author: MuRdock :

text:
    Estate of Frederick R. Shepherd, Deceased, Marjorie Bell Shepherd, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 80961.
    Promulgated January 4, 1939.

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

      Bean P. Kimball, Esq., for tlie respondent.
   Opinion.

MuRdock :

The Commissioner determined a deficiency of $326.17,in estate tax. The first issue is whether the Commissioner erred in including in the decedent’s gross estate an item of $145,669.21 on the ground that it represented the value at the date of the decedent’s death of trust property over which his father had given him a power of appointment. If that property is to be included in the decedent’s gross estate, the next issue is whether the value should be reduced by $5,883.33 representing fees of trustees and attorneys paid out of that property. The final issue is whether or not the value of other trust property included in the decedent’s gross estate should be reduced by $13,650, representing fees of trustees and attorneys paid out of Ithat trust. The parties have stipulated the facts and their stipulation is adopted as the Board’s findings of fact.

Edward S. Shepherd, father of Frederick S.. Shepherd, died testate on August 21, 1922. Edward, hereinafter referred to as the father, created several trusts by his will. One of those trusts will be referred to hereinafter as the article IY trust. Another will be referred to as the article Y trust. The article Y trust was divided into three portions. We are concerned only with the third portion. The third portion was divided into three parts. We are concerned only with the first part. The first part of the third portion consisted of two-thirds of that third portion. The principal beneficiary was the son, Frederick R. Shepherd, the decedent in the present case. All but one-third of that first part had been distributed to Frederick prior to his death. The remaining one-third was to be distributed to him at the age of 55, but he died testate on March 21, 1932, just before attaining that age. Frederick was given a general power of appointment by will over any undistributed remainder in that part at his death. He appointed his wife, Marjorie Bell Shepherd, to receive that remaining one-third of the first part of the third portion of the article V trust, under his father’s will, and she actually received that property pursuant to his appointment. Although that property is not involved in this first issue, the manner of its passing is.

The trustees of the article IY trust under the will of the father were required to make distribution of all of the property in that trust within 21 years after the death of the father, but were authorized to make distribution, in whole or in part, prior to that time as they in their discretion might deem such distribution advisable. They had in their hands at the time of the death of Frederick certain property which they had not seen fit to distribute. Several years after the death of Frederick these trustees decided to distribute all of the property in the article IV trust.

The will of the father provided that the article IV trust should be distributed to the trustee of the article Y trust, the latter should divide it into two equal parts and two-thirds of one of those equal parts should be added to the first part of the third portion, except that “If at the time fixed for the making of any such division as above described [of the article IY trust] the entire First Part of the Third Portion shall have been finally distributed, then my trustee shall pay over or divide such two-thirds as would have been added to any such distributed fund to or among the person or persons who participated in the last distribution of the same, in amounts proportionate to the amounts so last distributed to such persons (or if any such beneficiary is then deceased, his said share shall go to his or her descendants per stirpes).” The one-third of the article IY trust, (two-thirds of one-half) above mentioned, was distributed in 1935 to Marjorie Bell Shepherd, the wife of Frederick, inasmuch as she had received the final distribution of the first part of the third portion of the article Y trust.

There were court proceedings in the Superior Court of Cook County, Illinois, instituted by the trustees of the article IY trust, which affect the present proceeding. The entire record of those proceedings is not before the Board, but the part that is before the Board indicates that the court proceedings were in no sense collusive. There is no reason to infer that they were submitted for the purpose of obtaining a decision which would adversely affect the Government’s right to additional estate tax from the estate of Frederick. A number of other parties were interested in and were affected by those proceedings. Apparently the various parties interested worked out a plan for exchanging the property in the article IY trust for 600 shares of beneficial interest in a “Shepherd Realty Trust.” There was no provision in the father’s will for such an exchange and that may have been a reason for seeking court authority. The 600 shares were delivered to the article V trustee and 200 of those shares were distributed by that trustee to Marjorie. The court approved of the plan and directed distribution of the 200 shares “to Marjorie Bell Shepherd, if living and if not to her descendants, per stirpes? The final decree of the Superior Court of Cook County entered February 1, 1935, from which no appeal has ever been taken, stated in regard to the distribution of the 200 shares of beneficial interest to Marjorie Bell Shepherd:

The same shall be distributable to said Marjorie Bell Shepherd, not as the appointee under the will of Frederick R. Shepherd, but pursuant to the provisions of section D of Article V of said will [the will of the father], as a person who participated in the last distribution of the First Part of the Third Portion of the trust estate created under Article V of said will of Edward S. Shepherd.

The question for decision is, Did the one-third of the article IY trust finally pass to Marjorie Bell Shepherd under a general power of appointment exercised by the decedent, her husband, by will, as the respondent contends, or did that property pass to her as one of a class designated by the will of the father? The remainder of the first part of the third portion of the article Y trust concededly passed under a general power of appointment exercised by the decedent, Frederick R. Shepherd, by his will. The petitioner contends, however, that the one-third of the article IY trust passed to Marjorie under the terms of the father’s will rather than under a general power of appointment exercised by the son in his will. The petitioner points out that no mention is made of any power of appointment in connection with the distribution of the article IV trust. The one-third of that trust with which we are here concerned was to go, and did go, to the person who had received the final distribution of the first part of the third portion of the article V trust. Although Marjorie was not mentioned by name in the father’s will as one of the legatees to whom the property coming to the article V trust from the article IY trust should be distributed, nevertheless, the petitioner argues that events occurred subsequent to the death of the father which determined her to be one of the class designed by him as ultimate distributees of the article IY trust. These events were (1) the death of Frederick before reaching the age of 55 years, (2) the distribution of the article IY trust after final distribution had been made of the remainder of the first part of the third portion of the article V trust, and (3) the survival of Marjorie until the termination and distribution, of the article Y trust. The Commissioner replies that this argument loses sight of another event which was necessary in the chain, and that was the naming by Frederick in his will of Marjorie as the person whom he appointed to receive the property over which he had a general power of appointment, including the remainder in the first part of the third portion of the article Y trust created by his father’s will. He argues that in fact the son was given a power of appointment over the one-third of the article IY trust. It is true that the article IV trustees might have delayed distribution of that trust until after the death of Marjorie and then the article V trustee Avould have made the distribution directly to her heirs. The petitioner argues that this possibility shows that she took under the father’s will rather than by appointment of her husband.

The question upon which the present controversy necessarily turns, to wit, whether the property originating in the article IV trust eventually passed to Marjorie under a general power of appointment exercised by the decedent, her husband, in his will, rather than solely under the terms of the will of the father, was decided by a court of competent jurisdiction in Illinois, in a proceeding to which the various trustees and beneficiaries under the father’s will were parties. That court has held that the property did not pass under a general power of appointment. That was a proper question for decision under the local law. The Board, like the Federal courts, is bound by decisions of the state courts in regard to property rights and the effect of conveyances executed within the state relating to property situated therein. The decision of a state court, until reversed or overruled, establishes the law of that state respecting the distribution of trust property within its jurisdiction and the rights of beneficiaries to that property. Warburton v. White, 176 U. S. 484; Tyler v. United States, 281 U. S. 497; Leser v. Burnet, 46 Fed. (2d) 756; Freuler v. Helvering, 291 U. S. 34; Blair v. Commissioner, 300 U. S. 5; Sharp v. Commissioner, 303 U. S. 624; Union & Peoples National Bank of Jackson et al., Administrators, 30 B. T. A. 1277; Christine Smith Kendrick et al., Executrices, 34 B. T. A. 1040. Not only has a state court decided the precise question involved herein arising under the facts in this case, but the Commissioner has failed to cite any cases showing that that decision is in conflict with the law of the State of Illinois as established by statute or by decisions of other courts of the state. Cf. Brainard v. Commissioner, 91 Fed. (2d) 880, where the Circuit Court of Appeals for the Seventh Circuit refused to follow the decision of a Cook County Court which, it held, was in conflict with the law of the state. The Supreme Court granted certiorari in the Brainard case, but the appeal was dismissed on March 14, 1938, on motion of the taxpayer, while on the same day the Court rendered a per curiam opinion in the Sharp case, supra, in which, it cited with approval the Freuler and Blair cases, supra. This property may not be included in the decedent’s gross estate under section 302 (f) of the Revenue Act of 1926 as property passing under a general power of appointment exercised by the decedent by will. This being so, the second issue need not be decided.

Proceedings were instituted, following the death of the decedent, for the instruction of the article IV trustees and the article V trustee under the will of the father. The Commissioner has included in the decedent’s gross estate the value at the date of his death of the property remaining in the first part of the third portion of the article V trust. Trustee’s fees, guardian’s fees, attorneys’ fees, and costs of the litigation, above referred to, were incurred by the article V trustee and a portion thereof was charged against the first part of the third portion of the article V trust in the amount of $13,650. That amount was deducted from the remainder of the first part of the third portion of the article V trust before it was distributed to the decedent’s appointee, Marjorie Bell Shepherd. The petitioner contends that the value of the remainder of the first part of the third portion of the article V trust which may properly be included in the gross estate of the decedent was the value of that property at the date of the decedent’s death reduced by the portion of the expenses of the litigation subsequently paid from those funds before they were distributed to Marjorie Bell Shepherd. The parties have stipulated that the amount which the Commissioner has included in the decedent’s gross estate was the value at the date of the decedent’s death of the remainder in the first part of the third portion of the article V trust, “without any deductions on account of the liability of said trust estate for trustee’s fees, attorneys’ fees, or costs of litigation.” There is no showing, however, that there was any liability at that time for the fees and costs mentioned, nor is there any showing that the value at that time of the property passing under the general power of appointment of the decedent was less than the amount determined by the Commissioner. The value of that property at that time is the value which is to be included in the decedent’s gross estate under section 302 of the Revenue Act of 1926. This provision was amended by the Revenue' Act of 1935, but the amendment does not apply to the estate of this decedent since the decedent died prior to the effective date of the amendment.

Reviewed by the Board.

Decision will be entered under Bule 50.


source: Caselaw Access Project

author: Van Fossan :

license: Public Domain

text:
    Gloria Laura Morgan Vanderbilt, by Thomas B. Gilchrist, General Guardian of Her Property, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 84506.
    Promulgated January 4, 1939.

      Clarence Castimore, Esq., and J. Sims McCrath, Esq., for the petitioner.

      Allen T. Akin, Esq., for the respondent.
   OPINION.

Van Fossan :

In this case petitioner seeks to deduct as a business expense an item of $10,000 paid by the guardian of her property, with court approval, on account of legal services rendered to the guardian over a period of several years by a law firm of which the guardian was a member. On brief counsel for petitioner states his position to be that “the taxpayer was in business through her guardian. Therefore, the expense was an ordinary and necessary business expense and a proper deduction from gross income under the provisions of section 23 (a) of the Revenue Act of 1932.”

The respondent relies strongly on Van Wart v. Commissioner, 295 U. S. 112, and Alice G. Kales, 34 B. T. A. 1046.

We may observe at the outset that we do not interpret Van Wart v. Commissioner, supra, to hold that in no case may an infant, acting through a guardian, be engaged in business. The case involved only a single item or activity. The Court stated: “The ward was not engaged in any business. So far as appears the same thing is true of the guardian.” (Italics supplied-) We understand this to mean only that under the facts there present it did not appear that the guardian was engaged in business, presumptively on behalf of the infant. Instances are conceivable in which an infant, through a guardian, might be engaged in business.

The Supreme Court in the Van Wart case, however, stated two propositions of law that have application here: (1) A guardianship is not a taxable entity; and (2) the ward, not the guardian, is the taxpayer.

The fact that the guardianship is not a taxable entity destroys any parallelism between this case and the cases involving trusts relied on by petitioner. (John H. Watson, Jr. et al., Trustees, 35 B. T. A. 106; George Vanderbilt Trust, 36 B. T. A. 967.)

That the ward and not the guardian is the taxpayer is important in this case in view of the fact that most, if not all, of the services involved were such as would clearly be classified as purely personal in character if they had been performed at the behest of the taxpayer personally. No segregation of purely personal activities from those of a business nature was made or attempted in the record, petitioner claiming that the expenses were all incurred as guardian of the property of the infant and are accordingly deductible. The query thus arises, Are expenses personal in character, if paid or incurred by a taxpayer directly, converted into business expenses of the taxpayer if paid or incurred indirectly through a guardian? In answer to tMs proposition we quote from the opinion of the Circuit Court of Appeals in Commissioner v. Van Wart, 69 Fed. (2d) 299:

* * * An allowable expense is deductible only from tbe income of tbe taxpayer. Tbe taxpayer’s expenses incurred in carrying on a business are deductible, but bis personal expenses are not. As in this case tbe income belonged to tbe minor, the ward, and not to the guardian, she, and not he, was tbe taxpayer. Tbe attorneys’ fee was an expense of litigation which was paid out of her income. She was not engaged in any business, and therefore as to her the fee was not a business expense. If she had been of legal age and had brought the suit against the trustees of her grandfather’s estate in her own right, the amount of the fee would have been a personal expense for which she would not have been entitled to any deduction from her income. Commissioner v. Field (C. C. A.) 42 F. (2d) 820; Walker v. Commissioner (C. C. A.) 63 F. (2d) 351. The fact that she was a minor makes no difference. In the matter of personal expenses, the Income Tax Law makes no distinction between a minor and an adult taxpayer; it treats them both alike. They would be treated very differently under the rule announced by the Court in the Wurts-Dundas Case [54 F. (2d) 515] and followed by the Board in this case. Under that rule, the cost of litigation could be deducted from the minor’s personal expenses by incurring it at any time before he or she came of age, whereas, as we have seen, such cost could not be so deducted in the ease of an adult taxpayer; or where there were two beneficiaries of taxable income, one a minor and the other an adult, the former would but the latter would not be entitled to deduct the same sort of personal expenses. To follow such a rule would be, as it seems to us, to recognize a difference in tax liability where none was intended or authorized by the income tax law.

We concur fully in this exposition of the law.

In view of the nature of the services performed and of the fact that no segregation is made of personal from business expenses, this would seem to be dispositive of the case.

A similar conclusion is reached if we turn to the second phase of the case and assume that an infant, acting through a guardian, may be engaged in business. Under the decided cases the activities of the taxpayer acting through the guardian were not such as to entitle it to classification as a business.

The activities were of two kinds: (1) Those clearly personal in nature; and (2) those normally incident to the investment, conservation, and protection of property. Such activities did not amount to the carrying on of a business by the taxpayer. In considering the question we need not inquire nor decide whether the guardian, as such, was engaged in business. We are concerned only with determining whether the taxpayer, through the guardian, was engaged in business, and in that consideration the same criteria as are pertinent in other cases are applicable. Commissioner v. Van Wart, supra.

In Alice G. Kales, 34 B. T. A. 1046, the Board stated:

Tbe sums of money bandied by tbe petitioner are impressive as to amount, and if tbe size of an individual’s fortune were tbe determining factor in tbe question as to whether or not a trade or business is carried on, this case might well be concluded in favor of the petitioner. It is not the size of a person’s fortune, however, which determines that activities in connection therewith constitute the carrying on of a trade or business, but it is the use of the fortune, and the nature of the activities indulged in that are most enlightening. We know of no theory which holds that the amount involved in a transaction or in a number of transactions determines the question stated. As a matter of fact, a person of small capital most often finds it necessary to use that capital in the operation or conduct of a business in order to produce income sufficient for a livelihood, while a person of large means is much more likely to realize a sufficient income from investments which require no activities in connection with the business enterprise itself, but merely the doing of those things which are necessary from an investment point of view, that is, the collecting of the dividends or interest, and such supervision as may be necessary to shift from one investment to another when safety, security, and the yield of income suggest such a course. Such activities do not partake of the nature of the conduct of a trade or business in the ordinary sense and do not, in our opinion, fall within the meaning of section 23 (a), supra.

We are of the opinion that the taxpayer was not engaged, either personally or through her guardian, in carrying on a trade or business.

Decision will be entered for the respondent.


author: Stbkniiagbn:

text:
    Richard P. Hallowell, 2nd, Petitioner, v. Commissioner of Internal Revenue, Respondent. Durham Jones, Petitioner, v. Commissioner of Internal Revenue, Respondent. William E. Jones and Lillian D. Jones, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent. Frank A. Mason, Petitioner, v. Commissioner of Internal Revenue, Respondent. Thomas C. Thacher, Jr., and Vera M. Thacher, Husband and Wife, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 84777, 84778, 84779, 84780, 84781
    Promulgated January 5, 1939.

      Malcolm Donald, Esq., and Harold L. OlarTe, Esq., for the petitioners.

      Hartford Allen, Esq., and Arthur Clark, Esq., for the respondent.

   OPINION.

Stbkniiagbn:

The question to be decided is whether the petitioners are to be treated as having been entitled distributively to the $116,621.49 of the partnership income earned in 1933 after Hallowell’s death on June 1, 1933, and actually paid to his estate in accordance with the partnership agreement. According to the agreement, Hal-lowell’s estate was in its own right entitled to the $116,621.49 as its distributive share of partnership earnings of 1933, and it is in recognition of this right that the estate received the amount. The Commissioner, however, constructs a theory by which the amount of 1933 earnings is to be treated as distributable in the first instance to the petitioners as the sole partners after Hallowell’s death and in turn used by them to purchase from the estate Hallowell’s interest in the partnership. In our opinion it clearly appears that the Commissioner’s determination is both contrary to fact and unsupported in law.

The maimer of taxing partnership income is found in Eevenue Act of 1932, section 182:

There shall be included in computing the net income of each partner his distributive share, whether distributed or not, of the net income of the partnership for the taxable year. * * *

The partnership agreement which governed the distribution of income clearly provides for the projection of the partnership six months beyond Hallowell’s death, and that the share to which Hallowell would have been entitled had he lived should be distributable to his estate. This six-month period was properly extended until the end of the calendar year 1933. It was by virtue of these agreements that the estate had its direct right to the share of the partnership income here in question.

Looking at the later agreement of January 2, 1934, whereby the petitioners alone organized a new successor partnership and agreed upon a method of payment to the estate for Hallowell’s interest in the earlier partnership, the Commissioner infers that the share of 1933 income to which the Hallowell estate was already entitled was recognized by the partnership as being payable by the new partners in settlement of Hallowell’s capital interest. We find nothing, however, to support this view. It is true that the 1934 agreement recognizes the estate’s share in the 1933 earnings, but there is no reason to confuse the character of this agreement with the amount which the estate was entitled to receive from the new partnership as Hallowell’s capital contribution in the old.

The petitioner argues with much force that Hallowell’s estate received the amount as compensation for the use of his capital contribution; that the estate was during 1933 a continuing partner in the firm and received the $116,621.49 as its distributive share of partnership income; that, if not a partner, it had such a direct beneficial interest in the amount as to impose a trust obligation upon the surviving partners which would preclude their having any right in the $116,621.49 as a distributive share of partnership income; or that the estate’s right to the amount under the agreement was so definite as to amount to a contractual charge on partnership earnings which the partnership was required to pay before the distributable income could be determined. We refrain from adopting any of these characterizations as the reason for decision, since it is clear for the reasons already stated that the amount attributed to each partner may not be regarded as “Ms distributive share, whether distributed or not, of the net income of the partnership for the taxable year.”

The respondent cites Hill v. Commissioner, 38 Fed. (2d) 165; Pope v. Commissioner, 39 Fed. (2d) 420; W. Frank Carter, 36 B. T. A. 60; Arthur C. Hilmer, 27 B. T. A. 1165, but all of those cases are distinguishable because the circumstances showed a payment by the surviving partners to the representative of the deceased partner for the acquisition of the capital interest in the partnership. Both parties cite Bull v. United States, 295 U. S. 247, but we think that the reasoning supports the petitioner’s rather than the respondent’s view. As to the amount paid in recogmtion of Hallowell’s capital interest in the partnership, the opinion clearly indicates that this amount may not be used to reduce the taxable income of the surviving partners in firm profits; but as to the portion of the current profits paid directly to the estate, it is its income and not corpus, “and this is so whether we consider the executor a member of the old firm for the remainder of the year or hold that the estate became a partner in a new association formed upon the decedent’s demise.” The language of the Board in James Brown, 10 B. T. A. 1036, can well be applied here to the same effect:

* * * The plain intent of the partnership agreement was that regardless of the time during a year in which a partner might die, his estate would share in the partnership profits for the remainder of the year in the same manner as if he had lived throughout the year, and the capital which he had invested in the business would remain in, and at the risk of, the business until the end of the year. * * * After the end of the year, settlement was to be made with the estate not only on account of the profits for the year, but also for the capital which the deceased partner had in the business. * * * The profits of the partnership to which the surviving partners were entitled were not the total profits, but the total profits less the amount which all agreed should go to the estate of a deceased partner. There was not, therefore, receipt by these surviving partners of the total profits and then a distribution to the estate, but they were entitled in the first instance to receive only their share of the partnership profits and the remainder was a share of the profits which accrued to the estate.

See also Walter T. Gudeon, 32 B. T. A. 100.

The Commissioner’s determination is reversed.

Decision will be entered wnder Bule 50.


author: Black:

text:
    Georgie W. Rathborne, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 83106.
    Promulgated January 10, 1939.

      Louis G. Guidry, Esq., for the petitioner.

      S. B. Anderson, Esq., for the respondent.
   OPINION.

Black:

On May 31, 1938, the Board’s opinion in this proceeding was promulgated, in which it was directed that decision be entered under Bule 50. On June 22, 1938, respondent filed with the Board a computation for entry of decision in accordance with the opinion of the Board.

This computation shows that there is an overpayment in income tax by the petitioner, Georgie W. Rathborne, for the year 1932 of $2,490.43. This computation shows that petitioner paid income taxes for the year 1932 as follows:

March 10, 1933_$1,950.00
September 16, 1933_ 793.99
December 16, 1933_ 914.66
January 4, 1935_$152.98
Less interest- 14.95
- 138.03
Total payments_ 3, 796. 68

Of these payments, respondent asks the Board to find that $138.03 was paid within two years prior to the filing of the petition, March 2, 1936, and that the claim for refund of $1,399.16 filed by petitioner on March 10 (sic), 1934, was not a valid claim for refund within the meaning of the applicable revenue act and the regulations thereunder.

Petitioner acquiesces in respondent’s computation of an overpayment of $2,490.43 for the year 1932 and contends that the claim for refund filed by petitioner on March 9,1934, should be considered as amended by the amended petition which petitioner filed on November 30, 1937, with leave granted by the Board, and hence that all the payments made by petitioner on her income tax for the year 1932 were made within two years of the time of filing her valid claim for refund.

The alleged claim for refund was executed on form 843. It is signed by the petitioner and was filed with the collector of internal revenue for the district of Louisiana on March 9, 1934, and asks for a refund of $1,399.16.

The grounds stated in the claim as to why a refund should be made are as follows:

In my original 1932 return, I made an error in deducting 12%% on the following:
Hudson River Navigation Co-$2, 500
Estate Securities Corp-$6,168
General Theatres Co-$9, 950
Cody Lumber Co-$5, 000
These amounts should have been deducted on the face of my returns as bad debts because of the worthlessness of said items. My amended return shows my total 1932 taxes to be $1,344.83 and having previously paid $2,743.99, I am due a refund of $1,399.16.

The Commissioner in his determination of the deficiency disallowed petitioner’s claimed deductions as to each of the items enumerated above except the $5,000 relating to the Cody Lumber Co. This latter loss the Commissioner appears to have allowed in his determination of the deficiency.

In the deficiency notice the Commissioner, among other things, stated as follows:

Due to the adjustments herein shown, it is proposed to disallow your claim (Claim for Refund). Official notice of the disallowance will be issued by registered mail in accordance with section 1103(a) of the Revenue Act of 1932.

In the original petition which was filed, the only assignment of error was the action of respondent in disallowing the loss claimed by petitioner of $6,168 because of bonds of the Estate Securities Corporation becoming worthless in 1932. Prior to the close of the hearings in this proceeding, the assignment of error as to the above alleged loss was abandoned. The only assignments of error left for the Board to decide were raised by the amended petition filed November 30,1931. These assignments of error were as follows:

(a) The Commissioner erred in including in petitioner’s gross income for the said year 1932 the sum of $30,000 received by petitioner from the trust estate created by the last will and testament of the late Joseph Rathborne.
(b) The Commissioner erred in not finding as a fact that all of the said sum of $30,000 received by petitioner from said trust estate created by the late Joseph Rathborne was paid to petitioner by the Trustee out of tax exempt income.

It was assignment of error (b) above, which the Board sustained in part in its opinion promulgated May 31, 1938 (see 37 B. T. A. 936), which resulted in the stated overpayment of $2,490.43. None of that overpayment is due to the allowance by the Board of any of the grounds stated in petitioner’s claim for refund filed with the collector for the district of Louisiana on March 9, 1934. That claim for refund, as has already been stated, was denied by the Commissioner in his deficiency notice.

Article 1254 of Regulations 77, relating to the Revenue Act of 1932, reads in part as follows:

Claims for refund by taxpayers: * * * The claim must set forth under oath each ground, upon which a refund is claimed and facts sufficient to apprise the Commissioner of the exact basis thereof. No refund or credit will be allowed after the expiration of the statutory period of limitation applicable to the filing of a claim therefor except upon one or more of the grounds set forth in a claim filed prior to the expiration of such period. A claim which does not comply with this paragraph will not be considered for any purpose as a claim for refund.

Article 322-3 of Regulations 86, relating to the Revenue Act of 1934, contains the same provision.

Petitioner concedes that her refund claim filed March 9, 1934, did not specify the ground upon which the Board now finds that there was an overpayment. Petitioner concedes that no claim for refund as such is on file in any collector’s office which does specify as a ground for refund the basis upon which the Board holds that there was an overpayment. The petitioner does contend however that the amended petition which she filed on November 30, 1937, relates back to the filing of the original petition, March 2, 1936, and the filing of the original petition on that date relates back to the time of the filing of the refund claim, March 9, 1934, and that the refund claim filed March 9, 1934, is to be considered as amended by the amended petition filed November 30,1937. We can not subscribe to that theory.

It is true that we held in Edward E. Rieck, 35 B. T. A. 1178, that an amp.nrlp.fi petition filed with leave of the Board relates back and becomes effective as of the date of the filing of the original petition for the purpose of determining whether or not an overpayment is refundable under the provisions of section 504 (a) of the Revenue Act of 1934. We did not hold however that the filing of the original petition related back to the filing of any claim for a refund or had anything to do with a claim for refund.

It should be pointed out that the claim for refund which petitioner filed March 9, 1934, was not a general claim for refund, but was one which specified the grounds upon which petitioner relied, as required by the Commissioner’s regulations. Such a claim can not be amended by adding a new and different ground for recovery after the statute of limitations has run. United States v. Andrews, 302 U. S. 517; United States v. Garbutt Oil Co., 302 U. S. 528.

Prior to the Revenue Act of 1934 the Board had jurisdiction to determine, in any proceeding properly before it, that an overpayment of the tax had been made by the taxpayer, but not to determine whether such overpayment or any part thereof should be refunded. The Revenue Act of 1934 changed that situation. Section 504 (a) of that Act is applicable to the present situation and reads as follows:

(a) The last sentence of section 322 (d) of the Revenue Act of 1932 and of the Revenue Act of 1828 are amended to read as follows: “No such credit or refund shall he made of any portion of the tax unless the Board determines as part of its decision that it was paid within two years before the filing of the claim or the filing of the petition, whichever is earlier.”

The purpose of section 504 of the Revenue Act of 1934 is stated by the report of the Ways and Means Committee of the House of Representatives (Report No. 704 to accompany H. R. 7835) in the following language:

This section amends sections 322 (d) and 528 (d) of the Revenue Act of 1932, section 322 (d) of the Revenue Act of 1928 and sections 284 (e) and 319 (e) of the Revenue Act of 1926 to bring those into accord with the present bill in so far as the bill relates to the right of the Board of Tax Appeals to determine when an overpayment found by the Board is refundable to the taxpayer. Confusion has resulted under existing law due to the fact that the Board may find an overpayment of taxes but is not authorized to determine whether the overpayment is refundable, it being incumbent upon the Commissioner to determine whether or not an overpayment determined by the Board is barred by the running of the Statute of Limitations on refunds. The amendment made confers jurisdiction upon the Board of Tax Appeals to determine not only that the taxpayer has made an overpayment of the tax, but also whether such overpayment is refundable, so that the proceeding before the Board may result in a complete disposition of the tax case being considered.

To the same effect is the report from the Senate Committee on Finance. See Report No. 558 to accompany H. R. 7835.

Therefore it is our duty, under the provisions of section 504 (a) of the Revenue Act of 1934, to in effect determine whether all or any part of petitioner’s conceded overpayment for the taxable year 1932 should be refunded to her by the Commissioner. In discharge of that function, we determine, upon the facts above stated, that petitioner has overpaid her income tax for the year 1932 in the amount of $2,490.43; that of this amount $138.03 was paid within two years before the filing of the petition in this proceeding; that petitioner’s claim for refund of $1,399.16 filed on March 9, 1934, was not a valid claim for refund because it did not set forth the grounds upon which the overpayment in tax in fact is due; hence that none of the payments of income tax for the year 1932 ma,de by petitioner were paid within two years before the filing of a valid claim for refund.

Decision will be entered in accordance with the above opinion.


text:
    Alexander B. Siegel, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 82863.
    Promulgated January 10, 1939.

      Alexander B. Siegel, Esq., pro se.

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

Van Fossan :

Technically, the question at bar is the basis to be used in determining the gain or loss, if any, on the sale by petitioner in 1933 of certain stock acquired in 1930 by the exercise of an option. Petitioner contends that the option had been acquired by gift and that the basis is accordingly the basis to the transferor, i. e., the fair market value of the right. (Sec. 113 (a) (2), Revenue Act of 1932).

Although the option was received by the donors in December 1929, it had no fair market value at that time. Its value was entirely dependent on, and was fixed by, the consummation of the sale contract, which did not occur until January 7, 1930. This fact undoubtedly accounts for the Commissioner’s action in taxing the receipt of the same to the donors in 1930 at its then value of $20 per share. No question is presented on this phase of the case. Respondent’s counsel concedes that if the option was transferred to petitioner as a gift there is no tax due on the transaction. Respondent claims, however, that the option was acquired as compensation for services rendered and that accordingly the cost paid when the option was exercised, 28 cents per share, is the basis of gain or loss on the shares sold.

The Supreme Court, in Bogardus v. Commissioner, 302 U. S. 34, held that the determination of the question whether a payment was compensation or was a gift was a question of law or a mixed question of law and fact, and that the terms, “gift” and “compensation for personal services” were mutually exclusive. A bestowal of money can not be both. The Court stated, “if it be in fact a gift that is an end of the matter.” Addressing itself to the case in hand the Court observed:

In sum, then, the case comes to this: The stockholders of the Unopco, having at the time no connection with the Universal Company, but rejoicing in the fact of their own great good fortune, and mindful of the former loyal support of a number of employees of the Universal Company, and desiring to remember them “in the form of a gift or honorarium,” resolved to make through the Unopco Company the distribution in question. In doing so, they were moved, as Judge Swan said in his; dissenting opinion below, to an act of “spontaneous generosity.” We agree with this dissenting opinion of Judge Swan, and the dissenting opinion of Judge Morton in Walker v. Commissioner, supra, as stating the correct view of the matter.
The only facts which even seem to militate against this view are: (1) That the Unopco stockholders had benefited by the former services of the recipients; (2) that the stockholders at their meeting described the payment as a gift or “honorarium”; and (3) that the resolutions authorized the payment as a “bonus * * * in recognition of the valuable and loyal services” of the employees, etc.
1. Because the Unopco stockholders had benefited by the past services of the recipients, it by no means follows that the distribution in question was not a gratuity. It nowhere appears in the record that full compensation had not been made for these services. There would seem to be a natural inference to the contrary; and the inference is made determinate by the stipulated fact that no one was under any obligation, legal or otherwise (and this would include a moral obligation, however slight), “to pay any additional compensation.” There is no ground for saying that the benefit received and the compensation then paid for it were not equivalents.

The Court also stated:

Some stress is laid on the recital to the effect that the bounty is bestowed in recognition of past loyal services. But this recital amounts to nothing more than the acknowledgment of an historic fact as a reason for making the gifts. A gift is none the less a gift because inspired by gratitude for the past faithful service of the recipient.

Testing the facts of record by the criteria thus laid down, it is clear that the transfer of the option was in every sense a gift. It was so specifically characterized by both parties. Compensation in the full amount agreed on had been paid. It came as a surprise to petitioner and was conceived and suggested by the donor. On receipt by petitioner it was gratuitously apportioned by him among certain of his associates but not in the ratio of participation and ownership in the firm business. The only premises on which respondent’s case is based are the fact that the relationship of attorney and client had existed, the coincidence in time with the payment of fees, and the further fact that the assignment was inspired by appreciation of valuable services rendered. But the Supreme Court has indicated clearly that these circumstances are not sufficient to defeat a gift if in fact a gift is intended and carried out.

Counsel having agreed that a holding to the above effect is disposi-tive of the case, no purpose will be served by further discussion.

Decision will be entered wider Rule 50.


author: Steenhagen :

text:
    George B. Proctor and Jean K. Proctor, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 90311.
    Promulgated January 10, 1939.

      Melville F. Weston, Esq., for tlie petitioners.

      Paul E. Waring, Esq., for the respondent.

       Tlie wife is a petitioner only because she was party to the joint returns, and therefore in this report the husband alone will be called petitioner.

   OPINION.

Steenhagen :

The amounts which went to Wylde and Windeler in 1934 and 1935 by virtue of their individual contracts with Proctor and Wilder have been treated by the Commissioner as if in the first instance they had gone to Proctor and Wilder as their distributive shares of the income of their partnership and then had been used by them to purchase from Wylde and Windeler their rights and interests in intangible property constituting assets of the old partnership which expired in 1929. Cf. Hill v. Commissioner, 38 Fed. (2d) 165. In his brief the respondent states the issue thus:

The sole issue involved in this proceeding is whether the sums paid to Wylde in 1934 and to Windeler in 1934 and 1935 were paid by the partnership firm of Patterson, Wylde & Windeler to acquire on behalf of the petitioner and Henry H. Wilder the interests of retiring partners in the “good will” of a prior partnership and therefore such payments should not be deducted from the distributive partnership income of the petitioner and Wilder as partners of Patterson, Wylde & Windeler.

The petitioner contends that the amounts were paid to Wylde and Windeler in either of two possible characters — (1) as their several distributive shares of the partnership income, or (2) as compensation for services contracted to be rendered by them to the partnership; that either character precludes their being regarded as petitioner’s “distributive share, whether distributed or not, of the net income of the partnership for the taxable year.” Kevenue Act of 1934, sec. 182.

The essential problem is not that of finding the correct characterization of the amount as it was received by Wylde and by Win-deler, but to determine whether it can properly be called partnership income which this petitioner may properly be said to have received as his distributive share. We are of opinion that it was not, and that the Commissioner was therefore in error in including it within the petitioner’s taxable income. Whether Wylde and Windeler be be treated as partners with petitioner and Wilder, having a 5 percent right in partnership income, or as being merely employed as consultants and advisers with compensation fixed at such 5 percent, it is clear that the amounts to which they were thus entitled were charges upon partnership income before the distributive shares of petitioner and Wilder could be determined. To treat these percentage charges as if they were first distributable to petitioner and Wilder and then as if used by petitioner and Wilder as the consideration for the acquisition of the interests of Wylde and Windeler in the old partnership is not only an artificial conception, but is directly contrary to the fact.

The only justification which can be found for the theory is that the separate agreement made by the new partners with each of Wylde and Windeler ambiguously treats the 5 percent which the latter were each to receive in one place as compensation for services and, in another, as the consideration for the release of all their right in the old partnership’s assets. As a matter of fact, it happened that there were no such rights which Wylde and Windeler gave up, because in fact the $10,230.62 which appeared to be the net balance of the old partnership’s assets on December 31, 1929, had been shown to be merely a book figure of nonexistent assets when it appeared that $32,450.99 of accounts receivable were worthless. This left only the possible assets of firm name and good will, and both of those had already become rightfully owned by the partnership consisting of Proctor and Wilder. It would be unwarranted, therefore, to resolve the ambiguity of each of the separate contracts by treating the 5 percent as being paid by the petitioners for something of no substance. It can more reasonably be resolved by treating the 5 percent as compensation for the services which Wylde and Windeler were expected to perform and which in fact to some extent they did perform. There is reason to believe that the provision in subdivision fifth of the separate contracts was merely a precautionary provision to avoid possible controversy as to whether Wylde and Windeler or their estates might be entitled to further compensation for an intangible right which they might have retained. Eespondent further bolsters his conception of the 5 percent as consideration for Wylde and Windeler’s release by pointing to a provision of the contract that in case of the death of either of them in 1930,1931, or 1932 his estate was to receive 5 percent through 1932. Even if this conception were to be adopted it would still fall short of coloring the payments made after 1932, and would not support a holding to that effect in the taxable years 1984: and 1935. It seems the most reasonable interpretation of the several contracts and the conduct of the parties that what Wylde and Windeler were receiving was compensation for services paid by the partnership to them and constituting, in computing partnership income, a deduction for ordinary and necessary expenses of carrying on the partnership’s trade or business, Revenue Act of 1934, secs. 23 (a) and 183.

The reversal of the Commissioner’s determination upon this ground makes it unnecessary to decide whether Wylde and Windeler are properly to be regarded as partners with Proctor and Wilder so that the amounts received by them may be said to be their distributive shares of partnership income. Apparently among the four themselves neither Wylde nor Windeler was in a partnership relation. This the agreements were careful to recognize, leaving Proctor and Wilder as the sole partners. There was, however, enough to raise a serious question whether Wylde and Windeler were ostensible partners so as to impose liability upon them at the behest of a third person. Whether this is enough to require the application to them of the partnership provision of the revenue act is a question which need not be decided.

The Commissioner’s determination is reversed.

Decision toill be entered u/nder Bule 50.


author: Sternhagen :

text:
    Robert H. Munson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 88949.
    Promulgated January 10, 1939.

      James D. Dow, Jr., Esq., for the petitioner.

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

Sternhagen :

In determining petitioner’s income tax for 1932, the Commissioner determined that a gain of $971,985.24 was realized from the liquidation of the corporation. The petitioner assails this determination, and insists that he realized no gain. It would be ironic indeed if a gain of almost a million dollars could be recognized with a resulting tax liability of over half a million dollars when at the same time the petitioner was and has ever since been insolvent, as stated by both parties. But this does not dispose of the merits of the question.

The determination must be reversed because it is apparent that petitioner had no gain. He and his corporation went through motions which wholly lack substance. In reality the corporation did not distribute anything in liquidation. Bound as it was by its contract with the broker giving the broker a lien on its account to support Munson’s individual account which it had guaranteed, it could not transfer the asset of this account in liquidation to Munson without the broker’s consent. It did not attempt to do so, but had the broker transfer its account to petitioner’s to discharge its guaranty at a time when Munson’s assets made the guaranty a substantial, unmistakable, and imminent obligation. It was done on the same day as the simulation of a transfer in liquidation to petitioner, but this contemporaneous conduct must be taken as in the sequence which fits the corporation’s obligation. Cf. Liberty Service Corporation, 28 B. T. A. 1067; 77 Fed. (2d) 94. As in that case, the nominal liquidation and ostensible transfer to the shareholder were ineffectual. The forms adopted can not serve to establish as actual a liquidation to petitioner which was only apparent and which did not and legally could not transfer anything to him.

Decision will be entered, under Bule 50.


author: Van Fossan:

text:
    Thornton Emmons, Surviving Husband, and Thornton Emmons, Administrator of the Estate of Isabel Alley Emmons, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 88212, 88213.
    Promulgated January 10, 1939.

      Allen /. Pretrnnam,, Esq., for the petitioner.

      Joe D. Hughes, Esq., for the respondent.
   opinion.

Van Fossan:

These proceedings were brought to redetermine deficiencies in income tax of the petitioner for the years 1983 and 1934 in the respective amounts of $131.13 and $1,130.34.

The facts were stipulated substantially as follows:

The petitioner, Thornton Emmons, is the surviving husband of Isabel Alley Emmons, and the administrator of the estate of Isabel Alley Emmons, deceased.

On April 17, 1931, Henry Lord, a resident of the City and State of New York, executed a last will and testament leaving to eleven named beneficiaries certain specific legacies, and the remainder of his estate, by clause twelfth of the will, was divided among those eleven named legatees in proportion to the amount of their several legacies as set forth in the first eleven clauses of the will.

The sole heirs and next of kin of Henry Lord, at the time of the execution of his will and at the date of his death, wrere Sarah Lord Murphy and Isabel Alley Emmons, a niece and grandniece, who were not mentioned in the will.

The will was offered for probate in the Surrogate’s Court of the County of New York, State of New York, and thereupon Sarah Lord Murphy and Isabel Alley Emmons duly appeared and filed an answer to the petition for probate and objected to the probate of the alleged will upon the ground that at the time of its execution “Henry Lord was not of sound mind or memory or mentally capable of making a will,” and “that the said paper writing was not freely or voluntarily made or executed by the said Henry Lord, as his last Will and Testament,” but that the paper purporting to be his will was procured by fraud and undue influence practiced upon the decedent by certain named persons and organizations.

On April 10, 1933, a compromise agreement was entered into between the named legatees in the last will and testament of Henry Lord, and Sarah Lord Murphy and Isabel Alley Emmons, the contestants thereof. By the compromise agreement it was provided that, in consideration of the withdrawal by the contestants of their objections filed to the probate of the will, the named legatees granted, released, conveyed, sold, assigned, and transferred to the contestants in equal shares all of the right, title, and interest of the legatees in and to the residuary estate of Henry Lord.

On June 21, 1933, James A. Delehanty, one of the Surrogates of New York County, ordered, adjudged, and decreed that the agreement of compromise conformed to the requirements of section 19 of the Decedent Estate Law of the State of New York and the same was approved and declared to be valid and binding upon all of the parties thereto.

On June 27, 1933, the last will and testament of Henry Lord was admitted to probate, subject, however, to the terms of the compromise agreement of April 10, 1933.

Isabel Alley Emmons received the following amounts pursuant to the terms of the compromise agreement of April 10, 1933:

September 12, 1933-$2, 000.00
February 28, 1934_ 3, 000.00
May 23, 1934_ 7, 500.00
June 15, 1934_ 1,294.84
June 15, 1934_ 2, 516.20
16, 311.04

For the year 1933 the respondent has allowed a deduction of $498 from the $2,000 received, and for the year 1934 a deduction of $2,984.74 has been allowed from the sum of $14,311.04 received in that year.

The sum of $16,311.04 which was distributed to Isabel Alley Em-mons pursuant to the terms of the compromise agreement of April 10, 1933, comprised an amount equal to one-half of the residuary estate of Henry Lord, deceased.

By further provision of the compromise agreement of April 10, 1933, it was provided that Sarah Lord Murphy and Isabel Alley Emmons, contestants, were entitled to receive in equal shares the residuary estate of Henry Lord, deceased, as established by said will, to the same extent and with the same force and effect as if paragraph twelfth of said will had given, devised, and bequeathed the residuary estate of the decedent to the contestants instead of to the legatees entitled to legacies under the first eleven paragraphs of the will. Pursuant to the terms of the will and the compromise agreement, the executors proceeded with the administration of the estate and paid to Isabel Alley Emmons and Sarah Lord Murphy an amount equal to the residuary estate in the proportion set forth in the compromise agreement.

The parties also stipulated that, since the issue of law presented by the above facts was substantially the same as that in Lyeth v. Hoey, 96 Fed. (2d) 141, which case was then pending in the Supreme Court: “that a decision by the Supreme Court of the United States in that case, if considered and decided on its merits, will be binding in the instant case * *

On December 5, 1938, the Supreme Court rendered its decision in Lyeth v. Hoey, 305 U. S. 188, holding that property received by taxpayer in compromise of his claim as an heir is not taxable income.

In accordance with the stipulation of the parties and in reliance on the cited decision, we hold that petitioner is not taxable on the sums received in compromise of the will contest.

Decision will T>e entered for the petitioner.


author: SteRnhagen:

text:
    Arthur Berenson, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 91144.
    Promulgated January 10, 1939.

      Arthur Berenson, Esq., pro se.

      Bernard D. Daniels, Esq., for the respondent.
   OPINION.

SteRnhagen:

On his return for 1935 the petitioner deducted a loss of $22,000 in respect of the second mortgage described in the findings. The Commissioner disallowed the deduction and the petitioner now claims it as a bad debt. The two categories of deduction are mutually exclusive, Spring City Foundry Co. v. Commissioner, 292 U. S. 182. It does not appear anywhere in the record how the amount of $22,000 is arrived at, but, since there is no basis for the deduction in any event, this may be passed over. The petitioner’s contention, if we understand it correctly, is that the property securing his second mortgage was sold in foreclosure of the first mortgage in December 1934; that since there was a right of redemption for a year his security was not abolished until 1935; and hence that it was not until 1935 that he felt the impact of the worthlessness of the debt represented by the $125,000 note.

The sale of realty for taxes has been held to result in loss to the owner deductible in the year when the redemption period expires, Frederick Krauss, 30 B. T. A. 62; Herman M. Rhodes, 34 B. T. A. 212 (on review, C. C. A., 6th Cir.), and the same doctrine has been applied in determining the year of deduction available to an owner of real estate sold upon foreclosure, J. C. Hawkins, 34 B. T. A. 918; affd., 91 Fed. (2d) 354; Derby Realty Corporation, 35 B. T. A. 335; dismissed, 92 Fed. (2d) 999. This principle, however, has no application to petitioner, for he was not the owner of the foreclosed property and so far as the record shows he still held the $125,000 note, which may have been worth the full amount of the loan. The mere fact that the security of the second mortgage fell before the foreclosure of the first mortgage was not determinative of the worthlessness of the obligation which it secured.

But, assuming with petitioner that the worthlessness of the second mortgage carried with it the worthlessness of the secured note, this clearly occurred in 1934, when the mortgaged property passed to the first mortgagee pursuant to the power of sale contained in the mortgage, ch. 244, General Laws of Massachusetts, 1932, sec. 18, for the mortgagor “had no right to redeem after the foreclosure sale.” Matthews v. Dinner, 237 Mass. 153; 129 N. E. 394; Levin v. Century Indemnity Co., 279 Mass. 256; 181 N. E. 223; Beal v. Attleboro Sav. Bank, 248 Mass. 342; 142 N. E. 789; Way v. Mullet, 143 Mass. 49; 8 N. E. 881. We are not to say, as petitioner with some confusion urges, that the foreclosure sale was less conclusive than on its face and on this record it appears to be, because of some controversy carried on by petitioner with the bank as to whether it would hold him liable as endorser on the first mortgage note in excess of $10,000.

The Commissioner correctly disallowed the deduction taken for $22,000, and since this is the only item of the Commissioner’s determination which the petition assails* the deficiency must be sustained.

Decision will be entered for the respondent.


text:
    Albert E. Smith, Petitioner, v. Commissioner of Internal Revenue, Respondent. O. G. Dreher, Petitioner, v. Commissioner of Internal Revenue, Respondent. Carlton W. Smith, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 90266, 90267, 90268.
    Promulgated January 12, 1939.

      John F. Greaney, Esq., for the petitioners.

      Joe D. Hughes, Esq., and George W. Huntington, Esq., for the respondent.
   OPINION.

Van Fossan:

The recently promulgated opinion of this Board in Frank J. and Hubert Kelly Trust, 38 B. T. A. 1014, is decisive of most of the contentions in the present case. There is a factual difference in that in Frank J. and Hubert Kelly Trust, the preferred stock was received as a dividend on common stock, which was the only class of stock theretofore authorized and outstanding, while in the cases at bar the class B preferred stock was received as a dividend on common, the dividend preferred stock being junior to other preferred stock authorized and outstanding at the time. This difference, we believe for present purposes, is of no effect in the face of the rule governing these cases enunciated in Koshland v. Helvering, 298 U. S. 441, and Helvering v. Gowran, 302 U. S. 238, followed in Frank J. and Hubert Kelly Trust and hereinafter discussed.

Frank J. and Hubert Kelly Trust, supra, held that the stock dividend there involved was, by statute, specifically exempt from, taxation as a stock dividend (see Helvering v. Gowran, supra); and the same is true with respect to the stock dividend here in question. (Sec. 115 (f), Kevenue Act of 1932.) Albeit the stock dividend is itself exempt from taxation, the question as to whether it is income (Koshland v. Helvering, supra, and Helvering v. Gowran, supra) or a proliferation of capital (Eisner v. Macomber, 252 U. S. 189) is still pertinent in order that the correct basis upon which gain or loss should be computed may be decided.

The determinative issue thus presented is whether the common stockholders received an interest substantially different in character or extent from that previously held, when they received as a stock dividend on their common stock the class B preferred stock of the same company, which was junior to other preferred stock already issued and outstanding. Frank J. and Hubert Kelly Trust, supra; Tillotson Manufacturing Co., 27 B. T. A. 913, 917; affd., 76 Fed. (2d) 189.

In our opinion there is no question but that the stock received possessed substantially different attributes from the common stock. The character of the stock on its face is different. Manifestly, common stock and junior preferred stock are not possessed of the same rights. See Fletcher’s Cyclopedia of the Law of Private Corporations, vol. 11, sec. 5283, and Page’s Annotated Ohio General Code, secs. 8667-8671. 'With particular reference to the stocks here in question, we have found that holders of the common stock had the exclusive right to stock dividends; that on dissolution they were entitled pro rata to the company assets after fixed priorities and accrued dividends on preferred stock had been met; that after the stock dividend in question, the class B preferred stockholders were entitled to dividends as and when declared at the fixed rate of 7 percent per annum, payable quarterly and cumulative; that holders of class B preferred stock on dissolution were to be paid $100 per share, plus accrued dividends, before pro rata distribution was made to holders of common stock; that class B preferred was at all times junior to the so-called class A preferred; that class B preferred could at any time be repurchased by the company at the fixed price of $100 per share; and that voting rights were exclusively in holders of the common stock, except that if and when class A preferred dividends were two years in arrears then holders thereof had. voting rights.

It must readily be seen that the common stockholders of the American Envelope Co., by the 30 percent dividend in class B' preferred stock, payable on their stock, received new and distinct rights of a class B preferred stockholder. They were given preference rights in future income not theretofore secured to them, as well1. as fixed rights on dissolution or liquidation. (Magill, Taxable Income, p. 45 et seq.) Although there is the factual difference, herein-before mentioned, between the case at bar and Frank J. and Hubert Kelly Trust, supra, the distinctions there drawn between common and preferred stock are here apposite:

Petitioner’s counsel contends that after the issuance of the preferred stock all of the stockholders were in exactly the same position as before. He points out that the interest each had through the ownership of common shares was thereafter represented in the same proportion by the common and preferred shares combined, and concludes that their position before and after the dividend was as similar as it was in Eisner v. Macomber, supra. With this, however, we are unable to agree. The preferred shares were nonvoting, entitled to 7% cumulative dividends, and preferred on dissolution. It has been stated that although generally the discretion of the directors as to the payment of dividends to common stockholders will not be interfered with by a court, “different rules apply with respect to the right of holders of preferred stock to invoke the aid of a court to order the declaration and payment of dividends on their stock.” Craity v. Peoria Law Library Association, 219 Ill. 516; 76 N. E. 707, 708. If this be so, the preferred stock for this reason alone conferred upon the stockholders a new and different privilege. But entirely apart from this, the undeniable difference in the situation of the stockholders is that their interest, after the dividend, became to some extent transferable in parts where before it could be disposed of only as a whole. Before the dividend, it is true, a stockholder could have sold a portion of his common shares. But, as pointed out in the Macomber case, supra, p. 212, it is “in the nature of things impossible for one to dispose of any part of such an issue without a proportionate disturbance of the distribution of the entire capital stock.” After the preferred stock was issued this was no longer true. Petitioner’s donors, by transferring the preferred stock, as in fact they did, could then dispose of a part of their interest in the earnings and assets of the corporation without in any way disturbing the distribution of voting control. Or they could retain the preferred stock as representing a property interest and divest themselves of the powers of management. We find it impossible to conclude that this situation did not result in a substantial alteration of the interest of the stockholders. And the fact that, if they disposed of the dividend stock, their earnings from the corporation might be reduced is of no significance, since the same would be true in the event of a distribution in cash or in kind.

Petitioners contended as an alternative that the recapitalization of the American Envelope Co., attendant to the issuance of the class B preferred stock, was a “reorganization” of the company within the meaning of sections 112 and 113 of the Revenue Act of 1932. Such a contention is conclusively answered in Frank J. and Hubert Kelly Trust, supra. It is there said:

Finally, it is contended in a brief filed by amici curiae that apportionment of the basis is required by sections 112 and 113 of the Revenue Act of 1934, on the ground that the dividend stock was distributed pursuant to a reorganization, the definition of which includes recapitalization. The same argument was inferentially rejected in Pearl B. Brown, supra, p. 908. Whether or not the arrangement could have been considered a reorganization, it seems to us clear that it was not made “in pursuance of a plan” as that term is used in section 112, at least in so far as this record shows. And, in any event, acceptance of this position requires us to assume that Selvering v. Gowran, supra, was erroneously decided. This we are unable to do.

The Kelly case likewise indicates the Board’s position on the question relative to the applicability of section 113 (b) (1) (D) of the Revenue Act of 1932 here injected by respondent. In that case we postponed a determination of the question until a case arises in which the disposition of the original stock is involved. We make the same ruling here.

The further issue relative to the capital or noncapital character of the gain arising from the sale of the stock received by petitioners as a stock dividend must be resolved in favor of respondent. We have held above that the stock dividend here in question is not a pure stock dividend within the case of Eisner v. Maconiber, supra, and as such constitutionally exempt from tax. On the contrary, it is income. The holding period necessary to characterize it as capital gain is two years (sec. 101, Revenue Act of 1932), and as the Supreme Court has said in Helvering v. Gowran, supra, “In no sense can it [the dividend stock] be said to have been ‘held’ by Gowran prior to its declaration.” The class B preferred stock here was sold in the same year in which the dividend was declared. The gain, therefore, is not a capital gain.

Decision will be entered v/nder Rule 50.


author: Opper:

text:
    James R. Stewart, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 89950.
    Promulgated January 12, 1939.

      John L. Connolly, Esq., for the petitioner.

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

Opper:

The issue is whether the transaction by which petitioner canceled the land sale indebtedness, relinquished his interest in the property, and received Federal Farm Loan bonds in a lesser amount than the face value of the debt, was a sale or exchange of capital assets on the one hand or is to be treated as the payment of a partially worthless debt on the other. Respondent does not contend that the indebtedness was partially worthless when acquired by petitioner or that it became worthless prior to the taxable year, so that the only question is whether petitioner is entitled to a deduction for the full amount of his loss as a bad debt or only to the limited deduction allowable if the transaction is a sale or exchange.

The situation of the parties prior to the surrender of the claim and conveyance of the property by the petitioner seems to be comparable in all respects to the case of a sale of property for a consideration consisting of notes secured by a purchase money mortgage. Roby v. Bismarck National Bank, 4 N. D. 156; 59 N. W. 719, 720; Ferguson v. Blood, 152 Fed. 98, 103. Petitioner’s predecessor had made a contract to sell the property in consideration of the purchaser’s agreement to pay the purchase price in installments. This resulted in the purchaser obtaining equitable title (Woodward v. McCollum, 16 N. D. 42; 111 N. W. 623, 626; see Vail v. Evesmith (N. D., 1932), 241 N. W. 719, 721), being liable to the vendor on the contract, and leaving the vendor with legal title to the property or a vendor’s lien thereon as security for payment. Johnston Land Co. v. Whipple (N. D. 1930), 234 N. W. 59; Comp. Laws N. D. 1913, §§ 6861, 6720, 6721. And petitioner’s acquisition of the debt carried with it the vendor’s title held as security. Roby v. Bismarck National Bank, supra.

Had the purchaser surrendered his interest in the land or recon-veyed it to the vendor in exchange for a cancellation of the debt, the transaction would have been regarded as a sale or exchange of capital assets. Betty Rogers, 37 B. T. A. 897; Marry Payne Bingham, 38 B. T. A. 913. Here, however, the process was reversed. There was no reacquisition of the property by the vendor. Bather, he relinquished all of his claim to the property by conveying legal title to the purchaser, who already held equitable title. And he canceled part of the indebtedness in consideration of a payment of the remainder on behalf of the purchaser. From this standpoint it seems to us that the transaction was purely in the nature of a partial payment of an indebtedness. See Harold S. Denniston, 37 B. T. A. 834, 837. The result was not the sale or exchange of the legal title for the partial payment. It was the mere release of the property as security for the obligation, as in the Denniston case, the mere completion of the conveyance which had been initiated by the contract. And the cancellation of the debt in return for a partial payment could not be said to be a sale or exchange since, to quote from Hale v. Helvering, 85 Fed. (2d) 819, affirming 32 B. T. A. 356:

* * * Neither business men nor lawyers call the compromise of a note a sale to the maker. In point of law and in legal parlance property in the notes as capital assets was extinguished, not sold. In business parlance the transaction was a settlement and the notes were turned over to the maker, not sold to him. In John H. Watson, Jr., v. Commissioner of Internal Revenue, 27 B. T. A. 463, overruling Henry P. Werner v. Commissioner of Internal Revenue, 15 B. T. A. 482, it was Reid tliat the payment at maturity, of the face amount of bonds purchased at a premium, was not a sale or exchange resulting in a capital loss. Tf the full satisfaction of an obligation does not constitute a sale or exchange, neither does partial satisfaction. * * *

Nor can we question that the canceled portion of the debt was worthless in view of the facts that the debtor had other obligations of a substantial character; that the real property was evidently worth considerably less than the amount of the claim; and particularly that to the extent the indebtedness was actually reduced it was a condition of the intervention of the Federal Land Bank, from which apparently the only assistance could be procured. Had a note been given for the unpaid balance, to be later written off as worthless, as in Harold S. Denniston, supra, that formality would but have detracted from the convincing proof of worthlessness in the present proceeding. This proof is reinforced by the fact that petitioner claimed his entire loss on his verified income tax return. See Harold S. Denniston, supra, p. 837; cf. Rufus H. Syfers, 22 B. T. A. 736.

It is true that payment was made partly in the form of Federal Farm Mortgage Corporation bonds rather than cash. This seems to us under the present circumstances to be immaterial. It is evident from the statutory authorization and the practice of the Farm Credit Administration thereunder that it was an integral part of the program specified by Congress that payments on account of agricultural indebtedness of this character should be made to a considerable extent in the form of bonds. 12 U. S. C. 723 (f), 772, 1016 (g); 48 Stat. 346, 347. The choice did not lie with petitioner and it is difficult to see how his situation was aided or injured by the receipt of readily marketable securities in satisfaction of the debt. Josephine C. Bowen, 37 B. T. A. 412, is not authority to the contrary. As we said of that decision in Harold S. Denniston, supra, p. 839, “It does not appear, either, that the taxpayer there claimed any bad debt loss in respect of the balance of the purchase money mortgage, nor was there any discussion of this question.” Here, of course, petitioner expressly claims the right to such a deduction, and in fact that is the only issue.

Reviewed by the Board.

Decision will be entered for the petitioner.

Leech concurs only in the result.


author: HaeROn:

text:
    Cereal Products Refining Corporation (Now Known as Acme Breweries), Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 86538.
    Promulgated January 17, 1939.

      Norman A. Eisner, Esq., and Myrtile Gerf, G. P. A., for the petitioner.

      H. D. Thomas, Esq., for the respondent.
   OPINION.

HaeROn:

The deficiency in this proceeding results from respondent’s determination that the petitioner corporation’s income tax liability for 1933 should be computed, assessed, and collected on the basis of the consolidated income of petitioner and an affiliated corporation. Bespondent has made this determination by application to the year 1933 of article 11 (a) of Begulations 78. Begulations 78 were prescribed under section 141 (b) of the Bevenue Act of 1932, and were approved by the Secretary of the Treasury on December 7, 1932. If article 11 (a) of the regulations is properly applied to the year 1933, article 15 of the regulations, which imposed upon members of an affiliated group of corporations several liability for tax and any deficiency in respect thereof computed upon the consolidated net income of the group, is also applicable. Petitioner has been assessed the full amount of the deficiency, $29,657, under article 15 of Begula-tions 78. The only question for decision is whether petitioner’s income tax liability for 1933 should be computed on the basis of the separate income tax return which it made for itself, or upon the basis of consolidated income of petitioner and an affiliated corporation. It is respondent’s contention that, since a consolidated return was made by petitioner under Begulations 78, for the year 1932, a consolidated return must be made for the year 1933, during which time the two corporations remained affiliated. It is the contention of petitioner that, even though it made a consolidated return for the taxable year 1932, availing itself of the option afforded to it by the terms of section 141 (a) of the Bevenue Act of 1932, it had, nevertheless, a new election for the year 1933 with respect to the method of making income tax return because changes were made in the Bevenue Act of 1932 by enactment of certain revenue provisions in the National Industrial Recovery Act, enacted June 16, 1938. In substance, the petitioner contends that the Commissioner may not apply article 11 (a) of Regulations 18 to the taxable year 1933 in such way as to deny petitioner a new election under section 141 (a) for the year 1933.

Since the issue in this proceeding arises out of application of an administrative regulation, it is pertinent to comment first upon the recognized limitations upon the application of the administrative regulations. We refer to a decision of the Supreme Court in Manhattan General Equipment Co. v. Commissioner, 297 U. S. 129, in which the Court stated as follows:

The power of an administrative officer or board to administer a federal statute and to prescribe rules and regulations to that end is not the power to make law, for no such power can be delegated by Congress, but the power to adopt regulations to carry into effect the will of Congress as expressed by the statute. A regulation which does not do this, but operates to create a rule out of harmony with the statute, is a mere nullity. Lynch v. Tilden Produce Co., 265 U. S. 315, 320-322, 44 S. Ct. 488, 68 L. Ed. 1034; Miller v. United States, 294 U. S. 435, 439, 440, 55 S. Ct. 440, 79 L. Ed. 977, and cases cited. And not only must a regulation, in order to be valid, be consistent with the statute, but it must be reasonable. International R. Co. v. Davidson, 257 U. S. 506, 514, 42 S. Ct. 179, 66 L. Ed. 341.

The matter of requiring or allowing consolidated returns has long been in controversy, as clearly appears in reports of the Committee on Ways and Means and the Committee on Finance. Since the Revenue Act of 1918, there have been various provisions enacted by Congress relating to the method by which affiliated corporations should or could report income. In the 1918 Act, section 240 (a), Congress enacted a mandatory provision requiring affiliated corporations to make a consolidated return of net income. In the Revenue Act of 1921, section 240 (a) was amended so as to permit affiliated corporations to make either separate returns or, within their election, a consolidated return. But it was prescribed in the statute that if a return was made on either of such bases all returns thereafter should be made upon the same basis unless permission to change the basis was granted by the Commissioner. The consolidated returns provision in the revenue act remained the same in this particular respect until the Revenue Act of 1928, when it was considerably revised, and section 141 of that act extended to affiliated groups of corporations the privilege of making a consolidated return for the taxable year 1929 or any subsequent taxable year. Under the 1928 Act, a special provision was adopted, section 142, which required keeping the basis of income tax return the same for the year 1928 as had been adopted by the taxpayer for the year 1927. In the Revenue Act of 1932, section 141 remained unchanged, excepting for insertion of a parenthetical clause. There was not enacted any provision similar to section 142 of the 1928 Act. In the Revenue Act of 1934, Congress limited the privilege of filing consolidated returns to affiliated groups of railroad corporations (section 141 (a), (d)). Throughout this history of the consolidated returns provisions in the various revenue acts, it is clear that the requirement that consolidated returns must be made by affiliated corporations has been relaxed. Review of reports of the two Finance Committees of Congress shows that the consolidated returns provision was first enacted in the Revenue Act of 1918 because of the excess profits tax then in effect. With the repeal of the excess profits tax and the adoption of net loss provisions in the revenue acts, it has appeared to the Congressional finance committees that the advantages to corporations in making consolidated income tax returns have diminished and that there was less reason for allowing consolidated returns. The Ways and Means Committee has, from time to time, recommended abolition of the consolidated return provision, but the Treasury has consistently recommended to Congress that abolition of the consolidated returns provision was undesirable. The consolidated returns provision, revised, has been reenacted from time to time as a compromise measure. It is not material to explore the legislative history of the consolidated returns provisions in the various revenue acts excepting to point out that it is clear that Congress has allowed corporations a new election from time to time as the law has been changed and that when Congress intended that there should not be a new election under a new act it has so stated in the new act. Cf. section. 142,1928 Act. This is brought out in the report of the hearings before the Ways and Means Committee considering the proposed Revenue Act of 1934 (hearings December 15 to 21, 1933, and January 9 to 11,, 1934, pp. 86, 87). Roswell Magill, representing the Treasury Department, was asked by a member of the Committee if it was not true that affiliated corporations had the option of making separate returns or consolidated returns. The answer was in the affirmative. The further question was asked whether an affiliated group of corporations having once elected, then “must proceed along the line of their election.” To this question Magill replied in the affirmative and stated, “but a new election has been given them, from time to time, as the law has been changed.” Thus, we understand that whatever may have been the requirement under a specific revenue act and under approved regulations of the Commissioner, it has been recognized that there is a new election when the revenue act is changed, unless the new revenue act specifies otherwise. (Cf. section 142 of the 1928 Act.) We believe Congress has intended that this should be the procedure.

Congress gave to an affiliated group of corporations the privilege of making a consolidated return for a taxable year in lieu of separate returns under tbe provisions contained in section 141 (a) of tbe Revenue Act of 1932. Section 141 is set forth in tbe margin. Tbe privilege of making a consolidated return was conditioned upon consent to regulations prescribed by the Commissioner under section 141 (b) and tbe making of tbe consolidated return constitutes such consent. Tbe statute itself is silent on whether tbe election to make a consolidated return for one year is a binding election with respect to tbe method of making income tax returns for subsequent years. Tbe Commissioner prescribed article 11 («) as part of Regulations 78. This requirement may have been reasonable and valid under section 141 (b) of the Revenue Act of 1982 at tbe time tbe regulations were approved. We do not decide that question. However, tbe Revenue Act of 1932 underwent material revision by the enactment of revenue provisions in tbe National Industrial Recovery Act on June 16, 1933. Tbe reason for amending the Revenue Act of 1932 in the Recovery Act was to provide additional taxes sufficient to pay interest and sinking fund charges on an appropriation made by Congress in the National Industrial Recovery Act. Tbe amendments to tbe 1932 Act were extensive and, in particular, tbe income tax provisions relating to domestic corporations were materially changed. It was expected that there would be a general increase in taxes as a result of tbe amendments. We come now to consideration of the changes in the Revenue Act of 1932 enacted in June 1933 that affected taxation of corporations for the years 1933, 1934, and 1935.

Taxation of corporation income was affected by sections 215 (a), (f); 216 (a); 218 (e) of the National Industrial Recovery Act, as well as by other provisions of the Recovery Act. Briefly, a new capital stock and excess profits tax was enacted and the net loss provisions of the 1932 Act, sections 117; 23 (i); 169, 187, and 287, were repealed. Section 141 (c) was amended. It is clear from these amendments that taxation of corporation income was materially changed in the direction of increasing taxes, because under the Revenue Act of 1932 domestic corporations were not subject to capital stock or excess profits taxes and they had the benefit of the net loss provisions. Also, under section 141 (c) of the 1932 Act, the differential in tax upon consolidated income, where consolidated return was made, added to the normal rate of tax on corporations a rate of % of 1 percent, which operated to make corporation income taxable at the rate of 14% percent in cases where consolidated returns were made, as compared with 13% percent where separate returns were made. (See section 13 (a)). This differential in tax favored the making of separate returns as against consolidated returns and corporations electing to make consolidated return understood and accepted the increase in the tax rate. The amendment to section 141 (c) made by section 218 (e) of the National Industrial Recovery Act increased the differential in corporate tax to an added rate of 1 percent for the years 1934 and 1935, so that the tax on consolidated corporation income of corporations making consolidated return was increased to 14% percent under the National Industrial Recovery Act as compared with 14% percent under the 1932 Act.

It is not material to the decision of the question before us to explore the comparative advantages or disadvantages to groups of affiliated corporations, after amendment of the 1932 Act, to make consolidated returns instead of separate returns. The fact is that there was a new revenue act for the year 1933 affecting taxation of corporations. The petitioner corporation in this proceeding considered it preferable to make income tax returns on the basis of a separate return for the year 1933. Where there are two methods of making income tax return available to corporations which involve a choice between two possibly different tax liabilities, it is reasonable that corporations should consider the practical aspects of the election to make separate returns or consolidated returns. Certainly, since the 1928 Act, Congress has allowed affiliated corporations freedom to entertain such considerations. From the comparison made above of the Revenue Act of 1932 as it stood at the time petitioner elected to mak© a consolidated return for the year 1932 and as it was amended in 1933 and stood on March 15, 1934, when income tax return for the year 1933 became due, we think it clear that there were two entirely different tax situations for the years 1932 and 1933 and that the factors to be considered when petitioner elected to make a consolidated return for the year 1932 were different when the time arrived to make income tax return for 1933. The new factors appeared to be destined to apply to the years 1933, 1934, and 1935. Of course, taxpayers could not on March 15, 1934, anticipate that a new revenue act would be adopted for the year 1934 on May 10 of that year. It obviously became of practical importance for affiliated corporations to consider anew the method of making income tax return for the year 1933 and to consider anew the increased rate of tax upon corporations making consolidated returns. The new taxes on capital stock and excess profits, the repeal of the net loss provisions, the increase in the tax differential applicable to consolidated income for 1934 and 1935, all constituted changes in the law affecting tax liability. We point out that after the enactment of the excess profits tax in 1916 corporations generally resorted to making separate returns. (Hearings before the Committee on Ways and Means, 73d Cong., Dec. 15-21, 1933, Jan. 9-11, 1934, pp. 86, 88, 94.) We think that when an excess profits tax was enacted in 1933 Congress must have been cognizant of the possibility that affiliated corporations might elect to make separate returns for 1933, and that, if Congress had intended that separate returns should not be made for 1933 where consolidated returns were made for 1932, Congress would have so provided in the amendments to the 1932 Act as it had so provided by section 142 of the 1928 Act. In the absence of any clear expression in the statute, as it applied to the year 1933, that Congress intended that corporation income tax returns for 1933 should be made on the same basis as for the year 1932, even though changes in the law were made (cf. section 142, Revenue Act of 1928), we must conclude that petitioner had a new election for the year 1933 because the law was changed.

Under the circumstances reviewed above, and upon our opinion that Congress intended that a new election as to the method of making corporation income tax returns should be given, from time to time, as the revenue act is changed, we must conclude that the Commissioner’s application of article 11 (a) of Regulations 78 to the taxable year 1933 was not reasonable and was not consistent with the new revenue act for 1933. The application of article 11 (a) to the year 1933 does not carry out any intent of Congress that we are able to discover but, in fact, contravenes the apparent intent of Congress that there should be a new election when the law is changed. The determination of the Commissioner in this proceeding imposes an unreasonable restriction upon the petitioner. The determination is reversed.

Petitioner has paid the full amount of the tax reported on its separate return. However, the parties have stipulated that certain adjustments should be made. Consequently, there must be recomputation of the tax under Bule 50.

Beviewed by the Board.

Decision, will be entered wnder Bule 50.

Oppek concurs only in the result.

Mellott dissents.

       Art. 11. Consolidated Returns for Subsequent Years.
      (a) Consolidated Returns Required for Subsequent Years.
      If a consolidated return is made under these regulations for the taxable year 1932 or any taxable year thereafter, a consolidated return must be made for each subsequent taxable year during which the affiliated group remains in existence unless (1) a corporation (other than a corporation created or organized, directly or indirectly, by a member of the affiliated group) has become a member of the group during such subsequent taxable year, or (2) one or more provisions of these regulations, which have previously been consented to, have been amended, or (3) the Commissioner, prior to the time of making the return, upon application made by the common parent corporation and for good cause shown, grants permission to change.

       SEC. 141. CONSOLIDATED RETURNS OP CORPORATIONS.
      (a) Privilege to Pile Consolidated Returns. — An affiliated group of corporations shall, subject to the provisions of this section, have the privilege of making a consolidated return for the taxable year in lieu of separate returns. The making of a consolidated return shall be upon the condition that all the corporations which have been members of the affiliated group at any time during the taxable year for which the return is made consent to all the regulations under subsection (b) (or, in case such regulations are not prescribed prior to the making of the return, then the regulations prescribed under section 141 (b) of the Revenue Act of 1928 in so far as not inconsistent with this Act) prescribed prior to the making of such return; and the making of a consolidated return shall be considered as such consent. In the ease of a corporation which is a member of the affiliated group for a fractional part of the year the consolidated return shall include the income of such corporation for such part of the year as it is a member of the affiliated group.
      (b) Regulations.- — The Commissioner, with the approval of the Secretary, shall prescribe such regulations as he may deem necessary in order that the tax liability of an affiliated group of corporations making a consolidated return and of each corporation in the group, both during and after the period of affiliation, may be determined, computed, assessed, collected, and adjusted in such manner as clearly to reflect the income and to prevent avoidance of tax liability.
      (c) Computation and Payment of Tax. — In any case in which a consolidated return is made the tax shall be determined, computed, assessed, collected and adjusted in accordance with the regulations under subsection (b) (or, in case such regulations are not prescribed prior to the making of the return, then the regulations prescribed under section 141 (b) of the Revenue Act of 1928 in so far as not inconsistent with this Act) prescribed prior to the date on which such return is made; except that for the taxable years 1932 and 1933 there shall be added to the rate of tax prescribed by sections 13 (a), 201 (b), and 204 (a), a rate of % of 1 per centum.

       [See. 218 (e), National Industrial Recovery Act.] Effective as of January 1, 1933, section 141 (c) of the Revenue Act of 1932 is amended by striking out “except that for the taxable years 1932 and 1933 there shall be added to the rate of tax prescribed by sections 13 (a), 201 (b), and 204 (a), a rate of three-fourths of 1 per centum” and inserting in lieu thereof the following: “except that for the taxable years 1932 and 1933 there shall be added to the rate of tax prescribed by sections 13 (a), 201 (b), and 204 (a), a rate of three-fourths of 1 percentum and except that for the taxable years 1934 and 1935 there shall be added to the rate of tax prescribed by sections 13 (a), 201 (b), and 204 (a), a rate of 1 per centum.”