text:
    Helen E. Leatherbee and State Street Trust Company, Executors u/w Robert W. Leatherbee, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 51513.
    Promulgated March 24, 1936.

      Percy E. Gleason, Esq., Franh A. Lynch, Esq., 8. F. Moody, Esq., Hubert Van HooJe, Esq., and Harry J. Gerrity, Esq., for the petitioners.

      Bruce A. Low, Esq., L. H. Bushbrooh, Esq., and B. 0. Grauer, G. P. A., for the respondent.
   OPINION.

Leech :

The only issue of law involved here is the question of when petitioners’ decedent acquired the premises described in the foregoing lease and option.

Respondent, in his original computation of the gain to petitioners’ decedent on the sale in 1925, used a basis of $180 per acre for the entire acreage then sold. In his amended pleadings, respondent affirmatively alleges the purchase of the acreage covered by the present lease and option by petitioners’ decedent, in 1914 at a cost of $200 per acre. He thus asserts that such cost is the proper basis for computation of the disputed gain on the sale of that acreage by decedent in 1925.

The petitioners take several positions — all of them premised ultimately upon the proposition that the decedent acquired an interest in the lands described in the pending lease and option, at the execution of that instrument.

That premise is unsound. The instrument under consideration was not a contract of sale. An essential element in construing ⅛ as such is the presence of a binding obligation upon the seller to sell and the buyer to buy. Lawler v. Commissioner, 78 Fed. (2d) 567. Cf. Jefferson Gas Coal Co., 16 B. T. A. 1135; aff'd., 52 Fed. (2d) 120; A. B. Watson, 24 B. T. A. 466; aff'd., 62 Fed. (2d) 35; Charles J. Derbes, 24 B. T. A. 276, and cases there cited; C. A. Cochran, 23 B. T. A. 616.

This requisite is absent here. The terms here, under which the privilege to buy could be exercised, were not fixed in the writing since the payments were to be made in a manner “mutually agreeable” when the option was exercised. The privilege to buy was as separate and distinct from the agreement of lease as though they had been in separate instruments. No part of the rent here reserved and paid was allocable, under any circumstances, including that of the exercise of the option, to the purchase price of the land. The entire “rent” was paid, as such, solely for the use of the premises during the lease term. The only credit on that purchase price, in the event of the exercise of the option, was the $500 paid as a specific and separate consideration for the option itself.

Since the property here involved is situate in Illinois, the law of that state is authoritative in construing the pertinent instrument, which fixes the time when petitioners’ decedent acquired the property described therein. Poe v. Seaborn, 282 U. S. 101. The party of the second part in this instrument and, a fortiori, petitioners’ decedent by virtue of the written assignment and its acceptance (Adams v. Peabody Coal Co., 230 Ill. 469; 82 N. E. 645; Guyer v. Warren, 175 Ill. 328; 51 N. E. 580), was a mere optionee of the real estate included in that instrument and, as such, acquired no title therein until the exercise of that option in 1914. Barnett v. Meisterling; 327 Ill. 564; 158 N. E. 806. Cf. Richardson v. Hardwick, 106 U. S. 252; Todd v. Citizens' Gas Co., 46 Fed. (2d) 855; certiorari denied, 283 U. S. 852. This is in line with the weight of authority, as was decided by the Supreme Court in Commissioner v. San Joaquin Fruit & Investment Co., 297 U. S. 496.

Therefore, since petitioners’ decedent did not acquire any title in the premises covered by that written instrument, until February or March 1914, when he purchased it at a cost to him of $200 per acre, the basis for the computation of gain or loss of the petitioners’ decedent on the sale of that acreage in 1925 is that cost.

This brings us to the first question of fact, which is the fair market value of the 197.504 acres which petitioners’ decedent purchased prior to March 1, 1913.

As stated by the Supreme Court in Montana Railway Co. v. Warren, 137 U. S. 348, “at best, evidence of value is largely a matter of opinion, especially as to real estate.”

The spread is wide between the values to which the several witnesses testified. The petitioners introduced testimony of two witnesses, one of whom fixed the value of the acreage now under discussion as $1,000 at the crucial date. The three witnesses of the respondent gave it a value of $225 and $250 per acre, as of the same date.

Between 1911 and 1913, the market for small farms and country homes in the vicinity of the tract here in dispute, had increased rapidly. The evidence of sales of comparable property in the same neighborhood, somewhat before and after March 1, 1913, indicates this fact. One of the respondent’s witnesses testified to actual sales, in 1913 and 1914, of property directly across a road from the present acreage, at $500 per acre. True, he attempted to deprecate or destroy the natural effect of that testimony. However, in view of all the other evidence in the record, that attempt did not entirely succeed. A careful consideration of all the testimony, in the light of the respective qualifications of the several witnesses, leads us to the conclusion, already stated, that the 197.504 acres which petitioners’ decedent acquired prior to March 1, 1913, had a fair market value on that date of $400 per acre.

The other issue of fact is the correctness of respondent’s action in disallowing the deduction by petitioners’ decedent on his income tax return for 1926 of part of an alleged debt as having become worthless to that extent during the taxable year.

At the outset, it must be noted that this so-called debt was said to be due from the brother of the petitioners’ decedent. This fact subjects the transaction to rigid scrutiny. Storey v. Storey, 214 Fed. 973.

No written evidence of this asserted debt was executed, at least, until after the questioned deduction. No such evidence was offered to establish even that later execution. No evidence appears, either of the fact .of indebtedness or of its partial worthlessness in the taxable year, except the oral and, here, unconvincing testimony of the accountant who prepared the return upon which the deduction was taken. On the whole record, we are not satisfied that the petitioners have sustained their burden of proof in establishing error of the respondent in the disallowance questioned. The respondent is sustained on this issue.

Decision will be entered under Rule 50.


source: Caselaw Access Project

author: TURNER:

license: Public Domain

text:
    C. A. Goding, Petitioner, v. Commissioner of Internal Revenue, Respondent. H. A. Howe, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 71153, 67555.
    Promulgated March 24, 1936.

      Eugene Meacham, Esq., for the petitioners.

      Nathan Gammon, Esq., and E. A. Tonjes, Esq., for the respondent.
   OPINION.

TURNER:

On their returns the petitioners treated the redemption of the preferred stock of the J. W. Carter Co. as a sale and reported a profit thereon. In their petitions they allege that the profit so reported was correct. On the basis of amendments to the petition, filed in accordance with leave granted at the hearing, it is now contended that the amounts received in redemption of the stock represented the return of capital and that the petitioners are entitled to refunds.

It is the respondent’s contention that the stock was redeemed at such time and in such manner as to bring the transaction within the provisions of section 115 (g) of the Revenue Act of 1928 and that the distribution and redemption of preferred stock was, under the provisions of that section, a taxable dividend.

A review of the history of the corporation convinces us that the redemption of the stock was in keeping with the consistent practice and method for distributing earnings to its stockholders. Great stress is placed on the statement made on the witness stand by petitioner Goding, that the redemption of the stock was not a part of any unified plan of distributing corporate earnings. Regardless of whether the issuance and redemption of preferred stock was in accordance with any unified plan therefor, it is obvious that it was in accordance with a consistent practice of the corporation from its inception. Except for cash dividends approximating the 8 percent cumulative dividend on the preferred stock, no formal distribution of earnings was ever made, yet we find that prior to January 1, 1930, earnings of the corporation in the amount of $954,000 had been distributed to the stockholders through the issuance and redemption of preferred stock. This was approximately three times the amount that had been distributed as cash dividends on preferred stock.

It is argued by the petitioner that corporate surplus was not available for the distribution of the dividend and that the respondent’s case must fall for that reason. While it is true that book surplus at December 31, 1929, was only $101,410.90, and on January 2, 1930, there was a cash dividend of $70,000, as well as a redemption of the preferred stock in question, it must be remembered that the charge to surplus in respect of the preferred stock had been made at the time the stock was issued. The facts show that the earnings of the corporation up to that date were more than sufficient to cover both items. Up to the beginning of the taxable year the corporation had paid cash dividends amounting to $322,960 and had redeemed preferred stock amounting to $954,000, or a total of $1,276,960 over the life of the company. The earnings over the same period amounted to $1,529,573.10 and this amount does not include surplus at April 30, 1922, in the amount of $44,363.23, the source of which is not shown.

Mention is made that in 1926 or 1927 certain bankers complained that the dividend requirements of the petitioner’s preferred stock were too high and that this was the occasion for the redemption of at least a portion of the preferred stock. This contention is hot at all convincing, however, since the facts show that subsequently the corporation continued to issue preferred stock as dividends and to retire portions thereof at intervals in the same manner as had been done before. According to petitioner Goding’s recollection, this criticism of the bankers came shortly after the retirement on January 1, 1926, of' preferred stock having a par value of $461,000. In the face of this complaint, however, the corporation, on January 2, 1927, issued as a dividend preferred stock of the par value of $745,-000 and on January 24, 1929, issued another dividend in preferred stock amounting to $150,000. In this connection the petitioner cites George A. Lembcke, 33 B. T. A. 700. The facts here are altogether different from the facts in that case, which there disclosed a purpose and intention of compliance with the recommendation of the bankers for readjusting the capital structure of the corporation. In the light of those facts, there was no basis for the claim that the redemption of the stock was such as to constitute a dividend.

In the present case the petitioner, Goding, directed and controlled all of the activities of the corporation. It appears that the consistent practice was to issue preferred stock against corporate earnings, rather than to pay the earnings to the stockholders in the form of cash dividends. In the meantime, however, the stockholders made substantial withdrawals from the corporation from time to time. At some subsequent date, determined by Goding, the preferred stock so issued as dividends was redeemed and amounts were credited to the accounts of the stockholders equal to the par value of the stock so called in. So far as the record shows, the amounts of preferred stock redeemed, plus cash dividends paid, never at any time exceeded the earnings or profits of the corporation even though the books of the company did not show earnings as such by reason of the charges against surplus at the time the preferred stock was issued. Clearly the redemption of the stock in question was made at such time and in such manner as to constitute the redemption thereof a taxable dividend within the meaning of section 115 (g), supra. Randolph v. Commissioner, 76 Fed. (2d) 472, affirming 28 B. T. A. 773; Hill v. Commissioner, 66 Fed. (2d) 45, affirming 27 B. T. A. 73; Adler v. Commissioner, 77 Fed. (2d) 733, affirming 30 B. T. A. 897.

Furthermore, it does not appear from the record before us that the amounts received in redemption of the preferred stock should be excluded from income, even though it be held that the distribution did not constitute a dividend. If, as the petitioners contend, the issuance and redemption of preferred stock from time to time were not distributions of earnings but distributions chargeable to capital, the facts would indicate that the basis for preferred stock in the hands of the stockholders had long since been exhausted and under section 115 (c) of the Revenue Act of1928, the entire amount received by the petitioners during the taxable year would be gain from the sale or exchange of property.

The remaining issue has to do with the determination of losses sustained by the petitioner, Goding, from the sale of Fourth & First Banks, Inc., stock. It is stipulated that he was the owner of 638’ shares of stock, acquired by purchase, exchange, stock dividends, and other methods, at a total cost to him of $94,652.80, and that he sold during the taxable year 388 shares of this stock for a total price of $51,256, leaving 250 shares unsold. It is his contention that the remaining shares of stock became worthless during the taxable year and that he is entitled to a deduction of the balance of cost by reason of the worthlessness of these 250 shares of stock. The facts do not give support to this contention. While the selling price of the stock declined materially and sales were made in small lots only, it appears that the stock sold on December 31 at as much as $52.25 a share, that sales were also made in 1931 at pricey ranging from $16 to $8, and in 1932 at prices from $8 to $8.50 per share. It is true that none of these sales involved as much as 250 shares of the stock. They do indicate, however, that the stock was not worthless during the taxable year as claimed by petitioner. There is no showing whatever on the part of the petitioner that the block of stock which remained unsold in 1930 could not have been sold in small lots over a period of time at prices approximating those at which other lots of stock were sold during the years 1930,1931, and 1932. The loss from the sale of 388 shares is deductible and should be computed on the basis of the stipulated cost of the stock. The remaining 250 shares of stock not having been sold and not being worthless during the taxable year, there is no merit to the petitioners’ position on the second issue.

Decision will loe entered v/nder Rule 50.

         Sec. 115. (g) Redemption of stoeJc. — If a corporation cancels or redeems its stock (whether or not such stock was issued as a stock dividend) at such time and in such manner as to make the distribution and cancellation or redemption in whole or in part ■essentially equivalent to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock, to the extent that it represents a distribution of earnings or profits accumulated after February 28, 1913, shall be treated as a taxable dividend. In the case of the cancellation or redemption of stock not issued as a stock dividend this subsection shall apply only if the cancellation or redepmtion is made after January 1, 1928.


author: Seawell: ARNOLD,

text:
    Central & Pacific Improvement Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 68317.
    Promulgated March 25, 1936.

      Herschel B. Green, Esq., for the petitioner.

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

Seawell:

The decision entered herein was vacated after a review by the Board of the division report promulgated October 29, 1985, 33 B. T. A. 300. The facts are as follows:

The petitioner is a corporation organized under the laws of the State of California and has its principal place of business at 123 West Washington Boulevard, Los Angeles, California.

During the month of November 1913 petitioner, at a cost of $282,497.72, acquired fee title to a certain parcel of real estate in Los Angeles, California, which is bounded on the north by Eighteenth Street, on the west by Hill Street, on the south by Washington Boulevard, and on the east by an alley, the lot being 484.01 feet on the north, 349.35 feet on the west, 486.60 feet on the south, and 321.59 feet on the east, less a corner on the southwest corner of Hill Street and Washington Boulevard, being 120 feet on Hill Street and 150 feet on Washington Boulevard.

During the year 1930 the city of Los Angeles by proper legal proceedings opened up Broadway Street, a public thoroughfare, and condemned a right of way through said lot owned by the petitioner running from Eighteenth Street to Washington Boulevard, the strip condemned being 88.07 feet in width on Eighteenth Street and 88.42 feet in width on Washington Boulevard. In the same year the city of Los Angeles by proper legal proceedings also condemned a portion of said lot in so far as the lot extended along Washington Boulevard to the extent of 20 feet in depth along the entire side of the lot. A special improvement district was created, and the condemnation and improvements hereinafter mentioned were part of its work.

In the year 1930 the city of Los Angeles, by order of court, awarded petitioner for the land taken from it in the condemnation proceeding the sum of $203,211.88. Petitioner received out of the award only $34,321.86 in cash and the balance was applied as a credit on the assessments hereinafter referred to. The cost to the Xietitioner of the land taken in the condemnation proceeding was $72,357.29.

In the year 1930 the city of Los Angeles levied special assessments against petitioner on the remaining land owned by it in the above described parcel for the work of opening, widening, paving, and lighting in said improvement district in the sum of $155,164.28.

In the year 1931 the city of Los Angeles levied special assessments against petitioner on the remaining land owned by it in the above described parcel for the work of opening, widening, paving, and lighting in said improvement district in the sum of $8,057.30, which sum was paid by petitioner in the year 1931.

In the year 1930 the city of Los Angeles levied a special assessment against other property owned by the petitioner in said improvement district for the work of opening, widening, paving, and lighting in the district in the sum of $13,785.74. No part of the property with respect to which the assessment of $13,785.74 was levied was taken by the city of Los Angeles nor was any award made with respect thereto.

In 1930 the special assessments mentioned aggregating $168,950.02 were paid by the city of Los Angeles withholding that sum from the award of $203,271.88.

Petitioner did not sell, exchange, or otherwise dispose of the above described property in 1930, except as stated above.

The petitioner had the right either to collect its awards in full and permit the special assessments to go to bond payable over a period of years, or to apply the awards against the special assessments and receive the balance due. It chose the latter method.

The improvement district here concerned was very extensive. There were a great many property owners in the improvement district who had no property taken, but were required to pay special assessments.

In determining the deficiency here in question the respondent treated the entire award as income and computed the taxable gain by deducting therefrom the amount of $72,357.29 as the cost of the property taken.

The petitioner contends that, since the assessments were offset against the awards, the only income received by him in 1930 from the transaction was $34,321.86, which was further reduced by .$8,057.30, the special assessment levied in 1931, and, as a consequence, ■all of the proceeds of the property involuntarily converted was expended in the acquisition of other property similar or related in .service or use except $26,264.55, which is less than the cost of the property taken.

The question is how the gain, if any, should be computed. In his determination of the deficiency the respondent taxed the petitioner on a gain of $130,914.59, a figure he reached by deducting the stipulated cost basis of the land condemned from the amount of the awards made therefor. The petitioner argues, among other things to be mentioned, that it realized no taxable gain from the proceedings since its basis for the land taken, plus the assessments levied in 1930, exceeded the amount of the awards, and the cash of $34,321.86 received from the city was less than the cost of the land condemned.

We had the same question in Christian Ganahl Co., 34 B. T. A. 126. In that proceeding there was an award for land condemned by the city of Los Angeles and special assessments were levied against remaining portions of the lot, together with other real property of the taxpayer in the special assessment district. Our holding was that the gross amount of the awards constituted income to the taxpayer and that its taxable gain was the difference between such amount and the basis for the land condemned. Following that ruling, we hold that petitioner realized taxable gain of $130,914.59 from the condemnation proceedings, as determined by the respondent.

The petitioner also contends that it gave up rights in a portion of its property and received therefor an interest in a thoroughfare and accordingly the whole of the awards, or such amounts less the assessments levied in 1930 and 1931, were expended in the acquisition of other property similar or related in service or use within the meaning of section 112 (f) of the Revenue Act of 1928. There is no merit to the contention. L. H. Wolf, 29 B. T. A. 702; reversed on other grounds, 77 Fed. (2d) 455; Christian Ganahl Co., supra.

The report promulgated herein on October 29, 1935, is accordingly vacated.

Reviewed by the Board.

Decision will he entered) for the respondent.

ARNOLD,

dissenting: The majority opinion taxes petitioner with $130,914.59 as income for 1930. This represents the difference between the entire award and the original cost basis of the portion taken. The difference between the award for the land taken and the assessment levied against the remaining portion was less than the cost basis of the land taken.

To treat the assessment as added to the cost basis of the part remaining for future determination of gain or loss and the award, including that portion which paid the assessment, as taxable income in 1930 is, in my opinion, unwarranted and results in improperly taxing unrealized income. We are dealing here with a single tract of land over which an easement or right of way was acquired by the city of Los Angeles through the right of eminent domain.

We should not lose sight of 'the fact that petitioner was involuntarily divested of a part of the property. It was not a voluntary sale. While the assessment was levied against the part remaining it grew out of the award for the part taken and both the assessment and the award were inseparably merged into petitioner’s investment. To the extent the assessment was offset against the award, the receipt of the award and the payment of the assessment was one transaction, inseparable and indivisible, in fact simultaneous. Neither preceded the other in point of time and neither was separate and distinct from the other.

The Board has previously on two occasions held on a similar state of facts in line with the majority opinion here. Both cases were appealed to the Circuit Court of Appeals, one to the Second Circuit and one to the Ninth Circuit, and in both cases the Board was reversed. In one of these cases, Carrano v. Commissioner, 10 Fed. (2d) 319, the Second Circuit held that where a municipality paid the award by withholding the assessment from the award, the amount of the assessment should be immediately added to the original cost basis of the entire property and be treated as part of the original cost and the award applied in reduction of the cost basis in determining the gain or loss. Justice L. Hand, in that case, said:

* * * On the other hand, it appears to us that this payment should be treated as immediately added to the original “basis.” Although the assessment was not an added cost until paid, it became cost at the moment when it was set off against the award. Eeeeipt and payment were simultaneous; it is as false to say that the award was paid before it was expended, as that it was expended before it was paid.
* * * ⅜ * * ⅜
In this instance the “gain” in dispute could arise only on the hypothesis that so much of the award as paid the assessment was received before the assessment itself was paid. This was demonstrably not the ease; it was received at the same time. Thus it does not affirmatively appear to be taxable “gain” at all, and the taxpayer wins. Moreover, this is the direct and natural way to look at the transaction. The taxpayer has “gained” only what he has received above his cost; so far as his award has been cancelled by the assessment, it is not a “gain” at all, it is instantly absorbed by a new cost which arises and is paid without allowing him even a momentary possession of the “gain.”

The other case referred to is Wolf v. Commissioner, 11 Fed. (2d) 455, cited with approval in the majority opinion as authority on another point. The Ninth Circuit refused to approve the Board’s conclusion on a similar state of facts, saying:

* * * However that may be, it is clear that the entire proceeding for the opening of a street is one proceeding and the result should be treated as an entirety. This was the view of the Supreme Court of California expressed in considering a somewhat similar situation under the same street opening act in the case of Spring Street v. City of Los Angeles, 170 Cal. 24, wherein a parcel of land was awarded $20,000 and assessed $20,115.20 to pay for the property thus taken. This transaction was treated as a unit for the purpose of determining whether or not there had been an infringement of the constitutional rights of the owner of the land. * * *

The Board, in the recent case of Christian Ganahl Co., 34 B. T. A. 126, on which the majority opinion was based, adhered to its former decisions in the cases of Carrano v. Commissioner, supra and Wolf v. Commissioner, supra.

In my opinion the fairest and most equitable way to handle a situation of this kind is to add the assessment to the original cost basis of the entire tract, and apply the award in reduction of this new cost basis. The result of this will be fair to the Government and the taxpayer. The underlying purposes of the taxation of income is to tax realized gain rather than unrealized gain. Cf. Eisner v. Macomber, 252 U. S. 189; Safe Deposit & Trust Co. v. Miles, 259 U. S. 247. The Board decisions above referred to tax as realized gain that which is not a realized gain. The court, in the Carrano and Wolf cases above referred to, by merging the assessment and the award in a readjusted new cost basis, recognizes tibia underlying principle of income taxation, and in my opinion should be followed in cases like the one here. No income escapes taxation. The Government will get the tax on the gain when it is definitely determined; the taxpayer will not pay on a theoretical gain but will pay on the gain actually realized. For this reason, I respectfully dissent.

Matthews and Leech agree with this dissent.


author: Turner:

text:
    Herman M. Rhodes, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 54899.
    Promulgated March 25, 1936.

      F. E. Hagler, Esq., for the petitioner.

      Frank B. Schlosser, Esq., for the respondent.
   OPINION.

Turner:

Petitioner contends that the respondent erred in determining that a portion of the withdrawals made by him during the taxable year from the Rhodes-Jennings Furniture Co. constituted dividends instead of loans. He urges that the circumstances under which the withdrawals were made and the manner in which they were treated by him and the corporation sustain his contention.

We think it is clear that both petitioner and the corporation regarded the withdrawals as loans. The corporation carried them as accounts receivable on its books and showed them as such in its balance sheet which it submitted to third parties for credit purposes. At the beginning of the taxable year petitioner gave to the corporation as collateral a note for approximately the amount of the unpaid withdrawals. During the year interest was paid on the note at the rate of 6 percent per annum. Withdrawals made during the taxable year amounted to $96,423.32, while repayments amounted to $102,-984.80, or $6,561.48 in excess of the withdrawals. Petitioner was able financially to repay the amounts withdrawn. The evidence not only shows that the withdrawals were regarded as loans and were to be repaid, but that in a later year they were paid in full. On these facts we hold that the amounts in controversy constituted loans and not dividends. Kate C. Ryan, Executrix, 2 B. T. A. 1130; Comey & Johnson Co., 8 B. T. A. 52; D. Bruce Forrester, 12 B. T. A. 104.

Petitioner contends that the contract to purchase the Davis property became worthless in 1927, resulting in a loss to him in that year of $15,762.50, which he is entitled to take as a deduction. The respondent contends that the contract did not become worthless in 1927 and that any loss sustained by petitioner was sustained in 1928 when petitioner sold his interest thereunder. There is no controversy as to the amount allowable in the event we hold that petitioner sustained a loss in 1927, the parties having stipulated the amount paid on the purchase price of the property.

As a result of his investigation in September 1927, petitioner decided that the property covered by the contract was not worth the balance owing thereon and that the contract therefore was worthless. In the spring of 1928, however, he sold his interest under the contract for $1,000 or $1,100. Petitioner stated that he was surprised when he received the offer, but there is nothing in the record to indicate that the value of the property or of other real estate in that vicinity had improved to any extent after September 1927. It would thus appear that the value of the property was as much in 1927 as in 1928 when petitioner disposed of his interest under the contract. This being true, we are unable to find that the contract became worthless in 1927 as petitioner contends. Cf. Anderson & Gustafson, 3 B. T. A. 531; International Educational Publishing Co., 30 B. T. A. 1090; affd., 79 Fed. (2d) 343.

Petitioner also contends that he sustained a deductible loss of $28,875 on the Spann property during the taxable year, and the parties have stipulated that the foregoing amount is correct if petitioner is entitled to a loss deduction in respect of the said property. Petitioner took title to the Spann property in 1925, assuming first and second mortgages, and gave the sellers a third mortgage thereon to secure payment of certain purchase price notes. Upon nonpayment of the notes, the sellers, without resorting to foreclosure of the mortgage, brought suit and obtained judgment on the notes. Petitioner subsequently paid the judgment. What action, if any, the holders of the two prior mortgages have taken is not disclosed by the record. The situation, therefore, is not one involving a loss resulting from the foreclosure of a mortgage.

Petitioner claims that the loss deduction should be allowed on the ground that he determined the property to be worthless and abandoned it during the taxable year, and for the further reason that the property was sold during that year for unpaid state, county, and city taxes. We have considered the claim of abandonment of real estate as the basis for a loss deduction in respect thereto in numerous cases and have decided the issue adversely to the claim of the petitioner herein. A. J. Schwarzler Co., 3 B. T. A. 535; Greenleaf Textile Corporation, 26 B. T. A. 737; affd., 65 Fed. (2d) 1017; Frederick Krauss, 30 B. T. A. 62. The question as to whether a sale of Florida real estate for taxes is such an event as to give rise to a deductible loss has also been carefully and fully considered in Frederick Krauss, sufra, and determined adversely to the petitioner. We accordingly hold that petitioner is not entitled to the loss deduction claimed in respect of the Spann property.

Decision will be entered under Rule 50.


author: Van Fossan:

text:
    Thomas A. Scully and Frederick Scully, Sole Surviving Executors of the Estate of Enriqueta Angela Scully, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80244.
    Promulgated March 26, 1936.

      Robert F. Cogswell, Esq., D. H. Blair, Esq., and J. G. Korner, Jr., Esq., for the petitioners.

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

Van Fossan:

The respondent determined a deficiency of $3,067,-822.78 in estate tax. The sole question now presented for determination is whether decedent made two certain transfers of property in contemplation of death. The first transfer was made in 1918 and the second in 1927.

The parties stipulated certain facts, substantially as follows:

Enriqueta Angela Scully, the decedent, died on the sixth day of February 1932. She was born in the year 1850 and was 82 years of age at her death.

The decedent was the wife of the late William Scully, who died on October 17,1906, at the age of 85 years.

Decedent was a citizen of the United States and a resident of the city of Washington, D. O., although at the time of her death and for some years prior thereto she was temporarily domiciled in England, where she died.

The residence of William Scully and the decedent and their family was 1401 Sixteenth Street, 17. W., Washington, D. C.

The decedent, Enriqueta Angela Scully, was married to her husband, William Scully, in or about the year 1875. Decedent and her husband had four children, namely, Thomas A. Scully, who was born September 16, 1878, Angela Ida Harriet (Parry), bom November 4, 1879, Frederick Scully, born October 2, 1881, and William, who died an infant without issue.

Prior to the years 1887 and 1900 William Scully had acquired extensive holdings of real estate, consisting of farm lands and other property. The lands were situated principally in the States of Illinois, Missouri, Kansas, and Nebraska.

In 1887 William Scully conveyed to his wife by fee simple deed all his lands in the State of Illinois. In 1888 he similarly conveyed to his wife his lands in the States of Kansas and Nebraska. In 1902 he similarly conveyed to his wife the lands in Missouri. At the time of the conveyance in 1887 William Scully was 66 years of age and his children were 9, 8, and 6 years of age, respectively. When the conveyances were made as aforesaid in 1902 William Scully was 81 years of age and his children were 24, 23, and 21 years of age, respectively.

William Scully had grave apprehension as to the bad effect upon his children of entrusting them with a large amount of property before they had reached an age of maturity and experience sufficient to enable them to conserve and manage it wisely, and he was anxious that large amounts of property should not be given to his children until they had evidenced their capacity to take care of it and not have their lives spoiled by it. On many and frequent occasions, over a long period of years, both before and after the conveyances referred to in the above paragraph William Scully discussed this matter with his wife and advised her that the properties conveyed by him to her should be by her divided and distributed to their three children, and as to the manner in which such division and distribution should be made. These discussions continued down to the time of William Scully’s death.

William Scully advised his wife orally and in writing to make distribution of the property which he had conveyed to her, as well as other property which he might leave upon his death, among their three children when and if, in the judgment of the decedent, the children had attained sufficient age, experience, and capacity to take care of the property; and on November 8, 1900, William Scully wrote in his own handwriting a memorandum entitled “Suggestions to my Wife”, which memorandum he endorsed “Approved on April 13, 1901”, and in the said memoranda William Scully set forth his views as to the disposition of his lands and properties and either delivered the memoranda to his wife or made known to her the contents thereof before his death.

In order to increase the interest and sense of responsibility in his sons, Thomas and Frederick, William Scully employed the sons in his office and paid them a salary to assist him in looking after his property and his sons so remained in his employment to the time of their father’s death. At the time of their father’s death Thomas .'Scully was 21 years of age and Frederick Scully 25 years of age.

After the death of William Scully the two sons, Thomas Scully •and Frederick Scully, continued to work in the employ of their mother in assisting in the management of the said lands and properties.

On December 4,1918, the decedent executed deeds of conveyance to •her two sons conveying the farm lands in the States of Illinois, Missouri, Kansas, and Nebraska, the said conveyance deeds being •about fourteen in number. The conveyances were made to the two sons in severalty and represented the most feasible and just division of the lands between the sons. The division between the sons of these lands varied slightly from the original suggestions made by William ■Scully in his memorandum above referred to and the said variation was partly due to the fact that, at the time the distribution of the lands between the sons was made, some of the lands had enhanced in value while others had decreased in value, and for the further reason that it was necessary to make certain variations in order to get an equitable division of the lands in order that they might be more feasibly and economically managed. At the same time that decedent made the conveyances of lands to her sons she transferred to her daughter, Angela Ida Harriet Parry, securities in an amount to equalize her share of the division as compared with the lands •conveyed to the two sons. The daughter was at that time married to a British subject and was living in London.

On December 12, 1927, the decedent made a further distribution of property among her three children in equal shares, the said distribution consisting entirely of securities. After making the distribution of securities among her three children on December 12, 1927, as aforesaid, the decedent retained securities in an amount in excess of $2,000,000, approximately 95 percent of the value of which was represented by United States Government bonds and Joint Stock Land Bank bonds. She likewise retained her residence at 1401 Sixteenth Street, N. W., Washington, D. C.

From and after the death of her husband, William Scully, the decedent kept separate accounts in the First National Bank of Chicago and the First Trust & Savings Bank of Chicago, in one of which accounts, designated by her as “estate accounts”, she kept the income from the properties which she had received from her late husband in his lifetime, and in the other account, designated by her as “personal account”, she kept the income from her own securities. The decedent kept the two accounts separately.

The following additional facts were adduced by testimony, either taken by deposition or given at the hearing:

In 1915 and again in 1918, at the ages of 67 and 70, respectively, decedent underwent serious surgical operations for gallstones. In the first operation her gall bladder, containing gallstones, was removed and gallstones were removed from the common bile duct. At Mrs. Scully’s death on February 6, 1932, the death certificate was prepared by Dr. Henry Huxley, who had been her attending physician for many years, including the time when she underwent the two operations referred to. He stated the causes of death to be as follows:

(a) Cardiac debility,
(b) Chronic cirrhosis of the liver,
(c) Gallstones, gall bladder removed.

The health of the decedent, from the date of the second operation in 1918 to her last illness in 1932, was good, but she had occasional reminders of the liver (or gallstone) trouble which necessitated the operations in 1915 and 1918. She always suffered severely from seasickness and in the later years refrained from taking any kind of a boat trip for fear of serious consequences.

At various occasions after the death of the father the sons importuned the mother to make a division of the property. These suggestions were not received kindly by the decedent, who was a woman of strong will, with pronounced ideas of family discipline. She had a profound respect for the wishes of her deceased husband and considered his suggestions to be equivalent to commands to be carried out when the appropriate time arrived. By his memorandum of suggestions the husband left the determination of such time entirely to decedent’s judgment. Decedent frequently indicated to the children and others that she intended to carry out the suggestions of the father by making distributions of the property. However, she shared her late husband’s fear that the property would be squandered if the distribution occurred before the children proved themselves possessed of judgment and ability to manage the same efficiently. She referred to her desire to develop business capacity and responsibility in the sons, to see them enjoy the property, to be relieved of the care of management.

Decedent was a vigorous woman of unusual activity and keenness of interest in charitable affairs. She was never morbid and always made light of occasional indispositions. She entertained extensively and maintained close personal supervision over the large estates which she leased. In 1928 she took a three-year lease on one estate and remodeled it at considerable personal expense. In 1930 she negotiated for a renewal of a lease for seven years on her London house.

In 1912 decedent made a will respecting her British property and in 1923 made a codicil thereto. She also had a will, executed at some early date, not fixed, dealing with the American property, which was superseded and destroyed on the execution of her last will on June 4,1931.

Bespondent held that the transfers of property in 1918 and 1921 were made in contemplation of death and determined the tax accordingly.

Section 302 (c) of the Revenue Act of 1926 reads, in part, as follows:

Seo. 802. 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—
* ⅜ * * * * *
(c) 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 or full consideration in money or money’s worth. * * *

Article 16 of Regulations 80 provides, in part, as follows:

* * * A transfer in contemplation of death is a disposition of property prompted by the thought of death. The phrase “contemplation of death” as used in the statute is not limited to contemplation of imminent death or to an apprehension that death is near at hand. Death must be “contemplated”, that is, the motive which induces the transfer must be such that leads to testamentary disposition. A gift inter vivos which springs from a motive essentially associated with life rather than with death is not made in contemplation of death.
As the phrase “transfer in contemplation of death” is applicable to many varying transactions, the circumstances of each case must be examined to ascertain the motive which induced the decedent to make the transfer. If the transfer results from mixed motives, one of which is the thought of death, the more compelling motive controls. A condition of the mind or the body of the transferor (whether occasioned by old age or disease) which naturally prompts a testamentary disposition to a proper object of his bounty, will be considered a decisive test of contemplation of death in the absence of proof of the existence of purposes associated with life as the dominant motive for the transfer. * * *

The above definition was obviously phrased to bring the regulations into conformity with the opinion of the Supreme Court in United States v. Wells, 283 U. S. 102. Each case depends on the facts there present. Though motive is a state of mind, it is, nevertheless, a fact to be determined from the evidence as are other facts.

We have tested the evidence in the instant case by the above stated concepts and find ourselves unable to agree with respondent’s determination. The record not only fails to establish that the gifts were testamentary in their essential character, but it clearly demonstrates the contrary. The evidences, both oral and written, speak, not of death, but of life, of thoughts associated with and referable only expected further life. There was no coincidence in time between the making of the transfers and the making of decedent’s wills. Moreover, the record reveals clearly the impelling motive for the gifts. They were made pursuant to a plan conceived years before by the father. This plan was embodied in a holographic paper of suggestions to his wife, whose high respect for the judgment of her husband translated the suggestions into commands. So interpreted, the suggestions of the father committed decedent to a distribution of the property when, in her judgment, the children had reached an age and possessed the ability properly to manage such extensive properties. When this time arrived the transfers were made in contemplation, not of death, but of the satisfaction that would be derived from watching the donees administer their- respective estates — the pride of the parent in the success of the children.

We hold that the transfers by decedent made in 1918 and 192V here in question were not made in contemplation of death. The respondent is reversed.

The above holding makes unnecessary the further hearing to fix values that would have been consequent on a contrary ruling.

Reviewed by the Board.

Decision will be entered imder Rule 50.


author: Mellott:

text:
    Helmuth Heyl, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 79364.
    Promulgated March 26, 1936.

      Marry Abt, O. P. A., for the petitioner.

      Pawl Sebastian, Esq., and Victor Garland, Esq., for the respondent.
   OPINION.

Mellott:

In this proceeding petitioner contests respondent’s determination of a deficiency in income tax for the years 1918 and 1921 in the respective amounts of $743.24 and $97.86, or a total of $841.10. Notice of the deficiency was duly mailed to petitioner on February 8, 1936.

Petitioner alleges in his petition that collection of the tax is barred by the statute of limitations; that respondent erred in calculating the tax on gross income instead of on net income; and that he erred “in failing to make proper adjustment against the stated deficiency of overpayment of taxes improperly calculated, * * * collected * * * and withheld” by him.

No oral evidence was adduced, the case being submitted upon the pleadings, the statements and admissions of counsel, and a brief stipulation of facts dictated into the record. All of the facts being stipulated or admitted, for the purposes of this decision they may be summarized briefly as follows:

Petitioner is an individual residing in Buffalo, New York. In 1907 his mother created a trust estate, in which he and his brother were beneficiaries, the Wisconsin Trust Co. of Milwaukee, Wisconsin, being the trustee. Under the trust, petitioner was to receive $1,000 per year when he attained age 21, with an increase of $600 each year thereafter until his younger- brother became 30 years of age, at which time petitioner was to receive one half of the corpus of the trust.

In 1917, after the United States entered the World War, the corpus of the trust, which was not yet vested in the beneficiaries, was seized by the Alien Property Custodian and held by him from 1917 to some time in 1927, the exact date not being disclosed.

The property consisted chiefly of real estate, rentals from which were income to the trust estate and to the beneficiaries until March 18, 1921, on which date petitioner became the owner of a 50 percent interest in the trust property, and thereafter the rentals were income to petitioner to the extent of 50 percent thereof.

The Wisconsin Trust Co., trustee, collected the rents and turned them over to the Alien Property' Custodian. The Alien Property Custodian also received other property belonging to petitioner, including the profit on maturity of a certain life insurance policy. Petitioner had no control of the property or the income therefrom during the period it was held by said custodian.

Petitioner made no return of income for either of the taxable years before us, and no return of income for either of said years was made in his behalf. No tax was assessed or collected for said years and it was stipulated that the deficiency determined by the respondent for those years is correct.

Upon the hearing before us petitioner took the position that under section 24, Trading With the Enemy Act, as amended by section 18, Settlement of War Claims Act of 1928 (40 Stat. 411} as amended by 42 Stat. 1511, as amended by 45 Stat. 254) and the Treasury decisions and regulations thereunder, it was competent, relevant, and highly material for him to show what had happened during the period of time that the property was in the custody of the Alien Property Custodian with especial reference to tax collected for the year 1922.

The respondent objected to such evidence, but ruling upon such objection was deferred by the presiding Member. Respondent admitted, however, that, if the Board decided that the year 1922 should be considered, the facts with reference thereto are as follows: On March 15, 1924, the Alien Property Custodian paid to the Bureau of Internal Revenue the sum of $1,219.99 as income tax for the year 1922. The tax was computed upon the gross income of the trust estate, which amounted to $14,338.21, whereas the net income of the trust estate was $2,768.73, upon which the tax, computed under the applicable revenue act, was $70.75. There was, therefore, an overpayment in tax for the year 1922 in the amount of $1,149.24.

We hold that the evidence relative the year 1922 is not properly before us, is not competent, relevant, or material to any issue cognizable by us, and can not be considered. The reasons for our ruling will appear hereafter, and petitioner’s exception to such ruling is hereby noted; but we shall first consider petitioner’s contention that the collection of the tax is barred by the statute of limitations.

Petitioner cites section 250 (d) of the Revenue Act of 1918, which provides that, except in the case of false or fraudulent returns with intent to evade the tax, the amount of tax due under any return shall be determined and assessed by the Commissioner within five years after the return was due or was made.

He insists that “the shorter of the two alternative limits should prevail” and the section should be construed as starting the running of the statute of limitations when the 1918 return was due. This view is untenable. It is doubtful if the section has any application here, for the petitioner failed to file any return and no return was filed for him. Section 276 of the Revenue Act of 1934 (which is the same as section 276 (a) of the 1932 Act and 278 (a) of the 1926 Act) provides that, “In the case of * * * a failure to file a return the tax may be assessed * * * at any time.” This was the holding of the courts even prior to the enactment of the statute. Cf. Lucas v. Pilliod Lumber Co., 281 U. S. 245; Florsheim Brothers Drygoods Co., Ltd. v. United States, 280 U. S. 453; Employees Industrial Loan Association, Inc., 27 B. T. A. 945. It follows that the tax is not barred by the statute of limitations.

It should also be noted that section 24, Trading With the Enemy Act, as amended by the Settlement of War Claims Act of 1928, supra, did not create any new period of limitations upon the assessment and collection of taxes. (See G. C. M. 4978, C. B. VIX-2, p. 163.)

Petitioner argues quite persuasively that the facts in the instant case cry aloud for the application of the theory of recoupment applied recently by the Supreme Court in Bull v. United States, 295 U. S. 247. That case originated in the Court of Claims, whichj, as the Supreme Court points out, is not bound by any special rules of pleading, the pleading therein being sufficient to put in issue the right to recoupment. But this Board is an administrative tribunal having a limited jurisdiction. Section 272 (g) of the Revenue Act of 1934 specifically provides that it “shall have no jurisdiction to determine whether or not the tax for any other taxable year has been overpaid or underpaid”, though it may consider such facts with relation to the taxes for other taxable years when it is necessary to do so to correctly redetermine the amount of the deficiency. (Marie Pederson, 14 B. T. A. 1089; Lowe & Campbell Athletic Goods Co., 18 B. T. A. 1134; Greenleaf Textile Corporation, 26 B. T. A. 737; affd., 65 Fed. (2d) 1017; Standard Island Creek Coal Co., 28 B. T. A. 690; W. M. Ritter Lumber Co., 30 B. T. A. 231.)

But the leeway given the Board under the above statute is not sufficient to permit us to go to the length urged by petitioner. We have no jurisdiction to determine tax liability for a year which is not before us, though we may consider other years when it is necessary for us to do so for the purpose of redetermining the deficiency before us. Illustrative of the application of the section under discussion is the consideration by us of a “net loss” for prior years (section 206, Revenue Act of 1926) for the purpose of ascertaining taxable income in a later year. But we have no power to require the application of an overpayment for one year to the liquidation of a tax liability for another year. (Cf. Gould-Mersereau Co., 21 B. T. A. 1316; B. T. Couch Glue Co., 12 B. T. A. 1321; Robert Monro Sanderson et al., Executors, 16 B. T. A. 1022.)

The Board’s jurisdiction in connection with overpayments is prescribed in section 322 (d) of the Revenue Act of 1934, and is limited to cases in which the “Board finds that there is no deficiency and further finds that the taxpayer has made an overpayment of tax in respect of the taxable year in respect of which the Commissioner determined the deficiency.” In such cases the Board has jurisdiction to determine the amount of such overpayment, but “no such credit or refund shall be made of any portion of the tax unless the Board determines as part of its decision that it was paid within three years before the filing of the claim or the filing of the petition, whichever is earlier.”

The statutory period of limitation upon refunds and credits is prescribed in section 322 (b) (1) of the Revenue Act of 1934, shown in the margin.

Petitioner relies upon paragraph (b), article IV of Treasury Decision, 4168 (C. B. VII-2, p. 413), promulgated June 21, 1928, under the Trading With the Enemy Act as amended by the Settlement of War Claims Act, supra, which reads as follows:

If a final computation sliows that the full amount of internal revenue taxes properly payable is in excess of the amount (if any) previously paid, the amount remaining unpaid shall be paid by the Alien Property Custodian to the Collector of Internal Revenue, Baltimore, or to a representative of such collector, as soon as practicable, after the final computation has been made. If the final computation shows that the full amount of internal revenue taxes properly payable is less than the amount previously paid, the difference shall be credited or refunded in accordance with the provisions of these regulations. A final computation will not prohibit a subsequent computation if it is determined that the amount shown by the final computation is erroneous.

Upon brief petitioner contends that the regulation in effect provides for a single computation to be made of the full amount of taxes due while the property was held by the Alien Property Custodian, against which should be offset the total tax paid. Pie asserts that the respondent can not determine a deficiency unless the amount shown to be due exceeds the full amount collected.

We have carefully examined the act, the Treasury decision, and the regulations thereunder and can not reach such conclusion. Article-Ill (e) of the regulations, we believe, affords petitioner his remedy, but he has failed to avail himself of it. This provides that a final computation will be made by the Alien Property Custodian, and, if “the taxpayer desires to protect his right to any credit or refund; determined to be due, a claim for credit or refund should be filed.”' Section 24 (f) of the act provides for the filing of such claims either before the expiration of the period of limitations properly applicable thereto or before the expiration of six months after the-date of the enactment of the Settlement of War Claims Act of 1928,. whichever date is the later. No claim for refund or credit was filed and the period within which any could have been filed has long since elapsed.

In Bull v. United States, supra, the Court recognizes that situations might arise wherein the sovereign would retain a tax, taken unjustly and in violation of its own statute, and in which Congressional action would be the taxpayer’s sole avenue of redress. This is apparently such a situation.

While the equity of petitioner’s contention appeals to us, we have no alternative but to construe the acts of Congress precisely as written. We have held that the year 1922 is not before us for any purpose, and any overpayment made for such year can not be used to reduce the deficiency for the years 1918 and 1921. It is stipulated that such deficiency is correct. It follows that it must be, and is, approved.

Judgment will be entered for the respondent.

       Sec. 322. (b) (1) Period of Limitation. — Unless a claim for credit or refund is filed by the taxpayer -within three years from the time the return was filed by the taxpayer or within two years from the time the tax was paid, no credit or refund shall be allowed or made after the expiration of whichever of such periods expires the later. If no-return is filed by the taxpayer, then no credit or refund shall be allowed or made after two years from the time the tax was paid, unless before the expiration of such period a claim therefor is filed by the taxpayer.


author: Seawell :

text:
    Houston Natural Gas Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 74136.
    Promulgated March 27, 1936.

      Ira F. Kennerly, Esq., for the petitioner.

      Dean P. Kimball, Esq., and Curtis Risley, Esq., for the respondent.
   OPINION.

Seawell :

The respondent questions the deductibility of the amounts in question as ordinary and necessary business expenses on the ground that the expenditures were made in the acquisition of a capital asset. He regards the proceedings as being analogous to the creation or enlargement of the circulation structure of a newspaper or magazine.

No authority need be cited for the long established rule that expenditures made for benefits which are to be enjoyed for a period extending beyond the year in which they are made should be capitalized and, if of an exhaustible nature, exhausted ratably over the useful life of the asset, and may not be deducted from income as ordinary and necessary business expenses.

Expenditures made to maintain the circulation structure of a newspaper or magazine are ordinary and necessary business expenses, but those made for the primary purpose of increasing it are not. Gardner Printing Co., 4 B. T. A. 37; Public Opinion Publishing Co., 6 B. T. A. 1255; affd., 76 Fed. (2d) 494; News Publishing Co., 6 B. T. A. 1257; affirmed on this point, 29 Fed. (2d) 955; Successful Farming Publishing Co., 23 B. T. A. 150; affd., 64 Fed. (2d) 890; certiorari denied, 290 U. S. 646. The principal of these cases applies equally to other lines of business. In Goodell-Pratt Co., 3 B. T. A. 30, the cost of developing a foreign market for mechanics’ tools, charged to expense when incurred, was restored to surplus and included in invested capital. The cost of increasing an insurance policy list was held in Commercial National Insurance Co., 12 B. T. A. 655, to be a capital expenditure. Amounts expended for novelty banks distributed, among other things, to obtain new depositors were disallowed as a business expense in Liberty Insurance Bank, 14 B. T. A. 1428 (reversed on other issues, 59 Fed. (2d) 320), on the ground that the expenditures created benefits extending into future years. In Dime Bank of Lansford, Pa., 20 B. T. A. 250, sums paid to an individual to persuade depositors to transfer their accounts and to solicit new ones were held to be capital expenditures. In Northwestern Yeast Co., 5 B. T. A. 232, sums were expended for agents’ salaries, advertising, samples, etc., in connection with a campaign conducted in new sales territory. In holding that some part of the expenditures resulted in the acquisition of a capital asset, it was said:

There can be little doubt in the minds of reasonable men fairly acquainted with modern business that promotion expenditures like those before us have a significance similar to the investment in more tangible assets. They fertilize the field for new production. The free distribution of samples at the state fair is justified only if it lures a new customer. It was not to the housewife already convinced that the petitioner planned to give away its samples of yeast year after year, but to one who would become a new unit in its expanding business. In this way it was risking new capital in the business in the hope of future profits — making an investment. Whether this investment is to be called good will or trade name or trademark, or something else, is unimportant. It may not need a name, except for accounting purposes, in order to reflect the expenditure and yet not ignore its investment significance.

Colonial Ice Cream Co., 7 B. T. A. 154, is to the same effect.

The petitioner contends that the cases cited are not controlling, on the ground that it had passed out of its organization or promotion stage prior to the taxable year and that the expenses of the solicitors and the cost of laying the service lines were outlays made to protect and maintain an established business. The rule governing the question before us makes no such distinction.

In Northwestern Yeast Co., supra, the expenditures were made over a period of 15 years after the corporation was organized, and under the sales promotion plan new territory was canvassed each year. The expenditures involved in Liberty Insurance Bank, supra, were made at least five years after the institution came into existence. In other cases the expenses were incurred long after the taxpayers were organized. News Publishing Co., supra; Commercial National Insurance Co., supra; Public Opinion Publishing Co., supra.

In order to hold that the whole of the amounts involved was expended by the Gas Co. for the sole purpose of maintaining its list of customers and that the increase in business was only incidental to the activities carried on, we would have to disregard evidence clearly establishing the contrary.

As early as 1928 it had applications for gas service from residents of Houston, but until May 1929 it was not in a position to supply such demand. The increase of customers in 1929 was about 600 percent and in 1930 the number of its consumers increased about 60 percent. This additional volume of trade represents new business in territory just entered and resulted, in part, from the efforts of the soliciting agents and the laying of service lines for consumers free of charge in a campaign for new consumers inaugurated in 1929.

The record abounds with testimony relating to the keenness of the competition between the gas companies in 1929 and 1930, including extreme methods used by the Fuel Co. in an effort to prevent the Gas Co. from establishing a profitable business in territory in which it had for many years enjoyed a monopoly. The success of the Gas Co. in Houston depended not only upon its ability to retain what it had in the way of customers, but to obtain new business. The countervailing tactics employed by it were designed to and did accomplish both purposes. The new business may not be regarded as an incidental result of the expenditures.

The Gas Co. made no allocation of the expenditures on its books between the acquisition of new business and the maintenance of old consumers and there is no testimony in the -record on the point. Without means of determining to what extent the total expenditures are properly chargeable against current income, we are obliged to and do sustain the action of the respondent in disallowing the whole amount as an ordinary and necessary business expense.

Decision will Toe entered for the respondent.


author: Sternhagen :

text:
    Bay Trust Company, Trustee, Estate of Louis E. Oppenheim, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. Oscar Lowman, Pauline H. Sloman, and Florence H. Polozker, Executors of the Estate of Jennie H. Oppenheim, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent. Sara O. Levy, Petitioner, v. Commissioner of Internal Revenue, Respondent. Earl H. Spiesberger, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 76356, 77886, 79701, 79702.
    Promulgated March 27, 1936.

      Edward 8. Clark, Esq., for the petitioners in Docket Nos. 76356, 79701, and 79702.

      G. Frederick Stanton, Esq., for the petitioners in Docket No. 77886.

      Thomas F. Callahan, Esq., for the respondent.
   OPINION.

Sternhagen :

The respondent determined a deficiency of $1,289.66 in the 1931 income tax of the trustee of the estate of Louis E. Oppen-heim (Docket No. 76356), and determined liability therefor of Levy and Spiesberger as transferees (Docket Nos. 79701 and 79702). He also determined a deficiency of $2,699.28 in the 1932 income tax of Jennie H. Oppenheim (since deceased), the widow of Louis E. Op-penheim and one of the beneficiaries of his trust estate (Docket No. 77886). These determinations are admitted by the respondent to be inconsistent in theory, and the question to be determined is whether an annual payment made in 1931 by the trustee of Louis E. Oppen-heim’s estate to Jennie H. Oppenheim is a proper deduction of the trustee for that year under section 162 (b), Revenue Act of 1928, and whether a similar payment in 1932 is taxable income of the widow. The facts are all stipulated, and a brief statement will suffice for a consideration of the issue to be decided.

Louis E. Oppenheim died in Michigan on June 29, 1921, survived by his widow, Jennie H. Oppenheim, and two sisters, Carrie Spies-berger and Sara Levy. By his will he set up a trust of specific securities and directed that the net income therefrom should be paid quarterly to his widow for life, the property then to be distributed to the sisters. The widow refused to recognize the will and began a proceeding for intestate administration. Thereupon, on September 14, 1921, the interested parties made a settlement agreement whereby the widow would receive:

* * * an annuity during ner life of $30,000 per annum, payable in ecpial monthly installments of $2,500 on the 1st day of each month commencing July 1st, 1921. The trust described in Item XII of said Last Will and Testament of Louis ID. Oppenheim, deceased, shall, as supplemented and changed by this agreement, exist and continue to exist for the purpose of paying said annuity.

A trust was set up consisting of the securities provided in item XII of the will and other property of the estate. If the trust income were less than $30,000 in any year, the remaindermen were to make up the difference, upon failure of which the trustee might sell corpus to the extent necessary to enable it to pay the $30,000 to the widow. The agreement was immediately supplemented to provide that not only the annuity but also taxes and carrying charges should be paid out of trust income.

In October 1921, the will and the compromise agreement were probated in Michigan. In 1932, the agreement was further modified so that the remaindermen were only to make up a deficiency in an amount necessary to pay the widow $24,000. In 1931, $30,000 was paid to the widow out of trust income, and in 1932, $28,000 was paid to her, of which $19,268.45 was trust income.

The trustee, in its fiduciary income tax return’ for 1931, deducted $30,000 as trust income distributed to the widow, and she included the amount in her individual tax return as income. The Commissioner disallowed the deduction by the trustee and has withheld action upon a claim for; refund filed by the widow. For 1932, the Commissioner determined that the $28,000 received by the widow should be included in her income, and has determined a deficiency against her accordingly.

The trustee and its transferees contend that the amount paid to the widow was a distribution to her of trust income and therefore deductible upon the fiduciary return. The estate of the widow contends that the amounts received by her were not such distributions of income as were deductible by the trustee and taxable to her. The Commissioner stands neutral, although expressing his preference for the trustee’s position.

In our opinion, the widow’s position is supported by the authorities. Helvering v. Butterworth, 290 U. S. 365; Helvering v. Pardee, 290 U. S. 365; Boston Safe Deposit & Trust Co. v. Commissioner, 66 Fed (2d) 179; Bridgeport-City Trust Co., Trustee, 32 B. T. A. 1181 (on review, C. C. A., 2d Cir.); Houston Land & Trust Co., Trustee, 33 B. T. A. 73; Old Colony Trust Co., Trustee, 33 B. T. A. 311; cf. John K. Howard et al., Trustees, 34 B. T. A. 57. It seems to us not important whether the widow is to be regarded as deriving to any extent from the original will, or from the compromise agreements, or from both. She chose not to take under the will and not to take by statute, but instead to take by the agreement which was voluntarily made in substitution for both. But whether she may be said to have taken a legacy or a gift or contractually, we understand the Butterworth case, when read in the light of the earlier cases which it disapproved, as rejecting the view that she took by purchase. The amount must be regarded, therefore, either as a distribution of income or as an annuity, the significance of the alternative being for present purposes the tax effect upon the trustee and upon the widow under section 162 (b). Upon this subject the Supreme Court has spoken authoritatively in Helvering v. Pardee, supra, in which, as appears from the facts stated in the dissenting opinion, the periodical payments were a charge first upon income and only secondly upon corpus, and were apparently in fact paid in the taxable year from income. Nevertheless, the payments, because they were fixed in amount and payable in any event, were treated as annuities and held to be not deductible by the trustee. This was in contradistinction to the payments in the Butter-worth case, which were treated as distributions of net income. Following those decisions, the later decisions above cited have disapproved the deduction by the trustee of distributions fixed in' amount and payable without regard to whether they were within or exceeded the income of the trust. The opinion in John K. Howard et al., Trustees, supra, is not at variance with this line of decisions, since it was found in that case that the definite duty of the trustees was to distribute all the income, and this was held not affected by the added discretion to distribute corpus if in their opinion the needs of the widow required it. It must be held, therefore, that the literal application of the statute to permit the deduction by the trustee of so much of the trust income as is distributed currently is precluded by judicial construction.

The idea that the trust from which the widow’s payments were derived can be recognized as three trusts, one created by the will, another created by the agreement, and a third created by the re-maindermen’s contributions, can not be adopted. There was, in the taxable year, but a single trust, and the provision for further contributions by the remaindermen did not serve to make it, otherwise. Nor can we regard the possible contributions of the remain-dermen as income of the trust, the distribution of which is deductible. The widow’s right was against the trust for a fixed annuity, and the obligation of the remaindermen to make contributions to the trust sufficient to enable the trust to pay the annuity without invading its corpus did not affect the character of the widow’s right.

There is argument as to whether in Michigan the probate of the compromise agreement serves, as in Rhode Island, to stamp the contractual arrangement as testamentary, Smith v. Commissioner, 78 Fed. (2d) 897, or whether it retains its inherent contractual character although adjectively affected by probate law. Cf. Hu L. McClung et al., Executors, 13 B. T. A. 335; Bernard O. Kearney, 31 B. T. A. 935; Rose v. Southern Michigan National Bank, 255 Mich. 275; 238 N. W. 284. It is unnecessary in this proceeding to consider the argument, since in any event the trust obligation to the widow is, irrespective of its genesis, fixed in amount despite a possible inadequacy of income from which to defray it.

In Docket ISTo. 77886 the Commissioner erroneously included in the income of Jennie H. Oppenheim the amount received from the trust; in Docket No. 76356 he correctly denied the deduction to the trustee; and in Docket Nos. 79701 and 79702 the petitioners are liable as transferees for the resulting deficiency of the trust estate.

Judgment will he entered under Rule 50.

       SEC. 162. NET INCOME.
      The net income of the estate or trust shall be computed In the same manner and on the same basis as in the case of an individual, except that — ■
      * * * * * ⅜ *
      (b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under subsection (c) of this section in the same or any succeeding taxable year.

        Warner v. Walsh, 15 Fed. (2d) 367; United States v. Bolster, 26 Fed. (2d) 760; Allen v. Brandeis, 29 Fed. (2d) 363.

       See Case Note, Harvard Law Review, vol. 49, p. 844 (March 1936).


author: MuRdock :

text:
    William B. Weigel and Charles H. Alsip, Testamentary Trustees and Surviving Former Executors, Estate of Maud Alsip Weigel, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67203.
    Promulgated March 31, 1936.

      Arthur R. Foss, Esq., for the petitioners.

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

MuRdock :

The Commissioner determined a deficiency in income tax for the fiscal period April 1, 1929, to March 31, 1930, in the amount of $5,619.78, and sent a notice thereof addressed as follows: “William B. Weigel, Charles H. Alsip and Charles B. Obermeyer, Executors and Trustees, Estate of Maud Alsip Weigel, deceased.” “William B. Weigel and Charles H. Alsip, Testamentary Trustees and Surviving Former Executors, Estate of Maud Alsip Weigel, Deceased” filed the petition. They stated that they were individuals, the trustees of a testamentary trust created by the will of Maud Alsip Weigel, and the surviving former executors of the estate of Maud Alsip Weigel, deceased. Charles B. Obermeyer was dead at the time the petition was filed. The facts in the case have been stipulated.

One of the petitioners’ contentions is that the estate of Maud Alsip Weigel was entitled to a deduction of $63,358.51 which was not claimed on the return or allowed in determining the deficiency. Maud Alsip Weigel died testate on April 6,1929. Her will provided for the payment of funeral expenses and debts and for the bequest of some personal articles. The residue of her estate was given, devised, and bequeathed to her executors in trust during the lifetime of the decedent’s husband, William B. Weigel. Part of the income of the trust was to be paid to a faithful servant and the remainder to the decedent’s husband. The will also provided how the property should be disposed of thereafter. The executors named were William B. Weigel, Charles H. Alsip, and Charles B. Obermeyer. The executors were empowered “to sell or otherwise dispose of, in their discretion, for the purpose of setting apart portions of property or paying legacies, any real or personal property belonging to my estate not hereinbef ore specifically devised or bequeathed, * * ⅝ and to use, in their discretion, in the payment of legacies, any bonds, stocks, or other securities at the market value thereof at the time of payment, instead of converting such securities into money.” The beneficiaries under the decedent’s will survived her and were living throughout the taxable year here involved. Among the assets owned by the decedent at the time of her death were 520 shares of the capital stock of the Union Carbide & Carbon Co. which had a total fair market value at the date of her death of $111,607.60. Thereafter, those shares were increased to 1,560 shares by a stock dividend, and on August 29,1929, the executors sold the 1,560 shares for $203,235.10, or for a net profit of $91,627.50. The Commissioner determined that the taxable net income of the estate was $90,061.51, representing the aforesaid profit, plus dividends and interest in the total amount of $6,539.78, reduced by deductions of $8,105.77, representing taxes and expenses. The executors during the taxable year began to set aside certain portions of the estate and to- establish the trust provided for in the will. In so doing they properly paid during the taxable year to the trustees of the testamentary trust the cash proceeds of the aforesaid sale of stock to the extent of $140,535.08. “This distribution included the profit from said sale to the extent of $63,358.51.” The petitioners claim that the estate is entitled to a deduction of the sum of $63,358.51.

The petitioners rely upon the provisions of section 162 (c) of the Revenue Act of 1928, which are in part as follows:

In the case of income received by estates of deceased persons during the period of administration or settlement of the estate * * * there shall be allowed as an additional deduction in computing the net income of the estate or trust tlie amount of the income of the estate or trust for its taxable year which is properly paid or credited during such year to any legatee, heir, or beneficiary, but the amount so allowed as a deduction shall be included in computing the net income of the legatee, heir or beneficiary.

It is not disputed that the $91,627.50 was income received by the estate of a deceased person during the period of administration or settlement of the estate. The parties have stipulated that $63,358.51 of that profit was properly paid during the taxable year to the trustees of the testamentary trust. The petitioners contend that the trustees of the testamentary trust were a legatee and, therefore, the estate is entitled to the claimed deduction. The Board, however, has held otherwise. Anna M. Chambers et al., Trustees, 33 B. T. A. 1125. The Board reasoned, in reaching its conclusion on this question, that Congress intended to tax the entire income of an estate, including capital gain realized; it intended to allow the estate a deduction for income paid to a legatee, heir, or beneficiary only in case the amount paid, which represented income to the estate, likewise represented income to the legatee, heir, or beneficiary, so that it would “be included in computing the net income of the legatee, heir, or beneficiary”; and if a capital gain to the estate would represent corpus, rather than income, when paid to a legatee, no deduction was intended to be granted the estate. Here the amount paid by the executors to the trustees, which included a part of the capital gain from the sale of the stock, was paid to the trustees as corpus rather than as income. The Chambers case is applicable and this point is decided against the petitioners. Cf. Randolph v. Commissioner, 76 Fed. (2d) 472, affirming 28 B. T. A. 773.

The petitioners argue that their tax liability as trustees or as transferees is not involved in this proceeding and we agree, since the respondent makes no contention to the contrary. The petitioners also argue that they are not personally liable for any deficiency in tax and that they are not liable for any tax as executors, or otherwise, as fiduciaries. We think that the present proceeding can be decided without deciding any of these questions.

The Commissioner sent a notice of deficiency in income tax to the executors of the estate. The question for decision is whether he erred in holding that the additional tax was due from the estate. Collection is a different question which' is not before the Board. The jurisdiction of the Board is limited to decision of the questions of whether or not there is a deficiency and of whether or not there is an overpayment. However, the question of the collectibility of a deficiency sometimes becomes material in proceedings before the Board as, for example, in cases where it is claimed that the statutory period for collection has expired. That is because the statute provides that “if the assessment or collection of any tax is barred by any statute of limitations, the decision of the Board to that effect shall be considered as its decision that there is no deficiency in respect to such tax.” See section 601, Revenue Act of 1928. Thus, in such cases, the Board has to consider the question of collection. But in the present case the notice was mailed within the two-year statutory period, and there is no claim and no showing that the statute of limitations has run against assessment or collection. The Commissioner has determined that the deficiency is due from the estate, and since no error in that determination appears, it must be affirmed.

The notice of deficiency is addressed also to the trustees of the estate. The reason for including them does not appear. They do not represent the taxpayer, the estate which realized the income. The Commissioner has made no claim that their trust estate is liable as a transferee of the taxpayer, nor does he contend that the liability here in question is theirs for any reason. Therefore, it can not be held in this proceeding that the deficiency is one of the trust or for which the trust is liable as a transferee.

The Commissioner has not indicated in any way in the notice of deficiency whether or not he will seek to hold the executors personally liable for the deficiency. If he ever tries to collect from the executors on account of any alleged personal liability on their part, the present proceeding will in no way bar their remedies. Since the Commissioner has asserted no such liability, and since there is no reason to decide the question of personal liability of the executors at this time, that question will not be decided. Our decision will be that there is a deficiency in income tax of the estate of Maud Alsip Weigel, deceased,' for the fiscal period April 1, 1929, to March 31, 1930. With the entry of that decision our function will have been completely performed. Collection will be up to the Commissioner. Perhaps he may be able to collect the deficiency from someone. It does not appear that he must necessarily fail. But however that may be, nevertheless, the uncertainty as to ultimate collectibility does not go so far as to demonstrate that there is no deficiency. Short of such a showing, the question does not affect the real issue for decision by the Board.

The notice of their discharge, which the executors gave to the Commissioner, is immaterial for present purposes. It did not serve to shorten the two-year period for assessment of the deficiency against the estate as provided in section 275 (a) of the Revenue Act of 1928. There is a method provided in section 275 (b) which the executors could have adopted to shorten the two-year period. But they never adopted it; that is, they never made any request for prompt assessment. They claim that they gave notice under section 312. But that section does not purport to shorten the period of limitation nor to relieve the estate from liability for the tax. The-discharge of executors after a final accounting does not serve to shorten the period for assessment of a deficiency against the estate,, nor to extinguish the liability of the estate for Federal income tax, even though the executors exercised due diligence in determining whether or not any such liability existed. Cf. Elnora C. Haag, 19 B. T. A. 982; affd., 59 Fed. (2d) 516; Karl J. Kaufmann, Administrator, 15 B. T. A. 141 (this point was not appealed; see 44 Fed. (2d) 144); Etna S. Evans, Administratrix, 12 B. T. A. 334; Joseph Simon, Executor, 9 B. T. A. 84; Helen Dean Wright, 28 B. T. A. 543.

Judgment will be entered under Rule 50.


author: SteRnhagen :

text:
    Henry C. Taylor, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 50264.
    Promulgated April 3, 1936.

      Thomas O. Marlar, Esq., for the petitioner.

      Thomas F. Gallaban, Esq., for the respondent.
   OPINION.

SteRnhagen :

The facts are entirely inadequate to establish a deductible loss in 1927. They show merely a shortage in Robinson’s accounts discovered m 1927 and charged off on the “expense account” of that year. The petitioner limited his deduction to $10,000 of the total shortage because he regarded this as the amount which Robinson “had gotten away with” in 1927. If this were part of petitioner’s proper receipts for 1927 which Robinson had omitted to record upon the petitioner’s accounts, it would have represented a failure of 1927 profit rather than a loss, and we may assume that such an accounting shortage was reflected on the return by way of reducing gross income, thus justifying no deduction to arrive at net. A failure of profit does not support a statutory deduction. Frank F. Nicola, 1 B. T. A. 487, 490; Henry V. Poor, 11 B. T. A. 781; 30 Fed. (2d) 1019; see Paul and Mertens, vol. 3, §§ 26.28, 26.30. A shortage in the accounts of an employee is not per se a loss or a bad debt, because there is no knowing how it arises or what facts it represents. There must be evidence that the amount is actually out of pocket or otherwise how it affects the taxpayer.

The pleadings, opening statement, and briefs discuss embezzlement. The evidence, however, speaks only of a shortage in Robinson’s accounts and a charge-off in the ledger account of “the expense account at Detroit.” This does not establish an embezzlement, even if it starts a suspicion of one. In short, the evidence leaves it doubtful as to what happened, and more particularly whether in 1927 petitioner sustained a loss as the statute requires. On his return he treated the amount as a bad debt, and the Commissioner disallowed it because it had not been substantiated. The evidence in this record likewise fails to support the deduction of a loss, and the Commissioner’s determination is sustained.

Judgment will be entered wader Bule 50.