author: McMahon:

text:
    Joseph Blumenthal, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68473.
    Promulgated March 20, 1934.

      Theodore B. Benson, Esg., for the petitioner.

      P. A. Bayer, Esq., for the respondent.
   OPINION.

McMahon:

The question to be determined is whether the petitioner is entitled to a deduction from gross income for the year 1930 of the amount of $31,174.25, which petitioner claims represents a loss resulting from a sale of 1,075 shares of Reynolds Metals Co. stock in 1930 oñ the New York Stock Exchange through Montgomery, Scott & Co., brokers, in the regular course of business. The respondent, however, contends that the transaction did not constitute a sale, as the petitioner was the principal in the selling order and also the principal in the buying order, and, further, that if the transaction was a sale in form, it was not an actual sale.

The petitioner testified that he decided to dispose of the Reynolds Metals stock at the very end of 1930, solely because he wanted to show an income tax loss. In Mrs. Niels (Mellie) Esperson, Executrix, 13 B.T.A. 596, the Board stated:

* * * Since the transaction was made for the avowed purpose of reducing taxation and apparently would not have been consummated otherwise at this time, every requirement of a, sale must be met. * * * [Emphasis supplied.]

In Harold B. Clark, 2 B.T.A. 555, the Board stated:

* * * The parties must make a dona fide transfer as persons dealing at arm’s length would do — the seller for the purpose of absolutely getting rid of the stoclc and the buyer for the purpose of absolutely acquiring it as his own without any condition covering its later return to the seller. Receiving a credit for the price and the mere indicia of ownership, without the mutual element of intent on both sides to complete an absolute sale, cannot constitute a basis for a deduction for loss under the provisions of the tax law. A loss to be deductible must be a reality. [Emphasis supplied.]

The petitioner contends that he sold the stock in the regular course of business through a member of the New York Stock Exchange on December 26,1930, and that his wife purchased the stock on the same date with funds presented to her by him as a gift, or, in other words, that there were two transactions.

The petitioner testified that when he gave the order to sell the 1,075 shares of Reynolds Metals stock he also gave an order to buy the same number of shares in the name of his wife; that his wife did not tell him to purchase the stock, although she knew of it; that his wife had no property or money except such as he had given to her from time to time; that he told his wife that he was going to make her a present of $12,387.51, with which to purchase 1,075 shares of Reynolds Metals stock; and that he wanted his wife to own the stock as he did not want it to pass out of the family. However, the petitioner did not deliver his check in the amount of $12,387.51 to his wife. He delivered it to the bank in which he kept his funds, whereas his wife had a separate account at another bank, and he personally instructed the bank as to its disposition. His wife did not see the check, did not endorse it, and at no time, so far as we know, did she exercise any rights of ownership with respect to the funds deposited in her name by the petitioner with the Tradesmens National IBank.

The petitioner delivered the certificates issued in his name to the Tradesmens National Bank enclosed in his letter of December 26, 1930. The bank on December 29, 1980, delivered these certificates to Montgomery, Scott & Co., and on January 5, 1931, this company returned the same certificates to the bank. On the same date the bank sent these certificates to the Bankers Trust Co. of New York to be transferred to Mrs. Blumenthal. A clerk of the bank testified that before these certificates were sent to the Bankers Trust Co. he filled in the name of Mrs. Blumenthal in the endorsement on the back of each certificate as assignee, pursuant to instructions; that the bank’s records contain a receipt for these certificates signed by the Bankers Trust Co. and dated January 6, 1931, and that these records show that on January 7 the Bankers Trust Co. sent to the Tradesmens National Bank a letter accompanied by the new certificates issued to Mrs. Blumenthal; and that on January 8 the Trades-mens National Bank sent these certificates to the petitioner.

While it is asserted by the petitioner that the sale was made on the New York Stock Exchange on December 26, 1930, through Montgomery, Scott & Co., it appears from the foregoing that the first entry of the transaction in the account of the petitioner, and also in the account of his wife with such broker is dated December 29,1930, the date the original certificates were delivered to the broker by the Tradesmens National Bank, which certificates were returned to the bank on January 5, 1931.

From the whole record we are convinced that the foregoing constituted but one transaction and that there was no real or actual sale, the “ vital intent to change ownership ” being wholly absent. Luella Hoyt Slayton, 29 B.T.A. 931.

In a somewhat analogous situation, the Board, in Mrs. Niels (Mellie) Esperson, Executrix, supra, stated:

* * * A man can not make a sale to himself. And yet the evidence in this ease would indicate that this transaction, which we are asked to accept as a sale, amounted to little, if anything, more than this. We have already eliminated Peters and Brown [the alleged purchasers] from the transaction as independent actors. Whatever, therefore, was done by them .or in their names must be taken as if done by or on behalf of Esperson. * * *

In this proceeding it is very apparent that whatever was done was done upon instructions of the petitioner. While the petitioner testified that his wife knew about the transaction because he told her about it, there is no evidence of any independent act on her part in the whole transaction. It is true that the bank clerk testified that the records of the Tradesmens National Bank contain a letter dated January 9,1931, from Mrs. Ray S. Blumenthal acknowledging receipt of the certificates issued in her name, but there is no evidence that this letter was signed by her or anyone else. There is no evidence that the certificates were actually delivered to her. These certificates were mailed to the petitioner, were in his possession at the hearing, and, so far as we know, were never out of his possession. In our opinion, at the very outset of this transaction, the petitioner gave the order to sell the stock with the understanding that it or at least an equivalent number of shares would be returned to him issued in the name of his wife.

In Esperson v. Commissioner, 49 Fed. (2d) 259; certiorari denied, 284 U.S. 658, the Circuit Court, in affirming the decision of the Board in Mrs. Niels (Mellie) Esperson, Executrix, supra, stated:

* * * It may be assumed that an owner of stock would sustain a deductible loss by selling it and later buying back an equal amount, but no real sale is made where 6y one and the same transaction the same number of shares a/re both bought and sold at the same time and at the same price. [Emphasis supplied.]

The petitioner testified that he bought the stock because he thought the Reynolds Metals Co. was a good concern because he had confidence in R. S. Reynolds, the head of the company; that he thought its business was a good business and that the stock would pay; that R. S. Reynolds was president of the Eskimo Pie Corporation, a good customer of Blumenthal Bros.; and that his brothers bought some of the Reynolds Metals stock upon his recommendation and still own it. During the year of 1930 the petitioner received dividends from the Reynolds Metals Co. in the total amount of $2',865. There being nothing to the contrary, this evidence rather supports our view that the petitioner never intended to absolutely get rid of the stock or to lose control thereof.

In support of his contention that his wife purchased the 1,075 shares of Reynolds Metals stock, the petitioner contends that he made her a gift of the money with which to purchase the same. However, the check was never delivered to the wife; and while it was deposited in the bank in her name, as far as we know, the petitioner retained control of the account. As appears from the testimony of the petitioner, the purported gift was to be used for the purpose of acquiring 1,075 shares of Reynolds Metals stock. The record discloses that the petitioner saw to it that such funds were used for that purpose. Thereafter the certificates transferred to the wife were delivered to the petitioner at his office. The petitioner testified that his wife at no time agreed or promised to transfer the stock back to him; that he has not received any dividends from the stock; that the certificates have not been endorsed by his wife; and that the stock has never been used as collateral for a loan by either himself or his wife. In our opinion the latter testimony of the petitioner at most indicates an intention on the part of the petitioner to make a gift of the ¡stock to his wife. In that view the entire transaction amounted to a sale and purchase in form by the petitioner to make a gift of the stock to his wife. Such a transaction does not result in a deductible loss under the revenue laws, which answers the only question here presented in this respect.

The action of the respondent in disallowing the deduction of $31,174.25 is approved.

Since we approve the action of the respondent, it is not necessary to consider the alternative allegations contained in respondent’s answer based upon disapproval of his determination.

Pursuant to stipulation, the amount of the contributions allowed by the respondent in computing the tax liability of petitioner for the year 1930 should be decreased in the amount of $128 and the deficiency recomputed accordingly.

The respondent contended further that the return filed by the petitioner was the joint return of petitioner and his wife and that the petitioner and wife, after electing to file a single joint return, became a single interest and represented but one taxpayer within the meaning of section 118 of the Revenue Act of 1928, and that therefore the sale of securities from a husband to a wife must be treated as though made by one individual. Since we have determined that there was no real or actual sale, it is not necessary to consider this contention, or petitioner’s second assignment of error based upon such contention.

Reviewed by the Board.

Decision will be entered wnder Rule 50.


source: Caselaw Access Project

author: Seawell:

license: Public Domain

text:
    Henry Bradley Plant, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 43889, 48984, 52094, 55659, 60923.
    Promulgated March 20, 1934.

      George L. Shearer, Esq., Harry J. Campaign, Esq., and John A. Kratz, Esq., for the petitioner.

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

Seawell:

The first issue we shall consider and determine is whether the amounts paid by the trustees under the will of Morton F. Plant for the upkeep of the home at Eastern Point, Connecticut, out of income from the trusts established by him, constitute income to the petitioner.

This issue arises out of paragraph tenth of Morton F. Plant’s will, which is set out in the findings of fact. The Commissioner determined that the expense of maintaining the residence as provided in the will was additional income to the petitioner, who was thereby relieved of such expense on the residence occupied by him. The petitioner traverses this determination. We do not think Old Colony Trust Co. v. Commissioner, 279 U.S. 716, cited and relied on by the respondent, sustains his contention. The principle enunciated in that case is not applicable.

On the issue in the instant proceedings we are dealing with specific sections of the statutes imposing tax upon trust income, and where such tax is imposed primarily upon the trustee or trustees. The statutes involved are found in the Bevenue Acts of 1924, 1926, and 1928, and are substantially the same in all three acts. The sections principally relied on by petitioner as applicable are not set forth herein, but are merely referred to as sections 219 (a), 219 (a)(2), 219 (b), and 219 (b)(2) of the 1924 and 1926 Acts, and sections 161 (a), 161 (a) (2), 161 (b), and 162 (b) of the 1928 Act.

In John D. Rogers, Trustee, 16 B.T.A. 368, we had before us a case in which the facts are similar to those in the instant case. The testator, John D. Eogers, died in 1908, devising his plantation in Texas to the Texas Guarantee & Trust Co. in trust, which company declined to qualify and the petitioner, John D. Eogers, a grandson and one of the beneficiaries under the will, was appointed as trustee, the trust providing in part as follows:

To control, manage and operate said plantation with power to lease or rent the whole or any part thereof from year to year, and after paying all costs and expenses, including, among other things, the cost of keeping up and maintaining improvements and equipment on said Plantation and taxes, and after deducting reasonable compensation (not to exceed $500.00 per annum) to said Company for its services hereunder, to pay over annually one half (%) of the rents and revenues from said Plantation to my son, Robert A. Rogers, for and during his natural life and the other one half (%) of such rents and revenues from said Plantation to my son Robert A. Rogers as Trustee for my grandchildren. * * *

The will provided that the plantation should not be sold, but such provision was revoked by a codicil, which also provided: “ Furthermore, until sale of plantation, the trustee shall retain out of proceeds of each year’s crop sufficient to operate plantation the following year.”

The deficiencies in tax were for the years 1923 and 1924, and were determined against the petitioner, this Board following the reasoning of the Circuit Court of Appeals for the Eighth Circuit in Willcuts v. Ordway, 19 Fed. (2d) 917, and holding that under the will and codicil of Borers the beneficiaries had no distributable interest until all costs of operation of the current year had been paid and a sum retained for operations of the following year.

In Willcuts v. Ordway, supra, the court had occasion to interpret and apply the meaning of distribution ” and “ distributed ” as used in the 1916, 1918, and 1921 Revenue Acts (which construction we followed in the John D. Rogers, Trustee, case, supra), and in so doing, the court said in part:

* * * In each of these acts, the intent is that annual income to a particular beneficiary from a trust estate shall he taxed to him as a separate unit of taxation where that income is “ distributed ” to him. “ Distribution,” as there used, does not necessarily mean passing into the uncontrolled possession and disposition of the beneficiary. It means separation and segregation from the trust estate so that it no longer forms any part or parcel thereof. The test set up by the statute is whether the income passes from the trust estate which produced it and ceases to be subject to the terms and control of that trust. * * *

We adopted and applied the same reasoning and principle in Margaret B. Sparrow et al., Trustees, 18 B.T.A. 1, 16, 17, wherein we stated:

We are of the opinion that Margaret B. Sparrow did not have a life estate in the premises. The will specifically provides that she “ shall have the right to occupy such residence, * * * without the payment of any rent or charge therefor.” This would imply that she could not lease the premises and that she would not be entitled to receive rents or profits from the premises should they be leased by the trustees. All such rents and profits would be payable to the trustees. Her only right in the premises is to occupy them. Nowhere does it appear in the will that the testator intended his widow to assume the obligations of a life tenant. She was not required to prevent' waste, keep down encumbrances and charges, to pay interest on mortgages, if any such rested on the property, or to contribute toward paying off mortgages. Since the premises in question were a part of the corpus of the trust estate, the trustees clearly had authority to make necessary repairs upon them. Clearly, if the trustees had rented the premises and derived rent therefrom, no question could be raised but that they would be entitled to deduct from the gross income of the estate the amounts paid by them for necessary repairs. We think the situation is no different merely because by the provisions of the will the testator’s widow was permitted to occupy the premises. Nor do we think that there is any necessary implication that the testator intended that his widow should bear the expense of necessary repairs. He provided that the trustees should pay over to the widow a sum “ equal to the amount of the annual taxes, water rates, assessments, and insurance charges ” upon the property. Paragraph “ Thirteenth ” of the will provided, however, that the widow should occupy the premises “ without the payment of any rent or charge therefor.” As we construe the will, the widow was not chargeable with repairs upon the premises and, since the premises were included in the corpus of the trust' estate, thé trustees clearly had implied authority to make necessary repairs.

We are of the opinion and hold that the mere right or privilege possessed by the petitioner under the terms of the will to occupy the former home of the testator, so long as he might desire, is not in the sense of the statute income to the petitioner. The precisions of the will did not authorize nor permit the petitioner to lease the premises and receive the rents therefrom for his own separate use and benefit to do with as he might see fit, but the amounts used in the matter of the upkeep of the premises were expenditures made by the trustees pursuant to the specific directions of the will, the petitioner, so far as the record discloses, having no control over the amounts.

We hold, therefore, that the income collected by the trustees and so expended by them in maintenance of the premises, including the payment of taxes thereon, pursuant to provisions of the will1, did not represent “ income ” distributed or distributable to the petitioner herein within the meaning of that term as laid down by the Supreme Court in Eisner v. Macomber, 252 U.S. 189, and the respondent erred in determining otherwise.

The only other question in dispute relates to distributions made by the Griswold Co., in which the petitioner shared to the extent of one half. The amounts of distributions considered by the Commissioner as taxable dividends to the petitioner are set forth in our findings of fact.

The petitioner contends that no part of the distributions made by the Griswold Co. for the years in issue is taxable to him. The record shows that the company made earnings and profits during the six years in issue, 1924 to 1929, inclusive, of $951,711.40, or $309,711.40 more than the aggregate amount of distributions to its stockholders during that time. It is the insistence of petitioner that during that entire time the corporation had an operating deficit and the distributions represented a return of capital and are not taxable distributions from accumulated earnings and profits within the applicable provisions of the revenue acts. The respondent contends that the distributions taxed to petitioner were from earnings of the corporation accumulated since March 1, 1913, were paid out of surplus, and are taxable.

The record shows that beginning with March 1, 1913, the corporation had a small surplus of $4,811.64 and that in that year and years .subsequent to January 1, 1921, it sustained losses, there being an operating deficit on the latter date of $1,035,818.02. In 1921 and 1922 there were earnings, which reduced the deficit, leaving a deficit as of January 1, 1923, of $1,017,978¡63. In the latter year, however, there was a loss of $493,979.51, which, added to the prior existing deficit, makes a total of $1,511,958.14. During 1923 the stockholders made a donation to the corporation of 10,400 shares of its stock, having a par value of $1,040,000, and transferred property to the corporation having a value in excess of the par1 value of the stock issued for such property, in tbe amount of $672,000, resulting in the books of the corporation no longer showing a deficit, but a surplus on January 1, 1924, of $200,041.86. The record also shows that in 1924 there was transferred to the Griswold Co. certain property which was set up on the books of the company substantially on the basis of the valuation made for Federal estate tax purposes. For that property the company issued 480 shares of its treasury stock, such stock account being credited with the par value thereof, $48,000, and the balance, excess of value of property over par value of stock received, $67,200, credited to surplus as fully set forth in our findings of fact.

While the respondent contends that the amount of the distributions taxed to the petitioner were from earnings accumulated since March 1, 1918, and were paid out of surplus and are taxable, such contention can not be sustained in the light of this record, except on the assumption that the contributions by the stockholders of the Griswold Co. to it of stock and property as aforesaid constituted “earnings or profits accumulated since February 28, 1913.” The facts as stipulated and set forth in our findings of fact show that the operating deficit of the company on January 1, 1923, was $1,017,-978.63, and there were never any actual earnings of the company after that, including all the years in issue, to make good or wipe out that deficit, the actual earnings during the years in issue being $951,711.40, or $66,267.23 less than the operating deficit. Under such circumstances, shown in detail in our findings of fact, there is not, in our opinion, any justification for the respondent’s determination that the distributions to stockholders made during the taxable years in issue, amounting to $642,000, were made from earnings or profits accumulated since February 28, 1913, within the meaning of the applicable revenue acts. Such dividend distributions as were made to stockholders during the taxable years in issue were, in our opinion, and we so hold, made from capital or “ paid-in surplus,” distinguished from actual earnings or profits, constituting an “ earned surplus.” The record shows there was an operating deficit during the entire time, 1924 to 1929, inclusive, which exceeded in amount all the earnings or profits made during such period. This is fully and clearly shown in our findings of fact. The facts bring these cases within the rule and make applicable the principle that a paid-in surplus must be treated like capital, and dividends paid while there is an operating deficit should be deemed to be from capital or paid-in surplus, even though there are earnings of the taxable year sufficient to pay the dividends paid in that year in whole or in part.

In our opinion, the determination of the issue discussed is controlled by Arthur G. Stifel, 29 B.T.A. 1145, and renders unnecessary a further discussion of this issue, which we determine in favor of the petitioner.

The record shows that the respondent admits that petitioner’s income for 1929 should not have been increased by $3,240.08 representing a portion of fiduciary commissions disallowed as a deduction by reason of prorating such commissions between taxable and nontaxable income.

Decision will be entered wider Rule 50.


author: Evans, C.J.: McMahon:

text:
    Langwell Real Estate Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 23758.
    Promulgated March 20, 1934.

      Sydney' W. Stem, Esq., and David Greenberg, Esq., for the petitioner.

      Bruce A. Low, Esq., and ArtTwr Garnduf, Esq., for the respondent.
   In its opinion the court stated in part:

Evans, C.J.:

We find it impossible to escape the conclusion that upon the tenant’s release of its interest in said $50,000, respondent was enriched by that amount. Regulations 62 Treasury Department, Article 50. It was relieved of its obligation to pay this amount to the tenant at the expiration of the lease. At the same time and as a part of the same transaction, respondent released the tenant from its lease. Whether respondent suffered a loss by reason of the termination of the lease presents another issue, which is not covered by the findings of the Board of Tax Appeals. If respondent could have readily negotiated another lease with a responsible party, as favorable as the lease which was cancelled, it suffered no loss. On the other hand, if it could not have negotiated such a lease, then it suffered a loss. The amount of such loss, if any, was the legitimate subject of proof. The actual execution of a new lease was not necessary to determine this issue. The rental value of such property could be shown by oral testimony.
* ***** *

We think the Board was in error in assuming that a loss was sustained which offset the $50,000 gain. In the absence of proof sufficient to support a contrary finding by the Board of Tax Appeals, the finding of the Commissioner should have been sustained (Avery v. Commissioner, 22 F. (2d) 6). The record before us does not warrant our making a finding on this issue nor is it necessary for us so to do. 26 U. S. C. A. Sec. 1219; K. Coal Co. & D. Co. v. Commissioner, 29 E. (2d) 559.

Under all of the circumstances we think it would be promotive of justice in this instance to remand the case for further hearing. The taxpayer should be permitted the opportunity of offering evidence to shoiú that it suffered a loss and also the extent of its loss. If the proof be sufficient to sustain a finding of the amount of such loss, that sum should be deducted from the said $50,000. If no such loss be established, then the sum of $50,000 should be included as part of the taxpayer’s income.

The order of the Board of Tax Appeals is reversed with directions to proceed in accordance with the views expressed herein. [Emphasis supplied.]

Thereafter, in accordance with the opinion and mandate of the court, further hearings were had before the Board at New York and Chicago. Based on evidence received at those hearings, we make additional findings of fact.

FINDINGS OF FACT.

The property which was the subject of the lease is located at 123-129 West 44th Street, New York City, and consists of a lot 100 by 100.5 feet and a thirteen-story hotel building known as the Langwell Hotel. It was known for many years as the Hotel Girard. The petitioner acquired the property early in the year 1923, at a cost of $950,000. In June 1923 the building was about 30 years old. The hotel had 300 rooms and 100 baths. It had 66 suites of two and three rooms each, and the others were single rooms. This property is located about 350 feet from Broadway.

In 1920 the buildings on 44th Street between the property in question and Broadway consisted of restaurants, one theatre, and some small stores. On the other side of the property in question the buildings included the Belasco Theatre, which is adjacent to the property in question, and some five-story buildings. In 1922 the Paramount Building was built on the west side of Broadway, at 43d and 44th Streets, about 700 feet from the property in question. It was generally known in 1923 that the elevated railway from 53d Street to 59th Street was to be removed. It was actually removed in 1924 or 1925. In 1922 or 1923 several contracts were let for hotel buildings on 48th and 49th Streets. Some loft building projects were finished on 46th Street in 1924. There was considerable building along Fifth Avenue and Broadway in 1922 and 1923. Hopes for higher land values were prevalent in that neighborhood, and there was a speculative improvement in value of the property in question. Improvements in buildings between 42d and 50th Streets and between Fifth Avenue and Broadway from 1920 to 1923 included a number of new hotels and apartment houses, increasing the value of all property in that neighborhood, including the property in question.

About 1920 the lower part of the Langwell Hotel was closed for violation of the prohibition laws and at various times it had been closed as an immoral house. It has not been closed since 1920.

The lease in question, which went into effect on April 1, 1920, provided for a net rental of $80,000 per year. The lease contained the following provision:

It is the intention of the parties hereto and is understood and agreed by the Tenant that the Landlord shall not be called upon to- make any payments of any kind, nature or description whatsoever for the upkeep, maintenance, repair or replacement of said premises, or for any taxes, assessments or charges against the same or for the compliance of any orders of any department, Federal, State or Municipal having jurisdiction over said premises, but that the rental of Eighty Thousand ($80,000.00) Dollars per year reserved herein shall be absolutely net to the Landlord during the full term of the lease, excepting interest on mortgages which may be granted or executed by the Landlord or the owner or holder of title to said premises.

Under the agreement, dated June 20, 1923, between the petitioner and the Keystone Hotel Corporation, canceling the lease, the Keystone Hotiel Corporation was permitted to continue in possession of the hotel until September 30,1923. The agreement also provided for the purchase by the petitioner from the Keystone Hotel Corporation of all of the furniture and fixtures belonging to the corporation and then contained in the hotel, for the sum of $65,000.

The petitioner had to cancel the lease in question because the Keystone Hotel Corporation was an undesirable tenant in that it was nol paying its rent. The petitioner was glad to get rid of the tenant. The tenant was losing money in the operation of the hotel. The lease was canceled while the petitioner was negotiating for the sale of the property.

In July 1923 the petitioner entered into an agreement to sell the property in question to the 123-129 West 44th Street Corporation and the deal was consummated in October 1923. This sale included all of the furniture and fixtures which petitioner had purchased from the Keystone Hotel Corporation for $65,000. The total consideration which petitioner received was $1,050,000, made up as follows: The purchaser took the property subject to a first mortgage of $542,500, and subject to a second mortgage of $300,000; the purchaser executed to the petitioner a purchase money third mortgage in the amount of $157,500; and the purchaser paid petitioner $50,000 in cash. This $50,000 was in payment for the furniture and fixtures. The duration of the third mortgage was 10 years. It provided for quarter-yearly payments of $2,500 until the first day of October 1933, on which date the remainder was to become due and payable. This mortgage provided for interest at 6 percent per annum. At the time of this sale the petitioner negotiated with the purchaser to dispose of this third mortgage to the purchaser for $100,000. The purchaser, however, could not raise the cash to purchase the third mortgage at that time, but in June 1926 the purchaser did purchase the third mortgage at a reduction of $42,500. The remainder of the face of the mortgage, $115,000, was paid to the petitioner in cash.

OPINION.

McMahon:

The court remanded the instant cause to the Board for the purpose of permitting the petitioner to show whether or not it suffered a loss upon the termination of the lease and, if so, the amount thereof. The court stated in its opinion that if the petitioner could not have negotiated another lease with a responsible party as favorable as the lease which was canceled, the petitioner suffered a loss which might properly be used to offset the gain of $50,000; that the amount of such loss, if any, was the legitimate subject of proof; and that the rental value of such property could be shown by oral testimony.

After a full consideration of all the admissible evidence adduced, we are not convinced that the petitioner could not, upon the cancellation of the lease in question, have readily negotiated a lease with a responsible party as favorable as the one which was canceled.

The petitioner, in an attempt to prove that it could not have obtained a lease as favorable as the canceled lease, introduced the testimony of Alfred N. Gitterman and that of Frank Sullivan, two New York real estate appraisers. Gitterman is also a real estate broker. Gitterman testified that in his opinion on J une 20, 1923, the net rental value per annum of the property in question was $64,000. He arrived at this figure by taking 6 percent of what in his opinion was-the value of the land-and 8 percent of what in his opinion was the value of the building. He testified that he estimated the duplication value of the building at $425,000 and the value of the land at $500,000. He testified that leases in that part of the city were being made upon the basis of these percentages, and that he negotiated other leases in that • neighborhood upon that basis. These other buildings which the witness leased were, however,-different in type from the property in question here. He testified that the petitioner, by canceling the lease providing for a net rental of $80,000 per annum, thus lost $16,000 per annum in rent, and, since in 1923 the lease in question had approximately 18 years to run, the total loss to the petitioner was in excess of the sum of $50,000. Sullivan testified that in his opinion the net rental value of the property in question herein on June 20, 1923, to a responsible tenant, and upon the terms of a lease similar to the one in question here, was $59,000. He arrived at his opinion as to the net rental value by using the same formula used by Gitterman. He, however, appraised the land at a value of $450,000, and the building at a value of $400,000. Sullivan testified that the petitioner, upon the surrender of the lease in question on June 20,1923, suffered a loss in excess of $50,000. Sullivan testified that he does not know anything about the unsavory reputation of the hotel in question in 1920. He testified that there was no change in the value of property in that section after 1920. He testified that there was speculation going on in that neighborhood, but that it “ never meant anything.” He testified further that “ to a certain extent ” the selling price of property did not represent its value.

The opinions of these witnesses as to the rental value of the property in question are not binding upon the Board. Uncasville Mfg. Co. v. Commissioner, 55 Fed. (2d) 893, and Belridge Oil Co., 26 B.T.A. 810. We are not willing to accept the rental valuations to which they testified. Assuming, but not deciding, that their formula for calculating the rental value of property, that is, by taking 6 percent of the value of the land and 8 percent of the value of buildings, is correct, their results are incorrect since, in our opinion, the values of the property which they used in their calculations were incorrect. The evidence adduced at the original hearing in this proceeding, and the findings of fact reported in our first opinion, Langwell Real Estate Corp., 17 B.T.A. 196, show that on January 27,1923, E. Lewis Jacobs, as seller, and Abraham J. Cooper and Samuel J. Cooper, as purchasers, entered into a contract for the sale of the same real estate as is covered by the lease. This contract of sale was at a price of $950,000. The property was to be sold subject to the lease to the Keystone Hotel Corporation. The above contract was assigned by Abraham J. Cooper and Samuel J. Cooper to the petitioner during 1923. The petitioner carried out the deal with E. Lewis Jacobs.

The evidence shows that in July 1923, shortly after the lease on the property was canceled, the petitioner entered into an agreement to sell the property in question, including furniture and fixtures which had recently cost the petitioner $65,000, for $1,050,000. Fifty thousand dollars of such purchase price was paid for the furniture and fixtures, leaving the selling price of the land and building $1,000,000. . It is thus apparent that the valuation of $925,000 placed upon the property by Alfred N. Gitterman and the valuation of $850,000 placed upon the property by Frank Sullivan are erroneous. The best evidence as to the value of property is a fair sale of such property when not too remote from the date of valuation. Andrews v. Commissioner, 38 Fed. (2d) 55; affirming Estate of Effie Andrews, 13 B.T.A. 651; Hazleton v. LeDuc, 10 App. D.C. 319; and Ruppert v. McArdle, 42 App. D.C. 392. So far as we are advised both these sales which occurred in 1923 were fair sales, and the sale of the property by the petitioner for $1,000,000 in 1923 was near enough in point of time to the date of the cancellation of the lease, June 20, 1923, to establish the value of the property at the date of cancellation.

Fart of the consideration which was received by the petitioner upon the sale of its property in 1923 was a purchase money third mortgage in the amount of $157,500. Abraham J. Cooper, treasurer and one of the two stockholders of the petitioner in 1923, testified that at the time petitioner acquired the third mortgage its value was not over $100,000, that he offered it to the purchaser for $100,000 at that time, and that the petitioner disposed of it to the purchaser in 1926 for $115,000. The purpose of this testimony was apparently to show that the value of the property at the time of this sale as established by the sale was less than $1,000,000. There is nothing to show that this third mortgage would not be paid in full, with interest at 6 percent as it matured, or that the parties considered the security or the margin thereof inadequate. Too, it was not shown that it was not the usual procedure in New York City at that time to pay for real property by executing such mortgages. So far as we know Gitterman and Sullivan, in fixing their valuations of the property in question, had in mind the amount for which the property would sell for a similar kind of consideration. In our opinion the amount of $1,000,000 should be taken as the selling price of the property in question.

We have determined that the value of the property was $1,000,000 at the date of the cancellation of the lease, but even though it were assumed that) the method employed by Gitterman and Sullivan in arriving at the rental value of the property is correct, that is, by taking 6 percent of the value of the land and 8 percent of the value of the building, the evidence is insufficient to allow us to apply that formula to determine the rental value of the property, since there is no evidence upon which we can allocate the $1,000,000' selling price as between the land and the building.'

Furthermore, in determining the rental value or loss of rental value of property, the value of such property is not alone to be considered. There are other factors to be considered, and in reaching our conclusion in the instant proceeding we not only have taken into consideration the fact that the property had a value of $1,000,000 in 1923, at the time of the cancellation of the lease, but have considered all the other facts and circumstances, as appears herein.

The fact that in 1920, when, as the proof shows, the property in question was less valuable than it was in 1923, a lease was executed providing for a net rental of $80,000 a year indicates that rental value of property can not be computed accurately by applying a formula to the value of the property. The fact that such a lease was obtained in 1920 indicates that there was some additional value in the property for rental purposes not reflected by the value and attributable to other factors. This additional value may have been due to the location of the property, the attractiveness of its interior, or other factors, but as stated, we are not advised in this respect.

Abraham J. Cooper testified that after the cancellation of the lease he endeavored to. make a new lease on the property on behalf of the petitioner. He testified that he placed the property in the hands of several leading real estate brokers in New York and told them that petitioner would accept as low as $60,000 rental for the premises, but no offers were received. There is no evidence to show that either the brokers, the petitioner, or Cooper made bona fide offers of rental at the figure of $60,000 or any other figure to any responsible prospective lessee, or that anything beyond this was actually done by any of them to procure such a lessee at that or any other -figure. There is no evidence of a bona fide effort to rent the property to a responsible lessee at the same rental of $80,000 annually. The petitioner contends that the fact that the Keystone Hotel Corporation was operating the property at a loss tends to show that the rental of $80,000 provided in the lease in question was excessive. However, this does not necessarily follow. The loss may have been due to poor management. We have no proof upon that subject.

Gitterman testified that the shortage of housing of the caliber of the Langwell Hotel in New York was acute in 1920, 1921, and a part of 1922, but that in the. latter part of 1922 and in 1923 the shortage was less. The petitioner relies upon this to establish that the rental value of the property was less in 1923 than it was in 1920, when the lease in question was executed. This is a conclusion of the witness which is not binding. No evidence was adduced upon which the Board might make its own comparison of conditions in 1920 and 1923. There is no evidence to show the extent of the shortage in 1923 and therefore there is no showing that the shortage was so reduced as to prevent the. execution of a lease as advantageous to the petitioner in 1923 as the lease which was canceled.

The petitioner points to the fact that the property was about 30 years old in 1923 and that there had been a marked improvement in the neighborhood from 1920 to 1923, due to the building of new hotels and apartment houses. Petitioner contends that this rendered the property obsolete, resulting in lower rental value in 1923. However, there is no proof to sustain the holding that the property became obsolete. On the' other hand, the evidence shows that, due to these improvements between 1920 and 1923, the value of the property in question was enhanced.

Gitterman testified that the demand -was for single rooms with adequate bath facilities after 1922. The petitioner contends that, due to the fact that the Langwell Hotel had 66 two and three-room suites, it would not have a large rental value in 1923. However, the evidence shows that the Langwell Hotel had 300 rooms and 100 baths. We have no proof to show exactly how manj^ single rooms there were with bath facilities, but, assuming that there were an equal number of two and three-room suites, the hotel would then have only slightly more than one half cf its total number of rooms in suites. There would remain a goodly proportion of single rooms, nearly half; and we can not say from the evidence that this demand for single rooms in 1923 would detract from the rental value of the property. Furthermore, there is no showing as to how many rooms had no bath connections.

The petitioner also contends that the fact that the Keystone Hotel Corporation was willing to surrender a $50,000 deposit to secure a release of the lease is proof of the fact that the property was not then worth the rental that was being paid. The evidence indicates that the reason the Keystone Hotel Corporation was desirous of giving up the lease was that it was operating at a loss and, as heretofore stated, we do not know what caused such loss. It may have been poor management. So far as the record shows there may have been other reasons.

The evidence shows that the property in question increased in value between 1920 and 1923, due in part to the fact that severa] large buildings had been built in the neighborhood during that period. This is shown in part by the testimony of the witness Gitterman. The two sales of the property in 1923 referred to above show that the value of the property increased in that year by an amount of $50,000. Furthermore, the evidence shows that the property in question was much more desirable in 1923 than it was in 1920. In 1920 the hotel had an unsavory reputation and was closed for violations of the law. However, the evidence shows that the hotel has not been closed for such reasons since 1920, The evidence shows that the petitioner canceled this lease because the Keystone Hotel Corporation was an undesirable tenant in that it was not paying its rent. The evidence also shows that the petitioner was glad to get rid of this tenant. Thus, much of the evidence tends to show that upon the cancellation of the old lease, the petitioner probably could have obtained a lease just as advantageous as the lease which was canceled.

The respondent contends that the cancellation of the lease was necessary before the petitioner could effect the sale of the property in the year 1923. The evidence does strongly suggest that this may have been true. The Keystone Hotel Corporation was an undesirable tenant in that it was not paying rent and it is reasonable to suppose that the purchaser of the property would not care to have the property encumbered by such a lease. The evidence shows that, at the time of the agreement on June 20, 1923, to cancel the lease, negotiations were under way for the sale of the property. Under the terms of the cancellation agreement the tenant was to vacate the premises by September 30, 1923. The agreement to sell the property was entered into in July 1923. The evidence adduced at the original hearing in this proceeding, and our findings of fact in Langwell Real Estate Corp., 17 B.T.A. 196, disclose that this deal was consummated on October 1, 1923. It seems significant to us that the date upon which the tenant under the lease was to vacate the premises coincided with the date upon which the purchaser of the property was to take possession. We may say in passing that, if it was necessary for the petitioner to obtain the cancellation of the lease before it could effect a sale of the property, it would seem that, far from sustaining a loss upon the cancellation, the petitioner actually was benefited thereby.

We hold that the petitioner has not shown it did sustain a loss upon the cancellation of the lease and that, hence, in accordance with the opinion of the United States Circuit Court of Appeals for the Seventh Circuit, the amount of $50,000 should be included in the petitioner’s income for the year 1923, undiminished by any amount as a loss upon the cancellation of the lease.

Pursuant to and in accordance with the opinion and mandate of the court, as we understand them, we have taken additional evidence upon the question of whether or not the petitioner could or could not have readily obtained, upon the cancellation of the lease in question, another lease as favorable as the lease which was canceled. In view of our holding that the petitioner has not shown that it could not have readily obtained just as favorable a lease, there is no occasion for further consideration of the question of whether there has been proved a proper basis for the deduction of a loss upon the cancellation of the lease in question. Cf. Frank F. Nicola, 1. B.T.A. 487; M. F. Tarpey, 4 B.T.A. 1056; and Forrester Box Co., 25 B.T.A. 128.

At the taking of evidence preliminary to the final hearing had pursuant to the direction of the court, there was offered and admitted, over the objection of counsel for the petitioner, a copy of the Board’s findings of fact and opinion in E. Louis Jacobs, 20 B.T.A. 529. Thereafter, the respondent offered the transcript of the evidence in that proceeding. However, the respondent later withdrew the offer of the transcript. Upon further consideration we are of the opinion that the findings of fact and opinion are not properly admissible in this proceeding and so hold, since that proceeding did not involve the same parties or issues here involved and the petitioner had no opportunity to cross-examine the witnesses upon whose evidence the findings are based, or offer other evidence,- or be othei'wise heard upon the issues covered by the findings and opinion.

At the same preliminary taking of evidence there was received in evidence, over the objection of counsel for the respondent, the parol evidence of the witness Gitterman as to the amount at which the property in question was assessed in 1923 for purposes of taxation in the city of New York. Upon further consideration it is our opinion that such evidence is not properly admissible, and we so hold. It was not shown that Gitterman was an officer or employee of the petitioner, nor was it shown that he was connected in any way with the taxing authorities of the city of New York. He did not have before him the original records of the city relating to the assessed valuation. No officer or employee of the city was produced to testify as to the assessed valuation from original records or otherwise, and we are without any evidence as to how such valuation was made, or what the basis of it was. We do not know from the evidence that the assessed valuation was intended to represent the fair market value of the property. The party or parties who made the appraisal of the property for the city were not presented as witnesses and the respondent was therefore not accorded the right of cross-examination with regard to the assessed valuation.

In our consideration of this proceeding, we have not considered either the testimony of Gitterman, just above referred to, or the findings of fact and opinion in E. Louis Jacobs, supra, nor have we found any facts herein based on them. The defects in the evidence offered were not cured at the final hearing.

Reviewed by the Board.

Decision will be entered under Bule SO.

Smith, Sternhagen, Van Fossan, and Seawell concur in the result.


author:
Smith:
      GoodRIch,

text:
    Edmund O. Schweitzer, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 52884, 61908.
    Promulgated March 20, 1934.

      Hugh W. McCulloch, Esq., for the petitioner.

      James B. Johnston, Esq., and Paul D. Page, Jr., Esq., for the respondent.
   OPINION.

Smith:

These proceedings involve deficiencies in petitioner’s income taxes for the calendar years 1928 and 1929 in the amounts of $4,487.27 and $4,098.73, respectively. The only question for our determination is whether the petitioner is taxable upon the income from certain trusts created by him in 1925 and 1926, which income, under the trust agreements, was payable to him to be used solely for the support, maintenance, and education of his three minor children. The petitioner reserved the power to revoke the trusts with the consent of his wife, who was a contingent beneficiary. The proceedings were consolidated for hearing. The material facts have been stipulated and are, so far as material to the consideration of the question before us, as follows:

On March 23, 1925, the petitioner entered into a trust agreement with the Illinois Merchants Trust Co., as trustee, under the terms of which he transferred to the Trust Co. $30,000 to be divided in three equal parts and the income therefrom paid to the petitioner “ for the support, maintenance and education ” of his three children, Emily Louise Schweitzer, Edmund O. Schweitzer, Jr., and Evelyn Josephine Schweitzer, “ and for no other purpose whatsoever ” until said children shall reach the age of 21 years, respectively. Thereafter, the trust income is to be paid to the children until they shall reach the age of 35 years, respectively, when each child shall receive the corpus and any accumulated income of the part to which he or she may be entitled. There are provisions in the trust agreement, not here material, for the disposal of the income and corpus of the trust property in the event of the death of the petitioner or his children, and a further provision that both the income and corpus of each part of the trust property is to go to the surviving child or children and their lawful issue, and that:

Seventh : In the event of the death of any one of said children o-f said party of the first part prior to attaining the age of thirty-five (35) years, leaving no lawful issue him or her surviving, nor any child nor lawful issue of any child of said party of the first part then surviving, said Trustee shall pay over, convey and deliver the share of the principal or corpus of said trust estate to which the one so dying would have been entitled had he or she lived, to Lillian Schweitzer, wife of said party of the first part, if she shall be living at that time, and if not then to the heirs at law of the child so dying in accordance with the Statutes of Descent of the State of .Illinois then in force.

In clause tenth of the agreement it is provided that:

It is expressly understood and agreed that said party of the first part, by and with the consent of said Lillian Schweitzer, may at any time during his lifetime by a further or supplemental instrument in writing signed by said party of the first part and said Lillian Schweitzer, alter, change or amend this trust instrument and the terms of the trust hereby created, and wholly revoke the covenants and provisions hereof, and may recall, receive and recover to himself all the trust estate and property fully released from the trusts hereby created * * *.

The dates of birth of the petitioner’s wife and each of the above named children were as follows:

Lillian Schweitzer_October 23, 1875
Emily Louise Schweitzer-October 27, 1911
Edmund 0. Schweitzer, Jr_March 31, 1914
Evelyn Josephine Schweitzer_May 19, 1917

On November 28, 1926, the petitioner executed a second trust agreement similar in all material respects to the above described agreement of March 23, 1925, whereby he conveyed $50,000 to the same trustee to be held for like purposes and uses.

The respondent has determined that the petitioner is taxable upon the income of the trusts for each of the years 1928 and 1929 for reason that the trusts were revocable under the provisions of section 166 of the Revenue Act of 1928. The section referred to and section 167 read as follows:

SEO. 166. REVOCABLE TRUSTS.
Where the grantor of a trust has, at any time during the taxable year, either alone or in conjunction with any person not a beneficiary of the trust, the power to revest in himself title to any part of the corpus of the trust, tlien the income ol such part of the trust for such taxable year shall be included in computing the net income of the grantor.
SEC. 107. INCOME FOR BENEFIT OF GRANTOR.
Where any part of the income of a trust may, in the discretion of the grantor of the trust, either alone or in conjunction with any person not a beneficiary of the trust, be distributed to the grantor or be held or accumulated for future distribution to him, or where any part of the income of a trust is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23 (n), relating to the so-called “charitable contribution ” deduction), such part of the income of the trust shall be included in computing the net income of the grantor.

The petitioner contends that since the power of revocation which, as grantor, he reserved to himself could be exercised only in conjunction with his wife, who, being entitled to a contingent remainder interest in the trust property, was a beneficiary of the trusts, he did not have the power at any time during the taxable years to revest in himself, either alone or in conjunction with another not a beneficiary of the trusts, title to any of the trust property, and that he is therefore not taxable upon the income of the trusts, under the provisions of section 16G above. The petitioner cites Smith v. Commissioner, 59 Fed. (2d) 56, reversing Emma Louise Smith, 23 B.T.A. 631; Bessie R. Jones, 27 B.T.A. 171; and Iola Wise Stetson, 27 B.T.A. 173. In Smith v. Commissioner, supra, the Circuit Court of Appeals for the First Circuit held that the grantor of certain trusts was not taxable upon the income thereof where, under section 219 (g) of the Revenue Acts of 1924 and 1926, corresponding to section 166 above of the 1928 Act, she had created the trusts for the benefit of her children, reserving the power to revoke with the consent of her husband, who was a contingent beneficiary in that the trust property was distributable to him should he survive the children and the survivors of them. The court held that the husband was a beneficiary within the meaning of the statute and that the trusts therefore were not revocable by the grantor, either alone or in conjunction with one not a beneficiary.

The instant case is not distinguishable on the facts from the Smith case. That case was followed by the Board in the J ones and Stetson cases, supra. We are of the opinion that those cases are controlling here.

The respondent makes the further contention that, since the income of the trusts here was payable to and was paid to the petitioner during the taxable years, it is taxable to him under the provisions of section 22 of the Revenue Act of 1928 as ordinary gross income. That section requires the inclusion in gross income of all “ gains or profits and income derived from any source whatever.” From the stipulated facts it appears that the income of the trust funds for the year 1928 was $16,856.95 and for the year 1929, $16,170.81; that these amounts were received by the petitioner from the trustees in the years 1928 and 1929; and that the amounts were disbursed in the two years for the support, maintenance, and education of his three children. In his income tax returns for 1928 and 1929 the petitioner did not report the receipt of income from the trust funds, although he did claim personal exemption for three dependents under 18 years of age. Individual income tax returns were filed for each of the three children for the calendar years 1928 and 1929 and there was included in those returns the income disbursed in those years for their respective support, maintenance, and education under the provisions of the trust agreements dated March 28, 1925, and November 23, 1926.

In support of his contention that the petitioner is liable to income tax in respect of the amounts of money received from the trust funds, the respondent relies upon Burnet v. Wells, 289 U.S. 670. The question before the Supreme Court in that case was whether the grantor of a trust was liable to income tax in respect of the income of trusts created by him, a portion of which income was to be applied to the payment of premiums upon life insurance policies upon his own life, the beneficiaries being dependents of the grantor or others having a claim upon his bounty. In the course of its opinion the Supreme Court stated:

* * * Income permanently applied by the act the taxpayer to the maintenance of contracts of insurance made in his name for the support of his dependents is income used for his benefit in such a sense and to such a degree (hat there is nothing arbitrary or tyrannical in taxing it as his.

It is true that in that case the Court was concerned only with the construction of section 219 (h) of the Revenue Acts of 1924 and 1926, which provided that:

* * * where any part of the income of a trust is or may be applied to the payment of premiums upon policies of insurance on the life of the grantor * * * such part of the income of the trust shall be included in computing the net income of the grantor.

We are of the opinion, however, that the reasoning of the Supreme Court in that case is equally applicable'in the proceedings at bar and that income from trust funds created by a father for the support of his minor children whom he is bound to support, which income is received by the father and applied for the support of his minor children, is. taxable to him. The contention of the respondent upon this point is sustained.

Reviewed by the Board.

Judgment will be entered for the resfondent.

Marquette and VaN Fossan dissent.

GoodRIch,

dissenting: Suppose this trust had been created by someone other than petitioner — for example by the grandfather of the children who are its beneficiaries. Clearly, under those circumstances, it could not be argued that the income of the trust in anywise belonged to petitioner, even though he was relieved of the pecuniary burden of maintaining them, because the trust income provided their support. Such a trust doubtless would be a happy one for petitioner and would bestow on him a benefit — but not the sort of a benefit which can be put into his income and taxed. The payments under the trust to his children might spare him from spending, but they would not add to his income.

Petitioner’s situation is not changed merely because he himself created the trust. He has taken a part of his capital, set it aside beyond his reach, and provided that both it and its earnings should belong to others. Thereafter neither the capital nor the earnings could be his. How, then, can he be taxed on those earnings? The majority opinion indicates that the trust earnings are regarded as income to petitioner because they were received by those whom he was legally bound to maintain. But he did not escape his obligation by the creation of the trust, and I am not convinced that the fact that he has obtained relief from the immediate demands of that obligation makes income to him of the amounts received by the children. He transferred from himself ownership of the corpus from which the income arises; consequently, the income belongs to the new owners of the property. See William Ernest Seatree, 25 B.T.A. 396, on appeal, C.A.D.C.; Elizabeth D. Smith et al., Executors, 25 B.T.A. 291. I see no defect in the arrangement petitioner has made — and whether he made it to reduce his own income and so avoid taxes, or to insure the welfare of his children against the threat of his personal adversity, is immaterial — and I disagree with the result reached by the majority.

This case is not controlled by either the result or the reasoning in the Wells case. As pointed out, that case was confined under a specific statutory provision respecting a trust whose income is applied to the payment of premiums of insurance upon the life of the grantor, and certainly the Court made it plain that it was not attempting to deal with trusts of any other kind. Consequently, to decide the case at bar by the result in the Wells case is to do what the Supreme Court refused to do.

Trammell and McMaiioN agree with this dissent.


author: Marquette:

text:
    George E. Hamilton, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60991.
    Promulgated March 20, 1934.

      George E. Hamilton, Jr., Esq., and John F. MeOarron, Esq., for the petitioner.

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

Marquette:

The petitioner contends, first, that, when the New Hampshire Avenue property was abandoned as a residence and was placed in the hands of real estate agents for sale, at that time it became a transaction entered into for profit, and he cites Larkin v. Gage, 28 Fed. (2d) 18, in support of his position. We disagree. Under the decision of the Supreme Court in Heiner v. Tindle, 276 U.S. 582, the use of property to produce revenue is characterized as a transaction entered into for profit, and until there is an appropriation of the property to rental purposes it retains its character as. a residence. Such appropriation did not take place until March 1,1928, when the property was leased. Joseph F. Cullinan, 16 B.T.A. 991. The basis, therefore, in the computation of gain or loss would be the value of the property on March 1, 1923,- with proper allowance for allowable depreciation to the date of disposition. United States v. Ludey, 274 U.S. 295. We do not have these factors before us, and even if the petitioner were right in his next contention, we could not afford him the relief he seeks.

The petitioner next argues that since the New Hampshire Avenue property and money were exchanged for the Dove Farm, the transaction does not come within the exchange provisions of the statute, and that the general rule of section 111 is applicable. We must again disagree. W. H. Hartman Co., 20 B.T.A. 302; First Nat. Bank of Champlain, N.Y., 21 B.T.A. 415; DeBlois v. Commissioner, 12 B.T.A. 1138; 36 Fed. (2d) 11; Securities Co. v. Commissioner, 64 Fed. (2d) 330. In the last cited case the identical argument now made by the petitioner to take the case out of the exchange provisions of the statute was made by the Commissioner. The court there stated:

* * * But the taxpayer calls attention to Sec. 203 (b) (2) of the Act f 1924 which provides that:
(2) No gain or loss shall he recognized if stock or securities in a corporation a party to a reorganization are, in pursuance of the plan óf reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization.
It argues that the foregoing clause applies to the present case and nullifies he calculation of k gain based upon the difference between the value of the stock /hen issued and the amount realized when it was sold. The government, how-ver, seeks to avoid the application of the clause. It says that the stock of he old company was not exchanged “solely for stock or securities” of the ew company but that the old stock and cash, upon payment of which the tax-ayer was permitted to participate in the reorganization, were so exchanged, et the payment of cash did not take the transaction out of Sec. 203 (b) 2), for the word “ solely ” is aimed at what is received in exchange nd not at what is handed over in order to secure participation in a re-rganization. * * *

While it is true that the court had before it in that case an exchange of stock and money for stock in a corporation, a party to a reorganization under the Revenue Act of 1924, we think the reasoning therein equally applicable in the interpretation of section 112 (b) (1) of the Revenue Act of 1928. Here, the taxpayer exchanged investment property for “ like ” property, and paid cash or “ boot ” in addition. We do not think the payment of cash takes the case out of the provisions of the above section, but that it is a purchase of the excess value received in the form of “ like ” property. The transaction therefore comes within the quoted provisions of the Revenue Act of 1928, and no gain or loss is recognized. See Klein on Federal Income Taxation, p. 913, par. 27:26. The respondent’s determination is approved.

Judgment will be entered for the respondent.

       [See. 112, Revenue Act of 1928.1 * * * (b) Exchanges solely in hind.—
      (1) Property held for productive use or investment. — No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, Donds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged, solely for property of a like kind to be held either for productive use in trade or business or for investment.