author: Disney :

text:
    Effie Reed Buckner, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 84170.
    Promulgated November 4, 1941.

      W. B. Harrell, Esq., and Russell Allen, Esq., for the petitioner.

      Frank B. Schlosser, Esq., for the respondent.
   OPINION.

Disney :

The first contention of the petitioner, all others being in the alternative, is that since the estate of her deceased husband was in the process of administration throughout the taxable year, she is liable to report as income to her only $686.43; i. e., so much of the income of the estate as was actually paid or properly credited to her as beneficiary. The effect of the petitioner’s contention is that the executor, not the trust, was a member of the partnership during the taxable year and accordingly the partnership earnings were distributable and taxable to the executor, not the trustee, and therefore that only $686.43, the amount actually distributed to her, is properly to be included in her income. She cites Garrett J. Donnelly et al., Executors, 31 B. T. A. 577, as controlling. That case did not involve a trust or partnership. The question was whether certain dividends were taxable to the petitioner as executor of the estate of her deceased husband or to her personally as sole beneficiary of the estate. Here che will of the decedent clearly bequeathed his interest in the partnership to Willis E. Dearing in trust, with petitioner as sole beneficiary of the trust. No provision was made in the will for the payment of income of the estate of the decedent to petitioner.

Notwithstanding the contention being made, the petitioner does not specifically deny that the trust was in existence in 1932. The record not only does not contradict the existence of a trust during the taxable year, but contains evidence indicating that the trust was a member of the partnership during that period. In his determination of the deficiency the respondent found that the partnership had net income distributable to the trust estate, of which petitioner was sole beneficiary. The petition does not allege that the executor was a partner or deny that the trust was not a member of the firm. On the contrary, it contains allegations that Willis R. Dearing was made trustee by the will of petitioner’s husband; that he “as trustee” denied that anything was due to her; that she claimed that she was entitled under the will “to receive from the said Willis R. Dearing as Trustee” certain sums, which he “as Trustee” disputed, and that she had instituted action to recover “proceeds of said trust estate due her.” The petition assumes the reality of the trust. The stipulation of facts contains a statement that a certain amount was paid or credited to the petitioner in 1932 “either by the executor, the trustee or the partnership” and that “No fiduciary return was filed for the year 1932, either for the estate or the trust.” These statements are at least some indication that the trust was being administered during the taxable year.

It is obvious that the petitioner long took the view and in this matter has not abandoned the view that Willis R. Dearing was trustee for her benefit under the provisions of her husband’s will; and the respondent determined the deficiency on the theory that there was income in the taxable year from partnership to trust, and therefore liability to tax on the petitioner’s part as beneficiary of the trust, under section 162 (b), Revenue Act of 1932, regardless of the fact that there was no receipt of income by the petitioner (with the exception of $686.43). Does the petitioner show error on the part of the respondent? If in fact and contrary to the petitioner’s view in the litigation instituted by her, the estate of Roy E. Dearing, and not the trust estate provided for in the will, was the owner of the partnership interest, then it would follow that under section 162 (c), Revenue Act of 1932, the petitioner, not having received the amounts involved in this proceeding, would not be subject to tax thereon. The question is therefore one of fact. The trust estate, in our opinion, could have been set up and could have coexisted with the administration of the estate of Roy E. Dearing. That the estate was in process of administration is demonstrated by the various activities of the executor during the taxable year. Had the trust provided by the husband’s will also come into being, so that it was one of the partners of R. H. Dearing & Sons, subject to tax upon its portion of partnership earnings, and was the petitioner the beneficiary of such trust during the taxable year? Though the will provided for a trust, it did not arise automatically upon the death of the deceased and the estate of Roy E. Dearing included the property, to wit, the interest, in the partnership which the testator intended should constitute the corpus of the trust. Such property, like all other parts of the estate, was subject to administration and to the payment of the debts of the deceased. That the interest in the partnership was considered in the first instance a part of the general estate of Roy E. Dearing is shown by its inclusion in both the inventory .and appraisement and the affidavit for inheritance tax appraisement. Therefore only when distributed to the trustee did the interest in the partnership become trust corpus. The respondent having treated it as trust corpus, plainly the burden is upon the petitioner to show otherwise; but we think that this showing has been made. Upon examination of the entire record, we are of the opinion and find that, although throughout her litigation with Willis R. Dearing petitioner charged and considered that the trust had come into existence, it had not in fact done so during the taxable year.

There is no definite evidence that a distribution by the estate to the trustee had not been made, yet we think that fact is plainly and sufficiently indicated, both by the fact that in the litigation against Willis R. Dearing the petitioner did not allege a distribution by the estate to the trustee, but instead alleged an assumption by Willis R. Dearing of the duties of trustee; and, second, by the facts involved in litigation instituted by Willis R. Dearing, in suing on September 9, 1933, to collect a note belonging to the partnership. Therein he sued not as trustee, but as independent executor of the estate of Roy E. Dearing, and alleged the existence of the partnership and that he, as independent executor of the estate of Roy E. Dearing, and the executors of the estate of R. H. Dearing conducted the partnership and were the owners and holders of the indebtedness sued on. He further alleged that corporate stock pledged with the note sued on stood in the name of the individual partners by and on behalf of the partnership. Judgment was sought on the note and foreclosure of the pledge, and in accordance with the prayer judgment was rendered by the court in which it was specifically found that the partnership known as R. H. Dearing & Sons consisted of the estates of Roy E. Dearing and R. H. Dearing, and Willis R. Dearing individually. It thus appears that it was considered necessary, in order that judgment might be obtained upon the note belonging to the partnership, for the executor to institute action. We recognize that there is not the same necessity for formality in distribution between an executor, particularly an independent executor, and a testamentary trust estate of which the trustee is the same as the executor, as there is where one person is not both independent executor and trustee. Carleton v. Goebler, 58 S. W. 829; 24 C. J. 471; Williams v. Cobb, 219 Fed. 668; Estate of Lucile Gray, 42 B. T. A. 1279. Nevertheless, we conclude from all the facts here that there had been at the end of the taxable year no distribution from the estate to the trust. Although the petitioner in the litigation above mentioned after the taxable year took the view that Willis R. Dearing was trustee and sought an accounting from him as such, we find in the present matter neither facts nor pleading to justify any idea that she is estopped from contending that the estate during the taxable year was in process of administration and that partnership income was receivable by her through and from the executor. We conclude and hold, therefore, that section 162 (c) of the Revenue Act of 1982 applies and that the respondent erred in including in petitioner’s income that portion of the income of the partnership not received by her. In view of this conclusion, it is unnecessary to discuss the other contentions advanced by the petitioner.

Reviewed by the Board.

Decision will be entered wider Bule 50.

       SEC. 162. NET INCOME.
      The net income of the estate or trust shall be computed, in the same manner and on the same.basis as in the case of an individual, except that—
      * * $ # « * *

      (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year;

       (c) In the case of income received by estates of deceased persons during the period of administration or settlement of the estate, and in the case of income which, in the discretion of the fiduciary, may be either distributed to the beneficiary or accumulated, there shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir, or beneficiary.


source: Caselaw Access Project

author: Opper:

license: Public Domain

text:
    Muskegon Motor Specialties Company, a Delaware Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100097.
    Promulgated November 4, 1941.

      L. A. MasselinJe, Esq., for the petitioner.

      Paul A. Sebastian, Esq., for the respondent.
   OPINION.

Opper:

Petitioner succeeded to the business of two corporations, the Gordon Co. and Muskegon Michigan, whose stockholders transferred shares in the old companies in exchange for stock of petitioner. As part of this transaction, new money was furnished by a banking syndicate and in effect distributed to stockholders of the original corporations, partly by means of the formation of subsidiaries and the distribution of their stock. These securities were held in Flanders Investment Co., 33 B. T. A. 483, to be taxable to the recipients as “other property” received in the reorganization, since the two subsidiaries were held not to be parties thereto. The stock of the petitioner received by the shareholders of the predecessor corporations consisted of over 50 percent of petitioner’s voting stock, the bankers receiving the balance. Shortly after petitioner became the sole stockholder of the two corpo-. rations it acquired their properties and caused their dissolution.

We are required to determine the proper basis for depreciation of the physical assets which petitioner thus acquired from the two predecessor corporations. This, in the ordinary case, would be petitioner’s cost. But there are exceptions,- and^ respondent contends that one of these governs the present case. Specifically he urges that section 113 (a) (7) of the 1932 Act, expressly made applicable to periods subsequent to January 1, 1934, by subsection (a) (12) of section 113, requires us to find that the proper basis is not cost to petitioner, but that which prevailed in the hands of the transferor corporations.

The first requisite for approval of this contention is that the physical properties involved were acquired by petitioner “in connection with a reorganization.”' The transfer took place in 1928. The Board has heretofore taken the position that:

* * * Inasmuch as the acquisition in question occurred during the time the Revenue Act of 1928 was in effect, * * *. We therefore go to the Revenue Act of 1928 for tlie purpose of determining whether or not there was a reorganization as defined in said section [113 (a) (7), Revenue Act of 1932], [Schweitzer & Conrad, Inc., 41 B. T. A. 533, 539, 540.]

Even, however, if it is the definition in the 1932 Act which controls, the result necessary would not be different; for the 1932 version of that definition is identical with the comparable provision of the prior act. Cf. Lyon, Inc., 42 B. T. A. 1094. One of the statutory descriptions of a reorganization so appearing is:

* * * a merger or consolidation (including the acquisition hy one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), * * *

Petitioner acquired directly all of the stock of Gordon and Michigan and indirectly all of their properties, and gave in exchange a majority of its voting stock. This transfer was accordingly a reorganization. Nelson Co. v. Helvering, 296 U. S. 374; Helvering v. Minnesota Tea Co., 296 U. S. 378; Miller v. Commissioner (C. C. A., 6th Cir.), 84 Fed. (2d) 415. There was no lack of the continuing interest in the common stockholders which is necessary to distinguish a reorganization from a sale. Cf. Le Tulle v. Scofield, 308 U. S. 415. Voting control of petitioner remained in the former shareholders after the transfer. And, as will more evidently appear from subsequent discussion, this control of petitioner was held by those who had previously constituted the entire shareholding group of both the old companies.

An effort is made to convince us that the physical properties were transferred by the predecessor corporations in a separate distribution in liquidation and not as part of the reorganization. But petitioner concedes that “the liquidation [of the predecessors], although contemplated at the time petitioner was organized, was permissive.” We regard it as now settled law that an optional procedure “will be treated as a part of the plan if it is a contemplated possibility under the plan and actually eventuates.” Anheuser-Busch, Inc., 40 B. T. A. 1100, 1106; affd. (C. C. A., 8th Cir.), 115 Fed. (2d) 662; certiorari denied, 312 U. S. 699.

* * * It is eauaily clear that a plan must be viewed as a whole and that if the transferred property, although designed to pass temporarily through one corporation, is intended to rest permanently in another, the holding by the first may be of such a transitory nature as to be without real substance. [Gertrude B. Chase, 44 B. T. A. 39.]

We can not agree that the physical properties were not acquired by petitioner “in connection with” the reorganization. And see Muskegon Motor Specialties Co., 35 B. T. A. 851.

Nor is it material that there may have been no “tax-free” reorganization, a question we need not decide. Petitioner advances Muskegon Motor Specialties Co., supra, as controlling our decision here since it involved the same transaction. But, giving its argument the broadest possible scope, the most that can be said for it is that respondent, by conceding on his brief there that “respondent’s position that the assets were acquired in a nontaxable reorganization can not be maintained,” consented to a determination that this transaction did not constitute a reorganization which was “tax-free.” Assuming, without deciding, that a similar conclusion is binding here under the doctrine of res judicata, it still leaves petitioner no better off. For in 113 (a) (7), unlike 113 (a) (6) the section relied upon in Muskegon Motor Specialties Co., supra, the term used is “reorganization” without any reference to nonrecognition of gain, and if there be a reorganization it is not necessary that it be “tax-free.” In National Bank of Commerce of Seattle, 40 B. T. A. 72, 77; affd. (C. C. A., 9th Cir.), 115 Fed. (2d) 875, the Board held that as to:

* * * transfers * * * made in connection with a reorganization (even though not a tax-free reorganization) * * * section 113 (a) (7) of the Act of 1934 is applicable.

If the Muskegon case is relevant here at all it is rather in an aspect detrimental to petitioner’s position, for the Board there said:

* * * Considering all the evidence, it is our opinion that the dissolution of the two companies and the acquisition of their assets by the petitioner were all a part of the original plan of consolidation * * *.

However, we prefer to record no conclusion as to the binding quality of that decision, and to base our view in this aspect of the case on the strict ground that no “tax-free” reorganization is required to bring 113 (a) (7) into play.

The next question is whether, granting that the properties were acquired in connection with a reorganization, the requirement is met that “immediately after the transfer an interest or control in such property of 50 per centum or more remained in the same persons or any of them.” It is not entirely clear whether this necessitates that the continuing interest be held by all of the same persons who previously held a majority interest or control since the language is “the same persons or any of them.” But we can assume for present purposes the correctness of petitioner’s contention that use of the word “remained” imports that premise. See Rex Manufacturing Co., 37 B. T. A. 984; reversed other grounds, 102 Fed. (2d) 325. For even so, we think the facts show that not only a majority, but all of the previous shareholders retained stock ownership. In the instance of Michigan, that conclusion admits of no debate. All the stockholders of that company participated in the plan. As to Gordon, while some, in fact a majority of the erstwhile owners had granted options for cash sales of their stock, these had in effect been exercised before the plan went into effect. L. Q. Gordon, to whom the options ran, became thereby the owner of all the Gordon stock. His deposit of that stock in escrow under the plan was at once the necessary premise for the inception of the plan, and an act so inconsistent with any other ownership that we have no difficulty in ascribing to him the entire proprietorship of all 'of Gordon’s stock. Only thus can be justified the statement in the proposal that it had been “unanimously agreed upon * * * by all the stockholders of L. O. Gordon Manufacturing Company.”

Nor are we impressed by the contention that after the transfer this group held less than the 50 percent interest or control specified in the statute. It is possible that taking the liquidating values of petitioner’s assets and apportioning them between the Gordon and Michigan shareholders, on the one hand, and the new interests holding the class A stock with its partial preferences, on the other, the dollar value attributable to the latter might outweigh that of the common stock held by the former. It is also conceivable that the market value of the one might exceed that of the other. But such considerations, while perhaps relevant if the statute were limited to prescribing the value of merely an “interest”, overlooks the significance of the word “control” which is coupled with “interest” in the disjunctive. We think it idle to suggest that those owning a majority of the voting stock of an enterprise do not control it. Cf. Nelson Co. v. Helvering, supra. And that is all the provision requires.

Finally, we are asked to -hold that even if we find section 113 (a) (T) to be applicable, as we do, the basis in petitioner’s hands may nevertheless be computed by adding to the basis of its transferors so much of the gain on the transfer, received in the form of cash and “other property”, as was contemporaneously taxable to the participating stockholders. This would necessitate the conclusion that the latter were “transferors”, a result we find it impossible to reach in the face of Schweitzer c& Ooivrad, Inc., supra. On the authority of that case, disposition of this contention, as well as of any question of the retroactivity or constitutionality of section 113 (a) (7) in its application to a prior reorganization, must be unfavorable to petitioner. Hartford-Empire Co., 43 B. T. A. 113, upon which petitioner relies, dealt with a different question. The facts as they there appear do not indicate that any gain of the old shareholders had been taxable. The present question was not and apparently could not have been raised by the taxpayer nor was it discussed or decided by the Board.

Reviewed by the Board.

Decision will he entered for the respondent.

       SEC. 114. BASIS FOR DEPRECIATION AND DEPLETION. [Revenue Act of 1934.]
      (a) Basis jtoe Depreciation. — The basis upon which exhaustion, wear and tear, and obsolescence are to be allowed in respect of any property shall be the adjusted basis provided in section 113 (b) for the purpose of determining the gain upon the sale or other disposition of such property.
      SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
      5{c * * # * * *Jt
      (b) Adjusted Basis. — The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis determined under subsection (a), adjusted as hereinafter provided.

       SEC. 113. ADJUSTED BASIS FOR DETERMINING GAIN OR LOSS.
      (a) Basis (Unadjusted) op Property. — The basis of property shall be the cost of such property; except that-r-

      * * $ $ * * 4c

       (7) Transfers 'to corporation where control op property remains in same persons. — If the property was acquired after December 81, 1917, by a corporation in connection with a reorganization, and immediately after the transfer an interest or control in such property of 50 per centum or more remained in the same persons or any of them, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made. This paragraph shall not apply if the property acquired consists of stock or securities in a corporation a party to the reorganization, unless acquired by the issuance of stock or securities of the transferee as the consideration in whole or in part for the transfer.

       (12) Basis established by revenue act op 1932. — If the property was acquired, after February 28, 1913, in any taxable year beginning prior to January 1, 1934, and the basis thereof, for the purposes of the Revenue Act of 1932 was prescribed by section 113 (a) (6), (7), or (9) of such Act, then for the purposes of this Act the basis shall be the same as the basis therein prescribed in the Revenue Act of 1932.

       Revenue Acts of 1928 and 1932, sec. 112 (i) (1) (A),


author: Turner :

text:
    Estate of Henry Monroe Springer, Vera Springer Jones, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 100125.
    Promulgated November 5, 1941.

      Floyd E. Wright, Esq., and William H. Wright, Esq., for the petitioner.

      Angus R. Shannon, Jr., Esq., for the respondent.
   OPINION.

Turner :

The principal question presented in this proceeding is whether farm and ranch properties conveyed by the decedent during his lifetime to his daughters and grandchildren were transferred in contemplation of death within the meaning of section 302 (c) of the Eevenue Act of 1926, as amended, and were therefore a part of his gross estate. The determination of this question depends upon the impelling cause or motive for making the transfers. If the thought of death was the impelling cause, they were made in contemplation of death within the meaning of the statute. If the dominant motive was associated with life rather than death, the statute has no application. United States v. Wells, 283 U. S. 102, and Colorado National Bank of Denver v. Commissioner, 305 U. S. 23. The statute provides that “any transfer of a material part of his property in the nature of a final disposition or distribution thereof made by the decedent within two years prior to his death without such consideration shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.”

With respect to the transfers of the two farms deeded by the decedent to Vera Springer Jones in 1926, we are convinced that such transfers were not made in contemplation of death. For several years Vera Jones and her husband had been living on and managing the decedent’s farms in Wyoming. They also were operating a small store situated on one of the farms and lived in two small rooms in the back of the store. They were not at all satisfied and had often expressed their feelings to the decedent. They remained, however, upon the decedent’s request and his assurance that he would “make things right” if they did stay while he lived. They complied with the decedent’s request and the transfers resulted. Furthermore, the decedent had already helped his two older daughters to acquire their homesteads and felt that these transfers to Vera Jones would equalize his gifts to his three daughters. These facts, in our opinion, demonstrate that contemplation of death was not the motive for the transfers to Vera Jones under the deeds executed in 1926.

An entirely different set of circumstances surrounds the conveyances made in 1935. Decedent at that time was 75 years old. He had accumulated a substantial estate and felt that his farm lands were the most important part of that estate. It was his desire and hope that these lands would continue to be held by members of his family after he was gone. He previously had aided each of his three daughters in establishing themselves with their husbands on properties of their own, and in 1935 decided to and did divide all of his farm and ranch lands among his daughters and the three children of Vera Springer Jones. These transfers having been made within two years prior to decedent’s death, the statutory presumption that they were made in contemplation of death attaches and the burden is on petitioner to show otherwise.

It is the claim of petitioner that the presumption has been overcome by proof and that the dominant motive behind the transfers has been shown to have been associated with life rather death. In substance the argument of the petitioner seems to fall into three parts: (1) That the decedent “was in excellent health both before and after” the transfers and there was nothing about his physical condition at the time the transfers were made to prompt anything resembling a testamentary disposition of property; (2) that one reason for malting the transfers in 1935 was that the decedent understood that the gift tax rates would be increased in the succeeding year and that the gift tax “is certainly a matter associated with life” and not with the thought of death; and (3) that the transfers had been contemplated for some time and were made by the decedent both for the purpose of relieving himself of the continued burden of management of the properties and because he desired that his daughters should have the benefits of the properties and the responsibility of looking after the land while he was still alive and able to advise with them in their management.

In support of her contention that the decedent was in excellent health and there was nothing about his physical condition at the time of the transfers to prompt anything resembling a testamentary disposition of property, petitioner points to the testimony of Dr. Ohme, which was to the effect that the decedent was in excellent health, and to other testimony that decedent had not been known to have had a serious illness until that which caused his death, and, except for the fact that he no longer managed any farms, his business activities continued much the same up to the date of his death. These things, the petitioner says, negative the proposition that the transfers were made in contemplation of death. Much of the argument between the parties centers around the condition of petitioner’s heart. Dr. Ohme’s testimony was that decedent had no heart trouble and knew that the pains in the vicinity of his heart were gas pains. On the other hand, the testimony of Carl G. Weaver, supported by the testimony of Tallón and by the report of a general physical examination of decedent at the Wheatland General Hospital in 1933, convinces us that the decedent thought he was afflicted with heart trouble. Vera Springer Jones testified that she had urged both her father and mother to submit to a physical examination and the examination at the Wheatland General Hospital had followed. Dr. Ohme indicated that he was familiar with the report. One page, designated “History and Preliminary Examination”, contained much information, obviously obtained from decedent. That statement disclosed that the decedent had been suffering from pains over his heart, “at first” associated with gas in his abdomen. The statement of the examination indicated an enlargement of the heart. It may be that the enlargement of the heart disclosed by the examination was not serious, but such statement of enlargement was nevertheless contained in the report and we have no reason to doubt that the decedent was familiar with that report. Subsequent acts and statements indicated a fear on his part that he had serious heart trouble. He so advised Carl G. Weaver in January 1937. Weaver is a revenue agent, but was engaged in income tax work and was not concerned with estate and gift tax matters, nor with the state of decedent’s health. With Tallón, decedent’s representative in tax matters, he had called to discuss some matters pertaining to decedent’s income tax returns for 1933 and 1935. Tallón did not remember decedent’s statement that he was suffering from angina pectoris, but he did remember decedent’s remark with respect to his bad night and the pounding in his chest. We have no doubt that Weaver correctly recounted the substance of decedent’s conversation and that decedent told Weaver that he was suffering from angina pectoris and might die at any time or with care might live for a long time. In the light of this testimony, claims of the-petitioner that there was no heart condition and the testimony of Dr. Ohme that the decedent knew that the pains in the vicinity of his heart were gas pains and that the average individual is fully aware that such pains are attributable to gas and not heart trouble lose their force as indicatihg decedent’s state of mind with respect to his condition.

As to the gift tax, we are convinced that the decedent knew little, if anything, about it and that the imminence of a change in the gift tax rates had nothing to d^ with the transfers occurring in 1935, even though it be assumed for present purposes that a transfer motivated by a possible increase in gift tax rates is, as the petitioner contends, a matter associated with life and not with the thought of death. It may be that the decedent had considered the possibility of avoiding estate or inheritance taxes or the lessening of his income and general tax burdens by making the transfers in question and had discussed those possibilities with some of the witnesses. The circumstances under which the gift tax return was prepared and filed in 1936, the inclusion in that return of properties conveyed in 1926, and the conversations between the decedent and Tallón leave no doubt in our minds, however, that the decedent knew little, if anything, about gift taxes prior to the time Tallón suggested to decedent’s son-in-law, Oliver L. Jones, that a gift tax return should be filed.

More difficult of determination is the petitioner’s claim that the transfers were prompted by the desire of the decedent to give to his daughters and grandchildren the immediate benefits of ownership of the properties while he was still alive and able to advise in their management and that the transfers were not therefore made in contemplation of death. Considerable testimony was offered in support of the claim stated. The decedent, it would seem, had discussed the matter quite freely with numerous individuals, and the witnesses who testified about such conversations included two of decedent’s daughters, his niece and her husband, his tax consultant, and the cashier and teller at the First National Bank of Mitchell. One difficulty in giving to the testimony of these witnesses the weight desired by the petitioner is that the witnesses in many instances appeared to be laboring over the phraseology of their answers instead of giving simple expression to the thoughts contained in the statements attributed to the decedent. Another difficulty from the petitioner’s standpoint is that much of the testimony would give equal support to the proposition that the decedent was discussing his plans for the disposition or division to be made of his property at death. To Vera Springer Jones, for instance, he had explained that his greatest aim in life was to build an estate for his family and expressed the hope that his children would always keep the property so accumulated. He told his daughters that it was his intention to divide his lands among them. To his nephew he had expressed the intention of giving his property “to his heirs, the ones he wanted to have it.” Other statements made to Vera Springer Jones and his niece, Retta Elliott, might well have been directed to the property conveyed to Vera Jones in 1926 and have had to do with her management of the properties then conveyed. On the other hand, statements by a father to the effect that transfers to his children were made for the purpose of relieving himself of the continued burden of managing the properties conveyed and because of bis desire to give Ms children the benefit of ownership as well as the responsibility of looking after the properties while he was still alive and able to advise them might under proper circumstances be regarded as justifying the conclusion that the transfers were not made in contemplation of death. Here, however, the husband of each of the decedent’s daughters was experienced in managing and operating farm and ranch properties and the decedent himself had already shifted the management of his properties to Oliver L. Jones, husband of Vera Jones. At the time the gift tax return was prepared the decedent made a statement to Tallón somewhat as follows: “Of course, I let down work and haven’t worked for several years, but I have a son-in-law who is taking the — looking after the farms and doing the supervision of the farms and feeding the sheep. I have let down quite a little since then.” That statement certainly indicates no thought or feeling on the part of the decedent that continued participation by him in the management of the properties was either necessary or intended. By earlier transfers he had already established each of his daughters on homesteads of their own and the 1935 transfers accomplished the final and ultimate division among his cMldren and grandchildren of all his remaining farm lands — considered by him as the most important part of the estate he had built for his family. The properties were conveyed to the natural objects of his bounty, “his heirs, the ones he wanted to have it.” We are convinced that in making the 1935 transfers the decedent was taking what he considered the most important step in winding up his affairs, in putting his house in order, and with respect to those transfers we are of the opinion that they were made in contemplation of death within the meaning of the statute; surely petitioner has not overcome the statutory presumption that they were.

The remaining issues call for the determination of the fair market value of the decedent’s home in Mitchell, 100 shares of stock in the First National Bank of Mitchell, 37 shares of stock in the First National Bank of Morrell, and a promissory note of decedent’s son-in-law, L. D. Merchant.

A witness was called by each party to testify as to the fair market value of the decedent’s home on the date of his death. From these witnesses various facts were brought out concerning the property, its age, condition and location in the town of Mitchell, together with various facts concerning the town which might have a bearing on the value of such property. From the evidence it is our conclusion, and we have found as a fact, that the fair market value of the house and lot on March 9, 1937, was $5,500.

The stock of both the First National Bank of Mitchell and the First National Bank of Morrell was closely held and it was seldom that any stock of either bank was sold. The banks to some extent were controlled by the same individuals. They were prosperous and in very sound condition. Facts and data concerning their capitalization, earnings and dividends, surplus and undivided profits, and the book value of the stock of each institution were submitted. Witnesses were called to express their opinions as to value. The petitioner .took particular exception to the methods or formulas used by the respondent in making his determinations. We have often noted in our opinions that no set rule or formula is required in arriving at the fair market value of corporate or bank stock. One method might appear more readily applicable in one case and not in another. The end sought is the fair market value and not the method of arriving at value. After reviewing the testimony of the witnesses and other evidence tending to show the fair market value of the stock of the two banks, we have concluded that the respondent was justified in his determination that the fair market value of the stock of the First National Bank of Mitchell on March 9, 1937, was $290, while the fair market value of the stock of the First National Bank of Morrell on that date was $300.

The note of L. D. Merchant was listed in the estate tax return as having no value. The face amount was $2,139.27 and the respondent has determined that it had a fair market value in that amount at the date of decedent’s death. The note was dated March 7,1927, and was payable six months after date. No payment of interest or principal was ever made and the record does not show whether the decedent at any time made an effort to collect it. The only argument advanced by the petitioner in support of her claim that the note had no value is that the statute of limitations on collection had run long prior to the date of the decedent’s death. She has submitted no information concerning the ability of Merchant to pay the note. From the evidence it appears that Merchant was living in the State of Wyoming at the time the note was made and moved to New Mexico a year or so later, where he has since been engaged in the ranching business. The respondent, answering the petitioner’s contention as to the statute of limitations, points to section 20-214 of the Nebraska Statutes, which provides that where an individual is out of the state “the period limited to the commencement of the action shall not begin to run until he comes into the state * * * and the time of his absence * * * shall not be computed as any part of the period within which the action must be brought.” The facts of record do not show, as the petitioner claims, that the statute of limitations had run. See Edgerton v. Wachter (Nebr., 1880), 4 N. W. 85. There being no bar to collection of the note and the petitioner having failed to show the inability of Merchant to pay the note. the action of the respondent in including the Merchant note in the gross estate of the decedent at its face value is sustained. Cf. Leo Stein, 4 B. T. A. 1016.

In the notice of the deficiency the respondent stated that no credit was allowed in respect of estate, inheritance, legacy, or succession taxes paid the State for the reason that evidence as to payment of such taxes required under article 9 of Regulations 80 had not been submitted. By his answer he now admits that the evidence has been submitted and effect should be given thereto in recomputing the deficiency hereunder.

Decision will be entered under Rude 50.


text:
    Arthur O. Choate, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102064.
    Promulgated November 5, 1941.

      Harry W. Forbes, Esq., for the petitioner.

      Walt Mandry, Esq., for the respondent.
   OPINION.

Opper:

By this proceeding petitioner challenges a deficiency of $2,789.45 in income tax for the year 1937.

The only question for our consideration is whether petitioner realized taxable income by reason of his receipt of rights to subscribe to preferred stock of a company in which he held common stock.

The case was presented on stipulation of facts and the facts so stipulated are hereby found accordingly. The return for the period in question was filed with the collector for the second district of New York.

The stipulated facts show that on or about May 28, 1937, petitioner, by reason of his ownership of shares of common stock of the Crane Co., received 10,000 rights to subscribe on or before June 17, 1937, to a new issue of 5 percent cumulative convertible preferred stock at its par value of $100 per share. The new stock was convertible into common. It was subject to outstanding 7 percent preferred stock, but was preferred to any other class of stock as to dividends and liquidation. The Crane Co. had an agreement with underwriters to subscribe at $100 per share for any of the new issue not taken by the common stockholders. The fair market value of the rights received by petitioner, at the time petitioner received them, was $4,875 (i. e. $.4375 per right). It is this amount which respondent has added to petitioner’s taxable income for 1937.

On June 15, 1937, petitioner delivered all of his rights to various members of his family as a gift and on June 17, 1937, the donees exercised almost all of them.

On June 1, 1937, the first day upon which the rights were dealt in upon the New York Stock Exchange, sales were made at prices varying between $.25 and $.34375 per right and there were sales of the new preferred stock on a when-issued basis at an average price of approximately $104. On June 15 and 16, 1937, the last day on which the rights were quoted on the Exchange, their average price was $.02033 per right and there was a cash sale of such rights at less than 1 cent per right. On June 15, the average price of the new preferred stock upon a when-issued basis was 100% and on June 17, its average price on the when-issued basis was 100% 6-

This proceeding raises the same question as that disposed of in Helen Whitney Gibson, 44 B. T. A. 950. No contrary contention is made on petitioner’s behalf. On the authority of that case, therefore, respondent’s determination is sustained.

Although conceding that the two cases are identical in principle, petitioner filed a supplemental brief subsequent to the Board’s decision in the Gibson case, in which he urged that that decision is erroneous and should be reconsidered. He suggests that the facts shown by the present record exemplify important practical considerations which should lead to a contrary result. Specifically it is urged that where, as here, the market value of the stock rights received by the taxpayer declines materially before they are exercised or disposed of, it is not justifiable to hold that petitioner received income in the larger amount.

Accepting the principle of the Gibson case, however, it would not necessarily follow that in a situation where the facts do not justify it the result criticized by petitioner would be necessary. Once it is decided, in accordance with the Gibson case, that a common stockholder entitled to rights to subscribe to preferred stock has thereby received taxable income, the question of evaluating those rights for tax purposes automatically reveals itself. This is the imperative question in any situation where income is received in the form of property and determination of the taxable income depends upon the value of the property so received.

It may be that if the record permitted it we could examine.all the circumstances surrounding the transactions in these rights and determine as an issue of fact what was their fair market value in petitioner’s hands. This would not necessarily be confined to a consideration of stock exchange prices on any particular day. “Sales made under peculiar and unusual circumstances, such as sales of small lots, forced sales, and sales in a restricted market, may neither signify a fair market price or value.” Heiner v. Crosby (C. C. A., 3d Cir.), 24 Fed. (2d) 191. See also Estate of Leonard B. McKitterick, 42 B. T. A. 130; Estate of Millie Langley Wright, 43 B. T. A. 551, 555. Since rights to subscribe are ordinarily subject to exercise or sale within a limited period, it may well be that such transactions can be considered either forced sales, or sales in a restricted market, or perhaps both. Or the peculiar character of such arrangements may justify an independent rule. In any event, it hardly follows that the principle laid down in the Gibson case and applied here is incorrect, because of a criticism limited to the determination of value which is no more than a subordinate element of the ultimate result.

The question so raised, however, need not and in fact can not be decided upon this record. The parties have stipulated that “The fair market value of the said rights received by the petitioner, at the time the petitioner received them, was $4,375 * * This disposition by the parties themselves of the factual issue of value removes it from permissible consideration by the Board. Determination of the incidental matter of valuation in a stock rights case must accordingly be reserved for a proceeding in which it is appropriately presented.

Decision will be entered for the respondent.


author: Tyson :

text:
    Martha Locke Shoenhair, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102675.
    Promulgated November 5, 1941.

      John W. Townsend, Esq., and Lloyd Fletcher, Jr., Esq., for the petitioner.

      B. H. Transue, Esq., for the respondent.
   OPINION.

Tyson :

The petitioner contends that her agreement with her husband was valid under the laws of Arizona; that such agreement abrogated the community interest she would otherwise have had under those laws in her husband’s earnings; and that his earnings therefore constituted his separate income, taxable solely to him under section 22 (a) of the Revenue Act of 1936, citing, among numerous other cases, Helvering v. Hickman, 70 Fed. (2d) 985; Van Every v. Commissioner, 108 Fed. (2d) 650; certiorari denied, 309 U. S. 689; and Sparkman v. Commissioner, 112 Fed. (2d) 774.

The respondent admits that if the petitioner and her husband had been residents of California, instéad of Arizona, then Helvering v. Hickman, supra, would be controlling here. The respondent contends, however, that the cited case has no application here because the community property laws of Arizona differ from those of California. He contends, therefore, that the earnings of petitioner’s husband constituted community income taxable one-half to the husband and one-half to petitioner, under authority of Goodell v. Koch, 282 U. S. 118.

In Goodell v. Koch, supra, the husband and wife, residents of Arizona, each filed separate returns reporting one-half of the community income, and the question before the Supreme Court was whether such income could be so returned or whether it was all taxable to the husband, as determined by the Commissioner. The Supreme Court held that under the laws of Arizona the wife’s .interest in the community property was not a mere expectancy, but a present vested interest equal to that of the husband and that one-half of the community income was taxable to her and one-half thereof to the husband. In that case the Court did not havejbefore it the question here involved, i. e., whether the husband and wife could enter into an agreement whereby .the husband’s earnings were to be and remain his separate property; it consequently affords no support to respondent’s contention.

In Helvering v. Hickman, supra, the question presented was whether or not the husband was taxable on the income of his wife derived by her through a salary, or any portion thereof. The material facts shown were that the husband and his wife were professional actors earning their livelihood as such, and that prior to the taxable year in which the salary in question of the wife was earned the husband and wife orally agreed that “the earnings of each were to be and remain the sole and separate property of the spouse earning the same, free of any community right, claim, or interest of the other * * Upon consideration of the laws of California as reflected in the decisions of the Supreme Court of that state construing the meaning and effect of the state’s community property statutes, the Court held (a) that the earnings of the wife under the antecedent oral agreement between her and her husband became her separate property and (b) that by reason of such agreement, and its effect, under authority of Poe v. Seaborn, 282 U. S. 101, no part of the salary of the wife ever became community property and that consequently no part thereof was taxable as income to the husband.

In view of this holding it is pertinent to first consider whether or not the laws of Arizona are the same in effect as those of California with reference to the validity and effect of a conveyance of community property by a husband to his wife, or vice versa, as his or her separate property. If they are the same, Helvering v. Hickman, supra, controls the holding here, as conceded by respondent.

In construing the meaning and effect of the community statutes of Arizona the Supreme Court of that state has consistently held that the husband or wife can validly and effectively convey to the other as that other’s separate property any or all of his or her interest in the community property owned by both, provided the agreement of both spouses thereto is clearly shown. Main v. Main, 60 Pac. 888; Colvin v. Fagg, 249 Pac. 70; Jones v. Rigdon, 32 Ariz. 286; 257 Pac. 639; Schofield v. Gold, 225 Pac. 71; Lightning Delivery Co. v. Mattesan, 39 Pac. (2d) 938; Baldwin v. Baldwin, 71 Pac. (2d) 791; and Lincoln Fire Insurance Co. of New York v. Barnes, 88 Pac. (2d) 533. The substance of the holdings in the cited Arizona cases was succinctly stated in Baldwin v. Baldwin (1937), 71 Pac. (2d) 791, 795, as follows:

Property acquired by both spouses during marriage likewise belongs to the community, but whether acquired by one or both, either may convey his interest to the other and thus dissolve the community. In Luhrs v. Hancock, 6 Ariz. 340, 57 P. 605; Main v. Main, 7 Ariz. 149, 60 P. 888; Colvin v. Fagg, 30 Ariz. 501, 249 P. 70; Jones v. Rigdon, 32 Ariz. 286, 257 P. 639, and other cases, it has been decided by this court that a husband may convey his interest in the community to his wife, and in Schofield v. Gold, 26 Ariz. 296, 225 P. 71, 37 A. L. R. 275, that a wife may convey hers to her husband. * * *

We conclude that under the cited Arizona authorities the laws of that state are the same as those of California with reference to the effect of a conveyance of community property by a husband to his wife, or vice versa, as his or her separate property.

In the instant proceeding it is clearly shown that the petitioner and her husband entered into a mutual agreement on January 1, 1936, that the husband’s income from his earnings and investments would be his sole and separate property and that such agreement was strictly adhered to and carried out during 1936 and 1937. The respondent raises no objection to the fact that the contract was oral, nor do we think that fact is material. Helvering v. Hickman, supra; F. C. Busche, 10 B. T. A. 1345; and Francis Krull, 10 B. T. A. 1096. We conclude that, under the laws of Arizona, the earnings of the petitioner’s husband during 1936 and 1937 were his separate property, and upon authority of Helvering v. Hickman, supra; Van Every v. Commissioner, supra; and Sparkman v. Commissioner, supra, we hold that such earnings were taxable entirely to him and that no part of such earnings was taxable to petitioner.

The respondent erred in including in petitioner’s gross income the amounts of $2,763.85 for 1936 and $4,403.71 for 1937.

Decision will be entered under Bule 50.


author: TURNER: Van Fossan,

text:
    Schinebro, Incorporated, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101545.
    Promulgated November 5, 1941.

      John E. Hughes, Esq., for the petitioner.

      Walt Mandr^, Esq., for the respondent.
   OPINION.

TURNER:

The petitioner makes two major contentions: First, that under the facts and circumstances of this case it must be held that a dividend in the amount of $14,754.39 was paid within the meaning of section 27 of the Revenue Act of 1936, and, second, being a per-. sonal holding company and subject to tax under section 351 of the act, it is not subject to the tax imposed by section 14.

In support of the contention that a dividend was paid petitioner relies on Valley Lumber Co. of Lodi, 43 B. T. A. 423, and in that connection also argues that, since the dividend was payable in part in the stock of the Texas Co. and corporate stock being intangible, declaration of the dividend was sufficient to vest ownership of the stock in the stockholders and transfer thereof was not required to effect payment or distribution. In Valley Lumber Co. of Lodi, supra, dividends were declared and credited on the corporate books to the accounts of the shareholders but were not actually withdrawn during the corporate taxable year. We held that “the corporation continued to hold the funds wholly subject to the shareholders’ unrestricted demand and control” and that it was entitled to a dividends paid ciedit under section 27, supra. Clearly no such situation existed in the instant case. Furthermore, it may not be said on the facts that the adoption of the dividend resolution vested ownership of the 1,000 shares of Texas Co. stock in the petitioner’s stockholders. The action taken did not spring from any desire to distribute the corporate profits to the stockholders but fiom the desire to avoid the undistributed profits tax, and the thought apparently was that that purpose could be accomplished by adoption of the resolution and without distribution. The shares of Texas Co. were on deposit with Bache & Co. as collateral for the petitioner’s marginal account. The account was closed in 1937 at a loss to the petitioner of approximately $67,000. The loss sustained on the sale of the 1,000 shares of Texas Co. stock amounted to $3,090.23 and was claimed by the petitioner as a deduction on its return for 1937. The petitioner also received in 1937 and reported as its own a $200 dividend on the stock in question. The petitioner makes no attempt to reconcile its treatment of those items with its present claim that its stockholders were the owners of the Texas Co. stock. At the hearing petitioner’s accountant, Forrest E. Ferguson, who prepared the 1937 return, testified that in preparing the return he had made some adjustment therein which would reduce the amount of the loss deduction by the difference between the cost of the stock to the petitioner in FebTuary 1936 and .its fair market value on August 15, 1936, the date of the dividend resolution, but on examining the return was unable to state what, if any, item or schedule reflected such an adjustment. It is accordingly our conclusion that the stock of the Texas Co. was not distributed by the petitioner to its stockholders in payment of the alleged dividend.

The dividend resolution provided that after distribution of the 1,000 shares of Texas Co. stock “a sufficient amount of the cash paid to L. W. Schine on February 14, 1936 and the cash paid to J. M. Schine January 27,1936” should be designated as a dividend in order to equal a total dividend of $15,000. In making the credit on the books of the corporation the Texas Co. shares were carried over to the accounts of the two stockholders at their cost, namely, $13,393.50, and sufficient of the cash payments made to L. W. Schine and J. M. Schine on February 14 and January 27, respectively, were set up as dividends to bring the total dividend credits to $14,754.39, the amount of the petitioner’s earnings for the year. The cash credits so made as in payment of the dividend were $884.58 to J. M. Schine and $476.31 to L. W. Schine. The facts indicate that the petitioner, had received advances from its two stockholders from time to time and that on January 27,1936, when petitioner paid $2,000 to J. M. Schine, it was indebted to him in the amount of $12,500, and on February 14, 1936, when petitioner paid $1,606.50 to L. W. Schine, it was indebted to him in the amount of $29,630.91. The individual accounts of the stockholders -were charged with the cash payments made on January 27 and February 14. Neither of the Schines was offered as a witness and aside from the foregoing we know nothing of the ciicumstances under which the said amounts were paid to them. We are of the opinion therefore that these payments may not be regarded as anything other than payments on indebtedness owing to the Schines by the petitioner. They were not available for use in payment of the alleged dividend on August 16, when the dividend resolution was adopted, nor on December 31, when the dividend credits were made to the accounts of the stockholders. It is also noted that the fair market value of the Texas Co. stock at August 16, 1936, when the dividend resolution was adopted, was less than its cost and, even though payment of the dividend had been effected, the petitioner would not be entitled to a dividends paid credit in the full amount claimed. Sec. 27 (c), Revenue Act of 1936.

The petitioner makes further claim, relying on section 351 (d) of the Revenue Act of 1936, that a dividend must be regarded as having been paid because the petitioner’s shareholders reported the amount thereof in their individual income tax returns as dividends received. Section 351 (d) provides that the tax imposed by section 351 shall not apply “if (1) all the shareholders of the corporation include (at the time of filing their returns) in their gross income their entire pro rata shares, whether distributed or not, of the adjusted net income of the corporation for»such year.” It is argued that the purpose of section 14 “was to force corporations to declare dividends in order that shareholders might be forced to report and pay tax on such dividends and not avoid surtax by accumulating money in corporations”, and that, since that purpose has been accomplished by the reporting of the dividend by the stockholders in their individual returns, the purpose of the statute has been served and the dividend must therefore be regarded as having been paid within the meaning of section 27, supra. That Congress did have the purpose stated in mind is indicted by the report of the Committee on Ways and Means reporting the bill which became the Revenue Act of 1936, but a statement of a particular purpose for legislation in a committee report or in the debates with respect to pending legislation in no way limits the statute when enacted to the purpose stated where the said statute by clear and unambiguous wording is broader in scope. In such case it is certainly not within the province of this Board to say that Congress did not have other purposes in mind and that it did not mean what it expressly and clearly stated. Chester N. Weaver, 305 U. S. 293, affirming 35 B. T. A. 514. The tax imposed by section 14 is broadly stated and reaches “the net income of every corporation.” Subsection (b). In subsection (a), however, it is provided that in determining the undistributed net income, the income subject to tax, a dividends paid credit shall be allowed as provided in section 27 and in section 27 it is stated that “the dividends paid credit shall be the amount of dividends paid during the taxable year.” There is no provision which permits a dividends paid credit in the absence of payment. The dividend in the instant case was not paid and the petitioner is not entitled to the dividends paid credit claimed, even though the stockholders did report in their individual income tax returns the 1936 earnings of the corporation. Cox Motor Sales Co., 42 B. T. A. 192; Fort Pitt Investment Co., 45 B. T. A. 330.

Tbe final contention of the petitioner is that, being a personal holding company and subject to tax under section 351, it is not subject to the tax imposed by section 14. Petitioner’s argument is vague and somewhat difficult to follow. It seems to be based, however, on the language ox subsection (f) of section 14, which reads: “Tax on Personal Holding Companies. — For surtax on personal holding companies, see section 351.” The effect of the argument is that Congress, by the insertion of subsection (f), intended to and did except personal holding companies from the tax imposed by section 14. One difficulty with the petitioner’s position is that by section 14 (b) the surtax on undistributed profits is broadly imposed “upon the net income of every corporation” and the language of subsection (f) is that of cross-reference and does not state an exception to the tax imposed under subsection (b). Furthermore, in imposing the tax under section 351, Congress expressly stated that the tax so imposed is “in addition to the taxes imposed by Title I”, in which section 14 appears. That the language of subsection (f) was intended merely as an informatory cross-reference and not as an excepting clause is further borne out by subsection (g) of section 14. There Congress by substantially similar language referred to the surtax on corporations imposed by section 102. By petitioner’s argument it would follow that all corporations subject to tax under section 102 would not be subject to tax under section 14. Obviously such an argument could not be sustained. In section 102, as in section 351, it is stated that the tax there imposed is in addition to other taxes imposed by Title I and further, to show that Congress in making that statement had the tax imposed by section 14 in mind, the rates under section 102 were varied in the case of corporations also subject to tax under section 14. To apply the reasoning of the petitioner would make the provisions of section 102 (a) (2) meaningless. We find no merit to the petitioner’s contention that, since it is subject to the surtax on personal holding companies imposed by section 351, it is not liable to tax under section 14. The claim is accordingly denied.

Reviewed by the Board.

Decision will be entered for the respondent.

Van Fossan,

dissenting: Believing that the facts in this case bring it within our holding in Valley Tractor & Equipment Co., 42 B. T. A. 311, and that the credit claimed is accordingly allowable, I respectfully dissent.

Arundell and Opper agree with this dissent.

       SEC. 27. CORPORATION CREDIT FOR DIVIDENDS PAID.
      (a) Dividends Paid Credit in General. — For the purposes of this title, the dividends paid credit shall be the amount of dividends paid during the taxable year.
      *******
      (c) Dividends in Kind. — If a dividend is paid in property other than money (including stock of the corporation if held by the corporation as an investment) the dividends paid credit with respect thereto shall be the adjusted basis of the property in the hands of the corporation at the time of the payment, or the fair market value of the property at the time of the payment, whichever is the lower.

       SEC. 14. SuETAX ON UNDISTRIBÜTED PROFITS.
      *♦**#*#
      (b) Imposition of Tax. — There shall be levied, collected, and paid for each taxable year upon the net income of every corporation a surtax equal to the sum of the following, subject to the application of the specific credit as provided in subsection (c) :
      7 per centum of the portion of the undistributed net income which is not in excess of 10 per centum of the adjusted net income.
      * * -jt * * * #
      27 per centum of the portion of the undistributed net income which is in excess of 00 per centum of the adjusted net income.

       (a) Definitions. — As used in this title—
      (1) The term “adjusted net income” means the net income minus the sum of—
      ****** *
      (2) The term “undistributed net income” means the adjusted net income minus the sum of the dividends paid credit provided in section 27 and the credit provided in section 26 (e), relating to contracts restricting dividends.


author: Van Fossan:

text:
    William V. Griffin, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 98077.
    Promulgated November 6, 1941.

      E. Barrett Prettyman, Esq., and Francis T. Garmody, Esq., for the petitioner.

      Allen T. Akin, Esq., and Thomas N. Lewis, Esq., for the respondent.
   OPINION.

Van Fossan:

The respondent bases his contention that the petitioner is chargeable with taxable gain largely on the assumption and theory that the sale of the long stock, the purchase of the new stock, and the covering of the short sales constituted a single and indivisible transaction. He cites many cases to support the general principle that a single transaction may not be broken up into various elements in order to avoid a tax. He then argues that the steps taken by the petitioner were integral parts of a unified plan and affirms that the facts of record support his view.

It can not be gainsaid that the petitioner had the absolute right to establish and maintain both long and short accounts in the same stock. Article 117-6 of Regulations 86, as well as the well known practices of the stock exchange recognize that right. The regulation deals with the results of its exercise. Article 117-6 provides in part:

* * * If, however, lie covered the short sale by delivering shares which he held for more than one year but not for more than two years, only 80 per cent of the recognized gain or loss would be taken into account.

Thus the respondent’s own regulation contemplates the taxpayer’s right to maintain a long account as well as to purchase and own outright stock with which to cover his short sale commitments.

The petitioner’s object in establishing a short account in 1929 had no relation to tax avoidance. His purpose was to be able to offset possible losses due to a decline in the market with commensurable gains arising from his delivery of shares covering his short account at less than the contractual price. The consideration of tax-saving appeared in 1935 when he became acutely conscious that he was compelled to report as income dividends which were being credited to his long account but was unable to obtain any compensating offset or reduction of dividends which were being charged against him in his short account.

Under Regulation T of the Federal Reserve Board adopted pursuant to the provisions of the Securities Exchange Act of 1934, the petitioner’s accounts became restricted and consequently he could not increase his debit balance with Dominick beyond its amount on October 14, 1934, the effective date of the regulation. Therefore, he was forced to close his long and short accounts simultaneously. He was advised that the proper method of accomplishing such liquidation was to buy stock on the open market to cover his short sales and to sell his long stock likewise on the open market. This he proceeded to do in December 1935.

While made concurrently, the petitioner’s purchases and sales were wholly independent of each other. They follow the path outlined in the regulations and approved in principle in duPont v. Commissioner, 98 Fed. (2d) 459; certiorari denied, 305 U. S. 631, and Henry F. duPont, 38 B. T. A. 1317. In those cases the respondent took a view opposite to that which he now proposes. There, the court and the Board held that the measure of gain or loss was confined to the value of the securities purchased in the open market and applied to the short sales account. This ruling is in harmony with Regulation 117-6, which requires inferentially that long and short accounts in the same stock be treated as separate accounts. Petitioner elected to close his short sales by making independent covering purchases on the market. This course he was justified in pursuing, whether he paid for them from the proceeds of sales from his long account or from any other source.

The petitioner’s motive in protecting his long account with Dominick was wholly legitimate. The short sale device enabled him to do so. (See Frances Bartow Farr, 33 B. T. A. 557, for a comprehensive description of a short sale.) The respondent argues that the short sales were not transactions entered into for profit, as required by the statute. The obvious answer to this argument is that the petitioner relied on the anticipated gains from short sales to offset losses feared from the sale of stocks from his long account. The expectation of such gains was in fact the basic reason for his opening the short account. This was a profit motive,

Respondent’s third point is that the loss, if any, claimed by the petitioner was fully compensated for by insurance or otherwise and thus is not deductible. He bases this contention on his original theory that the petitioner’s acts in selling stock from his long account and purchasing stock for his short account were interdependent and that thus the loss automatically was accompanied by a compensating gain. What we have said on this subject heretofore applies here. The petitioner chose to adopt the method which, under the principle approved in the duPont cases and in Tracy v. Commissioner, 116 Fed. (2d) 500, affirming 38 B. T. A. 1366, enabled him to separate his covering purchases fi'om his sales and to keep each type of transaction on an independent basis, from the viewpoint of taxation. The treatment of such purchases and sales was strictly in accord with his purpose and with his instructions to his brokers. Henry F. duPont, supra.

The stocks in both the long and short accounts were identified and traced as they progressed on their several ways. As we said in Henry F. duPont:

* * * We do not think that it can be doubted that, if the petitioner had in August 1982 instructed his brokers to close his short account by a covering purchase of 62,500 shares of duPont common stock and the purchase had been made, the gain or loss upon the transaction reflected in the short account would be the difference between the proceeds from the short sale and the cost of the covering purchase.

No sham or fictitious sales or purchases were made but every item clearly reflected the underlying legitimate purpose of the petitioner.

The petitioner is entitled to compute separately his gain and loss on the two types of transactions.

Decision will be entered under Bule 50.

       Art. 117-6. Gains and losses from short sales. — For income tax purposes, a sliort sale is not deemed to be consummated until delivery of property to cover the short sale, and the percentage of the recognized gain or loss to be taken into account under section 117 (a) from a short sale shall be computed according to the period for which the property so delivered was held. Thus, if a taxpayer made a short sale of shares of stock and covered the short sale by purchasing and delivering shares which he held for not more than one year, 100 per cent of the recognized gain or loss would he taken into account under section 117 (a), even though he had on hand other shares of the same stock which he held for more than one year. If, however, he covered the short sale by delivering shares which he held for more than one year but not for more than two years, only 80 per cent of the recognized gain or loss would be taken into account. If the short sale is made through a broker and the broker borrows property to make delivery, the short sale is not deemed to be consummated until the obligation of the seller created by the short sale is finally discharged by delivery of property to the broker to replace the property borrowed by the broker.


author: Mellott:

text:
    Cooley Butler and La Rue Butler, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 101760.
    Promulgated November 6, 1941.

      Joseph D. Brady, Esq., Philip H. Richards, Esq., and Charles M. Walker, Esq., for the petitioners.

      E. A. Tonjes, Esq., for the respondent.
   OPINION.

Mellott:

The only question before us in whether the stock of the Idaho Copper Co. became worthless in 1937.

The respondent contends in his brief that the stock became worthless prior to January 1, 1937, and that, therefore, no loss Avag sustained by petitioners on account of such worthlessness in that year. In the examining officer’s report, attached to the deficiency notice, it is said: “It is held by the examining officer that all outstanding capital stock of Idaho Copper Company became worthless in 1933, when the sheriff’s deed was issued to Cooley Butler, covering all properties of Idaho Copper Company.”

Petitioner contends that the stock had some value at all times prior to January 1, 1937, and became worthless when, in that year, the company quitclaimed all of its right, title, and interest in the Ned Ledge mining properties as shown in our findings. His contention is grounded primarily on his assertion that the Ned Ledge mine, at all times material here, had a value substantially in excess of the amount of creditors’ claims against the Idaho Copper Co. He argues that the pending litigation, instituted before the Idaho Copper Co.’s equity of redemption under the foreclosure sale had expired, had the effect of postponing until 1937 the finality of the mortgage foreclosure and sale of the company’s property, so that in 1937 the company, having a right to repossess its properties under the conditions of the court’s interlocutory decree, had assets substantially in excess of the amount of the creditors’ claims against it, which gave its stock some value., Consequently, he says, the stock which he owned did not become worthless until 1937, when the court issued its final decree and the Idaho Copper Co. quitclaimed away all of its interest in the Red Ledge property.

The applicable provisions of the statutes and regulations are set out in the margin.

The statute permits a deduction of losses sustained during the taxable year. Therefore a deduction for worthless stock must be taken in the year in which it becomes worthless and not in a prior or subsequent year. Leigh Carroll, 20 B. T. A. 1029; Smith & Rumery Co., 21 B. T. A. 352. The time when worthlessness occurs is a question of fact which obviously must be determined in the light of all the surrounding circumstances.

Generally there is some event which evidences the destruction of value, John B. Marsh, 38 B. T. A. 878; but in any event actual 'worthlessness should be the test and the burden of proof is on the taxpayer to show that the loss which he claims was sustained in the taxable year in which he seeks to claim the deduction. Albert Y. Gowen, 24 B. T. A. 1028; affd., Gowen v. Commissioner, 65 Fed. (2d) 932; cer-tiorari denied, 290 U. S. 687; Olds & Whipple, Inc. v. Commissioner, 75 Fed. (2d) 272.

Stock of a distressed corporation may have a potential value, even though it does not have a current liquidating value, if there is reasonable hope and expectation that in the future it may acquire a value through foreseeable operations. While such a potential value exists, the stock can not be said to be worthless. Sterling Morton, 38 B. T. A. 1270; affd., Morton v. Commissioner, 112 Fed. (2d) 320. See also Wesley V. E. Terhune, 40 B. T. A. 750. We are satisfied from the facts in this record that the stock of the Idaho Copper Co., at all times material here, had a substantial potential value, which was not wiped out by the foreclosure sale of the Red Ledge mining property and the transfer of the property by sheriff’s deed to Butler, but was continued during the pendency of the stockholders’ suits attacking its validity and by the interlocutory decree of the state court in 1935 until the final decree of the state court and the consequent quitclaims by the Idaho Copper Co. of all its interest in the property in 1937.

It is true, as contended by the respondent, that the computations in the record as to the value were based largely on estimates. Such estimates, however, were based mostly upon facts in the record which were uncontroverted and which, standing alone, are sufficient ground for attributing to the stock a substantial potential value. It is not disputed that exploratory examinations of the mining property by diamond drilling and tunneling carried on by competent mining engineers had shown vast stores of recoverable copper ore containing valuable deposits of gold and silver; that the ore veins were of substantial size, from 60 to 70 feet thick, and easily mined; that the climatic conditions were favorable; that facilities for mining, such as water power and timber, were available in the vicinity; and that development, preliminary to operation, including a connecting road to within a few miles of the property, had been done at a cost of approximately $1,250,000. In this situation we think the stockholders’ hopes and expectations of refinancing the corporation’s debts or of obtaining a lessee under the terms and conditions of the interlocutory decree of the state court and liquidating the debts through payment of royalties, thus recovering the Red Ledge property, were reasonable. These hopes and expectations were not abandoned until the state court issued its final decree and the Idaho Copper Co. quitclaimed its interest in the property to Butler in 1937. Not until this event happened could it be definitely determined that there would be a loss or the amount of it. Morton v. Commissioner, supra. We hold that the stock of the Idaho Copper Co. had a potential value on January 1, 1937, and that it became worthless during that year.

Respondent concedes that petitioner’s cost of the 1,150,238 shares of Idaho Copper Co. stock and his basis for the computation of loss, if any, was $134,039.27. Being of the opinion that petitioner sustained a loss in that amount, we hold that respondent erred in denying the claimed deduction.

Decision will be entered under Bide 50.

       Sec. 23 (e), Revenue Act of 1936—
      (e) Losses bt Individuals. — In tlie case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
      (1) if incurred in trade or business; or
      (2) if incurred in any transaction entered into for profit, though not connected with the' trade or business; or
      (3) of property not connected with the trade or business, if the loss arises from fires, storms, shipwreck, or other casualty, or from theft. No loss shall be allowed as a deduction under this paragraph if at the time of the filing of the return such loss has been claimed as a deduction for estate tax purposes in the estate tax return.
      Art. 23 (e), Regulations 94—
      Aht. 23 (e)-l. Losses 6y individuals. — Losses sustained by individual citizens or residents of the united States and not compensated for by insurance or otherwise are fully deductible if (a) incurred in the taxpayer’s trade or business, or (b) incurred in any transaction entered into for profit, or (c) arising from fires, storms, shipwreck, or other casualty, or theft, and a deduction therefor has not prior to the filing of the return been claimed for estate tax purposes in the estate tax return, or (d) if not prohibited or limited by any of the following sections of the Act: Section 23 (g), relating to wagering losses; section 24 (a) (6), relating to losses from sales or exchanges of property between members of a family or between a corporation and its shareholders; section 112, relating to recognition of gain or loss upon sales or exchanges of property; section 117, relating to limitation on losses recognized by section 112 upon the sale or exchange of capital assets; section 118, relating to losses on wash sales of stock or securities; section 251," relating to income from sources within possessions of United States; and section 252, relating to citizens of possessions of United States. See Section 213 as to limitation upon losses sustained by nonresident aliens.
      In general losses for which an amount may be deducted from gross income must be evidenced by closed and completed transactions, fixed by identifiable events, bona fide and actually sustained during the taxable period for which allowed. Substance and not mere form will govern in determining deductible losses. Pull consideration must be given to any salvage value and to any insurance or other compensation received in determining the amount of losses actually sustained. See section 113 (b).


author: Hill:

text:
    Walter S. Mack, Jr., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 102833.
    Promulgated November 6, 1941.

      Francis D. Higson, Esq., for the petitioner.

      James G. Maddox, Esq., for the respondent.
   OPINION.

Hill:

The issue presented for decision in this case is whether petitioner is entitled to a deduction of $41,600 as an ordinary loss resulting from his transfer in 1937 to William B. Nichols of 416 shares of preferred stock of William B. Nichols & Co. under the circumstances set out above. The amount stated represents the undisputed cost of the stock to petitioner.

Petitioner contends in substance that the fundamental principle governing the case at bar is “abandonment, relinquishment or surrender of an asset the value of which has been impaired.” In support of his contention, petitioner cites, among other cases, Liberty Baking Co. v. Heiner, 37 Fed. (2d) 703; Industrial Cotton Mills Co., 43 B. T. A. 107; Rhodes v. Commissioner, 100 Fed. (2d) 966; Commonwealth, Inc., 36 B. T. A. 850; W. W. Hoffman, 40 B. T. A. 459; affd., 117 Fed. (2d) 987; Park Chamberlain, 41 B. T. A. 10; John J. Seerley, 43 B. T. A. 50.

Petitioner further urges that the present case is similar to numerous decisions of the Board in which it has been held that an owner of real property, subject to a mortgage on which he is not personally liable, sustains an ordinary loss deductible in full upon surrender of the property to the mortgagee, citing Commormealth, Inc., supra; W. W. Hoffman, supra; Realty Operators, Inc., 40 B. T. A. 1051; Harry C. Aberle, 41 B. T. A. 863, and others.

Finally, petitioner argues that the same principle should be applied in this case as was applied by the Board in certain decisions wherein it was held that the stockholder of a corporation who surrendered a part of his stock to be used as compensation for services to be rendered to the corporation sustained an ordinary loss deductible in full. See George M. Wright, 18 B. T. A. 471; modified, 47 Fed. (2d) 871; City Builders Finance Co., 21 B. T. A. 800; Helene Baldwin Burdick, Executrix, 20 B. T. A. 742; affd., 59 Fed. (2d) 395.

Respondent takes the position that the transfer of stock here in question constituted a gift, and hence did not result in a loss allowable as a deduction.

We shall not attempt a detailed discussion of the many cases cited by petitioner; we think none is controlling here. In respect of petitioner’s contention last above referred to and the citations thereunder, it is sufficient to point out that petitioner did not surrender a part of Ms stock for the benefit of the corporation, in order ultimately to increase the value of his remaining stock, as in the cases cited. He transferred all of his stock and completely severed all connection with the corporation.

Likewise, petitioner’s other and principal contention that he suffered a deductible loss as the result of abandonment of property can not, in our opinion, be sustained. The facts do not indicate that petitioner had any intention of abandoning his property, or that he did abandon it. Such term denotes an absolute giving up; forsaking or renouncing utterly. We think petitioner did not forsake or renounce ownership of the preferred stock; he simply transferred it without consideration to Nichols for a certain specific purpose, to which further reference will be made. Such transfer does not indicate abandonment. Ordinarily, a person does not abandon property having substantial value, and a transfer of valuable property, without consideration, would in the absence of explanation indicate a gift rather than abandonment. Thus, in all the cases cited above in which a loss deduction was allowed on account of abandonment of property, it appears that such property had lost its useful or economic value, or that the taxpayers thought the property was without substantial value. See especially W. W. Hoffman, supra. In Park Chamberlain, supra, one of the decisions heavily relied upon by petitioner, we said:

The substance of the transaction shown in our findings, we think, was an abandonment by petitioner of what he, and all who were familiar with it, thought was a worthless asset.

While a transfer, without consideration, of a worthless asset may evidence abandonment and constitute the identifiable event which fixes the incidence of loss, as in the cited cases, it is equally obvious on the other hand that such a transfer would not constitute a gift. A gift can be made only of property having value. This is made plain in our opinion in John J. Seerley, supra, another decision particularly relied upon by petitioner, where we held that the execution and delivery of an order directing the issuance to another of trust certificates representing the taxpayer’s equity interest in certain lands constituted an abandonment by the taxpayer of his equity in the land, and was not a gift.

The record in the instant case clearly establishes that the shares of preferred stock transferred by petitioner to Nichols had a very substantial value, although it is not shown precisely what the value was. The corporation was a going concern, apparently able to pay its current operating expenses and possessed of valuable assets. The letters set out in our findings above were devoted to a discussion of certain assets of the corporation, as they affected the liquidating value of tbe stock. It is not indicated that the corporation was particularly in financial difficulties, but rather that some of its assets were frozen. We think the evidence justifies the conclusion that petitioner’s preferred stock at the time of the transfer had not only a substantial liquidating value but probably a much higher potential value.

As was said in Noel v. Parrott, 15 Fed. (2d) 669, gifts usually proceed from the generosity of the giver and, where there is any doubt as to the nature of the transaction, the absence of such a motive is a pertinent circumstance for consideration. Petitioner argues that the transfer here in controversy was not actuated by any motive of generosity and he had no intention of making a gift; therefore, it was not a gift. We can not agree.

In the letter of November 30, 1937, to Nichols, petitioner expressed regret that he could not invest more capital in the corporation or give much time to its affairs, and referred to the fact that his name had been associated with the company for quite a number of years. (As previously stated, besides being a stockholder of the corporation, petitioner had been a director for more than seven years; he had also at one time been treasurer and a vice president of the corporation.) Petitioner further stated in his letter that he was willing to surrender all of the preferred stock owned by him in the corporation to Nichols individually, with the hope that he, Nichols, might be able to use the stock either to secure additional capital or to obtain services from others who could help him. He endorsed the certificates in blank and enclosed them in his letter.

These statements, in our opinion, sufficiently indicate the motive which actuated petitioner in transferring the stock to Nichols without material consideration. Surely it was an act of generosity on the part of petitioner so to assist an old friend in the only practical way available to him. It appears that petitioner was also connected with several other corporations in an executive capacity, and it may well be that petitioner felt that if William B. Nichols & Co., a corporation with which his name had been associated for many years, got into financial difficulties it would reflect on his reputation as a businessman and corporate executive. Whether or not this was true, we are persuaded from all the evidence before us that petitioner intended to and did make a gift of his preferred stock to Nichols, and he is therefore not entitled to deduct any part of the cost of the stock as a loss resulting from such transfer.

The deficiency determined by respondent is approved.

Decision will be entered for respondent.