text:
    Walter F. Haass, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54818.
    Promulgated January 24, 1934.

      Harry Allen, Esq., and Harry B. Sutter, Esq., for the petitioner.

      Owen W. Swecker, Esq., for the respondent.
   OPINION.

Adams: The petitioner contends that since his proportionate interest in the company was changed as a result of the consummation of the plan outlined, he has sustained “ a loss equal to the cost to him of the two-thirds of his original stock given to new capital, plus the proportion of the cost of the one-twelfth of his original stock surrendered to the Company’s treasurer which the stock issued for the new capital bore to the outstanding stock of the Company after the transaction, less the increment to the value of his retained stock by reason of the addition of the new capital.” Stated differently and in terms of dollars and cents, petitioner says he is entitled to deduct $20,704.94 instead of $22,500 originally claimed on his return. He cites the decisions of Wright v. Commissioner, 47 Fed. (2d) 871; affirming and modifying the Board’s decision in George M. Wright, 18 B.T.A. 471; Commissioner v. Burdick, 59 Fed. (2d) 395; affirming the Board’s decision in Helene Baldwin Burdick, Executrix, 20 B.T.A. 742; and City Builders Finance Co., 21 B.T.A. 800, as supporting his position.

The respondent contends that the transaction falls clearly within the terms of section 112 (b) (3) of the Revenue Act of 1928; that the term “ reorganization ” includes a recapitalization, section 112 (i) (1); that the agreement under which the reorganization and recapitalization was effected was entered into by all the stockholders and the corporation; that the stock was deposited with the trustees for the use of the corporation; that the corporation canceled the old stock and issued in lieu thereof new shares of class A and class B stock to the same stockholders; that these facts show a reorganization was accomplished; and that under section 112 (b) (3) no gain or loss was realized by petitioner upon the exchange of preferred and common stocks for class A and class B stocks. Respondent cites Benjamin W. Fredericks, 21 B.T.A. 433; Charles M. Haft, 20 B.T.A. 431; and Edith Scoville, 18 B.T.A. 261, and asserts that the decision in the Wright case, supra, is not in point. He directs attention to the circumstances considered in the Burdich case, supra, which would, according to the Board, constitute a reorganization, and contends that this proceeding falls squarely within the circumstances there considered.

In determining this question we must first consider whether the transaction amounted to a reorganization as defined in section 112 (i). The first two situations covered in the statutory definition are inapplicable because only one corporation is involved, but either (0) or (D) thereof could apply, given the proper circumstances. Considering the facts before us, it is obvious that if there has been a reorganization of the company it must have occurred as a result of a recapitalization.

A recapitalization connotes a change or a readjustment in the capital structure, either by an increase or by a decrease of the outstanding capital stock and bonds. Cook on Corporations, 8th ed., vol. 5, p. 4103, sec. 883, defines a reorganization as “ a business arrangement whereby the stock and bonds of the compan}'- are readjusted as to amount, income, or priority, or * * *. An agreement * * * to scale down the securities, is generally held not binding on any stockholder or bondholder who objects. * * * This mode of reorganization is hut a recapitalisation. It is a voluntary agreement of all stockholders and creditors to change and increase or decrease the capitalization or debts, or both.” (Italics supplied.)

In this proceeding it is clear that there was a change in the capital structure of the company. Prior to August 1928 it had an authorized capital of 3,000 shares of common stock of no par value and 1,500 shares of preferred stock of $100 par value. After the consummation of the agreement, the capital structure consisted of 3,000 shares of class B, no par stock, 1,000 shares class A, no par stock, and a proposed plan for the issuance of $50,000 of six-year 6 percent debenture notes to be used to liquidate accounts of the company.

The fact that the plan agreed to by the stockholders and the company provided for trustees who were to act for certain purposes does not bring this proceeding within the doctrine of the Wright and the Burdich cases, supra. There was no surrender of stock for the purpose of bringing in a new management; the surrender was for the purpose of reorganizing and refinancing the company. If we consider only the first step in the plan agreed to, namely, the 75 percent reduction, the stockholders would be in exactly the same position as that obtaining in Benjamin W. Fredericks, supra, affirmed in Kistler v. Burnet, 58 Fed. (2d) 687, where the Board held that a 25 percent reduction in second preferred stock outstanding, together with a change in value of common stock from $100 par to no par, and the issuance of 200 shares of no par common for each share of outstanding common of $100 par value, constituted a recapitalization, with no gain or loss to the petitioner.

The question naturally arises, therefore, whether the purchase of additional stock by petitioner alters the situation and justifies the deduction of 75 percent of the original cost of his stock as a loss. The mere statement of the question indicates its weakness. Petitioner has simply invested an additional $7,500 in the company as a result of the refinancing necessary to continue operations. There has been a recapitalization of the company, and since the definition of a reorganization includes a recapitalization, petitioner is governed by the statutory provisions applicable to reorganizations.

The exchange of stock for stock within the meaning of section 112 (b) (3), supra, occurred when petitioner turned in his shares of preferred and common, receiving in exchange therefore the new class A and class B stock of the company. His proportionate interest in the company was unchanged at this point. Upon the investment of the additional $7,500 his proportionate interest changed in accordance with lfis increased investment. After the consummation of the plan petitioner had a capital investment of $37,500, represented by class A and class B stock then in his possession. Gain or loss from his investment will result upon the sale or other disposition thereof.

In a recent decision, H. E. Muchnic, Administrator, 29 B.T.A. 163, the respondent proposed to tax the petitioner upon a gain realized from a recapitalization. The Board refused to permit the taxing of the gain because the readjustment of existing interests through the issuance of preferred stock and the reduction of common stock resulted in a recapitalization, and under section 112 (b) (3) no gain or loss could be recognized. See also Charles A. Gordon, 1 B.T.A. 1223; Fred D. Cock, 2 B.T.A. 1044; Tom S. Craven, 6 B.T.A. 373.

The City Builders Finance Co., supra, cited by petitioner, is clearly distinguishable on its facts from the instant proceeding.

Decision will be entered for the respondent.

       Sec. 112. (b) Exchanges .solely in kina.—
      *******
      (3) Stock for stock in reorganization. — No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

       Sec. 112. (i) Definition of reorganisation, — As used in this section and sections 113 and 115—
      (1) The term “ reorganization ” means (A) a merger or consolidation (including the acquisition by one corporation of at least a majority of the voting stock and at least a majority of the total number of shares of all other classes of stock of another corporation, or substantially all the properties of another corporation), or (B) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor or its stockholders or both are in control of the corporation to which the assets are transferred, or (C) a recapitalization, or (D) a mere change in identity, form, or place of organization, however effected.


source: Caselaw Access Project

author: Trammell :

license: Public Domain

text:
    Winston Brothers Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 59270.
    Promulgated January 24, 1934.

      Howe P. Coohrran, Esg., for the petitioner.

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

Trammell :

This is a proceeding for the redetermination of a deficiency in income tax for the year 1928 in the amount, of $21,092.54

Three errors were assigned in the petition, but at the hearing petitioner waived two of the assignments, leaving for consideration here only the allegation that “ The Commissioner erred in computing a profit on stock or a liquidation of $147,114.72,” which allegation was denied by the respondent in his answer.

This proceeding was heard on March 9, 1933, and thereafter on August 23, 1933, the Board’s first report was promulgated and published at 28 B.T.A. 1247. Pursuant thereto, decision in favor of the respondent was duly entered August 28, 1933. On September 13, 1933, the petitioner filed a motion for reconsideration, in which it sought to have our findings of fact modified and the decision reversed. In so far as it requested reconsideration of the case, the motion was granted, and the decision entered August 28, 1933, vacated and set aside.

All the facts in this case were stipulated by the parties. However, the stipulation consists in part of documents appended thereto as exhibits, and these exhibits record the transactions involved. The stipulation, together with the exhibits mentioned, is by reference here adopted in full as our findings of fact, and for convenience we set out hereinbelow only such facts as we consider material to a discussion of the issue presented.

The petitioner is a Minnesota corporation, with its principal office at Minneapolis. Prior to September 1, 1928, the petitioner owned 4,872 out of a total of 7,124 shares, or slightly more than 68 percent of the outstanding common stock of the Winston-Dear Co., and none of its preferred stock.

On July 27,1928, notices of special meetings to be held on August 9, 1928, were sent to the common stockholders of the petitioner and of the Winston-Dear Co. The special meetings were called to consider and vote on a proposed plan of reorganization of the petitioner and the Winston-Dear Co. by the exchange of all the properties of the latter corporation, subject to its liabilities, for common stock of the petitioner.

This plan of reorganization also contemplated the issuance by the petitioner of its preferred stock to the preferred stockholders of the Winston-Dear Co. for an equal amount of preferred stock of the latter company.

At the special meeting of the stockholders of both the petitioner and the Winston-Dear Co. on August 9, 1928, resolutions were adopted approving the proposed plan of reorganization and authorizing and directing the officers of each corporation to execute all instruments and to do all other things necessary and proper to renden the plan of reorganization effective and to consummate the same.

The plan of reorganization contemplated the acquisition by the petitioner of all the business and assets of the Winston-Dear Co. as of December 1,1928, subject to all of its liabilities and obligations, in exchange for 1,803 shares of common stock and 1,116 shares of preferred stock of the petitioner, and the immediate distribution of the stock so issued to the stockholders of the Winston-Dear Co., including the petitioner, as follows: The issuance to the preferred stockholders of the Winston-Dear Co. of an equal number of shares of the preferred stock of the petitioner, and the issuance to the common stockholders of the Winston-Dear Co., including the petitioner, of their pro rata share of the 1,803 shares of the common stock of the petitioner.

The resolution adopted by the stockholders of the Winston-Dear Co. further provided that, when and as the plan of reorganization should be consummated, the corporation should dissolve, and its officers were authorized to take all steps necessary to bring about the dissolution.

At the special meeting of the petitioner’s stockholders a resolution was also adopted authorizing the issuance of 1,116 shares of its preferred stock to take up and in exchange for the same number of outstanding shares of the preferred stock of the Winston-Dear Co.

A contract and bill of sale was executed by both corporations on September 1, 1928, carrying out the plan of consolidation. On the same date a joint meeting of the stockholders of both corporations approved the contract and bill of sale.

On September 1,1928, the petitioner acquired all the assets, subject to all the liabilities, of the Winston-Dear Co. in exchange for 1,803 shares of the petitioner’s common stock and 1,116 shares of its preferred stock. The preferred stock of the petitioner was turned over to the preferred stockholders of the Winston-Dear Co., share for share. The 1,803 shares of the petitioner’s common stock issued to the Winston-Dear Co. for its assets were ratably distributed by the Winston-Dear Co. to its common stockholders immediately upon receipt.

As a part of the 1,803 shares of common stock so issued by the petitioner on September 1, 1928, it issued certificate No. 124, representing 1,232 shares, which certificate the xaetitioner received back as its pro rata portion of the distribution of the 1,803 shares. The minority stockholders of the Winston-Dear Co. received 571 shares of the petitioner’s common stock as their pro rata portions of the distribution of the 1,803 shares. At the same time the stockholders of Winston-Dear Co., including the petitioner, surrendered or turned in their stock in that corporation and it was dissolved.

The minutes of the joint meeting of the stockholders of the Winston Brothers Co. and Winston-Dear Co. on September 6, 1928, record the fact that certificate No. 124 for 1,232 shares of common stock of the Winston Brothers Co., above mentioned, was received back by that company for cancellation as an offset to its account with the Winston-Dear Co.’s stock.

The petitioner’s complaint in respect to our findings of fact, we think, is without merit, since the facts were stipulated by the parties and we have by reference adopted their stipulation in full and made it our findings of fact.

The issue here is based upon the respondent’s determination that the petitioner derived a profit in the amount of $147,114.72 by way of a liquidating dividend received September 1, 1928, on the stock it owned in the Winston-Dear Co., and that such profit is recognizable for tax purposes under the provisions of section 112 of the Revenue Act of 1928. The petitioner makes no contention that respondent’s computation of the gain is erroneous, nor that it did not in fact derive the amount of gain alleged, but takes the position that neither gain nor loss under the circumstances is recognizable under the provisions of section 112.

Section 112 of the Revenue Act of 1928, in subdivision (a), lays down the general rule that upon the sale or exchange of property the entire amount of the gain or loss shall be recognized, except as thereinafter provided. The exception relied upon by the petitioner here is embodied in subdivision (b) (8) of that section, which reads as follows:

(3) Stock fob stock on reorganization. — No gain or loss shall be recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.

The petitioner takes the position that the facts of this case bring it squarely within the quoted provisions of the statute, since the transaction admittedly was in pursuance of a plan of reorganization, both the petitioner and the Winston-Dear Co. being parties to the reorganization, and the petitioner exchanged the stock which it owned in the Winston-Dear Co. for shares of its own stock.

The respondent contends that the transaction whereby the petitioner acquired all the assets of the Winston-Dear Co. as of September 1, 1928, was a complete liquidation within the meaning of section 115 (c) of the 1928 Act, resulting in a taxable profit to the petitioner; or, in other words, that the petitioner has failed to bring itself within the nonrecognition provisions of the quoted statute, and that the transaction constituted a liquidating dividend taxable under section 115 (c).

Kespondent argues that the substance of the transaction involved is that the petitioner issued 1,116 shares of its preferred stock, share for share, to the preferred stockholders of the Winston-Dear Co., and 571 shares of its common stock to the minority common stockholders of said company and received in liquidation the assets of the Winston-Dear Co. in return for the common stock of that company owned by the petitioner. While respondent concedes, as stipulated, that the petitioner issued certificate No. 124, representing 1,232 shares of its common stock, and delivered the certificate to the secretary of the Winston-Dear Co., who immediately turned it back to the petitioner for cancellation, it is argued that this action was nothing more than a mere device to escape tax on the gain realized by the petitioner. The effect of this argument is that we should look through the form to the substance of the transaction and regard it as constituting a liquidating dividend from which petitioner derived the admitted profit.

In the circumstances of this case, we think the rule invoked is not. applicable. Any taxpayer is entitled to conduct his business or to carry out a transaction in such manner as to avoid tax liability if he may do so lawfully, and there is no suggestion that the transaction involved here was in any way in violation of law. It is also true that a group of individuals who elect to carry on a business enterprise in corporate form not only must suffer the disadvantages, but are entitled to the benefits which flow therefrom.

On reconsideration of this question it is our opinion that, since the petitioner exchanged the stock which it owned in the Winston-Dear Co. for shares of its own stock held by the latter company in pursuance of a plan of reorganization, to which reorganization both corporations were parties, the transaction comes within the express language of section 112 (b) (3), supra, and the profit derived is not recognizable for tax purposes. -

Another question in this connection is suggested by the fact that stock certificate No. 124, issued by the petitioner as part of the consideration paid for the assets of the Winston-Dear Co., was admittedly received back by the petitioner for cancellation, in pursuance of the general plan of reorganization, and since the stipulation of the parties shows that the transaction was carried out in accordance with such plan, we must assume that the certificate was canceled by the petitioner when so received back. This act of cancellation of its own stock definitely terminated the investment which the petitioner had in stock of the Winston-Dear Co., and which investment was continued in or represented by the shares of its own stock received upon the exchange, up to the moment of actual cancellation.

It is argued that if the petitioner did not derive recognizable gain from the exchange of the Winston-Dear stock for its own stock, it derived taxable gain immediately thereafter and as a part of the same transaction upon the coincidental cancellation of its stock which terminated its investment. We think, however, that a corporation can neither realize taxable gain nor sustain deductible loss from the mere cancellation of shares of its own stock. Such cancellation is not' a “ sale or other disposition ” of such stock as is referred to in section 113. The ownership did not pass to others.

It has also been suggested that the issue in this case, in the last analysis, is whether a corporation may realize a taxable gain from dealing in its own stock. This question has been decided in the affirmative, under varying facts, in Walville Lumber Co. v. Commissioner, 35 Fed. (2d) 445; Commissioner v. Woods Machine Co., 57 Fed. (2d) 635, certiorari denied, 287 U.S. 613; Commissioner v. Boca Ciega Development Co., 66 Fed. (2d) 1004; Houghton & Dutton Co., 26 B.T.A. 52.

. Conceding, however, that a corporation may under certain circumstances derive gain or sustain loss from dealing in its own stock, and in this case it is admitted that there was a gain, such gain in this transaction is not taxable under section 112 (b) (3). The general rule as to the recognition of taxable gain or loss is not applicable when the facts in a case bring it under the above statutory provision.

Reviewed by the Board.

Judgment will be entered for the petitioner.


author: Lansdon:

text:
    Shamrock Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 22752.
    Promulgated January 24, 1934.

      Harry G. Weeks, Es.q., and John B. King, Esq., for the petitioner.

      8. 8. Faulkner, Esq., and B. B. Gcmnon, Esq., for the respondent.
   OPINION.

Lansdon:

The respondent asserted deficiencies in income and excess profits taxes for the years 1919 and 1920, in the respective amounts of $36,476.09 and $118,513.16. The petitioner contends (1) that the appeal has not been prosecuted by the taxpayer; (2) that the determination and collection of the deficiencies are barred by the statute of limitations; (3) that the deductions for amortization of leases in both years should be allowed; (4) that certain notes received for shares of capital stock should be included in the computation of invested capital for each of the taxable years; and (5) that the Shamrock Oil Co. and the joint stock association operating under the name of Chapman-Clark-Harbin, Trustees, were affiliated in 1920. At the hearing issues (3) and (4) were settled by stipulating that the petitioner was entitled to deductions from gross income for 1919 and 1920 in the respective amounts of $71,622.79 and $27,047.85, representing losses from amortization of nonproducing oil and gas leases, and that notes totaling $490,123.95 should be included in the computation of petitioner’s invested capital for each of the years under review. The petitioner has abandoned its fifth allegation of error. It follows, therefore, that only issues (1) and (2), relating respectively to the jurisdiction of the Board and the question of limitation, remain for consideration.

The substance of petitioner’s appeal as to issue (1) is that the proceeding was not instituted and has not been prosecuted by the taxpayer against which the respondent has asserted the deficiencies in question. As to this issue, the material facts are undisputed and are submitted for our decision as to their legal effect, and may be stated as follows:

The Shamrock Oil Co., existing and doing business under that name in the years 1919 and 1920, was a joint stock association created by a declaration of trust and articles of association executed on March 15, 1919, in conformity with the law of Texas. It was organized at Waxahachie, Ellis County, Texas, and the declaration of trust and articles of association were filed for record in that county. The management and control of its business were vested in a board of trustees and the following parties were named as trustees in the original instrument: C. H. Clark, T. H. Harbin, J. H. Miller, J. W. Rosson, Lynn D. Lasswell, R. W. Getzendaner, W. K. Ward, R. J. Coleman, and Homer N. Chapman. These parties continued to act as trustees during the entire life of this concern. It was organized for the purpose of operating an oil business and during the years 1919 and 1920 was so engaged, and for such years filed timely income and profits tax returns on May 20, 1920, and May 19, 1921, respectively. Its capital consisted of 12,500 shares of stock; of the par value of $100 per share.

A second joint stock association, or common law trust, was organized some time in the fall of 1919. The formal organization was completed on March 15,1920, a declaration of trust being executed as of that date, and filed for record in the deed records of Ellis County, Texas. The name of this company was designated in the declaration of trust as Chapman-Clark-Harbin, Trustees. The management and control of this company were vested in a board of trustees, and such trustees named in the instrument creating it were Homer N. Chapman, T. H. Harbin, W. K. Ward, E. W. Getzendaner, E. J. Coleman, J. H. Miller, O. B. Dunaway, and Lynn D. Lasswell. This concern was also created for engaging in the oil business and was actively so engaged during the year 1920 and filed an income tax return for that year.

In the fall of 1920 negotiations were entered into between the Shamrock Oil Co. and Chapman-Clark-Harbin, Trustees, looking towards a consolidation of the two companies. An offer was made by Shamrock to purchase the properties of Chapman-Clark-Harbin, Trustees, and the offer was declined. Later an offer was made by Chapman-Clark-Harbin, Trustees, to acquire the properties of Shamrock. Such offer was accepted and on January 8, 1921, a meeting of the stockholders of the Shamrock Oil Co. was held, pursuant to the call of the trustees. At that meeting the stockholders voted to ratify the action of the trustees in accepting the offer of Chapman-Clark-Harbin, Trustees, to purchase its assets, and, at the same meeting, by a unanimous vote, a resolution was passed dissolving the company and constituting and appointing its trustees as liquidating trustees for the purpose of carrying into effect the sale of the properties.

On January 4, 1921, the stockholders of the Shamrock Oil Co. were addressed a form letter in which the action of the stockholders at the meeting held on January 3, 1921, was set forth, and giving the option to such stockholders to receive in lieu of cash a like number of shares of beneficial interest in the Chapman-Clark-Harbin, Trustees, for their shares of stock. Thereafter such stockholders elected to take interests in Chapman-Clark-Harbin, Trustees, and exchanged stock for certificates of beneficial interest in that company. On January 3, 1921, the trustees of Chapman-Clark-Harbin, Trustees, at a meeting held at Waxahachie, Texas, changed the name of Chapman-Clark-Harbin, Trustees, to “ Shamrock Oil Company,” which thereafter did business under the name of and was known as the Shamrock Oil Co., and is the petitioner herein. For the year 1921 and subsequent years it filed income tax returns under that name.

On April 4, 1922, J. E. Dunaway was elected a trustee and vice president of the petitioner. On May SO, 1924, at a meeting of the trustees of the Shamrock Oil Co., it was voted that Dunaway be requested to go to the field and take active charge of the operations of the company. Acting under ,such authority, Dunaway removed to Wichita Falls, Texas, in July 1924 and took active charge of the financial end of this organization. Clark, who had been running the company up to that time, was displaced by Dunaway and his authority and duties were restricted to overseeing production. In April 1925 the petitioner sold all its assets and properties to the Prairie Oil Co. and quit business. Clark had nothing further to do with the company, but Dunaway remained in Wichita Falls, Texas, to wind up its affairs. While so engaged the waivers relied upon by the respondent were signed by Dunaway, and the 60-day letter upon which this appeal is predicated was received by him at the office of the petitioner and he executed the waivers at the request of the revenue agent, who advised him it was the best thing he could do. He thereafter employed accountants and counsel and authorized an appeal as to the additional tax determined by the respondent for the years 1919 and 1920.

The 60-day letter upon which this appeal is predicated was addressed to “ Shamrock Oil Company, Wichita Falls, Texas ” and bears the date of November 30, 1926. It shows on its face that it is the determination of the income tax liability of the concern to which it was addressed. It further conclusively shows that such tax liability was being asserted for the years 1919 and 1920. It does not in terms determine the income tax liability of the petitioner as transferee of the assets operated by the first group of trustees. The record shows that later, on February 29,1932, a 60-day letter was mailed to the petitioner, seeking to hold it liable as a transferee of the assets operated by the first group of trustees.

Three waivers are in evidence. The first was executed in March 1925 and purports to extend the time for assessment of any additional taxes due by the Shamrock Oil Co. for the year 1919 until December 31, 1925. It was executed “ Shamrock Oil Company, Taxpayer, by J. E. Dunaway, Vice President.” The second waiver was executed on November 28, 1925, extending the period of assessment for the years 1919 and 1920 until December 31, 1926. It was also signed “ Shamrock Oil Company, Taxpayer, by J. E. Dunaway, Vice President.” The third waiver was dated November 30, 1926, and purported to extend the time for assessment for the years 1919 and 1920 until December 31,1927. This waiver was executed “ Shamrock Oil Company, Taxpayer, by C. H. Clark, Vice President.” All of these waivers were executed several years after the transactions of January 3 and 4, 1921. J. E. Dunaway was not one of the original group of trustees.

In the circumstances here the respondent contends that any denial that the taxpayer is not before the Board is estopped by the acts of Dunaway, who executed the first two waivers, authorized this appeal, and verified the petition herein. The Commissioner relied on such acts and acted accordingly. If he had been advised of the facts alleged by the petitioner, he could have determined that the petitioner was liable as a transferee for the unpaid Federal income taxes resulting from the operation of the first group of trustees. Through the acts of Dunaway, a vice president and one of the trustees of the petitioner, respondent was led to believe that the appeal had been taken by the taxpayer and in due time would be heard and decided on the merits. In our opinion this position is very strongly supported by the record and by our report in Jere R. Downing, 26 B.T.A. 1115. The petitioner accepted the deficiency letter as a notice of its own liability, and acted thereon by filing- the appeal therefrom as provided by law. We are of the opinion that it should not now be heard in a plea to void its own acts and thereby bar the respondent from all remedy for the collection of taxes admittedly due and for which it is liable in law or at equity.

Even if the facts set out above are insufficient to estop petitioner from asserting that it is not the taxpayer, we are of the opinion that it is properly before the Board as a transferee of the assets of the first group o,f trustees, which it acquired on January 3, 1921, and by resolution provided for payment therefor either in cash or its own certificates of beneficial interest as the stockholders of the vendor company might elect. The record is clear that all, or practically all, elected to receive such certificates in lieu of cash. It is therefore apparent that the assets as to which the asserted tax liability attaches were acquired by the petitioner without any consideration other than its own certificates of beneficial interest. After the distribution of such certificates to the stockholders of the vendor trust, that concern was without assets and was insolvent. In our opinion it is not material that the notice of deficiency was not in so many words a determination of liability under section 280 of the Revenue Act of 1926. It was a determination of tax liability as to the income of a concern whose assets had passed to the recipient without consideration and was accepted as such by proper persons officially acting for the petitioner, which, in these circumstances, we believe, is properly before the Board as a transferee of assets impressed with a trust for unpaid Federal taxes. It, therefore, becomes immaterial that the appeal was not taken and prosecuted by persons authorized to act for the first group of trustees. San Joaquin Fruit & Investment Co., 52 Fed. (2d) 123; Commissioner v. New York Trust Co., 54 Fed. (2d) 463; Jere R. Downing, supra; Commissioner v. Nichols & Cox Lumber Co., 65 Fed. (2d) 1009; Pittsburgh Terminal Coal Corp. v. Heiner, 56 Fed. (2d) 1072.

The petitioner also pleads that even if it is properly before the Board, the statute of limitations has tolled the liability asserted as to each of the years 1919 and 1920. The returns in question were filed on May 20, 1920, and May 19, 1921, respectively. Under the Revenue Act of 1918 the statute of limitations applicable thereto would run on May 20,1925, and May 19, 1926. The petitioner became liable for the unpaid taxes here in question on January 3, 1921, when, without other consideration than its own certificates of beneficial interest, it acquired the assets impressed with a trust for unpaid Federal income taxes for 1919 and 1920. Nichols & Cox Lumber Co., supra. Thereafter such liability was its own and its officers were empowered to make legal agreements in respect thereto. Dunaway exercised such power when he signed the waivers. In so doing he was not acting for a prior taxpayer or transferor, but for the petitioner, whose liability at law or in equity had become absolute at January 3, 1921, and against which the bar of limitations had not then been dropped. The fact that section 280 had not been enacted at the date of the execution of either waiver is not material, as the liability of the petitioner was in no wise affected by that enactment, which merely provides for an additional method of collecting a liability at law or in equity for Federal income taxes. Phillips v. Commissioner, 283 U.S. 589. The waivers in question extended the period of limitations to December 31, 1926. The deficiency notice was mailed on November 30,1926, and was well within the period as so extended.

The parties have stipulated that the taxpayer is entitled to deductions from gross income in 1919 and 1920 in the respective amounts of $71,622.79 and $27,047.85 and that it is entitled to have the amount of $490,123.95 included in the computation of invested capital for the years 1919 and 1920. Such stipulation will be applied to the recom-putation of the asserted deficiencies. The petitioner’s motion to dismiss is denied.

Reviewed by the Board.

Decision will be entered under Buie 50.

Murdock dissents.


author: Murdock :

text:
    A. W. Dean, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73621.
    Promulgated January 24, 1934.

      O. G. Tilmam,, Esq., for the petitioner.

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

Murdock :

The Commissioner determined a deficiency in the petitioner’s income tax for 1931 in the amount of $249.19. However, only $111.27 of the total deficiency is in controversy. The error assigned is, “ Respondent has incorrectly computed the earned income credit in the determination of the alleged deficiency.” The parties have filed a stipulation of facts in which all necessary factors for the computation of the petitioner’s income tax liability for 1931 are set forth. There is no dispute as to any of these items. A part of the stipulation is that during the calendar year 1931 the petitioner sustained a “ capital net loss ” in the amount of $13,590.70. Attached to the stipulation are computations setting forth separately the computation of the respondent and the computation of the petitioner. Apparently no tax was shown to be due on the return, for each computation shows that no tax has been assessed, and the deficiency shown by each computation is the same therein as the “ net tax liability ” of that particular computation.

The assignment of error is misleading, for the difference between the parties is not in the computation of the earned income credit. On the contrary, the parties have entirely different methods of computing the petitioner’s tax liability. The respondent computes the liability without regard to the provisions of section 101, whereas the petitioner’s method is to compute a partial tax upon the basis of the ordinary net income at the rates and in the manner as if section 101 had not been enacted, and to subtract therefrom 12½ per centum o£ the capital net loss in order to arrive at the total tax. The respondent concedes the mathematical correctness of the petitioner’s computation. The amount which the petitioner arrives at as the total tax is less than the tax computed without regard to the provisions of section 101. The respondent relies upon the following provision in the latter part of the section 101 (b): “ but in no case shall the tax of a taxpayer who has sustained a capital net loss be less than the tax computed without regard to the provisions of this section.” The respondent contends that the larger tax which he has computed without regard to the provision of section 101 is the deficiency. Thus, the real difference between the parties is whether the tax computed without regard to the provisions of section 101 is less than the total tax computed in accordance with the provisions of section 101 (b). The petitioner contends that the word “ tax ” in the quoted portion of 101 (b) means the total of normal and surtaxes, whereas the respondent contends that it means the net amount arrived at by completing the computation provided by the statute, that is, by reducing the total of normal and surtax by any credits to which the taxpayer is entitled, including the credit for earned income. If the respondent’s contention is correct, the deficiency as determined by him is correct. If, however, the petitioner is correct, the correct deficiency is the amount of $137.92.

We do not agree with the petitioner in his interpretation of the latter part of section 101 (b) of the Revenue Act of 1928. In our opinion that provision means that in no event shall the amount which a taxpayer is required to pay as his tax be less than the amount which he would have been required to pay had section 101 never been enacted. The “ tax ”, as we understand it, is the tax liability of the taxpayer for the year involved, after a complete computation of that tax liability in accordance with the statute, including the subtraction necessary to give the taxpayer the benefit of a credit for earned income and of any other credit to which he may be entitled. Thus, the tax is the amount shown to be due on a correct and proper return.

The Commissioner has so interpreted the provision ever since it first appeared in the Revenue Act of 1924. The legislative history of section 101 (b) supports this view. Capital gain provisions first appeared in section 206 of the Revenue Act of 1921. The purpose of that section, as stated by the legislators, was to relieve from tax in the high brackets the gain from the sale of assets which had been held for some time. House Report No. 350, Ways and Means Committee, 67th Cong., 1st sess., on the Revenue Bill of 1921, p. 10. See also Burnet v. Harmel, 287 U.S. 103. The statute gave the taxpayer an election which permitted him to choose whether his capital net gain should be separately taxed at 12½ percent, or whether it should be taxed along with his other income in the usual way. There was no provision in that statute for capital net losses. The provision relating to capital net losses, in substantially the same form as it appeared in the 1926 and 1928 Acts, was first enacted as subsection (c) of section 208 of the Revenue Act of 1924. It appeared in the House bill. The Ways and Means Committee Report stated in regard to this subsection:

There is no provision of the existing law which corresponds to this subdivision. This provides that the amount by which the tax is reduced on account of a capital loss shall not exceed 12½ per cent of the capital loss. If the amount by which the tax is to he increased on account of capital gains is limited to 12½ per cent of the capital gain, it follows logically that the amount by which the tax is reduced on account of capital losses shall be limited to 12½ per cent of the loss.

The Senate struck out this provision. The report of the Finance Committee gives this explanation:

Such a provision would have resulted in an individual being liable to pay an income tax, although the total of his losses during the taxable year exceeded the amount of his income. Since this result is deemed to be undesirable, the subdivision has been stricken out of the bill as reported.

The Senate receded, however, and the provision was enacted as part of the Revenue Act of 1924. For further discussion see the statement of Mr. Green, Chairman of the Ways and Means Committee, vol. 65, Cong. Rec., part 3, 68th Cong., 1st sess., p. 2428. See also Piper v. Willcuts, 64 Fed. (2d) 813; affirming 55 Fed. (2d) 397. Clearly this legislation in regard to capital net losses was not put into the statute for the benefit of taxpayers. Cf. Piper v. Willcuts, supra. They would have benefited more had there been no such provision. They were given no election as in the case of capital net gains. The part of the provision which relates to the computation of a partial tax and the deduction of 12½ percent of the capital net loss prevents a capital net loss from having a greater benefit to a taxpayer than a reduction in his tax of 12½ percent. But that portion of the provision would still leave a benefit to those taxpayers in the lower tax brackets, and, so that in no event could a taxpayer get any greater benefit from a capital net loss than from an ordinary loss, the final portion of the provision was inserted. We think that it accomplishes the purposes for which it was intended.

Reviewed by the Board.

Decision will T>e entered for the respondent.


author: Black:

text:
    D. G. Wood, et ux., Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 58926.
    Promulgated January 25, 1934.

      Vernon B. Hill, Esq., for the petitioners.

      John D. Kiley, Esq., and B. B. Gannon, Esq., for the respondent.
   OPINION.

Black:

For the year 1928 the petitioners, D. G. Wood and wife, reported an income of $7,834, one half by the husband and one half by the wife.

The returns of petitioners did not include as taxable income an item of $6,000 representing salary received for the year by petitioner D. G. Wood as general manager of Hidalgo County Water Control and Improvement District No. 6. The Commissioner has added this $6,000 to income and has determined deficiencies of $47.13 against each of the petitioners.

From this determination the petitioners have brought a joint appeal and allege the following errors in their petition:

(a) The Commissioner of Internal Revenue has concluded that a salary received by the manager of a water control and improvement district in the State of Texas created under the statutes and the Constitution of the State of Texas is not for services rendered for an essential governmental function.
(b) The Commissioner of Internal Revenue has concluded that a water control and improvement district, created under the statutes and Constitution of the State of Texas, is a proprietary function and that salaries received from said districts are subject to be taxed.

The facts proved in the proceeding may be briefly stated as follows:

The Hidalgo County Water Control and Improvement District No. 6 was organized under chapter 25, Acts of the 39th Legislature, regular session, and subsequently it was created by a special act of the Legislature of the State of Texas. (See ch. 68, General and Special Laws of the State of Texas, 41st Legislature, regular session.) The district, thus created, came into existence under and by virtue of the constitutional authority given the legislature in section 59 of Article XYI of the Constitution of the State of Texas. There are two provisions under the Constitution of the State of Texas by which irrigation districts may be organized: The first provision is section 52 of Article III of the constitution. Irrigation districts organized under this provision are called “ water improvement districts ” and have a limit upon the bonded indebtedness which may be created of 25 percent of the assessed valuations of property within the district, and a vote of two thirds of the qualified voters within the district is required to carry a bond issue. The second provision is section 59 of Article XVI, and irrigation districts created under this provision of the constitution are known as “water control and improvement districts ”; this provision of the constitution permits an unlimited bonded indebtedness against such district to be voted by a bare majority of the voters at an election called for such purpose.

The Hidalgo County Water Control and Improvement District No. 6 was created under the second provision of the constitution and during the period involved in this deficiency assessment petitioner D. G. Wood was employed as general manager of the district, an office or employment especially provided for by section 46, chapter 25, Acts of the 39th Legislature. (See article 1880-46, Vernon’s Texas Statutes, 1925.) The compensation received by the petitioner as general manager of the district was the sum of $6,000 per year, and this is the amount sought to be taxed.

At a meeting of the board of directors of the district held on January 16, 1928, the following order was entered:

The matter of employing a general manager for the district was discussed and upon motion duly made, seconded and unanimously carried (Director Wood not voting), President D. G. Wood of the Board of Directors was employed as general manager for the District, for a period of one year commencing January 1st, 1928, at a salary of $6,000.00 per year, payable in monthly installments. (Director Wood did not vote on this motion.)

Under the provisions of the statutes set out above and under the order of the board of directors of Hidalgo County Water Control and Improvement District No. 6, petitioner D. G. Wood became an employee of the district.

The Hidalgo County Water Control and Improvement District No. 6 is in the arid or semiarid section of the State of Texas. Prior to the construction of an irrigation system the land within its borders was of no value except for grazing purposes. It has been found that private irrigation companies cannot operate profitably, and for this reason it is necessary to have an instrumentality of the state or a subdivision of the state to maintain and operate pumping plants, canals, and facilities to furnish water to lands within the water control and improvement districts. By reason of this need the Constitution and statutes of the State of Texas give authority to voters within the arid or semiarid section to organize a political subdivision of the state, its primary and only function being to furnish water to the lands within its boundaries. The irrigation district is supported by two sources: The first is the voting of bonds for the purpose of constructing pumping plants and canals necessary to furnish the water. These bonds are paid by the levying of an ad valorem tax on the property within the district and an interest and sinking fund is created for the retiring of the bonds. The second source of income is a maintenance and operating charge. The amount of the maintenance and operating charge is determined annually by the board of directors by estimating the expenditures necessary to maintain and operate the district for the succeeding year; after this expense has been estimated, a charge of so much per acre is made against all of the lands within the district. The board of directors also makes a charge for water furnished to the lands by the acre foot. All the income received by the district is used in the expenses connected with the operation of the district and there is no possible way or scheme whereby a water control and improvement district shall make a profit, and it is not permitted to make a profit. (See section 110, Acts of the 39th Legislature, regular session (article 7880-110, Vernon’s Texas Statutes, 1925).)

The functions and purposes of the Hidalgo County Water Control and Improvement District No. 6 are solely those alleged and set out above. The district pumps water from the Rio Grande River into a reservoir and from there it is distributed to the various lands within its boundaries. It does not own any property except the right of way over which its canals are constructed and the necessary pumping plants. All the officers and employees of the district receive a salary. There are no stockholders and no investments on the part of any individual or any enterprise in any of the property of the Hidalgo County Water Control and Improvement District No. 6. It is maintained solely by taxation and the maintenance and operation assessment as set out above.

There can be no doubt that the Hidalgo County Water Control and Improvement District No. 6 is a political subdivision of the State of Texas, and if section 1211 of the Revenue Act of 1926 were still in force the salary of petitioner D. G. Wood as an employee of the district would be exempt from taxation. Cf. Richard F. Burges, 17 B.T.A. 275. But the 1928 Act contains no provision such as section 1211 of the Revenue Act of 1926. If the salary of petitioner D. G. Wood is exempt from taxation, it must be on constitutional grounds resulting from the fact that the Hidalgo County Water Control and Improvement District No. 6 is an instrumentality of the State of Texas exercising essential governmental functions and that to tax petitioner’s salary would be to impair the district in its ability to exercise the essential governmental functions for which it was created.

This Board had occasion to consider the general question of the exemption from taxation of the salaries of officers and employees of irrigation districts (subdivisions of a state) in T. P. Wittschen, 25 B.T.A. 46. We there said:

Whatever disagreement and differences there may be in the classification of irrigation and similar districts, the cases are in accord in stating that such districts are organized not for governmental purposes, but for the benefit of certain portions of the state and the inhabitants therein. This is apparent from the context of the organic act itself.
The exemption from Federal taxation of the property, means and instru-mentalities of the states is also implied from “ the necessity of preserving the state in all its efficiency.” That the Federal taxation of the compensation of the petitioner received from the district would in any degree affect the state’s governmental efficiency or even its efficiency in developing and improving its resources to the benefit of the state and its inhabitants is so remote as to mate extended discussion thereof unnecessary.
sj: ⅝ ⅝ ⅝ # # ⅝<
As the district in the instant proceeding was not organized as a subdivision of the state primarily for governmental purposes, we hold that it is not engaged in performing essential governmental functions; that the services of petitioner as attorney for such district were not rendered in connection with the exercise of an essential governmental function; and that therefore compensation received by the petitioner from such district in payment of his services is not exempt from Federal taxation within the implied prohibition against Federal taxation of compensation of state officers or employees engaged in essential governmental functions or within the provisions of section 1211 of the Revenue Act of 1926. See Mary W. Niles, Executrix, 20 B.T.A. 949.

There appears to be no essential difference in the character of the irrigation district in Texas of which petitioner D. G. Wood was an employee from the one in California of which T. P. Wittschen was an officer or an employee. The Wittschen case has neither been reversed nor modified by the Board or the courts up to the present date.

Notwithstanding the reasoning used in the able brief filed by petitioners in the instant case, we believe the Wittschen case is controlling here. Therefore,

Decision will he entered for the resfondent.


author: GoodRioh :

text:
    Rust-Owen Lumber Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 48960, 62313.
    Promulgated January 25, 1934.

      P. M. Beach, Esq., and John M. Oamvpbell, Esq., for the petitioner.

      T. M. Mather, Esq., for the respondent.
   OPINION.

GoodRioh :

The issue in these proceedings, which were consolidated for hearing, relates to the amount of allowance for depletion of timber to be deducted from petitioner’s income for each of the years 1927, 1928, and 1929. In its returns petitioner claimed allowances computed upon its cuttings in those years at rates of $14 per thousand feet for pine and $4 for hardwood and hemlock. Although he allowed those rates in prior years, respondent reduced them to $7.5976 for pine and $2,042 for hardwood and hemlock in computing the depletion allowances for 1927 and 1928, and reduced them further to $6 for pine and $1.1375 for hemlock and hardwood in his computations for 1929. As a result of the application of the reduced unit rates, respondent disallowed, of the depletion allowances claimed by petitioner in its returns, $102,519.25 for 1927, $65,499.04 for 1928, and $104,433.35 for 1929. His denial of those claimed deductions from income gives rise to deficiencies of $16,172.71, $8,715.62, and $11,855.40, respectively, for these three years now before us. Petitioner objects to the reductions made in unit rates, and contends that the valuation of its reserves as of March 1, 1913, should be increased and the depletion allowances for its cuttings continued at the rates first fixed.

There is no dispute concerning the facts, and we adopt as our findings the written stipulation submitted and the statements agreed to upon the record at trial. Their repetition here is unnecessary to an understanding of the issue.

Prior to 1913 petitioner (a corporation having its principal office at Drummond, Wisconsin) owned in fee certain timber lands in Bayfield County, Wisconsin. During 1908 and 1909 these lands were cruised, and the estimates of reserves so obtained entered on the company’s records, and later adjusted for cuttings and purchases, to reflect the reserves as of March 1, 1913.

In February 1921, for the purpose of securing a depletion allowance, petitioner filed with respondent a questionnaire on the form required, setting forth detailed information respecting its timber and adjusting the first estimate of its reserves as of March 1, 1913, in accordance with, its cutting experience. It reported less of pine, and more of an aggregate of hardwood and hemlock than it had first set up on its books. This adjusted estimate of stumpage, and petitioner’s estimate of total value, which it obtained by multiplying the amount of timber by $14 per thousand for pine, and $4 per thousand feet for hardwood and hemlock, respondent used as a basis for his valuation of petitioner’s reserves.

By the end of 1926 it was apparent that both petitioner and respondent had underestimated the timber reserves as of March 1, 1913; that, using the unit rates previously allowed, the valuation base would be extinguished before the timber was exhausted. Accordingly, in computing the allowance for 1927 and 1928, respondent made a new estimate of uncut reserves and reduced the unit rate to figures (mentioned above) which, he calculated, would effect a proper extinguishment of the base value. However, when respondent considered petitioner’s return for 1929, he determined that the proper extinguishment of the base value. However, when respondent considered petitioner’s return for 1929, he determined that the unit rates were still too high, and again reduced them, as above stated.

The cutting of petitioner’s timber was completed during 1930; consequently, the actual figures as to the reserves are now available. Making adjustments for sales and purchases of timber, the reserves as of March 1, 1913, (1) according to the first estimates, based on cruises and set up on petitioner’s books, (2) according to the determination made by respondent in 1921, and (3) according to the records of cut, are as follows:

Under the applicable statutes, and regulations promulgated thereunder, in this case the basis to be used in computing petitioner’s allowances for depletion is the value, as of March 1, 1913, of petitioner’s timber reserves. Such allowances are tó be determined under rules fixed by respondent, which provide, inter alia, that once the depletion basis is fixed, it shall not be changed, except in case of fraud, misrepresentation, or gross error, but the unit rate may be changed if it is inadequate or excessive for the extinguishment of the basis through exhaustion of the reserves.

Kespondent maintains that his action in the case at bar is in accordance with his regulations. He found that continued use of the rates first fixed, applied to the total timber cut, would result in depletion allowances in excess of the basic value. Consequently, he made such reductions in the unit rates as were necessary to properly extinguish the depletion basis. Petitioner contends that the underestimate of the reserves as of March 1, 1913, as disclosed by the figures of the completed cut, was gross error, and sufficient cause, under respondent’s regulations, for a revaluation, resulting in an increased basis and the maintenance of the same unit rates of depletion. There is no suggestion of fraud or misrepresentation in the case. And it urges that the revaluation should be made by simply multiplying the unit rates first fixed by the number of units of the reserves as disclosed by the final figures of the cut, asserting that the valuation it claimed in its report of February 1921, which was adopted by respondent as his determination of basic reserve value, was computed by that method. Were this done, it points out, no adjustment would be necessary to unit rates for the overrun of timber not included in its estimate of reserves as of March 1, 1913.

With petitioner’s view we cannot agree. In determining the allowance for depletion to which petitioner may be entitled for any year, the primary inquiry concerns the depletable, basic value of the reserves, in this case, the value of the timber as of March 1, 1913. That value is the amount which, under the statute, shall be returned to petitioner through a ratable allowance as the property is depleted by cutting the timber. The unit rate, of course, depends upon the quantity of units contained in the reserve. If it appears that a mistake was made in estimating the number of units, with the result that the unit rate is erroneous, the unit rate should be adjusted or revised so that upon exhaustion of the reserves the depletable value will be extinguished. That is precisely what respondent has done here, and we see no error in his action.

Whether respondent made his determination of basic value by the method petitioner urges should now be used in making a revaluation, we do not know, and we regard the question as immaterial. That is not a correct method, for the basic value must be determined upon facts known, or reasonably to be anticipated, at the basic date. J. J. White Lumber Co., 24 B.T.A. 274.

Petitioner has not shown us that respondent’s determination of value is based upon gross error “ as to any facts determinable on the date of valuation.” As to the value of the timber reserves, whether by unit or in toto, no evidence has been presented. As to the quantity contained in the reserve, the stipulated figures show that the aggregate cut overran the aggregate estimate by about U percent. But there is no evidence before us to indicate that this error could have been known or reasonably anticipated on March 1, 1913. The inference is to the contrary, for before that time petitioner had made two cruises of its timber. For all that appears, they were made by competent cruisers and were as accurate as such estimates may be; at any rate, petitioner deemed them sufficiently accurate to be included in its formal report on its properties, submitted under oath to the Government, and carried the figures on its books, apparently relying upon them, for nearly 20 years. Moreover, while the parties stipulate that there was no new timber growth between 1913 and the years now before us, which might account in part for the excess in cut over estimate, and stipulate also that there was no change in cutting methods, it is possible that change in market demands permitted petitioner to cut and market timber of a size and quality not included in its cruise estimates as merchantable, which might account for the excessive cut. Such timber, not being merchantable on March 1,1913, of course should not have been valued as of that date, and the fact that it might later be marketed could not have been determined at that time. In any event, it has been held that an overrun of 14 percent (which is greater than that in tire case at bar) is not regarded as gross error offering cause for a revaluation of the basis. Boyne City Lumber Co., 47 Fed. (2d) 772 (reversing 7 B.T.A. 36).

Judgment will he entered for the resyondent.

       Sec. 204 (b) ; see. 234 (a) (8), 1926 Act; see. 114 (b) ; see. 23 (1), (m), 1928 Act; art. 230, Regulations 69; art. 250, Regulations 74.

       As to revision of unit rates see: Rayville Coal Co., 20 B.T.A. 525 ; Sterling Coal Co., 8 B.T.A. 549 ; Kehota Mining Co. v. Lewellyn, 28 Fed. (2d) 995; affd., 30 Fed. (2d) 17; certiorari denied.


author: Black :

text:
    George D. Harter Bank, Executor of the Last Will of H. H. Ink, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 53525.
    Promulgated January 25, 1934.

      Albert B. Arbaugh, Esq., for the petitioner.

      Maxwell M. Mahany, Esq., for the respondent.
   OPINION.

Black :

On March 16,1933, division report in this proceeding was promulgated (27 B.T.A. 941), in which the Board held against petitioner, following Julia Butterworth, 23 B.T.A. 838; Frank Pardee et al., Trustees, 23 B.T.A. 846. On March 18, 1933, decision was entered that there is a deficiency of $3,266.96 for the year 1928. On March 24, 1933, petitioner filed a motion for rehearing. On April 11, 1933, the Board entered an order reading in part as follows:

In view of the conflict between the decisions cited by the petitioner in his motion for rehearing and the decision of the United States Circuit Court of Appeals for the First Circuit, in Atkins v. Commissioner, decided January 31, 1933, it is believed that the Supreme Court of the United States will grant writs of certiorari so as to review the conflict between said decisions and will decide the question involved.
Therefore, the decision entered in this proceeding March 18, 1933, to the effect that there is a deficiency of $3,266.96 for the year 1928 is vacated and set aside. Petitioner’s motion for rehearing will be entertained and held for decision a reasonable length of time, waiting for a decision of the Supreme Coiut of the United States on the question involved.

On December 11, 1933, the Supreme Court of the United States rendered its opinion in Helvering v. Pardee, 290 U.S. 365, wherein it held that the will .provided for the payment to the widow of an annuity at all events and not necessarily from income. Having elected to take under the will, she elected to take as an ordinary legatee and payments to her were not deductible from the income of the estate, on authority of Burnet v. Whitehouse, 283 U.S. 148.

In the instant case the will of decedent contained the following provision:

I hereby will and bequeath unto my wife, Mary Ink, the sum of Twenty-four Thousand Dollars ($24,000.00) per year payable in monthly payments of Two Thousand Dollars ($2,000.00) each, said annuity to be received by her in full of her dower, distributive share, year’s support, and any and all other claims or demands whatsoever that she may or might have against my estate, and I hereby make said annuity a specific charge against my theatre property hereinafter referred to.

The facts also show that by writing, signed, acknowledged, delivered to the executors of the decedent, and duly filed and recorded as required by the statutes of Ohio, Mary Ink, the widow, elected to take under the will in lieu of the interest allowed her in decedent’s estate by the laws of Ohio.

During the year 1928 the petitioner received from the theatre property as net rental and income amounts in excess of $24,000, and pursuant to the terms of the will paid over or distributed to the widow during the year monthly payments aggregating $24,000. The sums so distributed, when added to payments of prior years, did not aggregate the amount which would have been apportionable to her as of the date of decedent’s death under the Ohio statutory provisions had she not elected to take under the will.

From the foregoing recital of facts it appears clear that the situation in the instant case comes squarely within the rule laid down by the Supreme Court in the Pardee case. Accordingly petitioner’s motion for rehearing is denied and the decision heretofore entered that there is a deficiency of $3,266.96 for the year 1928, which was subsequently vacated, will be reentered.

Decision will be entered for respondent.


author: Smith :

text:
    R. D. Jones, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 69858.
    Promulgated January 26, 1934.

      George E. PL. Goodner, Esq., for the petitioner.

      Carl B. Perkins, Esq., for the respondent.
   OPINION.

Smith :

This proceeding involves a deficiency in petitioner’s income tax for the calendar year 1930 in the amount of $230.97. The petitioner alleges that the respondent erred in disallowing a deduction of $9,700, representing the amount of a loss which he sustained on an investment in certain shares of stock which became worthless in that year.

In 1927 the petitioner acquired at a cost of $2,700, 2,700 shares of ¡.'common stock of the Monarch Royalty Corporation, a Delaware corporation, which was engaged in the business of dealing in oil lands and oil royalties. He also acquired at a price of $7,000, 7,000 shares of the $1 par value preferred stock of the same corporation. By a change in its charter during the early part of 1930 provision was made for the issuance of preferred A shares of no par value. Preferred stockholders were given an opportunity to exchange 15 shares of preferred stock for one share of the class A preferred. In March 1930 the petitioner exchanged his 7,000 shares of preferred stock of the Monarch Royalty Corporation for 467 shares of the class A preferred stock, no par value, and paid $5 in cash representing an additional amount due on the basis of the exchange. The class A preferred stock was entitled to ten times the dividend payable on the $1 par value preferred stock and, in case of liquidation of the company, to priority at the sarnie rate, that is, ten to one. In September 1930 the Monarch Royalty Corporation had outstanding 5,000,000 shares of preferred stock of the par value of $1 per share, 153,260 shares of class A preferred stock of no par value, and 2,000,000 shares of common stock of no par value.

The Monarch Royalty Corporation was actively engaged in a stock-selling campaign during the year 1929 and during the first half of 1930. . In the furtherance of its business it caused an appraisal of its oil and gas royalties to be made as of December 31, 1929, by W. O. Ligón & Co. The company had no property of any substantial value aside from its royalties. In 1930 another appraisal was made by one Allport, which showed total assets as of April 30, 1930, of $5,674,488.49. The company was placed in the hands of a receiver at the instigation of creditors on November 8, 1930. Claims filed by creditors in 1930 amounted to $300,000.

Between April 30 and November 8, 1930, the date of the receivership, the Monarch Royalty Corporation sold 67 producing properties for $68,395. These properties were appraised by one Roach as of January 31, 1929, at $359,221.48, and by W. O. Ligón & Co., as of December 31, 1929, at $227,240.02. During the same period the corporation also sold nine properties for $30,000 which had been appraised by Roach as of January 31, 1929, at $113,437.60, and by W. O. Ligón & Co. as of December 31, 1929, at $54,047.93.

The appraisals and books of the corporation could not be submitted in evidence by the petitioner because they were in the hands of the postal authorities, who had had them for a long period.

The Monarch Royalty Corporation is still in the hands of a receiver. The present receiver was appointed June 14, 1932. He testified that the board of directors of the corporation appraised its assets prior to the date of his appointment at - approximately $270,000; that the appraisal was made either in 1932 or very late in 1931.

The petitioner testified that after the corporation went into the hands of a receiver on November 8, 1930, he “ made diligent effort to sell that stock [common and preferred A shares] at some consideration and I was unable to get an offer from anyone for that, stock.” The present receiver for the corporation testified that in his opinion the common shares were worthless in 1930, and in fact worthless in 1929. O. A. Steiner, a security dealer and broker in Tulsa, Oklahoma, the location of the operations of the Monarch Royalty Corporation, stated that he was familiar with the value of the stock of the company in December 1930; that brokers were unable to find a market for the common stock at that time; that in Ms opinion it had no value; that he had tried but could make no sales of preferred A stock wMch, at or about the time of the receivership, was quoted at 18 to 20 cents a share; that a great many shares of common and preferred stock were offered for sale in December 1930, but that he did not remember consummating a single sale after the company went into the receivership; and that he judged the fair market value of class A preferred stock in December 1930 only from the quoted price coming out in the Trader’s Stock Reports, which'showed quotations at 4, 6, and 10 cents a share.

In this proceeding the petitioner contends that he sustained a loss in 1930 of his investment in the common shares of the Monarch Royalty Corporation by reason of the fact that those shares became worthless in 1930. At the hearing of this proceeding counsel for the respondent admitted that the evidence showed them to be worthless in 1930, but contended that they were worthless in 1929. Therefore, the only question for our determination with respect to the claimed loss of the investment in the common shares is whether those shares became worthless in 1930 or in 1929. In whichever year they became worthless the investment in such shares is a deduction from gross income of that year under article 174 of Regulations 74.

We are constrained to hold that the common stock became worthless in 1930. The evidence of record shows that an extensive stock-selling campaign was put on by the. Monarch Royalty Corporation in 1929, which extended into the year 1930. It is inconceivable without proof that the common shares became worthless prior to the end of the stock-selling campaign, which was apparently in the middle of the year 1930. In our opimon the appointment of the receiver for the corporation was the “ identifiable event ” which fixed the loss as one of the year 1930. United States v. White Dental Mfg. Co. of Pennsylvania, 274 U.S. 398.

There is the further question as to whether the petitioner’s investment in the class A preferred shares, amounting in all to $7,005, became worthless in 1930. The petitioner testified that after diligent effort he could not find anyone who would make him an offer for either his common or preferred shares. The record does not indicate, however, the fair value of the assets of the Monarch Royalty Corporation at the close of 1930. Apparently there were no bonds outstanding. Claims of approximately $300,000 were filed against the corporation, but these were settled for an amount not to exceed approximately $30,000. The preferred A shareholders were entitled to preference upon any liquidation of the company. Although the preferred A shares may have had at December 31, 1930, little more than a nominal value, the evidence is not conclusive that they did not have some value. The fact that the petitioner could not find any purchaser for his shares at the time he offered them for sale is not conclusive evidence, in the light of all of the other evidence in the record, that they were worthless at the end of 1930. We therefore sustain the Commissioner’s contention that the petitioner is not entitled to deduct from his gross income of 1930 any amount representing a loss of his investment in the preferred A shares.

Judgment will ~be entered under Rude 50.


author: SteRnhagen: Smith,

text:
    Luella Hoyt Slayton, Petitionee, v. Commissioner of Internal Revenue, Respondent. Virginia S. Straw, Hovey E. Slayton, Jr., Edward F. Messinger, Executors of the Estate of Hovey E. Slayton, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 57267, 57268.
    Promulgated January 26, 1934.

      Edward Clifford, Esq., and H. H. Shinnicle, Esq., for the petitioners.

      Prew Savoy, Esq., for the respondent.
   OPINION.

SteRnhagen:

Considering, as we have, all the evidence, it is our opinion that despite the appearance of sale, there was lacking the intent of the decedent and his wife to make a sale- of these shares. First, we think the evidence, and more particularly the subsequent retransfer by the son, upon the first occasion when ownership became important, to the father solely for the purposes of the father, falls short of establishing a real transfer of ownership by petitioners for any purpose. While a sale for tax purposes is not to be disregarded because of its motive, on the other hand, a mere gesture without the vital intent to change ownership is not to be recognized as a sale merely because superficially it resembles one. Second, we think the evidence indicates a lack of intent to receive the consideration for a sale and hence that any transfer that might have occurred was a nondeductible gift. This we gather from the entire series of events and all the circumstances.

Having been unable from all the evidence to find that a sale occurred, the basis for a deductible loss is lacking, and the respondent’s disallowance is sustained.

Reviewed by the Board.

Judgment will be entered for the respondent.

Smith,

dissenting: The evidence in these proceedings indicates that there was no market in 1928 for the voting trust certificates owned by the petitioners. They were practically worthless. The respondent does not question that the price paid for them by the son, namely, $5 per share, was the fair market price for them. I can not agree that the transaction by which the petitioners sold the certificates to their son was “ a mere gesture without the vital intent to change ownership.” Out of an abundance of caution the father sold the certificates through brokers rather than sell them directly to his son. In my opinion the sale was a bona fide sale of the certificates at a fair market price. Cf. Commissioner v. Hale, 67 Fed. (2d) 561.

Luella Hoyt Slayton testified that she had no knowledge at the time she sold her certificates as $5 per share through the broker that her son was the purchaser. I can not see how it can be validly held that she did not make a valid sale of her certificates from which she sustained a deductible loss. So far as the mother was concerned the gift of a check to her son on or about December 31, 1928¡ was an entirely separate and unrelated transaction. In any event I think that the ruling that the sale by the .mother was not bona fide is unwarranted.

TkamMell agrees with this dissent.


author: Aeundell:

text:
    General Utilities & Operating Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52770.
    Promulgated January 30, 1934.

      B. Kemp Slaughter, Esq., Hugh 0. Bicleford,, Esq., and Joseph A. Slattery, Esq., for the petitioner.

      'William E. Davis, Esq., and Paul E. Waring, Esq., for the respondent.
   OPINION.

Aeundell:

The respondent has determined that income was realized from the transactions detailed in the findings of fact and has asserted a tax thereon. His theory is that upon the declaration of the dividend on March 22, 1928, petitioner became indebted to its stockholders in the amount of $1,071,426.25, and that the discharge of that liability by the delivery of property costing less than the amount of the debt constituted income, citing Kirby Lumber Co. v. United States, 284 U.S. 1.

There are a number of decided cases somewhat similar to this, in some of which it has been held that the distributions resulted in gain or loss to the distributing corporation. See Callanan Road Improvement Co., 12 B.T.A. 1109; Bacon-McMillan Veneer Co., 20 B.T.A. 556. In those cases the dividend resolutions were construed as declaring dividends in definite amounts “ before the property was distributed in kind.” Bacon-McMillan Veneer Co., supra, p. 559. In this last cited case it was further said:

If, on the other hand, instead of providing for a definite percentage in the way of a dividend, if the resolution had merely provided that the Liberty bonds should be distributed by way of dividends, a different situation would have been presented which is clearly distinguishable from the case we have before us.

A situation like that mentioned in the quotation just given was present in First Utah Savings Bank, 17 B.T.A. 804; affd., 53 Fed. (2d) 919. There the banking corporation owned the stock of another company, which stock was held by trustees, and the bank’s directors by resolution directed the trustees “ to deliver as a dividend ” a designated number of shares of the stock. “ No cash dividend had been declared by the bank as a part of this transaction.” 53 Fed. (2d) 920. The stock at the time of distribution was worth less than cost. We held:

The petitioner, by resolution of its board of directors, of October 17, 1922, only incurred an obligation to distribute the 9,000 shares of Amalgamated Sugar Co. stock to its stockholders, which obligation it fully discharged without loss to it, by making the distribution of the stock as directed.
The facts in this case are somewhat analogous to those in Eollenberg Musió Oo., 6 B. T. A. 421, 425, wherein we said — referring to a dividend declared by the petitioner:
* * * If, as the resolution of February 6, 1917, indicates, the petitioner merely distributed the property interest along with other dividends, we are unable to see that loss, contingent or otherwise, resulted from the distribution. * * *

The Court of Appeals of the District of Columbia in affirming our decision said:

It is true that the rule hereby adopted leads to an anomalous result, inasmuch as appellant at the time of transferring the stock had suffered an actual loss of value measured by the difference between the cost of the transferred stock and its then'market price, for which no deduction is allowed. But, on the other hand, according to the same rule if the transferred stock had enhanced in value between its purchase and transfer no taxable gain would have been charged against the corporation because of that fact.

From the above cases the rule is deducible that, where the dividend resolution imposes only the obligation to distribute in kind and it is discharged in that way, no gain or loss results to the corporation. Counsel for respondent in his brief concedes this to be the correct view.

Our question .then is to determine whether the resolution of March 22, 1928, was one declaring a dividend of an amount of money, or whether it declared a dividend payable in stock of the Islands Edison Co. The second paragraph of the resolution opens with the statement: “ That a dividend in the amount of $1,071,426.25 be and it is hereby declared on the common stock of this Company * * The respondent would have us stop reading here. This, however, is only part of the resolution, and the part that immediately follows is of equal importance. The next clause limits as clearly as words can the medium of discharge of the dividend liability. Without separation by as much as a punctuation mark from the part of the resolution just quoted, the words are: “ payable in common stock of the Islands Edison Company * * Where the method of payment is prescribed a stockholder is not entitled to payment in some other form. In State v. B. & O. R.R., 6 Gill, (Md) 363, the railroad company had declared a dividend, payable in cash to holders of less than 50 shares, and payable part in cash and part in its own bonds to holders of 50 shares or more. The State of Maryland, being the owner of more than 50 shares, sued for a cash payment of the entire amount. The court denied recovery, saying in part :

It is immaterial in our view of the subject, whether the declaration of a dividend constitutes a contract, or is to he considered in the light of a performance of a duty. In either case, it is to be taken as it emanates from the board. A part of it cannot■ be taken and the rest discarded. It cannot be said you have declared three per cent, and we will have the money, although in the very declaration, they say they can only pay you in liabilities of the company. (P. 386.)

The intent of the directors of petitioner was to declare a dividend payable in Islands Edison stock; their intent was expressed in that way in the resolution formally adopted; and the dividend was paid in the way intended and declared. We so construe the transaction, and on authority of First Utah Savings Bank, supra, we hold that the declaration and payment of the dividend resulted in no taxable income.

Reviewed by the Board.

Decision will be entered for the f'etitioner.

Black, LaNSdoN, Sternhagen, Murdock, Seawell, and Adams dissent.


author: Tüammell :

text:
    United States Trucking Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50000.
    Promulgated January 30, 1934.

      Josiah Willard, Esq., for the petitioner.

      Harold D. Thomas, Esq., for the respondent.
   OPINION.

Tüammell :

This is a proceeding for the redetermination of the liability, at law or in equity, of the petitioner as a transferee of assets of a prior corporation of the same name, in respect of deficiencies in income tax of the transferor for the calendar years 1925 and 1926 in the amounts of $13,589.15 and $12,231.59, respectively.

On December 12, 1919, a corporation known as the United States Trucking Corporation was organized under the laws of the State of New York, and for the calendar year 1923 this corporation sustained a net loss of $107,540.74. On May 29, 1924, the transferor, another corporation of the same name, was organized under the laws of New York, and on or about April 13, 1927, the petitioner herein, a third corporation of the same name, was also organized under the laws of New York. These corporations will be hereafter referred to for convenience as the 1919 corporation, the 1924 corporation, and the 1927 corporation, respectively.

The issues raised by the pleadings are: (1) Whether the petitioner, the 1927 corporation, is a transferee of assets of the 1924 corporation, within the meaning of section 280 of the Eevenue Act of 1926; (2) if it is such a transferee, whether or not the net loss suffered by the 1919 corporation for 1923 should be allowed as a deduction in computing the net income for 1925 of the transferor 1924 corporation; and (3) if petitioner is liable as a transferee, then by what amount the income of the transferor corporation for 1925 and 1926 should be reduced on account of depreciation sustained in those years. The parties have stipulated that the 1919 corporation and the 1924 corporation are entitled to certain deductions for depreciation not claimed in the returns or otherwise allowed, which stipulation in effect disposes of issue (3).

The proceeding was submitted upon a stipulation of facts and allegations of the respondent’s amended answer admitted in petitioner’s reply. All facts so stipulated or admitted are by reference here adopted as our findings of fact, and so much thereof as is deemed pertinent will be stated in connection with our discussion of the issues.

On or about April 14, 1927, the next day after the petitioner was organized, a tripartite agreement was entered into by and between the 1924 corporation, the 1927 corporation (also referred to therein as the “ new corporation ”), and the United States Distributing Corporation, reading in material part as follows:

The undersigned corporation (organized under the laws of the State of New York in May 1924) hereby offers to sell and convey to the United States Trucking Corporation (organized as a New York corporation in April, 1927 in accordance with the provisions of Section 22 of the New York Stock Corporation Law) all of its property, rights, privileges and franchises, including its good-will and the right to use its corporate name, for and in consideration of the new United States -Trucking Corporation assuming all obligations and liabilities of the undersigned corporation, whether accrued or to accrue in the future, and in further consideration of the new United States Trucking Corporation issuing to United States Distributing Corporation all of its authorized capital stock, consisting of Twenty-one thousand (21,000) shares of 7% cumulative preferred stock of the par value of $100 per share and Ten thousand (10,000) shares of common stock without par value, whereupon United States Distributing Corporation shall forthwith issue to the undersigned corporation, or to its nominee or nominees, Forty-one thousand nine hundred and ten (41,910) shares of new convertible 7% cumulative preferred stock of the par value of $100 per share and One hundred nineteen thousand seven hundred (119,700) shares of new common stock without par value of United States Distributing Corporation.
To evidence the agreement upon the part of United States Distributing Corporation to issue such amounts of its preferred and new common stock, as above set forth, that corporation has executed the below approval of this offer’.

The- foregoing agreement was in the form of a letter signed by the 1924 corporation and addressed to the incorporators and directors of the 1927 corporation, which was “ accepted ” by the latter corporation and “ approved ” by the United States Distributing Corporation.

The provisions of this agreement were carried out forthwith, and pursuant thereto the stockholders of the 1924 corporation received the stock of the United States Distributing Corporation as nominees of the 1924 corporation.

The aggregate market value of the preferred and common stock of the United States Distributing Corporation issued to the 1924 corporation was in excess of the liabilities of the 1924 corporation at the time of the transfer of its assets to the 1927 corporation, including the Federal income tax liabilities for 1925 and 1926 at issue in this proceeding. The net value of the assets (assets less liabilities) of the 1924 corporation at the time of the transfer was in excess of the tax liabilities in question with interest thereon.

At the time of the transfer of the assets of the 1924 corporation to the 1927 corporation, the United States Distributing Corporation owned all of the 10,000 shares of the prior preference stock of the 1924 corporation, 12,220 out of the 25,842 outstanding shares of its preferred stock, 16,658 out of the 23,642 outstanding shares of its class A stock, and 36,657 out of the 45,534 outstanding shares of its class B stock.

The first issue for consideration is whether or not the petitioner is liable, at law or in equity, as a transferee of property of the taxpayer (1924) corporation, in respect of the latter’s taxes, within the meaning of section 280 (a) of the Eevenue Act of 1926, which in material part is set out in the margin.

The respondent contends that the facts hereinabove stated establish the liability of the petitioner, both at law and in equity, as a transferee within the purview of the quoted statute; while the petitioner contends that the same facts show that it has no liability either at law or in equity, as a transferee, which is enforceable by the remedy provided in that statute.

More specifically, the first question arising under this issue is whether the petitioner is liable as a transferee for the taxes of the 1924 corporation by reason of its agreement to assume the obligations of the latter; and, if so, whether such contractual liability may be enforced by the remedy provided in section 280.

By this contract the petitioner agreed to assume “ all obligations and liabilities of the undersigned [1924] corporation whether accrued or to accrue in the future.” While the deficiencies in tax due from the 1924 corporation for the years 1925 and 1926 had not been determined and asserted by the respondent in 1927 at the date the contract of assumption was executed, nevertheless they constituted valid obligations of the taxpayer existing at that time, and the language used in the contract, we think, is clearly broad enough to bring them within the “ obligations and liabilities ” assumed by the petitioner. In fact, petitioner does not contend that the taxes in controversy are not embraced within the terms of its contract of assumption, nor that it is not liable therefor under the contract, but defends on the ground that such liability may not be enforced by the remedy provided in section 280.

The precise issue presented here was considered by us in American Equitable Assurance Co. of New York, 27 B.T.A. 247, adversely to petitioner’s contentions. There we reached the conclusion that the liability of the petitioner arising from its contract to pay the tax of the vendor corporation was enforceable in behalf of the United States by a proper court action, and, being such a liability, held it might be enforced against the petitioner under section 280 of the Revenue Act of 1926. Our decision in that case was affirmed by the United States Circuit Court of Appeals for tbe Second Circuit, 68 Fed. (2d) 46.

On authority of the decision cited, we hold that this petitioner, on its contract of assumption, is liable for the taxes of the 1924 corporation as a transferee under the provisions of section 280 of the Eevenue Act of 1926.

The conclusion stated requires us to consider the second issue— whether the net loss sustained by the 1919 corporation for the year 1923 is allowable as a deduction in computing the net income of the 1924 corporation for 1925.

The stipulated facts show that Independent Warehouses, Inc., became affiliated with the 1919 corporation on or about March 31,1924, and the 1924 corporation was organized on May 29, 1924. On or about June 5, 1924, the 1919 corporation transferred its assets to the 1924 corporation. The 1919 corporation sustained a net loss for 1923. Only one return was filed by the 1919 and 1924 corporations for 1924. The respondent determined that two returns should have been filed for that year, one for the period January 1 to March 31, 1924, and the other for the period April 1 to December 31, 1924. The Eevenue Act of 1926 provides in section 206 for the deduction of net losses as follows:

(b) If, for any taxable year, it appears upon tlie production of evidence satisfactory to tbe Commissioner that any taxpayer bas sustained a net loss, the amount thereof shall be allowed as a deduction in computing the net income of the taxpayer for the succeeding taxable year (hereinafter in this section called “ second year ”), and if such net loss is in excess of such net income (computed without such deduction), the amount of such excess shall be allowed as a deduction in computing the net income for the next succeeding taxable year (hereinafter in this section called “ third year ”) ; * * *

The same provisions were contained in section 206 (b) of the Eeve-nue Act of 1924.

The taxpayer (1924) corporation was organized in accordance with the provisions of section 22 of the New York Stock Corporation Law, which provided that upon expiration of 15 days from the filing of the certificate of incorporation of the new (1924) corporation, the corporate existence of the old (1919) corporation should cease and it should be deemed dissolved. It follows, therefore, that the 1919 and 1924 corporations were separate legal entities and different taxpayers, and a net loss sustained by the former is not deductible by the latter. In such a situation we have repeatedly held that a net loss of a predecessor corporation cannot be deducted in computing net income of the successor corporation. Maytag Co., 17 B.T.A. 182; Athol Mfg. Co., 22 B.T.A. 105; affd., 54 Fed. (2d) 230; Overbrook Natl. Bank of Philadelphia, 23 B.T.A. 1390; New Colonial Ice Cream Co., 24 B.T.A. 886.

Petitioner’s contention that the taxpayer corporation is entitled to deduct the net loss of its predecessor may also well be denied on another ground. The respondent’s determination that two returns should have been filed for the year 1924 is correct, and since the period January 1 to March 31, 1924, constituted the “ succeeding taxable year ” in relation to 1923, when the net loss in question was sustained, and the period April 1 to December 31, 1924, constituted the “ next succeeding taxable year ” within the meaning of the quoted statute, the 1924 corporation is not in any event entitled to deduct, in computing net income for 1925, any portion of the net loss not absorbed in 1924. Weissberger Moving & Storage Co., 26 B.T.A. 1375; Joseph & Feiss Co., 26 B.T.A. 1424; Arnold, Constable Corp., 26 B.T.A. 1427; Crossett Western Co., 27 B.T.A. 258.

Respondent’s action on this issue is approved.

• The parties have stipulated that the 1924 corporation is entitled to additional deductions from gross income for 1925 and 1926 on account of depreciation sustained in those years in the respective amounts of $4,763.40 and $5,826.13. The stipulated deductions will be allowed in recomputing the deficiencies.

Reviewed by the Board.

Judgment will be entered under Rule SO.

Van Fossan and Adams concur in the result only.

       Sue. 280 (a). The amounts of the folio-wing liabilities shall, except as hereinafter in this section provided, be assessed, collected and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in tax imposed by this title * * *:
      (1) The liability, at law or in equity, of a transferee of property of a taxpayer, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed upon the taxpayer by this title or by any prior income, excess-profits, or war-profits Tax Act.