts supplied by T. T. Word. The accountant advised, among other things, that the books of the Texas corporation should not recognize the personal dealings of T. T. Word and the books of the Supply Co. should record only such matters as involved it, but that the personal books of T. T. Word should contain a complete history of all transactions and a record of his dealings in the securities of the Texas corporation. On the personal books the notes were set up as assets of T. T. Word at a cost of $190,000, and the interest paid from year to year on the loan from the bank was charged as additional cost, in the amount of $14,807.35. Both of these amounts were carried on his books as liabilities. The Texas corporation set up on its books an account entitled “T. T. Word, Personal, Notes Payable”, which was credited with $759,274.02. It set up a “T. T. Word Loan Account”, to which it charged amounts paid by it to the receivers and the bank from time to time on their notes. The Supply Co. set up on its books an “investment account” with the Texas corporation, in which it charged $190,000, representing cash acquired from Texas corporation and the bank. Over the period 1926 to 1932, this account was credited with payments aggregating $190,000, including about $60,000 paid by the Supply Co. directly to the bank. We think the entries on the Supply Co. books were made to reflect the passing of the money through it and not an investment on its own account. In addition to the books, the consolidated income tax returns of the Supply Co. and the Texas corporation for the years 1926, 1927, and 1928 contain balance sheets wherein, under the heading of “other assets”, the items of “Investment Account $190,000” and “Liquidation Account $64,097.49” are listed with the designation “T. T. Word Personal.” These records, in connection with other facts and circum-. stances, indicate quite clearly that the obligations received under the contract of March 10, 1926, were acquired for the account of T. T. Word.

We are of the opinon and find that at all times from March 1926 to May 8,1934, T. T. Word was the beneficial owner of the obligations of the Texas corporation.

Having determined that T. T. Word was the owner of the stock and the beneficial owner of the claims, the question remains whether he realized a taxable gain upon the surrender of the stock and cancellation of the claims in exchange for the assets of the Texas corporation in 1934. The respondent held that the transaction resulted in a complete liquidation, and that, since T. T. Word owned the stock, the gain resulting from the exchange was taxable income of the community estate under section 115 (c) of the Revenue Act of 1934. In computing the amount of the gain, he included in the assets acquired, as obligations owing by T. T. Word, the amounts of $190,000 and $38,000, and interest payments of $14,897.25, which as the evidence shows, are amounts which were withdrawn from the Texas corporation and used to pay for the stock .and claims. He allowed a basis of $38,000 for the stock, and $190,000 (less recoveries of $12,219.84) for the claims. The contention made in his brief is that, since T. T. Word owned the stock and claims, and since he had recovered the entire cost thereof through disposal of the assets of the Texas corporation, the receipt of the remaining assets in liquidation resulted in a closed transaction, and the fact that the assets were transferred direct to the Supply Co. is immaterial. The petitioners contend that, even if the stock and claims were in fact owned by T. T. Word, the transaction of 1934 was a merger or consolidation of the Supply Co. and the Texas corporation, and that, since T. T. Word owned no more after the consolidation than he did before, and, by reason of the cancellation of the claims, he in fact owned less — he realized no taxable gain.

Section 115 (c) of the statute provides that “amounts distributed in complete liquidation of a corporation shall be treated as in full payment in exchange for the stock, and amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock”, and that the “gain or loss to the dis-tributee resulting from such exchange shall be determined under section 111, but shall be recognized only to the extent provided in section 112.” Section 115 (i) provides that “the term ‘amounts distributed in partial liquidation’ means a distribution by a corporation in complete cancellation or redemption of a part of its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.” The liquidation of a corporation is the process of winding up its affairs by realizing upon its assets, paying its debts, and appropriating the amount of its profit and loss. It differs from normal operation for current profit in that it ordinarily results in the winding up of the corporation’s affairs, and there must be a manifest intention to liquidate, a continuing purpose to terminate its affairs and dissolve the corporation, and its activities must be directed and confined thereto. A mere declaration is not enough, and the question whether a corporation is in liquidation is one of fact. W. E. Guild, 19 B. T. A. 1186; Fred T. Wood, 27 B. T. A. 162. In the present case, the first formal declaration to dissolve was made in the resolution of May 8, 1934. Pursuant to that resolution the Texas corporation transferred its assets in exchange for the surrender of its stock and the cancellation of its principal obligations, and shortly thereafter was dissolved. Prior to the acquisition of the stock and claims and while the negotiations were pending with the receivers, T. T. Word organized the Supply Co. as a selling corporation, with a comparatively small paid-in capital. On January 6, 1926, the Supply Co. entered into a contract with the Texas corporation, under which the Supply Co. took over all of a large quantity of manufactured products, materials, supplies, and implements which the Texas corporation had on hand, for sale on a commission basis. The facilities theretofore used by the Texas corporation in the manufacturing branch of its business were transferred to the Tennessee corporation, which thereafter was to carry on that branch of the business, and the Supply Co. arranged to secure its future supply of manufactured products from the Tennessee corporation and sell them on consignment. The contract of January 6, 1926, recites that the business of the Texas corporation has proven unprofitable and that “it is understood and agreed that Lucey Manufacturing Corporation of Texas is discontinuing its business generally”, and it authorizes the use of its facilities by the Supply Co. “until sold and disposed of.” In connection with the loan of $130,000 from the Union National Bank, T. T. Word pledged all the assets of the Texas corporation as security, and represented that the Supply Co. was acquiring the stock, business, and assets of the Texas corporation and the note for $759,274.02, and that as the assets so acquired were liquidated the proceeds would be applied in liquidation of the $130,000, and thereafter the note for $759,274.02 would be canceled out by the Supply Co. absorbing the then remaining assets and liabilities. This evidence shows not only that there was a complete liquidaton in 1934, but that the Texas corporation was in process of complete liquidation beginning in 1926 and in the intervening years up to and including 1934, and the withdrawals during the period 1926 to 1932 must therefore be regarded as a series of distributions intended to be in complete liquidation of the corporation. James P. Gossett, 22 B. T. A. 1279; affd., 59 Fed. (2d) 365; 60 Fed. (2d) 484; Rollestone Corporation, 38 B. T. A. 1093; Kent Oil Co., 38 B. T. A. 528; Gaston & Co., 39 B. T. A. 640. In such cases the stockholder is entitled to have the amounts distributed applied against the aggregate basis of all his shares, and he realizes no taxable income until tbe distributions exceed the basis. Florence M. Quinn, 35 B. T. A. 412; Alvina Ludorff et al., Executrices, 40 B. T. A. 32; Norman Cooledge, 40 B. T. A. 110, 115. In the present case, the acquisition of the claims and the acquisition of the stock were integral parts of a single plan, and it was contemplated that, after all the liabilities incurred in the purchase had been satisfied out of the assets of the Texas corporation, the claims would be canceled with the surrender of the stock and the corporation would be liquidated. We think, therefore, that the petitioners are entitled to have the distributions applied against the cost of both the stock and the claims, and, as the distributions were equal to the cost, no gain was realized until the remaining assets were distributed in 1934. All amounts distributed in excess of the aggregate cost of the stock and claims constituted gain from the liquidation in 1934.

In view of our conclusion that T. T. Word was the owner of the stock, and that he was the beneficial owner of the claims, the facts that the Texas corporation in the resolution authorizing the exchange referred to the stock and claims as property owned by the Supply Co., that it conveyed the assets direct to the Supply Co., and that the latter released the lien of the mortgage notes and canceled the note for $159,274.02, are insufficient to show that he did not receive the assets in liquidation. As sole stockholder and owner of the claims, he was the only person entitled to the assets upon dissolution of the corporation. The Supply Co. had no interest in the Texas corporation, either as stockholder or creditor. It merely held the legal title to the claims for the benefit of T. T. Word. In receiving the assets and in canceling the liens and claims, it acted solely as the nominee or agent of T. T. Word. The assets could only pass to the Supply Co. through T. T. Word. The fact that the Supply Co. issued no stock or other thing of value for them indicates quite clearly that it acquired them as a donation or contribution of additional capital from him. The transfer of assets in complete liquidation to the wholly owned corporation of T. T. Word without consideration is analogous to those cases in which it has been held that a transfer of corporate assets to a partnership composed of the former stockholders is a distribution in the form of a liquidating dividend. See E. C. Huffman, 1 B. T. A. 52; Joseph Joseph, 6 B. T. A. 595; affd., 26 Fed. (2d) 532; John F. Prindible, 16 B. T. A. 187; Commonwealth Improvement Co., 20 B. T. A. 1189; affd., 287 U. S. 415.

The fact that in the complete liquidation T. T. Word, as creditor, surrendered claims of the face value of about $900,000 does not warrant the conclusion that nothing was distributed to him in liquidation. The evidence does not show that the claims were worth their face amount. They were purchased, along with some assets of the North Texas Supply Co., from outside creditors for $190,000. They were not exchanged solely for the assets, but, as the resolution of the stockholders shows, the consideration for the assets consisted of cancelation of the claims and surrender of the stock. We are of the opinion that the assets of the Texas corporation were distributed to T. T. Word in complete liquidation, and that the value of such assets, to the extent that they exceeded the basis of the stock and claims, constituted taxable income for the year 1984.

The contention of the petitioners that the transaction was a merger or consolidation and no taxable gain was realized is without merit. Whether any gain realized from the distribution is not to be recognized depends upon whether the transaction falls within any of the exceptions contained in section 112. Sec. 115 (c). The provisions of section 112 are exceptions to the rule taxing gains, and may not be availed of by a taxpayer unless he establishes a transaction coming clearly within their terms. Warner Co., 26 B. T. A. 1225; Dolomite, Inc., 28 B. T. A. 1271; John C. Shaffer, 28 B. T. A. 1294; Charles Hall, 81 B. T. A. 125. We need not decide whether there was a merger or consolidation, or a statutory reorganization. That of itself is not sufficient for nonrecognition of any gain under section 112. The taxpayer must further bring the transaction within one of the specific provisions of that section. See Cortland Specialty Co. v. Commissioner, 60 Fed. (2d) 937. The only provisions which can have any possible application are subdivisions (b) (3) and (b) (5). The former provides that no gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. The transaction does not fall within this language, since the stock of the Texas corporation was not exchanged solely for stock of the Supply Co. Subdivision (b) (5) provides that no gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation and immediately after the exchange such person or persons are in control of the corporation. Here, there was a transfer of property by T. T. Word to the Supply Co., but it was not transferred solely for stock of the transferee. The Supply Co. issued no stock whatever, and, as indicated above, the assets passed to the Supply Co. as a contribution of additional capital. Since the petitioners have failed to point out any provision of section 112 which would exempt from taxation the gain derived from the distribution, it follows that, under the express provisions of section 115 (c) and 112 (a), the gain realized is subject to tax. Coxe v. Handy, 103 Fed. (2d) 873.

The amount of gain realized, as computed by the respondent, is shown in our findings of fact. The cash, prepaid items, real estate, and finished goods, amounting to $85,668.76, are not disputed, nor is the item of liabilities assumed, amounting to $15,589.07, questioned by either party. The item of furniture and fixtures should be reduced to $2,000, since the evidence shows, and the respondent concedes, that to be the proper value. We find no reason to disturb the respondent’s valuation of the receivables at $8,701.68. The receivables on the books of the Texas corporation amounted to something over $75,000 and a reserve was set up for doubtful notes and accounts amounting to about $67,000, and in 1934 the accounts and reserve were transferred at the same figures to the Supply Co.’s books. T. T. Word determined at that time that $8,701.68 of the accounts would probably be collected. The petitioners now contend that this figure should be reduced to $1,500, and rely upon the testimony of T. T. Word that they were not worth more than that amount. He further testified that only $1,300 has since been collected. We agree with the respondent that the witness’ estimate made at the time of taking over the accounts is a better indication of their value at that time than one made by him several years later.

The Supply Co. accounts of $109,420.99 and $3,035.63 represent the balance in a current account due by the Supply Co. to the Texas corporation out of the proceeds of supplies sold on consignment. There is no evidence that this was not a valid claim or that the Supply Co. was unable to pay it. The only argument advanced by the petitioners is that these accounts were never transferred to T. T. Word in the so-called merger or consolidation of the two companies. From what has been said above, they clearly were assets of the Texas corporation, which passed to T. T. Word along with the other assets and to the Supply Co. by way of a capital contribution.

We have found as a fact that the gain realized by T. T. Word was $170,455.08. That amount should be included in computing the net income of T. T. Word and Anna Word on the community property basis. In accordance with the concession of the respondent, this conclusion requires the elimination of gain in the amount of $177,738.47 from the taxable income of the Supply Co.- for the year 1934.

The final question is’ whether the Supply Co. is entitled to a deduction of $10,424.55 for bad debts on its return for the year 1931. Deductions for bad debts are allowable only in the year in which two things occur — ascertainment of worthlessness and charge-off. Paul Pryibil, 31 B. T. A. 164. The accounts were charged off during 1931, and the question for determination is whether they were ascertained to be worthless in that year. The ascertainment need not be absolute, but the taxpayer must make some reasonable and intelligent investigation of the facts concerning the claim, and the circumstances disclosed must be such as reasonably to generate the belief that it is in fact worthless. American Trust Co. v. Commissioner, 31 Fed. (2d) 47; Sherman & Bryan, Inc. v. Blair, 35 Fed. (2d) 713; Clark v. Commissioner, 85 Fed. (2d) 622; Kahn v. Commissioner, 108 Fed. (2d) 748; Eastern New Jersey Power Co., 37 B. T. A. 1037. We can not rest our determination upon the conclusions of witnesses alone, in the absence of facts upon which their conclusions are based. Merrill Trust Co., 21 B. T. A. 1395; Higginbotham-Bailey-Logan Co., 8 B. T. A. 566; Avery v. Commissioner, 22 Fed. (2d) 6. The facts presented fail to show that the petitioner was justified in concluding in 1931 that the accounts were worthless. T. T. Word testified that in the latter part of 1931 he ascertained that they could not be collected. In support of his conclusion he stated that the debtors were operators and contractors in the East Texas Oil Field, that, as a result of overproduction in 1931, the oil industry fell into a chaotic condition, the price of oil declined to 10 cents per barrel, and the State authorities finally shut in the wells. He also stated that he attempted to make collections, but that none of the debtors could pay anything. He did not disclose, however, what facts, if any, he ascertained concerning the financial condition of the debtors. The failure of a debtor to pay on demand or to pay promptly does not justify determination that the debt is worthless, in the absence of any investigation of the debtor’s solvency. Joseph Kahn, 38 B. T. A. 1417; affd., Kahn v. Commissioner, 108 Fed. (2d) 748; Prescott State Bank, 11 B. T. A. 147. Cf. Clark v. Commissioner, supra. In the case of the Anderson account, it appears that the debtor was able to pay, and the petitioner testified that he was willing to do so. Anderson owned two oil wells which he sold two months after his account was charged off. The proceeds of that sale were used to discharge the balance of his debt. The collection of all of these accounts was undoubtedly delayed because of the unusual conditions, but there is no proof that they were worthless; and that they were not worthless is corroborated by the fact that, as soon as the condition of the oil industry improved, the accounts were paid. Joseph Kahn, supra; Richards & Hirschfeld, Inc., 24 B. T. A. 1289. The respondent’s disallowance of the deductions is approved.

Reviewed by the Board.

Decision will be entered for the resfondent in Docket No. 90991,, and. under Rule 50 in Docket Nos. 9351$, 93543, and 93544•

       Sec. 141 (d) * * * an “affiliated group” means one or more chains of corporations connected through stock ownership with a common parent corporation if—
      (1) At least 95 percentum of the stock of each of the corporations (except the common parent corporation) is owned directly by one or more of the other corporations; and
      (2) The common parent corporation owns directly at least 95 per centum of the stock of at least one of the other corporations.


source: Caselaw Access Project

author: Van Fossan: Black,

license: Public Domain

text:
    Denholm and McKay Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89606.
    Promulgated April 30, 1940.

      Howe P. Cochran, Esq., for the petitioner.

      E. L. Updike, Esq., for the respondent.
   OPINION.

Van Fossan:

On July 24, 1939, on consideration of alternative computations filed pursuant to report promulgated April 14, 1939 (39 B. T. A. 767), and in reliance on the decisions of the Board in Edward E. Rieck, 35 B. T. A. 1178, and Georgie W. Rathborne, 39 B. T. A. 56, and notwithstanding the reversal of the Board’s decision in the Rieck case in Commissioner v. Rieck, 104 Fed. (2d) 294, decision was entered in this proceeding as follows:

This proceeding was called from the Day Calendar of July 5, 1939, for hearing on settlement under Rule 50, and after argument same was taken under submission with leave to the petitioner to file a revised recomputation within ten days. Petitioner having filed a revised recomputation on July 11, 1939, and after due consideration, it is
Ordered and Decided : That there is an overpayment in income tax for the fiscal year ended January 31, 1935, in the amount of $821.37, which was paid within less than three years before the filing of the original petition.

On September 8, 1939, respondent filed a motion to vacate the decision and for reconsideration, which motion was duly entertained by the Board, final action thereon being postponed pending action of the Supreme Court of the United States on application for a writ of certiorari in the case of Rieck v. Helvering. Certiorari was denied November 6, 1939, 308 U. S. 602. Action was further postponed to await deciison of the Circuit Court of Appeals for the Second Circuit in Commissioner v. Estate of George M. Dallas.

On March 25,1940, the United States Circuit Court of Appeals for the Second Circuit, in Commissioner v. Estate of George M. Dallas, 110 Fed. (2d) 743, reversed a memorandum opinion of the Board which had held to the same effect as Edward E. Rieck, supra. The court pointed out that its decision was in accord with the decision of the Third Circuit in Commissioner v. Rieck, supra.

On consideration of the opinions of the Circuit Courts of Appeal in the two cited cases, we hold that an amended petition raising a new issue, filed more than three years after the payment of the tax, does not relate back to the time of filing of the original petition for the purpose of applying section 322 (d) of the Revenue Act of 1934, as amended by section 809 (a) of the Revenue Act of 1938.

Reviewed by the Board.

Decision will he entered under Bule 50.

Black,

dissenting: I respectfully dissent from the majority opinion for reasons which I shall state presently.

Before entering upon any discussion of the majority opinion, I think it would be well to have before us a brief statement of the facts which concern the point at issue. The motion of the Commissioner asking the Board to vacate its former decision and enter one in conformity with the court’s opinion in Commissioner v. Rieck, 104 Fed. (2d) 294, seems to correctly and fully state the pertinent facts and I quote from it, as follows:

On April 18, 1936 taxpayer paid tlie sum of $821.37 as income tax for the fiscal year ended January 31, 1935.
No claim for refund has been filed by the taxpayer in respect to its income tax liability for the fiscal year ended January 31,1936.
“The original petition” in this proceeding was filed with the Board on June 24,1937. In the original petition the assignments of error were:
“(a) The Commissioner of Internal Revenue erred in adding to the income shown by the return an item of $36,150.60, described by him as ‘Realty Company dividends’.
“(b) The Commissioner of Internal Revenue erred in adding to the income shown by the return an item of $7,429.37, described by him as ‘Received from Mutual Insurance Companies.’ ”
On May 6,103S, an amended petition was lodged with the Board and pursuant to leave granted filed on May 7, 1938. In the amended petition the assignments of error were:
“(a) The Commissioner of Internal Revenue erred in adding to the income shown by the return an item of $36,150.50, described by him as ‘Realty Company dividends.’
“(b) The Commissioner of Internal Revenue erred in adding to income shown by the return an item of $7,429.37, described by him as ‘Received from Mutual Insurance Companies.’
“(c) The Commissioner of Internal Revenue erred in failing to allow a deduction in the amount of $66,222.08 city property taxes accrued on January 1, 1936.”
There is no allegation in the original or the amended petitions in respect to the date and amount of the payment by the taxpayer of any income tax fo'r the fiscal year ended January 31,1935. In the prayer of the amended petition it is prayed that the Board allow as deductions the three amounts mentioned in the assignments of error and that “the Board may find that this petitioner has overpaid its taxes for the year ended 'January 31, 1935 and that the recovery of the overpayment is not barred by the statute of limitations”.
The taxpayer’s Federal income tax liability for the fiscal year ended Januarj 81, 1935, computed in accordance with the report promulgated by the Board on April 14, 1939, is as follows:
“Net income shown in notice of deficiency-<$54,182. 08
Less:
(a) Amount of preferred dividends of the Denholm and McKay Realty Company allowed by the Board as rent-$36,150. 50
(b) Insurance premiums overpayments- 7,429.37
(c) Taxes accrued on January 1, 1935 allowed by the Board as rent- 56, 222. 08
- 99,801.95
Net taxable income as adjusted- None
Income tax liability- None
Tax assessed (Account # 400636)-$821.37
Tax paid (April 18, 1935)-$821.37
Income tax liability- None
Overpayment_$821. 37”
The issue with respect to the deductibility of the item of $56,222.08 taxes accrued on January 1, 1935, was first presented in the amended petition lodged with the Board on May 6, 1938, and filed pursuant to leave granted on May 7, 1938.
No portion of the income tax paid by this taxpayer for the fiscal year ended January 31, 1935 was paid within three years before the filing of the amended petition.
The entire overpayment of $821.37 is due to the allowance by the Board of the $56,222.08 taxes accrued on January 1, 1935, in that without such allowance there would be a deficiency rather than the stated overpayment.

In dissenting from the majority opinion I, of course, recognize that the opinion is in accord with Commissioner v. Rieck, supra, and Commissioner v. Dallas, 110 Fed. (2d) 743. With all due respect to the opinions of these learned courts, I think they are wrong in applying the same rule to amended petitions filed with the Board of Tax Appeals as is applied to claims for refund which are filed with the Commissioner of Internal Revenue.

If in the matter of permitting amendments to petitions filed with the Board by taxpayers it is governed by the same rules as govern the Commissioner of Internal Revenue in matters pertaining to amendments to claims for refund filed with him, then undoubtedly under the Supreme Court’s decision in United States v. Andrews, 302 U. S. 517, and United States v. Garbutt Oil Co., 302 U. S. 528, the amened petition in the instant case was filed too late to be the basis of a refund of the overpayment found by the Board. But it is my view that the rules governing the Board of Tax Appeals in the matter of permitting amendments to petitions filed with it by taxpayers are altogether different from the rules which the Commissioner has prescribed in his regulations for amending claims for refund.

My views in that respect were rather fully stated in Edward E. Rieck, 35 B. T. A. 1178, and I respectfully refer to what I said there to save repetition here. It is true, of course, that the Board of Tax Appeals is not a court. Congress was content to establish the Board as a “legislative inferior tribunal, having judicial powers within its limited jurisdiction and capable of handing down not merely administrative determinations but judicial decisions.” Garden City Feeder Co., 27 B. T. A. 1132; affirmed on this point and reversed on another point, 75 Fed. (2d) 804. The Supreme Court, notwithstanding its statement that the Board is not a court, recognizes the judicial character of its jurisdiction and powers. Blair v. Oesterlein Machine Co., 275 U. S. 220; Williamsport Wire Rope Co. v. United States, 277 U. S. 551; cf. Pierce Oil Corporation, 30 B. T. A. 469.

The Board of Tax Appeals has rules of practice, promulgated pursuant to authority of section 907 (a) of the Revenue Act of 1924, as amended by section 601 of the Revenue Act of 1928, which provide in part that “The proceedings of the Board and its divisions shall be conducted in accordance with such rules of practice and procedure (other than rules of evidence) as the Board may prescribe and in accordance with the rules of evidence applicable in courts of equity of the District of Columbia.” Rule 17 of the Board’s Rules of Practice relates to amended and supplemental pleadings and reads as follows:

The petitioner may, as of course, amend his petition at any time before answer is filed. After answer is filed, a petition may be amended only by consent of the Commissioner or on leave of the Board.
All motions to amend, made prior to the hearing, must be accompanied by the proposed amendments or amended pleading.
Upon motion made, the Board may, in its discretion, at any time before the conclusion of the hearing, permit a party to a proceeding to amend the pleadings to conform to the proof.
When motions to amend are granted at the hearing, the amendment or amended pleading shall be filed at the hearing or with the Board within such time as, the Division may fix.
TSee Buies 4 and 19.]

It was under this rule that petitioner was granted leave on May 7, 1938, to file an amended petition setting up in addition to the grounds of error assigned in the original petition a new assignment of error, reading as follows: “(c) The Commissioner of Internal Revenue erred in failing to allow a deduction in the amount of $56,222.08, city property taxes accrued on January 1, 1935.” The Board in its opinion promulgated April 14, 1939, 39 B. T. A. 767, sustained this new assignment of error contained in the amended petition, as well as the first assignment of error, and the Commissioner conceded the second assignment of error. Unless the Board abused its discretion in granting petitioner permission to file the amendment in question, I think it is effective for all purposes. I have heard no suggestion that the Board abused its discretion in granting such an amendment.

The effect of the decisions of the court in the Rieck case, supra, and the Dallas case, supra, it seems to me is to hold that when such an amended petition is filed setting up an entirely new assignment of error, a new cause of action is begun and is tantamount to the filing of a new original petition. If that is true, then it would seem to me to follow that the Board would be without authority to grant a petitioner permission to amend his petition by setting up an entirely new assignment of error, unrelated to errors already assigned, even in cases where no overpayment is involved, after the 90-day period prescribed by the statute for appeal to the Board has expired. If a new and unrelated assignment of error pertaining to the same tax liability is held to raise a new cause of action, then the Board would be without jurisdiction to hear it if filed after the 90-day period for appeal to the Board has expired.

If that is the correct rule of law, then a petitioner to the Board of Tax Appeals must raise in his original petition every ground upon which he relies at the peril of never being able to raise them; after the 90-day period has expired he may amend only in the way of perfecting amendments to the grounds of error already assigned; and he may not file an amended petition which raises an entirely new ground of error on the part of the Commissioner, for to do so would, under the rule laid down by the courts in the Rieck and Dallas cases, be raising a new cause of action.

For a discussion of the problem as to when an amendment sets up a new cause of action in pleadings generally, see Justice Cordozo’s discussion in United States v. Memphis Cotton Oil Co., 288 U. S. 62. See also Guettel v. United States, 95 Fed. (2d) 229, in which the court, among other things, said:

A single tax was assessed and a single tax was paid. Because the tax assessed and paid was in excess of what was legally due the government, it was obligated to repay the entire excess; hut the cause of action for the recovery of the whole excess arose out of one transaction and was a single cause of action, regardless of the nwribcr of grounds upon which the taw was excessive. [Emphasis supplied.]

I prefer to believe that such an amendment as we have here, filed with the permission of the Board, does not raise a new cause of action, but merely perfects and enlarges tire one already before the Board, and, as we said in Edward E. Rieck, supra, relates back to the time of the filing of the original petition. Cf. United States ex rel. Texas Portland Cement Co. v. McCord, 233 U. S. 157, 164.

Therefore, I think the decision of the Board in the instant case should be that “There is an overpayment in petitioner’s income tax for the fiscal year ended January 31, 1935, in the amount of $821.37, which amount was paid within three years before the filing of the petition on June 24,1937.”

Leech, Harron, and Kern agree with this dissent.


author: Hill :

text:
    Alexander Zolotoff, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90883.
    Promulgated April 30, 1940.

      Bernard J. Reis, C. P. A., for the petitioner.

      S. U. Hiken, Esq., for the respondent.
   OPINION.

Hill :

The issue arising in this case is the year of taxable receipt of certain interest payments credited to petitioner’s account in the years 1924 and 1925 but freed from the shadow of any legal dispute only in the year 1927.

In his petition the petitioner set forth, as the basis for the assignment of error, that he was under no obligation to make a return for the taxable years, inasmuch as the withholding agent was required to make a return in his behalf. We understand that position to have been abandoned by petitioner in view of the provisions of sections 210, 217, and 221 (d) of the Revenue Acts of 1924 and 1926. There are, however, in paragraphs four and five of the petition additional statements which constitute adequate assignment of other points pressed by the petitioner o.n trial and on brief. Respondent’s motion for decision on the pleadings is, therefore, denied.

On the evidence, however, our decision must be for the respondent. Whether the interest payments standing in petitioner’s name with the Fidelity International Trust Co. be regarded as funds in the hands of petitioner’s agent or as a credit given him by a solvent banking institution, it seems clear that these amounts were subject to his immediate and unfettered control and were constructively received by him. Sara A. Twohy, 34 B. T. A. 444; Huntington National Bank, Trustee, 32 B. T. A. 342; Ella C. Loose, Executrix, 15 B. T. A. 169; Loose v. United States, 4 Fed. Supp. 375; affd., 74 Fed. (2d) 147, and cases there cited; Albert J. Sullivan, 16 B. T. A. 1347.

It has often been noted that the doctrine of constructive receipt is to be used with caution; under the citations given, nevertheless, situations comparable to the present have been recognized as appropriate for its application. The account opened by the trust company might have been used by the petitioner at any time he chose through the simple expedient of a draft or check. It appears that the money would have been transmitted by the trustee to the petitioner as soon as it was received except for instructions given that it be retained.

Petitioner contends that he had no use of the interest payments during the taxable years for the reason that he was in ignorance of their existence. Whatever weight this circumstance might have if shown by competent evidence to be true, no proof has been offered in substantiation. On the contrary, his counsel stated on the trial that petitioner was informed in 1923 of the reorganization and placed the matter in the hands of his attorneys. In addition there was some evidence that the petitioner instructed the trust company to retain the credited funds. Petitioner has failed to offer any evidence in opposition from which we may find that he was unaware of the payments of interest.

The argument of the petitioner runs, however, that the interest payments were made on bonds given without his consent or knowledge in settlement of a valid obligation that might have been enforced in full through court action; that during the taxable years he could not use the interest credited to him without ratifying the very settlement which he was then contesting in court; that the condition of his acceptance of the settlement blocking his use of the interest nullified the unfettered control of the funds that is required for the operation of the idea of constructive receipt.

A similar argument was made to the Board in William Parris, 20 B. T. A. 320, where taxpayer contended that royalty payments due from his lessee were not received in the years when they were payable (on the presentation by taxpayer of a signed division order), since at that time taxpayer was contesting the lease, asking its cancellation, and the signing of the required division order and use of tli© funds would have prejudiced his position. He had been so advised by counsel. In that case we said:

* * * We need not determine whether petitioner was correctly advised and whether his position would have been prejudiced by signing a division order, for in any event our decision as to whether the income was constructively received is not affected. If he elected not to take possession of income which was subject to his demands because of some benefit which would thereby accrue to him, the amount is nevertheless constructively received***

Similarly, in Harry B. Hurd, 12 B. T. A. 368, where the taxpayer received as income certain securities to the terms of which he objected. Although he took manual delivery of the certificates, he refused to accept them in settlement of the claims for which they were offered. We rejected the contention that the certificates were not received for taxation purposes in the year in which they were delivered into his unfettered control.

For similar holdings see Esther Rentie, 21 B. T. A. 1230; Hamilton National Bank of Chattanooga, Administrator, 29 B. T. A. 63.

In view of these decisions we think respondent must prevail in his determination that petitioner received taxable income in 1924 and 1925 in the amounts of interest credited to his account in the taxable years.

Decision will be entered for the resfondenb.


author: Tyson :

text:
    Morton Stein, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91981.
    Promulgated April 30, 1940.

      Louis Balant, Esq., and Louis F. Gosswein, C. P. A., for the petitioner.

      Conway N. Kitchen, Esq., for the respondent.
   OPINION.

Tyson :

This proceeding involves a portion of an income tax deficiency of $1,804.97 determined by respondent for the year 1934.

The only question, is whether the income of a certain trust for the year 1934 is taxable to the petitioner, the grantor of such trust.

The petitioner, a resident of the City and State of New York, has been for many years engaged in practicing his profession as attorney at law. The petitioner’s wife, Berdie H. Stein, and their daughter, Margaret, born June 22, 1910, were living throughout the taxable year. Their son, David, died in 1933.

By a written trust instrument, executed in New York on December 3, 1923, the petitioner, as grantor, transferred certain described stocks and securities to his wife, Berdie H. Stein, Lawrence Hock-heimer, and himself, as trustees of the “Berdie H. Stein Trust”, to hold the trust property with or without designation as trustees, to manage, invest, sell, and reinvest the same and to pay over the net income “to Berdie H. Stein, the wife of Grantor, or for her account, annually or oftener, so long as she lives, Provided, Nevertheless, that in the event of illness or other undue condition it becomes necessary in the opinion of Grantor, if living * * * to pay over any part of the principal to meet the expenditures thereby required, the Trustees are authorized to pay over such amounts as may be thus necessary and as to any part of the principal so paid over the trust shall cease.” Upon the death of Berdie H. Stein the then remaining “principal” of the trust was to be paid over to the grantor, if living, or, if dead, such principal was, upon the death of David Stein, a contingent beneficiary of the income, to be “paid over and belong absolutely” to grantor’s daughter, Margaret, or her issue, with certain contingent remainders not material here. The trust would thereupon terminate. The petitioner’s purpose in creating the trust was to provide his wife with an independent income so as to enable her to do the things she liked to do without calling on him for money.

The trust instrument reserves to the grantor the right, during his lifetime: To direct the trustees to sell any trust property; to designate the kind of investment to be made with any part of the trust corpus without any responsibility being imposed upon the trustees because of such investments; to direct the voting of all stock and securities held by the trust; to designate the depository of the trust funds; to fill trustee vacancies and designate other or additional trustees; and, further, the right “to alter, modify or vary the terms of the trust hereby created, but not to revoke the said trust or any part thereof, nor to alter the same so that any part of the income shall be paid to him during the lifetime of Berdie EL Stein.” The trust instrument further provided that no part of the income or corpus to which any beneficiary might be entitled could be alienated, assigned, or pledged by any beneficiary prior to actual payment of such part to such beneficiary.

The trustees accepted the trust created by the trust instrument and acknowledged receipt of the properties described therein. Upon execution and delivery of the trust instrument the properties involved were transferred to the trustees.

Over the period of years since the trust was created the petitioner has, on many occasions, directed the sale of trust property and the reinvestment of the proceeds therefrom in many different types of investment. Also, he has attended stockholders’ and directors’ meetings of corporations in which the trust held stock and he has always voted such stock. He exercised such reserved powers so as to centralize authority over the trust property.

No understanding or agreement has existed between the petitioner and his wife as to her use of the income of the trust and she was free to and did use such income as she chose. The petitioner maintained a home for himself and his family and paid the household expenses.

A bank account was opened in the name of “Berdie H. Stein Trust” and the checks drawn on such account were signed in that name by petitioner or one of the other trustees, as trustee. Excepting checks made for disbursements on account of trust expenses or investments, all checks were made at the request of the beneficiary and payable to her or her nominee. Berdie H. Stein has maintained her own personal bank account, but also has treated the income of the trust in the hands of the trustees as a “second” bank account and has directed the trustees as to whom she desired checks to be made payable and her directions have been followed. In that manner Berdie H. Stein withdrew and used as much of the net trust income as she desired. In the taxable year Berdie H. Stein withdrew the amount of $2,054.53 for her own personal use and the un-withdrawn balance of $3,186.15 of such income was credited to her in an undistributed income account and at all times remained subject to her demand. In the books of account maintained by the trust there were entered all disbursements and the purposes thereof.

The total net income of the Berdie H. Stein trust for the taxable year 1934 was $5,840.68, of which $1,120.08 represented capital gains, $4,131.51 represented dividends on stocks of domestic corporations, and $583.09 represented other net income. All of such income, whether or not actually received by Berdie H. Stein during 1934, was included in her gross income as reported in the income tax return filed by her for the year 1934 and the tax shown to be due was paid by her.

In determining the deficiency in controversy the respondent has, inter alia, included in the petitioner’s gross income for 1934 the amount of $5,840.68 representing the net income of the Berdie H. Stein trust.

The petitioner contends that the income in question was that of a valid'irrevocable trust, the grantor of which reserved no power to revest in himself any part of the corpus or to receive any part of the income therefrom; that the income of the trust was distributable to Berdie H. Stein for her unfettered use and was taxable to her; and that no part of such income is taxable to petitioner under any of the provisions of the revenue acts.

The respondent contends that the income in question is taxable to petitioner on either one of three grounds, viz., (1) under the provisions of sections 166 and 167 of the Revenue Act of 1934, or (2) because such income was used in the discharge of the grantor’s legal obligation to support his wife, or (3) under the provisions of section 22 (a) of the Revenue Act of 1934, because, despite the execution of the trust instrument, the petitioner retained such substantial attributes of ownership of the property transferred in trust as to remain, in substance, the owner thereof.

In view of the respondent’s third contention, the facts in the instant case must be considered in the light of the United States Supreme Court’s decision in Helvering v. Clifford, 309 U. S. 331. That case involved a short term trust as to which the grantor was also the trustee and the wife of the grantor was the income beneficiary. Upon termination of that trust, at the end of five years, or earlier upon certain contingencies, the entire corpus thereof was to go to the grantor. During the continuance of the trust, the grantor, as trustee, had the power to exercise voting rights incident to the trusteed shares of stock; to sell, exchange, mortgage, invest, and reinvest the trust property in his absolute discretion and without restriction; to collect and distribute the income; to compromise claims; and to hold the trust property in the names of others, or in his own name, individually; and, further, the trust instrument contained a clause exculpating the trustee from the result of certain of his acts.

In reaching the conclusion that the grantor of the trust, in the Clifford case, supra, continued to be the owner of the trust corpus for the purposes of the broad provisions of section 22 (a), supra, the Court said, “the short duration of the trust, the fact that the wife was the beneficiary, and the retention of control over the corpus” by the grantor “all lead irresistibly” to such conclusion. The Court then laid stress «upon the extent and effect of the grantor’s retained dominion over the trust corpus through control over investment and otherwise, and, also, upon the fact that the trust accomplished, at best, a temporary reallocation of the income therefrom within an intimate family group, and concluded that, “when the benefits flowing to him (grantor) indirectly through the wife are added to the legal rights he retained, the aggregate may be said to be a fair equivalent of what he previously had. To exclude from the aggregate those indirect benefits would be to deprive § 22 (a) of considerable vitality and to treat as immaterial what may be highly relevant considerations in the creation of such family trusts. For where the head of the household has income in excess of normal needs, it may well make but little difference to him (except income-tax-wise) where portions- of that income are routed — so long as it stays in the family group. In those circumstances the all-important factor might be retention by him of control over the principal.”

There are some differences between the provisions of the trust instruments in the Clifford case and the instant case, which are, in effect, as follows: In the Clifford case the term of the trust was for five years, or a shorter period in certain contingencies, at the expiration of which period the trust terminated and the corpus thereof was to go to the grantor (sole trustee of the trust), while here the term of the trust was for at least the lifetime of the, grantor’s wife; in the Clifford case the trust instrument provided that the net income was' to be held for the exclusive benefit of grantor’s wife and the accumulation, if any, paid her at the termination of the trust, but that during the duration of the trust only such part of the net income should be currently paid the wife as might be determined in the absolute discretion of the trustee, while here the trust instrument provides that the trustees shall pay the net income of the trust annually or oftener to the grantor’s wife; in the Clifford case the trust instrument provided that the trustee could compromise any claim held by him as trustee, while here the grantor did not expressly reserve such power; in the Clifford case the trustee could hold any property of the trust estate in the names of “other persons or in my own name as an individual,” except as otherwise provided, while here the trust property could be held in the names of the trustees, with or without their being designated as trustees.

While there were differences between the provisions of the trust instruments in the Clifford case and the instant case, it is to be noted that, on the other hand, the trust instrument, in the instant case contained other provisions which are not shown to have been contained in the trust instrument in the Clifford case, to wit, the grantor reserved the right to designate the depository of the trust funds; the grantor reserved the right to fill trustee vacancies and to designate other or additional trustees; and the grantor reserved “the power * * * to alter, modify or vary the terms of the trust * * *, but not to revoke the trust, or any part thereof, nor to alter the same so that any part of the income shall be paid to him during the lifetime” of his wife, the beneficiary.

The trust instrument in the instant case also contains other provisions substantially the same as those contained in the trust instrument in the Clifford case (except that in the Clifford case such provisions related to the power granted to the trustee, who was also the grantor, while here, they relate to the power reserved by the grantor individually), to wit: The grantor here had the right to direct the sale of any of the trust property and the trustee there had the right to make such sale; the grantor here had the right to direct and designate the kind of investment or reinvestment to be made of the trust property and the trustee there had the right to himself make such investment or reinvestment of the trust property; and the grantor here had the right to direct the voting of all stocks and securities held by the trust, and the trustee there had the right to himself vote such stocks and securities. In the trust instruments in both the Clifford case and the instant case there was also an exculpatory clause protecting the trustees from the results of certain of their acts and there was another clause, in both trust instruments, prohibiting the alienation, assignment, or pledge by any beneficiary of any part of the income or corpus prior to actual payment thereof to such beneficiary.

The grantor here not only retained powers of dominion and control, closely parallel with those granted the trustee in the Clifford case, but also he reserved additional powers which extend beyond those given the trustee in the Clifford case, in (a) the important particular of the grantor’s retained power to add to the number of trustees and (b) the more important particular of the reservation by the grantor of the power to alter, modify, or vary the terms of the trust, except that he could not revoke the trust or alter or modify it so that he would receive any part of the income during the life of his wife. Under this latter power, the grantor retained a very vital incident of ownership, namely, the right, individually to change the beneficiaries of the corpus and to give the income therefrom to whomsoever he pleased-,' whensoever he pleased.

In the Clifford case, supra, the Court said, that “no one fact is normally decisive but that all considerations and circumstances of the kind we have mentioned are relevant to the question” of the continued ownership by the grantor of trusteed property, for the purposes of section 22 (a), supra. The same is true here and, in our opinion, the principal differences between the provisions of the trust instruments in the two cases, viz., there it was a short term trust and the grantor was the sole trustee while here it was not a short term trust and the grantor was one of three trustees, are without material significance and do not warrant a conclusion here different from that reached in the Clifford case. To hold otherwise, under the facts of this case, would be to disregard the all-important factor of dominion and control over the trust corpus, as well as the factor of the indirect benefits of the trust flowing to grantor through his wife, the factors stressed by the Court in the Clifford case, and would rest the decision herein upon refined legal forms rather than substance.

We conclude that during the year 1934 the petitioner continued to be the owner of the corpus of the trust here in question, for the purposes of section 22 (a) of the Revenue Act of 1934, and that the income therefrom is taxable to him for that year. Such conclusion obviates the necessity of discussing the other contentions made by respondent.

Reviewed by the board.

Decision will be entered for the respondent.

Murdock dissents.

       SEC. 166. REVOCABLE TRUSTS.
      Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested—
      (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or
      (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom,
      then the income of such part of the trust shall be included in computing the net income of the grantor.
      SEC. 167. INCOME EOR BENEFIT OF GRANTOR.
      (a) Where any part of the income of a trust— .
      (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or
      (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or
      * * Ü * * * *
      then such part of the income of the trust shall be included in computing the net income of the grantor.

       SEC. 22. GROSS INCOME.
      (a) General Definition. — “Gross income” includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever. * * *


author: Meuloit :

text:
    Herbert H. Springford, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97247.
    Promulgated April 30, 1940.

      John W. Drye, Jr., Esq., and Theodore Pearson, Esq., for the petitioner.

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

Meuloit :

The Commissioner determined deficiencies in the income tax of petitioner for the calendar years 1934 and 1935 in the respective amounts of $2,119.62 and $9,313, or a total of $11,432.62.

The petition alleges that the Commissioner erred (a) in determining that petitioner received compensation in the amount of $10,000 in the calendar year 1934 and $45,000 in the calendar year 1935 by virtue of his purchase from Servel, Inc., of shares of its common stock pursuant to option agreements theretofore entered into by petitioner and Servel, Inc.; and (b) in refusing to allow as a deduction from gross income for the calendar year 1935 the amount of $550 paid by petitioner during that year as compensation to his secretary. These allegations were denied in the respondent’s answer.

The proceeding was submitted upon a stipulation of facts. Error (b) was abandoned and petitioner now concedes that the respondent did not err in disallowing the deduction claimed. It is agreed that if issue (a) is decided in favor of the respondent the deficiencies are in the amounts determined. If decided in favor of the petitioner there is no deficiency for the year 1934 but there is a deficiency for 1935 in the amount of $93.50.

The issue is entirely one of law. Epitomizing the facts, petitioner and Servel, Inc., a corporation engaged in manufacturing and selling gas refrigerators and other products, entered into several contracts of employment, the first one being dated March 1, 1930, the second January 1,1931, the third May 29,1931, and the fourth March 25,1932. Under the first three contracts petitioner’s salary was $50,000 per year and he was given certain options to purchase stock which need not be referred to at any length here. All of the agreements are set out in full in the stipulation, the last mentioned being referred to as Exhibit D. Exhibit D was modified by an agreement dated July 26, 1932, shown as Exhibit E to the stipulation, by an agreement dated May 22,1933, shown as Exhibit F, and by an agreement dated March 23, 1934, shown as Exhibit G. Exhibit D provides:

Second: Servel hereby agrees to employ Mr. Springford and Mr. Springford hereby accepts employment by Servel for a period commencing March 15, 1932, and ending February 28, 1933, upon the terms and conditions hereinafter set forth.
Third: Mr. Springford agrees to continue for the balance of his present term of office as Chairman of the Board of Servel and thereafter in such capacity as the Board of Directors may from time to time determine, to devote all of his time, skill and energy to the affairs of Servel and its subsidiary and affiliated companies and without additional compensation to act in such capacity in respect of said subsidiary and affiliated companies as shall from time to time be determined.
Fourth : A cash salary shall be paid to Mr. Springford from March 15, 1932, at the rate of Forty-five thousand Dollars ($45,000) per annum, payable in monthly instalments at the end of each month, the first payment to be made March 31, 1932.
Fifth : As further consideration for Mr. Springford’s entering into this agreement and performing services as Chairman of the Board of Servel, or in such other capacity as the Board of Directors may from time to time determine, and if determined in a like capacity in respect of subsidiary or affiliated companies, Servel agrees to grant and hereby grants to Mr. Springford options to purchase shares of the Common Stock of Servel, as now constituted, in the amounts, at the prices and on the terms hereinafter set forth.
Sixth : The options to purchase Common Stock of Servel granted to' Mr. Springford under the terms of this Agreement, shall he three (3) in number:
(a) Option No. 1 is for the purchase of all or any part of 15,000 shares of Common Stock at a price of $4.00 per share and may be exercised at any time during the period commencing March 25, 1932, and ending February 28,1933, and at no other time.
(b) Option No. 2 is for the purchase of all or any part of 15,000 shares of Common Stock at a price of $5.00 per share and may be exercised at any time during the period commencing March 1, 1933 and ending February 28, 1934, and at no other time.
(c) Option No. 3 is for the purchase of all or any part of 15,000 shares of Common Stock at a price of $6.00 per share and may be exercised at any time during the period commencing March 1, 1934 and ending February 28, 1935, and at no other time; provided, however, that said option may only be exercised if Mr. Springford was in the employ of Servel on December 31, 1932.
Seventh: Anything herein contained to the contrary notwithstanding, so long as any Common Stock of Servel is listed on the New York Stock Exchange, Servel shall not be obliged to deliver to Mr. Springford any Common Stock in respect of which options are hereby granted until authority for the listing of such Common Stock upon the New York Stock Exchange has beep, obtained. At the request of Mr. Springford, Servel agreees to make every reasonable effort to obtain authority for the listing on the New York Stock Exchange of all the Common Stock required for delivery upon the exercise of the options hereby granted to Mr. Springford.

Exhibit E grants to'petitioner the right to purchase common stock of the par value of $1 per share “when, as and if” the certificate of incorporation is changed, amending its common stock without par value into common of a par value of $1.

Exhibit F provides in part as follows:

Whebeas, under date of March 25, 1932, Servel and Mr. Springford entered into an agreement for the employment of Mr. Springford by Servel whereby, among other things, certain options were granted by Servel to Mr. Springford for the purchase by Mr. Springford of not exceeding in the aggregate forty-five thousand (45,000) shares of the Common Stock without par value of Ser-vel, said options being therein designated, respectively, as Option No. 1, Option No. 2 and Option No. 3; and
Whekeas, thereafter and under date of July 26, 1932, Servel and Mr. Spring-ford entered into an agreement supplemental to said agreement dated March 25, 1932, modifying the terms of said agreement dated March 25, 1932 by providing that said options should be applicable to shares of the Common Stock of the par value of $1. per share of Servel, in place of said shares of Common Stock without par value, and in other respects ratifying and confirming the terms and provisions of said agreement dated March 25, 1932 (hereinafter, as so modified, called the Agreement of March 25, 1932) ; and
Whereas, the term within which said Option No. 1 granted to Mr. Spring-ford by the Agreement of March 25, 1932 might be exercised has expired, and Mr. Springford is not under contract of employment with Servel; and
Whereas, Servel desires to induce Mr. Springford to continue in its employment, and in consideration thereof is willing to extend the term within which said Option No. 1 may be exercised, provided that certain modifications are made in the terms and provisions of the Agreement of March 25, 1932 regarding the manner in which said Option No. 3 thereby granted to Mr. Spring-ford may be exercised, and Mr. Springford has agreed to continue in the employment of Servel and is willing to agree to such modifications;
Now, Therefore, in consideration of the premises and of the sum of One Dollar ($1.00), lawful money of the United States, to each of the parties hereto in hand paid by the other, and of other good and valuable considerations, the receipt of which is hereby acknowledged, Servel and Mr. Springford hereby agree as follows:
First : That the Agreement of March 25, 1932 shall be and is hereby amended as follows:
1. By striking out the whole of Article Sixth thereof, as now constituted, and inserting in place thereof the following:
“Sixth: The options to purchase common stock of Servel granted to Mr. Springford under the terms of this agreement shall be three in number:
(a) Option No. 1 is for the purchase of all or any part of 15,000 shares of Common Stock at a price of $4.00 per share, and may be exercised at any time during the period commencing March 25, 1932 and ending February 28. 1934. and at no other time:
(b) Option No. 2 is for the purchase of all or any part of 15,000 shares of Common Stock at a price of $5.00 per share, and may be exercised at any time during the period commencing March 1, 1933, and ending February 28, 1934, and at no other time;
(c) Option No. 3 is for the purchase of all or any part of 15,000 shares of Common Stock at a price of $6.00 per share and may be exercised at any time during the period commencing March 1, 1934 and ending February 28, 1935, if Mr. Spring-ford is in the employ of Servel at the time of such exercise, and at no other time; provided, however, that if at any time prior to February 28, 1935 Servel shall obligate itself to convey and transfer all or substantially all of its business, property and assets, then Option No. 3 may be exercised by Mr. Springford during the thirty-day period immediately succeeding the date of the contract, agreement, understanding or commitment by which Servel shall obligate itself to make such conveyance and transfer, and at no other time, provided that Mr. Springford shall have been in the employ of Servel on such date.”

The agreement of March 23, 1934, Exhibit G, reads in part as follows:

1. Servel hereby employs Mr. Springford and Mr. Springford hereby agrees to enter into the enrploy of Servel for the period commencing March 23, 1934, and ending February 28, 1935, upon the terms and conditions hereinafter provided.
2. Mr. Springford’s duties shall be in an advisory capacity only and during the period above specified he agrees from time to time to give such advice and counsel to the Chairman of the Board and the President of Servel as they may from time to time reasonably request. During such period Mr. Spring-ford shall be free to accept other employment from any person, association, corporation or concern and to conduct any business, other than in the refrigeration field.
3. Mr. Springford’s compensation during the term of this agreement, for the period commencing March 23, 1934, and ending March 31, 1934, shall be at the rate of $45,060 per year; and for the period commencing April 1, 1934, and ending February 28, 1935, shall be the sum of $15,000, payable as follows;
$ 4, 090.92, in equal monthly installments of $1,363.64 each on the last days of April, May and June, 1934
$10,909,00, at such time or times after June 30, 1934, as Mr. Springford may in writing designate.
4. It is expressly understood and agreed that Mr. Springford, as an employee of Servel under the terms and provisions of this agreement, shall have the right to exercise all unexpired options to purchase Common Stock of Servel under his existing contracts with Servel, subject to the terms and provisions of said contracts.

On and prior to March 1,1930, petitioner was a director and chairman of the board of directors of Servel, Inc., which position he occupied until January 26, 1934. On March 23, 1934, he ceased to be a director but served in an advisory capacity as an employee until February 28,1935. On February 21,1934, under option 2 of Exhibit D, as modified by Exhibits E and F, he purchased from Servel, Inc., 5,000 shares of its common stock and paid the sum of $25,000, or $5 per share. On February 20, 1935, under option 3 of Exhibit D, as modified by Exhibits E, F, and G, he purchased from Servel 15,000 shares of its' common stock for $90,000, or $6 per share.

The fair market value of the common stock of Servel per share was as follows on the dates indicated:

March 25, 1932-$4. 00
July 26, 1932- 2.125
March 1, 1933_ 1.5625
May 22, 1933_ 1.0625
Feb. 21, 1934_,_$7.00
March 1, 1934_ 6.25
Feb. 20, 1935_ 9.00

None of the shares acquired by petitioner as herein above set out were sold or disposed of by him during the calendar year 1934. In his income tax returns for the years 1934 and 1935 petitioner reported no profit from the acquisition of the shares.

During the calendar year 1935, petitioner sold certain of the shares so acquired by him as follows:

On January 3, 1935, he sold for an aggregate price of $7,925, 1,000 of the shares which he had acquired on February 21, 1934; and
On April 5 and 6, 1935, he sold for an aggregate price of $22,849.53, 2,500 of the shares which he had acquired on February 20, 1935.

In his Federal income tax return for the calendar year 1935 petitioner used, as the basis for the sale of the 3,500 shares sold, the amount paid by him for said shares, viz., $5 per share for the 1,000 shares acquired on February 21, 1934, and $6 per share for the 2,500 shares acquired on February 20, 1935, and reported and paid tax upon the gain realized upon said sales as follows:

1,000 shares:
Sold for_$7, 925. 00
Basis at $5- 5,000. 00
Gain thereon- 2,925. 00
2,500 shares:
Sold for-$22, 849. 53
Basis at $6- 15,000. 00
Gain thereon 7, 849. 53
Total gain thereon- 10, 774.53

Petitioner’s income tax returns for the calendar years 1934 and 1935 were duly filed with the collector of internal revenue for the second New York district and the amounts of tax shown to be due thereon were duly paid.

In the notice of deficiency, dated December 8, 1938, respondent determined that the excess of the market values of the stock, on the respective dates the options were exercised, over the agreed option prices represented additional compensation received by petitioner on said dates. He accordingly adjusted petitioner’s net income for the years in question by making additions thereto as follows:

1984
5,000 shares acquired February 21, 1934:
Market value on said date-$35, 000
Agreed option price paid therefor- 25, 000
Additional compensation- 10,000
1985
15,000 shares acquired February 20, 1935:
Market value on said date-$135,000
Agreed option price paid therefor- 90, 000
Additional compensation- 45, 000

In said deficiency letter respondent adjusted the basis of the aforesaid 3,500 shares sold by petitioner in 1935 to agree with the market values stated above, thereby reducing the gain realized by petitioner on the sale of said shares by $9,500, viz., from $10,774.53, as reported in the return, to $1,274.53.

The basic question has been passed upon by the courts and the Board in numerous cases. Some have arisen from the Commissioner’s disallowance of the deduction from gross income of the excess of the fair market value of stock over the price at which it was sold to an employee, the corporation claiming that such excess constituted additional compensation paid. Gardner-Denver Co. v. Commissioner, 75 Fed. (2d) 38; certiorari denied, 295 U. S. 763; Electric Storage Battery Co., 39 B. T. A. 121. Others have involved the basis to be used by the employee in computing his gain or loss upon a subsequent sale or other disposition. Larkin v. United States, 78 Fed. (2d) 951; Robinson v. Commissioner, 59 Fed. (2d) 1008; Salvage v. Commissioner, 76 Fed. (2d) 112; Helvering v. Salvage, 297 U. S. 106; Bothwell v. Commissioner, 77 Fed. (2d) 35. Many have involved situations somewhat analogous to the one before us — where the Commissioner has determined that an employee who purchased stock from his corporate employer at less than its fair market value received taxable income in the year the purchase was made, equivalent to the excess of such fair market value over the purchase price. Albert Russel Erskine, 26 B. T. A. 147; Omaha National Bank v. Commissioner, 75 Fed. (2d) 434, reversing 29 B. T. A. 817; Delbert B. Geeseman, 38 B. T. A. 258; Gordon M. Evans, 38 B. T. A. 1406; Rossheim v. Commissioner, 92 Fed. (2d) 247; Charles E. Adams, 39 B. T. A. 387.

The conclusions reached in the cited cases may not always have been consistent; but they seem to establish the rule that if the right to purchase stock is granted as compensation or additional compensation for services rendered or to be rendered, then the difference between the price paid and the fair market value of the stock when ac- ] quired is deductible by the corporation as compensation paid to its/ employee, may he added to the basis for the computation by the employee of his gain or loss upon a subsequent sale or other disposition, and constitutes part of his gross income in the year of acquisition.

Respondent insists that his determination is justified under the fifth provision of the contract of March 25, 1932, (Exhibit D) granting the options “As further consideration for Mr. Springford’s entering into this agreement and performing services as Chairman of the Board * * * ”; by the restriction contained in subparagraph (c) of Exhibit F requiring Springford to be in the employ of Servel at the time of the exercise of the option; in the fact that his salary, previous to the execution of Exhibit D, had been $50,000 per year instead of $45,000 with options to' purchase stock at different prices and dates and under different terms; in the circumstance that there was no restriction upon his right to sell the stock immediately upon receipt of it from his employer; in the fact that the right was given to him as an executive officer and not as a part of a general plan for the benefit of all employees; and in the circumstance that he could not lose by the transaction since he was not required to make any purchase and would do so only in the event that it would result in gain to him.

Petitioner argues that the Commissioner is attempting to tax a “paper profit”; that the sales were made in discharge of a binding contract which had been executed at a time when the agreed purchase prices were actually in excess of the then current market value ; that the fact that a profit was actually realized was merely fortuitous and neither of the contracting parties knew that that would be the result of the agreements; that the rights granted were too speculative to have any value; that under the rationale of Phillip W. Haberman, 31 B. T. A. 75; affd., 79 Fed. (2d) 995, if the rights are to be taxed at any time other than when actually granted, they should be taxed on the first day that they could have been exercised, at which time, under the stipulated facts, the prices were below or substantially equivalent to those petitioner was required to pay; that the decision of the tax question ought not'to turn upon the niceties of whether a contract produces a given result by way of consideration or by way of condition; that it should not be held that petitioner “has recited himself into taxable income” merely because the contract which he signed states that the options were granted “As further consideration for * * * performing services”; and that most of the decided cases have tended to limit,- rather than to extend, the rule of the Erskine case.

Respondent, upon brief, asks that findings be made to the effect that the prices at which the purchases were made “were fixed by services rendered and to be rendered” and that the “rights to purchase stock, conferred upon petitioner by Options 2 and 3 * * * constituted additional compensation” to him. We have refrained from making such finding, not only because it is more in the nature of a conclusion than it is a fact, but also because the stipulated facts do not, in our opinion, support it. In Delbert B. Geeseman, supra, strongly relied upon by the respondent as an effort by the Board “to clarify the previous confused state of the law on this subject”, it is stated that “as a prerequisite to the conclusion sought by the respondent it should definitely and clearly appear that a transaction, which in form is nothing more than a purchase and to an obvious and substantial extent is unquestionably a purchase, is in fact to some extent the payment of compensation for services rendered or to be rendered.” In our opinion the stipulated facts make no such definite and clear showing. Wei do not intimate that the respondent had any burden of proof which he failed to sustain. We give him the full benefit of the presumption of correctness attaching to his notice of deficiency. But since all of the facts are before us we do not think it can be said, as a matter of law, that the purchase was “in fact to some extent payment of compensation for services.”

A detailed analysis of cited or pertinent cases would not be particularly helpful. Such an analysis was made in the recent cases of Gordon M. Evans and Charles E. Adams, supra. It was pointed out in the Adams case that although there was “undoubtedly connection between petitioner’s position as an employee and the granting of the option to him, *■ * * it did not amount, by any means, to the option being granted as compensation for services rendered.” In the Evans case, even though the right to purchase stock was given “as additional and separate consideration for * * * [the taxpayer’s] continued best efforts in the service of the company”, it was held that “the injection into the extended plan of an arrangement whereby additional compensation was so paid to employees does not affect or change the purchase of Kelvinator Corporation stock by petitioner into the payment of compensation by the corporation.”

The line of demarcation between cases holding that a taxpayer has realized taxable income through the purchase from his employer of stock at a “bargain” price under an option and those holding that no taxable income has been realized until the stock is subsequently sold, is not very distinct. That the Treasury Department is experiencing difficulty in finding and applying a correct rule, is indicated by the recent change in its regulations, the old (Regulations 94, art. 22 (a)-l) providing that “If property is transferred by * * * an employer to an employee, for an amount substantially less than its fair market value, * * * such employee shall include in gross income the difference between the amount paid for the property and the amount of its fair market value”, while the later one (Regulations 101, art. 22 (a)-l) adds the words “to the extent that such difference is in the nature of * * * compensation for services rendered or to be rendered.”

The new regulation, as such, is not applicable in the instant proceeding; but, as we have pointed out, the same rule seems to be established by the decided cases. Since we can not find that the purchase of stock in the instant proceeding was payment of compensation, it follows that, pursuant to the stipulation of the parties,

Decision will ~be entered that there is no deficiency for the year 1931t- and that there is a deficiency of $93.60 for the year 1936.