author: Sea well :

text:
    Fulton Gold Corporation, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 60222.
    Promulgated November 6, 1934.

      Benjamin Mahler, Esg.,' for the petitioner.

      W. E. Davis, Esg., for the respondent.
   OPINION.

Sea well :

The petitioner, a corporation, in 1920 purchased from the Hopkinson Bergen Co. a piece of improved real estate in New York City for $600,000. There was an outstanding mortgage on the property for $450;000 and petitioner received the property subject to the mortgage, payment of which, however, it did- not assume. In consideration of the payment of the mortgage before maturity the holder agreed to accept less than the face amount of the mortgage in satisfaction thereof. Accordingly, in May 1922 the petitioner paid the sum of $407,8,53 in full settlement of the mortgage and legsll expenses and other charges incurred in the transaction.

In 1929 the petitioner sold the property for $652,166.67, and in its return for that year reported taxable gain of $46,781.57 resulting from the sale, based upon a cost of $600,000. In determining a deficiency of $10,635.50 in income tax against the petitioner for 1929 the respondent reduced the cost basis used by the petitioner by $42,147, representing the difference between the face amount of the mortgage and the sum paid in full settlement thereof, including legal expenses and other charges. The petitioner questions only this basis of cost.

The petitioner contends that the respondent’s action is contrary to the principle of United States v. Kirby Lumber Co., 284 U. S. 1. The respondent filed no brief. In making the adjustment in the cost basis of the property, he cited Des Moines Improvement Co., 7 B. T. A. 279, and I. T. 2406, C. B. VII-1, p. 68, as supporting his action. In March 1934 the respondent revoked I. T. 2406 in view of the Board’s decision in B. F. Avery & Sons, Inc., 26 B. T. A. 1393, dismissed on motion of the respondent, 67 Fed. (2d) 985, and his nonacquiescence in the Des Moines Improvement Co. case and American Seating Co., 14 B. T. A. 328, reversed on other issues, 50 Fed. (2d) 681. C. B. XIII-13.

In. American Seating Co., supra, the taxpayer acquired assets subject to an outstanding mortgage securing bonds issued by the seller. Subsequently the buyer purchased the bonds then outstanding in the hands of the public for less than par and the mortgage was satisfied. Our holding was that the payment represented a part of the cost of the assets and did not result in taxable income in the year it was made.

The Kirby Lumber Co. case and the more recent decision of the same Court in Commissioner v. American Chicle Co., 291 U. S. 426, reversing 65 Fed. (2d) 454, which affirmed 23 B. T. A. 221, do not appear to be opposed to such ruling. The former case involved the purchase by the taxpayer of its own bonds at less than par, and the latter case concerned the purchase from the public, at less than their face amount, of bonds the payment of which the taxpayer assumed when acquiring all of the assets of the issuing corporation. In each case the Court held that taxable income was realized to the extent of the difference between the issuing price of the securities and the amount paid in their repurchase. The basis for the Court’s holdings is, as we read the decisions, that the purchases released assets offset by personal obligations under the bonds, resulting in a corresponding accession to income.

Here the petitioner, instead of assuming the mortgage, bought the property subject to it, and by making the purchase on such terms incurred no personal liability for the debt. Accordingly, payment of the mortgage did not result in the liquidation of a personal debt;.. By it the petitioner merely, satisfied an encumbrance on property in which it had an equity and there was no release of assets previously offset by the obligation ” of the notes or bonds evidencing the debt secured by the mortgage. United States v. Kirby Lumber Co., supra.

The stipulation is that the holder of the mortgage instituted negotiations for the “ cancellation of the mortgage on the ground that it could not legally hold such mortgage.” We are not aware of the time when such action was taken. For aught we know the petitioner was cognizant of it in 1920 and bought the mortgaged property with knowledge that it would be able to acquire the lien for less than its face amount. In any event, it does not appear that the real property was at any time after 1920 worth less than $600,000, and, if so, the petitioner’s equity therein was never, in fact, at stake.

The American Chicle Co. case involved, as the Court pointed out, a “narrow point” and we do not think it or the Kirby Lumber Co. case governs the question here. We think the correct result was reached by us in American Seating Co.. supra. Cf. Leichner & Jordan Co., 4 B. T. A. 133, and James Sweinhart, 29 B. T. A. 1179.

Reviewed by the Board.

Decision will be entered for the respondent.

McMahon concurs in the result.


source: Caselaw Access Project

author: Seawell:

license: Public Domain

text:
    Herbert G. Hanan, Executor of the Estate of Herbert W. Hanan, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 58931.
    Promulgated November 6, 1934.

      Fred A. Woodis, Esq., for the petitioner.

      R. W. Wilson, Esq., for the respondent.
   OPINION.

Seawell:

This proceeding involves a deficiency in income tax of the decedent, Herbert W. Hanan, for the fiscal year ended October 31, 1928, in the amount of $50,209.36, and results from the disallowance by respondent of an amount' which it is alleged decedent paid to compromise a lawsuit and to buy his peace from the estate of a deceased partner.

A notice of deficiency was mailed to the decedent, Herbert W. Hanan, who at that time resided at 118 Eighth Avenue, Brooklyn, New York. The decedent filed the petition and thereafter on July 21, 1933, died. Bobert W. Hanan became executor of decedent’s estate, but he also died before the hearing, and Herbert G. Hanan succeeded him in that office and was substituted as petitioner herein.

At the hearing all issues involved in the proceeding were definitely abandoned by petitioner, except that growing out of the allegation (4-1 of petition) that respondent “ erred in disallowing the deduction of $261,754.4?, which petitioner paid to the estate of Addison G. Hanan to compromise a pending lawsuit.” In reference to this alleged payment petitioner further alleges that the sum paid was in excess of all sums which he owed said estate and was paid in connection with his business and solely to buy his peace. These allegations, together with all allegations of error on the part of respondent, were denied by respondent in his answer.

Herbert W. Hanan, deceased, the original petitioner in this proceeding, and Addison G. Hanan for many years and to the time of Addison G. Hanan’s death on July 16, 1923, were copartners engaged in the business of manufacturing and selling footwear in New York and Chicago under the firm name of Hanan & Son. The contract of partnership provided that upon the death of a partner his estate should be fixed and measured by ascertaining, and liquidated by paying to the estate of the deceased partner, the amount of the cash capital actually invested by such deceased partner in the business, or standing to his credit on the books of the firm, together with his share of the net profits earned down to the date of his death; that the surviving partner was to pay all the indebtedness of the firm; and that interest on any capital of the partners was to be credited to their respective accounts at the rate of 5 percent per annum, with adjustments to be made for capital withdrawn.

After the death of Addison G. Hanan, Herbert W. Hanan, the surviving partner, continued to operate the business; he caused to be prepared a statement of the account of the partnership affairs which, as prepared, showed that the value of the interest of Addison G. Hanan in the business amounted to $1,097,918.10, and about February 1, 1924, submitted to the executors of the estate of Addison. G. Hanan said statement of account, to which they objected, as they were not satisfied with the method by which the amount was arrived at. At some time prior to December 6, 1928, but the record does not show when nor upon what understanding or agreement, if any, decedent paid to the estate of Addison G. Hanan the amount of $1,097,918.10 and the further sum of $105,655.90 claimed by decedent to be an overpayment after interest adjustments. The executors of the estate of Addison G. Hanan at some indefinite time brought action in the Supreme Court of New York against Herbert W. Hanan, individually, and as surviving partner of the two partnerships of Hanan & Son, and therein asked for an accounting. In an agreement dated December 6, 1928, executed by decedent and the executors of Addison G. Hanan, it was agreed that this action should be discontinued “ upon the approval of this agreement as hereinafter mentioned, without costs to any party as against the others,” and that Herbert W. Hanan should pay to the executors of the estate of Addison G. Hanan, who agreed also to accept, “the sum of Nine hundred thousand ($900,000.) Dollars less the said sum of $105,655.90 i. e., the sum of $794,344.10 with interest * * * in full settlement of said action * * *.” In that agreement the executors acknowledged receipt on April 25, 1928, from Herbert W. Hanan of the sum of $200,000 on account of said $794,344.10, leaving a balance due from Herbert W. Hanan to the executors “ on account of said action of $594,344.10.” In the agreement it was further stated:

It is mutually agreed that this agreement shall not in anywise he binding on the parties hereto unless and until same shall be approved by order or decree of a court of competent jurisdiction * * *.

There was no evidence offered that the agreement was ever approved by any court.

Petitioner through his counsel contends and insists that whatever sum was paid during the taxable year by decedent for settlement of the lawsuit is deductible from gross income under section 23 (a) or (e) (1) of the Revenue Act of 1928, the pertinent parts of which are as follows:

In computing net income there shall be allowed as deductions:
(a) Expenses. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business * * *
* * * * * * *
(e) Losses Toy individuals. — In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
(1) if incurred in trade or business.

It would appear that, unless what petitioner paid out was to him either an expense or a loss, these provisions of the statute are not applicable. However, counsel for petitioner in his brief makes argument that the amount paid was “ an expense necessary in order to protect the business ”, and relies on the cases of Kornhauser v. United States, 276 U. S. 145, and H. M. Howard, 22 B. T. A. 375, with other cases supporting the doctrines therein stated.

These cases are distinguishable from the one at bar. Kornhauser paid legal fees in defense of a suit for an accounting brought against him by a former partner, the suit growing directly out of the conduct of the partnership business. The claim asserted against Kornhauser was not sustained, as the Court points out, and judgment was rendered in his favor. The money he expended for attorney fees in the litigation was held to be for ordinary and necessary expense and was allowed him as a deduction. If the suit in the Kornhawser case had been for an accounting and payment to the plaintiff for his share in the partnership assets and Kornhauser had admitted failure to make payment, or underpayment, to his former partner and promised, by way of compromise, tO' make payment of a balance due, it would have been a different case and certainly more like the case here, and it is inconceivable that the tax result would not also have been different. In the Howard case, supra, Howard with others was sued not for the recovery of partnership assets, but for an alleged tort growing out of matters connected with their business. Howard and the others, it at least inferentially appears, owed the plaintiff nothing, but they found it advantageous to themselves and their business to' end the litigation by buying their peace, and Howard paid the price personally and the compromise payment of damages as well as attorney fees was allowed to him as a deduction. Petitioner in the case at bar was not sued for tort, and there are no attorney fees or other outlay for expenses involved.

As we see the situation, when Addison G. Hanan died, the surviving partner, his brother, the petitioner here, became by operation of law a trustee of his interest in the partnership assets and accountable to his estate for the value thereof. Walker v. Miller, 139 N. C. 448; 52 S. E. 125. If petitioner paid the estate $1,097,918.10 and that was only a portion of the amount due the estate, as it would seem to have been since the petitioner himself agreed to pay more thereafter, the legal representatives of the deceased had the right, and it was their duty, if necessary, to bring action in court to compel the payment of the remainder. If a trustee or debtor fails to pay when it is his duty to pay and is sued when he is in default and pays no more than is due, what he pays is not an expense or loss in any proper meaning of the statute.

Petitioner’s allegation that the amount paid was more than was due is supported by no word of proof. His further allegation that such payment was made to buy his peace lacks also any evidence to sustain it. There is no suggestion in the evidence that decedent’s business was in any way molested, threatened, or interfered with by the executors of Addison G. Hanan’s estate or others. No authority was cited for our consideration, and we are not able to find any, which holds that a compromise of a lawsuit presupposes that the suit was wrongfully prosecuted or that the defendant therein was not justly liable for the amount which he agreed in the compromise to pay.

The death of decedent shortly before the hearing may have left his case without the benefit of his own evidence, but we must try the case on the evidence produced and can not try it on what, under other circumstances, the evidence might have been. Notwithstanding the death of decedent, it is not supposed that evidence might not have been produced showing the pleadings in the lawsuit compromised, the whole of the contract of partnership, the statement of account which petitioner caused to be made of the partnership affairs after the death of his partner, the books of account of the partnership and the true amount therein shown to be due, the negotiations between petitioner and the personal representatives of the deceased partner before the lawsuit was begun, showing why it was begun, and those negotiations thereafter leading to the compromise. None of these things were shown. We are asked to surmise, which we may not do.

From the evidence before us and the permissible deductions therefrom it appears that petitioner at the death of his brother, his partner, had left in his hands a large estate belonging to the brother; he paid to his brother’s executors $1,097,918.10 under claim that it covered the full amount due; later he paid a further amount of $105,655.90, which he claimed was an overpayment; still later (and within the taxable year) he paid $200,000; and after suit was brought against him he agreed to pay a further sum of $594,344.10 ($900,000 less $105,655.90 and $200,000). Having personally agreed to pay these amounts, the presumption would follow, nothing else appearing, that they were in truth due and owing. Certainly it is not shown that at the time of the payment of $200,000 petitioner did not then have in his hands assets of the old partnership belonging to his former partner’s estate of that value. Cf. Arthur F. Thurnauer, 30 B. T. A. 1023; Dorcas G. Rehtz, 26 B. T. A. 807.

The evidence, therefore, shows no expense or loss to petitioner and leaves the determination of the respondent undisturbed. Under the clear import and meaning of the statute involved, we consider further discussion of cases cited by petitioner’s counsel unnecessary.

Judgment will be entered for the respondent.


author: Smith:

text:
    Sarah A. Bergan and Margaret L. Goggin, Administratrices of the Goods, Chattels, and Credits of Kate A. Johnson, Deceased, Petitioners, v. Commissioner of Internal Revenue, Respondent.
    Docket Nos. 55457, 68169.
    Promulgated November 7, 1934.

      O. V. W. HawJeins, Esq., for the petitioners.

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

Smith:

These two appeals, consolidated for hearing, involve income tax liabilities for the years 1928 and 1929 in the respective amounts of $8,592.57 and $4,800.45.

The issue for 1928 is whether the petitioners’ decedent’s distributive share of income from the estate of Charles E. Johnson should be increased by $84,370.25 representing payment of Federal income tax by the trustees on behalf of the decedent. The issue for 1929 is whether petitioners’ decedent’s distributive share of income from the estate of Charles E. Johnson should be increased by $18,945.11 representing payment of Federal income tax in the amount of $16,001.15 and New York State income tax in the amount of $2,943.96 by the trustees on behalf of the decedent.

The facts were stipulated.

Charles E. Johnson died testate, a resident of New York State on September 4, 1924. His will was duly admitted to probate in the New York County Surrogate’s Court. He placed his residuary estate in trust for the life of his widow, with the remainder over to his children.

The will provided in part as follows:

I direct my Executors and Trustees hereunder to pay to my beloved wife, ICate A. Johnson, fifty per cent (50%) or one-half (%) of the said net income arising from my estate so long as she shall live, and direct that the same shall be paid to her in quarter yearly payments to commence immediately after my decease and that the same shall be made free from any and all tax or charge whatsoever which if any shall be borne and paid from and out of my general estate.

The' balance of the income was directed to be paid to his two children in equal shares.

Kate A. Johnson died intestate on December 6,1932.

The trustees kept their books of account on the calendar year basis pursuant to the provisions of decedent’s will as interpreted.by the Court of Appeals in Matter of Pflomm, 241 N. Y. 513, and in accordance with the decree of the New York Surrogate’s Court entered on the order of the Court of Appeals annually paid out of the income of the trust, before the determination of the distributable income, the Federal and'New York State income taxes assessed against Kate A. Johnson on her distributable share of the income of the trust.

Pursuant to the directions in the will, as construed by the Court of Appeals, the trustees paid $39,816.72 out of the income of the trust during 1928, of which amount $34,370.25 represented Federal income taxes assessed against Kate A. Johnson for the years 1925, 1926, and 1927, and $5,446.47 represented New York State income tax paid for her in 1928.

In her individual income tax return for 1928, Kate A. Johnson did not include in her gross income any part of the $39,816.72 paid on her behalf by the trustees. In the determination of the deficiency for 1928, the respondent has added to the gross income of Kate A. Johnson $34,370.25 representing the Federal income tax paid for her by the trustees, but has failed to add to such gross income the amount of $5,446.47 representing the state income tax which the trustees also paid for her.

Of the $34,370.25 item in question, $9,313.61 represents an amount paid to Kate A. Johnson to reimburse her for an additional income tax assessed against her by the United States for 1925 and paid by her in 1928. This amount was illegally collected and was refunded to Kate A. Johnson with interest in 1929. She in turn reimbursed the trust for the $9,313.61 paid to her in 1928.

During the year 1929 the trustees paid out of the entire net income of the trust $18,945.11, of which amount $16,001.15 represented Federal income tax and $2,943.96 represented New York State income tax, all assessed against Kate A. Johnson.

In the notice o.f deficiency for 1929 the respondent increased decedent’s net income by the amount of $20,001.90. It is stipulated, however, that the additional income at issue for 1929 should be $18,945.11 instead of $20,001.90. Of the $20,001.90, $1,056.79 represented a refund by the trust to Kate A. Johnson of an overpayment made by her to the trust in 1929.

The principal question in issue in these proceedings is whether Kate A. Johnson, the petitioner’s decedent, is liable to income tax in respect of Federal and New York State income taxes paid for her by the trust of which she was one of the beneficiaries.

Section 22 (a) of the Kevenue Act of 1928 defines “ gross income ” as including “ gains, profits, and income * * * derived from any source whatever.”

Sections 161 and 162 of the Revenue Act of 1928 provide in material part as follows:

SEO. 161. IMPOSITION OP TAX.
(a) Application of taw. — The taxes imposed by this title upon individuals shall apply to the income of estates or of any kind of property held in -trust, including—
* * * * * * *
(2) Income which is to be distributed currently by the fiduciary to the beneficiaries, * * *
;!: »j« ‡ $ * $ • *
(b) Computation anú) payment. — The tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary, * * *
SEO. 162. NET INCOME.
The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that — •
*****•.{:*
(b) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, * * * but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not. * * *

The argument of' the petitioners is that the beneficiaries of a trust are taxable only upon their portions of the distributable income; that Kate A. Johnson received one half of the distributable income of the trust in question and accounted for it in her income tax returns for 1928 and 1929; that under the decree of the Court of Appeals of the State of New York in Matter of Pflomm, supra, the distributable income of the trust is to be determined after the deduction from the gross income of taxes paid on behalf of Kate A. Johnson; and that, inasmuch as under the decree of the court such payments were treated as any other expense payments of the trust, the decedent did not “ receive ” the payments of the taxes in question and accordingly is not liable to income tax in respect of them.

No contention is made in these proceedings that the taxes paid by the trustees for Kate A. Johnson were not her personal obligations. The taxes were computed on her income and were assessed against her.

The fiduciary returns filed for the trust for 1928 and 1929 show no taxable net income. All of the net income reported is shown as being distributable to the beneficiaries. The respondent in his brief states definitely that no taxes were assessed against or paid by the trust in respect of any income received by it for either 1928 or 1929. This fact is not stipulated, but the returns filed show that no tax liability of the trust was reported.

The respondent argues that, if Kate A. Johnson is not liable for income tax in respect of the amounts paid by the trustees for her benefit, then such portion of the income as is paid out for that purpose escapes income tax.

In Helvering v. Butterworth, 290 U. S. 365, it was held, referring to the Kevenue Acts of 1924 and 1926: The evident general purpose of the statute was to tax in some way the whole income of all the trust estates.” The observation is equally applicable to the Kevenue Act of 1928.

In Old Colony Trust Co. v. Commissioner, 279 U. S. 716, the Supreme Court had before it a question certified by the United States Circuit Court of Appeals for the First Circuit — “Did the payment by the employer of the income taxes assessable against the employee constitute additional income to such employee ? ” The Court answered the question in the affirmative. In the course of its opinion the Court stated:

* * * The payment of the tax by the employers was in consideration of the services rendered by the employee, and was again derived by the employee from his labor. The form of the payment is expressly declared to make no difference. Section 213, Revenue Act of 1018, c. 18, 40 Stat. 1065. It is therefore immaterial that the taxes were directly paid over to the government. The discharge by a third person of an obligation to him is equivalent to receipt by the person taxed. * * *

To the same effect see United States v. Boston & Maine R. R., 279 U. S. 732, and Charles B. Levey, 68 Fed. (2d) 401, affirming 26 B. T. A. 889.

In the proceedings at bar we do not have precisely the same situation as was present in those cases, but it is plain that the principle invoked by the courts in those cases is equally applicable here. We therefore hold that the petitioner’s decedent should have included in gross income the amounts paid by the trustees in settlement of her tax liabilities.

It will be noted that the amount of income taxes paid by the trustees for the benefit of Kate A. Johnson in 1928 was $39,816.72. In the determination of the deficiency for that year the respondent has increased the gross income of petitioner’s decedent by only $34,370.25, which represents the Federal income taxes paid by the trustees. On brief the respondent contends that he made an error by not including in the gross income the $5,446.47, representing the state income taxes paid by the trustees, since the beneficiary claimed and was allowed the deduction of the $5,446.47 as a tax paid. At the hearing of these proceedings, however, the respondent did not move to increase the deficiency determined for 1928 and therefore there can be no increase in the deficiency for that year. Sec. 272 (e), Revenue Act of 1928.

Of tbe $34,370.25 added by the respondent to Kate A. Johnson’s gross income for 1928, there is an item of $9,313.61 representing a deficiency in her income tax for 1925 paid in 1928 for which she was reimbursed by the trustees. In 1929 the tax was refunded to Kate A. Johnson, whereupon she reimbursed the trustees for the $9,313.61 payment in question. Apparently this amount was reflected in the distributable income of the trust for 1929 for which the beneficiary accounted for one half in her income tax return for that year. If this assumption is correct, one half of the $9,313.61, or $4,656.81, was erroneously reported by Kate A. Johnson as her share of the distributable income of 1929. Correction of this error, if made, should be reflected in the redetermination of the deficiency.

Reviewed by the Board.

Judgment will be entered under Rule 50.

Moekis, Muedock, McMahon, Goodeich, and Leeci-i concur in the result.


author: Adams :

text:
    Isaac L. Merrill, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 61722.
    Promulgated November 7, 1934.

      A. Gdlder Maekay, Esq., for the petitioner.

      Arthur L. Murray‘s Esq., for the respondent.
   OPINION.

Adams :

This proceeding is for the redetermination of a deficiency in income tax for the calendar year 1929 in the amount of $1,398.91.

The facts were stipulated, which stipulation is made a part of our findings herein. Briefly, they are as follows:

During the years 1916 to 1918, petitioner purchased “ Fifty thousand Rubles Russian Government bonds, 5y2% ”, due in 1926, at a cost of $15,500 or $310 per 1,000 rubles. During the year 1929 the petitioner sold the entire amount of these bonds for a net consideration of $101.

The Soviet Government, during February 1918, repudiated all obligations of previous Russian Governments, including the bonds referred to above.

The records of the Standard Statistics Co. of New York City disclose the following with regard to bonds of the Eussian Government (Fifth War Loan) 5%’s, 1926:

During 1920 quoted at $75 to $80 per thousand rubles;
A sale of 20,000 rubles on January 18, 1920, at auction, for $1,700.00, or $85.00 a thousand;
During 1921 quotations of from $9.00 to $14.00 per thousand rubles;
During 1925 bids ranging from $2.00 to $2.50 per thousand rubles and offers to sell at from $3.00 to $4.00 per thousand rubles;
During 1926 offers of from $2.25 to $3.50 per thousand rubles and offers to sell at from $3.25 to $4.00 per thousand rubles ;
During 1931 bids of from $1.25 to $2.50 per thousand rubles, and offers to sell at from $2.25 to $3.25 per thousand rubles.

It is stipulated that “ Eussian Government (Fifth War Loan) 5%s, 1926,” were quoted during May 1934 at $1.50 per 1,000 rubles.

These facts present only one question for our determination, namely: Did petitioner sustain a deductible loss during the year 1929 ?

The applicable statute, section 23 (e) of the Eevenue Act of 1928, provides:

SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
sfe s-s ^
(e) Losses hy individuals.- — In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise—
(1) if incurred in trade or business; or
(2) if incurred in any transaction entered into for profit, though not connected with the trade or business * * *.

We have had a number of cases involving losses on Eussian Government bonds. Some have arisen where the owners of such bonds undertook to take a deduction for their losses under the bad debt provisions of the statute, and others under the loss provisions. Here, however, petitioner contends that he sold the bonds in good faith; that during all the years he owned them they were quoted on the market as having some value; that when he sold his bonds, he sustained as a loss the difference between what he received and the purchase price.

The respondent contends that the bonds became worthless in 1920 and that on two occasions the Board has held that bonds of the Eus-sian Imperial Government, which were repudiated by the Soviet Government during 1918, became worthless in 1920, citing Murchison National Bank, 1 B. T. A. 617, and Samuel Bird, 4 B. T. A. 259. An examination of these cases will show that the Board held that the facts presented established that the bonds became worthless in 1920. Here, we have no testimony and must go to the stipulation agreed upon by the parties for the facts. From this it appears that, during every year up to and including 1929, when the bonds were sold, they bad been quoted on tbe market at some price. True, this price was a very small percentage of the cost of the bonds to the petitioner, but at the same time it was enough to show that these bonds were not worthless during that period.

Each case depends upon its own facts and we can only decide cases from the evidence presented to us at the hearing. If it be true, as contended by respondent, that these bonds were worthless in 1920 or at any other time prior to the date of their sale by petitioner, such fact does not appear in the record.

Eespondent next contends that a taxpayer may not realize a 1929 income deduction by selling during that year securities which were worthless prior to 1929.

This proposition presupposes proof of the fact that the securities so sold were shown by the testimony to have become worthless prior to the date of the sale, and, therefore, respondent’s proposition is not applicable to the case before us.

Eespondent next contends that the market quotations of securities and sales of same at nominal prices are not conclusive evidence that such securities have any real value.

Admitting the correctness of the respondent’s position as to this question, yet we think that, although all such quotations are not conclusive, still they are some evidence that such securities did have value, and where we find sales made on the basis of such quotations, there being no suggestion of collusion or bad faith in the sale, we are not prepared to say the testimony fails to show that the securities so sold did have value.

The mere fact that the Soviet Government repudiated the bonds did not make them worthless is evidenced by the quotations shown in the stipulation. It is true that the market value was considerably below par; nevertheless it is a known fact that bonds repudiated by one government are often recognized by a succeeding government.

On the record before us, the fact is that petitioner did purchase these bonds and did, during the year 1929, sell them for a sum less than the purchase price. These facts establish petitioner’s right to take the loss as a deduction in his income tax return during the year of sale.

The determination of the respondent is reversed.

Eeviewed by the Board.

Decision will be entered under Rule GO.


author: Sternhagen :

text:
    Francis S. Appleby, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 73089.
    Promulgated November 7, 1934.

      William E. White, Jr., Esq., for the petitioner.

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

Sternhagen :

The respondent determined a deficiency of $1,874.24 in petitioner’s individual income tax for 1930. The petitioner assails the respondent’s disallowance of deductions taken by him upon his return as losses sustained upon three sales of corporate shares.

On December 30, 1930, petitioner directed a broker to sell for him 100 shares of American Smelting & Refining Co., 100 shares of United Corporation, and 100 shares of General Electric Corporation, and the orders were immediately fulfilled. Petitioner owned the shares and held them in a safe-deposit box, having previously bought them for $7,330, $3,265, and $8,020, respectively. The broker sold them on December 30, 1930, for $3,943.50, $1,546, and $4,268.50, respectively, and in the usual and customary course he would have received the certificates from the petitioner the next day. But petitioner left town for a holiday and inadvertently omitted to make the customary delivery before he left. He did not return until January 5, 1931. The following day, January 6, he delivered the certificates. Meanwhile, the broker had sent him the usual note of sale on December 30, and on the monthly statement of account of January 1 the sale was indicated as well as the nonreceipt of the shares. Petitioner’s accounts were kept on the cash basis.

At the time of the determination of the deficiency, the Commissioner thought that the sale was technically a short sale, from which no loss would be derived until there was a covering purchase, cf. Robert W. Bingham, 27 B. T. A. 186. However, at the trial it was made clear that the sale was not a short sale, and this is now agreed on both sides. The respondent argues now that since no delivery was made by the petitioner to the broker, and since under New York law (Personal Property Law, sec. 162), title was therefore not transferred, there was no completed sale in 1930, and hence that no loss was sustained in that year.

The year of deductibility of a loss is determinable by a practical test, Lucas v. American Code Co., 280 U. S. 445. In our opinion, the present circumstances meet the test. The failure of delivery was not enough to affect the certainty of loss, Denman v. Brumback, 58 Fed. (2d) 128; Hoffman v. Commissioner, 71 Fed. (2d) 929; John C. Shaffer, 28 B. T. A. 1294.

While Charles H. Oshei, 31 B. T. A. 23, is similar in that there was an order to sell executed by the broker in 1929 and delivery in 1930, it is distinguishable by more- important features which required the decision that the loss was' not sustained until the later year. If, as was intimated, the sale was a short sale, the loss was not sustained until the covering purchase of the following year and the case need not be distinguished further. But leaving aside its aspect as a short sale, it is still distinguishable because both practically and legally the seller was not in position to make delivery except after satisfying the pledgee with whom he carried his margin account. In other words, Oshei’s failure to deliver was a substantial fact imbedded in circumstances so important that the transaction was not, and, so far as the record showed, could not be, completed until the later year. In the present case, however, the petitioner’s failure to deliver was a mere inadvertence, for he was at all times in position to make a complete transfer and in all substantial respects the transfer was, as to all concerned, effective in the earlier year.

The loss was deductible and the Commissioner’s determination is reversed.

Reviewed by the Board.

Judgment will be entered .wider Rule 50.

Seawell and Adams dissent.


author: Morris :

text:
    Beardsley Ruml, Petitioner, v. Commissioner of Internal Revenue, Respondent.

      Docket No. 49737.
    Promulgated November 7, 1934.

      G. 8. Herr, Esq., for the petitioner.

      John E. Marshall, Esq., for the respondent.
   OPINION.

Morris :

The respondent having determined a deficiency in income tax of $1,606.64 for the calendar year 1928, the petitioner brings this proceeding for the redetermination thereof, alleging error by reason of the disallowance of a claimed loss of $6,687.80 sustained upon the sale of certain securities.

The respondent concedes that a loss was actually, sustained and that the amount claimed is correct, but contends that it is allowable in. 1929, when the sale of. said securities was consummated by delivery. The simple issue, therefore, is the year in which the. loss should be allowed.

The petitioner, an individual, resident of Bronxville, New York, purchased through his brokers certain shares of capital stock of the North Central Texas Oil Co. in or about April 1928, and at or about which time the stock was transferred to his name and delivered to the Guaranty Trust Co., where it was posted as collateral security for a loan. .

In the fall of 1928, the petitioner decided to sell the stock and he not only informed his brokers of his intention to do so, but instructed them to sell the stock for his account. He explained to his brokers that the stock was pledged as collateral and that he desired to have his credit standing at the bank maintained. Whereupon his broker stated that the matter could be taken care of and that he, the petitioner, could substitute other collateral at the bank and deliver the stock for sale at his convenience. What the broker actually did, as the petitioner learned after receiving a statement of his account in January 1929, though he gave no instructions that the transaction should be so handled, was to sell the shares “ short” of the market. When the petitioner learned how the transaction had been handled he took the matter up with his broker and was told “ That is simply the way we. carry it until you deliver it.”

The petitioner delivered 1,500 shares, of the stock aforesaid to his broker in 1928 and upon such shares a loss was claimed by him in that year and admittedly allowed by the respondent. It was not until early in 1929, however, when the loan at the bank had been paid, that the remaining 2,500 shares were actually delivered. The respondent disallowed a claimed'deduction in 1928 upon the 2,500 shares on the ground that the transaction was not completed with respect thereto until actual delivery in February 1929.

“In general, the statute is cóncernéd only with realized losses, Weiss v. Wiener, 279 U. S. 333; though ‘ exception is made, however, in the case of losses which are so reasonably certain in fact and ascertainable in amount as to justify their deduction, in certain circumstances, before they are absolutely realized,’ Lucas v. American Code Co., 280 U. S. 445. They must be fixed identifiable events, United States v. White Dental Mfg. Co., 274 U. S. 398; and, as a rule, evidenced by closed and completed transactions, art. 141, Reg. 65 and 69; and Ewing Thomas Converter Co. v. McGaughn, 43 Fed. (2) 503; certiorari denied, 282 U. S. 897.” John C. Shaffer, 28 B. T. A. 1294.

The petitioner’s counsel would have us completely ignore the fact that a “ short ” sale was effected in 1928 of the 2,500 shares of stock in question. This he dismisses with the explanation that “ There is no magic in the word ‘ short ’ ”, which, he says, was used by the broker to “ signify that delivery of the stock was yet to be made.” Furthermore, notwithstanding his case must rest upon the proposition that there was a closed and completed sale in 1928, he would also have us ignore the fact that there was no delivery of the stock until the following year. Neither of which may we do.

Where was the “ identifiable event ” in 1928 which determined this petitioner’s loss in that year? Let us consider the transaction as it was actually consummated, for after all what was actually done — not •what was intended to be done but was not in fact done- — concerns us most. The broker sold these 2,500 shares short. This meant that one of two things would eventually happen; either (1) the petitioner would make delivery of the specific shares posted as collateral with the bank, though he was under no moral or legal obligation to do so, or (2) “ buy in ” his short sale, thus completing what had theretofore amounted to an incomplete transaction. If the market price of the shares sold had advanced rather than declined, as contemplated by a short sale, the logical chances are that the petitioner would have made no delivery, at the time, at least, but would have preferred to buy in his short sale and retain the shares which he owned for greater profit. Until the transaction has been so completed there is no identifiable event upon which to predicate a loss.

Viewing the matter from the point of view of what the petitioner says he intended, that is, as an outright sale, we find lacking the one essential characteristic, namely, the giving up of dominion over the subject matter of the sale either symbolically or otherwise. The petitioner not only retained dominion but, in our opinion, absolute ownership of these 2,500 shares until a delivery thereof was made in 1929. He in fact suffered no loss until the happening of this event. Cf. Charles H. Oshei, 31 B. T. A. 23.

Reviewed by the Board.

Judgment will he entered for the respondent.

Smith dissents.


author: Adams:

text:
    Rockford Brick & Tile Company, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67998.
    Promulgated November 7, 1934.

      A. F. Schaetzle, Esq., for the petitioner.

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

Adams:

The Commissioner proposed a deficiency in petitioner^ income tas for the fiscal year ended January 31, 1930, in the sum of $861.44. In the petition, the errors are alleged as follows:

The determination of tax set forth in the said notice of deficiency is based upon the following errors:
1 — The Commissioner has erred in not allowing a loss sustained on account of clay products sold to the Albert Lea Farms Company. The amount disallowed aggregates $15,873.75.
2 — Numerous adjustments were made in the asset accounts and reserves for depreciation, aggregating in a net increase to income in the sum of $30,698.90. It is believed the Commissioner has erred in including these items as income.
Paragraph V of the petition is in part as follows:
The facts upon which the petitioner relies as the basis of this proceeding, are as follows:
As to “ 1
The Petitioner sold certain of its clay products to the Albert Lea Farms Company on open account. Subsequently this company became embarrassed and could not meet its obligations on open account, but were willing to give notes therefor. The petitioner accepted the notes in good faith and set them up on the books of account in lieu of accounts receivable. The economic condition as it affected the rural communities continued to grow worse and in order to protect the best interests of the Farms Company it was incorporated as the Hollandale Farms Inc. by the same interests in the Albert Lea Farms Company (i. e. Payne Investment Company), taking over the assets and assuming the liabilities. Both the Payne Investment Company and the Albert Lea Farms Company were insolvent if forced sale had been pursued. However, the creditors recognizing the peculiar situation they were occupying, consented, by complacency, to a reorganization of the Albert Lea Farms Co. into a corporation by the name of Hollandale Farms, Inc.
The Petitioner was induced and did accept stock in the Hollandale Farms Incorporated, in lieu of the notes receivable from the Albert Lea Farms Company. The actual value of the notes had depreciated to not in excess of 15% of their face value. The 85% was charged off as a loss.

The petitioner introduced no testimony at the hearing on the second issue and does not urge the same in his brief, and it is, therefore, considered abandoned. On this issue we find for the respondent.

The Rockford Brick & Tile Co. is a corporation engaged in the manufacture of clay products, principally brick and drainage tile, at the town of Rockford, Iowa. The Albert Lea Farms Co. was incorporated for the purpose of promoting the development of a tract of about 12,500 acres of land in Freeborn County, Minnesota, to be sold in tracts ranging in. size from twenty to forty acres to small farmers for the raising of potatoes and other truck farm products. The land was naturally a very fertile but soggy muck soil, requiring drainage to adapt it to crop production. The Albert Lea Farms Co. placed the subdivided tracts in condition for cultivation by draining them with ditches and drainage tile purchased from the petitioner on open account.

In 1926 the Albert Lea Farms Co. was indebted to the petitioner for $15,000 which it was unable to pay. The petitioner consented to a deferred payment of the account and accepted in settlement thereof the Farms Co.’s promissory notes for $15,000, payable at a future date, with the understanding that the Farms Co. would continue to purchase clay tile of the petitioner on a cash basis as the goods were delivered. However, after a while the petitioner began indulging the Farms Co. with further credits, with the result that in 1928 the Farms Co. owed the petitioner on open account $1,899.14 in addition to the notes which were still unpaid, together with accrued interest on the whole indebtedness.

The financial condition of the Farms Co. was such that further credit was out of the question, and that concerted action on the part of the several unsecured creditors was necessary to forestall a foreclosure of a mortgage upon the Farms Co.’s real estate. It was thought that had any of the unsecured creditors started suit for judgment or a receivership the real estate mortgage holders would immediately start foreclosure proceedings at the behest of the holders of the mortgage bonds. So, an attempt was made to effect an agreement among the unsecured' creditors whereby the Farms Co. would be granted sufficient time to meet its obligations. The effort met with failure. Some other plan had to be tried out. Accordingly, in February 1928 a creditors’ committee was appointed to form a corporation to receive the claims of creditors of the Albert Lea Farms Co. and adjust the conflicting rights of the holders of mortgage bonds and of the general creditors.” The Hollandale Farms, Inc., was accordingly organized, the stockholders of which were the general creditors of the Albert Lea Farms Co. and owned all of the stock of the new company. The general creditors waived all of their rights to about 7,000 acres of the land. The Hollandale Farms, Inc., acquired the remaining 5,500 acres. Each creditor of the old company entering into the new arrangement received stock of the new Hollandale Farms, Inc., in proportion to the amount of his claim surrendered, on the basis of $100 par value. In December 1929 the petitioner received 186% shares for its claim of $18,675. This was during the fiscal year ended January 81, 1930.

As a result of the aforesaid transaction the taxpayer charged out all of the debts owing it by the Albert Lea Farms Co. (it had been carrying the notes of the Farms Co. in its accounts receivable), and entered the stock in its accounts receivable in the amount of only $2,801.25, or $15 per share, and charged off the sum of $15,873.75 as its loss sustained in the liquidation of its claim against the Farms Co.

The agreement of the creditors pursuant to which the exchange of claims for stock was finally effected was entered into on the 9th day of January 1929, and recited that the Albert Lea Farms Co. was without current assets or funds wherewith to meet its current liabilities, and that the Atlas Lumber- Co. had brought suit against the Albert Lea Farms Co. and a receiver had been appointed who had taken possession and control of the assets of the company. It appeared in the agreement that the Farm Co.’s equities in its lands and land sale contracts amounted to $795,094.20 and that the greater portion thereof was in what was known as the West Side Unit, upon which the Minnesota Loan & Trust Co. held mortgage liens. It was agreed that the Albert Lea Farms Co. would convey the West Side Unit, subject to the mortgage liens above described, to a separate corporation to be. organized for the purpose of taking, holding, and disposing of those lands, and that the stock of the said company shall be issued to and held by the creditors (other than first lien bondholders) and each creditor shall receive stock of the par value of the principal amount of his, her or its claim, and accrued interest to February 1, 1929.”

The creditors who participated in the creation of the Hollandale Farms, Inc., acquired all of its capital stock and were in complete control. G. H. Galvin, president and general manager of the petitioner corporation, was one of the creditors’ committee and a party to said agreement, representing the general creditors. Galvin testified that there were several sales of stock of the Hollandale Farms, Inc., in 1929 at $10 per share; that the shares of stock of that company were worth not to exceed $15 per share; and that the land itself was without value because there was a “ ditch ” tax upon the land in the nature of a special improvement tax for drainage ditches constructed to transform the land from swamp to tillable soil.

The petitioner contends that it ascertained the amount due it by the Albert Lea Farms Co. to be worthless and charged the same off in part during the taxable year, and asserts it is entitled to deduct the amount so charged off under the provisions of section 23 (j) of the Revenue Act of 1928, the pertinent portions of which are as follows:

SBC. 2 3. DEDUCTIONS PROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
•h ‡ V *i» * V
(j) Bad debts. — Debts ascertained to be worthless and charged off within the taxable year * * *; and when satisfied that a debt is recoverable only in part, the Commissioner may allow such debt to be charged off in part.

The respondent contends that the transaction is one in which neither gain nor loss is recognized and that it comes within the purview of section 112 (b)(5) and (j) of the Revenue Act of 1928, which read as follows:

Sno. 112. (b) (5) Transfer to corporation controlleS» by transferor. — No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation, and immediately after the exchange such person or persons are in control of the corporation; but in the case of an exchange by two or more persons this paragraph shall apply only if the amount of the stock and securities received by each is substantially in proportion to his interest in the property prior to the exchange.
* * * * * * *
(3) Definition of control. — As used in this section the term “control” means the ownership of at least 80 per centum of the voting stock and at least 80 per centum of the total number of shares of all other classes of stock of the corporation.

It has been ruled by the Bureau of Internal Revenue that a taxpayer sustains no recognizable loss on a transfer of bonds of a defaulting corporation for stock of a new corporation organized for the purpose of acquiring the property and business of the old corporation following foreclosure proceedings. (I. T. 2071, C. B. III-2, p. 34.)

In the instant case, the creditors of the Albert Lea Farms Co. turned over their claims to the creditors’ committee. The creditors’ committee organized the new corporation, the Hollandale Farms, Inc., and distributed stock in that company to the creditors in proportion to their claims. This brought the transaction clearly within the provisions of section 112 (b) (5) and the creditors, through the committee, were immediately in control of the corporation on account of their ownership of all its capital stock. This constituted an exchange of the creditors’ claims (petitioner being one of them), against the Albert Lea Farms Co. for stock in the Hollandale Farms. Inc., and no gain or loss resulted by reason of this transaction. Petitioner contends that at the time the stock was received it had a value not in excess of $15 per share and that it was entitled to charge off on its books the difference between the value of the stock and the amount of its debt. Whatever loss petitioner sustained by reason of its dealings with the Albert Lea Farms Co. and the organization of the Hollandale Farms, Inc., must be postponed until such time as petitioner disposes of its stock in the latter corporation.

The petitioner has failed to overcome the presumption of the correctness of the Commissioner’s determination, and

Decision will be entered for the respondent.


text:
    Jacob Carp, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 52794.
    Promulgated November 8, 1934.

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

      John H. Pigg, Esq., for the respondent.
   OPINION.

Adams :

It is the contention of the petitioner that the two contracts of January 8, 1926, do not state the facts or agreements correctly, and that the correct agreement was that he was selling only one half of bis stock, or 50 shares, and that G-oldman was selling one half of his stock, or 50 shares, to the Michigan Stock Buyers, Inc. It is further contended that the two contracts as corrected should be construed together and considered as one transaction, and if this were done Goldman was a full partner in the deal and liable for half of the tax.

We are not impressed by this claim nor by the evidence introduced to sustain it. The two contracts were drawn by a capable lawyer, who included therein the agreements as told him by the parties, who were all present and signed the contracts. The contract between petitioner and the corporation provides: “ The first party agrees to sell and the second party agrees to purchase one hundred (100) shares of the capital stock of the Michigan Stock Buyers, Inc.” It was further provided in the contract: Said one hundred shares of stock sold shall be assigned to the corporation on the certificate thereof by first party and deposited in escrow with the United States Trust Company of Detroit.”

In the contract between petitioner and, Goldman, we find this recital: “ Whereas first party [petitioner] has disposed of his stock holdings in the Michigan Stock Buyers, Inc., a Michigan corporation, receiving therefor Fifty Thousand Dollars in cash, and Fifty Thousand Dollars in notes, signed by the Michigan Stock Buyers, Inc., and Whereas, second party herein [Goldman] now is the owner of ninety-nine shares of the capital stock of said Michigan Stock Buyers, Inc., and Whereas, it is the desire of the parties hereto that they shall share jointly in the stock holdings of the second party and the assets received by first party from the sale of his stock * * *.” The contract then provided that petitioner was to have a one-half interest in the stock Goldman then owned, or might own in the future in the Michigan Stock Buyers, Inc., and Goldman was to have a one-half interest in any business or investment made or entered into by petitioner with the proceeds from the sale of petitioner’s stock.

We prefer to follow the provisions of these written contracts rather than the vague, uncertain oral testimony. There is nothing whatever in either of the contracts indicating a sale by Goldman of one half of his stock to the corporation and no agreement by it to purchase anything whatever from Goldman. Plainly there were two separate transactions — one a sale by petitioner of his one hundred shares of stock to the Michigan corporation, and the other an agreement by which Goldman gave petitioner a one-half interest in his 99 shares of stock in the Michigan corporation in consideration for’ a one-half interest in a business or investment to be made by petitioner with the proceeds of the sale of petitioner’s stock. Goldman had no interest in the stock sold by petitioner and whatever profit resulted from the sale is taxable to the petitioner. We are not now concerned with the results of the joint venture between petitioner and Goldman. It remains now to consider whether the profits of the transaction were taxable in 1926, when the petitioner received the consideration, or in 1929, when the certificates of stock were released by the escrow agent and delivered to the purchaser.

A good deal of the evidence and of the argument of petitioner’s counsel was devoted to the theory that, because the petitioner endorsed the notes upon which the $50,000 for the cash payment was obtained, petitioner received no consideration of value in 1926. It is sufficient to say in answer to this that petitioner did receive the cash payment of $50,000 and the Michigan company ultimately paid the notes. It was part of the agreement that petitioner endorse the notes, and he received the cash as agreed upon. There was nothing unusual in the transaction, for if the corporation had given him the notes instead of the bank, he would have had to endorse them to discount them.

We think that this case is governed by the rules laid down in Seletha O. Thompson, 9 B. T. A. 1342, John W. Sherwood, 8 B. T. A. 103, and others hereinafter cited, and that the entire profit is taxable in 1926.

In both of these cases as in the instant case the seller received the entire consideration in the taxable year and the stock certificates and lease assignments were merely placed in escrow to secure the payment of the notes. As there were a hundred notes it would have been impractical to attach the stock certificates to them as collateral security, so the difficulty was met by placing them in escrow. Cf. S. L. Meyer, Executor, 23 B. T. A. 1201; Parish-Watson & Co., 2 B. T. A. 851; Boston American League Baseball Club, 3 B. T. A. 149; B. P. Bailey, 18 B. T. A. 105; Ohio Brass Co., 17 B. T. A. 1199.

Of the cases cited by petitioner, Theodore J. Swift,. 20 B. T. A. 1099, and Charles W. Dahlinger, 20 B. T. A. 176, related to the statute governing capital gains which required that sales be consummated after December 31,1921, and they were decided mainly on the meaning of the word “ consummated.” In addition, it may be observed that the Swift case involved a sale of real estate where the deed had been placed in escrow and was not to be delivered until final payment, while the Dahlinger case really sustains the contention of the respondent herein. In K. E. Merren, 18 B. T. A. 156, the consideration was in escrow during the taxable year, and in Rebecca J. Murray, 28 B.T.A. 624, the question at issue was whether' or not there was an installment sale. None of these cases is applicable here.

Petitioner also relies upon the case of Solomon Silberblatt, 28 B. T. A. 73, but that case is clearly distinguishable from the instant case. In the Silberblatt case the petitioner placed the stock in escrow to be delivered to the purchaser if and when the latter made prompt payment of the deferred installments as they fell due. The right to recall the stock from escrow, if any deferred payment was not promptly made, was expressly reserved to the petitioner. Under this reserved right of recall title did not pass until all deferred payments were made. This right to recall the stock from escrow was not in the agreement in the instant case and clearly distinguishes them.

Relative to the claim of the petitioner that he is entitled to a deduction of $12,814.58 for reduction or remission of consideration made by him, it is sufficient to say that if any deduction is allowable therefor it would be for 1928 and not 1926. The same question was before us in S. L. Meyer, Executor, 23 B. T. A. 1201, where we said:

We fail to find any evidence to tlie effect that he made any gift of the three notes in. the year 1923. After one note of $2,500 was paid in 1924, he surrendered the remaining three. The gift of the notes was made in 1924 and can in no way affect decedent’s tax liability for 1923.

The respondent determined that the one hundred $500 notes had a fair market value of par. All of the notes falling due in 1926 and. all but about $12,000 during later years were paid. Petitioner has not produced sufficient competent evidence to rebut the prima facie correctness of respondent’s finding, but, on the contrary, the evidence tends to support it.

We have no fault to find with the many Michigan cases cited by petitioner, but “ we are concerned only with the meaning and application of a statute enacted by Congress, in the exercise of its plenary power under the Constitution, to tax income. The exertion of that power is not subject to state control.” Burnet v. Harmel, 287 U. S. 103.

Decision will be entered for the respondent.


text:
    William W. Vaughan, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 67843.
    Promulgated November 8, 1934.

      Albert 8. 'Wright, Esq., and William M. Sperry, Esq., for the petitioner.

      Mason B. Leming, Esq., for the respondent.
   OPINION.

Smith:

The first question for decision is whether the petitioner is entitled to deduct from his gross income the total loss of the partnership business from March 19, 1929, to the end of the year. In his return the petitioner deducted only 60 percent of such loss, which was the amount of the loss allocated to him on the partnership return filed. He now makes the contention that, inasmuch as the operations of the partnership to December 31, 1929, resulted in a loss, he is entitled to deduct the entire amount of the loss by reason of the provisions of the partnership contract that the other partners “ shall not be obligated to contribute to any partnership loss except out of such profits as they shall have received or be entitled to over and above the amount of their respective drawing accounts.”

The respondent has determined that the business of Vaughan & Co. for the period March 19 to December 31, 1929, was operated at a loss of $63,989.89. This loss resulted from closed and completed transactions. Under the contract which the petitioner had with Burns and Toomey that loss was the petitioner’s loss. Burns and Toomey were not required to bear any portion of it. If, in subsequent fiscal periods, the business was operated at a profit, the petitioner was required to report the profits distributable to him. But the result of future operations would not affect the result of operations for the period in question in. tbis proceeding. . The petitioner’s contention that he is entitled to deduct from his gross income the total loss of Yaughan & Co. for the period March 19 to December 31, 1929, is sustained.

The second question in issue is the right of the petitioner and of the partnership to use inventories at market value in the computation of their respective net incomes. The evidence shows that for years prior to 1929 the petitioner had made his returns by the use of inventories at market value and that his returns had been checked by revenue agents and no question raised as to his right to compute net income upon the basis of such inventories, even though the returns did not show that the net income had been computed by the use of inventories. The respondent has disallowed the use of inventories on the basis of market value for the year 1929 upon the ground that neither the petitioner nor Vaughan & Co. were dealers in securities within the contemplation of the Commissioner’s regulations.

Section 41 of the Nevenue Act of 1928 provides in part

SEC. 41. GENERAL RULE.
The net income shall be computed upon the basis of the taxpayer’s annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner does clearly reflect the income. * * *

Section 22 (c) of the same act provides:

(c) Inventories. — Whenever in the opinion of the Commissioner the use of inventories is necessary in order clearly to determine the income of any taxpayer, inventories shall be taken by such taxpayer upon such basis as the Commissioner, with the approval of the Secretary, may prescribe as conforming as nearly as may be to the best accounting practice in the trade or business and as most clearly reflecting the income.

Pursuant to the last cited provision of the statute the respondent has prescribed article 105 of Regulations 74, which reads as follows:

Akt. 105. Inventories try dealers in securities. — A dealer in securities, who in his books of account regularly inventories unsold securities on hand either—
(a) At cost;
(b) At cost or market, whichever is lower; or
(c) At market value,
may make his return upon the basis upon which his accounts are kept; provided that a description of the method employed shall be included in or attached to the return, that all the securities must be inventoried by the same method,_ and that such method must be adhered to in subsequent years, unless another be authorized by the , Oommissioner. For the purpose of this rule a dealer in securities is a merchant of securities, whether an individual, partnership, or corporation, with an established place of business, regularly engaged in the purchase of securities and their resale to customers; that is, one who as a merchant buys securities and sells them to customers with a view to the gains and profits that may be derived therefrom. If such business is simply a branch of the activities carried on by such person, the securities inventoried as here provided may include only those held for purposes of resale and not for investment. Taxpayers who buy and sell or hold securities for investment or speculation and not in the course of an established business, and officers of corporations and members of partnerships who in their individual capacities buy and sell securities, are not dealers in securities ' within the meaning of this rule.

The claim of the petitioner that he is entitled to compute his net income for the calendar year 1929 upon the basis of inventories at market value on December 31, 1929, is not sustained. -The evidence is conclusive that on and after March 18 the petitioner was not a merchant in securities as an individual. He did not buy and sell securities as a dealer in securities after the creation of the partnership.

In Estate of Harry E. R. Hall, 29 B. T. A. 1255, we held that a specialist on the New York Stock Exchange was entitled to compute income by the use of inventories at market value. In James B. Lowell, 30 B. T. A. 1296, upon somewhat different evidence, we reached a contrary conclusion. Cf. Alfred E. Hamill, 30 B. T. A. 955. In the circumstances of this case we do not find it necessary to attempt to distinguish those cases. For here, the partnership has not complied with the respondent’s regulations with respect to the filing of a return on an inventory basis. The respondent’s regulations, article 105 of Regulations 74, are specific that dealers in securities may make their returns upon the basis of inventories “ provided that a description of the method employed shall be included in or attached to the return.” In ’Northeastern Surety Co., 29 B. T. A. 297, we approved the above article as being “ reasonable, and designed to carry out fairly the terms and intent of the statute.” The partnership return filed for Yaughan & Co. for its fiscal period ended December 31, 1929, not only did not show the basis upon which inventories were taken, but failed to show that the net income was computed upon an inventory basis. The spaces on the return form after the titles “ Inventory at beginning of year ” and “ Less inventory at end of year ” were left blank. The respondent contends that this failure of the partnership to comply with his regulations is sufficient ground for denying to the partnership its present contention. We are of opinion that the position of the respondent is well taken. As stated by the Supreme Court, “Men must turn square corners when they deal with,the Government.” Rock Island A. L. Co. v. United States, 254 U. S. 141.

We can not find in the present proceeding that the use of inventories is necessary in the determination, of the net income of either the petitioner or the partnership. The respondent is not attempting to tax the petitioner upon any greater net income than would be obtained by taxing him upon net income obtained by the use of inventories on the basis of cost. The petitioner is simply claiming the benefit of the deduction from gross income of a shrinkage in the value of securities not sold. This contention of the petitioner is not sustained.

The final point in issue is whether the petitioner is entitled to be taxed under the capital gains provision of the statute, section 101 of the Revenue Act of 1928, upon the gain of $1,252,200.84 realized from the sale of 3,500 shares of Corn Exchange Bank & Trust Co. stock. The respondent has disallowed the claim of the petitioner upon this point. On brief the respondent contends that the petitioner at all times held the stock “ primarily for sale whenever he could get his price therefor.”

Section 101 (c) (8) of the Revenue Act of 1928 provides:

(8) “Capital assets” means property held by the taxpayer for more than two years (whether or not connected with his trade or business), hut does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business. * * *

The last clause of the above quoted definition of “ capital assets ” first appeared in the Revenue Act of 1924. The reason for the addition of this clause to the definition was explained by Chairman Green of the Committee on Ways and Means, in his report accompanying H. R. 6715, as follows:

The last part of the definition of capital assets is changed to remove any doubt as to whether property which is held primarily for resale constitutes capital assets, whether or not it is the type of property which under good accounting practice would be included in the inventory. [Report 179, 1st Sess., 68th Congress.]

A similar explanation is found on page 18 of “ Statement of Changes ” made in the Revenue Act of 1921 by H. R. 6715 and reasons therefor prepared for the use of the Committee on Finance, March 6, 1924, which incorporates the preceding excerpt from Mr. Green’s report. In John M. Welch, Sr., 19 B. T. A. 394; affirmed upon the point in question in 50 Fed. (2d) 1085, the Board held that an individual who owned real estate, which, in the ordinary course of his business as a real estate dealer, he was endeavoring to sell, could not claim that profits arising from the sales of such land were capital assets, even though they had been owned for a period of more than two years.

The question here is whether the petitioner, who was a stock broker, held the bank shares in question for sale in the ordinary course of bis trade or business. The petitioner testified that his father was a director of the Corn Exchange Bank and that he made his first purchases of stock in that bank more than 20 years ago; that when his father died in 1920 he inherited most of the shares of stock in the bank which he owned in 1929; and that he had exercised rights to acquire, and had acquired, additional shares of stock whenever they had been issued by the bank. The par value of the shares was reduced from $100 to $20 per share in 1929 and the petitioner received five shares for each share then held. The petitioner never considered his investments in the bank stock as in any wise connected with his brokerage business; the shares were not for sale by him. He testified:

I heard quite a number of rumors [in 1929] that the City Bank were going to buy the Corn Exchange out. I was going away on vacation, and I was down in Chesapeake Bay, got an evening paper and saw that the City Bank had bought control of the Corn Exchange Bank; but when I left, four weeks before that, Mr. Erew told me that there was no chance of it. I came back and I didn’t want to be a party to anything with the City National Bank, and when they booted the price * * * high enough, I sold my stock.
Q. Did you ever buy any of it back?
A. To my sorrow, yes, sir.
Q. And what was the occasion of that?
A. When the City Bank refused to go through with the contract.
Q. In buying all this Corn Exchange Bank stock, what was your purpose in buying it? * * * were you buying it for resale or investment, or for what purpose?
A. Sentimental; my father was connected with it for a great many years.
Q. Did you buy it with the intention of keeping it or selling it?
A. I gave my office a price at some time, if I lived long enough, they could sell it.

The evidence clearly shows that after the petitioner, on or about March 19, 1929, made the agreement with Burns and Toomey whereby they were to receive certain percentages of the profits of the business, the petitioner was not a dealer in securities. All of his activities after March 18 were connected with the business of Vaughn & Co. He was not engaged in business as an individual. The evidence is conclusive that the shares of bank stock were not held primarily for sale by the petitioner “ in the course of his trade or business.” The petitioner’s contention that the profit realized from the sale of the shares is taxable as capital net gain is sustained.

Reviewed by the Board.

Judgment will T)e entered wider Rule 50.


author: Goodeich:

text:
    East Coast Oil Company, S. A., Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 58180.
    Promulgated November 8, 1934.

      George L. Buland, Esq., Gharles L. Minor, Esq., and Ellis N. Blade, Esq., for the petitioner.

      Bruee A. Low, Esq., and T. G. Histon, Esq., for the respondent.
   OPINION.

Goodeich:

In this proceeding petitioner seeks redeterminations of deficiencies in income and excess profits taxes of $35,422.64 for 1919, $348,448.98 for 1920, and $104,085.76 for 1921.

Of the several issues raised by the pleadings, the majority have been disposed of by agreement of the parties, to which effect will be given upon recomputation under Rule 50. Petitioner’s claim to special assessment, by order heretofore entered, has been held over to await our decision of the one issue presently submitted. Broadly speaking, that issue is, whether income derived by petitioner during the years mentioned from sales of oil is subject to tax by the United States. The facts are not in dispute. They were presented upon stipulation, enlarged somewhat by additional testimony on the trial record, and need not be set out here in full, for a brief statement will suffice for an understanding of the case.

At the times here material petitioner was a Mexican corporation, engaged in the business of producing, buying and selling oil. It owned extensive properties near Tampico. Certain of its titular officers were citizens and residents of the United States, and it maintained offices at Tucson, Arizona, and Houston, Texas. Its stock was owned by the Southern Pacific Co., a domestic corporation. Its income, taxability of which is here in controversy, arose from sales of oil — all of which it either purchased or produced in Mexico— made under varying circumstances. For convenience, we will treat the sales as of three classes.

The first class includes sales pursuant to oral or memorandum agreements made in Mexico, the oil being there sold and there delivered to the purchasers. Respondent now concedes that income arising from such sales is not subject to tax by the United States. Cognizance will be taken of this admission under Rule 50.

The second class includes sales made under written contracts with various domestic corporations and the United States Railroad Administration. The contracts were drawn and executed in the United States, and covered annual periods. Payments for the oil were made to petitioner at its Houston office, upon monthly settlements. Deliveries of the oil were made by petitioner at its wharf near Tampico, Mexico, to tank ships owned or supplied by the purchasers.

The third class includes sales likewise made under written contracts with domestic corporations, drawn and executed in the United States, under which payments were made to petitioner at Houston upon monthly settlements. Deliveries were specified, c. i. f. wharf tanks at Galveston, Texas, or Algiers, Louisiana. Shipments were made by petitioner from its wharf in Mexico by common carriers.

At the time the several contracts were drawn the oil to be delivered, for the most part, was unascertained, and had yet to be produced or purchased by petitioner. Petitioner produced all the oil sold in 1919; produced part and purchased part of the oil sold in 1920; and purchased all the oil sold in 1921.

Respondent has determined a tax upon all the profits derived by petitioner from all its oil sales during the years here before us, regarding such income as taxable under the provisions of section 233 (b) of the Revenue Acts of 1918 and 1921.

For the purposes of this case we need attempt no distinction (if such there be) as to the effect of the quoted provisions, of the respective revenue acts. The last clause of the cited section of the 1918 Act — “ on the manufacture and disposition of goods within the United States ” — means only disposition of goods ”, so far as the creation of taxable income is concerned; see Richard, L. Birkin, 5 B. T. A. 402; Tootal Broadhurst Lee Co., 30 Fed. (2d) 239; affirming 9 B. T. A. 321. In 1921 petitioner produced no oil; it purchased for resale. Therefore, in this case, under the provisions of either act, the matter of production of oil is not material; we are concerned only with the sales. Consequently, the issue here comes down to this: Where were these sales made? If they were made within the United States, as-respondent has determined, the income arising therefrom is taxable. If they were made in Mexico, as petitioner contends, the income is not subject to tax by this country.

Respondent points to the contracts, which recite that the seller “ hereby sells and agrees to deliver ” and the buyer hereby buys and agrees to receive ” an amount of oil bétween specified maximum and minimum limits. But such terms are not necessarily controlling in a contract of sale. They do not necessarily evidence the actual consummation of the sale; they cannot transpose an execu-tory contract covering unascertained goods into an instrument of present sale. Brown Lumber Co., 9 B. T. A. 719, 730, and cases there cited. Cunningham Iron Co. v. Warren Manufacturing Co., 80 Fed. 878. Where, as here, it becomes important to determine just where and when a sale occurs, circumstances beyond mere recitals must be examined.

Respondent points also to the fact that the contracts and the payments under them were made in this country, urging that here was the place of sale. Of course, the place of contract, the place of delivery and of payment, the terms of the agreement, and extraneous circumstances may each have a bearing. But the ultimate goal of the examination of all such considerations is to ascertain when and where the title to the goods passes from the seller to the buyer. It is then and there a sale is consummated — when and where property in the goods passes, when and where the incidents of ownership vest in the vendee. Such is the rule, long and firmly established.

That respondent recognized the rule and long adhered to it, is evidenced by his rulings promulgated during a twelve-year period— an administrative history entitled to weight. It was not until 1930, when he promulgated Ms G. C. M. 8594, IX-2 C. B. 354, that he sought to depart from it. By that ruling, upon which he bottoms his position in this case, and which he repeats to us as his brief, he proposes the place of contract as controlling in determining the place of sale, in so far as the latter is decisive of the source of income. That is the result he draws from the decision of the Supreme Court in Compania General v. Collector, 279 U. S. 306. We j disagree with his conclusion.

As we read it, the Compañía General case in no wise varies the established rule that the place where title passes is the place of sale. There a tax (arising under provisions of the Philippine income tax law similar to the provisions of the 1918 and 1921 Acts here material) was imposed upon net income received from sources within the Philippine Islands.

The taxpayer plaintiff was a corporation which produced and purchased products within the Islands and disposed of them in the United States through a branch agency. Under the law, the profits on the sales were’subject to the Philippine tax, unless the sales were made in the United States. The case was submitted to the Court upon a stipulation to the effect that the sales were made in the United States, subject however to final confirmation by the plaintiff in the Philippines. Under that stipulation the Court could not but conclude that when confirmation was given, the sale became complete, and that it was not complete until confirmation was given. The stipulation was consistent only with the proposition that property in the goods passed, eo instanti, upon the confirmation made in the Philippines — that the place of sale is where the final act of the seller, causing title to pass, was done. And to that effect was respondent’s argument to the Court. The Court did not say that the place where is made an executory contract of sale is necessarily the place of sale; it did not set aside the rule that a sale is consummated when and where the property in the goods passes. See Briskey Co., 29 B. T. A. 987.

So, the fundamental inquiry here is, Where did the property in the oil sold by petitioner pass from it to the purchasers? As to the oil shippéd to the purchasers by common carrier there can be no doubt; the law is clear. These sales were made under c. i. f. contracts (often judicially defined); that is, contracts in which the agreed price includes cost of goods, insurance upon them during transit, and the freight from point of shipment. Under such contracts, the seller has performed his part when he has loaded the goods on the carrier, secured the insurance, and forwarded to the purchaser the proper shipping documents. At that time, and at the place of shipment, title passes to the purchaser; thereafter the goods, and the risks, are his. The record shows that petitioner fully performed in Mexico all its obligations under these contracts. It follows that property in the oil passed in Mexico to the purchasers, and the sales were there made. Consequently, the profits from those sales, -made without the United States, are not subject to the tax respondent seeks to impose.

Scarcely more difficulty arises concerning the sales made to the purchasers who furnished their own tankers to transport the oil. The contracts provide for deliveries to be made by petitioner into the purchasers’ ships at the point of shipment in Mexico, thus stating expressly the terms implied by the classification f. o. b.; that is, in this case, placed by the seller, free of expense, on board a vessel for transportation to the buyer. Under such contracts, property in the goods passes, and the sale is thus completed, upon delivery of the goods by the vendor to the carrier (which, in this case, was the vendee itself). That delivery was made in Mexico; consequently, the sales were there made, and respondent erred in attempting to subject to tax the profit arising from them.

Our agreement with petitioner’s contentions finds further support in two circumstances of the case. When the contracts were made, the oil to be sold was unascertained, unappropriated. That fact prevented a completed sale instanter, for there can be no transfer of title to that which is not in esse. Further, the fact that these sales were made on credit evidences a passing of title — an early relinquishment of it by the seller — prior to payment for the goods, thus here eliminating the place of payment as being determinative of the place of sale.

The conclusion we have reached makes unnecessary consideration of petitioner’s claim to special assessment.

Reviewed by the Board.

Judgment will be entered under Bule 50.

Matthews did not participate in the consideration of or decision in this report.

Smith dissents.

       [Sec. 233 (b), Revenue Act of 1918.] In the case of a foreign corporation gross income includes only the gross income from sources ■within the united States, including * * * all amounts received (although paid under a contract for the sale of goods or otherwise) representing profits on the manufacture and disposition of goods within the united States.
      [Sec. 233 (b), Revenue Act of 1921.] In the case of a foreign corporation, gross income means only gross income from sources within the united States determined * * * in the manner provided in section 217.
      [Sec. 217 (e).] * * * Gains, profits and income derived from the purchase of personal property within and its sale without the united States or from the purchase of personal property without and its sale within the united States, shall be treated as derived entirely from the country in which sold.

         Abraham B. Johnson, 7 B. T. A. 820; W. L. Griffith et al., Executors, 10 B. T. A. 799 ; R. J. Dorn & Co., 12 B. T. A. 1102; Number Nine Plantation, 23 B. T. A. 974 ; Solomon Silberblatt, 28 B. T. A. 73 ; Lucas v. North Texas Co., 281 U. S. 11; American Land & Investment Co. v. Commissioner, 40 Fed. (20) 336; Uniform Sales Act, sec. 1, subd. 2; Williston on Sales (2d od.), rol. 1, p. 3.

       O. D. 651, 3 C. B. 265 ; O. D. 1100, 5 C. B. 118 ; A. R. R. 723, 1-1 C. B. 113 ; I. T. 1569. II-1 C. B. 126; I. T. 2068, III-2 C. B. 164.

       See the seventh point in respondent’s brief on hearing of ■writ of certiorari.

        The Hans Maersk, 266 Red. 806; Kinglig Jarnvagsstyrelsen v. Dexter & Carpenter, 32 Red. (2d) 195; Thames & Mersey Marine Insurance Co., Ltd. v. United States, 237 U. S. 19; Mee v. McNider, 17 N. B. 424 (N. Y.) ; Seaver v. Lindsay Light Co., 135 N. E. 329 (N. Y.); Smith Co., Ltd. v. Moscahlades, 183 N. Y. S. 500; Masondray & Co. v. Grace & Co., 30 Fed. (2d) 647 ; certiorari denied, 279 U. S. 863. See authorities collected in notes 10 A. L. R. 701 and 20 A. L. R. 1236; also Williston on Sales (2d ed.), sec. 280 (c).

      Williston on Sales (2d ed.), see. 280 (a); idem, 280 (.1), American Foreign Trade Definitions, 26 C. J. 745.

      Williston on Sales (2d ed.), see. 278 (a), 280 (b) ; United States v. Andrews & Co., 207 U. S. 229; Hill Veneer Co. v. Monroe, 189 Fed. 834; Nelson Bros. Coal Co. v. Perryman-Burns Coal Co., 48 Fed. (2d) 99. See Notes 44 L. R. A. N. S. 435 ; 16 C. J. 195.

       Contracts to be fulfilled by acquiring and delivering the subject matter to tire purchasers are executory contracts. Abraham B. Johnson, 7 B. T. A. 820 ; Briskey Co., 29 B. T. A. 987; Rosenberg Bros. & Co. v. Beales et al., 205 Pac. 18; Montauk Ice Cream Co. v. Daigger Co., 126 S. E. 681.

      Williston on Sales (2d ed.), sec. 269.


author: Goodrich:

text:
    E. Phillips Oppenheim, Petitioner, v. Commissioner of Internal Revenue, Respondent.
    Docket No. 70408.
    Promulgated November 12, 1934.

      Claude W. Dudley, Esq., for the petitioner.

      R. N. McMillan, Esq., for the respondent.
   opinion.

Goodrich:

Respondent determined deficiencies in income tax of $334.99 for 1928 and $386.85 for 1929. He demands also penalties for delinquent returns amounting to 25 percent of the deficiencies in each of these years, or $83.75 and $96.59, respectively. Petitioner assails the determination of deficiencies as erroneous, but offers no defense against the imposition of the penalties. There is but one issue for our decision in the case, namely, whether sums received by petitioner in accordance with contracts in each of these years are to be treated as earned income in computing credit provided by section 31, Revenue Act of 1928. The facts are not in dispute. The parties filed a stipulation of facts of which a condensed statement here will serve for an understanding of the issue.

Petitioner, an author, is a nonresident alien, residing at Villa D ever on, Cagnes-Sur-Mer, France. In 1922 he entered into a contract with Little, Brown & Co., of Boston, Massachusetts, as publishers, which remained in force and effect throughout the year 1928. On January 19, 1928, the same parties made a new contract which, with certain amendments later made, remained in force and effect throughout the year 1929. The slight differences in the terms of the two contracts are not here material.

Under the contracts petitioner granted to the publishers the exclusive book rights in the United States and Canada “ during the full term of the copyrights and all renewals thereof, in all novels by him published ”, and agreed to deliver to the publishers the manuscripts of not less than two novels in each year. The publishers agreed to make certain monthly advances to Oppenheim against specified royalties to be paid him from sales of his books, and to publish at least two, and at the most, three, of the novels each year. While both contracts provided that the publishers, in their firm name, should take out the copyrights in the United States to the books written by petitioner under the agreements, it appears that the copyrights, and renewals thereof, were taken out by petitioner in his own name. No additional rights accrued to petitioner on that account however, nor was his compensation thereby increased.

In 1928 petitioner received as royalties under the contracts, $29,264.11, and in 1929, $30,866.34 (both amounts including the monthly advances). On his returns for 1928 and 1929 he reported the whole of the amounts so received as earned income and, in the computation of his tax liability, deducted credits of $435.99 for 1928 and $421.35 in 1929. These credits respondent has disallowed, having determined that the royalties paid petitioner were not compensation for personal services but represented payments for the use or sale of property, since they arose from the copyrights standing in petitioner’s name. Consequently, respondent reduced petitioner’s earned income in each year to $5,000, the minimum provided by section 31, Revenue Act of 1928, allowing credits of $43.74 for 1928 and $35 for 1929. That action gives rise to the deficiencies here, and the propriety of that action is the issue.

Since only the classification of the income is in dispute, we need consider only the statutory definition of earned income, which is, “ wages, salaries, professional fees, and other amounts received as compensation for personal services actually rendered.” Probably it is impossible, and we do not attempt, to lay a flat rule as to what may constitute compensation for personal services actually rendered, with respect to an intellectual product. Clearly, the weekly wage paid by a newspaper to a reporter employee whose task is to gather information concerning persons and events, and write it up in printable style, would be. Quite as clearly, the income from the use of an invention, although the whole of the development, patenting, and licensing resulted from the intellect, personal effort and capital of the inventor, would not be. Somewhere in the field between these two extremes must be found for each case the place which fits its facts. Somewhere in that field perhaps a line may be drawn; here we need not attempt to draw it, for, in our view, the income in this case falls well toward the end farthest from compensation for the rendition of personal services.

On brief, petitioner relies heavily upon the decision in Ingram v. Bowers, 47 Fed. (2d) 925; affd., 57 Fed. (2d) 65. So do we, but with a result opposite to that for which petitioner contends. In that case the issue required determination of the geographical source of income received bj Enrico Caruso from the Victor Talking Machine Co., as royalties paid him upon sales of records without the United States, it being conceded that the singing by Caruso for the manufacture of the records was done in this country. Determination of the source of the income required also a determination as to the nature of it; that is, whether it was income from the use of property or compensation for personal services rendered. The income was held to be the latter, chiefly because the matrices which caught the songs as Caruso sang them and from which the records were made, and the records themselves, were the property of the Victor Co.; and Caruso had no right nor interest in them.

That reasoning is controlling here. Oppenheim owned the copyrights to his book. True enough, as counsel points out, the contracts provided that the copyrights should be taken by the publishers in the firm name. Why that was not done, we are not told; the fact remains that petitioner secured and retained them. A copyright— “ the exclusive privilege of printing * * * publishing and vending copies of a literary * * * production ” — embraces a number of privileges the use of which may be separately licensed in order to realize the fullest value of the work. One of those rights, “ the exclusive book rights ” in the United States and Canada, petitioner granted and assigned to Little, Brown & Co. From certain provisions of the contracts we infer that he granted similar rights to publishers in England, and, it may be, to publishers in other countries as well.

The terms of the contracts make it clear that Little, Brown & Co. owned no interest in petitioner’s intellectual product. The firm did not employ Oppenheim to write .stories for it, nor did it buy the stories. It bought and owned only a license — the right, exclusive within a specified territory, to publish in book form, and so sell, the stories which petitioner wrote. And for that right the publishers agreed to pay Oppenheim an amount to be measured by the book sales. Such payments, clearly, are not compensation for personal services actually rendered.

Judgment will be entered for the respondent

       See G. C. M. 236, VI-2 C. B. 27.

       See John E. Greenawalt, 27 B. T. A. 936.

       See I. T. 2735, XII-2 C. B. 131, and citations there given.