author: HaRkon :

text:
    William Korn, Alexander H. Arnstein and Ethel Lewis Korn, as Executors of the Last Will and Testament of Ralph H. Korn, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78954.
    Promulgated April 30, 1937.

      George H. Graven, Esq., and Edwin A. Cooney, Esq., for the petitioners.

      R. P. Hertzog, Esq., for the respondent.
   OPINION.

HaRkon :

The stipulated facts show, and respondent concedes, that the decedent’s transfer of his vested remainder interest in the estate of his father was not made in contemplation of death.

The issues here are (1) whether the value of the vested remainder interest transferred in trust during decedent’s lifetime should be included in his gross estate; (2) whether the value of the remainder interest is $361,938.85 as determined by the Commissioner under table A of article 13 of Regulations 80, or is some other amount.

Issue {!). Section 302 of the Revenue Act of 1926 provides for determination of the value of a gross estate for purposes of estate taxation and the provisions relied upon in this proceeding are set forth in the margin so far as pertinent. It is petitioners’ contention that the assignment of his remainder interest, to trustees under the instrument of January 10, 1927, completely divested decedent of all of his interest in the property constituting the remainder interest and that decedent retained no interest subject to estate tax under section 302 (c) of the Revenue Act of 1926 or under the amendments to that section of March 3, 1931 (section 803 of the Revenue Act of 1932) or under section 302 (d) of the Revenue Act of 1926.

The interest of decedent in the property rights involved in the trust instrument which he executed January 10, 1927, is to be determined by the laws of the State of New York, where his estate is administered. Commissioner v. Jones, 62 Fed. (2d) 496. The trust instrument under consideration was irrevocable. It is governed by the laws of the State of New York. The corpus of this trust was the remainder interest of Ralph Korn in his father’s estate which was not then and is not now in possession of the trust. The trust created a life estate in the grantor, Ralph Korn, in the corpus of the trust. It gave to the trustees power to distribute the corpus upon termination of the trust. The trust instrument named four persons, then living, to whom the corpus should be distributed eventually, if there should be no living issue of the grantor, Ralph Korn, or if, in the alternative, he should fail to exercise a reserved power of appointment to such of the issue of his father, David Korn, in such shares as he should designate by his last will. The four named dis-tributees are now living. Under the trust they received a future interest in the corpus of the trust. The laws of the State of New York favor the vesting of future interests. Section 40 of the Real Property Law (Laws of 1909, ch. 52) McKinney’s Consolidated Laws of New York, Annotated, book 49, provides as follows:

When future estcttes are vested,; when contingent. A future estate is either vested or contingent. It is vested, when there is a person in being, who would have an immediate right to the possession of the property, on the determination of all the intermediate or precedent estates. It is contingent while the person to whom or the event on which it is limited to take effect remains uncertain.

The test of vesting applied by New York courts has been stated as follows:

If you can point to a man, woman or child who, if the life estate should now cease, would, eo instanti et ipso facto, have an immediate right of possession, then the remainder is vested.

Section 41 of the Real Property Law (McKinney’s Consolidated Laws of New York, Annotated, book 49) provides as follows:

The existence of an unexecuted power of appointment does not prevent the vesting of a future estate, limited in default of the execution of the power.

This provision has been interpreted by New York courts to mean the following:

Under the law of the State of New York estates in remainder which are limited to take effect upon default in the exercise of a power of appointment are not prevented from vesting by the existence of the power, but take effect in the same manner as if no power existed, subject, however, to be divested by an exercise of the power.

(Sec. 41, Real Property Law, supra, and cases cited thereunder, particularly Matter of Haggerty (1908), 128 App. Div. 479; 112 N. Y. S. 1017; affd. (1909), 194 N. Y. 550; 87 N. E. 1120; In re Leonard's Will, 143 Misc. 172; 256 N. Y. S. 355; In re Bower's Estate, 186 N. Y. S. 912; In re Haight's Estate, 136 N. Y. S. 557, affirming 136 N. Y. S. 952; Schoellkopf v. Marine Trust Co., 267 N. Y. 358, all referred to on the question of contingently vested future interests.) See also Elizabeth B. Wallace, Executrix, 27 B. T. A. 902, for review of the law of New York relating to when future estates are vested and when contingent.

It is in our opinion clear that the four named nieces and nephews of Ralph Korn received under the trust he created a vested future estate in the corpus of the trust subject to a condition subsequent which never occurred because the decedent did not exercise his power of appointment. However, up to the time of his death, decedent had the power to divest the interest of his nieces and nephews or to alter their shares, if we regard them as “the issue of the said David Korn” in the broader sense of the term issue, as petitioner contends they are. Direct issue of David Korn were living at the time of the execution of the trust, namely, his sons, Daniel and William, and they survived decedent. Ralph Korn, therefore, could have divested the interest of his nieces and nephews completely under his reserved power of appointment by will. He retained a power of revocation with respect to their interest. The decedent retained substantial control, though limited, over the trust corpus until his death. His death terminated that control, ended the possibility of any change by him and was the generating source of transmission of the property involved to the survivors. The reservation of such power to change the possession of the interest brings the case within Porter v. Commissioner, 288 U. S. 436.

We must hold, therefore, that the remainder interest of Ralph Korn in his father’s estate was an interest which must be included in his taxable gross estate under the provisions of section 302 (d) of the Revenue Act of 1926, for the enjoyment of this interest transferred to the trust “was subject at the date of his death to * * * change through the exercise of a power.” Holding as we do, it is not necessary to consider whether section 302 (c) as amended would be applicable in determining this issue.

In support of our determination of this issue the decision of the Circuit Court of Appeals in Commissioner v. Chase National Bank of New York, 82 Fed. (2d) 157; certiorari denied, 299 U. S. 553, is referred to. The facts in that case are so similar to those before ns here as to make that proceeding indistinguishable from this one. The same issue arose in the jurisdiction of the State of New York and was decided adversely to the petitioners there. This Board has previously followed the decision referred to in Stewart W. Bowers, Trustee, 84 B. T. A. 597, and previous to that decision arrived at the same conclusion in W. H. Holderness, Administrator, 33 B. T. A. 155; affd., Holderness v. Commissioner, 86 Fed. (2d) 137. Where the grantor reserves the power to alter, amend, or revoke a trust it has been consistently held that the reservation of the power requires the taxation of the trust as part of the grantor’s gross estate. Cook v. Commissioner, 66 Fed. (2d) 995, affirming 23 B. T. A. 335; Dort v. Commissioner, 69 Fed. (2d) 836; Hoblitzelle v. United States, 3 Fed. Supp. 331, Frederick Foster et al., Executors, 31 B. T. A. 769; Edward Jackson Holmes et al., Executors, 30 B. T. A. 97; Mead v. Welch, 13 Fed. Supp. 981; Margaret Day et al., Executors, 34 B. T. A. 11; Boston Safe Deposit & Trust Co. et al., Executors, 34 B. T. A. 911. Cf. Tait v. Safe Deposit & Trust Co. of Baltimore, 74 Fed. (2d) 851, where it was held that no power to alter or amend the trust, ever came into existence.

Issue (2). The primary question involved in this issue is, What was the value at the date of decedent’s death of his remainder interest in his father’s estate which was subject to the life estate of another person? Section 302 of the Revenue Act of 1926 states that, “The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated.” The statute does not define the term “value”, nor has Congress seen fit to enlarge upon the meaning of this term in the statute. The Commissioner has adopted the regulations prescribing the method of valuing various types of property for purposes of determining estate taxes and these .regulations in substantially the same form have been followed for many years. Article 13 of Regulations 80 is set forth in the margin in so far as it is pertinent to this issue. The respondent lias determined the value of the remainder interest, under section 302 of the statute referred to above, to be $361,938.85 by application of the method for valuing remainder interest set forth in article 13 (10). The petitioners contest both the valuation determined by the respondent and the method, which he has used in arriving at this determination.

Since the method used by respondent in determining valuation is under attack, it is pointed out that estate taxes “rest in their essence upon the principle that death is the generating source from which the particular taxing power takes its being, and that it is the power to transmit, or the transmission, from the dead to the living, on which such taxes are more immediately rested.” See Knowlton v. Moore, 178 U. S. 41. Also, in principle, an inheritance and legacy tax “is not upon property in the ordinary sense of the term, but upon the right to dispose of it”; “the tax is not a tax upon the property itself, but upon its transmission by will or descent”; Knowlton v. Moore, supra. Thus Congress has the power to prescribe any reasonable standard or measure for the taxation of the exercise of this right, and under the present statute it has prescribed the value of the property passing to be the measure of the tax. In general, the Commissioner of Internal Revenue has, by Regulations 80, article 13, interpreted the term “value” in section 302 of the Revenue Act of 1926 to be “fair market value.” Article 13 (1) generally states: “The value of all property includable in the gross estate is the fair market value thereof at the time of decedent’s death.” See Cecil 3. Gamble, Executor, 33 B. T. A. 94, 99. It is our understanding that article 13 (10), providing a method for valuing remainder interests, is intended to carry out this general interpretation of the term “value” and endeavors to arrive at the “fair market value” of the remainder interest by computing the present worth of the corpus which is valued at its fair market value on the date of decedent’s death.

The property subject to the remainder interest involved consists chiefly of bonds of states, cities, railroads, and public service corporations. The parties have stipulated that the value of this property at the date of decedent’s death was $456,682.12. It is our understanding that this stipulated value is the fair market value of the corpus of the remainder interest. The method used by respondent in determining the present value of this remainder interest subject to a life estate may be described in the following way:

Since the remainder interest is subject to the life estate of another person and will not come into possession and enjoyment until the termination of that life estate the respondent has valued the remainder interest under the method provided by his regulations for computing the present worth of a sum, the possession of which is deferred for a given period. The respondent’s regulations adopt the combined experience table of mortality for determining the life expectancy of the life tenant which is the period during which the remainderman’s possession will be deferred. The value of the corpus is then discounted at a rate of 4 percent compounded annually over that period in order to ascertain the present worth. It is recognized by the Commissioner, frequently, that the rate of 4 percent compounded may not always be a proper rate and the factor is adjusted to adopt another rate of interest if the facts show justification. See Security-First National Bank of Los Angeles, Executor, 35 B. T. A. 815. But here there is nothing to indicate that the method prescribed by article 13 (10) is unreasonable. See Simpson v. United States, 252 U. S. 547.

The petitioners contend that the method followed by the respondent in valuing the remainder interest should not be applied in this pro-, ceeding. They contend that this remainder interest has a “fair market value” which is a price which it would bring on a market for remainder and reversionary interest which can be found in New York, Boston, Philadelphia, or Chicago. The testimony of the petitioners’ expert witness is that the best price which this remainder interest would have brought at the date of decedent’s death was $162,000. This price is alleged to be “the fair market value of the remainder interest.” From a review of the evidence we are convinced that this price is not the fair market value of the remainder interest. It is clear, throughout the testimony of petitioners’ expert witness, that this price is based upon the experience which the expert witness has had in disposing of remainder interests in a limited market and also that his experience in almost every instance is that sales of remainder interests at such prices are made by remaindermen compelled to liquidate their interests under the pressure of extreme need for money. It is also evident that, in the experience of petitioners’ expert witness, the buyers of remainder interests with whom he has negotiated, have been willing to pay a price fixed at no more than one-third of the value of the property in remainder interests comparable to that here involved, because they regard such purchases as speculative investments. On redirect examination the expert witness was asked:

Q. From your experience, do you consider it possible for the owner of a reversionary interest to obtain anything like a fair price as compared with what the property will yield him if he waits until its maturity?
A. I have never known it to be so.

On cross-examination, the witness was asked the following questions :

Q. If you had been the owner of a reversionary interest of this kind would you have sold it for one-third?
A. I don’t approve of these transactions.
Q. I did not ask whether yon approved.
A. I vjould not have done it.
Q. Ton would not have accepted one-third?
A. It depended on the necessity, if I needed the money.
Q. Unless you were forced to sell?
A. I would have sold half of the fractional interest; I would not have sold the whole thing.
Q. You would not have sold for one-third unless you needed the money or were forced to sell?
A. No, sir.

The petitioners’ expert witness testified specifically as to one recent sale of a remainder interest which he had handled. In this negotiation he persuaded the remaindermen to sell only a part of their remainder interest because of the extremely low price which he could get in a limited market. From his testimony it is apparent that this expert witness himself does not believe that the prices which can be obtained in the limited market for remaindermen’s reversionary interests are fair prices and it is apparently his practice to advise remaindermen to sell only parts of their remainder interests, rather than sacrifice the whole for such low prices as compared to the values involved. We must conclude, therefore, that petitioner has not offered any evidence of the “fair market value” of the remainder interest involved and that the value of $162,000 is not a fair market value within the meaning of article 13 (1) of Kegulations 80, which specifically provides that:

The fair market value is the price at which the property would change hands between a willing buyer and a willing seller neither being under any compulsion to buy or sell. The fair market value of a particular kind of property includable in the gross estate is not to be determined by a forced sale price * * *.

This is the. definition of fair market value laid down in many decisions of this Board and the courts. French Dry Cleaning Co., v. Commissioner, 72 Fed. (2d) 167; Robertson v. Routzahn, 75 Fed. (2d) 537; James Couzens, 11 B. T. A. 1040; Brooks v. Wilcutts, 78 Fed. (2d) 270; Premier Packing Co., 12 B. T. A. 637, 642; Elmhurst Cemetery Co. v. Commissioner, 300 U. S. 37.

No other evidence has been introduced to overcome the correctness of the Commissioner’s determination. There is no direct attack on the propriety of the respondent’s use of a 4 percent compound discount factor in arriving at the present value of the remainder interest. The petitioners’ attack on the combined experience table of mortality used by the Commissioner was chiefly directed to the point that any mortality table furnishes only an estimate and not-a certainty on life expectancy and that speculative buyers would discount that estimate in their own favor. In so far as the petitioners’ attack was directed at the particular mortality table used it must be dismissed in the absence of any attempt to prove the superior accuracy and validity of any other mortality table. This comment is made without passing on the merits of the regulation followed for so many years, but we take notice of the statement of the Supreme Court in Simpson v. United States, supra:

The objection is not to the particular table that was used but to the use of any such table at all — to the method. Such tables, indeed the precise table which was made the basis of the one used by the collector, has been resorted to for many years prior to 1889 by courts, Legislatures, and insurance companies for the purpose of determining the present value of future contingent interests in property * * *. Both the method and the rate adopted in this ease have been assumed by this court, without discussion, as proper in computing the amount of taxes to be collected under this War Revenue Act in Knowlton v. Moore, 178 U. S. 41, 44, 20 Sup. Ct. 747; United States v. Fidelity Trust Co., 222 U. S. 158; Rand et al. v. United States, 249 U. S. 503; Henry, Executor v. United States, 251 U. S. 393. It is much too late to successfully assail a method so generally applied. * * *

In this proceeding petitioners liave failed to introduce evidence upon which we can sustain their attack upon the method used and there is no evidence to show that the valuation of $361,938.85 arrived at by the respondent by use of the method is not a fair value within the meaning of section 302 of the Revenue Act of 1926.

The respondent is therefore sustained in the valuation of the remainder interest which he has determined to be proper for the purposes of estate tax in this proceeding.

The respondent has not allowed credits for the amount of any estate tax paid to a state pursuant to section 301 (b) of the Revenue Act of 1926. Upon proof of such payment and the amount thereof to the Commissioner, such credit is allowable.

Reviewed by the Board.

Decision will he entered imder Bule 50.

       Sec. 302. The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated—
      ****** *
      (e) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *
      (d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money’s worth. * * *

         Art. 13. (1) General. — The value of all property includable in the gross estate is the fair market value thereof at the time of decedent’s death. The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell. The fair market value of a particular kind of property includable in the gross estate is not to be determined by a forced sale price * * *.
      * * * * . * * *
      (10) * * * If the decedent had a remainder interest in property subject to the life estate of another, and such interest constituted an asset of his estate, the present worth of the remainder interest at the time of death should be obtained by multiplying the value of the property at the time of death by the figure in column 3 of Table A opposite the number of years nearest to the age of the life tenant. If the remainder interest is subject to an estate for a term of years Table B should be used.
      Example: The decedent was entitled to receive property worth $50,000 upon the death of his elder brother, to whom the income for life had been bequeathed. The brother at the time of the decedent’s death was 31 years old. By reference to the table it is found that the figure in column 3 opposite 31 years, is 0.31262. The present worth of the remainder interest is, therefore, $15,631. * * *


source: Caselaw Access Project

author: Aknold :

license: Public Domain

text:
    H. T. Robinson, Petitioner, v. Commissioner of Internal Revenue, Respondent. A. D. Robinson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 62273, 62274.
    Promulgated May 7, 1937.

      George Bouchard, Esg., and Josefh D. Brady, Esq., for the petitioners.

      I. Graff, Esq., for the respondent.
   OPINION.

Aknold :

The petitioner contends that the amount of $170,439.93, representing the cost of the assets transferred to him by the sub-dividers in aid of construction, and thereafter transferred by him to the corporation together with other assets of the water company, for the bonds and stock of the corporation, was an expenditure properly chargeable to his capital account and should be included in his basis for determining loss or gain on the sale of said bonds and stock under section 202 (a) and (b). Petitioner further argues that these assets transferred to him in aid of- construction constituted a gift to him and under section 204 (a) (2) of the Revenue Act of 1926 may be included in his basis at their cost to the transferors.

The respondent contends that the transfer of these assets by the subdividers to petitioner was for a valuable consideration and not a gratuitous transfer or gift within the meaning of the above cited section of the statute and cites numerous cases to the effect that a gift must not have consideration. He further contends that petitioner acquired the water mains, pipe lines, and connections without cost to him, and, therefore, their cost should not be considered in determining gain or loss on the sale of the stock and bonds here in question.

Petitioner cites Edwards v. Cuba Railroad Co., 268 U. S. 628, as controlling. That case does not answer the question we have to decide here. There, physical properties and money subsidies paid to the Cuba Bailroad Co. by the Bepublic of Cuba were held not income to the donee within the meaning of the Sixteenth Amendment. In the opinion the Court said:

* * * Such aids, gifts and grants from the government, subordinate political subdivisions or private sources — whether of land, other property, credit or money — in order to induce construction and operation of railroads for the service of the public are not given as mere gratuities. Burke v. Southern Pacific R. R. Co., 234 U. S. 669, 679, 34 S. Ct. 907, 58 L. Ed. 1527; Louisville & Nashville R. R. v. United States, decided March 2, 1925, 267 U. S. 395, 45 S. Ct. 233, 69 L. Ed. 678. * * * The subsidy payments taxed were not made for services rendered or to he rendered. They were not profits or gains from the use or operation of the railroad, and do not constitute income within the meaning of the Sixteenth Amendment. See Stratton’s Independence v. Howbert, 231 U. S. 399, 415, 34 S. Ct. 136, 58 L. Ed. 285; Eisner v. Macomber, 252 U. S. 189, 207, 40 S. Ct. 189, 64 L. Ed. 521, 9 A. L. R. 1570; Merchants’ Loan & Trust Co. v. Smietanka, supra.

The donations in aid of construction were treated by the Supreme Court as constituting reimbursement for capital expenditures. The Court pointed out that “Neither the laws nor the contracts indicate that the money subsidies were to be used for the payment of dividends, interest or anything else properly chargeable to or payable out of earnings or income.” To the same effect is Liberty Light & Power Co., 4 B. T. A. 155. See also El Paso Electric Co., 10 B. T. A. 79; Tampa Electric Co., 12 B. T. A. 1002; Frank Holton & Co., 10 B. T. A. 1317.

The property in question was not' given petitioner for services rendered or to be rendered to the subdividers. The service which petitioner was obligated to render was supplying water to the consumers in the subdivision, who paid the regular rates for water which obtained in that area. The property received represents the measure of cost of additional water mains and equipment which petitioner would have had to make in order to supply the subdivisions with water and is in the nature of reimbursement for construction costs. Edwards v. Cuba Railroad Co., supra. It became a part of petitioner’s water system which was operated as a unit and from which income was derived.

The respondent’s argument that because a lessee is not entitled to claim depreciation on leased property, the petitioner is not entitled to a basis on tlie property transferred to him, is not convincing. The lessee is held not entitled to depreciation because he does not own the property, but the petitioner became the owner of the property transferred to him by the subdividers and it was a part of the capital used in his business. Ownership and not possession is the test in determining whether assets used in business are subject to depreciation, and where the owner of property used in business has paid a consideration for it he is entitled through depreciation to recover the value of the consideration paid.

The respondent argues that the transfer of the pipe lines, water mains, etc., was not a gift to petitioner, but was for a valuable consideration. At the same time he contends that they cost him nothing. We do not think these positions are consistent. We think it clear that the transaction here was not a gift in the sense that it was a gratuity. Burke v. Southern, Pacific Railroad Co., 234 U. S. 669; Louisville & Nashville Railroad v. United States, 267 U. S. 395; Edwards v. Cuba Railroad Co., supra. The “donors” did not intend to make such a gift to petitioner. The relationship of the parties negatives any such intent. Both were interested in the benefits they hoped to reap by the arrangements. There was, as argued by the respondent, valuable consideration flowing to the subdividers from petitioner for the transfer of the property here in question. The parties were dealing at arm’s length. The sub-dividers needed water to enable them to promote the subdivisions and they agreed to pay the cost of installing all the necessary mains, pipes, and connections, and to transfer title to such property to the petitioner. The petitioner agreed to maintain the property and to furnish an adequate water supply to the subdivisions. This promise constituted consideration for the property received. These contracts under which the gifts or grants in aid were made were, we think, valid and enforceable. The grantors having performed could require the petitioner to do so or respond in damages.

There was, therefore, a mutual consideration between the parties and in the absence of any evidence to the contrary we assume that there was a quid pro quo, and that the obligation of petitioner was equal to the value of the property received. In other words, the consideration given by petitioner was reasonably wortli what the subdividers paid for it. The parties themselves so considered it, or they would not have entered into the arrangements. That consideration was petitioner’s enforceable promise to perform. The sub-dividers undoubtably hoped to recover the cost to them of the donations through the increased value of the property supplied with water.

The fair market value of the property transferred to petitioner in aid of construction was, when transferred to him, equal to its cost or $170,439.93. This was the value of the consideration given by the subdividers and we think must be regarded as representing the value of the consideration given by petitioner or the cost basis of the property transferred in the hands of petitioner. The cost to petitioner of the water plant or assets transferred, exclusive of the donations in aid of construction was $35,751.93. This gives a total cost basis to petitioner of the assets transferred to the corporation for its stock and bonds of $206,191.86.

The statute- is designed to tax the profit realized upon the sale or disposition of property and such profit is determined as the difference between the cost of the property and the amount so realized. A taxpayer is entitled to recover his cost as capital.

The consideration given by petitioner was his obligation under the contract to furnish an adequate supply of water to the subdivisions, which was executory and continuing. He is entitled to recover the value of this consideration. The expenditure made for any additional wells and for extending the water mains to the subdivisions has been capitalized and is included in the $35,751.93, allocated to the value of the assets transferred to the corporation, exclusive of the donations in aid of construction. The corporation took over the water plant as a going concern and the assets were transferred to it. It, therefore, assumed the executory obligation of petitioner under the contracts with the subdividers, and relieved petitioner of any further performance thereunder. Petitioner, therefore, received in exchange for the assets of the water system not only the stock and bonds of the corporation, but was relieved at that time of performance under the contract with the subdividers. This assumption of performance constituted a full recovery of the consideration given by him for the donations in aid of construction. Thereafter the only part of his cost not recovered was the $35,751.93. This he is entitled to recover upon the sale of the stock and bonds which he received in the exchange. The difference between this amount and the amount received on disposition of the stock and bonds constitutes capital gain and is subject to tax. The transaction was similar to a sale where the purchaser assumes a mortgage and relieves the seller of liability, cf. Brons Hotels, Inc., 34 B. T. A. 376; Hendler v. United States, 17 Fed. Supp. 558. This reduced petitioner’s cost basis to $35,751.93, which amount he is entitled to recover upon the sale of the stock and bonds received in exchange for the assets of the water company.

As to A. D. Robinson, we find there is no deficiency.

Decision will l>e entered wnder Rule 50.


author: Hakron :

text:
    Roche’s Beach, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78259.
    Promulgated May 7, 1937.

      Jacob Mertens, Jr., Esq., for tbe petitioner.

      J■ E. Marshall, Esq., S. L. Young, Esq., and L. W. Greason, Esq., for tbe respondent.
   OPINION.

Hakron :

No question is raised regarding the nature of the Edward and Ellen Roche Relief Foundation as a charitable organization exempt from taxation. The sole question is whether the petitioner corporation is exempt from taxation within the provisions of either subsection (6) or (14) of section 103 of the Revenue Act of 1928.

Both subsections (6) and (14) of section 103 limit exemption from taxation to corporations organized exclusively for stated purposes. It is a principal of the law of private corporations that “the particular classification within which a corporation falls depends upon the purposes for which it is formed and the powers conferred upon it. The purposes for which it is organized are primarily to be sought and found in its charter or certificate of incorporation * * See Fletcher, Cyclopedia, of the Law of Private Corporations, 1931, vol. 1, § 71. Thus in the case of In re Beekman's Estate, 232 N. Y. 365; 134 N. E. 183, in a proceeding involving exemption of a corporation from the New York Tax Law, it was held that the articles of incorporation alone must determine whether a corporation comes within the exemption. See also, In Re De Peyster's Estate, 210 N. Y. 216; 104 N. E. 714; People, ex rel, New York & Albany Lighterage Co. v. Cantor, 239 N. Y. 64; 145 N. E. 741. The Circuit Court of Appeals, Second Circuit, in Sun-Herald Corporation v. Duggan, 73 Fed. (2d) 298, has stated that the word “organized” in section 103 (14) of the Revenue Act of 1928 means “incorporated” and not “operated” and pointed out that the use of the word “operated” in addition to the “organized” in subdivisions (4), (6), (9), and (12) of the same section, “indicates that ‘organized’ was not intended to have the meaning of ‘operated’ * * See also Stanford University Book Store v. Helvering, 83 Fed. (2d) 710, where exemption under section 103 (6) was denied. There the articles of incorporation showed that the association was organized for the purpose of carrying on a general mercantile business for the accommodation of students and faculty so that the corporation was not “a corporation organized and operated exclusively for educational purposes.” The principle involved is clear that to determine whether a corporation falls within any stated class, it is necessary to look to the charter of the corporation to see what the purposes of the particular corporation are and whether they are such as to bring the corporation within a described class.

In this proceeding, examination of the charter of the petitioner corporation shows that it was organized only for purposes related to carrying on various kinds of business, including carrying on the business of a bathing beach or public amusement resort. ' Its purposes, summarized in the findings of fact above, are not exclusively for charitable purposes or for holding title to property, collecting income therefrom, and turning over the entire proceeds to an organization itself exempt from taxation. It is evident that Edward Eoche, deceased, intended that all the stock of the petitioner corporation should be held by the trustees for the Eelief Foundation and that the corporation should be a medium for producing income for the Eelief Foundation. However, the exemption here claimed is limited by statute to corporations organized, exclusively for stated purposes and this petitioner corporation appears to have been organized for the purpose of carrying on various types of business. The stockholders have the power to change the type of business in their own discretion to any of the enterprises permitted by the certificate of incorporation. Section 103 (6) and (14), in our opinion, does not permit us to give consideration to intent or circumstances outside of the charter of the corporation. Section 103 (6) is applicable to corporations which are both organized and operated exclusively for stated purposes, including charitable purposes. The difficulty in this proceeding is that the petitioner corporation, while operated to produce income for charitable uses and although it held title to property and collected income therefrom through various rentals in the taxable year, was not organized for "any of these purposes exclusively in so far as its certificate of incorporation shows. Also, the certificate of incorporation of the petitioner corporation leaves it within the discretion of the board of directors to determine and direct the use and disposition of any net-earnings or. surplus and to set apart out of any of the funds of the corporation available for dividends reserves for any purpose other than dividends and to determine in its own discretion when dividends shall be paid. Such wide powers as to the use of earnings are not consistent with the single purpose of turning over the entire net income to an organization itself exempt from taxation, as section 103 (14) seems to require. The record indicates in a general way that net earnings of the petitioner corporation were paid over to the Eelief Foundation, but there is not positive proof that all the net earnings were so used. See Citizens Water Works, Inc., 33 B. T. A. 201.

The petitioner relies strongly on the decisions in Unity School of Christianity, 4 B. T. A. 61; Sand Springs Home, 6 B. T. A. 198; and Trinidad v. Sagrada Orden de Predicadores, 263 U. S. 578. In all of these cases the charters of the corporations involved showed that the corporations were organized for either religious, educational, benevolent, charitable, or scientific purposes. The Sand Springs Home Corporation was organized as an eleemosynary corporation. In the Unity School case this Board held that a corporation otherwise exempt from tax is not deprived of exemption because it carries on competitive activities in furtherance of its predominant religious and charitable purposes. Those cases are distinguishable on the facts from this proceeding and do not serve to support petitioner’s contentions.

It is therefore held that the petitioner corporation fails to meet the requirements 'of both subsections (6) and (14) of section 103, and the determination of the respondent is sustained. See Sun-Herald Corporation v. Duggan, supra.

Decision will be entered for the respondent.

       SEC. 103. EXEMPTIONS FROM TAX ON CORPORATIONS.
      *******
      (6) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, literary or educational purposes, or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private shareholder or individual ;
      * * * * * * *
      (14) Corporations organized for the exclusive purpose of holding title to property, collecting income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt from the tax imposed by this title.


author: Miller:

text:
    Axel Holmstrom, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 81373.
    Promulgated May 11, 1937.

      Isadore Stern, Esq., and John N. Landberg, Esq., for the petitioner.

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

Miller:

Respondent claims deficiencies in petitioner’s income tax and 25 percent additional taxes for the years 1920, 1921, 1922, and 1923. The additional taxes were imposed because of petitioner’s failure to make personal income tax returns for those years. The Revenue Act of 1918 is applicable to the year 1920 and the Revenue Act of 1921 to the remaining years. The applicable sections are set forth in the margin.

Petitioner was a nonresident alien inventor, who received royalties on his patents from a partnership which sold etching machines in Philadelphia during those years. The partnership made agents’ withholding returns for the same years.

Every individual receiving income above the statutory exemption is required to make a return of such income, or if unable to do so, to have it done by an authorized agent. Sec. 223, Revenue Act of 1918; sec. 223, Revenue Act of 1921. The petitioner received income in each of the four years sufficient to require the filing of individual returns thereon.

Gross income of nonresident aliens from sources within the United States is defined by section 213 of the Revenue Act of 1918, and by section 217 of the Revenue Act of 1921. No question is raised in the petition that all income included by the respondent was from sources within the United States. In computing net income of a nonresident alien, deductions are limited to those related to income from sources within the United States, sec. 214(b), Revenue Act of 1918, sec. 214 (b), Revenue Act of 1921; and a nonresident alien individual is ■entitled to “receive the benefit of the deductions and credits allowed in this title only by filing or causing to be filed with the collector a true and accurate return of his total income received -from all sources corporate or otherwise in the United States.” In case of failure to file a return, the collector is required to collect the tax on such income, and all property • belonging to such nonresident alien individual or foreign trader is liable to distraint for the tax. Sec. 217, Revenue Act of 1918; sec. 217 (g), Revenue Act of 1921. .

(1) The first question is whether the assessments are barred by the statute of limitations.

The period of limitation fixed by the statute for assessing and collecting income taxes for the year 1920 was five.years after the filing of the required return; and the period of limitation fixed by the statute relating to taxes for the years 1921, 1922, and 1923 was four years after the filing of the required returns for each year. Revenue Act of 1926, sec. 277 (a).

Section 278 (a) of the Revenue Act of 1926 further provided:

In the case of a false or fraudulent return with intent to evade tax or of a failure to file a return the tax may he assessed, or a proceeding in court for the collection of such tax may be begun without assessment at any time. [Italics supplied.]

There is no evidence that petitioner ever filed personal income tax returns for the years in question, or that any such returns were filed in his behalf. No allegations to that effect were made in the petition or by petitioner -when he was on the witness stand at the hearing. Representatives of the collector’s office at Philadelphia and at Baltimore testified that neither of those offices contained any record of such returns. While this evidence is entirely negative, we think it clearly establishes the fact that no returns were ever filed by petitioner for those years, and we have so found as a fact.

The only tax returns filed on behalf of petitioner for the four years in question were the “withholding tax” returns filed by Plesser and Gies. These filings were insufficient to start the running of the periods of limitation. Cantrell & Cochrane, Ltd., 19 B. T. A. 16.

What has been said of the withholding returns applies with equal force to the partnership returns filed by the Axel Holmstrom Etching Machine Co. The only parties appearing by name on these returns are Plesser and, Gies. The petitioner’s name does not appear at all except as it appears in the. name of the partnership. These returns were not intended to be the individual returns which petitioner should have filed, and can not be substituted therefor. None of the returns filed by Plesser and Gies, either as withholding agents or for' the partnership, purported to reveal or to give “substantial information as to the specific items of the taxpayer’s gross income and the deductions and credits to which it (he) was entitled.” This is true particularly as it relates to income received from the estate of Schuessler. For the reasons set forth in Cantrell & Cochrane, Ltd., supra, at page 26 et seq., they are insufficient, therefore, to satisfy the requirement of the law. The petitioner, as a nonresident alien, failed to file returns a,t his peril.

Since no individual income tax returns were filed by petitioner or by any agent in his behalf during the taxable years, the statute of limitations raises no bar to the assessments. It is the filing of such returns that starts the running of the statutory period. Sec. 277 (a), Revenue Act of 1926; Eli Kirk Price, Executor, 23 B. T. A. 1192, 1199; Employees Industrial Loan Association, Inc., 27 B. T. A. 945; Updike v. United States, 8 Fed. (2d) 913.

The respondent has determined additional taxes of 25 percent of the amount of the deficiencies in the several years because of petitioner’s failure to file individual returns. No question of fraud is raised. The additional taxes are laid under the Eevised Statutes, section 3176, which, as amended by section 1317 of the Revenue Act of 1918 and reenacted by section 1311 of the Revenue Act of 1921, is set out in the margin. The reasons which require that the deficiencies be sustained, require also that the additional taxes be sustained.

Petitioner seeks to escape liability both for taxes and additional taxes on the theory that his agents Plesser and Gies were under obligation to file returns in his behalf and to pay his taxes. The facts fail to support this theory. Plesser and Gies were neither obligated nor authorized to file individual tax returns for petitioner, disclosing his income from all sources in the United States, and to pay taxes thereon. The evidence was contradictory as to which of these instruments was the one under which petitioner and Gies and Plesser operated in the taxable years; petitioner maintaining that the contract of February 3, 1920, was in force until 1927, and Gies that it was repudiated in the same week made. Petitioner contends that the contract dated February 3, 1920, was the one which determined the relationship of Plesser and Gies to him, and fixed their liability to make returns and pay taxes in his behalf.

The only reference to taxes in that contract is that which is found in the undated and unsigned “Additions to The Contract”, attached at the end thereof, as follows:

Taxes winch in the United States of North America have to be paid on the licenses are to be paid as follows:
By Axel Holmstrom-50%
Otto Plesser_25%
Marie O. Gies-25%

It can hardly be seriously contended that the foregoing was intended to obligate Plesser and Gies to file individual tax returns for petitioner. It could as well be argued therefrom that the petitioner was obligated to make individual tax returns for Plesser and Gies. In fact, it is apparent that this statement was no more than a specification of the percentage which each of the three undertook to pay, of “taxes which * * * have to be paid on the licenses.” If there were any doubt as to the meaning bf this provision it ivas completely removed by the letter Avritten by petitioner in 1924, antedated April 1, 1920:

I refer to conversation with you while I was there, regarding the 8% income taxes payable on my licenses. When I gave you the license price of $650.00 I had not figured on having to pay taxes out of this amount. As agreed, I will pay 4% and you the other 4%.

The power of attorney given by petitioner to Plesser and Gies contains no language which can possibly be construed to require the filing of tax returns or to permit the payment of taxes.

Conceding, for the purpose of argument, as petitioner so earnestly contends, that his agents not only failed to fulfill the obligations assumed under their contract of agency, but also intentionally sought to defraud petitioner, still we are not concerned with that question here. We are concerned only with ascertaining whether the taxes were properly laid on petitioner as a nonresident alien, and, if so, whether the Commissioner may collect them directly from petitioner’s property without resort to his agents. The statutes clearly confer that power.

The Government is not limited to its remedy against the agent for collection of the tax if the principal has property subject to dis-traint. This is the language and the clear and obvious intendment of section 217 of the Revenue Act of 1918, and of section 217 (g) of the Revenue Act of 1921.

Far from constituting an excuse for a taxpayer’s failure to file required returns, willful neglect upon the part of an agent to do so may be imputed to his principal, so as to sustain imposition of additional taxes upon the latter. Berlin v. Commissioner, 59 Fed. (2d) 996; Frischkorn Development Co., 30 B. T. A. 8, 15, and cases there cited.

Petitioner returned to the United States on December 17, 1934, and remained until after the hearing of this case in May 1936. For a period of nearly six months prior to the assessments made by the respondent, petitioner failed to file his returns for the years in dispute, although present in this country and in full charge of his own affairs. Had he filed returns during this period he would, perhaps, have been in a position to urge reasonable cause for delay in filing as a reason for nonimposition of additional taxes. This he failed to do and has thus cut off any chance of avoiding such additional taxes. It is only in the case of returns actually filed that a taxpayer can plead reasonable cause for tardiness in filing as a means of avoiding such assessments. Employees Industrial Loan Association, Inc., 27 B. T. A. 945; Charles S. Pearsall & Son, 29 B. T. A. 747, and cases there cited.

One further question remains — whether respondent correctly determined petitioner’s net income for each of the years in controversy from the records of bis bant deposits, credits, and withdrawals and from the books of the Axel Holmstrom Etching Machine Co.. The Commissioner’s resort to the taxpayer’s bank deposits to establish his income, other evidence being lacking, is not unreasonable. Cf. Pincus Brechar, 27 B. T. A. 1108; Russell C. Mauch, 35 B. T. A. 617. And here, except for the amount of bank credits on interest received by petitioner on his bank deposits, the bank records are used only to corroborate evidence otherwise obtained. It is argued that none of the amounts received by petitioner from the Schuessler estate constituted income, but instead represented an old debt, dating back to 1918, which was paid to him little by little each month. The evidence is clear that these amounts were petitioner’s share of old installment sales made since 1910. Since petitioner was on a cash basis, these installment payments, no matter when earned, constituted income to him in the year of their receipt. Jackson v. Smietanka, 272 Fed. 970; Holbrook v. Moore, 293 Fed. 264; S. P. Freeling, 7 B. T. A. 1238. Cf. Avery v. Commissioner, 292 U. S. 210.

In the bank deposit accounts it should be noted that a duplication of $30,000 occurs in the year 1921 which should be eliminated from petitioner’s deposits in the Philadelphia Trust Co. for that year (August 29, 1921) and also from the withdrawals from the Girard National Bank (August 8,1921), since this represents merely a transr fer from one-bank to the other of the same money. It should be noted also, for purposes of recomputation, that the amount received by petitioner from the Axel Holmstrom Machine Co. in 1922 was $30,586.40 instead of $31,386.40 as found by the respondent, making his total income for that year $33,100.67 instead of $33,900.67.

The determination of increased deficiencies is sustained for the years 1920, 1921, 1922, and 1923 in accordance with the facts found, and also additional taxes amounting to 25 percent of the deficiencies for each year involved.

Reviewed by the Board.

Judgment will be entered under Bule 50.

       [Revenue Act of 1918.] Sec. 221. (a) That all individuals, corporations- and partnerships, in -whatever capacity acting, including lessees or mortgagors of real or personal property, fiduciaries, employers, and all officers and employees of the united States, having the control, receipt, custody, disposal, or payment, of interest, rent, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income of any nonresident alien individual (other than Income received as dividends from a corporation which is taxable under this title upon its net income) shall (except in the cases provided for in subdivision (b) and except as otherwise provided in regulations prescribed by the Commissioner under section 217) deduct and -withhold frpm such annual or periodical gains, profits, and income a tax equal to 8 per centum thereof: Provided: That the Commissioner may authorize such tax to be deducted and withheld from the interest upon any securities the owners of which are not known to the withholding agent. '
      * ******
      (e) Every individual, corporation, or partnership, required to deduct and withhold any tax under this section shall make return thereof on or before March first of each year and shall on or before June fifteenth pay the tax to the official of the united States Government authorized to receive it. Every such individual, corporation, or partnership-is hereby made liable for such tax and is hereby indemnified against the claims and demands of any individual, corporation, or partnership for the amount of any payments made in accordance with the provisions of this section.
      (d) Income upon which any tax is required to be withheld at the source under this section shall be included in the return of the recipient of such income, but any amount of tax so withheld shall be credited against the amount of income tax as computed in such return.
      (el If any tax required under this section to be deducted and withheld is paid by the recipient of the income, it shall not be re-collected from the withholding agent; nor in cases in which the tax is so paid, shall any penalty be imposed upon or collected from the recipient of the income or the withholding agent for failure to return or pay the same, unless such failure was fraudulent and for the purpose of evading payment.
      [The same provisions are repeated by section 221 of the Revenue Act of 1921.]

       [Section 1317, Revenue Act oí 1918 (Rev. Stat., sec. 3176.)]
      4 $ 'H $ $ *
      Tlie Commissioner of Internal Revenue shall determine and assess all taxes, other than stamp taxes, as to which returns or lists are so made under the provisions of this section. In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner of Internal Revenue or the collector in pursuance of law; the Commissioner of Internal Revenue shall add to the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax. * * *


author: HarROn:

text:
    Louis Boehm, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 78692.
    Promulgated May 13, 1937.

      Louis Boehm, Esq., pro se.

      B. M. Goon, Esq., for the respondent.
   OPINION.

HarROn:

Issue (1). — The claim which the petitioner originally had against the United Power Laundries, Inc., for $25,000 was for a “bonus” or additional interest relating to a loan to this corporation. It was not a claim for payment for personal services. The amount in question was due and payable April 29, 1929, and on that date the petitioner had a vested interest in the claim for payment which was not in any way dependent upon any performance of duties by him. When the corporation defaulted in the payment the petitioner. had a cause of action against the corporation for breach of contract. We think it clear that the petitioner’s right of action against the corporation is a property right in the State of New York. See McKinney’s Consolidated Laws of New York, book 21, p. 51, § 39 and annotations; Gilbert v. Ackerman, 159 N. Y. 118; 53 N. E. 753; American Law Institute Restatement of Property, cb. 1, p. 3. The petitioner’s rights related to the payment of money and were assignable. His rights under a contract had completely accrued at the time they were assigned. In our opinion, the assignment of June 20, 1929, from the petitioner to his wife of all of his right, title, and interest in the cause of action against United Power Laundries, Inc., and any and all proceeds accruing out of the action operated at that time to irrevocably divest the petitioner of entire ownership and control over and right to receive money that might subsequently be paid as a result of the action instituted against the corporation. The assignment gave Lillian Boehm an enforceable legal right to the money collectible under the suit for breach of contract. Therefore, the money paid to Lillian Boehm pursuant to judgment was not income of the petitioner and is not taxable to him. See Hall v. Burnet, 54 Fed. (2d) 443; Commissioner v. Ross, 83 Fed. (2d) 18; Matchette v. Commissioner, 81 Fed. (2d) 13; certiorari denied, 298 U. S. 677; Nelson v. Ferguson, 56 Fed. (2d) 121; certiorari denied, 286 U. S. 565; Commissioner v. Field, 42 Fed. (2d) 820; Blair v. Helvering, 300 U. S. 5; Julius E. Lilienfeld, 35 B. T. A. 391; J. V. Leydig, 15 B. T. A. 124; affd., 43 Fed. (2d) 494. Where the thing assigned is a property right productive of income and the assignment effectively divests the assignor of all control over the property so that he can not defeat subsequent payment of income to the assignee, the income thereafter arising from such property is income to the assignee by virtue of his ownership.

Issue (%). — The petitioner claims the right to deduct as ordinary and necessary business expenses a total of $1,188.11 paid as dues, contributions, and entertainment expenses to a golf country club, a city athletic club, various civic and political clubs, and two lodges. He claims that he maintained his memberships in all of these organizations for the purpose of furthering his law practice.

Section 23 (a) of- the Revenue Act of 1928 allows the deduction of all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Section 24 (a) prohibits deducting from net income personal, living, or family expenses. Whether or not a particular expenditure is a deductible business expense turns on the facts of each case and the burden of proof is on the petitioner to show that such expenditures were primarily business rather than personal expenses. We do not think the burden of proof is met by the petitioner’s argument that in general, membership in social, political, and fraternal organizations is helpful in obtaining clients through contacts made thereby or the citing of one instance of gaining a client through acquaintance made at a political club. No evidence has been introduced to show that any part or all of the expenditures in question were so closely related to the conduct of the petitioner’s business as to have been appropriate, helpful, usual, or necessary. It is noted that in cases where expenditures of a social nature have been" held to be deductible business expenses proof was presented to show that such expenditures had a direct relation to the conduct of a business or the business benefits expected. Such proof has not been presented here to show that the expenditures are deductible under section 23 (a). Cf. E. E. Dickinson, 8 B. T. A. 722; Wade H. Ellis, 15 B. T. A. 1075; affd., 50 Fed. (2d) 343; Robert C. Coffey, 21 B. T. A. 1242; Victor J. McQuade, 4 B. T. A. 837; Blackmer v. Commissioner, 70 Fed. (2d) 255. The respondent’s determination with respect to these expenditures is sustained.

Issue (3). — The petitioner’s claim for depreciation on the furniture and fixtures of his law office including his law library must fail for lack of proof. The statute provides that the basis for depreciation generally “shall be the cost of such property”, with certain exceptions not shown to be applicable here. Secs. 113 and 114, Revenue Act of 1928. The purpose of the provision, as amplified in articles 201-204, Treasury Regulations 74, is to assure to the owner the return or replacement of the capital sum constituting his basis. Usually the capital sum to be replaced is charged off over the useful life of the property. The petitioner’s only evidence is his estimate that in the taxable year his office equipment was worth $4,000 and that depreciation of 10 percent per year is, in his opinion, a fair annual charge-off for office equipment generally. But it is evident that the equipment was not purchased in the taxable year. Lacking information as to the original costs, present age of the equipment, probable useful life, and what part if any has already fully depreciated, it is not possible to approve the petitioner’s claim that a deduction of $400 for depreciation is proper in the taxable year, and the disallowance of the entire deduction by the respondent is sustained.

Decision will be entered under Rule 50.


author: Black: SteeNi-iagbN, Smith, Morris,

text:
    Metropolitan Edison Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 57869.
    Promulgated May 14, 1937.

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

      Chester A. Gwinn, Esq., for the respondent.
   OPINION.

Black:

The issues which remain for our decision have been set out in our preliminary statement. We think however that these issues will be better understood if we subdivide them somewhat and this we shall do.

I.

Bond premiums and unamortized discount and expense, relating' to redemption of petitioner’s own bonds. — We shall first take up petitioner’s claim for deduction of $1,097,145.29, being the total premiums and unamortized debt discount and expense incurred and accrued at the time of the retirement of $6,080,000 of petitioner’s own bonds in 1928. The facts with reference to the retirement of these bonds are stated in paragraph 11 of the stipulation.

The only contention which respondent makes as to why petitioner is not entitled to the deduction claimed is that the bonds were redeemed with the proceeds of petitioner’s new bond issue of $23,000,000 first mortgage 4y2 percent gold bonds, series D, issued March 1, 1928, due in 1968, and that the amount claimed should be amortized over the life of these new bonds.

It will be noted that none of petitioner’s old bonds redeemed in 1928 were exchanged for bonds of the new issue. The bonds retired were redeemed in cash. Under these circumstances petitioner is entitled to the deduction claimed. American Gas & Electric Co., 33 B. T. A. 471; East Ninth Euclid Co., 26 B. T. A. 32; 27 B. T. A. 1289; National Tile Co., 30 B. T. A. 32; San Joaquin Light & Power Co. v. McLaughlin, 65 Fed. (2d) 677; Commissioner v. Columbia Steel Corporation, 67 Fed. (2d) 989; Commissioner v. California-Oregon Power Co., 75 Fed. (2d) 644; Commissioner v. Union Public Service Co., 75 Fed. (2d) 723; Commissioner v. Central States Electric Corporation, 76 Fed. (2d) 1011.

The respondent in his brief admits that the foregoing authorities are against him on this point, but elects not to concede the issue.

II.

Unamortized discount and expense of redemption relating to subsidiaries’ bonds. — We shall next take up petitioner’s claim for deduction on a consolidated return for 1928 of unamortized discount and expense relating to certain bond issues of the Hamburg Gas & Electric Co., Topton Electric Light & Power Co., and Blue Mountain Electric Co.

These corporations were subsidiaries of petitioner and filed consolidated returns with petitioner for the year 1928. The facts with reference to the retirement of these bonds are stated in paragraphs 14, 15, 16, and 17 of the stipulation. These bonds were redeemed by the corporations which issued them with funds advanced by petitioner. Respondent’s only contention as to why petitioner is not entitled to take the deduction claimed on the consolidated return is that the funds with which the bonds were redeemed were obtained by petitioner’s new issue of $23,000,000 of bonds discussed under “I” above. Respondent admits that the authorities are against him on this point, but he does not concede the issue. On the strength of the authorities cited under “I” above, we hold for petitioner on this issue.

III.

Bond premiums incurred and paid, in redemption of bonds assumed by petitioner in acquiring assets of subsidiary corporations. — We shall next consider petitioner’s contention that it is entitled to deduct' bond premiums incurred and paid in the redemption of bonds which were not originally issued by petitioner but which it assumed and agreed to pay at the time it acquired all the assets of certain of its subsidiaries. The circumstances attending the assumption of and agreement to pay these several bond issues and the names of the subsidiaries are set forth in the stipulation and need not be repeated here. We deem it unimportant to decide for this point whether petitioner became liable to pay these bonds as a part of the consideration for the purchase of assets in liquidation of a subsidiary or whether the transaction in which the bonds were assumed was a nontaxable reorganization between petitioner and its subsidiary short of a statutory merger and consolidation, or whether the transaction by which petitioner became liable on, the bonds was a statutory merger and consolidation of two or more corporations under which petitioner as the succeeding consolidated corporation became liable on the bonds not by reason of a contract of purchase, but by operation of law. We think in any event, regardless of tile form of the transaction, petitioner is entitled to the deduction of the premiums which it paid in the redemption of these bonds. When petitioner became liable to pay the bonds, whether by contract of purchase and assumption, or by contract of merger short of a statutory consolidation, or by operation of law following a statutory merger and consolidation of corporations under the laws of the State of Pennsylvania, it became definitely and legally liable for only the face value of the bonds plus the rate of interest provided in the bonds. The bonds, it is true, contained provisions by which the obligor could declare the premature maturity of the bonds upon condition that certain premiums would be paid upon redemption.

This redemption would usually occur only where prevailing interest rates would justify the calling of the bonds and incurring a premium, so that the debt represented by the bonds could be refunded at a lower interest rate. We do not think that the expenses incurred in redeeming bonds at a premium under such circumstances represent any part of the cost of the assets taken over when liability to pay the face value of the bonds was incurred. Therefore to say, as respondent contends, that a taxpayer under such circumstances is not entitled to a deduction for the amount of bond premiums incurred in the redemption of bonds, unless he affirmatively shows that ha has incurred a loss in the purchase of the assets equal to the amount of the bond premiums paid, is not correct reasoning, we think.

Such, it is true, was the basis of our reasoning in Coast Counties Gas & Electric Co., 33 B. T. A. 1199, but we now think that was error. In that case certain subsidiaries of the Coast Counties Gas & Electric Co., under agreements executed and carried out several years prior to the taxable year in question, transferred their properties to the parent corporation, which, as part of the consideration for such transfers, agreed to pay the bonds of the subsidiaries. In 1930 the bonds were called and retired. The taxpayer, the parent corporation, paid a premium on some of the bonds. We held that the taxpayer might not deduct the amount of said premium, as there was no showing that it sustained a loss on the transaction.

We cited in support of our holding in that respect, Helvering v. American Chicle Co., 291 U. S. 426, and United States v. Kirby Lumber Co., 284 U. S. 1. We distinguished Bowers v. Kerbaugh Empire Co., 271 U. S. 170. On reconsideration we think these cases are not in point. In Helvering v. American Chicle Co., supra, the taxpayer in a purchase of assets had assumed and agreed to pay as a part of the purchase price of the assets taken over, the full face value of the seller’s outstanding bonds. Subsequently it purchased some of these bonds at less than their issuing price. The Commissioner determined that the difference between the issuing price of the bonds and the price at which they were purchased represented income to the American Chicle Co. The Supreme Court upheld this contention of the Commissioner, citing United States v. Kirby Lumber Co., supra. The Supreme Court, as a part of its reasoning, said: Nothing indicates whether respondent lost or gained by the transaction. * * * Here, for aught we know, there was .substantial profit — certainly the record does not show the contrary. Doubtless respondent’s books indicated a decrease of liabilities with corresponding increase of net assets.”

As we liave already pointed out, we do not tliink that bond premiums paid in the redemption of bonds represent a part of the cost of assets taken over. Bather we think they represent part of the expenses of taxpayer’s business and are deductible as ordinary and necessary business expenses under the provisions of section 23 (a) of the Eevenue Act of 1928, and section 214 (a) of the Revenue Act of 1926, which are applicable to the taxable years involved in this proceeding.

But if we are wrong in characterizing such bond premiums as ordinary and necessary business expenses, such premiums would be deductible under the loss provisions of the applicable statutes. The Court of Claims in the recent case of American Gas & Electric Co. v. United States, 17 Fed. Supp. 151, held, under facts practically the same as those present here, that the corporation, which had assumed and agreed to pay the bonds when it took over the assets of the selling corporation and subsequently called the bonds for redemption at a premium, was entitled to take as a loss deduction the amount of the premiums paid in the year of redemption. It will be thus noted that in the American Gas & Electric Co. case the Court of Claims placed the allowable deduction under the loss provisions of the statute. So it seems plain that whether the amount of bond premiums paid under such circumstances is characterized as business expense or as a loss, it is an allowable deduction in determining taxpayer’s net income.

We now think that our holding in the Coast Counties Gas & Electric Co. case, supra, to the contrary was erroneous and on that point it will no longer be followed.

IV.

Unamortized discount and expense relating to bonds of the Metropolitan Power Co. — We shall next consider petitioner’s claim of the right to deduct unamortized discount and expenses on its consolidated return for 1927 by reason of its redemption in that year of certain bonds previously issued by the Metropolitan Power Co. The amount of the deduction claimed in this respect is $308,-097.90. Facts with reference to these bonds are shown in paragraphs 3,4, 5, 6, 7, 8, 9, and 10 of the stipulation.

Petitioner does not contend that the transaction by which petitioner took over the assets of the Metropolitan Power Co. and assumed all of its outstanding liabilities, including the bonds in question, was a strict merger under the laws of the State of Pennsylvania. Petitioner in its brief terms the transaction as a de facto merger. Regardless of petitioner’s characterization, we think the facts which have been stipulated show a liquidation of the Metropolitan Power Co. by its parent, the Metropolitan Edison Co. Such a liquidation is one in which gain or loss is recognized to the parent corporation. Pierce Oil Corporation, 32 B. T. A. 403; Commissioner v. Aluminum Goods Manufacturing Co., 287 U. S. 544; Commissioner v. Riggs National Bank, 57 Fed. (2d) 980. In such a transaction the purchasing corporation is not entitled to deduct the unamortized discount and expenses remaining unrecovered on the bonds previously issued by the subsidiary. Turner-Farber Love Co. v. Commissioner, 68 Fed. (2d) 416; American Gas & Electric Co., 33 B. T. A. 471; affirmed, except as to bonds of Appalachian Power Co., which the court held to have been assumed in a statutory merger or consolidation; American Gas & Electric Co. v. Commissioner, 85 Fed. (2d) 527.

Following these authorities we hold that petitioner is not entitled to the deduction of $308,097.90 unamortized discount and expenses which it claims by reason of the redemption in 1927 of bonds of the Metropolitan Power Co.

V.

Unamortized discount and expense relating to bonds assumed by petitioner upon transfer of assets by wholly owned subsidiaries in a so-called “short form” of merger. — We shall next take up petitioner’s claim for deduction on a consolidated return for 1928 of $752,481.26 unamortized debt discount and expense of retirement of bonds previously issued by the Cumberland Valley Light & Power Co., York Haven Water & Power Co., Hanover Power Co., and Pennsylvania Edison Co. Facts with reference to these bonds will be found in paragraphs 12 and 13 of the stipulation.

It has been stipulated that during the calendar year 1928 the petitioner, pursuant to the terms of the various indentures referred to, called and retired certain bonds of former subsidiaries which it theretofore had assumed by merger under the laws of the State of Pennsylvania. It has also been stipulated that the four so-called mergers above referred to were under the acts of the General Assembly of the Commonwealth of Pennsylvania of April 29, 1874, and April 17, 1876.

The two acts of April 29, 1874, and April 17, 1876, pursuant to which the contracts were executed, and amendments thereto are embodied in 15 Purdon’s Pennsylvania Statutes, Annotated, section 595, and the following provisions are pertinent to this controversy:

Any corporation created under the provisions of this act, * * * may reduce its capital stock * * * by a vote of the stockholders * * '*; and it shall be lawful for any corporation in the same manner to sell, assign, dispose of and convey to any corporation created under or accepting the provisions of this act, its franchises, and all its property, real, personal and mixed, and thereafter such corporation shall cease to exist, and the said property and franchises not inconsistent with this act, shall thereafter be vested in the corporation so purchasing as aforesaid * * *.

We think that the so-called mergers uzider the above quoted acts, ' which petitioner in its brief calls “short form of merger”, amounted in effect to a sale by'the subsidiary of its assets to the parent corporation. In fact in each of the exhibits attached to 'the stipulation, showing details of the merger of Cumberland Valley Light & Power Co., York. Haven Water & Power Co., Hanover Power Co., and Pennsylvania Edison Co. with the Metropolitan Edison Co., petitioner, the transaction is referred to as a sale of assets by the subsidiary to the parent corporation. For example, in the application for approval by the Public Service Commission of the Commonwealth of Pennsylvania of the transfer of assets by the York Haven Water & Power Co. to the Metropolitan Edison Co., the proceeding is captioned as follows: “In the Matter of the application of York Haven Water and Power Company and Metropolitan Edison Company under Section 3 (c) Article III and Sections 18 and 19, Article V of the Public Service Company Law, for the approval of the sale of the property and franchises of the former to the latter Company.” A careful inspection of each of the exhibits which show the details of the transfer of assets by the four above named corporations to the Metropolitan Edison Co. convinces us that the transactions were essentially liquidations of those companies in consideration of the surrender and cancellation of all their capital stock which was held by petitioner and the assumption of all their liabilities by the petitioner.

In such a situation the same rule applies as we applied in “IV” above, relating to the bonds of Metropolitan Power Co. On the strength of the authorities there cited, we hold against petitioner on the issue of deduction of unamortized discount and expense on the redemption of the bonds of the Cumberland Valley Light & Power Co., York Haven Water & Power Co., Hanover Power Co., and Pennsylvania Edison Co.

VI.

Unamortized discount and expense bonds assumed by petitioner in consolidation of three corporations to form petitioner. — On August 6,1917, the following corporations were consolidated to form the Metropolitan Edison Co. (petitioner): Metropolitan Electric Co., Edison Electric Illuminating Co. of Lebanon, Pennsylvania, and Lebanon Valley Electric Light Co. This consolidation took place under the Act of May 3,1909, P. L. 408, section 1, Laws of the State of Pennsylvania. See paragraph 13 of the stipulation.

Section 5750 of the Pennsylvania Statutes, which amends the act of May 3, 1909, reads as follows:

Skc. 5750. Effect of merger; new patent tonus; certificate of reports and payment of taxes. — Upon the filing of said certificates and agreement, or copy of the agreement, in the office of the Secretary .of the Commonwealth, and upon the issuing of new letters patent thereon by the Governor, the said merger shall be deemed to have taken place, and the said corporations to be one corporation under the name adopted in and by said agreement, possessing all the rights, privileges, and franchises theretofore vested in each of them; and all the estate and property, real and personal,-and rights of action, of each of said corporations, shall be deemed and taken to be transferred to and vested in the said new corporation, without any further act or deed: Provided, That all rights of creditors and all liens upon the property of each of said corporations shall continue unimpaired, limited in lien to the property affected by such liens at the time of the creation' of the same, and the respective constituent corporations may be deemed to be in existence to preserve the same; and all debts not of record, duties and liabilities of each of said constituent corporations shall thenceforth attach to the said new corporation, and may be enforced against it to the same extent and by the same process as if said debts, duties, and liabilities had been contracted by it. But such merger and consolidation shall not be complete, and no such consolidated corporation shall do any business of any kind, until it shrill have first obtained from the Governor of the Commonwealth new letters patent, and shall have paid to the State Treasurer a bonus, as prescribed by law, upon all its capital stock in excess of the amount of capital stock of the several corporations so consolidating, upon which the bonus required by law has been theretofore paid.And provided further, That new letters patent of such consolidated corporation shall not be issued by the Governor of the Commonwealth, until each corporation entering into and forming the consolidated corporation shall have filed with the Secretary of the Commonwealth a certificate from the Auditor General of the Commonwealth, setting forth that all reports required by the Auditor General of the Commonwealth have been duly filed to the date of the proposed merger, and that all taxes due the Commonwealth of Pennsylvania have been paid, up to and including said date. (1915, April 20; P. L. 205, sec. 1.)

The agreement of merger is set out in full in Exhibit J of the stipulation and bears the caption, “Agreement of Consolidation and merger by and between Metropolitan Electric Company, The Edison Electric Illuminating Company of Lebanon, Pa., and Lebanon Valley Electric Light Company Forming Metropolitan Edison Company.” The agreement to merge and consolidate is a lengthy document and it is believed unnecessary to set it out in full here. Suffice it to say it appears to follow and comply with the Pennsylvania Act of May 3, 1909, as amended, relating to mergers and consolidation of Pennsylvania corporations.

We are of the opinion that'the merger and consolidation of the three named corporations to form the petitioner — Metropolitan Edison Co. — was substantially the same as the mergers involved in. Connecticut Electric, Service Co., 35 B. T. A. 444. In that case we upheld the contention' of the taxpayer that the corporation, which assumed and agreed to pay the bonds of its merged subsidiary as a part of the plan of the merger, was entitled to succeed to the right. to deduct unamortized discount of tire bond issue of the subsidiaries. In ruling upon this point, we said:

Three courts and this Board have now spoken on the right of a corporation resulting from a statutory merger to deduct bond discount on bonds issued by a constituent corporation, and they have all reached the same result in allowing such deduction. The Circuit Court of Appeals for the Fourth Circuit, in Western Maryland, Ry. Co. v. Commissioner, 33 Fed. (2d) 695; the Circuit Court of Appeals for the Second Circuit, in New York Central R. R. Co. v. Commissioner, 79 Fed. (2d) 247, and American Gas & Electric Co. v. Commissioner, 85 Fed. (2d) 527; the Court of Claims, in American Gas & Electric Co. v. Commissioner, - Fed. Supp. - (Dec. 7, 1936) : and this Board in Illinois Power & Light Corporation v. Commissioner, 33 B. T. A. 1189, all allowed the deduction where the consolidation or' merger was effected pursuant to the provisions of state statutes. Turner-Farber-Love Co. v. Commissioner, 68 Fed. (2d) 416, did not involve a statutory merger.

On the strength of Connecticut Electric Service Co., supra, and cases there cited, we hold that petitioner is entitled to deduct $17,383.28 unamortized debt discount and expenses upon retirement in 1928 of bonds of the Metropolitan Electric Co. We do not regard this holding as being in conflict with Pennsylvania Co. for Insurances on Lives and Granting Annuities v. Commissioner, 75 Fed. (2d) 719. That case involved the right of a consolidated corporation resulting from the merger and consolidation of two other Pennsylvania corporations to bring forward the statutory net loss of one of the merging corporations incurred in the period prior to the merger and use it as a deduction from the income of the corporation resulting from the consolidation. The court denied the right claimed, citing as authority New Colonial Ice Co. v. Helvering, 292 U. S. 435.

We have here no question of the right to curry forward and use as a deduction a statutory net loss. If the same rule that governs the carrying forward of statutory net losses applies to unamortized discount bn bonds, then our decision in Connecticut Electric Service Co., supra, was wrong and so would be all the cases cited in that report in support of the conclusion there reached. We do not think the rule applicable to the carrying forward of statutory net losses is applicable here.

Reviewed by the Board.

Decision will he entered wider Bule 50.

SteeNi-iagbN,

dissenting: It seems to me that the decision in subdivision VI, allowing the deduction of $17,383.28 unamortized discount and expense upon the retirement in 1928 of the bonds of the Metropolitan Electric Co., is contrary to Turner-Farber Love Co. v. Commissioner, 68 Fed. (2d) 416; American Gas & Electric Co. v. Commissioner, 85 Fed. (2d) 527. The petitioner is, under Pennsylvania law, “an entity entirely distinct from that of its constituents”, and as the result of merger or consolidation, the constituent corporations “are deemed dissolved” and “cease to exist.” Pennsylvania Co. for Insurances, etc., v. Commissioner, 75 Fed. (2d) 719. In this important respect the situation is different from a consolidation in Connecticut, and Connecticut Electric Service Co., 35 B. T. A. 444, is not controlling. There the Board said that “the law of Connecticut is particularly clear in providing that the constituent corporations in the case of a merger or consolidation continue their existence in the corporations into which they are merged or consolidated.”

Murdock agrees with this dissent.

Smith,

dissenting: I am of the opinion that the petitioner is entitled to deduct from the gross income of the taxable years the amounts which have been disallowed in the prevailing opinion of the Board as deductions for unamortized bond discount and expense. The petitioner took over its subsidiaries under mergers of the petitioner with its subsidiaries. It took over the assets of its subsidiaries at the actual costs to the subsidiaries. If the petitioner is not entitled to deduct the unamortized bond discount and expense upon the bonds redeemed in the taxable years it will never get deductions for the unamortized bond discount and expense upon the bond issues of the subsidiaries. In my opinion such a result is not responsive to the legislative intent. See Western Maryland Ry. Co. v. Commissioner, 33 Fed. (2d) 695; New York Central R. Co. v. Commissioner, 79 Fed. (2d) 247.

Morris,

dissenting: I dissent from that part of the opinion which is inconsistent with the Coast Counties Gas & Electric Co., 33 B. T. A. 1199, for the reasons given in that opinion in support of the conclusion therein.


author: Arundell :

text:
    Mary S. Childs, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 84497.
    Promulgated May 14, 1937.

      Charles H. Buckley, Esq., and George Link, Jr., Esq., for the petitioner.

      J. B. Johnston, Esq., for the respondent.
   OPINION.

Arundell :

The respondent determined a deficiency in petitioner’s income tax for 1933 in the amount of $731.51. Two errors are alleged in the petition: First, the treatment as ordinary income of an item reported as capital gain, and, second, the disallowance of a deduction of $165 for accounting fees expended in the preparation of petitioner’s income tax return. No evidence was offered as to the second issue and it was not argued by counsel. This issue must be decided for the respondent. Charles Henry Mattlage, 3 B. T. A. 242.

Under the first issue the evidence consists of a stipulation of facts as follows:

It is hereby stipulated and agreed that the plaintiff was the owner of certain shares of preferred stock of Standard Brands, Inc., owned and held by her for more than two years and that in the year 1933, the stock was called by the corporation pursuant to the provisions contained in the stock certificate at a profit to the petitioner in the sum of $1,837.50.
That the sole question involved is whether profit realized upon stock called by the corporation is a capital gain or an ordinary gain.

There is an apparent conflict in the decisions as to whether a gain on. a “redemption” is to be treated as ordinary income or as capital gain. In Robert R. Meyer, 27 B. T. A. 44, and Louis Rorimer, 27 B. T. A. 871, we held that the gain on the redemption of preferred stock should be taxed as capital gain. In John H. Watson, Jr., 27 B. T. A. 463, we held that the redemption of Liberty bonds at maturity was neither a sale nor an exchange and the loss incurréd or gain realized in such a transaction was not a capital loss or a capital gain, thereby overruling the decision in Henry P. Werner, 15 B. T. A. 482. We applied the rule of the Watson case in Arthur E. Braun, Trustee, 29 B. T. A. 1161, to the gain on redemption of corporate bonds, and in George A. Hellman, 33 B. T. A. 901, to the gain on the surrender of insurance and annuity policies. In William G. Rands, 34 B. T. A. 1107, we applied the same rule to the gain derived from the redemption of both corporate debentures and preferred stock, holding that the gain should be treated as ordinary income. The opinion in the Rands case does not mention the earlier Meyer and Rorimer cases, which treat gain on stock redemption as a capital gain. This situation requires a further consideration of the question here presented.

It has been stipulated that the stock here involved had been owned and held by the petitioner for more than two years. Consequently, it was a capital asset within the definition of that term in section 101 (c) (8) of the Revenue Act of 1932. Under subsection (c) (1) and (2) of the same section, capital gain and loss are defined as being the taxable gain or the deductible loss, as the case may be, resulting “from the sale or exchange of capital assets.” Section 115 (c)' of the same act provides that “amounts distributed in partial liquidation of a corporation shall be treated as in part or full payment in exchange for the stock.” Subsection (h) defines partial liquidation as follows:

(h) Definition of Partial Liquidation. — As used in this section the term “amounts distributed in partial liquidation” means a distribution by a corporation in complete cancellation or redemption of a part óf its stock, or one of a series of distributions in complete cancellation or redemption of all or a portion of its stock.

Article 625 of Kegulations 77 provides that a gain to the shareholder from a distribution in liquidation may at his option be taxed as a capital net gain. This provision of the regulations is in accord with cases wherein stockholders have reported as capital transactions the redemption of stock, and that method of reporting has been approved by this Board. See Henry B. Babson, 27 B. T. A. 859; affd., 70 Fed. (2d) 304; James A. Connelly, 30 B. T. A. 331. In Edward S. Harkness, 31 B. T. A. 1100, we directly held that gain on the complete liquidation was a capital gain. The effect of those cases is to treat redemptions of stock, whether they are partial or complete liquidations, as “payments in exchange for stock.” This is the language of the statute, section 115 (c). And as the capital gain provision specifically deals with the proceeds of the “sale or exchange of capital assets”, it seems to us that that treatment is sound. We accordingly hold that the opinion in William C. Rands, supra, is wrong in so far as it treats the gain on redemption of stock as ordinary income.

We think that there is a basic distinction between the redemption of bonds and the redemption of stock, based on the different characteristics of the two. A bond usually contains a definite promise to pay a named sum on or before a specified time. Payment in accordance with the specified terms is nothing more than the discharge of a contractual obligation to repay a sum loaned. In the case of stock, however, there is no obligation to pay any sum at any time. Quite often stock, especially preferred stock, contains a provision reserving to the issuing corporation the right to retire it, but that is nothing more than an option, and, when that option is exercised by payment of the price specified, the transaction is in every real sense a sale as fully as the exercise of an option on other personal property, or on real property. Moreover, the statutory provision dealing with partial liquidation treats only of stock and does not include bonds. Sec. 115 (c), supra.

. The taxing statute treats sales and exchanges alike in providing that gain may be realized or loss sustained on either. Secs. Ill and 112. The capital gain provisions likewise apply to sales and exchanges. Sec. 101 (c). Consequently, whether a redemption is treated as a purchase by the corporation and a sale by the stockholder or as a “payment in exchange for the stock” as provided in the liquidation provision, the transaction comes within the literal provisions of the capital gain sections. We hold that petitioner properly treated the gain on redemption of her preferred stock as a capital gain.

Reviewed by the Board.

Decision will be entered under Bule 50.


author: Haeron :

text:
    R. C. Bayliss, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 84472.
    Promulgated May 20, 1937.

      Frank J. ATbus, Esq., for the petitioner.

      Albert E. Arent, Esq., for the respondent.
   OPINION.

Haeron :

The purchase and sale of the Dupont Circle property was not incurred in the petitioner’s regular business and loss therefrom is not allowable under section 23 (e) (1). The question in this proceeding is whether or not the transaction was one entered into for profit, though not connected with the petitioner’s business, for if it was a transaction entered into for profit the resulting loss is deductible from the petitioner’s gross income under the provisions of section 23 (e) (2) of the Revenue Act of 1932.

Upon review of the evidence it is held that the loss was not incurred in a transaction entered into for profit. The petitioner’s claim is based upon the argument that his business was carried on in two capacities, both as an individual and as a member of a real estate partnership, and that the purchase of the Dupont Circle property was a transaction entered into in the petitioner’s separate and individual business of buying and selling real estate. The evidence shows that from 1929 to 1933 the petitioner did not buy and sell real estate on his own account for profit. During this period, but before the taxable year, he owned a piece of property which he rented to tenants and he held two or three unimproved lots. The purchase of the Dupont Circle property appears to hav6 been made with the intention of using or disposing of the property as would be done in a transaction entered into for profit, but the petitioner abandoned such intention at the start and used the property practically from the time of acquisition until a few months after the date of sale as a residence. It was not used to produce income at any time. From "its use, the purchase and sale of the property lost the characteristics of a transaction entered into for profit and was instead a transaction whereby the petitioner acquired a residence until such time as a new residence was completed for his occupancy. Therefore petitioner is not entitled to the deduction under section 23 (e) (2). See W. H. Moses, 21 B. T. A. 226; Henry DeFord, 7 B. T. A. 630; affd., 29 Fed. (2d) 532.

Petitioner relies upon the rule set forth in Henry J. Gordon, 12 B. T. A. 1191, wherein it is stated that “where a taxpayer acquired property with the intention of selling it at a profit, even though he may have resided thereon, if the predominating factor in its selection was the prospect of future profits, he is entitled to any loss sustained upon the sale thereof.” Whether or not a loss is incurred in a transaction entered into for profit must be determined by the facts in each proceeding. Where a taxpayer is engaged in the real estate business, it is natural for him to argue that all purchases of real estate are transactions entered into for profit. However, the facts relating to the purchase of the particular piece of real estate may indicate otherwise. In this proceeding, there is no convincing evidence that the petitioner actively and persistently endeavored to dispose of the piece of property involved during the time of his ownership.so as to make convincing the argument that the use of the property as a residence was secondary to carrying out a transaction entered into for profit. During four years the house was shown by agents to only three or four people. During the month preceding his occupancy of the property, the petitioner did not do anything towards promoting the sale or rental of the property. It appears that he acquired a residence for his family until he should find it convenient to build his new home. There are lacking facts to show that the predominant factor was a real estate promotion transaction throughout so that the use of the property as a residence was an afterthought brought about through adverse circumstances delaying the carrying out of a real estate transaction as in the cases of Sydney W. Sinsheimer, 7 B. T. A. 1099; John N. Hughes, 8 B. T. A. 206; Henry J. Gordon, 12 B. T. A. 1191; Minnie L. Campe, 17 B. T. A. 575; Marjorie G. Randall, 27 B. T. A. 475. The fact that the petitioner did not intend to permanently use the property for a residence is not sufficient to characterize the transaction as one primarily entered into for profit.

The petitioner realized a gain of $250 from the sale of a lot in May 1933 and is clearly taxable upon this income.

Decision will be entered for the respondent.


author: Harron :

text:
    Ella T. Flaherty, Executrix under the Will of William Flaherty, and Ella T. Flaherty, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79397.
    Promulgated May 20, 1937.

      A. J. Aldridge, Esq., and J. F. Brennan, Esq., for the petitioner.

      Hartford Allen, Esq., for the respondent.
   OPINION".

Harron :

The notice of deficiency, having been mailed to Ella T. Flaherty both as executrix and as an individual, seeks to impose liability upon Ella T. Flaherty as an individual for the entire amount of the deficiency assessed by respondent, and Ella T. Flaherty, as an individual, denies such liability. This Board has held that the ■filing of a joint return by husband and wife does not thereby make ¡ them a single taxing entity. Frank B. Gummey, 26 B. T. A. 894. The revenue act provides that “There shall be levied, collected and paid for each taxable year upon the net income of every individual a normal tax * * Sec. 11, Revenue Act of -1932. Section 51 of the same act requires that individuals in various classes file income tax returns and if a husband and wife are living together they may ... elect either to file an individual or a joint return. The taxing statute clearly seeks to tax the income of each individual and the provision for filing joint returns is a convenience. It has been held that “spouses are not jointly and severally liable for a deficiency arising entirely out of the separate income of one of them.” Cole v. Commissioner, 81 Fed. (2d) 485; Frank W. Darling, 34 B. T. A. 1062. Since none of the deficiency is attributable to the income of Ella T. Flaherty she is not individually liable for any part of the deficiency. It is held that there is no deficiency in the case of Ella T. Flaherty as an individual.

William Flaherty, deceased, failed to report income from his law practice in the net amount of $98,530.19. All of the other corrections made by the respondent also relate to the taxable net income of William Flaherty, deceased, and no evidence has been presented to overcome the respondent’s determination. The estate of William Flaherty, deceased, is therefore liable for the deficiency assessed.

Decision will be entered under Rule 50.