text:
    J. V. Rowan, Petitioner, et al.,
      v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 99430, 99431, 99433, 99434.
    Promulgated August 8, 1940.

      Muokleroy McDonnold, Esq., for the petitioners.

      Wilford H. Payne, Esq., for the respondent.

       Proceedings of the following petitioners are consolidated herewith: Bertha White Rowan, Alvin C. Hope, and Consuelo C. Hope.

   OPINION.

Black :

The statute applicable to the only issue which we have to decide in this proceeding is section 131 of the Eevenue Act of 1936, the pertinent parts of which are printed in the margin.

Petitioners concede that the partnership of Eowan & Hope did not pay to the Government of Mexico any income tax during the year 1937. They contend, however, that there were certain accrued income taxes due the Eepublic of Mexico by Eowan & Hope at the end of the taxable year 1937.

The partnership set up on its books an item of $4,665 as a reserve for income tax accrued to the Mexican Government for the taxable year ended December 31,1937. The proportions of this amount which each petitioner took as a credit in filing his income tax return for 1937, which credits the Commissioner has disallowed, are shown in our findings of fact. Petitioners do not now claim the full amount of these credits which they took on their income tax returns, but in their brief they have reduced their claims, as shown by the following quotation therefrom:

During the year 1937, income taxes payable to Mexico in the amount of $2,490.68 accrued against income earned by the partnership of Rowan and Hope in Mexico. Each petitioner is entitled to credit for income taxes paid to a foreign country in the amount of $622.67, one-fourth of $2,490.68.

It is undoubtedly true that, if during the year 1937 any income tax imposed by the Mexican Government accrued against the partnership of Rowan & Hope, the members of the partnership, under section 131, supra, would be entitled to credit for their proportional parts of such accrued income tax. The partnership would not have had to pay the tax during the year 1937. It would be sufficient if the tax accrued against the partnership.

The Mexican income tax laws under which the payments made by the partnership of Eowan & Hope in 1938 were assessed were not introduced in evidence. The Board does not take judicial notice of foreign laws.. Foreign laws, to, be considered by the Board, must be proved. Columbian Carbon Co., 25 B. T. A. 456, 465. The Declara-ción Provisional (translated Provisional Declaration) filed with the Mexican Government March 24, 1938, and the Impuesto Sobre la Eenta Cedula Primera Comercio (translated “Income Tax First Schedule Commerce) filed with the Mexican Government November 22, 1938, were both introduced in evidence. These documents contain certain extracts from Mexican law and regulations. If these be considered sufficient proof of Mexican law, the fact still remains that none of these show that any income tax accrued against the partnership of Eowan & Hope for the period August 25, 1937, when the partnership began business in Mexico, to December 31, 1937, the end of the calendar year.

On the contrary, the evidence of Mexican law shown by these returns, if it be considered evidence, was to the effect that the partnership was required to file for the first 6 months of its operations in Mexico a provisional declaration covering its operations for the 6-month period just closed and pay the tax shown to be due thereon. This petitioner did on March 23, 1938, covering the period August 25,1937, to February 24, 1938. Also the partnership was required to file a return for the full 12-month period beginning August 25, 1937, and ending August 24, 1938, and pay the tax shown thereon, taking into consideration the tax already paid under the provisional declaration. This it did on November 22, 1938. Thus we see that both taxable periods ended in 1938. So far as the evidence shows, the partnership had no taxable period under Mexican law which began on August 25, 1937, the date it began business and ended December 31, 1937, the end of the calendar year. Therefore, we can not say that under Mexican law any income tax accrued against the partnership in 1937. Under the income tax law of the United States there is no such thing as imposing an income tax for a taxable period which does not exist. Oklahoma Contracting Corporation, 35 B. T. A. 232, and cases there cited. We have no evidence that any different rule prevails under Mexican law.

Petitioners contend for the right to apportion the tax which accrued at the end of the 6-month period ended February 24, 1938, between the portion of the period which fell in 1937 and the portion which fell in 1938 and take the portion allotted to 1937 as a credit in filing income tax returns for that year. We know of no law, or Board or court decision, which would permit such an apportionment, The statute allows “a credit of the amount of any income, war-profits, and excess-profits taxes which has accrued or has been paid during the taxable year to any foreign country”, and that means the whole tax and not a mere portion of it. The facts in the instant case are not like those in United States v. Anderson, 269 U. S. 422. In that case the munitions tax was levied upon the taxpayer’s 1916 income, and the Supreme Court said that it should be accrued as a liability against 1916 income even though it was not assessed and payable until 1917. The gist of the Court’s opinion in the Anderson case was that the taxable period was the calendar year 1916 and, therefore, at the end of that year the tax had accrued and Avas deductible from 1916 income and for no other year, by one which kept its books on an accrual basis.

As we have already endeavored to point out, the taxable period of the partnership of Rowan & Hope under Mexican law did not end December 31, 1937. The first period ended February 24, 1938, and the second period ended August 24, 1938. Therefore, both the accrual and payment of income taxes of the partnership to the Mexican Government fell in the year 1938. On this issue we sustain the Commissioner. Our holding in this respect does not mean that petitioners will be deprived of a credit, under section 131 of the Revenue Act of 1936, for the income taxes paid to the Mexican Government by the partnership. It simply means that they must claim such credit for the year when the taxes were accrued and paid, which was the year 1938.

Decision will he entered wider Rule 50.

       SEC. 131. TAXES OE FOREIGN COUNTRIES AND POSSESSIONS OF UNITED STATES.
      (a) Allowance of Credit. — If the taxpayer signifies in his return his desire to have the benefits of this section, the tax imposed by this title shall be credited -with :
      (1) Citizen and domestic Corporation. — In the case of a citizen of the united States and of a domestic corporation, the amount of any income, war-profits, and excess-profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and
      (2) Resident of United States. — In the case of a resident of the United States, the amount of any such taxes paid or accrued during the taxable year to any possession of the United States; and

      (4) Partnerships and Estates. — In the case of any such individual who is a member of a partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the partnership or the estate or trust paid or accrued during the taxable year to a foreign country or to any possession of the united States, as the case may be.
      * * * * ⅝ * #
      (d) Teak in Which Credit Taken. — The credits provided for in this section may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year in which the taxes of the foreign country or the possession of the united States accrued, subject, however, to the conditions prescribed in subsection (c) of this section * * *.
      (e) Proof oe Credits. — The credits provided in this section shall be allowed only if the taxpayer establishes to the satisfaction of the Commissioner (1) the total amount of income derived from sources without the united States, determined as provided in section 119, (2) the amount of income derived from each country, the tax paid or accrued to which is elaimied as a credit under this section, such amount to be determined under rules and regulations prescribed by the Commissioner with the approval of the Secretary, and (3) all other information necessary for the verification and computation of such credit?.


source: Caselaw Access Project

author: Leech :

license: Public Domain

text:
    Shelden Land Company, a Michigan Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 93196.
    Promulgated August 8, 1940.

      Ferns D. Stone, Esq., and Edward S. Reid, Esq., for the petitioner.

      Philip M. Clarín, Esq., for the respondent.
   OPINION.

Leech :

The first issue arises out of respondent’s disallowance of a loss of $235,766.14 which petitioner claims as a result of the sale of land made by it to the Warren Corporation. Respondent’s action is predicated on two propositions, first that the sale falls within section 24 (a) (6) of the Revenue Act of 1934, and, second, that the interfamily character and other circumstances of the transactions in connection with the sale contradict its bona fides and render the sale a nullity for tax purposes.

Section 24 (a) (6) disallows any deduction for “loss from sales or exchanges of property, directly or indirectly, (A) between members of a family, or (B) except in the case of distributions in liquidation, between an individual and a corporation in which such individual owns, directly or indirectly, more than 50 per centum in value of the outstanding stock. For the purpose of this paragraph — (C) an individual shall be considered as owning the stock owned, directly or indirectly, by his family; and (D) the family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants.”

The net result of the sale here was that petitioner, the greater part of whose stock was held directly or beneficially by various relatives of the Shelden family, transferred certain property to the Warren Corporation, all of whose stock was held in trust for the benefit of the two children of Allan and Elizabeth Warren Shelden. Considering the factual situation against the provisions of the statute, we do not think the section can be applied.

Subsection (A) of the quoted statutory provision specifies sales, directly or indirectly, between members of a family. To hold that this was a sale between members of the same family would require not only the disregard of several trust entities, as well as two corporate entities, but also the specific language of subsection (D) of the same statute.

It is true that, in determining the number of $5,000 exclusions in connection with gifts to trusts, it has been held that such exclusions apply separately to each beneficiary rather than, as formerly, to the trust itself. Wilton Rubinstein, 41 B. T. A. 220. “But the very doubt which has affected the question as to trusts strengthens the conclusion that a gift to a corporation -may not be treated as a group of gifts to its shareholders.” Frank B. Thompson, 42 B. T. A. 121. Here the seller and purchaser are both bona fide corporations. And, no such circumstances are discernible as would warrant our disregard of the entities of these two corporations. Burnet v. Commonwealth Improvement Co., 287 U. S. 415; Burnet v. Clark, 287 U. S. 410; Dalton v. Bowers, 287 U. S. 404. But, even if the separate entities of the several trusts and corporations here involved be ignored, the sale was not between “members of a family”, as that term is defined in section 24 (a) (6) (D), supra. The individuals owning the stock of the buying corporation, under the provisions of section 24 (a) (6) (C), supra, were William Warren Shelden and Allan Shelden III. But, in the petitioner, the seller, these individuals owned, both actually and constructively, as described in subsection 24 (a) (6) (C), supra, only the stock held in the Allan Shelden III trust, the William Warren Shelden trust, the Allan Shelden trust and the Squire trust. The aggregate of the par value of all of this stock is $32,666.66, which is substantially less than the 50 percent ownership which section 24 (a) (6) (B), supra, requires. The majority stock of the seller, i. e., $63,333.34 in par value, is owned by their uncles, Alger and Henry Shelden, who are not “brothers and sisters, spouses, ancestors, or lineal descendants” of William Warren and Allan Shelden III.

The controlling statute does contain the ambiguous expression “directly or indirectly.” (Emphasis supplied.) But there appears to be no legislative history resolving that uncertainty or, at least, none that can give respondent any encouragement here. We, therefore, refuse to construe it as including the present situation. See Frank B. Thompson, supra.

Subsection (B) of section 24 (a) (6) singles out sales between an individual and a corporation in which the individual owns more than 50 percent in value of outstanding stock. This provision is clearly inapplicable here, since petitioner, the vendor, is a corporation.

Congress amended section 24 (a) (6), supra, in several respects in section 301 of the Revenue Act of 1937. That section, as thus amended, disallows losses, in addition to the instances already covered by section 24 (a) (6), in exchanges between corporations where more than 50 percent of the value of the outstanding stock in each of which is owned by or for the same individual, provided either one of such corporations is a personal holding company. The section, as amended, also provides that where a trust is involved, the beneficiaries shall be considered as owners of stock held by the trust, and where a corporation is involved, a person shall be considered as owning stock owned by members of his “family.”

Assuming that the Warren Corporation is a personal holding company, section 801 of the 1937 Act would nevertheless not apply here, even if it were, as argued by respondent, a mei'e clarification of existing law. As already discussed, under the specific terms of the statute, the individuals owning the stock of the Warren Corporation, the purchaser, owned less than 50 percent of the stock of the taxpayer, the selling corporation. We therefore conclude that the deduction of the loss on the present transaction is disallowed by neither the 1934 nor the 1937 Revenue Act. Cf. Higgins v. Smith, 308 U. S. 473.

Petitioner needed the money, arising from the transaction, to meet pressing obligations. The fair market value of the land was subjected to an investigation, from which it was determined that $32,446.79 was the best price that could be obtained for the acreage. Petitioner proved by an expert witness, whose testimony was unchallenged, that the fair market value of the land sold was $200 per aore, or a total of $32,000. The consideration for the purchase was not furnished by the seller, petitioner, nor any of its stockholders. There was no agreement or option for reacquisition by the petitioner, nor was the property ever reconveyed to the petitioner. Consequently, we think, the second premise, upon which respondent denied any loss on this sale, is likewise without merit. James Lee Johnson, 37 B. T. A. 155; affd., 104 Fed. (2d) 140, and 308 U. S. 523; Ralph Hochstetter, 34 B. T. A. 791; Marjory Taylor Hardwick, 33 B. T. A. 249; William H. Albers, 33 B. T. A. 373; Chicago Title & Trust Co., Executor, 32 B. T. A. 249; A. R. Glancy, Inc., 31 B. T. A. 236; A. S. Eldridge, 30 B. T. A. 1322; Sydney M. Shoenberg, 30 B. T. A. 659; affd., 77 Fed. (2d) 446; Luella Hoyt Slayton, 29 B. T. A. 931; Oscar F. C. Kunau et al., Trustees, 27 B. T. A. 509; Commissioner v. Dyer, 74 Fed. (2d) 685; Commissioner v. Riggs, 78 Fed. (2d) 1004.

Respondent contends that petitioner’s loss on the sale to the Warren Corporation, if otherwise allowable, is allowable only to the extent of $2,000 under section 117 of the Revenue Act of 1934 because the property was a capital asset. This contention was made neither in the deficiency letter nor in the pleadings and is raised for the first time on brief. Respondent has thus made no determination that the property in question was a capital asset, and no presumption to that effect can properly be entertained. Indeed, since contiguous property had been developed, subdivided and sold, it is likely that petitioner was merely awaiting a favorable time to accord this tract of land the same treatment and that this fact could easily have been shown liad the issue been timely raised. In any event, we will not consider the question now, especially since petitioner, not having been apprised in advance of the hearing of respondent’s reliance on this ground, would thereby be seriously prejudiced and robbed of an opportunity to offer proof on the point. Ortiz Oil Co., 37 B. T. A. 656, and cases therein cited.

Accordingly, we hold that the loss suffered by petitioner upon the sale of its property to the Warren Corporation may be deducted in full. This conclusion is not affected by the fact that petitioner may have made the sale in order to reduce its tax liability on account of retirement of bonds at less than face value. Without now deciding whether petitioner realized income by reason of such retirement, it is well settled that a transaction is not vitiated because motivated by a desire to reduce taxes. United States v. Isham, 17 Wall. 496; Jones v. Helvering, 71 Fed. (2d) 214; Gregory v. Helvering, 293 U. S. 465.

Respondent disallowed petitioner’s foreclosure loss on the sole ground that the loss occurred in the year of foreclosure rather than the year in which the equity of redemption expired. It is settled, Iioav-ever, that it is the expiration of the period of redemption which is the indentifiable event fixing such a loss. Derby Realty Corporation, 35 B. T. A. 335; J. C. Hawkins, 34 B. T. A. 918; affd., 91 Fed. (2d) 354. See also Sherwin A. Hill, Administrator, 40 B. T. A. 376. The case of W. W. Hoffman, 40 B. T. A. 459, upon which respondent relies, is distinguishable in that there an abandonment of worthless property occurred in the year of foreclosure. Here, far from abandoning the property, petitioner remained in possession and collected rents, issues, and profits during the period of redemption. We hold that petitioner is entitled to deduct a loss of $5,175 by reason of the foreclosures of its properties. In view of the stipulation of the parties that petitioner is not entitled to a loss of $700 in respect of certain other property which was foreclosed,

Revieived by the Board.

Decision will be entered under Rule SO.

       See Seidman, Legislative History of Eederal Income Tax Laws, pp. 316, 317.


author: MtjRdock : HakRON,

text:
    John Thomas Smith, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 65717, 71888, 75858.
    Promulgated August 9, 1940.

      David Sher, Esq., for the petitioner.

      Franh D. Strader, Esq., and Ellyne E. Striclcland, Esq., for the respondent.
   SUPPLEMENTAL OPINION.

MtjRdock :

The Board promulgated findings of fact and an opinion in this case. See 40 B. T. A. 387. It then entered its decision on October 31,1939. Thereafter, on January 8,1940, the Supreme Court decided a case of this same taxpayer for another year. Higgins v. Smith, 308 U. S. 473. The Board, upon motion of the Commissioner, vacated its decision to consider the possible effect of the Supreme Court decision upon the Board decision. See order of January 18, 1940. The parties were heard and they filed briefs. The Board now concludes that the decision of the Supreme Court requires modification of the decision of the Board in one respect and in only one respect.

The petitioner argues that we have no power to change our original decision. That decision was vacated before it became final, before the taking of an appeal, and before the time for appeal had expired. If the Board correctly interprets the Supreme Court decision, then the vacation was proper because it permits the Board to correct an error which would otherwise justify an appeal. The Board believes that it has jurisdiction and deems the question of the timeliness of the Commissioner’s motion unimportant under the circumstances.

The Board allowed the petitioner deductions for losses in 1929 upon sales of, stock by the petitioner to his wholly owned corporation, Innisfail. The Supreme Court disallowed deductions for losses from similar sales in 1932 upon the ground that such transactions were too insubstantial to give rise to deductible losses. That decision is controlling here, and upon its authority we hold that the petitioner is not entitled to deductions for the losses of $48,811 and $39,240 claimed for 1929 upon the sales of 1,900 shares of Hudson Motor Car Co. common and 1,000 shares of Aldebaran Corporation stock to Innisfail. The decision does not require complete disregard of the separate corporate entity, Innisfail, for tax purposes and we are not disposed to go further than has the Supreme Court.

Reviewed by the Board.

Decisions will he entered under Rule 50 and those for 1930 and, 1931 will he in the same amounts as were entered on October 31,1939.

Supplemental Dissenting Opinion.

HakRON,

dissenting: The Board's reconsideration of the original' majority opinion makes it necessary to supplement the original minority opinion in this case, reported in 40 B. T. A. 387, at pages 402-424.

The reconsideration now given in the supplemental opinion of the majority is limited to the question of whether petitioner sustained losses on the Hudson Motors and Aldebaran stocks, purportedly sold to his wholly owned corporation in 1929, so as to be entitled to deductions from taxable income. This limited reconsideration of the several questions presented in this case is premised upon the belief that the Supreme Court’s decision in Higgins v. Smith, 308 U. S. 473, involving a later tax year, 1932, does not require reconsideration of any of the other questions decided by the Board in the original opinion. With this I disagree.

Petitioner received dividends in 1930 and 1931 on the Hudson Motors stocks purportedly sold to Innisfail in 1929. No dividends were paid on the Aldebaran stock. Petitioner received dividends on Chrysler stocks in 1929, 1930, and 1931. The Commissioner has determined that all of these dividends constituted petitioner’s income, taxable to him, and part of the deficiency is due to this determination. While the Supreme Court did not have before it any question relating to petitioner’s liability for tax on dividends on stocks used in transactions of petitioner with his wholly owned corporation, it seems clear that the views expressed by the Supreme Court on the question that was before it requires that the Board should reconsider the additional question relating to taxation of petitioner on the dividends in question in this case.

In the Higgins v. Smith case, the Supreme Court held that the continued dominion and control of petitioner over the securities there involved was such that there was not “enough of substance” in the transactions to determine a loss to petitioner. In this case, with reT spect to the dividends in question there is so much evidence to show a continued dominion and control of petitioner over the stocks on which the dividends were paid and over other stocks which petitioner claims to have sold on credit to his wholly owned corporation in transactions exactly like the “sales” involved in the case before the Supreme Court, that there appears to be much similarity between the dividends question before the Board and the particular question that was before the Supreme Court in the other case. Petitioner disclaims liability for tax on the dividends in question upon the claim that his wholly owned corporation was in debt to him and that he received the dividends in liquidation of the debt, with respect to the dividends received in 1929 and 1930. Petitioner disclaims liability for tax on the dividends received by him in 1931 upon the claim that he borrowed from Innisfail those sums, albeit they were paid to him directly by the Chrysler and Hudson Motors corporations. In the case before the Supreme Court, the Court went to the substance of certain transactions and held that there was no real loss to support petitioner’s claim for deductions. In this case, by the same reasoning, the Board should examine the situation to determine whether the so-called debt of the wholly owned corporation to petitioner had enough of reality to relieve petitioner from tax on the dividends of 1929 and 1930 allegedly kept in liquidation of the debt; and, also, whether tllere was any real loan of the 1931 dividends from Innisfail to petitioner to relieve petitioner from tax on the dividends of 1931. Or, from another viewpoint, it would seem that, without considering the reality or the unreality of the alleged debt of Innisfail to petitioner in 1929 and 1930, or the reality or unreality of the alleged debt of petitioner to Innisfail in 1931,- the Board should consider whether for tax purposes these dividends which were so completely within the petitioner’s control as to be subject at all times to his unfettered command and use, should Toe attributed to petitioner as his income, taxable to him in each of the three years.

Without attempting to repeat the facts, which are set forth more fully in the earlier minority opinion than in the earlier majority opinion (40 B. T. A. 402-424) it should be pointed out again that the Hudson and Chrysler stock certificates remained in petitioner’s name, that the dividends paid on those stocks by the Hudson and Chrysler corporations were paid to petitioner by checks made out in his name, and that the checks were deposited by petitioner directly in his own bank account. At some time in 1930 petitioner did not any longer have, as an excuse for the continued receipt of those dividends, the existence of any so-called debt of the corporation he owned to him, but, nevertheless, he continued to receive and retain the dividends in the guise of borrowings by him from the corporation. With respect to his transactions constituting debits and credits in a running account with the corporation owned by him, and the so-called lending and borrowing back and forth, petitioner testified that he did not want the corporation ever to pay him any money, which only means that petitioner’s plan was devised primarily for the purpose of relieving himself from taxation on income which he claims he effectively siphoned into the corporation so as to relieve himself from income tax.

It appears to have been stated so frequently by the Supreme Court, in various ways in various cases, that a taxpayer is to be taxed on income subject to his unfettered command and use, from which he is the real recipient of the economic benefits, that the question here would seem to' turn ón just that. See Corliss v. Bowers, 281 U. S. 376; Burnet v. Wells, 289 U. S. 670; Helvering v. Clifford, 309 U. S. 331. Taking the question of petitioner’s liability for tax oii the Hudson and Chrysler dividends in 1929, 1930, and 1931 in.its broad and most essential aspects, does not petitioner’s income tax liability rest upon the fact that petitioner’s command, use, privileges, and benefits in those dividends were so substantial and so real as to make him taxable on that basis? While I believe strongly that there was no debt from the wholly owned corporation to petitioner in 1929 and 1930, cognizable for tax purposes, against which the.dividends could be offset to relieve petitioner from taxation, even if-such were assumed to be technically true, is the situation here not the type of situation which may be disregarded in order to effectively serve the purposes of the taxing statutes? Is it not true that, so far as petitioner’s dominion and control were .concerned, neither the wholly owned corporation nor the transactions relied on effected any substantial change in petitioner’s ownership of the stocks on which the dividends in question were paid? Should it not be held that petitioner’s devices fail to relieve him from the burden of taxation? As for the situation in the year 1931, there seems no ground whatever over which petitioner can escape taxation on the dividends paid directly to him in that year. He could not then anticipate future “debts” of his wholly owned corporation to him to offset the income he received in 1931 from the dividends. See Lucas v. Earl, 281 U. S. 111.

The reasoning employed by the Supreme Court in the Higgins v. Smith case, if applied here to the question of petitioner’s liability for tax on the Hudson and Chrysler dividends in 1929, 1930, and 1931, would seem to support sustaining the Commissioner’s determinations. I respectfully dissent from the majority’s contrary conclusion and its failure to reconsider this particular question in the light of the recent Supreme Court decision.

Tuener agrees with this dissent.


author: Tyson:

text:
    Clarkson Lindley Trust, Anna Gale Lindley, Charlotte Lindley Wurtele, and Alfred D. Lindley, Trustees, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97084.
    Promulgated August 13, 1940.

      Kenneth Taylor, Esq., for the petitioners.

      Henderson A. Melville, Esq., for the respondent.
   OPINION.

Tyson:

Petitioners contend that the interest of Clarkson Lindley in the bonds in question was, under the terms of his lease agreement with the S. S. Kresge Co., a property right which was fixed and certain prior to the time of his transfer, on May 20,1932, of such interest to the petitioner trust and that such property right, upon that transfer being made, became part of the capital or corpus of the trust and constituted a gift from Clarkson Lindley to the trust specifically exempt, as to the donee trust, from taxation under section 22 (b) (3) of the Revenue Acts of 1934 and 1936, except only as to any capital gains derived from the sale of the bonds after the trust had acquired them.

Eespondent contends, on the other hand, that the bonds were additional rent, or bonus in the nature of rent, for the leased premises and that when received by the trust in the taxable years the value thereof became rental income to it and includable in its tax returns, as such, for those years.

We are presented with the preliminary questions of whether the bonds constituted the purchase price of the buildings on the leased premises or additional rent, or bonus in the nature of rent, for those premises, since if they were the purchase price of the buildings the petitioners’ contention should be sustained without further consideration of other features of the case., .

Paragraph V of the lease contract, as above set out, provided that the bonds, when delivered to the executors of Clarkson Lindley’s estate, should constitute full payment for the buildings. Other provisions of the lease contract provided, inter alia: That the buildings thereon should be insured by the lessee, with loss payable to the lessor; that any building removed should be replaced by another building at least equal in value to the one removed, all at the expense of the lessee; that the lessee, before demolishing or removing a building for the purpose of replacing it, should execute a bond guaranteeing the proper completion of the new building or buildings, unless same was waived by the lessor, for any or all buildings costing in excess of $10,000; that at the termination of the lease, either by the expiration of its period or by default of the lessee, the buildings would remain attached to the leased premises as the property of the lessor. Under all the provisions of the lease instrument taken together for the purpose of construing its meaning, we are of the opinion that the bonds in question constituted additional rental, or bonus in the nature of rental, of the leased premises and not the purchase price of the buildings thereon, notwithstanding the provisions of paragraph V of the lease instrument. Minneapolis Syndicate, 13 B. T. A. 1303; George W. Crile, 18 B. T. A. 588; affd., 55 Fed. (2d) 804; certiorari denied, 287 U. S. 600; Marvin H. Gates, Trustee, 26 B. T. A. 998; affirmed on this point, 69 Fed. (2d) 277; and Nicollet Associates, Inc., 37 B. T. A. 350.

The contention of petitioners, however, presents the further question of whether, even if the bonds were additional rentals, or bonus in the nature of rentals, the right to receive the bonds had, nevertheless, accrued to Clarkson Lindley as a property right either when the lease contract was executed in 1924 or when the bonds had all been deposited with the depositary in 1927, as provided in the lease agreement, and that consequently the transfer of that right to the trust constituted a gift to it of corpus or capital which would preclude the bonds from being included in the income of the donee trust, under section 22 (b) (3), supra.

By the trust instrument, Clarkson Lindley, the grantor therein, conveyed to the trustees an undivided one-half interest in certain definitely described real estate, the entire real estate being owned in fee by Lindley at the time of the conveyance and under lease from him for a term to run approximately 28 years thereafter. The terms of this lease provided for an annual rental in definite amounts, varying as to certain years, and also provided for additional rent, or bonus in the nature of rent, evidenced by United States bonds of the face value of $200,000, which bonds were to be delivered to the estate of Lindley six months after his death. The conveyance of the one-half interest in the real estate to the trust was absolute and in fee except as stated in the conveyance “it was subject to * * * an undivided one-half (½) interest in that certain lease of the whole of said premises”, i. e., the real estate conveyed. The recital that the conveyance of the interest in the real estate was subject to the lease did'not “work” severance of the rent from the reversion, Equitable Life Ins. Co. v. Bowman, 32 S. W. (2d) 126, 128.

The real estate conveyed to the trust undoubtedly constituted a gift by Clarkson Lindley to the trust, the value of which was exempt from taxation to the trust, as donee, under section 22 (b) (3), supra. But was the right of his estate to receive the United States bonds six months after his death, as additional rental, or bonus in the nature of rental, which we have found such bonds to be, also a gift and likewise exempt under section 22 (b) (3), supra?

Although the trust instrument in terms purported to convey, in addition to the real estate, “all interest of the grantor in an undivided one-half (½) of said lease and the leasehold interest thereby created, including one-half (⅝) of all rentals hereafter accruing under said lease and a one-half interest” in all the bonds deposited, which bonds were to be turned over to Lindley’s estate six months after his death, we are of the opinion that the purported transfer, in express terms, of such rights in the United States bonds did not constitute a gift, the value of which is exempt from taxation under section 22 (b) (3), supra, for the reason that the conveyance of the right to receive the bonds, which was not to accrue until after the execution of the trust instrument and six months after the death of the grantor, was necessarily an incident, and only an incident, to the accompanying transfer, by way of gift, of the real estate from which such bonds, as' rentals, were to be derived — the grantor of the trust not having expressly reserved such rentals. The controlling principle of law is that the transfer of the reversion carries with it the right to rent subsequently accruing unless the rent is expressly reserved. Butt v. Ellett, 19 Wall. (U. S.) 544; In re Owsley’s Estate, 122 Minn. 190; 142 N. W. 129; and Fisher v. Heller, 174 Minn. 233; 219 N. W. 79. This rule obtains generally, as well as in Minnesota where the real estate involved is situated. 36 C. J. 364, § 1206; 66 C. J. 1040, § 792; and Tiffany on Real Property, vol. 3, § 881. Rents subsequently accruing are those rents becoming due on a date subsequent to the transfer of the reversion, Tiffany on Real Property, vol. 3, § 888; Handlan v. Bennett, 51 Fed. (2d) 21; Hammond v. Thompson, 168 Mass. 531; 47 N. E. 137; Hearne v. Lewis, 78 Tex. 276; 14 S. W. 572; and Fahrenbraker v. Horst Co., 209 Cal. 7; 284 Pac. 905.

After the conveyance by the trust instrument of the one-half interest in the real estate from which the rentals (including the bonds in question) arose, the further specific purported conveyance in that instrument of the leasehold and the rents to be derived therefrom was superfluous and did not constitute a gift separate from that of the real estate, since the gift of the real estate, of itself, carried with it, as a necessary incident thereto, the rents to be derived and thereafter accrued therefrom.

Although the one-half interest in the real estate transferred by Clarkson Lindley to the trust constituted a gift to the trust, we are of the opinion, and so hold, that the transfer by Lindley of the fight of his estate to receive the bonds six months after his death, which transfer was necessarily incident to his unrestricted transfer of the real estate, did not constitute a gift from Lindley to the trust exempt from taxation under section 22 (b) (3), supra.

We are further of the opinion, and so hold, that, both Lindley and the petitioner trust being on the cash receipts and disbursements basis as to the keeping of their books and as to the making of their income tax returns, the value of the bonds received by the trust, without restriction, in the respective taxable years involved, is to be included in its income as rentals, or bonus in the nature of rentals, for those years. Cf. Renwick v. United States, 87 Fed. (2d) 123, and authorities cited therein.

We hold that the respondent did not err in including in the income of petitioners for 1935 the amount of $9,735.43 as the value of the bonds received by them in that year, and, further, that respondent did not err in likewise including in petitioners’ income for 1936 the amount of $93,655.64 as the value of the bonds -received by them in that year. ...

No question is raised and the petitioners do not claim that the value of the bonds is distributable currently by the trust to the beneficiaries and that such value is therefore deductible in computing the net income of the trust under section 162 (b) of the Revenue Act of 1934.

The amount of gain, capital or otherwise, on the sales of the bonds in 1935 and 1936, is not presented as an Issue in this proceeding.

Decision will be entered under Bule 50.

       SBC. 22. GROSS INCOME.
      *******
      (b) Exclusions prom Gross Income. — The following items shall not be included in gross Income and shall be exempt from taxation under this title:
      *******
      (3) Gifts, bequests, and devises. — The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income).


author: MtjedocK :

text:
    Prudential Tobacco Company, Inc., by O. H. Chalkley and W. H. Hatcher, Surviving Directors Acting as Trustees in Liquidation, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 97348.
    Promulgated August 13, 1940.

      Harry J. Zigun, Esq., for the petitioners.

      L. A. Spalding, Jr., Esq., for the respondent.
   OPINION.

MtjedocK :

The Commissioner determined a deficiency in income tax in the amount of $7,136.05 and a deficiency in excess profits tax in the amount of $1,679.15 for the taxable period January 1, 1936, to and including March 31, 1936. The issue for decision is whether or not provisions of the Revenue Act of 1936 are applicable to the period here involved. The Roard adopts the stipulation of the. parties as its findings of fact.

The petitioner filed its income tax returns for all periods up to December 31, 1935, upon the basis of a calendar year. It made application on December .20, 1935, for permission to change to a fiscal period beginning April 1 of one year and ending on March 31 of the following year so that it would be on the same basis as its parent, Philip Morris & Co., Ltd. The Commissioner, on January 17, 1936, granted permission for the change, effective March 31, 1936, provided the taxpayer would make proper adjustments on its books and would file a return on or before June 15, 1936, for the period from January 1, 1936, through March 31, 1936. The petitioner corporation was dissolved on June 2, 1936. The petitioner on June 15, 1936, filed its return for the period January 1 through March 31, 1936, and paid an amount equal to one-fourth of the income and excess profits taxes computed under the Revenue Act of 1934 upon the income shown on that return. The Revenue Act of 1936 was approved and became a law on June 22, 1936.

The petitioner contends that the Revenue Act of 1934 and not the Revenue Act of 1936 is applicable to the taxable period January 1 through March 31, 1936. The words “taxable year” are defined in section 48 of the Revenue Act of 1936 to include “in the case of a return made for a fractional part of a year under the provisions of this title or under regulations prescribed by tlie Commissioner with the approval of the Secretary, the period for which such return is made.” The petitioner does not contend that the return for the period of three months was not made in accordance with the law and regulations.- The short period was a taxable year. Pennsylvania Electric Steel Casting Co., 20 B. T. A. 602; Corno Mills Co., 21 B. T. A. 712; Sunburst Refining Co., 23 B. T. A. 824; Pennsylvania Chocolate Co. v. Lewellyn, 27 Fed. (2d) 762. Section 1 of the Revenue Act of 1936 makes it clear that the provisions of the act are to apply to all taxable years beginning after December 31, 1935, but are not to apply to any taxable year beginning prior to January 1, 1936. Section 63 of the same act provides that the taxes imposed are in lieu of taxes imposed under the Revenue Act of 1934. Since the taxable period here in question was a taxable year beginning after December 31, 1935, the Revenue Act of 1936 and not the Revenue Act of 1934 applies.

Section 14 of the Revenue Act of 1936 imposes what is there called “Surtaxes on Undistributed Profits.” Those taxes “upon the net-income of every corporation” differ from prior taxes on income in some respects. They are measured by the sum of various percentages of “the undistributed net income.” The undistributed net income is defined as the adjusted net income minus two credits, one of which is the dividends paid credit. The dividends paid credit is defined generally as “the amount of dividends paid during the taxable year.” Sec. 27. Adjusted net income is defined as the net income minus the sum of certain items not here material. The petitioner argues that the real purpose of the wholly new statutory provisions relating to the surtaxes on undistributed profits was to cause corporations to distribute their net earnings, so that they would be received by and taxed to the stockholders, and to penalize, by the high tax, those corporations which, having had the opportunity, refused or failed to relieve themselves from the penalty by exercising their privilege of distributing dividends. The petitioner then points out that this revenue act was not adopted until several months after the close of the taxable period involved herein and the petitioner never had any opportunity to act within that year with knowledge of the statutory provisions now said to be applicable thereto. It did not know in time and had no way of knowing that the distribution of dividends within the period would relieve it from the surtaxes. It argues that the application of the surtax provisions to this short period would subject this one taxpayer to the burden of a penal provision without giving it the same privilege of obtaining relief through the dividends paid credit afforded all other corporations, would be a retroactive application of an act penal in character without locus poenitentia, would be arbitrary and discriminatory, and for those reasons .would be unconstitutional.

The lengthy Committee -Reports on the undistributed profits tax provisions collected in Seidman’s Legislative History of Federal Income Tax Laws, beginning at page 207, do not fully support the statements of the petitioner as -to the nature and purpose of the provisions. They indicate that the purpose of Congress was not to penalize accumulations but to equalize tax by collecting in this wise an amount which would otherwise be collected as surtaxes from shareholders. It was pointed out that partners were taxed upon their respective shares of partnership income (clearly not a penal provision) regardless of distribution, and the undistributed profits tax would tend to produce a corresponding revenue from corporate earnings otherwise free from surtax. The President’s message was to the same effect. We are unable to say-that section 14 is penal in character (cf. United Business Corporation of America v. Commissioner, 62 Fed. (2d) 754) or that it is a wholly new tax, as for example, was the gift tax. Cf. Blodgett v. Holden, 275 U. S. 142, modified on rehearing, 276 U. S. 594. See also Brady v. Anderson, 240 Fed. 665; certiorari denied, 244 U. S. 654. The cases cited by the petitioner to support its claims that this tax is penal are not in point, because they deal with wholly different statutory provisions. An increase in rate is not a new tax and may be retroactively applied Without violating the Constitution. Milliken v. United States, 283 U. S. 15; Welch v. Henry, 305 U. S. 134.

The latter case is particularly interesting here. The Wisconsin taxing act in force in 1933 imposed a- tax on net income at graduated rates. It allowed a deduction for dividends received. Welch filed his return for 1933 on March 15, 1934, showing no taxable income after deducting dividends. The legislature, a year later, decided to tax the dividends and enacted a law imposing a tax on dividends received in 1933 and theretofore deductible. The rates were higher than those in effect in 1933. The Supreme Court discussed the retroactive application of taxing acts, held that the one in question was constitutional, and said: “In each case it is necessary to consider-the nature of the tax and the circumstances in which it is laid before it can be said that its retroactive application is so harsh and oppressive as to transgress the constitutional limitation.” That case and United States v. Hudson, 299 U. S. 498, indicate that taxpayers must be deemed to be forewarned of the possibility of changes in rates, classifications, deductions, and credits in the income tax laws. See possibly contra Untermeyer v. Anderson, 276 U. S. 440. It might be well to mention at this point the circumstances of this case. The petitioner voluntarily interjected the short period. Had it remained upon a calendar year basis all of the provisions of the Revenue Act of 1936 would have applied to its 1936 income. The filing of a return, on or before June 15, 1936,' for the short period, was one of the conditions upon which permission for the change was granted. Failure to file the return would have left the petitioner upon the calendar year basis. Perhaps an answer to the petitioner is that it must take the disadvantages of the short period along with the advantages which it sought. •

The Supreme Court, in discussing proper tax classifications under the Fourteenth Amendment, has said: “The state is not bound by any rigid equality. This is the rule; its limitation is that it must not be exercised in ‘clear and hostile discriminations between particular persons and classes.’ ” Citizens Telephone Co. v. Fuller, 229 U. S. 322. It also said that the classification “must rest upon some ground of difference having a fair and substantial relation to the object of the legislation, so that all persons similarly circumstanced shall be treated alike.” Louisville Gas & Electric Co. v. Coleman, 277 U. S. 32. A taxing statute “may not be so arbitrary as to amount to confiscation * * *." Nichols v. Coolidge, 274 U. S. 531. Here the constitutional question is raised under the Fifth Amendment, but if the above rules have any application, they do not show this provision unconstitutional. It does not discriminate between taxpayers similarly circumstanced. Cf. Brushaber v. Union Pacific Railroad Co., 240 U. S. 1; Heinman v. United States, 52 Fed. (2d) 1035; Foley Securities Corporation v. Commissioner, 106 Fed. (2d) 731. While we are not entirely free from doubt upon the present question, nevertheless, we are unwilling to declare it unconstitutional upon the present record.

Decision will 1)6 entered for the respondent.


author: Disney :

text:
    Badger Oil Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 95482.
    Promulgated August 14, 1940.

      Boss M. Lanibdin, Esq., and ’Walter T. Russell, Esq., for the petitioner.

      J. L. Badcstrom, Esq., for the respondent.
   OPINION.

Disney :

The respondent allowed depletion upon amounts received from International by petitioner as royalty payments upon the two-thirds royalty interest owned by petitioner, but denied depletion upon $305,000 received as consideration for conveyances to International. The question presented here arises upon the disallowance of percentage depletion upon the $305,000. The gist of the principal problem is whether depletion is allowable on ⅛⅝ theory that the petitioner, having owned both a leasehold and about two-thirds of the lessor’s interest, was in effect in conveying to International, the lessor of a lease, retaining an economic interest, under such cases as Herring v. Commissioner, 293 U. S. 322, or should be denied on the theory that it occupies the position of an assignor of a lease, within the principle enunciated in Helvering v. Elbe Oil Land Development Co., 303 U. S. 372, and cases to the same effect.

The petitioner executed and delivered (a) an assignment in the usual form of an oil and gas lease as to about 1,327 acres of land, (b) an assignment of an oil payment, (c) an original oil and gas lease; and a “Royalty Owner’s Agreement” releasing, as such royalty owner, International from certain obligations as leaseholder.

The oil payment, of a value of $650, was payable from the net proceeds of one-fourth of the oil or gas as, if, and when produced and sold by the Mcllroy Oil Co., to whom petitioner assigned the lease. Mcllroy was not liable personally for the payments. After any default in payment, petitioner’s signature was necessary upon division orders on the sales of oil or gas. In assigning to Mollroy, the petitioner retained an economic interest in the oil and gas, but sold such interest for cash, and was not entitled to depletion upon $650, that part of the $305,000 consideration attributable to the oil payment. Commissioner v. Fleming, 82 Fed. (2d) 324; R. R. Ratliff, 36 B. T. A. 762; Rawco, Inc., Ltd., 37 B. T. A. 128 (139).

Included in the lease assigned to International was a tract of 130 acres in Carson County. This was not included in the warranty deed by which the petitioner acquired the remainder of the estate of the lessors, Lewis and wife. Therefore the petitioner owned no interest in the 130 acres, except as lessee. Depletion was properly denied, to the extent of $2,000, the value of the lease. Helvering v. Elbe Oil Land Development Co., supra; Darby-Lynde Co. v. Alexander, 51 Fed. (2d) 56. Hammonds v. Commissioner, 106 Fed. (2d) 420.

This brings us to consideration of the principal issue: As to those lands in which petitioner had acquired not only a lease, but the lessor’s interest, except approximately one-third of the rights to royalties under oil and gas leases, is petitioner entitled to depletion upon amounts received, in large part for an assignment of the lease held by it, and as to a smaller amount of land, for delivery of a lease executed by petitioner itself, and for the “Royalty Owner’s Agreement” as to offsetting wells, etc.? In effect, the petitioner argues that it occupies the same economic position as the original lessor, having acquired his interests (except one-third of royalty rights conveyed to others) and has an economic interest in the production to be realized from the lease conveyed and is entitled to depletion. Petitioner bases its contention in part upon the idea of merger of lease in the larger estate acquired from the lessor, but urges that, irrespective of merger and ignoring the technical forms of conveyancing, such an interest in future production remained in the petitioner as to require allowance of depletion upon amounts received for the conveyance.

We think it plain that petitioner’s position must depend upon whether its leasehold interest was merged into and extinguished by the acquisition of the remaining interests of the lessor; for it is not to be doubted, in the light of the decisions above enumerated, that an assignor of a lease, merely assigning the rights thereunder to his assignee, does not, in receiving a cash consideration for the assignment, derive “gross income from the property” within the terms of section 114 (b) (3) of the Eevenue Act of 1934. The petitioner, a lessee, having received a cash consideration from International, its assignee, must demonstrate that its position is not that of mere assignor. In fact, it executed, in large part, an ordinary assignment. Repeated pronouncements of course forbid undue regard for mere forms of conveyancing and require consideration of the true economic status of the taxpayer. Yet merger, upon which in essence petitioner must rely to escape the position of ordinary assignor, is a question largely of intent, and the fact of execution of an assignment, rather than an original lease, as to most of the lands, clearly casts some light upon intent, particularly in connection with the other facts here presented. As to a small portion of the lands, the petitioner executed an original lease. Why was an assignment executed as to the greater portion? Obviously, the distinction between assignment and lease was recognized, and an assignment intentionally used. This action, by the owner of both the lease and most of the lessor’s interests, seems clear indication of intent not to merge the two interests. “* * * the merger will not be held to take place if it be apparent that it was not the intention of the owner, or if, in the absence of any intention, said merger was against his manifest interest.” Factors' & Traders’ Insurance Co. v. Murphy, 111 U. S. 738. Caprito v. Grisham-Hunter Corporation, 128 S. W. (2d) 149 (Civ. App. Texas). From examination of all of the evidence herein, we are of the opinion that the petitioner did not intend merger, but intended what was actually done, as to the principal lease — to assign the lease. The language was that of an ordinary assignment, and was so captioned. Therein reference is first made to the lease executed by the land owner in 1921 and then repeated reference is made to the “said lease and all rights thereunder” and to the fact of transfer of right, title, and interest “in and to said lease and rights thereunder.” No rights are reserved to the petitioner by the instrument, as would be done under an oil and gas lease (and is in fact specifically done in the original oil and gas lease also executed, and hereinafter discussed). The instrument conveys rights — it does not retain or create them for the petitioner as owner of the fee or royalties or in any manner refer to its rights or ownership other than as lessee. On the contrary, the instrument recites a convenant that the rents and royalties due and payable under the lease have been paid, thus assuming the position of the grantor to be that of lessee. Moreover, the intent to distinguish between positions as lessee and royalty owner is made plain by the fact of the execution by the petitioner of a separate instrument, called “Royalty Owner’s Agreement”, wherein in substance it agreed, “so far as it may lawfully do so as owner of a portion of the royalty interest reserved in the lease”, that International need not drill offset wells and might designate the purchaser of the “royalty oil and gas.” The contract between petitioner and International covering the whole transaction provided, first, that petitioner sell and assign an oil and gas lease executed not by petitioner, but in 1921 by T. D. Lewis and wife; and in sharp contrast thereto, provided for execution of “an original oil and gas lease from Badger Oil Company as lessor, to International Petroleum Corporation” upon another smaller amount of land. We conclude that merger was not intended, but that the petitioner in dealing with International intended to do so as lessee-assignor.

Moreover, as a matter of law there was, in our opinion, no merger. That doctrine involves the extinguishment or “drowning” of a lesser in a larger estate. The petitioner never acquired all of the estate remaining after execution of the oil and gas lease. One-third of the right to receive royalties under the lease and under any future lease was in other hands. A lease can not, we think, be merged in any estate less than that of the full estate of the lessor. In Wisconsin National Bank, 4 B. T. A. 109, 113, we held that there was no merger of a leasehold into a two-thirds interest in the fee estate, acquired by the lessee after execution of the lease. We said:

* * * Although the lessee purchased portions of the fee at different times, the leasehold, nevertheless, continued to have a legal existence in its entirety and so could have been sold or otherwise transferred as a whole at any time prior to legal merger of the lesser and greater estate through acquisition of the entire fee by such lessee.

In the present matter also approximately one-third of the royalty interest was extant in others and the lease was in fact sold or otherwise transferred as a whole — “prior to legal merger of the lesser and greater estate through acquisition of the entire fee by such lessee.” Quoting Bouvier, we also observed:

“To have the union operate a merger, the estates must unite in one and thie same person, having a commensurate and coextensive interest in each, with no intervening interest in another. A legal estate in fee in one who has only a partial equitable interest, or vice versa, would not merge. In re Washburn’s Estate, 11 Cal. App. 735; 106 Pac. 415.”

We consider it clear that the outstanding one-third interest in the royalties was an intervening estate, and that the whole lease can not merge in less than the whole interest of the lessor. The outstanding royalty interests had a right to continuance of the lease and to payment of royalties thereunder. A conception of the lease merged as to two-thirds of the royalty interests, but still existent as to one-third, is an anomaly. Less than the entire lessor’s interest can not encompass and “drown” a lease under which every part of the lessor’s interest has rights.

This is no matter of mere legal formality, but one of logic and legal rights of parties. Petitioner, having assigned in due form, its lease, seeks to demonstrate the transaction to be other than mere assignment, with its attendant results as to depletion, and must show reason why the lease has ceased to be such. That reason, we consider not to have been shown, but, on the contrary, we consider that reason and logic point to continuance of the lease. In effect petitioner relies upon the general idea that an economic interest gives right to depletion, but imports the economic interest from its royalty interests (where it is not denied, but given effect by depletion allowed by the respondent) into the leasehold interest. In the royalty interests the petitioner had an investment of $10,000. It is plain that, by depletion allowed on royalties, petitioner is recovering this investment, because in truth the income from royalties is under the statute “gross income from the property”, i. e., the property conveyed by warranty deed, including royalty rights. But it is equally plain that the $305,000, or that portion thereof obtained for assigning the leasehold, is not income from the same property, but is the sale prices of the leasehold, in which the petitioner had a base entirely different from the $40,000 invested in the property conveyed by warranty deed. That investment in the leasehold is not properly recoverable from depletion proper upon a different capital investment. Depletion is allowed “to the recipients of the gross income from the oil and gas by reason of their capital investment in the oil and gas in place.” Helvering v. Bankline Oil Co., 303 U. S. 362; Helvering v. O'Donnell, 303 U. S. 370. Such investment by the petitioner was the $40,000, not the investment in the lease itself. Moreover, it is to be noted that the $305,000 was not payable in any part out of any oil produced, as in such cases as Palmer v. Bender, 287 U. S. 551; Marrs McLean, 41 B. T. A. 565. Though $165,000 of the full consideration of $365,000 paid (including $60,000 for personal property) was not paid at the date of transfer, but was paid later in 1935, the amount was represented by promissory notes, secured by a deed of trust on the lease assigned, the original lease, and the $18,000 oil payment, the deed of trust providing that upon default the properties should be sold at public outcry in satisfaction of the notes. Obviously, this is not reservation of economic interest. It can not be said, as is said in Anderson v. Helvering, 310 U. S. 404, limiting Thomas v. Perkins, 301 U. S. 655, that “the reserved payments are to be derived solely from the production of oil and gas.” We conclude and hold that the petitioner is not entitled to depletion as to the amounts received for assignment of the lease to International.

In the state of the record the same must be said as to the original lease executed by the petitioner to International. This comprises a comparatively small portion of the total acreage involved, i. e., 160 acres as compared with about 1,327 acres in the lease assigned. The value of the original lease at execution is not shown. The $305,000 consideration is not divided between original lease and assigned lease. Therefore, even though we should assume that the existence of the Martin lease (if it still existed as to the 160 acres) is without effect on the question as to depletion on any consideration paid for the new lease, and that under Herring v. Commissioner, supra, the petitioner as original lessor might be entitled to depletion upon bonus received, since there is no evidence in the record herein as to what, if anything, was received as consideration or bonus for the 160-acre lease, respondent’s determination in that respect is approved. No error being found in respondent’s action in disallowing depletion,

Decision will be entered, for the respondent.


text:
    Logan Coal and Timber Association, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 93381, 99976.
    Promulgated August 14, 1940.

      E. Spencer Miller, Esq., for the petitioner.

      Brooks Fullerton, Esq., and David B. Herman, Esq., for the respondent.
   OPINION.

Disney :

Section 351 of the Eevenue Act of 1934 and sections 351, 352, and 353 of the Eevenue Act of 1936, as amended by the Eevenue Act of 1937, impose surtaxes on undistributed income of personal holding companies. The 1934 Act and the 1936 Act, prior to the amendment, defined a personal holding company, to the extent material here, as a corporation deriving a specified percentage of its gross income from “royalties, dividends, interest, annuities * * Sec. 351 (b) (1). Section 353 (a) and (b) of the Revenue Act of 1936, applicable to the taxable year 1937 (sec. 3, Revenue Act of 1937) contain a similar definition, excluding, however, mineral, oil, and gas royalties. Such income and rent income are covered by subsections (g) and (h) of section 353, reading as follows:

For the purpose of this title the term “personal holding company income” means the portion of the gross income which consists of:
*******
(g) Rents. — Rents, unless constituting 50 per centum or more of the gross income. For the purposes of this subsection the term “rents” means compensation, however designated, for the use of, or right to use, property; but does not include amounts constituting personal holding company income under subsection (f).
(h) MinheaIi, On., or Gas Royalties. — Mineral, oil, or gas royalties, unless (1) constituting 50 per centum or more of the gross income, and (2) the deductions allowable under section 23 (a) (relating to expenses) other than compensation for personal services rendered by shareholders, constitute 15 per centum or more of the gross income.

Questions relating to the taxability of petitioner, an association, as a corporation, the ownership of its stock, and the general source of its income, have been disposed of by admissions of the petitioner. The disagreement of the parties is on the character of the income. In his determination of the deficiencies the respondent held that the income constituted royalties paid under the leases, and, therefore, not rents, as reported by the petitioner. Petitioner alleges such action to be erroneous. The issue is thus narrowed to the question of whether the income constituted rent or royalties.

Neither the 1934 Act nor the 1936 Act, prior to the amendment, included, within the statutory definition of a personal holding company, a corporation deriving income from rents; hence if the income derived from the leases in 1934,1935, and 1936 represents rent money, the respondent’s action is error.. The amended 1936 Act, governing the taxable year 1937, includes, in the definition of a personal holding company, corporations receiving income from rents and also corporations receiving mineral royalties. The income of petitioner in 1937 from the leases was in excess of 50 percent of its gross income and, accordingly, subsection (g) of section 353 applies, and the amounts do not constitute personal holding company income, if the income constitutes rents. If the income represents royalties, subsection (h) governs, and it is personal holding company income, petitioner having admitted that the deductions under section 23 (a), other than compensation for services rendered, were less than 15 percent of its gross income.

The petitioner contends that Von Baumbach v. Sargent Land Co., 242 U. S. 503, is authority for a ruling here that the payments made under the lease agreements were rents. Among the issues raised by the taxpayers in that case was the question of whether the moneys received from the lessees under contracts for the mining of ore in Minnesota constituted gross income, or whether they represented, in whole or in part, the conversion of ore into money. The Court said: “The decisive question in this case is whether the payments made as so-called royalties amount to income so as to bring such payments within the scope of the Corporation Tax Act of 1909.” The real question, as thus stated by the Court, was in effect whether the payments were income or a return of capital, and did not include, if the former, the narrower question whether the amounts were rents or royalties. In arriving at its conclusion that the payments were subject to tax, the Court did not decide that the amounts “were income, since they were rents” as alleged by petitioner. In discussing the issue before it, the Court first said that “We think that the payments” were not the proceeds of a sale, “but, in view of the terms of these instruments, were in fact rents or royalties,” and then concluded that the corporation was subject “to the tax upon its income derived from the royalties under these leases.” (Italics supplied.) It thus appears that, except for the use of “royalties” last above quoted, the Court did not indicate whether the income was rents or royalties. We think the use of the term was general and not definitive. Boyalties are income.

Neither is United States v. Biwabik Mining Co., 247 U. S. 116, also relied upon by petitioner, decisive. The question there was whether the value of ore in place was deductible from gross income under the Corporation Tax Act of 1909. The Court said that in deciding the Sargent Land Co. case, supra, it pointed out that the Miimesota courts held instruments of the nature involved therein to be leases “and that the royalties agreed to be paid were rentals in compensation for the privileges granted the lessee.” Thus it is seen that the Court uses both terms. The case involved lessees, not, as here, a lessor, and there was no occasion for the Court to decide whether the payments made by the lessees for the right to mine the ore were royalties or rents. The District Court, whose judgment the Court affirmed, referred to the payments as royalties, without, however, any need to rule upon the precise character of the consideration.

Bankers Pocahontas Coal Co. v. Burnet, 287 U. S. 308, not cited by either party, is a case similar to the proceedings relied upon by the petitioner. There the payments made by the lessee to extract coal from lands situated in West Virginia were referred to as royalties in deciding the question of whether the moneys received were for capital assets or constituted ordinary income.

Another case cited by petitioner to support its theory that the payments made under the contracts were rents is Raynolds v. Hanna, 55 Fed. 783. It is like the Supreme Court cases just referred to, the issue having been whether amounts paid under an agreement for the privilege of entering upon and mining coal from certain lands should be regarded as income or corpus of the estate of a decedent. The court said that “it is not material that the rental to be paid to the lessee is called ‘royalty,’ which is perhaps the most appropriate word where rental is based upon the quantity of coal or other mineral that is or may be taken from the mine”, and then remarked that “But, aside from all this, the money received under the contract, whether called ‘royalty’ or ‘rent,’ is clearly ‘income or increase’ of the estate collected by the executors.” This language discloses recognition by the court of the immateriality of deciding the precise character of the payments.

The language used by the courts in the above cases can not, under the circumstances, be regarded as a ruling upon whether the payments made under the leases were rents or whether they were royalties. Bingham v. United States, 296 U. S. 211; Keeler v. Commissioner, 86 Fed. (2d) 265.

In the recent case of Kiesau Petroleum Corporation, 42 B. T. A. 69, we were required to decide whether certain payments made to the taxpayer out of the proceeds of oil wells in payment of equipment furnished to drill the wells constituted royalties within the meaning of section 351 (b) (1) of the Revenue Act of 1934. We decided that Congress used the term in its ordinary, normal, and familiar meaning and that dictionary definitions disclosed the word “royalty” to mean “an interest reserved by the owner in return for permission to use the property owned.” The dictionary definitions relied upon embraced the products of coal mines. Other authoritative definitions are, in substance, the same. Bouvier defines a royalty as “A payment reserved by the grantor of a patent, mining lease, etc., and payable proportionately to the use made of such right.” Numerous cases are cited to support the following definition of the term appearing in Black’s Law Dictionary: “A payment reserved by the grantor of a patent, lease of a mine, or similar right, and payable proportionately to the use made of the right by the grantee.” In Homestake Exploration Corporation v. Schoregge, 81 Mont. 604; 264 Pac. 388, the court said: “The word ‘royalty’ has a definite and well understood meaning m mining and oil operations. It means a share of the product or profit paid to the owner of the property.” To the same effect is the following definition appearing in Kissick v. Bolton, 134 Iowa, 650; 112 N. W. 95: “The word ‘royalty,’ as employed in the contract, means the share of the profit reserved by the owner for permitting the removal of the coal and is in the nature of rent.” In Raynolds v. Hanna, supra, the court said that the term royalty is “perhaps the most appropriate word where rental is based upon the quantity of coal or other mineral that is or may be taken from the mine.”

The term “rent” has been defined in various ways. Bouvier defines it as “A return or compensation for the possession of some corporeal inheritance. A certain profit, either in money, provisions, or labor, issuing out of lands and tenements, in return for their use.” The definitions in Black’s Law Dictionary include the following :

A certain profit issuing yearly out of lands and tenements corporeal; a. species of incorporeal hereditament. 2 Bl. Comm. 41. A compensation or return yielded periodically, to a certain amount, out of the profits of some corporeal hereditaments, by the tenant thereof. 2 Steph. Comm. 23. A certain yearly profit in money, provisions, chattels, or labor, issuing out of lands and tenements, in return for their use. 3 Kent, Comm. 460.

Federal courts have said that “Bent is a sum stipulated to be paid for the ‘use and enjoyment of land.” In re Roth & Appel, 181 Fed. 667; In re Mullings Clothing Co., 230 Fed. 681.

Definitions of other courts are to the same effect. Fiske v. Brayman, 21 R. I. 195; 42 Atl. 878; Kendall v. Uland, 83 Neb. 527; 120 N. W. 152; and Saulsberry v. Saulsberry, 162 Ky. 486; 172 S. W. 932.

The term “rents” for the purpose of section 353 (g), applicable to the year 1937, means “compensation however designated, for the use of, or right to use, property.” This statutory definition is in agreement with the judicial and other definitions set forth above.

There is no need here to point out all of the distinctions between the terms “rents” and “royalties.” One difference of importance disclosed by the various definitions is that royalties, unlike rent, are paid according to the use made of the rights granted by the owner. As stated by the court in Western Union Telegraph Co. v. American Bell Telephone Co., 125 Fed. 342, “Bents in their ordinary signification are not limited as royalties in their ordinary signification; that is to something proportionate to the use of the patented device.”

The amounts involved in the question here were paid by the lessees in proportion to the use made of the principal right granted by the contracts, that is, on the basis of the quantity of coal mined from the properties. Any minimum royalties paid are not an exception, since the difference between the amount paid on a tonnage basis and the minimum payment was recoverable in subsequent years by mining free of charge coal in excess of the minimum requirements.

Numerous authorities, mostly textbooks, are cited by the respondent to show that the right of the lessees to deplete the leased premises of coal is a right of profit a prendre, an incorporeal hereditament, and that as liability for rent issues only out of an estate in land, the payments here do not constitute receipts of rent. Petitioner does not challenge the general conclusions reached by the respondent from the authorities cited. It contends that the point is not important, since the leases granted rights in addition to that of mining coal.

The leases gave the lessees the right, among other things, to use the surface of the land, together with so much of the timber, stone, sand, clay and water as was necessary to conduct mining operations. They also bad the right to manufacture on the premises coke and other byproducts of coal and the privilege of conducting a general mercantile business. The lease of January 1, 1909, gave the Eed Jacket Jr. Coal Co. the additional right to transport over, through, and on the land other coal owned or acquired by the lessee. The right to manufacture coke and other byproducts of coal was not exercised and it does not appear from the record to what extent the other privileges were exercised. Referring to the right to manufacture coke and other products, or byproducts of coal, the conduct of a general mercantile business, transportation of coal from other lands over the leased lands, and manufacture thereof into coke or other coal products on the leased premises, and the right to have the lessor join the lessee in conveying railroad rights of way, a witness for the petitioner stated that the rights were “essential ones in the conduct of any mining operations.” Obviously, most of the rights were essential to the lessee’s operations, and therefore they do not affect the question as to whether payments made were royalties, or rents. We think, however, that it can hardly fairly be said that transporting coal from adjacent lands over the leased lands is essential to mining the lease. Does the grant of the right to such transportation constitute reason for considering the payments as rents? This is the prime question before us. The etymology of the word royalty shows its original meaning to be the king’s share; and later, the owner’s share. The petitioner in receiving the payments made received its share on each ton of coal. Such payments on a per unit basis are royalties, unless the fact that they are consideration, not only for the coal mined, but other privileges, particularly that of transporting other coal, alters the situation and converts the nature of the payments into rentals. Of course, in a general sense, all such payments partake of the nature of rents, but our question is whether, more definitely and under the language of the statute as to personal holding companies, they are “royalties.”

In Vandalia Coal Co. v. Underwood, 60 Ind. App. 675; 111 N. E. 329, we find this question discussed as follows:

Mining leases are divided into two classes, those requiring the payment of a fixed rent known as dead rent at stated intervals, and those providing for payment of royalty with requirement that a stipulated amount of the mineral should be mined; hence a lease providing for payment of royalty, but declaring that in case a certain amount of coal should not be mined the lessors should receive $600 per annum, is one for the payment of royalty.

The case was one to collect a minimum payment of $600 per annum provided for in the lease, after the coal was exhausted, because the lessee continued, after such exhaustion of coal, to remove through the leased land, mineral found on adjoining land, as it had a right to do, free of charge, under the lease. The court, in denying recovery after exhaustion of the coal, contradicts any idea of the payments being rent based, as claimed in the instant case, upon use of the lease for transportation of coal from other lands.

In Robinson v. Stover, 320 Pa. 308; 182 Atl. 145, the Supreme Court of Pennsylvania considered a mining lease which, in addition to providing a royalty on coal mined, provided also for payment of one-half cent per ton on coal mined on other lands and transported over the leased lands, and held that the lessee must pay “royalties” on such coal transported after exhaustion of the coal on the leased land. The court remarked that such an agreement, in that industry, is called a “wheelage clause.” In Tustin v. Philadelphia & Reading Coal & Iron Co., 250 Pa. 425; 95 Atl. 595, the same court considered a situation similar to that in the instant case. Therein the lease provided for a “rent or right of way of 5 cents per ton on all coal mined from other adjoining lands and carried through the said demised premises”, as well as minimum payments for mining coal on the lease. It was held that payment must be made not only of the minimum amounts for mining coal, but also for transporting other coal, which could not be considered included in the minimum royalty. In Siler v. White Star Coal Co., 190 Ky. 7; 226 S. W. 102, a Kentucky case, it was contended that, although the payment of minimum royalty on coal mined each month was subject to reduction in case of epidemics, riots, insurrections, strikes, etc., yet, since the contract was more than an ordinary lease because it granted easements and privileges necessary for mining other land, the minimum amounts were payable each month, regardless of such contingencies as strikes, it being “urged that the payment of the minimum royalty each month, regardless of the contingencies provided for in paragraph 9 (as to strikes, etc.), was the consideration for such easements and privileges.” This seems essentially the same contention as made by the petitioner herein. The court denied the relief prayed for, in effect, holding that the payments were not mere rents for the use of the land, including the transportation over it of other coal, for if they had been such rents, and not royalties upon production, the provision as to strikes would not have affected them. In Lennox v. Vandalia Coal Co., 158 Mo. 473; 59 S. W. 242, it was held that where a lease provided that $50 per month should be paid for mining coal on the plaintiff’s land and for hoisting coal mined from adjoining land through a shaft on the lease and that the defendant would continue operation until exhaustion of coal on the leased lands and pay a minimum royalty on coal mined, use of the land, after exhaustion of the coal, for hoisting coal from other lands rented, rendered the defendant liable to pay $50 per month rent.

From the above cases it would appear that, if provision is made in a coal lease for definite payments for the use of the land for transportation of coal from other lands under a “wheelage clause”, such payments may be true rents and not a part of the royalties based upon the amount of coal mined from the lease involved. In the instant case, however, the only consideration provided in the lease was payment computed on the basis of coal mined. (Minimum payments were, in effect, advance royalties for coal which could later be mined.) No separate consideration on account of transportation of coal from other lands was provided in the lease. We think it obvious that the prime consideration for the contract was the payment based upon coal mined and we hold that such payment constituted royalties within the intent and meaning of the revenue statutes here being considered. The fact that the lease terminated upon exhaustion of merchantable coal, regardless as to whether the 50-year period had terminated, leaving the lessee no right to continue to transport coal from other lands across the lease, and in fact leaving it no way of calculating payments for such right, indicates, in our opinion, that the payments made up to the time of exhaustion of the coal can not be said to be as a whole rents for the use and occupation of the land, as petitioner contends. If we should assume that some part of the consideration for the payments made to petitioner was for the privilege of transporting coal from other lands, the record herein contains no evidence upon which to base a division between royalties and any rent for the transportation privileges, or to find error on the part of the respondent in treating the payments in question as royalties.

The petitioner filed corporation income and excess profits tax returns on Form 1120. It does not appear and no contention is being made that it filed returns as a personal holding company. Under the circumstances the imposition of delinquency penalties is mandatory. Collateral Mortgage & Investment Co., 37 B. T. A. 630; Rotorite Corporation, 40 B. T. A. 1304.

Decision will be entered for the respondent.


author: ARNOLD:

text:
    The Citizens National Bank of Kirksville, Missouri, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 96808.
    Promulgated August 15, 1940.

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

      Angus R. Bhamion, Esq., for the respondent.
   OPINION.

ARNOLD:

Petitioner does not now claim that the $2,400 paid to Frank Baird is deductible as rent. It claims that the payments so made are deductible (1) as exhaustion or amortization of the terminable interest acquired from Frank Baird, or (2) as annuity payments made in the acquisition of Frank Baird’s interest. In the alternative petitioner claims that $1,971.44 thereof is deductible as that portion of Frank Baird’s interest in the building that was demolished in 1923.

In determining the issue presented, the situation at the time the contract was executed must be borne in mind. Petitioner had been occupying the premises for 14 years, paying rent first to Frank Baird’s father and then to Frank Baird. In giving the income from the property to his son for life, the father’s will had charged the son with making repairs to the building, carrying the insurance thereon and heating it. In April 1920 the building was old and badly in need of repairs to make it suitable for petitioner’s business. If Frank Baird made the necessary repairs it would entail considerable expense, as evidenced by the $15,000 petitioner laid aside for alterations and repairs in 1920, 1921, and 1922. Also at the time there were matters personal to Frank Baird which made the time opportune to negotiate for his interest in the property.

Petitioner contends that Frank Baird conveyed only a terminable interest by the instrument of April 21, 1920, and that he retained a contingent reversionary interest. Even if this were true, we think that subsequent events, occurring prior to the taxable year, dissipated any limitation placed on the conveyance. As the owner- of the net income from the building for life, Frank Baird had certain duties and responsibilities to his sister as remainderman, some of which were specifically provided for by his father’s will. Under the contract with Frank Baird petitioner acquired the right to make repairs, but it could not commit waste against the remainderman, such as would occur if it demolished the. building. After acquiring the remainderman’s interest, petitioner could commit no waste as against itself as assignee of the life tenant, and when it started to make certain repairs in 1923, which ended in the construction of a new building, it constructed the building as remainderman and not as assignee of the life tenant.

It should be noted that the conveyance by Frank Baird relieved him of certain obligations which constituted additional consideration for the contract. Furthermore, the contract fixed and determined the amount of monthly income he would receive from the property. Thereafter the expenses of renting, repairing, except as to the roof, and heating the building fell upon the petitioner. After the construction of the new brick and stone building it is doubtful whether the contract provision that Frank Baird should keep the roof repaired had any real significance. Certainly, the contract related to the building as' it then existed in 1920, badly in need of repairs. The provision, that if the building became untenantable petitioner’s obligation to make the monthly payments should cease and determine, lost its force after the erection of the new structure. The provision regarding the ending of petitioner’s rights and liabilities upon the destruction of the building by fire or storm ceased to be á serious limitation after petitioner became the owner of the remainder interest. Thus, it appears, that, after 1923, Frank Baird’s only substantial right under the contract was the right to receive $200 per month, and his only obligation was to pay certain insurance charges, which averaged $33.81 per year.

Petitioner relies upon our decision in Elmer J. Keitel, 15 B. T. A. 903, and Floyd M. Shoemaker, 16 B. T. A. 1145, as justifying its exhausting the terminable interest acquired from Frank Baird. These cases are distinguishable. Frank Baird had outlived his life expectancy by 1936, and, even if petitioner were entitled to exhaust the value of the asset acquired, the value thereof, as stipulated, would have been exhausted prior to the taxable year. The cited cases capitalized the purchase price of the terminable interest in order to exhaust it, and we do not understand this petitioner to contend that the monthly payments were not capital expenditures. Certainly, its claim for exhaustion contemplates that a capital expenditure was made. Unless the petitioner can point to some deduction, authorized by statute, the capital investment must remain until the property is sold or otherwise disposed of.

Petitioner’s second contention is that the monthly payments are deductible as an expense or loss. The argument advanced is that petitioner, in effect, wrote an annuity on the life of Frank Baird at $197.18 per month ($200 less average monthly insurance charges of $2.82); that by October 1933 the total monthly payments to Frank Baird equaled the value of the property acquired from him; and that all subsequent payments constituted income to Frank Baird and an expense or loss to petitioner under the rule announced in Commissioner v. Moore Corporation, 42 Fed. (2d) 186, affirming 15 B. T. A. 1140.

The premise of this contention is that petitioner ventured into the field of annuity writing for profit or loss, that a loss resulted as to each payment made after October 1933, and that the total payments made during 1936 are deductible. If the premise be granted, the argument finds support in the cited case, but we can not agree with the premise.

In our opinion petitioner was purchasing a capital asset, the right to possession of property; it was not writing an annuity for profit. Frank Baird was given the possession and net income from the building for his lifetime. Petitioner had been the tenant of Frank Baird and his father before him for years. It was possession of the property which petitioner sought and the consideration therefor took the form of monthly payments. The contract fixed the net income from the building for Baird, relieved him from certain obligations, and transferred possession of the building to petitioner. •Likewise, the contract fixed the monthly payments to be made by petitioner for possession and enjoyment of the building and measured its tenure by the life of the vendor. Except for certain contingencies, which became increasingly remote, the contract assured petitioner’s continued possession and use of the property for business purposes during Frank Baird’s lifetime. By the acquisition of the remainder interest and construction of a new building petitioner practically removed all contingencies and insured its permanent possession of the property. But for the restrictive provisions of section 23 (a) of the Revenue Act of 1936 regarding payments made as a condition to the continued use or possession of this property, petitioner might justify the deduction of its monthly payments as rent. Clearly, however, this petitioner had a substantial equity in the property during 1936 and would have a clear title thereto after the death of Frank Baird. In these circumstances the statute precludes the deduction, and the facts of record necessarily catalogue the payments as capital expenditures. See Corbett Investment Co. v. Helvering, 75 Fed. (2d) 525; Helvering v. Louis, 77 Fed. (2d) 386; Klein v. Commissioner, 84 Fed. (2d) 310; Commissioner v. Smiley, 86 Fed. (2d) 658; and Edwards v. Commissioner, 102 Fed. (2d) 757.

Petitioner contends in the alternative that it is entitled to deduct $1,971.44 of the $2,400 payment made in 1938 as representing that portion of the payment applicable to Baird’s interest in the building demolished in 1923, citing Louis Pizitz Dry Goods Co., 22 B. T. A. 161; Parma Co., 18 B. T. A. 429; and Ingle v. Gage, 52 Fed. (2d) 738. The cited cases hold that the fee owner is entitled to deduct losses resulting from voluntary demolition of buildings when the property was purchased with no intention of demolishing the building and erecting a new structure thereon. None of the cited cases deal with the interest of a life tenant in a building voluntarily demolished.

We doubt that petitioner would seriously contend that it demolished the building in 1923 as assignee of the life tenant, or that the entire value of the building so demolished should be allocated to the life tenant and no value should be allocated to the remainderman. It can not be presumed that a life tenant would deliberately commit waste as against his remainderman, and certainly the demolition of the building in 1923 was more properly attributable to petitioner as remainderman than as the assignee of the life tenant. Furthermore, it is inconceivable that petitioner, as assignee of a life tenant, 64 years of age in 1923, would erect a new building of brick and stone if its tenancy would so shortly terminate. Obviously, the new structure was erected by petitioner as remainderman, and Frank Baird was content to rely upon his personal contract with the bank for his monthly payment. Whatever loss petitioner sustained as a result of the demolition of the building occurred in 1923, and no part of the additional payments to Baird for the right of possession transferred in April 1920 was lost as a result of the demolition. The payments were capital in nature and constituted a part of the cost of the premises occupied by petitioner. This disposition renders it unnecessary to decide respondent’s contention that a merger resulted upon the acquisition of the interest of Frank Baird and Alta Baird Belshe. In either event petitioner is not entitled to the deduction claimed.

Decision will be entered for the respondent.