author:
TRAMmell:
      Smith,

text:
    William R. Huntley, Petitioner, v. Commissioner of Internal Revenue, Respondent. Manufacturers & Traders Trust Company and William R. Huntley, Trustees for Mary Huntley Green, Petitioners, v. Commissioner of Internal Revenue, Respondent. Manufacturers & Traders Trust Company and William R. Huntley, Trustees for Robert R. Huntley, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 69214, 69215, 69216.
    Promulgated June 15, 1934.

      Ralph M. Andrews, Esq., for the petitioners.

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

TRAMmell:

These are consolidated proceedings for the redeter-mination of deficiencies in income tax for the year 1930 as follows:

The sole issue in this case relates to the basic date for determination of the profit derived by the petitioners from the sales of certain corporate stocks during the year 1930. The facts were stipulated by the parties, and their stipulation is by reference here adopted in full as our findings of fact. Only so much of the stipulation as is deemed essential to a discussion of the issue is set out hereinbelow.

Charles R. Huntley died testate, a resident of the city of Buffalo, Erie County, New York, on September 27, 1926. The petitioners in Docket Nos. 69214 and 69215 are the duly qualified trustees under the last will and testament of the, decedent, and the petitioner in Docket No. 69216 is a son of the decedent.

On May 22,1929, the Surrogate of Erie County, New York, issued a decree judicially settling the intermediate accounts of the executors of the decedent’s estate, and ordering a partial distribution of the assets. The decree in material part reads as follows:

It Is Further Ordered, Adjudged and Degreed, that said Executors make a partial distribution of the securities and property, remaining in their hands and transfer and deliver the same as follows:

To William R. Huntley
*******
500 Shs. Amer. Superpower Corp. Class B. Com-$48,000.00
*******
To William R. Huntley and Manufacturers & Traders-Peoeles Trust Company, as Trustees fob Robebt R. Huntley
*******
1250 Shs. Bflo. Niag. & East. Pr. Corp. Class A_ 79,843.75
*******
To William R. Huntley and Manufactubees & Tbadees-Peoples Trust Company, as Trustees fob Mary Huntley Green
*******
1250 Shs. Bflo. Niag. & East. Pr. Corp. Class A- 79,843. 75
It Is Further Obdebed, Adjudged and Deoeebd that the proper officers, registrars and transfer agents of the respective corporations by whom said stocks and bonds were issued be and they hereby are directed upon the presentation to them of the stock certificates and/or bonds duly endorsed and a duly certified copy of this decree to make transfer of the stock represented by said certificates and of said bonds as hereinabove directed;
*******
It Is Furtheb Obdebed, Adjudged and Decreed Upon filing in this Court receipts showing the distribution, transfer and delivery of the moneys and property as hereinabove directed, that the executors be and they hereby are discharged of any further liability and accountability as to all things determined by this decree;
It Is Fubtheb Obdebed, Adjudged and Decreed, that after making the payments and transfers hereinabove directed to be made, the balance of the moneys and property in their hands be retained by the Executors and administered in accordance with the terms of the Last Will and Testament of Charles R. Huntley, Deceased.

Pursuant to the surrogate’s decree the executors proceeded to have the securities transferred on the books of the respective corporations to, and new stock certificates issued in the names of, the several legatees entitled to receive them.

Thereafter, on June 20, 1929, the executors delivered to the trustee for Robert R. Huntley a certificate for 1,250 shares of class A stock of the Buffalo, Niagara & Eastern Power Corporation, which certificate was, on August 19, 1929, exchanged by the trustees for 5,000 shares of common stock of Niagara Hudson Power Corporation. The latter stock was sold by the trustees on May 12, 1930.

On June 20, 1929, the executors also delivered to the trustees for Mary Huntley Green a certificate for 1,250 shares of class A stock of the Buffalo, Niagara & Eastern Power Corporation, which certifi'cate was, on August 19, 1929, exchanged by the trustee for 5,000 shares of Niagara Hudson Power Corporation common stock, and the latter stock was sold by the trustees on May 12, 1930.

On July 12, 1929, the executors delivered to petitioner William R. Huntley a certificate for 2,500 shares of the new common stock of the American Superpower Corporation, which certificate had been received by the executors on June 14,1929, in exchange for the original 500 shares of class B common stock of this corporation, referred to in the decree of distribution. William R. Huntley sold the 2,500 shares of new common stock on October 14, 1930.

The class A stock of the Buffalo, Niagara & Eastern Power Corporation had a fair market value of 61 % on May 22, 1929, and the same stock had a fair market value of 99% on June 20, 1929. The class B common stock of the American Superpower Corporation had a fair market value on May 22, 1929, of 163%, and the new common stock of this corporation had a fair market value on June 14, 1929, of 41% and on July 12,1929, of 64%.

In determining the deficiencies in controversy, respondent used as the basis for computing the profit derived by the petitioners from the sales of stock in 1930 the fair market value of the stocks on the date of the decree of distribution, while the petitioners contend that the proper basis is the fair market value at the dates on which the stock certificates were actually delivered to them by the executors.

The pertinent provisions of the Revenue Act of 1928, embodied in section 113 (a) (5), are set out in the margin.

Under the prior acts the basis for computing gain or loss on the sale of corporate securities received from a decedent was the fail-market value of such property “at the time of acquisition.” The 1928 Act effected a change in the law and provided that the basis for determining gain or loss upon the sale of personal property acquired by general bequest, as in the present case, shall be the fair market value of the property “ at the time of the distribution to the taxpayer.” Brewster v. Gage, 280 U.S. 327.

The parties here agree that the basis for determining the gain derived from the sales of stocks in 1930 is the fair market value “ at the time of the distribution. ” to them, but they disagree as to what date or dates constitute “the time of the distribution.” Thus, the issue presented involves a construction of the phrase “ time of the distribution to the taxpayer.” In other words, under the facts of this case, when were the stocks in question distributed to the petitioners within the meaning of the statute? Was “the time of the distribution ” the date on which the surrogate by his decree ordered distribution to be made, as urged by the respondent, or the dates on which the stock certificates were actually delivered to the respective dis-tribúteos by the executors, as contended by the petitioners ?

Substantially the same question was considered by us in Arthur E. Braun, Trustee, 29 B.T.A. 1161. In that case the Orphans’ Court entered a decree in 1925 and another in 1927, in each of which it was directed that certain shares of stock be distributed to the trustees at a future date. The certificates of stock were not actually delivered to the distributees until subsequent to the dates on which distribution was ordered by the decrees. Two lots of stock were sold in 1928. We held in that situation that “ the time of the distribution to the taxpayer ”, under the statute hereinabove referred to, was. neither the dates on which the decrees were entered nor the dates on which the stock certificates were actually delivered to the distributees, but the effective dates of the decrees, that is, the dates on which distribution was directed to be made by the decrees. In our opinion we said:

As we construe these decrees, they directed in effect that distribution be made at a future date, upon the happening of specified events, and until those events transpired, the decrees by their terms were not operative to effect distribution. * * *
The dates on which the executors in this case delivered actual possession of the stock to the trustees, we think, are immaterial. The dates on which the decrees directed distribution constituted the “ time of the distribution to the taxpayer” within the meaning of section 113 (a)(5), supra, and the fair market, value of the stock on those respective dates is the basis provided for determining gain or loss.

The same rule, in our opinion, must be applied in the instant case. Here the. surrogate’s decree did not direct distribution to be made at a future date, but the executors were ordered to make distribution without limitation as to time, and hence they were authorized to distribute immediately after the signing and entry of the decree. The effective date of the decree was, therefore, May 22, 1929. On and after that date the respective petitioners were the owners of the shares of stock set aside and distributed to them by the decree. Any increase in the value of the stocks thereafter would inure exclusively to their benefit, and they alone would suffer loss resulting from any decline in the value after that date.

A certificate of stock merely evidences ownership, it is not the stock itself. If certificates representing the shares of stock distributed to these petitioners had never been delivered to them by the executors, they would nevertheless have been the owners of interests in the respective corporations from May 22, 1929. Therefore, the dates on which the stock certificates were actually delivered to the petitioners are not the dates on which they became the owners of the property or interest rights in the corporations; they became owners of such property rights on the effective date of the decree of distribution, namely, May 22, 1929.

Plainly, we think, to adopt the contention of the petitioners that “ the time of the distribution ” is the date on which actual delivery is made would throw open the door to tax evasion and lead to results not contemplated by Congress in adopting the statute in question. In such event, any taxpayer in the position of these petitioners could obtain an increased basis for computing profit or loss by merely deferring acceptance of possession of the stock ; certificates on a rising market where the value of the stock was increasing.

This is well illustrated by the instant case. The surrogate’s decree of May 22, 1929, directed distribution to petitioner Huntley of 500 shares of class B common stock of the American Superpower Corporation, then having a fair market value of 163%. On June 14 the executors received a certificate for 2,500 shares of the new common stock, made out in Huntley’s name, in exchange for the original 500 shares of class B common. Yet the certificate for the new stock was not delivered to the petitioner until July 12, 1929. The market price of the stock was increasing rapidly. The new stock had a fair market value of 41% on June 14, but its value had increased to 64% on July 12, when actual delivery of the certificate was made, thus affording the petitioner a materially increased basis for computing profit on a subsequent sale, if value at the date of actual delivery of the certificate be taken as a basis.

We do not think that Congress intended by the quoted statute to permit a taxpayer to fix the basis for determining profit or loss by merely accepting possession immediately in the case of a falling market or deferring acceptance of the stock certificates where the market is rising.

On authority of our decision in the Braun, case, supra, we hold that the basis for determining gain or loss on the sales of the stocks here involved is the fair market value of the stocks at May 22, 1929, the effective date of the decree of distribution.

Reviewed by the Board.

Judgment will be entered under Bule 50.

Smith,

dissenting: That the phrase “ at the time of the distribution to the taxpayer ” used in section 113 (a) (5) of the Revenue Act of 1928 has the meaning “ at the time of the delivery to the taxpayer” appears to me to admit of no doubt. The Senate Finance Committee Report No. 960, p. 28, 10th Cong., 1st sess., explaining section 113 (a) (5), states:

It appears that the House bill is inadequate to take care of a number of situations which frequently arise. For example, the executor, pursuant to the terms of the will, may purchase property and distribute it to the beneficiaries, in which case it is impossible to use the value at the decedent’s death as the basis for determining subsequent gain or loss, for the decedent never owned the property. Moreover, the fair market value of the property at the decedent’s death can not properly be used as the basis, in the case of property transferred in contemplation of death where the donee sells the property while the donor is living.
Accordingly, the committee has revised section 113 (a) (5) and certain related sections, so as to provide that in the case of a specific bequest of personalty or a general specific devise of realty, or the transmission of realty by intestacy, the basis shall be the fair market value at the time of the death of the decedent. In these cases it may be said, as a matter of substance, that the property for all practical purposes vests in the beneficiary immediately upon the decedent’s death, and therefore the value at the date of death is a proper basis for the determination of gain or loss to the beneficiary. The same rule is applied to real and personal property transmitted by the decedent, where the sale is made by the executor. In all other cases the basis is the fair market value of the property at the time of the distribution to the taxpayer. The latter rule would obtain, for example, in the case of personal property not transmitted to the beneficiary by specific bequest, but by general bequest or by intestacy. It would also apply in cases where the executor purchases property and distributes it to the beneficiary.

It must be apparent from the foregoing that in many instances the phrase “time of distribution” has application to the time of delivery. Why should not the rule be applied universally ? I think it should be. I am furthermore of the opinion that the Committee, in referring to the case “ where the executor purchases property and distributes it to the beneficiary,” must have had in mind an act which the executors have the power to perform. That is delivery — not apportionment.

It is furthermore to be noted that elsewhere in the Revenue Act of 1928 the word “ distribution ” or “ distribute ” is used, notably in sections 112,115,161,162, and 182. In all of these sections the word has reference to payment or delivery. But, even more significantly, the word appears in section 113 (a) (9), the same section of the law involved here. In every instance where the word appears in these sections it is used synonymously with “ delivery.” Indeed, in section 113 (a) (9), Congress has used the word “ distribution ” in clear contradistinction to the word apportioned.”

Where Congress had occasion in the Revenue Act of 1928 to refer to income or property which is set aside for specific beneficiaries but not physically transferred to them, it used the phrase “ to be * * * distributed as the court may direct ” (as in section 161 (a) (2) and section 162 (b)), or referred to such income or property as “distributive share ” (as in section 182 (a)).

There is a sharp analogy between distribution of an estate and distribution of dividends. Dividends when declared are formally set aside out of surplus for stockholders, though not paid until a later date. In other words, so much of the corporation’s surplus is allotted to stockholders. Yet, in construing the Revenue Act of 1917 (section 81 (b)), dealing with “distribution made to the shareholders ” the courts held that “ distribution made ” meant “ paid ”— not “ declared.”

In Mason v. Routzahn, 276 U.S. 175, the Supreme Court held: “We think it clear that, for this purpose, the date of payment, not the date of the declaration of the dividend, is the date of distribution * * To the same effect is Lewellyn v. Harbison, 31 Fed. (2d) 740 (certiorari denied, 280 U.S. 560), in which the Circuit Court of Appeals for the Third Circuit held: “We agree with the Circuit Court of Appeals for the Sixth Circuit that a ‘ distribution made ’ means dividends paid,’ and not merely declared. * * * ”

It is furthermore to be noted that the courts and statutes of New York and of most jurisdictions regard “ distribution ” as being an act of executors done pursuant to a decree — not an act accomplished by the decree itself. The New York law is plain. The decree pursuant to which the taxpayers here received Buffalo, Niagara & Eastern Power Corporation and American Superpower Corporation stock did not say “the following securities are hereby distributed.” It said, “ ORDERED, Adjudged and Decreed That said Executors malee a 'partial distribution of the securities and property remaining in their hands.” (Emphasis supplied.) Had distribution been effected by the decree itself, it would have read, “ Ordered, Adjudged and Decreed that the following securities and property remaining in the hands of the executors be and they are hereby distributed in the following manner.” In other words, distribution was not effected by the decree. The decree simply directed the executors to make distribution. This is in line with the New York statute. Section 267 of the Surrogate’s Act provides:

Where an account is judicially settled', as prescribed in this article, and any part of the estate or fund remains and is ready to be distributed, the decree must direct the payment and distribution thereof to the persons so entitled, according to their respective rights. It may also award to a surviving husband, wife, or child, the same relief as to set off of exempt property which may be awarded in bis or ber favor, on a petition presented as prescribed in section two hundred and one of this act. [Emphasis supplied.]

“ Payment ” and “ distribution ” are treated synonymously by the statute, payment applying to cash and distribution to property other than cash.

To the same effect are the New York cases. See Matter of Isaacs, 103 Misc. 184, 191; Matter of Thompson, 41 Misc. 420; Clapp v. Meserole, 38 Barb. 661.

New York by no means stands alone in regarding the decree as ordering the executors to make distribution (thereby denoting delivery) rather than itself effecting distribution. In Michigan, in the case of Burke’s Estate, 240 Mich. 444; 215 N.W. 413, 417, it was held: “The distribution in the sense that it is. used in the statute means a physical turning over of the estate to those who are by law entitled to it.” See also Scully v. Squier, 13 Idaho, 417; 90 Pac. 573; Goldberg v. Kidd, 5 S.D. 169; 58 N.W. 574.

In Brewster v. Gage, 280 U.S. 327, the Supreme Court used this language:

Petitioner’s father died testate May 20, 1918. The Surrogate’s Court at Rochester, N.Y., entered a final decree April 19', 1920, pursuant to which certain stochs were distributed to the petitioner as one of the residuary legatees. * * * [Emphasis supplied.]

The use of the word “pursuant” is an absolute negation of the idea that distribution is effected by the decree itself. Webster’s Dictionary defines “pursuant” as follows:

(As an adjective) “Acting or done in consequence or in prosecution (of anything); hence, agreeable; conformable, following, according; ” and (as an adverb) “Agreeably; conformably; according; as, pursuant to our contract.”

In Benjamin G. Chapman, Jr., Executor, 19 B.T.A. 105, we said:

In view of the pleadings herein and the admissions made by counsel at the hearing, the only controversy between the parties to this proceeding is as to the date that Fannie H. Higbee acquired, within the meaning of the Revenue Acts of 1921 and 1924, the 4,956 shares of the capital stock of the Burroughs Adding Machine Co. that were distributed to her on August 7, 1918, pursuant to the decree of the Circuit Court of the city of St. Louis.
* * * * * * *
The petitioner relies on the cases of F. W. Matthiessen, Jr., 2 B.T.A. 921; Alice Fisher Foster, 7 B.T.A. 1137; Nellie B. McGee, 13 B.T.A. 1181; and F. W. Matthiessen, Jr. v. United States, 65 Ct. Cls. 484, in which it was held that a legatee under a will acquires personal property within the meaning of the Revenue Acts of 1918 and 1921 when such property is distributed by the executor and that gain or loss on the subsequent sale of the property should be computed from the date of distribution. * * * [Emphasis supplied.]

In F. W. Matthiessen, Jr. v. United States, 65 Ct. Cls. 484, the court said in narrating the facts:

Subsequent to tbe execution of tbe above agreement, June 18, 1918, an order was entered by the probate court mríhorismg the executors to distribute to tbe residuary legatees all of tbe stocks of the testator, except certain ones with which we have no concern. [Emphasis supplied.]

It is elementary law that under the will of a decedent personal property composing the residuary estate of the decedent passes to the executor. In re Stoiber, 103 Misc. 654; 170 N.Y.S. 897; Anderson v. Wilson, 289 U.S. 20. Title continues in the executor until he transfers it pursuant to the decree. Anderson v. Wilson, supra. The decree itself does not effect a change in title. It simply evidences a right to receive it. The Supreme Court said in Brewster v. Gage, supra:

* * * The decree of distribution confers no new right; it merely identifies the property remaining, evidences right of possession in the heirs or legatees, and requires the administrators or executors to deliver it to them. * * *

In the light of the above I can not see any ground for a contention that the “ time of distribution ” used in section 113 (a) (5) of the statute has reference to any time other than that when actual distribution is made to the legatees. I think it is immaterial whether that distribution is made before or after the date of the decree ordering-distribution. It was unquestionably the intent of Congress to lay down a universal rule, which a layman could follow. If the “ time of distribution ” has reference to the date of the decree in this case, and in Arthur E. Braun, 29 B.T.A. 1161, to a period after the date that the decree was entered, the administration of the provision in question must be attended with the same uncertainty which obtained prior to the amendment of the law made by the section in question.

       SEC. 113. BASIS POE DETERMINING GAIN OR LOSS.
      (a) Property Acquired After February 28, ISIS. — The basis ior determining the gain or loss from tbe sale or other disposition of property acquired after February 28, 1913 shall be tbe cost of such property; except that—
      ***** * *
      (5) property transmitted at death. — If personal property was acquired by specific bequest, or if real property was acquired by general or specific device or by intestacy, the basis shall he the fair market value of the property at the time of the death of the decedent. If the property was acquired by the decedent’s estate from the decedent, the basis in the hands of the estate shall be the fair market value of the property at the time of the death iof the decedent. In all other cases if the property was acquired either by will or intestacy, the basis shall be the fair market value of the property at the time of the distribution to the taxpayer. * * *


source: Caselaw Access Project

author: Murdock :

license: Public Domain

text:
    The American Railways Company, Formerly American Electric Power Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67662.
    Promulgated June 19, 1934.

      G. J. McGuire, Esq., J. Marvin Haynes, Esq., and W. O. Magathan, Esq., for the petitioner.

      Harold Alien, Esq., for the respondent.
   OPINION.

Murdock :

The Commissioner determined a deficiency of $2,133.29 in the petitioner’s tax for the calendar year 1924. The only error assigned is that the statutory period of limitation within which assessment and collection of any deficiency in tax for 1924 could be legally made had expired before July 14, 1932, when the notice of deficiency was mailed to this taxpayer.

The facts were stipulated as follows:

1. The petitioner is a corporation with its principal office at 15 Exchange Place, Jersey City, N.J. Its corporate name was formerly American Electric Power Company which was later changed to “ The American Railways Company ”, the change being a change in name only.
2. For the calendar year 1924 petitioner filed a final consolidated income tax return with the Collector of Internal Revenue at Philadelphia, Pennsylvania. Said return was filed May 7, 1925. It is attached hereto, marked “ Exhibit A.”
3. The aforesaid consolidated return was for an affiliated group of corporations. Such consolidated return included the income of Ohio Valley Electric Railway Company, which was erroneously believed to be a member of the affiliated group.
4. Subsequent to the filing of the consolidated return (Exhibit A) the respondent determined that the aforesaid Ohio Valley Electric Railway Company was not affiliated with this petitioner and should not have been included in the consolidated group for which the return was filed. In his audit of the return of the affiliated group he excluded the income of Ohio Valley Electric Railway Company.
5. In a letter dated March 9, 1929, the Commissioner of Internal Revenue determined that the correct tax liability of the group, not including the Ohio Valley Electric Railway Company, was $102,291.22, and that there was a deficiency in tax in the amount of $23,068.63. No appeal from this determination was filed with the Board. In a letter dated March 14, 1929, counsel for petitioner waived the restrictions on assessment and collection contained in subsection 274 (a) of the Revenue Act of 1926. The $23,068.63 was assessed against petitioner on March 23, 1929, and was paid by petitioner. Attached hereto and made a part hereof, marked Exhibit B, is the aforesaid letter dated March 14, 1929.
6. The consolidated return filed by petitioner (Exhibit A) disclosed a tax liability of $79,222.59, which was duly assessed and paid. When he determined that the correct tax liability of the affiliated group was $102,291.22, as indicated in the preceding paragraph, the respondent allocated the entire original assessment of $79,222.59 against the liability of the affiliated group in determining the deficiency of $23,068.63. This resulted in no part of the $79,222.59 being allocated to Ohio Valley Electric Bailway Company, the corporation whose income originally had been included in the consolidated return, but which had been excluded by respondent in his audit of the return.
7. On December 19, 1929, respondent determined a deficiency in tax for the year 1924 against Ohio Valley Electric Kailway Company in the amount of $2,133.29, issuing a deficiency notice to that company. Ohio Valley Electric Kailway Company had a waiver on file extending the statutory period for assessments to December 31, 1929. A copy of such waiver is attached hereto, marked Exhibit C, and is made a part hereof. An appeal from respondent’s determination was filed with the Board on February 14, 1930, by Ohio Valley Electric Railway Company. On May 24, 1932, upon stipulation by the Commissioner of Internal Revenue and the Ohio Valley Electric Railway Company, the Board issued a final order that there was no deficiency against Ohio Valley Electric Railway Company for the year 1924. (See Docket No. 47512).
8. The elimination of the deficiency of $2,133.29, as described in the preceding paragraph was due to respondent’s reconsidering the tax liability of Ohio Valley Electric Railway Company and allocating to it $2,133.29 of the assessment of $79,222.59, which had been made against petitioner on the original consolidated return, Exhibit A hereto. The Ohio Valley Electric Railway Company reimbursed the petitioner for its portion of the tax assessed on the original consolidated return in the amount of $3,307.78.
9. In respondent’s deficiency notice of July 14, 1932, from which this appeal is taken, the tax liability as determined by him in his letter of March 9, 1929, was unchanged, being in the amount of $102,291.22, but he reduced the allocation of tax previously assessed from $79,222.59 (as described in paragraph 6 hereof) to $77,089.30. The deficiency of $2,133.29 is the result of this allocation reduction.

In addition to the stipulated facts the following appears from two . documents offered by the respondent and admitted in evidence:

In January 1929 the Commissioner received a form of waiver, dated January 7, 1929, which had been executed and sent by the petitioner. It stated that the taxpayer and the Commissioner thereby waived the time prescribed by law for making any assessment due under any return made by the taxpayer for 1921 and 1925. It was to expire on December 31, 1929. On February 4, 1929, the Commissioner wrote to the representatives of the taxpayer in regard to this document as follows:

Receipt is acknowledged of your letter of January 12, 1929, in which you submit a combined consent and allocation of tax agreement in behalf of the above company and affiliated companies.
Examination of the consent and agreement discloses the fact that you have not used the proper forms in accordance with the requirements of the Bureau, and for that reason, the combined form submitted is not acceptable. Furthermore the consent submitted only extends the statutory period of limitations of the parent company for the years 1924 and 1925 until December 31, 1929 and does not cover the subsidiary companies.
With respect to the consent forms which extend the period of limitations within which additional tax may be assessed for the years 1924 and 1925, it will be necessary for you to submit separate consents signed by each of -the affiliated companies, affixing to each the corporate seal of each corporation signing the consent.
Likewise the agreement for the allocation of the tax must be signed by the proper officers, attested by the Secretary and bearing the corporate seal of each of the affiliated companies, wherein it is agreed that the total Federal income tax based upon the consolidated return for the calendar years 1924 and 1925 may be assessed against the parent company.
Proper forms of consent and agreement for the allocation of tax are enclosed, and it is requested that you have these forms executed and returned to this office within fifteen days from date of this letter.

On December 5, 1933, the day of the hearing in this case, the Commissioner’s name was signed to the form of waiver dated January 7, 1929.

The income taxes in question in this proceeding were imposed by the Revenue Act of 1924. Section 277 (a) provides that the amount of such taxes shall be assessed within four years after the return was filed. Thus the statute of limitations on assessment of the taxes imposed upon this petitioner for the calendar year 1924 began to run on May 7, 1925, when the petitioner’s return for 1924 was filed, and the statutory period for assessment expired on May 6, 1929, unless it was extended by the consent of both the Commissioner and the taxpayer in writing (section 278 (c)), or unless the running of this period was suspended in some way.

The Commissioner, on March 9, 1929, notified the petitioner of a deficiency in tax and the deficiency then determined was paid by the petitioner without appeal or protest. Section 277 (b) provides that the running of the statute of limitations on the making of assessments shall (after the mailing of a notice under subdivision (a) of section 274) be suspended for the period during which the Commissioner is prohibited from making the assessment and for 60 days thereafter. Where, as here, no petition was filed with the Board, this suspension amounted to 120 days. Thus the statutory period for assessment of the deficiency mentioned in the Commissioner’s notice of March 9, 1929, would have expired on September 3, 1929. The deficiency now in controversy is not the deficiency, but is a second one, determined thereafter on July 14, 1932. The Commissioner does not now rely upon the suspension of 120 days which resulted from.his first notice and it does not benefit him in any way. Cf. Alice Wilson, 23 B.T.A. 644; aff'd., 60 Fed. (2d) 501.

Section 278 (c) provides that if the Commissioner and the taxpayer mutually consent in writing, the statutory period for assessment may be extended to any date agreed upon by them. The petitioner was once willing to agree with the Commissioner to extend the period for assessment of its 1924 taxes to December 31, 1929, and sent a document to the Commissioner in January 1929 so that the latter might join with the taxpayer and make this document the consent authorized by the statute. However, the Commissioner promptly and definitely rejected this document for the purpose for which it was offered, refused to accept it for any purpose, and so notified the taxpayer on February 4,1929. In his letter of that date he requested that consents in a different form, which he specified, should be executed and forwarded to him, but these forms were never executed or furnished the Commissioner. .There is no suggestion or claim of bad faith on the part of the taxpayer in this connection. Thus there was no valid consent in writing between the taxpayer and the Commissioner to extend the period for assessment beyond May 6, 1929, and, consequently, the statutory period for assessing the taxes here in controversy expired on that day. Cf. Alice Wilson, supra.

This case came on for trial before the Board on December 5,1933. The sole question in controversy was whether or not the statute of limitations on assessment of the deficiency determined in the notice of July 14, 1932, had run when that notice was mailed. A representative of the Commissioner must have found in his file, at the time of the hearing, the old paper which the petitioner had signed on January 7, 1929, and which the Commissioner had definitely rejected on February 4, 1929, and a representative of the Commissioner must have had the Commissioner’s name signed to this paper on the very day of the hearing in a vain belated attempt to revive the period for. assessment of the taxes in controversy in this proceeding. That document up to that time had been a nullity and had served no useful purpose, since the Commissioner had not signed it, had not relied nor acted upon it, and had definitely rejected it, and the taxpayer had neither accepted nor received any benefits under it. Cf. Florsheim Brothers Dry Goods Co. v. United States, 280 U.S. 453, 464; Stange v. United States, 282 U.S. 270, 276; Aiken v. Burnet, 282 U.S. 277; Brown & Sons Lumber Co. v. Burnet, 282 U.S. 283; Burnet v. Chicago Ry. Equipment Co., 282 U.S. 295; Commissioner v. United States Refractories Corp., 64 Fed. (2d) 69; aff'd., 290 U.S. 501; Corn Products Refining Co., 22 B.T.A. 605; Liberty Baking Co. v. Heiner, 37 Fed. (2d) 703, 704; Stearns Co. v. United States, 2 Fed. Supp. 773. The original deficiency was determined within the four-year period of limitation and has been paid. More than four and one half years had elapsed since the document in question had been rejected and since the expiration of the four-year period of limitations. The petitioner had never asked for the return of the document, but this fact seems immaterial, for it had a right to rely upon the Commissioner’s statement that the document was entirely unsatisfactory. Thereafter the taxpayer never renewed its offer to consent to an extension of the statutory period for assessment, either by the use of this document or any other. It would be unconscionable to hold, under such circumstances, that the signing of this paper by the Commissioner at that late date had any effect whatever upon the statute of limitations on assessment.

Section 278 of the Revenue Act of 1926 was amended by section 506 of the Revenue Act of 1928 to provide in part as follows:

(c) Where before the expiration of the time prescribed in section 277 for the assessment of the tax, both the Commissioner and the taxpayer have consented in writing to its assessment after such time, the tax may be assessed at any time prior to the expiration of the period agreed upon. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon.
*******
(f) Any agreement which would be within the provisions of subdivision (c) or (d) of this section but for the fact that it was executed after the expiration of the period of limitation extended by such agreement, shall be valid and effective according to its terms if entered into after the enactment of the Revenue Act of 1928 and before January 1, 1929.

In the present case it is not true that “ before the expiration of the time prescribed in section 277 for the assessment of the tax, both the Commissioner and the taxpayer had consented in writing to its assessment after such time.” The Commissioner did not sign the document until December 5, 1933. This was after January 1, 1929. Thus the document would not be made valid by the amendments above quoted. Cf. Conference Report, House of Representatives,- 70th Cong., 1st sess., Rept. No. 1882, p. 21. The paper did not become the consent authorized by the statute and it did not serve to revive the statutory period for the assessment of the taxes here in controversy. May 6, 1929, was the last day upon which the Commissioner could have mailed a notice of a deficiency which was legally assessable and collectible. The Commissioner, on July 14, 1932, when the notice of deficiency on which this proceeding is based was mailed, was barred from making an assessment of the taxes represented in the deficiency which he then determined.

The respondent contends however that section 240 (h) (1) of the Revenue Act of 1926, amended by section 501 (a) of the Revenue Act of 1928, applies, and under its provisions the statute of limitations on assessment had not run as to this taxpayer’s taxes for the year 1924 on July 14, 1932, when the notice of deficiency was mailed. The statutory provision is as follows:

SEC. 5 01. AFFILIATED CORPORATIONS-STATUTE OF LIMITATIONS.
(a) Section 240 of the Revenue Act of 1926 is amended by adding at the end thereof a new subdivision to read as follows:
“(h) (1) If a notice under subdivision (a) of section 274 in respect of a deficiency for the taxable year 1922, 1923, 1924, 1925, 1926, or 1927, has been mailed to a corporation, the suspension of the running of the statute of limitations, provided in subdivision (b) of section 277 and in subdivision (1) of section 283, shall apply in the case of corporations with which such corporation made a consolidated return for such taxable year.”

The petitioner filed a consolidated return for the calendar year 1924 and erroneously included therein the income of the Ohio Valley Electric Railway Co., with which it was not affiliated. The Commissioner corrected this error, made one determination of the tax liability of the petitioner and its affiliated companies from which there was no appeal, and also, on December 19, 1929, made a timely determination of a deficiency against the Ohio Valley Electric Railway Co. for 1924. The Ohio Valley Electric Railway Co. filed an appeal with this Board. On May 24, 1932, the Commissioner stipulated before this Board that there was no deficiency against the Ohio Valley Electric Railway Co. for the year 1924. He now contends that since he mailed to the Ohio Valley Electric Railway Co. a notice under subdivision (a) of section 274 in respect of a deficiency for the taxable year 1924, and since the petitioner made a consolidated return for that year with the Ohio Valley Electric Railway Co., the suspension of the running of the statute of limitations provided in subdivision (b) of section 277 and in subdivision (1) of section 283 applies in the case of this petitioner. Section 277 (b) of the Revenue Act of 1926 provides :

The running of the statute of limitations * * * on the making of assessments * * * in respect of any deficiency, shall (after the mailing of a notice under subdivision (a) of section 274) be suspended for the period during which the Commissioner is prohibited from making the assessment * * * and for 60 days thereafter.

Section 283 (1) seems to have no bearing upon this case. It is important to note that sections 240 (h) (1) and 277 (b), relied upon by the respondent, provide for suspension of the running of the statute of limitations. Obviously their effect is limited to cases in which the statute has not already run. The notice of deficiency to the Ohio Valley Electric Railway Co. was mailed on December 19, 1929, after the period for assessment against the petitioner in this case had expired. Where, as here, the statute relating to this petitioner had completely run, it was not still running and, consequently, its running could not be suspended by the mailing of a notice to the Ohio Valley Electric Railway Co. on November 19, 1929. Even at that time the Commissioner would have had to revive the period for assessment against the petitioner in order to make the necessary assessment of the taxes here in controversy. But section 240 (h) (1) does not provide for reviving a period which had already expired and the -Commissioner does not suggest any other way in which this period might have been revived.

Reviewed by the Board.

Decision will be entered for the 'petitioner.

Smith dissents.


author: Murdock:

text:
    Munson Steamship Line, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 46601.
    Promulgated June 19, 1934.

      Edward L. Blackman, Esq., and Frederick E. King, Esq., for the . petitioner.

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

Murdock:

The Commissioner determined a deficiency in income and excess profits taxes for the year 1920 in the amount of $182,-960.49. He made this determination upon the basis of a consolidated return filed by the petitioner for itself and certain subsidiary companies. This proceeding involves only the deficiency in excess profits tax in the amount of $178,980.52. The taxpayer companies filed an agreement with the Commissioner that the petitioner should be liable for all of the tax due. The question at issue before the Board is the amount of the deduction to which the petitioner is entitled under section 23 of the Merchant Marine Act, 1920, for the purpose of ascertaining its net income subject to excess profits tax.

The petitioner is a Hew York corporation which has been, engaged for many years in the steamship and transportation business. It was so engaged in 1920. During the year it owned two vessels, the Walter D. Munson and the Tuscan, together with oilier property, including other vessels, barges, lighters, terminal facilities, and an office building in New York City where it had its principal office and place of business. It also owned all of the outstanding capital stock of eight corporations hereinafter mentioned. The principal stockholders of the petitioner during 1920 were Frank C. Munson, his brother, and his father’s estate. Some stock was also owned by officers and employees of the petitioner and by estates of former officers and employees.

The petitioner caused eight vessels to be built in American shipyards during the period 1916 to 1918. It organized eight corporations during this period under the laws of New York. It sold and transferred to each corporation one of the eight vessels. The name of each vessel was thje same as the first word of the name of the corporation to which it was sold. The cost of each vessel was carried on the petitioner’s books as an investment until the time of sale. The purchase price of each vessel was paid to the petitioner either entirely, or principally, in stock of the purchaser at par; the balance, if any, was paid in cash or in promissory notes of tíre purchaser. The following table shows the name of each vessel, the name of the steamship corporation which owned it, the date each was incorporated, the amount of its capital stock outstanding in 1920, the cost of each vessel to the petitioner, the date of sale, and the amount of the purchase price:

Each of the aforesaid vessels was registered under the laws of the United States throughout 1920 in the name of its owner, with two exceptions. The Mwnisla was lost at sea in 1919 and the Munisla Steamship Corporation purchased another American vessel from the United States Shipping Board on March 27, 1920, to replace it. This latter vessel, also named Mumsla, was registered at the time of purchase and delivery in the name of Munisla Steamship Corporation. The Mmiindies had been engaged in war service and was registered in the name of United States Shipping Board Emergency Fleet Corporation. It was returned to the Munindies Steamship Corporation in 1919, but its registration was not changed to the Munindies Steamship Corporation until August 25, 1920.

Frank C. Munson and John W. Reynolds have been, respectively, president and secretary of the petitioner and of each of the eight subsidiary corporations at all times material hereto. The petitioner and each of the eight companies had a board of directors of five members. Four individuals were directors in each of the companies. Each company had a fifth director who was an employee of the petitioner but was not a director of any of the other companies. The directors of the eight subsidiary companies received no salaries as such. They met in the office of the petitioner to declare dividends. These eight subsidiaries maintained no offices of their own and transacted no shipping business except through the petitioner. The subsidiaries owned no property other than the vessels above mentioned and certain balances due to them from the petitioner on account of the operation of these vessels.

The petitioner operated a fleet of vessels during 1920 which included the Walter D. Mims on and the Tuscan, owned by it, and the eight vessels owned by the subsidiaries. Frank C. Munson directed the operation of this fleet and assigned the vessels to particular services according to their availability. In some instances the vessels of the subsidiaries were operated under formal written time-charter parties, signed by the petitioner and the subsidiary, by which a stipulated charter hire was payable by the petitioner as charterer and the operating expenses, including wages, fees, provisions, stores, insurance, and repairs, were to be borne by the subsidiary as owned. In some instances these vessels were operated by the petitioner without the execution of any written agreement. The petitioner advertised all of the vessels in the fleet, issued all bills of lading, and transacted the business under its own name. It attended to the hiring of the officers and crews, and paid their wages, contracted and paid for all repairs, paid all operating expenses of vessels in the fleet, and collected and received all revenue derived from the operation of the vessels. The earnings of each vessel were apportioned between the petitioner and the owner in amounts determined by Frank C. Mun-son. If a written charter had been entered into, the amount of the charter hire was credited to the account of the owner on the petitioner’s books, and the account of the owner was charged with the amount of the operating expenses which it was required to pay under the terms of the charter. In those cases where no written agreement had been entered into, the petitioner credited to the account of the owner an amount which Frank C. Munson regarded as fair for the use of the vessel, being the amount which he estimated it would have earned in the trade, and the subsidiary was charged with an amount which Frank C. Munson considered proper as representing the operating expenses ordinarily borne by an owner. The balance due each owner in these accounts, on the books of the petitioner, represented the earnings of that owner’s vessel over and above the cost of operation, as determined by Frank C. Munson. When the directors of any of the subsidiary companies declared dividends, the petitioner deposited in the bank account of the company declaring the dividend a sufficient amount to enable the company to pay the dividend to the petitioner on the following day. These transactions were recorded on the books of the respective corporations. Total balances of approximately $3,000,000 were due to the subsidiaries from the petitioner throughout and at the close of 1920.

In 1920 the petitioner entered into a contract with the New York Shipbuilding Corporation of Camden, New Jersey, for the construction of a new ocean-going combination freight and passenger vessel named the Munargo. The vessel was completed in 1921, within the period of three years fixed by regulations of the United States Shipping Board relating to section 23 of the Merchant Marine Act, and was documented under the laws of the United States. The total cost of the vessel was $3,290,365, exclusive of furniture and fittings of the passenger department, and the funds for its construction were furnished by the petitioner. During 1920 the petitioner paid $675,-362.26 to the builder, and additional costs of $219,802.55 were incurred on the builder’s charges during November and December 1920, which were payable in January 1921.

The United States Shipping Board adopted a resolution at a meeting on July 3,1929, as follows:

Whereas, the Munson Steamship Line of New York having filed with this Board an application claiming benefits under Sec. 23 of the Merchant Marine Act, 1920, in aid of the steamship “ Munargo ”, from which application and documents supplemental thereto it appears that applicant embodied these claims in its income tax returns for the year 1920, based on net income earned by it in 1920 from the operation of vessels in foreign trade, the tax on which has been computed by applicant to be about $225,000, the exemption of which, if allowed by the Treasury Department, is subject to a certification from this Board that a new vessel costing not less than $675,000 has been constructed in accord with the requirements of Section 23 of the Merchant Marine Act, 1920; and
Whereas, the Munson Steamship Line has, at a cost exceeding $1,000,000, duly built a new vessel named “ Munargo ” documented under the laws of the United States (Official No. 221839), built in an American shipyard, and completed within the time limit fixed under the rules and regulations ^relating to Sec. 23, Merchant Marine Act, 1920;
Resolved, that the vessel “Munargo” (Official No. 221839), a steel combination freight and passenger vessel, 413 ft. long, with a speed of about 15% knots, is hereby approved both as to type and kind, and generally, for purposes incident to claims under Sec. 23, Merchant Marine Act, 1920, and as required by Article 5, Sec. 3 of the rules relating thereto. The facts set forth in the second preamble hereof are hereby certified to the Secretary of the Treasury as information. Whether the fund to which the tax involved relates arose from the sources and under the circumstances prescribed by Sec. 23, Merchant Marine Act, 1920, and whether the amount claimed by applicant as exempt is in fact exempt, are not certified by this Board.

The net taxable earnings for 1920 of the eight subsidiary corporations above referred to amounted to $1,22-3,319.53, of which $1,187,-613.72 represented net earnings from charter hire of the eight vessels while operated in foreign trade during that year. The petitioner filed a consolidated income tax return for the year 1920 on behalf of itself and its subsidiary corporations, in which it claimed a deduction of $1,384,738.82 under section 23 of the Merchant Marine Act. The respondent disallowed $1,223,592.49 of this deduction and allowed $161,146.33 representing the difference between $185,034.30, the net earnings of the Walter D. Munson in foreign trade in 1920, and $23,887.97, the net loss of the Tuscan in foreign trade in 1920.

The petitioner contends that the deduction allowed by section 23 of the Merchant Marine Act, 1920, for the purpose of ascertaining net income subject to the war profits and excess profits taxes imposed by Title III of the Revenue Act of 1918 includes the equivalent of the net earnings for 1920 from the operation in foreign trade of eight vessels owned by and registered in the name of eight of the petitioner’s subsidiary corporations. The statement of facts contained in the foregoing paragraphs has been abridged from the stipulation of facts filed by the parties and supplemented by some facts found from the testimony. The parties are apparently agreed upon all of the important facts. Thus they seem to agree that: The petitioner was the owner in every sense of the word of the steamships Waiter D. Munson and Tuscan; legal title to the steamships Munalbro, Muniska, Munplace, Munrio, Munsomo, Mundelta, Munaires, and Mwdndies was not held by the petitioner, but each of eight separate corporations held legal title to one of these vessels which it had bought and paid for; all 10 vessels were documented under the laws of the United States and were operated in foreign trade during the year 1920; the petitioner properly set aside and actually invested in a new vessel, built in shipyards in the United States, of a type and kind approved by the Shipping Board, an amount in excess of the war profits and excess profits taxes that would have been payable for the whole group had section 23 of the Merchant Marine Act never been enacted; and two thirds of the cost of the vessel was paid for out of the ordinary funds or capital of the petitioner. Furthermore, the parties are in agreement as to the amount of the net earnings of each of these vessels from its operations in foreign trade in 1920. Thus the question presented to the Board is, Was the petitioner the “ owner ” of the steamships Munalbro, Muniska, Munplace, Munrio, Munsomo, Mundelta, Munaires and Mwnindies within the meaning of that term as used in section 23 of the Merchant Marine Act?

The petitioner argues that section 23 of the Merchant Marine Act is remedial legislation in the form of an amendment to the Revenue Act of 1918 which should be liberally construed in favor of the taxpayer; the regulations promulgated by the United States Shipping Board give to the word “ owner ” an interpretation which includes one having a beneficial interest in the property; all of the money risked in the business carried on by the subsidiary companies was risked by the petitioner; the petitioner exercised complete control over the vessels of its subsidiaries and in substance, although not in form, was the owner of the eight vessels in question within the meaning which Congress intended that word to have in section 23. The petitioner admits that, under a narrow or strict construction of the statute, it is not entitled to the deduction, since, in that sense, it was not the owner of the eight vessels which earned the income in foreign trade.

The United States Shipping Board was authorized and directed by section 19 of the Merchant Marine Act to make all necessary rules and regulations to carry out the provisions of the act. The rules and regulations adopted by the Board on June 28, 1922, relating to section 23, are in part as follows:

Artigue 1.
Waiver of Tax oasr Net Earnings.
1. Scope of the Waiver: The provisions relate to the war profits and excess profits taxes imposed by Title III of the Revenue Act of 191S; in effect, it is, a waiver of such taxes on the net earnings from American vessels operated in foreign trade; and waiver resulting from an allowance, in proper cases, of the deduction of such net earnings for the purpose of ascertaining the owner’s net income subject to such taxes.
2. The Person Entitled: The person entitled must be the owner of the vessel which yielded the “ net earnings ”. The term “ owner of a vessel ” includes a person who has the real ownership of a vessel or of any portion thereof, whether or not encumbered. Where there are two or more owners, each oí them subject to the tax involved is entitled to the benefits allowed by this Section, in proportion to his share of the earnings; but persons owning shares in a corporation which own the vessel, have no right, for that reason to the deduction. “ Net earnings ” accruing to an owner from the charter of a vessel, to the extent it is operated in foreign trade through the period of the charter party, may receive the benefits of this Section.

Title III of the Revenue Act of 1918 imposed a tax, called war profits and excess profits tax, upon corporations only, and not upon individuals. Sec. 301 (a). Therefore, the word “person” in section 23 of the Merchant Marine Act and in the above quoted regulations can refer only to corporations. The regulation would then provide in part: “ [Corporations] owning shares in a corporation which own[s] the vessel, have no right, for that reason to the deduction”. These regulations support the Commissioner’s determination rather than the contention of the petitioner.

The word “ owner ” is an untechnical word (Flink v. Paladini, 279 U.S. 59), and has a variety of meanings. It is not defined in the Merchant Marine Act. Were we to assume that Congress intended it to have its ordinary and everyday meaning (United States v. Kirby Lumber Co., 284 U.S. 1; Welch v. Commissioner, 63 Fed. (2d) 976), the word “ owner ” would not include one whose interest in the property arose through ownership of stock of a corporation which in turn owned the property. To “ own ” means “ to possess; to have or hold as property, appurtenance, or proprium; to have rightful title to, whether legal or natural ”, Webster, New Int. Dic.; “to hold as property; to have a legal or rightful title to; to have; to possess; and an ‘owner’ is one who owns; a rightful proprietor. An owner is not necessarily one owning a fee simple or one having in the property the highest estate it will admit of. One having a lesser estate may be an owner, and, indeed, there may be different estates in the same property vested in different persons, and each be an owner thereof ”, United States v. Ninety-nine Diamonds, 139 Fed. 961. The word may refer not only to one holding the legal title, but also under some circumstances to one having only a beneficial interest in the property.

The petitioner states that it not only had the entire beneficial interest in the eight vessels in question, but it had possession and complete control over them. It argues that the word “ owner ” should be liberally construed to carry out the obvious purpose of the Merchant Marine Act, which was to encourage the development in this country of shipbuilding and a merchant marine. It argues as another reason for a liberal construction in its favor that the act was remedial and a taxing statute. But the act imposed no tax. On the contrary, it granted a deduction or an exemption, and there is a rule of construction that doubts in such statutes are to be resolved in favor of the Government and the deduction or exemption denied unless the taxpayer comes squarely within the terms of the statute. Swan & Finch Co. v. United States, 190 U.S. 143, 146; Cornell v. Coyne, 192 U.S. 418; Charles A. Collin, 1 B.T.A. 305, 307. Thus, assuming but not deciding that the act was “ remedial ”, there is, at best for the petitioner, a conflict of the rules of construction.

The meaning of a word as used at one place in a statute may be different from the meaning of the same word as used at another place in the same statute. Atlantic Cleaners & Dyers, Inc. v. United States, 286 U.S. 427. The intended meaning must be gathered from the connection in which the word is used. Frequently the obvious nature and purpose of a statute may indicate that the legislature intended a word to have some one of several possible meanings. Hyde v. Shine, 199 U.S. 62; American Car & Foundry Co. v. Brassert, 61 Fed. (2d) 162; Warren v. Lower Salt Creek Dist., 316 Ill. 345; 147 N.E. 248. There is a general rule that a corporation is a separate legal entity which is the owner of its assets so that its stockholders can not assert separate ownership of, control over, or right to adverse possession of the property of the corporation. De La Vergne Co. v. German Savings Inst., 175 U.S. 40; Klein v. Board of Supervisors, 282 U.S. 19, 24; Wabash Ry. v. American Refrigerator Co., 7 Fed. (2d) 335; Jones v. Commissioner, 71 Fed. (2d) 214. Occasionally, however, courts have subordinated this rule temporarily and, for special purposes, have treated stockholders as the equitable owners of the property of a corporation. Huron Portland Cement Co. v. Woodworth, 19 Fed. (2d) 530; Southern Pacific Co. v. Lowe, 247 U.S. 330; Gulf Oil Corp. v. Lewellyn, 248 U.S. 71; Berl v. Crutcher, 60 Fed. (2d) 440; The Cimbria, 214 Fed. 131; The Natchez, 236 Fed. 588; Paladini v. Flink, 26 Fed. (2d) 21; aff'd., 279 U.S. 58; The J. B. Austin, Jr., 1 Fed. (2d) 451; Luckenbach S.S. Co. v. Grace & Co., 267 Fed. 676. But in each case the court found some important reason, peculiar to the particular situation presented and dominating the reason for the general rule, which required a departure from that rule. United States v. Milwaukee Refrigerator Transit Co., 142 Fed. 247. These cases do not lay down any general rule of their own to be applied every time the word “ owner ” is used in a statute. Burnet v. Commonwealth Improvement Co., 287 U.S. 415. Careful consideration of section 23 fails to disclose any relation between it and the statutory provisions involved in the cited cases sufficiently close, or any peculiar reasons applicable here so important, as to require a departure from the rule that a corporation is the owner of its property, and a stockholder, even a sole stockholder dominating and controlling the corporation, is not the owner of the property of the corporation. Cf. New Colonial Ice Co. v. Commissioner, 292 U.S. 435.

The encouragement which Congress intended to give shipping in section 23 was obviously limited to corporations. It was further limited to corporate owners of vessels and was also limited to corporate owners of vessels producing net earnings from foreign trade. Why these limitations were imposed is difficult to determine, but they were imposed. The alleged hardship to this petitioner from the construction made by the Commissioner is no greater or more difficult to accept as intentional than others which are quite obvious under the act. In the present case the subsidiaries were the owners of the vessels, both legally and beneficially. They were entitled to the net earnings by reason of their ownership. They were taxable on these net earnings and the excess profits and war profits taxes were imposed upon them, despite their affiliation with the petitioner. Woolford Realty Co. v. Rose, 286 U.S. 319. It was only by agreement that the taxes imposed upon them were to be assessed against and paid by the petitioner on the basis of a consolidated return. Sec. 240, Revenue Act of 1928. The petitioner and each of the eight separate companies had net earnings from vessels engaged in foreign trade, but none of the eight companies set aside any amount for the building of a new ship. The petitioner alone set aside an amount for the building of a new vessel. The amount which it set aside was not only sufficient to offset the profits tax which it would have had to pay on its share of the net earnings of its vessels engaged in foreign trade, but was also' sufficient to more than offset the profits tax imposed by each of the eight separate companies on account of the income of those companies from their vessels engaged in foreign trade. If each of the eight separate companies had complied with section 23, each would have been entitled to some deduction in computing its tax liability. But it does not follow that, because the petitioner set aside a sum larger than was necessary to entitle it to a deduction on account of its own earnings, it is entitled to a deduction in excess of its own earnings from vessels engaged in foreign trade and equal to the sum of the earnings of itself and the eight separate corporations from this source. Affiliation does not enlarge the taxpayer’s right to this deduction. If Congress had intended the parent corporation of an affiliated group to have such a benefit, it would no doubt have made specific provision therefor. Cf. United States v. Delaware & Hudson Co., 213 U.S. 366, 414. Where no such provision was made by the legislature, no other branch of the Government should supply the provision or interpret the act as if it contained such a provision.

The petitioner is contending for a deduction which will offset, inter alia, its own income and reduce its own tax liability, but which is based upon tbe income of a wholly different taxpayer. The petitioner deliberately created the separate corporations and deliberately sold and transferred the vessels to them. Dividends from these corporations were received tax free by the petitioner. The petitioner recognized that it did not own-the vessels, in many instances executed formal time charters under which it operated the vessels, and in every instance paid for its use of the vessels. Whatever might have been the purpose of this arrangement, it was not a mere legal fiction and the ownership by the separate corporations was not fictitious. Cf. Union Petroleum S.S. Co. v. Edwards, 7 Fed. (2d) 301. The meaning of the word “ owned ” as used in section 23 is clear enough and no reason is apparent to enlarge this meaning to include a holding corporation such as the petitioner.

The petitioner raised another issue in the petition, namely, whether the deduction to which it is entitled under section 23 of the Merchant Marine Act, as owner of the vessels Walter D. Munson and Tuscan, is the equivalent of the net earnings of the Walter D. Munson without reducing those earnings by the corresponding net losses of the Tuscan, or whether it is limited to the equivalent of the net amount of the earnings of the two vessels from foreign trade in 1920, as determined by the Commissioner. The point has apparently been abandoned by the petitioner, for it was not even referred to at the hearing or in the petitioner’s brief. The Commissioner contends that the manifest purpose of section 23 was to eliminate from income subject to profits tax only the net income derived by a taxpayer from the operation of its vessels in foreign trade. Under the circumstances we see no reason to disturb the Commissioner’s determination in this regard.

Reviewed by the Board.

Decision will be entered for the respondent.

Smith dissents.

       Sec. 23. That the owner of a vessel documented under the laws of the United States and operated in foreign trade shall, for each of the ten taxable years while so operated, beginning with the first taxable year ending after June 5, 1920, he allowed as a deduction for the purpose of ascertaining his net income subject to the war-profits and excess-profits taxes imposed by Title III of the Revenue Act of 1918 an amount equivalent to the net earnings of such vessel during such taxable year, determined in accordance with rules and regulations to be made by the board: Provided, That such owner shall not be entitled to such deduction unless during such taxable year he invested, or set aside under rules and regulations to he made by the board in a trust fund for investment, in the building in shipyards in the United States of new vessels of a type and kind approved by the board, an amount, to be determined by the Secretary of the Treasury and certified by him to the hoard, equivalent to the war-profits and excess-profits taxes that would have been payable by such owner on account of the net earnings of such vessels but for the deduction allowed under the provisions of this section: Provided further, That at least two-thirds of the cost of any vessel constructed under this paragraph shall be paid for out of the ordinary funds or capital of the person having such vessel constructed. * * * (June 5, 1920, c. 250, §23, 41 Stat. 997.)

       See for the purpose and legislative history of the act: Sec. 1, 41 Stat. 988; Sen. Kept. No. 573, 66th Cong., 2d sess., pp. 1-4 ; 59 Cong. Rec., pt. 7, pp. 7224, 7226, 7296; American-Hawaiian S. S. Co., v. United States, 46 Fed. (2d) 592; H. Rept. 1093, 66 Cong., 2d sess., pp. 10, 11, and 32; 59 Cong. Rec., pt. 8, pp. 8408, 8500.


author: SteRnhagen :

text:
    Alfred E. Hamill, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 71808-71810, 72923-72026.
    Promulgated June 19, 1934.

      Addison 8. Pratt, Esq., for the petitioners.

      Lloyd W. Greason, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith : Arnold M. Ellert; John McCarthy; Stewart S. Hathaway; Howard C. Smith; John Norrish Thorne; and G. Bruce Wallace.

   OPINION.

SteRnhagen :

Since each of these proceedings is derivative from the determination of the partnership income, the partnership will be treated as if it were the single party in interest. On the partnership return for 1930 (not in evidence), it deducted $121,415 as an inventory loss, and this item the respondent disallowed with a somewhat ambiguous statement. At the beginning of the trial the petitioners conceded that the deduction was in any event too large because the partnership had in its computation omitted to apply the first-in first-out rule to securities which had been sold during the year, thus applying to the remaining inventoried securities an improper cost basis. The issue is thus confined to the propriety of a deduction of $92,242.50. This figure represents a “ write-down ” of 10 blocks of securities owned at the end of 1930 to their market value on December 31. The securities being still on hand at that time, such deduction is only available to the partnership if it has the right to the use of an inventory in the computation of its taxable income. This is the issue.

The method of determining taxable income by the use of inventories has always been recognized as special and as involving problems of general administration peculiarly cognizable by the Commissioner. Cf. Atlantic Coast Realty Co., 11 B.T.A. 416. Section 22 (c), Revenue Act of 1928, is necessarily the foundation for any claim of a taxpayer relating to an inventory. Like its predecessors in earlier statutes, the section is as follows:

Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

Fortified with such a clear sanction in the statutory grant of power, the administrative determination in such a case must survive all but the strongest attack. Short of being arbitrary or capricious or based on a clear demonstration of error, the determination in any single instance ought not to be disturbed. This is not a matter of jurisdiction, for the Board clearly has the power of review, Blair v. Oesterlein Machine Co., 275 U.S. 220, but is rather an attitude of the Board in the exercise of its jurisdiction not to interfere lightly with general administrative matters which the Congress has entrusted to the Commissioner’s discretion. In Lucas v. Kansas City Structural Steel Co., 281 U.S. 264, the Supreme Court said, in 1930:

First, whether in a particular business inventories are necessary for the determination of income is a practical question left by the statute to the judgment of the Commissioner. On that account he and the company did not differ. In every year, it, without any question or protest, used inventories in making its return. The dispute was merely on the method of valuation to be adopted for that part of the stock which it calls its normal stock.

And in closing its opinion, the Court said: “The company’s case falls far short of meeting the heavy burden of proving that the Commissioner’s action was plainly arbitrary.”

In 1931 the Circuit Court of Appeals for the Fourth Circuit said, in Finance & Guaranty Co. v. Commissioner, 50 Fed. (2d) 1061:

As will be seen from the Act, Congress plainly placed the question of the proper use of inventories within the opinion of the Commissioner, and that question was left by Congress to the discretion of the Commissioner. In such a case a heavy burden of proving that the Commissioner’s action was plainly arbitrary rests upon the taxpayer. Lucas v. Kansas City Structural Steel Co., 281 U.S. 284. Where a statute commits to an executive department of the government a duty required in the exercise of an administrative discretion the decision of the executive department, as to such questions is final and conclusive, unless it is clearly proven arbitrary or capricious or fraudulent, or involving a mistake of law. * * * A study of the records leads us to the conclusion that the action of the Commissioner was not only not arbitrary or capricious hut was correct.

These cases indicate a heavy burden upon the taxpayer who undertakes to overthrow an administrative determination in respect of inventories — a burden undoubtedly heavier than that of overthrowing a purely factual determination upon which the ultimate determination must depend. It was apparently in the latter class of dispute that the Circuit Court of Appeals for the Second Circuit regarded Harriman Nat. Bank v. Commissioner, 43 Fed. (2d) 950, although the dissenting opinion therein supports a doubt.

The difficulty of having such questions as this determined judicially, whether by the Board or by the courts, is manifest. Riverside Mfg. Co. v. United States, 67 Ct. Cls. 117; certiorari denied, 279 U.S. 863; Clark Distilling Co. v. United States, 66 Ct. Cls. 726; certiorari denied, 279 U.S. 868. The statute apparently contemplates not so much the right of taxpayers to use inventories as their duty to do so when necessary clearly to determine income, together with a power in the Commissioner to enforce the duty, Thomas Shoe Co., 1 B.T.A. 124. While this does not justify the Commissioner in arbitrarily requiring inventory in one case and not in another similarly situated, the issue here is not framed along that line. The language of the statute alone would give no right to a taxpayer to demand the use of an inventory if his income could be clearly determined without it. This Board has no data, outside the evidence in any case, to indicate whether as to any taxpayer or class of taxpayers inventories are necessary.

The Commissioner, however, has not restricted the use of inventories to cases of'diecessity, but has made their use permissive to all who meet the conditions prescribed by his general regulations. Perhaps we should assume from Regulations 74, article 105, that as to all dealers therein described the use of inventories has been found to be necessary to a clear determination of income, although it seems hard to believe that frequently income of such a dealer could not be accurately computed by awaiting the ultimate disposition of the securities and then offsetting cost against sale price. The regulation is as follows:

akt. 105. Inventories by dealers in securities. — A dealer in securities, who in his books o£ account regularly inventories unsold securities on hand either—
(a) At cost;
(b) At cost or market, whichever is lower; or
(c) At market value,
may make his return upon the basis upon which his accounts are kept; provided that a description of the method employed shall be included in or attached to the return, that all the securities must be inventoried by the same method, and that such method must be adhered to in subsequent years, unless another be authorized by the Commissioner. For the purpose of this rule a dealer in securities is a merchant of securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. If such business is simply a branch of the activities carried on by such person, the securities inventoried as here provided may include only those held for purposes of resale and not for investment. Taxpayers who buy and sell or hold securities for investment or speculation and not in the course of an established business, and' officers of corporations and members of partnerships who in their individual capacities buy and sell securities, are not dealers in securities within the meaning of this rule.

The petitioners have presented their case largely as if the only question to be determined is whether the partnership was in 1930 a dealer in securities, an affirmative decision on that question resulting in the approval of the deduction claimed. The issue, however, is not so simple, and it has not been so simply pleaded. Claimed under article 105, the deduction must be brought in all respects within it. It is not enough that the taxpayer has bought some securities for resale, as is clear from the evidence, at least as to some of the comparatively small number of securities on hand December 31, 1930. Even if, by such evidence, he is to be held to be a dealer pro tanto, he must also show that the other conditions imposed by the regulation upon such a dealer have been fulfilled. The partnership predicates its argument largely upon the postulate that its character as a dealer has existed since 1874 because of its commercial paper business, which is a large part of the whole. But, so far as this record shows, it has never accounted for its commercial paper transactions by the inventory method and has never used such method in its tax returns. Furthermore, it does not appear that the inventory method has been consistently applied to the small part of the business consisting of buying and selling other “ securities ”, even assuming that the segregation of such part is practical and has been made. “ What the inventory practice is is of some importance; that the practice should be uniform is of the highest importance.” Thomas Shoe Co., 1 B.T.A. 124. The Circuit Court of Appeals, in Hammam, Nat. Bank v. Commissioner, supra, held that a bank which, in addition to its general banking business, was a dealer in securities to a large and substantial extent was, upon the evidence, .entitled to use an inventory including short term Government notes; but we do not understand that opinion to hold that where the portion of the business is slight the Commissioner is equally required to permit inventories to be used. Sere the proportion of business to which the inventory is sought to be applied comprises less than one half of one percent of the total business. The distinction between commercial paper and the partnership’s dealings therein, on the one hand, and securities (stocks, bonds, equipment trust notes, etc.), and the partnership’s diverse methods of doing business in relation thereto, on the other hand, is subtle. The evidence in this case leaves the classification not clear or free from doubt. There is substantial room for confusion in an attempt to vary the treatment for tax purposes of the activities of a single taxpayer who in the same year engages in underwriting, in syndicate and pool participation, in brokerage, in financing, and in purchase and sale. Trading, dealing, investment, and speculation are not sharply defined. We can readily believe that there would be substantial administrative difficulty in auditing the petitioner’s accounts for the purpose of determining income, part of which is to be based on inventories and most of which is not. As to most of its business, it appears that the turnover is so rapid that there is no occasion for the use of inventory.

The conclusion, therefore, must be that the record is insufficient to establish either the necessity of inventories as contemplated by the statute or the fulfillment of the condition prescribed by the Commissioner in his regulations for the permission to use inventories. The determination of the deficiency is, therefore, sustained.

Judgment will be entered under Bule 50.

       The difficulty is illustrated in the following cases Involving inventory of securities.: Clinton Graham, 1 B.T.A. 775; Pan-American Bank & Trust Co., 5 B.T.A. 839; Franklin Q. Brown, 9 B.T.A. 965; Clinton Gilbert, Jr., Executor, 20 B.T.A. 765; Adirondack Securities Corp., 23 B.T.A. 61; Northeastern Surety Co., 29 B.T.A. 297; Donander Co., 29 B.T.A. 312; Oil Shares, Inc., 29 B.T.A. 664; C E. Wilson, 29 B.T.A. 1022; Estate of Harry E. R. Hall, 29 B.T.A. 1255.


author: Black:

text:
    Erskine Hewitt, Petitioner, v. Commissioner of Internar Revenue, Respondent.
    Docket Nos. 57032, 63141.
    Promulgated June 19, 1934.

      Francis J. Sweeney, Esq., for the petitioner.

      W. F. Wattles, Esq., and Bernard D. Daniels, Esq., for the respondent.
   OPINION.

Black:

These proceedings, duly consolidated, are for the rede-termination of deficiencies in income taxes for the years 1928 and 1929 in the amounts of $7,335.87 and $5,877.97, respectively. The amounts in controversy are $6,125 for 1928 and $5,000 for 1929.

The question involved is whether the respondent erred in including in petitioner’s income $24,500 in 1928 and $25,000 in 1929 as interest received by petitioner in those years on certain bonds purchased by petitioner at various times between 1921 and 1928, when, at the time of purchase, the obligor of the bonds had been in default as to interest payments since July 2, 1913. The facts set forth are summarized from a stipulation of facts submitted by the parties.

Petitioner is an individual, residing at Ringwood Manor, Passaic County, New Jersey.

On January 3,1921, and certain intervening dates up to and including May 10, 1928, petitioner purchased $980,000 face amount of first mortgage gold 5 percent (formerly 6’s) bonds of the Guayaquil Quito Railway Co., a New Jersey corporation which owns and operates a railroad in Ecuador, dated January 2, 1899, and maturing January 2, 1932, together with $546,925 defaulted matured interest coupons on said bonds from July 2, 1913, to the several dates of purchase, paying therefor the sum of $261,086.23. On October 23, 1928, petitioner purchased $10,000 face amount of the same issue of bonds, together with $7,500 defaulted matured interest coupons on said bonds from January 2, 1914, paying therefor the sum of $6,486.43. On December 26, 1928, petitioner again purchased $10,000 face amount of the same issue of bonds, together with $7,500 defaulted matured interest coupons on said bonds from January 2,1914, paying therefor the sum of $6,537.50. A schedule showing in detail the several dates of the above-mentioned purchases and the par amount of bonds and defaulted matured interest coupons purchased, together with the amounts paid therefor, is included in the stipulation. It is believed unnecessary to set it out here in detail.

The Guayaquil & Quito Railway Co. has been in default as to the sinlring fund provisions on its bonds and the default as to sinking fund payments continued from July 1909 to the year 1928, when a one-half year’s sinking fund payment was made.

The Guayaquil <£) Quito Railway Co. has been in default as to interest on its bonds and the default upon the interest payments continued from July 2, 1913, to July 2, 1928, when the July 2, 1913, coupon was paid, and on January 2, 1929, the Guayaquil & Quito Railway Co. paid the interest coupon due January 2, 1914.

The default of the Guayaquil & Quito Railway Co. as to interest payments on said bonds, the principal of which was due January 2, 1932, lias continued with respect to matured interest coupons dated July 2, 1914, and all subsequent coupons to date of maturity, January 2, 1932. On January 2, 1932, the Guayaquil & Quito Railway Co. defaulted and failed to pay the principal and interest then and theretofore due and has continued the defaults with respect to both interest and principal.

On July 2, 1928, petitioner received the sum of $24,500 in payment of the defaulted matured interest coupons due July 2, 1913, on the aforesaid bonds and matured interest coupons which the petitioner had theretofore purchased and then owned.

On January 2, 1929, petitioner received the sum of $25,000 in payment of the defaulted matured interest coupons due January 2, 1914, on the aforesaid bonds and matured interest coupons which the petitioner had theretofore purchased and then owned.

In determining the deficiencies proposed in the deficiency notices, the respondent treated the entire amount of the aforesaid proceeds received on July 2, 1928, with respect to the July 2, 1913, coupon in the amount of $24,500 and on January 2, 1929, with respect to the January 2, 1914, coupon in the amount of $25,000, as taxable income to petitioner.

The bonds and defaulted matured interest coupons purchased by the petitioner have not been sold or otherwise disposed of, except, as heretofore stated, that on July 2, 1928, the July 2, 1913, coupons in the amount of $24,500 and on January 2, 1929, the January 2, 1914, coupons in the amount of $25,000, were paid.

The Guayaquil & Quito Railway Co. first mortgage 5 percent gold bonds (formerly 6Js) are listed, and at all times mentioned in these proceedings have been traded on the London Stock Exchange at a price range from 1923 to 1931, inclusive, as follows:

The quotations represent the price of both the bonds and matured interest coupons purchased. There were no sales of the Guayaquil & Quito Kail way Co. first mortgage 5 percent gold bonds (formerly 6’s) on July 2, 1928. During the month of June 1928 there was a sale at 55. The nearest sale to January 2, 1929, of the Guayaquil & Quito Kailway Co. first mortgage 5 percent gold bonds (formerly 6’s) was on December 26,1928, at 65%.

In the statement attached to the deficiency notice in Docket No. 57032, the respondent advised petitioner as follows:

Relative to interest of $24,500.00 received on bonds of the Guayaquil and Quito Railway Company which was included in net income by the revenue agent, you are informed that inasmuch as you report on a cash receipt and disbursement basis the entire amount of interest received from this source is held to be taxable income for 1928. Furthermore, it has not been shown what part of the original cost of the bonds was for unpaid coupons. The findings of the examining ofiicer are, therefore, sustained.

Petitioner contends that the amounts received should be treated as a return of capital, and that he should not be considered as having realized any income from the collection of certain of the defaulted matured interest coupons attached until his entire investment of $274,110.16 has been returned to him. In support of this contention petitioner cites Doyle v. Mitchell Bros. Co., 247 U.S. 179; Eisner v. Macomber, 252 U.S. 189; La Belle Iron Works v. United States, 256 U.S. 377; Burnet v. Logan, 283 U.S. 404; Collin v. Commissioner, 32 Fed. (2d) 753; Commissioner v. Garber, 50 Fed. (2d) 588; Kirkland v. Burnet, 57 Fed. (2d) 608.

The respondent contends that what petitioner received was “interest”; that under sections 22 (a) and 42 of the Revenue Act of 1928 and article 333, Regulations 74, the amounts received should be considered as income in the year in which received; and that “ At best, the most petitioner could hope to have treated as a return of capital upon the payment of interest coupons, would be the cost of those coupons. But no showing as to such cost has been made. Consequently, he can not prevail in this action.”

We do not agree with the contention of respondent that the amounts of $24,500 and $25,000 received in 1928 and 1929, respectively, are taxable. These amounts, under the facts stipulated in these proceedings, did not, in petitioner’s hands, represent “ interest ” as that term is used in section 22 (a) of the Revenue Act of 1928, and defined in Greenville Textile Supply Co., 1 B.T.A. 152, and Joseph W. Bettendorf, 3 B.T.A. 378. Petitioner purchased both the bonds and the coupons after the latter had matured and were in default. Such coupons, in petitioner’s hands, were capital assets. Cf. L. A. Thompson Scenic Ry. Co., 9 B.T.A. 1203, last paragraph. To the same effect is Sol. Op. 46, C.B. No. 3, p. 90. Cf. John Hancock, Mutual Life Ins. Co., 10 B.T.A. 736.

The accumulated defaulted interest was just as much an obligation of the obligor corporation as the principal of the bonds. They did not represent different classes of property where it is contemplated that an apportionment of costs be made, if practicable, in accordance with the respective fair market values of each at the time of purchase. Cf. Glenn H. Curtiss, 21 B.T.A. 629; aff'd., 57 Fed. (2d) 847.

This holding we think is borne out by the fact that the price quotations shown in our findings of fact in this opinion are in single figures and represent the price of both the bonds and matured interest coupons attached. In other words, when the bonds, with the defaulted interest coupons attached, were sold on the London Stock Exchange they were sold as one single piece of property and no attempt was made to quote the bonds at one figure and the defaulted interest coupons at another figure. Under these stipulated facts there is no basis for apportioning the cost between the face value of the bonds and accumulated interest evidenced by defaulted coupons attached to the bonds. We think, therefore, that petitioner is entitled to recover his capital cost before there would be a realization of income. It js plain that the amounts received from the collection of the interest coupons in question were much less than a return of petitioner’s capital investment. The situation we have before us in the instant case should not be confused with that where the owner of bonds purchases them before there is any default in interest. In such a case there is of course no purchase of defaulted interest and in subsequent years if there is a default in interest, which is subsequently paid, it is income to the owner of the bonds in the year in which it is paid. Cf. London v. Commissioner, 59 Fed. (2d) 989, last paragraph of the court’s opinion.

Article 333 of Regulations 74, Revenue Act of 1928, deals with that sort of a situation wherein it says: “ Defaulted coupons are income for the year in which paid.” Respondent has cited this regulation in his brief in support of his contention that the defaulted interest collected by petitioner in the instant case is income. However, it seems clear that the cited regulation has no application to a situation where a taxpayer purchases bonds with interest coupons attached, already defaulted. In such a situation the purchase of the defaulted interest coupons is, as we have already endeavored to point out, as much a capital transaction as the purchase of the principal obligation of the bonds.

We hold, therefore, that petitioner, in collecting the 1913 and 1914 interest coupons, owing to the position of purchaser thereof which he occupied, was not collecting interest within the meaning of that term as used in the statute, but was recovering a part of his capital investment. The amounts received being less than the taxpayer’s capital investment, there was no taxable income. Cf. Drier v. Commissioner, 72 Fed. (2d) 76.

Petitioner does not contest some other minor adjustments made by the Commissioner.

Reviewed by the Board.

Decision will be entered under Rule 50.