author: Leech : Smith,

text:
    Missouri State Life Insurance Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 58241, 62386.
    Promulgated November 23, 1933.

      Ecerl W. Shinn, Esq., for the petitioner.

      John D. Foley, Esq., for the respondent.
   OPINION.

Leech :

Petitioner, a Missonri corporation, carrying on a life insurance business, with its home office at St. Louis, Missouri, by these proceedings consolidated for hearing and decision, seeks redetermination of deficiencies of $4,388.52 and $66,794.13, determined by respondent for the calendar years 1928 and 1929, respectively. The same eight issues are presented by each petition for each year. Respondent raises additional issues by amended answers, charging that he, in error, (a) allowed deductions in each of the taxable years of amounts representing taxes paid in those years upon real estate purchased by petitioner, where such taxes accrued as a liability of the former owner of the property and existed as a lien upon the property at the time of its acquisition by petitioner, and (b) for the year 1929 allowed deductions representing advances to tenants. He contends that such payments do not represent proper deductions and asks that net income as determined by him be increased by these amounts and the deficiencies be increased accordingly.

Most of the facts necessary to a determination of the issues are formally stipulated by the parties. Additional facts to those stipulated were established at the hearing. We adopt and incorporate herein by reference the formal stipulation as findings of fact. Additional facts found by us upon the testimony of witnesses at the hearing are set out under the separate headings of the issues to which such facts pertain.

Issue No. 1.

Reserve for Premium Reduction Coupons.

Respondent reduced petitioner’s reserve, as determined by it, for computation of its deduction under section 203 (a) (2) of the Revenue Act of 1928, by the amount set up by it to meet its liability upon matured coupons under policies known as “ guaranteed premium reduction coupon policies.” These policies carried coupons attached, maturing on given dates, the policy contract obligating the company to pay the fixed sum stated in the coupon upon maturity, if all premium payments then due had been met. The policyholder is given the option of receiving payment of the coupon in cash, using it to reduce premium payments, purchasing additional insurance, or leaving it at a fixed rate of interest subject to demand.

The record shows that the reserves maintained by petitioner in respect to these coupon obligations are necessarily set aside from premium payments to meet at maturity one of the fixed and definite obligations of the policy and are consequently legal reserves. McCoach v. Ins. Co. of North America, 244 U.S. 585; New York Life Ins. Co. v. Edwards, 271 U.S. 109; United States v. Boston Ins. Co., 269 U.S. 197.

The amounts of the reserves in question for each of the taxable years are stipulated. Upon this issue we sustain the petitioner. Farmers Life Ins. Co., 27 B.T.A. 423; Reserve Loan Life Ins. Co., 18 B.T.A. 359; petition for review dismissed, C.C.A., 7th Cir., Jan. 14, 1933; Standard Life Ins. Co. of America, 13 B.T.A. 13; affd., 47 Fed. (2d) 218; Commissioner v. Western Union Life Ins. Co., 61 Fed. (2d) 207.

Issue No. 2.

Depreciation on Assets Used, in the Underwriting Department of Petitioner’s Business.

Respondent allowed depreciation upon assets used in the investment department of petitioner’s business, but disallowed depreciation of assets used in the underwriting department. The amount of depreciation actually sustained is stipulated.

The question is controlled by our decision in Lafayette Life Ins. Co., 26 B.T.A. 946. We are advised of the decision of the Circuit Court of Appeals for the 7th Circuit (Oct. 20,1933) upon the appeal of this case, reaching the opposite conclusion upon this question. However, since our decision we have consistently applied the rule there laid down. Manhattan Life Ins. Co., 28 B.T.A. 129, and several cases decided by memorandum opinion. We are still of the opinion that our conclusion on this question is correct, and, therefore, hold that petitioner is entitled to the deduction sought.

Issue No. 3.

Deduction — Interest Paid on Dividends to Accumulate under Terms of Outstanding Policies.

Petitioner paid in 1928 the sum of $30,421.13 and in 1929 the sum of $33,945.05 to policyholders as interest upon dividends apportioned but left by the policyholder to accumulate at a specified rate of interest. Respondent admits that petitioner is entitled to the deduction of these amounts, and we accordingly so hold.

Issue No. 4.

Deduction — Amounts Paid in 1928 and 1929 as Interest upon Deferred Dividends Under Policies Whose Tontine Period Ended in Those Years.

Petitioner paid in 1928 the sum of $46,237.13 and in 1929 the sum of $42,091.91 as interest upon deferred dividends under policies whose tontine period ended in those years. The following is a specimen of the material portions of the policy in question:

This policy shares in the profits of the company, as follows:
The accumulation period ends on the-1 day of-19-- If the
insured is then living and all premiums have been paid, the company will apportion to this policy its share of the accumulated profits, and
The Entire Cash Value of this policy shall then consist of_
'1. The guaranteed cash value of and
2. The profits in cash then appor- . tioned.
The insured may then select one of the following Options of Settlement:
1. Receive the entire cash value as stated above," in cash; or
Surrender 2. Receive the entire cash value as stated above, Options. converted into an annual cash income for life; or,
3. Receive the entire cash value as stated above, converted into profit-sharing paid-up life insurance.
and in any such •case discontinue this policy, or,
4. Receive the profits in cash; or,
5. Receive the profits converted into an annual cash income
Continuing for life; or
Options. 6. Receive the profits converted into additional profit-sharing paid-up life insurance, subject to evidence of insurability satisfactory to the Company.
and in any such case continue this policy for $-as profit-sharing insurance for life by payment of the same premium as previously.
At the end of the accumulation period the Company will send to the insured a written statement of the results under the foregoing options of settlement. If the insured’s written selection of one of these options is not received at the Home Office within one month thereafter, it is agreed that settlement shall be made under Option 4, and the profits held by the Company at three per cent interest, subject to the written demand of the insured.
If this policy is continued beyond the accumulation period, profits will be apportioned at the end of each year thereafter during its continuance and shall be payable in cash.

The method followed by petitioner with respect to- the apportionment of the deferred dividends on these policies was to set aside each year an amount as representing the profits of such year allowable to the policy, the total of these sums representing the sum apportioned as a deferred dividend at the close of the tontine period. In each year it also set aside on each policy an amount designated as interest and computed at 3½ percent compounded annually upon the amounts theretofore set aside as apportioned profits of prior years. The total of these sums was paid to the policyholder at the close of the period. The question here presented is whether those portions of the payments made in the taxable years which represented the so-called interest computed, were in fact payments of interest upon debts or obligations of petitioner or whether the entire payment in each case was one of deferred dividends.

In Lafayette Life Ins. Co., supra, we had a situation substantially similar to this before us. In that case we said:

Nor can it be said that the deferred dividends constituted debts owed by petitioner during the 20-year period of the tontine policies. A debt in its general sense is “ a specific sum of money which is due or owing from one person to another, and denotes not only the obligation of the debtor to pay, but the right of the creditor to receive and enforce payment.” J. S. Cullinan, 19 B.T.A. 930. During the tontine period none of the deferred dividends constituted “ a specific sum of money due or owing ” from petitioner to a policyholder and enforceable by the latter. Not until the end of such period could it be determined who of the policyholders might be entitled to deferred dividends. Indeed, it is quite conceivable that none would be so entitled. It is clear, we think, that under such circumstances the so-called interest payments could not properly be deemed interest. They constituted additional dividends rather than interest.

It will be noted that there is no agreement in the policy here in question to pay interest upon deferred dividends, and we think it immaterial how petitioner computes the amount allocable to the policy for each year, the total of which it pays at the close of the tontine period, which is the date its obligation to make any payment accrues. Petitioner attempts to distinguish the above cited case upon the ground that the apportionment of profits for each year and the computation of interest thereon was made at the close of the tontine period, whereas in the present case it was made each year and the tentative credits to the policy then transferred from surplus. We see in that no material difference. It was at most, in our opinion, merely a different method of recording upon the corporate books a transaction in all respects similar to the one before us in Lafayette Ins. Co., supra. In both cases the obligation was similar and the payments made were identical in character.

Our decision in the Lafayette Life Ins. Co. case, supra, was reversed on appeal, supra, upon this issue, also. However, having consistently followed the rule we there adopted, in a number of cases, decisions in which were by memorandum opinion, and remaining convinced of its correctness, we adhere thereto and sustain respondent upon this issue.

Isstjh No. 5.

Inclusion in Income of Rental Value of Space Occupied, 6y Petitioner in Its Some Office Building.

For the calendar year 1928 petitioner included in its gross income the sum of $85,948.89 as representing the rental value of space occupied by it in its home office building and was allowed by respondent, under section 203 (b) of the Revenue Act of 1928, deductions for depreciation, taxes and operating expenses on said building. For the calendar year 1929 petitioner included no amount in its reported gross income as representing such rental value and was denied by respondent, in computing the deficiency for that year, the deductions for taxes, depreciation and operating expenses. Petitioner contends that income for 1928 should be reduced by the rental value reported in that year and that income for 1929 should be reduced by the amount of depreciation sustained and taxes and expenses paid. All facts necessary for a determination of the issue are formally stipulated.

This Board has held section 245 (b) of the Revenue Acts of 1921 and 1924 to be unconstitutional. Independent Life Ins. Co. of America,, 17 B.T.A. 757; Reserve Loan Life Ins. Co., supra; Lafayette Life Ins. Co., supra; Two-Republics Life Ins. Co., 21 B.T.A. 1355; Jefferson Standard Life Ins. Co., 25 B.T.A. 1335; Volunteers State Life Ins. Co., 27 B.T.A. 1149.

We are aware of the fact that the Circuit Court of Appeals for the Seventh Circuit in deciding (Oct. 20, 1933) the appeals in Lafayette Life Ins. Co., supra, and Rockford Life Ins. Co. (memorandum opinion of this Board), held to the contrary. Since our decision in Independent Life Ins. Co., supra, we have applied the rule there laid down in a number of cases. (See citations in preceding paragraph.) It may be noted, further, that this question is pending on appeal in the Circuit Court of Appeals for the Sixth Circuit, Commissioner v. Independent Life Ins. Co., 62 Fed. (2d) 1066; 288 U.S. 592; as well as in the Circuit Court of Appeals for the Fourth Circuit, Jefferson Standard Life Ins. Co., supra. We are still of the opinion that the conclusion reached by us in the cited cases is correct and therefore hold that petitioner is entitled under this issue to the relief asked.

Issue No. 6.

Interest Realized, as Income Received.

Petitioner during the taxable years 1928 and 1929 acquired numerous parcels of real estate upon which it held mortgages as security for loans. Some of these were acquired from the owners by voluntary conveyance under quitclaim or warranty deeds in consideration of the release of the indebtedness, including interest due. Others were acquired at foreclosure sales in which petitioner bid in the properties for the sum of the loan plus accrued interest. In all cases petitioner entered these properties on its books at figures totaling the loan plus interest and, in the case of foreclosed properties, the cost of such foreclosure. The properties in question, the amount of the loan and interest assumed at the time of purchase are all stipulated by the parties.

Petitioner contends that these transactions can not be considered as mere purchases of property, but really constitute recoveries of only a portion of the face of the loans as in nearly all cases the properties acquired had then fair market values less than the principal sums of the loans. Respondent contends, that petitioner acquired the properties in each case for a consideration representing the principal and accrued interest on the loan and has constructively received its interest, and that, in determining the deficiencies for each year respondent has included in income the amount of accrued interest involved in the transactions taking place in such year. A somewhat similar question was before us in John Hancock Mutual Life Ins. Co., 10 B.T.A. 736. We held there that petitioner was not in receipt of income representing accrued interest, for the reason that he had only bid the sum of the principal of the loan, and that the total proceeds of the foreclosure sale were insufficient to satisfy the principal debt and there was nothing to apply to interest accrued.

In Reserve Loan Life Ins. Co., supra, the petitioner, a life insurance company, had acquired various properties at foreclosure. In that case we said:

In the instant case the record is silent as to whether the bid prices at which the petitioner acquired the farms were for the principal and the interest of the mortgage or for the principal only, or for less than the principal or at prices in excess of principal and interest. The facts show that upon acquiring title to the farms the petitioner in its books of account transferred these mortgage loan investments from its mortgage loan account to an account of real estate owned, for the full amount then invested in the respective mortgage loans, including the accrued and unpaid interest here involved, and as a part of the transaction credited its income account of interest on mortgage loans with the amount of interest then accrued and unpaid. In the absence of evidence showing at what prices the petitioner acquired the respective farms at foreclosure, we are not in a position to hold that the amounts of interest here in controversy were improperly included in the petitioner’s income for the respective years.

Tn Ewen MacLennan, 20 B.T.A. 900, petitioner, the mortgage creditor, had bid in the property at foreclosure for the debt, accrued interest, and costs of sale. There we said:

Whether settlement was made in cash or by a partial application of credits due the buyer, the amount of accrued interest paid or applied as a credit is, under our decision in Manomet Cranberry Co., 1 B.T.A. 706, taxable income to the petitioner.

In these sales petitioner was a voluntary purchaser. In those cases where the transaction was by agreement with the owner, who deeded his property in consideration of his release from the obligation representing the loan plus accrued interest, we assuredly would not permit such, owner deduction, as a loss, of the difference between the cost of the place to him and the fair market value at the time conveyed to his creditor. If such sale is to the seller one at a consideration representing the liability released, the same consideration must be charged to the purchaser who passes it. In the case of purchases at foreclosure sales petitioner has bid in the property as a purchaser, has obligated himself for the money payment of his bid, and has exercised his right to satisfy such obligation by application of the indebtedness due under the loan contract.

We hold that petitioner in the instances in question has realized in income the accrued interest which represented part of the consideration with which it acquired title to the properties. There is much testimony in the record upon the question of the fair market values of the properties acquired. In our view of the situation such question is not material and accordingly no findings are made of those values other than that the fair market values of certain properties were less than the amount of the loan upon such properties plus accrued interest. Cf. American Cigar Co., 21 B.T.A. 464; affd., 56 Fed. (2d) 425.

Issue No. 7.

Depreciation.

This issue is upon the disallowance by respondent of depreciation taken by petitioner upon eleven properties owned in the taxable years. The depreciable cost, amount of the depreciation taken, and the amount disallowed by respondent in respect to each property are stipulated by the parties. Additional facts, upon which depreciation as to each piece of property will be computed, are determined by us as follows:

Syndicate Trust Building, St. Louis, Missouri. — This is a steel, stone and concrete fireproof department store and office building of 16 stories and basement, erected in 1908. It was 23 years old when acquired by petitioner in 1929 and at that time bad a normal useful life of approximately 27 years.

Century Building. — This is a stone building of 10 stories and basement, built in 1897 as a theatre and office building and remodeled in 1910. It was adjacent to the Syndicate Trust Building mentioned above, separated by an alley which was later built over by a new building constructed to make the Syndicate Trust and Century Buildings one operating building. It is agreed by both parties that this building over the alleyway had a normal life when constructed in 1919 of 50 years and a useful life of 40 years when acquired in 1929 by petitioner. The witnesses upon the question of the normal remaining life of the Century Building at the time acquired by petitioner differ to some extent, one being of the opinion that it had a life of 50 years from date of construction and that its life was not extended by the remodeling in 1,910. The other witness was of the opinion that its life was 40 years when constructed and this life extended by 10 years as the result of the remodeling. Neither witness testified as to the effect upon its life by reason of the construction in 1919 of the “ over-alley ” building by which it was made an integral part of the Syndicate Trust Building.

Upon careful consideration of all the facts we are of the opinion that when acquired by petitioner in 1929 the building in question had a reasonable remaining useful life of approximately 27 years.

Annex. — This is a steel and brick building, the first floor used for retail store purposes and the upper floors for warehouse and workshop by the lessees of the department store portions of the Syndicate Trust and Century Buildings. This building had a normal useful life of 50 years when constructed and was 16 years old when acquired by petitioner in 1929. At that time it had a remaining life of usefulness of approximately 34 years.

Criterion Theatre Building, St. Louis, Missouri. — This is a small theatre building of brick and stone construction with some steel reinforcement. It was approximately 20 years old when acquired by petitioner in 1929 and had at that time a remaining normal useful life of approximately 20 years.

Stanley Apartments, Chicago, Illinois. — This is a four-story brick and concrete building constructed in 1916 and having a normal life of approximately 35 years from that date. It had a remaining normal useful life of approximately 24 years when acquired by petitioner in 1927.

8%2-S%l¡, Leland Avenue, Chieago, Illinois. — This is a fchree-story and basement stone front building constructed as a six-flat apartment but now u,sed as a rooming house. It was acquired by petitioner in 1927, was 11 years old at that time and had a remaining normal useful life of 24 years.

Vandervoort Hotel, Paragould, Arkansas. — This is a four-story brick hotel of ordinary joist construction, not fireproof, with approximately 80 hotel rooms. It was 11 years old when acquired by petitioner in 1927. When built it had a normal useful life of 35 years and a remaining life of usefulness of 24 years when acquired by petitioner.

Warehouse, Gentralia, Illinois. — This is a two-story brick warehouse, 50 by 100 feet, without basement and not fireproof. It was acquired by petitioner in 1928, was six years old at that time and had a remaining normal useful life of approximately 25 years.

Brick store, Charleston, Missouri. — This is a two-story brick store with composition roof and not fireproof. The first floor is used as a store space and the upper floor for storage. It was 33 years old when acquired by petitioner in 1928 and at that time had a remaining normal useful life of approximately 10 years.

Brick store, Memphis, Tennessee. — This is a three-story brick store, the first floor of which' is used as a market. It was erected in 1906 and was in a dilapidated condition when acquired in 1928 by petitioner but had a remaining normal useful life at that time of approximately 10 years.

Store and warehouse building, McAlester, Oklahoma. — This is a three-story brick store building, semifireproof. It is well built and was 17 years old when acquired by petitioner in 1928, at which time it had a normal remaining useful life of approximately 23 years.

We hold that petitioner is entitled to depreciation on the properties listed above at rates based upon the approximate normal useful life of such properties when acquired by it, in accordance with the facts as above found by us.

Issue] No. 8.

Income Realized, from Assets Acquired.

On August 25, 1928, petitioner acquired all of the assets and business of the International Life Insurance Co. under a contract, a copy of which is a part of the formal stipulation of facts filed. The consideration to be paid consisted of the assumption by petitioner of all of the debts and policy obligations of the International Life, including the reinsurance of all of its outstanding life and annuity contracts and the agreement to pay an indeterminate amount provided in no event to be in excess of $5,625,000. The cash consideration is provided to be paid by application of 75 percent of any earnings or profits from assets so acquired and insurance taken over to reduce the deficit of International Life, the remaining 25 percent to be paid that company. When and if such deficit is eliminated and the balance sheet upon the International Life assets shows a surplus, it is to be prorated and paid 15 percent to International Life and 25 percent to petitioner, such payments to continue until the International Life shall have received total payments under the contract of $5,625,000 plus 5 percent interest on the unpaid balance of this sum from the date of the contract or until 15 years have elapsed from the date of the first semiannual balance sheet on which a surplus is shown, whichever event shall first occur.

Among the assets transferred to petitioner under this contract were various bonds, mortgage loans, and collateral loans upon which interest accrued but unpaid amounted to $801,091.65. Of this amount petitioner collected in 1928 the sum of $301,302.09 and in 1929 the sum of $194,482.84. Petitioner included these amounts in its income reported for the taxable years in question and now contends that such action was in error as such sums represented the liquidation of capital assets purchased by it.

The collections in question represent the income upon property belonging to petitioner at the time such income was realized, and petitioner is on a cash basis. These collections are not subject to inclusion in income of the International Life, which, as far as we know, may never have received any payment under the contract in question. Petitioner has taken over the business of that company. It is not merely a transaction of the purchase of assets, but a contract of reinsurance under which the policy liabilities of the International Life have been assumed by petitioner, and its assets, representing the investment of the legal reserves guaranteeing such policies, have been taken over and continue to guarantee such obligations. The amounts here in controversy, representing the earnings of such invested assets, could in no event represent income to either the International Life Insurance Co. or petitioner until realized by collection, and are, we think, clearly within the definition of gross income under section 202 (a) of the Revenue Act of 1928 which provides: “ In the case of a life insurance company the term ‘ gross income ’ means the gross amount of income received from interest, dividends and rents.”

Even were it conceded that the accrued but uncollected items represented capital acquired by petitioner, they would upon collection be taxable to the extent, if any, that they exceeded the consideration paid. The burden is upon petitioner to show them not to be subject to tax, or, in other words, to show the proportion of the total consideration allocable to these particular items. This it is manifestly unable to do. In fact the amount of the consideration is not determinable. It may be $5,625,000 or it may be nothing, depending upon future events impossible to forecast.

We can not find that this specific question has, in the case of an insurance company, been passed upon by us or by the courts. The case of Pontiac Commercial & Savings Bank, 11 B.T.A. 118; affd., 41 Fed. (2d) 602, is similar in many respects, and the reasoning of the court in its opinion approving the conclusion reached by us appears to apply equally to the facts here shown. In that case the court said:

Tliis interest having been assigned to petitioner, and yet having been omitted from the capital account, when collected by petitioner necessarily became income to petitioner just as it would have been to the Pontiac Savings Bank if collected before the transfer of the securities. These interest items when collected fell within the term “gross income” as defined in section 213 (a), Revenue Act 1918, 40 Stat. 1065. We do not think it can avail petitioner that the interest accrued while the securities were in the hands of its transferors. See Taft v. Bowers, 278 U.S. 478, 482, 49 S.Ct. 199, 73 L.Ed. 460, 64 A.L.R. 362. It was no less income when collected by the united bank than it would have been if collected by one of the units thereof before the consolidation. Oases cited to the effect that income such as profits, commissions, etc., earned during the life of a decedent but not due or payable at his death, are not taxable as income when collected, are not particularly helpful. There is no analogy between the status of the estate of a decedent and the situation presented here.

We hold that the amounts in question represented gross income to petitioner when collected by it.

Issue No. 9.

Payments Made Toy Petitioner Representing Tams Accrued: Against Property Prior to Its Acquisition.

By amendment to his answers in each appeal respondent questions the allowance granted by him of general property and special assessment taxes paid in the taxable year by petitioner upon property acquired by it in those years either by foreclosure or purchase. The facts are not in dispute. The parties have formally stipulated the facts in respect to the properties, dates of acquisition, amount of taxes, dates paid, periods for which paid, and dates of accrual under laws of the various states in which the properties are situated.

With respect to the general property taxes respondent contends that they represent merely the payment of an encumbrance existing upon property acquired at the date of acquisition and constitute liabilities of the former owner, their payment being merely a part of the capital expenditure made in acquiring a clear and unencumbered title. Petitioner contends that the provision of section 208 (a) (6) of the Revenue Act of 1928 grants the deduction as the payment is one of “ taxes upon or in respect to real estate owned by the company.” It contends that it is in any event entitled to deduction of that part of the tax for the year allocable to that portion of the tax year during which it was the owner of the property.

Petitioner cites our decision in John Hancock Mutual Life Ins. Co., 10 B.T.A. 736, but we find in that case no support for its contention. There we said:

When property is sold with a covenant that it is tree and clear of encumbrance, the covenant is broken if prior to the sale taxes had become a lien upon the land. This is true where the taxes become a lien from the date of assessment, though they have not become due and payable at the time of the conveyance. See Thompson on Real Property, §3499, and cases therein cited, particularly O’Connell v. First Parish in Malden, 204 Mass. 118; 90 N.E. 580. If in such case the purchaser was legally required to pay the taxes, he would have recourse against the seller. It is then apparent that taxes which have become a lien against real estate in Massachusetts prior to the date of the sale are primarily an obligation of the seller and not of the purchaser. If then the purchaser of real estate agreed to pay a lien which he knew existed as a charge on the property at the time of its purchase, and if, in fact, he does discharge that lien by payment, he has not in fact paid taxes or interest of which the lien may have consisted, but he is simply completing his payments in the purchase of the property. The taxes and interest installments which he paid were the seller’s taxes and interest installments and it was by an agreement and reduction in the purchase price that the purchaser paid them on behalf of the seller. The same principle applies where the sale is on the foreclosure of a mortgage.

We did not there hold that the proration of the tax payment was proper. Respondent in determining the deficiency had made such proration and the only question presented to us was whether petitioner was entitled to deduction of that portion of the tax representing the period prior to the foreclosure sale.

In First Bond & Mortgage Co., 27 B.T.A. 430, we held that taxes paid by the purchaser on property acquired at a foreclosure sale, which represented at that time a lien on the property sold, could not be claimed as a deduction by such purchaser on computing net income. In the present case the properties were acquired after the tax liability accrued and were subject to a lien for its payment. We hold that petitioner is not entitled to deduction of the payments made. Leamington Hotel Co., 26 B.T.A. 1004; Grand Hotel Co., 21 B.T.A. 890; H. H. Brown Co., 8 B.T.A. 112.

With respect to the special, improvement taxes the parties have stipulated the dates of acquisition of the several properties, the date in each instance of the assessment of the tax, and the proportion of the tax representing interest and maintenance charges. Respondent contends that in no event are these payments allowable deductions to petitioner, as they fall within the exception of the statute as “ taxes assessed against local benefits of a kind tending to increase the value of the property assessed.” He contends, that since the saving clause in section 23 (c) (3) of the Revenue Act of 1928, permitting the deduction by other corporations of so much of taxes assessed against local benefits as is properly allocable to maintenance or interest charges, is not found in section 203 of the act, it follows that no part of the tax is deductible by an insurance company.

With this contention we do not agree. Our decision upon the question of general property taxes disposes of the question in respect to the special improvement taxes which are shown by the stipulation to have been assessed prior to the acquisition of the several properties by petitioner. However, those taxes assessed subsequent to the acquisition of the property by petitioner are allowable deductions unless they come within the prohibition of section 203.

The specific allowance of the deduction of so much of special improvement taxes as represents interest and maintenance charges appears for the first time in section 23 (c) (3) of the Revenue Act of 1928. In prior acts the provision respecting corporations other than insurance companies is similar to that here under consideration, embodied in section 203 of the Revenue Act of 1928, and under these former acts we have uniformly held that taxes representing interest and maintenance charges, such as these, were not of a character tending to increase the value of the property assessed and consequently were not excepted from allowance as a deduction. Evens & Howard Fire Brick Co., 8 B.T.A. 867; Andrew Little, 21 B.T.A. 911.

This petitioner is granted by the act here applicable the deduction of taxes, except those assessed against local benefits of a hind tending to increase the 'value of the 'property assessed, and the question of its right to deduction is determined by the answer to the inquiry of whether or not the taxes representing interest and maintenance are such as tend to increase the value of the property. We hold that these taxes, to the extent that they represent interest and maintenance, are not of such character and are consequently deductible by petitioner in those cases where, under the stipulation filed, the properties are shown to have been acquired prior to the assessment of the tax.

For the year 1929, however, respondent affirmatively charges error on his part in his allowance of a deduction of $11,244.27 representing “ advances ” by petitioner in this amount to tenants. The record fails to show what these advances represent. If they were advances for capital improvements to the property they would not be deductible, but if they merely represented advances for purchase of seed and fertilizer or some similar expense item and return was realized by petitioner only in the rent received, they would be deductible as an expense. The burden is upon respondent to show the item not allowable and he has failed to make such showing. His allowance of this item will not be disturbed.

Reviewed by the Board.

Judgment will be entered under Bule 50.

Smith,

dissenting: The decision on Issue No. 5 of the majority opinion is predicated upon the assumption that certain provisions of the income tax law relating to life insurance companies are unconstitutional. I disagree. See Commissioner v. Lafayette Life Ins. Co., 67 Fed. (2d) 209, and Commissioner v. Rockford Life Ins. Co., 67 Fed. (2d) 213. I also dissent from the decision on Issue No. 2. See Commissioner v. Lafayette Life Ins. Co., supra.

Van Fossan agrees with this dissent.

       (b) Rental value of real estate. — No deductions shall be made under subsection (a) (6) and (7) of this section on account of any real estate owned and occupied in whole or in part by a life insurance company unless there is included in the return of gross Income the rental value of the space so occupied. Such rental value shall be not less than a sum which in addition to any rents received from other tenants shall provide a net income (after deducting taxes, depreciation, and all other expenses) at the rate of 4 per centum per annum of the book value at the end of the taxable year of the real estate so owned or occupied.

       (6) Real Estate Expenses. — Taxes and other expenses paid during the taxable year exclusively upon or with respect to the real estate owned by the company, not including taxes assessed against local benefits of a kind tending to increase the value of the property assessed, and not including any amount paid out for new buildings, or for permanent improvements or betterments made to increase the value of any property. The deduction allowed by this paragraph shall be allowed in the case of taxes imposed upon a shareholder of a company upon his interest as shareholder, which are paid by the company without reimbursement from the shareholder, but in such case no deduction shall be allowed the shareholder for the amount of such taxes.


source: Caselaw Access Project

author: Lansdon:

license: Public Domain

text:
    E. T. Schuler, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 51237, 54775, 63736.
    Promulgated November 23, 1933.

      W. S. Pritchard, Esq., for the petitioner.

      De Witt M. Evans, Esq., for the respondent.
   OPINION.

Lansdon:

The respondent applied section 115 (a) of the Revenue Act of 1928 (sec. 201 (a), Act of 1924 and 1926) to the facts in petitioner’s transactions with his corporation, and held that under its provision the disputed payments constituted taxable dividends. This provision reads as follows:

(a) Definition of dividend. — The term “ dividend ” when used in this title ⅜ * * means any distribution made by a corporation to its shareholders, whether in money or in other property, out of its earnngs or profits accumulated after February 28, 1913.

The petitioner concedes that he received the payments as set forth in our findings, but contends that he received them as agent of the Coosa Land Co., and that they were all reinvested, or otherwise expended in the interest of that corporation. He has furnished us no records of investments made or details of expenditures, from which we may determine the ultimate disposal of the disputed funds, and whether or not, if invested, he acted within the scope of agency, if any, and for the benefit of his principal.

We are convinced that the Coosa Land Co. was a one man corporation, and, for all practical purposes, the alter ego> of the petitioner. He seems to have dealt with its affairs with a free hand, and without advice, consent, or restraint from its board of directors or other stockholders. In this situation, although such powers are not expressly given him, we are inclined to recognize his general powers to deal with the corporation’s funds and invest them largely as he may see fit, so long as it is shown that they are, in fact, invested for the corporation, whose separate identity is recognized, and not commingled with his own in such a way as to amount to an appropriation. When used in connection with agency, the term “ investment ” has a highly legal significance. It means the laying out of money in such a manner as to produce revenue, or to purchase income-producing property. Una v. Dodd, 39 N.J. Eq. 173; People v. Utica Insurance, 15 Johns. 392; Niel v. Beach, 92 Pa. 226; New England Mutual Life v. Phillips, 141 Mass. 535; Savings Bank v. Barrett, 126 Cal. 413; 50 Pac. 914.

The answers to the questions here raised are functions of the Board which are not satisfied by expressions of a witness’ opinion or com elusions, however honest they may be. The petitioner has assumed to answer these questions for us instead of giving the facts from which we may find the answer. We cannot accept the petitioner’s naked statements as proof that he made the investments he claims to have made for his company; or, from them, find how he disposed of the controverted funds. J. M. Lyon, 1 B.T.A. 378; Pleasant Valley Ranch, 2 B.T.A. 335; Seymour Mfg. Co., 19 B.T.A. 1280; Williams v. Commissioner, 44 Fed. (2d) 467.

The petitioner refers to the fact that his stockholding in the Coosa Land Co. was of but one share and that no dividends were declared by the corporation in the years here involved and argues (1) that that corporation was at no time under his control; or (2), if so, that his ratable share in such distribution would have been nominal only. Although we are convinced that the petitioner’s dominance over the corporation was sole and complete to the extent that he could, and probably did, use it in transactions wholly his own, wherein he took losses and absorbed profits without interference from the other stockholders and without formal corporate records being kept, we are of opinion that the question of corporate regularity is of no importance to his taxable status as the actual recipient of the disputed funds, if he did so receive and retain them, as the respondent found. Clearly the purpose of the statute above quoted was to make taxable all corporation profits earned since February 28, 1913, when permanently separated from surplus and delivered to a “ stockholder ”, whether legally distributed or not. Lincoln Nat. Bank, Executor, 23 B.T.A. 1304; Christopher v. Burnet, 55 Fed. (2d) 527.

The petitioner received the payments in dispute and in his audit the respondent has held that they constituted income to him and were taxable as dividends under the law quoted. This holding is presumed to be correct unless the petitioner shows that the respondent committed error in his conclusion. This the petitioner has failed to do and we accordingly approve the respondent’s conclusion. Leo G. Hadley, 6 B.T.A. 1031; aff'd., 36 Fed. (2d) 543; Lincoln Nat. Bank, Executor, supra.

The taxpayer concedes and the record shows that he received taxable income in 1925 which he neglected to report as required by law. In this situation it was mandatory on the respondent under section 1003 of the Revenue Act of 1924 to impose a delinquency penalty and assess and collect the same. Clarence C. Smith, 4 B.T.A. 514; John B. Nordholt, 4 B.T.A. 509; Eagle Piece Dye Works, 10 B.T.A. 1360; John T. Sline, 9 B.T.A. 1222; American Milk Products Corp. v. United States, 41 Fed. (2d) 966.

Decision will be entered for the respondent.


author: AnAivrs: Smith,

text:
    Adam, Meldrum and Anderson Company, Inc., Petitioner, v. Commissioner of Internal Revenue, Respondent. Adam, Meldrum and Anderson State Bank, Petitioner, v. Commissioner of Internal Revenue, Respondent. A. M. & A. Cleaning Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 59077, 59078, 59079.
    Promulgated November 24, 1933.

      John W. Sanborn, G.P.A., for the petitioners.

      James K. Polh, Jr., Esq., for the respondent.
   OPINION.

AnAivrs:

The first issue presented for our decision is whether petitioner, a corporation, may deduct from its gross income, for the purpose of determining its net income subject to tax, contributions made to certain charitable organizations.

The petitioner urges that the contributions made by it to various charitable organizations were advertising expenses and are, therefore, to be treated as ordinary and necessary expenses incurred in carrying on its business during the taxable year.

The relevant sections of the statute are set out in the margin.

Section 28 provides that certain deductions shall be allowed in computing net income, most of which are common to both corporations and individuals, but charitable and certain other contributions are allowed only to individuals. The prior revenue acts are substantially the same in this respect as the Act of 1928. Corporations have never been allowed, as in the case of individuals, to deduct contributions or gifts made to organizations operated exclusively for charitable purposes. This has not been the result of any failure of Congress to consider such deductions in respect to corporations. It is the result of deliberate Congressional action.

The legislative history of these provisions is conclusive as to the intent of Congress. When the Revenue Bill of 1918 was being considered by the House, an amendment was offered providing that corporations be allowed the same deductions as individuals with respect to charitable contributions. After a debate on the floor of the House this amendment was defeated. In the debate it was urged, among other reasons, that it would be dangerous to encourage directors to be generous with the money of their stockholders even for such laudable purposes. When the Revenue Bill of 1921 was under consideration the House Bill extended to corporations the provisions of the existing law allowing individuals to deduct contributions made for charitable purposes, but limiting the amount of such deductions to 5 percent of the net income. The Senate struck out the provision and the House receded. Hone of the subsequent revenue acts allow the deduction.

In all of the revenue acts, both corporations and individuals have been allowed to deduct the “ ordinary and necessary expenses ” paid or incurred during the taxable year in carrying on any trade or business. In Consolidated Gas, Electric Light & Power Co. v. United States, 65 Ct. Cls. 252, the Court of Claims points out that the words “ ordinary and necessary expenses ” in the Act of 1916 could not have been intended to be given the wide meaning now urged, but related to expenses paid in the maintenance and operation of the business. When the Act of 1916 was amended deductions for charitable contributions were allowed individuals, but were not extended to corporations. The subsequent revenue acts have never confused charitable contributions with the ordinary and necessary expenses of the business and have very guardedly limited the latter to expenses paid or incurred in carrying on the business.

In the Consolidated Gas, Electric Light & Power Co. case, supra, the court said:

Mnding the words we are called upon to construe in a taxing act, we must recognize the “ literal meaning ” of the words employed is most important because such statutes are not to be extended by implication beyond the clear import of the language used. Doubts are to be resolved in favor of the taxpayer. See Gould v. Gould, 245 U. S. 151, 153; United States v. Merriam, 263 U. S. 179, 188. In the latter case is cited with approval the rule stated by Lord Cairns in Partington v. Attorney General, L.R. 4 H.L. 100, 122, in tlie course of which it is said:
“ In other words, if there he admissible in any statute what is called an equitable construction certainly such a construction is not admissible in a taxing statute, where you can simply adhere to the words of the statute.”

In Holt Plaid Mills, Inc., 9 B.T.A. 1360, the Board said: “The deduction of contributions by a corporation is not expressly authorized by statute, and is allowed only upon a clear showing of direct benefit to the corporation so as to clearly come within the term ordinary and necessary business expenses.’ ” See also Thomas Shoe Co., 1 B.T.A. 124; Poinsett Mills, 1 B.T.A. 6. Where the benefit has appeared direct we have allowed the deduction, cf. Sugarland Industries, 15 B.T.A. 1265; Evening Star Newspaper Co., 28 B.T.A. 762, and where it was remote we have disallowed it, cf. Elm City Cotton Mills, 5 B.T.A. 309, but in every case the burden rests with the taxpayer to prove the business character of the item. Cf. Killian Co., 20 B.T.A. 80; Alfred A. Nahman, 21 B.T.A. 121.

We can not speculate on what direct benefit flowed to petitioner from its contributions to the charitable organizations here enumerated. Apparently, it was motivated by the business received from the organizations as well as its own charitable inclinations. But petitioner has not shown a direct benefit flowing to it from its contributions. There is no claim that petitioner is the only department store in Buffalo that contributes, nor that such organizations trade exclusively with petitioner, and there is no'showing that the contributions influenced either the organizations or their employees to trade with it. The evidence does not convince us that the business received was given as a return for petitioner’s donations or that such donations were necessary to retain it. The amounts contributed to the various organizations bear no definite relation to the amount of .business received from them. Moreover, petitioner has given us no method by which we can determine what portion of the amount was due to its charitable inclinations and what portion was due to business received from the organizations. These contributions were undoubtedly a benefit to the community of which petitioner Avas a member. They were commendable, and may have had some effect in building up a general good will. Moreover, such contributions by business organizations are expected by the community and perhaps a refusal to support local charities would have some effect upon petitioner’s business. But we must assume that all these things Avere knoAvn to Congress at the time the revenue laAvs were enacted. Deductions must be supported by some legislative authority, and where Congress has made no provision for a deduction we can not supply that authority.

It is our opinion that contributions of this character do not fall within the classification of “ ordinary and necessary expenses ” as that phrase is used in the revenue laws, unless it is clearly shown that the expenses bear some direct relation to petitioner’s business. They rather fall within the charities enumerated in section 2S (n) of the Revenue Act of 1928. Congress has provided that such expenditures are, within certain limitations, deductible by individual taxpayers, but not by corporations. Such contributions if made public may have some advertising value, but they can hardly be classed as “ ordinary and necessary ” expenses of advertising. The respondent is sustained as to this issue.

The petitioner alleges it was affiliated with P. Centemeri & Co. during the taxable year 1928. In support of its allegation it has produced evidence to the effect that during 1928 and for many years prior thereto the certificates of stock of P. Centemeri & Co. were in the possession of petitioner’s treasurer, and that petitioner voted all but the qualifying shares at the stockholders’ meeting in February 1928. While these facts are evidentiary, they do not prove ownership in the petitioner. The stock was voted by the holders of record at the annual stockholders’ meeting in 1927, and at all meetings prior to that date and the treasurer of petitioner testified that no changes took place between March 1927 and February 1928. Petitioner has not shown how or when it acquired the stock, nor has it shown any fact conclusive of ownership. In this situation the determination of the respondent is sustained as to this issue. Having decided petitioner was not affiliated with P. Centemeri & Co. during the taxable year, it becomes unnecessary to consider the affirmative issues raised by the respondent.

Reviewed by the Board.

Decision will be entered for the respondent.

SteRNHageN and Trammell concur in the result.

Smith,

dissenting: The applicable taxing statute permits a corporation to deduct from gross income “ all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” The petitioner, operating a department store in Buffalo, New York, made certain payments in 1928 to certain charitable institutions which it charged on its books of account as advertising expenses and deducted from gross income in its tax return as ordinary and necessary expenses. The evidence shows that the payees were customers of the petitioner and that the payments were recurrent. Weldon D. Smith, vice president and treasurer of the petitioner, testified that in arriving at the amounts paid—

We look over the amount of business that we get from those organizations here and the amount of business that we get from the officers of those organizations, and we more or less add to that our own charitable feelings, and decide on a certain amount.

On cross-examination he was asked:

Now, with reference to these charitable contributions, you stated that they were made in part from the charitable feelings of your organization. Do they bear any direct relation to the amount of business done?
A. Yes, I think they do; that has been said.

The respondent in article 562 of Regulations 69 has provided:

* * * Donations which legitimately represent a consideration for a benefit flowing directly to the corporation as an incident of its business are allowable deductions from gross income. * * *

Article 121 of Regulations 74, applicable to the taxable year under review, provides in part: “A taxpayer is entitled to deduct the necessary expenses paid in carrying on his business from his gross income from whatever source.”

The question as to whether contributions of the character of those herein involved are deductible from gross income has been before this Board in many different cases. See cases cited in Corning Glass Works v. Lucas, 37 Fed. (2d) 798. We have allowed as deductions from gross income similar payments in First National Bank of Omaha, 17 B.T.A. 1358; Hirsch-Weis Mfg. Co., 14 B.T.A. 796; Merchants Transfer & Storage Co., 17 B.T.A. 290; First National Bank in St. Louis, 23 B.T.A. 1125; Old Mission Portland Cement Co., 25 B.T.A. 305; Evening Star Newspaper Co., 28 B.T.A. 762.

In Kornhauser v. United States, 276 U.S. 145, the question before the Supreme Court was whether attorneys’ fees for defending an action by a former partner for accounting of “business earnings” were deductible from gross income. The Court of Claims held that they were not business expenses but were personal living or family expenses and were therefore not a legal deduction from gross income. Kornhauser v. United States, 62 Ct. Cls. 647. This decision was reversed by the Supreme Court. In its opinion the Court stated:

In Appeal of F. Meyer & Brother Co., 4 B.T.A. 481, the Board of Tax Appeals held that a legal expenditure made in defending a suit for an accounting and damages resulting from an alleged patent infringement was deductible as a business expense.
The basis of these holdings seems to be that where a suit or action against a taxpayer is directly connected with, or,- as otherwise stated (Appeal of Backer, 1 B.T.A. 214, 216) proximately resulted from, his business, the expense incurred is a business expense within the meaning of section 214 (a), subd. 1, of the act. [Revenue Act of 1918.] These rulings seem to us to be sound and the principle upon which they rest covers the present ease. * * *

I am of the opinion that the same principle is applicable to the facts involved herein.

In Corning Glass Works v. Lucas, supra, the question before the court was whether a corporation was permitted to deduct from gross income $25,000 representing a contribution to the building fund of a hospital located in a town having a population of 15,000, paid in part to avoid enlarging its dispensary facilities at the factory. It was held that the amount was a legal deduction from gross income as a business expense. In the course of its opinion the court referred to a decision of an English court, Hutton v. West Cork Ry. Co., 23 Ch. Div. 654, 671, and quoted therefrom as follows:

* * * Most businesses require liberal dealings. The test there again is not whether it is ’bona, flete, but whether, as well as being bona fide, it is done within the ordinary scope of the company’s business, and whether it is reasonably incidental to the carrying on of the company’s business for the company’s benefit. * * *

To the same effect is American Rolling Mill Co. v. Commissioner, 41 Fed. (2d) 314. In that case the plaintiff claimed the deduction from gross income of $360,000 which it had contributed to a civic fund raised in Middletown, Ohio. Numerous charitable organizations were the beneficiaries of this fund. The Board held that the amount was not a legal deduction from gross income of the year 1920, the year in which paid. The Circuit Court of Appeals for the Sixth Circuit reversed the Board and held that the amount was a legal deduction. It quoted with approval the decision of the Court of. Appeals of the District of Columbia in Corning Glass Works v. Lucas, supra, to the effect that in that case the donation was reasonably incidental to the carrying on of the company’s business for the company’s benefit ” and was therefore a legal deduction. The court further stated: “ The question always is whether balancing the outlay against the benefits to be reasonably expected, the business interest of the taxpayer will be advanced.”

The income tax is imposed upon “ gains, profits, and income.” It falls upon the net income determined by deducting from the gross income certain items among which are the ordinary and necessary expenses. I can not believe that it was the intention of Congress to disallow the deduction of expenses of the nature of those involved herein. In no sense did they constitute gifts. It unquestionably wpuld.have been to the detriment of the petitioner’s business to have failed to make the payments. Congress has not forbidden their deduction. Although the evidence in this case is not as full or satisfactory as might be wished, I am of opinion that the amount was a legal deduction from gross income. I think it is wrong to assume that because Congress has not provided specifically that a corporation may deduct payments of this character from gross income it is therefore prohibited from deducting them from gross income. The whole current of judicial opinion is to the contrary.

       Revenue Act of 1928 :
      SEC. 23. DEDUCTIONS PROM GROSS INCOME.
      In computing net income there shall be allowed as deductions:
      (a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *.
      * * * * * * *
      (n) Charitable and other contributions. — In the case of an individual, contributions or gifts made within the taxable year to or for the use of:
      *******
      (2) any corporation, or trust, or 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.
      *******
      SEC. 142. CONSOLIDATED RETURNS OP CORPORATIONS — TAXABLE YEAR 1928.
      *******
      (b) Computation and payment of tax. — In any case in which a tax is assessed upon the basis of a consolidated return, the total tax shall be computed in the first instance as a unit and shall then be assessed upon the respective affiliated corporations in such proportions as may be agreed upon among them, or, in the absence of any such agreement, then on the basis of the net income properly assignable to each. There shall be allowed in computing the income tax only one specific credit computed as provided in section 26 (b).
      (e) Definition of affiliation. — Por the purpose of this section two or more domestic corporations shall be deemed to be affiliated (1) if one corporation owns at least 95 per centum of the stock of the other or others, oi (2) if at least 95 per centum of the stock of two or more corporations is owned by the same interests. As used in this subsection the term “ stock ” does not include nonvoting stock which is limited and preferred as to dividends.

       See Congressional Record, House, Sept. 17, 1918, vol. 66, pp. 10419-10421.

       Con. Kept. 486, 67th Cong., 1st sess., p. 36.


author: Seawell:

text:
    James J. Forstall, Petitioner, v. Commissioner of Internal Revenue, Respondent. Nell Lothrop Forstall, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 59388, 59389.
    Promulgated November 24, 1933.

      Frederich B. Gibbs, Esq., for the petitioners.

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

Seawell:

Section 23 of the Revenue Act of 1928, to the extent material here, reads as follows:

In computing net income there shall be allowed as deductions:
* *.;< ⅜ s« * ⅜ *
(n) Charitable and other contributions. — In the case of an individual, contributions or gifts made within the taxable year to or for the use of:
* ⅞ ⅜ ⅜* * ⅜ #
(2) any corporation, or trust, or 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.
* * * * * *

The parties here stipulated that none of the funds of the Association inure to the benefit of any individual. They differ only as to whether the Association was organized and operated exclusively for educational purposes, no contention being made by the petitioners that it was organized and operated for any of the other purposes set forth in the statute.

In Slee v. Commissioner, 42 Fed. (2d) 184; affirming 15 B.T.A. 710, the court, in holding that a donation to the American Birth Control League was not deductible as a contribution to a charitable, scientific or educational association, said: “Political agitation as such is outside the statute, however innocent the aim. ⅜ * * Controversies of that sort must be conducted without public subvention ; the Treasury stands aside from them.” Instances were given in which agitation for the repeal or passage of laws as an incident to the end sought would not take the association beyond the statute. In discussing the activities of the association before it, the court said:

⅜ * * So far, however, as its political activities were general, it seems to us, regardless of bow much we might be in sympathy with them, that its purposes cannot be said to be “ exclusively ” charitable, educational or scientific. It may indeed be for the best interests of any community voluntarily to control the procreation of children, but the question before us is whether the statute covers efforts to proselytize in that or other causes. Of the purposes it defines “ educational ” comes the closest, and when people organize to secure the more general acceptance of beliefs which they think beneficial to the community at large, it is common enough to say that the public must be “ educated ” to their views. In a sense that is indeed true, but it would be a perversion to stretch the meaning of the statute to such eases; they are indistinguishable from societies to promote or defeat prohibition, to adhere to the League of Nations, to increase the Navy, or any other of the many causes in which ardent persons engage.
* * * indeed, were we in a position to pass upon the evidence de novo, we should be somewhat slow to believe that the ends proposed did not still include convincing Legislatures and other influential persons that it was desirable in the interests of the moral and social well-being of the community that all persons should be free to control the number of their children. However commendable this may be — and we mean to raise no question as to it — it is not in our judgment one of those purposes which Congress meant to assist. * * *

In the case of Weyl v. Commissioner, 48 Fed. (2d) 811; reversing 18 B.T.A. 1092, the same court expressed the opinion that “ Congress did not intend to use the word 1 education ’ in the statute in any exceptional sense * * and quoted with apparent approval a dictionary definition of the term. In allowing the contribution as a deduction the court pointed out, however, that the corporation (League for Industrial Democracy) bad “no legislative program hovering over its activities.”

In the more recent case of Leubuscher v. Commissioner, 54 Fed. (2d) 998, the same court, in allowing the deduction of a legacy to a foundation organized to expound the principles of Henry George, pointed out that no part of the money was to be used in “ seeking the passage of legislation.” In the same proceeding the court considered the deductibility of a contribution to the Manhattan Single Tax Club, a corporation having as one of its purposes advocacy of the abolition of all taxes upon industry and the products of industry and their replacement by a single tax upon land. In holding that the contribution was not deductible, the court said:

* * * It [the club] has for its purposes the dissemination of controversial propaganda, which means a plan for the publication of a doctrine or system of principles.
This we do not regard as exclusively .educational within the meaning of the statute, but on the contrary it tends, we think, to accomplish the purpose of the person proposing it, and that purpose is to effect a change in the existing system of taxation. Such a purpose does not meet the requirements of the statute.

In John H. Watson, Jr. 27 B.T.A. 463, the Citizens League of Cleveland, to which the contribution there in question was made, classified candidates for public office, and when considered desirable, advocated amendments to existing laws and presented its recommendations to the proper legislative body. We held that such activities were not educational but in the field of advocacy in political matters.

The parties regard the contributions in question as contributions to the Association. There is no occasion to distinguish them, the League of Nations Association of Illinois, to which the donations were made, being merely a branch office of the Association.

The certificate of incorporation of the Association, as amended (no contention is made that it read otherwise throughout 1928), gives as the purpose of the Association “ * * * the cultivation of such public opinion as will influence the government of the United States to cooperate to the fullest extent practicable in the activities of the League of Nations and to enter the League of Nations at the earliest practicable date.” The platform of the Association, as set forth in one of its published pamphlets, is much broader, and includes “ promotion of American cooperation with and support of the various commissions and other agencies of the League in political as well as nonpolitical activities ” and “ Vigorous support of the three protocols for adherence to the World Court.” The chief objective of the Association was the entrance of the United States into the League of Nations. The development of sufficient public opinion to influence the proper authorities of the United States to bring about the result desired was the declared purpose of the Association.

Whether the United States should join the League of Nations is, as history relates, a highly controversial question. At times it has been the subject of bitter debate in the halls of Congress. The organizers of the Association adopted one side of the question and incorporated the Association for the stated purpose of bringing public opinion in line with their views through the dissemination of literature, public addresses, etc. They were in the final analysis advocates of a change in existing methods of dealing with certain international questions by our Government. Public opinion may be, and often is, cultivated by other than educational methods. The expressed purpose of the Association is not, in our opinion, exclusively educational.

Neither do wo think that the operations of the Association were exclusively educational. Judged in the light of the broad meaning of the word “ educate ”, some of the activities of the Association were educational, notwithstanding the highly controversial character of the subject. Other activities were beyond the realm of education, such as the writing of letters to legislators when the need was felt, urging our adherence to the World Court, presenting issues before national political conventions, urging members to select candidates for Congress on the basis, among other things, of their opinions on principles advocated by the Association, etc.

On the whole record, we are of the opinion, and so hold, that the Association was not organized and operated exclusively for educational purposes. Slee v. Commissioner, supra; Leubuscher v. Commissioner; supra; John H. Watson, Jr., supra. No error was committed by the respondent in refusing to allow the contributions in question as deductions.

In Locket No. 69388 decision will be entered for the respondent. In Locket No. 59389 decision will be entered under Rule 60.


author: Marquette :

text:
    Henry A. Cleland Estate Company, Ltd., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 33585, 40890, 51197.
    Promulgated November 24, 1933.

      J. H. Amide, G.P.A., for the petitioner.

      James K. PolJe, Esq., for the respondent.
   OPINION.

Marquette :

The petitioner concedes that the basis for the computation of gain on the sale made in 1925 and of the loss suffered in 1927 is the same as if the gain or loss had been made or suffered by the beneficiaries under the will of Henry A. Cleland. Section 202 (c) (3) of the Revenue Act of 1921, sections 203 (b) (4) and (i), and 204 (a) (8) of the Revenue Act of 1926. The respondent has determined that the basis in this case is the fair market values of the petitioner’s properties on March 1, 1913. See section 204 (a) (5) and (b) of the Revenue Act of 1926. The petitioner contends that the proper basis is the fair market values of the properties as of August 14, 1921, the date of the death of Hannah Maria Cleland.

The question for decision is when these beneficiaries “ acquired ” these properties. If the interests of the beneficiaries were vested as of the date of the death of the testator the respondent must be affirmed on this point. Randolph S. Warner, 28 B.T.A. 1178, and cases cited. Whether these interests were vested or contingent must be determined under the laws of Michigan, where the testator resided, his will was probated, and the real estate was located. Isabelle Richardson Molter, 27 B.T.A. 442; Randolph S. Warner, supra; Pringle v. Commissioner, 64 Fed. (2d) 863. For this reason, among others, Louis Kalb, 15 B.T.A. 886, on which the petitioner relies is not in point. That proceeding was decided under the laws of Wisconsin. Further, the deed there involved differs in many of its provisions from the will of Henry A. Cleland. Among the differences is the fact that the gift to the remaindermen made by the deed is found in the provision that after the termination of the life estate the trustees should convey the property to the remaindermen. Here the testator in disposing of the remainder interests uses the words “ I give, devise and bequeath.” There is nothing in the will which indicates an intention on the part of the testator that the vesting of the remainder estates should be postponed. Only the right to possession was postponed. The devises and bequests were to named individuals. The rule of pay or divide has no application. Cf. Randolph S. Warner, supra.

Section 11531 of the Compiled Laws of Michigan (1916) provides:

Further estates are either vested or contingent :
They are vested when there is a person in being who would have an immediate right to the possession of the lands, upon the ceasing of the intermediate or precedent estate;
They are contingent whilst the person to whom, or the event upon which they are limited to take effect, remains uncertain.

The named remaindermen under Cleland’s will were persons in being who would have had an immediate right to the possession of the land on the ceasing of the estate of Hannah Maria Cleland. These remainder interests were therefore vested as of the date of the testator’s death. Subdivision Fourth of the will contains no words importing a contingency, but, assuming that any or all these interests might have been divested by death before the expiration of the life estate, yet the fact remains that these interests were vested as of the testator’s death, and, not having been divested, the remainder-men acquired the properties devised as of July 19, 1911, the date of the testator’s death. This conclusion is in harmony with the decision in McInerny v. Haase, 163 Mich. 364; 128 N.W. 215. There the testator devised a farm to his wife for life, remainder to his daughter, and upon the death of the latter to a grandchild should she survive the daughter; if she did not survive the daughter, then to others. The court held that the granddaughter took a vested interest subject to be divested in case of her death before the death of the daughter.

On the question of the fair market value as of March 1, 1913, of the property sold in 1925 each party introduced two witnesses. All were real estate operators in Detroit and well qualified to express opinions as to such value. Their valuations differ widely. The petitioner’s two witnesses placed such value at $100,000 and $103,600, respectively, while the respondent’s two witnesses placed this value at $44,046 and $61,900. The witnesses testify as to many sales, but often do not state whether the property was or was not improved. From their testimony it appears that there was in this locality a gradual increase in value prior to 1913 and that business was approaching this section from the south, so that southerly lots would possess greater values than those farther north. Woodward Avenue was a more important thoroughfare than Columbia Street. In this mass of testimony we find two sales which we think have an important bearing on the then fair market value of the petitioner’s property. One of these sales was of a lot fronting 26 feet on the west side of Woodward Avenue by a depth of 116 feet to an alley. This lot was 24 feet south of the north corner of the same block on which the petitioner’s property was located. This property was sold on April 16, 1913, for $65,000, of which $5,000 represented the value of the improvements. The other sale, made April 5, 1912, was of the corner lot, which had a front of 51.12 feet on Woodward Avenue at a depth of 95½ feet and was bounded on the north and west by the petitioner’s property. The sale was for $125,000, of which $18,000 to $20,000 represented the cost of improvements. Although the petitioner’s property was not a corner lot it possessed elements of coimer value. It fronted on the two streets. It had the advantage of the alley. It had potential value in that it cut off access to the alley from the corner lot. In our opinion the so-called two lots should be treated as a single tract. As such they were sold. After careful consideration of the evidence we- have arrived at the fair market values set forth in our findings.

Having arrived at a greater value than that determined by the respondent, we are met by his contention that we should use as a basis not the fair market value of the property on March 1, 1913, but the then fair market value of the remaindermen’s interests. This contention is denied on the authority of Huggett v. Burnet, 64 Fed. (2d) 705.

The only evidence as to the fair market value of the building-known as the Cynthia Apartments was the testimony of two witnesses introduced by the petitioner. These witnesses valued this building as of March 1, 1913, at $23,909 and $25,000, respectively, and as of March 4, 1921, at $19,636 and $19,921. They based these valuations solely on computations in which the cubic contents of the building were multiplied by a factor representing the then value of a cubic foot. The witnesses did not agree on the values to be attributed to each cubic foot. One used a factor of 28 cents a cubic foot for 1913 value and of 31 cents for 1921 value, while the other used factors for the same years of 27 cents and 34 cents. Both deducted depreciation from the year 1896 at the rate of 2½ percent.

Section 204 (b) of the Revenue Act of 1926 calls for proof of “ fair market value,” that is, what a willing buyer would give and a willing seller would accept. This is quite a different thing from cost (Burnet v. Houston, 283 U.S. 223) and, of course, from reproduction cost, even after deducting accrued depreciation. We are not informed as to the physical condition of the building on the basic dates or its rent rolls. Obsolescence is a factor. We are not even given the independent judgment of the witnesses as to what in their opinion was the then fair market value of the building. All that we have before us is the application of a hard and fast rule of thumb. Such evidence is not sufficient to overcome the determination of the respondent. Rockford Malleable Iron Works, 2 B.T.A. 817; Huron Bldg. Co., 15 B.T.A. 1107; affd., 53 Fed. (2d) 575; National Straw Works, 16 B.T.A. 463; affd., 47 Fed. (2d) 844; York Hotel Corp., 18 B.T.A. 162; National Packing Corp., 24 B.T.A. 952. The respondent’s determinations both as to value and as to the rate of depreciation on this building are sustained.

The petitioner’s right to deduct from gross income for 1928 a net loss of 1927 will be determined upon final computation.

Judgment will be entered wnder Rule 50.


author: Smith :

text:
    The Rudolph Wurlitzer Company, Petitioner, v. Commissioner of Internal Revenue, Respondent. The Wurlitzer Grand Piano Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 57800, 66769.
    Promulgated November 24, 1933.

      Laurence Craves, Esq., for the petitioners.

      W. Frank Gibbs, Esq., for the respondent.
   OPINION.

Smith :

The basic question presented by this proceeding is whether the preferred stock of the Wurlitzer Grand Piano Co. is “ nonvoting stock ” within the meaning of section 141 (d) of the Kevenue Act of 1928, which reads in part as follows:

(d) Definition of “ affiliated (/roup”. — As used in this section an “affiliated group ” means one or more chains of corporations connected through stock ownership with a common parent corporation if—
(1) At least 95 per centum of the stock of each of the corporations (except the common parent corporation) is owned directly by one or more of the other corporations; and
(2) The common parent corporation owns directly at least 95 per centum of the stock of at least one of the other corporations.
As used in this subsection the term “ stock ” does not include nonvoting stock which is limited and preferred as to dividends.

At the hearing of this proceeding, counsel for the petitioners stated:

If the Commissioner is right in his determination that this preferred stock is voting stock, his determination of the tax liability is correct. If, on the other hand, this preferred stock is not in fact voting stock his determination is erroneous and the Wurlitzer Grand Piano Company should be included and consolidated for each of those years.

Section 6 of the General Corporation Act of the State of Illinois, approved June 28, 1919 (Callaghan’s Illinois Statutes Annotated, ch. 32, vol. 2, p. 1868), provides in part:

¶ 6. Powers, rights and privileges generally. § 6. Each corporation organized under this Act shall, subject to the conditions and limitations prescribed by this Act, have the following powers, rights and privileges:
⅜ ⅜ ⅜ ⅜ * * *
(4) To have a capital stock of such an amount, and divided into shares with a par value, or without a par value, and to divide such capital stock into such classes, with such preferences, rights, values and interests as may be provided in the articles of incorporation, or any amendment thereof;
* * * ⅛ ⅜ * #
(10) To make by-laws not inconsistent with the laws of this State for the administration of the business and interests of such corporation.

Section 15 of the same act (Callaghan’s, etc. p., 1890), provides:

¶ 15. Blection of directors named in certificate — Meeting to elect officers and adopt hy-lams. § 15. The directors named in the certificate of incorporation shall be elected by the subscribers to the capital stock named in such certificate after due and timely notice; and such directors shall, within sixty days next after incorporation, meet, elect officers, adopt by-laws, and transact such other business as may properly come before them.

Section 18 (p. 1891) provides in part:

¶ 18. Blection — Term—Division into classes. § 18. The directors named in the certificate of incorporation shall hold office until the first annual meeting of the stockholders. At such annual meeting and at each annual meeting thereafter, the stockholders shall, except as hereinafter provided, elect directors for a term of one year.

Section 21 (p. 1893) provides in part:

¶ 21. Povjers and duties. § 21. The directors shall:
(1) Exercise the corporate powers of the corporation.

Section 39 (p. 1913) provides:

¶ 39. Annual meeting — Time for holding — Notice to stochholders — Quorum.
§ 39. An annual meeting of the stockholders shall be held within ninety days after the end of each fiscal year of the corporation. A written or printed notice, stating the place, day and hour of the meeting shall be mailed by the secretary of the corporation at least ten days before such meeting to each stockholder to his, her or its last known post office address, as appears upon the books of the corporation. A majority of the capital stock outstanding represented in person or by proxy shall constitute a quorum at all stockholders’ meetings.

Section 42 (p. 1914) provides:

¶ 42. Mleotion of directors — Holding at annual meeting. § 42. Directors shall be elected at the regular annual meeting of the stockholders.

Section 50 (p. 1915) provides:

¶ 50. Number of votes to which, subscriber or stockholder entitled — Cumulat-ing votes. § 50. In all elections for directors every subscriber or stockholder shall have the right to vote in person or by proxy for the number of shares of stock owned by the holder for as many persons as there are directors to be elected, or to cumulate such shares and give one candidate as many votes as the number of directors multiplied by the number of shares of stock shall equal, or to distribute them on the same principle among as many candidates as the holder shall think fit.

Section 3 of article 11 of the Constitution of the State of Illinois, in effect at the date of the organization of the Wurlitzer Grand Piano Co. and for many years prior thereto, reads as follows:

The General Assembly shall provide, by law, that in all elections for directors or managers of incorporated companies, every stockholder shall have the right to vote, in person or by proxy, for the number of shares of stock owned by him, for as many persons as there are directors or managers to be elected, or to cumulate said shares, and give one candidate as many votes as the number of directors multiplied by the number of his shares of stock shall equal, or to distribute them on the same principle among as many candidates as he shall think fit; and such directors or managers shall not be elected in any other manner.

In People ex rel. Watseka Telephone Co. v. Emmerson, 302 Ill. 300; 134 N.E. 707, a petition for mandamus was filed, praying that the secretary of state be commanded tó issue a certificate to the Watseka Telephone Co. permitting it to increase its capital stock and issue preferred stock containing certain conditions. The conditions were in a resolution providing that preferred stockholders should not have the right to vote as to any election or to consent to or refuse to consent to any corporate action; that such right was waived by the owners and holders of such preferred stock as a condition and in consideration of its being issued by the company. The secretary of state refused to receive the proposed amendment to the articles of incorporation on the ground that the proposed amendment was not in conformity with the provisions of the Constitution of the State of Illinois. The case was considered by the Supreme Court of the State of Illinois, which held that in view of the constitution (sec. 3, art. 11) and the General Incorporation Act, section 28a22, containing practically the same provision, enacted pursuant thereto, an Illinois corporation has no right to issue preferred stock depriving stockholders of the right to vote for directors. The court said:

The public policy of the state, as shown by legislative enactments and in the decisions of this court, and particularly by the provisions of section 3 of article 11 of the Constitution, must be held to be that the petitioner’s by-laws and the proposed amendment of its articles of incorporation, which provided that the owners of preferred stock in said corporation should be deprived of the right to vote for directors or managers of the company, are contrary to the provisions of the Constitution, and therefore the Secretary of State rightly refused to permit the petitioner to file the amendment to the articles of incorporation on the payment of the statutory fee.

In People ex rel. Weber v. Cohn, 339 Ill. 121; 171 N.E. 159, tbe question before the court was whether the stockholders of the corporation were authorized to elect a director or whether that was required to be done by the then two directors. Paragraph 5 of section 21 of the Corporation Act (Smith’s Stat. 1929, p. T26), provided that the directors of a corporation shall “fill all vacancies which may happen in the board of directors caused by death, resignation or otherwise, until the next annual meeting of the stockholders.” The Supreme Court of Illinois held that this statute violated article 12, section 3, of the Constitution of the State of Illinois above adverted to and that it was void. In the course of its opinion the court stated:

Tbe precise question presented bas not previously been considered by this court. In People v. Emmerson, 302 Ill. 300, 134 N.E. 707, 21 A.L.R. 636, this court considered tbe provision of the Constitution referred to, and held that a corporation could not deprive any stockholder of the right to vote by the adoption of a resolution amending articles of incorporation so as to exclude preferred stockholders from the right to vote. The court said in Hall v. Woods, 325 Ill. 114, 156 N.E. 258, 269, that “ every stockholder of a corporation has the right to vote his stock at every election of directors, and the Legislature has no power to enact a law which will prevent his doing so.” The court said in Luthy v. Ream, 270 Ill. 170, 110 N.E. 373, 375, Ann. Cas. 1917B, 368: “ Corporations shall be controlled by a majority of the stockholders, acting through directors elected by them. ⅜ ⅜ * The power to vote for directors can be exercised only by stockholders in person or by proxy, and they cannot be deprived or deprive themselves of this power.”

From the foregoing it seems plain that the provision of the charter of the Rudolph Wurlitzer Co. which authorized it to issue preferred stock without voting rights, provided the dividends were not more than one year in arrears, was in violation of the Constitution of the State of Illinois and therefore void. Likewise it seems plain that the preferred stockholders had a right under the Constitution of the State of Illinois to vote their shares if they had elected to do so. They undoubtedly could have enforced their rights by a quo war-ranto proceeding, which was the proceeding taken in People eso rel. Weber v. Cohn, supra. The question is whether the respondent may question a provision of the charter of the company for the purpose of collecting Federal income tax. In Cortez Oil Co., 20 B.T.A. 462, the Board held that, where a corporation held and voted certain capital stock of another corporation in violation of section 49, article 9, of the Constitution of Oklahoma, such stock should nevertheless be taken into consideration as voting stock in determining the question of affiliation. The Board said:

Petitioner asserts that by the above provisions [section 41, article 9, Constitution of Oklahoma] Indiahoma was prohibited from voting the stock held by it, with the result that all the voting stock was held by Meyer and the King family. * * *
****#:{:*
The Constitution of Oklahoma does not declare such ownership and voting-void. It imposes neither forfeiture nor penalty. No legislation has been enacted to carry it into effect. It lays down a rule of public policy and not of property. Only the State could question the validity of the transaction. [Citing- cases.]
Tax matters are controlled by what actually took place and not by what might have occurred. Petitioner or its officers might have taken steps through the proper public officials to require Indiahoma to sell its stock or to stop it from voting, but neither was done. Unquestionably a majority of petitioner’s stock was owned by Indiahoma and it was in fact voted and upon its vote is based the entire superstructure of corporate affairs. The legal and practical situations are such that we must hold that in determining the question of affiliation the stock owned by Indiahoma must be treated as any other stock.

The record does not disclose in the instant proceeding whether the preferred stockholders of the Rudolph Wurlitzer Co. in fact voted their stock in either of the tax years before us. Presumably they did not. We think it is clear, however, that they had the right to vote their stock under the Constitution of the State of Illinois had they chosen to do so. We are therefore of the opinion that the preferred stock was not nonvoting within the purview of section 141 of the Revenue Act of 1928. The action of the respondent in refusing so to consider it is sustained.

Reviewed by the Board.

Judgment will be entered for the respondent.

SteRNHageN dissents.


text:
    Louis G. Neville, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 64598.
    Promulgated November 24, 1933.

      Loomis Patrick, Esq., for the petitioner.

      O. A. Bay, Esq., for the respondent.
   OPINION.

Smith :

The petitioner, seeks the redetermination of a deficiency in income tax for 1929 in the amount of $356.98.

The petitioner is engaged in business on his own account as a dealer and broker in securities in Boston, Massachusetts. He is also the treasurer of the Standard Securities Co., an association with transferable shares whose headquarters and transfer offices are in the office of the petitioner.

On December 28, 1929, the petitioner sold to the Standard Securities Co. 500 shares of Standard Securities Co. stock for the sum of $9,750. The following certificates, acquired on the dates and at the cost prices shown, were delivered by the petitioner to the Standard Securities Co. on December 28, 1929:

In his income tax return for 1929, the petitioner claimed that the loss sustained upon the sale of these securities was the difference between $9,750, the selling price, and $52,130.50, which represents the cost to the petitioner of the first 500 shares of Standard Securities Co. stock acquired by him and owned by him at the date of the sale of the 500 shares in question. The petitioner’s computation is based on the assumption that he is entitled to a cost based on the so-called “ first in, first out ” rule, and it is stipulated that if that rule is applicable to the facts which obtain in this proceeding the petitioner’s computation of the deductible loss is correct.

For many years the petitioner has been engaged in the business of a dealer in securities on his own account. He has uniformly computed gains and profits upon sales of securities upon the basis that any shares sold were those first purchased by him and he has always borne the burdens and obtained the benefits from such method of reporting up to the taxable year 1929.

Article 58 of Eegulations 74 provides, in part, as follows:

Aut. 58. Sale of stock and rights. — When shares of stock in a corporation are sold from lots purchased at different dates and at different prices and the identity of the lots can not be determined, the stock sold shall be charged against the earliest purchases of such stock. * * *

The identical language shown above appears in each of the regulations promulgated in connection with the Eevenue Acts of 1918 to 1926, inclusive.

The above regulation, called by counsel the “first in, first out” rule, is a rule of expediency. It is simply to the effect that where a person owning several lots of stock purchased at different dates and different prices can not identify the shares sold as belonging to any particular lot, it shall be assumed that the shares sold represented those first purchased.

In Cleveland Trust Co., Executor, 24 B.T.A. 132, 1,500 shares of the National Acme Co., represented by certificates numbered 1545 to 1554, inclusive, for 100 shares each, and certificates numbered 1608 to 1612, inclusive, for 100 shares each, were sold by E. C. and Dora V. Henn in 1920 for $39,694.50. The issue related to whether in that case the petitioner had established a proper identification of the stock. In its opinion the Board stated in part as follows:

* * * Tbe petitioners have shown clearly that the shares of capital stock of the National Acme Company sold in 1920 for $39,694.50 were the same shares purchased by them in 1919 and represented by certificates Nos. 1545 to 1554, inclusive, and Nos. 1608 to 1612, inclusive, for an aggregate price of $55,221.75. At the time of purchase the certificates were deposited with the trustee and became a part of the corpus of the trust fund. They were withdrawn therefrom under the usual “ revocation ” notices and sold in December, 1920. By thus identifying the shares so bought and sold, and the cost and sale price thereof, the petitioners have established a basis for the calculation of gain or loss in the transaction. * * *

Cf. Henry C. Heinz, 28 B.T.A. 276.

In Howbert v. Penrose, 38 Fed. (2d) 577, the court quoted with approval from Towne v. McElligott (D.C.), 274 Fed. 960, 963, the following:

The plaintiff answers this argument by saying that, if so, all shares at any time held by a stockholder must be brought into hotch-pot and averaged. 1 scarcely think that consistency requires me to go so far. The law may, and in fact does, recognize an identity in every share, which can indeed be traced upon the books of the company, at least until certificates are consolidated, and later subdivided. The purchase of a number of shares can be earmarked by the certificate, and it is an enormous convenience to keep the purchases separate. * * *

In Snyder v. Commissioner (C.C.A., 3d Cir.), 54 Fed. (2d) 57, the court had before it for decision the question of identification of shares of stock in a marginal account. In the course of its opinion the court stated: “ The shares are not delivered or earmarked or allocated to the customer even on the books,” clearly indicating that if the shares could have been identified the decision might have been otherwise. Cf. David Stewart, 17 B.T.A. 604; Richard B. Turner Estate, 26 B.T.A. 1204.

In Skinner v. Eaton (C.C.A., 2d Cir.), 45 Fed. (2d) 568; certiorari denied, 283 U.S. 837, those shares which were identified were excluded from the “ first in, first out ” rulé. In that case the court said:

* * * The Revenue Act does not permit merging the cost of stock acquired at various prices and over a period of years. Shares of stock are identifiable, and, for income tax purposes, they are regarded as specific properties. De Ganay v. Lederer, 250 U.S. 376, 39 S.Ct. 524, 63 L.Ed. 1042; Cummings v. Clark, 2 F. (2d) 442 (C.C.A. 3) ; Towne v. McElligott, supra.

The decision of the Supreme Court in De Ganay v. Lederer, cited by the Circuit Court of Appeals for the Second Circuit in Skinner v. Eaton, supra, authoritatively decides that from an income tax standpoint shares of stock are identifiable and regarded as specific property.

Since there can be no question that the shares of stock sold by the petitioner in 1929 are identifiable as having been purchased on the dates and for the prices stipulated, the contention of the respondent that the cost basis for the determination of the loss upon the sale of the 500 shares is $23,259.37 is sustained.

Judgment will be entered under Rule 50.